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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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AMENDMENT NO. 1
TO
FORM 10-KSB
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TWELVE MONTH PERIOD ENDED OCTOBER 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER 000-31727
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THE QUANTUM GROUP, INC.
(Name of registrant as specified in its charter)
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NEVADA 20-0774748
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No)
3460 FAIRLANE FARMS ROAD, SUITE 4
WELLINGTON, FLORIDA 33414
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: (561) 798-9800
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $.001 PAR VALUE
SERIES A PREFERRED, $.001 PAR VALUE
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in the definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Revenues for the most recent fiscal year: $1,119
The aggregate market value of the Registrant's voting Common Stock held
by non-affiliates of the registrant was approximately $8,406,809 (computed using
the closing price of $.80 per share of Common Stock on January 31, 2006 as
reported by OTCBB, based on the assumption that directors and officers and more
than 5% stockholders are affiliates).
There were 22,803,511 shares of the registrant's Common Stock, par
value $.001 per share, outstanding on January 31, 2006.
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AVAILABLE INFORMATION
---------------------
The public may read and copy any materials filed by The Quantum Group,
Inc. (referred to throughout this Report as "our Company") with the United
States Securities and Exchange Commission (the "Commission") at the Commission's
Public Reference Room at 100 F Street, Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the Commission at 1-800-SEC-0330. The Commission maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding our Company and other issuers that file reports
electronically with the Commission at http://www.sec.gov
FORWARD LOOKING STATEMENTS
--------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain statements contained herein,
which are not historical facts, are forward-looking statements with respect to
events, the occurrence of which involve risks and uncertainties. These
forward-looking statements may be impacted, either positively or negatively, by
various factors. Information concerning potential factors that could affect our
Company is detailed from time to time in our Company's reports filed with the
Commission. This Report contains "forward-looking statements" relating to our
Company's current expectations and beliefs. These include statements concerning
operations, performance, financial condition, anticipated acquisitions and
anticipated growth. For this purpose, any statements contained in this Form
10-KSB, Form 10QSB, Form 8K, Form 14-C and other reports filed with the
Commission referred to herein that are not statements of historical fact are
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "would," "expect," "believe," "anticipate,"
"intend," "could," "estimate," or "continue," or the negative or other variation
thereof or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, which are beyond our Company's control. Should one or more of
these risks or uncertainties materialize or should our Company's underlying
assumptions prove incorrect, actual outcomes and results could differ materially
from those indicated in the forward-looking statements.
CONTEXT
-------
The information in this report is qualified in its entirety by
reference to the entire report; consequently, this report must be read in its
entirety. This is especially important in light of material subsequent events
disclosed. Information may not be considered or quoted out of context or without
referencing other information contained in this report necessary to make the
information considered, not misleading.
The Quantum Group, Inc.
FORM 10-KSB FOR THE YEAR ENDED OCTOBER 31, 2005
TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of Business ......................................................... 4
Item 2. Description of Property .......................................................... 25
Item 3. Legal Proceedings ............................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ............................. 25
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ........................ 25
Item 6. Management's Plan of Operation ................................................... 26
Item 7. Financial Statements ............................................................ 32
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ......................................................... 32
Item 8A Controls and Procedures........................................................... 32
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ........................... 35
Item 10. Executive Compensation ........................................................ 39
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder matters. ...................................... 40
Item 12. Certain Relationships and Related Transactions ............................... 42
Item 13. Exhibits, List and Reports on Form 8-K............................................ 43
Item 14. Principal Accountant Fees and Services ....................................... 44
SIGNATURES ............................................................................... 45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ....................................................
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
The Quantum Group, Inc. (the terms "Company", "us", "QTUM" and/or "we"
and other similar terms as used herein refer collectively to the Company
together with its principal operating subsidiaries) is a Nevada corporation
created for the sole purpose to reorganize and change domicile of the
predecessor company, Transform Pack International, Inc. (TPII). Transform Pack
was originally formed as a Minnesota corporation in February 1975 under the name
Automated Multiple Systems, Inc., subsequently changed its name to Stylus, Inc.,
and then changed its name to Cybernetics, Inc. in December 1997. Throughout the
early years of the corporation, its business and management were located in
Minnesota. However, since 2000 the business and management of Transform Pack
have been located in Moncton, New Brunswick, and as of May 29, 2003 in
Wellington, Florida.
On May 28, 2003, Transform Pack completed the acquisition of Quantum
HIPAA Consulting Group, Inc., a Florida Corporation based in Wellington,
Florida. Quantum HIPAA Consulting Group was in the business of advising the
healthcare industry on the implementation of regulations created to comply with
the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
Transform Pack made the acquisition by issuing 27,000,000 shares of Common Stock
($0.004 par value) to Noel J. Guillama, the sole stockholder of Quantum HIPAA
Consulting Group, in exchange for all the issued and outstanding shares of
Quantum HIPAA Consulting Group. As a result, Mr. Guillama became the direct and
beneficial owner of approximately 80.18% percent of the issued and outstanding
shares of the Company. For accounting purposes, this transaction was treated as
a reorganization. Prior to the acquisition of Quantum HIPAA Consulting Group,
there was no affiliation or other relationship between Transform Pack and
Quantum HIPAA Consulting Group or Mr. Guillama.
Since Transform Pack no longer had any business or management
connection with the state of Minnesota, the Board of Directors determined late
in 2003, that the corporation could benefit from changing its domicile to a
state such as Nevada. With the ratification by the Shareholders on January 30,
2004, completed in February 2004, the Company changed its domicile and its stock
symbol on the Over-the-Counter Bulletin Board market was changed to QTUM.
The Company is a development stage company with nominal revenues. From
inception through January 31, 2006 management's efforts have been primarily in
market research, business development, negotiations of various Letters of Intent
and due diligence on potential acquisitions, joint ventures and licensing
agreements. In the preceding year the Company had negotiated contracts with
three HMOs, one of which is currently operational, the remaining two of which
are currently in development. It has also assembled a provider relations
department that has negotiated with over 600 contracted physicians, ancillary
providers and hospitals.
The Company has as of January 1, 2006 established full operations in
three primary Florida Markets.
The business model today is to become a leading provider of services
to the healthcare industry in three complementary areas: outsourcing
administrative responsibilities for physicians, Managed Care Organizations,
healthcare facilities and physician associations; developing new technologies to
create a more effective and responsive healthcare system; and providing leading
edge healthcare services to consumers.
In developing this model, the Company originally purchased 20% interest
from our major shareholder in Quantum Medical Technologies, Inc. (QMT) (a
Florida corporation) and Renaissance Health Systems, Inc. (RHS) (a Florida
corporation). Both QMT and RHS are development stage companies. Each company had
a Letter of Intent (LOI) to develop products and services with institutions in
the healthcare field; however, the capital had not been secured to fully exploit
these opportunities. Management believed that with a more complex and
complementary model, the Company would be more likely to obtain financing that
in the end would produce positive results for the Company's shareholders.
4
At a Special Meeting of the shareholders held on January 30, 2004 the
majority of the shareholders agreed to acquire the balance of the shares of QMT
and RHS held by Mr. Guillama. In consideration for the QMT and RHS shares, the
Company issued to Mr. Guillama 13,300,000 post reverse shares and 200,000 Series
A Preferred Stock (subsequently added to the purchase price by the Board of
Directors on July 19, 2004). On May 23, 2005, the majority shareholder returned
the 200,000 Series A preferred stock received from the acquisition in order to
facilitate future capital raising efforts. The merger was completed in August
2004.
The Company is organized in three key operating divisions:
>> THE QUANTUM GROUP. The Quantum Group, Inc.(QTUM) provides
healthcare outsourcing services, systems, technology solutions
and venture management to the $1.9 trillion US healthcare
system. The Company currently, and/or has in development, a
range of strategic services including: managed care
contracting, privacy consulting, human resources management,
government compliance, financial management, facilities
management and healthcare venture/merchant banking. Through
its network of subsidiary companies which include Renaissance
Health Systems and Quantum Medical Technologies, QTUM
strategically addresses many of the administrative needs of
managed care organizations, physicians, healthcare facilities
and physician associations that bring increased and highly
valued efficiencies to this rapidly growing industry.
>> RENAISSANCE HEALTH SYSTEMS (RHS). The Quantum Group, through
its wholly owned subsidiary, Renaissance Health Systems,
contracts with HMOs/MCOs in Florida to coordinate the delivery
of healthcare services via its proprietary model, "The
Community Health System" (CHS), in return for a percentage of
Medicare premiums. Quantum delivers its services through a
network of over 600 affiliated physicians in south and north
central Florida, an area that represents 11 counties, with
access to over 16 hospitals. As it expands further into
Florida, the company is forecasting to secure an additional
800-1000 individual providers, which will bring the year-end
projected total to 1500 providers, and approximately 15 more
hospitals next year. The Company executed three managed care
contracts (one of which is active, the other two of which are
currently in development) in Dade and Broward Counties
(Florida's largest Medicare market segment) and Volusia
County, and is in discussion with three additional plans. It
is important to note that most similar companies engage in
exclusive contracts with one, and in rare cases two, managed
care organizations. The Renaissance model allows for
contracts with a multitude of MCOs thereby increasing its
reach and potential for continued growth.
>> QUANTUM MEDICAL TECHNOLOGIES (QMT). Quantum Medical
Technologies (QMT) was incorporated to support the continued
growth and development of The Quantum Group and Renaissance
Health Systems, in addition to acquiring and developing
medical technologies to provide solutions in managed care, and
physician outsourcing services - including medical billing,
web services, and electronic medical record management. As a
result, the Company is dynamically growing an integrated
practice management platform that will provide a full HIPPA
(Health Insurance Portability and Accountability Act)
-compliant medical information system to connect physicians
with their patients and payers. The opportunity is to leverage
and cross-market this platform into the existing client base
of Renaissance Health Services, as well as those physicians
utilizing the outsourcing solution services offered by The
Quantum Group. Recently, the Company executed an agreement
with Biocard Corporation of Miami to acquire its Biocard(SM)
and Biorecord(SM) products (electronic patient medical record
management).
Success in developing the Company will be highly dependant on the Company's
ability to attract capital, people and contracts and on management's ability to
manage a complex organization.
MISSION STATEMENT:
To identify and pursue leading edge opportunities within the healthcare
industry and bring significant return on investment ("ROI") to all shareholders,
employees and the community at large.
VISION STATEMENT:
As the US healthcare system nears its most critical period, The Quantum
Group seeks to develop efficient, quality, proactive, cost effective and
innovative healthcare solutions through the integration of intelligence,
products, services, technology, and outsourcing. This will permit the healthcare
industry to effectively deliver highly personal, quality-focused healthcare
services in a cost effective and profitable manner.
VALUES STATEMENT:
To increase the value of our shareholders, provide leadership in our
industry, our community and our employees, and provide our patients with the
absolute best possible products and services.
BUSINESS STRATEGY OVERVIEW
The Quantum Group, Inc. - Outsourcing
The Quantum Group, Inc. is a development stage company which intends to
provide a broad range of consulting services and products to the healthcare
community, consisting primarily of individual physician practices, ancillary
providers and other small to mid-size healthcare facilities. The Company is
focusing on medical practices and businesses with annual revenues in the
$500,000 to $20,000,000 range. The Company believes that this is a highly
underserved market, and when these businesses do receive consulting services it
is usually in a fragmented, sporadic and inefficient manner.
5
The Company's initial product/service offered is assistance to
healthcare providers and organizations generally covered under the Health
Insurance Portability and Accountability Act of 1996 (HIPAA) that deal with
administrative simplifications, privacy and security of both electronic and
physical (paper) medical records.
The Company developed a comprehensive system for training non-medical
consultants in the implementation of HIPAA regulations. The Company has in the
past trained approximately 100 consultants in a trial project and intends to
fully deploy its ability to create documentation and systems beyond HIPAA into
other areas of healthcare consulting, ranging from medical billing and coding to
information technology, once sufficient capital has been secured.
The Company anticipates providing consulting services and solutions to
healthcare organizations including health plans and technology providers with
special emphasis on physician practices, ancillary providers and an integrated
delivery of health systems.
The Company intends to design solutions to enable clients to reap the
benefits of their investments in new systems and information technology by
improving financial performance, increasing productivity, and improving clinical
and operational performance.
To address the increased industry-wide focus on patient safety,
clinical excellence, compliance with security regulations and financial
performance, we intend to design solutions that give the healthcare industry the
tools and strategies they need to serve their customers effectively, improve the
quality and safety of clinical care, secure and authenticate online healthcare
transactions, reduce cost and ensure compliance with evolving government and
industry requirements, including the Health Insurance Portability and
Accountability Act ("HIPAA").
From education, visioning and planning, to implementation and
outsourcing, the Company intends to provide the following services and solutions
that are designed to help client organizations perform better:
>> Government Compliance
o HIPAA
o Medicare
o Medicaid
o HMO/PPO
>> Managed Care
o Contract Negotiations
o Auditing
o Business Development
o MSO Development
o IPA Development
>> Financial Management
o Billing Services
o Collection Services
o Payroll Services
o Accounts Receivable Financing
o Equipment Financing
o Executive Lines of Credit
>> Information Technology
o Website Development
o Information Management
o ASP Services
o Secure Communications
o Business Process Management
>> Information Technology
o Full Medical Office Management
o Facilities Management
o Employee Management
o Placement Services
o Personnel Training
>> Business Venture Management
>> Healthcare Merchant Banking Services
6
Because of our management team's extensive knowledge of the healthcare
industry, our clients' needs, and our management's range of healthcare
experience in healthcare operations and workflow, IT and clinical systems, we
should be able to work with clients to enable them to leverage their existing
systems and processes to accelerate their return on investments. Once fully
operational, we believe that our in-depth knowledge of the healthcare industry
and the range of services we intend to offer endow us with significant
advantages over small competitors in marketing additional services and winning
new engagements. We believe that with this plan we will be well positioned to
help healthcare providers bridge traditional services in a new environment to
create new efficiencies and a better, more responsive healthcare system. Our
goal is to be the preferred, if not sole, provider of a broad range of
outsourcing and consulting solutions for each of our clients.
Quantum Medical Technologies, Inc. - Technology
QMT was incorporated in January 2000 by our Chairman to create a new
model for managing information in the medical industry. In a pending business
process environment branded as Cybernaptic (SM), which connects all the `touch
points' of healthcare in one ASP based system, the clients of QMT will be able
to choose any combination of support, including: (i) full outsourcing with data
center consolidation, (ii) 24/7/365 network monitoring and help desk through our
network control center, as well as (iii) facility management, application
unification, application outsourcing and interim management of their entire IT
operations.
The healthcare IT environment is increasingly complex and costly as a
result of the challenges inherent in deploying new technologies, maintaining or
integrating older computer systems and deploying an IT function capable of
meeting new objectives designed to improve clinical quality and patient safety,
achieve regulatory compliance and ensure secure digital transactions while at
the same time improving business operations and the revenue cycle as well as
reducing supply costs. With all of these pressures, healthcare organizations
must become more efficient and effective. As a result, we believe that the
healthcare industry will continue to increase the percentage of its budget
devoted to IT solutions.
Computer-based patient record systems and other technologies in the
healthcare delivery process can enable organizations to improve their bottom
line. These technologies help healthcare organizations reduce costs through
clinical and supply chain efficiencies, enhance communications with physicians,
patients, payers and other constituencies, improve care delivery and patient
safety and streamline activities such as claims processing, eligibility
verification and billing.
We believe that healthcare participants will continue to turn to
outside consultants, external management of formerly internal information
systems, application support and full outsourcing arrangements as a means of
coping with the financial and technical demands of information systems
management and integration of web-based solutions. QMT anticipates responding to
these demands by developing and providing information technology and management
consulting services and solutions along with flexible business process and
information technology outsourcing solutions, business process and IT
operations. Through outsourcing, clients can achieve their business process and
information technology goals while remaining focused on expanding their primary
businesses and reducing related capital outlay.
The Company has also begun to develop a new method to track improvement
in patient life style with a patent pending process called QuantumQuotient (sm)
or Qx(2) (sm). The Company is exploring validation by a major research
university in the U.S.
Renaissance Health Systems, Inc. - Services
RHS was incorporated in the State of Florida on December 13, 2002. The
RHS strategy is to create a new type of healthcare delivery system built on the
extensive experience of our senior management team. We intend to specialize in
managed care Percentage of Premium (POP) contracting. RHS is creating a new
model for healthcare called the Community Health System (CHS) to contract with
Florida Managed Care Organizations (MCOs) to manage the care of patients in a
proactive and cost effective environment. RHS has secured an agreement with
three Florida MCOs.
7
In the preceding year the Company has negotiated contracts with three
HMOs one of which is operational, the remaining two of which are currently in
development. It has also assembled a provider relations department that has
negotiated with over 600 contracted physicians, ancillary providers and
hospitals.
The Company has, as of January 1, 2006, established operations in three
primary Florida Markets.
INDUSTRY BACKGROUND
Medicare is the health insurance program for retired United States
citizens aged 65 and older, qualifying disabled persons, and persons suffering
from end-stage renal disease. Medicare is funded by the federal government and
administered by the Centers for Medicare and Medicaid Services, or CMS. The
Medicare eligible population is large and growing. During 2004, approximately
41.7 million people, or approximately 14% of the United States population, were
enrolled in Medicare according to CMS. The Henry J. Kaiser Family Foundation
estimates that the number of Medicare enrollees will increase to 43.1 million in
2006, 46 million by 2010, 61 million by 2020, and 78 million by 2030. The
Congressional Budget Office expects Medicare expenditures, without taking into
account the new prescription drug benefit, will rise at a compounded annual
growth rate of 9.3%, from approximately $297 billion in 2004 to approximately
$722 billion in 2014.
Medicare is offered to eligible beneficiaries on a fee-for-service
basis or through a managed care plan that has contracted with CMS pursuant to
the Medicare Advantage program. In 2005, nationwide Medicare Advantage
penetration, expressed as a percentage of total Medicare eligible beneficiaries
who belong to a Medicare Advantage plan, is approximately 13%. Medicare
Advantage penetration is anticipated to grow to almost 30% by 2013, according to
the Henry J. Kaiser Family Foundation. We believe that the projected favorable
Medicare Advantage enrollment trends and the reforms proposed by the MMA will
have a positive impact on our Medicare Advantage plans.
Developments in healthcare:
Current healthcare spending in the United States accounts for 15.5
percent of the nation's gross domestic product, or GDP. The Department of Health
and Human Services (HHS) announced that healthcare spending shot up 6.3 percent
in 2004, to a total of $1.9 trillion. That represents an average of over $6,280
for each person in the United States. Further HHS projections place healthcare
spending at 18.7 percent of GDP, by 2014 for a total amount of $3.6 trillion.
On December 8, 2003, President Bush signed into law the Medicare
Prescription Drug Improvement, and Modernization Act--the most
significant
change in healthcare coverage for senior citizens and those with disabilities in
nearly forty years. This historic legislation makes available a prescription
drug benefit to all 41 million Medicare beneficiaries, helping them afford the
cost of their medicines, and offering other significant improvements as well.
Medicare Part D, as the program is now known, began enrolling members nationwide
January 1, 2006. The program has not met enrollment projections. The Company is
not a participant in this program.
According to the 2005 Federal Budget, Medicare Advantage (formerly
Medicare + Choice) growth was projected to increase nearly 100% over the
following 4 years. In addition, actual "per member per month" (PMPM) payments to
Managed Care Organizations (MCO) were increased by a record 10.6% nationwide.
What's more, Medicare spending increased 8.9% to a record high of $309 billion
in 2005. In Palm Beach County Florida, where the Company is based, federal
funding to Medicare HMOs was increased about 16 percent in 2005. MCOs will
receive $734.51 per member per month from the federal government, up from
$633.86 per member per month.
Federal officials and members of Congress are on the record stating
that they hoped the increase, five times as large as the typical annual increase
in recent years, would reverse the exodus of private plans from the Medicare
program. The administration, trying to enhance competition and efficiency in the
Medicare marketplace, wants to triple enrollment in private plans within three
years.
8
With Medicare payments to MCOs rising two percent annually in recent
years, many insurance executives decided that they could no longer do business
with the program because their Medicare-related costs were rising about 10
percent a year. From 1999 to 2003, health plans dropped more than 2.4 million
Medicare beneficiaries. Some pulled out of Medicare entirely, while others
curtailed their participation by withdrawing from specific counties. The Federal
Centers for Medicare and Medicaid Services predicted publicly that as a result
of the increased payments, which took effect March 1, 2004, many private plans
would return to the Medicare program.
About 4.6 million beneficiaries, or 11 percent of the 41 million people
enrolled in Medicare, are now in MCOs, which have customarily provided drug
benefits and preventive care not available in the original fee-for-service
program
The federal government predicts that the Medicare law enacted in
December 2003, to encourage people to enroll in MCOs and similar private plans
called Preferred Provider Organizations (PPOs), so that by 2007, 35 percent of
beneficiaries will be members of such plans. The Secretary of Health and Human
Services, described the increased payments as "an investment in our seniors." As
a result of the increase Medicare beneficiaries will have more options and
better services. Private plans will be able to use the additional money to
enhance benefits, to reduce premiums or co-payments paid by beneficiaries, or,
as a way of stabilizing the network of healthcare providers who serve the
beneficiaries, to increase payments to doctors and hospitals.
The new Medicare law not only created a prescription drug benefit but
also gave private health plans a larger role in the program. Indeed, how much to
pay the private plans was one of the biggest issues in Congressional debate over
the bill.
As enacted, the legislation established a complex new formula for
determining such payments, a provision that the government is now applying in
arriving at an increase of 10.6 percent. The Congressional Budget Office
estimates that the extra payments to private plans under that formula slightly
exceeded $500 million in 2004 and will total $14 billion from 2004 to 2013.
The Centers for Medicare & Medicaid Services announced January 16, 2004
that this significantly increases federal payment rates for Medicare Advantage
health plans, aimed at supporting improvements in services and lower costs for
Medicare beneficiaries enrolled in private health plans, as well as more options
for Medicare coverage.
The increased payments to Medicare Advantage were included in the
bipartisan Medicare Prescription Drug, Improvement and Modernization Act signed
into law by President Bush. The increases average 10.6 percent across plans.
The provision requires managed care organizations to use the funds to:
o Reduce beneficiary premiums or co-pays;
o Enhance benefits;
o Stabilize or expand the network of doctors and other healthcare providers
available to seniors;
o Reserve funds to offset either premium increases or reduced benefits in
the future.
"These increases are an investment in our seniors. They are aimed at
supporting better services for Medicare beneficiaries in healthcare plans. And
at the same time they will help support more choice of Medicare options for all
beneficiaries," HHS Secretary Tommy G. Thompson said. "We want private health
plans to develop attractive benefits and strong networks of providers. And we
want beneficiaries to have a range of reliable alternatives so they can choose
the coverage options that serve them best. This is an important improvement to
the Medicare system that addresses a long-standing concern by seniors who prefer
managed care plans."
The new provision gives those managed care organizations that announced
they were leaving Medicare Advantage or reducing their services the opportunity
to remain in the program, providing continued service for seniors who choose a
managed care plan.
9
"We expect that these new rates will help beneficiaries by enabling their
plans to deliver better benefits, such as enhanced prescription drug coverage,
reduced out-of-pocket costs, and more reliable access to the providers in their
communities," said a CMS Administrator. "They will provide equitable payments to
private plans to support better service for Medicare beneficiaries. Over the
long term, sharing this investment with the private plans can yield important
benefits to beneficiaries and taxpayers."
The same CMS Administrator said, "We are encouraged by the number of
plans that continue to expand their reach and bring more choices to millions of
beneficiaries, and we expect this trend to accelerate, These health plans are
very important for lower-income seniors, minority seniors and disabled
individuals who rely on them for their healthcare, to keep costs affordable, and
for the valuable benefits that are not available in fee-for-service Medicare."
The amount of the increase varies by county. The average increase in
2004 was about 10.6 percent for those counties where Medicare Advantage plans
are available. That increase includes an average 3.2 percent increase that plans
were expected to receive in 2004 before the enactment of the new Medicare law.
In a survey completed by Harris Interactive(R) of attendees at the
World Health Care Congress, top executives in the healthcare industry believe
information technology is key to containing rising healthcare costs in the U.S.
Seventy-nine percent of those polled - leaders of health insurance companies,
hospitals, pharmaceutical corporations and large employers - cited information
technology's ability to improve the quality of care in conjunction with practice
guidelines and other proposals made by the Institute of Medicine (IOM) as
effective and desirable ways to contain costs. When respondents were asked to
identify their top two priorities for containing costs, use of information
technology in conjunction with practice guidelines and other proposals made by
IOM emerged as the number one choice with 49 %.
During a speech February 2004 at the World Healthcare Congress in
Washington, U.S. Health and Human Services Secretary Tommy Thompson said that
"Four years into the 21st century, the healthcare industry still depends on
pencils, papers, manila folders, and memo sheets as primary tools for getting
its work done" he further said "the nation's healthcare delivery system needs to
more widely incorporate business practices used in other industries, especially
information technology."
In the same speech, Thompson told attendees that supermarket clerks
rely on technology to ensure they give customers the right change, without
mistakes. Yet, the Institute of Medicine estimates that 98,000 patients die--and
even more are disabled each year--due to errors that can be largely prevented by
technologies such as computerized prescription ordering, drug bar-code systems,
and electronic patient medical records.
The adoption of those and other technologies in healthcare "could save
[the U.S.] $100 billion" a year, through reduced deaths and disabilities.
Because the government's Medicare program makes the federal government "the
country's largest insurance company, the feds are taking a lead role in trying
to make it easier for more health-care providers to adopt these technologies.
The ability to share patient information electronically can help doctors and
other providers to make better-informed decisions and spot potential mistakes
before they happen. However, without data and other technical standards, the
sharing of patient information electronically among health providers is often
difficult or impossible. Over the last year or so, Health and Human Services has
adopted five key standards related to formats and transmission of patient data,
so that electronic medical records can be more easily shared among caregivers.
That includes adopting SnoMed as the federal government's standard lexicon for
medical diagnosis and treatments. The government is also offering the healthcare
industry use of SnoMed free of licensing fees."
(Information compiled from reliable media/new sources and websites of US Health
and Human Service and Center for Medicare Services)
GENERAL
There is today a greater emphasis than ever placed on issues of patient
safety and the prevention of medical errors, competition in clinical care
quality and IT innovation, as well as heightened awareness of the urgency to
implement digital security measures and compliance strategies. We believe that
these factors, combined with changes in federal, state and commercial/private
payer reimbursement, slowed growth of Medicare payments, the aging of the U.S.
population and the growing acceptance of the Internet and web-based
technologies, and spurred by the increasingly vocal demands of consumers for
quality care, will result in continued dramatic change in the healthcare
industry.
10
We also see that today there are, with minor exceptions, only two
places physicians or medical providers can turn for help in meeting all the
demands placed on him or her by the business and healthcare environment. Those
are high-end highly paid consultants that could be represented by large
accounting and large consulting firms, or the local cottage industry of
healthcare consultants that range from HR functions to accounting and tax work,
generally specializing in one or two areas and stretching to meet the ever
increasing needs of his or her client.
Consulting and Outsourcing
The changing business environment has produced an evolving range of
strategic and operating options for healthcare entities. In response, healthcare
participants are formulating and implementing new strategies and tactics,
redesigning business processes and workflows, acquiring better technology to
improve operations and patient care, integrating legacy systems with web-based
technologies, developing e-commerce abilities and adopting or remodeling
customer service, patient care and marketing programs. We believe that
healthcare participants will continue to turn to outside consultants to assist
in this vast array of initiatives for several reasons: the pace of change is
eclipsing the capacity of their own internal resources to identify, evaluate and
implement the full range of options; consultants enable healthcare participants
to develop better solutions in less time and can be more cost effective. By
employing outside expertise, healthcare providers can often improve their
ability to compete by more rapidly deploying new processes.
In 2005, the healthcare consulting industry was highly fragmented and
consisted primarily of:
o Larger systems integration firms, including the consulting divisions
of the national accounting firms and their spin-offs, which may or may
not have a particular healthcare focus or offer healthcare consulting
as one of several specialty areas;
o Healthcare information systems vendors that focus on services relating
to the software solutions they offer;
o Healthcare consulting firms, many of which focus on selected specialty
areas, such as strategic planning or vendor-specific implementation;
o Large general management consulting firms that may or may not
specialize in healthcare consulting and/or do not offer systems
implementation; and
o Boutique firms that offer one or two specialized services, or who
service a particular geographic market.
The Company believes that, increasingly, the competitive advantage in
healthcare consulting will be gained by those firms which:
>> Are able to coordinate the necessary expertise and resources to offer
comprehensive skill sets and packaged solutions to clients;
>> Have the vision, strength and consistency to advise clients along the
entire service continuum, from strategy to selection to implementation
to operation;
>> Offer the flexibility to meet the challenges of the rapidly changing
healthcare, e-commerce and IT environment; and
>> Have assets to bring total solutions including offerings that address
the clients' need for market expansion and capital replacement.
11
Healthcare Services
MCOs, in response to escalating expenditures in healthcare costs, have
increasingly pressured physicians, hospitals and other providers to contain
costs. This pressure has led to the growth of lower cost outpatient care and
reduction of hospital admissions and lengths of stay. To further increase
efficiency and reduce the incentive to provide unnecessary healthcare services
to patients, payers have developed a reimbursement structure called percentage
of premium (POP). POP contracts require the payment to healthcare providers of a
fixed amount per patient for a given patient population. The providers assume
responsibility for servicing all of the healthcare services needs of those
patients, regardless of their condition. We believe that low cost providers will
succeed in the POP environment because such companies have the ability to manage
the cost of patient care.
The highly fragmented nature of the delivery of outpatient services
has created an inefficient healthcare services environment for patients, payers
and providers. MCOs and other payers must negotiate with multiple healthcare
services providers, including physicians, hospitals and ancillary services
providers, to provide geographic coverage to their patients. Physicians who
practice alone or in small groups have experienced difficulty negotiating
favorable contracts with managed care companies and have trouble providing the
burdensome documentation required by such entities. Healthcare service providers
may lose control of patients when they refer them out of their network for
additional services that such providers do not offer. We will continue
affiliating with physicians who are sole practitioners or who operate in small
groups to staff and expand our Health System which should make us a provider of
choice to managed care organizations.
We pay physicians a capitated fee for providing the services and assume
a portion of the financial risk for the physician's performance related to our
members. In addition to providing certain administrative services to the
physicians, we also provide utilization assistance.
Renaissance Health Services and the Community Health System (CHS)
Management views the U.S. healthcare systems as broken. Though a 1.9
trillion dollar business, the fragmented industry is materially ineffective in
providing cost effective and quality healthcare. Over the last 15 years there
have been many experiments on how to make the treatment of patients more
effective, faster and with a sensitivity to cost and outcomes.
The management of this Company has been part of that experimental
process from the days when acquiring doctors was expected to be the "solve-all"
solution, to the later evolution of Physician Practice Management (PPM),
Management Services Organization (MSO) and Provider Sponsored Network (PSN).
Management believes that in all these models the patient is effectively
placed last by the healthcare system. Renaissance has developed a new model for
treating patients, providers, and insurers: the Community Health System or CHS.
In a CHS the patient is recognized as the true consumer of healthcare services.
The doctor and patient jointly call the shots, not the Managed Care Organization
(MCO) by itself. Patients are actively involved in the improvement of their own
healthcare lifestyle. The benefits of the MCO, Renaissance (RHS), the physician,
and most importantly the patients are aligned, not just to treat the sick, but
to proactively keep the patient healthy and well, thus, reducing the overall
costs for the patient and the industry. RHS will pay the physicians to keep
their patients healthy, and also directly incentivize the patient at the end of
each year for actively participating in his or her own healthcare improvement.
The listed table below identifies Florida counties where the Company
intends to focus its business.. The table identifies each county by name, total
population, HMO enrollment and contains other relevant data, intended to
demonstrate financial opportunity. There is no statement made as to the
probability of entering more than one county or having a material penetration of
the Medicare lives in those counties. The information was gathered exclusively
from Federal and State of Florida websites, and should only be used as
representative of opportunity for the Company and its subsidiaries.
12
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MEDICARE
ADVANTAGE
MONTHLY
PER CAPITATION
% OF CAPITA % OF RATES (PART A &
COUNTY TOTAL TOTAL TOTAL HMO MEDICARE INCOME GROWTH PART B TOTAL)
POPULATION MEDICARE EMROLLMENT PENETRATION (2002) 1990 PMPM
------------------------------------------------------------------------------------------------------------------
DADE 2,341,176 317,289 150,780 47.50% $26,780 20.90% $986.14
------------------------------------------------------------------------------------------------------------------
BROWARD 1,731,347 253,695 103,486 40.80% $31,785 37.90% $917.04
------------------------------------------------------------------------------------------------------------------
PALM BEACH 1,216,282 269,119 64,615 24.01% $44,120 40.90% $863.22
------------------------------------------------------------------------------------------------------------------
MARTIN 135,122 36,585 2,625 7.20% $44,370 33.90% $731.63
------------------------------------------------------------------------------------------------------------------
ST. LUCIE 213,447 46,575 4,115 8.80% $23,458 42.10% $836.79
------------------------------------------------------------------------------------------------------------------
OKEECHOBEE 37,481 6,049 642 10.60% $18,818 26.50% $971.67
------------------------------------------------------------------------------------------------------------------
INDIAN RIVER 120,463 33,520 2,524 7.50% $39,830 33.50% $714.80
------------------------------------------------------------------------------------------------------------------
VOLUSIA 468,663 99,753 32,517 32.60% $24,747 26.40% $654.22
------------------------------------------------------------------------------------------------------------------
FLAGLER 62,206 16,680 4,472 26.80% $24,041 116.70% $654.22
------------------------------------------------------------------------------------------------------------------
BREVARD 505,711 101,176 16,577 16.40% $27,762 26.80% $728.24
------------------------------------------------------------------------------------------------------------------
ST. JOHN 142,869 21,601 22 0.10% $37,191 70.40% $711.08
------------------------------------------------------------------------------------------------------------------
Strategy Overview -RHS Services
Management expertise will allow the Company to provide a service and
manage the risk that health insurance companies cannot provide on an efficient
and economic level. Health insurance companies are typically structured as
marketing entities to sell their products on a broad scale. Due to mounting
pressures from the industry, MCOs have altered their strategy, returning to the
traditional model of selling insurance and transferring the risk to the CHSs.
Under such arrangements MCOs receive premiums from the Center for Medicare
Services (CMS), a division of the Department of Health and Human Services, and
commercial groups and pass a significant percentage of the premium on to a third
party such as RHS, to provide covered benefits to patients including pharmacy
and other enhanced services.
After all medical expenses are paid any surplus or deficit remains with
the CHS. When managed properly accepting this risk can create a significant
surplus. Under the RHS model the physicians maintain their independence but are
aligned with a professional staff to assist in providing cost effective
healthcare. This in turn helps maximize profits for the physicians and RHS. To
limit exposure RHS intends to secure reinsurance (stop-loss coverage).
Our RHS business model is unique and based on educating, motivating and
assembling physicians in groups that are prepared to assume managed care risk.
We envision expanding our Community Health System of Physicians to provide our
members healthcare services on an efficient and cost effective basis through
strategic alliances with insurance companies and other healthcare providers on a
statewide basis. Beyond that, our model is based on a direct, proactive,
involved participation with our real client, the physicians, for the benefit of
the patients of our CHS program.
Under our proposed MCO agreement(s), RHS, through affiliated providers,
is responsible for the provision of all covered benefits. While responsible for
all medical expenses for each covered life, we intend to limit our exposure by
obtaining reinsurance/stop-loss coverage. We have capitated high volume
specialties, fixing our cost on a per-member-per-month (PMPM) basis. Low volume
providers remain at a discounted fee-for-service basis. A change in healthcare
legislation, inflation, major epidemics, natural disasters and other factors
affecting the delivery and cost of healthcare are beyond our control and may
adversely affect our operating results.
Under our model, the physicians maintain their complete independence
but are aligned with our professional staff to assist in providing cost
effective quality medicine. Each primary care physician provides direct patient
services as a primary care doctor including referrals to specialists, hospital
admissions and referrals to diagnostic services and rehabilitation. In the
future, we may seek to acquire, develop or partner with a number of our
providers in Company owned medical centers of excellence that will serve as our
model facilities.
13
We enhance administrative operations of our physician practices by
providing management functions, such as payer contract negotiations,
credentialing assistance, financial reporting, risk management services and the
operation of integrated billing and collection systems. We offer the physicians
increased negotiating power associated with managing their practice and fewer
administrative burdens. This allows the physician to focus on providing care to
patients.
We intend to use the Internet extensively to help process referral
claims between our Community Health System's primary care physicians and
specialists and to communicate with patients. This process helps reduce
paperwork in the physician's office as well as provide a more efficient method
for the patients in our Community Health System. Our utilization management team
will communicate with the physicians on a daily basis to provide overall
management of the patient.
MCO Arrangements
Executed Agreements
The Company has executed three contracts with Florida Managed Care
Organizations (MCO), one of which is currently active, the remaining two of
which are currently in development. The terms of the active contract detail that
RHS will be responsible for arranging a Provider Health System in three Florida
counties. The agreement calls for RHS to receive a percentage of premiums
received by the MCO. Relating to this agreement, the Company is required to
place $100,000 in a segregated bank account to start and increase this amount by
3% of the revenues generated by the agreement up to a total $1,000,000. The
Company anticipates that if properly funded, this agreement will be generating
$20,000,000 in revenues by December 31, 2006.
Future Agreements
The Company further intends to have a substantial amount of its
revenues derived from agreements with MCOs that provide for the receipt of
capitated fees. Capitated fees are negotiated fees that stipulate a specific
dollar amount or a percentage of premiums (POP) collected by an insurer or payer
source to cover the partial or complete healthcare services deliveries to a
person. The fees are determined on a per capita basis paid monthly by managed
care organizations. MCO enrollees may come from the integration or acquisition
of healthcare providing entities, additional affiliated physicians, and acquire
and increase enrollment in MCOs currently contracting with the Company through
its Physician Practices and Ancillary Services, or from agreements with new
MCOs. The Company intends to enter into additional MCO agreements, which
generally will be for one-year terms, and subject to annual negotiation of
rates, covered benefits and other terms and conditions. MCO agreements are often
negotiated and executed in arrears.
The Company in the future may negotiate discounts for service
arrangements with managed care companies. These arrangements would place no
additional financial risk to the Company. In all cases, they are either
negotiated flat, mutually agreed upon rates for covered services, usually
calling for a discount of 30% from usual and customary charges, or a call for
payment at a percentage of Medicare allowable rates (ranging from 70% to 150%).
OPPORTUNITY
We believe that the current environment in the healthcare industry is
consistent with the Company's business plan. As physicians try to reverse what
has been declining net revenues adjusted for inflation over the last 15 years,
they will seek to outsource non-core competencies such as the services the
Company intends to provide. We believe we can offer those services at a lower
cost and with better results than the physician can achieve on the physician's
own. This trend, if it continues, will benefit the Company's
Consulting-Outsourcing operations. We also believe that with the projected
growth in Medicare Advantage, as described above, MCOs will be even more likely
to contract with third-party organizations such as our RHS to bring them, and
then manage, Medicare Advantage members. If this trend materializes as expected,
it would materially benefit RHS. Lastly, as with both trends discussed above, we
believe that with the proper and smart use of technology and new systems, the
industry and both of the Company's operations in Outsourcing-Consulting and
Services will benefit from the use of the technology QMT is anticipated to bring
to the Company. In addition, QMT services as those of RHS and QTUM, can and will
stand on their own.
14
COMPETITION
The healthcare industry is highly competitive and is subject to
continuing changes in the provision of services and the selection and
compensation of providers. The Company will compete with numerous national,
regional and local companies in providing services, products and technology.
Excluding individual physicians and small medical groups, the Company's
competitors are larger and better capitalized and may have longer established
relationships with buyers of such services.
EMPLOYEES
As of January 31, 2006, the Company has 22 full-time employees employed
at the Company's executive offices. No employees of the Company are covered by a
collective bargaining agreement or are represented by a labor union. The Company
considers its employee relations to be excellent.
RECENT CORPORATE EVENTS
During the summer of 2004, the Company leased a new facility to house
its corporate office. The 3,830 square foot facility was remodeled at a cost of
$25,000. The new facility is capable of providing work space for 24 full time on
site employees. It is anticipated that the Company will need to seek larger and
/ or additional facilities before the end of 2006. We also anticipate opening
small remote offices to support field operations in Seminole County in 2006.
GOVERNMENT REGULATION
As a player in the healthcare industry, the Company's operations and
relationships are subject to extensive and increasing regulation by a number of
governmental entities at the federal, state and local levels. The Company has
structured its operations to be in material compliance with applicable laws.
There can be no assurance that a review of the Company's or the affiliated
physician's business by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or the
affiliated physicians or that the healthcare regulatory environment will not
change so as to restrict the Company's or the affiliated physicians' existing
operations or their expansion.
The laws of many states prohibit business corporations such as the
Company from practicing medicine and employing physicians to practice medicine.
In Florida, non-licensed persons or entities, such as the Company, are
prohibited from engaging in the practice of medicine directly. However, Florida
does not prohibit such non-licensed persons or entities from employing or
otherwise retaining licensed physicians to practice medicine so long as the
Company does not interfere with the physician's exercise of independent medical
judgment in the treatment of patients. The laws in most states, including
Florida, regarding the corporate practice of medicine have been subjected to
limited judicial and regulatory interpretation and, therefore, no assurances can
be given that the Company's activities will be found to be in compliance, if
challenged.
There are also state and federal civil and criminal statutes imposing
substantial penalties, including civil and criminal fines and imprisonment,
administrative sanctions and possible exclusion from Medicare and other
governmental programs on healthcare providers that fraudulently or wrongfully
bill governmental or other third-party payers for healthcare services. The
federal law prohibiting false billings allows a private person to bring a civil
action in the name of the United States government for violations of its
provisions. Moreover, technical Medicare and other reimbursement rules affect
the structure of physician and ancillary billing arrangements. The Company
believes it will always be in material compliance with such laws, but there is
no assurance that the Company's activities will not be challenged or scrutinized
in the future by courts or governmental authorities. Noncompliance with such
laws may adversely affect the operation of the Company and subject it to
penalties and additional costs.
Certain provisions of the Social Security Act, commonly referred to as
the "Anti-Kickback Statute," prohibit the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare or
state health program patients or patient care opportunities, or in return for
the recommendation, arrangement, purchase, lease or order of items or services
that are covered by Medicare or state health programs. The Anti-Kickback Statute
is broad in scope and has been broadly interpreted by courts in many
15
jurisdictions. Read literally, the statute places at risk many business
arrangements, potentially subjecting such arrangements to lengthy, expensive
investigations and prosecutions initiated by federal and state governmental
officials. Violation of the Anti-Kickback Statute is a felony, punishable by
significant fines and/or imprisonment. In addition, the Department of Health and
Human Services may impose civil penalties excluding violators from participation
in Medicare or state health programs.
The federal Health Insurance Portability and Accountability Act (HIPAA)
expands the government's resources to combat healthcare fraud, creates several
new criminal healthcare offenses and establishes a new advisory opinion
mechanism under which the Office of Inspector General is required to respond to
requests for interpretation of the Anti-Kickback Statute, in an effort to bring
clarity and relief to the uncertainty of the Anti-Kickback Statute. Due to the
newness of the legislation, it is impossible to predict the impact of the new
law on the Company's operations.
Congress, in the Omnibus Budget Reconciliation Act of 1993, enacted
significant prohibitions against physician referrals. These prohibitions,
commonly known as "Stark II," amended prior physician self-referral legislation
known as "Stark I" by dramatically enlarging the field of physician-owned or
physician-interested entities to which the referral prohibitions apply.
Effective January 1, 1995, Stark II prohibits, subject to certain exceptions,
including a group practice exception, a physician from referring Medicare or
Medicaid patients to an entity providing "designated health services" in which
the physician or immediate family member has an ownership or investment interest
or with which the physician has entered into a compensation arrangement. The
designated health services include clinical laboratory services, radiology and
other diagnostic services, radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
equipment and supplies, prosthetics, orthotics, outpatient prescription drugs,
home health services, and inpatient and outpatient hospital services. The
penalties for violating Stark II include a prohibition on payment by these
government programs and civil penalties of as much as $15,000 for each violative
referral and $100,000 for participation in a "circumvention scheme." The Stark
legislation is broad and ambiguous. Interpretive regulations clarifying the
provisions of Stark II have not been issued. Florida has also enacted similar
self-referral laws. The Florida Patient Self-Referral Act of 1992 severely
restricts patient referrals for certain services by physicians with ownership or
investment interests, requires disclosure of physician ownership in businesses
to which patients are referred and places other regulations on healthcare
providers. While the Company believes it is in compliance with the Florida and
Stark legislation, and their exceptions, future laws, regulations or
interpretations of current law could require the Company to modify the form of
its relationships with physicians and ancillary service providers. Moreover, the
violation of Stark I or II or the Florida Patient Self-Referral Law of 1992 by
the Company's Physician group could result in significant fines and loss of
reimbursement which would adversely affect the Company.
RISK FACTORS
FORWARD LOOKING STATEMENTS
The discussion in this report regarding our business and operations
includes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1996. Such statements consist of any
statement other than a recitation of historical fact and can be identified by
the use of forward-looking terminology such as "may," "expect," "anticipate,"
"intend," "estimate" or "continue" or the negative thereof or other variations
thereof or comparable terminology. The reader is cautioned that all
forward-looking statements are speculative, and there are certain risks and
uncertainties that could cause actual events or results to differ from those
referred to in such forward-looking statements. This disclosure highlights some
of the important risks regarding our business. The number one risk of the
Company is its ability to attract fresh and continued capital to execute its
comprehensive business plan. In addition, the risks included should not be
assumed to be the only things that could affect future performance. Additional
risks and uncertainties include the potential loss of contractual relationships,
changes in the reimbursement rates for those services as well as uncertainty
about the ability to collect the appropriate fees for services provided by us.
Also, the Company faces challenges in technology development, deployment and
use, medical malpractice exposure and the fluctuation of medical costs vs.
medical payments. The Company may also be subject to disruptions, delays in
collections, or facilities closures caused by potential or actual acts of
terrorism or government security concerns.
16
o Dilution and Exposure Relating to Recent Shareholder Vote
The Company issued shares of common stock to acquire the remaining 80%
of Renaissance Health Systems and Quantum Medical Technologies from the majority
shareholder of those companies. The majority shareholder had granted 7,175,000
options at $.001 to purchase shares held by Mr. Guilllama. The shareholders of
RHS and QMT are beneficial shareholders of the Company, including all executive
officers and directors. Therefore, this is clearly not an arms-length
transaction; however, management feels it is in the best interest of the
Company's current and future shareholders by widely expanding the business
strategy, acquiring letters of intents in place and by eliminating distractions
from management. As a result of this action and the approval by the board of
directors, the Company could face scrutiny by regulators, SEC and IRS; and
further could face complaints and/or lawsuit from dissident minority
shareholders. In potential offset, the Chairman has proposed to the Board that
he will allow restrictions on the shares he would receive in this consolidation
to serve as collateral for any successful claims made on anyone as it
specifically relates to this transaction. The Company does not have any reason
to believe that anyone would object, however if someone objects and successfully
wins in a claim against the Company, the Company may not have the resources to
defend or prevail in such actions.
o Need for Substantial Additional Financing and Going Concern
From inception to date, the Company has relied upon the sale of common
stock in order to maintain its operations. There can be no assurance that the
Company will be able to obtain additional financing if, and when, it is needed
on terms the Company deems acceptable. The inability of the Company to obtain
sufficient additional financing would have a material adverse effect on the
Company's ability to implement its business, and as a result, could require the
Company to diminish or suspend activities.
o Dependence on MCO Agreements; Capitated Nature of Revenues; Control of
Healthcare Costs
The Company intends to have a substantial part of its revenues derived
from agreements with Managed Care Organizations ("MCOs") that provide for the
receipt of capitated fees. Capitated fees are a negotiated percentage of total
premiums collected by an insurer or payer source to cover the partial or
complete healthcare services deliveries to a person. The fees are determined on
a per capita basis paid monthly by managed care organizations. MCO enrollees may
come from the integration or acquisition of healthcare providing entities,
additional affiliated physicians and acquire and increase enrollment in each
contract/region serviced by the Company. The Company intends to enter into MCO
agreements, which generally will be for one-year terms, and subject to annual
negotiation of rates, covered benefits and other terms and conditions. MCO
agreements are often negotiated and executed in arrears. There can be no
assurance that such agreements will be entered into, or renewed, or if entered
into and/or renewed that they will contain these favorable reimbursement terms
to the Company and its affiliated providers. There can be no assurance that the
Company will be successful in identifying, acquiring and integrating MCO
entities or in increasing the number of MCO enrollees. Once acquired, a decline
in enrollees in MCOs could also have a material adverse effect on the Company's
profitability.
Under the MCO agreements the Company, through its affiliated providers,
will generally be responsible for the provision of all covered hospital benefits
as well as outpatient benefits regardless of whether the affiliated providers
directly provide the healthcare services associated with the covered benefits.
To the extent that enrollees require more care than is anticipated or require
supplemental healthcare, which is not otherwise reimbursed by the MCO, aggregate
capitation rates may be insufficient to cover the costs associated with the
treatment of enrollees. If revenue is insufficient to cover costs, the Company's
operating results could be adversely affected. As a result the success of the
Company will depend in large part on the effective management of healthcare
costs through various methods, including utilization management, competitive
pricing for purchased services and favorable agreements with payers. Recently
many providers have experienced pricing pressures with respect to negotiations
with MCOs. There can be no assurance that these pricing pressures will not have
a material adverse impact on the operating results of the Company. Changes in
healthcare practices, inflation, new technologies, major epidemics, natural
disasters and numerous other factors affecting the delivery and cost of
healthcare are beyond the control of the Company and may adversely affect its
operating results.
17
Under MCO agreements the Company will be responsible for the provision
of all covered hospital benefits regardless of whether it is responsible for
provision of the hospital services associated with the covered benefits. In
connection with hospital covered benefits, the Company will enter into a per
diem arrangement with a hospital or hospitals whereby the Company will pay the
hospital service provider a flat per diem fee, for which the hospital will
provide all hospital directed services for a single per diem fee. In some cases
the Company would be required to pay a percentage of usual and customary
hospital charges if a capitated patient is seen or admitted in a hospital not
under contract to the Company. The Company intends to contract with a number of
hospitals to provide covered services to MCO enrollees who have been assigned to
the physician practices affiliated with the Company. The Company expects to seek
additional hospital providers to provide covered services to MCO enrollees
assigned to its affiliated physicians. To the extent that enrollees require more
care than is anticipated or require supplemental care that is not otherwise
reimbursed by the MCOs, aggregate capitation rates may be insufficient to cover
the costs associated with the treatment of enrollees. If such revenue is
insufficient, the Company's operating results could be adversely affected.
The MCO agreements often contain shared-risk provisions under which
additional revenue can be earned or economic penalties can be incurred based
upon the utilization of hospital physicians and ancillary services by MCO
enrollees. These estimates are based upon resource consumption, utilization and
associated costs incurred by MCO enrollees compared to budgeted costs.
Differences between actual contract settlements and amounts estimated as
receivable or payable relating to MCO risk-sharing arrangements are generally
reconciled annually, which may cause fluctuations from amounts previously
accrued.
Our Failure to Estimate IBNR Claims Accurately Will Affect Our Reported
Financial Results. Our medical care costs include estimates of our IBNR claims.
We estimate our medical expense liabilities using actuarial methods based on
historical data adjusted for payment patterns, cost trends, product mix,
seasonality, utilization of healthcare services, and in consultation with our
MCO Partners, other relevant factors. Actual conditions, however, could differ
from those we assume in our estimation process. We continually review and update
our estimation methods and the resulting accruals and make adjustments, if
necessary, to medical expense when the criteria used to determine IBNR change
and when actual claim costs are ultimately determined. As a result of the
uncertainties associated with the factors used in these assumptions, the actual
amount of medical expense that we incur may be materially more or less than the
amount of IBNR originally estimated. If our estimates of IBNR are inadequate in
the future, our reported results of operations will be negatively impacted.
Further, our inability to estimate IBNR accurately may also affect our ability
to take timely corrective actions or otherwise establish appropriate premium
pricing, further exacerbating the extent of any adverse effect on our results.
Competition in Our Industry May Limit Our Ability to Maintain or Attract
Members, Which Could Adversely Affect Our Results of Operations. We operate in a
highly competitive environment subject to significant changes as a result of
business consolidations, new strategic alliances, and aggressive marketing
practices by other managed care organizations that compete with us for members.
Our principal competitors for contracts, members, and providers vary by local
service area and are comprised of national, regional, and local managed care
organizations that serve Medicare recipients, including, among others,
UnitedHealth Group, Humana, Inc., Metcare Healthplan, America's Health Choice,
Vista Health Plans, Wellcare Healthplans and others. Our failure to maintain or
attract members to our MCO Partners could adversely affect our results of
operations. We believe changes resulting from the MMA may bring additional
competitors into our Medical Advantage service areas. In addition, we face
competition from other managed care companies that often have greater financial
and other resources, larger enrollments, broader ranges of products and
benefits, broader geographical coverage, more established reputations in the
national market and our markets, greater market share, larger contracting scale,
and lower costs. Such competition may negatively impact our enrollment,
financial forecasts, and profitability.
Our Inability to Maintain The Medicare Advantage Members, or our MCO
Partners, or Increase Our Membership Could Adversely Affect Our Results of
Operations. A reduction in the number of members in our Affiliated Medicare
Advantage plans, or the failure to increase our membership, could adversely
affect our results of operations. In addition to competition, factors that could
contribute to the loss of, or failure to attract and retain, members include:
o negative accreditation results or loss of licenses or contracts to
offer Medicare Advantage plans;
o negative publicity and news coverage relating to us or the managed
healthcare industry generally;
o litigation or threats of litigation against us;
18
o disenrollment as a result of members choosing a stand-alone PDP; and
o our inability to market to and re-enroll members who enlist with our
competitors because of the new annual enrollment and lock-in
provisions under the MMA.
A Disruption in Our Healthcare Provider Networks Could Have an Adverse
Effect on Our Operations and Profitability. Our operations and future
profitability are dependent, in part, upon our ability to contract with
healthcare providers and provider networks on favorable terms. In any particular
service area, healthcare providers or provider networks could refuse to contract
with us, demand higher payments, or take other actions that could result in
higher healthcare costs, disruption of benefits to our members, or difficulty in
meeting our regulatory or accreditation requirements. In some service areas,
healthcare providers may have significant market positions. If healthcare
providers refuse to contract with us, use their market position to negotiate
favorable contracts, or place us at a competitive disadvantage, then our ability
to market products or to be profitable in those service areas could be adversely
affected. Our provider networks could also be disrupted by the financial
insolvency of a large provider group. Any disruption in our provider network
could result in a loss of membership or higher healthcare costs.
Negative Publicity Regarding the Managed Healthcare Industry Generally or
Us in Particular Could Adversely Affect Our Results of Operations or Business.
Negative publicity regarding the managed healthcare industry generally, any of
our MCO Partners, or us in particular, may result in increased regulation and
legislative review of industry practices that further increase our costs of
doing business and adversely affect our results of operations by:
o requiring us to change our products and services;
o increasing the regulatory burdens under which we operate;
o adversely affecting our ability to market our products or services; or
o adversely affecting our ability to attract and retain members.
Violation of the Laws and Regulations Applicable to Us Could Expose Us to
Liability, Reduce Our Revenue and Profitability, or Otherwise Adversely Affect
Our Operations and Operating Results. The federal and state agencies
administering the laws and regulations applicable to us have broad discretion to
enforce them. We expect to be subject, on an ongoing basis, to various
governmental reviews, audits, and investigations to verify our compliance with
our contracts, licenses, and applicable laws and regulations. An adverse review,
audit, or investigation could result in any of the following:
o cancellation of any or all of our MCO contracts;
o loss of our right to participate in the Medicare Advantage program;
o forfeiture or recoupment of amounts we have been paid pursuant to our
contracts or performance bonds;
o imposition of significant civil or criminal penalties, fines, or other
sanctions on us and our key employees;
o damage to our reputation in existing and potential markets;
o increased restrictions on marketing our products and services; and
o inability to obtain approval for future products and services,
geographic expansions, or acquisitions.
19
Claims Relating to Medical Malpractice and Other Litigation Could Cause
Us to Incur Significant Expenses. From time to time, we may be party to various
litigation matters, some of which could seek monetary damages. Managed care
organizations and their assets may be sued directly for alleged negligence,
including in connection with the credentialing of network providers or for
alleged improper denials or delay of care. In addition, Congress and several
states have considered or are considering legislation that would expressly
permit managed care organizations to be held liable for negligent treatment
decisions or benefits coverage determinations. Of the states in which we
anticipate future operations, only Texas has enacted legislation relating to
health plan liability for negligent treatment decisions and benefits coverage
determinations. In addition, our providers involved in medical care decisions
may be exposed to the risk of medical malpractice claims. A material percentage
of these providers do not have malpractice insurance. As a result of increased
costs or inability to secure malpractice insurance, the percentage of physicians
who do not have malpractice insurance may increase.
The Inability or Failure to Properly Maintain Effective and Secure
Management Information Systems, Successfully Update or Expand Processing
Capability, or Develop New Capabilities to Meet Our Business Needs Could Result
in Operational Disruptions and Other Adverse Consequences. Our business will
depend significantly on effective and secure information systems. The
information gathered and processed by our management information systems will,
once completed assist us in, among other things, marketing and sales tracking,
billing, claims processing, medical management, medical care cost and
utilization trending, financial and management accounting, reporting, planning
and analysis and e-commerce. These systems could, in the future, support on-line
customer service functions, provider and member administrative functions and
support tracking and extensive analyses of medical expenses and outcome data.
These information systems and applications require continual maintenance,
upgrading and enhancement to meet our operational needs and handle our expansion
and growth. Any inability or failure to properly maintain management information
systems, successfully update or expand processing capability or develop new
capabilities to meet our business needs in a timely manner, could result in
operational disruptions, loss of existing customers, difficulty in attracting
new customers or in implementing our growth strategies, disputes with customers
and providers, regulatory problems, increases in administrative expenses, loss
of our ability to produce timely and accurate reports and other adverse
consequences. To the extent a failure in maintaining effective information
systems occurs, we may need to contract for these services with third-party
management companies, which may be on less favorable terms to us and
significantly disrupt our operations and information flow. Furthermore, our
business requires the secure transmission of confidential information over
public networks. Because of the confidential health information we store and
transmit, security breaches could expose us to a risk of regulatory action,
litigation, possible liability and loss. Our security measures may be inadequate
to prevent security breaches, and our business operations and profitability
would be adversely affected by cancellation of contracts, loss of members and
potential criminal and civil sanctions if they are not prevented.
If We Are Unable to Implement Effective Internal Controls Over
Financial Reporting, Investors Could Lose Confidence in the Reliability of Our
Financial Statements, Which Could Result in a Decrease in the Price of Our
Common Stock. We are required to implement financial, internal, and management
control systems to meet our obligations as a public company, including
obligations imposed by the Sarbanes-Oxley Act of 2002. However, with limited
resources our ability to complete this task may be limited. These areas include
corporate governance, corporate control, internal audit, and compliance
requirements.
o Reductions in Third-Party Reimbursement
Healthcare providers that render services on a fee-for-service basis
(as opposed to a capitated plan), typically submit bills for healthcare services
provided to various third-party payers, such as governmental programs (e.g.,
Medicare and Medicaid), private insurance plans and managed care plans, for the
healthcare services provided to their patients. A portion of the future revenues
of the Company are likely to be derived from payments made by these third-party
payers. These third-party payers increasingly are negotiating the prices charged
for healthcare services with the goal of lowering reimbursement and utilization
rates. The success of the Company depends in part on the effective management of
healthcare costs. This includes controlling utilization of specialty care
physicians and other ancillary providers and purchasing services from
third-party providers at competitive prices. There can be no assurance that
payments under governmental programs or from other third-party payers will
remain at present levels. Third-party payers can deny reimbursement if they
determine that treatment was not performed in accordance with the cost-effective
treatment methods established by such payers, was experimental, or for other
reasons.
20
o The Development of Management Information Systems May Involve
Significant Time and Expense.
We expect to develop a management information system as an important
component of the business. The development and implementation of such systems
involve the risk of unanticipated delay and expense, which could have an adverse
impact on our operations.
o Risks Associated with Development of Management Information Systems;
Dependence on Major Customers for Management Information Systems
The Company's management information systems will be an important
component of the business. The Company is participating in the development of an
integrated management information system. This would be designed to provide
centralized billing, permit the review of a patient's electronic medical records
and information on practice guidelines, monitor utilization, and measure patient
satisfaction and outcomes of care. The development and implementation of such
systems involve the risk of unanticipated delay and expense, and there can be no
assurance that the Company will be successful in implementing the integrated
management information system. The Company has no active information system
installed currently, and may seek to outsource all management system functions
to a third party.
o Exposure to Professional Liability; Liability Insurance
In recent years physicians, hospitals and other providers in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice and related legal theories. Many of these lawsuits
involve large claims and substantial defense costs. Once funding is secured, the
Company expects to secure professional liability insurance coverage, on a claim
made basis, in amounts that exceed the requirements as mandated by the State of
Florida, but which may not be adequate to protect the Company's assets.
o Competition
The healthcare industry is highly competitive and subject to continual
changes in the method in which services are provided and the manner in which
healthcare providers are selected and compensated. Companies in other healthcare
industry segments, some of which have financial and other resources greater than
we do, may become competitors in providing similar services. Our principal
competitors include Metropolitan Health Networks, Inc. (a company that our CEO
and CFO jointly co-founded), Continucare, Primary Care Specialists, First
Consulting Group, Accuro Healthcare Solutions, Inc., WebMD, and Z Consulting.
Our strength, in comparison with our competitors, is our knowledge,
understanding, and experience in managed care risks, information technology and
systems development.
o The healthcare industry is highly regulated and failure to comply with
laws or regulations, or a determination that in the past we have
failed to comply with laws or regulations, could have an adverse
effect on our financial condition and results of operations.
The healthcare services that we and our affiliated professionals intend
to provide are subject to extensive federal, state and local laws and
regulations governing various matters such as the licensing and certification of
our facilities and personnel, the conduct of our operations, our billing and
coding policies and practices, our policies and practices with regard to patient
privacy and confidentiality and prohibitions on payments for the referral of
business and self-referrals. If we fail to comply with these laws, or a
determination is made that in the past we have failed to comply with these laws,
our financial condition and results of operations could be adversely affected.
Changes to healthcare laws or regulations may restrict our existing operations,
limit the expansion of our business or impose additional compliance
requirements. These changes could have the effect of reducing our opportunities
or continued growth and imposing additional compliance costs on us that may not
be recoverable through price increases.
Federal anti-kickback laws and regulations prohibit certain offers,
payments or receipts of remuneration in return for referring Medicaid or other
government-sponsored healthcare program patients or patient care opportunities
or purchasing, leasing, ordering, arranging for, or recommending any service or
item for which payment may be made by a government-sponsored healthcare program.
Federal physician self-referral legislation, known as the Stark Law, prohibits
Medicare or Medicaid payments for certain services furnished by a physician who
has a financial relationship with various physician-owned or
21
physician-interested entities. These laws are broadly worded and, in the case of
the anti-kickback law, have been broadly interpreted by federal courts, and
potentially subject many business arrangements to government investigation and
prosecution which can be costly and time consuming. Violations of these laws are
punishable by monetary fines, civil and criminal penalties, exclusion from
participation in government-sponsored healthcare programs and forfeiture of
amounts collected in violation of such laws, which could have an adverse effect
on our business and results of operations. Florida also has anti-kickback and
self-referral laws, imposing substantial penalties for violations.
o HIPAA
The Health Insurance Portability and Accountability Act (HIPAA) portion
that deals with patient privacy became effective April 14, 2003. These new
federal health privacy regulations set a national floor of privacy protections
that will reassure patients that their medical records are kept confidential.
The rules intend to ensure appropriate privacy safeguards are in place as we
harness information technologies to improve the quality of care provided to
patients.
The new protections give patients greater access to their own medical
records and more control over how their personal information is used by their
health plans and healthcare providers. Consumers are required to receive a
notice explaining how their health plans, doctors, pharmacies and other
healthcare providers use, disclose and protect their personal information.
Consumers now have the ability to see and copy their health records and to
request corrections of any errors included in their records. Consumers may file
complaints about privacy issues with their health plans or providers or with the
Office for Civil Rights.
If the Company, and/or its affiliates, is found in violation of HIPAA
regulations, the Company could face substantial fines and restrictions including
the loss of its MCO contracts.
o Healthcare Reform
As a result of the continued escalation of healthcare costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been or may be introduced in the U.S. Congress and state legislatures
relating to healthcare reform. There can be no assurance as to the ultimate
content, timing or effect of any healthcare reform legislation. It is impossible
at this time to estimate the impact of potential legislation that may be
material to the Company, its operations and profitability.
o Control by Management and Present Shareholders of the Company
As of October 31, 2005, Mr. Guillama and his family control
approximately 41.0%, of the Company's issued and outstanding Common Stock. The
Officers and Directors of the Company collectively control 51.9% of the common
shares of the Corporation. This effectively gives Mr. Guillama material control
of the Company including the ability to change the entire Board of Directors.
o Dependence on Key Personnel
Implementation of the Company's business strategy is largely dependent
on the efforts of two senior officers, Noel J. Guillama, Chief Executive
Officer, and Donald B. Cohen, Chief Financial Officer. The Company's operations
are dependent to a great degree on the continued efforts of the President, Chief
Executive and Operation Officer of the Company, Noel J. Guillama. Furthermore,
the Company will likely be dependent on other senior management and the entire
Board of Directors as the Company grows. Competition for highly qualified
personnel is intense and the Company has very limited resources. The loss of any
executive officer or other key employee, or the failure to attract and retain
other skilled employees could have a material adverse impact upon the Company's
business, operations or financial condition.
22
o Capital Needs May Have Dilutive Effect
The Company will need to raise additional capital through the issuance
of long-term or short-term indebtedness, a bank line of credit and / or
recoverable factoring facility and / or the issuance of additional equity
securities including sale of common or preferred stock in private or public
transactions at such times as management deems appropriate and the market
allows. Any of such financings can result in dilution of existing equity
positions, increased interest and amortization expense, or decreased income to
fund future expansion. There can be no assurance that acceptable financing for
future acquisitions, or for the integration and expansion of existing networks,
can be obtained.
o Shares Eligible for Future Sale
At October 31, 2005, the Company had 22,705,311 outstanding shares of
common stock of which 22,032,423 are "restricted securities" and in the future
may be sold upon compliance with Rule 144 adopted under the Securities Act. Rule
144 provides that a person holding "restricted securities" for a period of two
years may sell only an amount every three months equal to the greater of (a) one
percent of the Company's issued and outstanding shares, or (b) the average
weekly volume of sales during the four calendar weeks preceding the sale.
o Anti-Takeover Provisions
Certain provisions of the Company's Articles of Incorporation and
Bylaws may be deemed to have anti-takeover effects and may delay, defer or
prevent a takeover attempt of the Company, which include when and by whom
special meetings of the Company may be called. In addition, the Company's
Articles of Incorporation (Nevada) authorize the issuance of up to 30,000,000
shares of Preferred Stock with such rights and preferences as may be determined
from time to time by the Board of Directors. Accordingly, the Board of Directors
may, without shareholder approval, issue Preferred Stock with dividends,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Common Stock.
Additionally, the Company's Articles of Incorporation, Bylaws and
Nevada corporate law, where the Company is incorporated, authorize the Company
to indemnify its directors, officers, employees and agents and limit the
personal liability of corporate directors for monetary damages, except in
certain instances.
o Absence of Dividends
The Management of the Company believes that the purpose of a
corporation is to provide a return on the investments of its shareholders.
Management's goal is to pay dividends to all shareholders, common and preferred
within five years. Holders of the Company's Common Stock are entitled to cash
dividends from funds legally available when, and if, declared by the Board of
Directors. As a newly organized corporation the Company has never paid
dividends. The Company does not anticipate the declaration or payments of any
dividends in the foreseeable future. The Company intends to retain any earnings
in the first few years to finance the development and expansion of its business.
Future dividend policy will be subject to the discretion of the Board of
Directors and will be contingent upon future earnings, the Company's financial
condition, capital requirements, general business conditions and other factors.
Future dividends may also be subject to covenants contained in loan or other
financing documents. Therefore, there can be no assurance that cash dividends of
any kind will ever be paid.
o The loss of a future agreement and the capitated nature of our future
revenues could materially affect our operations.
Once operational, the majority of our revenues will come from
agreements with managed care organizations that provide for the receipt of
capitated fees. Capitated fees are negotiated fees that stipulate a specific
dollar amount or a percentage of total premiums collected by an insurer or payer
source to cover the partial or complete healthcare services deliveries to a
person. We expect to enter into one-year and three-year term agreements that are
renewable annually thereafter. These agreements may be terminated on short
notice or not renewed on terms favorable to our affiliated providers and us. We
may not be successful in obtaining additional MCO agreements or in increasing
the number of MCO enrollees once we secure such agreements.
23
Under the MCO agreements the Company through its affiliated providers,
generally will be responsible for the provision of all covered hospital
benefits, as well as outpatient benefits, regardless of whether the affiliated
providers directly provide the healthcare services associated with the covered
benefits. To the extent that enrollees require more care than is anticipated,
aggregate capitation rates may be insufficient to cover the costs associated
with the treatment of enrollees. If revenue is insufficient to cover costs, our
operating results could be adversely affected. As a result, our success will
depend in large part on the effective management of healthcare costs. Pricing
pressures may have a material adverse effect on our operating results. Changes
in healthcare practices, inflation, new technologies, and numerous other factors
affecting the delivery and cost of healthcare are beyond our control and may
adversely affect our operating results.
o The price of the Company's Common Stock could fall dramatically.
Due to the substantial number of shares that will be eligible for sale
in the future, the market price of our common stock could fall as a result of
sales of a large number of shares of common stock in the market, or the price
could remain lower because of the perception that such sales may occur.
These factors could also make it more difficult for us to raise funds
through future offerings of our common stock. As of January 31, 2006, there were
22,803,511 shares of our common stock outstanding.
o Our business will suffer if we fail to successfully integrate any
potential acquisition or technologies in the future.
Part of our business plan is to acquire, license or joint venture other
organization's products, services and/or technology. If we are unable to acquire
and/or successfully integrate the acquisitions, this could have a material
impact on our business model and/or development.
Consequently, we may not be successful in integrating acquired
businesses or technologies and may not achieve anticipated revenue and cost
benefits. We also cannot guarantee that these acquisitions will result in
sufficient revenues or earnings to justify our investment in, or expenses
related to, these acquisitions or that any synergies will develop. The
healthcare technology industry is consolidating and we expect that we will face
intensified competition for acquisitions. If we fail to execute our acquisition
strategy successfully for any reason, our business will suffer significantly.
o Developing our intellectual property may be subjected to infringement
claims or may be infringed upon.
Our intellectual property will be important to our business. We could
be subject to intellectual property infringement claims as the number of our
competitors grows and the functionality of our applications overlaps with
competitive offerings. These claims, even if not meritorious, could be expensive
and divert management's attention from our operations. If we become liable to
third parties for infringing their intellectual property rights, we could be
required to pay a substantial damage award and to develop non-infringing
technology, obtain a license or cease selling the applications that contain the
infringing intellectual property.
o Limited release of information
Due to the highly competitive nature of the healthcare industry in
Florida, the Company has taken a position that disclosing certain information
like the names of HMOs (under LOI or contract), counties of service, detailed
terms of contracts with these HMOs and/or strategic partnerships may be used by
our competitors to our determent, therefore the Company intends to be as
cautious as possible in press releases and public filings so as not to divulge
confidential and strategic corporate information, as such it will be hard to
fully access the risk of the company's future development.
24
ITEM 2. DESCRIPTION OF PROPERTY
Our offices are located at 3460 Fairlane Farms Road, Suite 4,
Wellington, Florida where the Company occupies approximately 3,830 square feet
at a current monthly rent of $5,068 pursuant to leases expiring July 14, 2007
.
The Company's property is not leased from an affiliate.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
25
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
CAPITALIZATION OF COMPANY
Post re-organization, the Company has 200,000,000 shares authorized; of
which, 170,000,000 are common shares with a par value of $0.001; and 30,000,000
are undesignated preferred shares with a par value of $0.001. As of January 31,
2006 there are 22,803,511 outstanding common shares and no preferred shares.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors with the result that
the holders of more than 50% of the shares voted for the election of directors
and can elect all of the directors. The holders of Common Stock are entitled to
receive dividends, when, and if, declared by the Board of Directors out of funds
legally available. In the event of liquidation, dissolution or winding up, the
holders of Common Stock are entitled to share ratably in all assets remaining
available for distribution to them after payment of liabilities and after
provision has been made for each class of stock, if any, having preference over
the Common Stock. Holders of shares of Common Stock, as such, have no
conversion, preemptive or other subscription rights, and there are no redemption
provisions applicable to Common Stock. All of the outstanding shares of Common
Stock, and the shares of Common Stock offered hereby, will be, duly authorized,
validly issued, fully paid and non-assessable.
The Company currently believes it has approximately 750 beneficial
shareholders of record.
PREFERRED STOCK
We are authorized to issue 30,000,000 shares of Preferred Stock with
such designation, rights and preferences as may be determined from time to time
by the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of the Common Stock. In the event of
issuance, the Preferred Stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control. In August
2004, the Company issued 200,000 special Series A-1 preferred to Noel J.
Guillama the majority shareholder of the Company as part of the transaction to
acquire Quantum Medical Technologies, Inc., and Renaissance Health Systems, Inc.
Each share was convertible into 30 shares of common stock after four years at
the option of holder. As part of continued financing and without consideration
Mr. Guillama agreed to cancel and return to the company his entire holding of
series A-1 Preferred Shares.
25
(a) Market Information
As of the fiscal year ended October 31, 2005, our Common Stock was
quoted on the Over-The-Counter Bulletin Board Trading System ("OTCBB") under
the symbol "QTUM". Until February 6, 2004, our Common Stock trade under the
symbol TPII.
The price range per share reflected in the table below is the high and
low bid quotation for our common stock and reflects all stock splits affected by
the Company.
Quarter High Low
------- ------ ------
Fiscal Year Ended October 31, 2004
1st Quarter 2004 $ 1.30 $ 0.60
2nd Quarter 2004 $ 1.00 $ 0.04
3rd Quarter 2004 $ 1.50 $ 0.55
4th Quarter 2004 $ 1.05 $ 0.75
Fiscal Year Ended October 31, 2005
1st Quarter 2005 $ 1.01 $ 0.47
2nd Quarter 2005 $ 0.60 $ 0.30
3rd Quarter 2005 $ 0.70 $ 0.50
4th Quarter 2005 $ 1.01 $ 0.70
Trading in our common stock on the OTCBB market has been limited and
sporadic and the quotations set forth above are not necessarily indicative of
actual market conditions. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions.
We have never declared or paid any cash dividends on our Common
Stock. We currently intend to retain future earnings, if any, to finance the
expansion and growth of our business and do not expect to pay any cash dividends
in the foreseeable future. Payment of future cash dividends, if any, will be at
the discretion of our board of directors after taking into account various
factors, including our financial condition, operating results, current and
anticipated cash needs, plans for expansion and other factors considered
relevant by our Board of Directors.
(b) Holders
The Company believes that there were approximately 750 beneficial
shareholders of record of our Common Stock as of October 31, 2005.
(c) Dividends
The Company has not paid any dividends on its Common Stock nor does the
Company anticipate paying any dividends in the foreseeable future. All earnings,
if any, will be reinvested in the Company.
(d) Recent sale of Unregistered Securities:
26
The following information is furnished with regard to all securities
sold by us since inception that were not registered under the Securities Act.
The issuances described hereunder were made in reliance upon the exemptions from
registration set forth in Section 4(2) of the Securities Act or Regulation D,
Rule 506 of the Securities Act of 1933 ("1933 Act"). None of the foregoing
transactions involved a distribution or public offering.
During the period July through December 2004, the Company sold
1,378,905 shares of common stock to foreign investors for an average sale price
of $0.275 per share under an agreement the Company signed with an investment
group. Each investor represented to us that the investor was not a "U.S.
Person", as defined under Regulation S of the 1933 Act. The Company realized net
proceeds, after commissions, of approximately $330,000 and issued 199,170
warrants to purchase Common Stock at a price of $.275 per share expiring January
4, 2010 as additional commission. Shares were issued to 152 investors.
On December 16, 2004, the Company sold 370,370 shares of Common
Stock for a price of $0.27 per share and realized net proceeds of $87,000. The
Company also issued 37,037 warrants at an exercise price of $0.27 per share to
the placement company. These shares were issued as restricted shares under the
1933 Act and were endorsed with a restrictive legend.
During the period December 2004 through June 2005, the Company sold
1,750,000 shares of Common Stock for a price of $0.40 per share under an
agreement signed with a placement company. The Company realized net proceeds of
$609,000 and issued 175,000 warrants with an exercise price of $0.40 per share
as commission to the placement company. These shares were issued as restricted
shares under the 1933 Act and were endorsed with a restrictive legend.
During the period July through October 2005, the Company sold 1,272,600
shares of Common Stock for a price of $0.50 per share and realized net proceeds
of $553,581, and issued 63,630 warrants exercisable at $0.50 per share as
commission to the placement company.
TRANSFER AGENT
The Transfer Agent for our shares of Common Stock is Fidelity Transfer
Company, Salt Lake City, Utah.
ITEM 6 MANAGEMENT'S PLAN OF OPERATIONS
RISK FACTORS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
The discussion in this section regarding our business and operations
includes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1996. Such statements consist of any
statement other than a recitation of historical fact and can be identified by
the use of forward-looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereof or
comparable terminology. The reader is cautioned that all forward-looking
statements are speculative, and there are certain risks and uncertainties that
could cause actual events or results to differ from those referred to in such
forward-looking statements. This disclosure highlights some of the important
risks regarding our business. The number one risk of the Company is its ability
to attract fresh and continued capital to execute its comprehensive business
plan. In addition, the risks included should not be assumed to be the only
things that could affect future performance. Additional risks and uncertainties
include the potential loss of contractual relationships, changes in the
reimbursement rates for those services as well as uncertainty about the ability
to collect the appropriate fees for services provided by us. Also, the Company
faces challenges in technology development, attracting competent personnel,
deployment and use, medical malpractice exposure and the fluctuation of medical
costs vs. medical payments. The Company may also be subject to disruptions,
delays in collections, or facilities closures caused by potential or actual acts
of terrorism or government security concerns.
GOING CONCERN
The Company is a development stage company that over the last
three years has expensed material sums in creating procedures, manuals and
systems to assist the medical community in the implementation of medical
27
regulations. Though the Company has materially finished developing its training
programs, additional updates and deployment will be required. The Company has
completed creating three Community Health Systems (medical delivery network)
Volusia, Dade and Broward Counties in Florida and has been negotiating
additional MCO contracts as well as creating three websites for medical
societies.
As shown in the accompanying consolidated financial statements, the
Company has incurred recurring losses and negative cash flows from its
development and organization activities and has negative working capital and
shareholders' deficit. Under normal conditions, these conditions raise
substantial doubt about the Company's ability to continue as a going concern.
There can be no assurance that the Company will be able to successfully
implement its plans to generate additional investor interest and raise
additional capital, or if such plans are successfully implemented, that the
Company will achieve its goals.
Furthermore, if the Company is unable to raise additional funds, it may
be required to modify its growth and developmental plans, and even be forced to
severely limit development operations completely.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and do not include
any adjustments to reflect the possible future effects of the recoverability and
classification of assets or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.
MANAGEMENT'S PERSPECTIVE AND DEVELOPMENT PLAN FOR THE FISCAL YEAR ENDING
OCTOBER 31, 2005
The Company is a development stage company and has nominal current
revenues. The Company has raised a net total of approximately $2,159,900 through
Janaury 31, 2006 including approximately $181,400 from loans and stock purchases
from our Chairman and net proceeds of approximately $1,978,500 from loans and
the sale of stock to others. As of February 1, 2006 management's efforts have
been primarily in market research, creating a business model, investigating best
practices, business development, negotiations of various contracts and due
diligence on potential acquisitions/joint ventures and licensing agreements. It
has developed HIPAA compliance manuals and a training material. The Company has
created an interactive educational compact disk in conjunction with a public
university in Florida. The Company has recently completed developing its first
three CHS's. It has secured three medical associations to provide web services
and is in negotiations with several others. The Company has acquired a Health
Information Platform currently undergoing upgrades.
In the preceding year the Company negotiated contracts with three HMOs,
one of which is operational. It has also assembled a provider relations
department that has negotiated with over 600 contracted physicians, ancillary
providers and hospitals.
The Company has, as of January 1, 2006, established operations in three
key Florida markets.
In the Company's business model we seek to become a leading provider of
services to the healthcare industry in three complementary areas. Those include:
outsourcing administrative responsibilities for physicians, Managed Care
Organizations, healthcare facilities, physician associations; developing new
technologies to create a more effective and responsive healthcare system; and
providing leading edge healthcare services to consumers.
We are focusing all our efforts on reaching and selling our services to
medical practices and businesses with annual revenues in the $500,000 to
$20,000,000 range. We believe that this is a highly underserved market, and when
these businesses receive consulting services they are in a fragmented, sporadic
and inefficient manner.
We expect to use a portion of any capital available that the Company
raises to invest in designing solutions to enable clients to reap the benefits
of their investments in new systems and information technology by improving
financial performance, increasing productivity, and improving clinical and
operational performance.
28
From education, visioning and planning, to implementation and
outsourcing, the Company intends to provide the following specific services and
solutions that are designed to help client organizations perform better:
>> Government Compliance
o HIPAA
o Medicare
o Medicaid
o HMO/PPO
>> Managed Care
o Contract negotiations
o Auditing
o Business development
o MSO development
o IPA development
>> Financial Management
o Billing Services
o Collection services
o Payroll services
o Accounts receivable financing
o Equipment Financing
o Executive lines of credit
>> Information Technology
o Website development
o Information management
o ASP services
o Secure Communications
o Business Process Management
>> Human Resource Services
o Full medical office management
o Facilities management
o Employee management
o Placement services
o Personnel training
>> Business Venture Management
>> Healthcare Merchant Banking Services
QUANTUM MEDICAL TECHNOLOGIES, INC. - TECHNOLOGY
QMT expects in the coming year to continue to work on developing and
enhancing its current patent pending business processes. The first is branded as
Cybernaptic (sm), connecting all the `touch points' of healthcare in one ASP
based system. The clients of QMT will be able to choose any combination of
support, including full outsourcing with data center consolidation, 24/7/365
network monitoring and help desk through a to-be-developed network control
center, as well as facility management, application unification, application
outsourcing and interim management of their entire IT operations for healthcare
facilities. The Company has also begun to develop a new method to track
patient's improvement in their healthcare/lifestyle in a patent pending process
called QuantumQuotient (sm) or Qx(2) (sm) . The Company is exploring validation
by a major research university in the U.S. If the current expectations are met,
this product could have a material effect on behavior and controlling medical
cost. In addition the Company is also exploring developing a web-based
marketplace for diagnostic services that is in a patent pending business
process.
The Company has executed agreements with medical associations that show
great promise, in the development and operation of a complete website and secure
information between member and other members and their patients. The first three
medical societies collectively have over 2000 active physician members. We seek
to develop these relationships and produce revenues by the end of 2006.
29
The Company is currently in discussion with companies that have foreign
healthcare technology with application in the U.S. and with U.S. companies that
have technology that is used in other industries with healthcare applications.
The Company expects that a portion of any money secured by the Company will go
towards development of these technologies or relationships. These products
include the secure transfer of medical records over the Internet, secure
verifiable clearing of medical transactions, HIPAA compliant email and instant
messaging, all to be included in a QuantumSuites (SM) packaging. We expect with
the development of this QuantumSuite (SM) of products we will begin to receive
revenues by the end of 2006.
QMEDSELECT (SM)
In December 2004, the Company purchased an Application Service Provider
Platform (ASP) from a Florida based Limited Liability Corporation. This product
has been previously certified in a Microsoft based platform In conjunction with
this acquisition, the Company has been accepted into the Microsoft ISV program
and anticipates Microsoft partner recognition during 2006. The Company
anticipates that it will need $500,000 over the balance of the year to complete
redevelopment of the platform and begin beta testing. The Company anticipates
revenues from this product late in 2006.
RENAISSANCE HEALTH SYSTEMS, INC. - SERVICES
RHS's model shows great promise in the short term for revenues and
profitability of the Company. Therefore management allocated a greater portion
of all moneys raised thus far in the Company's Plan to its development. The RHS
strategy is to create a new type of healthcare delivery system built on the
extensive experience of our management team. We intend to specialize in managed
care Percentage of Premium (POP) contracting. RHS expects to create a new model
for healthcare called a Community Health System (CHS).
Our RHS business model is unique and based on educating, motivating and
assembling physicians in groups that are prepared to assume some managed care
risk with professionals by their side. We envision expanding our Health System
of physicians to provide our patients healthcare services on an efficient and
cost effective basis through strategic alliances with insurance companies and
other healthcare providers on a statewide basis. Our model is based on a direct,
proactive, involved participation with our real clients physician or the benefit
of patients in our CHS model.
Under our MCO agreement(s), RHS, through affiliated providers, is
responsible for the provision of all covered benefits. While responsible for all
medical expenses for each covered life, we intend to limit our exposure by
obtaining reinsurance/stop-loss coverage. We also intend to capitate high volume
specialties, fixing our cost on a per-member-per-month (PMPM) basis. Low volume
providers will remain at a discounted fee-for-service basis.
Under our model, the physicians maintain their complete independence
but are aligned with our professional staff to assist in providing cost
effective quality medicine. Each primary care physician provides direct patient
services as a primary care doctor including referrals to specialists, hospital
admissions and referrals to diagnostic services and rehabilitation. In the
future, we may seek to acquire, develop or partner with a number our providers
in creating Company owned medical centers of excellence that will serve as our
model facilities.
We intend to use the Internet extensively, with available and
to-be-developed applications, to help process referral claims between the
Community Health System's primary care physicians and specialists and to
communicate with patients. This process should help to reduce paperwork in the
physician's office as well as provide a more efficient method for the patients
in our Community Health System. Once developed, our utilization management team
will communicate with the physicians on a daily basis to provide overall
management of the patient.
The Company has executed three contracts with Florida Managed Care
Organizations (MCOs), one of which is currently active. The terms of the
contract detail that RHS will be responsible for arranging a Provider Health
System in the three key Florida markets. The agreement calls for RHS to receive
a percentage of premiums received by the MCO. Relating to this agreement, the
Company is required to place $100,000 in a segregated bank account to start and
increase this amount by 3% of the revenues generated by the agreement up to a
total $1,000,000. The Company anticipates that if properly funded, this
agreement will be generating $20,000,000 in revenues by December 31, 2006.
30
Use of Capital
The Company will need approximately $10 million to implement its
business plan over the next 24 months. The Company will attempt to raise the
required capital through the issuance of a Private Placement Memorandum and/or a
secondary public offering.
The first $2,000,000 in new capital will go towards the development and
completion of our fourth, fifth, sixth and seventh CHSs in key Florida markets,
with approximately $1,000,000 going towards continued development of technology
solutions. We expect to hire an additional 10 people to develop these networks
on the ground and to create systems and protocols to provide for cost effective
medical management. As the Company's CHS business develops, the Company expects
that it will have to increase the amount of reserves up to $500,000 over the
following 12-18 months for a total of $1,000,000.
The Company expects to spend $4,000,000 to acquire multiple billing and
collection companies and further assumes certain obligations associated with
those acquisitions. With these acquisitions, we expect to hire/acquire a minimum
of 50 employees. In addition, we are likely to invest additional funds to update
computers, technology and systems. We believe that identifying qualified
candidates to staff these positions will not present a problem.
We expect to continue to expend resources in developing Cybernaptic
(SM) and the Quantum Quotient (SM) solutions and utilize RHS for the trial,
testing and deployment of these solutions. It is anticipated that this will cost
from $300,000 to $500,000 in this initial phase, and will require the entire
fiscal 2006 to complete. Revenues are not expected until fiscal year end 2007.
The balance of the funds needed will be used for working capital,
legal, accounting, marketing and development of new markets within the state of
Florida. If the additional capital is available, and the assumptions, contracts
and relationship materialize as projected, the Company would expect to have
nearly 100 employees by October 31, 2006, generating run-rate revenues of $25
million per-year.
RESULTS OF OPERATIONS
Years ended October 31, 2005 and 2006
The net expenses for the year ended October 31, 2005 were $1,853,620
compared to $1,119,986 for the year ended October 31, 2004. The increase of
$733,633 was primarily due to an increase of $631,132 in personnel related costs
which include increases in salaries and personnel related costs of $347,213,
consulting fees of $32,440, and stock compensation of $251,480. Salaries and
personnel related costs, including stock compensation were $1,238,415,
representing 66.8% of the total net expense for the year ended October 31, 2005
as compared to $639,724, representing 57.1% of the total net expenses for the
year ended October 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a development stage company and has only begun to
generate nominal revenues during the prior year; therefore all our capital
requirements will have to be raised through equity or debt financing. We will
need approximately $10 million over the next 24 months to implement the
Company's business plan.
As of October 31, 2005, we had cash of $74,771 and total assets of
$733,444 as compared to $35,468 and $125,175 at October 31, 2004, respectively.
We had current liabilities of $1,330,899 and $994,604 at October 31, 2005 and
2004, respectively.
31
At October 31, 2005 the Company had a working capital deficit of
$1,126,671 as compared to a working capital deficit of $958,836 at October 31,
2004. The Company's net expenses representing net loss for the year ended
October 31, 2005 was $1,853,620 as compared to $1,119,986 for the year ended
October 31, 2004. The increase of $733,634 was primarily due to the increase in
costs due to the increase in staffing.
The Company realized net proceeds from the sale of common stock in the
amount of $1,299,533 during the year ended October 31, 2005. Cash used in
operations was $1,045,324 and the Company used $151,403 for the acquisition of
assets and another $60,437 in the repayment of notes payable and accrued
interest. Without a significant infusion of capital or revenues from proposed
operations, it is unlikely that we will be able to sustain operations or
implement our business plan.
Since its inception, the Company has been dependent upon the receipt of
capital investment and loans to fund its continuing activities. In addition to
the normal risks associated with a new business venture, there can be no
assurance that the Company's business plan will be successfully executed. In
addition, the responsibilities of a public company will require the Company to
meet certain legal and accounting requirement that will stress any capital
available.
There can be no assurances that the Company, even with adequate equity
financing, will be able to successfully implement its plans, or if such plans
are successfully implemented, that the Company will achieve sustained
profitability. Furthermore, if the Company is unable to raise adequate funds, it
may be forced to terminate business activity partially or completely.
There can be no assurance that sufficient financing will be obtained to
keep the company operating over the next twelve months. Nor can any assurance be
made that the Company will generate substantial revenues or that the business
operations will prove to be profitable. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
financial statements reflect ongoing losses, negative cash flows from operating
activities, negative working capital and shareholders' deficit. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required pursuant to this item are filed under
Part III, Item 13(a) (1) of this report. The financial statement schedule
required under Item 310 (a) of Regulation S-B is filed under Part III, Item 13
(a) (2) of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 8A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures, that are
designed to ensure that information required to be disclosed in the Company's
Securities Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Our Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures for a Company of our size and simplicity. Based upon this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities and Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time period specified by
the Securities and Exchange Commission's rules and forms.
Additionally, there were no significant changes in the Company's
internal controls that could significantly affect the Company's disclosure
controls and procedures subsequent to the date of their evaluation, nor were
there any significant deficiencies or material weaknesses in the Company's
internal controls. As a result, no corrective actions were required or
undertaken.
32
Corporate Governance- Board of Directors
Election of Officers
Each director is elected at the Company's annual meeting of
shareholders and holds office until the next annual meeting of stockholders or
until the successors are qualified and elected. The Company's bylaws provide for
not less than one (1) director. Currently there are seven (7) directors in the
Company; Michael Rosenbaum and Peter Nauert were elected to the Board of
Directors after our fiscal year end during an annual Board Meeting held February
9, 2006 and as such have only begun to exercise their official duties. The
bylaws permit the Board of Directors to fill any vacancy and such director may
serve until the next annual meeting of shareholders or until his or her
successor is elected and qualified. The bylaws also allow for removal of a
director for cause as determined by the majority of the Board of Directors. The
Board of Directors elects officers and their terms of office are, except to the
extent governed by future employment contracts, at the discretion of the Board.
Mr. Noel J. Guillama and Mrs. Susan D. Guillama are married. Other than as
previously indicated above, there are no family relations among any officers or
directors of the Company.
The Company has four committees: Audit, Executive, Compensation, and an
Option Committee.
o The Audit Committee selects the independent auditors, reviews the
results and scope of the audit and other services provided by
independent auditors. It reviews and evaluates internal control
functions. As an advisory function of the committee, members also
participate in financings, review budgets prior to presentation to the
Board of Directors and review budgets vs. actual reports. The Board of
Directors has elected Mr. Haggerty as the sole member of the Audit
Committee and as its "financial expert"; as such term is defined under
federal securities law. At the Board meeting February 9, 2006, Mr.
Rosenbaum was elected to serve with Mr. Haggerty on the Audit
Committee.
o The Executive Committee may exercise the power of the Board of
Directors in the management of business and affairs at any time when
the Board of Directors is not in session. The Executive Committee
shall, however, be subject to the specific directions of the Board of
Directors, and is currently composed of Mr. Guillama, Ms. Guillama and
Mr. Baker. All actions of the Executive Committee require a unanimous
vote.
o The Compensation Committee consists of Ms. Guillama and Mr. Haggerty.
The Compensation Committee makes recommendations to the Board of
Directors concerning compensation for executive officers, employees
and consultants of the Company. All actions of the Compensation
Committee require a unanimous vote. At the Board meeting February 9,
2006, the Board elected to combine the Compensation Committee with
the Option Committee and elected Mr. Nauert to serve with Ms. Guillama
and Mr. Haggerty.
o The Option Committee consists of Ms. Guillama and Mr. Baker. The
Option Committee makes recommendations to the Board of Directors
concerning the Company's Stock Option Plan and administers it
accordingly. All actions of the Option Committee require a unanimous
vote. At the Board meeting February 9, 2006, the Board elected to
combine the Compensation Committee with the Option Committee.
CODE OF CONDUCT
The Company has adopted three Codes of Conduct that collectively covers
all officers, directors, employees, consultants and independent contractors of
the Company. One Code of Conduct is for employees in general and second Code of
Ethics is for all consulting and / or contracted positions, and the third
addresses senior officers, board members and accounting personnel of the
Company. The first and second Codes of Conduct set Company policy on inside
information, conflicts of interest, trading of inside information, management
and accounting ethics and compliance with all local, state, and federal laws.
The third one has special consideration for the handling of Corporate financials
and disclosure information. The Codes of Conduct may be reviewed at the
Company's website www.qtum.com. The Code of Ethics for Principal Executives has
been previously filed with the Form 10KSB for the fiscal year ending October 31,
2004.
33
The Company has also adopted a Non-Disclosure Non-Solicitation
Agreement that all employees, officers and Board members must sign specifically
acknowledging disclosure of confidential information and solicitation of
employees.
34
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the names, ages, and positions with for
each of the directors and officers.
NAME AGE POSITIONS(1) SINCE
Noel J. Guillama 46 Chairman, President,
and Director 2003
Donald B. Cohen 52 Vice President, Chief Financial
Officer and Director 2003
Susan D. Guillama 45 Vice President, Secretary, Chief
Administrative Officer and Director 2003
James D. Baker 62 Director 2003
Mark Haggerty 57 Director 2003
Michael Rosenbaum (1) 68 Director 2006
Peter Nauert (1) 62 Director 2006
------------
(1) Messrs Rosenbaum and Nauert joined the Board of Directors of the Company
subsequent to the fiscal year end and accordingly were not asked to sign
this filing on Form 10-KSB
All directors hold office until the next annual meeting of stockholders
and until their successors are elected and qualify. Officers serve at the
discretion of the Board.
NOEL J. GUILLAMA, CHAIRMAN, PRESIDENT, AND DIRECTOR
Noel J. Guillama, born in Havana, Cuba, and a resident of Palm Beach
County for over 30 years, is a nationally recognized expert in healthcare
management and operations. Mr. Guillama has participated in a number of public
companies as merchant banker, principal shareholder, founder or strategic
advisor; primarily in healthcare, construction, real estate and technology.
Since 2003, Mr. Guillama has been Chairman and President of The Quantum Group,
Inc., Mr. Guillama was Founder, Chairman, President and Chief Executive Officer
of Metropolitan Health Networks, Inc. of West Palm Beach, Florida, (AMEX:MDF)
from its inception in January 16, 1996 to February 1, 2000. Metropolitan, at the
time of Mr. Guillama's departure, had expanded from inception to 240 employees,
experienced 400% annualized compounded growth, and reported revenues of $119
million with $5 million profit in fiscal 2000. Metropolitan continues to provide
comprehensive care to over 40,000 patients on a monthly basis and is one of the
largest healthcare providers in Florida. Prior to1996, Mr. Guillama was Vice
President of Development for MedPartners, Inc. (NYSE:DRX), a Birmingham,
Alabama-based physician practice management company with revenues of over $5
billion at the time of his departure. Prior to MedPartners, he served as
Director and Vice President of Operations for Quality Care Networks, Inc.; a
South Florida based comprehensive group practice with 36 physicians and 7
offices. Mr. Guillama remains his position as Chairman of Tektonica to this
date. Mr. Guillama is a member of both the American College of Health Care
35
Executives and the Medical Group Management Association. Mr. Guillama continues
to hold active licensure as a Building Contractor, Real Estate Broker, Mortgage
Broker and Insurance Broker in the State of Florida. An active proponent of
education, Mr. Guillama serves as a director of the Florida International
University Foundation and as a director of the Palm Beach County Community
College Foundation. He also serves on the Board of Directors for Junior
Achievement of the Palm Beaches and the Education Advisory Committee of the
Village of Wellington. At FIU, Mr. Guillama also serves as the Chairman of the
FIU Academic Committee and is a member of the Audit Committee for the Board. A
community advocate, Mr. Guillama is also a member of the Palm Beach Chamber of
Commerce, Palms West Chamber of Commerce, Hispanic Chamber of Commerce of Palm
Beach County, the Wellington Chamber of Commerce and Wellington Rotary Club. Mr.
Guillama is also a Trustee of Palms West Hospital in Loxahatchee, Florida. Mr.
Guillama is a Co-Founder and was the first President of the Lake Worth Community
Development Corporation.
Still an active organization today, The Lake Worth Community Development
Corporation is a 501(c)(3) local non-profit community organization dedicated to
improving the quality of life in the City of Lake Worth, Florida through
revitalization and homebuyer assistance. During Mr. Guillama's tenure, the group
helped in the design and redevelopment of downtown Lake Worth. On a more
national level, Mr. Guillama lends his experience in healthcare and in growing a
small business as a member of the United States Chamber of Commerce Small
Business Council which represents the issues affecting small businesses
throughout the country. Mr. Guillama is the beneficiary of numerous awards of
distinction, some of which are from the Lion's Club, Leukemia Society of America
and American Diabetes Association. Mr. Guillama is a graduate of Massachusetts
Institute of Technology's (MIT) Birthing of Giants Entrepreneurial Leadership
Program (1997 - 1999).
DONALD B. COHEN, VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR
Mr. Cohen is a co-founder of Quantum. Prior to joining Quantum, he
served as Chief Financial Officer of I-Titan Communications Network, Inc. a
technology design and manufacturer from April 2001 through January 2002. He also
served as Chief Financial Officer and Director of Metropolitan Health Networks,
Inc. (AMEX:MDF) from April 1996 to April 1999. While at Metropolitan, Mr. Cohen
was directly responsible for all accounting reporting and SEC disclosures and
was instrumental in designing, installing and operations of the company's
extensive management information and billing and collections system connecting
numerous sites into a state-of-the-art leading edge financial system. He
additionally served as a consultant for the Company through January 2000. Prior
to this, Mr. Cohen was Vice President and CFO of ProSports Video Response, Inc.,
from 1989 to 1992, Vice President and CFO of BDS, Inc., from 1987 to 1989, and
Director of Finance of Tel-Plus Communication of Southern California from 1984
to 1986. From 1993 to 1995, Mr. Cohen worked for Ocwen Financial Corporation
designing and implementing a loan accounting system. Mr. Cohen has extensive
experience in information systems and start-up ventures. Mr. Cohen received a
Bachelor of Science degree from California State University, Northridge, and was
certified as a CPA in the State of California.
SUSAN D. GUILLAMA, VICE PRESIDENT, SECRETARY, CHIEF ADMINISTRATIVE OFFICER AND
DIRECTOR
Mrs. Guillama has over 18 years of experience in consulting, human
resources and facilities operations. Her extensive background encompasses a wide
range of businesses. Mrs. Guillama had been an outside consultant with Quantum
from September 2000 to April 2003, when she joined Quantum fulltime. Prior to
joining Quantum, she was with ALLTEL Information Services in early 2001 through
April 2003 where she led the human resources and training departments for a
national division focused on banking software solutions. Prior to this she had
her own consulting organization, Jacobs Consulting, which focused on employee
initiatives such as change management, outplacement and transition services,
customer service and career workshops, general employment consulting, and other
training initiatives. For almost 10 years previous to this, she was Director for
People with ServiceMaster, in which she led human resource departments for the
HealthCare Services and the Business & Industry Group serving both hospitals and
long-term care facilities, and focused in the automotive and transportation,
food processing, and manufacturing industries. These divisions were nationwide
in scope with a base of over 3,500 employees in both union and non-union
environments. Mrs. Guillama is a certified master trainer, recruiter and
interviewer and holds certifications from Gallup, London House, DDI, and is
certified by the American Institute of Baking in Food Processing, Sanitation &
Hygiene. She is a member the Society of Human Resource Management and the Palm
Beach County HR Association. Mrs. Guillama earned her Bachelor's degree in
Communication from the University of South Florida, and an Associates degree in
Pre-Law. Additional professional training includes an extensive three-year
executive graduate program. Mrs. Guillama is the wife of Noel J. Guillama.
36
JAMES D. BAKER, OUTSIDE DIRECTOR
Mr. Baker has many years of experience as CEO and Director of several
successful start-up companies. He has founded and operated several profitable
computer based high technology companies where he played a key role in their
launch and success. From the beginning of 2003 until the present time, Mr. Baker
has been a Director, President and CEO of Q-Net Technologies, Inc. (QNTI), a
public company created to introduce consumer technology and value added Internet
services into the Chinese market. From 2000 until 2002, Mr. Baker was the
President of TargitInteractive, Inc. a interactive marketing services provider
that delivers millions of e-mail messages on the Internet daily for major
clients such as General Motors, Mercedes, Warner Brothers, Kraft Foods, Lexus,
and many other advertisers. Mr. Baker currently serves as a director of the
Company. In1997, Mr. Baker became the CEO of AegiSoft, Inc., a digital rights
management company that provided software and digital content publishers the
technology to rent their products, such as software, music, movies and
electronic books. In 1995, he founded RAPOR, Inc. and is currently on the Board
of Directors. RAPOR is a manufacturer of computer-controlled doors for the
security industry (www.rapor.com). From 1991 through 1995, he served as a
founder, President and CEO of Datamed Systems, Inc. a medical device EMG
provider and rolled the company up into Quality Care Networks, Inc. a physician
practice management company. Mr. Baker was employed from 1967 to 1981 by IBM in
their MIS area and was a Project Manager of Security Systems Development. He
left IBM in 1981 to form his own company, Computer Application Systems, Inc.
(CASI), a Florida corporation that commercialized computer-based security
systems. CASI was number 50 in the INC. 500 list of fastest growing privately
held companies in the United States in 1987 and was then sold to Figgie
International Inc. in September 1987. Mr. Baker worked with Figgie as a Vice
President of Strategic Business Development through 1991. Mr. Baker obtained a
Bachelor of Science degree in industrial management from the University of
Cincinnati and pursued a master's degree in business administration at the
University of Michigan.
MARK HAGGERTY, JD, OUTSIDE DIRECTOR
Mr. Haggerty is a graduate of the University of Minnesota Law School
and was in private practice as an employee, shareholder, director and youngest
vice president of the Minneapolis law firm of Smith, Juster, Feikema, Haskvitz
and Malmon from 1971 through 1985. During the early 70's he was a contract
prosecutor and then specialized in corporate, securities and medical law. From
1985 through 1987 he acted as senior vice president and counsel to the
350-person securities firm of Miller & Schroeder Financial, Inc. of Minneapolis.
From 1976 through 1987 Mr. Haggerty structured and closed over one billion
dollars in financings for numerous projects including medical clinics and
nursing homes through out the United States. From 1987 through 1993 Mr. Haggerty
became President of Haggerty & Associates, Inc. and consulted for private
companies and the US Agency for International Development in the US, Europe and
Africa. From 1993 to 2003 he was President of Voice & Wireless Corporation, a
fully SEC reporting public company. From 2003 to present he has acted as
in-house legal counsel to a SEC licensed investment advisory corporation. Mr.
Haggerty was a guarantor for two corporations which went insolvent which then
caused him to file bankruptcy in October, 2005. In 1996, Mr. Haggerty was a
co-founder of Metropolitan Health Networks, Inc. and acted as Chairman of its
advisory board. Mr. Haggerty is an elected county official having recently been
elected to his third term as Hennepin County Parks Commissioner and serves as
its Vice-Chairperson. He is a past president of the Minneapolis Chamber of
Commerce and the County Bar Association there. In addition to his being licensed
to practice law in the Minnesota and United States Supreme Courts, he also is
licensed as a series 7 and 63 securities representative from the NASD and the
SEC.
PETER NAUERT, OUTSIDE DIRECTOR
Peter Nauert serves as a member of the Company's Board of Directors
since February 9th. Mr. Nauert has over thirty years experience as a founder,
creator and leader in the insurance industry with an emphasis on mergers and
acquisitions, as well as funding. He was the inventor of the industry's first
web-based agent sales system. Mr. Nauert is nationally recognized as an
entrepreneur and has an extensive success record in implementing public and
private campaign funding vehicles. Mr. Nauert is the Founder and Chairman of
Insurance Capital Management (ICM), a national Company which provides marketing,
web-based technology and specialty products for insurance and financial
services. ICM's distribution subsidiaries comprise nearly 10,000 sales agents
nationwide. Prior to founding ICM, Mr. Nauert was Chairman and CEO of Ceres
Group, Inc. (Nasdaq: CERG) from July 1998 to June 2002. In 1998, Mr. Nauert led
37
an investor group that purchased Central Reserve Life Insurance Company (CRLC),
a financially troubled health insurance company. He founded Ceres Group, Inc.,
as the new holding company of CRLC. Through management changes and a series of
acquisitions, Mr. Nauert achieved first-year profit turnaround and continuing
yearly profits. As Chairman, Mr. Nauert increased Ceres' gross revenue to $907
million. Prior to Ceres, Mr. Nauert founded Pioneer Financial Services, Inc.
(NYSE: PFS), arranged its IPO in 1986 and established numerous national
subsidiaries in healthcare, managed care, health and life insurance and
marketing. As Chairman and CEO, Mr. Nauert grew PFS during its 10 years as a
public company to gross revenues of $1 billion and assets of nearly $2 billion.
In 1997, Mr. Nauert negotiated the sale of PFS to Conseco, Inc. for $480
million. Mr. Nauert received a Bachelor of Science degree in Business
Administration from Marquette University as well as a Juris Doctor (J.D.) from
George Washington University. He currently has residences in Fort Worth, TX, and
Santa Fe, NM.
MICHAEL ROSENBAUM, OUTSIDE DIRECTOR
Michael Rosenbaum serves as a member of the Company's Board of
Directors since February 9th. Mr. Rosenbaum has extensive experience in law,
mergers and acquisitions, merchant banking and finance. Mr. Rosenbaum has served
as a Director for Protrak International since 1984, and continues in this role
today. Protrak is the global leader and a major innovative force in the
development and delivery of Customer Relationship Management software (CRM) and
Sales Force Automation (SFA) to the investment management industry. From 1998 to
2000, he served as a Director and Officer of Throttlebox Media, a company that
specialized in the sales of downloadable multimedia entertainment. From 1984 to
1993, Mr. Rosenbaum was also Executive Vice President and Director for Vector
Group, which is traded on the New York Stock Exchange. The Vector Group has
previously owned companies including Western Union, Mai Basic Four, Brighams and
Skybox - a trading card company of which Mr. Rosenbaum also served as the Vice
Chairman. Ultimately Skybox was sold to Marvel. Further, Mr. Rosenbaum was a
member of the Board of Advisors of South Beach Beverage Company which was sold
in 2002 to Pepsi. Mr. Rosenbaum is currently a principal in the real estate
development of Nail Bay, which is comprised of approximately 160 acres and is
located on Virgin Gorda in the British Virgin Islands. Mr. Rosenbaum has been
active in Israeli Technology Partners for the last five years having also served
as a Director from 2002 through 2004. This organization invests in high tech
companies that are based in, or are based upon, technology that was developed in
Israel. He is also a Director of Soup Kitchen International, which manufactures
soup and has franchise operations. Mr. Rosenbaum received a Bachelor of Arts
degree from Yale in Economics and Political Science, as well as a Bachelor of
Law (LL.B) from Columbia University. Additionally, Mr. Rosenbaum possesses a
Master of International Affairs, also from Columbia University. Mr. Rosenbaum's
personal interests include fiction writing and he currently resides in New York.
COMPENSATION OF DIRECTORS
The Company reimburses all Directors for their expenses in connection
with their activities as Directors of the Company. In addition, the Company has
granted each outside Director approximately 30,000 shares of stock, vested over
three years, and an annual cash fee of $5,000. It is expected that compensation
to outside Directors will increase as their responsibility expands and the
Company develops. The Directors will make themselves available to consult with
the Company's management as well as serve on one or more of its Committees. The
Directors of the Company that are also employees of the Company do not receive
additional compensation for their services as Directors.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
(10%) percent of the outstanding Common Stock, to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership on Form 3 and
reports of changes in ownership of Common Stock on Forms 4 or 5. Such persons
are required by SEC regulation to furnish the Company with copies of all such
reports they file.
Based solely on its review of the copies of such reports furnished to
the Company or written representations that no other reports were required, the
Company believes that all Section 16(a) filing requirements applicable to its
officers, directors and greater than (10%) percent beneficial owners were
complied with during the year ended October 31, 2005.
38
ITEM 10. EXECUTIVE COMPENSATION
Noel J. Guillama, Chief Executive Officer, became an executive officer
at the end of May 2003. The Company has no agreement or understanding, express
or implied, with any officer, director, or principal stockholder, or their
affiliates or associates, regarding employment with the Company or compensation
for services, excluding those previously identified regarding outside directors
in Item 9 or those identified below.
The Company expects to pay Mr. Guillama, Mr. Cohen and Mrs.
Guillama with permanent compensation and bonuses to be negotiated with
Compensation Committee of the Company. As of October 31, 2005, the Company has
accrued a total of $393,000 in compensation for Mr. Guillama, $121,000 for Mr.
Cohen, and $117,000 for Mrs. Guillama in anticipation of such arrangement. The
Company has also accrued $37,400 for the compensation of Outside Directors. As
of November 1, 2004, the Board had approved accrual of $200,000 compensation for
Mr. Guillama, and $96,000 each for Mrs. Guillama and Mr. Cohen.
Employment Agreements
The Company has no employment agreement with any of its senior
officers. All officers serve at the pleasure of the Board of Directors.
The following tables present information concerning the cash
compensation and stock options provided to the Company's Chief Executive Officer
and each additional executive officer for the fiscal years ended October 31,
2005, 2004 and 2003.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
RESTRICTED SECURITIES
FISCAL OTHER ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION AWARD OPTIONS
--------------------------- ------ ------ ------------- ---------- ----------
Noel J. Guillama 2005 $200,000 $ -- -- 258,099
President, Chairman, CEO 2004 $134,000 $ -- -- --
2003 $ 84,000 $ -- -- 200,000
Donald B. Cohen 2005 $ 96,000 $ -- 30,000 151,914
Vice President, 2004 $ 87,000 $ 12,500 30,000 --
CFO, Director 2003 $ 25,000 $ 1,500 -- 150,000
Susan D. Guillama 2005 $ 96,000 $ -- -- 83,340
Vice President, Secretary, 2004 $ 87,000 $ -- -- --
Chief Administrative Officer, 2003 $ 25,000 $ -- -- --
Director
OPTIONS AND COMMON SHARES GRANTED IN THE YEAR ENDED OCTOBER 31, 2005 TO
EXECUTIVES
39
Percent of
Number of Total Options
Securities Granted to Exercise or Potential Realizable Value at Assumed
Underlying Employees in Base Price Expiration Annual Rate of Stock Price
Name Options Fiscal Year ($/Share) Date Appreciation for Option Term
------------------------------------------------------------------------------------------------------------------------------------
5% 10%
Noel J. Guillama 600,000 34.0% $ 0.50 Jan 27, 2010 thru $ 339,000 $ 473,500
Dec 26, 2012
Donald B. Cohen 300,000 17.0% $ 0.50 Jan 27, 2010 thru
Dec 26, 2012 $ 169,500 $ 236,750
Susan D. Guillama 300,000 17.0% $ 0.50 Jan 27, 2010 thru
Dec 26, 2012 $ 169,500 $ 236,750
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of January31, 2005, the number and
percentage of the outstanding shares of Common Stock that, according to the
information supplied to the Company, were beneficially owned by (i) each person
who is currently a director, (ii) each executive officer, (iii) all current
directors and executive officers as a group and (iv) each person who, to the
knowledge of The Quantum Group, Inc. the Company, is the beneficial owner of
more than five percent of the outstanding Common Stock. The only persons who
hold five percent or more of the outstanding common stock are also officers and
directors. Except as otherwise indicated, the persons named in the table have
sole voting and dispositive power with respect to all shares beneficially owned,
subject to community property laws where applicable.
40
Amount/Nature of
Beneficial Percentage of
Ownership of Beneficial
Name/Address of Beneficial Owner Common Stock Ownership
-------------------------------- ------------- ------------
Guillama, Noel (1)(7) 9,762,286 41.00%
3460 Fairlane Farms Road, Suite 4
Wellington, FL 33414
Cohen, Donald B. (2) 1,345,007 5.65%
3460 Fairlane Farms Road, Suite 4
Wellington, FL 33414
Guillama, Susan D. (3)(8) 1,277,726 5.37%
3460 Fairlane Farms Road, Suite 4
Wellington, FL 33414
Baker, James D. (4) 220,005 0.92%
3460 Fairlane Farms Road, Suite 4
Wellington, FL 33414
Haggerty, Mark (5) 215,005 0.90%
3460 Fairlane Farms Road, Suite 4
Wellington, FL 33414
Rosenbaum, Michael (6) 265,000 1.11%
3460 Fairlane Farms Road, Suite 4
Wellington, FL 33414
Nauert, Peter 250,000 1.05%
3460 Fairlane Farms Road, Suite 4
Wellington, FL 33414
Directors and Executive
Officers, as a group (7 persons) 13,335,029 56.00%
---------------
(1) Includes (a) 7,492,125 shares held by Mr. Guillama; (b) 520,078 shares held
by Guillama Family Holdings, Inc.; (c) 300,078 held by his minor son; (d)
1,000,000 held by Guillama, Inc.; (e) 200,000 shares issuable upon the
exercise of options at $.40 per share until October 1, 2010; and (f)
250,005 shares issuable upon the exercise of options at $.50 per share
until March 27, 2011 . This does not include 349,995 shares issuable upon
the exercise of options at $.50 per share until December 26, 2012. Mr.
Guillama disclaims all shares and has no interest in the holdings of Mrs.
Guillama.
(2) Includes (a)1,070,000 shares; (b) 150,000 shares issuable upon the exercise
of options at $.40 per share until October 1, 2010; and (c)125,007 shares
issuable upon the exercise of options at $.50 per share until March 27,
2011. Does not include 174,993 shares issuable upon the exercise of options
at $.50 per share until December 26, 2012.
(3) Includes (a) 962,678 shares; (b) 190,041 shares held by her minor son; and
(c). 125,007 shares issuable upon the exercise of options at $.50 per share
until March 27, 2011. Does not include 174,993 shares issuable upon the
exercise of options at $.50 per share until December 26, 2012. Mrs.
Guillama disclaims all shares and has no interest in the holdings of Mr.
Guillama.
(4) Includes (a) 122,500 shares; (b) 20,000 shares transferable upon the
exercise of options at $.001 per share owned by Mr. Guillama (c) 5,000
shares issuable quarterly at a rate of 833 per month until October 1, 2006;
(d) 10,000 shares issuable upon the exercise of options at $.40 per share
until October 1, 2010; and (e) 62,505 shares issuable upon the exercise of
options at $.50 per share until March 27, 2011. Does not include (a) 87,495
shares issuable upon the exercise of options at $.50 per share until
December 26, 2012 and (b) 5,000 shares issuable quarterly at a rate of 833
per month until October 1, 2006.
41
(5) Includes (a) 87,500 shares; (b) 35,000 shares held by Linda Jean Haggerty
(c) 2,500 shares transferable upon the exercise of options at $.01 per
share on shares owned by Mr. Guillama until July 24, 2008; (d) 12,500
shares transferable upon the exercise of options at $.01 per share until
July 24, 2008 held by Linda Jean Haggerty; (e) 5,000 shares issuable
quarterly at a rate of 2,500 per quarter until October 1, 2006; (f) 10,000
shares issuable upon the exercise of options at $.40 per share until
October 1, 2010 and (g) 62,505 shares issuable upon the exercise of options
at $.50 per share until March 27, 2011. Does not include (a) 87,495 shares
issuable upon the exercise of options at $.50 per share until December 26,
2012 and (b) 5,000 shares issuable quarterly at a rate of 2,500 per quarter
until October 1, 2006. .
(6) Includes 265,000 held by Maj-Britt Rosenbaum.
(7) Mr. Guillama has granted options to purchase 1,590,514 shares of the
Company at $.001 per share, of the 2,700,000 shares he originally owned. Of
the 1,590,514 options granted 257,642 options remain unexercised of which
35,000 options were granted to Directors and their affiliated persons and
222,642 options were granted to unaffiliated persons. .
(8) Mrs. Guillama is the wife of Mr. Guillama.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 28, 2003, Transform Pack completed the acquisition of Quantum
HIPAA Consulting Group, Inc., a Florida Corporation based in Wellington,
Florida. Quantum HIPAA Consulting Group is in the business of advising the
healthcare industry on the implementation of regulations created to comply with
the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
Transform Pack made the acquisition by issuing 27,000,000 shares of Common Stock
($0.004 par value) to Noel J. Guillama, the sole stockholder of Quantum HIPAA
Consulting Group, in exchange for all the issued and outstanding shares of
Quantum HIPAA Consulting Group. As a result, of the acquisition on May 28, 2003,
Mr. Guillama became the direct and beneficial owner of approximately 80.18 % of
the issued and outstanding shares of the Company. Prior to the acquisition of
Quantum HIPAA Consulting Group, there was no affiliation or other relationship
between Transform Pack and Quantum HIPAA Consulting Group or Mr. Guillama.
At a Special Meeting of the shareholders held on January 30, 2004 the
majority of the shareholders agreed to issue 13,300,000 post reverse shares and
200,000 Series A Preferred Stock (subsequently cancelled and returned to the
Company) to the majority shareholder of the Company, Mr. Guillama, of both QMT
and RHS for the 80% of each of those companies. Mr. Guillama had previously
granted 7,175,000 options exercisable at $.001 per share on the shares he owned
in the two companies. Of this 1,000,000 options are held by an affiliate of Mr.
Guillama, 2,180,000 are held by Directors of the Quantum Group and 3,995,000 are
held by non affiliates. As of October 31, 2004, 965,000 options were exercised
leaving Mr. Guillama with a direct and beneficial ownership of approximately 79%
of the issued and outstanding shares of the Company. Control in the Company will
not materially change, since all the shareholders in numbers and relative
beneficial ownership of both QMT and RHS are also material and beneficial owners
of the Common Shares of the Company today. The final merger was completed in
August 2004.
42
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
(a)(2) Financial Statement Schedules
All schedules have been omitted because they are not applicable or the
required information is provided in the consolidated financial statements,
including the notes thereto, as part of this Form 10-KSB.
(a) (3) Exhibits
Exhibit Item 601 Title of Document
No. Ref. No.
1 2.12 Exchange Agreement dated May 28, 2003 between Transform
Pack International and Quantum HIPAA Consulting Group,
Inc.
2. 2.12 Articles of Incorporation The Quantum Group, Inc. (Nevada)
3 2.2 Agreement and Plan of Exchange between The Quantum Group,
Inc., Quantum Medical Technologies, Inc., and Noel J.
Guillama, dated August 9, 2004(2)
4 2.3 Agreement and Plan of Exchange between The Quantum Group,
Inc., Renaissance Health Systems, Inc., and Noel J.
Guillama, date August 9, 2004(2)
5 3.4 By-Laws The Quantum Group, Inc. (Nevada)(1)
6 3.5 2003 INCENTIVE EQUITY & OPTION PLAN(1)
7 10.11 Put Option Agreement between Transform Pack International
and HANS MEIER, CARMELLE CAISSIE, DANIEL SCHAM and ROBERT
TALBOT, TRUSTEE
8 14.1 Code of Ethics(3)
9 31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002*
10 31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002*
11 32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
12 32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
---------------
* filed herewith
(1) Incorporated by reference to the Company's Form 14-C filed on January 7,
2004
(2) Incorporated by reference to the Form 8-K filed August 20, 2004
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended October 31, 2003, as filed with the Commission on
February 13, 2004
43
FORM 8-K FILINGS
(b) Reports on Form 8-K filed during the quarter ended October 31, 2004
August 20, 2004: Disclosure of the acquisition of Quantum Medical Technologies,
Inc. and Renaissance Health Systems, Inc.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Audit fees billed by the Company's principal accountant total $25,500 during the
year ended October 31, 2005 through date of this report and $20,948 for the year
ended October 31, 2004.
AUDIT RELATED FEES
No audited-related fees have been billed by the Company's principal accountant
for any period.
TAX FEES
Tax fees billed by the Company's principal accountant totaled $4,800.
ALL OTHER FEES
No other fees other than those set out above have been paid to the Company's
principal accountant.
AUDIT COMMITTEES PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee approves all professional services and fees provided by our
principal accountants. For the year 2005 and 2004, the audit committee approved
only professional services rendered by our principal accountants for the audit
of our annual financial statements and review of our financial statements
included in our Form 10-QSB or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for those fiscal years and tax compliance.
44
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
registrant has duly caused this Amendment No. 1 to Form 10-KSB to be signed on
its behalf by the undersigned, thereunto duly authorized, this 23rd of February,
2005.
THE QUANTUM GROUP, INC.
By: /s/ Noel J. Guillama
---------------------------------
Noel J. Guillama,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act, as amended, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
/s/ Noel J. Guillama /s/ Susan D. Guillama
-------------------------------------- ---------------------------
Noel J. Guillama, Director Susan D. Guillama, Director
President and Chief Executive Officer Vice President
Date: February 23, 2006 Date: February 23, 2006
/s/ Donald B. Cohen /s/ Mark Haggerty
-------------------------------------- ---------------------------
Donald B. Cohen, Director Mark Haggerty, Director
Chief Financial Officer
Date: February 23, 2006 Date: February 23, 2006
/s/ James D. Baker
--------------------------------------
---------------------------
James D. Baker, Director Michael Rosenbaum, Director
Date: February 23, 2006 Date:
--------------
--------------------------------------
Peter Nauert, Director
Date:
------------
45
THE QUANTUM GROUP, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Deficiency in Assets F-5
Consolidated Statements of Cash Flows F-6
Notes to the Consolidated Financial Statements F-7
F-1
[GRAPHIC OMITTED] Daszkal Bolton LLP Michael I. Daszkal, C.P.A., P.A.
----------------------------------- Jeffrey A. Bolton, C.P.A., P.A.
CERTIFIED PUBLIC ACCOUNTANTS Timothy R. Devlin, C.P.A., P.A.
Michael S. Kridel, C.P.A., P.A.
Marjorie A. Horwin, C.P.A.,
P.A.
Patrick D. Heyn, C.P.A., P.A.
Gary R. McConnell, C.P.A., P.A.
Scott A. Walters, C.P.A., P.A.
-------------------------------
Colleen DeWoody Bracci, C.P.A.
Arthur J. Hurley, C.P.A.
Amy E. Vetter, C.P.A.
Prochi Sheth
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-----------------------------------------------------------
To the Board of Directors and Shareholders
The Quantum Group, Inc.
We have audited the accompanying consolidated balance sheet of The Quantum
Group, Inc. (a Development Stage Company) as of October 31, 2005, and the
related consolidated statements of operations, changes in shareholders'
deficiency in assets and cash flows for the two years ended October 31, 2005 and
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Quantum Group,
Inc. at October 31, 2005 and the results of its operations and its cash flows
for the two years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses and had negative
cash flows from operations which raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do no include any
adjustments that might result from the outcome of this uncertainty.
/s/ Daszkal Bolton LLP
---------------------------
Daszkal Bolton LLP
Boca Raton, Florida
February 12, 2006
2401 NW Boca Raton o Boulevard Boca Raton, FL 33431-6632 o t: 561.367.1040
f: 561.750.3236 O 2401 PGA Boulevard, Suite 196 o Palm Beach Gardens,
FL 33410-3500 o T: 561.367.1040 o f: 561.624.1151
2700 West Cypress Creek Road, Suite D 126 o Fort Lauderdale, FL 33309-1744
t: 954.974.3544 o f: 954.974.3680
PCAOB Registered WWW.DASZKALBOLTON.COM [LOGO OMITTED]
Affiliated Offices Worldwide
F-2
THE QUANTUM GROUP, INC.
Consolidated Balance Sheet
As of October 31, 2005
(A Development Stage Enterprise)
ASSETS
CURRENT ASSETS
Cash $ 74,771
Prepaid expenses $ 129,457
-----------
TOTAL CURRENT ASSETS 204,228
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $30,145 100,673
GOODWILL 23,300
OTHER ASSETS
Software 395,000
Deposits 10,243
-----------
TOTAL ASSETS $ 733,444
===========
LIABILITIES AND DEFICIENCY IN ASSETS
CURRENT LIABILITIES
Accounts payable $ 140,553
Accrued liabilities $ 198,364
Accrued payroll and payroll taxes 737,941
Notes payable and accrued interest - shareholder 194,041
Other current liabilities 60,000
-----------
TOTAL CURRENT LIABILITIES 1,330,899
CAPITAL LEASE OBLIGATION - net of current portion 3,315
-----------
TOTAL LIABILITIES 1,334,214
COMMITMENTS AND CONTINGENCIES
DEFICIENCY IN ASSETS ACCUMULATED DURING DEVELOPMENT STAGE (600,770)
-----------
TOTAL LIABILITIES AND DEFICIENCY IN ASSETS $ 733,444
===========
See accompanying notes to consolidated financial statements
F-3
THE QUANTUM GROUP, INC.
Consolidated Statement of Operations
( A Development Stage Enterprise)
For the Years Ended October 31, 2005 and 2004
For the period
July 24, 2001
For the years ended (inception) to
------------------------------ ------------
October 31, October 31, October 31,
2005 2004 2005
------------ ------------- ------------
Revenues $ 1,119 $ -- $ 1,119
Medical Costs $ 1,119 $ -- $ 1,119
------------ ------------- ------------
Gross Profit $ -- $ -- $ --
------------ ------------- ------------
General and adminstrative expenses
Salaries and employee costs $ 1,238,416 $ 639,724 $ 1,998,478
Consulting expense 169,641 137,202 455,315
Occupancy 59,525 22,223 108,594
Interest 33,394 37,550 104,383
Other general & adminstrative expenses 352,644 283,287 767,367
------------ ------------- ------------
Total Expenses 1,853,620 1,119,986 3,434,137
------------ ------------- ------------
------------ ------------- ------------
Net expenses representing net loss $ (1,853,620) $ (1,119,986) $ (3,434,137)
============ ============ ============
Basic and diluted (loss) per common share $ (0.09) $ (0.17)
============ ============
Weighted average number of common shares
outstanding 20,261,348 6,565,873
============ ============
See accompanying notes to consolidated financial statements.
F-4
THE QUANTUM GROUP, INC.
Consolidated Statement of Changes in Deficiency in Assets Accumulated
During the Development Stage October 31, 2005
Preferred Stock Common Stock
par value $.001 par value $.001
per share per share
30,000,000 authorized 70,000,000 authorized Additional
-------------------- --------------------- Paid-in Deferred
# of Shares Amount of Shares Amount Capital Warrants Compensation
----------- ------ ---------- ------ ------- ---------- ------------
Balance at 10-31-01 -- -- 2,700,000 2,700 17,300 -- --
Net (loss) -- -- -- -- -- -- --
-------------------------------------------------------------------------------------
Balance at 10/31/02 2,700,000 2,700 17,300 -- --
Merger with TPII 510,885 511 (121,363) -- --
Sale of common stock for cash 86,000 86 64,914 -- --
Deferred compensation-stock options -- -- -- -- 207,500 -- (207,500)
Deferred compensation-stock grants -- -- -- -- -- -- (327,150)
Amortization of deferred comp -- -- -- -- -- -- 3,458
Net (loss) -- -- -- -- -- -- --
-------------------------------------------------------------------------------------
Balance at 10/31/03 -- -- 3,296,885 3,297 168,351 -- (531,192)
Sale of common stock -- -- 1,188,122 1,188 276,690 -- --
Conversion of note payable -- -- 300,000 300 164,700 -- --
Issuance of stock - stk grants -- -- 197,269 197 172,551 -- 172,748
Amortization of deferred compensation -- -- -- -- -- -- 83,975
Stock based compensation -- -- 25,000 25 23,475 -- --
Merger - Renaissance
Health Systems, Inc. 100,000 100 9,300,000 9,300 -- -- --
Merger - Quantum Medical
Technologies, Inc. 100,000 100 4,000,000 4,000 -- -- --
Deferred compensation-
stock grants -- -- -- -- -- -- (45,950)
Grant of stock options -- -- -- -- 79,800 -- (79,800)
Net (loss) -- -- -- -- -- -- --
-------------------------------------------------------------------------------------
Balance at 10/31/04 200,000 $ 200 18,307,276 $ 18,307 $ 885,567 -- $ (400,219)
Sale of common stock -- -- 3,590,128 3,590 1,295,944 -- --
Issuance of stock - stk grants -- -- 176,325 176 134,373 -- 232,765
Stock based compensation -- -- 114,000 114 108,716 -- --
Stock issued in lieu of cash -- -- 317,572 318 179,750 -- --
Cancellation of preferred stock (200,000) $ (200) -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- -- 91,379
Stock issued for purchase of software -- -- 200,000 200 169,800 145,000 --
Deferred compensation-stock grants -- -- -- -- -- -- (57,683)
Deferred compensation-stock options -- -- -- -- 16,350 -- (16,350)
Net (loss) -- -- -- -- -- -- --
-------------------------------------------------------------------------------------
Balance at 10/31/05 -- $ -- 22,705,301 $ 22,705 $ 2,790,500 $ 145,000 $ (150,108)
=====================================================================================
RESTUBBED TABLE
Allocated
Shares
Deferred Accumulated Total
pensation Deficit Equity
---------- ----------- ------
Balance at 10-31-01 -- (127,576) (107,576)
Net (loss) -- (86,400) (86,400)
-------------------------------------
Balance at 10/31/02 -- (213,976) (193,976)
Merger with TPII -- -- (120,852)
Sale of common stock for cash -- -- 65,000
Deferred compensation-stock options -- -- --
Deferred compensation-stock grants $ 327,150 -- --
Amortization of deferred comp -- -- 3,458
Net (loss) -- (246,555) (246,555)
-------------------------------------
Balance at 10/31/03 327,150 (460,531) (492,925)
Sale of common stock -- -- 277,878
Conversion of note payable -- -- 165,000
Issuance of stock - stk grants (172,748) -- 172,748
Amortization of deferred compensation -- -- 83,975
Stock based compensation -- -- 23,500
Merger - Renaissance
Health Systems, Inc. -- -- 9,400
Merger - Quantum Medical
Technologies, Inc. -- -- 4,100
Deferred compensation-
stock grants 45,950 -- --
Grant of stock options -- -- --
Net (loss) -- $(1,119,986) (1,119,986)
-------------------------------------
Balance at 10/31/04 $ 200,352 $ (1,580,517) $ (876,310)
Sale of common stock -- -- 1,299,534
Issuance of stock - stk grants (232,765) -- 134,549
Stock based compensation -- -- 108,830
Stock issued in lieu of cash -- -- 180,068
Cancellation of preferred stock -- -- (200)
Amortization of deferred compensation -- -- 91,379
Stock issued for purchase of software -- -- 315,000
Deferred compensation-stock grants 57,683 -- --
Deferred compensation-stock options -- -- --
Net (loss) -- (1,853,620) (1,853,620)
-------------------------------------
Balance at 10/31/05 $ 25,270 $(3,434,137) $ (600,770)
=====================================
See accompanying notes to consolidated financial statements.
F-5
THE QUANTUM GROUP, INC.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flow
For the Years Ended October 31, 2005 and 2004
Year Year July 24, 2001
ended ended (Inception) to
October 31, October 31, October 31,
2005 2004 2005
----------- ----------- -----------
OPERATING ACTIVITIES
Net (loss) $(1,853,620) $(1,119,986) (3,434,137)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 23,186 4,033 30,145
Amortization of deferred compensation 226,353 83,975 313,786
Issuance of stock for compensation 90,461 196,248 286,709
Issuance of stock in lieu of cash 65,463 -- 65,463
Loss on conversion of debt to common stock -- 135,000 135,000
Changes in operating assets and liabilities:
Decrease (increase) in other assets 6,102 (10,478) (7,148)
Increase in accounts payable and accrued
liabilities 396,731 456,291 1,046,191
----------- ----------- -----------
Total adjustments 808,296 865,069 1,870,146
----------- ----------- -----------
Net cash used in operating activities (1,045,324) (254,917) (1,563,991)
INVESTING ACTIVITIES
Purchase of property and equipment (71,403) (44,258) (120,281)
Purchase of software (80,000) -- (90,000)
----------- ----------- -----------
Net cash used in investing activities (151,403) (44,258) (210,281)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds (repayments) on notes payable (60,437) 57,515 190,690
Proceeds from issuance of common stock 1,299,533 277,878 1,662,411
Repayments on capital lease obligation (3,566) (492) (4,058)
----------- ----------- -----------
Net cash provided by financing activities 1,235,530 334,901 1,849,043
----------- ----------- -----------
Net increase (decrease) in cash 38,803 35,726 74,771
Cash at beginning of period 35,968 242 --
----------- ----------- -----------
Cash at end of period $ 74,771 $ 35,968 $ 74,771
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 53,931 $ 2,208 $ 56,139
Supplemental disclosures of non-cash investing and
financing activities:
Assumption of Liabilities of Transform Pack
International Inc. $ -- $ -- $ 120,852
Common stock and preferred stock issued in
connection with acquisitions $ -- $ 23,300 $ 23,300
Capital lease obligations incurred on purchases
of equipment $ -- $ 10,358 $ 10,358
Conversion of convertible note into common stock $ -- $ 30,000 $ 30,000
Acquisition of Biocard assets $ 315,000 $ -- $ 315,000
See accompanying notes to consolidated financial statements
F-6
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005
NOTE 1: DESCRIPTION OF COMPANY
On May 28, 2003, Transform Pack International, Inc. (the "Company")
merged with Quantum HIPAA Consulting, Inc. ("Quantum"). On January 30, 2004, the
shareholders of the Company approved the reincorporation of the Company under
the name of The Quantum Group, Inc. ("QTUM"). The Company's business model is to
become a provider of services to the healthcare industry in three complementary
areas: outsourcing administrative responsibilities for physicians, Managed Care
Organizations, healthcare facilities and physician associations; developing new
technologies for the healthcare delivery system; and providing healthcare
services to consumers.
GOING CONCERN
The Company has limited revenues to date. Since its inception, the Company has
been dependent upon the receipt of capital investment to fund its continuing
activities. In addition to the normal risks associated with a new business
venture, there can be no assurance that the Company's business plan will be
successfully executed. The Company's ability to execute its business model will
depend on its ability to obtain additional financing and achieve a profitable
level of operations. There can be no assurance that sufficient financing will be
obtained. Nor can any assurance be made that the Company will generate
substantial revenues or that the business operations will prove to be
profitable. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. At October 31, 2005
there were no cash equivalents.
PROPERTY AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, which range
from three to five years.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense when incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates and the differences could be material.
F-7
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill is recorded in connection with business combinations as the excess
purchase price over the fair value of the net assets acquired. Goodwill is not
amortized, but tested for recoverability annually or more frequently if
indicators of possible impairment exist. The Company will recognize an
impairment loss if the carrying value of the asset exceeds the fair value
determination. As of October 31, 2005, there was no impairment of goodwill.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements for the period ended October
31, 2005 include the accounts of The Quantum Group, Inc. and its subsidiaries,
Renaissance Health Systems, Inc. and Quantum Medical Technologies, Inc. All
intercompany accounts have been eliminated in consolidation.
REVENUE RECOGNITION
The Company has entered into a full risk contract with a Health Maintenance
Organization (HMO). Commencing when the Company has 300 patients, the Company
will receive monthly fee for each patient that chooses one of the Company's
physicians as their primary care physician. The fixed fee is based on a
percentage of the premium the HMO receives. Revenue under this agreement is
generally recorded in the period services are rendered at the rates then in
effect with quarterly adjustments. The Company started treating patients in
September 2005, but have not reached the 300 minimum by October 31, 2005. The
Company has recorded income relating to the primary care physician's charges for
the months of September and October 2005. Medical costs associated with the
revenue were equal to the revenue.
STOCK COMPENSATION
The company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 encourages the
use of a fair-value-based method of accounting for stock-based awards, under
which the fair value of stock options is determined on the date of grant and
expensed over the vesting period. Under SFAS 123, companies may, however,
measure compensation costs for those plans using the method prescribed by
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees." Companies that apply APB No. 25 are required to include
pro forma disclosures of net earnings and earnings per share as If the
fair-value-based method of accounting had been applied. The Company elected to
account for such plans under the provisions of APB No. 25. The Company accounts
for stock options granted to consultants under the fair value provisions of SFAS
123.
F-8
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION (CONTINUED)
Had the compensation expense for the stock option plan been determined based on
the fair value of the options at the grant date consistent with the methodology
prescribed under Statement of Financial Standards No. 123, "Accounting for Stock
Based Compensation," at October 31, the Company's net loss and loss per share
would have been increased to the pro forma amounts indicated below:
2005 2004
------------ ------------
Net income (loss)
As reported $ (1,853,620) $ (1,119,986)
------------ ------------
Pro forma $ (2,132,585) $ (1,246,706)
------------ ------------
Earnings per share
As reported $ (0.09) $ (0.17)
------------ ------------
Pro forma $ (0.11) $ (0.19)
------------ ------------
The fair value of each option is estimated on the date of grant using the fair
market value option-pricing model with the assumptions:
Risk-free interest rate 3%
Expected life (years) 5
Expected volatility 1.22
Expected dividends None
NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, which replaces APB No. 20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements, and changes the
requirements for the accounting for and reporting of a change in accounting
principles for all voluntary changes in accounting principles and to changes
required by accounting pronouncements in the unusual instance that the
pronouncements do not include specific transition provisions. It is effective
for fiscal years beginning after December 15, 2005. The impact of adoption of
this statement is not expected to be significant to the Company.
In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment" ("SFAS
123R"), a revision to SFAS No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123"), and superseding APB Opinion No. 25 "Accounting for Stock Issued to
Employees" and its related implementation guidance. SFAS 123R establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services, including obtaining employee services
in share-based payment transactions. SFAS 123R applies to all awards granted
after the required effective date and to awards modified, repurchased, or
cancelled after that date. Adoption of the provisions of SFAS 123R is effective
as of the beginning of the first interim or annual reporting period that begins
after June 15, 2005. The Company is currently in the process of evaluating the
potential impact that the adoption of SFAS 123R will have on its consolidated
financial position and results of operations.
F-9
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005
NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts payable and accrued
liabilities approximate their fair value because of the short maturity of these
financial instruments.
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
2005 2004
-------- --------
Computer and other equipment $ 77,259 $ 33,118
Furniture and Fixtures 28,805 8,908
Leasehold Improvements 24,754 17,389
-------- --------
130,818 59,415
Less: Accumulated Depreciation (30,145) (6,959)
-------- --------
Total $100,673 $ 52,456
======== ========
Depreciation expense for the years ended October 31, 2005 and 2004 was $23,186
and $4,033.
NOTE 5: DEFERRED INCOME TAXES
The Company's evaluation of the tax benefit of its net operating loss carry
forward is presented in the following table for years ended October 31, 2005 and
2004. At October 31, the tax amounts have been calculated using the 34% federal
and 5.5% state income tax rate.
2005 2004
---------- ----------
Income tax (benefit) consists of:
Current $ -- $ --
Deferred -- --
---------- ----------
Provision (benefit) for income taxes $ -- $ --
========== ==========
Reconciliation of the federal statutory income tax rate to the Company's
effective tax rate is as follows:
2005 2004
---------- ----------
Taxes computed at combined federal $ (630,231) $ (380,795)
Non-deductible expenses -- 46,867
State income taxes, net of federal income tax benefit (67,286) (35,652)
---------- ----------
Increase (decrease) in deferred tax asset
valuation allowance (697,517) (369,580)
---------- ----------
Provision (benefit) for income taxes $ -- $ --
========== ==========
F-10
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005
NOTE 5: DEFERRED INCOME TAXES (CONTINUED)
The components of the deferred tax asset were as follows at October 31:
2005 2004
----------- -----------
Deferred tax assets:
Net operating loss carryforward and start
up costs $ 523,435 $ 212,473
Stock based compensation 214,144 75,149
Accrued compensation 377,657 147,648
Accrued interest 44,263 26,711
----------- -----------
Total deferred tax assets 1,159,499 461,981
----------- -----------
Valuation allowance:
Beginning of year (461,983) (92,401)
Decrease (increase) during the year (697,516) (369,582)
----------- -----------
Ending balance (1,159,499) (461,983)
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
As of October 31, 2005, the Company had an unused net operating loss
carryforward and start up costs of approximately $1,391,004 available for use on
its future corporate income tax returns. This net operating loss carry forward
begins to expire in October 2024. Pursuant to Sections 382 and 383 of the
Internal Revenue Code, annual use of any of the Company's net operation loss and
credit carry forwards may be limited if cumulative changes in ownership of more
than 50% occur during any three year period.
NOTE 7: LOSS PER SHARE
Basic loss per share is computed by dividing loss available to common
shareholders by the weighted average number of common shares for the period. The
computation of diluted loss per share is similar to basic loss per share, except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the potentially dilutive common
shares, such as options, had been issued. Diluted loss per share does not give
effect to options granted, as the effects would be anti-dilutive.
NOTE 8: LEASE COMMITMENTS
Certain non-cancelable leases are classified as capital leases and leased assets
are included as part of property and equipment. Other leases are classified as
operating leases and thus are not capitalized. The Company leases its corporate
offices under operating lease agreements, which expire July 14, 2007. Total
rental expense amounted to $47,903 and $16,219 for the years ended October 31,
2005 and 2004, respectively.
The Company is obligated under capital leases. The leased property under the
capital leases had a cost of $10,538, and accumulated depreciation of $1,932 and
$351, respectively. Amortization of the leased property is included in
depreciation expense.
F-11
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005
NOTE 8: LEASE COMMITMENTS (CONTINUED)
Future minimum lease payments for these leases at October 31 are as follows:
Capital Operating
Years Ending October 31, Leases Leases
=========================================================================
2006 $ 4,200 $ 59,661
2007 3,500 32,316
2008 -- --
2009 -- --
2010 -- --
--------- ----------
Total minimum lease payments 7,700 $ 91,977
Less: amount representing interest (819)
---------
Present value of net minimum leae payments 6,881
Less: current portion (3,566)
---------
Noncurrent portion $ 3,315
---------
NOTE 9: INCENTIVE EQUITY AND STOCK OPTION PLAN
In October 2003, the Company adopted an incentive equity and stock option plan.
The purpose of the plan is to advance the interests of the Company by providing
an additional incentive to attract, retain and motivate highly qualified and
competent persons who are key to the Company, including key employees,
consultants, independent contractors, Board members, advisory board members,
officers and directors by authorizing the grant of awards of Common Stock and
options to purchase Common Stock of the Company.
Options granted under this plan may either be options qualifying as incentive
stock options under Section 422 of the Internal Revenue Code of 1986, as
amended, or options that do not so qualify. Any incentive option must provide
for an exercise price of not less than 100% of the fair market value of the
underlying shares on the date of such grant, but the exercise price of any
incentive option granted to an eligible employee owning more than 10% of our
common stock must be at least 110% of such fair market value as determined on
the date of the grant.
The term of each option and the manner in which it may be exercised is
determined by the board of directors, provided that no option may be exercisable
more that 10 years after the date of its grant and, in the case of an incentive
option granted to an eligible employee owning more that 10% of the our common
stock, no more than five years after the date of the grant. The board of
directors shall determine the exercise price of non-qualified options.
The Company has reserved 5,000,000 shares of common stock under the plan. The
board of directors or a committee of the board of directors will administer the
plan including, without limitation, the selection of the persons who will be
granted plan options under the plan, the type of plan options to be granted, the
number of shares subject to each plan options and the plan option price.
The per share exercise price of shares granted under the plan shall not be less
than 90% of the fair market value of common stock on the grant date. Officers,
directors and key employees of and consultants to Quantum will be eligible to
receive non-qualified options or stock grants under the plan. Only officers,
directors and employees of Quantum who are employed by Quantum or by any
subsidiary thereof are eligible to receive incentive options.
F-12
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005
NOTE 9: INCENTIVE EQUITY AND STOCK OPTION PLAN (CONTINUED)
Under the plan, the Company granted 60,000 shares of common stock and no options
during the year ended October 31, 2005. There were no options or stock granted
during the year ended October 31, 2004.
2005 2004
---------------------------------------- -------------------------------------
Options Options
------------------------- ----------------------
Incentive Weighted Weighted
Stock Number of Average Common Number of Average
Grants Shares Exercise Price Stock Grants Shares Exercise Price
------------------------------------------- -------------------------------------------
Outstanding at beginning of the
period -- -- -- -- -- $ --
Granted 60,000 -- -- -- -- --
Exercised -- -- -- -- -- $ --
Forfeited -- -- -- -- $ --
--------- -------- --------- --------- -------- --------
Outstanding at October 31, 60,000 -- -- -- -- --
--------- -------- --------- --------- -------- --------
Exercisable at October 31, -- -- -- -- -- --
Available for issuance at
October 31 under the plan 4,940,000 -- -- -- 5,000,000 --
--------- -------- --------- --------- -------- --------
NOTE 10: ACQUISITION OF QUANTUM MEDICAL TECHNOLOGIES, INC. AND RENAISSANCE
HEALTH SYSTEMS, INC.
Following a motion approved by the Company's shareholders during a meeting
January 30, 2004, the Board of Directors agreed to issue 13,300,000 post reverse
shares and 200,000 shares of Series A preferred stock, approved separately by
the Board of Directors on July 19, 2004, to the shareholder of both Quantum
Medical Technologies, Inc. (QMT) and Renaissance Health Systems, Inc. (RHS) for
80% of the those companies which the Company did not already own from the
majority shareholder of the Company. The Series A preferred stock is convertible
into 30 common shares after 4 years at the option of the holder. Control in the
Company will not materially change, since all the shareholders in numbers and
relative beneficial ownership of both QMT and RHS are also material and
beneficial owners of the common shares of the Company today. The final merger
was consummated in August 2004. On May 23, 2005, the majority shareholder
returned the 200,000 Series A preferred stock received from the acquisition in
order to facilitate future capital raising efforts.
Quantum Medical Technologies, Inc. (QMT) was incorporated in January 2000, and
is a developmental stage company, with no significant material assets or
liabilities and no revenues, and consists primarily of intellectual and patent
pending business process to provide medical technologies, computer programs,
electronic services, predictive modeling and other services to the medical
profession. The Company has begun to develop a Cybernaptic (SM) process to
connect with an applications service provider (ASP) format most of the touch
points in the healthcare delivery system. The Company also has in development a
QuantumQuotient (SM) index that the Company believes could be used as a tool to
provide a measurable way to tack improvement in the healthcare lifestyle of its
subject. If this process can be confirmed, it could have significant value to
the Company as a tool to reduce cost, and as a intellectual property it can sell
or license to others. In addition, the Company has purchased an online medical
office billing and collection program.
F-13
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005
NOTE 10: ACQUISITION OF QUANTUM MEDICAL TECHNOLOGIES, INC. AND RENAISSANCE
HEALTH SYSTEMS, INC. (CONTINUED) Renaissance Health Systems, Inc. was
incorporated in December of 2002, and is a developmental stage company, with no
significant material assets or liabilities and no revenues, which was formed to
create a community health system (CHS) that will coordinate care to managed care
patients by affiliating with providers, physicians and hospitals. The Company
has secured contracts with a three Florida licensed health maintenance
organizations to build CHSs. As of October 31, 2005, only one of the contracts
is operational.
NOTE 11: OTHER EQUITY TRANSACTIONS
DEFERRED COMPENSATION
The Company granted 93,950 and 57,000 shares of common stock to employees,
directors and advisors in lieu of or as partial compensation for services
performed for the Company for years ended October 31, 2005 and 2004,
respectively. These shares started vesting August 1, 2004 and are to be vested
over two and three year periods. The Company recorded $55,282 and $45,950 of
unearned compensation for the years ended October 31, 2005 and 2004,
respectively, and recorded the unvested shares as Deferred Compensation -
Allocated Shares in the equity section of the balance sheet. The Company
recognized $135,798 and $148,612 in compensation expense related to these stock
grants for the years ended October 31, 2005 and 2004. During the year ended
October 31, 2005, 8,025 shares were forfeited with a value of $6,627 and 138,575
shares were issued. During the year ended October 31, 2004, 98,125 shares were
forfeited with a value of $88,312 and 98,933 shares were issued. The value of
the stock was determined by the closing market price at the date of grant.
Additionally, the Company granted 1,764,000 options at an average exercise price
of $.57 per share to employees and directors and granted 52,500 options at an
average exercise price of $.76 per share to consultants. All options granted
during the year ended October 31, 2005 are to be vested over three years. These
options start vesting January 27, 2005. The Company granted 185,000 options to
consultants at an average exercise price of $.42 per share and 176,000 options
to employees at an average exercise price of $.94 during the year ended October
31, 2004. These options vest over a period of a period of one to two years. The
Company has recognized $16,350 and $79,800 in deferred compensation in relation
to the issuance of the stock options in conjunction with Statement of Financial
Accounting Standard No. 123 for the years ended October 31, 2005 and 2004,
respectively. The values of the options were determined based upon the market
value of the common shares at the time of grant less the exercisable price. The
Company has recognized $84,235 and $3,458 in compensation expense related to
stock option grants for the years ended October 31, 2005 and 2004, respectively.
During fiscal years ended October 31, 2005 and 2004, 164,125 options with a
value of $480 were forfeited and 14,288 options with a value of $7,144 were
forfeited, respectively.
REVERSE STOCK SPLIT
In January 2004, the shareholders of the Company approved the merger of the
Company into The Quantum Group, Inc. for the purpose of reincorporation in the
State of Nevada. In conjunction with the reincorporation, the shareholders
approved a 1 for 10 reverse stock split of its common stock. An amended and
restated Articles of Incorporation have been filed to change the name of the
Company to The Quantum Group, Inc. ("QTUM") and to set the authorized shares of
common stock to 170,000,000 at a par value of $.001 per share and authorized
preferred stock to 30,000,000 at a par value of $.001 per share. All share and
per share amounts have been retroactively restated in the accompanying financial
statements and notes for all periods presented.
F-14
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005
NOTE 11: OTHER EQUITY TRANSACTIONS (CONTINUED)
EQUITY FINANCING
In June 2004, the Company entered into an agreement with two companies to raise
a minimum of $500,000 to a maximum of $1,000,000. The shares were priced at 25%
of the closing price of the Company's stock on the OTC. The placement companies
received a combined placement fee of 13% of the gross proceeds received from
issuance of shares and one warrant at an exercise price equal to the average
price per share for every ten shares sold. The Company issued 138,529 five year
warrants at an exercise price of $0.275 per share during the year ended October
31, 2005. The Company received $61,900 and issued 253,707 shares during the year
ended October 31, 2005 and received $319,400 and issued 1,131,582 shares during
the year ended October 31, 2004. Cash commission paid to the placement companies
was $8,047 and $41,522 for the years ended October 31, 2005 and 2004,
respectively.
On August 26, 2004, an advance of $30,000 from an outside investor, made in June
2004, was converted into 300,000 shares of common stock at a conversion price of
$0.10 per share. The Company recognized a loss on conversion of the debt of
$135,000.
In December 2004, the Company sold 370,370 shares of common stock for $0.27 per
share. The Company paid a placement company 13% of the proceeds, $13,000, and
37,037 warrants at an exercise price of $0.27 per share.
In December 2004, the Company agreed with a placement company to sell common
stock of the Company at a price of $0.40 per share. The placement company
received 13% cash commission and one warrant at an exercise price of $0.40 per
share for every ten shares of common stock sold. The Company received $700,000
and issued 1,750,000 shares of common stock. The placement company received
$91,000 in cash commissions and 175,000 warrants.
On July 5, 2005, the Company issued a private placement memorandum to sell
3,000,000 shares of the Company's common stock for $0.50 per share in order to
raise $1,500,000. The Company agreed to pay a placement agent a 13% cash
commission plus one warrant at an exercise price of $0.50 per share for every
ten dollars raised. As of October 31, 2005, the Company received $636,300 and
issued 1,272,600 shares of common stock. Additionally, the Company paid $82,719
in cash commissions and issued 63,630 warrants to a placement company.
NOTE 12: ACQUISITION OF SOFTWARE
On December 16, 2004, Quantum Medical Technologies, Inc. entered into an
agreement to purchase an application systems provider software from a Florida
Limited Liability Corporation for $80,000. The software was in developmental
stage and has received HIPPA certification. The purchase price is to be paid
over a period of 120 days from the date of closing. Upon review and testing by
an independent software development company, management has determined that
certain representations by the seller were not met and therefore the Company has
not made the second scheduled payment due 60 days from closing. The Company is
seeking to renegotiate or rescind the purchase with the seller.
On September 27, 2005, the Company acquired software, domain names and other
assets from Biocard Corporation for 200,000 shares of common stock and 500,000
180-day warrants to purchase shares of the Company at an exercise price of $0.50
per share. The total value of the acquisition was $315,000.
F-15
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005
NOTE 13: RELATED PARTY TRANSACTIONS
On November 1, 2002, the Company entered into an agreement with a shareholder to
purchase certain intellectual property integral to the Company's business. In
exchange, the company issued a three (3) year installment note for $179,080 with
an interest rate of eighteen percent (18%) per annum. The price of the sale was
equal to the cost the shareholder incurred to develop the property purchased.
The note is payable monthly starting January 2003. The Company is in technical
default of the terms of the note and have classified the note as current. The
Company paid $17,667 of principal during the year ended October 31, 2005. The
note balance is $161,413 and $179,080 at October 31, 2005 and 2004, respectively
and interest accrued is $46,645 and $54,410 at October 31, 2005 and 2004,
respectively.
NOTE 14: SUBSEQUENT EVENTS
On November 30, 2005, the Company entered into a $100,000 two-year loan
agreement. This agreement bears an interest rate of 13% per annum payable
quarterly. Additional compensation included 70,000 shares of the Company's
common stock. If the Company repays the loan within the first 365 days, 17,500
shares will be returned to the Company, if the loan is prepaid after 365 days
and prior to the maturity date, 3,000 shares will be returned to the Company.
The note is callable if the interest is not paid 15 days subsequent to
notification by the holder that the interest was not paid.
On December 16, 2005, the Company entered into a $100,000 promissory note. This
note is due January 31, 2006 and bears an interest rate of 8% per annum payable
at term of the note. Additional compensation includes 15,000 shares of the
Company's common stock. The Company is currently in negotiation to extend the
term of the note.
On January 13, 2006, the Company entered into a $25,000 two-year loan agreement.
This agreement bears an interest rate of 12% per annum payable quarterly.
Additional compensation includes 1,500 shares of the Company's common stock for
every quarter the loan is outstanding.
Subsequent to October 31, 2005, under the current private placement memorandum,
the Company has sold 220,000 shares of common stock for $110,000 and paid a
commission of $14,300 and issued 11,000 warrants exercisable at $0.50 per share.
F-16