UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
(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, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-31727
----------
THE QUANTUM GROUP, INC.
(Name of registrant as specified in its charter)
NEVADA APPLIED FOR
(State or other jurisdiction of (I.R.S. Employer Identification No)
Incorporation or organization)
12230 FOREST HILL BLVD. / SUITE 157
WELLINGTON, FLORIDA 33414
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: (561) 227-1597
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
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: $0
The aggregate market value of the Registrant's voting Common Stock held
by non-affiliates of the registrant was approximately $642,846 (computed using
the closing price of $.70 per share of Common Stock on January 30, 2004 as
reported by OTCBB, based on the assumption that directors and officers and more
than 5% stockholders are affiliates). The shares and market price have been
retroactively adjusted for a 1 for 10 stock split.
There were 3,368,137 shares of the registrant's Common Stock, par value
$.001 per share, outstanding on January 30, 2004. The outstanding shares have
bee retroactively adjusted for a 1 for 10 stock split.
AVAILABLE INFORMATION
---------------------
The public may read and copy any materials filed by The Quantum Group (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 450 Fifth Street, Northwest, 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 of the 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, Forms 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.
2
DOCUMENTS INCORPORATED BY REFERENCE
Form 14-C dated January 7, 2004 as filed by the Company with the Securities and
Exchange Commission incorporated here by reference.
The Quantum Group, Inc.
FORM 10-KSB FOR THE YEAR ENDED OCTOBER 31, 2003
TABLE OF CONTENTS
PAGE
PART I ----
Item 1. Description of Business.........................................4
Item 2. Description of Property........................................23
Item 3. Legal Proceedings..............................................23
Item 4. Submission of Matters to a Vote of Security Holders............23
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.......23
Item 6. Management's Plan of Operation.................................25
Item 7. Financial Statements...........................................30
Item 7A Quantitative and qualitative disclosures about market risk.....30
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................31
Item 8A Controls and Procedures........................................31
PART III
Item 9. Directors and Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the
Exchange Act...................................................33
Item 10. Executive Compensation.........................................36
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder matters.....................37
Item 12. Certain Relationships and Related Transactions.................39
Item 13. Exhibits, List and Reports on Form 8-K.........................40
SIGNATURES...................................................................41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
The Quantum Group, Inc. (the terms "Company", "us" "TQGI" and/or "we"
and other similar terms as used herein refer collectively to the Company
together with its principal operating subsidiaries) is a recently organized
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 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, Mr. Guillama is now the direct and
beneficial owner of approximately 78.98% percent 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.
Since Transform Pack no longer has 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. Recently, with the ratification by the Shareholders on
January 30, 2004, and subject to filing the appropriate documentation with the
state of Nevada, the reorganization will be completed.
The Company is a development stage company with no current revenues. As
of February 6, 2004 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.
Its business model today is to become a leading provider of services to the
healthcare industry in three complementary areas. Those include: outsourcing for
physicians, Managed Care Organizations, healthcare facilities, physician
associations; developing new technologies that will create a more effective and
responsive healthcare system; and providing leading edge healthcare services to
consumers.
In developing this model, the Company recently purchased 20% interest
from our major shareholder in two companies which he was developing. These
companies are Quantum Medical Technologies, Inc. (QMT) (a Florida corporation)
and Renaissance Health Systems, Inc. (RHS) (a Florida corporation). Both QMT and
RHS are also development stage companies. In both cases each company has a
Letter of Intent (LOI) to develop products and services with institutions in the
healthcare field; however, the capital has not been secure at this time to
exploit these opportunities. Management believes that with a more complex and
complementary model the Company is more likely to obtain financing that in the
end will produce results for shareholders.
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 to
the shareholders of both QMT and RHS for the 80% of each of those companies the
company does not own today. Control in the Company will not 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 share of the Company
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today. The final merger is not expected to be consummated until documentation is
completed.
Once the acquisition is completed, the Company will be organized in
three key operating divisions consisting of:
>> THE QUANTUM GROUP, as the parent company, will provide outsourcing to
physicians and healthcare organizations. Our services will include:
privacy consulting, human resources management, managed care
contracting, government compliance, financial management, facilities
management, venture management, and healthcare venture/merchant
banking. The company has identified potential acquisitions to give it a
core group of services, such as medical billing and collections,
consulting and financial services.
>> QUANTUM MEDICAL TECHNOLOGIES (QMT). The QMT team has spent 4 years in
the development of technology systems to increase the efficiency of the
healthcare system. The company has in development process three PATENT
PENDING business processes.
>> RENAISSANCE HEALTH SYSTEMS (RHS). RHS is organized as a new breed, next
generation Community Health System (CHS), contracting 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 one Florida MCO.
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 business 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 receive consulting services they are in a
fragmented, sporadic and inefficient manner.
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
5
administrative simplifications, privacy and security of both electronic and
physical (paper) medical records.
The Company has 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
>> Human Resource Services
o Full Medical Office Management
o Facilities Management
o Employee Management
o Placement Services
o Personnel Training
6
>> Business Venture Management
>> Healthcare Merchant Banking Services
Because of our management team's extensive knowledge of the healthcare
industry, our future 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
-----------------------------------------------
Quantum Medical Technologies, Inc. (QMT) was incorporated in January
2000 by our current Chairman to create a new model for managing information in
the medical industry. In a pending business process environment 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 our network control center, as well as
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 increase the percentage of its budget devoted to IT
solutions.
Computer-based patient record systems and other technologies into 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 patient's
improvement in their life style in a patent pending process called
QuantumQuotient (sm) or Qx2 (sm) . The Company is exploring validation by a
major research university in the U.S.
Renaissance Health Systems, Inc. - Services
-------------------------------------------
Renaissance Health Systems, Inc. ("Renaissance" or "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
7
care Percentage of Premium (POP) contracting. RHS expects to create a new model
for healthcare called the Community Health System (CHS).
INDUSTRY BACKGROUND
Recent developments in healthcare:
In 2004 total health spending in the U.S. will account for nearly 15
percent of the nation's gross domestic product, or GDP. The Department of Health
and Human Services (HHS) announced that healthcare spending shot up 9.3 percent
in 2002, the largest increase in 11 years, to a total of $1.55 trillion. HHS
estimates that healthcare expenditures will reach $2 trillion by 2008; that
represents an increase for each person from $5,440 to $7,100 in the United
States alone. Projections put health spending at 17.7 percent of GDP, by 2008.
On December 8, 2003, the President signed into law the Medicare
Prescription Drug, Improvement, and Modernization Act--the most significant
improvement 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 offers other significant improvements as
well.
According to President Bush's proposed 2005 Federal Budget recently
released, Medicare Advantage (formerly Medicare + Choice) growth is projected to
increase nearly 100% over the next 4 years. In addition, actual "per member per
month" (PMPM) payments to Managed Care Organizations (MCO) are expected to be
increased by a record 10.6% nationwide. In Palm Beach County Florida where the
Company is based, federal funding to Medicare HMOs is increasing about 16
percent. 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.
With Medicare payments to MCO's rising 2 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. Leslie V.
Norwalk, acting deputy administrator of the federal Centers for Medicare and
Medicaid Services, has predicted publicly that as a result of the increased
payments, which take 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 MCO's, which have customarily provided drug
benefits and preventive care not available in the original fee-for-service
program. The number of people in private plans reached a peak of 6.3 million, or
16 percent of beneficiaries, in late 1999.
The Bush administration predicts that the Medicare law enacted in
December 2003, will encourage people to enroll in MCO's and similar private
plans called preferred provider organizations (PPO's), so that by 2007, 35
percent of beneficiaries will be members of such plans. Tommy G. Thompson, the
secretary of Health and Human Services, described the increased payments as "an
investment in our seniors." As a result of the increase, Mr. Thompson said,
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.
8
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 president 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 will
slightly exceed $500 million this year and will total $14 billion from 2004 to
2013.
The Centers for Medicare & Medicaid Services announced January 16, 2004
that this significantly increases in 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 will take effect March 1,
2004,and were included in the bipartisan Medicare Prescription Drug, Improvement
and Modernization Act recently signed into law by President Bush. The increases
will 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. These organizations must submit new proposals to CMS for
review by January 30, 2004. Also by that date, all managed care organizations
that renewed their contracts with CMS for 2004 are required to revise their
Adjusted Community Rate Proposals (ACRP) and submit this information to CMS.
"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 Dennis Smith, CMS acting 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 new rate is one of many steps being taken rapidly in response to
the Medicare Improvement Act. CMS has also launched its plans to make a drug
discount card available to Medicare beneficiaries this spring, and published
updated payment rates for physicians and outpatient hospitals.
In the past year 2003, beneficiaries in Medicare+Choice have seen the
program stabilize, with fewer plans leaving than in recent years. In addition,
many existing plans have expanded their service areas and others are offering
new programs. Since Jan. 1, 2003, CMS has approved 12 new Medicare+Choice
contracts and the expansion of service areas for 40 plans. As of Jan. 1, 2004,
there were 10 new plans and nine service area expansions pending. Currently, 4.6
9
million of the 41 million Medicare beneficiaries have chosen to enroll in a
Medicare Advantage plan.
"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 with this announcement," Smith said. "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 will
be 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 recently 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, Thompson said.
The adoption of those and other technologies in healthcare "could save
[the U.S.] $100 billion" a year, through reduced deaths and disabilities, he
said. 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 to 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
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quality care, will result in continued dramatic change in the healthcare
industry.
We also see that today there are, with minor exceptions, only two
places physicians or medical provider 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 & 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 2004, 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 consulting 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
MCO's, 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 intend to 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 intend to pay the 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 1.5
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). 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 the
year for actively participating in his or her own healthcare improvement.
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, MCO's have altered their strategy, returning to the
traditional model of selling insurance and transferring the risk to the CHS's.
Under such arrangements MCO's receive premiums from the Center for Medicare
Services (CMS), a division of the Department of Health and Human Services, and
12
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 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 patient members 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 limited 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 rehab. In the future, we may
seek to acquire, develop or partner with a number our providers in Company owned
medical centers of excellence that will serve as our model facilities.
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 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 Health System. Our utilization management team will communicate with the
physicians on a daily basis to provide overall management of the patient.
MCO Arrangements
o Executed Agreements
The Company has executed a Letter of Intent (LOI) with a Florida
Managed Care Organization (MCO), and, subject to completion of each party's
respective due diligence investigation anticipates a formal contract in the near
future. The terms of the LOI detail that RHS will be responsible for arranging a
Provider Health System in the Central Florida market place. 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 in a segregated bank account
$50,000 to start and afterward 3% of the revenues generated by the agreement up
to $1,000,000 is collected segregated. The Company anticipates that if properly
funded, this agreement will be generating $10,000,000 in revenues by December 1,
2004. The Company anticipates a formal agreement as soon as the company is able
to meet the capital requirements.
13
o 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 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 100% to 150%).
OPPORTUNITY
We believe that the current environment in the healthcare industry is
consistent with the company's business plan. As physician 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 his 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 organization such as our RHS to bring them and then manage Medicare
Advantage members. If this trend materializes as expected this would materially
benefit RHS. Lastly, as both the trends discusses 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 TQGI can and will stand on their own.
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, all of the Company's
competitors are larger and better capitalized and may have longer established
relationships with buyers of such services.
EMPLOYEES
As of February 7, 2004, the Company had 3 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
The Company held a Special Meeting of the stockholders of The Company
International, Inc. called by the Board of Directors on January 30, 2004, at
12230 Forest Hill Blvd., Conference Room One, Wellington, Florida. The Special
Meeting was called to obtain stockholder approval of:
14
(1) The change of the state of incorporation of Transform Pack from
Minnesota to Nevada through a merger with and into The Quantum Group,
Inc., a Nevada company formed for that purpose, so that The Quantum
Group becomes the surviving corporation;
(2) A 1-for-10 reverse split in the outstanding common stock of
Transform Pack, which will be effected in the merger with The Quantum
Group by exchanging one share of The Quantum Group for every ten shares
of Transform Pack;
(3) An amendment to the Articles of Incorporation of Transform Pack to
change the name of the corporation to The Quantum Group, Inc., which
will be effected in the merger as a result of the Articles of
Incorporation of The Quantum Group becoming the Articles of
Incorporation of the surviving corporation;
(4) An amendment to the Articles of Incorporation of Transform Pack to
increase the number of authorized shares of common stock from
40,000,000 to 170,000,000 and increase the number of authorized shares
of preferred stock from 5,000,000 to 30,000,000, which will be effected
in the merger as a result of the Articles of Incorporation of The
Quantum Group becoming the Articles of Incorporation of the surviving
corporation;
(5) An amendment to the Articles of Incorporation of Transform Pack to
opt out of the application of business combination and control share
acquisition restrictions imposed under state law, which will be
effected in the merger as a result of the Articles of Incorporation of
The Quantum Group becoming the Articles of Incorporation of the
surviving corporation;
(6) An amendment to the Articles of Incorporation of Transform Pack to
allow the Board of Directors to remove a Director for cause, which will
be effected in the merger as a result of the Articles of Incorporation
of The Quantum Group becoming the Articles of Incorporation of the
surviving corporation; and
(7) The 2003 Incentive Equity & Option Plan adopted by the Board of
Directors of Transform Pack on October 2, 2003.
All items before the shareholders all passed consecutively with
27,000,000 votes for and none against.
GOVERNMENT REGULATION
As a player in the healthcare industry, the Company's operations and
relationships will be subject to extensive and increasing regulation by a number
of governmental entities at the federal, state and local levels. The Company
intends to structure 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.
15
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
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 new 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.
16
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.
o Dilution and Exposure Relating to Recent Shareholder Vote
At a result of a shareholder vote on January 30, 2004 and subject to
affirmative vote by the Board of Directors, it is anticipated that in the near
future the Company will issue 13,300,000 shares to acquire 100% of Renaissance
Health Systems and Quantum Medical Technologies from the shareholders of those
respective companies. All 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 anticipated future 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 is such
actions.
o Need for Substantial Additional Financing
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 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
17
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.
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. See "Business".
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.
18
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
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 and First
Consulting Group, WebMD, 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 our 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.
19
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
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
Mr. Guillama and his family control approximately 79.0%, of the
Company's issued and outstanding Common Stock. The Officers and Directors of the
Company collectively control 81.6% of the common shares of the Corporation. This
effectively gives Mr. Guillama material control of the Company and with 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
20
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.
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 or recoverable
factoring facility 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
The Company currently has 3,368,137 outstanding shares of common stock
of which 3,133,697 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. A
proposed rule that may be adopted by the Commission will reduce these two and
three year periods to one and two years, respectively.
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.
21
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.
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 if a publicly
traded market develops, 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 30, 2004, there were
3,368,137 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.
22
ITEM 2. DESCRIPTION OF PROPERTY
Our offices are located at 12230 Forest Hill Blvd., Suite 157,
Wellington, Florida where we occupy approximately 300 square feet and shares
other common space with unaffiliated companies, at a current monthly rent of
$843 pursuant to a lease expiring July 31, 2004.
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
No matter was submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the twelve months ended October 31,
2003.
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 30,
2004 there are 3,368,137 common shares issued 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 350 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.
23
(a) Market Information
As of the fiscal year ended October 31, 2003, our common stock was
quoted on the Over-The- Counter Bulletin Board Trading System ("OTCBB") under
the symbol "QNTU". 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, 2002
1st Quarter 2002 $4.40 $2.00
2nd Quarter 2002 $4.10 $1.50
3rd Quarter 2002 $3.50 $1.30
4th Quarter 2002 $3.10 $0.15
Fiscal Year Ended October 31, 2003
1st Quarter 2003 $1.30 $0.20
2nd Quarter 2003 $1.50 $0.70
3rd Quarter 2003 $1.60 $0.20
4th Quarter 2003 $1.60 $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 350 beneficial
shareholders of record of our common stock as of October 31, 2003.
(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:
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. None of the foregoing transactions involved a
distribution or public offering.
On August 2003 the Company purchased 100% of the outstanding shares of
Quantum HIPAA Consulting Group, Inc. from Noel J. Guillama in exchange for the
issuance of 2,700,000 common shares. The transaction was exempt from
registration under Section 4(2) as the recipient of the shares is a
sophisticated investor and was provided with access to the officers of the
24
company so as to receive all material information regarding the company, which
the recipient requested. The shares were issued with restrictive legend and the
transactions did not include a public distribution or offering.
In July 2003, the Company sold 46,000 shares of common stock to foreign
investors for $0.10 per share including 23,000 warrants to purchase common stock
at a price per share of $0.25 and 23,000 warrants to purchase common stock at a
price per share of $0.40. The warrants expire on March 31, 2006. Each investor
represented to us that the investor was not a "U.S. Person", as defined under
Regulation S of the 1933 Act. The shares were issued as restricted shares under
the 1933 Act and were endorsed with a restrictive legend. Shares were issued to
two investors.
In August 2003, the Company sold 40,000 shares of common stock to
foreign investors for $0.05 per share. Each investor represented to us that the
investor was not a "U.S. Person", as defined under Regulation S of the 1933 Act.
The shares were issued as restricted shares under the 1933 Act and were endorsed
with a restrictive legend. Shares were issued to three investors.
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.
MANAGEMENT'S PERSPECTIVE AND DEVELOPMENT PLAN FOR THE FISCAL YEAR ENDING
OCTOBER 31, 2004
The Company is a development stage company and has no current revenues.
The Company has raised a total of $280,000 to date, approximately $215,000 from
loans and stock purchases from our Chairman and approximately $65,000 from the
sale of stock to others. As of February 6, 2004 management's efforts have been
primarily in market research, creating a business model, investigating best
practices, business development, negotiations of various Letters of Intent 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.
25
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 for physicians, Managed Care Organizations, healthcare facilities,
physician associations; developing new technologies (that will create a more
effective and responsive healthcare system); and providing leading edge
healthcare services to consumers.
In developing this mode further the Company recently purchased 20%
interest from our Chairman and major shareholder in two companies which he was
developing. These companies are Quantum Medical Technologies, Inc ("QMT") (a
Florida corporation) and Renaissance Health Systems, Inc. ("RHS") (a Florida
corporation). These agreements were not negotiated at arm's length and no
independent valuation was made. Both QMT and RHS are also development stage
companies. In both cases each company has a Letter of Intent (LOI) to develop
products and services with institutions in the healthcare field; however the
capital has not been secured at this time to exploit these opportunities.
Management believes that with a more complex and complementary model the Company
is more likely to obtain financing that in the end will produce results for
shareholders. Further, 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 to the shareholders of both QMT and RHS for the 80% of those
companies the company does not own today. Control in the Company will not
changes, since all the shareholder in number and relative beneficial ownership
of both QMT and RHS are also material and beneficial owners of the commons share
of the company today. The final merger is not expected to be consummated until
documentation is completed.
Once the acquisition is completed the Company, we will be organized in
three key operating divisions consisting of:
>> THE QUANTUM GROUP as the parent company, will provide outsourcing to
physicians and healthcare organizations. Our services will include:
HIPAA compliance, privacy consulting, human resources management,
managed care contracting, government compliance, financial management,
facilities management, venture management, and healthcare
venture/merchant banking. The company has identified potential
acquisitions to give it a core group of services, such as medical
billing and collections, consulting and financial services.
>> QUANTUM MEDICAL TECHNOLOGIES (QMT) The QMT team has spent 4 years in
the development of technology systems to increase the efficiency of the
healthcare system. The company has in development three (3) patent
pending business processes.
>> RENAISSANCE HEALTH SYSTEMS (RHS) RHS is organized as a new breed next
generation Community Health System (CHS), contracting 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 one Florida MCO.
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 have developed an initial set of product/service to assist
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 has developed a comprehensive system for training
non-medical consultants in the implementation of HIPAA regulations. The Company
has trained approximately 100 consultants in a trial project. Once capital has
been secured, the Company intends to fully deploy its ability to create
26
documentation and systems beyond HIPAA into other areas of healthcare
consulting, ranging from medical billing and coding to information technology.
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.
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 Qx2 (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
27
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 a letter of intent with a medical association
that shows great promise, in the development and operation of a complete website
and secure information between member and other member and their patient. We
seek to develop this relationship and produce revenues by the end of the year.
The Company is currently in discussion with four separate companies
that have foreign healthcare technology with application in the US and with US
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 that with the development of this QuantumSuite (SM) of products to begin
to receive revenues by the end of the year.
RENAISSANCE HEALTH SYSTEMS, INC. - SERVICES
RHS's model shows great promise in the short term for revenues and
profitability of the Company. Therefore management will allocated a greater
portion of all moneys raised 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 managed care risk
with professionals by their side. We envision expanding our 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. Our model is based on a direct,
proactive, involved participation with our real client, the members 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 limited 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 rehab. 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 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 Health System. Once
developed, our utilization management team will communicate with the physicians
on a daily basis to provide overall management of the patient.
We have executed a Letter of Intent (LOI) with a Florida MCO, which
anticipates a formal contract in the near future. The terms of the LOI details
28
that RHS will be responsible for arranging a Community Health System (CHS) in
the Central Florida market place. 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 in a segregated bank account $50,000 to start and
afterward 3% of the revenues generated by the agreement up to $1,000,000 is
collected. The Company anticipates that if properly funded, this agreement will
be generating $10,000,000 in revenues by December 1, 2004. The Company
anticipates a formal agreement as soon as the company is able to meet the
capital requirements.
Use of Capital
The Company will need approximately $2.5-$3.5 million to implement its
business plan over the next 12-18 months.
The first $500,000 in new capital will go towards the development and
completion of our first CHS in the central Florida market, with approximately
$50,000 going towards continued development of technology solutions. We expect
to initially hire 10 people to develop the network on the ground and to create
systems and protocols. 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 $500,000 to acquire a billing and
collection company and further assumes certain obligations associated with that
acquisition. With this acquisition, we expect to hire/acquire a minimum of 20
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 $100,000 to $300,000 in this initial phase, and will require the entire
fiscal 2004 to complete. Revenues are not expected until fiscal year end 2005.
We anticipate that the first trial of this new technology/system will be at RHS.
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 expected, the Company would expect to have 35
employees by October 31, 2004, generating run-rate revenues of $5-7 million
per-year.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a development stage company and has not generated any
revenues during the prior year; therefore all our capital requirements will have
to be raised through equity or debt financing. We will need approximately $2.5
to $3.5 million over the next 12 to 18 months to implement the Company's
business plan.
As of October 31, 2003, we had cash of $242 and total assets of
$14,708. We had current liabilities of $507,633. 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
29
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.
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.
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 accompanying condensed 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INFLATION AND CHANGING PRICES
DEPENDENCY ON REIMBURSEMENT BY THIRD PARTIES
The Medicare and Medicaid programs are subject to statutory and
regulatory changes, retroactive and prospective rate adjustments, administrative
rulings and funding restrictions, any of which could have the effect of limiting
or reducing reimbursement levels. A substantial portion of our managed care
revenues is based upon Medicare reimbursable rates. Any changes that limit or
reduce Medicare reimbursement levels could have a material adverse effect on our
business. Further, significant changes have or may be made in the Medicare
program, which could have a material adverse effect on our business, results of
operations, prospects, financial results, financial condition or cash flows. In
addition, the Congress of the United States may enact unfavorable legislation,
which could adversely affect operations by, among other things, decreasing
Medicare reimbursement rates.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from
the potential change in value of a financial instrument as a result of
fluctuations in interest rates and market prices. We do not currently have any
trading derivatives nor do we expect to have any in the future. We have
established policies and internal processes related to the management of market
risks, which we use in the normal course of our business operations.
INTEREST RATE RISK
We believe a change in interest rates would not have a material impact
on our financial condition, future results of
operations or cash flows.
INTANGIBLE ASSET RISK
We have a substantial amount of intangible assets. Although at October
31, 2002 we believe our intangible assets are recoverable, changes in the
economy, the business in which we operate and our own relative performance could
change the assumptions used to evaluate intangible asset recoverability. We
continue to monitor those assumptions and their consequent effect on the
estimated recoverability of our intangible assets.
30
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.
As of a date within 90 days of the date of this report, 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.
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 six (6) directors in the
Company; however, the Company will seek to elect at least one (1) additional
outside director by the end of 2004. 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 indicated above, there are no family relations among any
officers or directors of the Company. The officers of the Company currently
devote themselves part time to the development 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. Haggarty as the sole member of the Audit
Committee and as its "financial expert"; as such term is defined under
federal securities law.
31
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, Mrs. Guillama and
Mr. Baker. All actions of the Executive Committee require a unanimous
vote.
o The Compensation Committee consists of Mrs. Guillama and Mr. Haggarty.
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.
o The Option Committee consists of Mrs. 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.
CODE OF CONDUCT
The Company has adopted two Codes of Conduct that collectively covers
all officers, directors and employees of the Company. One Code of Conduct is for
employees in general and one Code of Conduct is for senior officers and
accounting personnel of the Company. This first Code of Conduct sets Company
policy on inside information, conflicts of interest, trading on inside
information, management and accounting ethics and compliance with all local,
state, and federal laws. The second 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.thequantumgroupinc.com. The
Code of Ethics for Principal Executive and senior Financial Officers is attached
to this form.
32
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
Buyers United for each of the directors and officers.
NAME AGE POSITIONS(1) SINCE
---- --- ------------ -----
Noel J. Guillama 44 Chairman, President,
and Director 2003
Susan D. Guillama 43 Vice President, Secretary,
and Director 2003
Marion D. Thorpe, Jr., M.D., M.P.H. 38 Vice Chairman and Director 2003
Donald B. Cohen 50 Vice President,
Chief Financial Officer
and Director 2003
James D. Baker 60 Director 2003
Mark Haggerty 55 Director 2003
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 our Board.
NOEL J. GUILLAMA, CHAIRMAN, PRESIDENT, AND DIRECTOR
Noel J. Guillama, is the founder of Quantum HIPAA Consulting Group,
Inc. Mr. Guillama is a seasoned executive that has participated in various
public and private companies in healthcare, real estate, construction and
technology, collectively raising over $75 million of capital. In addition to
Quantum, Mr. Guillama is also currently a Director of TargitInteractive, Inc. of
Portsmouth, New Hampshire, a provider of interactive marketing. Prior, Mr.
Guillama was Founder, Chairman, President and Chief Executive Officer of
Metropolitan Health Networks, Inc. of West Palm Beach, Florida, (NASDAQ:MDPA)
from its inception in January 16, 1996 to February 1, 2000. Originally
Metropolitan was involved in operating a pharmacy, physical therapy facilities,
diagnostic imaging, and direct medical care. While at Metropolitan, Mr. Guillama
created MetBilling Group which became one of the largest medical billing
companies in South Florida and served as the management information system of
the Company. The Company operated facilities throughout Florida. Metropolitan,
at the time of Mr. Guillama's departure, had experienced 400 percent-annualized
compounded growth, and reported revenues of $119 million with a $5 million
profit in fiscal 2000. Metropolitan provides comprehensive care to over 40,000
patients on a monthly basis and is one of the largest healthcare providers in
Florida. Mr. Guillama has divested completely of his MDPA holdings, leaving
Metropolitan to develop Quantum. From 1994 to 1995, Mr. Guillama was Vice
President of Development for MedPartners, Inc. (NYSE:DRX), a Birmingham,
Alabama-based physician practice. From 1991 to 1994, he served as Director and
Vice President of Operations of Quality Care Networks, Inc., a South Florida
based comprehensive group practice with 36 physicians and seven offices. From
1980 to 1990, Mr. Guillama served as President and Chief Executive Officer of
Tektonica, Inc. At that time Tektonica was a diversified company with interests
in construction, real estate, mortgage financing, and trucking in South Florida.
Mr. Guillama remains Chairman of Tektonica to this date. Mr. Guillama holds
active licensure as a Building Contractor, Real Estate Broker, Mortgage Broker
and Insurance Broker in the State of Florida and held a NASD registration from
1990-1995. Mr. Guillama is a member of the American College of Health Care
Executives, Medical Group Management Association. Mr. Guillama serves a director
of the Florida International University Foundation. Based in Miami, Florida, FIU
has 34,000 students, 1,100 full-time faculty, and 95,000 alumni, making it the
largest university in South Florida and placing it among the nation's 30 largest
colleges and universities.
33
SUSAN D. GUILLAMA, VICE PRESIDENT, SECRETARY, 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 the 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.
MARION D. THORPE, JR., M.D., M.P.H., VICE-CHAIRMAN AND DIRECTOR
Dr. Thorpe has a Masters in Health Policy and Administration from
Chapel Hill School of Public Health. In addition, Dr. Thorpe received a Doctor
of Medicine from Chapel Hill School of Medicine. Prior to joining Quantum, Dr.
Thorpe was a founding member of the Florida Health Information Systems Council
from 1999-2002. Dr. Thorpe was also President & CEO of Medical-Net Information
Management Group (MNIMG.com). Dr. Thorpe is a legislative liaison for the
organization Kidz 2000 and Beyond and assists them in establishing state and
federal funding opportunities. Dr. Thorpe serves as an adjunct Professor for the
University of Miami School of Medicine Department of Epidemiology.
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. (NASDAQ:MDPA) 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 in Northridge, and
was certified as a CPA in the State of California.
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
34
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 2000, the Company was sold to Real Networks, Inc. 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). RAPOR customers include IBM, Intel and the US Army. 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 customers included IBM, General Motors,
Salomon Brothers, banks, hospitals and many Fortune 1000 firms. 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 the present he has been the President of Voice & Wireless
Corporation, a fully SEC reporting public company. 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.
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 300,000 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. All of
the Directors of the Company that are also employees of the Company do not
receive additional compensation for their services as Directors.
35
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, 2003.
ITEM 10. EXECUTIVE COMPENSATION
Noel J. Guillama, our Chief Executive Officer, became an executive
officer at the end of May 2003 and has not received any direct or indirect
compensation for services rendered on behalf of the Company the since that time.
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.
Executive Compensation
The Company expects to pay Mr. Guillama, Mrs. Guillama, and Mr. Cohen
with permanent compensation and bonuses to be negotiated with Compensation
Committee of the Company for the period of organization through October 31,
2003. As of that date, the Company has accrued a total of $74,000 compensation
for Mr. Guillama, $27,500 for Mr. Cohen, and $25,000 for Mrs. Guillama in
anticipation of such arrangement. The Company has also accrued $5,000 for the
compensation of Outside Directors.
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,
2003, 2002 and 2001.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Securities
Fiscal Other Annual Restricted Underlying
Name and Principal Position Year Salary Compensation Stock Award Options
--------------------------- ------ ------ ------------ ----------- ----------
Noel J. Guillama 2003 $ -- $ -- $ -- 200,000
President, Chairman, CEO 2002 $ -- $ -- $ -- --
2001 $ -- $ -- $ -- --
Donald B. Cohen 2003 $ -- $ 1,500 $ 54,000 150,000
CFO, Director 2002 $ -- $ -- $ -- --
2001 $ -- $ -- $ -- --
Susan J. Guillama 2003 $ -- $ -- $ -- --
Vice President, Secretary, 2002 $ -- $ -- $ -- --
Director 2001 $ -- $ -- $ -- --
36
OPTIONS AND COMMON SHARES GRANTED IN THE YEAR ENDED OCTOBER 31, 2003
TO EXECUTIVES
The following table sets forth information with respect to stock options and
common shares granted to each of our named executive officers during our most
recent fiscal year ended October 31, 2003.
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise of Options Number of
Options/SARs Employees in Base Price Exercisable/ Restricted
Name Granted Fiscal Year ($/Share) Expiration Date Unexercisable Stock Granted
---- ------------ ------------ ----------- ----------------- ------------- -------------
Noel J. Guillama 200,000 53% $0.40 1/1/09 to 10/1/10 -/ 200,000 --
Donald B. Cohen 150,000 36% $0.40 1/1/09 to 10/1/10 -/ 150,000 60,000
The options were granted in October 2003 and become exercisable beginning
January 1, 2004 through October 1, 2005. The restricted common shares were
granted in October 2003, and are earned over a period of 22 months beginning
January 1, 2004.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of January 30, 2004, 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.
37
Amount/Nature
of Beneficial Percentage of
Ownership of Beneficial
Name/Address of Beneficial Owner Common Stock Ownership
-------------------------------- ------------- -------------
Guillama, Noel (1)(7) 2,762,857 78.98%
12230 Forest Hill Blvd.,Suite 157
Wellington, Florida
Guillama, Susan D. (2)(8) 122,007 3.49%
Cohen, Donald B. (3) 104,642 2.99%
Baker, James D. (4) 22,310 0.64%
Haggerty, Mark (5) 103,768 2.97%
Thorpe, Marion (6) 24,749 0.71%
Directors and Executive
Officers, as a group (6 persons) 2,855,201 81.62%
----------
(1) Includes (a) 2,700,000 shares held by Mr. Guillama and (b) 62,857 issuable
upon the exercise of options at $.40 per share until January, 2009. This
does not include 137,143 shares issuable upon the exercise of options at
$.40 per share until October 1, 2010.
(2) Includes (a) 122,007 shares transferable upon the exercise of options at
$.01 per share on shares owned by Mr. Guillama until July 24, 2008 and (b)
30,031 shares transferable upon the exercise of options at $ .01 per share
on shares owned by Mr. Guillama until July 24, 2008 held by her minor son.
This does not include (a) 40,670 shares transferable upon the exercise of
options at $.01 per share on shares owned by Mr. Guillama until July 24,
2009 and (b) 10,010 shares transferable upon the exercise of options at $
.01 per share on shares owned by Mr. Guillama until July 24, 2009 held by
her minor son.
(3) Includes (a) 45,000 shares transferable upon the exercise of options at $.01
per share on shares owned by Mr. Guillama until July 24, 2008; (b) 47,142
issuable upon the exercise of options at $.40 per share until January 1,
2009 and (c) 12,500 shares issuable through March 1, 2004. Does not include
(a) 15,000 shares transferable upon the exercise of options at $.01 per
share on shares owned by Mr. Guillama until July 24, 2009; (b) 47,500 shares
issuable monthly at a rate of 2,500 per month until October 1, 2005; and (c)
102,858 shares issuable upon the exercise of options at $.40 per share until
October 1, 2010.
(4) Includes (a) 4,167 shares issuable through March 1, 2004; (b) 15,000 shares
transferable upon the exercise of options at $.01 per share on shares owned
by Mr. Guillama until July 24, 2008 and (c) 3,143 issuable upon the exercise
of options at $.40 per share until January 1, 2009. Does not include (a)
5,000 shares transferable upon the exercise of options at $.01 per share on
shares owned by Mr. Guillama until July 24, 2009; (b) 25,833 shares issuable
monthly at a rate of 833 per month until October 1, 2005; and (c) 6,857
shares issuable upon the exercise of options at $.40 per share until October
1, 2010.
(5) Includes (a) 5,000 shares issuable through March 1, 2004 (b) 1,875 shares
transferable upon the exercise of options at $.01 per share on shares owned
by Mr. Guillama until July 24, 2008; (c) 9,375 shares transferable upon the
exercise of options at $.01 per share until July 24, 2008 held by Linda Jean
Haggerty and (d) 3,143 issuable upon the exercise of options at $.40 per
share until January 1, 2009. Does not include (a) 625 shares transferable
upon the exercise of options at $.01 per share on shares owned by Mr.
Guillama until July 24, 2009; (b) 3,125 shares transferable upon the
exercise of options at $.01 per share until July 24, 2009 held by Linda Jean
Haggerty; (c) 25,000 shares issuable quarterly at a rate of 2,500 per
38
quarter until October 1, 2005; and (d) 6,857 shares issuable upon the
exercise of options at $.40 per share until October 1, 2010.
(6) Includes (a) 15,678 shares issuable through March 1, 2004; (b) 7,500 shares
transferable upon the exercise of options at $.01 per share on shares owned
by Mr. Guillama until July 24, 2008 and (c) 1,571 issuable upon the exercise
of options at $.40 per share until January 1, 2009. Does not include (a)
2,500 shares transferable upon the exercise of options at $.01 per share on
shares owned by Mr. Guillama until July 24, 2009; (b) 17,322 shares issuable
quarterly at a rate of 2,887 per quarter until October 1, 2005; and (d)
3,429 shares issuable upon the exercise of options at $.40 per share until
October 1, 2010.
(7) Mr. Guillama has granted options to purchase 1,590,514, at $.001 per share,
of the 2,700,000 shares he owns. 307,718 options were granted to Directors
and their affiliated persons, 820,154 options were granted to affiliated
trusts/controlled entities of which he has total voting control, and 462,642
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, Mr. Guillama is now the direct and
beneficial owner of approximately 80.18 percent 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 result of a shareholder vote on January 30, 2004 and subject to
affirmative vote by the Board of Directors, it is anticipated that in the near
future the Company will issue 13,300,000 shares to acquire 100% of Renaissance
Health Systems and Quantum Medical Technologies from the shareholders of those
respective companies. All 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.
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-K.
39
(a)(3) Exhibits
Exhibit Item 601
No. Ref. No. Title of Document
------- -------- -----------------
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. 3.4** By-Laws The Quantum Group, Inc (Nevada)
4. 3.5** 2003 INCENTIVE EQUITY & OPTION PLAN
5. 10.11* Put Option Agreement between Transform Pack International
and HANS MEIER, CARMELLE CAISSIE, DANIEL SCHAM
and ROBERT TALBOT, TRUSTEE
----------
* Each of these documents are incorporated herein by this reference from the
Form 8K Filed by the Company on May 28, 2003 as filed by the Company with the
Securities and Exchange Commission
** Each of these items are incorporated herein by this reference as filed in
Form 14-C on January 7, 2004 as filed by the Company with the Securities and
Exchange Commission.
FORM 8-K FILINGS
The Company filed a Form 8-K/A on October 10, 2003 to include audited
financial statement on acquisition of Quantum HIPAA Consulting Group, Inc. on
May 28, 2003 incorporated here by reference.
40
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
registrant has duly caused this Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, this 13th of February, 2003.
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: Date:
----------- --------------
/s/ Marion D. Thorpe, Jr. /s/ Donald B. Cohen
--------------------------- ---------------------------
Marion D. Thorpe, Jr., M.D., Director Donald B. Cohen, Director
Vice Chairman Chief Financial Officer
Date: Date:
----------- --------------
/s/ James D. Baker
--------------------------- ---------------------------
James D. Baker, Director Mark Haggerty, Director
Date: Date:
----------- --------------
41
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
Exhibit 4.1 CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL
OFFICERS
Exhibit 31.1 Certification of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of the Principal Financial and Accounting
Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(7)
Exhibit 32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
42
Michael I. Daszkal, CPA, P.A. 2401 N.W. Boca Raton Boulevard
Jeffrey A. Bolton, CPA, P.A. DaszkalBolton LLL Boca Raton, FL 33431
Timothy R. Devlin, CPA, P.A. t: 561.367.1040
Michael S. Kridel, CPA, P.A. f: 561.750.3236
Marjorie A. Horwin, CPA, P.A. www.daszkalbolton.com
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors and Stockholders
The Quantum Group, Inc.
We have audited the accompanying balance sheet of The Quantum Group, Inc. (a
development stage company) as of October 31, 2003, and the related statements of
operations, changes in deficiency in assets and cash flows for the years ended
October 31, 2003 and 2002 and for the period July 24, 2001 (inception) to
October 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Oversight Board in the United States of America. Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the 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 financial statements referred to above present fairly, in
all material respects, the financial position of The Quantum Group, Inc. as of
October 31, 2003, and the results of its operations and its cash flows for the
year ended October 31, 2003 and 2002 and for the period July 24, 2001 to October
31, 2003 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying 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 that 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 the Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Daszkal Bolton LLP
Boca Raton, Florida
February 13, 2004
Member of American Institute of Certified Public Accountants -
SEC and Private Companies Practice Sections
Member Affiliated Offices Worldwide
F-1
The Quantum Group, Inc.
Condensed Balance Sheet
(A Development Stage Enterprise)
October 31, 2003
ASSETS
Current assets:
Cash $ 242
---------
Total current assets 242
Property and equipment, net of accumulated depreciation of $2,926 1,693
Investment in related companies 10,000
Other assets 2,773
---------
Total assets $ 14,708
=========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities - (note 7) $ 170,595
Accrued payroll $ 110,075
Notes payable and accrued interest - shareholder 226,963
---------
Total current liabilities 507,633
Commitments and contingencies
Deficiency in assets accumulated during development stage (492,925)
---------
Total liabilities and deficiency in assets $ 14,708
=========
See accompanying notes to financial statements.
F-2
The Quantum Group, Inc.
Condensed Statement of Operations
( A Development Stage Enterprise)
For the Periods Ended October 31, 2003 and 2002
For the period
For year ended July 24, 2001
------------------------------------- (inception) to
October 31, 2003 October 31, 2002 October 31, 2003
---------------- ---------------- ----------------
Interest Expense $ 33,432 $ 7 $ 33,439
Other Expenses $ 213,123 $ 86,393 $ 427,092
----------- ----------- -----------
Expenses Representing Net Loss $ 246,555 $ 86,400 $ 460,531
=========== =========== ===========
Basic and diluted loss per common share $ (0.080) $ (0.030) $ (0.160)
=========== =========== ===========
Weighted average number of common shares
outstanding 2,939,761 2,700,000 2,805,437
=========== =========== ===========
See accompanying notes to financial statements.
F-3
The Quantum Group, Inc.
Statement of Changes in Deficiency in Assets
Accumulated During the Development Stage
October 31, 2003
Common Stock
par value $.001 per share
170,000,000 authorized Additional Allocated Shares
---------------------- Paid-in Deferred for Deferred Accumulated Total
# of Shares Amount Capital Compensation Compensation Deficit Equity
----------- ------ ------- ------------ ------------ ------- ------
Balance 7/24/01 (inception) 2,700,000 $ 2,700 $ 17,300 -- -- -- $ 20,000
Net (loss) -- -- -- -- -- $(127,576) (127,576)
--------- --------- --------- --------- --------- --------- ---------
Balance at 10-31-01 2,700,000 2,700 17,300 -- -- (127,576) (107,576)
Net (loss) -- -- -- -- -- $ (86,400) (86,400)
--------- --------- --------- --------- --------- --------- ---------
Balance at 10/31/02 2,700,000 2,700 17,300 -- -- (213,976) (193,976)
Merger with TPII 510,877 $ 511 $(121,363) -- -- -- $(120,852)
Sale of common stock for cash 86,000 $ 86 $ 64,914 $ 65,000
Deferred Compensation-Stk Options -- -- $ 207,500 $(207,500) -- -- $ --
Deferred Compensation-Stock Grants -- -- -- $(327,150) $ 327,150 -- $ --
Amortization of Deferred Comp -- -- -- $ 3,458 -- -- $ 3,458
Net (loss) -- -- -- -- -- $(246,555) $(246,555)
--------- --------- --------- --------- --------- --------- ---------
Balance at 10/31/03 3,296,877 $ 3,297 $ 168,351 $(531,192) $ 327,150 $(460,531) $(492,925)
========= ========= ========= ========= ========= ========= =========
See accompanying notes to financial statements.
F-4
The Quantum Group, Inc.
(A Development Stage Enterprise)
Statements of Cash Flow
For the Periods Ended October 31, 2003 and 2002
Year Year July 24, 2001
ended ended (Inception) to
October 31, 2003 October 31, 2002 October 31, 2003
----------- --------------------- ----------------
OPERATING ACTIVITIES
Net (loss) $(246,555) $ (86,400) (460,531)
--------- --------- ---------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,269 1,243 2,927
Amortization of deferred compensation 3,458 3,458
Changes in operating assets and liabilities:
Increase in other assets (952) (2,773)
Increase (decrease) in accounts payable and accrued liabilities 174,380 (6,218) 193,169
--------- --------- ---------
Total adjustments 178,155 (4,975) 196,781
--------- --------- ---------
Net cash used in operating activities (68,400) (91,375) (263,750)
INVESTING ACTIVITIES
Purchase of property and equipment (890) (4,620)
Investment in related companies (10,000) (10,000)
--------- --------- ---------
Net cash provided by (used in) investing activities (10,890) -- (14,620)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from note payable 14,532 90,820 193,612
Proceeds from issuance of common stock 65,000 85,000
--------- --------- ---------
Net cash provided by financing activities 79,532 90,820 278,612
--------- --------- ---------
Net increase (decrease) in cash 242 (555) 242
Cash at beginning of period -- 555 --
--------- --------- ---------
Cash at end of period $ 242 $ -- $ 242
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ -- $ -- $ --
Supplemental disclosures of non-cash investing and financing
activities:
Assumption of Liabilities of Transform Pack International, Inc. $ 120,852 $ -- $ 120,852
See accompanying notes to financial statements.
F-5
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2003
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. ("TQGI"). The shareholders approved a 1 for 10 reverse stock
split (See Note 6). The Company is a development stage enterprise which will
provide medical practice and HIPAA compliance consulting services to the health
care industry. Management has focused its efforts creating the Company's
business model and the creation of training manuals and compact disc.
(See Note 4)
Going Concern
The Company has no 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. For the years ended
October 31, 2003 and 2002, 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-6
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2003
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Company has not recognized any benefit of such net operation loss carry
forwards in the accompanying financial statements in accordance with the
provisions of SFAS No. 109, as the realization of this deferred tax benefit is
not likely. A 100% valuation allowance has been recognized to offset the entire
effect of the Company's net deferred tax asset.
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 SFAS 123.
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
changes the accounting for certain financial instruments with characteristics of
both liabilities and equity that, under previous pronouncements, issuers could
account for as equity. The new accounting guidance contained in SFAS No. 150
requires that those instruments be classified as liabilities in the balance
sheet. SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatory redeemable shares,
which the issuing company is obligated to buy back in exchange for cash or other
assets. A second type includes put options and forward purchase contracts, which
involve instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets. The third type of instruments that
are liabilities under this Statement is obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or predominantly to a
variable such as a market index, or varies inversely with the value of the
issuers' shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety. Most of the provisions of
SFAS No. 150 are consistent with the existing definition of liabilities in FASB
Concepts Statement No. 6, "Elements of Financial Statements".
F-7
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2003
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The remaining provisions of this Statement are consistent with the FASB's
proposal to revise that definition to encompass certain obligations that a
reporting entity can or must settle by issuing its own shares. This Statement
shall be effective for financial instruments entered into or modified after May
31, 2003 and otherwise shall be effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory redeemable financial
instruments of a non-public entity, as to which the effective date is for fiscal
periods beginning after December 15, 2003. The Company is currently assessing
the impact of SFAS No. 150, which is not expected to have a material impact on
the Company's financial statements. In November 2002, the FASB issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires that a liability be recorded in the guarantor's balance
sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures
about the guarantees that an entity has issued, including a reconciliation of
changes in the entity's product warranty liabilities. The initial recognition
and initial measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements of FIN 45 are
effective for financial statements for interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 did not have a material impact on the
Company's financial position or on its results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company does not
expect adoption of FIN 46 to have a material impact on its financial position or
on its results of operations.
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: MERGER WITH QUANTUM HIPAA CONSULTING, INC.
Effective May 28, 2003, the Company consummated a merger pursuant to a merger
agreement with Quantum HIPAA Consulting, Inc. Quantum HIPAA Consulting Group,
Inc developed a training compact disc and manuals to instruct the healthcare
industry on the implementation of the regulations created to comply with the
Health Insurance Portability and Accountability Act of 1996 (HIPAA).
F-8
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2003
NOTE 4: MERGER WITH QUANTUM HIPAA CONSULTING, INC. (continued)
The Company completed the merger by issuing 27,000,000 million shares of Common
Stock to the sole shareholder of Quantum, in exchange for all the issued and
outstanding shares of Quantum. For accounting purposes, the acquisition will be
treated as a recapitalization of the Company. The value of the net assets of the
Company after the acquisition was completed is the same as their historic book
value.
On May 30 2003, in accordance with the agreement, the Company, Transform Pack
International, Inc., sold its wholly owned subsidiary, Transform Pack, Inc.
(TPI) to certain previous shareholders and investors of the Company. Transform
Pack, Inc. and its shareholders have agreed to assume and indemnify the Company
for all operating debts of the Company.
NOTE 5: 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 is not
presented as the effects would be anti-dilutive.
NOTE 6: OTHER COMMON STOCK TRANSACTIONS
Sale of Common Stock
In July 2003, the company sold 44,000 shares of common stock and 22,000 warrants
with exercise price of $.25 per share and 22,000 warrants with an exercise price
of $.40 per share for $44,000 in cash. The warrants are exercisable anytime
before 5:00 pm March 31, 2006.
In August 2003, the Company sold 42,000 shares of common stock for $21,000 in
cash.
Deferred Compensation
On October 1, 2003, the Company granted 3,635,000 shares of common stock to
employees, directors and advisors in lieu of or as partial compensation for
services performed for the Company. These shares start vesting January 1, 2004
and are to be vested over two and three year periods. The Company recorded
$327,150 of unearned compensation and recorded the unvested shares as Allocated
Shares for Compensation in the equity section of the balance sheet. The Company
recognized $11,912 in compensation expense related to these stock grants. The
value of the stock was determined by the closing market price at the date of
grant. Additionally, the Company granted 4,150,000 options at $.04 per share to
employees and directors to be vested over three years. The options start vesting
January 1, 2004. The Company has recognized $207,500 in deferred compensation in
relation to the issuance of the stock options in conjunction with Statement of
Financial Accounting Standard no. 123. 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 $3,458 in compensation expense
related to these stock option grants.
F-9
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2003
NOTE 6: OTHER COMMON STOCK TRANSACTIONS (continued)
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. ("TQGI") 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.
NOTE 7: STOCK OPTIONS
In October 2003 the Company adopted a stock option plan. The purpose of the
stock option plan was to increase the employees and non-employee director's
proprietary interest in Quantum and to align more closely their interests with
the interests of the shareholders of Quantum, as well as to enable Quantum to
attract and retain the services of experienced and highly qualified employees
and non-employees directors.
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 the 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. As of
October 31, 2003 we have not granted any options under the stock option 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 may be adjusted in
the event of certain changes in the total purchase price payable upon the
exercise in full of options granted under the plan. Officers, directors and key
employees of and consultants to Quantum will be eligible to receive
non-qualified options 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-10
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2003
NOTE 7: STOCK OPTIONS (continued)
The Company has elected to account for the stock options under the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, no compensation expense has been
recognized on the employee stock options. The Company accounts for stock options
granted to consultants under Financial Accounting Standards Board Statement No.
123, "Accounting for Stock-Based Compensation." The Company recognized $207,500
in compensation expense, of which $204,042 was deferred, at October 31, 2003.
During the year ended October 31, 2003, 415,000 options were granted to
officers, directors and employees of the Company.
A summary of options during the years ended October 31, 2003 and 2002 is shown
below:
October 31, 2003 October 31, 2002
----------------------------------- -----------------------------
Number of Weighted Average Number of Weighted Average
Shares Exercise Price Shares Exercise Price
Outstanding at beginning of year -- -- $ --
Granted 415,000 $ 0.40 -- $ --
Exercised - $ -- -- $ --
Forfeited -- $ -- -- $ --
------------------------------ -------------------------
Outstanding at October 31, 415,000 $ 0.40 -- $ --
------------------------------ -------------------------
Exercisable at October 31, -- -- $ --
----------- ----------
Available for issuance at October 31, 5,000,000 -- $ --
----------- ----------
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 income and earnings per
share would have been reduced to the pro forma amounts indicated below:
2003 2002
----------------- ----------------
Net income (loss)
As reported $ (246,555) $ (86,400)
---------------- ---------------
Pro forma $ 256,827 $ (86,400)
---------------- ---------------
Earnings per share
As reported $ (0.08) $ (0.32)
---------------- ---------------
Pro forma $ (0.09) $ (0.32)
---------------- ---------------
F-11
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2003
NOTE 7: STOCK OPTIONS (continued)
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 4%
Expected life (years) 5
Expected volatility 2.31
Expected dividends None
NOTE 8: 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 as no payments have been made on the note. The Company is accruing
interest, at 18% per annum, monthly on the unpaid principal balance and has
classified the note as current as per the agreement. The interest accrued at
October 31, 2003 is $32,235
On November 2, 2002 the Company signed a demand note, with an interest rate of
eighteen percent (18%) per annum, for the expenses a shareholder paid on behalf
of the Company subsequent to the sale of the intellectual property. The note
payable balance and accrued interest as of October 31, 2003 are $14,532 and
$1,116 respectively.
In July 2003, the Company purchased a 20% interest Renaissance Health Systems,
Inc. for $5,000 from a shareholder of the Company. Renaissance Health Systems is
a development stage enterprise in the health care business. Additionally, the
Company purchased a 20% interest in Quantum Medical Technologies, Inc. for
$5,000 from a shareholder of the Company. Quantum Medical Technologies, Inc. is
a development stage enterprise in the medical technologies business.
NOTE 9: SUBSEQUENT EVENTS
On January 30, 2004 the Company shareholders approved the proposals included in
the Company's information statement pursuant to Section 14(c) of the Securities
Exchange Act of 1934 filed on January 10, 2004. The items stated in the filing
included the intention of the Company to change the State of incorporation from
Minnesota to Nevada; the change of the corporate name from Transform Pack
International, Inc. to The Quantum Group, Inc.; the increase of authorized
common shares from 40,000,000 to 170,000,000 and the reduction of the par value
per common share from $.004 to $.001; a one for ten common stock reverse split;
and the adoption of a Company Incentive Equity and Option Plan.
Additionally, the majority of the shareholders agreed to issue 13,300,000 post
reverse shares to the shareholders of both QMT and RHS for the 80% of the those
companies which the Company does already not own. Control in the Company will
not 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 Board of Directors of each of these
companies have not yet approved this transaction. The final merger is not
expected to be consummated until documentation is completed and approval of the
Board of Directors of all the companies.
F-12