FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: March 31, 2002
Commission file number 0-13215
-----------
LATINOCARE MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 30-0050402
-------- ---------------
(State of Incorporation) (I.R.S. Employer Identification No.)
4150 Long Beach Boulevard, Long Beach, California 90807
(Address of principal executive offices) (Zip Code)
(562) 997-4420
Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- -------------------------
COMMON STOCK OTC
-----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The aggregate market value of voting stock held by non-affiliates of
the registrant was $1,639,055 as of March 31, 2002 (computed by reference to the
last sale price of a share of the registrant's Common Stock on that date as
reported by the NASDAQ).
There were 14,529,100 shares outstanding of the registrant's Common
Stock as of March 31, 2002.
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2
Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001 2
Statements of Operations for the Three Months ended March 31, 2002
and March 31, 2001 3
Statement of Stockholders' Deficit for the year ended December 31, 2001,
and for the Three Months ended March 31, 2002 (unaudited) 4
Statements of Cash Flow for the Three Months ended March 31, 2001 and 2002 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
PAGE 2
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
CONSOLIDATED BALANCE SHEET
MARCH 31, 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,873
Accounts receivable 298
Prepaid expenses and other current assets 88,243
---------
Total current assets 97,414
Property and equipment:
Net of accumulated depreciation 204,850
---------
Total property and equipment 204,850
---------
Other assets:
Deposit 15,478
---------
Total other assets 15,478
---------
$ 317,742
=========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 199,709
Accrued expenses 153,823
Accrued interest payable 72,299
Income tax payable 1,600
Due to related party 803,399
Note payable - related party 1,750,000
---------
Total current liabilities 2,980,830
---------
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, par value $.001; 50,000,000
Shares authorized; 14,529,100 shares issued
and outstanding 997,652
Preferred stock, par value $ .001; 2,000,000
Shares authorized; no shares issued and
outstanding 0
Additional paid-in capital 10,000
Accumulated deficit (3,670,740)
---------
Total shareholders' deficit (2,663,088)
---------
$ 317,742
=========
See accompanying notes and accountants' review report which are
integral parts of these consolidated financial statements.
Page 3
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Three Months Ended
March 31,
2002 2001
---- ----
Revenue:
Management fees- related party $ 355,556 $ 511,078
Management Fees- Others 16,821 42,950
--------- ---------
372,377 554,028
Costs and expenses:
Salaries and benefits 482,738 351,292
Professional and consulting fees 113,134 146,833
General and administrative 158,369 126,624
Depreciation 13,750 9,900
--------- ---------
767,991 634,649
Operating Income (Loss) (395,614) (80,621)
--------- ---------
Other income (expense):
Interest Expense (26,270) (12,927)
--------- ---------
Other income (loss) before income taxes (421,884) (93,548)
Provision for Income Taxes 800 800
--------- ---------
Net Income (Loss) $ (422,684) $ (94,348)
========= =========
Earnings (Loss) per common share
Basic $ (0.03) $ 0.00
========= =========
Diluted $ (0.03) $ 0.00
========= =========
Weighted average common shares outstanding
Basic 14,529,100 14,529,100
========== ==========
Diluted 14,529,100 14,529,100
========== ==========
See accompanying notes and accountants review report which are integral parts
of these consolidated financial statements
Page 4
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
MARCH 31, 2002
Retained Earnings Total
Common Stock Additional Accumulated Shareholders'
Shares Amount Paid-in Deficit Equity
---------- --------- -------- ------------ ------------
Balance at December
31, 2000 3,781,455 $ 952,727 $ 0 $(960,942) $ (8,215)
Retirement of common
stock (3,270,000)
Reissuance of new common
stocks to existing
shareholders of the
acquiring company 13,471,645
Issuance of new shares of stock:
Common stock issued
as part of
cost of acquiring
JNS Marketing 260,000 26,000 ( 26,000) 0
Common stock issued
for services
rendered 100,000 10,000 10,000
Common stock issued
to private investors
prior to acquisition 186,000 8,925 ( 8,925) 0
Transfer of acquiring
company's accumulated
deficit 0 0 0 (1,671,685) (1,671,685)
Consolidated net loss
for period ended
December 31, 2001 0 0 0 (580,504) (580,504)
---------- --------- -------- ------------ ------------
Balance at December
31, 2001 14,529,100 $ 997,652 0 (3,248,056) (2,250,404)
Private placement
Offering 10,000 10,000
Consolidated net loss
for three months
Ended Mar 31, 2002 ( 422,684) ( 422,684)
---------- --------- -------- ------------ ------------
Balance at
March 31, 2002 14,529,100 $ 997,652 $ 10,000 $(3,670,740) $(2,663,088)
========== ========= ======== ========== ==========
See accompanying notes and accountants review report which are integral parts
of these consolidated financial statements
Page 5
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Three Months
March 31,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from operations $ (422,684) $( 94,348)
Adjustment to reconcile net income (loss) from
operations to cash provided (used) in operating
activities:
Depreciation 13,750 9,900
(Increase) decrease in:
Accounts receivable 2,624 0
Other current assets (38,952) (66,889)
Increase (decrease) in:
Accounts payable 3,322 54,068
Accrued expense 46,301 ( 6,886)
Accrued interest 26,265 13,217
Income tax 0 800
-------- -------
Net cash used from operating activities (369,374) (90,138)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment 0 (1,448)
-------- -------
Net cash used from investing activities 0 (1,448)
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Related party loan 365,643 94,408
Private placement offering 10,000 0
--------- -------
Net cash provided from financing activities 375,643 94,408
--------- -------
Net increase (decrease) in cash 6,269 2,822
Cash, beginning of the year 2,604 65,532
--------- -------
Cash, end of the year $ 8,873 $ 68,354
========= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 0 $ 0
========= =======
Cash paid during the period for income taxes $ 987 $ 275
========= =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
Accrued interest on notes payable $ 0 $ 13,217
========= =======
Accrued interest on the equity to debt conversion $ 26,265 $ 0
========= =======
See accompanying notes and accountants review report which are integral
parts of these consolidated financial statements
Page 6
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(1) General Background and Nature of Operations:
a. General background:
Latinocare Management Corporation (the "Company") was
incorporated in the State of Nevada on January 22, 2002. The Company, a
management service organization, is in the business of providing
management and administrative services, and has developed a system of
operations, management and marketing for independent practice
associations engaged in providing health care services. The Company is
authorized to issue two classes of shares - Common Stock and Preferred
Stock. The total number of shares which the Company is authorized to
issue is 50,000,000 common shares at $ .001 par value and 2,000,000
preferred shares at $ .001 par value. The preferred stock may be issued
in such series as are designated by the Board of Directors. The Board
of Directors may fix the number of authorized shares of preferred stock
for each series, and the rights, preferences and privileges of each
series of preferred stock.
JNS Marketing, Inc. (JNS) is a reporting public shell company
incorporated in the state of Colorado in July 1983 with no tangible
assets, insignificant liabilities and no revenues as of December 31,
2001. For the three months ended March 31, 2002, JNS have no revenues
and activities.
Latinocare Management Corporation - California (LMC) dba
Latino Health Care was founded and incorporated on February 23, 1995 as
a California for-profit stock corporation. Its sole purpose, when
originally organized, was to manage all operations of Latinocare
Network Medical Group (IPA), a related party who have common
shareholders who influence the activities of both entities.
LMC acquired JNS in November 2001 purchasing 3,270,000 or
approximately 86% of the issued and outstanding common stock of JNS
Marketing, Inc. in exchange for $300,000. There was a delay in the
planned acquisition date due to renegotiation of the acquisition cost
which resulted in the issuance of an additional 260,000 new shares of
common stock of the Company as part of the purchase price. The
3,270,000 shares common stock were subsequently retired and cancelled.
The members of the Board of Directors of the Company before the
purchase were replaced with the members of LMC's Board of Directors.
LMC and JNS entered into an Agreement and Plan of
Reorganization which will result in a share exchange between
shareholders of two companies, whereby LMC will become a wholly owned
subsidiary of the Company. JNS was renamed as Latinocare Management
Corporation, reincorporated in the State of Nevada on January 2002 and
which is referred in this report as the "Company".
See accountants' review report
Page 7
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(1) General Background and Nature of Operations (Cont'd):
a. General background (cont'd):
The Company has a total of 14,529,100 shares of its
outstanding common stock issued. 511,455 shares or 3% of the issued and
outstanding common stock consist of the original shareholders of the
acquired company, 13,471,645 shares or 93% of the outstanding common
stock were issued to two members of the Company's Board of Directors;
and new shares issued totaling 546,000 shares or 4% of the outstanding
common stock issued consists of 260,000 shares of common stock issued
to individuals as part of LMC's renegotiated cost of acquiring the
Company, 100,0000 shares of common stock issued for services rendered
and 186,000 shares of common stock issued to unaffiliated private
investors.
b. Nature of operations:
The Company is in the business of providing management,
administrative services and marketing for independent practice
associations engaged in providing health care services.
The Company has targeted and successfully reached four primary
groups: health plans, hospitals, health service recipients and
physicians with significant focus on the Latino market.
Latinocare Network Medical Group, Inc., an Independent
Physician Association (IPA), was incorporated on September 30, 1994, as
a licensed medical group able to accept physician services risk from
third-party payors and self-insured employers. The IPA was organized
for the purpose of meeting the comprehensive health care needs of the
Latino population and the lack to access to quality health care
services available to the Latino community. The IPA has a network of
private practicing physicians who provide quality health care services
that are accessible, friendly, affordable, and culturally sensitive. It
offers a wide range of comprehensive health care programs and services
to keep its members and families healthy and productive.
On November 1995, the Company has entered into a twenty-five
(25) year Management Services Agreement with Latinocare Network Medical
Group, Inc. to provide all management and administrative support,
allowing the IPA to focus efforts on physician network development.
These services include, among others; clerical and billing services,
claims settlement and collection, accounting, financial and cash flow
management, marketing and general administrative services
(collectively, "Management Services"). The Company acts as the
exclusive agent to the IPA with regards to seeking, negotiating,
renewing, and executing managed care contracts.
See accountants' review report
Page 8
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(2) Summary of Significant Accounting Policies:
The Company has prepared interim financial statements that
include all adjustments which, in the opinion of management, are
necessary to make the financial statements not misleading. The Company
believes that all adjustments of a normal recurring nature that are
necessary for a fair presentation of the results of the interim periods
presented in this report have been made.
The Company's cash and available credit are not sufficient to
support operations for the next year. A net loss of $3,248,056 was
incurred from inception on February 1995 until December 31, 2001. For
the three months ended March 31, 2002, the Company had an additional
net loss of $422,683. The Company also had negative working capital and
stockholders deficit at March 31, 2002.
Management plan is to raise enough equity through private
placements (see Note 13 - Subsequent Events) and individual investors;
pay off the note issued to a related party; pay off a related party
shareholder's equity interest; and to raise enough working capital to
pay off liabilities and sustain operations. These consolidated
financial statements have been prepared on the basis that adequate
equity financing will be obtained.
a. Principles of Consolidation:
The consolidated financial statements include the accounts of
the Company and its subsidiary. Intercompany accounts and transactions
have been eliminated in the consolidated financial statements.
b. 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 amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
c. Revenue Recognition:
Revenues from professional services, primarily from management
fees, are recognized on an accrual basis of accounting as services are
performed or the amounts earned (in compliance with SOP 00-2), based on
a percentage of capitalization revenues received by the IPA, which is a
related party transaction.
See accountants' review report
Page 9
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(2) Summary of Significant Accounting Policies (cont'd):
c. Revenue Recognition (cont'd):
The IPA has managed care contracts with various Health
Maintenance Organizations (HMO) to provide medical services to
subscribing members. Under these agreements, the IPA receives monthly
capitation payments based on the number of each HMO's subscribing
members whether or not a member requests services to be performed by
the IPA. The Company receives 16% of all IPA collections.
Revenues are also generated from risk pool settlements.
Revenues from risk pool settlements (cash received) are surpluses
distributed by the IPA from the HMO.
Currently, two separate types of risk pools exist - specialty
risk pools and hospital (institutional) risk pools. Specialty risk pool
are reserve for specialist medical expenses whereas hospital risk pool
relate to reserves for hospital expenses. These reserves are held by
the HMO and surpluses are distributed, after year-end accounting of all
claims, to the related physicians at fifty percent (50%), IPA at
twenty-five percent (25%) and the Company at twenty-five percent (25%).
d. Cash and Cash Equivalents:
The Company considers all money market funds and highly liquid
debt instruments with maturities of three months or less when acquired
to be cash equivalents.
e. Accounts Receivable:
The Company considers accounts receivable to be fully
collectible; accordingly, no allowance for doubtful accounts is
required. If amounts become uncollectible, they will be charged to
operations when that determination is made.
f. Prepaid Private Placement Costs:
Specific incremental costs directly attributable to proposed
or actual offering of securities are deferred and charged against the
gross proceeds of the offering. Management salaries and other general
and administrative expenses are not allocated as costs of the offering.
In the event that the offering does not take place, the prepaid private
placement costs will be expensed immediately.
g. Property, Equipment and Related Depreciation:
Property and equipment are stated at cost. Maintenance,
repairs and minor renewals and betterment's are expensed; major
improvements are capitalized.
See accountants' review report
Page 10
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(2) Summary of Significant Accounting Policies (cont'd):
g. Property, Equipment and Related Depreciation (cont'd):
Depreciation of property and equipment is provided for using
the straight-line method over the estimated useful lives of the assets
as follows:
Estimated
Useful Lives
------------
Leasehold improvements Life of lease
Computer, equipment and office furniture 5 - 10 Years
Upon retirement, sale, or other disposition of property and
equipment, the costs and accumulated depreciation are eliminated from
the accounts, and any resulting gain or loss is included in operations.
h. Advertising Expenses:
All advertising expenses are expensed as incurred.
i. Income Taxes:
The Company is taxed at C Corporation income tax rates. The
Company recognizes deferred income tax under the asset and liability
method of accounting. This method requires the recognition of deferred
income taxes based upon the tax consequences of "temporary differences"
by applying enacted statutory tax rates applicable to future years to
differences between the financial statements carrying amounts and the
tax basis of existing assets and liabilities.
j. Adoption of Recent Accounting Standards:
Segment Reporting:
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 131
("SFAS" No. 131"), "Disclosure About Segments of an Enterprise and
Related Information." SFAS No. 131 established standards for the way
companies report information about operating segments in annual
financial statement. It also established standards for related
disclosures about products and services, geographic areas and major
customers.
The disclosures prescribed in SFAS No. 131 became effective
for the year ended December 31, 1998. The Company has determined that
it operates as one business segment.
The Company is not affected by the adoption of new accounting
standards for Accounting for Derivative Instruments and Hedging
Activities as well as the Accounting for Comprehensive Income as these
activities did not occur in its operations.
See accountants' review report
Page 11
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(2) Summary of Significant Accounting Policies (cont'd):
j. Adoption of Recent Accounting Standards (cont'd):
Business Combination:
SFAS 142 and SFAS 141, Business Combinations, are designed to
improve reporting and disclosure with respect to goodwill and other
acquired tangible assets. SFAS 141 eliminated the pooling of interest
method as an accounting option for business combination while SFAS 142
modified the purchase method of accounting by eliminating the
amortization of goodwill and substituting an impairment test. The FASB
overcame several operation impediments to non-amortization including:
the reporting level at which to conduct impairment reviews, consistency
with SFAS 121 (Accounting for the impairment of long-lived assets) and
finite-lived goodwill. The emphasis will be on the fair value
measurements of assets and liabilities instead of amortization. An
impairment in the carrying value of an asset is recognized when the
fair value of the asset is less than its carrying value.
(3) Private Placement Offering and Prepaid expenses:
Prepaid expenses and other current assets consists of:
Prepaid private placement costs $ 86,346
Other current assets 1,897
-------
$ 88,243
On November 30, 2001, a Private Placement Memorandum was
issued for qualified investors in connection with the Company's offer
of sale of its common stock.
The above prepaid private placement costs consists of
printing, mailing and consulting fees that have been incurred from the
offering date to March 31, 2002. These costs directly attributable to
the offering of securities are deferred and will be charged against the
gross proceeds of the offering of securities when the offering ends or
is terminated.
(4) Property and Equipment:
Property and equipment consists of the following:
March 31,
2002
Furniture, fixtures and office equipment $ 83,786
Leasehold improvement 77,157
Computers and software 171,013
-------
331,956
Less accumulated depreciation 127,106
-------
$ 204,850
See accountants' review report
Page 12
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(4) Property and Equipment (cont'd):
Depreciation expense for the three months ended March 31, 2002 and 2001
was:
March 31,
2002 2001
------- --------
Depreciation $ 13,750 $ 9,900
======= ========
The Company periodically evaluates the net realizable value of
long-lived assets, including property and equipment, relying on a
number of factors including operating results, business plans, economic
projections and anticipated future cash flows.
(5) Notes Payable - Related Party:
Notes payable are all current and comprised of the following
amounts as of March 31, 2002:
Cedars Sinai, due July 23, 2002
with interest at 6.0% per annum $ 1,750,000
=========
The notes for Cedars Sinai matures as follows:
$500,000 shall be paid on or before 120 days on or before the
date of the note; $500,000 shall be paid on or before 240 days on or
before the date of the note; and $750,000 and all accrued but unpaid
interest shall be paid on or before the expiration of 360 days from the
date of the note.
This note shall be secured and that in the event of a breach
by the Company, Cedars-Sinai's sole recourse shall be the repossession
of that portion, if any, of its shareholdings (28% of the outstanding
shares) from the Company pursuant to the following provision:
a. For the first seven hundred fifty thousand dollars ($750,000)
repaid by the Company, recourse shareholdings shall be reduced
from twenty-eight percent (28%) of the issued and outstanding
shares to not less than twenty percent (20%) of such issued
and outstanding shares, or the portion thereof;
b. For the next one million dollars repaid ($1,000,000) by the
Company, recourse shareholdings shall be reduced from twenty
percent (20%) of the issued and outstanding shares to zero
percent (0%) of such issued and outstanding shares, or the
portion thereof.
See accountants' review report
Page 13
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(5) Notes Payable - Related Party (cont'd):
If this note is not paid when due, the Company shall pay all
costs of collections, including attorney's fees and costs and all
expenses incurred on account of collection, whether or not suit is
filed.
As of March 31, 2002, no payments were made by the Company nor
any collection actions from Cedar Sinai. The Company plans to amend the
terms of the above agreement with Cedar Sinai.
(6) Provision for Income Taxes:
The provision for taxes consists of the following for both
periods ended March 31, 2002 and 2001:
Federal State Total
------ ------ ------
Current $ 0 $ 800 $ 800
Deferred 0 0 0
------ ------ ------
$ 0 $ 800 $ 800
====== ====== ======
Other than the minimum tax due to the State of California, no
income tax accruals were recorded because the Company incurred a loss
for the previous and current years and has available net operating loss
(NOL) carry forwards at year ended December 31, 2001 and three months
ended March 31, 2002 of approximately $2,212,504 and $ 2,635,187
respectively, available to offset future taxable income. These NOL
carry forwards expire beginning in 2010 and ending in 2014, fifteen
years from the year in which the losses were incurred.
Deferred tax assets and liabilities were not presented because
the amounts were insignificant.
(7) Advertising:
Advertising expense consists of the following:
Three Months Ended
March 31,
2002 2001
------- -------
Total $ 2,100 $ 1,096
======= =======
See accountants' review report
Page 14
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(8) Employee Savings Plan:
On August 1, 2000, the Company adopted a 401(K) Profit Sharing
Plan and Trust for the benefit of its employees and beneficiaries.
Eligible employees may contribute a portion of their pretax
annual compensation within specified limits. A discretionary matching
contribution will be provided by the employer which may or may not be
limited to its current accumulated net profit.
There are no employer contributions to the plan for the three
months ended March 31, 2002 and 2001.
(9) Commitments:
The Company has entered into various operating leases for
equipment and occupies its facility under a long-term lease agreement
expiring in March 31, 2010 with option to cancel after five (5) years
or extend. Future minimum lease payments under the non-cancelable
leases for the remaining years are as follows:
Period Ending
March 31, Office Space Equipment Total
------------- ------------ --------- ---------
2001 $ 157,632 $ 38,282 $ 195,914
2002 157,632 38,856 196,488
2003 157,632 38,856 196,488
2004 157,632 38,856 196,488
Thereafter 157,632 16,062 173,694
------- ------ -------
Total $ 788,160 $ 170,912 $ 959,072
Total lease and rent expense consist of the following:
Three Months Ended
March 31,
2002 2001
Equipment lease $ 13,750 $ 9,782
Office rent 62,288 63,624
------ ------
$ 76,038 $ 73,406
See accountants' review report
Page 15
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(10) Related Party Transactions:
a. Latinocare Network Medical Group, Inc.:
The CEO/President of Latinocare Network Medical Group, Inc.
(IPA) is a member of the board of directors and a major stockholder for
both the IPA and the Company until his recent death in February 2002.
In light of this shareholder's death, the Company has the contractual
right to acquire his shares of stock from the IPA and the Company for
$2.5 million contingent on the Company making some milestone payments.
The Company is in discussions with the heirs of the shareholder to make
the purchase essentially on the same terms as previously agreed with
the shareholder before his death.
The Company and the IPA, are bound by a twenty-five year
management services agreement. Under this agreement, the IPA has
effectively transferred total contract and management control to the
Company for the term of the agreement. In return for management and
administrative services provided under the management service
agreement, the Company receives management fees of sixteen percent
(16%) of monthly capitation payments (based on predetermined rates)
received by the IPA.
The Company has been charging the IPA a management fee
according to sliding scale based on enrollment. The management fee
percentage was charged against the total capitation the IPA receives
from members. The following matrix reflects this management fee
arrangement:
RATE ENROLLMENT
----- ----------
16% 0 - 20,000
15 20,000 - 30,000
14 30,000 - 40,000
12 40,000 - 50,000
In addition to management fees the Company is also entitled to
receive fifty percent (50%) of the IPA's share of hospital (with
hospital or HMO) and specialty risk pool settlements. Hospital and risk
pools are revenues estimated for hospital and specialist medical
expenses held in reserve until actual claims are adjudicated. Surpluses
are distributed accordingly after all financial obligations are met.
The Company also renders services on business development and
marketing of products and services of the IPA.
See accountants' review report
Page 16
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(10) Related Party Transactions (cont'd):
a. Latinocare Network Medical Group, Inc. (cont'd):
The management fees, settlement fees, marketing and business
development from the IPA, paid and due to the Company were
approximately:
Three Months
Ended March 31,
2002 2001
Management fee $ 355,556 $ 395,997
Settlement fee 0 115,081
------- -------
Total $ 355,556 $ 511,078
======= =======
The IPA accounts for more than ninety percent (90%) of the
Company's revenue. IPA has a concentration of customers of
approximately eight (8) customers which are health maintenance
organizations.
Related party receivables and advances payable as if March 31,
2002:
Receivable from related party $ 403,078
Payable to related party (1,206,477)
----------
Due to related party $ (803,399)
==========
The above outstanding net payable to the IPA of approximately
$803,399 was used as working capital.
b. Gonzales-D'Avila Enterprise dba JJ&M Management:
The JJ&M's CEO/President is a stockholder and a member of the
board of directors for JJ&M, the IPA and the Company. The related party
transactions involve reimbursement of health insurance advanced by the
Company for JJ&M.
Total amount of related party transaction is not presented
because the amount is insignificant.
c. Cedars Sinai Medical Center:
Cedars Sinai Medical Center, the Company's strategic partner,
has been the largest single investor to the Company providing over $2
million including the accrued interest of approximately $290,000 that
was converted to equity in June 2001. Cedar Sinai's financial support
consisted of a convertible note payable of $1,000,000, issued November
30, 1996, and was converted into a twenty percent (20%) of the
Company's common stock in 1997. The $750,000 and $62,460 of notes
payable issued in 1996 and 1997 were converted into an additional eight
percent (8%) equity interest, including accrued interest, on June 12,
2001.
See accountants' review report
Page 17
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(10) Related Party Transactions (cont'd):
c. Cedars Sinai Medical Center (cont'd):
The Company has existing promissory notes to Cedars Sinai
payable on demand with the balance (including interest) as of December
31, 2000 of $812,460. These notes were converted to eight percent (8%)
of the outstanding common stock of Company in June 2001.
On July 23,2001, the Company issued a convertible note to
Cedars Sinai in the amount of $1,750,000 bearing simple interest at the
rate of 6% per annum payable in full on or before July 23, 2002, to
redeem all shares issued to Cedars-Sinai. If the note is not repaid by
that time, Cedar Sinai has the right to convert it into 28% of the
outstanding common stock of the Company, subject to a pro-rata
adjustment if the note is partially repaid (see Note 5 Notes Payable -
Related Party). A full or partial conversion of the note would cause
dilution in the ownership of the Company by its existing shareholders.
Accordingly, capital stock is reduced for the redeemed value
of the stock. For accounting purposes, the stock redemption is treated
as a retirement of stock.
Client made no repayment for the above loan as of March 31,
2002. The Company plans to amend the terms of the agreement subsequent
to this balance sheet date.
(11) Significant Management Investment:
The current management and directors as a group beneficially
owns approximately ninety three percent (93%) of the total shares
issued and outstanding. By virtue of such stock ownership, the current
management and directors as a group generally exercise control over the
affairs of the Company.
(12) Stock Option Plan:
On January 31, 2002, the Board of Directors of the Company
unanimously approved and the shareholders ratified the adoption of the
2002 Stock Option Plan. The Stock Option Plan consist of 1,200,000
stock options for directors, executive officers and key employees to
purchase 1,200,000 shares of the Company's Common Stock. As of March
31, 2002, the plan have not been implemented.
See accountants' review report
Page 18
LATINOCARE MANAGEMENT CORPORATION
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(13) Subsequent Events:
a. Management agreement with IPA:
The Company has recently changed the management agreement from
a sliding scale agreement to a "cost plus" agreement. In the cost-plus
model, the Company will charge the IPA, and all future acquired IPAs or
IPAs managed by the Company, the entire cost of managing the business
plus a fixed amount as profit margin. The cost component will vary
among IPAs depending on negotiated terms of management.
b. Private Placement Offering:
On November 30, 2001, a new Private Placement Memorandum was
issued for qualified investors in connection with the Company's offer
of sale of its common stock. This offering will terminate on May 31,
2002, unless the Company extends the offering period up to an
additional 180 days. The Company is offering 800,000 Units for a
purchase price of $1.25 per Unit (maximum gross proceeds of
$1,000,000). Each Unit includes one share of the Company's common stock
and one Warrant to purchase one share of the Company's common stock for
a purchase price of $2.00 per share at any time until one year after
the date that they are issued. The Company has the option to increase a
total amount of the offering by up to an additional $150,000 (120,000
shares). There is no minimum amount of the offering and the maximum
offering is $1,150,000 (if the Company exercises its option to increase
the maximum amount of the offering). The purchase price for the shares
will be payable in full in cash upon subscriptions.
The net proceeds from the offering are expected to be
approximately $900,000 after the payment of offering costs including
printing, mailing, legal, and accounting costs, and potential selling
commissions and finder's or referral fees that may be incurred. The net
proceeds from this offering are estimated to be utilized to pay
marketing and promotion costs to obtain new enrollees; to finance
acquisitions of IPAs; and for working capital purposes.
See accountants' review report
Page 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CAUTIONARY STATEMENTS
This Form 10-QSB contains financial projections, synergy estimates and
other "forward-looking statements" as that term is used in federal securities
laws about Latinocare Management Corporation's financial condition, results of
operations and business. These statements include, among others:
- statements concerning the benefits that the Company expects will
result from its business activities and certain transactions the Company has
completed, such as the potential for increased revenues, decreased expenses and
avoided expenditures; and
- statements of the Company's expectations, beliefs, future plans and
strategies, anticipated developments and other matters that are not historical
facts. These statements may be made expressly in this Form 10-QSB. You can find
many of these statements by looking for words such as "believes," "expects,"
"anticipates," "estimates," or similar expressions used in this Form 10-QSB.
These forward-looking statements are subject to numerous assumptions, risks and
uncertainties that may cause the Company's actual results to be materially
different from any future results expressed or implied by the Company in those
statements. The most important facts that could prevent the Company from
achieving its stated goals include, but are not limited to, the following:
(a) volatility and/or decline of the Company's stock price;
(b) potential fluctuation in quarterly results;
(c) barriers to raising the additional capital or to obtaining the
financing needed to implement its full business plans;
(d) inadequate capital to continue business;
(e) changes in demand for the Company's products and services;
(f) rapid and significant changes in technology and markets;
(g) litigation with or legal claims and allegations by outside parties;
(h) insufficient revenue to cover operating costs.
Because the statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. The Company cautions you not to place undue reliance
on the statements, which speak only as of the date of this Form 10-QSB. The
cautionary statements contained or referred to in this section should be
considered in connection with any subsequent written or oral forward-looking
statements that the Company or persons acting on its behalf may issue. The
Company does not undertake any obligation to review or confirm analysts'
expectations or estimates or to release publicly any revisions to any
forward-looking statements to reflect events or circumstances after the date of
this Form 10-QSB or to reflect the occurrence of unanticipated events.
Page 20
RESULTS OF OPERATIONS FOR FISCAL QUARTER ENDED MARCH 31, 2002 COMPARED TO FISCAL
QUARTER ENDED MARCH 31, 2001
Total revenue for the three months period ending March 31, 2002
decreased by $181,651 to $372,377 from $554,028 in the prior comparable fiscal
quarter. Approximately $56,000 of this decrease in revenue is due to a decrease
in members months caused by (1) the bankruptcy of Tower Corporation, which
represents the loss of 11,000 member months, (2) the termination by PacifiCare
of a contract with LNMG, which indirectly represents the loss of approximately
4,100 member months, (3) the loss of approximately 1,500 member months from an
HMO that was sold and the lives transferred, and (4) the loss of approximately
5,000 lives from HMOs that had decreasing enrollment. The impact of the Tower
bankruptcy was offset by two new HMO contracts completed during the last two
months of 2001. These two new contracts accounted for approximately 11,000
member months during the three months ended March 31, 2002 and are expected to
exceed the member months lost due to the Tower bankruptcy during 2002. The net
effect of the change in member months is approximately $56,000. The remaining
decrease in revenue is primarily the result of the Company not accruing risk
pool revenue for the three months ended March 31, 2002. The risk pool revenue
for the three months ended March 31, 2001 was $115,081. Reasonable estimates for
risk pool revenue for 2002 were not available for the three months ended March
31, 2002 but the Company believes that risk pool revenue for 2002 will be
comparable to fiscal 2001. For the three months ended March 31, 2001, the risk
pool revenue consisted primarily of revenue from Tower which, as previously
noted, filed bankruptcy. Since Tower filed for bankruptcy, no revenue for Tower
was recorded for the three months ended March 31, 2002.
Operating and administrative expenses increased by $133,342 during the
three months ended March 31, 2002 to $767,991 from $634,649 in the prior
comparable first quarter ended March 31, 2001. Salaries & benefits increased by
$131,446 for the three months ended March 31, 2002 as compared to the three
months ended March 31, 2001. This increase is due primarily to the following:
(1) the Company's Chief Executive Officer, who had been compensated as a
consultant for the three months ended March 31, 2001, was added to the Company's
payroll in July 2001, (2) the Company's business development department was
expanded to promote employer based enrollment and add new providers to increase
the Company's visibility and membership, (3) the Company's health educational
compliance department was expanded to meet increased HMO and government
requirements, and (4) core departments, including claims, member and provider
services were expanded to compensate for the loss, as a result of the out source
vendor going out of business, of the Company's computer system in June 2001 and
the introduction of a new automated system which was partially implemented
during the four months ended December 2001. The increased staffing for the core
department was maintained subsequent to December 2001 in anticipation of
increased membership to result from the fund raising activities that the Company
is undertaking. Professional and consulting expenses decreased by $33,699 for
the three months ended March 31, 2002 as compared to the three months ended
March 31, 2001, primarily as a result of the Chief Executive Officer being added
to payroll as opposed to being paid as a consultant. General and administrative
expenses increased by $31,736 for the three months ending March 31, 2002 as
compared to the three months ended March 31, 2001. The primary reason for the
increase are (1) increase in office rent, (2) increase in equipment rental
related to additional equipment lease, and (3) additional maintenance cost on
the building and equipment. The increase in office rent was because office rent
was reduced by pro-rated free rent under the rental agreement during the first
three months of 2001 which did not exist for the three months ended March 31,
2002.
For the three months ended March 31, 2002, the Company's consolidated
net loss was $422,684 as compared to a consolidated net loss of $93,548 for the
three months ended March 31, 2001. The consolidated net loss of $422,684 for the
three months ended March 31, 2002 is primarily the result of a) the fact that,
no risk pool revenue was recorded in the first fiscal quarter of 2002. Based on
preliminary information received from the Health Plans and Company records,
management believes that risk pool revenue of $50,000 will be received and
recorded in the second fiscal quarter of this year. In addition, expenses
incurred on behalf of LNMG for marketing, business development, and other
reimbursable activities approximated $142,465 for the three months ended March
31, 2002. These expenses are reimbursable from LNMG but were not recorded as
revenue until it is certain that LNMG will be able to reimburse the Company.
Management believes that by the end of fiscal year 2002 LNMG should be in a
position to reimburse the Company for these expenses. For the three months ended
March 31, 2001, the reimbursable expenses were $106,528. These expenses were not
recorded in the first fiscal quarter of 2001. These expenses were reimbursed by
Page 21
LNMG by the end of fiscal year 2001. Finally, the Company incurred certain
expenses related to the private placement and fund raising activities of the
Company which are reflected in the operating results for the three months ended
March 31, 2002. The total of these expenses approximated $ 55,000 and the
Company anticipates being reimbursed as soon as the capital raising activities
are concluded to the extent additional capital is raised. The Company has
increased revenue from management fees from LNMG for 2002 as compared to the
latter part of fiscal 2001. Revenue for the three months ended March 31, 2002
was $372,377 compared to revenue of $355,558 for the three months ended December
31, 2001, excluding reimbursable expenses for LNMG of $612,054 and risk pool
revenue of $26,517.
The Company has continued to support the marketing and business
development activities of LNMG to increase member lives and add physicians to
the provider network. Resources needed to provide this support have continued to
be made available after certain significant events (i.e. Tower Bankruptcy) have
negatively impacted LNMGs membership. The Company will continue to provide this
support as it endeavors to raise capital to acquire lives. In the event the
capital is not available, the Company has examined its operations and that of
LNMG and will implement the necessary reductions during the third quarter of
fiscal 2002 that it believes will return the operations of the Company and LNMG
to profitability. Final implementation of the new computer system was completed
in the three months ended March 31, 2002. Efficiency gained from the new system
is expected to allow the Company to provide services in a more cost effective
manner as membership increases.
LIQUIDITY AND CAPITAL RESOURCES
The Company had consolidated net cash of $8,873 at March 31, 2002 as
compared to net cash of $2,604 as of December 31, 2001. The Company had a net
working capital deficit (i.e. the difference between current assets and current
liabilities) of $2,885,416 at March 31, 2002 as compared to a working capital
deficit of $2,484,482 at December 31, 2001. Cash flow used for operating
activities decreased from ($369,374) during the three months ended March 31,
2002 to ($90,138) during the three months ended March 31, 2001. There was no
cash used for investing activities during the three months ended March 31, 2002
with ($1,448) used during the three months ended March 31, 2001. Cash provided
by financing activities increased from $94,408 during the three months ended
March 31, 2001 to $375,643 during the three months ended March 31, 2002. Since
March 31, 2001, the Company's capital needs have primarily been met from
advances received from LNMG.
The Company will have additional capital requirements during 2002 if
the Company continues with its plan of acquisition and incubation of new IPAs
and projects, and to pay operating costs. There is no assurance that the Company
will have sufficient capital to finance its growth and business operations or
that such capital will be available on terms that are favorable to the Company
or at all. The Company is currently incurring operating deficits which are
expected to continue until LNMG increases its patient enrollment, which depends
in part on the Company raising additional working capital for marketing and
acquisitions. The change is expected to be the result of adjustment to expenses
and by increased revenues due to acquisitions, provided that the Company raises
additional capital.
The Company expects to have material capital requirements during 2002
as it relates to acquisitions of membership by LNMG, the IPA. Subject to the
availability of capital, LNMG and the Company plan to acquire additional
membership through the acquisition of IPAs and from individual physicians. The
latter method is not the acquisition of physician's practices but rather the
transfer of these physicians' membership from other IPAs to LNMG. The funds to
make these acquisitions are expected to be generated from a private placement of
common stock and warrants currently being made by the Company to raise
approximately $1,000,000 of capital. The private placement commenced in late
2001 and involves the offer of 800,000 units at a price of $1.25 per unit. Each
unit consists of one share of common stock and one warrant to purchase one share
of common stock for a purchase price of $2.00 per share for a period of one year
from the date of issuance, subject to extension until the shares underlying the
warrants are registered with the Securities and Exchange Commission. The
warrantholders have registration rights after issuance of the warrants. To date,
approximately $12,500 has been raised in the private placement. There is no
assurance that the Company will raise additional capital.
Page 22
On July 23, 2001, the Cedars-Sinai Medical Center (CSMC) sold its LMC
common stock to LMC in consideration for a note in the amount of $1.75 million
plus simple interest at the rate of 6% per annum. The note is payable in three
installments on or before July 23, 2002. The first installment was due in
January 2002 and was not paid. As a result, CSMC has the right to convert the
note into 28% of the outstanding common stock of the Company, or a pro rata
share if the promissory note is partially repaid. The Company expects to
negotiate an extension with CSMC on the promissory note.
LNMG was owned by Roberto Chiprut, M.D. who was a major shareholder and
director of the Company and LMC until his recent death. Prior to his death, the
Company and Dr. Chiprut had reached agreement and executed a contract for the
Company to acquire his IPA and Company stock for $2.5 million contingent on the
Company making certain milestone payments. The Company is in discussions with
the heirs of Dr. Chiprut to make the purchase on essentially the same terms as
previously agreed upon with Dr. Chiprut, subject to the availability of capital.
The Company currently does not have the funds to purchase Dr. Chipruts's stock
and there is no assurance that the Company will be able to obtain sufficient
capital to pay the purchase price for the stock.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
On February 28, 2002, the Company conducted its annual meeting of the
shareholders pursuant to which the shareholders approved the election of Jose J.
Gonzalez and Joseph Luevanos to the Board of Directors, approved the change of
the Company's fiscal year to end on December 31, approved the reincorporation of
the Company in the State of Nevada, approved the change of the name of the
Company to Latinocare Management Corporation, ratified the selection of Ostrich
& Oppenheimer as the Company's independent certified public accounting firm, and
approved the Company's 2002 Stock Option Plan for Directors, Officers, Employees
and Key Consultants. See the Company's Proxy Statement on Schedule 14A, dated
and filed with the Securities and Exchange Commission on January 14, 2002.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
(b) Reports on Form 8-K.
Report on Form 8-KA, dated February 1, 2002, relating to the business
combination between JNS Marketing, Inc., a Colorado corporation, and Latinocare
Management Corporation, a California corporation.
Report on Form 8-K, dated February 11, 2002, relating to the death of
one of the directors.
Report on Form 8-K, dated March 11, 2002, relating to the change of
accounting firms.
Page 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 15, 2002
BY: /s/ Jose J. Gonzalez
-----------------------------------------------
Jose J. Gonzalez, Chairman of the Board,
Chief Executive Officer, President and Secretary
BY: /s/ Joseph Luevanos
------------------------------------------------
Joseph Luevanos, Director and Chief
Financial Officer