As filed with the Securities and Exchange Commission on May 15, 1996.
Registration No. 333-1650
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
___________
SUNSTAR HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 8011 59-3361076
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
231 East New Haven Avenue
Melbourne, Florida 32901
(407) 728-8711
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
___________
WARREN D. STOWELL, President and Chief Executive Officer
SunStar Healthcare, Inc.
231 East New Haven Avenue
Melbourne, Florida 32901
(407) 728-8711
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
___________
Copies of communications to:
GARY J. SIMON, Esq. KENNETH SELTERMAN, Esq.
Parker Chapin Flattau & Klimpl, Tenzer Greenblatt LLP
LLP
1211 Avenue of the Americas 405 Lexington Avenue
New York, New York 10036 New York, New York 10174
Telephone: (212) 704-6000 Telephone: (212) 573-4300
Telecopier: (212) 704-6288 Telecopier: (212) 573-4313
__________
Approximate date of proposed sale to the public: As soon as practicable
after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-----------------------------------------------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUNSTAR HEALTHCARE, INC.
CROSS REFERENCE SHEET
Item Number of Form SB-2 Location or Caption in Prospectus
------------------------ ---------------------------------
1. Front of the Registration
Statement and Outside Front Outside Front Cover Page
Cover Page of Prospectus . . .
2. Inside Front and Outside Back
Inside Front Cover Page;
Cover Pages of Prospectus . . . Outside Back Cover Page
3. Summary Information and Risk Prospectus Summary; Risk
Factors . . . . . . . . . . . . Factors
4. Use of Proceeds . . . . . . . . Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page; Risk
Factors; Underwriting
6. Dilution . . . . . . . . . . . Dilution
7. Selling Security Holders . . . Not Applicable
8. Plan of Distribution . . . . . Outside Front Cover Page;
Underwriting
9. Legal Proceedings . . . . . . . Business Legal Proceedings
10. Directors, Executive Officers, Management - Directors and
Promoters and Control Persons . Executive Officers
11. Security Ownership of Certain Principal Stockholders
Beneficial Owners and
Management . . . . . . . . . .
12. Description of Securities . . . Outside Front Cover Page;
Description of Securities
13. Interest of Named Experts and Experts
Counsel . . . . . . . . . . . .
14. Disclosure of Commission
Position on Indemnification for Not Applicable
Securities Act Liabilities . .
15. Organization Within Last Five Management's Discussion
Years . . . . . . . . . . . . . &Analysis of Financial
Condition and Results of
Operations; Certain
Transactions
16. Description of Business . . . . Business
17. Management's Discussion and Management's Discussion and
Analysis or Plan of Operation .
Analysis of Financial Condition
and Results of Operations
18. Description of Property . . . . Business Company Centers
19. Certain Relationships and Certain Transactions
Related Transactions . . . . .
Market for Common Equity and
20. Dividend Policy; Description of
Related Stockholder Matters . . Securities
21. Executive Compensation . . . . Management Executive
Compensation; Management
Stock Option Plan
22. Financial Statements . . . . . Financial Statements
23. Changes in and Disagreements
with Accountants on Accounting Not Applicable
and Financial Disclosure . . .
-2-
<PAGE>
SUBJECT TO COMPLETION--DATED MAY 15, 1996
PROSPECTUS
1,300,000 SHARES
SUNSTAR HEALTHCARE, INC.
COMMON STOCK
Prior to this offering, there has been no public market for the Common Stock
and there can be no assurance that any such market will develop. It is
anticipated that the Common Stock will be quoted on the Nasdaq SmallCap Market
under the symbol "SUNS" and listed on the Boston Stock Exchange under the symbol
"SSH." For a discussion of the factors considered in determining the initial
public offering price, see "Underwriting."
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS
WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK
FACTORS" ON PAGE 7
AND
"DILUTION."
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................. $5.00 $.475 $4.525
Total (3)................................. $6,500,000 $617,500 $5,882,500
</TABLE>
(1) In addition, the Company has agreed to pay the Underwriters a 3%
non-accountable expense allowance, to sell to the Underwriters warrants (the
"Underwriters' Warrants") to purchase 130,000 shares of Common Stock and to
engage the Underwriters as financial consultants. The Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses, including the Underwriters' non-accountable
expense allowance in the amount of $195,000 ($224,250 if the Underwriters'
over-allotment option is exercised in full), estimated to be $620,000,
payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within 45
days after the date of this Prospectus, to purchase an aggregate of 195,000
additional shares of Common Stock on the same terms as set forth above,
solely for the purpose of covering over-allotments. If the over-allotment
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $7,475,000,
$710,125 and $6,764,875, respectively. See "Underwriting."
-------------------
The shares are being offered, subject to prior sale, when, as and if
delivered to and accepted by the Underwriters and subject to approval of certain
legal matters by counsel and certain other conditions. It is expected that
delivery of certificates representing the shares of Common Stock will be made
against payment therefor at the offices of H.J. Meyers & Co., Inc., 1895 Mount
Hope Avenue, Rochester, New York 14620, on or about , 1996.
H.J. MEYERS & CO., INC. RICHTER & CO., INC.
The date of this Prospectus is May __, 1996
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
Upon the consummation of this offering, the Company will become subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and will file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected and copied at prescribed rates
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
following regional offices of the Commission: 7 World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. The Company intends to furnish its stockholders
with annual reports containing audited financial statements certified by its
independent public accountants and such other periodic reports as the Company
deems appropriate or as may be required by law.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-------------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. Unless otherwise indicated, all share and
per share data and information in this Prospectus relating to the number of
shares outstanding (i) have been adjusted to give retroactive effect to the
contribution by National Home Health Care Corp. to the Company of all of the
issued and outstanding capital stock of Brevard Medical Center, Inc. and First
Health, Inc. in January 1996 and an approximate 1.03 for one stock split in
April 1996, and (ii) assume no exercise of the Underwriters' over-allotment
option to purchase 195,000 additional shares from the Company. See "Certain
Transactions" and "Underwriting."
THE COMPANY
SunStar Healthcare, Inc. (the "Company") provides managed healthcare
services through seven primary care centers located in central Florida. Medical
services are delivered by eleven board certified or board eligible primary care
physicians employed by the Company. The Company's healthcare operations consist
primarily of medical treatment and care typically furnished in a family
practitioner's office. The Company also arranges for clinical laboratory
services and engages physicians specializing in various medical practices to
complement the Company's primary care operations.
The Company currently offers healthcare services on a contractual and
fee-for-service basis. The Company has a prepaid cost reimbursement contract
with the Health Care Financing Administration of the federal government
("HCFA"), pursuant to which the Company provides prescribed primary care to
Medicare beneficiaries who enrolled directly with the Company prior to January
1, 1996. The Company also has provider agreements with Humana Health Care Plans,
CAC/United Healthcare Plans of Florida Inc. and Blue Cross Blue Shield of
Florida, which are health maintenance organizations ("HMOs") operating in the
State of Florida. Pursuant to such agreements, the Company receives a fixed
amount, or "capitated" fee, for each participating enrollee per month,
regardless of utilization. For the year ended July 31, 1995, medical services
provided under the Company's contracts with HCFA, HMOs and on a fee-for-service
basis accounted for approximately 33.7%, 30.7% and 32.2%, respectively, of the
Company's revenues.
The Company intends to pursue a strategy of aggressive growth and plans to
deliver managed healthcare services through the establishment of an HMO. The
Company believes that the following key industry trends will contribute
favorably to the expected growth in demand for managed healthcare services:
. In response to escalating healthcare costs, federal and state governmental
authorities have increasingly emphasized stringent cost containment
measures, and employers, consumers and other purchasers of healthcare have
sought cost-effective alternatives to traditional healthcare insurance,
where providers are generally paid on a fee-for-service basis.
. Major third-party payors (Medicare, Medicaid and private healthcare
insurance companies) have undertaken substantial revision to their payment
methodologies and monitoring of healthcare expenditures in order to
control costs.
. HMOs have developed largely as a cost-effective alternative to traditional
healthcare insurance, as a result of their ability to arrange for the
delivery of healthcare to enrollees through participating healthcare
providers for a fixed monthly premium and little or no deductibles or
copayments regardless of the frequency, value or type of healthcare
service utilized.
. The practice of medicine has become increasingly complex and highly
regulated, resulting in industry consolidation and the proliferation of
multi-specialty physician medical practices.
3
<PAGE>
The Company will seek to capitalize on opportunities arising from the
growing trend toward managed healthcare by focusing its efforts on expanding its
primary care operations. The Company intends to use a portion of the proceeds of
this offering to relocate its existing centers in Brevard and Volusia counties
to larger facilities and to develop and/or acquire additional centers and
physician practices in new geographic areas in central Florida. The Company also
intends to use a portion of the proceeds of this offering to deliver managed
healthcare services through the establishment of a commercial health maintenance
organization initially serving Brevard county. According to the Florida
Department of Insurance, as of June 30, 1995, HMO penetration rates in Brevard
and contiguous counties in central Florida were less than 10% of the population
of such counties. The Company believes that it is positioned to capitalize on
low HMO penetration rates in these unpenetrated potential markets.
The Company's objective is to establish relationships with qualified
physicians, hospitals and other healthcare providers who are willing to provide
medical services to members of managed care organizations at a reasonable cost.
The Company believes that these efforts will enable it to provide low-cost
managed healthcare products to attract individuals and small employer groups
willing to enroll in the Company's proposed HMO and to otherwise determine the
viability and potential of its proposed HMO operations. The Company believes
that, if it is successful in meeting this objective, its primary care physician
network will be a significant competitive factor in the marketing of managed
healthcare products.
During the twelve months following the consummation of this offering, the
Company intends to shift its focus from the provision of primary care services
under agreements with third-party payors to the establishment of commercial HMO
operations in Brevard county. The process of obtaining government approvals and
establishing HMO operations can be lengthy, expensive and uncertain. The
Company's success will be largely dependent upon the Company's ability to obtain
governmental approvals to operate as a commercial HMO; to establish satisfactory
relationships with specialty and acute care physician groups and provider
networks (including hospitals); to provide a variety of low-cost managed care
healthcare products suitable for individuals and employer groups; and to enroll
significant numbers of members. In the event that the Company is successful in
entering into a satisfactory affiliation arrangement with a hospital and in
obtaining required government approvals, the Company anticipates that it will
commence HMO operations and enroll members by early 1997. The Company also
intends to continue to provide primary care services on a fee-for-service basis
and pursuant to existing arrangements with third-party payors and, if it is
successful in establishing commercial HMO operations, will evaluate the
feasibility of continuing to do so independently of commercial HMO operations in
Brevard county. There can be no assurance that the Company will be able to
successfully establish HMO operations or otherwise successfully expand its
operations or that any such operations will not result in increased competition
and a significant decline in revenues from its existing operations. See "Risk
Factors."
The Company was incorporated under the laws of the State of Delaware in
December 1995 by National Home Health Care Corp., a publicly-held Delaware
corporation ("National"), to hold the capital stock of Brevard Medical Center,
Inc. ("Brevard") and First Health, Inc. ("First Health"), which previously were
direct, wholly-owned subsidiaries of National. In January 1996, National
contributed to the Company all of the issued and outstanding shares of capital
stock of Brevard and First Health held by it and Brevard and First Health became
direct, wholly-owned subsidiaries of the Company. Upon the consummation of this
offering, National will continue to own approximately 40.9% of the Common Stock
of the Company and will be in a position to generally direct the affairs of the
Company. See "Risk Factors" and "Certain Transactions."
The Company's principal executive offices are located at 231 East New Haven
Avenue, Melbourne, Florida 32901, and its telephone number is (407) 728-8711.
Unless otherwise indicated, references in this Prospectus to the Company include
Brevard, First Health and Boro Medical Corp., Brevard's wholly-owned subsidiary.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered......................... 1,300,000 shares
Common Stock to be outstanding after the
offering(1).................................. 2,200,000 shares
Use of Proceeds.............................. The Company intends to use the net proceeds
of this offering for the establishment of an
HMO; the development and/or acquisition of
additional primary care centers; the
relocation of existing centers; and the
balance for working capital and general
corporate purposes. See "Use of Proceeds."
Risk Factors................................. The shares offered hereby involve a high
degree of risk and immediate substantial
dilution. See "Risk Factors" and "Dilution."
Proposed Nasdaq Symbol....................... SUNS
Proposed Boston Stock Exchange Symbol........ SSH
</TABLE>
- ------------
(1) Does not include (i) 130,000 shares of Common Stock issuable upon exercise
of the Underwriters' Warrants, (ii) an aggregate of 200,000 shares of Common
Stock reserved for issuance pursuant to options available for grant under
the Company's 1996 Stock Option Plan, of which options to purchase 112,500
shares have been granted as of the date of this Prospectus, and (iii) an
aggregate of 325,000 shares of Common Stock issuable upon the exercise of
options granted to certain officers and directors of the Company and a
consultant to the Company. See "Management--Executive Compensation,"
"--Stock Option Plan," "Certain Transactions," "Underwriting" and Note J to
Notes to Financial Statements.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial information has been derived from and should
be read in conjunction with the financial statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JULY 31, JANUARY 31,
------------------------ ----------------------------
1994 1995 1995 1996
---------- ---------- ---------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Patient service revenue................... $3,882,946 $5,127,572 $2,437,073 $2,446,601
Total operating expenses.................. 3,668,411 5,035,462 2,491,058 2,509,332
Net income (loss)......................... 132,170 55,431 (31,873) (111,540)
Pro forma net income (loss) per share
(1)....................................... .05 (.09)
Pro forma average number of shares
outstanding (1)........................... 1,208,750 1,208,750
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1996
JULY 31, ----------------------------
1995 ACTUAL AS ADJUSTED(2)
---------- ---------- --------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital....................................... $ 284,531 $ 370,005 $5,632,505
Total Assets.......................................... 1,280,702 1,276,958 6,539,458
Total Liabilities..................................... 243,756 200,095 200,095
Stockholder's equity.................................. 1,036,946 1,076,863 6,339,363
</TABLE>
- ------------
(1) Gives effect to the issuance by the Company of (i) 900,000 shares of Common
Stock to National and (ii) the shares of Common Stock issuable upon the
exercise of certain options, as if such issuances occurred as of the
beginning of the periods presented. See Note B[3] to Notes to Financial
Statements.
(2) As adjusted to give effect to the sale of the Common Stock offered hereby
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
6
<PAGE>
RISK FACTORS
The shares offered hereby involve a high degree of risk and should not be
purchased by investors who cannot afford the loss of their entire investment.
Each prospective investor should carefully consider the following risk factors
before making an investment decision.
Absence of Substantial Profitability. The Company currently operates on a
"low-margin" basis and has achieved only limited profitability. The Company's
operating expenses have increased and can be expected to increase significantly
in connection with the Company's proposed expansion (which will require the
Company to make significant up-front expenditures to relocate, develop and/or
acquire primary care centers and physician practices and pay salaries of
additional personnel). Accordingly, the Company's future profitability will
depend on corresponding increases in revenues from operations. Future events,
including unanticipated expenses, capitated fee arrangements, increased
competition or changes in government regulation, could adversely affect the
Company's operating margins and results of operations. There can be no assurance
that the foregoing factors will not adversely affect the Company's future
operating results or that the Company's future operations will be profitable.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Financial Statements.
Recent Loss. For the six months ended January 31, 1996, the Company incurred
a loss of $111,540 as a result of a non-cash charge of approximately $185,000
relating to compensation expense in connection with the issuance of options to
purchase an aggregate of 325,000 shares of Common Stock to certain officers and
directors of the Company and a consultant to the Company. The remaining
compensation expense of approximately $221,000 relating to these options will be
incurred over a three year period. Such compensation expense and the Company's
anticipated increased levels of expenditures could have a material adverse
effect on the Company's future operating results. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Dependence on Principal Contracts. The Company is dependent on a limited
number of contracts with third-party healthcare payors for a substantial portion
of its revenues. For the year ended July 31, 1995 and the six months ended
January 31, 1996, four contracts with payors in the aggregate accounted for
approximately 64.4% and 71.3%, respectively, of the Company's revenues. For the
year ended July 31, 1995, a prepaid cost reimbursement contract with HCFA
accounted for approximately 33.7%, and contracts with Humana Health Care Plans,
Blue Cross Blue Shield of Florida and CAC/United Healthcare Plans of Florida
Inc. accounted for approximately 17.8%, 6.7% and 6.2%, respectively, of the
Company's revenues. Contracts with third-party payors generally are short-term
and contain short-term cancellation provisions. Non-renewal or termination of
the Company's contracts with any such payors would have a material adverse
effect on the Company. There can be no assurance that the Company will be able
to maintain its existing provider contracts. See "Business--Primary Healthcare
Operations."
Fundamental Shift in Business Focus; Possible Decline in Revenues. During
the twelve months following the consummation of this offering, the Company
intends to shift its focus from the provision of primary care services under
provider agreements to the establishment of commercial HMO operations in Brevard
county. The commencement of HMO operations will put the Company into direct
competition with other HMOs operating in the State of Florida, including certain
of the Company's principal payors. As a result of such competition, it is
possible that HMOs may terminate provider contracts with the Company, which
could result in a significant decline in revenues. Although the Company believes
that revenues from its proposed HMO operations will offset any decline in
revenues from existing provider contracts, there can be no assurance that
proposed HMO operations will be successful or that revenues derived from
such operations will be sufficient to offset any loss of revenues. In addition,
pursuant to recent amendments to the Social Security Act, effective January 1,
1996, the Company is prohibited from enrolling Medicare beneficiaries who are
not members of employer groups or unions under its agreement with HCFA until it
establishes Medicare HMO operations. Such limitation may effectively
7
<PAGE>
prevent the Company from enrolling certain new Medicare beneficiaries and
increasing revenues under its agreement with HCFA for the forseeable future. Any
significant decline in revenues would have a material adverse effect on the
Company. See "Business--Proposed HMO Operations."
Dependence on Proceeds to Implement Proposed Expansion; Need for Additional
Financing. The Company is dependent on and intends to use the proceeds of this
offering to implement its proposed expansion. The Company anticipates, based on
currently proposed plans and assumptions relating to its operations (including
the costs associated with, and the timetable for, its proposed expansion), that
the proceeds of this offering, together with projected cash flow from
operations, will be sufficient to satisfy its contemplated cash requirements for
approximately twelve months following the consummation of this offering. In the
event that the Company's plans change, its assumptions change or prove to be
inaccurate or if the proceeds of this offering or cash flow prove to be
insufficient (due to unanticipated expenses, difficulties, problems or
otherwise), the Company may be required to seek additional financing. There can
be no assurance that the proceeds of this offering will be sufficient to permit
the Company to meet its objective of providing low-cost managed healthcare
products to individuals and employers and to otherwise determine the viability
and potential of its proposed HMO operations. To the extent that the proceeds of
this offering are not sufficient to enable the Company to engage in operations
sufficient to generate meaningful revenues or achieve profitable operations, the
inability to obtain additional financing will have a material adverse effect on
the Company, including possibly requiring the Company to significantly curtail
its operations. In addition, any implementation of the Company's expansion plans
beyond the twelve month period following this offering (including expansion of
commercial HMO operations into new geographic areas and the establishment of
Medicare HMO operations) will require capital resources substantially greater
than the proceeds of this offering or otherwise currently available to the
Company. The Company has no current arrangements with respect to, or sources of,
additional financing and it is not anticipated that National will provide any
portion of the Company's future financing requirements. There can be no
assurance that additional financing will be available to the Company on
acceptable terms, or at all. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Government Approval Process. The process of obtaining government approvals
and establishing HMO operations can be lengthy, expensive and uncertain. Prior
to commencing HMO operations, the Company will be required to obtain a license
from the Florida Department of Insurance ("DOI") to operate a commercial HMO in
Brevard county. In order to obtain such license, the Company will be required to
demonstrate its ability to provide a full range of healthcare services
consistent with prevailing professional standards and statutory requirements. In
connection with the government approval process, the Company will be required to
submit an actuarily sound HMO operating plan supported by an independent
financial feasibility study. The Company is engaged in all activities required
for the preparation of an application to obtain a commercial HMO license and
expects to file an application with the DOI by September 1996. The Company
anticipates that the application process could range from 60 to 180 days. There
can be no assurance that the Company will be able to obtain the required
governmental approvals for its proposed HMO operations. See "Business--Proposed
HMO Operations."
Uncertainty of Proposed HMO Operations. Even if required regulatory
approvals are obtained, the Company's proposed HMO operations will be largely
dependent upon the Company's ability to establish satisfactory relationships
with specialty and acute care physician groups and provider networks (including
hospitals) on a timely and competitive basis to enable the Company to provide
low-cost managed healthcare products suitable for individuals and employer
groups. The Company's prospects will be significantly affected by the Company's
ability to implement effective marketing programs to attract and enroll
significant numbers of members. Moreover, failure to obtain accreditation for
the Company's proposed HMO operations within one year of receiving the required
government approvals could result in suspension or revocation of such government
approvals. There can be no assurance that the Company will be able to
successfully establish HMO operations, that such operations will result in
increased revenues or profitable operations or that the Company will be able to
maintain required governmental approvals. See "Business--Proposed HMO
Operations."
8
<PAGE>
Dependence Upon Limited Number of Qualified Physicians. The Company is
substantially dependent on fees generated by primary care physicians and on the
skills of such physicians who perform medical services and treatment on behalf
of the Company. Poor performance by physicians could have an adverse effect on
the Company's prospects and reputation. The Company's proposed expansion will be
dependent upon the Company's ability to attract and retain sufficient numbers of
qualified primary care physicians, specialists, hospitals and other healthcare
providers who are willing to provide medical services to members of managed care
providers at reasonable cost. The Company is currently dependent on a limited
number of primary care physicians and has experienced high physician turnover
and attrition rates. The Company expects that there will be increasing
competition from HMOs and other healthcare plans for physicians, hospitals and
other healthcare providers. There can be no assurance that the Company will be
able to attract or retain necessary healthcare providers. See "Business."
Uncertainty of New Center Development and Acquisition. The Company intends
to use a portion of the proceeds of this offering to relocate existing primary
care centers in Brevard and Volusia counties and to develop and/or acquire
additional primary care centers and physician practices in new geographic areas
in central Florida. The Company has no experience in effectuating rapid
expansion or in managing a large number of physician practices which are
geographically dispersed, and has limited experience and limited financial,
personnel and other resources to undertake extensive development and acquisition
activities. There currently are seven primary care centers in operation, all of
which are in Brevard and Volusia counties. The results achieved to date by the
Company's centers may not be indicative of the prospects or market penetration
of a larger number of primary care centers, particularly in wider and more
geographically dispersed areas with varied demographic characteristics. The
Company's centers were designed by National as free-standing offices suitable
for small physician practices. There can be no assurance that the Company will
be able to successfully relocate such centers or develop new centers (which may
require the purchase of capital equipment, leasehold improvements or significant
upgrading) on a timely and cost-effective basis. Although the Company has
identified and is evaluating potential sites in Brevard and Volusia counties,
the Company has no specific plans relating to any particular site in these or
any other counties. Furthermore, since proposing, negotiating and implementing
an economically feasible affiliation with a physician can be lengthy and
complex, it is possible that the Company may find it difficult to acquire
physician practices. To the extent that the Company acquires physician practices
in the future, there can be no assurance that the financial results of any such
practice will not be adversely affected by a change in motivation resulting from
a change in ownership. While the Company has evaluated possible acquisition
opportunities, as of the date of this Prospectus, the Company has no agreements,
arrangements, understandings or commitments relating to potential acquisitions.
There can be no assurance that the Company will effect any acquisitions or that
it will be able to successfully integrate into its operations any acquired
practice. Failure to do so, particularly in instances in which the Company has
made significant capital investments, could have a material adverse effect on
the Company. See "Business--Growth Strategy."
Risks Associated with Continuing Expansion. The Company may determine,
depending upon the opportunities available to it, to seek additional debt or
equity financing to fund the costs of continuing expansion. To the extent that
the Company finances an acquisition with a combination of cash and equity
securities, any such issuance of equity securities would result in dilution to
the interests of the Company's stockholders. Additionally, to the extent that
the Company incurs indebtedness or issues debt securities in connection with any
acquisition, the Company will be subject to risks associated with incurring
substantial indebtedness, including the risks that interest rates may fluctuate
and cash flow may be insufficient to pay principal and interest on any such
indebtedness. See "Business--Growth Strategy."
Limited Experience of Richter & Co., Inc. Richter & Co., Inc., one of the
Underwriters, has engaged in limited underwriting activities and has acted as
principal underwriter in only three public offerings. There can be no assurance
that Richter & Co., Inc.'s lack of public offering experience will not affect
the proposed public offering of Common Stock and subsequent development of a
trading market, if any. See "Underwriting."
9
<PAGE>
Government Regulation. The healthcare industry and physicians' medical
practices are subject to extensive, stringent and frequently changing federal
and state regulation, which is interpreted and enforced by regulatory
authorities with broad discretion. Among other things, these regulations
prohibit the solicitation or payment for the referral of Medicare or Medicaid
patients, recommending or purchasing Medicare or Medicaid covered services and
false or improper billings for physician services, and place restrictions on
physicians' referrals for designated health services to entities in which they
have a financial interest. In addition, state laws require the Company and its
physicians to obtain and maintain licenses in connection with the Company's
operations and subject the Company to periodic compliance inspections by
regulatory authorities. HMOs are also subject to stringent regulation under
federal and state law which will require the Company to maintain minimum capital
surplus accounts and subscriber grievance procedures and comply with regulations
governing the marketing and sale of healthcare services and products. The
extensive regulatory framework applicable to physicians' practices imposes
significant compliance burdens and risks on the Company. The Company believes
that it is in compliance with all federal, state and local laws, rules and
regulations applicable to its current operations and has obtained all licenses
necessary to conduct its business. Amendments to existing statutes and
regulations, adoption of new statutes and regulations and the Company's
expansion into new operations and jurisdictions could require the Company to
obtain additional licenses, modify its arrangements with physicians or otherwise
alter methods of operation at costs that could be substantial. There can be no
assurance that the Company will be financially or otherwise able to comply with
applicable laws and regulations and licensing requirements. Failure to comply
with applicable laws and regulations and licensing requirements would subject
the Company and its physicians to civil remedies, including significant fines,
penalties, injunctions and expulsion from participation in Medicare and Medicaid
programs, as well as possible criminal sanctions, which would have a material
adverse effect on the Company. See "Business--Government Regulation."
Healthcare Reimbursement and Reform. The Company's operating results depend
in large part upon the availability of reimbursement for the cost of medical
treatment from third-party healthcare payors, principally Medicare, Medicaid and
private health insurance and managed care plans. Such third-party payors are
increasingly challenging and negotiating the cost of medical services, which
have had and could continue to have a significant effect on the medical practice
patterns of many healthcare providers, generally causing them to provide more
efficient services at reduced costs. Also forcing medical efficiencies is the
increasing practice of health maintenance organizations to pay physicians fixed
or "capitated" annual or monthly fees for each member, regardless of the nature
or extent of the required treatment. In addition, several proposals have
recently been made by federal and state government officials that may lead to
substantial healthcare reforms, including the implementation of a
government-directed national healthcare system and stringent healthcare cost
containment measures. Adoption of such a system or cost controls could further
limit reimbursement for medical services. Moreover, past congressional actions
have resulted in changes in Medicare and Medicaid reimbursement rates, and the
Company believes that it is likely that Congress will, over the next several
years, substantially limit the growth of Medicare and Medicaid expenditures. For
the year ended July 31, 1995 and the six months ended January 31, 1996,
approximately 42.8% and 39.6%, respectively, of the Company's revenues were
derived from medical treatment and services reimbursed by Medicare and Medicaid
(including reimbursement under the Company's HCFA contract). Significant
uncertainty exists as to the status of reimbursement and there can be no
assurance that healthcare insurers and other third-party payors will continue to
cover certain medical services or reimburse such services at current levels. Any
significant reduction of healthcare insurance coverage for medical services
could have a material adverse effect on the Company's business and prospects.
See "Business--Government Regulation."
Competition. The managed healthcare industry is highly competitive. The
Company currently competes with other providers of primary healthcare services,
including primary care centers, regional hospitals and physician practice
groups. Many of such competitors offer a broader range of primary healthcare
services than the Company and have extensive relationships with group specialty
practices.
10
<PAGE>
The managed healthcare industry has experienced significant changes in recent
years, primarily due to rising healthcare costs. Employer groups have demanded a
variety of health care options, such as traditional indemnity insurance, HMOs,
point of service plans and preferred provider options, offered either through
third parties or by self-funding. The Company's proposed HMO operations will
compete with providers of all of these products, including CAC/United Healthcare
Plans of Florida Inc., Humana Health Care Plans, Blue Cross/Blue Shield of
Florida and PCA Health Plan, most of which have substantially greater financial,
management, marketing, personnel and other resources than the Company. The
Company also will be required to respond to various competitive factors
affecting the healthcare industry generally, including trends relating to demand
for healthcare services, regulatory, economic and political factors, changes in
patient demographics and competitive pricing strategies by health maintenance
organizations and other healthcare plans. The Company will be subject to
significant competition in any new geographic areas it may enter, with respect
to any products it may offer and with respect to any commercial and governmental
health care programs developed. There can be no assurance that the Company will
be able to compete successfully. See "Business--Competition."
Control Over and Predictability of Healthcare Costs. The Company's future
profitability will be highly dependent on its ability to maintain effective
control over healthcare costs, including physician groups, hospitals and
ancillary providers such as pharmaceutical suppliers, laboratories and non-
physician specialists. The Company's success will be dependent upon its ability
to predict and control future healthcare costs through utilization management
and negotiation of favorable provider contracts. There can be no assurance that
provider agreements that may be negotiated in the future will not result in
substantially higher healthcare costs. Inflation, new technologies, major
epidemics, natural disasters and numerous other external factors relating to the
delivery of healthcare services may adversely affect the ability of the
Company's proposed HMO to control and predict healthcare costs. Although the
Company will seek to enter into fixed rate, or "capitated," provider contracts
and shift the risk for catastrophic loss by obtaining reinsurance coverage,
there can be no assurance that these contracts or reinsurance will be available
or result in decreased financial risks. See "Business--Proposed HMO Operations."
Potential Malpractice Liability. The Company and its physicians may be
exposed to potential professional liability claims by patients and others as a
result of the negligence or other acts of physicians. Claims of this nature, if
successful, could result in substantial damage awards to claimants which may
exceed the limits of any applicable insurance coverage. The Company could become
liable for the negligent acts of physicians, as well as negligence in recruiting
and selecting physicians. The Company currently maintains malpractice liability
insurance with limits of $3,000,000 in the aggregate and $1,000,000 per
occurrence and requires physicians to maintain malpractice liability insurance
in amounts which it deems adequate for the types of medical services provided.
There can be no assurance, however, that such insurance will be sufficient to
cover potential claims or that adequate levels of coverage will be available in
the future at a reasonable cost. In the event of a partially or completely
uninsured successful claim against the Company, the Company's business and
financial condition would be materially adversely affected. See
"Business--Insurance."
Concentration of Ownership. Upon consummation of this offering, National
will continue to own approximately 40.9% of the outstanding Common Stock of the
Company (assuming no exercise of the Underwriters' over-allotment option or
outstanding options). Certain directors of the Company (including Frederick H.
Fialkow and Bernard Levine, M.D., who have indicated their intention to purchase
35,000 and 129,000 shares, respectively, of Common Stock in this offering) are
also officers, directors and/or principal stockholders of National and,
consequently, may be able, through National, to direct the election of the
Company's directors, effect significant corporate events and generally direct
the affairs of the Company. In addition, Ira Greifer, M.D., a director of
National, has indicated his intention to purchase 5,000 shares of Common Stock
in this offering. See "Management" and "Principal Stockholders."
11
<PAGE>
Relationship with National. The Company has been dependent on National for
various administrative and financial support, including a $250,000 letter of
credit obtained by National to satisfy statutory reserve requirements. Following
this offering, National will provide the Company with certain administrative
services during a transition period and the Company will not have the benefit of
National's financial, personnel and other resources in the future. National has
agreed not to cause the Company to make any distribution of cash or other
property to National following this offering (other than repayment of advances
of expenses of the Company in connection with this offering) and has
acknowledged that it has no intention to direct the day to day affairs of the
Company. The Company has agreed to use its best efforts to include 83,000 shares
of Common Stock held by National in a registration statement filed under the
Securities Act two years after the date of this prospectus. The Company has also
agreed not to distribute any cash or other property to National or enter into
any transactions with National or its affiliates in the future unless such
transaction is fair and reasonable to the Company and is approved by a majority
of the independent and disinterested members of the Board of Directors and, to
the extent deemed necessary or appropriate by the Board of Directors, the
Company will obtain a fairness opinion and stockholder approval in connection
with any such transaction. Notwithstanding the foregoing, there can be no
assurance that future transactions, if any, will not result in conflicts of
interest which will be resolved in a manner favorable to the Company. See
"Certain Transactions."
Dependence Upon Key Personnel. The success of the Company will be largely
dependent on the personal efforts of Warren D. Stowell, its President and Chief
Executive Officer, David Jesse, its Executive Vice President and Chief Operating
Officer, and other key personnel. The loss of the services of either such
individual or the services of certain other key employees could have a material
adverse effect on the Company's business and prospects. The Company intends to
obtain "key-man" insurance on the life of Mr. Stowell in the amount of
$1,000,000 prior to the consummation of this offering. The Company's success
will also be dependent upon the Company's ability to hire and retain additional
management, financial, marketing and other personnel. Robert P. Heller, the
Company's Chief Financial Officer, is also National's chief financial officer
and performs certain administrative services for the Company on a part-time
basis. The Company intends to hire a full-time Chief Financial Officer following
the consummation of this offering. Competition for qualified personnel in the
healthcare industry is intense, and there can be no assurance that the Company
will be able to attract and retain additional qualified personnel. See
"Management."
Broad Discretion in Application of Proceeds; Possible Benefit to Related
Parties. Approximately $1,142,500 (21.7%) ($1,995,625 (32.6%) if the
Underwriters' overallotment option is exercised in full) of the estimated net
proceeds of this offering have been allocated to working capital and general
corporate purposes. Accordingly, the Company's management will have broad
discretion as to the application of such proceeds. The Company may use a portion
of the proceeds of this offering to pay salaries of its executive officers to
the extent that cash flow from operations is insufficient for such purpose. See
"Use of Proceeds."
Effect of Outstanding Options. As of the date of this Prospectus, there are
325,000 shares of Common Stock reserved for issuance upon the exercise of
outstanding stock options, exclusive of options granted under the Company's 1996
Stock Option Plan. Such options are comprised of options to purchase 250,000
shares at an exercise price per share of $.25 issued to Warren D. Stowell,
President and Chief Executive Officer of the Company, in connection with his
employment by the Company; options to purchase 25,000 shares at the same
exercise price issued to another executive officer of the Company in connection
with his employment by the Company; and options to purchase 50,000 shares at the
same exercise price issued to a consultant to the Company in connection with his
agreement to provide management consulting services to the Company. The grant
and subsequent exercise of such options could have a dilutive effect on the
Company's stockholders. Moreover, the terms upon which the Company may be able
to obtain additional equity capital may be adversely affected, since the holders
of the options can be expected to exercise them at a time when the Company
would, in all likelihood, be
12
<PAGE>
able to obtain any needed capital on terms more favorable to the Company than
those provided in the options. See "Management--Employment Agreements" and
"Certain Transactions."
Benefits to Related Parties. The Company's executive officers and
directors will realize substantial benefits in connection with this
offering. The Company has granted to Warren D. Stowell, the President and
Chief Executive Officer of the Company, options to purchase an aggregate
of 250,000 shares of Common Stock at an exercise price per share equal to
$.25, and has granted to David Jesse, the Executive Vice President of the
Company, options to purchase an aggregate of 75,000 shares of Common Stock
at exercise prices per share ranging from $.25 to the initial public offering
price. As of the date of this Prospectus, the Company has granted to each
of Frederick H. Fialkow, Steven Fialkow, Bernard Levine, M.D., Dean Sloane
and Richard Siedelman, M.D., directors of the Company, options to purchase
7,500 shares of Common Stock at an exercise price per share equal to the
initial public offering price. In addition, the Company may use a portion of
the proceeds of this offering to pay salaries of its executive officers and
fees to directors to the extent that cash flow from operations is
insufficient for such purposes.
Authorization of Preferred Stock. The Company's Certificate of Incorporation
authorizes the issuance of 1,000,000 shares of "blank check" 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 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 of the
Company. Although the Company has no present intention to issue any shares of
its preferred stock, there can be assurance that the Company will not issue
shares of preferred stock in the future. The Company has agreed not to issue any
shares of Preferred Stock for a period of two years following the consummation
of this offering without the Underwriters' prior written consent. See
"Description of Securities."
No Assurance of Public Market; Determination of Offering Price; Possible
Volatility of Market Price of Common Stock. Prior to this offering, there has
been no public trading market for the Common Stock. Consequently, the initial
public offering price of the Common Stock has been determined by negotiations
between the Company and the Underwriter. There can be no assurance that a
regular trading market for the Common Stock will develop after this offering or
that, if developed, it will be sustained. The market price for the Common Stock
following this offering may be highly volatile as has been the case with the
securities of other small capitalization companies. Factors such as the
Company's financial results, acquisition of additional practices by the Company,
the status of government regulation and various factors affecting the healthcare
industry generally may have a significant impact on the market price of the
Common Stock. Additionally, in recent years, the stock market has experienced a
high level of price and volume volatility and market prices for the stock of
many companies, particularly of small capitalization companies that trade in the
over-the-counter market, have experienced wide price fluctuations not
necessarily related to the operating performance of such companies. See
"Underwriting."
Immediate and Substantial Dilution. This offering involves an immediate and
substantial dilution of $2.30 (46%) per share between the net tangible book
value per share of Common Stock and the initial public offering price. See
"Dilution."
No Dividends. The Company has not paid any cash dividends on its Common
Stock and does not expect to declare or pay any cash dividends in the
foreseeable future. See "Dividend Policy."
Shares Eligible for Future Sale; Registration Rights. Upon consummation of
this offering, the Company will have 2,200,000 shares of Common Stock
outstanding (assuming no exercise of outstanding options), of which the
1,300,000 shares of Common Stock offered hereby will be freely tradable without
restriction or further registration under the Securities Act of 1933 (the
"Securities Act"). All of the remaining 900,000 shares of Common Stock
outstanding are "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act and may be publicly sold without
registration pursuant to such rule, commencing two years following the date of
this Prospectus. National, the holder of all of such shares, has agreed not to
sell such shares for a period of eighteen months from the date of this
Prospectus without the Underwriters' prior written consent. In addition, an
aggregate of 137,500 shares of Common Stock issuable upon the exercise of
immediately exercisable options held by certain executive officers and a
consultant of the Company will become available for sale pursuant to Rule 701
commencing 90 days after the date of this Prospectus, subject to the agreement
of such persons not to sell such securities for a period of eighteen months
following the consummation of this offering without the Underwriters' prior
written consent. The Company has agreed to use its best efforts to include (i)
87,500 of the shares that are available for sale pursuant to Rule 701 as
described above and (ii) 83,000 shares held by National in a registration
statement filed under the Securities Act two years after the date of this
Prospectus. No prediction can be made as to the effect, if any, that sales
13
<PAGE>
of shares of Common Stock or even the availability of such shares for sale will
have on the market prices of the Common Stock prevailing from time to time. The
possibility that substantial amounts of Common Stock may be sold in the public
market may adversely affect the prevailing market price for the Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities. See "Certain Transactions," "Description of Securities,"
"Shares Eligible for Future Sale" and "Underwriting."
Possible Delisting of Common Stock from Nasdaq System; Risks Related to
Low-Priced Stocks. It is anticipated that the Common Stock will be quoted on the
Nasdaq SmallCap Market. However, in order to continue to be listed on Nasdaq, a
company must maintain $2,000,000 in total assets, a $200,000 market value of the
public float and $1,000,000 in total capital and surplus. In addition, continued
inclusion requires two market makers and a minimum bid price of $1.00 per share;
provided, however, that if a company falls below such minimum bid price, it will
remain eligible for continued inclusion on Nasdaq if the market value of the
public float is at least $1,000,000 and the company has $2,000,000 in capital
and surplus. The failure to meet these maintenance criteria in the future may
result in the delisting of the Common Stock from Nasdaq and trading, if any, in
the Common Stock would thereafter be conducted in the non-Nasdaq
over-the-counter market. As a result of such delisting, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Common Stock. In addition, if the Common Stock was to become
delisted from trading on Nasdaq and the trading price of the Common Stock was to
fall below $5.00 per share, trading in the Common Stock also would be subject to
the requirements of certain rules promulgated under the Exchange Act, which
require additional disclosure by broker-dealers in connection with any trades
involving a stock defined as a penny stock (generally, any non-Nasdaq equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. The additional burdens imposed upon broker-dealers by such
requirements may discourage them from effecting transactions in the Common
Stock, which could severely limit the liquidity of the Common Stock and the
ability of purchasers in this offering to sell the Common Stock in the secondary
market.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,300,000 shares of
Common Stock offered hereby (after deducting underwriting discounts and
commissions and other expenses of the offering) are estimated to be $5,262,500
($6,115,625 if the Underwriters' over-allotment option is exercised in full).
The Company expects to use such proceeds over a period of approximately twelve
months as follows:
<TABLE><CAPTION>
APPROXIMATE DOLLAR APPROXIMATE PERCENTAGE
APPLICATION OF PROCEEDS AMOUNT OF NET PROCEEDS
- ------------------------------------------------------ ------------------ ----------------------
<S> <C> <C>
Establishment of health maintenance organization(1)... $1,750,000 33.3%
Development of additional primary care centers(2)..... 1,750,000 33.3
Relocation of existing primary care centers(3)........ 370,000 7.0
Establishment of letter of credit(4).................. 250,000 4.7
Working capital and general corporate purposes(5)..... 1,142,500 21.7
------------------ -----
$5,262,500 100.0%
------------------ -----
------------------ -----
</TABLE>
- ------------
(1) Represents anticipated costs associated with establishing a commercial
health maintenance organization in Brevard county, including (i)
approximately $100,000 in connection with licensing activities and
professional fees; (ii) approximately $400,000 in connection with the
purchase and implementation of a management information system; and (iii)
approximately $1,000,000 in connection with establishing arrangements with
physicians, hospitals and other health care providers (including salaries
for physicians and marketing personnel). See "Business--Proposed HMO
Operations."
(2) Represents anticipated costs associated with developing and/or acquiring up
to five additional primary care centers outside of Brevard county, including
acquisition costs and costs associated with site selection, leasehold
improvements, acquisition of furniture, fixtures and medical equipment and
salaries of additional personnel. As of the date of this Prospectus, the
Company has no pending agreements, oral or written, regarding the
development or acquisition of additional primary care centers. See
"Business--Growth Strategy."
(3) Represents anticipated costs associated with relocating the Company's
existing primary care centers to larger facilities in Brevard and Volusia
counties, including the purchase of furniture, fixtures and equipment and
salaries for additional personnel. As of the date of this Prospectus, the
Company has not identified any potential new facilities. See
"Business--Primary Healthcare Operations."
(4) Represents amount which will be restricted for the purpose of securing the
letter of credit required in connection with the Company's prepaid health
clinic operations. Prior to this offering, such letter of credit was
maintained by National for the benefit of the Company.
(5) Working capital may be used for, among other things, selling, general and
administrative expenditures (including salaries of its executive officers to
the extent that cash flow from operations is insufficient) and other general
corporate purposes, as well as for the other uses identified in the table.
In the event the Underwriters exercise their over-allotment option in full,
the Company will realize additional net proceeds of $853,125 which will be added
to the Company's working capital.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations (including the costs associated with, and the
timetable for, its proposed expansion), that the proceeds of this offering,
together with projected cash flow from operations, will be sufficient to satisfy
its contemplated cash requirements for approximately twelve months following the
consummation of this offering. In the event that the Company's plans change, its
assumptions change or prove to be inaccurate or if the proceeds of this offering
or cash flow prove to be insufficient to fund operations (due to unanticipated
expenses, difficulties, problems or otherwise), the Company may find it
necessary or desirable to reallocate a portion of the proceeds within the above
described categories, seek additional financing or curtail its expansion
activities. In addition, any implementation of the Company's expansion plans
beyond the twelve month period following this offering (including expansion of
commercial HMO operations into new geographic areas and the establishment of
Medicare HMO operations) will require capital resources substantially greater
than the proceeds of this offering or otherwise currently available to the
Company. There can be no assurance that additional financing will be available
to the Company on acceptable terms, or at all.
Pending utilization, the net proceeds of this offering will be invested in
short-term bank certificates of deposit, interest bearing savings accounts,
United States government obligations or other short-term interest bearing
investments.
15
<PAGE>
DIVIDEND POLICY
Although the Company has made distributions to National prior to this
offering, the Company does not anticipate paying cash dividends in the
foreseeable future. The Company currently intends to reinvest earnings, if any,
in the development and expansion of its business. The declaration of dividends
in the future will be at the election of the Board of Directors and will depend
upon the earnings, capital requirements and financial position of the Company,
general economic conditions and other relevant factors.
DILUTION
The net tangible book value of the Company at January 31, 1996 was $668,134
or $.74 per share of Common Stock. Net tangible book value per share is
determined by dividing the net tangible book value of the Company (total
tangible assets less total liabilities) by the number of shares of Common Stock
outstanding. After giving effect to the receipt of net proceeds from the sale of
the shares offered hereby, the pro forma net tangible book value of the Company
at January 31, 1996, would have been $5,930,634 or $2.70 per share of Common
Stock, representing an immediate increase in net tangible book value of $1.96
per share to the existing stockholders and an immediate dilution of net tangible
book value of $2.30 to new investors. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price............................. $5.00
Net tangible book value before offering............... $ .74
Increase attributable to new investors................ $1.96
-----
Pro forma net tangible book value after offering.......... $2.70
-----
Dilution to new investors................................. $2.30
-----
-----
</TABLE>
The following table sets forth, as of the date of this Prospectus, the
number of shares of Common Stock purchased, the percentage of total shares
purchased, the total consideration paid, the percentage of total consideration
paid and the average price per share paid by the investors in this offering and
the current stockholders of the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
--------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Current Stockholder................ 900,000 40.9% $1,076,863 14.2% $1.20
New Investors...................... 1,300,000 59.1 6,500,000 85.8 5.00
--------- ----- ---------- -----
Total.............................. 2,200,000 100.0% $7,576,863 100.0%
--------- ----- ---------- -----
--------- ----- ---------- -----
</TABLE>
The above table assumes no exercise of the Underwriters' over-allotment
option or outstanding options.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at January
31, 1996, and as adjusted to give effect to the sale of the 1,300,000 shares of
Common Stock offered hereby and the application of the estimated net proceeds
therefrom.
<TABLE>
<CAPTION>
JANUARY 31, 1996
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Capital lease obligations--current and long term................... $ 22,799 $ 22,799
----------- -----------
Preferred stock, par value $.001 per share, 1,000,000 shares
authorized, no shares issued..................................... -- --
Common Stock, par value $.001 per share, 10,000,000 authorized,
900,000 shares issued and outstanding at January 31, 1996 and
2,200,000 shares issued and outstanding as adjusted (1)............ 900 2,200
Additional paid-in capital......................................... 1,297,318 6,558,518
Unearned compensation.............................................. (221,355) (221,355)
----------- -----------
Total stockholders' equity..................................... 1,076,863 6,339,363
----------- -----------
Total capitalization....................................... $ 1,099,662 $ 6,362,162
----------- -----------
----------- -----------
</TABLE>
- ------------
(1) Does not include (i) 130,000 shares of Common Stock issuable upon exercise
of the Underwriters' Warrants, (ii) an aggregate of 200,000 shares of Common
Stock reserved for issuance pursuant to options available for grant under
the Company's 1996 Stock Option Plan, of which options to purchase 112,500
shares have been granted as of the date of this Prospectus, and (iii) an
aggregate of 325,000 shares of Common Stock issuable upon the exercise of
options granted to certain officers and directors of the Company and a
consultant to the Company. See "Management--Executive Compensation,"--Stock
Option Plan," "Certain Transactions," "Underwriting," and Note J to Notes to
Financial Statements.
17
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial information set forth below is derived from
the financial statements and should be read in conjunction with the detailed
information in the financial statements and notes thereto appearing elsewhere
herein.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JULY 31, JANUARY 31,
---------------------- ----------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Patient service revenue.......................... $3,882,946 $5,127,572 $2,437,073 $2,446,601
Cost and expenses:
Cost of revenue:............................... 2,475,907 3,506,847 1,766,830 1,577,731
General and administrative..................... 1,159,506 1,472,116 696,263 725,539
Compensation expense........................... -- -- -- 184,895
Amortization of intangibles.................... 32,998 56,499 27,965 21,167
---------- ---------- ---------- ----------
Total operating expenses .................. 3,668,411 5,035,462 2,491,058 2,509,332
---------- ---------- ---------- ----------
Income (loss) from operations.................... 214,535 92,110 (53,985) (62,731)
Interest income.................................. 9,435 5,921 3,712 3,691
---------- ---------- ---------- ----------
Income from operations before taxes.............. 223,970 98,031 (50,273) (59,040)
Provision (benefit) for income taxes............. 91,800 42,600 (18,400) 52,500
---------- ---------- ---------- ----------
Net income (loss)................................ 132,170 55,431 (31,873) (111,540)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma net income (loss) per share (1)........ $ .05 $ (.09)
---------- ----------
---------- ----------
Pro forma average number of shares outstanding
(1).............................................. 1,208,750 1,208,750
</TABLE>
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1995 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working Capital.................................................... $ 284,531 $ 370,005
Total Assets....................................................... 1,280,702 1,276,958
Total Liabilities.................................................. 243,756 200,095
Stockholders' equity............................................... 1,036,946 1,076,863
</TABLE>
- ------------
(1) Gives effect to the issuance by the Company of (i) 900,000 shares of Common
Stock to National and (ii) the shares of Common Stock issuable upon the
exercise of certain options, as if such issuances occurred as of the
beginning of the periods presented. See Note B[3] to Notes to Financial
Statements.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
National was organized under the laws of the State of Delaware in July 1983
for the purpose of establishing medical treatment facilities throughout the
State of Florida. National acquired or established seventeen medical centers
between August 1984 and January 1987, twelve of which were sold or closed in
1987 and 1988. National's decision to close such medical centers was based
primarily on National's market position and its available resources and a
determination to focus its efforts in Brevard county. National also provides
home healthcare services in New York and Connecticut.
Brevard was organized by National in 1984 and currently operates five
primary care centers in Brevard county. In September 1994, Brevard established
an additional primary care center in Brevard county which was closed in August
1995. First Health was incorporated by National in 1994 and currently operates
two primary care centers in Volusia county. In April and June 1994, First Health
acquired certain assets, including furniture, fixtures and equipment, of two
companies engaged in providing medical services for an aggregate purchase price
of $147,000. See Note C to Notes to Financial Statements.
The Company was organized by National in December 1995 to hold the capital
stock of Brevard and First Health. Upon the consummation of this offering,
National will continue to own approximately 40.9% of the Common Stock of the
Company and will be in a position to generally direct the affairs of the
Company. See "Certain Transactions."
The Company recognizes fee-for-service revenues based on net realizable
amounts due from patients and third-party payors at the time medical services
are rendered. Capitation revenues from HMOs that contract with the Company are
recognized on a monthly basis. Reimbursement under the Company's contract with
HCFA are based on costs incurred in connection with medical services provided
and are subject to audit and retrospective adjustment. See Note B[2] to Notes to
Financial Statements.
The Company has granted options to purchase an aggregate of 325,000 shares
of Common Stock, exclusive of options granted under the Company's 1996 Stock
Option Plan, to certain officers and directors of the Company and a consultant
to the Company at an exercise price of $.25 per share. Consequently, for the six
months ended January 31, 1996, the Company incurred a loss of $111,540 primarily
as a result of a non-cash charge of approximately $185,000 relating to
compensation expense in connection with these options. The remaining
compensation expense of approximately $221,000 relating to these options will be
incurred over a three year period.
RESULTS OF OPERATIONS
Six Months Ended January 31, 1996 Compared to Six Months Ended January 31, 1995.
Revenues increased by approximately $10,000 from $2,437,000 for the six
months ended January 31, 1995 to $2,447,000 for the six months ended January 31,
1996. This increase is a result of an increase in capitation revenue, offset by
a decline in fee-for-service revenue. Capitation revenue as a percentage of
total revenue increased from 28% to 33% and fee-for-service revenue decreased
from 34% to 26% in the comparable periods. These trends are the result of the
shift in the healthcare industry towards managed care, particularly the decline
in fee-for-service revenues. The Company expects that these trends will
continue and that revenues for the three months ended April 30, 1996 will
decline slightly, primarily as a result of a decline in fee-for-service
revenues.
Cost of revenue as a percentage of revenue declined from 72% for the six
months ended January 31, 1995 to 64% during the six months ended January 31,
1996. This decrease is attributable to the reduction in staff physicians
employed in the Company's centers as well as the closing of a non-profitable
center opened during the six months ended January 31, 1995.
19
<PAGE>
General and administrative expenses for the six months ended January 31,
1996 increased by approximately $29,000, or 4%, from the six months ended
January 31, 1995. Included in general and administrative expenses for the six
months ended January 31, 1996 is a charge of $51,000 in connection with the
settlement of certain claims. Excluding this charge, general and administrative
expenses decreased approximately $22,000 or 3% from the comparable period of
1995. This decrease is primarily attributable to the elimination of the
Company's sales personnel, who previously enrolled subscribers, and the
implementation of cost control measures in connection with the shift in the
healthcare industry towards managed care.
Compensation expense for the six months ended January 31, 1996 is
attributable to the Company granting of options to purchase an aggregate of
325,000 shares of Common Stock to certain officers and directors of the Company
and a consultant to the Company at an exercise price of $.25 per share.
The Company recorded a tax provision for the six months ended January 31,
1996 of $52,500 as compared to a tax benefit of $18,400 for the six months ended
January 31, 1995. The provision for the six months ended January 31, 1996 is a
result of recording a compensation charge not currently deductible and for which
a tax benefit is dependent on future market conditions and has not been
recorded.
As a result of the foregoing, the Company recorded a net loss for the six
months ended January 31, 1996 of approximately $112,000 as compared to a net
loss of $32,000 for the six months ended January 31, 1995.
Year Ended July 31, 1995 ("fiscal 1995") Compared to Year Ended July 31, 1994
("fiscal 1994")
Revenues increased by approximately $1,245,000, or 32%, from $3,883,000 for
fiscal 1994 to $5,128,000 for fiscal 1995. Approximately $811,000 of this
increase is attributable to a full year of HMO-related capitation revenues
derived from the Company's operations in Volusia county in 1995 as compared to
1994, during which the Company derived revenues from such operations for only
three months following the acquisition of such operations. These revenues had no
material impact on the earnings of the Company. In addition, revenues derived
from the Brevard county operations increased by $434,000 for fiscal 1995,
primarily due to an increase in capitation revenue (including revenues from a
center that was opened during such period). Medicare cost reimbursement revenue
also increased by 137,000 in fiscal 1995.
Cost of revenue as a percentage of revenue increased to 68% for fiscal 1995
from 64% for fiscal 1994. The increase was primarily attributable to the
establishment of a new center in Brevard county and the recruitment of
additional physician staff. This new center was subsequently closed in September
1995. Cost of revenue also increased as a result of the Company preparing to
obtain accreditation of its prepaid health clinic operations, which
accreditation involves a review of all aspects of the Company's Brevard county
operations. See "Business--Primary Healthcare Operations."
General and administrative expenses increased by approximately $313,000, or
27%, during fiscal 1995, as compared to fiscal 1994. This increase is
attributable to a full year of operations in Volusia county in 1995.
As a result of the foregoing, net income for fiscal 1995 declined to $55,000
from $132,000 for fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1996, the Company had working capital of $370,000 as compared
to working capital of $285,000 at July 31, 1995. The Company has historically
financed its working capital requirements through cash flow from operating
activities.
20
<PAGE>
Net cash provided by operating activities was $120,000 for the six months
ended January 31, 1996, as compared to net cash used in operating activities of
$206,000 for the six months ended January 31, 1995. The increase in cash
provided by operating activities was primarily attributable to a reduction of
accounts payable and accrued expenses of $33,000 for the six months ended
January 31, 1996 as compared to a reduction of $189,000 in the prior comparable
period. Additionally, while the Company incurred a net loss of $112,000, such
loss was offset by a noncash charge for compensation of $185,000 and operating
expenses of $65,000 funded by National. Net cash used in investing activities
for the six months ended January 31, 1996 and 1995 reflect the purchase of
equipment. Net cash used in financing activities for the six months ended
January 31, 1996 and 1995 were $109,000 and $103,000, respectively, and reflect
primarily distributions to National. At January 31, 1996, the Company had cash
and cash equivalents of $218,000.
Net cash provided by operating activities was $39,000 for fiscal 1995, as
compared to net cash provided by operating activities of $588,000 for fiscal
1994. This decrease in cash provided by operating activities was primarily
attributable to decreases in accounts payable and accrued expenses. Net cash
used in investing activities for fiscal 1995 was approximately $47,000,
reflecting the Company's purchase of property and equipment during fiscal 1995.
Net cash used in investing activities for fiscal 1994 reflects the acquisition
of two primary care centers by First Health in fiscal 1994. Net cash used in
financing activities for fiscal 1995 was $324,000 as compared to net cash used
in financing activities of $239,000 for fiscal 1994. Cash used in financing
activities during these periods primarily reflects distributions to National.
The Company intends to shift the focus of its business from the provision of
primary care services under provider agreements to the establishment of
commercial HMO operations in Brevard county. Although the Company is unable to
predict with any degree of certainty what effect such proposed change in
business focus will have on the Company, it is possible that the Company's
proposed HMO operations could result in increased competition with HMOs
operating in the state of Florida. As a result of such competition, it is
possible that certain HMOs may terminate provider agreements with the Company,
which could result in a significant decline in revenues. In addition, the
Company's operating expenses can be expected to increase significantly in
connection with the Company's proposed expansion, which will require the Company
to make significant up-front expenditures to relocate, develop and/or acquire
primary care centers and physician practices and pay salaries for additional
personnel. The Company anticipates that it will make capital expenditures
associated with, among other things, leasehold improvements and office equipment
(including telephone and management information systems and software). The
Company expects to pay salaries for additional financial, marketing and other
personnel to augment the Company's efforts to successfully manage anticipated
growth. There can be no assurance that the foregoing factors will not
adversely affect the Company's future operating results.
Following this offering, during a transition period, National will provide
the Company with limited administrative support in connection with certain
accounting services and, other than such support, the Company will not have the
benefit of National's financial, personnel and other resources in the future.
Prior to this offering, such accounting services represented the only
administrative costs of the Company incurred by National. See Note B[1] to Notes
to Financial Statements.
The Company is dependent on and intends to use the proceeds of this offering
to implement its proposed expansion. The Company anticipates, based on currently
proposed plans and assumptions relating to its operations (including the costs
associated with, and the timetable for, its proposed expansion), that the
proceeds of this offering, together with projected cash flow from operations,
will be sufficient to satisfy its contemplated cash requirements for
approximately twelve months following the consummation of this offering. In the
event that the Company's plans change, its assumptions change or prove to be
inaccurate or if the proceeds of this offering or cash flow prove to be
insufficient (due to
21
<PAGE>
unanticipated expenses, difficulties, problems or otherwise), the Company may be
required to seek additional financing. There can be no assurance that the
proceeds of this offering will be sufficient to permit the Company to meet its
objective of providing low-cost managed healthcare products to individuals and
employers and to otherwise determine the viability and potential of its proposed
HMO operations. To the extent that the proceeds of this offering are not
sufficient to enable the Company to engage in operations sufficient to generate
meaningful revenues or achieve profitable operations, the inability to obtain
additional financing will have a material adverse effect on the Company,
including possibly requiring the Company to significantly curtail its
operations. In addition, any implementation of expansion of commercial HMO
operations into new geographic areas and the establishment of Medicare HMO
operations will require capital resources substantially greater than the
proceeds of this offering or otherwise currently available to the Company. The
Company has no current arrangements with respect to, or sources of, additional
financing and it is not anticipated that National will provide any portion of
the Company's future financing requirements. There can be no assurance that
additional financing will be available to the Company on acceptable terms, or at
all.
22
<PAGE>
BUSINESS
The Company provides managed healthcare services through seven primary care
centers located in central Florida. Medical services are delivered by eleven
board certified or board eligible primary care physicians employed by the
Company. The Company's healthcare operations consist primarily of medical
treatment and care typically furnished in a family practitioner's office. The
Company also arranges for clinical laboratory services and engages physicians
specializing in various medical practices to complement the Company's primary
care operations.
THE MANAGED HEALTHCARE INDUSTRY
According to the National Center for Healthcare Statistics, annual
healthcare expenditures in the United States have grown from approximately
$422.6 billion in 1985 to approximately $884.2 billion in 1993, representing
more than 13.9% of the gross domestic product. In response to escalating
healthcare costs, federal and state government authorities have increasingly
emphasized stringent cost containment measures, and employers, consumers and
other purchasers of healthcare have sought cost-effective alternatives to
traditional insurance, where providers are generally paid on a fee-for-service
basis.
Although traditional health insurance plans permit enrollees to select any
physician or hospital, enrollees are often responsible for significant
deductibles, copayments and provider charges in excess of reimbursement
allowances. HMOs developed largely as an alternative to traditional insurance.
HMOs arrange for the delivery of healthcare to enrollees through participating
healthcare providers for a fixed monthly premium and little or no deductibles or
copayments regardless of the frequency, value or type of healthcare services
utilized. HMOs are generally able to arrange for healthcare delivery at lower
costs than those associated with traditional insurance plans as a result of
appropriate controls on the utilization of healthcare services and the
negotiation of discounts from standard healthcare provider rates.
HMOs experienced rapid enrollment growth in the mid-1980s when healthcare
costs increased sharply. According to the Group Health Association of America,
as of December 31, 1994, over 51 million individuals were enrolled in HMOs in
the United States. The Florida HMO Association reports that Florida had more
than three million HMO enrollees as of December 31, 1994, or approximately 23%
of the state population. According to the Florida Department of Insurance, HMO
penetration rates in the counties of Brevard, Indian River, Lake, Martin,
Osceola, Polk, St. Lucie and Sumter, the Company's principal target market, is
less than 10%, as compared to approximately 35% in the Ft. Lauderdale and Miami
areas.
Since the mid-1980's, increased employer focus on cost, employee choice and
flexibility in obtaining healthcare has led to development of additional managed
healthcare options, some of which are self-funded. These alternatives include
preferred provider organizations ("PPOs") and multiple option plans. In a PPO,
the enrollee obtains care from a panel of preferred providers who provide
services on a discounted fee-for-service basis. A multiple option plan offers a
combination of HMO, PPO and/or insurance options. Multiple option plans have
gained favor with some large employer groups because they allow consolidation of
health benefit programs and often permit the enrollee to choose providers within
the HMO or to select a PPO or unaffiliated provider at a higher out-of-pocket
cost. While increasingly popular as a means of expanding employee choice, these
alternatives may also result in increased healthcare costs to employers to the
extent that employees select healthcare options without the managed care
features of pure HMOs.
The goal of health maintenance organizations is to combine the quality
delivery of preventive and primary care with a business strategy and management
controls designed to encourage more cost-effective use of the healthcare
delivery system. To accomplish these objectives, three basic models of HMOs have
evolved: staff, group and individual practice associations. The key
distinguishing feature
23
<PAGE>
between each model is the relationship between the HMO and the physician. Under
the staff model, the HMO employs the physician and uses capital to provide the
facility in which the physician sees patients. The physician receives a salary
and/or a bonus based on the performance of the HMO. Under the group model, the
HMO contracts with primary care and multi-specialty medical group practices
which typically receive a fixed monthly or capitated fee for each HMO member,
regardless of the medical services provided to each member. Under an individual
practice association model, the HMO can contract with established physicians who
are broadly dispersed throughout a community and who can see patients in their
own offices in exchange for a monthly capitation fee. While the Company intends
to employ a mix of these HMO models, the Company expects that the staff model
will account for a significant portion of its proposed HMO operations.
GROWTH STRATEGY
The Company will seek to capitalize on opportunities arising from the
growing trend toward managed healthcare by focusing its efforts on expanding its
primary care operations. The Company's principal target market includes the
counties of Brevard (cities of Melbourne, Titusville, Merritt Island, Palm Bay
and Cape Canaveral); Indian River (city of Vero Beach); Lake (city of Leesburg);
Martin (city of Stuart); St Lucie (cities of Ft. Pierce and Port St. Lucie);
Sumter (city of Wildwood); Osceola (cities of Kissimmee and St. Cloud); and Polk
(city of Lakeland) in central Florida. Such market has aggregate populations of
approximately 1,550,000 with 336,000 residents over the age of 65. The Company
intends to use a portion of the proceeds of this offering to develop and/or
acquire up to five additional primary care centers in unpenetrated small and
medium sized markets in this geographic area.
The Company's growth strategy involves capitalizing on management's
experience in the healthcare industry to acquire existing primary care centers.
The Company believes that it can successfully integrate the operations and
improve the results of acquired centers by leveraging its existing corporate
infrastructure and implementing its strategy for center growth in selected
markets. The Company intends to focus on the acquisition of centers which the
Company believes are profitable or can be made profitable with management
experience and that have affiliations with qualified physicians who maintain
good relationships within their local community.
The Company may also seek to develop new centers in selected markets. In
seeking suitable locations for the development of new centers, the Company will
rely primarily on demographic studies and its analysis of local competition,
physician referral patterns, reimbursement profiles and legislative environment.
New center development will also depend upon the Company's ability to associate
with qualified physicians.
The Company believes that trends in the healthcare industry significantly
enhance acquisition opportunities for its business and provide economic
incentives for physicians to seek affiliations with the Company. By providing
business management services and systems designed to increase revenues and
profitability, the Company believes that it will attract physicians seeking to
expand their practice, while enabling them to concentrate on the delivery of
cost-effective, quality medical care. Although the Company has identified
certain areas for possible expansion, as of the date of this Prospectus, the
Company has no specific plans or any pending agreements, either written or oral,
relating to the development or acquisition of any additional primary care
centers. In addition, although the Company has allocated approximately
$1,750,000 of the proceeds of this offering to develop and/or acquire up to five
additional primary care centers, until potential acquisition candidates are
identified, the Company will be unable to estimate the costs associated with the
acquistion of any particular center.
The Company also intends to pursue a strategy of aggressive growth and plans
to deliver managed healthcare services through the establishment of a commercial
health maintenance organization
24
<PAGE>
initially serving Brevard county. The Company believes that it is positioned to
capitalize on low HMO penetration rates in this and other potential markets.
The Company's objective is to establish relationships with qualified
physicians, hospitals and other healthcare providers who are willing to provide
medical services to members of managed care organizations at a reasonable cost.
The Company believes that these efforts will enable it to provide a variety of
low-cost managed healthcare products to attract individuals and small employer
groups willing to enroll in the Company's HMO and to otherwise determine the
viability and potential of its proposed HMO operations. The Company believes
that, if it is successful in meeting this objective, its primary care physician
network will be a significant competitive factor in the marketing of managed
healthcare products.
As part of the Company's long-term strategy, the Company intends to expand
its target market to include additional counties in central and northern
Florida. The Company will also seek to establish an HMO to serve the Medicare
eligible population in its target markets and to convert enrollees under its
agreement with the HFCA to members of such HMO.
The Company's strategy and preliminary and future expansion plans may be
subject to change as a result of numerous factors, including progress or delays
in the Company's expansion efforts, changes in market conditions, new or
different opportunities which may become available to the Company in the future
and competitive conditions. There can be no assurance that the Company will be
able to successfully expand its operations.
PRIMARY HEALTHCARE OPERATIONS
The Company currently conducts its operations through seven primary care
centers in Brevard and Volusia counties. The Company's centers were designed by
National as free-standing offices suitable for small physician practices. To
accommodate proposed expansion, the Company intends to use a portion of the
proceeds of this offering to relocate its existing primary care centers to
larger facilities. The Company is currently engaged in identifying suitable
sites for its primary care operations in Brevard and Volusia counties. See
"Company Centers."
The Company's primary care centers are equipped with electrocardiograms,
physical therapy, pulmonary, audiometry, glaucoma screening and basic
radiological equipment necessary for the diagnosis and treatment of most chronic
and acute illnesses. The Company believes that its existing equipment is
satisfactory for its current operations. In connection with its proposed
expansion, the Company expects to purchase or lease additional medical equipment
for use in its operations.
The Company currently employs eleven board certified or board eligible
primary care physicians. These family practitioners, pediatricians and general
internists are responsible for providing and coordinating healthcare services to
patients and are required to maintain local hospital admitting privileges in
order to provide continuity of medical care. The Company's physicians provide
medical services in accordance with quality assurance standards established by
the American Medical Association and are continually monitored in accordance
with the Company's quality improvement programs. The Company also employs one
family nurse practitioner and one physician's assistant in its primary care
operations.
The Company has entered into a one-year employment agreement with each of
its physicians and other practitioners which is automatically renewable, subject
to early termination upon three months' prior written notice. The agreements
require physicians to devote their full time to the Company's business, to
obtain and maintain professional malpractice insurance and licenses and include
provisions which prohibit the employee from competing and soliciting and from
disclosing proprietary information. The agreements also provide for guaranteed
annual salaries plus incentive performance bonuses.
25
<PAGE>
In addition, the Company has arrangements with approximately twelve
physicians specializing in various medical practices, such as cardiology,
gastroenterology, podiatry, urology, ear, nose and throat and general and
vascular surgery, to complement the Company's primary care operations. These
arrangements permit the Company to provide physician consultations both at the
Company's offices and at the physician's office, as well as acute care in the
hospital for advanced diagnostic testing and surgery. These physicians are
available to provide services as required and are paid primarily on an hourly
basis.
The Company also arranges for clinical laboratory services pursuant to an
agreement with SmithKline Beecham Clinical Laboratories. The Company pays
SmithKline a fixed annual fee of approximately $70,500 to provide these
services.
REVENUE SOURCES AND REIMBURSEMENT
The Company currently offers healthcare services on a contractual and
fee-for-service basis. The following table sets forth for the periods indicated
the approximate revenues and percentages of revenues derived from the Company's
various revenue sources:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
JULY 31, JANUARY 31,
------------------------------------------ ------------------------------------------
1994 1995 1995 1996
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HCFA................. $1,592,056 41.0% $1,728,918 33.7% $ 831,500 34.1% $ 933,056 38.2%
HMOs................. 679,149 17.5 1,573,394 30.7 685,811 28.1 812,359 33.2
Fee-For-Service...... 1,436,905 37.0 1,649,268 32.2 824,878 33.9 631,681 25.8
Prepaid Health
Clinic............... 174,836 4.5 175,992 3.4 94,884 3.9 69,505 2.8
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total........... $3,882,946 100.0% $5,127,572 100.0% $2,437,073 100.0% $2,446,601 100.0%
---------- ----- ---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- ----- ---------- -----
</TABLE>
HCFA Contract. The Company has a prepaid cost reimbursement contract with
HCFA, pursuant to which the Company provides prescribed primary care services to
Medicare beneficiaries who enrolled directly with the Company prior to January
1, 1996. The Company currently provides medical services to approximately 3,175
Medicare enrollees through its five primary care centers in Brevard county.
Medicare enrollees pay a nominal annual enrollment fee without monthly premiums,
deductibles or copayments for medical services. The Company may bill Medicare
patients for services not covered by the Company's agreement with HCFA.
Pursuant to the terms of the agreement with HCFA, the Company is paid a
monthly premium in advance for each Medicare beneficiary enrolled by the
Company. Payments under the agreement are based on costs incurred in connection
with medical services and are subject to year-end adjustments. The Company is
subject to governmental audit to ensure the basis of medical costs incurred. To
date, no adjustments have been made under the HCFA contract and the Company has
never been subject to audit.
The Company's agreement with HCFA is automatically renewable on a yearly
basis unless either party elects not to renew. HCFA may terminate the agreement
at any time in the event that the Company fails to perform its obligations under
the agreement or fails to comply with applicable laws and regulations or
undergoes a change of ownership. HCFA may audit the Company to determine the
quality of medical care and compliance by the Company under the terms of the
agreement and applicable law.
Pursuant to recent amendments to the Social Security Act, effective January
1, 1996, the Company is prohibited from enrolling Medicare beneficiaries who are
not members of employer groups or unions under its agreement with HCFA until it
establishes Medicare HMO operations. Such limitation may prevent the Company
from enrolling certain new Medicare beneficiaries and increasing revenues under
its contract with the HCFA in the foreseeable future.
26
<PAGE>
Agreements with Health Maintenance Organizations. The Company also has
provider agreements with Humana Health Care Plans, United Healthcare Corporation
and Blue Cross Blue Shied of Florida, pursuant to which the Company provides
primary care services for approximately 12,000 HMO enrollees. Under such
agreements, the Company generally receives a fixed amount, or "capitated" fee,
for each participating enrollee per month, regardless of utilization. Under
certain circumstances, the Company is entitled to collect coinsurance
obligations and deductibles from HMO enrollees, and is entitled to bill
enrollees for medical services not provided by contract. Agreements with HMOs
are generally short-term and contain short-term cancellation provisions. The
Company's agreement with Humana Health Care Plans acknowledges that the Company
may continue to provide medical services to Humana Health Care Plans members
notwithstanding the Company's intention to establish HMO operations.
Fee-for-Service. The Company offers healthcare services on a fee-for-service
basis, pursuant to which the Company receives payments for medical services from
individuals, private insurance companies, workers' compensation programs,
municipalities, other self-insured groups and government assistance programs
such as Medicare and Medicaid.
Medicare is a federally funded and administered program that provides
healthcare payments for most persons who are 65 years of age or older and
entitled to retirement benefits. Medicare payments are based on a standard fee
schedule used by HCFA. For the year ended July 31, 1995, the Company provided
medical services on a fee-for-service basis to approximately 10,000 Medicare
beneficiaries through its seven primary care facilities, which accounted for
approximately 7.0% of the Company's revenues.
Medicaid is funded jointly by the federal and state governments and covers
indigent patients. The Company has entered into an agreement with the Florida
Agency for Health Care Administration ("AHCA") to provide primary care services
to Medicaid patients. The Company must accept reimbursement from Medicaid as
payment in full for medical services provided. For the year ended July 31, 1995,
the Company provided medical services to approximately 1,700 Medicaid patients
through its seven primary care centers which are qualified under state law to
receive reimbursement under federal and state Medicaid guidelines. During such
year, Medicaid services accounted for approximately 2.1% of the Company's
revenues.
The balance of the Company's fee-for-service revenues are derived from
non-governmental private insurers, private payors and co-payments from insured
beneficiaries.
Prepaid Health Clinic. The Company also provides medical services to
subscribers pursuant to a prepaid health clinic license issued by the DOI. This
license permits the Company to provide certain primary healthcare coverage to
individuals for a fixed monthly premium. For the year ended July 31, 1995,
through its five centers in Brevard County, the Company had approximately 1,300
subscribers participating in the prepaid health clinic operations. The Company
has filed an application with the Accreditation Association for Ambulatory
Healthcare ("AAAHC") for accreditation of its prepaid health clinic operations.
Although the Company has received a consultative survey by the AAAHC and was
found to be in substantial compliance with such survey, and also received a
favorable external quality assurance assessment, there can be no assurance that
such accreditation will be obtained. Failure to receive such accreditation would
result in the suspension of the Company's prepaid health clinic operations and
the loss of the revenues derived therefrom. During the year ended July 31, 1995,
revenues from the Company's prepaid health clinic operations accounted for
approximately 3.4% of the Company's revenues.
PROPOSED HMO OPERATIONS
During the twelve months following the consummation of this offering, the
Company intends to shift its focus from the provision of primary care services
under agreements with third party payors to
27
<PAGE>
the establishment of commercial HMO operations in Brevard county. The process of
obtaining government approvals and establishing HMO operations can be lengthy,
expensive and uncertain.
Licensing and Accreditation. Prior to commencing HMO operations, the Company
will be required to obtain a Certificate of Authority from the DOI to operate a
commercial HMO in Brevard county. In order to obtain a Certificate of Authority,
the Company must first obtain a Health Care Provider Certificate ("HCP
Certificate") from the AHCA which certifies the Company's ability to provide a
range of quality healthcare services consistent with prevailing professional
standards and statutory requirements. The Company has obtained a HCP Certificate
in connection with its prepaid health clinic operations and expects to seek
approval from the AHCA to confirm that such certificate is sufficient to cover
its proposed HMO operations. The Company does not expect to seek such approval,
however, until it establishes an affiliation with a hospital serving Brevard
county. The Company is currently engaged in discussions with hospitals in
central Florida in connection with potential affiliation arrangements. There can
be no assurance that the Company will enter into a satisfactory affiliation
arrangement with a hospital or obtain an HCP Certificate covering its proposed
HMO operations.
In connection with the application process, the Company will be required to
submit an operating plan which describes all aspects of its proposed HMO
operations, including its provider relationships and agreements, subscriber
contracts, grievance procedures, premium rates and managed healthcare products
it proposes to offer, as well as marketing strategies and proposed advertising,
which must be actuarially sound and supported by an independent financial
feasibility study. Such study must include enrollment assumptions and contain an
opinion of an actuary as to the reasonableness of such assumptions and their
application and the adequacy and fairness of premium rates proposed to be
charged pursuant to subscriber contracts. The Company must also submit evidence
that it has obtained sufficient general liability and medical malpractice
insurance as well as a blanket fidelity bond in the amount of $100,000, and must
submit audited financial statements and other records requested by the DOI.
The Company is engaged in all activities required for the preparation of its
application and expects to file an application with the DOI by September 1996.
The application process could range from 60 to 180 days. In the event that the
Company is successful in entering into a satisfactory affiliation arrangement
with a hospital and obtains a Certificate of Authority, the Company currently
anticipates that it will commence HMO operations and enroll members by early
1997.
In addition, state law requires accreditation of HMO operations by either
the National Committee for Quality Assurance, the Joint Commission for
Accreditation of Health Care Organizations or the AAAHC within one year
following the issuance of a Certificate of Authority. The accreditation process
will require the Company to demonstrate that it has established and effectively
implemented all of the policies and procedures necessary for the proper
management and oversight of its HMO operations and its healthcare providers. The
Company has filed an application with the AAAHC for accreditation of its
proposed HMO operations. Although the Company has received a consultative survey
by the AAAHC and was found to be in substantial compliance with such survey, and
also received a favorable external quality assurance assessment, there can be no
assurance that such accreditation will be obtained. Failure to obtain
accreditation for the Company's proposed HMO operations within one year of the
issuance of a Certificate of Authority could result in suspension or revocation
of the Certificate of Authority, which would have a material adverse effect on
the Company.
Proposed Provider Arrangements. The Company intends to arrange for the
delivery of healthcare services to enrollees by contracting with physicians,
either directly or through independent practice associations, and with hospitals
and other health care providers. It is currently anticipated that physician
providers contracting directly with the Company on a nonexclusive basis will be
paid on a fixed-fee or discounted fee-for-service basis, where the Company will
be able to negotiate a lower price for services because of the volume of
business it offers. It is also anticipated that physician providers will
28
<PAGE>
be paid through capitation arrangements pursuant to which the group is paid a
fixed amount per enrollee or a fixed percentage of premiums, regardless of
utilization. The Company intends to actively pursue capitation arrangements with
physician groups. The Company will also seek to contract with hospitals and
other health care providers, including pharmacies, laboratories, and
radiologists. Reimbursement rates are expected to be negotiated annually based
on several payment methodologies, including per diem (where the reimbursement
rate varies and is based on a per day of service charge for specified types of
care), capitation, discounted fee-for-service or per-case basis.
There is increasing competition from HMOs and other health care plans for
physicians and other health care providers. There can be no assurance that the
Company will be successful in maintaining existing relationships or attracting
and retaining necessary health care providers.
Proposed Marketing Activities. The Company anticipates that initial
commercial marketing efforts targeting individual enrollees will be undertaken
by a marketing coordinator and licensed sales representatives. Marketing efforts
targeting employer groups are expected to be made through regional sales
managers employed by the Company who will be responsible for coordinating the
efforts of sales representatives. Such efforts are intended to be supported by
market research to identify prospects and to establish specific enrollment goals
by territory, employer groups and sales representatives. These marketing efforts
are also expected to be supported by print advertising in local newspapers. The
Company does not currently engage any marketing personnel in its operations and
has limited experience and limited financial and other resources to undertake
extensive marketing activities. There can be no assurance that the Company will
be able to hire and retain necessary marketing personnel or that any marketing
efforts undertaken will be successful.
Cost Control Strategies. The Company's profitability is and will continue to
be dependent on the Company's ability to control healthcare and other costs. The
Company will endeavor to manage and control costs by control of utilization of
healthcare services and by capitation contracts and negotiation of favorable
rates with healthcare providers. The Company expects that HMO-covered hospital
care will be subject to the prior approval of the primary care physician and
review by the Company and attending physicians of the necessity of the
enrollee's continued hospitalization. Utilization review procedures are expected
to be performed to evaluate the cost, quality and utilization of care. The
Company also intends to control health care costs by seeking to negotiate
favorable terms with respect to physician payment arrangements, per diem
hospitalization rates and volume discounts for services or products. The Company
believes that its primary care physicians will play a significant role in cost
control by coordinating the provision of comprehensive health care services and
managing the use of specialists and hospitals. There can be no assurance that
the Company will be able to successfully control healthcare and other costs.
Insurance. The Company maintains general liability and professional
liability, or malpractice, insurance coverage in amounts that the Company
believes are adequate. The Company also requires its physicians to maintain
malpractice insurance. The Company will seek to shift part of the risk of
catastrophic losses by maintaining reinsurance coverage for hospital costs. The
Company believes a reinsurance policy limits at a reasonable cost the risk of
catastrophic losses. There can be no assurance that adequate levels of
reinsurance coverage will be available to the Company on commercially reasonable
terms.
Quality Assurance. The Company currently has an active program to evaluate
the quality and appropriateness of medical care provided. These procedures
involve reviews of the tests, types of treatment and procedures performed by
physicians for specific diagnoses. In considering whether to contract with a
physician, the Company intends to conduct an evaluation of the physician's
professional competence, including licensure, board certification, residency
program completion, malpractice claims history and ability to accommodate
enrollment demands. The Company will also seek to implement a
29
<PAGE>
customer services department that works directly with enrollees to respond to
their concerns, and develop enrollee grievance procedures to investigate and
resolve any complaints.
Management Information Systems. The Company maintains management information
systems and intends to use a portion of the proceeds of this offering to develop
and implement additional management information systems to help manage
operations and to provide information with respect to patient processing
efficiencies, physician referral patterns, patient and payor mix and quality
control. These systems are expected to enable the Company to coordinate and
oversee many aspects of its centers' operations and allow physicians to develop
working plans for improving profit margins by reviewing results and trends in
center operations.
There can be no assurance that the Company will be able to successfully
establish HMO operations or that any such operations will result in increased
revenues or profitable operations.
COMPETITION
The managed healthcare industry is highly competitive. The Company currently
competes with other providers of primary healthcare services, including primary
care centers, regional hospitals and physician practice groups. Many of such
competitors offer a broader range of primary healthcare services than the
Company and have extensive relationships with group specialty practices. The
Company currently competes primarily on the basis of reputation, quality of care
and physician support.
The managed healthcare industry has experienced significant changes in
recent years, primarily due to rising healthcare costs. Employer groups have
demanded a variety of health care options, such as traditional indemnity
insurance, HMOs, point of service plans and preferred provider options, offered
either through third parties or by self-funding. The Company's proposed HMO
operations will compete with providers of all of these products, including
CAC/United Healthcare Plans of Florida Inc., Humana Health Care Plans, Blue
Cross/Blue Shield of Florida and PCA Health Plan, most of which have
substantially greater financial, management, personnel and other resources than
the Company. The Company also will be required to respond to various competitive
factors affecting the healthcare industry generally, including new medical
technologies which may be introduced, general trends relating to demand for
healthcare services, regulatory, economic and political factors, changes in
patient demographics and competitive pricing strategies by health maintenance
organizations and other healthcare plans. The Company will be subject to
significant competition in any new geographic areas it may enter, with respect
to any products it may offer and with respect to any commercial and governmental
health care programs developed. There can be no assurance that the Company will
be able to compete successfully.
INSURANCE
The Company and its physicians may be exposed to potential professional
liability claims by patients as a result of the negligence or other acts of
physicians. Claims of this nature, if successful, could result in substantial
damage awards to claimants which may exceed the limits of any applicable
insurance coverage. The Company could become liable for the negligent acts of
physicians, as well as negligence in recruiting and selecting physicians. The
Company currently maintains an occurrence malpractice liability insurance policy
with limits of $3,000,000 in the aggregate and $1,000,000 per occurrence and
requires physicians to maintain malpractice liability insurance in amounts which
it deems adequate for the types of medical services provided. There can be no
assurance, however, that such insurance will be sufficient to cover potential
claims or that adequate levels of coverage will be available in the future at a
reasonable cost. In the event of a partially or completely uninsured successful
claim against the Company, the Company's business and financial condition would
be materially adversely affected.
30
<PAGE>
GOVERNMENT REGULATION
The health care industry and physician medical practices are subject to
extensive, stringent and frequently changing federal, state and local
regulation, which is interpreted by regulatory authorities with broad
discretion. The extensive regulatory framework applicable to physicians'
practices imposes significant compliance burdens and risks on the Company.
Various federal and state laws regulate the relationship between providers
of healthcare services and physicians, including employment or service
contracts, and investment relationships. These laws include the fraud and abuse
provisions of the Medicare and Medicaid and similar state statutes ("fraud and
abuse laws"), which prohibit the payment, receipt, solicitation or offering of
any direct or indirect remuneration intended to induce the referral of Medicare
or Medicaid patients or for the ordering or providing of Medicare or Medicaid
covered services, items or equipment. Violations of these provisions may result
in civil and criminal penalties and/or exclusion from participation in the
Medicare and Medicaid programs and from state programs containing similar
provisions relating to referrals of privately insured patients. These laws have
been interpreted broadly to include the payment of anything of value to
influence the referral of Medicare or Medicaid business. These regulations set
forth certain "safe harbors," representing business relationships and payments
that can safely be undertaken without violation of the fraud and abuse laws.
The "Stark" amendments of the Social Security Act provide, with certain
exceptions, that if a physician has a "financial interest" in an entity (which
may consist of either an ownership interest or a compensation arrangement), the
physician is prohibited from making a referral to the entity for the provision
of certain "designated health services" for which payment may be made by
Medicare or Medicaid. In April 1992, the State of Florida adopted the Patient
Self-Referral Act of 1992, which prohibits referrals for certain designated
health services by a health care provider to a facility in which such provider
has an ownership interest. This law prohibits any claim for payment for services
furnished pursuant to a prohibited referral, and requires a refund if an
unlawful payment was made. Florida legislation also imposes, with certain
exceptions, a cap on the fees charged by all providers of designated health
services.
In addition, state laws, although varied, generally prohibit a commercial
enterprise, such as the Company, from engaging in the practice of medicine or
otherwise exercising control or influencing the medical judgments or decisions
of physicians, and prohibit physicians from "fee-splitting" with non-physicians.
Florida law does not currently contain such a prohibition.
The federal government and the State of Florida have each enacted statutes
extensively regulating the activities of health maintenance organizations that
are applicable to the Company's proposed operations. Among the areas regulated
are the scope of benefits required to be made available to members, the manner
in which member rates are structured, procedures for review of quality
assurance, enrollment requirements, composition of policy making bodies to
assure member representation, the interrelationship between health maintenance
organizations and their healthcare providers, licensure and financial condition.
Under federal regulations, services to members must be provided substantially on
a fixed prepaid basis, without regard to the actual degree of utilization of
services. Although premiums established by a health maintenance organization may
vary from account to account through composite rate factors and special
treatment of certain broad classes of enrollees, traditional experience rating
of accounts (i.e., setting premiums for a group account based on that group's
part use of healthcare services) is not permitted under federal regulations. In
Florida, health maintenance organizations must also comply with certain other
provisions of state health and insurance laws, including the licensing of
salespersons and maintenance of a minimum statutory net worth requirement
(liquid tangible assets less liabilities) of $500,000. The Company must file
periodic reports with, and will be subject to periodic review by, the federal
and state licensing authorities which regulate the Company.
31
<PAGE>
The Company currently holds a Certificate of Authority issued by the Florida
Department of Insurance to provide prepaid health clinic services. The Company
also holds a Health Care Provider Certificate issued by the Florida Agency for
Health Care Administration in connection with its prepaid health clinic
operations. Most states, including Florida, require a health maintenance
organization to be licensed prior to commencing operations.
The Company believes that it is in compliance with all federal, state and
local laws, rules and regulations applicable to its current operations and has
obtained all licenses necessary to conduct its business. Amendments to existing
statutes and regulations, adoption of new statutes and regulations and the
Company's expansion into new operations and jurisdictions could require the
Company to obtain additional licenses, modify its arrangements with physicians
or otherwise alter methods of operations at costs that could be substantial.
There can be no assurance that the Company will be able, for financial or other
reasons, to comply with applicable laws and regulations and licensing
requirements. Failure to comply with applicable laws and regulations and
licensing requirements would subject the Company and its physicians to civil
remedies, including significant fines, penalties, injunctions and expulsion from
participation in Medicare and Medicaid programs, as well as possible criminal
sanctions, which would have a material adverse effect on the Company.
Several proposals have recently been made by federal and state government
officials that may lead to substantial healthcare reforms, including the
implementation of a government-directed national healthcare system and stringent
healthcare cost-containment measures. Adoption of such a system or cost controls
could further limit reimbursement for medical services. Past congressional
actions have resulted in changes in Medicare and Medicaid reimbursement rates,
and the Company believes that it is likely that Congress will, over the next
several years, substantially limit the growth of Medicare and Medicaid
expenditures. Significant uncertainty exists as to the status of reimbursement
and there can be no assurance that healthcare insurers and other third-party
payors will continue to cover certain medical services or reimburse such
services at current levels. Any significant reduction of healthcare insurance
coverage for medical services could have a material adverse effect on the
Company's business and prospects.
EMPLOYEES
As of April 30, 1996, the Company employed 83 persons, including four
executive officers, eleven physicians, one nurse practitioner, one physician's
assistant, twenty one medical assistants and forty five persons engaged in
administrative and clerical capacities. None of the Company's employees are
represented by a union. The Company believes that its relations with its
employees are good.
COMPANY CENTERS
The Company occupies its principal executive offices and primary care
centers under third-party lease agreements. The following table sets forth the
location, approximate square footage, approximate annual rent, use of each
location and expiration date of each lease:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE LEASE
LOCATION SQUARE FEET RENT USE EXPIRATION DATE
- ----------------------- ----------- ----------- ----------------------- -----------------
<S> <C> <C> <C> <C>
Deltona, FL............ 2,500 $44,000 Primary Care Center April 30, 1997
South Daytona, FL...... 2,500 26,000 Primary Care Center February 28, 1997
Melbourne, FL.......... 1,600 14,000 Executive Office July 31, 1996
Melbourne, FL.......... 2,900 50,000 Primary Care Center July 31, 1997
Palm Bay, FL........... 2,800 40,000 Primary Care Center December 31, 1996
Merritt Island, FL..... 2,680 27,000 Primary Care Center August 31, 1996
Satellite Beach, FL.... 2,580 45,000 Primary Care Center July 31, 1997
Titusville, FL......... 3,200 58,000 Primary Care Center June 30, 1998
</TABLE>
32
<PAGE>
Although the Company believes that such centers are adequate for its
existing operations, the Company regularly evaluates the adequacy of each
primary care center. Each lease which expires in 1996 contains a renewal
provision giving the Company the option to renew the subject lease. The Company
intends to use a portion of the proceeds of this offering to relocate several of
its existing primary care centers to larger facilities (approximately 4,000
square feet per facility). The Company expects to renew, or find other suitable
locations for, all leases which will expire during 1996.
LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company is a
party or to which any of its properties is subject.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- -------------------------------------------------------
<S> <C> <C>
Warren D. Stowell............ 43 President, Chief Executive Officer and Chairman of the
Board of Directors
David Jesse.................. 46 Executive Vice President, Chief Operating Officer and
Director
Robert P. Heller............. 34 Vice President of Finance, Chief Financial Officer and
Secretary
Michael Landau............... 37 Vice President of Operations
Frederick H. Fialkow......... 64 Director
Steven Fialkow............... 36 Director
Bernard Levine, M.D.......... 67 Director
Dean L. Sloane............... 50 Director
Richard Seidelman, M.D....... 38 Director
</TABLE>
Warren D. Stowell has been President and Chief Executive Officer of the
Company since December 1995, Chairman of the Board of Directors of the Company
since March 1996 and President and Chief Executive Officer of each of Brevard
and First Health since November 1, 1995. From July 1993 through November 1995,
Mr. Stowell served as Chief Operating Officer, Insurance Division, for Ramsay
HMO, Inc., an HMO operating in the State of Florida. From June 1991 until July
1993 Mr. Stowell was President and Chief Executive Officer of Care Florida, Inc.
From May 1988 to May 1991, Mr. Stowell served as President and Chief Executive
Officer of H.I.P. Network of Florida.
David Jesse has been Executive Vice President and a director of the Company
since January 1996. Mr. Jesse has been a principal of Masters & Jesse Co., LPA,
a legal professional association, since March 1993. From May 1992 to February
1993, he was Vice President and General Counsel of CareFlorida, Inc., a health
maintenance organization based in Miami, Florida. From 1988 to 1992, Mr. Jesse
was an associate with the law firm of Climaco, Climaco, Seminiatore, Lefkowitz &
Garofoli in its health care law department. Prior thereto, from 1984 to 1987,
Mr. Jesse was the Vice President and General Counsel of HealthAmerica
Corporation of Ohio, a health maintenance organization based in Cleveland, Ohio.
Robert P. Heller has been Vice President of Finance, Chief Financial Officer
and Secretary of the Company since December 1995. Mr. Heller has served as Vice
President of Finance and Chief Financial Officer of National since March 1989.
Prior thereto, from January 1985 to March 1989, Mr. Heller was employed by
Richard A. Eisner & Company, LLP, the Company's independent auditors. Mr. Heller
is a certified public accountant.
Michael Landau has been Vice President of Operations of the Company since
December 1995. Mr. Landau has been employed by Brevard since January 1988 and
has served as Vice President of Operations of Brevard since January 1989 and as
Vice President of Operations of First Health since May 1994. Mr. Landau is the
stepson of Frederick H. Fialkow.
Frederick H. Fialkow has been a director of the Company since December 1995.
Mr. Fialkow has been Chairman of the Board, President and Chief Executive
Officer of National since February 1988. Mr. Fialkow is the father of Steven
Fialkow and the stepfather of Michael Landau.
Steven Fialkow has been a director of the Company since December 1995. Mr.
Fialkow has served as Secretary of National since September 1995, as Executive
Vice President of New England Home Care, Inc. since August 1995 and as a
director of National since December 1991. Prior thereto he
34
<PAGE>
served as Executive Vice President of Health Acquisition Corp. from May 1994 to
August 1995. He has served as President of National HMO (New York), Inc. from
April 1989 to April 1994 and Vice President of National HMO (New York) Inc. from
August 1984 to March 1989. Steven Fialkow is a certified public accountant. He
is the son of Frederick H. Fialkow.
Bernard Levine, M.D. has been a director of the Company since December 1995.
Dr. Levine is a private investor, primarily in the healthcare industry. He also
is a Professor of Internal Medicine at New York University School of Medicine
with a sub-specialty in allergy and immunology. Dr. Levine also currently is
serving as a director of National and Cypros Pharmaceutical Corp.
Dean L. Sloane has been a director of the Company since February 1996. Mr.
Sloane has served as Chairman of the Board, President, Chief Executive Officer
and a director of Community Medical Transport, Inc. since December 1988. From
1973 to 1988, Mr. Sloane served as Chief Executive Officer of Prime Medical
Services Inc. (formerly known as C.P. Rehab. Corp.), a public specialty medical
management service company. Mr. Sloane co-founded and served as Chairman of the
Board of National from 1983 to 1986. Mr. Sloane also served as a director of
EPIC Health Group, Inc., a public mail order pharmaceutical company, from 1984
to 1986.
Richard Seidelman, M.D. has been a director of the Company since February
1996. Since June 1989, Dr. Seidelman has been a pulmonary care physician in
private practice in South Florida. Dr. Seidelman is a graduate of the University
of Pennsylvania and received his M.D. degree from Hahnemann University. He
completed his residency in internal medicine at Georgetown University/VA Medical
Center and his fellowship in pulmonary medicine at George Washington University.
All directors of the Company hold office until the next annual meeting of
the stockholders and until their successors have been elected and qualified. The
officers of the Company are elected by the Board of Directors at the first
meeting after each annual meeting of the Company's stockholders, and hold office
until their death, until they resign or until they have been removed from
office.
The Company intends to obtain "key-man" insurance covering the life of
Warren D. Stowell in the amount of $1,000,000 prior to the consummation of this
Offering. The Company will be the sole beneficiary under this policy. The
Company also intends to obtain directors and officers liability insurance in the
amount of $1,000,000.
EXECUTIVE COMPENSATION
Gerald Kline, the former president and chief executive officer of Brevard
and First Health, received compensation of $98,280 during fiscal 1995 for
services rendered in all capacities to Brevard and First Health. No executive
officer of the Company, Brevard or First Health received compensation in excess
of $100,000 during fiscal 1995 in connection with services rendered to or on
behalf of the Company. Mr. Kline resigned as the President of Brevard and First
Health in October 1995.
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive compensation for
serving as directors. Each director who is not an employee of the Company will
receive a fee of $2,500 for attendance at each Board of Directors meeting. All
directors will be reimbursed for their reasonable out-of-pocket expenses
incurred in connection with attending meetings of the Board of Directors and for
other expenses incurred in their capacity as directors of the Company.
The Company's 1996 Stock Option Plan provides that each current non-employee
director of the Company will be granted, on the date of this Prospectus,
nonqualified stock options to purchase 7,500 shares of Common Stock exercisable
at a price equal to the initial public offering price. Thereafter, on the date
that any other individual first becomes a non-employee director of the Company,
each such
35
<PAGE>
director will be granted nonqualified stock options to purchase 7,500 shares of
Common Stock exercisable at a price equal to the fair market value of the Common
Stock on the date of grant. See "Stock Option Plan."
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement, dated as of November
1, 1995, with Warren D. Stowell pursuant to which he is employed full-time as
the Company's President and Chief Executive Officer. The agreement expires on
the second anniversary of the date of this Prospectus, provided that the
agreement may be renewed for successive one-year periods unless, within thirty
days of the expiration of the agreement, either party notifies the other of its
election not to renew the agreement. The agreement also provides that for so
long as Mr. Stowell remains employed by the Company, he shall serve as a member
of the Company's Board of Directors and shall have the right to designate one
additional member to the Board of Directors. David Jesse is Mr. Stowell's
current designee. The agreement provides for a salary of $125,000 per annum,
payable commencing on the date of this Prospectus, increasing to $150,000 per
annum on the first anniversary of the date of this Prospectus. The agreement
also provides for such bonuses as the Board of Directors may determine based on
performance and other criteria. Mr. Stowell's employment agreement contains a
confidentiality provision and a covenant not to compete with the Company for a
period of six months following termination of employment.
In addition, the Company has granted to Mr. Stowell options to purchase an
aggregate of 250,000 shares of Common Stock at an exercise price equal to $.25
per share. The options are currently exercisable as to one-fourth of the shares
covered thereby and shall be exercisable as to an additional one-fourth of the
shares covered thereby on January 28, 1997, 1998 and 1999, respectively,
provided that Mr. Stowell is employed by the Company on each such date.
Commencing two years after the date of this Prospectus, the Company has agreed
to use its best efforts to file a registration statement under the Securities
Act to register the shares of Common Stock issuable to Mr. Stowell pursuant to
the exercise of such options.
The Company has entered into an employment agreement, dated as of January
10, 1996, with David Jesse pursuant to which he is employed full-time as the
Company's Executive Vice President and Chief Operating Officer. The agreement
expires on the second anniversary of the date of this Prospectus, provided that
the agreement may be renewed for successive one-year periods unless, within
thirty days of the expiration of the agreement, either party notifies the other
of its election not to renew the agreement. The agreement provides for a salary
of (i) an aggregate amount of $25,000 with respect to services performed through
the date of this Prospectus and (ii) $100,000 per annum during the first year
following the date of this Prospectus, increasing to $135,000 per annum on the
first anniversary of the date of this Prospectus. The agreement also provides
for such bonuses as the Board of Directors may determine based on performance
and other criteria. Mr. Jesse's employment agreement contains a confidentiality
provision and a covenant not to compete with the Company for a period of six
months following termination of employment.
In addition, the Company has granted to Mr. Jesse options to purchase an
aggregate of 75,000 shares of Common Stock. Options to purchase 25,000 shares of
Common Stock, at an exercise price of $.25 per share, currently are exercisable.
The remaining 50,000 options, which have been granted pursuant to the Company's
1996 Stock Option Plan and which have an exercise price per share equal to the
initial public offering price, shall be exercisable as to one-fourth of the
shares covered thereby on each of the first four anniversaries of the date of
this Prospectus, provided that Mr. Jesse is employed by the Company on such
dates. Commencing two years after the date of this Prospectus, the Company has
agreed to use its best efforts to file a registration statement under the
Securities Act to register the shares of Common Stock issuable to Mr. Jesse
pursuant to the exercise of such options.
36
<PAGE>
The Company has entered into an employment agreement, effective as of the
date of this Prospectus, with Michael Landau pursuant to which he is employed
full-time as the Company's Vice President. The agreement expires on the first
anniversary of the date of this Prospectus, provided that the agreement may be
renewed for successive one-year periods unless, within thirty days of the
expiration of the agreement, either party notifies the other of its election not
to renew the agreement. The agreement provides for an annual salary of $75,000,
payable commencing on the date of this Prospectus. Mr. Landau's employment
agreement contains a confidentiality provision and a covenant not to compete
with the Company for a period of six months following termination of employment.
In addition, the Company has granted to Mr. Landau options to purchase an
aggregate of 25,000 shares of Common Stock. The options, which have been granted
pursuant to the Company's 1996 Stock Option Plan and which have an exercise
price per share equal to the initial public offering price, shall be exercisable
as to one-fourth of the shares covered thereby on each of the first four
anniversaries of the date of this Prospectus, provided that Mr. Landau is
employed by the Company on such dates.
STOCK OPTION PLAN
In February 1996, the Board of Directors of the Company adopted and
National, the Company's sole stockholder at that time, approved the Company's
1996 Stock Option Plan (the "Option Plan") pursuant to which 200,000 shares of
Common Stock currently are reserved for issuance upon the exercise of options
designated as either (i) options intended to constitute incentive stock options
("ISOs") under the Internal Revenue Code of 1986, as amended (the "Code"), or
(ii) nonqualified options. ISOs may be granted under the Option Plan to
employees and officers of the Company. Non-qualified options may be granted to
consultants, directors (whether or not they are employees), employees or
officers of the Company.
The Option Plan is intended to qualify under Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and will be administered
by a committee of the Board of Directors, provided that the full Board of
Directors currently is administering the Option Plan. The Board of Directors or
the committee, as the case may be, within the limitations of the Option Plan,
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option, the exercise price per share
and the manner of exercise and the time, manner and form of payment upon
exercise of an option. Unless sooner terminated, the Option Plan will expire on
February 13, 2006.
ISOs granted under the Option Plan may not be granted at a price less than
the fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company) may not exceed
$100,000 and options to purchase no more than 50,000 shares may be granted under
the Option Plan to any single optionee in any calendar year. Non-qualified
options granted under the Option Plan may not be granted at a price less than
90% of the fair market value of the Common Stock on the date of grant. Options
granted under the Option Plan will expire not more than ten years from the date
of grant (five years in the case of ISOs granted to persons holding 10% or more
of the voting stock of the Company). All options granted under the Option Plan
are not transferable during an optionee's lifetime but are transferable at death
by will or by the laws of descent and distribution. In general, upon termination
of employment of an optionee, all options granted to such person which are not
exercisable on the date of such termination immediately terminate, and any
options that are exercisable terminate 90 days following termination of
employment.
The Option Plan contains anti-dilution provisions authorizing appropriate
adjustments in certain circumstances. Shares of Common Stock subject to options
which expire without being exercised or
37
<PAGE>
which are canceled as a result of cessation of employment are available for
further grants. No shares of Common Stock may be issued to any optionee until
the full exercise price has been paid. The Board of Directors or the committee,
as the case may be, may grant individual options under the Option Plan with more
stringent provisions than those specified in the Option Plan.
The Option Plan provides that each current non-employee director of the
Company will be granted, on the date of this Prospectus, nonqualified stock
options to purchase 7,500 shares of Common Stock exercisable at a price equal to
the initial public offering price. Thereafter, on the date that any other
individual first becomes a non-employee director of the Company, each such
director will automatically receive a one time grant of options to purchase
7,500 shares of Common Stock at an exercise price equal to the fair market value
of the Common Stock. Each non-employee director option expires five years from
the date of grant.
The Company has granted options to purchase an aggregate of 75,000 shares
under the Option Plan, exclusive of non-employee director options to purchase an
additional 37,500 shares granted as of the date of this Prospectus, none of
which options has been exercised.
The Company has agreed that for a period of one year from the date of this
Prospectus, the Company will not grant any options under the Option Plan without
the prior written consent of the Underwriters, which consent shall not be
unreasonably withheld.
38
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of the date of this
Prospectus and as adjusted to reflect the sale of the Common Stock offered
hereby, regarding beneficial ownership of the Company's Common Stock by: (i)
each director and executive officer of the Company, (ii) all directors and
executive officers as a group, and (iii) all persons known by the Company to be
the beneficial owner of more than 5% of the outstanding Common Stock. Unless
otherwise noted, all persons named in the table have sole voting and dispositive
power with respect to Common Stock beneficially owned.
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT AND NATURE OF OUTSTANDING
BENEFICIAL OWNERSHIP SHARES OWNED
-------------------- --------------------
BEFORE AFTER BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OFFERING OFFERING OFFERING OFFERING
- --------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
National Home Health Care Corp............... 900,000 900,000 100% 40.9%
700 White Plains Road
Scarsdale, NY 10583
Bernard Levine, M.D.......................... 7,500(2) 136,500(3) (7) 6.2
Frederick H. Fialkow......................... 7,500(2) 42,500(4) (7) 1.9
Warren D. Stowell............................ 62,500(2) 62,500(2) 6.5 2.8
David Jesse.................................. 25,000(2) 25,000(2) 2.7 1.1
Robert P. Heller............................. 0 1,000(5) (7) (7)
Dean Sloane.................................. 7,500(2) 7,500(2) (7) (7)
Steven Fialkow............................... 7,500(2) 7,500(2) (7) (7)
Richard Seidelman, M.D....................... 7,500(2) 12,500(6) (7) (7)
All directors and executive officers as a
group (8 persons).......................... 125,000(2) 295,000 )-(6) 12.2% 12.7%
</TABLE>
- ------------
(1) Other than National, the address of each of these persons is care of the
Company, 231 East New Haven Avenue, Melbourne, Florida 32901.
(2) Consists of shares of Common Stock issuable pursuant to immediately
exercisable stock options.
(3) Gives effect to the purchase of 129,000 shares of Common Stock by Dr. Levine
in this offering and includes 7,500 shares of Common Stock issuable pursuant
to immediately exercisable stock options.
(4) Gives effect to the purchase of 35,000 shares of Common Stock by Mr. Fialkow
in this offering and includes 7,500 shares of Common Stock issuable pursuant
to immediately exercisable stock options.
(5) Gives effect to the purchase of 1,000 shares of Common Stock by Mr. Heller
in this offering.
(6) Gives effect to the purchase of 5,000 shares of Common Stock by Dr.
Seidelman in this offering and includes 7,500 shares of Common Stock
issuable pursuant to immediately exercisable stock options.
(7) Less than 1%.
39
<PAGE>
CERTAIN TRANSACTIONS
On January 29, 1996, National made a capital contribution to the Company of
all of its shares of capital stock of Brevard and First Health, constituting all
of the issued and outstanding capital stock of each of Brevard and First Health.
Upon consummation of this offering, National will continue to own 40.9% of
the outstanding Common Stock of the Company (assuming no exercise of the
Underwriters' over-allotment option or outstanding options). Certain directors
of the Company are also officers, directors and/or principal stockholders of
National and, consequently, may be able, through National, to direct the
election of the Company's directors, effect significant corporate events and
generally direct the affairs of the Company. The Company has been dependent on
National for various administrative and financial support, including a $250,000
letter of credit obtained by National to satisfy statutory reserve requirements.
Following this offering, National will provide the Company with certain
administrative services during a transition period and the Company will not have
the benefit of National's financial, personnel and other resources in the
future. National has agreed not to cause the Company to make any distribution of
cash or other property to National following this offering (other than repayment
of advances of expenses of the Company in connection with this offering) and has
acknowledged that it has no intention to direct the day to day affairs of the
Company. The Company has also agreed not to distribute any cash or other
property to National or enter into any transactions with National or its
affiliates in the future unless such transaction is fair and reasonable to the
Company and is approved by a majority of the independent and disinterested
members of the Board of Directors and, to the extent deemed necessary or
appropriate by the Board of Directors, the Company will obtain a fairness
opinion and stockholder approval in connection with any such transaction.
All future transactions between the Company and its officers, directors
and beneficial owners of more than five percent of the outstanding Common
Stock will be on terms no less favorable to the Company than could be
obtained from non-affiliated third parties and will be approved by a
majority of the non-employee, disinterested directors of the Company.
The Company has granted to Warren D. Stowell (the President, Chief Executive
Officer and a director of the Company) and David Jesse (the Executive Vice
President, Chief Operating Officer and a director of the Company) options to
purchase 250,000 and 25,000 shares, respectively, of Common Stock at an exercise
price per share of $.25 in connection with their respective employment by the
Company. Mr. Stowell's options are currently exercisable as to one-fourth of the
shares covered thereby and shall be exercisable as to one-fourth of the shares
covered thereby on January 28, 1997, 1998 and 1999, respectively, provided that
Mr. Stowell is employed by the Company on each such date. Commencing two years
after the date of this Prospectus, the Company has agreed to use its best
efforts to file a registration statement under the Securities Act to register
the shares of Common Stock issuable to Mr. Stowell pursuant to the exercise of
such options.
The Company has agreed to use its best efforts to include 83,000 shares of
Common Stock held by National in a registration statement to be filed under the
Securities Act two years after the date of this Prospectus.
40
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 10,000,000 shares of Common Stock, par
value $.001 per share, and 1,000,000 shares of Preferred Stock, par value $.001
per share. As of the date of this Prospectus, the Company had 900,000 shares of
Common Stock outstanding held of record by National.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of preferred stock which may from time to time be outstanding, if any,
holders of Common Stock are entitled to receive dividends when, as, and if
declared by the Board of Directors out of funds legally available therefor and,
upon the liquidation, dissolution or winding up of the Company, are entitled to
share ratably in all assets remaining after payment of liabilities and payment
of accrued dividends and liquidation preferences on the preferred stock, if any.
Holders of Common Stock have no preemptive rights and have no rights to convert
their Common Stock into any other securities. All outstanding shares of Common
Stock are, and the shares of Common Stock offered hereby upon issuance and when
paid for, will be, duly authorized, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, par value $.001 per share. The preferred stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by stockholders, and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions. The issuance of any such preferred stock could
adversely affect the rights of the holders of Common Stock and, therefore,
reduce the value of the Common Stock. The ability of the Board of Directors to
issue preferred stock could discourage, delay, or prevent a takeover of the
Company.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Following the consummation of this offering, the Company will be subject to
the provisions of Section 203 of the Delaware General Corporation Law ("DGCL").
In general, this statute prohibits a publicly held Delaware corporation from
engaging, under certain circumstances, in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless (i)
prior to the date at which the stockholder became an interested stockholder, the
board of directors approved either the business combination or the transaction
in which the person becomes an interested stockholder; (ii) the stockholder
acquires more than 85% of the outstanding voting stock of the corporation
(excluding shares held by directors who are officers or held in certain employee
stock plans) upon consummation of the transaction in which the stockholder
becomes an interested stockholder; or (iii) the business combination is approved
by the board of directors and by at least 66 2/3% of the outstanding voting
stock of the corporation (excluding shares held by the interested stockholder)
at a meeting of stockholders (and not by written consent) held on or subsequent
to the date such stockholder became an interested stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
at any time within the prior three years did own) 15% or more of the
corporation's voting stock. Section 203 defines a "business combination" to
include, without limitation, mergers, consolidations, stock sales and asset
based transactions and other transactions resulting in a financial benefit to
the interested stockholder.
41
<PAGE>
LIMITATION ON DIRECTORS' LIABILITY
In accordance with the DGCL, the Company's Certificate of Incorporation
provides that the directors of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach duty as a director
except (i) for any breach of the director's duty of loyalty to the Company and
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct, or knowing violation of law; (iii) under Section 174 of
the DGCL, which relates to unlawful payments of dividends and unlawful stock
repurchases and redemptions; or (iv) for any transaction from which the director
derived an improper personal benefit. This provision does not eliminate a
director's fiduciary duties; it merely eliminates the possibility of damage
awards against a director personally which may be occasioned by certain
unintentional breaches (including situations that may involve grossly negligent
business decisions) by the director of those duties. The provision has no effect
on the availability of equitable remedies, such as injunctive relief or
rescission, which might be necessitated by a director's breach of his or her
fiduciary duties. However, equitable remedies may not be available as a
practical matter where transactions (such as merger transactions) have already
been consummated. The inclusion of this provision in the Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
the Company and its stockholders.
INDEMNIFICATION
The Company's Certificate of Incorporation provides that the Company shall
indemnify its officers, directors, employees and agents to the fullest extent
permitted by the DGCL. Section 145 of the DGCL provides that the Company may
indemnify any person who was or is a party, or is threatened to be made a party,
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than a "derivative"
action by or in the right of the Company) by reason of the fact that such person
is or was a director, officer, employee or agent of the Company, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe was unlawful.
A similar standard of care is applicable in the case of derivative actions,
except that no indemnification shall be made where the person is adjudged to be
liable to the Company, unless and only to the extent that the Court of Chancery
of the State of Delaware or the court in which such action was brought
determines that such person is fairly and reasonably entitled to such indemnity
and such expenses.
TRANSFER AGENT
The Company has appointed American Stock Transfer & Trust Company, New York,
New York as Transfer Agent and Registrar for the Common Stock.
REPORTS TO STOCKHOLDERS
The Company has agreed, subject to the sale of the shares of Common Stock
offered hereby, that on or before the date of this Prospectus, it will register
the Common Stock under the provisions of Section 12(g) of the Exchange Act. Such
registration will require the Company to comply with periodic reporting, proxy
solicitation and other requirements of the Exchange Act.
42
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have 2,200,000 shares
of Common Stock outstanding (2,395,000 shares, if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 1,300,000
shares offered hereby (1,495,000 shares, if the Underwriters' over-allotment
option is exercised in full) will be freely tradeable without restriction or
limitation under the Securities Act, except to the extent such shares are
subject to the agreement with the Underwriters described below, and except for
any shares purchased by "affiliates" of the Company, as such term is defined
under the Securities Act. The remaining 900,000 shares, all of which are
presently owned by National, are "restricted securities" within the meaning of
Rule 144 adopted under the Securities Act and will be eligible for public sale
under Rule 144 commencing two years following the date of this Prospectus. Sales
of such shares in the public market, or the availability of such shares for
sale, could adversely affect the market price for the Common Stock.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company, who has beneficially owned shares for at least a
two-year period (as computed under Rule 144) is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i) 1%
of the then outstanding shares of Common Stock, or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice, and the availability of current public information about
the Company. A person, however, who is not deemed to have been an affiliate of
the Company during the 90 days preceding a sale by such person and who has
beneficially owned shares of Common Stock for at least three years may sell such
shares without regard to the volume, manner of sale or notice requirements of
Rule 144. The foregoing summary of Rule 144 is not intended to be a complete
description thereof.
The Company, each of its directors and officers and National have agreed not
to offer, sell or otherwise dispose of any shares of Common Stock beneficially
owned by them prior to this offering for a period of eighteen months from
the date of this Prospectus without the prior written consent of the
Underwriters. See "Underwriting."
An aggregate of 325,000 shares of Common Stock are reserved for issuance
upon the exercise of outstanding options, exclusive of options granted under the
Plan. Subject to the contractual restrictions described above, an aggregate of
137,500 shares of Common Stock issuable upon the exercise of immediately
exercisable options held by certain executive officers and a consultant of the
Company will become available for sale pursuant to Rule 701 commencing 90 days
after the date of this Prospectus. The Company has agreed to use its best
efforts to include (i) 87,500 of the shares that are available for sale pursuant
to Rule 701 as described above and (ii) 83,000 shares held by National in a
registration statement filed under the Securities Act two years after the date
of this Prospectus.
An aggregate of 130,000 additional shares of Common Stock may be purchased
by the Underwriters for a period of five years following the date of this
Prospectus through the exercise of the Underwriters' Warrants. Any and all
shares of Common Stock purchased upon exercise of the Underwriters' Warrants may
be freely tradeable, provided that the Company satisfies certain securities
registration and qualification requirements in accordance with the terms of the
Underwriters' Warrants. See "Underwriting."
Prior to this offering, there has been no public market for the Common Stock
and no prediction can be made as to the effect, if any, that sales of Common
Stock pursuant to Rule 144 or otherwise, or the availability of such shares for
sale, will have on the market price prevailing from time to time. Nevertheless,
the possibility that substantial amounts of Common Stock may be sold in the
public market may adversely affect prevailing market prices for the Common Stock
and could impair the Company's ability to raise capital through the sale of
equity securities.
43
<PAGE>
UNDERWRITING
H.J. Meyers & Co., Inc. and Richter & Co., Inc. (the "Underwriters"), have
agreed, subject to the terms and conditions contained in the underwriting
agreement between the Company and the Underwriter, to purchase 1,300,000 shares
of Common Stock from the Company. The Underwriters are committed to purchase and
pay for all of the shares of Common Stock offered hereby if any of such shares
are purchased. The Common Stock is being offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to approval of certain legal matters by counsel and to certain other
conditions.
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus. The Underwriters may allow certain dealers
who are members of the NASD concessions not in excess of $ per share of
Common Stock, of which not in excess of $ per share of Common Stock may be
reallowed to other dealers who are members of the NASD.
The Company has granted to the Underwriters an option, exercisable during
the 45-day period from the date of this Prospectus, to purchase from the Company
up to 195,000 additional shares of Common Stock at the public offering price set
forth on the cover page of this Prospectus, less underwriting discounts and
commissions. The Underwriters may exercise this option in whole, or from time to
time, in part, solely for the purpose of covering over-allotments, if any, made
in connection with the sale of the shares of Common Stock offered hereby.
The Company has agreed to pay the Underwriters a non-accountable expense
allowance of 3% of the gross proceeds of this offering of which $40,000 has been
paid as of the date of this Prospectus. The Company has also agreed to pay all
expenses in connection with qualifying the shares of Common Stock offered hereby
for sale under the laws of such states as the Underwriters may designate,
including expenses of counsel retained for such purpose by the Underwriters.
The Company has agreed to sell to the Underwriters and their designees, for
an aggregate of $130, warrants (the "Underwriters' Warrants") to purchase up to
130,000 shares of Common Stock at an exercise price equal to 120% of the initial
public offering price per share. The Underwriters' Warrants may not be sold,
transferred, assigned or hypothecated, except to officers and directors of the
Underwriters, and are exercisable commencing eleven months from the date of
this Prospectus until May ___ , 2001 (the "Warrant Exercise Term"). During the
Warrant Exercise Term, the holders of the Underwriters' Warrants are given, at
nominal cost, the opportunity to profit from a rise in the market price of the
Company's Common Stock. To the extent that the Underwriters' Warrants are
exercised, dilution of the interests of the Company's stockholders will occur.
Further, the terms on which the Company will be able to obtain additional equity
capital may be adversely affected since the holders of the Underwriters'
Warrants can be expected to exercise them at any time when the Company would,
in all likelihood, be able to obtain any needed capital on terms more favorable
to the Company than those provided in the Underwriters' Warrants. Any profit
realized by the Underwriters on the sale of the Underwriters' Warrants or the
underlying shares of Common Stock may be deemed additional underwriting
compensation. Subject to certain limitations, the Company has agreed, at the
request of the holders of a majority of the Underwriters' Warrants, at the
Company's expense, to register the Underwriters' Warrants and the shares of
Common Stock issuable upon exercise of the Underwriters' Warrants under the
Securities Act on one occasion (and a second occasion solely at the
Underwriters' expense) during the Warrant Exercise Term and to include the
Underwriters' Warrants and such underlying shares in any appropriate
registration statement which is filed by the company during the seven years
following the date of this Prospectus.
44
<PAGE>
In addition, the Company has agreed to enter into a consulting agreement to
retain the Underwriters as financial consultants for a period of two years at an
annual fee of $25,000, payable in full, in advance, at the closing of this
offering. The consulting agreement will not require the consultants to devote a
specific amount of time to the performance of their duties thereunder. In the
event that the Underwriters originate a financing or a merger, acquisition,
joint venture, or other transaction to which the company is a party, the
Underwriters will be entitled to receive a finder's fee in consideration for
origination of such transaction.
All of the Company's officers, directors and current security holders have
agreed not to sell or otherwise dispose of any shares of Common Stock
beneficially owned by them prior to this offering for a period of eighteen
months from the date of this Prospectus without the prior written consent
of the Underwriters.
The Underwriters have advised the Company that they do not expect sales of
the shares offered hereby to discretionary accounts to exceed 1% of the shares
offered hereby.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act.
In connection with this offering, Frederick H. Fialkow and Bernard Levine,
M.D., directors of the Company, have indicated their intention to purchase
35,000 and 129,000 shares, respectively, of the Common Stock offered hereby at
the initial public offering price.
Prior to this offering, there has been no public trading market for the
Company's Common Stock. Consequently, the initial public offering price of the
Common Stock has been determined by negotiations between the Company and the
Underwriters. Among the factors considered in determining the offering price of
the Common Stock were the Company's financial condition and prospects, market
prices of similar securities of comparable publicly traded companies, certain
financial and operating information of companies engaged in activities similar
to those of the Company and the general condition of the securities market.
Since its inception in April 1989, Richter & Co., Inc. has been engaged
generally in the stock brokerage business. Richter & Co., Inc. has acted as
managing underwriter in three public offerings. The managing directors of
Richter & Co., Inc., however, each have over twenty years of experience in the
investment banking industry. The managing director of Richter & Co., Inc.
overseeing the Company's proposed offering has managed as the senior corporate
finance officer more than twenty registered public offerings over the last
twenty years.
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by Parker Chapin Flattau & Klimpl,
LLP, New York, New York. Certain legal matters in connection with the offering
will be passed upon for the Underwriters by Tenzer Greenblatt LLP, New York, New
York.
EXPERTS
The financial statements of the Company as at July 31, 1995 and for each of
the years in the two year period then ended included in this Prospectus have
been audited by Richard A. Eisner & Company, LLP, independent auditors, as
indicated in their report with respect thereto, and are included herein in
reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.
45
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W. Washington, D.C. 20549, a Registration
Statement on Form SB-2 (the "Registration Statement") under the Securities Act
of 1933, as amended, with respect to the securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits thereto, as permitted by the rules and regulations of
the Commission. For further information regarding the Company and the securities
offered hereby, reference is made to the Registration Statement and to the
exhibits filed as a part thereof, which may be inspected at the offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 without charge or
copied upon request to the Public Reference Section of the Commission and
payment of the prescribed fee. Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. In
addition, it is anticipated that the Common Stock will be quoted on the Nasdaq
SmallCap Market under the symbol "SUNS" and listed on the Boston Stock Exchange
under the symbol "SSH." Reports and other information concerning the Company may
be inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006, and at the offices of the
Boston Stock Exchange at One Boston Place, Boston, Massachusetts 02108.
46
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets at January 31, 1996 (unaudited) and July 31, 1995......... F-3
Consolidated Statements of Operations for the six months ended January 31, 1996 and
1995 (unaudited) and for the years ended July 31, 1995 and 1994..................... F-4
Consolidated Statements of Changes in Equity for the cumulative period from August 1,
1993 to January 31, 1996.............................................................. F-5
Consolidated Statements of Cash Flows for the six months ended January 31, 1996 and
1995 (unaudited) and for the years ended July 31, 1995 and 1994....................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SunStar Healthcare, Inc.
Melbourne, Florida
We have audited the accompanying consolidated balance sheet of SunStar
Healthcare, Inc. and subsidiaries as at July 31, 1995, and the related
consolidated statements of operations, changes in equity and cash flows for each
of the years in the two-year period ended July 31, 1995. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 enumerated above present fairly, in
all material respects, the consolidated financial position of SunStar
Healthcare, Inc. and subsidiaries at July 31, 1995, and the consolidated results
of their operations and their consolidated cash flows for each of the years in
the two-year period ended July 31, 1995, in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
October 6, 1995
F-2
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(NOTES A, B[1] AND H)
<TABLE>
<CAPTION>
JULY 31, 1995 JANUARY 31, 1996
------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash (including cash equivalents of $170,686 and $151,303)
(Note I)........................................................ $ 216,440 $ 218,077
Accounts receivable (less allowance for doubtful accounts of
$79,000)........................................................ 209,724 167,356
Due from parent............................................. 51,000
Prepaid expenses and other assets........................... 63,543 106,223
Deferred taxes (Note G)..................................... 27,000 27,000
------------- ----------------
Total current assets.................................... 516,707 569,656
Furniture, equipment and leasehold improvements, net (Notes B[5]
and D).......................................................... 260,081 224,624
Goodwill (Notes C and E)........................................ 429,895 408,729
Restricted cash (Note J)........................................ 30,000 30,000
Deposits and other assets....................................... 36,119 36,049
Deferred taxes (Note G)......................................... 7,900 7,900
------------- ----------------
TOTAL................................................... $ 1,280,702 $1,276,958
------------- ----------------
------------- ----------------
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses....................... $ 210,318 $ 177,296
Capital lease obligations--current (Note F)................. 21,858 22,355
------------- ----------------
Total current liabilities............................... 232,176 199,651
Capital lease obligations--noncurrent (Note F).................. 11,580 444
------------- ----------------
Total liabilities....................................... 243,756 200,095
------------- ----------------
Commitments and contingencies (Note J)
Equity:
Shareholder's net investment (Notes A, B[1] and H).......... 1,036,946
Preferred stock, par value $.001 per share, 1,000,000 shares
authorized, no shares issued
Common stock, par value $.001 per share, 10,000,000
authorized, 900,000 shares issued and outstanding............... 900
Additional paid-in capital.................................. 1,297,318
Unearned compensation....................................... (221,355)
------------- ----------------
Total equity............................................ 1,036,946 1,076,863
------------- ----------------
TOTAL................................................... $ 1,280,702 $1,276,958
------------- ----------------
------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(NOTES A, B[1] AND H)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31,
------------------------ ------------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Patient service revenue.................... $3,882,946 $5,127,572 $2,437,073 $2,446,601
---------- ---------- ---------- ----------
Cost and expenses:
Cost of revenue........................ 2,475,907 3,506,847 1,766,830 1,577,731
General and administrative............. 1,159,506 1,472,116 696,263 725,539
Compensation expense (Note J).......... 184,895
Amortization of intangibles............ 32,998 56,499 27,965 21,167
---------- ---------- ---------- ----------
Total operating expenses............. 3,668,411 5,035,462 2,491,058 2,509,332
---------- ---------- ---------- ----------
Income (loss) from operations.............. 214,535 92,110 (53,985) (62,731)
Interest income............................ 9,435 5,921 3,712 3,691
---------- ---------- ---------- ----------
Income (loss) from operations before
taxes...................................... 223,970 98,031 (50,273) (59,040)
Provision (benefit) for income taxes (Note
G)......................................... 91,800 42,600 (18,400) 52,500
---------- ---------- ---------- ----------
NET INCOME (LOSS).......................... $ 132,170 $ 55,431 $ (31,873) $ (111,540)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma net income (loss) per share (Note
B[3])...................................... $.05 $(.09)
Pro forma average number of shares
outstanding (Note B[3]).................... 1,208,750 1,208,750
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(NOTES A, B[1] AND H)
<TABLE>
<S> <C>
YEAR ENDED JULY 31, 1994:
Balance--August 1, 1993.................................................... $1,159,098
Net income................................................................. 132,170
Net equity transactions with National Home Health Care Corp. (Note H)...... (103,274)
----------
Balance--July 31, 1994..................................................... 1,187,994
YEAR ENDED JULY 31, 1995:
Net income................................................................. 55,431
Net equity transactions with National Home Health Care Corp. (Note H)...... (206,479)
----------
Balance--July 31, 1995..................................................... 1,036,946
SIX MONTHS ENDED JANUARY 31, 1996 (UNAUDITED):
Net loss................................................................... (111,540)
Compensation to employees and consultant in connection with options issued
(Note J)....................................................................... 406,250
Net equity transactions with National Home Health Care Corp. (Note H)...... (33,438)
----------
Balance attributable to common stock issued at par value and additional
paid-in capital.......................................................... 1,298,218
Less unearned compensation................................................. (221,355)
----------
BALANCE--JANUARY 31, 1996 (UNAUDITED)...................................... $1,076,863
----------
----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLDIATED STATEMENTS OF CASH FLOWS
(NOTES A, B[1] AND H)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31,
---------------------- ----------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 132,170 $ 55,431 $ (31,873) $(111,540)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization............. 102,650 144,231 57,996 66,135
Provision for doubtful accounts........... 45,000
Deferred taxes............................ (1,200) (30,400)
Noncash compensation...................... 184,895
Operating expenses and income taxes funded
by parent..................................... 118,000 98,000 6,600 65,000
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable.................................... 120,548 (64,552) (33,614) 42,368
(Increase) in due from parent........... (51,000)
Decrease (increase) in prepaid expenses
and other assets.............................. 5,987 2,162 (15,478) (42,610)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities........ 109,483 (210,496) (189,254) (33,022)
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities.......................... 587,638 39,376 (205,623) 120,226
--------- --------- --------- ---------
Cash flows from investing activities:
Purchase of furniture, equipment and
leasehold improvements.................... (69,819) (47,388) (38,854) (9,512)
Purchase of assets of business.............. (147,000)
--------- --------- --------- ---------
Net cash (used in) investing
activities.................................... (216,819) (47,388) (38,854) (9,512)
--------- --------- --------- ---------
Cash flows from financing activities:
Principal payments under capital lease
obligations................................... (17,866) (19,762) (9,644) (10,639)
Shareholder distributions................... (221,274) (304,479) (93,003) (98,438)
--------- --------- --------- ---------
Net cash (used in) financing
activities.................................... (239,140) (324,241) (102,647) (109,077)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 131,679 (332,253) (347,124) 1,637
Cash and cash equivalents--beginning of
period........................................ 417,014 548,693 548,693 216,440
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS--END OF PERIOD...... $ 548,693 $ 216,440 $ 201,569 $ 218,077
--------- --------- --------- ---------
--------- --------- --------- ---------
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest.... $ 9,855 $ 7,629 $ 5,584 $ 4,057
Noncash investing and financing activities
(see Notes A, H and J)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JANUARY 31, 1996 AND THE
SIX MONTHS ENDED JANUARY 31, 1995 AND 1996)
(NOTE A)--GENERAL INFORMATION:
SunStar Healthcare, Inc. ("SunStar" or the "Company") was incorporated in
December 1995 and issued 875,000 shares (prior to a stock split discussed below)
of common stock. In January 1996, National Home Health Care Corp. ("NHHC"), then
the sole shareholder of the Company, contributed to SunStar 100% of the
outstanding capital stock of its wholly owned subsidiaries, First Health, Inc.
("First Health") and Brevard Medical Center, Inc. ("Brevard"), which included
100% of the outstanding capital stock of Brevard's wholly owned subsidiary, Boro
Medical Corp. ("Boro"). The Company, First Health, Brevard and Boro collectively
are referred to herein as SunStar. SunStar provides managed healthcare services
pursuant to contractual arrangements, as well as on a fee-for-service basis,
through its outpatient medical centers in central Florida. SunStar intends to
offer 1,300,000 previously unissued shares of common stock for sale in an
initial public offering (the "Offering"). Upon completion of the Offering,
NHHC's interest in SunStar will approximate 40.9% (after the stock split
discussed below), without giving effect to an over-allotment option granted to
the underwriter.
SunStar is authorized to issue 10,000,000 shares of common stock, par value
$.001 per share, and 1,000,000 shares of preferred stock, par value $.001 per
share. The preferred stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the Board of Directors. In
April 1996, the Board of Directors approved a 1.02857 for one stock split.
Accordingly, all share amounts have been retroactively adjusted for all periods
presented. As of January 31, 1996, the Company had issued 900,000 shares of
common stock.
In order to facilitate an orderly transition of SunStar to an independent
company, SunStar expects NHHC to continue, in the near term, to provide certain
administrative support.
(NOTE B)--BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
[1] Basis of presentation:
The formation of the Company has been accounted for as a reorganization.
Accordingly, the financial statements have been prepared using NHHC's historical
basis in the assets and liabilities of First Health and Brevard (the
"Predecessor"), including goodwill and other intangibles recognized by NHHC in
the acquisition of certain companies. All significant intercompany accounts have
been eliminated.
The financial statements reflect the results of operations, financial
condition and cash flows of the Company from the date of its formation, and, the
Predecessor as a component of NHHC, and may not be indicative of actual results
of operations and financial position of the Company under other ownership. The
statements of operations include, in management's opinion, a reasonable
allocation of administrative costs incurred by NHHC which benefit SunStar of
$25,000 in both 1994 and 1995 and $12,500 in each of the six-month periods ended
January 31, 1995 and 1996. Such allocation is based on the value of time devoted
by NHHC employees.
Shareholder's net investment represents NHHC's contribution of its net
investment after giving effect to net income (loss) of SunStar, net equity
transactions with NHHC (see Note H) and certain compensation charges (see Note
J). Effectively on January 31, 1996, the balance of this net investment was
converted to common stock issued and additional paid-in capital (see Note A).
The Company will separately present retained earnings on the effective date of
the Offering. The consolidated financial statements include no provision for
interest on capital of NHHC used by the Company.
F-7
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JANUARY 31, 1996 AND THE
SIX MONTHS ENDED JANUARY 31, 1995 AND 1996)
(NOTE B)--BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES:--(CONTINUED)
[2] Revenue recognition:
The Company recognizes fee-for-service revenues based on net realizable
amounts due from patients and third-party payors at the time medical services
are rendered. The Company recognizes capitated fee arrangements from Health
Maintenance Organizations ("HMOs") on a monthly basis for each participating
enrollee, regardless of utilization; health care costs relating to capitation
fee arrangements from HMOs are recognized as the services are provided.
Reimbursement for the Company's participation under a federal third-party
reimbursement contract is based on cost reimbursement principles and is subject
to audit and retrospective adjustment.
[3] Pro forma earnings per share:
Historical earnings per share data are not presented as the Company's
historical capital structure is not comparable to its structure subsequent to
the ownership transfer (see Note A). The Company has reflected in its
calculations of earnings per share the 900,000 shares issued by SunStar to NHHC
and the common shares issuable upon the exercise of the options granted to two
employees and a consultant (discussed in Note J[2]) as if such shares were
considered to have been issued at the beginning of the respective period. The
pro forma earnings per share are computed to give effect to stock options with
exercise prices below the IPO price (see Note J) using the treasury stock
method. In accordance with Securities and Exchange Commission rules, such effect
is also included in a loss period where the impact of the incremental shares is
antidilutive.
[4] Cash and cash equivalents:
Cash and cash equivalents include short-term investments with original
maturities of 90 days or less.
[5] Furniture, equipment and leasehold improvements:
Furniture, equipment and leasehold improvements are stated at cost and
depreciated over estimated useful lives of five to ten years on a straight-line
method.
[6] Goodwill and other intangibles:
Goodwill is amortized over periods of 5 to 20 years and other intangibles
consisting of a covenant not to compete, is amortized over a period of one year
on a straight-line basis. Goodwill is evaluated periodically, on a site by site
basis, and adjusted, if necessary, if events and circumstances indicate that an
other than temporary decline in value below the current unamortized historical
cost has occurred. Several factors are used to evaluate goodwill, including but
not limited to: management's plans for future operations, recent operating
results and projected undiscounted cash flows.
[7] Income taxes:
The Company's operations have historically been included in the consolidated
income tax returns filed by NHHC. Accordingly, the provision for federal and
state taxes and the related payments or refunds of tax are determined on a
consolidated basis. Income tax expense in the accompanying financial statements
has been computed assuming the Company filed separate income tax returns, with
the related taxes currently payable reflected as a contribution to capital by
NHHC. Deferred taxes result primarily from the use of accelerated depreciation
for tax purposes and from reserves for uncollectible accounts receivable.
F-8
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JANUARY 31, 1996 AND THE
SIX MONTHS ENDED JANUARY 31, 1995 AND 1996)
(NOTE B)--BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES:--(CONTINUED)
[8] Interim financial information:
The accompanying consolidated financial statements as at January 31, 1996
and for the six months ended January 31, 1996 and 1995 are unaudited but, in the
opinion of management of the Company, reflect all adjustments (consisting only
of normal and recurring adjustments) necessary for a fair presentation. The
results of operations for the six-month period are not necessarily indicative of
the results that may be expected for the full year ending July 31, 1996.
[9] Recently issued accounting pronouncements:
In March 1995 and October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long Lived Assets and for the Long Lived
Assets to be Disposed of", and Statement of Financial Accounting Standard No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation", respectively. SFAS
121 is effective for the Company's fiscal year ended July 31, 1997 and SFAS 123
has various effective and transition dates. The Company believes adoption of
SFAS 121 and SFAS 123 will not have a material impact on its financial
statements. The Company expects to continue to account for employee stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" using intrinsic values with
appropriate disclosures using the fair value based method. The Company does not
intend to early adopt SFAS 123.
[10] 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 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. Such estimates relate primarily to goodwill, depreciable assets and
valuation reserves for accounts receivable.
(NOTE C)--ACQUISITIONS:
In April and June 1994, the Company purchased certain assets of two
companies engaged in outpatient medical services in Volusia County, Florida for
an aggregate purchase price of $147,000. The acquisition was accounted for as a
purchase, and, accordingly, the results of operations of the acquired companies
are included in the Company's statements of operations since the dates of
acquisition. The purchase price was allocated as follows: $57,000 to furniture
and equipment, $73,000 to goodwill and $17,000 to covenant not to compete. Had
the operations of the acquired companies been acquired as of August 1, 1993
there would have been no material effect on the combined operations of the
Company for the year ended July 31, 1994.
F-9
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JANUARY 31, 1996 AND THE
SIX MONTHS ENDED JANUARY 31, 1995 AND 1996)
(NOTE D)--FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1995 1996
---------- -----------
<S> <C> <C>
Furniture, equipment and fixtures................. $1,154,507 $ 1,155,457
Leasehold improvements............................ 259,699 268,260
---------- -----------
1,414,206 1,423,717
Less accumulated depreciation and amortization.... (1,154,125) (1,199,093)
---------- -----------
Balance........................................... $ 260,081 $ 224,624
---------- -----------
---------- -----------
</TABLE>
The net book value of furniture and equipment held under capital leases was
$31,352 and $21,440 at July 31, 1995 and January 31, 1996, respectively.
Depreciation expense includes depreciation on assets held under capital leases.
(NOTE E)--GOODWILL AND OTHER INTANGIBLE ASSET:
[1] Goodwill:
<TABLE>
<CAPTION>
JULY 31,
-------------------- JANUARY 31,
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
Balance--beginning of period............... $429,393 $472,227 $ 429,895
Increases.................................. 73,000
Amortization............................... (30,166) (42,332) (21,166)
-------- -------- -----------
Balance--end of period..................... $472,227 $429,895 $ 408,729
-------- -------- -----------
-------- -------- -----------
</TABLE>
[2] Other intangible:
Other intangible was fully amortized as of July 31, 1995. Amortization for
1994 and 1995 amounted to $2,833 and $14,167, respectively.
(NOTE F)--CAPITAL LEASE OBLIGATIONS:
At July 31, 1995, approximate future minimum lease payments under
capitalized lease obligations were as follows:
<TABLE>
<S> <C>
1996............................................................. $ 24,323
1997............................................................. 11,832
--------
Total minimum lease payments............................... 36,155
Less amounts representing interest............................... (2,717)
Less amounts due within one year................................. (21,858)
--------
Amounts due after one year....................................... $ 11,580
--------
--------
</TABLE>
F-10
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JANUARY 31, 1996 AND THE
SIX MONTHS ENDED JANUARY 31, 1995 AND 1996)
(NOTE G)--INCOME TAXES:
The provision for income taxes for 1994 and 1995 consists of:
<TABLE>
<CAPTION>
YEAR ENDED JULY
31,
------------------
1994 1995
------- -------
<S> <C> <C>
Current:
Federal............................................... $79,000 $62,000
State................................................. 14,000 11,000
------- -------
93,000 73,000
Deferred tax benefit.................................... (1,200) (30,400)
------- -------
Total............................................. $91,800 $42,600
------- -------
------- -------
</TABLE>
The principal items of deferred income tax benefits are as follows:
<TABLE>
<CAPTION>
1994 1995
------ -------
<S> <C> <C>
Depreciation and amortization............................ $1,200 $14,900
Bad debt reserves........................................ 15,500
------ -------
$1,200 $30,400
------ -------
------ -------
</TABLE>
Deferred tax assets at July 31, 1995 and January 31, 1996 are as follows:
<TABLE>
<S> <C>
Accounts receivable reserves..................................... $27,000
Furniture, equipment and leasehold improvements.................. (2,100)
Goodwill and other intangible asset.............................. 10,000
-------
$34,900
-------
-------
</TABLE>
The reconciliation of the statutory tax rate to the effective rate for each
of the years in the two-year period ended July 31, 1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Federal statutory rate.................................. $76,000 $33,000
State taxes, net of federal tax benefit................. 9,000 7,000
Amortization............................................ 6,800 2,600
------- -------
$91,800 $42,600
------- -------
------- -------
</TABLE>
The difference between the tax provision provided for the six months ended
January 31, 1996 and that expected from applying the U.S. statutory rate to loss
from operations before taxes is primarily attributable to the Company recording
a compensation charge not currently deductible and for which a tax benefit is
dependent on future market conditions and has not been recorded.
F-11
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JANUARY 31, 1996 AND THE
SIX MONTHS ENDED JANUARY 31, 1995 AND 1996)
(NOTE H)--NET EQUITY TRANSACTIONS WITH NHHC:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JULY 31, ENDED
---------------------- JANUARY 31,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Corporate expense allocation............. $ 25,000 $ 25,000 $ 12,500
Current income taxes..................... 93,000 73,000 52,500
Shareholder distributions................ (221,274) (304,479) (98,438)
--------- --------- -----------
$(103,274) $(206,479) $ (33,438)
--------- --------- -----------
--------- --------- -----------
</TABLE>
(NOTE I)--CONCENTRATION OF CREDIT RISK AND MAJOR PAYERS:
Capitation revenue from three HMOs amounted to approximately 18% in 1994,
31% in 1995 and 28% and 33% for the six-month periods ended January 31, 1995 and
1996, respectively, of patient fee revenue.
Approximately 41% in 1994, 34% in 1995 and 34% and 38% for each of the
six-month periods ended January 31, 1995 and 1996, respectively, of patient fee
revenue was derived under a federal cost reimbursement contract.
The Company maintains its cash balances at two financial institutions.
(NOTE J)--COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
[1] Leases:
The Company rents various medical and office facilities through 1998 under
terms of several lease agreements which include escalation clauses.
At July 31, 1995, minimum annual rental commitments under noncancelable
leases are as follows:
<TABLE>
<S> <C>
1996............................................................ $ 78,000
1997............................................................ 54,000
1998............................................................ 50,000
--------
$182,000
--------
--------
</TABLE>
The Company also rents various medical and office facilities pursuant to one
year leases subject to annual renewals through 1998 at the option of the
Company.
Rent expense amounted to $297,000 and $387,000 for the years ended July 31,
1994 and 1995 and $189,000 and $170,000 for the six months ended January 31,
1995 and 1996.
[2] Employment and consulting agreements:
In connection with and upon the completion of the Offering, the Company
agreed to retain the underwriter as a consultant for a period of two years at a
fee of $18,500 per year.
The Company has entered into an employment agreement with the Company's
President and Chief Executive Officer. The agreement expires on the second
anniversary of the successful completion of the Offering (the "Effective Date"),
provided that the agreement may be renewed for successive one-year periods
unless, within thirty days of the expiration of the agreement, either party
notifies the other of its
F-12
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JANUARY 31, 1996 AND THE
SIX MONTHS ENDED JANUARY 31, 1995 AND 1996)
(NOTE J)--COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:--(CONTINUED)
[2] Employment and consulting agreements: (continued)
election not to renew the agreement. The agreement also provides that for so
long as the President remains employed by the Company, he shall serve as a
member of the Company's Board of Directors and shall have the right to appoint
one additional member to the Board of Directors. The agreement provides for an
annual salary of $125,000 in the first year and $150,000 in the second year,
payable commencing on the Effective Date. The agreement also provides for such
bonuses as the Board of Directors may determine based on performance and other
criteria. The agreement contains a confidentiality provision and a covenant not
to compete with the Company for a period of six months following termination of
employment.
In addition, in January, 1996, the Company has granted options to the
President to purchase an aggregate of 250,000 shares of common stock at an
exercise price equal to $.25 per share. The options are currently exercisable as
to one-fourth of the shares covered thereby and shall be exercisable as to an
additional one-fourth of the shares covered thereby on January 28, 1997, 1998
and 1999, respectively, provided that the President is employed by the Company
on each such date. Commencing two years after the Effective Date, the Company
has agreed to use its best efforts to file a registration statement under the
Securities Act to register the shares of common stock issuable pursuant to the
exercise of such options.
The Company has also entered into an employment agreement with the Company's
Executive Vice President. The agreement expires on the second anniversary of the
Effective Date, provided that the agreement may be renewed for successive
one-year periods unless, within thirty days of the expiration of the agreement,
either party notifies the other of its election not to renew the agreement. The
agreement provides for initial compensation of $25,000 through the Effective
Date and an annual salary of $100,000 in the first year and $135,000 in the
second year, payable commencing on the Effective Date. The agreement also
provides for such bonuses as the Board of Directors may determine based on
performance and other criteria. The agreement contains a confidentiality
provision and a covenant not to compete with the Company for a period of six
months following termination of employment.
In addition, the Company granted to the Executive Vice President options to
purchase an aggregate of 75,000 shares of the Company's common stock, of which
options to purchase 25,000 shares, at an exercise price of $0.25 per share,
currently are exercisable. The remaining 50,000 options, which have been granted
pursuant to the Company's 1996 Stock Option Plan (the "Plan") and which have an
exercise price of $5.00 per share, shall be exercisable as to one-fourth of the
shares covered thereby on each of the first four anniversaries of the Effective
Date, provided that the Executive Vice President is employed by the Company on
such dates. Commencing two years after the Effective Date, the Company has
agreed to use its best efforts to file a registration statement under the
Securities Act to register the shares of common stock issuable upon exercise of
such options.
The Company has entered into an employment agreement, effective on the
Effective Date, with the Company's Vice President. The agreement expires on the
first anniversary of the Effective Date, provided that the agreement may be
renewed for successive one-year periods unless, within thirty days of the
expiration of the agreement, either party notifies the other of its election not
to renew the agreement. The agreement provides for an annual salary of $75,000,
payable commencing on the Effective Date. The agreement contains a
confidentiality provision and a covenant not to compete with the Company for a
period of six months following termination of employment.
F-13
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JANUARY 31, 1996 AND THE
SIX MONTHS ENDED JANUARY 31, 1995 AND 1996)
(NOTE J)--COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:--(CONTINUED)
[2] Employment and consulting agreements: (continued)
In addition, the Company has granted to the Vice President options to
purchase an aggregate of 25,000 shares of the Company's common stock. The
options, which have been granted pursuant to the Plan and which have an exercise
price of $5.00 per share, shall be exercisable as to one-fourth of the shares
covered thereby on each of the first four anniversaries of the Effective Date,
provided that the Vice President is employed by the Company on such dates.
Commencing one year after the Effective Date, the Company has agreed to use its
best efforts to file a registration statement under the Securities Act to
register the shares of common stock issuable to the Vice President pursuant to
exercise of such options.
The Company has entered into a consulting agreement, as of the Effective
Date, with an individual pursuant to which such individual will provide
management consulting services to the Company. The agreement expires on July 31,
1996. As compensation for all management consulting services performed under
this agreement, the Company has granted to this individual options to purchase
an aggregate of 50,000 shares of common stock at an exercise price equal to
$0.25 per share. All of these options are currently exercisable.
The Company's granting of options relating to the above agreements resulted
in a charge to operations of approximately $185,000 in the six months ended
January 31, 1996. Unearned compensation at January 31, 1996 amounts to
approximately $221,000 which is presented as a reduction of equity. Such
unearned amounts will be accounted for as an expense during the periods in which
the related services are performed.
A summary of options granted (exlcusive of Plan and Offering options (see
Note J[4])) through January 31, 1996 in connection with employment and
consulting agreements are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------
NUMBER EXERCISE
OF PRICE PER
SHARES SHARE
------- ---------
<S> <C> <C>
Employment agreements................................... 275,000 $ .25
Consulting agreement.................................... 50,000 $ .25
-------
325,000 $ .25
-------
-------
</TABLE>
At January 31, 1996, options to purchase 137,500 shares are exercisable.
[3] Regulatory requirements:
Restricted cash consists of funds held as collateral for certain regulatory
requirements. In addition, NHHC has obtained a $250,000 letter of credit on
behalf of the Company to satisfy certain regulatory requirements none of which
has been used as of July 31, 1995 and January 31, 1996.
[4] Stock option and benefit plans:
Employees of the Company participate in NHHC's Employee Savings and Stock
Investment Plan organized under Section 401(k) of the Internal Revenue Code.
Under the plan, employees may contribute 10% of their salary into the plan,
limited to the maximum amount allowable under federal tax regulations. The
Company will match employee contributions invested in NHHC common stock up
F-14
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JANUARY 31, 1996 AND THE
SIX MONTHS ENDED JANUARY 31, 1995 AND 1996)
(NOTE J)--COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:--(CONTINUED)
[4] Stock option and benefit plans: (continued)
to 5% of the employees' salary and may also make additional contributions at its
discretion. In addition to investing in NHHC stock, an employee may invest in
several mutual funds. The Company's contribution for the years ended July 31,
1994 and 1995 amounted to approximately $34,000 and $30,000, respectively.
Participation in this plan by Company employees will cease upon successful
completion of the Offering.
In February 1996, the Board of Directors of SunStar adopted and SunStar's
sole shareholder at that time, NHHC, approved the Plan pursuant to which 200,000
shares of common stock were reserved for issuance upon the exercise of options
designated as either (i) options intended to constitute incentive stock options
("ISOs") under the Internal Revenue Code of 1986, as amended, or (ii)
nonqualified options. ISOs may be granted under the Plan to employees and
officers of the Company. Nonqualified options may be granted to consultants,
directors (whether or not they are employees), employees or officers of the
Company.
The Plan is intended to qualify under Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and is administered by a
committee of the Board of Directors; provided that the full Board of Directors
currently is administering the Plan. The Board of Directors or the committee, as
the case may be, within the limitations of the Plan, determines the persons to
whom options will be granted, the number of shares to be covered by each option,
whether the options granted are intended to be ISOs, the duration and rate of
exercise of each option, the exercise price per share and the manner of exercise
and the time, manner and form of payment upon exercise of an option. Unless
sooner terminated, the Plan will expire on February 13, 2006.
ISOs granted under the Plan may not be granted at a price less than the fair
market value of the common stock on the date of grant (or 110% of fair market
value in the case of persons holding 10% or more of the voting stock of the
Company). The aggregate fair market value of shares for which ISOs granted to
any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company) may not exceed
$100,000 and options to purchase no more than 50,000 shares may be granted under
the Plan to any single optionee in any calendar year. Nonqualified options
granted under the Plan may not be granted at a price less than 90% of the fair
market value of the common stock on the date of grant. Options granted under the
Plan will expire not more than ten years from the date of grant (five years in
the case of ISOs granted to persons holding 10% or more of the voting stock of
the Company). All options granted under the Plan are not transferable during an
optionee's lifetime but are transferable at death by will or by the laws of
descent and distribution. In general, upon termination of employment of an
optionee, all options granted to such person which are not exercisable on the
date of such termination immediately terminate, and any options that are
exercisable terminate 90 days following termination of employment.
The Plan contains anti-dilution provisions authorizing appropriate
adjustments in certain circumstances. Shares of common stock subject to options
which expire without being exercised or which are canceled as a result of
cessation of employment are available for further grants. No shares of common
stock may be issued to any optionee until the full exercise price has been paid.
The Board of Directors or the committee, as the case may be, may grant
individual options under the Plan with more stringent provisions than those
specified in the Plan.
F-15
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JANUARY 31, 1996 AND THE
SIX MONTHS ENDED JANUARY 31, 1995 AND 1996)
(NOTE J)--COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:--(CONTINUED)
[4] Stock option and benefit plans: (continued)
In February 1996, the Company granted options to purchase an aggregate of
75,000 shares under the Plan which are exercisable at $5.00 per share commencing
on the first anniversary of the Effective Date.
The Plan provides that each nonemployee director automatically receives,
upon first becoming a nonemployee director, a grant of options to purchase 7,500
shares of the Company's common stock at an exercise price equal to the fair
market value of the Company's common stock on the date of grant. The Company
intends to grant an aggregate of 37,500 of such options to nonemployee directors
on the Effective Date at $5.00 per share. Each nonemployee director option will
expire five years from the date of grant.
SunStar has agreed that for a period of one year from the Offering, it will
not grant any options under the Plan without the prior written consent of the
underwriter, which consent shall not be unreasonably withheld.
Activity in the Plan through January 31, 1996 including 37,500 options to be
granted to nonemployee directors on the Effective Date, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------
NUMBER EXERCISE
OPTIONS OF PRICE PER
AVAILABLE SHARES SHARE
--------- ------- ---------
<S> <C> <C> <C>
Options authorized............................ 200,000
Options granted............................... (112,500) 112,500 $5.00
--------- ------- ---------
Balance, January 31, 1996..................... 87,500 112,500 $5.00
--------- ------- ---------
--------- ------- ---------
</TABLE>
At January 31, 1996, none of the above options are exercisable.
[5] Other:
Common stock reserved for future issuance at January 31, 1996 is as follows:
<TABLE>
<CAPTION>
NUMBER
OF
SHARES
-------
<S> <C>
Options granted under employment and consulting agreements....... 325,000
Options granted under the Plan................................... 112,500
Reserved for future grants under the Plan........................ 87,500
-------
525,000
-------
-------
</TABLE>
[6] Settlement of complaints:
In the January 31, 1996 financial statements, the Company included a $51,000
charge in settlement of certain complaints in general and administrative
expenses.
F-16
<PAGE>
- ------------------------------------------- -----------------------------------
- ------------------------------------------- -----------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR THE UNDERWRITER. THIS 1,300,000 SHARES
PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO SUNSTAR HEALTHCARE, INC.
MAKE SUCH AN OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY OFFER, SOLICITATION
OR SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION HEREIN IS CORRECT AS OF
COMMON STOCK ANY TIME SUBSEQUENT TO THE
DATE OF THE PROSPECTUS.
-------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 7
Use of Proceeds...................... 15 H.J. MEYERS & CO., INC.
Dividend Policy...................... 16 -------------------
Dilution............................. 16 RICHTER & CO., INC.
Capitalization....................... 17
Selected Financial Data.............. 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
Business............................. 23
Management........................... 34 , 1996
Principal Stockholders............... 39
Certain Transactions................. 40
Description of Securities............ 41
Shares Eligible for Future Sale...... 43
Underwriting......................... 44
Legal Matters........................ 45
Experts.............................. 45
Additional Information............... 46
Index to Financial Statements........ F-1
--------------------
UNTIL , 1996 (25 DAYS AFTER
THE LATER OF THE EFFECTIVE DATE OF THE
REGISTRATION STATEMENT OR THE FIRST DATE
ON WHICH THE COMMON STOCK WAS OFFERED TO
THE PUBLIC), ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------ -------------------------------------
- ------------------------------------------ -------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Company's Certificate of Incorporation provides that the Company shall
indemnify its officers, directors, employees and agents to the fullest extent
permitted by the DGCL. Section 145 of the DGCL provides that a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon
plea of nolo contendere or its equivalent, shall not, in and of itself, create a
presumption that his conduct was unlawful.
Section 145 also provides that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending, or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to b liable to the corporation unless
and only to the extent that the Court of Chancery or the court in which such
action or suit was brought shall determine upon adjudication that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnify for such expenses which
the Court of Chancery or such other court shall deem proper.
To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or other wise in defense of any
action, suit or proceeding referred to above, or in defense of any claim, issue
or matter therein, such person shall be indemnified against expenses (including
attorney's fees) actually and reasonably incurred by such person in connection
therewith.
Any such indemnification (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because such person has met the applicable standard of conduct set
forth above. Such determination shall be made:
(1) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding; or
(2) if such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a
written opinion; or
(3) by the stockholders.
Section 145 permits a Delaware business corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint ventre, trust or other enterprise against any liability
asserted against such person and incurred by him in such capacity, or arising
our of his status as such, whether or not the corporation would have the power
to indemnify such person. The Company intends to purchase directors and
officers liability insurance in the amount of $1,000,000.
In accordance with the DGCL, the Company's Certificate of Incorporation
provides that the directors of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach duty as a director
except (i) for any breach of the director's duty of loyalty to the Company and
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct, or knowing violation of law; (iii) under Section 174 of
the DGCL, which relates to unlawful payments of dividends and unlawful stock
repurchases
II-1
<PAGE>
and redemptions; or (iv) for any transaction from which the director derived an
improper personal benefit. This provision does not eliminate a director's
fiduciary duties; it merely eliminates the possibility of damage awards against
a director personally which may be occasioned by certain unintentional breaches
(including situations that may involve grossly negligent business decisions) by
the director of those duties. The provision has no effect on the availability
of equitable remedies, such as injunctive relief or rescission, which might be
necessitated by a director's breach of his or her fiduciary duties. However,
equitable remedies may not be available as a practical matter where transactions
(such as merger transactions) have already been consummated. The inclusion of
this provision in the Certificate of Incorporation may have the effect of
reducing the likelihood of derivative litigation against directors, and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefited the Company and its stockholders.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses (other than selling
commissions and other fees paid to the Underwriters) which will be paid by the
Company in connection with the issuance and distribution of the securities
being registered. With the exception of the registration fee and the NASD filing
fee, all amounts shown are estimates.
Registration fee . . . . . . . . . . . . . . . . . $ 2,847
NASD filing fee . . . . . . . . . . . . . . . . . . 1,326
NASDAQ listing expenses . . . . . . . . . . . . . . 5,000
Boston Stock Exchange listing expenses . . . . . . 5,000
Blue sky legal fees . . . . . . . . . . . . . . . . 30,000
Printing expenses . . . . . . . . . . . . . . . . . 75,000
Legal fees and expenses (other than Blue Sky) . . . 170,000
Accounting fees and expenses . . . . . . . . . . . 75,000
Transfer Agent and Registrar fees and expenses . . 3,000
Miscellaneous expenses . . . . . . . . . . . . . . 20,827
----------
Total . . . . . . . . . . . . . . . . . . . . $ 388,000
==========
Item 26. Recent Sales of Unregistered Securities.
In January 1996, the Company issued 875,000 shares of Common Stock to
National Home Health Care Corp. in consideration of $875.00. The Company
believes that such transaction is exempt from the registration provisions of the
Securities Act of 1933 in reliance upon Section 4(2) thereof.
II-2
<PAGE>
Item 27. Exhibits.
Number Description of Exhibit
------ ----------------------
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Company.
3.2 By-Laws of the Company.
4.1 Specimen Certificate of the Company's Common Stock.
4.2 Form of Warrant Agreement (including Form of Underwriters'
Common Stock Purchase Warrant).
4.3 1996 Stock Option Plan.
4.4 Form of 1996 Stock Option Contract.
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP.
10.1 Form of Agreement with Humana Health Care Plans.
10.2 Form of Agreement with CAC/United Healthcare Plans of
Florida, Inc.
10.3 Form of Agreement with Blue Cross Blue Shield of Florida.
10.4 Agreement for Health Care Prepayment Plan, dated September
21, 1992, between the Health Care Financing Administration
and Boro Medical Corporation.
10.5 Certificate from State of Florida, Agency for Health Care
Administration certifying Boro Medical Corporation a Health
Care Provider.
10.6 Form of Employment Agreement, dated as of November 1, 1995,
between the Company and Warren D. Stowell.
10.7 Form of Employment Agreement, dated as of January 10, 1996,
between the Company and David Jesse.
10.8 Form of Employment Agreement, dated as of January 10,
between the Company and Michael Landau.
10.9 Form of First Amendment to Employment Agreement, dated as
of April 17, 1996, between the Company and Warren D.
Stowell.
10.10 Form of First Amendment to Employment Agreement, dated as
of April 17, 1996, between the Company and David Jesse.
21.1 List of Subsidiaries.
23.1 Consent of Richard A. Eisner & Company.
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (included in
Exhibit 5.1).
24.1 Power of Attorney.
Item 28. Undertakings.
The undersigned Company hereby undertakes to provide to the Underwriters at
the closing as specified in the Underwriting Agreement Common Stock certificates
in such denominations and registered in such names as required by the
Underwriting Agreement to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form SB-2 and authorizes this Amendment No. 3 to
the Registration Statement to be signed on its behalf by the undersigned, in the
City of New York, State of New York, on the 15th day of May, 1996.
SUNSTAR HEALTHCARE, INC.
By: /s/ Warren D. Stowell
------------------------------------------
Warren D. Stowell
President, Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, the Amendment No. 3
to the Registration Statement has been signed below by the following persons in
the capacity and in the dates indicated.
Signature Title Date
- --------- ----- ----
/ s/ Warren D. Stowell
- ----------------------- President, Chief May 15, 1996
Warren D. Stowell Executive Officer and
Chairman of the Board of
Directors
*
- ----------------------- Executive Vice May 15, 1996
David Jesse President, Chief
Operating Officer and
Director
*
- ----------------------- Vice President of May 15, 1996
Robert P. Heller Finance, Chief Financial
Officer and Secretary
(Principal Financial and
Accounting Officer)
*
- ----------------------- Director May 15, 1996
Frederick H. Fialkow
*
- ----------------------- Director May 15, 1996
Steven Fialkow
*
- ----------------------- Director May 15, 1996
Bernard Levine, M.D
*
- ----------------------- Director May 15, 1996
Dean Sloane
*
- ---------------------- Director May 15, 1996
Richard Seidelman, M.D.
*By: /s/ Warren D. Stowell
------------------------------------
Warren D. Stowell
An original power of attorney authorizing Warren D. Stowell to sign the
registration statement and any amendments thereof on behalf of the above-named
directors and officers of the Company, has been previously filed.
II-4
