AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1997
REGISTRATION STATEMENT NO. 333-28233
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.c. 20549
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AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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HEALTHCORE MEDICAL SOLUTIONS, INC.
(Exact name of Small Business issuer as specified in its charter)
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Delaware 7299 43-1771999
(State or other (Primary standard (I.R.S. employer
jurisdiction of industrial classification identification
incorporation) code number) number)
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11904 Blue Ridge Boulevard
Grandview, Missouri 64030
(816) 763-4900
(Address and telephone number of principal executive offices
and principal place of business)
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NEAL J. POLAN
Chairman of the Board
And Chief Executive Officer
1325 Avenue of the Americas, Suite 1200
New York, New York 10019
(Name, address and telephone number of agent for service)
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Copies to:
MARC S. GOLDFARB, ESQ. BARRY A. BROOKS, ESQ.
Bachner, Tally, Polevoy & Misher Llp Paul, Hastings, Janofsky & Walker Llp
380 Madison Avenue 399 Park Avenue, 31St Floor
New York, New York 10017 New York, New York 10022
(212) 687-7000 (212) 318-6000
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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, please check the following box. /x/
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 registration statement for the same
offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. /x/
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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 the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<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.
SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 1997
PROSPECTUS
HEALTHCORE MEDICAL SOLUTIONS, INC.
1,760,000 Units
Consisting of 1,760,000 Shares of Class A Common Stock
and 1,760,000 Redeemable Class A Warrants
Each unit ("Unit") offered by HealthCore Medical Solutions, Inc. (the
"Company") consists of one share of class A common stock, $.01 par value ("Class
A Common Stock") and one redeemable class A warrant ("Class A Warrants" or
"Warrants"). The components of the Units will be separately transferable
immediately upon issuance. Each Class A Warrant entitles the holder to purchase
one share of Class A Common Stock at an exercise price of $6.50, subject to
adjustment, at any time through the fifth anniversary of the date of this
Prospectus. Commencing one year from the date hereof, the Class A Warrants are
subject to redemption by the Company at a redemption price of $.05 per Warrant
on 30 days' written notice, provided the closing bid price of the Class A Common
Stock averages in excess of $9.10 per share for any 30 consecutive trading days
ending within 15 days of the notice of redemption. See "Description of
Securities."
As of the date hereof, 216,000 shares of Class B Common Stock, $.01 par
value ("Class B Common Stock"), of the Company are outstanding. The Class A
Common Stock and the Class B Common Stock are substantially identical on a
share-for-share basis, except that the holders of Class B Common Stock have five
votes per share on each matter considered by stockholders and the holders of
Class A Common Stock have one vote per share on each matter considered by
stockholders, and except that the holders of each class will vote as a separate
class with respect to any matter requiring class voting by the General
Corporation Law of the State of Delaware.
Prior to this offering (the "Offering"), there has been no public market
for the Units, Class A Common Stock or Class A Warrants and there can be no
assurance that such a market will develop. The Company has applied for quotation
of the Units, Class A Common Stock and Class A Warrants on The Nasdaq SmallCap
Market ("Nasdaq") under the symbols HMSIU, HMSI and HMSIW, respectively. It is
anticipated that the initial public offering price will be $5.00 per Unit. See
"Underwriting" for a discussion of factors considered in determining the initial
public offering price. FOR INFORMATION CONCERNING A SECURITIES AND EXCHANGE
COMMISSION INVESTIGATION RELATING TO THE REPRESENTATIVE, SEE "RISK FACTORS" AND
"UNDERWRITING."
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 7 AND "DILUTION."
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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.
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Underwriting Discoun Proceeds to
Price To Public and Commissions (1) Company (2)
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Per Unit............. $ $ $
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Total (3)........... $ $ $
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(1) Does not include additional compensation to be received by D.H. Blair
Investment Banking Corp., the representative (the "Representative") of the
several underwriters (the "Underwriters"), in the form of (i) a
non-accountable expense allowance of $______, or $______ per Unit ($______
if the Underwriters' over-allotment option is exercised in full) and (ii)
an option, exercisable over a period of two years commencing three years
from the date of this Prospectus, to purchase up to 176,000 Units at
$______ per Unit (the "Unit Purchase Option"). The Company has also agreed
to indemnify the Underwriters against certain liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting estimated expenses of $______ payable by the Company,
including the Representative's non-accountable expense allowance.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 264,000 additional Units on the same terms and conditions as set forth
above, solely to cover over-allotments, if any, subject to the right of the
Representative to elect, in its sole discretion, to exercise such option
individually, and not as representative of the several Underwriters. If the
over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$______, $______ and $______, respectively. See "Underwriting."
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The Units are being offered on a "firm commitment" basis by the
Underwriters when, as and if delivered to and accepted by the Underwriters,
subject to their right to reject orders in whole or in part and subject to
certain other conditions. It is expected that the delivery of the certificates
representing the Units will be made against payment at the offices of D.H. Blair
Investment Banking Corp., 44 Wall Street, New York, New York on or about
___________, 1997.
D.H. BLAIR INVESTMENT BANKING CORP.
The date of this Prospectus is __________, 1997
<PAGE>
[The following paragraph describes a graphic in the printed material]
The artwork is a collage of pictures depicting (i) health care professionals
performing services on patients, (ii) an individual ordering a prescription over
the telephone and (iii) a picture of the Company's HealthCare Solutions Card.
The artwork also contains the following caption: "HealthCare Solutions Card
holders simply present the card to any of our network of thousands of healthcare
professionals around the country to receive savings on the spot on many products
and services."
The Company intends to furnish its stockholders and holders of Class A
Warrants with annual reports containing financial statements audited by its
independent auditors.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE UNITS,
CLASS A COMMON STOCK AND/OR THE CLASS A WARRANTS. SUCH TRANSACTIONS MAY INCLUDE
THE PURCHASE OF UNITS, CLASS A COMMON STOCK AND CLASS A WARRANTS FOLLOWING THE
PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE UNITS, THE
CLASS A COMMON STOCK AND THE CLASS A WARRANTS OR FOR THE PURPOSE OF MAINTAINING
THE PRICE OF THE UNITS, THE CLASS A COMMON STOCK AND THE CLASS A WARRANTS AND
THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
Except as otherwise noted, all information in this Prospectus (a) gives effect
to (i) the incorporation of the Company in Delaware and the merger of the
Company's predecessor entity, a Missouri limited liability company, into the
Company in February 1997; and (ii) the conversion, on the closing of the
Offering, of certain outstanding warrants issued by the Company in a private
placement completed in February and March 1997 (the "Bridge Financing") into
Class A Warrants (the "Bridge Warrants") identical to the Class A Warrants
offered hereby; and (b) assumes no exercise of (i) the Underwriter's
over-allotment option; (ii) the Class A Warrants; (iii) the Bridge Warrants;
(iv) the Unit Purchase Option; (v) options granted or available for grant under
the Company's 1997 Stock Option Plan; and (vi) outstanding warrants for the
purchase of Class A Common Stock. See "Capitalization," "Management -- Stock
Options," "Certain Transactions" and "Description of Securities."
The Company
The Company is a development stage enterprise organized to develop, market
and administer a health care benefit services program which is designed to
enable participants ("Members") to obtain discounts on purchases of ancillary
health care products and services through certain networks (the "Networks") of
health care providers (the "Providers"). The Networks with which the Company
currently maintains contracts comprise an aggregate of approximately 44,000
participating Providers of eye care, dental, hearing, pharmacy and chiropractic
benefits throughout the United States, and Members will be able to access the
Networks through the use of a discount membership card (the "HealthCare
Solutions Card"). The HealthCare Solutions Card is expected to be marketed,
directly and through independent brokers, agents and consumer marketing
organizations, to individuals and to employers, health maintenance organizations
("HMOs") and business and other associations (collectively, "Sponsors") who may
either purchase the HealthCare Solutions Card for, or offer it to, their
employees or members.
The Company believes that the HealthCare Solutions Card addresses two
significant concerns in the healthcare industry: cost containment and the rising
number of people who are underinsured. In recent years, the cost of
health-related products and services has increased at a rate significantly
greater than the general rate of inflation. Such increasing costs have led to
limitations on reimbursement from insurance companies, HMOs and government
sources and have generated demand for products and services designed to control
health care costs. Many employers have responded to the increased cost of
providing insurance to their employees by reducing or eliminating available
insurance coverage and by requiring employees to contribute heavily to premiums,
especially for family members. As a result, the Employee Benefit Research
Institute estimates that in 1995, approximately 40 million Americans, or
approximately 17% of the population under the age of 65, had no health
insurance, and most Americans lacked insurance coverage for one or more
ancillary health care services. In addition, based upon a 1995 Blue Cross Blue
Shield Survey, it is estimated that in 1995, approximately $140 billion was
spent on ancillary health care services, including eye care, dental, and
pharmaceutical services, and that only approximately $50 billion of such amount
was reimbursed by a third party. Moreover, as a result of the "baby boom"
generation, the group of persons over the age of 50 is currently the fastest
growing segment of the United States population. As the population ages, a
greater percentage of the total population is likely to need vision, dental,
pharmaceutical, chiropractic and hearing care products and services, many of
which are not covered by Medicare.
The Company believes that the HealthCare Solutions Card will provide a
low-cost, non-insurance alternative to individuals who are seeking to reduce
their out-of-pocket health care costs not covered by insurance or who are unable
to obtain health care insurance due to their medical history, age or occupation.
For an annual fee expected to range from approximately $60 to $80, Members will
be able to obtain discounts of 5% to 60% off the retail or usual and customary
prices from participating Providers. Acceptance in the Company's program is
unrestricted, and the HealthCare Solutions Card can be used to cover any member
of the cardholder's immediate family. The Company's revenues are initially
expected to be derived principally from the receipt of annual or monthly
enrollment fees paid by or on behalf of Members for the right to obtain
discounts at the point of purchase from Providers in the Networks.
The Company's strategy is to focus principally on (i) expanding the range
of ancillary and other health care services and products included in the
Networks, (ii) expanding the Networks to include additional Providers throughout
the United States, (iii) expanding the Company's sales and marketing
capabilities and (iv) the possible development of a physician and hospital
network.
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3
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Since its inception, the Company's activities have consisted of (i)
designing and developing a network administration and management system which
the Company believes will facilitate data processing and enhance its customer
service capabilities (the "Network Administration System"), (ii) negotiating
contracts with Networks of Providers, (iii) organizing an initial marketing
force to market the HealthCare Solutions Card and (iv) test marketing. The
Company has only recently begun to market the HealthCare Solutions Card and is
currently focusing its initial marketing efforts in the states of Illinois,
Indiana, Missouri and Texas. To date, only minimal sales of the HealthCare
Solutions Card have taken place and there can be no assurance that the Company
will successfully maintain or expand the Networks and/or market the HealthCare
Solutions Card. There can also be no assurance that sales of the HealthCare
Solutions Card will ever result in the Company achieving profitable operations.
The Company was established in October 1995 as MegaVision L.C., a Missouri
limited liability company ("MegaVision"). In February 1997, MegaVision merged
into HealthCore Medical Solutions, Inc. Except as otherwise required by the
context, all references to the Company and its operations include MegaVision and
its operations. The Company's executive offices are located at 11904 Blue Ridge
Boulevard, Grandview, Missouri 64030, and its telephone number is (816)
763-4900.
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4
<PAGE>
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The Offering
Securities Offered............. 1,760,000 Units, each Unit consisting of on
share of Class A Common Stock and one Class
A Warrant. Each Class A Warrant entitles
the holder to purchase one share of Class A
Common Stock at an exercise price of $6.50,
subject to adjustment, at any time through
the fifth anniversary of the date of this
Prospectus. The Class A Warrants are
subject to redemption in certain
circumstances. See "Description of
Securities."
Common Stock Outstanding
Before Offering (1):
Class A Common Stock..... 984,000 shares (2)(3)
Class B Common Stock..... 216,000 shares (3)
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Total............ 1,200,000 shares (2)(3)
=========
Common Stock Outstanding
After Offering (1):
Class A Common Stock..... 2,744,000 shares (2)(3)(4)
Class B Common Stock..... 216,000 shares (3)
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Total............ 2,960,000 shares (2)(3)(4)
=========
Use of Proceeds . ............. To repay $2,300,000 principal amount of 10%
subordinated notes (the "Bridge Notes")
issued in the Bridge Financing, plus
accrued interest thereon; for marketing and
sales, acquisition of computer equipment
and for working capital. See "Use of
Proceeds." Proposed Nasdaq Symbols (5)
Units.................... HMSIU
Class A Common Stock..... HMSI
Class A Warrants......... HMSIW
Risk Factors................... The Offering involves a high degree of risk
and immediate substantial dilution. See
"Risk Factors" and "Dilution."
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(1) For a description of the Class A Common Stock and Class B Common Stock
(collectively, the "Common Stock"), see "Description of Securities --
Common Stock."
(2) Excludes (i) an aggregate of 1,150,000 shares of Class A Common Stock
reserved for issuance upon exercise of the Bridge Warrants; (ii) 284,000
shares of Class A Common Stock reserved for issuance upon exercise of
outstanding warrants, 142,000 of which are exercisable only upon the
attainment by the Company of certain earnings or market price thresholds;
and (iii) 200,000 shares of Class A Common Stock reserved for issuance
under the Company's 1997 Stock Option Plan (the "Plan"), under which, as of
the date of this Prospectus, options to purchase 57,500 shares of Class A
Common Stock are outstanding at an exercise price of $5.00. See "Risk
Factors -- Charges and Potential Charges to Earnings," "Management -- Stock
Options" and "Certain Transactions."
(3) Includes 900,000 shares of Common Stock (the "Escrow Shares") which have
been deposited into escrow by the holders thereof on a pro rata basis. The
Escrow Shares are subject to cancellation and will be contributed to the
capital of the Company if the Company does not attain certain earnings
levels or the market price of the Company's Class A Common Stock does not
achieve certain levels during the next three years. If such earnings or
market price levels are met, the Company will record a substantial non-cash
charge to earnings, for financial reporting purposes, as compensation
expense relating to the value of the Escrow Shares released to Company
officers and employees. See "Risk Factors -- Charges and Potential Charges
to Earnings," "Capitalization" and "Principal Stockholders."
(4) Excludes (i) up to 528,000 shares of Class A Common Stock issuable upon
exercise of the Underwriters' over-allotment option (and the Warrants
included therein); (ii) 1,760,000 shares of Class A Common Stock issuable
upon exercise of the Class A Warrants which are components of the Units
offered hereby; and (iii) an aggregate of 352,000 shares of Class A Common
Stock issuable upon exercise of the Unit Purchase Option and the Class A
Warrants included therein. See "Underwriting."
(5) Notwithstanding quotation on the Nasdaq SmallCap Market, there can be no
assurance that an active trading market for the Company's securities will
develop or, if developed, that it will be sustained.
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5
<PAGE>
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<TABLE>
<CAPTION>
Summary Financial Information
June 1, 1995
(Inception) Nine Months Ended June 1, 1995
Through Year Ended June 30, (Inception)
September 30, September 30, -------------------------- Through
1995 1996 1996 1997 June 30, 1997
---- ---- ---- ---- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
General and administrative
expenses ................... $ 78,105 $ 900,177 $ 745,123 $ 1,418,389 $ 2,396,671
Selling and marketing expenses 34,158 277,845 59,624 251,731 563,734
Interest expense ............. -- 36,071 3,028 514,598 550,669
--------- ----------- --------- ----------- -----------
Net loss ..................... $(112,263) $(1,214,093) $(807,775) $(2,184,718) $(3,511,074)
========= =========== ========= =========== ===========
Net loss per share(1) ........ $ (0.46) $ (3.95) $ (2.35) $ (5.57)
========= =========== ========= ===========
Weighted average number of
shares outstanding ......... 245,010 307,717 344,417 392,067
========= =========== ========= ===========
</TABLE>
At June 30, 1997
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Actual As Adjusted(2)
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(Unaudited)
Balance Sheet Data:
Working capital (deficit).......................... $(1,868,259) $5,203,548
Total assets....................................... 1,124,046 5,940,246
Total liabilities.................................. 2,647,500 551,166
Deficit accumulated during the development stage... (3,511,074) (4,131,662)
Total stockholders' equity (capital deficiency).... (1,523,454) 5,389,080
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(1) The Escrow Shares are excluded from the computation of net loss per share.
See Notes B(4) and D of Notes to Financial Statements.
(2) Adjusted to give effect to (i) the sale of the 1,760,000 Units offered
hereby at an assumed initial public offering price of $5.00 per Unit and
the use of a portion of the net proceeds to repay the Bridge Notes (plus
accrued interest thereon through June 30, 1997) and the corresponding
additional charge to operations of approximately $204,000 and (ii) an
anticipated non-cash charge to operations of approximately $417,000 in the
quarter ending September 30, 1997 relating to the fair market value of
warrants issued to the Company's Chairman of the Board and Chief Executive
Officer with an exercise price below the fair market value of the Company's
Class A Common Stock. See "Risk Factors -- Charges and Potential Charges to
Earnings," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Transactions."
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6
<PAGE>
Risk Factors
The securities offered hereby are speculative in nature and an investment
in the Units offered hereby involves a high degree of risk. Prospective
investors are cautioned that the statements in this Prospectus that are not
descriptions of historical facts may be forward-looking statements that are
subject to risks and uncertainties. Actual results could differ materially from
those currently anticipated due to a number of factors. In addition to the other
information contained in this Prospectus, prospective investors should carefully
consider the following risk factors in analyzing this Offering.
History of Operating Losses; Anticipated Future Losses. The Company has
experienced significant operating losses since its inception in June 1995. As of
June 30, 1997, the Company had an accumulated deficit of approximately $3.5
million and significant losses and increases in working capital deficit have
occurred since such date and are expected to continue for the foreseeable
future. Such losses have been and are expected to be principally the result of
the various costs associated with the Company's development and marketing
activities. There can be no assurance that the Company will ever achieve or
sustain commercial sales or profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Development Stage Company; No History of Operations. The Company was
organized in June 1995 and is currently in the development stage. The Company
has only recently contracted with the Networks and has achieved only minimal
sales of the HealthCare Solutions Card. The Company's success depends upon
several factors, including the quality and quantity of Providers in the
Networks, the acceptance of the HealthCare Solutions Card by individuals,
employers, HMOs, business and other associations, providers of medical benefits
and Members, the ability of the Company to incentivize independent sales
representatives to sell the Company's products and managing the technical
aspects of its operations. Investors should be aware of the difficulties
normally encountered by a new enterprise and the high rate of failure of such
enterprises. There is no history upon which to base any assumption as to the
likelihood that the Company will prove successful, and there can be no assurance
that the Company will become a viable or profitable business. While the Company
has conducted limited development and sales and marketing activities and has
generated minimal sales in the third calendar quarter of 1997, it has not
generated any significant revenues and may experience many of the problems,
delays, expenses and difficulties commonly encountered by early stage companies,
many of which are beyond the Company's control. These include, but are not
limited to, unanticipated problems, delays or expenses relating to product
development and marketing, uncertain market acceptance, lack of sufficient
capital, competition, customer service and regulatory compliance, as well as
additional costs and expenses that may exceed current estimates. There can be no
assurance that the Company will successfully develop a viable cardholder base,
that it will be able to enter into and maintain agreements with a sufficient
number of Providers that are accessible and acceptable to potential Members, or
that the Company will generate any revenues or ever achieve profitable
operations. Additionally, the Company has never operated a network of the size
that will be required to be profitable and cannot predict all of the technical
difficulties, including issues relating to management information systems and
customer service, that may arise. See "Business."
Use of Proceeds to Repay Indebtedness; Need for Significant Additional
Funds. The Company has a working capital deficit and requires the proceeds of
this Offering to pursue its business plan. Approximately $2,425,000, or
approximately 34%, of the net proceeds of this Offering will be used for the
repayment of the Bridge Notes issued in the Bridge Financing and will not be
available for any other purpose. The remaining proceeds of this Offering are
only expected to be sufficient to fund the Company's operations for
approximately 18 months and the Company will likely require significant
additional funds to continue its operations after such period. Moreover, the
Company's cash requirements may vary materially from those currently anticipated
due to product development and marketing programs, changes in the forms and
direction of the Company's activities, the timing of receipt of revenues, if
any, and other factors. The Company has no commitments for any future funding
and there can be no assurance that the Company will be able to obtain additional
financing in the future from either debt or equity financings, bank loans,
collaborative arrangements or other sources on terms acceptable to the Company,
or at all. If the Company is unable to obtain the necessary financing, it will
be required to significantly curtail its activities or cease operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Unproven Commercial Viability; Need for Market Acceptance. The Company's
success is dependent on commercial acceptance of the HealthCare Solutions Card,
as well as any other potential medical benefits related products the Company may
offer in the future. Except as described herein, the Company has no present
intention to
7
<PAGE>
offer additional medical benefits related products. The commercial viability of
the Company will be determined in large part by the acceptance of the HealthCare
Solutions Card by individuals, employers, HMOs, business and other associations,
providers of medical benefits and Members and will require the Company to secure
marketing and Network provider alliances within the highly competitive medical
benefits industry. To date, the Company has achieved only minimal sales of the
HealthCare Solutions Card. There can be no assurance that the Company will be
able to successfully demonstrate that the benefits associated with the
HealthCare Solutions Card justify the costs associated with the card or that
such benefits outweigh those associated with competing medical benefits programs
or traditional insurance programs. If the Company is unable to achieve
commercial acceptance of the HealthCare Solutions Card, the Company may be
forced to cease operations.
Limited Marketing Capabilities; Dependence on Third Parties for Marketing
Activities. The Company's operating results will depend to a large extent on its
ability to successfully market the HealthCare Solutions Card and any other
potential products to Sponsors and Members. The Company currently has limited
marketing capabilities and believes it will have to significantly expand its
sales and marketing capabilities, as well as concentrate its limited resources
on defined segments of its target market. The Company anticipates that it will
depend, to a significant extent, on independent brokers and selected marketing
organizations to market the Company's products. Although such parties will
receive a commission for their services, the success of any such relationship
will depend in part upon such parties' own competitive, marketing and strategic
considerations, including the relative advantages of alternative products being
marketed by such persons, and there can be no assurance that such parties will
have the interest or ability to successfully market the Company's products. To
the extent that the Company utilizes third parties to market its products, the
Company's control over sales and marketing will be reduced. Although the Company
has entered into numerous agreements with independent brokers, substantially all
of these brokers are affiliated with American Family Life Assurance Company
("AFLAC") and are concentrated in the states of Illinois, Indiana, Missouri and
Texas. Accordingly, the Company's initial marketing efforts will be focused in
such states. There can be no assurance that the Company will be able to hire
experienced marketing personnel or establish any additional arrangements with
independent brokers or that any current or future marketing efforts undertaken
by or on behalf of the Company will be successful or will result in any
significant sales of the Company's products. See "Business -- Sales and
Marketing."
Dependence Upon Providers; Possible Termination of Provider Agreements. The
success of the Company's operations will depend in part on the ability of the
Company to enter into and maintain service agreements with provider Networks of
health care products and services under discount and other pricing terms that
make the HealthCare Solutions Card attractive to Members and Sponsors. To date,
the Company has entered into non-exclusive service agreements with several
provider Networks. The agreements generally expire after approximately one to
three years, but are subject to earlier termination upon the occurrence of
certain events, including, in certain cases, notice by the other party. There
can be no assurance that (i) the providers affiliated with such Networks will
actually provide services to the Members, (ii) any such agreements will be
renewed upon their respective expiration dates or (iii) any such agreements will
not be terminated earlier. The exercise of cancellation rights by any provider
Network could have a material adverse effect on the Company. Further, there can
be no assurance that the Company will be successful in securing agreements with
additional providers or provider networks or that any providers that agree to
join the Network will provide services or cost savings that will be desirable to
Members. The inability of the Company to retain its current service providers or
to obtain alternate or additional service providers will likely detract from the
real or perceived value of the HealthCare Solutions Card and may cause the
Company to curtail or alter its activities or cease operations. See "Business --
The HealthCare Solutions Card" and "-- Competition."
Risks Related to Possible Entry Into Physician and Hospital Network
Business. The Company previously entered into a letter of intent with a view to
acquiring certain assets associated with an ongoing medical benefits business
that is developing a network of physician and hospital providers. The letter of
intent expired by its terms and the parties have terminated their discussions.
The Company expects to continue to explore the possibility of developing or
acquiring a physician and hospital network business and has entered into a new,
non-binding letter of intent to establish a joint venture with a preferred
provider organization ("PPO") that maintains a nationwide network of
approximately 250,000 physicians and hospitals. There can be no assurance that
the letter of intent will result in the execution of definitive agreements or
that any such physician and hospital network will be established. See "Business
- -- The HealthCare Solutions Card -- Potential Physician and Hospital Services."
The development by the Company of a physician and hospital network business is
subject to numerous risks, including (i) risks similar to
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those identified elsewhere in this Prospectus in connection with the Company's
proposed development of an ancillary benefits network, (ii) significant barriers
to entry, (iii) intense competition with well-capitalized insurance companies
and (iv) the possible incurrence of significant additional sales and marketing
costs to develop a distribution system different from the one being developed by
the Company for its ancillary health care network. In addition, the Company will
continue to be subject to certain confidentiality and non-solicitation
provisions entered into with the other party to the previously terminated letter
of intent, which provisions will impose limitations on the Company's flexibility
within the physician and hospital network business and may expose the Company to
the risk of litigation should it enter such business. See "Business --
Strategy."
Possible Exposure to Liability. Physicians and other medical entities have
become increasingly vulnerable to lawsuits alleging medical malpractice. While
the Company does not intend to practice medicine or control any affiliated
Provider's practice of medicine, there can be no assurance that the Company will
not become a party to malpractice litigation in the future. The Company also may
be exposed to claims for personal injuries as a result of the incorrect
preparation or packaging of prescriptions or from the pilferage of or tampering
with the prescription drugs supplied by pharmacy benefits Providers. The Company
will attempt to take precautions to protect itself from such claims, including
seeking indemnification from such Providers, but no assurance can be given that
such precautions will be implemented or will prove adequate. Because the Company
is not itself permitted to render medical services, it cannot obtain malpractice
insurance. The Company does not maintain errors and omissions insurance, but
does maintain general liability insurance in the amount of $2,000,000 which
provides general coverage for property damage, business liability and medical
payments. There can be no assurance that the Company will not be sued for
malpractice as the result of the activities of providers or that any such suit
will not result in a recovery against the Company in excess of any applicable
general liability insurance coverage and thus materially and adversely affect
the Company's financial viability.
Health Care Reform. In recent years there have been numerous proposals to
change the health care system in the United States. The Company is unable to
predict the effect on the Company of potential reforms in the health care
industry, either by legislative mandate or through self policing mechanisms,
particularly those affecting physicians, health care payors and affiliated
health systems. Such changes could have a material adverse effect on the
Company.
Government Regulation. The delivery of health care products and services is
subject to extensive federal, state and local regulation, including but not
limited to the prohibition of business corporations from providing medical care,
fraud and abuse provisions of the Medicare and Medicaid statutes, state laws
that prohibit referral fees and fee splitting and certain regulations applicable
to insurance companies and certain organizations that provide or arrange for
health care services. The Company believes that certain registration and
licensing laws and regulations in certain states in which the Company intends to
operate may apply to the Company's operations. In addition, statutes and
regulations applicable to other health care organizations with which the Company
may contract, including without limitation those relating to fee splitting,
referral fees, patient freedom of choice, provider rights to participate and
antidiscrimination, may impact the Company and may result in the delay or denial
of any such organization's participation in the Company's Networks. The
utilization fees received by the Company in connection with the pharmacy
benefits program might be construed to contravene the literal provisions of
these statutes and regulations in a number of states in which the Company
intends to operate. Although the Company has not obtained any rulings from any
governmental authorities or an opinion of counsel with regard to any of these
matters, the Company believes that the extent of its compliance with such laws
and regulations as they are currently enforced and applicable to the Company is
consistent with current industry practices and will not have a material adverse
affect on its business. However, legislation in these areas continues to evolve
and there can be no assurance that changes in enforcement and compliance
practices will not occur in the future, or that existing legislation will not be
expanded. In any such event, the Company could be required to effect
registration in various additional states, post substantial fidelity or surety
bonds and/or meet other financial requirements in connection therewith.
Alternatively, the Company could be required to modify the products and services
offered by it, modify its contractual arrangements with Networks and Sponsors or
be precluded from providing some or all of its products and services in certain
states. Any or all of the foregoing consequences, or a determination that the
Company is in violation of any applicable laws or regulations, could have a
material adverse effect on the Company. See "Business -- Government Regulation."
Competition. The Company believes that a critical element of its business
is the competition for a portion of the benefit dollars allocated by various
organizations for employee benefit programs. The Company competes for a portion
of those dollars with various other cost-containment marketing organizations,
pharmacy indemnity programs,
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retail pharmacies, mail order prescription companies, preferred provider
organizations, HMOs, health care membership programs and other ancillary health
care insurance programs. Most of these competitors have had longer operating
histories and have significantly greater financial, marketing and administrative
resources than the Company. There can be no assurance that the Company will
develop products that achieve greater market acceptance than competitive
products or that the Company's competitors will not succeed in developing
products that would render the Company's products less competitive or obsolete.
See "Business -- Competition."
Proprietary Rights; Management Information Systems. The Company's Network
Administration System is a critical component of the Company's ability to
provide customer service and process other data. The Company relies on trade
secrets to establish and protect its proprietary rights to its Network
Administration System. However, trade secrets are difficult to protect and there
can be no assurance that others will not independently develop substantially
equivalent proprietary technology or otherwise gain access to the Company's
trade secrets or disclose such technology, or that the Company can meaningfully
protect its rights to unpatented trade secrets.
The Company has applied for rights to the tradenames "HEALTHCARE
SOLUTIONS," "THE SOLUTIONS CARD," "HEALTHCARE SAVINGS. GUARANTEED," and
"HEALTHCORE MEDICAL SOLUTIONS, INC." and the service marks for "HEALTHCARE
SOLUTIONS" and "HEALTHCORE MEDICAL SOLUTIONS, INC." from the United States
Patent and Trademark Office, but there can be no assurance that such rights will
be granted. If the Company is not able effectively to protect itself against use
of similar trade names or service marks, or if the Company's use of its trade
names or service marks are found to infringe upon the proprietary rights of
third parties, the Company's business could be adversely affected. See "Business
- -- Proprietary Rights."
Reliance Upon Data Processing. Certain aspects of the Company's business,
including its customer service capabilities, are dependent upon its ability to
store, retrieve, process and manage data and to maintain and upgrade its data
processing capabilities. Although the Company believes it has established or
will establish appropriate safeguard mechanisms, interruption of data processing
capabilities for any extended period of time, loss of stored data, programming
errors or other computer problems could have a material adverse effect on the
Company. There can be no assurance the Company will not experience problems,
delays or unanticipated costs in the use of its current system. Any difficulties
in reviewing Providers in a timely manner may adversely affect the Company's
customer service efforts and its ability to attract and retain customers. In
addition, the Company intends to utilize its data processing system to
facilitate the payment of commissions to brokers and the payment of fees to
certain Networks. Any difficulties in the payment of such commissions and fees
could adversely affect the Company's ability to attract and retain brokers and
Networks.
Money Back Guarantee. The Company intends to offer a full money back
guarantee to Members who, after the first full year of enrollment, are not
satisfied with the HealthCare Solutions Card. The Company intends to recognize
revenue from the sale of the HealthCare Solutions Card upon receipt of the
annual or monthly fee by the Company from Members and, therefore, if refunds
exceed the reserves established by the Company, the Company's operating results,
cash flows and financial condition could be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Broad Discretionary Use of Proceeds. The Company has broad discretion with
respect to the specific application of approximately $2,191,200, or
approximately 31%, of the net proceeds of the Offering. Such amounts are
intended to be used for working capital, including salaries of current executive
officers and significant employees. Thus, purchasers of the Units will be
entrusting their funds to the Company's management, upon whose judgment the
investors must depend, with only limited information concerning management's
specific intentions. See "Use of Proceeds."
Dependence on Key Personnel; Need for Additional Personnel. The Company is
dependent upon Neal J. Polan, the Company's Chairman and Chief Executive
Officer, as well as principal members of its management team. Mr. Polan expects
to devote approximately 50% of his business time to activities on behalf of the
Company. The Company has not entered into any employment agreement with Mr.
Polan, although the Company intends to obtain "key-man" life insurance coverage
in the face amount of $2,000,000 on Mr. Polan. The Company currently has only 13
full-time employees. The Company's success will be dependent, in part, upon its
ability to attract and retain additional skilled personnel to manage the
Company's operations. The inability to do so, or the loss of services of certain
of its executive officers and directors or other executive officers or key
employees that may be hired in the future, may have a material adverse effect on
the Company.
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Control by Management and Principal Stockholders; Potential Anti-takeover
Effect of Shares Having Disproportionate Voting Rights. All of the outstanding
Class B Common Stock is currently owned beneficially by Neal J. Polan, the
Chairman of the Board and Chief Executive Officer of the Company. Moreover,
pursuant to a voting proxy, Mr. Polan has the power to vote an additional
144,000 shares of Class A Common Stock held by a former employee of the Company.
As a result, upon completion of the Offering, Mr. Polan will have the ability to
vote shares of Common Stock representing approximately 32.0% of the total voting
power of the Company, and therefore influence significantly or control the
outcome of substantially all matters submitted to a vote of the stockholders.
Furthermore, the disproportionate vote afforded the Class B Common Stock could
also serve to impede or prevent a change of control of the Company. As a result,
potential acquirors may be discouraged from seeking to acquire control of the
Company through the purchase of Class A Common Stock, which could have a
depressive effect on the price of the Company's securities. See "Certain
Transactions," "Principal Stockholders" and "Description of Securities."
Potential Adverse Effects of Preferred Stock; Possible Anti-takeover
Provisions. The Company's By-laws authorize the issuance of shares of "blank
check" preferred stock, which will have such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors will be empowered, without stockholder
approval (but subject to applicable government regulatory restrictions), to
issue preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of the Common Stock. In the event of such 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 preferred stock, there can be no
assurance that the Company will not do so in the future. The Company is also
subject to a Delaware statute regulating business combinations that could
discourage, hinder or preclude an unsolicited acquisition of the Company and
make it less likely that stockholders receive a premium for their shares as a
result of such attempt, which may adversely affect the market price of the
Company's securities. See "Description of Securities -- Preferred Stock" and "--
Business Combination Protections."
Immediate Dilution. The purchasers of the Units in the Offering will incur
immediate dilution of approximately $2.36 or 47.2% in the pro forma per share
net tangible book value of their Class A Common Stock ($2.16 or 43.2% if the
Underwriters' over-allotment option is exercised in full). Additional dilution
to public investors, if any, may result to the extent that the Class A Warrants,
the Representative's Unit Purchase Option or other outstanding options or
warrants are exercised at a time when the net tangible book value per share of
Common Stock exceeds the exercise price of any such securities. See "Dilution."
Charges and Potential Charges to Earnings. As a condition to the Offering,
the current holders of the Company's Class A and Class B Common Stock have
agreed to place, on a pro rata basis, 900,000 shares, or three-quarters of the
outstanding shares of Common Stock of the Company before the Offering, into
escrow, to be released only upon the attainment by the Company of certain
earnings or market price thresholds determined by negotiation between the
Company and the Underwriters. The Securities and Exchange Commission (the
"Commission") has taken the position with respect to such escrow arrangements
that in the event any shares are released from escrow to the holders who are
officers, directors, employees or consultants of the Company, a compensation
expense will be recorded for financial reporting purposes. Accordingly, in the
event of the release of the Escrow Shares, the Company will recognize during the
period in which the earnings thresholds are probable of being met or such stock
levels achieved, a substantial non-cash charge to earnings equal to the fair
market value of such shares on the date of their release, which would have the
effect of significantly increasing the Company's loss or reducing or eliminating
earnings, if any, at such time. The recognition of such compensation expense may
have a depressive effect on the market price of the Company's securities.
Notwithstanding the foregoing discussion, there can be no assurance that the
Company will attain the targets which would enable the Escrow Shares to be
released from escrow.
The Company incurred a non-cash charge to operations of approximately
$438,000 during the nine months ended June 30, 1997 and expects to incur
additional non-cash charges to operations aggregating approximately $204,000
through the closing of the Offering relating to the unamortized debt discount
and debt issuance costs incurred in connection with the Bridge Financing. The
Company also expects to incur an additional non-cash charge to operations of
approximately $417,000 in the quarter ending September 30, 1997 relating to the
fair market value of the warrants issued to Neal J. Polan, the Company's
Chairman of the Board and Chief Executive Officer, with an exercise price below
the fair market value of the Company's Class A Common Stock. In addition, a
portion of the warrants issued to Mr. Polan will become exercisable only upon
the attainment by the Company of certain earnings
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or market price thresholds. In the event that such warrants become exercisable,
the Company will recognize during the period in which the earnings thresholds
are probable of being met or such stock levels achieved, an additional non-cash
charge to earnings equal to the fair market value of the portion of the warrants
subject to such earnings or market price thresholds, which could have the effect
of significantly increasing the Company's loss or reducing or eliminating
earnings, if any, at such time. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Certain Transactions,"
"Principal Stockholders" and "Description of Securities."
Potential Influence of the Representative. The Representative has the
right, for a period of five years after the completion of the Offering, to
designate one individual for nomination to the Company's Board of Directors,
although it has not yet selected any such designee. In addition, during the
five-year period from the date of this Prospectus, in the event the
Representative originates a financing or a merger, acquisition or transaction to
which the Company is a party, the Representative will be entitled to receive a
finder's fee in consideration for origination of such transaction. The Company
has also agreed to sell to the Representative and its designees, for nominal
consideration, the Unit Purchase Option to purchase up to 176,000 Units and has
agreed to grant to the holders of the Unit Purchase Option registration rights
with respect to the securities issuable upon exercise thereof. Such rights may
enable the Representative to exert a degree of influence over the Company during
the period such rights are outstanding.
No Dividends. The Company has not paid any cash dividends on its Class A
Common Stock and does not expect to declare or pay any cash or other dividends
in the foreseeable future. See "Dividend Policy."
No Public Market for Securities; Possible Volatility of Market Price;
Arbitrary Determination of Offering Price. Prior to the Offering, there has not
been any market for any of the Company's securities, and there can be no
assurance that an active trading market will develop or be sustained after the
Offering. The initial public offering price of the Units and the exercise price
and other terms of the Class A Warrants have been determined by negotiation
between the Company and the Representative and are not necessarily related to
the Company's asset value, net worth, results of operations or any other
criteria of value and may not be indicative of the prices that may prevail in
the public market. The market prices of the Units, Class A Common Stock and
Class A Warrants could also be subject to significant fluctuations in response
to variations in the Company's development efforts, intellectual property
position, government regulations, general trends in the industry and other
factors, including extreme price and volume fluctuations which have been
experienced by the securities markets from time to time. See "Underwriting."
Shares Eligible for Future Sale. Future sales of Common Stock by existing
stockholders pursuant to Rule 144 under the Securities Act or otherwise could
have an adverse effect on the price of the Company's securities. The 1,200,000
shares of Common Stock outstanding before the Offering are eligible for resale
in the public market, subject to compliance with Rule 144 under the Securities
Act. In addition, 13,000 shares of Class A Common Stock issuable upon the
exercise of stock options will be eligible for resale pursuant to Rule 144 and
Rule 701 under the Securities Act immediately after the 90th day following the
date of this Prospectus and a portion of the remaining 44,500 outstanding
options will vest and be eligible for resale pursuant to Rule 144 and Rule 701
under the Securities Act beginning in May 1998. However, holders of all of the
outstanding shares of Common Stock and outstanding options prior to the Offering
have agreed not to sell any shares of Common Stock for a period of 13 months
from the date of this Prospectus without the prior written consent of the
Representative. Sales of Common Stock, or the possibility of such sales, in the
public market may adversely affect the market price of the securities offered
hereby. In addition, the holders of the Unit Purchase Option have certain demand
and "piggy-back" registration rights with respect to their securities and a
stockholder of the Company has certain "piggy-back" registration rights with
respect to 132,000 shares of Class A Common Stock owned by such stockholder.
Exercise of such rights could involve substantial expense to the Company. The
Company has agreed to register for resale the 1,150,000 Bridge Warrants and the
underlying Class A Common Stock one year from the closing of the Offering. See
"Description of Securities," "Shares Eligible for Future Sale" and
"Underwriting."
Outstanding Warrants and Options; Exercise of Registration Rights. Upon
completion of the Offering, the Company will have outstanding (i) 1,760,000
Class A Warrants to purchase an aggregate of 1,760,000 shares of Class A Common
Stock; (ii) the Bridge Warrants to purchase 1,150,000 shares of Class A Common
Stock; and (iii) the Unit Purchase Option to purchase an aggregate of 352,000
shares of Class A Common Stock, assuming exercise of the underlying Class A
Warrants. The Company also has (i) 200,000 shares of Class A Common Stock
reserved for issuance upon exercise of options under its 1997 Stock Option Plan,
of which 57,500 have been granted, and (ii) outstanding warrants to purchase
284,000 shares of Class A Common Stock. Holders of such warrants and options
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are likely to exercise them when, in all likelihood, the Company could obtain
additional capital on terms more favorable than those provided by warrants and
options. Further, while these Warrants and options are outstanding, the
Company's ability to obtain additional financing on favorable terms may be
adversely affected. The holders of the Unit Purchase Option have certain demand
and "piggy-back" registration rights with respect to their securities and a
stockholder of the Company has certain "piggy-back" registration rights with
respect to 132,000 shares of Class A Common Stock owned by such stockholder.
Exercise of such rights could involve substantial expense to the Company. In
addition, the Company has agreed to register for resale the 1,150,000 Bridge
Warrants and the underlying Class A Common Stock within one year from the
closing of the Offering. See "Management -- Stock Options," "Description of
Securities" and "Underwriting."
Potential Adverse Effect of Redemption of Warrants. Commencing one year
from the date of this Prospectus, the Class A Warrants may be redeemed by the
Company at a redemption price of $.05 per Warrant upon not less than 30 days'
prior written notice if the closing bid price of the Class A Common Stock shall
have averaged in excess of $9.10 per share for 30 consecutive trading days
ending within 15 days of the notice. Redemption of the Class A Warrants could
force the holders (i) to exercise the Warrants and pay the exercise price
therefor at a time when it may be disadvantageous for the holders to do so, (ii)
to sell the Warrants at the then current market price when they might otherwise
wish to hold the Warrants, or (iii) to accept the nominal redemption price
which, at the time the Warrants are called for redemption, is likely to be
substantially less than the market value of the Warrants. See "Description of
Securities -- Redeemable Class A Warrants."
Current Prospectus and State Registration to Exercise Warrants. Holders of
Class A Warrants will be able to exercise the Warrants only if (i) a current
prospectus under the Securities Act relating to the securities underlying the
Warrants is then in effect and (ii) such securities are qualified for sale or
exempt from qualification under the applicable securities laws of the states in
which the various holders of Warrants reside. Although the Company has
undertaken and intends to use its best efforts to maintain a current prospectus
covering the securities underlying the Warrants following completion of the
Offering to the extent required by Federal securities laws, there can be no
assurance that the Company will be able to do so. The value of the Class A
Warrants may be greatly reduced if a prospectus covering the securities issuable
upon the exercise of the Warrants is not kept current or if the securities are
not qualified, or exempt from qualification, in the states in which the holders
of Warrants reside. Persons holding Class A Warrants who reside in jurisdictions
in which such securities are not qualified and in which there is no exemption
will be unable to exercise their Warrants and would either have to sell their
Warrants in the open market or allow them to expire unexercised. If and when the
Class A Warrants become redeemable by the terms thereof, the Company may
exercise its redemption right even if it is unable to qualify the underlying
securities for sale under all applicable state securities laws. See "Description
of Securities -- Redeemable Class A Warrants."
Possible Adverse Effect on the Liquidity of the Company's Securities Due to
Securities and Exchange Commission Investigation of the Representative and Blair
& Co. and Recent Settlement by Blair & Co. with Nasd. The Securities and
Exchange Commission (the "Commission") is conducting an investigation concerning
various business activities of the Representative and D.H. Blair & Co., Inc., a
selling group member which will distribute a substantial portion of the Units
offered hereby ("Blair & Co."). The Company has been advised by the
Representative that the investigation has been ongoing since at least 1989 and
that it is cooperating with the investigation. The Representative cannot predict
whether this investigation will ever result in any type of formal enforcement
action against the Representative or Blair & Co.
In July 1997, Blair & Co., its Chief Executive Officer and its head trader
consented, without admitting or denying any violations, to a settlement with the
NASDR District Business Conduct Committee for District No. 10 to resolve
allegations of NASD rule and securities law violations in connection with
mark-up and pricing practices and adequacy of disclosures to customers regarding
market-making activities of Blair & Co. in connection with certain securities
issues during the period from June 1993 through May 1995 where Blair & Co. was
the primary selling group member. NASDR alleged the firm failed to accurately
calculate the contemporaneous cost of securities in instances where the firm
dominated and controlled after-market trading, thereby causing the firm to
charge its customers excessive mark-ups. NASDR also alleged the firm did not
make adequate disclosure to customers about its market-making activities in two
issues. As part of the settlement, Blair & Co. has consented to a censure and
has agreed to pay a $2 million fine, make $2.4 million in restitution to retail
customers, employ an independent consultant for two years to review and make
recommendations to strengthen the firm's compliance procedures, and has
undertaken for 12 months not to sell to its retail customers (excluding banks
and other institutional investors) more
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than 60% of the total securities sold in any securities offering in which it
participates as an underwriter or selling group member. The Chief Executive
Officer of Blair & Co., has agreed to settle failure to supervise charges by
consenting to a censure, the imposition of a $225,000 fine and a 60-day
suspension from associating with any NASD member firm and to take a
requalification examination. The firm's head trader has agreed to settle charges
against him by consenting to a censure, the imposition of a $300,000 fine and a
90-day suspension from associating with any member firm and has undertaken to
take certain requalification examinations. The settlement with NASDR does not
involve or relate to the Representative, its chief executive officer or any of
its other officers or directors.
The Company has been advised that Blair & Co. intends to make a market in
the Company's securities after the Offering. The Company is unable to predict
whether Blair & Co.'s settlement with the NASDR or any unfavorable resolution of
the Commission's investigation will have any effect on such firm's ability to
make a market in the Company's securities and, if so, whether the liquidity or
price of the Company's securities would be adversely affected. See
"Underwriting."
Possible Restrictions on Market-making Activities in Company's Securities.
The Representative has advised the Company that Blair & Co. intends to make a
market in the Company's securities. Regulation M under the Securities Act of
1934, as amended (the "Exchange Act"), may prohibit Blair & Co. from engaging in
any market-making activities with regard to the Company's securities for the
period from five business days (or such other applicable period as Regulation M
may provide) prior to any solicitation by the Representative of the exercise of
Class A Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right that the
Representative may have to receive a fee for the exercise of Class A Warrants
following such solicitation. As a result, Blair & Co. may be unable to provide a
market for the Company's securities during certain periods while the Class A
Warrants are exercisable. In addition, the Company has agreed to register for
resale the Bridge Warrants and the underlying Class A Common Stock within one
year from the closing of the Offering. Under applicable rules and regulations
under the Exchange Act, any person engaged in the distribution of the Bridge
Warrants may not simultaneously engage in market-making activities with respect
to any securities of the Company for the applicable "cooling off" period (which
is likely to be five business days) prior to the commencement of such
distribution. Accordingly, in the event the Representative or Blair & Co. is
engaged in a distribution of the Bridge Warrants, neither of such firms will be
able to make a market in the Company's securities during the applicable
restrictive period. Any temporary cessation of such market-making activities
could have an adverse effect on the market price of the Company's securities.
See "Underwriting."
Possible Delisting of Securities From the Nasdaq Stock Market. While the
Company's Units, Class A Common Stock and Class A Warrants meet the current
Nasdaq listing requirements and are expected to be initially included on the
Nasdaq SmallCap Market, there can be no assurance that the Company will meet the
criteria for continued listing. Nasdaq has recently adopted more stringent
financial requirements for Nasdaq securities. Continued inclusion on Nasdaq
would require that (i) the Company maintain (A) net tangible assets (defined as
total assets less total liabilities and goodwill) of at least $2,000,000, (B)
net income of $500,000 in two of the last three years, or (C) market
capitalization of at least $35,000,000, (ii) the minimum bid price of the Class
A Common Stock be $1.00 per share, (iii) there be at least 500,000 shares in the
public float valued at $1,000,000 or more, (iv) the Class A Common stock have at
least two active market markers and (v) the Class A Common Stock be held by at
least 300 holders.
If the Company is unable to satisfy Nasdaq's maintenance requirements, its
securities may be delisted from Nasdaq. In such event, trading, if any, in the
Units, Class A Common Stock and Class A Warrants would thereafter be conducted
in the over-the-counter market in the so-called "pink sheets" or the NASD's
"Electronic Bulletin Board." The Representative and Blair & Co. are currently
permitted to make a market in securities traded on the "Electronic Bulletin
Board," although neither the Representative nor Blair & Co. has committed to do
so in the event the Company's securities were traded thereon. Consequently, the
liquidity of the Company's securities could be impaired, not only in the number
of securities which could be bought and sold, but also through delays in the
timing of transactions and lower prices for the Company's securities than might
otherwise be attained.
Risks of Low-priced or "Penny" Stock. If the Company's securities were
delisted from Nasdaq (See "-Possible Delisting of Securities from The Nasdaq
Stock Market, Inc."), they could become subject to Rule 15g-9 under the Exchange
Act, which imposes additional sales practice requirements on broker-dealers
which sell such securities except in transactions exempted by such Rule,
including transactions meeting the requirements of Rule 505 or 506 of Regulation
D under the Securities Act and transactions in which the purchaser is an
institutional accredited investor (as defined) or an established customer (as
defined) of the broker or dealer. For transactions
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covered by this rule, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. Consequently, such rule may adversely
affect the ability of broker-dealers to sell the Company's securities and may
adversely affect the ability of purchasers in the Offering to sell in the
secondary market any of the securities acquired hereby.
Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of a penny
stock from associating with a broker-dealer or participating in a distribution
of a penny stock, if the Commission finds that such a restriction would be in
the public interest. If the Company's securities were subject to the rules on
penny stocks, the market liquidity for the Company's securities could be
severely adversely affected.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,760,000 Units
offered hereby, after deducting underwriting discounts and commissions and other
expenses of the Offering, are estimated to be approximately $7,116,200
($8,269,880 if the Underwriter's over-allotment option is exercised in full).
The Company expects the net proceeds to be utilized approximately as follows:
Approximate Amount Percentage of
Application of Net Proceeds Net Proceeds
---------- ------------------ ------------
Repayment of Bridge Notes (1)................. $2,425,000 34.1%
Marketing and Sales (2)....................... 2,000,000 28.1
Acquisition of Computer Equipment (3)......... 500,000 7.0
Working Capital (4)........................... 2,191,200 30.8
---------- -----
Total................................. $7,116,200 100.0%
========== =====
- ----------------
(1) Represents the principal amount and accrued interest at the rate of 10% per
annum (estimated at approximately $125,000 through September 15, 1997) of
Bridge Notes issued in the Bridge Financing in February and March 1997. The
proceeds of the Bridge Financing were and are being used primarily for the
repayment of certain outstanding indebtedness and for working capital
purposes. The outstanding indebtedness repaid with the proceeds of the
Bridge Financing included (a) approximately $171,000, plus accrued interest
ranging from 8.5% to 11% per annum, owed to several stockholders and
affiliates of stockholders of the Company, including Neal J. Polan, the
Company's Chairman of the Board and Chief Executive Officer, which loans
had varying maturity dates and (b) approximately $22,000, plus accrued
interest ranging from 9.5% to 10.75% owed to a financial institution and
one individual, which loans had varying maturity dates. Approximately
$126,000 of such indebtedness was incurred for working capital purposes and
approximately $77,000 of such indebtedness was incurred in connection with
the satisfaction of a consulting arrangement with a stockholder of the
Company who beneficially owns two percent of the outstanding Common Stock
prior to the Offering. See "Capitalization -- Bridge Financing" and
"Certain Transactions."
(2) Includes the design and production of marketing materials, salaries of the
Company's three current in-house sales personnel and other related
marketing expenditures. See "Business -- Sales and Marketing."
(3) Includes computer hardware and telephone switching systems, as well as
software development costs, required to implement the Network
Administration System. See "Business -- The Network Administration System."
(4) Includes general and administrative expenses, including approximately
$524,000 for salaries of four current executive officers and significant
employees (other than significant employees who are members of the
Company's in-house sales personnel) for the 18-month period following the
date of this Prospectus. In the event the Company's proposed joint venture
to establish a physician and hospital network is consummated, the Company
anticipates that it will make an initial capital contribution to the joint
venture vehicle in an amount not to exceed $250,000.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering during the next 18 months. This estimate is
based on certain assumptions relating to the Company's sales and marketing
activities, market acceptance of the Company's products, competition and other
factors. Future events, as well as changes in economic, regulatory or
competitive conditions or the Company's business and the results of the
Company's sales and marketing activities, may make shifts in the allocation of
funds necessary or desirable. In addition, the Company may seek to utilize a
portion of the funds allocated to working capital for acquisitions of new
products or other complementary businesses. The Company does not currently have
any agreements, commitments or arrangements with respect to any proposed
acquisitions and there can be no assurance that any acquisitions will be
consummated.
The Company currently estimates that the net proceeds of the Offering will
be sufficient to fund its planned operations for approximately 18 months.
However, the Company may require additional funds during such period in the
event of delays in sales and marketing or product development, cost overruns or
other unanticipated expenses commonly associated with a company in an early
stage of development. In addition, the Company will likely need substantial
additional financing following such 18 month period. There can be no assurance
that additional funding will be available to the Company on acceptable terms, if
at all. In the event such financing is not obtained, the Company may be
materially adversely affected and may have to cease or substantially reduce
operations.
16
<PAGE>
Any additional proceeds received upon exercise of the Class A Warrants will
be added to working capital. Pending utilization, the net proceeds of the
Offering will be invested in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain all earnings, if any, for use in the expansion of
the Company's business. The declaration and payment of future dividends, if any,
will be at the sole discretion of the Board of Directors and will depend upon
the Company's profitability, financial condition, cash requirements, future
prospects and other factors deemed relevant by the Board of Directors.
17
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1997 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization giving effect
to the automatic conversion of 144,000 shares of Class B Common Stock into
144,000 shares of Class A Common Stock upon the resignation of a former employee
of the Company and a non-cash charge to operations with respect to the issuance
of certain warrants and (iii) the as adjusted capitalization giving effect to
the sale of the Units offered hereby and the application of the net proceeds
therefrom to repay the Bridge Notes. This table should be read in conjunction
with the Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------
Actual Pro Forma As Adjusted
------ ---------- -----------
<S> <C> <C> <C>
Bridge Notes, net of discount(1)................................. $2,096,334 $2,096,334 --
Stockholders' Equity:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding actual,
pro forma and as adjusted.................................. -- -- --
Class A Common Stock, $.01 par value, 19,640,000 shares
authorized; 840,000 shares issued and outstanding actual,
984,000 shares issued and outstanding pro forma and
2,744,000 shares issued and outstanding as adjusted (2)(3). 8,400 9,840 27,440
Class B Common Stock, $.01 par value, 360,000 shares
authorized; 360,000 shares issued and outstanding
actual, 216,000 shares issued and outstanding pro forma
and as adjusted (3)........................................ 3,600 2,160 2,160
Additional paid-in capital................................. 1,975,620 2,392,542 9,491,142
Deficit accumulated during the development stage........... (3,511,074) (3,927,996)(4) (4,131,662)(5)
---------- ---------- ----------
Total stockholders' equity (capital deficiency)........ (1,523,454) (1,523,454) 5,389,080
---------- ---------- ----------
Total capitalization................................... $ 572,880 $ 572,880 $5,389,080
========== ========== ==========
</TABLE>
- ----------------
(1) The Bridge Notes are payable on the earlier of February 27, 1998 or the
completion of the Offering. See "Use of Proceeds."
(2) Excludes (i) up to 528,000 shares issuable upon exercise of the
Underwriters' over-allotment option and the underlying Warrants; (ii)
1,760,000 shares issuable upon exercise of the Class A Warrants included in
the Units offered hereby; (iii) 1,150,000 shares issuable upon exercise of
the Bridge Warrants; (iv) 352,000 shares issuable upon exercise of the Unit
Purchase Option and the Class A Warrants included in such option; (v)
284,000 shares of Class A Common Stock issuable upon exercise of
outstanding warrants, 142,000 of which are exercisable only upon the
attainment by the Company of certain earnings or market price thresholds;
and (vi) 200,000 shares reserved for issuance under the Company's 1997
Stock Option Plan, of which options to purchase 57,500 shares are
outstanding. See "Risk Factors -- Charges and Potential Charges to
Earnings," "Management -- Stock Option Plan," "Certain Transactions" and
"Description of Securities."
(3) Includes the Escrow Shares. See "Principal Stockholders -- Escrow Shares."
(4) Gives effect to the recognition of an anticipated non-cash charge to
operations of approximately $417,000 in the quarter ending September 30,
1997 relating to the fair market value of warrants issued to the Company's
Chairman of the Board and Chief Executive Officer with an exercise price
below the fair market value of the Company's Class A Common Stock. See
"Risk Factors -- Charges and Potential Charges to Earnings," "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Certain Transactions."
(5) Gives effect to recognition, upon the closing of the Offering, of
approximately $204,000 of unamortized discount and debt issuance costs
relating to the Bridge Notes. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Bridge Financing
In February and March 1997, the Company completed the Bridge Financing of
an aggregate of $2,300,000 principal amount of Bridge Notes and 1,150,000
warrants. The Representative acted as the placement agent for such financing and
received from the Company a commission of $230,000 and a non-accountable expense
allowance of $69,000 in connection with the Bridge Financing. The Bridge Notes
issued in the Bridge Financing are payable, together with accrued interest at
the rate of 10% per annum, on the earlier of February 27, 1998 or the closing of
the Offering. See "Use of Proceeds."
The warrants issued in the Bridge Financing entitle the holders thereof to
purchase one share of Class A Common Stock commencing on February 27, 1998 but
will be converted automatically on the closing of the Offering into the Bridge
Warrants, each of which will be identical to the Class A Warrants included in
the Units offered hereby. The Company has agreed to register for resale the
Bridge Warrants and the underlying Class A Common Stock one year from the
closing of the Offering.
18
<PAGE>
DILUTION
The following discussion and tables allocate no value to the Class A
Warrants included in the Units.
At June 30, 1997, the Company had a negative net tangible book value of
$(1,679,895) or $(5.60) per share, based upon 300,000 shares outstanding
(excluding the 900,000 Escrow Shares). Net tangible book value per share
represents the amount of the Company's total assets minus the amount of its
intangible assets and liabilities, divided by the number of shares of Common
Stock outstanding. Dilution represents the difference between the initial public
offering price paid by the purchasers in the Offering and the net tangible book
value per share immediately after completion of the Offering. After giving
effect to the sale of 1,760,000 Units offered hereby at an assumed initial
public offering price of $5.00 per Unit and the receipt of the net proceeds
therefrom, the net tangible book value of the Company, as adjusted at June 30,
1997 would have been $5,436,305 or $2.64 per share. This represents an immediate
increase in net tangible book value of $8.24 per share to existing stockholders
and an immediate dilution of $2.36 per share to persons purchasing shares at the
initial public offering price ("New Investors"). The following table illustrates
this per share dilution:
Assumed initial public offering price per share..... $ 5.00
Negative net tangible book value per share
before Offering................................. $ (5.60)
Increase per share attributable to New Investors.... $ 8.24
------
Net tangible book value per share after Offering.... $ 2.64
-------
Dilution per share to New Investors................. $ 2.36
=======
If the over-allotment option is exercised in full, the net tangible book
value after the Offering would be approximately $2.84 per share, resulting in
dilution to New Investors in the Offering of $2.16 per share.
The following table summarizes the differences between existing
stockholders and New Investors with respect to the number of shares of Common
Stock purchased from the Company, the total consideration paid to the Company
and the average price per share paid by existing stockholders and by New
Investors:
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration Paid Average
-------------------- ---------------------- Price Per
Number Percent Amount Percent Share
--------- ------- ----------- ------- ------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.... 1,200,000(1) 40.50% $ 1,329,018 13.12% $1.11
New Investors............ 1,760,000 59.50 8,800,000 86.88 5.00
--------- ------ ---------- ------
Total................ 2,960,000 100.00% $10,129,018 100.00%
========= ====== ========== ======
</TABLE>
- ----------------
(1) Includes the Escrow Shares.
The foregoing tables do not give effect to exercise of any outstanding
options or warrants. To the extent such options or warrants are exercised there
will be further dilution to New Investors. See "Capitalization -- Bridge
Financing," "Management -- Stock Options," "Certain Transactions" and
"Description of Securities."
19
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below has been derived from the
financial statements of the Company. The financial statements of the Company as
at September 30, 1996 and for the year ended September 30, 1996 and the periods
from June 1, 1995 (inception) through September 30, 1995 and from June 1, 1995
(inception) through September 30, 1996, together with the notes thereto and the
report of Richard A. Eisner & Company, LLP, independent auditors, are included
elsewhere in this Prospectus. The selected financial data as at and for the nine
month period ended June 30, 1996 and June 30, 1997 and the period June 1, 1995
to June 30, 1997 are derived from the Company's unaudited financial statements.
The unaudited financial statements include all adjustments, consisting of only
normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operation for these
periods. Operating results for the nine months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for any other period.
The selected financial data set forth below should be read in conjunction with
the financial statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
June 1, 1995
(Inception) Nine Months Ended June 1, 1995
Through Year Ended June 30, (Inception)
September 30, September 30, ------------------------ Through
1995 1996 1996 1997 June 30, 1997
---- ---- ---- ---- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
General and administrative
expenses........................... $ 78,105 $ 900,177 $ 745,123 $ 1,418,389 $ 2,396,671
Selling and marketing expenses....... 34,158 277,845 59,624 251,731 563,734
Interest expense..................... -- 36,071 3,028 514,598 550,669
--------- ----------- --------- ----------- -----------
Net loss............................. $(112,263) $(1,214,093) $(807,775) $(2,184,718) $(3,511,074)
========= =========== ========= =========== ===========
Net loss per share(1)................ $ (0.46) $ (3.95) $ (2.35) $ (5.57)
========= =========== ========= ===========
Weighted average number of
shares outstanding................. 245,010 307,717 344,417 392,067
========= =========== ========= ===========
</TABLE>
At September At June 30,
30, 1996 1997
----------- -------------
(Unaudited)
Balance Sheet Data:
Working capital (deficit).......................... $ (233,206) $(1,868,259)
Total assets....................................... 160,200 1,124,046
Total liabilities.................................. 235,278 2,647,500
Deficit accumulated during the development stage... (1,326,356) (3,511,074)
Total capital deficiency........................... (75,078) (1,523,454)
- -----------
(1) The Escrow Shares are excluded from the computation of net loss per share.
See Notes B[4] and D of Notes to Financial Statements.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is a development stage enterprise organized to develop, market
and administer a health care benefit services program which is designed to
enable Members to obtain discounts on purchases of ancillary health care
products and services through Networks of health care providers with which the
Company has executed provider agreements. The Company's revenues are initially
expected to be derived principally from the receipt of annual or monthly
enrollment fees paid by or on behalf of Members for the right to obtain
discounts at the point of purchase from providers in the Networks. The Company
currently anticipates that a significant portion of its revenue will be received
in the form of monthly bank drafts and monthly payroll deductions made by
employers on behalf of their employees. Accordingly, all monthly payment sales
and their corresponding expenses, including sales commissions and provider fees,
will be recognized in the monthly periods for which they are billed. However,
since the initial cost of delivering the cards to the Company's customers will
be incurred and expensed in the first month, the gross profit associated with
each new individual card issued will be lower in the month of issuance than in
the remaining eleven months prior to the card's expiration date. In addition,
since all renewal cards will be subject to the same costs of issuance, this
twelve month pattern of lower gross profits in the first month will likely
continue for any renewal periods.
In those instances when a sale of the Company's HealthCare Solutions Card
is collected as a single annual fee, the Company intends to recognize all of its
single payment sales in the period in which the card is delivered, since all of
the expenses resulting from the purchase of an annual card, including the costs
of issuance, sales commissions, provider fees and a provision for loss from
potential guarantee-related refunds, will be incurred by the Company at the time
of sale. The Company will incur only nominal additional direct costs associated
with each cardholder in the following eleven months due to the fact that under
all of its provider network contracts, each provider is obligated to continue to
provide discounts to all cardholders until the annual card expires, even if the
provider network contract has been terminated. The Company also intends to offer
a full money-back guarantee to Members who, after the first full year of
enrollment, are not satisfied with the HealthCare Solutions Card and the Company
intends to establish reserves therefor.
Since its inception, the Company's primary activities have consisted of (i)
designing and developing the Network Administration System, which the Company
believes will facilitate data processing and enhance its customer service
capabilities, (ii) negotiating contracts with Networks of Providers, (iii)
organizing a marketing force to market the HealthCare Solutions Card and (iv)
test marketing. The Company has only recently begun to market the HealthCare
Solutions Card and is currently focusing its initial marketing efforts in the
states of Illinois, Indiana, Missouri and Texas. To date, only minimal sales of
the HealthCare Solutions Card have taken place and the Company believes that
these customers were primarily evaluating the commercial potential of the
HealthCare Solutions Card. There can be no assurance that the Company will
successfully maintain or expand the Networks and/or market the HealthCare
Solutions Card.
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
Prospectus.
Results Of Operations
Nine Months Ended June 30, 1996 and 1997. No revenues were generated during
either the nine month period ended June 30, 1997 (the "1997 Nine Months") or the
nine month period ended June 30, 1996 (the "1996 Nine Months").
Selling, general and administrative expenses increased by 107% from
approximately $805,000 in the 1996 Nine Months to approximately $1,670,000 in
the 1997 Nine Months primarily as a result of (i) an increase in the number of
employees at the Company, (ii) an increase in professional fees and certain
other expenses, primarily marketing, incurred in connection with the development
of the HealthCare Solutions Card, (iii) non-recurring, non-cash charges of
approximately $372,000 relating to the fair market value adjustment of certain
shares of capital stock issued to two stockholders of the Company, (iv) a
non-recurring, non-cash charge of approximately $33,000
21
<PAGE>
related to the write-off of certain equipment, primarily computer hardware and
phone system equipment abandoned upon the installation of the Company's Network
Administration System and phone system in May 1997 and (v) approximately $77,000
incurred in connection with the cancellation of an outstanding consulting
agreement, of which $67,000 was repaid during the 1997 Nine Months.
Interest expense increased from approximately $3,000 in the 1996 Nine
Months to approximately $515,000 in the 1997 Nine Months primarily as a result
of (i) accrued interest of approximately $75,000 recorded on the Bridge Notes,
(ii) accretion of the discount related to the Bridge Financing of approximately
$438,000, and (iii) approximately $13,000 related to various other borrowings by
the Company. Interest income increased by approximately $14,000 as a direct
result of the short term investment of the balance of proceeds received by the
Company from the Bridge Financing.
Net loss increased by approximately 170% from approximately $808,000 in the
1996 Nine Months to approximately $2,185,000 in the 1997 Nine Months as a result
of the foregoing factors.
Fiscal Years Ended September 30, 1995 and 1996. No revenues were generated
during the fiscal years ended September 30, 1995 (the "1995 Fiscal Year") or
September 30, 1996 (the "1996 Fiscal Year").
Selling, general and administrative expenses increased by approximately
952% from approximately $112,000 in the 1995 Fiscal Year to approximately
$1,178,000 in the 1996 Fiscal Year primarily as a result of (i) a full year of
operations in the 1996 Fiscal Year as compared to only four months in the prior
fiscal year, (ii) an increase in the number of employees at the Company and
(iii) an increase in the amount of professional fees and certain other expenses,
primarily marketing, incurred in connection with the development of the
HealthCare Solutions Card.
Interest expense increased by approximately $36,000 in the 1996 Fiscal Year
compared to no interest expense in the 1995 Fiscal Year primarily as a result of
various borrowings by the Company from banks, stockholders and others.
Net loss increased by approximately 984% from approximately $112,000 in the
1995 Fiscal Year to approximately $1,214,000 in the 1996 Fiscal Year as a result
of the foregoing factors.
Liquidity and Capital Resources
The Company has funded its activities to date primarily through loans and
capital contributions from principal stockholders and private placements of
equity and debt securities. As of June 30, 1997, the Company had a working
capital deficit of $1,868,259. Since its inception, the Company has received
working capital loans from its principal stockholders. In September 1996, such
stockholders agreed to contribute to the capital of the Company an aggregate of
approximately $466,000 of such indebtedness. See "Certain Transactions."
In February and March 1997, the Company completed the Bridge Financing
which consisted of $2,300,000 principal amount of Bridge Notes bearing interest
at an annual rate of 10% and warrants to purchase an aggregate of 1,150,000
shares of Class A Common Stock. The proceeds of the Bridge Financing, which were
approximately $1,964,000 (net of $230,000 in commissions and a $69,000 expense
allowance paid to the Representative for acting as placement agent and other
expenses of the private placement) have been utilized by the Company for the
repayment of certain indebtedness and for working capital purposes, including
general and administrative expenses and expenses of the Offering. The Company
intends to repay the principal and accrued interest on the Bridge Notes issued
in the Bridge Financing with a portion of the proceeds of the Offering. See "Use
of Proceeds," "Capitalization -- Bridge Financing" and "Certain Transactions."
The Company requires the proceeds of the Offering to implement its business
plan, which includes the refinement, sales and marketing of the HealthCare
Solutions Card and the possible development of a physician and hospital network.
The Company has entered into certain equipment leases relating to computer
hardware and telecommunications systems requiring it to pay an aggregate of
approximately $373,000 through September 2000. In addition, during the 18-month
period following the Offering, the Company has agreed to pay approximately
$726,000 in compensation to its current executive officers and significant
employees and approximately $68,000 in real estate lease payments. Moreover, the
Company may seek to recruit an additional senior level executive officer
following the closing of the Offering to complement its exisiting senior
management personnel. See "Business -- Properties" and "Management -- Executive
Compensation."
The Company expects to continue to incur substantial costs in the near term
in connection with sales and marketing activities and the purchase or lease of
additional computer equipment required for the Network Administration System,
all of which is expected to be financed with the proceeds of this Offering. The
Company does not have any commitments for the purchase or lease of additional
computer equipment required for the Network
22
<PAGE>
Administration System, although the Company believes that such equipment is
commercially available. The Company also expects that general and administrative
costs necessary to support the establishment of a sales and marketing
organization and other infrastructure will increase in the future. Unless the
Company is able to generate significant commercial sales of the HealthCare
Solutions Card, the Company will continue to incur increasing operating losses.
There can be no assurance that the Company will ever achieve profitable
operations.
The Company incurred non-cash charges to operations of approximately
$438,000 during the nine months ended June 30, 1997 and expects to incur
additional non-cash charges to operations aggregating approximately $204,000
through the closing of the Offering relating to the Bridge Financing and the
repayment of the Bridge Notes. The Company also expects to incur an additional
non-cash charge to earnings of approximately $417,000 in the quarter ending
September 30, 1997 relating to the fair market value of the warrants issued to
Neal J. Polan, the Company's Chairman of the Board and Chief Executive Officer,
with an exercise price below the fair market value of the Company's Class A
Common Stock. In addition, a portion of the warrants issued to Mr. Polan will
become exercisable only upon the attainment by the Company of certain earnings
or market price thresholds. In the event that such warrants become exercisable,
the Company will recognize during the period in which the earnings thresholds
are probable of being met or such stock levels achieved, an additional non-cash
charge to earnings equal to the fair market value of the portion of the warrants
subject to such earnings or market price thresholds, which could have the effect
of significantly increasing the Company's loss or reducing or eliminating
earnings, if any, at such time. See "Certain Transactions" and "Principal
Stockholders -- Escrow Shares."
The Company believes that the proceeds of the Offering, together with
available cash, will provide the necessary liquidity and capital resources to
sustain its planned operations for approximately 18 months following the
Offering. In the event that the Company's internal estimates relating to its
planned expenditures prove materially inaccurate, the Company may be required to
reallocate funds among its planned activities and curtail certain planned
expenditures. In any event, the Company anticipates that it will likely require
substantial additional financing after such time, which financing could be in
the form of equity or debt financing or money received in connection with
collaberative arrangements that may be entered into in the future. The Company
has no commitments for any future financing and there can be no assurance as to
the availability or terms of any required additional financing, when and if
needed. In the event that the Company fails to raise any funds it requires, it
may be necessary for the Company to significantly curtail its activities or
cease operations. See "Use of Proceeds."
Release of Escrow Shares. In connection with the Offering, the current
stockholders of the Company are placing, on a pro rata basis, a portion of their
shares into escrow pending the Company's attainment of certain earnings
thresholds or per share stock price thresholds. The Commission has taken the
position with respect to the release of securities from escrow that in the event
the Escrow Shares are released from escrow to directors, officers, employees or
consultants of the Company, the release will be treated, for financial reporting
purposes, as compensation expense to the Company. Accordingly, in the event of
the release of the Escrow Shares, the Company will recognize during the period
in which the earnings or market price targets are met or become probable of
being met, a substantial non-cash charge which would substantially increase the
Company's loss or reduce or eliminate earnings, if any, at such time. The amount
of compensation expense recognized by the Company will not affect the Company's
total stockholders' equity. There can be no assurance that the Company will
attain the targets which would enable the Escrow Shares to be released from
escrow. See "Principal Stockholders -- Escrow Shares."
The recognition of the potential charges to income described above may have
a depressive effect on the market price of the Company's securities.
23
<PAGE>
BUSINESS
General
The Company is a development stage enterprise organized to develop, market
and administer a health care benefit services program which is designed to
enable participants ("Members") to obtain discounts on purchases of ancillary
health care products and services through certain networks (the "Networks") of
health care providers (the "Providers"). The Networks with which the Company
currently maintains contracts comprise an aggregate of approximately 44,000
participating Providers of eye care, dental, hearing, pharmacy and chiropractic
benefits throughout the United States, and Members will be able to access the
Networks through the use of a discount membership card (the "HealthCare
Solutions Card"). The HealthCare Solutions Card is expected to be marketed,
directly and through independent brokers, agents and consumer marketing
organizations, to individuals and to employers, health maintenance organizations
("HMOs") and business and other associations (collectively, "Sponsors") who may
either purchase the HealthCare Solutions Card for, or offer it to, their
employees or members.
The Company believes that the HealthCare Solutions Card addresses two
significant concerns in the healthcare industry: cost containment and the rising
number of people who are underinsured. The Company also believes that the
HealthCare Solutions Card will provide a low-cost, non-insurance alternative to
individuals who are seeking to reduce their out-of-pocket health care costs not
covered by insurance or who are unable to obtain health care insurance due to
their medical history, age or occupation. For an annual fee expected to range
from approximately $60 to $80, Members will be able to obtain discounts of 5% to
60% off the retail or usual and customary prices from participating providers.
Acceptance in the Company's program is unrestricted, and the HealthCare
Solutions Card can be used to cover any member of the cardholder's immediate
family. The Company's revenues are initially expected to be derived principally
from the receipt of annual or monthly enrollment fees paid by or on behalf of
Members for the right to obtain discounts at the point of purchase from
providers in the Networks with whom the Company has contracted.
Since its inception, the Company's activities have consisted of (i)
designing and developing a network administration and management system which
the Company believes will facilitate data processing and enhance its customer
service capabilities (the "Network Administration System"), (ii) negotiating
contracts with Networks of Providers, (iii) organizing a marketing force to
market the HealthCare Solutions Card and (iv) test marketing. The Company has
only recently begun to market the HealthCare Solutions Card and is currently
focusing its initial marketing efforts in the states of Illinois, Indiana,
Missouri and Texas. To date, only minimal sales of the HealthCare Solutions Card
have taken place and there can be no assurance that the Company will
successfully maintain or complete the Networks and/or market the HealthCare
Solutions Card. There can also be no assurance that sales of the HealthCare
Solutions Card will ever result in the Company achieving profitable operations.
Strategy
The Company's strategy is to focus principally on (i) expanding the range
of ancillary and other health care services and products included in the
Networks, (ii) expanding the Networks to include additional Providers throughout
the United States, (iii) expanding the Company's sales and marketing
capabilities and (iv) the possible development of a physician and hospital
network. The principal elements of the Company's strategy are as follows:
Expand the Range of Services and Products Provided. The Company will seek
to enter into agreements with Networks that offer ancillary and other health
care services and products not currently offered under the Company's program.
The Company intends to monitor the market and the needs of Members and Sponsors
for additional services that might be available. The Company also intends to
monitor the market for new medical benefits products that might be incorporated
into, or marketed in conjunction with, the HealthCare Solutions Card.
Expand Provider Networks. In addition to seeking agreements with providers
of services and products not currently included in the HealthCare Solutions Card
program, the Company also intends to enter into agreements with additional
Networks that offer ancillary services already offered by the Company. For
example, while most of the Networks currently under contract are nationwide, the
Company may choose to supplement its existing coverage in certain geographic
areas by offering access to additional providers. Where necessary, the Company
intends to contract with additional Networks to participate in the Company's
programs simultaneously with the development of a membership base in a
particular geographical area. The Company believes that a greater number of
participating providers will increase the convenience, and therefore the
attractiveness, of the HealthCare Solutions Card.
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Expand Sales and Marketing Capabilities. The Company intends to establish
relationships with additional independent sales representatives to market the
HealthCare Solutions Card. The Company believes that such arrangements will
allow it to leverage its resources by providing potential access to the
extensive contacts and relationships maintained by such representatives.
Although the Company has entered into numerous contracts with independent
brokers, substantially all of such brokers concentrate their efforts in the
states of Illinois, Indiana, Missouri and Texas. The Company believes that
additional relationships that it may establish with independent sales
representatives will enable the Company to expand its focus into additional
states throughout the United States. See "-- Sales and Marketing."
Develop Physician and Hospital Network. The Company is currently exploring
the possibility of developing a product that will offer a national network of
physicians and hospitals and has entered into a non-binding letter of intent to
establish a joint venture with a preferred provider organization ("PPO") that
maintains a nationwide network of approximately 250,000 physicians and
hospitals. There can be no assurance that the letter of intent will result in
the execution of definitive agreements or that any such physician and hospital
network will be established. See "Risk Factors -- Risks Related to Possible
Entry into Physician and Hospital Network Business" and "-- The HealthCare
Solutions Card -Potential Physician and Hospital Services."
Industry Overview
In recent years, the cost of health-related products and services has
increased at a rate significantly greater than the general rate of inflation.
Such increasing costs have led to limitations on reimbursement from insurance
companies, health maintenance organizations ("HMOs") and government sources and
have generated demand for products and services designed to control health care
costs. Many employers have responded to the increased cost of providing
insurance to their employees by reducing or eliminating available insurance
coverage and by requiring employees to contribute heavily to premiums,
especially for family members. As a result, the Employee Benefit Research
Institute estimates that in 1995, approximately 40 million Americans, or
approximately 17% of the population under the age of 65, had no health
insurance, and most Americans lacked insurance coverage for one or more
ancillary health care services. In addition, based upon a 1995 Blue Cross Blue
Shield Survey it is estimated that in 1995, approximately $140 billion was spent
on ancillary health care services, including eye care, dental and pharmaceutical
services and that approximately only $50 billion of such amount was reimbursed
by a third party.
Moreover, as a result of the "baby boom" generation, the group of persons
over the age of 50 is currently the fastest growing segment of the United States
population. As the population ages, a greater percentage of the total population
is likely to need vision, pharmacy, dental and hearing care products and
services, many of which are not covered by Medicare.
The Healthcare Solutions Card
General. The HealthCare Solutions Card will enable Members to obtain
discounts of approximately 5% to 60% on purchases of ancillary health care
products and services through certain Networks of providers. Members will have
access to participating Providers, and will automatically receive a discount at
the point-of-purchase upon presentment of the HealthCare Solutions Card. To
date, the Company has entered into non-exclusive agreements with six national
networks of eye care service providers, a national network of dental service
providers, two discount pharmacy provider networks, two national providers of
hearing products and services, and a national network of chiropractic service
providers to participate in the Network so that Members will be entitled to the
benefits received by participants in their respective provider networks. The
Networks with which the Company has contracted were generally created to provide
individuals with access to medical services at reduced costs and to provide such
individuals with broader geographical access to such providers. Pursuant to
agreements entered into between the Networks health care and providers,
providers have agreed to provide health care services to members of the Network
at reduced costs and, in exchange, providers are given access to additional
patients and additional sources of revenue.
The Company's agreements with Networks are generally for a term of one to
three years and provide for termination by either party in the event of a
default or, at any time after a stipulated period of time following the
execution of the agreement (generally ranging from six months to three years),
upon 60 to 90 days prior written notice. The agreements also provide that upon
termination of an agreement for any reason, the Company and the Providers
participating in such Networks will continue to provide services to Members, for
the term of their enrollment,
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if they purchased the HealthCare Solutions Card for access to such Provider's
network prior to such termination. In addition, certain of these agreements
provide for the payment of a stipulated access fee per card per year from the
Company to the respective Network to provide Members with access to their
network of Providers. In the case of the Company's agreement with Prescription
Care, Inc. ("PCI"), the Company will also receive from such Network a stipulated
commission for each prescription ordered by a Member.
The Company recently completed test marketing of the HealthCare Solutions
Card in the Kansas City, Missouri area and distributed approximately 12,000
cards for such purpose. The test marketing was designed primarily to test the
Company's customer service capabilities and the Network Administration System.
As a result of the test marketing, the Company determined that its customer
service capabilities and the current Network Administration System (together
with certain anticipated implementation activities) were sufficient to satisfy
the Company's anticipated needs for at least the next 12 months.
Eye Care Services. The Company's Networks include eye care services and
products designed to provide savings to Members by reducing the cost of eye
examinations, contact lenses and eyeglass frames and lenses (the "Eye Care
Plan"). Pursuant to non-exclusive agreements with Association for Eye Care
Centers, Inc., Cohen Fashion Optical, ECCA Managed Vision Care, National Vision
Associates, Ltd., Sterling Vision, Inc. and Wal*Mart, each a national network of
eye care providers (the "Eye Care Providers"), the Eye Care Plan will initially
be comprised of an aggregate of approximately 6,000 opticians, optometrists and
ophthalmologists located throughout the United States. Under the Eye Care Plan,
Members will be entitled to receive eye care services and products, including
eye examinations, contact lens fittings and eye wear purchases, at a
pre-determined discount off the usual and customary amounts charged by the Eye
Care Providers. Members will also be eligible to receive a discount on radial
keratotomy (RK) surgical procedures, a surgical procedure designed to correct
nearsightedness and a procedure which is typically not covered by traditional
health insurance.
Based on industry data, the Company believes that approximately 65% of
working-age Americans wear corrective eyewear. Industry data also indicates that
approximately one out of every five people, whether or not wearing corrective
eyewear, is in need of additional vision correction. As the population in the
United States ages, there is expected to be a greater need for corrective
eyewear. In addition, the increase in the number of persons working at video
display terminals has led to increased eye care needs among employees and calls
for legislation which may require employers to provide certain eye care
benefits.
Pursuant to the Company's eye care provider contracts, the Eye Care
Providers have agreed to provide eye care services and products to Members in
the Company's Eye Care Plan at discounts ranging from 5% to 30% off retail
prices. Such services and products will be provided by opticians, optometrists
and ophthalmologists working at vision care centers managed and administered by
the Eye Care Providers. The Eye Care Providers are expected to solicit and
contract with additional Providers to participate in the eye care segment of the
Company's Networks and have agreed to continue to manage and provide
administrative services to Providers at their respective vision care centers.
Dental Services. The Company's Networks include dental services and
products designed to provide savings to Members by reducing the cost of dental
examinations and products (the "Dental Plan"). Pursuant to a non-exclusive
agreement with CAREINGTON international ("Careington"), a national network of
dental service providers, the Dental Plan will initially be comprised of an
aggregate of approximately 15,000 dentists located throughout the United States.
Under the Dental Plan, Members will be entitled to receive dental services and
products, including routine check-ups and cleanings, at a pre-determined
discount off the usual and customary amount charged by the Providers.
Although many large employers offer dental benefit coverage to their
employees, according to the 1993 Foster Higgins Survey of Employee Sponsored
Health Plans, only 37% of employers with less than 200 employees offer dental
benefits. Moreover, according to the American Dental Association (1992), dental
care is the leading neglected health need in the United States.
Pursuant to the Company's contract with Careington, Careington has agreed
to provide dental services and products to Members in the Company's Dental Plan
at discounts of 10% to 60% off usual and customary prices. Members in the Dental
Plan will have access to Careington's network of dentists throughout the United
States, and as the Company expands the Dental Plan, Careington has agreed to
solicit and contract with additional dental Providers to participate in the
Networks. Careington has agreed to continue to manage and provide administrative
services to Providers included in its dental network.
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Pharmaceutical Plans. The Company's Networks include a retail
pharmaceutical plan (the "Retail Pharmaceutical Plan") and a mail-order
pharmaceutical plan (the "Mail-Order Pharmaceutical Plan"). In connection with
such pharmaceutical plans, Members will only have the ability to access one of
the Providers in such plan and the HealthCare Solutions Card delivered to each
Member will identify the Provider in the retail and mail-order pharmaceutical
plan to which such Member will have access. Pursuant to non-exclusive agreements
with The Inteq Group, Inc. and Pharma-Link, Inc. ("Pharma-Link"), each a network
of national pharmacy chains, the Retail Pharmaceutical Plan will initially be
comprised of approximately 19,000 national pharmacies throughout the United
States. Members enrolling in the Retail Pharmaceutical Plan will be able to
obtain discounts of 12% for brand name drugs and 20% for generic drugs off the
average wholesale price, plus certain dispensing fees, at the point of purchase
at participating national pharmacy chains.
Pursuant to the Company's agreement with Pharma-Link and a non-exclusive
agreement with PCI, an operator of a mail-order pharmacy system, Members
enrolling in the Mail-Order Pharmaceutical Plan will be able to obtain discounts
of 14-15% for brand name drugs and 40% for generic drugs off the average
wholesale price, plus certain dispensing and shipping and handling fees. The
Company will also receive a small commission from PCI for each prescription
order filled by PCI through the Mail-Order Pharmaceutical Plan.
Although Members may continue to purchase acute prescription drugs at
retail pharmacies, Network Pharmacies and other retail outlets, the Company
believes that the Mail-Order Pharmaceutical Plan will find acceptance among many
Members due to the economy and convenience that such program offers. The Company
also believes that the added personal convenience of receiving as much as a 100
day supply of prescription maintenance drugs instead of the shorter supply
(typically 30 to 34 days) generally provided by other prescription drug programs
which utilize participating retail pharmacies will be attractive to Members. The
purchase of prescription maintenance drugs through the Mail-Order Pharmaceutical
Plan may also result in substantial savings to Members. By using professional
staff only for the purpose of dispensing prescription maintenance drugs rather
than for the many nonprofessional tasks associated with the operation of retail
drug stores, the Company believes that mail service pharmacies generally incur
lower operating costs than current retail pharmacy-based delivery systems and
will therefore be able to pass along a portion of these savings to Members.
Hearing Services. The Company's Networks include hearing services and
products designed to provide savings to Members by reducing the cost of hearing
examinations and products (the "Hearing Plan"). Pursuant to agreements with
Miracle Ear and Beltone Managed Care, Inc. ("Beltone"), national networks of
hearing products and service providers (the "Hearing Providers"), the Hearing
Plan will initially be comprised of an aggregate of approximately 1,000 retail
locations throughout the United States. Under the Hearing Plan, Members will be
entitled to receive hearing services and products, including routine check-ups
and hearing aid products and accessory purchases, at a pre-determined discount
off the usual and customary amount charged by the Providers.
Pursuant to the Company's contracts with Miracle Ear and Beltone, the
Hearing Providers have agreed to provide hearing examinations and certain other
services at no cost to Members in the Company's Hearing Plan and hearing aid
products at discounts of 15% to 20% off retail prices. Members in the Hearing
Plan will have access to participating Miracle Ear franchises and Beltone
providers throughout the United States, and as the Company expands the Hearing
Plan, Miracle Ear and Beltone have agreed to market the Company's plan and
encourage additional Miracle Ear franchises and Beltone providers to participate
in the Networks. Miracle Ear and Beltone have agreed to continue to manage and
provide administrative services to their respective providers.
Chiropractic Services. The Company's Networks include chiropractic services
designed to provide savings to Members by reducing the cost of chiropractic
examinations and related services (the "Chiropractic Plan"). Pursuant to an
agreement with ChiroSource Inc. ("ChiroSource"), a national network of
chiropractic service providers, the Chiropractic Plan will initially be
comprised of an aggregate of approximately 3,000 providers throughout the United
States. Under the Chiropractic Plan, Members will be entitled to receive
chiropractic services, including chiropractic examinations and related services
at a pre-determined discount off the usual and customary amount charged by the
Providers.
Based upon the National Board of Chiropractic Examiners, approximately 18
million people in the United States used chiropractic services in 1995. The
Company believes that many of these services were not covered by traditional
health care insurance.
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Pursuant to the Company's contract with ChiroSource, participating
chiropractors have agreed to provide chiropractic examinations and related
services at discounts of 20% off usual and customary prices. Members in the
Chiropractic Plan will have access to participating chiropractors throughout the
United States. ChiroSource has agreed to solicit additional Providers to
participate in the chiropractic segment of the Company's Networks and has agreed
to continue to manage and provide administrative services to the chiropractors
participating in ChiroSource's network.
Potential Physician and Hospital Services. The Company is currently
exploring the possibility of developing a product that will offer a network of
physicians and hospitals and has entered into a non-binding letter of intent to
establish a joint venture with a PPO that maintains a nationwide network of
approximately 250,000 physicians and hospitals. As currently proposed, the joint
venture would involve the establishment of a new entity, to be owned 50% by each
party, that would serve as the parties' exclusive vehicle for the development of
a physician and hospital network business. There can be no assurance that the
letter of intent will result in the execution of definitive agreements or that
any such physician and hospital network will be established. However, the
Company believes that the large number of uninsured and underinsured
individuals, coupled with the rising costs incurred by businesses, particularly
small businesses who employ approximately 40% of the country's workforce, and
the advent of tax-preferred Medical Savings Accounts, may present an opportunity
to develop a core health care product. In the event that the Company determines
to develop a physician and hospital network product, the Company believes that
it would be marketed principally through insurance brokers, rather than through
consumer marketing organizations or other independent sales representatives.
Advantages of the Healthcare Solutions Card
Advantages to Members. In addition to providing access to ancillary health
care products and services on a discounted fee-for-service basis at the point of
purchase, the Company believes the HealthCare Solutions Card will be attractive
to Members because of its flexibility and ease of use. Membership in the
HealthCare Solutions Card program will be unrestricted, thereby providing
potential benefits to individuals who, because of their medical history, age or
occupation, are otherwise unable to obtain such benefits. The HealthCare
Solutions Card will cover each person in the Member's immediate family and can
be used as often as each participant wishes. In addition, unlike many
traditional indemnity or managed care programs, Members will have no paperwork
or claims to prepare, no waiting periods, and no prior authorizations will be
required. Moreover, in certain cases, membership in the Company's programs will
entitle Members to benefits that would otherwise be unavailable or difficult to
obtain. For example, the Company's Mail-Order Pharmaceutical Plan provides
access to mail order pharmacies that will enable Members to obtain longer
supplies of drugs and home delivery. In addition, even where a Member may
already have insurance for a particular ancillary product, the HealthCare
Solutions Card will entitle Members to various discounted products and services
that would typically be excluded from traditional health care insurance,
including certain pharmaceuticals, vitamins, growth hormones, oral
contraceptives, smoking deterrents and fertility drugs, and certain elective
procedures and services.
Advantages to Providers and Networks. The Company believes that health care
providers will be attracted to the Company's program because it will enable them
to obtain additional patients who are Members while allowing Providers to retain
their existing practices. Although Members generally pay fees and charges less
than those of non-Members, the incremental business from Members can be an
important source of revenue to the Providers, with little or no increase in
their overhead costs. However, there can be no assurance that Providers will
continue to participate in the Networks even if their participation results in
such an increase in revenues since the Member portion of their business may be
relatively less profitable. In addition, the Company believes that its program
will be attractive to provider networks because it may increase the likelihood
that Providers will affiliate with provider networks in order to have access to
Members, and accordingly, provider networks may realize increased revenues from
such affiliations.
Advantages to Sponsors. The Company believes that the HealthCare Solutions
Card will assist Sponsors in their efforts to attract and retain employees by
enabling them to offer a more complete health care benefits package. Similarly,
as competition between HMOs for participants continues to intensify, the Company
believes that the HealthCore Solutions Card will enable HMOs to offer a more
complete, and therefore more attractive, array of potential health care
benefits. In addition, due to the low cost of the HealthCare Solutions Card,
Sponsors may even choose to offer it to part-time employees, who often are not
eligible for health care benefits offered to full-time
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employees. Moreover, because the HealthCare Solutions Card is a discount card
and not an insurance product, Sponsors can offer discounts to their employees or
members without bearing any economic risk over the annual cost of the card.
Sales and Marketing
The Company intends to rely primarily upon the services of independent
sales representatives, including brokers, agents, consumer marketing
organizations and associations, to market the HealthCare Solutions Card. The
Company anticipates that such arrangements will generally provide for a
commission based upon a percentage of sales of the HealthCare Solutions Card,
which commission is expected to range from 20% to 50% of the aggregate sales
price. The Company believes that there are a large number of independent brokers
and other agents nationwide with whom the Company may establish relationships.
To date, the Company has entered into numerous agreements with individuals,
substantially all of whom are affiliated with AFLAC, who are expected to serve
as independent brokers. The Company intends to continue to contract with
additional independent brokers in the future and believes that certain of its
Networks may provide the Company with access to additional independent brokers.
In addition, the Company maintains an in-house sales force that currently
consists of three persons, and the Company intends to hire additional
salespersons as needed in the near term.
The Company intends to market the HealthCare Solutions Card principally to
potential Sponsors, including insurance carriers, third party administrators,
corporations, HMOs, preferred provider organizations, Blue Cross and Blue Shield
organizations and unions, which have, or have access to, a large number of
potential Members. The Company believes that its use of independent brokers and
third party administrators will not only provide immediate access to specific
organizations with potential Members, but will also enable the Company to
establish relationships with these individuals and entities who may be
gatekeepers to even greater numbers of potential Members through their extensive
contacts in their respective industries.
The Company anticipates that Sponsors will either fund the HealthCare
Solutions Card program on behalf of their members or employees so that every
eligible individual in the organization becomes a Member or they will offer the
HealthCare Solutions Card to their members or employees as an option where each
individual will be responsible for purchasing the HealthCare Solutions Card and
paying the annual fee (either directly or through a payroll deduction plan). The
Company also expects to market the HealthCare Solutions Card directly to
potential Members, particularly in cases where a Sponsor offers the HealthCare
Solutions Card as an unpaid option to its members or employees.
The Company also intends to market the HealthCare Solutions Card as an
"affinity" card to selected large Sponsors, including large corporations and
consumer marketing organizations. Pursuant to such affinity card arrangements,
the Sponsor would be able to custom design, and place its own name on, the
HealthCare Solutions Card. In certain cases, the Company's name may not appear
on the card, although the Company would provide access to its Networks, as well
as all required fulfillment services. The Company believes that affinity cards
will be attractive to certain Sponsors because they will enable the Sponsor to
more closely identify itself with the benefit provided to the Member. Moreover,
the Company believes that the preexisting relationship, or affinity, between the
Sponsor and its employees or members may enhance the likelihood that a potential
Member will purchase the card.
The Company's ability to demonstrate its customer service capabilities will
be a key element in the Company's marketing efforts, particularly those efforts
targeting large Sponsors. The Company believes that the Network Administration
System, once fully operational, will enable the Company to quickly and
efficiently respond to requests of Members and Sponsors and will be critical to
the Company's sales and marketing efforts. See "-- The Network Administration
System."
The Company anticipates that its marketing efforts, and the expenses
associated therewith, will be heavily concentrated in the first few years of its
operation. The Company's marketing efforts will emphasize the substantial
potential discounts to Members through their use of the HealthCare Solutions
Card, as well as the broad array of ancillary health care services and products
which are included in the Company's Networks.
The Network Administration System
The Company has substantially completed the initial design and development
of the Network Administration System, a management information system which the
Company believes will (i) facilitate its ability to process Member applications
and access Member and Provider data, (ii) enhance the Company's customer service
capabilities
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and (iii) facilitate its ability to process and pay commissions to brokers and
fees to certain Networks. See "-- Sales and Marketing." The Network
Administration System database will contain information relating to Members,
such as eligibility in the respective plan, services and products available to
Members, the discounts available to the Member for services and products,
locations of Providers and utilization data provided to the Company on a
quarterly basis by each of the Providers in the Networks. The Company believes
that the Network Administration System will enable it to enroll Members
electronically, quickly respond to information requests from Members, Sponsors
and Providers, assist Members in locating the nearest Provider and facilitate
billing and data processing.
The Company is also developing an internet web site which will be
accessible by existing and potential Providers, Sponsors, Members and
independent sales representatives. Individuals accessing the web site will be
able to review the ancillary health care benefit plans offered by the Company, a
list of Providers in the Networks and their locations, the products and services
provided by the Providers, the discounts available to Members for services and
products and any special promotions. Individuals accessing the Company's
internet web site will also be able to immediately apply for a HealthCare
Solutions Card by filling out an application online.
Competition
The Company believes that a critical element of its business is the
competition for a portion of the benefit dollars allocated by various
organizations for employee benefit programs. The Company competes for a portion
of those dollars with various other cost-containment marketing organizations,
pharmacy indemnity programs, retail pharmacies, mail order prescription
companies, preferred provider organizations, HMOs, health care membership
programs and other ancillary health care insurance programs for Members and
Providers. With respect to its vision, hearing, dental, pharmaceutical and
chiropractic businesses, the Company will compete for potential Sponsors,
Members and Providers, depending on the geographic area or market, with various
entities that have developed discount membership cards which provide national
coverage, including AT&T, CUC International, Inc. and J.C. Penney & Co., Inc.,
and entities that have developed discount membership cards which provide
regional coverage only. The Company will also compete with various organizations
which provide services and products in specific areas of ancillary healthcare.
With respect to eye care services, the Company will compete with various
provider organizations, including Avesis, Cole Vision, Eye Care Plan of America
and Spectrum Vision Systems. With respect to its pharmaceutical services, the
Company will compete with cost containment marketing organizations for mail
order prescription drugs, such as Medco Containment Services, Inc., America's
Pharmacy (a division of Caremark, Inc.), Health Care Services, Inc. and Thrift
Drug (a division of J.C. Penney & Co., Inc.); the pharmacy division of the
non-profit American Association of Retired Persons; service delivered pharmacy
indemnity programs; independent and chain-operated retail pharmacy outlets,
retail medical/surgical supply companies and other mail order prescription
companies; HMOs and health care membership programs. Most of these competitors
have had longer operating histories and have significantly greater financial,
marketing and administrative resources than the Company. There can be no
assurance that the Company will develop products that achieve greater market
acceptance than competitive products or that the Company's competitors will not
succeed in developing products that would render the Company's products less
competitive or obsolete.
The Company believes that the broad range of choices of ancillary health
care benefit packages, its customer service capabilities resulting from the
Network Administration System and its competitive pricing will differentiate it
from its competitors and may enable it to offer a more comprehensive and cost
effective solution to its customers' needs. See "-- Sales and Marketing."
Government Regulation
The delivery of health care products and services is subject to extensive
federal, state and local regulation, including but not limited to the
prohibition of business corporations from providing medical care, fraud and
abuse provisions of the Medicare and Medicaid statutes, state laws that prohibit
referral fees and fee splitting and certain regulations applicable to insurance
companies and certain organizations that provide or arrange for health care
services. The Company believes that certain registration and licensing laws and
regulations in certain states in which the Company intends to operate may apply
to the Company's operations. In addition, statutes and regulations applicable to
other health care organizations with which the Company may contract, including
without limitation those relating to fee splitting, referral fees, patient
freedom of choice, provider rights to participate and antidiscrimination, may
impact the Company and may result in the delay or denial of any such
organization's participation in the Company's Networks. The utilization fees
received by the Company in connection with the
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Mail-Order Pharmaceutical Plan might be construed to contravene the literal
provisions of these statutes and regulations in a number of states in which the
Company intends to operate. Although the Company has not obtained any rulings
from any governmental authorities or an opinion of counsel with regard to any of
these matters, the Company believes that the extent of its compliance with such
laws and regulations as they are currently enforced and applicable to the
Company is consistent with current industry practices and will not have a
material adverse effect on its business. However, legislation in these areas
continues to evolve and there can be no assurance that changes in enforcement
and compliance practices will not occur in the future, or that existing
legislation will not be expanded. In any such event, the Company could be
required to effect registration in various additional states, post substantial
fidelity or surety bonds and/or meet other financial requirements in connection
therewith. Alternatively, the Company could be required to modify the products
and services offered by it, modify its contractual arrangements with Networks
and Sponsors or be precluded from providing some or all of its products and
services in certain states. Any or all of the foregoing consequences, or a
determination that the Company is in violation of any applicable laws or
regulations, could have a material adverse effect on the Company.
Proprietary Rights
The Company's Network Administration System is a critical component of the
Company's ability to provide customer service and process other data. The
Company relies on trade secrets to establish and protect its proprietary rights
to its Network Administration System. However, trade secrets are difficult to
protect and there can be no assurance that others will not independently develop
substantially equivalent proprietary technology or otherwise gain access to the
Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its rights to unpatented trade secrets.
The Company has applied for rights to the tradenames "HEALTHCARE
SOLUTIONS," "THE SOLUTIONS CARD," "HEALTHCARE SAVINGS. GUARANTEED," and
"HEALTHCORE MEDICAL SOLUTIONS, INC." and the service marks for "HEALTHCARE
SOLUTIONS" AND "HEALTHCORE MEDICAL SOLUTIONS, INC." from the United States
Patent and Trademark Office, but there can be no assurance that such rights will
be granted. If the Company is not able effectively to protect itself against use
of similar trade names or service marks, or if the Company's use of its trade
names or service marks are found to infringe upon the proprietary rights of
third parties, the Company's business could be adversely affected.
Employees
The Company currently has 13 full-time employees. The Company intends to
hire additional sales, management and administrative personnel. The Company's
future success depends in significant part upon the continued service of its
executive officers and key personnel and its ability to attract and retain
highly qualified sales and marketing and managerial personnel. Competition for
such personnel is intense and there can be no assurance that key employees can
be retained or that it can attract, assimilate or retain other highly qualified
sales and marketing and managerial personnel can be retained in the future. None
of the Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees to
be good.
Facilities
The Company currently leases approximately 4,000 square feet of office
space in Grandview, Missouri for its executive offices pursuant to a lease
agreement that provides for monthly rent of approximately $2,300 and expires in
October 1999 and approximately 1,000 square feet of office space in Springfield,
Missouri for the development of the Network Administration System pursuant to a
lease agreement that provides for monthly rent of approximately $1,100 and
expires in May 1998. The Company also reimburses an entity affiliated with the
Company's Chairman and Chief Executive Officer approximately $1,000 per month
for the use of certain office space in New York, New York. The Company believes
that such office space will be suitable for the current and anticipated needs of
the Company.
Legal Proceedings
The Company is not involved in any material legal proceedings.
31
<PAGE>
MANAGEMENT
Executive Officers, Directors and Significant Employees
The following table sets forth the names, ages and positions of the
executive officers, directors and significant employees of the Company.
<TABLE>
<CAPTION>
Name Age Position
----- --- --------
Executive Officers and Directors
<S> <C> <C>
Neal J. Polan......................... 46 Chairman of the Board and Chief Executive Officer
James H. Steinheider.................. 48 Chief Financial Officer and Chief Operating
Officer
Eli Levitin........................... 33 Director
Norman H. Werthwein................... 52 Director
Significant Employees
Thomas J. Pitzenberger................ 42 National Marketing Director-- HealthCare Division
Ben E. Randall........................ 53 Vice President-- Information Systems
Terrence R. Reigers................... 49 Vice President-- Sales and Marketing
Ronald F. Torchia..................... 59 Vice President and Secretary
</TABLE>
NEAL J. POLAN joined the Company as its Chairman of the Board in January
1997 and was elected as Chief Executive Officer in April 1997. Mr. Polan expects
to devote approximately 50% of his business time to activities on behalf of the
Company. Mr. Polan has served as the Managing Director of National Financial
Co., a middle market merchant bank since April 1996. From March 1992 to
September 1994, Mr. Polan served as the President and a director of Sterling
Vision, Inc., one of the largest optical retailers in the United States and a
publicly traded company.
JAMES H. STEINHEIDER has been the Chief Financial Officer and Chief
Operating Officer of the Company since March 1997. Mr. Steinheider also served
as a director of the Company from March 1997 until his resignation from the
Board of Directors in September 1997. From December 1994 to February 1997, Mr.
Steinheider served as the founder and President of the CFO Group, Inc., a
consulting company that provided chief financial officer services to small and
mid-sized companies. From September 1995 to February 1997, Mr. Steinheider
served as the Chief Financial Officer of Earth Partners, Inc., a manufacturer of
recycling equipment for the automotive industry. From October 1992 to October
1993, Mr. Steinheider served as the Senior Vice President and Chief Financial
Officer of Medifax, Inc., a provider of medical transcription services for
physicians and hospitals. Mr. Steinheider is a Certified Public Accountant.
ELI LEVITIN has served as a director of the Company since July 1997. Since
December 1993, Mr. Levitin has served as the General Counsel of Acta Realty
Corp., a real estate investment and management company. Prior to joining Acta
Realty, Mr. Levitin was an associate at White & Case, a New York law firm, from
October 1991 to December 1993. Mr. Levitin received his J.D. from Columbia
University School of Law.
NORMAN H. WERTHWEIN has served as a director of the Company since July
1997. Mr. Werthwein is the Chief Financial Officer of Beech Street Corporation,
a preferred provider organization, a position he has held since August 1994.
Prior to joining Beech Street in August 1994, Mr. Werthwein served as the Chief
Financial Officer of Curaflex Health Services, an alternate site health care
service provider, from January 1992 until August 1994.
THOMAS J. PITZENBERGER has been the National Marketing Director -
HealthCare Division of the Company since July 1997. From July 1996 to July 1997
Mr. Pitzenberger served as the National Director of Medaphis Corporation, a
corporation providing software and services in the healthcare industry. From
February 1994 to July 1996, Mr. Pitzenberger served as the Region Manager of
QuadraMed Corporation, an electronic data interchange corporation in the health
care industry and a publicly traded company. In 1987, Mr. Pitzenberger founded
MediQuest Inc., a provider of software and services to the health care industry.
Mr. Pitzenberger sold MediQuest in September 1991 and served as the Vice
President -Marketing of MediQuest until February 1994.
BEN E. RANDALL has been the Vice President -- Information Systems of the
Company since February 1997. From January 1996 to February 1997, Mr. Randall
served as a Managing Member of MegaVision. From November 1989 to January 1996,
Mr. Randall was the owner and President of R&R Computer Services, a computer
software developer for the real estate insurance and appraisal industries.
32
<PAGE>
TERRENCE R. REIGERS has been the Vice President - Sales and Marketing of
the Company since June 1997. From December 1992 to May 1997, Mr. Reigers served
as the Director of Managed Vision Care of National Vision Associates, Ltd., a
retail optical company. From December 1991 to October 1992, Mr. Reigers served
as a Marketing and Sales Manager of Pearle Managed Vision Care, a retail optical
company.
RONALD F. TORCHIA is a co-founder of the Company and has been a Vice
President and Secretary since February 1997. From October 1995 to February 1997,
Mr. Torchia served as a Managing Member of MegaVision. From October 1991 to
October 1995, Mr. Torchia managed A&R Contracting, Inc., a company engaged in
the business of preparing property loss bids for insurance companies.
Directors serve until the next annual meeting or until their successors are
elected and qualified. Officers serve at the discretion of the Board of
Directors, subject to rights, if any, under contracts of employment.
The Company has agreed, if requested by the Representative, to nominate a
designee of the Representative to the Company's Board of Directors for a period
of five years from the date of this Prospectus. See "Underwriting."
The Board of Directors intends to establish a Compensation Committee and an
Audit Committee. The Compensation Committee is expected to make recommendations
to the Board concerning salaries and incentive compensation for officers and
employees of the Company and may administer the Company's 1997 Stock Option
Plan. The Audit Committee is expected to review, with the Company's independent
accountants, the scope, timing and results of audit services and any other
services that the accountants are asked to perform, their report on the
Company's financial statements following completion of their audit and the
Company's policies and procedures with respect to internal accounting and
financial controls. In addition, the Audit Committee is expected to make annual
recommendations to the Board of Directors for the appointment of independent
public accountants for the ensuing year.
Executive Compensation
The following Summary Compensation Table sets forth the compensation paid
or accrued by the Company for services rendered by Theodore W. White, Jr., the
former acting chief executive officer of MegaVision, the predecessor of the
Company, for the fiscal year ended September 30, 1996 (the "named executive
officer"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Compensation Annual Compensation Long-term
Name and Present ------------------------------ Other Annual Awards
Principal Position Year Salary Bonus Compensation Options
--------------- ---- ------ ------ ------------- -------
<S> <C> <C> <C> <C> <C>
Theodore W. White, Jr. (1)............... 1996 132,325 -- -- --
</TABLE>
- ----------------
(1) For a portion of 1996, Mr. White acted in the capacity of the chief
executive officer for MegaVision, the predecessor of the Company. Mr. White
resigned from the Company effective August 15, 1997.
The Company has agreed, commencing on the closing of the Offering, to pay
annual compensation of $150,000 to Neal J. Polan, the Company's Chairman of the
Board and Chief Executive Officer. In addition, the Company may seek to recruit
an additional senior level executive officer following the closing of the
Offering to complement its existing senior management personnel. For a
discussion of additional non-cash compensation received by Mr. Polan, see
"Certain Transactions" and "Principal Stockholders."
Director Compensation
After completion of the Offering, non-employee directors will receive $500
for each Board and committee meeting attended and will be reimbursed for their
expenses in attending such meetings. Directors are not precluded from serving
the Company in any other capacity and receiving compensation therefor. In
addition, directors may also receive stock option grants under the Company's
1997 Stock Option Plan. See "-- Stock Options."
Stock Options
In February 1997, the Board of Directors adopted and the Company's
stockholders approved, the 1997 Stock Option Plan (the "Plan"), which provides
for the grant by the Company of options to purchase up to an aggregate of
200,000 shares of the Company's authorized but unissued Common Stock. Pursuant
to the Plan, employees, officers
33
<PAGE>
and directors of, and consultants or advisers to, the Company and any subsidiary
corporations are eligible to receive incentive stock options ("incentive
options") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") and/or options that do not qualify as incentive
options ("non-qualified options"). The Plan, which expires in February 2007,
will be administered by the Board of Directors or a committee of the Board of
Directors. The purposes of the Plan are to ensure the retention of existing
executive personnel, key employees, directors, consultants and advisors who are
expected to contribute to the Company's future growth and success and to provide
additional incentive by permitting such individuals to participation the
ownership of the Company, and the criteria to be utilized by the Board of
Directors or the committee in granting options pursuant to the Plan will be
consistent with these purposes.
Options granted under the Plan may be either incentive options or
non-qualified options. Incentive options granted under the Plan are exercisable
for a period of up to 10 years from the date of grant at an exercise price which
is not less than the fair market value of the Common Stock on the date of the
grant, except that the term of an incentive option granted under the Plan to a
stockholder owning more than 10% of the outstanding voting power may not exceed
five years and its exercise price may not be less than 110% of the fair market
value of the Common Stock on the date of the grant. To the extent that the
aggregate fair market value, as of the date of grant, of the shares for which
incentive options become exercisable for the first time by an optionee during
the calendar year exceeds $100,000, the portion of such option which is in
excess of the $100,000 limitation will be treated as a non-qualified option.
Options granted under the Plan to officers, directors or employees of the
Company may be exercised only while the optionee is employed or retained by the
Company or within 90 days of the date of termination of the employment
relationship or directorship. However, options which are exercisable at the time
of termination by reason of death or permanent disability of the optionee may be
exercised within 12 months of the date of termination of the employment
relationship or directorship. Upon the exercise of an option, payment may be
made by cash or by any other means that the Board of Directors or the committee
determines. No option may be granted under the Plan after February 2007.
Options may be granted only to such employees, officers and directors of,
and consultants and advisors to, the Company or any subsidiary of the Company as
the Board of Directors or the committee shall select from time to time in its
sole discretion, provided that only employees of the Company or a subsidiary of
the Company shall be eligible to receive incentive options. As of August 31,
1997, the number of employees, officers and directors of the Company eligible to
receive grants under the Plan was 16 persons. The number of consultants and
advisors to the Company eligible to receive grants under the Plan is not
determinable. An optionee may be granted more than one option under the Plan.
The Board of Directors or the committee will, in its discretion, determine
(subject to the terms of the Plan) who will be granted options, the time or
times at which options shall be granted, and the number of shares subject to
each option, whether the options are incentive options or non-qualified options,
and the manner in which options may be exercised. In making such determination,
consideration may be given to the value of the services rendered by the
respective individuals, their present and potential contributions to the success
of the Company and its subsidiaries and such other factors deemed relevant in
accomplishing the purpose of the Plan.
Under the Plan, the optionee has none of the rights of a stockholder with
respect to the shares issuable upon the exercise of the option until such shares
shall be issued upon such exercise. No adjustment shall be made for dividends or
distributions or other rights for which the record date is prior to the date of
exercise, except as provided in the Plan. During the lifetime of the optionee,
an option shall be exercisable only by the optionee. No incentive option may be
sold, pledged, assigned, hypothecated, transferred or disposed of in any manner
other than by will or by the laws of decent and distribution. The Board of
Directors or the committee may authorize non-qualified options to be
transferable to immediate family members, trusts for the benefit of immediate
family members, partnerships of immediate family members and non-profit
charitable organizations.
The Board of Directors may amend or terminate the Plan except that
stockholder approval is required to effect a change so as to increase the
aggregate number of shares that may be issued under the Plan (unless adjusted to
reflect such changes as a result of a stock dividend, stock split,
recapitalization, merger or consolidation of the Company), to modify the
requirements as to eligibility to receive options, to increase materially the
benefits accruing to participants or as otherwise may be required by Rule 16b-3
or Section 422 of the Code. No action taken by the Board may materially and
adversely affect any outstanding option grant without the consent of the
optionee.
34
<PAGE>
Under current tax law, there are no Federal income tax consequences to
either the employee or the Company on the grant of non-qualified options if
granted under the terms set forth in the Plan. Upon exercise of a non-qualified
option, the excess of the fair market value of the shares subject to the option
over the option price (the "Spread") at the date of exercise is taxable as
ordinary income to the optionee in the year it is exercised and is deductible by
the Company as compensation for Federal income tax purposes, if Federal income
tax is withheld on the Spread. However, if the shares are subject to vesting
restrictions conditioned on future employment or the holder is subject to the
short-swing profits liability restrictions of Section 16(b) of the Exchange Act
of (i.e., is an executive officer, director or 10% stockholder of the Company)
then taxation and measurement of the Spread is deferred until such restrictions
lapse, unless a special election is made under Section 83(b) of the Code to
report such income currently without regard to such restrictions. The optionee's
basis in the shares will be equal to the fair market value on the date taxation
is imposed and the holding period commences on such date.
Incentive option holders incur no regular Federal income tax liability at
the time of grant or upon exercise of such option, assuming that the optionee
was an employee of the Company from the date the option was granted until 90
days before such exercise. However, upon exercise, the Spread must be added to
regular Federal taxable income in computing the optionee's "alternative minimum
tax" liability. An optionee's basis in the shares received on exercise of an
incentive stock option will be the option price of such shares for regular
income tax purposes. No deduction is allowable to the Company for Federal income
tax purposes in connection with the grant or exercise of such option.
If the holder of shares acquired through exercise of an incentive option
sells such shares within two years of the date of grant of such option or within
one year from the date of exercise of such option (a "Disqualifying
Disposition"), the optionee will realize income taxable at ordinary rates.
Ordinary income is reportable during the year of such sale equal to the
difference between the option price and the fair market value of the shares at
the date the option is exercised, but the amount includable as ordinary income
shall not exceed the excess, if any, of the proceeds of such sale over the
option price. In addition to ordinary income, a Disqualifying Disposition may
result in taxable income subject to capital gains treatment if the sales
proceeds exceed the optionee's basis in the shares (i.e., the option price plus
the amount includable as ordinary income). The amount of the optionee's taxable
ordinary income will be deductible by the Company in the year of the
Disqualifying Disposition.
At the time of sale of shares received upon exercise of an option (other
than a Disqualifying Disposition of shares received upon the exercise of an
incentive option), any gain or loss is long-term or short-term capital gain or
loss, depending upon the holding period. The holding period for long-term
capital gain or loss treatment is more than one year.
The foregoing is not intended to be an exhaustive analysis of the tax
consequences relating to stock options issued under the Plan. For instance, the
treatment of options under state and local tax laws, which is not described
above, may differ from the treatment for Federal income tax purposes.
To date, options to purchase 57,500 shares of Common Stock at an exercise
price of $5.00 per share have been granted under the Plan. All of such options
were granted in May and July 1997.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation eliminates in certain
circumstances the liability of directors of the Company for monetary damages for
breach of their fiduciary duty as directors. This provision does not eliminate
the liability of a director (i) for breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions by the director not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for willful or negligent declaration of an unlawful dividend, stock
purchase or redemption, or (iv) for transactions from which the director derived
an improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company believes that it is the position of the Commission that insofar
as the foregoing provision may be invoked to disclaim liability for damages
arising under the Securities Act, the provision is against public policy as
expressed in the Securities Act and is therefore unenforceable. Such limitation
of liability also does not affect the availability of equitable remedies such as
injunctive relief of recession.
35
<PAGE>
The Company intends to enter into indemnification agreements
("Indemnification Agreement(s)") with each of its directors and officers after
the Offering. Each such Indemnification Agreement will provide that the Company
will indemnify the indemnitee against expenses, including reasonable attorneys'
fees, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or officer.
Such indemnification will be available if the indemnitee acted in good faith and
in a matter he reasonably believed to be in or not opposed to the best interests
of the Company, and, with respect to any criminal action, had no reasonable
cause to believe his conduct was unlawful. The Indemnification Agreements will
also require that the Company indemnify the director or other party thereto in
all cases to the fullest extent permitted by applicable law. Each
Indemnification Agreement will permit the director or officer that is party
thereto to bring suit to seek recovery or amounts due under the Indemnification
Agreement and to recover the expenses of such a suit if he is successful.
The Company's By-laws provide that the Company shall indemnify its
directors, officers, employees or agents to the full extent permitted by the
Delaware General Corporation Law, and the Company shall have the right to
purchase and maintain insurance on behalf of any such person whether or not the
Company would have the power to indemnify such person against the liability. The
Company has not currently purchased any such insurance policy on behalf on any
of its directors, officers, employees or agents.
36
<PAGE>
CERTAIN TRANSACTIONS
In late 1995, the Company's predecessor, MegaVision, L.C., entered into an
agreement with Ben Randall, the Vice President - Information Systems of the
Company, to purchase certain computer software for $37,500 in cash and the
issuance of 170 units of limited liability company interest. The Company paid
$8,500 in cash to Mr. Randall in early 1996 and in September 1996 issued an
additional 20 units of limited liability company interest in exchange for the
remaining $29,000 owed to Mr. Randall under the agreement. In connection with
the Merger, the 190 units of limited liability interest issued to Mr. Randall
were converted into 114,000 shares of Class A Common Stock.
In September 1996, Robert E. Hunter, Michael J. Reichert and Donald Umbach,
each a principal stockholder of the Company, agreed to contribute to the capital
of the Company's predecessor, MegaVision, L.C., $125,000, $100,000 and $100,000,
respectively, of indebtedness owed to such individuals in exchange for 130, 110
and 70 units, respectively, of limited liability company interest (which were
converted into 78,000, 66,000 and 42,000 shares of Class A Common Stock in
connection with the Merger).
In October 1996, MegaVision, L.C. entered into an agreement with M.K.D.
Capital Corp. ("M.K.D."), which agreement was amended in January and July 1997.
Annette Lebor, the spouse of the President of M.K.D., is the beneficial owner of
11% of the outstanding shares of Common Stock of the Company prior to the
Offering. The agreement, as amended, provides that M.K.D. will receive a
commission equal to 3% of any payments collected by the Company for sales of the
Company's products originated by M.K.D., less direct manufacturing costs
incurred by the Company in the production of such products and any broker's
commission payable in connection with the sale; provided that in connection with
sales of the Company's products by agents of AFLAC with whom the Company has
contracted, M.K.D. will receive a commission of $1.25 for each annual HealthCare
Solutions Cards sold by such agents. In addition, M.K.D. will also receive a
commission for introducing additional networks of health care providers to the
Company, if such networks enter into a contract with the Company. The actual
commission to be paid to M.K.D., if any, will be negotiated in connection with
any such transaction.
In November 1996, MegaVision sold 360 units of limited liability company
interest (which were converted into 216,000 shares of Class B Common Stock in
connection with the Merger) to Neal J. Polan, the Company's Chairman of the
Board and Chief Executive Officer, for $6,300 in cash and for certain consulting
services rendered by Mr. Polan.
Between January and February 1997, Mr. Polan loaned an aggregate of
approximately $67,000 to the Company for working capital purposes. Such loans
were repaid together with interest at 10% per annum in March 1997 with a portion
of the proceeds of the Bridge Financing.
Mr. Polan and his wife, jointly, and Eli Levitin, a director of the
Company, invested $50,000 and $25,000, respectively, in the Bridge Financing in
March 1997 (on the same terms as non-affiliated investors) and, accordingly,
each received a Bridge Note in such amount, which will be repaid from the
proceeds of the Offering, and 25,000 and 12,500 warrants, respectively, which
will be exchanged for 25,000 and 12,500 Bridge Warrants, respectively, upon the
completion of the Offering. See "Use of Proceeds."
In June 1997, Mr. Polan and Theodore White, Jr., a former employee of the
Company, entered into a voting agreement pursuant to which Mr. Polan is entitled
to vote all of the shares of Common Stock held by Mr. White. The voting proxy
will expire upon the earlier of (i) June 5, 2002; (ii) the death of Mr. Polan;
(iii) Mr. Polan's termination of employment with the Company for any reason; or
(iv) if, for the year ending December 31, 1998, the Minimum Pretax Income is
less than $1,000,000 or if, for any subsequent year through the year ending
December 31, 2001, the Company's Minimum Pretax Income does not equal or exceed
an amount equal to the Minimum Pretax Income for the prior fiscal year plus ten
percent (10%). Mr. White resigned from the Company, effective August 15, 1997,
and at such time the shares of Class B Common Stock held by Mr. White converted
automatically into shares of Class A Common Stock. As a result, Mr. Polan will
control 32.0% of the total voting power of the Company upon completion of the
Offering and will have the ability to influence significantly the election of
directors, outcome of corporate transactions or other matters submitted for
stockholder approval.
The Company reimburses an entity affiliated with Mr. Polan approximately
$1,000 per month for the use of certain office space in New York, New York.
37
<PAGE>
In June 1997, the Company loaned Mr. White $30,000 as evidenced by a
promissory note bearing interest at a rate of 10% per annum. The loan was to
mature in September 1998 or upon demand by the Company in the event Mr. White's
employment with the Company was terminated for any reason. Pursuant to the note,
Mr. White was required to make monthly payments of principal and interest in the
amount of $750. As security for the loan, Mr. White pledged 15,000 shares of
Class B Common Stock to the Company (which shares automatically converted into
Class A Common Stock upon Mr. White's resignation). In connection with Mr.
White's resignation from the Company in August 1997, the Company and Mr. White
entered into an agreement pursuant to which the Company (i) made a payment of
$20,000 to Mr. White, (ii) waived Mr. White's obligation to make monthly
payments of principal and interest in the amount of $750 until February 15, 1998
and (iii) extended the maturity date of the loan until March 1999; provided
that, in the case of (ii) and (iii) above, Mr. White complies with the
provisions of the agreement. In addition, pursuant to the agreement, Mr. White
has agreed not to compete with the Company for a period of one year. The Company
also agreed to enter into an agreement with Mr. White whereby Mr. White would
serve as an independent broker for the Company.
In September 1997, the Company granted warrants to purchase 284,000 shares
of Class A Common Stock to Mr. Polan. The warrants are exercisable at a price of
$1.00 per share and expire in September 2007. Warrants to purchase 142,000 of
such shares of Class A Common Stock are currently exercisable and warrants to
purchase 142,000 of such shares of Class A Common Stock will become exercisable
if, and only if, one or more of the following conditions are met: (i) the
Company's Minimum Pretax Income (as defined) amounts to at least $3,800,000 for
the fiscal year ending September 30, 1998; (ii) Company's Minimum Pretax Income
amounts to at least $5,500,000 for the fiscal year ending September 30, 1999;
(iii) Company's Minimum Pretax Income amounts to at least $7,500,000 for the
fiscal year ending September 30, 2000; (iv) the Closing Price (as defined in the
Escrow Agreement) of the Common Stock averages in excess of $12.50 per share for
30 consecutive business days during the 18-month period commencing on the date
of this Prospectus or (v) the Closing Price of the Common Stock averages in
excess of $16.50 per share for 30 consecutive business days during the 18-month
period commencing with the nineteenth month from the date of this Prospectus.
See "Principal Stockholders -- Escrow Shares."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company has adopted a policy that all future
transactions between the Company and its officers, directors, principal
stockholders and their affiliates will be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested outside
directors on the Board of Directors, and will continue to be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
38
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of Common Stock by (i) each person known by the Company to own beneficially more
than 5% of the outstanding Common Stock, (ii) each director and named executive
officer of the Company and (iii) all executive officers and directors of the
Company as a group, (a) prior to the Offering and (b) as adjusted to give effect
to the sale of the 1,760,000 Units offered hereby:
<TABLE>
<CAPTION>
Class A Class B Percent of Shares
Common Common Beneficially Owned
Stock Stock ------------------- Percent of
Beneficially Beneficially Before After Voting Power
Name and Address of Beneficial Owner(1) Owned(2) Owned(2) Offering Offering After Offering (3)
- ------------------------------------ --------- ---------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Neal J. Polan............................. 142,000 (4) 216,000 (5)(6) 26.7% 11.5% 34.4%(6)
James H. Steinheider...................... 4,000 (7) -- * * *
Eli Levitin............................... -- (8) -- * * *
Norman H. Werthwein....................... -- (8) -- * * *
Ronald F. Torchia......................... 114,000 -- 9.5 3.9 2.9
Ben E. Randall............................ 114,000 -- 9.5 3.9 2.9
Theodore W. White, Jr. ................... 144,000 (6)(9) -- 12.0 4.9 *
Robert Hunter (10)........................ 132,000 -- 11.0 4.5 3.5
Annette Lebor (11)........................ 132,000 -- 11.0 4.5 3.5
Michael J. Reichert Revocable Trust (12).. 132,000 -- 11.0 4.5 3.5
Donald E. Umbach Revocable Trust (13)..... 66,000 -- 5.5 2.2 1.7
Patricia L. Umbach Revocable Trust (14)... 66,000 -- 5.5 2.2 1.7
All executive officers and directors
as a group (4 persons) ................. 146,000 (15) 216,000 26.9% 11.7% 34.5%(6)
</TABLE>
- ----------------
* Less than 1%
(1) Unless otherwise indicated, the address of such individual is c/o
HealthCore Medical Solutions, Inc., 11904 Blue Ridge Boulevard, Grandview,
Missouri 64030.
(2) Includes such individuals' Escrow Shares.
(3) For purposes of this calculation, the shares of Class A Common Stock and
shares of Class B Common Stock are treated as a single class. The shares of
Class B Common Stock are entitled to five votes per share, whereas the
shares of Class A Common Stock are entitled to one vote per share. See
"Description of Securities."
(4) Represents shares of Class A Common Stock issuable upon exercise of
outstanding warrants that are currently exercisable. Does not include
142,000 shares of Class A Common Stock issuable upon exercise of warrants
that are not exercisable within 60 days. See "Certain Transactions."
(5) Includes 48,000 shares of Class B Common Stock held by Mr. Polan as
custodian for his child. Mr. Polan is the beneficial owner of such shares
by virtue of his authority to vote and/or dispose of such shares.
(6) Mr. Polan owns all of the issued and outstanding shares of Class B Common
Stock. Pursuant to a voting proxy granted from Mr. White to Mr. Polan, Mr.
Polan has the power to vote all of Mr. White's shares of Class A Common
Stock.
(7) Represents shares of Class A Common Stock issuable upon exercise of
outstanding options that are currently exercisable. Does not include 6,000
shares of Class A Common Stock issuable upon exercise of options that are
not exercisable within 60 days.
(8) Does not include 7,500 shares of Class A Common Stock issuable upon
exercise of options that are not exercisable within 60 days.
(9) Mr. White has pledged 15,000 shares of Class A Common Stock to the Company
in connection with a loan from the Company to Mr. White. See "Certain
Transactions."
(10) The address of Mr. Hunter is 6301 Trust Avenue, Kansas City, Missouri
64131.
(11) The address of Ms. Lebor is 114 East 32nd Street, New York, New York 10037.
Ms. Lebor is the spouse of Avram Lebor, the President of M.K.D. Capital
Corp. See "Certain Transactions."
39
<PAGE>
(12) The trustees under the Michael J. Reichert Revocable Trust are Michael J.
Reichert and Jean A. Reichert. Mr. Reichert and Mrs. Reichert are the
beneficial owners of such shares by virtue of their authority to vote
and/or dispose of such shares. The address of the Mr. Reichert and Mrs.
Reichert is P.O. Box 1198, Liberty, Missouri 64069.
(13) The trustee under the Donald E. Umbach Revocable Trust is Donald E. Umbach.
Mr. Umbach is the beneficial owner of such shares by virtue of his
authority to vote and/or dispose of such shares. Mr. Umbach may also be
considered a beneficial owner of the 66,000 shares of Class A Common Stock
held by the Patricia L. Umbach Revocable Trust, under which Mr. Umbach's
wife, Patricia L. Umbach is the trustee. The address of Mr. Umbach is 6905
Blue Ridge Boulevard, Raytown, Missouri 64133.
(14) The trustees under the Patricia L. Umbach Revocable Trust is Patricia L.
Umbach. Mrs. Umbach is the beneficial owner of such shares by virtue of her
authority to vote and/or dispose of such shares. In addition, Mrs. Umbach
may be considered a beneficial owner of the 66,000 shares of Class A Common
Stock held by the Donald E. Umbach Revocable Trust, under which Mrs.
Umbach's husband, Donald E. Umbach is the trustee. The address of Mrs.
Umbach is 6905 Blue Ridge Boulevard, Raytown, Missouri 64133.
(15) Represents shares issuable upon exercise of outstanding options that are
currently exercisable. Does not include 163,000 shares of Class A Common
Stock issuable upon exercise of options and warrants that are not
exercisable within 60 days.
Escrow Shares
In connection with the Offering, the current holders of the Company's Class
A and Class B Common Stock have agreed to place, on a pro rata basis, 900,000
shares, or three-quarters of the outstanding shares of Common Stock of the
Company before the Offering, into escrow pursuant to an amended and restated
escrow agreement (the "Escrow Agreement") with American Stock Transfer & Trust
Company, as escrow agent. The Escrow Shares are not transferable or assignable,
but may be voted by the beneficial holders thereof.
400,000 of the Escrow Shares will be released from escrow if, and only if,
one or more of the following conditions is/are met:
(a) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings (all as audited by the
Company's independent public accountants in accordance with U. S.
generally accepted accounting principles) (the "Minimum Pretax
Income") amounts to at least $3,800,000 for the fiscal year ending
September 30, 1998;
(b) the Minimum Pretax Income amounts to at least $5,500,000 for the
fiscal year ending September 30, 1999;
(c) the Minimum Pretax Income amounts to at least $7,500,000 for the
fiscal year ending September 30, 2000;
(d) the Closing Price (as defined in the Escrow Agreement) of the Common
Stock averages in excess of $12.50 per share for 30 consecutive
business days during the 18-month period commencing on the date of
this Prospectus;
(e) the Closing Price of the Common Stock averages in excess of $16.50 per
share for 30 consecutive business days during the 18-month period
commencing with the nineteenth month from the date of this Prospectus.
The remaining 500,000 Escrow Shares will be released from escrow if, and
only if, one or more of the following conditions is/are met:
(a) the Minimum Pretax Income amounts to at least $4,600,000 for the
fiscal year ending September 30, 1998;
(b) the Minimum Pretax Income amounts to at least $6,600,000 for the
fiscal year ending September 30, 1999;
(c) the Minimum Pretax Income amounts to at least $9,000,000 for the
fiscal year ending September 30, 2000;
(d) the Closing Price (as defined in the Escrow Agreement) of the Common
Stock averages in excess of $15.00 per share for 30 consecutive
business days during the 18-month period commencing on the date of
this Prospectus;
(e) the Closing Price of the Common Stock averages in excess of $18.00 per
share for 30 consecutive business days during the 18-month period
commencing with the nineteenth month from the date of this Prospectus.
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The Minimum Pretax Income amount set forth above shall (i) be calculated
exclusively of any extraordinary earnings, including any charge to income
resulting from release of the Escrow Shares and (ii) be increased
proportionately, with certain limitations, in the event additional shares of
Class A Common Stock or securities convertible into, exchangeable for or
exercisable into Class A Common Stock are issued after completion of the
Offering. The Closing Price amounts set forth above are subject to adjustment in
the event of any stock splits, reverse stock splits or other similar events. The
Escrow Agreement can be amended by a two-thirds vote of the outstanding shares
of Common Stock of the Company, other than any shares held by the stockholders
whose shares are held in escrow.
Any money, securities, rights or property distributed in respect of the
Escrow Shares, including any property distributed as dividends or pursuant to
any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Shares. If none of the applicable Minimum Pretax Income or Closing Price levels
set forth above have been met by December 31, 2000, the Escrow Shares, as well
as any dividends or other distributions made with respect thereto, will be
cancelled and contributed to the capital of the Company. The Company expects
that the release of the Escrow Shares to officers, directors, employees and
consultants of the Company will be deemed compensatory and, accordingly, will
result in a substantial charge to reportable earnings, which would equal the
fair market value of such shares and options on the date of release. Such charge
could substantially increase the loss or reduce or eliminate the Company's net
income, if any, for financial reporting purposes for the period during which
such shares and options are, or become probable of being, released from escrow.
Although the amount of compensation expense recognized by the Company will not
affect the Company's total stockholders' equity, it may have a negative effect
on the market price of the Company's securities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note D of
Notes to Financial Statements.
The Minimum Pretax Income and Closing Price levels set forth above were
determined by negotiation between the Company and the Representative and should
not be construed to imply or predict any future earnings by the Company or any
increase in the market price of its securities.
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DESCRIPTION OF SECURITIES
The following description of the Company's securities does not purport to
be complete and is subject in all respects to applicable Delaware law and to the
provisions of the Company's Certificate of Incorporation and By-laws, the
Warrant Agreement among the Company, the Representative and American Stock
Transfer & Trust Company, as warrant agent, pursuant to which the Warrants will
be issued, and the Underwriting Agreement between the Company and the
Representative, copies of all of which have been filed with the Commission as
exhibits to the Registration Statement of which this Prospectus is a part.
The Company's authorized capital stock currently consists of 19,640,000
shares of Class A Common Stock, par value $.01 per share, 360,000 shares of
Class B Common Stock, par value $.01 per share, and 5,000,000 shares of
Preferred Stock, par value $.01 per share.
Units
Each Unit consists of one share of Class A Common Stock and one redeemable
Class A Warrant. Each Class A Warrant entitles the holder to purchase one share
of Class A Common Stock. The Class A Common Stock and Class A Warrants
comprising the Units are separately transferable immediately upon issuance.
Common Stock
Class A Common Stock
Immediately prior to the date hereof there were 984,000 shares of Class A
Common Stock outstanding held by 11 stockholders of record. Holders of Class A
Common Stock have the right to cast one vote for each share held of record on
all matters submitted to a vote of holders of Class A Common Stock. The Class A
Common Stock and Class B Common Stock vote together as a single class on all
matters on which stockholders may vote, except as required by law.
Holders of Class A Common Stock are entitled to dividends, together with
the holders of Class B Common Stock, pro rata based on the number of shares
held, when, as and if declared by the Board of Directors, from funds legally
available therefor subject to the rights of holders of any outstanding preferred
stock. In the case of dividends or other distributions payable in stock of the
Company, including distributions pursuant to stock splits or division of stock
of the Company, only shares of Class A Common Stock will be distributed with
respect to Class A Common Stock. In the event of liquidation, dissolution or
winding up of the affairs of the Company, all assets and funds of the Company
remaining after the payment to creditors and to holders of preferred stock shall
be distributed, pro rata, among the holders of the Class A Common Stock and the
Class B Common Stock. Holders of Class A Common Stock are not entitled to
preemptive, subscription, cumulative voting or conversion rights, and there are
no redemption or sinking fund provisions applicable to the Class A Common Stock.
All shares of Class A Common Stock are, and the shares of Class A Common Stock
offered hereby will be when issued, fully paid and non-assessable.
Class B Common Stock
Immediately prior to the date hereof there were 216,000 shares of Class B
Common Stock outstanding held by two stockholders of record. Each share of Class
B Common Stock is entitled to five votes on all matters on which stockholders
may vote, including the election of directors. The Class A Common Stock and
Class B Common Stock vote together as a single class on all matters on which
stockholders may vote, except as required by law.
Holders of Class B Common Stock are entitled to participate together with
the holders of Class A Common Stock, pro rata based on the number of shares
held, in the payment of cash dividends and in the liquidation, dissolution and
winding up of the Company subject to the rights of holders of any outstanding
preferred stock. In the case of dividends, or other distributions payable in
stock of the Company, including distributions pursuant to stock splits or
divisions of stock of the Company, only shares of Class A Common Stock shall be
distributed with respect to Class B Common Stock.
Each share of Class B Common Stock is automatically converted into one
share of Class A Common Stock upon (i) its sale, gift or transfer, (ii) the
death of the original holder thereof, (iii) the holder's termination of
employment with the Company for any reason or (iv) if, for the fiscal year
ending September 30, 1999, the Minimum Pretax
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Income is less than $1,000,000 or if, for any subsequent fiscal year through the
fiscal year ending September 30, 2002, the Company's Minimum Pretax Income does
not equal or exceed an amount equal to the Minimum Pretax Income for the prior
fiscal year plus ten percent (10%).
The difference in voting rights increases the voting power of the holders
of Class B Common Stock and accordingly has an anti-takeover effect. The
existence of the Class B Common Stock may make the Company a less attractive
target for a hostile takeover bid or render more difficult or discourage a
merger proposal, an unfriendly tender offer, a proxy contest, or the removal of
incumbent management, even if such transactions were favored by the stockholders
of the Company other than the holders of Class B Common Stock. Thus, the
stockholders may be deprived of an opportunity to sell their shares at a premium
over prevailing market prices in the event of a hostile takeover bid. Those
seeking to acquire the Company through a business combination will be compelled
to consult first with the holders of Class B Common Stock in order to negotiate
the terms of such business combination. Any such proposed business combination
will have to be approved by the Board of Directors, which may be under the
control of the holders of Class B Common Stock, and if stockholder approval were
required, the approval of the holders of Class B Common Stock will be necessary
before any such business combination can be consummated.
Redeemable Class A Warrants
Each Class A Warrant entitles the registered holder to purchase one share
of Class A Common Stock at an exercise price of $6.50 at any time until 5:00
P.M., New York City time, on _____________, 2002. Commencing one year from the
date of this Prospectus, the Class A Warrants are redeemable by the Company on
30 days' written notice at a redemption price of $.05 per Class A Warrant if the
"closing price" of the Company's Class A Common Stock for any 30 consecutive
trading days ending within 15 days of the notice of redemption averages in
excess of $9.10 per share. "Closing price" shall mean the closing bid price if
listed in the over-the-counter market on Nasdaq or otherwise or the closing sale
price if listed on the Nasdaq National Market or a national securities exchange.
All Class A Warrants must be redeemed if any are redeemed.
The Class A Warrants will be issued pursuant to a warrant agreement (the
"Warrant Agreement") among the Company, the Representative and American Stock
Transfer & Trust Company, New York, New York, as warrant agent (the "Warrant
Agent"), and will be evidenced by warrant certificates in registered form. The
Class A Warrants provide for adjustment of the exercise price and for a change
in the number of shares issuable upon exercise to protect holders against
dilution in the event of a stock dividend, stock split, combination or
reclassification of the Common Stock or upon issuance of shares of Common Stock
at prices lower than the market price of the Common Stock, with certain
exceptions.
The exercise price of the Class A Warrants was determined by negotiation
between the Company and the Representative and should not be construed to be
predictive of or to imply that any price increases in the Company's securities
will occur.
The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Class A Common Stock for issuance upon the
exercise of the Class A Warrants. A Class A Warrant may be exercised upon
surrender of the Warrant certificate on or prior to its expiration date (or
earlier redemption date) at the offices of the Warrant Agent, with the form of
"Election to Purchase" on the reverse side of the Warrant certificate completed
and executed as indicated, accompanied by payment of the full exercise price (by
certified or bank check payable to the order of the Company) for the number of
shares with respect to which the Warrant is being exercised. Shares issued upon
exercise of Class A Warrants and payment in accordance with the terms of the
Warrants will be fully paid and non-assessable.
For the life of the Class A Warrants, the holders thereof have the
opportunity to profit from a rise in the market value of the Class A Common
Stock, with a resulting dilution in the interest of all other stockholders. So
long as the Class A Warrants are outstanding, the terms on which the Company
could obtain additional capital may be adversely affected. The holders of the
Class A Warrants might be expected to exercise them at a time when the Company
would, in all likelihood, be able to obtain any needed capital by a new offering
of securities on terms more favorable than those provided for by the Warrants.
The Class A Warrants do not confer upon the Warrantholder any voting or
other rights of a stockholder of the Company. Upon notice to the Warrantholders,
the Company has the right to reduce the exercise price or extend the expiration
date of the Class A Warrants.
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The 1,150,000 warrants issued in the Bridge Financing will be converted
automatically on the closing of the Offering into the Bridge Warrants, each of
which will be identical to the Class A Warrants included in the Units offered
hereby.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of "blank-check"
preferred stock (the "Preferred Stock"). The Board of Directors will have the
authority to issue this Preferred Stock in one or more series and to fix the
number of shares and the relative rights, conversion rights, voting rights and
terms of redemption (including sinking fund provisions) and liquidation
preferences, without further vote or action by the stockholders. If shares of
Preferred Stock with voting rights are issued, such issuance could affect the
voting rights of the holders of the Company's Common Stock by increasing the
number of outstanding shares having voting rights, and by the creation of class
or series voting rights. If the Board of Directors authorizes the issuance of
shares of Preferred Stock with conversion rights, the number of shares of Common
Stock outstanding could potentially be increased by up to the authorized amount.
Issuance of Preferred Stock could, under certain circumstances, have the effect
of delaying or preventing a change in control of the Company and may adversely
affect the rights of holders of Common Stock. Also, Preferred Stock could have
preferences over the Common Stock (and other series of preferred stock) with
respect to dividend and liquidation rights. The Company currently has no plans
to issue any Preferred Stock.
Unit Purchase Option
The Company has agreed to grant to the Representative, upon the closing of
the Offering, the Unit Purchase Option to purchase up to 176,000 Units. These
Units will be identical to the Units offered hereby except that the Warrants
included in the Unit Purchase Option will only be subject to redemption by the
Company after the Unit Purchase Option has been exercised and the underlying
Warrants are outstanding. The Unit Purchase Option cannot be transferred, sold,
assigned or hypothecated for three years, except to any officer of the
Representative or members of the selling group or their respective officers. The
Unit Purchase Option exercisable during the two-year period commencing three
years from the date of this Prospectus at an exercise price of $____ per Unit
(120% of the initial public offering price) subject to adjustment in certain
events to protect against dilution. The holders of the Unit Purchase Option have
certain demand and piggyback registration rights. See "Underwriting."
Registration Rights
The holders of the Unit Purchase Option will have demand and piggy-back
registration rights relating to such options and the underlying securities. See
"Underwriting." In addition, a stockholder of the Company has certain
"piggy-back" registration rights with respect to 132,000 shares of Class A
Common Stock owned by such stockholder. The Company has also agreed to register
for resale the 1,150,000 Bridge Warrants and the underlying Class A Common Stock
within one year from the closing of the Offering.
Business Combination Protections
The voting provisions of the Class A Common Stock and Class B Common Stock
and the broad discretion conferred upon the Board of Directors with respect to
the issuance of series of Preferred Stock (including with respect to voting
rights) could substantially impede the ability of one or more stockholders
(acting in concert) to acquire sufficient influence over the election of
directors and other matters to effect a change in control or management of the
Company, and the Board of Directors' ability to issue Preferred Stock could also
be utilized to change the economic and control structure of the Company. As a
result, such provisions, together with certain other provisions summarized in
the succeeding paragraph, may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in such stockholder's best interest, including attempts that
might result in a premium over the market price for the Common Stock hold by
stockholders.
The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested stockholders," defined as persons who have
acquired at least 15% of a corporation's stock. Under such statute a corporation
may not engage in any business combination with any interested stockholder for a
period of three years after the date such person became an interested
stockholder unless (a) prior to such date the board of directors of the
corporation approved either the "business combination" or the transaction which
resulted in the stockholder becoming an "interested stockholder," (b) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the "interested stockholder" owned at least 85% of the
voting stock of the corporation outstanding at the time the
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transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by (i) persons who are directors and also
officers and (ii) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (c) on or subsequent to
such date the "business combination" is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the "interested stockholder." The statute contains provisions enabling a
corporation to avoid the statute's restrictions.
The Company has not sought to "elect out" of the statute, and, therefore,
upon closing of the Offering and the registration of its shares of Class A
Common Stock under the Exchange Act, the restrictions imposed by such statute
will apply to the Company.
Transfer Agent
American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
2,960,000 shares of Common Stock. Of these shares, the 1,760,000 shares of Class
A Common Stock offered hereby will be freely transferable without restriction or
further registration under the Securities Act, unless purchased by affiliates of
the Company as that term is defined in Rule 144 under the Securities Act ("Rule
144") described below. The 1,200,000 shares of Common Stock currently
outstanding are "restricted securities" or owned by affiliates within the
meaning of Rule 144 and may not be sold publicly unless they are registered
under the Securities Act or are sold pursuant to Rule 144 or another exemption
from registration. However, holders of all of the outstanding shares have agreed
not to sell or otherwise dispose of any shares of Common Stock without the
Representative's prior written consent for a period of 13 months after the date
of this Prospectus. In addition, 900,000 of such shares are Escrow Shares and
are subject to the restrictions on transfer set forth in the Escrow Agreement.
See "Principal Stockholders -- Escrow Shares" and "Underwriting."
In general, under Rule 144, a person (or persons whose shares are
aggregated), including persons who may be deemed to be "affiliates" of the
Company as that term is defined under the Securities Act, is entitled to sell
within any three-month period a number of restricted shares beneficially owned
for at least one year that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) an amount equal to 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. However, a person who is not deemed an affiliate and has
beneficially owned such shares for at least two years is entitled to sell such
shares under Rule 144(k) without regard to the volume or other resale
requirements.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled to
sell such shares after the 90th day following the date of this Prospectus in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day
period, but without a holding period. 13,000 shares of Class A Common Stock
issuable upon the exercise of stock options will be eligible for resale pursuant
to Rule 144 and Rule 701 under the Securities Act immediately after the 90th day
following the date of this Prospectus and a portion of the remaining 44,500
outstanding options will vest and be eligible for resale pursuant to Rule 144
and Rule 701 under the Securities Act beginning in May 1998. However, holders of
all of the outstanding options prior to the Offering have agreed not to sell any
shares of Common Stock for a period of 13 months from the date of this
Prospectus without the prior written consent of the Representative.
Pursuant to registration rights acquired in the Bridge Financing, the
Company has agreed to register for resale on behalf of the investors in the
Bridge Financing the 1,150,000 Bridge Warrants held by such investors and the
underlying Class A Common Stock one year from the closing of the Offering.
The Representative also has demand and piggyback registration rights with
respect to the securities underlying the Unit Purchase Option. See
"Underwriting." In addition, a stockholder of the Company has certain
"piggy-back" registration rights with respect to 132,000 shares of Class A
Common Stock owned by such stockholder.
Prior to the Offering, there has been no market for any securities of the
Company, and no predictions can be made of the effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and the ability of the Company to
raise equity capital in the future.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, each of
the Underwriters named below, for whom D.H. Blair Investment Banking Corp. is
acting as Representative, has severally agreed to purchase from the Company, and
the Company has agreed to sell to such Underwriter, the respective number of
Units set forth opposite the name of such Underwriter:
Name Number of Units
----- ---------------
Total.....................................
--------------
It is expected that Blair & Co. will distribute as a selling group member a
substantial portion (not to exceed 52%, including the over-allotment option) of
the Units offered hereby. Blair & Co. is owned by a corporation which is
substantially owned by family members of J. Morton Davis. Mr. Davis is the sole
stockholder of the Representative.
The Underwriters have advised the Company that they propose to offer the
Units to the public at the public offering price set forth on the cover page of
this Prospectus and to certain dealers who are members of the NASD, at such
prices less concessions of not in excess of $__ per Unit, of which a sum not in
excess of $__ per Unit may in turn be reallowed to other dealers who are members
of the NASD. After the initial offering, the public offering price, the
concession and the reallowance may be changed by the Representative.
The Company has granted to the Underwriters an option, exercisable during
the 45-day period commencing on the date of this Prospectus, to purchase from
the Company at the public offering price, less underwriting discounts, up to
264,000 additional Units for the purpose of covering over-allotments, if any,
subject to the right of the Representative to elect, in its sole discretion, to
exercise such option individually, and not as representative of the several
Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Representative a non-accountable expense allowance
equal to 3% of the gross proceeds derived from the sale of Units offered hereby,
including any Units purchased pursuant to the Underwriters' overallotment
option, $40,000 of which has been paid to date.
All of the Company's current stockholders, officers and directors have
agreed not to sell, assign, transfer or otherwise dispose of any of their shares
of Common Stock for a period of 13 months from the date of this Prospectus
without the prior written consent of the Representative.
The Representative has the right to designate one individual for nomination
to the Company's Board of Directors for a period of five years after the
completion of the Offering, although it has not yet selected any such designee.
Such designee may be a director, officer, partner, employee or affiliate of the
Representative.
During the five-year period from the date of this Prospectus, in the event
the Representative originates a financing or a merger, acquisition or
transaction to which the Company is a party, the Representative will be entitled
to receive a finder's fee in consideration for origination of such transaction.
The fee is based on a percentage of the consideration paid in the transaction
ranging from 7% of the first $1,000,000 to 2% of any consideration in excess of
$9,000,000.
The Company has agreed not to solicit Warrant exercises other than through
the Representative, unless the Representative declines to make such
solicitation. Upon any exercise of the Warrants after the first anniversary of
the date of this Prospectus, the Company will pay the Representative a fee of 5%
of the aggregate exercise price of the Warrants, if (i) the market price of the
Company's Class A Common Stock on the date the Warrants are exercised is greater
than the then exercise price of the Warrants; (ii) the exercise of the Warrants
was solicited by a member of the NASD; (iii) the warrantholder designates in
writing that the exercise of the Warrant was solicited by a member of the NASD
and designates in writing the broker-dealer to receive compensation for such
exercise; (iv) the Warrants
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are not held in a discretionary account; (v) disclosure of compensation
arrangements was made both at the time of the Offering and at the time of
exercise of the Warrants; and (vi) the solicitation of exercise of the Warrant
was not in violation of Regulation M, which was recently adopted to replace Rule
10b-6 and certain other rules promulgated under the Exchange Act.
Regulation M may prohibit Blair & Co. or any other soliciting broker-dealer
from engaging in any market making activities with regard to the Company's
securities for the period from five business days (or such other applicable
period as Regulation M may provide) prior to any solicitation by the
Representative of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Representative may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, Blair & Co. may be unable to
provide a market for the Company's securities during certain periods while the
Warrants are exercisable.
The Company has agreed to sell to the Representative and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 176,000 Units,
substantially identical to the Units being offered hereby, except that the Class
A Warrants included therein are subject to redemption by the Company at any time
after the Unit Purchase Option has been exercised and the underlying warrants
are outstanding. The Unit Purchase Option will be exercisable during the
two-year period commencing three years from the date of this Prospectus at an
exercise price of $____ per Unit, subject to adjustment in certain events to
protect against dilution, and is not transferable for a period of three years
from the date of this Prospectus except to officers of the Representative or
members of the selling group or their respective officers. The Company has
agreed to register during the three-year period commencing two years from the
date of this Prospectus, on two separate occasions, the securities issuable upon
exercise thereof under the Securities Act, the initial such registration to be
at the Company's expense and the second at the expense of the holders. The
Company has also granted certain "piggy-back" registration rights to holders of
the Unit Purchase Option.
Prior to the Offering, there has been no public market for any of the
securities offered hereby. Accordingly, the public offering price of the Units
offered hereby and the terms of the Warrants have been determined by negotiation
between the Company and the Representative and are not necessarily related to
the Company's asset value, net worth or other established criteria of value.
Factors considered in determining such prices and terms, in addition to
prevailing market conditions, include the history of and the prospects for the
industry in which the Company competes, the present state of the Company's
development and its future prospects, an assessment of the Company's management,
the Company's capital structure, demand for similar securities of comparable
companies and such other factors as were deemed relevant.
The Underwriters have informed the Company that they do not expect to make
sales of the Units offered hereby to discretionary accounts.
The Representative acted as Placement Agent for the Bridge Financing in
February and March 1997 for which it received a fee of $230,000 and a
non-accountable expense allowance of $69,000.
The Commission is conducting an investigation concerning various business
activities of the Representative and Blair & Co. The Company has been advised by
the Representative that the investigation has been ongoing since at least 1989
and that it is cooperating with the investigation. The Representative cannot
predict whether this investigation will ever result in any type of formal
enforcement action against the Representative or Blair & Co.
In July 1997, Blair & Co., its Chief Executive Officer and its head trader
consented, without admitting or denying any violations, to a settlement with the
NASDR District Business Conduct Committee for District No. 10 to resolve
allegations of NASD rule and securities law violations in connection with
mark-up and pricing practices and adequacy of disclosures to customers regarding
market-making activities of Blair & Co. in connection with certain securities
issues during the period from June 1993 through May 1995 where Blair & Co. was
the primary selling group member. NASDR alleged the firm failed to accurately
calculate the contemporaneous cost of securities in instances where the firm
dominated and controlled after-market trading, thereby causing the firm to
charge its customers excessive mark-ups. NASDR also alleged the firm did not
make adequate disclosure to customers about its market-making activities in two
issues. As part of the settlement, Blair & Co. has consented to a censure and
has agreed to pay a $2 million fine, make $2.4 million in restitution to retail
customers, employ an independent consultant
48
<PAGE>
for two years to review and make recommendations to strengthen the firm's
compliance procedures, and has undertaken for 12 months not to sell to its
retail customers (excluding banks and other institutional investors) more than
60% of the total securities sold in any securities offering in which it
participates as an underwriter or selling group member. The Chief Executive
Officer of Blair & Co., has agreed to settle failure to supervise charges by
consenting to a censure, the imposition of a $225,000 fine and a 60-day
suspension from associating with any NASD member firm and to take a
requalification examination. The firm's head trader has agreed to settle charges
against him by consenting to a censure, the imposition of a $300,000 fine and a
90-day suspension from associating with any member firm and has undertaken to
take certain requalification examinations. The settlement with NASDR does not
involve or relate to the Representative , its chief executive officer or any of
its other officers or directors.
The Company has been advised that Blair & Co. intends to make a market in
the Company's securities after the Offering. The Company is unable to predict
whether Blair & Co.'s settlement with the NASDR or any unfavorable resolution of
the Commission's investigation will have any effect on such firm's ability to
make a market in the Company's securities and, if so, whether the liquidity or
price of the Company's securities would be adversely affected.
In connection with the Offering, the Underwriters and certain selling group
members may engage in certain transactions that stabilize, maintain or otherwise
affect the market price of the Units, the Class A Common Stock and the Class A
Warrants. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase the Units, the Class A Common Stock and the Class A Warrants for
the purpose of pegging, fixing or maintaining the market price of such
securities. The Underwriters may also create a short position in the Units by
selling more Units in connection with the Offering than it is committed to
purchase from the Company, and in such case the Representative may reduce all or
a portion of that short position by purchasing the Units, the Class A Common
Stock and the Class A Warrants in the open market. The Representative also may
also elect to reduce any short position by exercising all or any portion of the
over-allotment option described herein. In addition, the Representative may
impose "penalty bids" on certain Underwriters and selling group members. This
means that if the Representative purchases shares of Class A Common Stock or
Class A Warrants in the open market to reduce the Underwriters' short position
or to stabilize the price of the Class A Common Stock or the Class A Warrants,
they may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares of Class A Common Stock or Class A
Warrants as part of the Offering. Any of the transactions described in this
paragraph may stabilize or maintain the market price of the Units, the Class A
Common Stock and the Class A Warrants at a level above that which might
otherwise prevail in the open market.
Neither the Company nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Units, the Class A Common Stock and
the Class A Warrants. In addition, neither the Company nor the Underwriters make
any representation that the Underwriters or any selling group members will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York. Certain
legal matters will be passed upon for the Underwriters by Paul, Hastings,
Janofsky & Walker LLP, New York, New York. Bachner, Tally, Polevoy & Misher LLP
represents the Representative in other matters.
EXPERTS
The financial statements of HealthCore Medical Solutions, Inc., as of
September 30, 1996 and for the fiscal year ended September 30, 1996 and the
periods from June 1, 1995 (inception) through September 30, 1995 and from June
1, 1995 (inception) through September 30, 1996 appearing in this Prospectus and
Registration Statement have been audited by Richard A. Eisner & Company, LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
49
<PAGE>
ADDITIONAL INFORMATION
The Company is not a reporting company under the Exchange Act. The Company
has filed a Registration Statement on Form SB-2 under the Securities Act with
the Commission in Washington, D.C. with respect to the Units offered hereby.
This Prospectus, which is part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Units
offered hereby, reference is hereby made to the Registration Statement and such
exhibits, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at 500 West Madison (Suite 1400), Chicago, Illinois 60661. Copies
of such material may also be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of such site is
http://www.sec.gov. Although the statements contained in this Prospectus as to
the contents of any contract or other document referred to are accurate in all
material respects, such statements do not purport to be complete and in each
instance reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
Following the Offering, the Company will be subject to the reporting and
other requirements of the Exchange Act and intends to furnish to its
stockholders annual reports containing audited financial statements and may
furnish interim reports as it deems appropriate.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT AUDITORS ............................................ F-2
BALANCE SHEETS AS OF SEPTEMBER 30, 1996 AND JUNE 30, 1997 (UNAUDITED) ..... F-3
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND THE
PERIODS FROM JUNE 1, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 1995,
JUNE 1, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 1996 AND FOR THE
NINE MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) AND THE
PERIOD FROM JUNE 1, 1995 (INCEPTION) THROUGH JUNE 30, 1997
(UNAUDITED) ............................................................. F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) FOR
THE PERIOD FROM JUNE 1, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 1996
AND FOR THE NINE MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED) ........... F-5
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND THE
PERIODS FROM JUNE 1, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 1995,
JUNE 1, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 1996 AND FOR THE
NINE MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) AND THE
PERIOD FROM JUNE 1, 1995 (INCEPTION) THROUGH JUNE 30, 1997
(UNAUDITED) ............................................................. F-6
NOTES TO FINANCIAL STATEMENTS.............................................. F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders
HealthCore Medical Solutions, Inc.
Grandview, Missouri
We have audited the accompanying balance sheet of HealthCore Medical
Solutions, Inc., (a development stage company and the business successor to
MegaVision, L.C.) as at September 30, 1996 and the related statements of
operations, changes in capital deficiency and cash flows for the year ended
September 30, 1996 and the periods from June 1, 1995 (inception) through
September 30, 1995 and from June 1, 1995 (inception) through September 30, 1996.
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 financial position of HealthCore Medical
Solutions, Inc. as of September 30, 1996 and the results of its operations and
its cash flows for the year ended September 30, 1996 and the periods from June
1, 1995 (inception) through September 30, 1995 and from June 1, 1995 (inception)
through September 30, 1996, in conformity with generally accepted accounting
principles.
As described more fully in Note A to the financial statements, the business
of the Company was conducted by MegaVision, L.C. prior to the merger in February
1997.
Richard A. Eisner & Company, LLP
New York, New York
October 31, 1996
With respect to Notes A, H, I and J
March 13, 1997
F-2
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
(a development stage company)
BALANCE SHEETS
(Note A)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 668,203
Prepaid expenses and other current assets ........... $ 2,072 14,475
----------- -----------
Total current assets ............................ 2,072 682,678
----------- -----------
Property and equipment, net ........................... 73,985 190,180
Deferred offering costs ............................... 40,000 156,441
Other assets .......................................... 44,143 94,747
----------- -----------
158,128 441,368
----------- -----------
T O T A L ....................................... $ 160,200 $ 1,124,046
=========== ===========
LIABILITIES
Current liabilities:
Bank overdraft ...................................... $ 9,914
Accounts payable and accrued expenses ............... 106,077 $ 288,098
Current portion of obligation under capital lease ... 45,977
Notes payable - bank ................................ 56,300 103,600
Notes payable - bridge units ........................ 2,096,334
Notes payable - others .............................. 54,494
Notes payable - related parties ..................... 10,000
Other liabilities ................................... 8,493 2,832
----------- -----------
Total current liabilities ....................... 235,278 2,546,841
----------- -----------
Obligation under capital lease ........................ 100,659
----------- -----------
Total liabilities ............................... 235,278 2,647,500
----------- -----------
Commitments, contingency and other matters
CAPITAL DEFICIENCY
Preferred stock, $.01 par value, authorized,
5,000,000 shares
Common stock, $.01 par value:
Class A, authorized, 19,640,000 shares; issued and
outstanding, 684,000 shares at September 30, 1996
and 840,000 shares at June 30, 1997 ............. 6,840 8,400
Class B, authorized, 360,000 shares; issued and
outstanding, 144,000 shares at September 30, 1996
and 360,000 shares at June 30, 1997 ............ 1,440 3,600
Additional paid-in capital ............................ 1,242,998 1,975,620
Deficit accumulated during the development stage ...... (1,326,356) (3,511,074)
----------- -----------
Total capital deficiency ........................ (75,078) (1,523,454)
----------- -----------
T O T A L ....................................... $ 160,200 $ 1,124,046
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
(a development stage company)
STATEMENTS OF OPERATIONS
(Note A)
<TABLE>
<CAPTION>
June 1, 1995 June 1, 1995 June 1, 1995
(Inception) Nine Months Ended (Inception) (Inception)
Through Year Ended June 30, Through Through
September 30, September 30, ------------------------ September 30, June 30,
1995 1996 1996 1997 1996 1997
---------- ---------- ---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
General and administrative ....... $ 78,105 $ 900,177 $ 745,123 $ 1,418,389 $ 978,282 $ 2,396,671
Selling and marketing ............ 34,158 277,845 59,624 251,731 312,003 563,734
Interest-net ..................... 36,071 3,028 514,598 36,071 550,669
---------- ----------- ---------- ----------- ----------- -----------
NET LOSS ........................... $ (112,263) $(1,214,093) $ (807,775) $(2,184,718) $(1,326,356) $(3,511,074)
========== =========== ========== =========== =========== ===========
Net loss per share ................. $ (0.46) $ (3.95) $ (2.35) $ (5.57)
========== =========== ========== ===========
Weighted average number of shares
outstanding .................... 245,010 307,717 344,417 392,067
========== =========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
(a development stage company)
STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(Note A)
<TABLE>
<CAPTION>
Common Stock Deficit
----------------------------------------------------- Accumulated
Class A Class B Additional During
------------------------- ------------------------- Paid-in Development
Shares Amount Shares Amount Capital Stage Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued at inception 102,000 $ 1,020 102,000 $ 1,020 $ (2,040) $ -0-
Common stock issued in private
placement, net of offering
costs of$5,832 .............. 123,000 1,230 297,938 299,168
Net loss ........................ $ (112,263) (112,263)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance - September 30, 1995 .... 225,000 2,250 102,000 1,020 295,898 (112,263) 186,905
Common stock issued in private
placement, net of offering
costs of $13,533 ............. 105,000 1,050 410,417 411,467
Compensatory common stock issued 24,000 240 54,760 55,000
Common stock issued in connection
with purchase of software .... 102,000 1,020 (1,020) -0-
Conversion of debt into common
stock ........................ 228,000 2,280 42,000 420 482,943 485,643
Net loss ........................ (1,214,093) (1,214,093)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance - September 30, 1996 .... 684,000 6,840 144,000 1,440 1,242,998 (1,326,356) (75,078)
Common stock issued ............. 132,000 1,320 216,000 2,160 378,960 382,440
Conversion of debt to common
stock ........................ 24,000 240 47,985 48,225
Warrants issued in connection
with the bridge units, net
of costs of $4,823 ........... 305,677 305,677
Net loss ........................ (2,184,718) (2,184,718)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE - JUNE 30, 1997
(Unaudited) .................. 840,000 $ 8,400 360,000 $ 3,600 $ 1,975,620 $(3,511,074) $(1,523,454)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
(a development stage company)
STATEMENTS OF CASH FLOWS
(Note A)
<TABLE>
<CAPTION>
June 1, 1995 June 1, 1995 June 1, 1995
(Inception) Nine Months Ended (Inception) (Inception)
Through Year Ended June 30, Through Through
September 30, September 30, ------------------------- September 30, June 30,
1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................... $ (112,263) $(1,214,093) $ (807,775) $(2,184,718) $(1,326,356) $(3,511,074)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .............. 33,206 27,628 36,741 33,206 69,947
Amortization of discount on note
payable - bridge units ................ 437,857 437,857
Noncash compensation and expense
charges ............................... 124,917 22,000 372,290 124,917 497,207
Write down of worthless equipment ....... 32,865 32,865
Changes in assets and liabilities:
(Increase) decrease in prepaid
expenses and other assets .............. (18,627) 9,258 (1,468) (104,929) (9,369) (114,298)
Increase in accounts payable and
accrued expenses ....................... 8,402 147,592 60,112 182,021 155,994 338,015
Increase in due to related party ......... 29,000 29,000 29,000 29,000
Increase (decrease) in other liabilities . 8,493 6,370 (5,661) 8,493 2,832
----------- ----------- ----------- ----------- ----------- -----------
Net cash used in operating
activities ........................... (122,488) (861,627) (664,133) (1,233,534) (984,115) (2,217,649)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment ....... (88,499) (18,692) (12,243) (30,749) (107,191) (137,940)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Increase (decrease) in bank overdraft ....... 9,914 (9,914) 9,914
Issuance of notes payable - bridge units .... 1,695,323 1,695,323
Net change in notes payable - bank and other 110,794 63,652 41,031 110,794 151,825
Net change in notes payable to related
parties ................................... 31,152 434,491 96,248 10,000 465,643 475,643
Principal payments on obligation under
capital lease .............................. (3,340) (3,340)
Net proceeds from issuance of common
stock ..................................... 299,168 282,633 400,000 10,150 581,801 591,951
Proceeds from issuance of warrants .......... 305,677 305,677
Deferred bridge unit costs .................. (36,846) (36,846) (36,846)
Deferred offering costs ..................... (40,000) (116,441) (40,000) (156,441)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities ........................... 330,320 760,986 559,900 1,932,486 1,091,306 3,023,792
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ............... 119,333 (119,333) (116,476) 668,203 - 0 - 668,203
Cash - beginning of period .................... 119,333 119,333
----------- ----------- ----------- ----------- ----------- -----------
CASH - END OF PERIOD .......................... $ 119,333 $ - 0 - $ 2,857 $ 668,203 $ - 0 - $ 668,203
=========== =========== =========== =========== =========== ===========
Supplemental information:
Interest paid during the period ............. $ 1,114 $ 15,397 $ 1,114 $ 16,511
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1997)
and the nine-month periods ended June 30, 1997
and June 30, 1996 is unaudited)
(NOTE A)--The Company and Basis of Presentation:
HealthCore Medical Solutions, Inc. ("HealthCore" or the "Company") was
organized as a Delaware corporation in February 1997. The Company is in the
development stage and intends to market and administer vision, hearing, drug and
dental discount programs (the "HealthCare Solutions Card") which are designed to
enable participants (members), who are enrolled through various organizations
such as insurance carriers, corporations, and unions to realize savings on
purchases of products and services. These savings will be obtained through a
company-organized network of providers, such as opticians, chiropractors,
optometrists, hearing specialists, pharmacists and dentists. The Company is the
business successor to MegaVision, L.C. Through June 30, 1997, the Company,
exclusive of test marketing, has not sold any "HealthCare Solutions Cards".
In February 1997, MegaVision, L.C. ("MegaVision" or the "Predecessor"), a
Missouri limited liability company in the development stage, merged into
HealthCore, a newly formed entity. In conjunction with the merger, 1,100 member
units of MegaVision were exchanged for 708,000 shares of Class A common stock of
HealthCore and 600 member units of MegaVision were exchanged for 360,000 shares
of Class B common stock of HealthCore. The business of the Company was conducted
by MegaVision from June 1, 1995 to February 19, 1997. The merger described above
has been accounted for in a manner similar to a pooling of interests and, except
as otherwise indicated or where the context otherwise requires, the information
set forth in these financial statements has been adjusted to give retroactive
effect to the reorganization.
The Company and Predecessor have been principally devoted to
organizational activities, raising capital, marketing and negotiating provider
agreements.
As further described in Note I, in February and March 1997, the Company
received net proceeds of $1,964,000 from the sale of a private placement of
subordinated notes and warrants ("Bridge Units"). The Company anticipates that
the proceeds from the Bridge Units will be sufficient to fund its operations
through September 30, 1997. The Company will require substantial additional
funds to complete its current planned activities.
(NOTE B)--Summary of Significant Accounting Policies:
[1] Cash and cash equivalents:
Cash and cash equivalents include cash on hand, demand deposits and all
highly liquid investments with a maturity of three months or less at the time of
purchase.
[2] Property and equipment:
Property and equipment are recorded at cost. Depreciation and amortization
are being provided on the straight-line method over the estimated useful lives
of the assets. Equipment is depreciated over periods ranging from five to seven
years. Leasehold improvements are amortized over the shorter of the lease term
or their estimated useful life.
Equipment under capital leases is recorded at the lesser of the present
value of the lease payments or fair value of the equipment. Such equipment is
amortized on a straight-line basis over the shorter of the lease term or its
estimated useful life.
(continued)
F-7
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1997)
and the nine-month periods ended June 30, 1997
and June 30, 1996 is unaudited)
(NOTE B)--Summary of Significant Accounting Policies: (continued)
[3] Management 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,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
[4] Net loss per share:
Net loss per share was computed based upon the weighted average number of
shares of common stock outstanding during the period excluding shares which are
expected to be placed in escrow (see Note D). Those escrowed shares are common
stock equivalents for purposes of calculating earnings per share. Since in 1996
and 1997, certain shares of common stock were issued at less than the
anticipated offering price of the proposed initial public offering, all such
shares of common stock have been included in the calculation of the weighted
average shares outstanding for all periods presented using the treasury stock
method based on the estimated initial public offering price, pursuant to the
requirements of the Securities and Exchange Commission.
The Company anticipates repaying the bridge notes with proceeds of the
proposed initial public offering. Had the bridge notes not been initiated in
1997 and had the Company issued common stock instead, the net loss per share for
the nine months ended June 30, 1997 would have been $(5.59) based upon an
additional weighted average number of shares outstanding for the nine months
ended June 30, 1997 of 85,600.
[5] Interim financial statements:
The accompanying interim financial statements at June 30, 1997 and for
each of the nine-month periods ended June 30, 1997 and June 30, 1996 are
unaudited. However, in the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary to be in conformity with
generally accepted accounting principles have been made. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the entire year.
[6] Stock-based compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") allows companies to either expense
the estimated fair value of employee stock options or to continue to follow the
intrinsic value method set forth in Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") but disclose the pro forma
effects on net loss had the fair value of the options been expensed. The Company
has elected to apply APB 25 in accounting for its employee stock options
incentive plans.
[7] Recently issued accounting standards:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128") which is effective for periods ending after December 15, 1997. Management
believes that "basic earnings per share," as defined, for each of the periods
included in these financial statements would be substantially the same as the
net loss per share amounts included on the statements of operations.
Additionally, the "diluted earnings per share," as defined, would be
anti-dilutive.
(continued)
F-8
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1997)
and the nine-month periods ended June 30, 1997
and June 30, 1996 is unaudited)
(NOTE B)--Summary of Significant Accounting Policies: (continued)
[7] Recently issued accounting standards: (continued)
Effective October 1, 1996 the Company adopted the provisions of a recently
issued accounting standard regarding impairments of long-lived assets ("SFAS No.
121"). SFAS No. 121 requires entities to review long-lived assets and certain
identifiable intangibles to be held and used, for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of this standard did not have a significant impact on
financial position or results of operations as at and for the period ended June
30, 1997.
(NOTE C)--Property and Equipment:
Property and equipment (at cost) consists of:
September 30, June 30,
1996 1997
-------- --------
Equipment ........................ $ 60,800 $195,407
Leasehold improvements ........... 46,391 46,391
-------- --------
107,191 241,798
Less accumulated depreciation
and amortization ............... 33,206 51,618
-------- --------
Total ...................... $ 73,985 $190,180
======== ========
In April 1997, the Company acquired equipment under capital lease
aggregating $175,865. Depreciation expense on this equipment totaled $8,793 for
the nine months ended June 30, 1997.
(NOTE D)--Deferred Offering Costs:
The Company has incurred deferred offering costs of $40,000 in connection
with a proposed initial public offering ("IPO") through September 30, 1996 and
$156,441 through June 30, 1997. The deferred costs will either be charged
against the gross proceeds of the offering, or if not consummated, they will be
charged to expense. Additionally, the Company will incur substantial additional
offering costs and the current stockholders will be expected to place 900,000
shares of their Class A and Class B common stock into an escrow account. Some or
all of these shares will be released upon the Company meeting certain
performance goals or the stock price exceeding certain targets. If these goals
are not met the shares will be canceled. However, should the goals be met, the
release of the shares will result in the Company recognizing an additional
expense equal to the market value of the shares released. A total of 400,000
shares of common stock held in escrow will be released if either (a) the
Company's minimum pretax income, as defined, equals or exceeds $3,800,000 for
the year ending September 30, 1998, $5,500,000 for the year ending September 30,
1999 or $7,500,000 for the year ending September 30, 2000 or (b) the average
closing price of the common stock equals or exceeds $12.50 per share for a 30
trading day period in the 18-month period beginning with the consummation of the
IPO or $16.50 per share for 30 trading days in the period beginning after 18
months after the consummation of the IPO ending 36 months after the IPO. All
shares of common stock held in escrow will be released if either (a) the
Company's minimum pretax income, as defined, equals or exceeds $4,600,000 for
the year ending September 30, 1998,
(continued)
F-9
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1997)
and the nine-month periods ended June 30, 1997
and June 30, 1996 is unaudited)
(NOTE D)--Deferred Offering Costs: (continued)
$6,600,000 for the year ending September 30, 1999 or $9,000,000 for the year
ending September 30, 2000 or (b) the average closing price of the common stock
equals or exceeds $15.00 per share for a 30 trading day period in the 18-month
period beginning with the consummation of the IPO or $18.00 per share for 30
trading days in the period beginning after 18 months after the consummation of
the IPO ending 36 months after the IPO.
(NOTE E)--Related Party Transactions:
During the year ended September 30, 1996, the Company entered into an
agreement to purchase certain software. The purchase price was $37,500 plus the
issuance of 102,000 shares of the Company's Class A common stock. The cost of
the acquired software was immediately expensed based on the Company's intention
to distribute to providers certain software at no charge in conjunction with its
discount programs. An employment agreement was executed with the software
developer which was subsequently cancelled. At September 30, 1996 the Company's
remaining liability under the purchase agreement was $29,000 which was converted
into additional Class A common stock.
During the nine months ended June 30, 1997, stockholders loaned the
Company $160,553. Interest expense, at rates ranging from 8.5% to 11% per annum,
aggregated $2,231. Additionally, beginning in November 1996, the Company has
rented office space for $1,000 per month from an affiliate of the chairman.
In February 1997, a minority stockholder agreed to cancel a consulting
agreement with the Company in exchange for a $17,000 non interest bearing note,
due and paid in March 1997 and a $60,000 note bearing interest at 8.5% per
annum. At June 30, 1997, $10,000 remains outstanding.
From April through June 1997, the Company loaned $37,200 to an
officer/stockholder. Loans totaling $7,200 are unsecured and are due in August
1997 with interest at 8% per annum. The remaining $30,000 is due in monthly
installments of $750 through August 1998 and the remaining balance plus any
unpaid interest due in September 1998. This loan bears interest at 10% per annum
and is secured by 15,000 shares of the Company's Class B common stock. Effective
August 15, 1997, (i) no payments are due until February 15, 1998 and the
maturity was extended to March 1999, and (ii) 15,000 shares of Class B common
stock converted to 15,000 shares of Class A common stock. Prepaid expenses and
other current assets includes $9,427 of such balance with the remaining $27,773,
included in other assets, respectively.
(NOTE F)--Obligation Under Capital Lease:
In April 1997, the Company entered into an obligation under a capital
lease, with an affiliate of a stockholder, due in monthly installments of
$6,472, including imputed interest at 25%, through January 2000. The following
are the minimum future lease payments:
Twelve Months
Ending June 30, Amount
--------------- --------
1998 ............................................. $ 77,665
1999 ............................................. 77,665
2000 ............................................. 45,305
--------
200,635
Less amount representing interest ................ 53,999
--------
Present value of net minimum lease payments ...... 146,636
Less present value of net minimum
lease payments due within one year ............. 45,977
--------
$100,659
========
(continued)
F-10
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1997)
and the nine-month periods ended June 30, 1997
and June 30, 1996 is unaudited)
(NOTE G)--Notes Payable--Bank:
At September 30, 1996, the Company has loans outstanding bearing interest
between 7% and 10.75%. The loans are collateralized by a life insurance policy
or certificates of deposits of stockholders of the Company. During the nine
months ended June 30, 1997, the maturity dates on these loans were extended to
November 1997 and the Company borrowed an additional $61,674 under the same
terms.
(NOTE H)--Notes Payable--Others:
[1] The Company had entered into a financing arrangement with DHF
International, Inc. ("DHF") which represented two short-term notes secured by
computer equipment owned by the Company. The notes, originally due September 24,
1996 and February 28, 1997, were restructured in October 1996. Under the
restructuring agreement the collateral remained the same, however, the Company
was obligated to pay DHF $50,000. The payment terms were $20,000 on December 1,
1996, and $10,000 on each of January 1, 1997, February 1, 1997 and March 1,
1997. However, subsequently DHF cancelled the Company's obligation to pay and
transferred all rights, title and interest in the computer equipment to the
Company, in exchange for 24,000 shares of the Company's Class A common stock and
a right of first refusal with respect to the leasing of equipment to the
Company.
[2] A demand loan payable in the amount of $7,500 was repaid subsequent to
September 30, 1996.
(NOTE I)--Notes Payable--Bridge Units:
In February and March 1997, the Company sold 46 Bridge Units, each
consisting of a $50,000, 10% subordinated note and warrants to purchase 25,000
shares of Class A common stock. The notes are due the earlier of the closing of
the IPO or February 1998. If warrants exercisable into Class A common stock are
issued in connection with the IPO, these warrants will convert into the IPO
warrants. If the IPO is not completed or warrants are not offered in the IPO,
the warrants become exercisable into Class A common stock at $4.00 per share in
February 1998 and expire in February 2000. The Company received $1,964,154, net
of offering costs. One Bridge Unit was purchased by the chairman of the board
and his wife and one-half of a Bridge Unit was purchased by a director, on the
same terms as the other Bridge Units.
The Company valued the warrants at $310,500. Accordingly, additional
paid-in capital has been credited with $305,677 which represents the value of
the warrants less the allocable portion of the offering costs. The short-term
note has been discounted by the value of the warrants and the offering costs.
The discount is being amortized as additional interest expense from the date of
issuance to August 15, 1997, the anticipated maturity date.
(NOTE J)--Capital Deficiency:
[1] Contributed capital:
In accordance with the unanimous written consent of the stockholders and
managers of the Company, certain stockholders' loans and other amounts owed by
the Company totalling $465,643 were converted into Class A and Class B common
stock effective as of September 30, 1996 at an exchange rate of $1.85 per share.
Such exchange did not affect the results of operations.
(continued)
F-11
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1997)
and the nine-month periods ended June 30, 1997
and June 30, 1996 is unaudited)
(NOTE J)--Capital Deficiency: (continued)
[2] Issuance of Class A common stock:
In February 1997, the Company issued an assignee of M.K.D. Capital Corp.
("M.K.D."), 132,000 shares of Class A common stock for total consideration of
$149,160. The shares were valued at their fair value at the date of issuance.
M.K.D. paid $3,850 in cash and the remaining $145,310 has been charged to
operations for services rendered.
[3] Issuance of Class B common stock:
In November 1996, the Company entered into an agreement to issue 216,000
shares of Class B common stock for $6,300 to the chairman of the board of
directors. The Company valued these shares at $233,280, their estimated fair
value at the date of issuance, and charged $226,980 to operations in the three
months ended December 31, 1996.
[4] Stock option plan:
In 1997, the Company adopted a stock option plan under which 200,000
shares of Class A common stock are reserved for issuance upon exercise of either
incentive or nonincentive stock options which may be granted from time to time
by the board of directors to employees and others. In May and July 1997, the
Company granted options to purchase 57,500 shares of Class A common stock at $5
per share. The options become exercisable during the period from August 1997
through July 2000 and expire in May through July 2007.
[5] Shares reserved for issuance:
The Company has reserved 1,634,000 shares of its Class A common stock for
issuance upon exercise of the outstanding warrants and options.
[6] Common and preferred stock:
The shares authorized aggregate 19,640,000 shares of Class A common stock,
360,000 shares of Class B common stock and 5,000,000 shares of preferred stock
all with $.01 par value. The Class A and Class B shares of common stock are
substantially identical except that the Class A common stockholders have the
right to cast one vote per share and the Class B common stockholders have the
right to cast five votes per share. Upon the occurrence of certain events, the
Class B shares automatically convert into Class A shares. Effective August 15,
1997, 144,000 shares of Class B common stock converted into 144,000 shares of
Class A common stock.
(NOTE K)--Income Taxes:
Prior to March 1997, the Company was a limited liability company and was
not subject to income taxes, however the Company's income or loss is required to
be recognized by the members and taxed on their individual income tax returns.
Accordingly, the losses incurred through February 1997 will not be available to
offset the Company's future taxable income, if any.
The Company's deferred tax asset at June 30, 1997 represents a benefit
from net operating loss carryforward of $462,000 which is reduced by a valuation
allowance of $462,000 since the likelihood of realization of such tax benefit is
not presently determinable. The Company's provision for income taxes for the
nine months ended June 30, 1997 are comprised of the deferred tax items.
(continued)
F-12
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1997)
and the nine-month periods ended June 30, 1997
and June 30, 1996 is unaudited)
(NOTE K)--Income Taxes: (continued)
The difference between the statutory federal income tax rate on the
Company's net loss and the Company's effective income tax rate for the nine
month period ended June 30, 1997 is summarized as follows:
Statutory federal income tax rate ............... 34.0%
Loss available to members ....................... (10.3)
Compensation charge ............................. (2.6)
Increase in valuation allowance ................. (21.1)
----
Effective income tax rate ....................... 0.0%
====
(NOTE L)--Fair Value of Financial Instruments:
The estimated fair value of financial instruments has been determined
based on available market information and appropriate valuation methodologies.
The carrying amounts of cash, accounts payable, notes payable to bank and others
approximate fair value at September 30, 1996 and June 30, 1997 because of the
short maturity of these financial instruments. The fair value estimates were
based on information available to management as of September 30, 1996 and June
30, 1997.
(NOTE M)--Commitments, Contingency and Other Matters:
[1] Operating leases:
The Company leases office space and equipment under operating leases with
initial or remaining terms of one year or more expiring through June 2000.
Certain leases obligate the Company for property taxes, insurance and
maintenance. Future minimum rental payments under these leases are as follows:
Twelve Months
Ending June 30, Amount
--------------- --------
1998 ....................................... $ 96,000
1999 ....................................... 85,822
2000 ....................................... 64,795
--------
$246,613
========
Rent expense inclusive of taxes, maintenance and insurance, aggregated
$43,312 for the year ended September 30, 1996, $45,273 for the nine months ended
June 30, 1997 and $22,223 for the nine months ended June 30, 1996.
In May 1997, the Company entered into an operating equipment lease which
requires, among other things, a $70,000 initial payment and, until certain
covenants are met, an $85,000 irrevocable stand by letter of credit. As of June
30, 1997, the Company has not accepted the equipment and the lease has not
commenced, however, the Company paid the initial $70,000 payment which has been
included in other assets. Additionally, the Company is in the process of
obtaining the stand by letter of credit and has been informed by its bank that
the bank will require an $85,000 certificate of deposit as security.
(continued)
F-13
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1997)
and the nine-month periods ended June 30, 1997
and June 30, 1996 is unaudited)
(NOTE M)--Commitments, Contingency and Other Matters: (continued)
[2] Broker agreement:
In October 1996, the Company entered into an agreement with M.K.D. which
was modified January 16, 1997 that provides for M.K.D. to introduce the Company
to businesses that may be interested in either purchasing products or services
from the Company or providing services under the HealthCare Solutions Card. In
the event the introductions lead to the purchase of the Company's products,
M.K.D. will receive a commission equal to 3% of gross payments. Gross payments
shall mean payments collected by or on behalf of any business contact for any of
the Company's products, less any direct manufacturing costs incurred by the
Company in the production of such products and any broker's commissions payable.
In addition, in connection with the January 1997 modification, the Company
issued 132,000 shares of Class A common stock to M.K.D.'s assignee for $3,850
(see Note J[2]).
[3] Self-insurance:
The Company had been self-insured for its workers' compensation insurance
benefits. In March 1997, the Company obtained workers' compensation coverage
from a commercial insurance carrier.
(NOTE N)--Subsequent Event:
In September 1997, the Company granted warrants to purchase 284,000 shares
of Class A Common Stock to its Chairman of the Board and Cheif Executive
Officer. The warrants are exercisable at $1.00 per share and expire in September
2007. The Company has valued these warrants at $416,922, the estimated Fair
market value of the warrants at the date of grant, and expects to incur a
non-cash charge to operations of $416,922 in the quarter ending September 30,
1997. Of the 284,000 shares, 142,000 are immediately exercisable and the
remaining 142,000 will become exercisable upon the Company meeting certain
performance goals or the stock price exceeding certain targets. If these targets
are not met the warrants will be canceled. However, should the goals be met, the
Company will recognize an additional expense equal to the fair market value of
the portion of the warrants subject to such targets. The warrants will become
exercisable if either (a) the Company's minimum pretax income, as defined,
equals or exceeds $3,800,000 for the year ending September 30, 1998, $5,500,000
for the year ending September 30, 1999 or $7,500,000 for the year ending
September 30, 2000 or (b) the average closing price of the common stock equals
or exceeds $12.50 per share for a 30 trading day period in the 18-month period
beginning with the consummation of the IPO or $16.50 per share for 30 trading
days in the period beginning after 18 months after the consummation of the IPO
to 36 months after the IPO.
F-14
<PAGE>
[The following paragraph describes a graphic in the printed material]
The artwork contains pictures of (i) the Company's HealthCare Solutions Card,
(ii) a caduceus, (iii) pharmaceutical pills and (iv) a health care professional.
The artwork also contains the following legends: "It's a savings card. Not an
insurance plan." and "The simplicity of the HealthCare Solutions Card makes it
easy to market to consumers." The second legend also describes the benefits of
the HealthCare Solutions Card.
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by the Underwriters.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer, or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein contained is correct as of any time
subsequent to the date of this Prospectus.
------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 7
Use of Proceeds ........................................................... 16
Dividend Policy ........................................................... 17
Capitalization ............................................................ 18
Dilution .................................................................. 19
Selected Financial Data ................................................... 20
Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................ 21
Business .................................................................. 24
Management ................................................................ 32
Certain Transactions ...................................................... 37
Principal Stockholders .................................................... 39
Description of Securities ................................................. 42
Shares Eligible for Future Sale ........................................... 46
Underwriting .............................................................. 47
Legal Matters ............................................................. 49
Experts ................................................................... 49
Additional Information .................................................... 50
Index to Financial Statements ............................................. F-1
------------------
Until , 1997, 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.
================================================================================
================================================================================
1,760,000 Units
HEALTHCORE
MEDICAL
SOLUTIONS, INC.
Consisting of 1,760,000 shares
of Class A Common Stock and
1,760,000 Redeemable Class A Warrants
------------
PROSPECTUS
------------
D.H. BLAIR INVESTMENT
BANKING CORP.
_____________, 1997
================================================================================
<PAGE>
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions) are as follows:
Amount
------
SEC Registration Fee ........................................ $ 7,721
NASD Filing Fees ............................................ 3,048
Nasdaq Filing Fees .......................................... 18,000
Printing and Engraving Expenses ............................. 100,000
Accounting Fees and Expenses ................................ 150,000
Legal Fees and Expenses ..................................... 200,000
Blue Sky Fees and Expenses .................................. 25,000
Transfer Agent's Fees and Expenses .......................... 10,000
Miscellaneous Expenses ...................................... 61,231
--------
Total ............................................... $575,000
========
Item 14. Indemnification of Directors and Officers
The Amended and Restated Certificate of Incorporation and By-Laws of the
Registrant provide that the Company shall indemnify any person to the full
extent permitted by the General Corporation Law of the State of Delaware (the
"DGCL"). Section 145 of the DGCL, relating to indemnification, is hereby
incorporated herein by reference.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or controlling persons of the Company pursuant
to the Company's Amended and Restated Certificate of Incorporation, By-Laws and
the DGCL, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The Company's Amended and Restated Certificate of Incorporation includes
certain provisions permitted pursuant to Delaware law whereby officers and
directors of the Company are to be indemnified against certain liabilities. The
Company's Amended and Restated Certificate of Incorporation also limits, to the
fullest extent permitted by Delaware law, a director's liability for monetary
damages for breach of fiduciary duty, including gross negligence, except
liability for (i) breach of the director's duty of loyalty, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) the unlawful payment of a dividend or unlawful stock
purchase or redemption and (iv) any transaction from which the director derives
an improper personal benefit. Delaware law does not eliminate a director's duty
of care and this provision has no effect on the availability of equitable
remedies such as injunction or rescission based upon a director's breach of the
duty of care.
In accordance with Section 102(a) (7) of the DGCL, the Amended and Restated
Certificate of Incorporation of the Registrant eliminates the personal liability
of directors to the Company or its stockholders for monetary damages for breach
of fiduciary duty as a director with certain limited exceptions set forth in
Section 102(a) (7).
The Registrant also intends to enter into indemnification agreements with
each of its officers and directors, the form of which is filed as Exhibit 10.4
and reference is hereby made to such form.
Reference is made to Section 6 of the Underwriting Agreement (Exhibit 1.1)
which provides for indemnification by the Underwriters of the Registrant, its
officers and directors.
Item 15. Recent Sales of Unregistered Securities
During the last three years, the Registrant has sold and issued the
following unregistered securities:
In February 1997, in connection with the merger of MegaVision L.C. into the
Registrant, the Registrant issued an aggregate of 684,000 shares of Class A
Common Stock and 360,000 shares of Class B Common Stock to the former members of
MegaVision L.C.
II-1
<PAGE>
In February 1997, the Registrant sold 132,000 and 24,000 shares of Class A
Common Stock to an affiliate of MKD Capital Corp. and DHF International Inc.,
respectively, at a purchase price of approximately $.03 and $2.01, respectively,
per share. In connection with the sale of shares of Class A Common Stock sold to
M.K.D., M.K.D. agreed to modify an existing contract with the Registrant and
reduce the commissions it will be entitled to receive from the Registrant for
sales of the Registrant's products originated by M.K.D. and for introducing the
Registrant to additional networks of health care providers, if such networks
enter into a contract with the Registrant.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof. The sale of securities
was without the use of an underwriter, and the certificates evidencing the
shares bear a restrictive legend permitting the transfer thereof only upon
registration of the shares or an exemption under the Securities Act of 1933, as
amended. The foregoing recipients of Common Stock of the Registrant were (i) six
accredited investors, as defined in Rule 501 of Regulation D promulgated under
Section 4(2) of the Securities Act, (ii) four officers or directors of the
Registrant and (iii) two sophisticated investors capable of evaluating an
investment in the Registrant. All of the sophisticated investors had adequate
access to information about the Registrant. In addition, the recipients of
securities in each such transaction represented their intention to acquire the
securities for investment purposes only and not with a view to or for sale in
connection with any distribution thereof.
In February and March 1997, the Company issued an aggregate of 46 units,
each unit consisting of a subordinated note in the principal amount of $50,000
bearing interest at 10% per annum and warrants to purchase 25,000 shares of
Class A Common Stock at an exercise price of $4.00 per share (assuming the
offering contemplated by this Registration Statement is not consummated) to 64
accredited investors for an aggregate purchase price of $2,300,000. The units
were issued pursuant to an exemption from registration provided by Regulation D
promulgated under Section 4(2) of the Securities Act. The Representative acted
as the Registrant's placement agent in connection with these private placements.
In connection therewith, the Registrant paid sales commissions in the aggregate
amount of $230,000 and a non-accountable expense allowance in the aggregate
amount of $69,000.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
1.1 -- Form of Underwriting Agreement
3.1* -- Amended and Restated Certificate of Incorporation of the
Registrant
3.2* -- By-laws of the Registrant
4.1* -- Form of Bridge Note
4.2* -- Bridge Warrant Agreement
4.3* -- Form of Warrant Agreement
4.4 -- Form of Representative's Unit Purchase Option
5.1 -- Opinion of Bachner, Tally, Polevoy & Misher LLP
10.1* -- 1997 Stock Option Plan
10.2* -- Amended and Restated Escrow Agreement dated as of
July 31, 1997 by and between the Registrant, American
Stock Transfer & Trust Company and certain stockholders
of the Registrant
10.3* -- Form of Network Provider Agreement
10.4* -- Form of Indemnification Agreement
10.5* -- Lease Agreement for office space in Grandview, Missouri between
the Registrant and J.C. Nichols Company, as amended by an
Assignment and First Amendment of Lease dated July 18, 1997.
10.6* -- Voting Agreement dated June 5, 1997 by and between
Theodore W. White, Jr. and Neal J. Polan
10.7* -- Form of Broker Agreement
10.8* -- Agreement between M.K.D. Capital Corp. and the Registrant,
as amended.
II-2
<PAGE>
23.1 -- Consent of Bachner, Tally, Polevoy & Misher LLP-- Included
in Exhibit 5.1
23.2 -- Consent of Richard A. Eisner & Company, LLP -- Included on
Page II-6
24.1* -- Power of Attorney -- Included on Page II-5
27.1 -- Financial Data Schedule
- --------------
* Previously filed.
Item 17. Undertakings
(1) The undersigned Registrant hereby undertakes that it will:
(a) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act,
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement, and
(iii) Include any additional or changed material information on
the plan of distribution.
(b) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(c) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of this offering.
(2) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant 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 Registrant 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 whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(4) The undersigned Registrant hereby undertakes that it will:
(a) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act as part of this registration statement as
of the time it was declared effective.
(b) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of such securities at that time as the initial
bona fide offering of those securities.
II-3
<PAGE>
CONSENT OF COUNSEL
The consent of Bachner, Tally, Polevoy & Misher LLP will be contained in
its opinion to be filed as Exhibit 5.1 to the Registration Statement.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Registration
Statement or Amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Grandview, State of Missouri on the
17th day of September, 1997.
HEALTHCORE MEDICAL SOLUTIONS, INC.
By: /s/ NEAL J. POLAN
------------------------------
Neal J. Polan
Chairman and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement or Amendment thereto has been signed by the following
persons in the capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/ NEAL J. POLAN Chairman of the Board September 17, 1997
- -------------------------- and Chief Executive Officer
Neal J. Polan (principal executive officer)
/s/ JAMES H. STEINHEIDER Chief Operating Officer and September 17, 1997
- -------------------------- Chief Financial Officer
James H. Steinheider (principal financial and
accounting officer)
/s/ NORMAN H. WERTHWEIN Director September 17, 1997
- --------------------------
Norman H. Werthwein
/s/ ELI LEVITIN Director September 17, 1997
- --------------------------
Eli Levitin
II-5
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form SB-2 of
our report dated October 31, 1996 (with respect to Notes A, H, I and J March 13,
1997), on the financial statements of HealthCore Medical Solutions, Inc. as at
September 30, 1996 and for the year then ended and the periods from June 1, 1995
(inception) through September 30, 1995 and June 1, 1995 (inception) through
September 30, 1996. We also consent to the reference to our firm under the
captions "Selected Financial Data" and "Experts."
Richard A. Eisner & Company, LLP
New York, New York
September 16, 1997
II-6
1,760,000 Units
(each Unit consisting of (i) one share of Class A Common Stock, par value $0.01
per share, and (ii) one redeemable Class A Warrant to purchase one share of
Class A Common Stock)
HealthCore Medical Solutions, Inc.
Underwriting Agreement
[__], 1997
D.H. Blair Investment Banking Corp.
(as representative of the several underwriters
named in Schedule A attached hereto)
44 Wall Street, 2nd Floor
New York, New York 10005
HEALTHCORE MEDICAL SOLUTIONS, INC., a Delaware corporation
(the "Company"), proposes to issue and sell to the several underwriters named in
Schedule A attached hereto (collectively, the "Underwriters") for whom you are
acting as representative (the "Representative") pursuant to this Underwriting
Agreement (this "Agreement") an aggregate of One Million Seven Hundred Sixty
Thousand (1,760,000) Units, each unit being hereinafter referred to as a "Unit"
and consisting of (i) one share of class A common stock, par value $0.01 per
share ("Shares"), and (ii) one redeemable class A warrant ("Class A Warrants" or
"Warrants") to purchase one share of class A common stock at a price of Six
Dollars and Fifty Cents ($6.50) from _____, 1997) through [__], 2002. The
Warrants are subject to redemption, in certain instances commencing one (1) year
from the date of this Agreement. In addition, the Company proposes to grant to
the Underwriters the option referred to in Section 2(b) to purchase all or any
part of an aggregate of Two Hundred Sixty Four Thousand (264,000) additional
Units, subject to the right of the Representative to elect, in its sole
discretion, to exercise such option individually, and not as representative of
the several Underwriters. Unless the context otherwise indicates, the term
"Units" shall include the Two Hundred Sixty Four Thousand (264,000) additional
Units referred to above.
The aggregate of One Million Seven Hundred Sixty Thousand
(1,760,000) Units to be sold by the Company, together with all or any part of
the Two Hundred Sixty Four Thousand (264,000) Units which the Underwriters or
the Representative, on an individual basis, as the case may be, have the option
to purchase, and the Shares and the Warrants comprising such Units, are
<PAGE>
herein called the "Units". The class A common stock of the Company to be
outstanding after giving effect to the sale of the Shares is herein called the
"Common Stock". The Shares and Warrants included in the Units (including the
Units which the Underwriters or the Representative, on an individual basis, as
the case may be, have the option to purchase) are herein collectively called the
"Securities".
You have advised the Company that you desire to purchase the
Units. The Company confirms the agreements made by it with respect to the
purchase of the Units by you as follows:
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (File No. 333-28233) on Form SB-2
relating to the public offering of the Units, including a form of prospectus
subject to completion, copies of which have heretofore been delivered to you,
has been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and has been filed with the Commission under the Act
and one or more amendments to such registration statement may have been so
filed. After the execution of this Agreement, the Company will file with the
Commission either (i) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act,
either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as
hereinafter defined) relating to the Units that shall identify the Preliminary
Prospectus (as hereinafter defined) that it supplements containing such
information as is required or permitted by Rules 434, 430A and 424(b) under the
Act or (B) if the Company does not rely on Rule 434 under the Act, a prospectus
in the form most recently included in an amendment to such registration
statement (or, if no such amendment shall have been filed, in such registration
statement), with such changes or insertions as are required by Rule 430A under
the Act or permitted by Rule 424(b) under the Act and in the case of either
clause (i)(A) or (i)(B) of this sentence, as have been provided to and approved
by the Representative prior to the execution of this Agreement, or (ii) if such
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Representative prior to the execution of this
Agreement. As used in this Agreement, the term "Registration Statement" means
such registration statement, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto and including
any information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the term
"Prospectus" means (A) if the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Units that is first filed pursuant to Rule 424(b)(7) under
the Act, together with the Preliminary Prospectus identified therein that such
Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the
Act, the
2
<PAGE>
prospectus first filed with the Commission pursuant to Rule 424(b) under the Act
or (C) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to said Rule 424(b), such term means
the prospectus included in the Registration Statement; except that if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and prior
to the Option Closing Date (as hereinafter defined), the terms "Registration
Statement" and "Prospectus" shall include such registration statement and
prospectus as so amended, and the term "Prospectus" shall include the prospectus
as so supplemented, or both, as the case may be; and the term "Term Sheet" means
any term sheet that satisfies the requirements of Rule 434 under the Act. Any
reference to the "date" of a Prospectus that includes a Term Sheet shall mean
the date of such Term Sheet.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. At the time the Registration
Statement becomes effective and at all times subsequent thereto up to and on the
Closing Date (as hereinafter defined) or the Option Closing Date, as the case
may be, (i) the Registration Statement and Prospectus will in all respects
conform to the requirements of the Act and the Rules and Regulations; and (ii)
neither the Registration Statement nor the Prospectus will include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make statements therein not misleading; provided,
however, that the Company makes no representations, warranties or agreements as
to information contained in or omitted from the Registration Statement or
Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of the Underwriters specifically for
use in the preparation thereof. It is understood that the statements set forth
in the Prospectus on page 2 with respect to stabilization, under the heading
"Risk Factors -- Possible Adverse Effect on the Liquidity of the Company's
Securities Due to Securities and Exchange Commission Investigation of the
Representative and Blair & Co. and Recent Settlement by Blair & Co. with NASD",
the first sentence under the heading "Risk Factors -Possible Restrictions on
Market-Making Activities in Company's Securities", under the heading
"Underwriting" and the identity of counsel to the Underwriters under the heading
"Legal Matters" constitute the only information furnished in writing by or on
behalf of the Underwriters for inclusion in the Registration Statement and
Prospectus, as the case may be.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, with full power and authority (corporate and other) to own
its properties and conduct its business as described in the Prospectus and is
duly qualified to do business as a foreign corporation and is in good standing
in all other jurisdictions in which the nature of its business or the character
or location of its properties requires such qualification, except where failure
to so qualify will not materially affect the Company's business, properties or
financial condition.
(d) The authorized, issued and outstanding capital stock of
the Company as of June 30, 1997 is as set forth in the Prospectus under
"Capitalization"; the shares of issued and outstanding capital stock of the
Company set forth thereunder have been duly authorized, validly issued and are
fully paid and non-assessable; except as set forth in the Prospectus, no
options,
3
<PAGE>
warrants, or other rights to purchase, agreements or other obligations to issue,
or agreements or other rights to convert any obligation into, any shares of
capital stock of the Company have been granted or entered into by the Company;
and the capital stock conforms to all statements relating thereto contained in
the Registration Statement and Prospectus.
(e) The Units and the Shares are duly authorized, and when
issued and delivered pursuant to this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and free of preemptive rights of
any security holder of the Company. The Warrants have been duly authorized and,
when issued and delivered pursuant to this Agreement, will have been duly
executed, issued and delivered and will constitute valid and legally binding
obligations of the Company enforceable in accordance with their terms, except as
may be limited by bankruptcy, insolvency, moratorium or similar laws relating to
or affecting creditors' rights generally and by general principles of equity,
and entitled to the benefits provided by the warrant agreement pursuant to which
such Warrants are to be issued (the "Warrant Agreement"), which will be
substantially in the form filed as an exhibit to the Registration Statement. The
shares of Common Stock issuable upon exercise of the Warrants have been reserved
for issuance upon the exercise of the Warrants and when issued in accordance
with the terms of the Warrants and Warrant Agreement, will be duly and validly
authorized, validly issued, fully paid and non-assessable and free of preemptive
rights and no personal liability will attach to the ownership thereof. The
Warrant Agreement has been duly authorized and, when executed and delivered
pursuant to this Agreement, will have been duly executed and delivered and will
constitute the valid and legally binding obligation of the Company enforceable
in accordance with its terms, except as may be limited by bankruptcy,
insolvency, moratorium or similar laws relating to or affecting creditors'
rights generally and by general principles of equity. The Warrants and the
Warrant Agreement conform to the respective descriptions thereof in the
Registration Statement and Prospectus. The Shares and the Warrants contained in
the Unit Purchase Option (as such term is defined in the Prospectus) have been
duly authorized and, when duly issued and delivered, such Warrants will
constitute valid and legally binding obligations of the Company enforceable in
accordance with their terms, except as may be limited by bankruptcy, insolvency,
moratorium or similar laws relating to or affecting creditors' rights generally
and by general principles of equity, and entitled to the benefits provided by
the Unit Purchase Option. The Shares included in the Unit Purchase Option (and
the shares of Common Stock issuable upon exercise of such Warrants) when issued
and sold in accordance with the terms of the Unit Purchase Option and the
Warrant Agreement, as the case may be, will be duly authorized, validly issued,
fully paid and non-assessable and free of preemptive rights and no personal
liability will attach to the ownership thereof.
(f) This Agreement, the Unit Purchase Option, the M/A
Agreement and the Escrow Agreement have been duly and validly authorized,
executed and delivered by the Company. The Company has full power and lawful
authority to authorize, issue and sell the Units to be sold by it hereunder on
the terms and conditions set forth herein, and no consent, approval,
authorization or other order of any governmental authority is required in
connection with such authorization, execution and delivery or with the
authorization, issue and sale of the Units or the Unit Purchase Option, except
such as may be required under the Act or state securities laws.
4
<PAGE>
(g) Except as described in the Prospectus, the Company is not
in violation, breach or default of or under, and consummation of the
transactions herein contemplated and the fulfillment of the terms of this
Agreement will not conflict with, or result in a material breach or violation
of, any of the terms or provisions of, or constitute a material default under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any of the property or assets of the Company pursuant to the terms of any
indenture, mortgage, deed of trust, loan agreement or other material agreement
or instrument to which the Company is a party or by which the Company may be
bound or to which any of the property or assets of the Company is subject, nor
will such action result in any violation of the provisions of the articles of
incorporation or the by-laws of the Company, as amended, or any statute or any
order, rule or regulation applicable to the Company of any court or of any
regulatory authority or other governmental body having jurisdiction over the
Company.
(h) Subject to the qualifications stated in the Prospectus,
the Company has good and marketable title to all properties and assets described
in the Prospectus as owned by it, free and clear of all liens, charges,
encumbrances or restrictions, except such as are not materially significant or
important in relation to its business; all of the material leases and subleases
under which the Company is the lessor or sublessor of properties or assets or
under which the Company holds properties or assets as lessee or sublessee as
described in the Prospectus are in full force and effect, and, except as
described in the Prospectus, the Company is not in default in any material
respect with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone adverse to rights of the
Company as lessor, sublessor, lessee or sublessee under any of the leases or
subleases mentioned above, or affecting or questioning the right of the Company
to continued possession of the leased or subleased premises or assets under any
such lease or sublease except as described or referred to in the Prospectus; and
the Company owns or leases all such properties described in the Prospectus as
are necessary to its operations as now conducted and, except as otherwise stated
in the Prospectus, as proposed to be conducted as set forth in the Prospectus.
(i) Richard A. Eisner & Company, LLP, who have given their
reports on certain financial statements filed and to be filed with the
Commission as a part of the Registration Statement, which are incorporated in
the Prospectus, are with respect to the Company, independent public accountants
as required by the Act and the Rules and Regulations.
(j) The financial statements, together with related notes, set
forth in the Prospectus (or if the Prospectus is not in existence, the most
recent Preliminary Prospectus) or the Registration Statement present fairly the
financial position and results of operations and changes in cash flow position
of the Company on the basis stated in the Registration Statement, at the
respective dates and for the respective periods to which they apply. Said
statements and related notes have been prepared in accordance with generally
accepted accounting principles applied on a basis which is consistent during the
periods involved. The information set forth under the captions "Dilution",
"Capitalization", and "Selected Financial Data" in the Prospectus fairly
present, on the basis stated in the Prospectus in all material respects, the
information included therein.
5
<PAGE>
(k) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), the Company has not
incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business, or entered into any transaction not in the ordinary
course of business, which is material to the business of the Company, and there
has not been any change in the capital stock of, or any incurrence of short-term
or long-term debt by, the Company or any issuance of options, warrants or other
rights to purchase the capital stock of the Company or any adverse change or any
development involving, so far as the Company can now reasonably foresee a
prospective adverse change in the condition (financial or other), net worth,
results of operations, business, key personnel or properties of it which would
be material to the business or financial condition of the Company and the
Company has not become a party to, and neither the business nor the property of
the Company has become the subject of, any material litigation whether or not in
the ordinary course of business.
(l) Except as set forth in the Prospectus, there is not now
pending or, to the knowledge of the Company, threatened, any action, suit or
proceeding to which the Company is a party before or by any court or
governmental agency or body, which might result in any material adverse change
in the condition (financial or other), business prospects, net worth, or
properties of the Company, nor are there any actions, suits or proceedings
related to environmental matters or related to discrimination on the basis of
age, sex, religion or race; and no labor disputes involving the employees of the
Company exist or are imminent which might be expected to adversely affect the
conduct of the business, property or operations or the financial condition or
results of operations of the Company.
(m) Except as disclosed in the Prospectus, the Company has
filed all necessary federal, state and foreign income and franchise tax returns
and has paid all taxes shown as due thereon; and there is no tax deficiency
which has been or to the knowledge of the Company might be asserted against the
Company.
(n) Except as described in the Prospectus, the Company has all
licenses, permits and other governmental authorizations currently required for
the conduct of its business or the ownership of its properties as described in
the Prospectus and is in all material respects complying therewith and owns or
possesses adequate rights to use all material patents, patent applications,
trademarks, copyrights, service marks, trade-names, trademark registrations,
service mark registrations, copyrights and licenses necessary for the conduct of
such business and had not received any notice of conflict with the asserted
rights of others in respect thereof. To the best knowledge of the Company, none
of the activities or business of the Company are in violation of, or cause the
Company to violate, any law, rule, regulation or order of the United States, any
state, county or locality, or of any agency or body of the United States or of
any state, county or locality, the violation of which would have a material
adverse impact upon the condition (financial or otherwise), business, property,
prospective results of operations, or net worth of the Company.
(o) The Company has not, directly or indirectly, at any time
(i) made any
6
<PAGE>
contributions to any candidate for political office, or failed to disclose fully
any such contribution in violation of law or (ii) made any payment to any state,
federal or foreign governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments or contributions
required or allowed by applicable law. The Company's internal accounting
controls and procedures are sufficient to cause the Company to comply in all
material respects with the Foreign Corrupt Practices Act of 1977, as amended.
(p) On the Closing Dates (hereinafter defined) all transfer or
other taxes, (including franchise, capital stock or other tax, other than income
taxes, imposed by any jurisdiction) if any, which are required to be paid in
connection with the sale and transfer of the Units to the Underwriters hereunder
will have been fully paid or provided for by the Company and all laws imposing
such taxes will have been fully complied with.
(q) All contracts and other documents of the Company which
are, under the Rules and Regulations, required to be filed as exhibits to the
Registration Statement have been so filed.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Units hereby.
(s) The Company has no subsidiaries.
(t) The Company has not entered into any agreement pursuant to
which any person is entitled either directly or indirectly to compensation from
the Company for services as a finder in connection with the proposed public
offering.
(u) Except as previously disclosed in writing by the Company
to the Representative, no officer, director or stockholder of the Company has
any affiliation or association with any member of the National Association of
Securities Dealers Inc. ("NASD").
(v) The Company is not, and upon receipt of the proceeds from
the sale of the Units will not be, an "investment company" within the meaning of
the Investment Company Act of 1940, as amended, and the rules and regulations
thereunder.
(w) The Company has not distributed and will not distribute
prior to the First Closing Date any offering material in connection with the
offering and sale of the Units other than the Preliminary Prospectus,
Prospectus, the Registration Statement or the other materials permitted by the
Act, if any.
(x) The conditions for use of Form SB-2, as set forth in the
General Instructions thereto, have been satisfied.
7
<PAGE>
(y) There are no business relationships or related-party
transactions of the nature described in Item 404 of Regulation S-B involving the
Company and any person described in such Item that are required to be disclosed
in the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and that have not been so disclosed.
(z) The Company has complied with all provisions of Section
517.075 Florida Statutes relating to doing business with the government of Cuba
or with any person or affiliate located in Cuba.
2. Purchase, Delivery and Sale of the Units.
(a) Subject to the terms and conditions of this Agreement, and
upon the basis of the representations, warranties, and agreements herein
contained, the Company agrees to issue and sell to the Underwriters, and each
Underwriter agrees, severally and not jointly, to buy from the Company at $[__]
per Unit, at the place and time hereinafter specified, the number of Units set
forth opposite the name of such Underwriter in Schedule A attached hereto (the
"First Units") plus any additional Units which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 9 hereof. The First
Units shall consist of One Million Seven Hundred Sixty Thousand (1,760,000)
Units to be purchased from the Company. Delivery of the First Units against
payment therefor shall take place at the offices of D.H. Blair Investment
Banking Corp., 44 Wall Street, 2nd Floor, New York, New York 10005 (or at such
other place as may be designated by agreement between you and the Company) at
10:00 a.m., New York time, on [__], 1997, or at such later time and date as you
may designate, such time and date of payment and delivery for the First Units
being herein called the "First Closing Date".
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company hereby grants an option to the Underwriters (or,
at the Representative's option to the Representative, individually) to purchase
all or any part of an aggregate of an additional 264,000 Units at the same price
per Unit as the Underwriters shall pay for the First Units being sold pursuant
to the provisions of subsection (a) of this Section 2 (such additional Units
being referred to herein as the "Option Units"). This option may be exercised
within 45 days after the effective date of the Registration Statement upon
notice by the Representative to the Company advising as to the amount of Option
Units as to which the option is being exercised, the names and denominations in
which the certificates for such Option Units are to be registered and the time
and date when such certificates are to be delivered. Such time and date shall be
determined by the Representative, but shall not be earlier than four nor later
than ten full business days after the exercise of said option, nor in any event
prior to the First Closing Date, and such time and date is referred to herein as
the "Option Closing Date". Delivery of the Option Units against payment therefor
shall take place at the offices of D.H. Blair Investment Banking Corp., 44 Wall
Street, 2nd Floor, New York, New York 10005. The number of Option Units to be
purchased by each Underwriter, if any, shall bear the same percentage to the
total number of Option Units being purchased by the several Underwriters
pursuant to this subsection (b) as the number of Units such Underwriter is
purchasing bears to the total
8
<PAGE>
number of the First Units being purchased pursuant to subsection (a) of this
Section 2, as adjusted, in each case by the Representative in such manner as the
Representative may deem appropriate. The Option granted hereunder may be
exercised only to cover over-allotments in the sale by the Underwriters of First
Units referred to in subsection (a) above. In the event the Company declares or
pays a dividend or distribution on its Common Stock, whether in the form of
cash, shares of Common Stock or any other consideration, prior to the Option
Closing Date, such dividend or distribution shall also be paid on the Option
Units on the Option Closing Date.
(c) The Company will make the certificates for the securities
comprising the Units to be purchased by the Underwriters hereunder available to
you for checking at least two full business days prior to the First Closing Date
or the Option Closing Date (which are collectively referred to herein as the
"Closing Dates"). The certificates shall be in such names and denominations as
you may request, at least two full business days prior to the Closing Dates.
Time shall be of the essence and delivery at the time and place specified in
this Agreement is a further condition to the obligations of the Underwriters.
Definitive certificates in negotiable form for the Units to be purchased by the
Underwriters hereunder will be delivered by the Company to you for the accounts
of the Underwriters against payment of the respective purchase prices by the
Underwriters, by certified or bank cashier's checks or, at the Representative's
option, by wire transfer in New York Clearing House funds, payable to the order
of the Company. In addition, in the event the Underwriters or the
Representative, on an individual basis, as the case may be, exercise the option
to purchase from the Company all or any portion of the Option Units pursuant to
the provisions of subsection (b) above, payment for such Units shall be made to
or upon the order of the Company by certified or bank cashier's checks or, at
the Representative's option, by wire transfer payable in New York Clearing House
funds at the offices of D.H. Blair Investment Banking Corp., 44 Wall Street, 2nd
Floor, New York, New York 10005, at the time and date of delivery of such Units
as required by the provisions of subsection (b) above, against receipt of the
certificates for such Units by the Representative for the respective accounts of
the Underwriters registered in such names and in such denominations as the
Representative may request. It is understood that you, individually and not as
Representative of the several Underwriters, may (but shall not be obligated to)
make any and all payments required pursuant to this Section 2 on behalf of any
Underwriters whose check or checks shall not have been received by the
Representative at the time of delivery of the Units to be purchased by such
Underwriter or Underwriters. Any such payment by you shall not relieve any such
Underwriter or Underwriters of any of its or their obligations hereunder. It is
also understood that you individually rather than all of the Underwriters may
(but shall not be obligated to) purchase the Option Units referred to in
subsection (b) of this Section 2, but only to cover overallotments. It is
understood that the Underwriters propose to offer the Units to be purchased
hereunder to the public upon the terms and conditions set forth in the
Registration Statement, after the Registration Statement becomes effective.
3. Covenants of the Company. The Company covenants and agrees
with the several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement to
9
<PAGE>
become effective as promptly as possible. If required, the Company will file the
Prospectus or any Term Sheet that constitutes a part thereof and any amendment
or supplement thereto with the Commission in the manner and within the time
period required by Rules 434 and 424(b) under the Act. Upon notification from
the Commission that the Registration Statement has become effective, the Company
will so advise you and will not at any time, whether before or after the
effective date, file the Prospectus, Term Sheet or any amendment to the
Registration Statement or supplement to the Prospectus of which you shall not
previously have been advised and furnished with a copy or to which you or your
counsel shall have objected in writing or which is not in compliance with the
Act and the Rules and Regulations. At any time prior to the later of (A) the
completion by all of the Underwriters of the distribution of the Units
contemplated hereby (but in no event more than nine months after the date on
which the Registration Statement shall have become or been declared effective)
and (B) 25 days after the date on which the Registration Statement shall have
become or been declared effective, the Company will prepare and file with the
Commission, promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus which, in your opinion, may be necessary or
advisable in connection with the distribution of the Units. As soon as the
Company is advised thereof, the Company will advise you, and confirm the advice
in writing, of the receipt of any comments of the Commission, of the
effectiveness of any post-effective amendment to the Registration Statement, of
the filing of any supplement to the Prospectus or any amended Prospectus, of any
request made by the Commission for amendment of the Registration Statement or
for supplementing of the Prospectus or for additional information with respect
thereto, of the issuance by the Commission or any state or regulatory body of
any stop order or other order or threat thereof suspending the effectiveness of
the Registration Statement or any order preventing or suspending the use of any
preliminary prospectus, or of the suspension of the qualification of the Units
for offering in any jurisdiction, or of the institution of any proceedings for
any of such purposes, and will use its best efforts to prevent the issuance of
any such order, and, if issued, to obtain as soon as possible the lifting
thereof. The Company has caused to be delivered to you copies of each
Preliminary Prospectus, and the Company has consented and hereby consents to the
use of such copies for the purposes permitted by the Act. The Company authorizes
the Underwriters and dealers to use the Prospectus in connection with the sale
of the Units for such period as in the opinion of counsel to the Underwriters
the use thereof is required to comply with the applicable provisions of the Act
and the Rules and Regulations. In case of the happening, at any time within such
period as a Prospectus is required under the Act to be delivered in connection
with sales by an underwriter or dealer of any event of which the Company has
knowledge and which materially affects the Company or the securities of the
Company, or which in the opinion of counsel for the Company or counsel for the
Underwriters should be set forth in an amendment of the Registration Statement
or a supplement to the Prospectus in order to make the statements therein not
then misleading, in light of the circumstances existing at the time the
Prospectus is required to be delivered to a purchaser of the Units or in case it
shall be necessary to amend or supplement the Prospectus to comply with law or
with the Rules and Regulations, the Company will notify you promptly and
forthwith prepare and furnish to you copies of such amended Prospectus or of
such supplement to be attached to the Prospectus, in such quantities as you may
reasonably request, in order that the Prospectus, as so amended or supplemented,
will not contain any untrue statement of a material fact or omit to state any
material facts necessary in order to make the statements in the
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Prospectus, in the light of the circumstances under which they are made, not
misleading. The preparation and furnishing of any such amendment or supplement
to the Registration Statement or amended Prospectus or supplement to be attached
to the Prospectus shall be without expense to the Underwriters, except that in
case any Underwriter is required, in connection with the sale of the Units to
deliver a Prospectus nine months or more after the effective date of the
Registration Statement, the Company will upon request of and at the expense of
the applicable Underwriter, amend or supplement the Registration Statement and
Prospectus and furnish the applicable Underwriter with reasonable quantities of
prospectuses complying with Section 10(a)(3) of the Act. The Company will comply
with the Act, the Rules and Regulations and the Securities Exchange Act of 1934
and the rules and regulations thereunder in connection with the offering and
issuance of the Units.
(b) The Company will use its best efforts to qualify to
register the Units for sale under the securities or "blue sky" laws of such
jurisdictions as the Representative may designate and will make such
applications and furnish such information as may be required for that purpose
and to comply with such laws, provided the Company shall not be required to
qualify as a foreign corporation or a dealer in securities or to execute a
general consent of service of process in any jurisdiction in any action other
than one arising out of the offering or sale of the Units. The Company will,
from time to time, prepare and file such statements and reports as are or may be
required to continue such qualification in effect for so long a period as the
Representative may reasonably request.
(c) If the sale of the Units provided for herein is not
consummated for any reason caused by the Company, the Company shall pay all
costs and expenses incident to the performance of the Company's obligations
hereunder, including but not limited to, all of the expenses itemized in Section
8, including the accountable out-of-pocket expenses of the Representative.
(d) The Company will use its best efforts to (i) cause a
registration statement under the Securities Exchange Act of 1934 to be declared
effective concurrently with the completion of this offering and will notify the
Representative in writing immediately upon the effectiveness of such
registration statement, and (ii) if requested by the Representative, obtain a
listing on the Nasdaq Small Cap Market and to obtain and keep current a listing
in the Standard & Poors or Moody's Industrial OTC Manual.
(e) For so long as the Company is a reporting company under
either Section 12(g) or 15(d) of the Securities Exchange Act of 1934, the
Company, at its expense, will furnish to its stockholders an annual report
(including financial statements audited by independent public accountants), in
reasonable detail and at its expense, will furnish to you during the period
ending five (5) years from the date hereof, (i) as soon as practicable after the
end of each fiscal year, a balance sheet of the Company and any of its
subsidiaries as at the end of such fiscal year, together with statements of
income, surplus and cash flow of the Company and any subsidiaries for such
fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent accountants; (ii) as soon as
practicable after the end of each of the first three fiscal
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quarters of each fiscal year, consolidated summary financial information of the
Company for such quarter in reasonable detail; (iii) as soon as they are
available, a copy of all reports (financial or other) mailed to security
holders; (iv) as soon as they are available, a copy of all non-confidential
reports and financial statements furnished to or filed with the Commission or
any securities exchange or automated quotation system on which any class of
securities of the Company is listed; and (v) such other information as you may
from time to time reasonably request.
(f) In the event the Company has an active subsidiary or
subsidiaries, such financial statements referred to in subsection (e) above will
be on a consolidated basis to the extent the accounts of the Company and its
subsidiary or subsidiaries are consolidated in reports furnished to its
stockholders generally.
(g) The Company will deliver to you at or before the First
Closing Date two signed copies of the Registration Statement including all
financial statements and exhibits filed therewith, and of all amendments
thereto, and will deliver to the Underwriters such number of conformed copies of
the Registration Statement, including such financial statements but without
exhibits, and of all amendments thereto, as the Underwriters may reasonably
request. The Company will deliver to or upon the order of the Underwriters, from
time to time until the effective date of the Registration Statement, as many
copies of any Preliminary Prospectus filed with the Commission prior to the
effective date of the Registration Statement as the Underwriters may reasonably
request. The Company will deliver to the Underwriters on the effective date of
the Registration Statement and thereafter for so long as a Prospectus is
required to be delivered under the Act, from time to time, as many copies of the
Prospectus, in final form, or as thereafter amended or supplemented, as the
Underwriters may from time to time reasonably request. The Company, not later
than (i) 5:00 p.m., New York City time, on the date of determination of the
public offering price, if such determination occurred at or prior to 12:00 noon,
New York City time, on such date or (ii) 6:00 p.m., New York City time, on the
business day following the date of determination of the public offering price,
if such determination occurred after 12:00 noon, New York City time, on such
date, will deliver to the Underwriters, without charge, as many copies of the
Prospectus and any amendment or supplement thereto as the Underwriters may
reasonably request for purposes of confirming orders that are expected to settle
on the First Closing Date.
(h) The Company will make generally available to its security
holders and to the registered holders of its Warrants and deliver to you as soon
as it is practicable to do so but in no event later than 90 days after the end
of twelve months after its current fiscal quarter, an earnings statement (which
need not be audited) covering a period of at least twelve (12) consecutive
months beginning after the effective date of the Registration Statement, which
shall satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of
the Units for the purposes set forth under "Use of Proceeds" in the Prospectus,
and will file such reports with the Commission with respect to the sale of the
Units and the application of the proceeds therefrom as may be required pursuant
to Rule 463 under the Act.
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(j) The Company will, promptly upon your request, prepare and
file with the Commission any amendments or supplements to the Registration
Statement, Preliminary Prospectus or Prospectus and take any other action, which
in the reasonable opinion of Paul, Hastings, Janofsky & Walker LLP, counsel to
the Underwriters, may be reasonably necessary or advisable in connection with
the distribution of the Units, and will use its best efforts to cause the same
to become effective as promptly as possible.
(k) The Company will reserve and keep available that maximum
number of its authorized but unissued securities which are issuable upon
exercise of the Unit Purchase Option outstanding from time to time.
(l) For a period of thirteen (13) months from the First
Closing Date, no officer, director or stockholder of the Company will directly
or indirectly, offer, sell (including any short sale), grant any option for the
sale of, acquire any option to dispose of, or otherwise dispose of any shares of
Common Stock without the prior written consent of the Representative.
(m) Prior to completion of this offering, the Company will
make all filings required, including registration under the Securities Exchange
Act of 1934, to obtain the listing of the Units, Common Stock, and Warrants on
the Nasdaq Small Cap Market (or a listing on such other market or exchange as
the Representative consents to), and will effect and use its best efforts to
maintain such listing for at least five years from the date of this Agreement.
(n) The Company and each of the beneficial owners listed under
the heading "Principal Stockholders" in the Prospectus (the "Principal
Stockholders") represents that it or he has not taken and agree that it or he
will not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Units, Shares or the Warrants
or to facilitate the sale or resale of the Securities.
(o) On the Closing Date and simultaneously with the delivery
of the Units, the Company shall execute and deliver to you the Unit Purchase
Option. The Unit Purchase Option will be substantially in the form of the Unit
Purchase Option filed as an Exhibit to the Registration Statement.
(p) Without the prior written consent of the Representative,
(i) during the eighteen (18) month period commencing on the date of this
Agreement, the Company will not grant options to purchase shares of Common Stock
at an exercise price less than the greater of (x) the initial public offering
price of the Units (without allocating any value to the Warrants) or (y) the
fair market value of the Common Stock on the date of grant; (ii) during the six
month period commencing on the date of this Agreement, grant options to any
current officer of the Company; (iii) during the three year period commencing on
the date of this Agreement, offer or sell any of its securities pursuant to
Regulation S under the Act; (iv) grant registration rights to any person which
are exercisable sooner than thirteen (13) months from the First Closing Date;
(v) issue any additional securities which have
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per share voting rights greater than the voting rights of the Shares (or take
any corporate action which would have this effect) or (vi) during the eighteen
(18) month period commencing on the date of this Agreement, enter into any
agreement or arrangement with any investment banking firm other than the
Representative relating to investment banking, corporate finance, merger and
acquisition or other similar advisory or consulting services.
(q) Neal J. Polan shall be Chairman and Chief Executive
Officer of the Company on the Closing Dates. The Company has obtained key person
life insurance on the life of Neal J. Polan in an amount of not less than Two
Million Dollars ($2,000,000) and will use its best efforts to maintain such
insurance during the five year period commencing with the First Closing Date
unless his employment with the Company is earlier terminated. In such event, the
Company will obtain a comparable policy on the life of his successor for the
balance of the five year period. For a period of thirteen months from the First
Closing Date, the compensation of the executive officers of the Company shall
not be increased from the compensation levels disclosed in the Prospectus.
(r) On the Closing Date and simultaneously with the delivery
of the Units the Company shall execute and deliver to you, individually and not
as representative of the Underwriters, an agreement with you regarding mergers,
acquisitions, joint ventures and certain other forms of transactions, in the
form previously delivered to the Company by you (the "M/A Agreement").
(s) So long as any Warrants are outstanding, the Company shall
use its best efforts to cause post-effective amendments to the Registration
Statement to become effective in compliance with the Act and without any lapse
of time between the effectiveness of any such post-effective amendments and
cause a copy of each Prospectus, as then amended, to be delivered to each holder
of record of a Warrant and to furnish to each Underwriter and dealer as many
copies of each such Prospectus as such Underwriter or dealer may reasonably
request. The Company shall not call for redemption any of the Warrants unless a
registration statement covering the securities underlying the Warrants has been
declared effective by the Commission and remains current at least until the date
fixed for redemption. In addition, for so long as any Warrant is outstanding,
the Company will promptly notify the Representative of any material change in
the business, financial condition or prospects of the Company.
(t) Upon the exercise of any Warrant or Warrants after [__],
1998, the Company will pay D.H. Blair Investment Banking Corp. individually and
not as representative of the Underwriters, a fee of five percent (5%) of the
aggregate exercise price of the Warrants, of which a portion may be reallowed to
the dealer who solicited the exercise (which may also be the D.H. Blair
Investment Banking Corp.) if (i) the market price of the Company's Common Stock
is greater than the exercise price of the Warrants on the date of exercise; (ii)
the exercise of the Warrant was solicited by a member of the National
Association of Securities Dealers, Inc., (iii) the Warrant Holder designates in
writing that the exercise of the Warrant was solicited by a member of the NASD
and designates in writing the broker-dealer to receive compensation for such
exercise; (iv) the Warrant is not held in a discretionary account; (v) the
disclosure of compensation
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arrangements has been made in documents provided to customers, both as part of
the original offering and at the time of exercise, and (vi) the solicitation of
exercise of the Warrant was not in violation of Regulation M promulgated under
the Securities Exchange Act of 1934, as amended. The Company agrees not to
solicit the exercise of any Warrants other than through the D.H. Blair
Investment Banking Corp. and will not authorize any other dealer to engage in
such solicitation without the prior written consent of the D.H. Blair Investment
Banking Corp..
(u) For a period of five (5) years from the Effective Date the
Company (i) at its expense, shall cause its regularly engaged independent
certified public accountants to review (but not audit) the Company's financial
statements for each of the first three (3) fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's
10-Q quarterly report and the mailing of quarterly financial information to
stockholders and (ii) shall not change its accounting firm without the prior
written consent of the Chairman or the President of the Representative.
(v) As promptly as practicable after the Closing Date, the
Company will prepare, at its own expense, hard cover "bound volumes" relating to
the offering, and will distribute at least four of such volumes to the
individuals designated by the Representative or counsel to the Representative.
(w) For a period of five years from the First Closing Date (i)
the Representative shall have the right, but not the obligation, to designate
one director of the Board of Directors of the Company and (ii) the Company shall
engage a public relations firm acceptable to the Representative.
(x) The Company shall, for a period of six years after date of
this Agreement, submit which reports to the Secretary of the Treasury and to
stockholders, as the Secretary may require, pursuant to Section 1202 of the
Internal Revenue Code, as amended, or regulations promulgated thereunder, in
order for the Company to qualify as a "small business" so that stockholders may
realize special tax treatment with respect to their investment in the Company.
4. Conditions of Underwriters Obligation. The obligations of
the Underwriters to purchase and pay for the Units which it has agreed to
purchase hereunder, are subject to the accuracy (as of the date hereof, and as
of the Closing Dates) of and compliance with the representations and warranties
of the Company herein, to the performance by the Company of its obligations
hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and
you shall have received notice thereof not later than 10:00 A.M., New York time,
on the date on which the amendment to the registration statement originally
filed with respect to the Units or to the Registration Statement, as the case
may be, containing information regarding the initial public offering price of
the Units has been filed with the Commission, or such later time and date as
shall have been agreed to by the Representative; if required, the Prospectus or
any Term Sheet that constitutes a part thereof and any amendment or supplement
thereto shall have been filed with the
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Commission in the manner and within the time period required by Rule 434 and
424(b) under the Act; on or prior to the Closing Dates no stop order suspending
the effectiveness of the Registration Statement shall have been issued and no
proceedings for that or a similar purpose shall have been instituted or shall be
pending or, to your knowledge or to the knowledge of the Company, shall be
contemplated by the Commission; any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Paul, Hastings, Janofsky & Walker LLP, counsel to the
Underwriters ("PHJ&W");
(b) At the First Closing Date, you shall have received the
opinion, together with copies of such opinion for the Underwriters, dated as of
the First Closing Date, of Bachner, Tally, Polevoy & Misher LLP, counsel for the
Company, in form and substance satisfactory to counsel for the Underwriters, to
the effect that:
(i) the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Delaware, with full corporate power and authority to own its properties and
conduct its business as described in the Registration Statement and Prospectus
and is duly qualified or licensed to do business as a foreign corporation and is
in good standing in Missouri and in each other jurisdiction in which the
ownership or leasing of its properties or conduct of its business requires such
qualification, except where the failure to so qualify will not have a material
adverse affect on the business of the Company;
(ii) to the best knowledge of such counsel, (a) the
Company has obtained all licenses, permits and other governmental authorizations
necessary to the conduct of its business as described in the Prospectus, (b)
such licenses, permits and other governmental authorizations obtained are in
full force and effect, and (c) the Company is in all material respects complying
therewith;
(iii) the authorized capitalization of the Company as
of June 30, 1997 is as set forth under "Capitalization" in the Prospectus; all
shares of the Company's outstanding stock requiring authorization for issuance
by the Company's board of directors have been duly authorized, validly issued,
are fully paid and non-assessable and conform to the description thereof
contained in the Prospectus to the best of such counsel's knowledge, the
outstanding shares of Common Stock of the Company have not been issued in
violation of the preemptive rights of any shareholder and the shareholders of
the Company do not have any preemptive rights or other rights to subscribe for
or to purchase, nor are there any restrictions upon the voting or transfer of
any of the Stock; the Common Stock, the Warrants, the Unit Purchase Option and
the Warrant Agreement conform as to legal matters in all material respects to
the respective descriptions thereof contained in the Prospectus; the Shares have
been, and the shares of Common Stock to be issued upon exercise of the Warrants
and the Unit Purchase Option, upon issuance in accordance with the terms of such
Warrants, the Warrant Agreement and Unit Purchase Option have been duly
authorized and, when issued and delivered, will be duly and validly issued,
fully paid, non-assessable, free of preemptive rights and no personal liability
will attach to the ownership thereof; a sufficient number of shares of Common
Stock has been reserved for issuance upon exercise of the Warrants and Unit
Purchase
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Option and to the best of such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Units as contemplated by
this Agreement gives rise to, any registration rights or other rights, other
than those which have been waived or satisfied for or relating to the
registration of any shares of Common Stock;
(iv) this Agreement, the Unit Purchase Option, the
Warrant Agreement and the M/A Agreement have been duly and validly authorized,
executed and delivered by the Company and, assuming due execution by each other
party hereto or thereto, each constitutes a legal, valid and binding obligation
of the Company enforceable against the Company in accordance with its respective
terms (except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law;
(v) the certificates evidencing the shares of Common
Stock are in valid and proper legal form; the Warrants will be exercisable for
shares of Common Stock of the Company in accordance with the terms of the
Warrants and at the prices therein provided for;
(vi) delivery of certificates for the Securities
underlying the Units, upon payment therefor by the Underwriters as provided in
the Underwriting Agreement, will transfer valid title to such Securities to the
Underwriters; and, upon payment for such Securities, the Underwriters will
acquire such Securities free and clear of any liens;
(vii) such counsel knows of no pending or threatened
legal or governmental proceedings to which the Company is a party which could
materially adversely affect the business, property, financial condition or
operations of the Company; or which question the validity of the Securities,
this Agreement, the Warrant Agreement, the Unit Purchase Option or the M/A
Agreement, or of any action taken or to be taken by the Company pursuant to this
Agreement, the Warrant Agreement, the Unit Purchase Option or the M/A Agreement;
and no such proceedings are known to such counsel to be contemplated against the
Company; to such counsel's knowledge there are no governmental proceedings or
regulations required to be described or referred to in the Registration
Statement which are not so described or referred to;
(viii) to such counsel's knowledge the Company is not
in violation of or default under, nor will the execution and delivery of this
Agreement, the Unit Purchase Option, the Warrant Agreement or the M/A Agreement,
and the incurrence of the obligations herein and therein set forth and the
consummation of the transactions herein or therein contemplated, result in a
breach or violation of, or constitute a default under the certificate of
incorporation or by-laws, in the performance or observance of any material
obligations, agreement, covenant or condition contained in any bond, debenture,
note or other evidence of indebtedness or in any material contract, indenture,
mortgage, loan agreement, lease, joint venture or other agreement or instrument
to which the Company is a party or by which it or any of its properties may be
bound or in violation of any material order, rule, regulation, writ, injunction,
or decree of any government, governmental
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instrumentality or court, domestic or foreign, the effect of which default,
breach or violation would be material to the Company;
(ix) the Registration Statement has become effective
under the Act, and to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for that purpose have been instituted or are pending before, or
threatened by, the Commission; the Registration Statement and the Prospectus
(except for the financial statements and other financial data contained therein,
or omitted therefrom, as to which such counsel need express no opinion) comply
as to form in all material respects with the applicable requirements of the Act
and the Rules and Regulations;
(x) such counsel has participated in the preparation
of the Registration Statement and the Prospectus and, although such counsel did
not independently verify, and are not passing upon and do not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus, based upon such
participation (relying as to materiality to a large extent upon the certificates
of officers and other representatives of the Company), nothing has come to the
attention of such counsel to cause such counsel to have reason to believe that
the Registration Statement or any amendment thereto at the time it became
effective contained any untrue statement of a material fact required to be
stated therein or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus or any supplement thereto contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make statements
therein, in light of the circumstances under which they were made, not
misleading (except, in the case of both the Registration Statement and any
amendment thereto and the Prospectus and any supplement thereto, for the (1)
financial statements, notes thereto and other financial information and
schedules contained therein, (2) matters relating to proprietary rights or
intellectual property or (3) matters relating to government regulatory matters
relating to the development and potential marketing and sale of the Company's
products as to all of which such counsel need express no opinion);
(xi) all descriptions in the Registration Statement
and the Prospectus, and any amendment or supplement thereto, of contracts and
other documents are accurate and fairly summarize in all material respects the
information required to be shown, and such counsel is familiar with all
contracts and other documents referred to in the Registration Statement and the
Prospectus and any such amendment or supplement or filed as exhibits to the
Registration Statement, and such counsel does not know of any contracts or
documents of a character required to be summarized or described therein or to be
filed as exhibits thereto which are not so summarized, described or filed;
(xii) no authorization, approval, consent, or license
of any governmental or regulatory authority or agency is necessary in connection
with the authorization, issuance, transfer, sale or delivery of the Units by the
Company, in connection with the execution, delivery and performance of this
Agreement by the Company or in connection with the taking of any action
contemplated herein, or the issuance of the Unit Purchase Option or the
Securities underlying the Unit Purchase Option, other than registrations or
qualifications of the Units under applicable state
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or foreign securities or Blue Sky laws and registration under the Act;
(xiii) the statements in the Registration Statement
under the captions "Business," "Management," Shares Eligible for Future Sale,"
"Certain Transactions," and "Description of Securities" have been reviewed by
such counsel and insofar as they refer to descriptions of agreements, statements
of law, descriptions of statutes, licenses, rules or regulations or legal
conclusions, are correct in all material respects;
(xiv) based solely upon advice of representatives of
Nasdaq, the Units, the Common Stock and the Warrants have been duly authorized
for quotation on the Nasdaq Small Cap Market; and
(xv) to such counsel's knowledge, there are no
business relationships or related-party transactions of the nature described in
Item 404 of Regulation S-B involving the Company and any person described in
such Item that are required to be disclosed in the Prospectus and which have not
been so disclosed.
Such counsel need express no opinion with respect to the financial statements
and other financial data included in or omitted from the Registration Statement
or Prospectus, nor to matters pertaining to patent or intellectual property law,
nor to matters pertaining to government regulatory matters relating to the
development and potential marketing and sale of the Company's products. Such
opinion shall also cover such matters incident to the transactions contemplated
hereby as the Underwriters or counsel for the Underwriters shall reasonably
request. In rendering such opinion, such counsel may rely upon certificates of
any officer of the Company or public officials as to matters of fact; and may
rely as to all matters of law other than the law of the United States or of the
State of New York upon opinions of counsel satisfactory to you, in which case
the opinion shall state that they have no reason to believe that you and they
are not entitled to so rely.
(c) All corporate proceedings and other legal matters relating
to this Agreement, the Registration Statement, the Prospectus and other related
matters shall be satisfactory to or approved by PHJ&W, counsel to the
Underwriters, and you shall have received from such counsel a signed opinion,
dated as of the First Closing Date, together with copies thereof for each of the
other Underwriters, with respect to the validity of the issuance of the Units,
the form of the Registration Statement and Prospectus (other than the financial
statements and other financial data contained therein), the execution of this
Agreement and other related matters as you may reasonably require. The Company
shall have furnished to counsel for the Underwriters such documents as they may
reasonably request for the purpose of enabling them to render such opinion.
(d) You shall have received a letter prior to the effective
date of the Registration Statement and again on and as of the First Closing Date
from Richard A. Eisner & Company, LLP, independent public accountants for the
Company, substantially in the form approved by you, and including estimates of
the Company's revenues and results of operations for the period ending at the
end of the month immediately preceding the effective date and results of the
comparable period
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during the prior fiscal year.
(e) At the Closing Dates, (i) the representations and
warranties of the Company contained in this Agreement shall be true and correct
with the same effect as if made on and as of the Closing Dates and the Company
shall have performed all of its obligations hereunder and satisfied all the
conditions on its part to be satisfied at or prior to such Closing Date; (ii)
the Registration Statement and the Prospectus and any amendments or supplements
thereto shall contain all statements which are required to be stated therein in
accordance with the Act and the Rules and Regulations, and shall in all material
respects conform to the requirements thereof, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto shall
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading; (iii) there shall have been, since the respective dates as of
which information is given, no material adverse change, or any development
involving a prospective material adverse change, in the business, properties,
condition (financial or otherwise), results of operations, capital stock,
long-term or short-term debt or general affairs of the Company from that set
forth in the Registration Statement and the Prospectus, except changes which the
Registration Statement and Prospectus indicate might occur after the effective
date of the Registration Statement, and the Company shall not have incurred any
material liabilities or entered into any agreement not in the ordinary course of
business other than as referred to in the Registration Statement and Prospectus;
and (iv) except as set forth in the Prospectus, no action, suit or proceeding at
law or in equity shall be pending or threatened against the Company which would
be required to be set forth in the Registration Statement, and no proceedings
shall be pending or threatened against the Company before or by any commission,
board or administrative agency in the United States or elsewhere, wherein an
unfavorable decision, ruling or finding would materially and adversely affect
the business, property, condition (financial or otherwise), results of
operations or general affairs of the Company, and (v) you shall have received,
at the First Closing Date, a certificate signed by each of the Chairman of the
Board or the President and the principal financial or accounting officer of the
Company, dated as of the First Closing Date, evidencing compliance with the
provisions of this subsection (e).
(f) Upon exercise of the option provided for in Section 2(b)
hereof, the obligations of the Underwriters (or, at its option, the
Representative individually) to purchase and pay for the Option Units referred
to therein will be subject (as of the date hereof and as of the Option Closing
Date) to the following additional conditions:
(i) The Registration Statement shall remain effective
at the Option Closing Date, and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that purpose shall have
been instituted or shall be pending, or, to your knowledge or the knowledge of
the Company, shall be contemplated by the Commission, and any reasonable request
on the part of the Commission for additional information shall have been
complied with to the satisfaction of PHJ&W, counsel to the Underwriters.
(ii) At the Option Closing Date there shall have been
delivered to you the
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signed opinion of Bachner, Tally, Polevoy & Misher LLP, counsel for the Company,
dated as of the Option Closing Date, in form and substance satisfactory to
PHJ&W, counsel to the Underwriters, together with copies of such opinion for the
Underwriters, which opinion shall be substantially the same in scope and
substance as the opinion furnished to you at the First Closing Date pursuant to
Section 4(b) hereof, except that such opinion, where appropriate, shall cover
the Option Units.
(iii) At the Option Closing Date there shall have
been delivered to you a certificate of the Chairman of the Board or the
President and the principal financial or accounting officer of the Company,
dated the Option Closing Date, in form and substance satisfactory to PHJ&W,
counsel to the Underwriters, substantially the same in scope and substance as
the certificate furnished to you at the First Closing Date pursuant to Section
4(e) hereof.
(iv) At the Option Closing Date there shall have been
delivered to you a letter in form and substance satisfactory to you from Richard
A. Eisner & Company, LLP, dated the Option Closing Date and addressed to the
Underwriters confirming the information in their letter referred to in Section
4(d) hereof and stating that nothing has come to their attention during the
period from the ending date of their review referred to in said letter to a date
not more than three business days prior to the Option Closing Date, which would
require any change in said letter if it were required to be dated the Option
Closing Date.
(v) All proceedings taken at or prior to the Option
Closing Date in connection with the sale and issuance of the Option Units shall
be satisfactory in form and substance to you and PHJ&W, counsel to the
Underwriters, shall have been furnished with all such documents, certificates,
and opinions as you may request in connection with this transaction in order to
evidence the accuracy and completeness of any of the representations, warranties
or statements of the Company or its compliance with any of the covenants or
conditions contained herein.
(g) No action shall have been taken by the Commission or the
NASD the effect of which would make it improper, at any time prior to the
Closing Date, for members of the NASD to execute transactions (as principal or
agent) in the Units, Common Stock or the Warrants and no proceedings for the
taking of such action shall have been instituted or shall be pending, or, to the
knowledge of the Underwriters or the Company, shall be contemplated by the
Commission or the NASD. The Company represents that at the date hereof it has no
knowledge that any such action is in fact contemplated by the Commission or the
NASD. The Company shall have advised the Underwriters of any NASD affiliation of
any of its officers, directors, stockholders or their affiliates.
(h) If any of the conditions herein provided for in this
Section shall not have been fulfilled as of the date indicated, this Agreement
and all obligations of the Underwriters under this Agreement may be canceled at,
or at any time prior to, each Closing Date by the Representative. Any such
cancellation shall be without liability of the Underwriters to the Company.
5. Conditions of the Obligations of the Company. The
obligation of the Company to sell and deliver the Units is subject to the
condition that at the Closing Dates, no stop
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<PAGE>
orders suspending the effectiveness of the Registration Statement shall have
been issued under the Act or any proceedings therefor initiated or threatened by
the Commission. If the condition to the obligations of the Company provided for
in this Section have been fulfilled on the First Closing Date but are not
fulfilled after the First Closing Date and prior to the Option Closing Date,
then only the obligation of the Company to sell and deliver the Units on
exercise of the option provided for in Section 2(b) hereof shall be affected.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which such Underwriter or such controlling person may become subject,
under the Act or otherwise, and will reimburse, as incurred, such Underwriter
and such controlling persons for any legal or other expenses reasonably incurred
in connection with investigating, defending against or appearing as a third
party witness in connection with any losses, claims, damages or liabilities,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
(B) any blue sky application or other document executed by the Company
specifically for that purpose or based upon written information furnished by the
Company filed in any state or other jurisdiction in order to qualify any or all
of the Units under the securities laws thereof (any such application, document
or information being hereinafter called a "Blue Sky Application"), or arise out
of or are based upon the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus, Prospectus, or any amendment
or supplement thereto, or in any Blue Sky Application, a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent, but only to the extent, that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the Underwriters
specifically for use in the preparation of the Registration Statement or any
such amendment or supplement thereof or any such Blue Sky Application or any
such preliminary Prospectus or the Prospectus or any such amendment or
supplement thereto. This indemnity will be in addition to any liability which
the Company may otherwise have.
(b) Each Underwriter, severally, but not jointly, will
indemnify and hold harmless the Company, each of its directors, each nominee (if
any) for director named in the Prospectus, each of its officers who have signed
the Registration Statement, and each person, if any, who controls the Company
within the meaning of the Act, against any losses, claims, damages or
liabilities (which shall, for all purposes of this Agreement, include, but not
be limited to, all costs of defense and investigation and all attorneys' fees)
to which the Company or any such director, nominee, officer
22
<PAGE>
or controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto (i) in reliance upon and in
conformity with written information furnished to the Company by you or any
Underwriter specifically for use in the preparation thereof and (ii) relates to
the transactions effected by the Underwriters in connection with the offer and
sale of the Units contemplated hereby. This indemnity agreement will be in
addition to any liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify in writing the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that if the indemnified party is an Underwriter
or a person who controls an Underwriter within the meaning of the Act, the fees
and expenses of such counsel shall be at the expense of the indemnifying party
if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both the Underwriter or such
controlling person and the indemnifying party and in the judgment of the
applicable Underwriter, it is advisable for the applicable Underwriter or
controlling persons to be represented by separate counsel (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the applicable Underwriter or such controlling person, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys for the applicable Underwriter and controlling
persons, which firm shall
23
<PAGE>
be designated in writing by the applicable Underwriter). No settlement of any
action against an indemnified party shall be made without the consent of the
indemnifying party, which shall not be unreasonably withheld in light of all
factors of importance to such indemnifying party.
7. Contribution. In order to provide for just and equitable
contribution under the Act in any case in which (i) an Underwriter makes claim
for indemnification pursuant to Section 6 hereof but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case, notwithstanding the
fact that the express provisions of Section 6 provide for indemnification in
such case, or (ii) contribution under the Act may be required on the part of any
Underwriter, then the Company and each person who controls the Company, in the
aggregate, and any such Underwriter shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees) in either
such case (after contribution from others) in such proportions that all such
Underwriters are only responsible for that portion of such losses, claims,
damages or liabilities represented by the percentage that the underwriting
discount per Unit appearing on the cover page of the Prospectus bears to the
public offering price appearing thereon, and the Company shall be responsible
for the remaining portion, provided, however, that (a) if such allocation is not
permitted by applicable law then the relative fault of the Company and the
applicable Underwriter and controlling persons, in the aggregate, in connection
with the statements or omissions which resulted in such damages and other
relevant equitable considerations shall also be considered. The relative fault
shall be determined by reference to, among other things, whether in the case of
an untrue statement of a material fact or the omission to state a material fact,
such statement or omission relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
Company and the Underwriters agree (a) that it would not be just and equitable
if the respective obligations of the Company and the Underwriters to contribute
pursuant to this Section 7 were to be determined by pro rata or per capita
allocation of the aggregate damages or by any other method of allocation that
does not take account of the equitable considerations referred to in the first
sentence of this Section 7 and (b) that the contribution of each contributing
Underwriter shall not be in excess of its proportionate share (based on the
ratio of the number of Units purchased by such Underwriter to the number of
Units purchased by all contributing Underwriters) of the portion of such losses,
claims, damages or liabilities for which the Underwriters are responsible. No
person guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. As used in this paragraph, the word
"Company" includes any officer, director, or person who controls the Company
within the meaning of Section 15 of the Act. If the full amount of the
contribution specified in this paragraph is not permitted by law, then the
applicable Underwriter and each person who controls the applicable Underwriter
shall be entitled to contribution from the Company, its officers, directors and
controlling persons to the full extent permitted by law. The foregoing
contribution agreement shall in no way affect the contribution liabilities of
any persons having liability under Section 11 of the Act other than the Company
and the Underwriters. No contribution
24
<PAGE>
shall be requested with regard to the settlement of any matter from any party
who did not consent to the settlement; provided, however, that such consent
shall not be unreasonably withheld in light of all factors of importance to such
party.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective or the
sale of the Units to the Underwriters is consummated, the Company will pay all
costs and expenses incident to the performance of this Agreement by the Company
including, but not limited to, the fees and expenses of counsel to the Company
and of the Company's accountants; the costs and expenses incident to the
preparation, printing, filing and distribution under the Act of the Registration
Statement (including the financial statements therein and all amendments and
exhibits thereto), Preliminary Prospectus and the Prospectus, as amended or
supplemented, or the Term Sheet, the fee of the NASD in connection with the
filing required by the NASD relating to the offering of the Units contemplated
hereby; all expenses, including reasonable fees and disbursements of counsel to
the Underwriters, in connection with the qualification of the Units under the
state securities or blue sky laws which the Representative shall designate; the
cost of printing and furnishing to the Underwriters copies of the Registration
Statement, each Preliminary Prospectus, the Prospectus, this Agreement, the
Agreement Among Underwriters, Selling Agreement, Underwriters' Questionnaire,
and the Blue Sky Memorandum, any fees relating to the listing of the Units,
Common Stock and Warrants on the Nasdaq Small Cap Market or any other securities
exchange, the cost of printing the certificates representing the securities
comprising the Units, the fees of the transfer agent and warrant agent the cost
of publication of at least three "tombstones" of the offering (at least one of
which shall be in national business newspaper and one of which shall be in a
major New York newspaper) and the cost of preparing at least four hard cover
"bound volumes" relating to the offering, in accordance with the
Representative's request. The Company shall pay any and all taxes (including any
transfer, franchise, capital stock or other tax imposed by any jurisdiction) on
sales to the Underwriters hereunder. The Company will also pay all costs and
expenses incident to the furnishing of any amended Prospectus or of any
supplement to be attached to the Prospectus as called for in Section 3(a) of
this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company shall at
the First Closing Date pay to the Representative, individually and not as
representative of the Underwriters, a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds derived from the sale of Units offered
hereby, of which Forty Thousand Dollars ($40,000) has been paid. In the event
the over-allotment option is exercised, the Company shall pay to the
Representative at the Option Closing Date an additional amount equal to three
percent (3%) of the gross proceeds received upon exercise of the over-allotment
option. In the event the transactions contemplated hereby are not consummated by
reason of any action by the Underwriters (except if such prevention is based
upon a breach by the Company of any covenant, representation or warranty
contained herein or because any other condition to the Underwriters' obligations
hereunder required to be fulfilled by the Company is not fulfilled) the Company
shall be liable for the accountable out-of-pocket expenses of the
Representative, including "blue sky" legal fees up to a maximum of Forty
Thousand Dollars
25
<PAGE>
($40,000). In the event the transactions contemplated hereby are not consummated
by reason of any action of the Company or because of a breach by the Company of
any covenant, representation or warranty herein, the Company shall be liable for
the accountable out-of-pocket expenses of the Representative, including legal
fees, up to a maximum of One Hundred Eighty Thousand Dollars ($180,000).
(c) No person is entitled either directly or indirectly to
compensation from the Company, from the Underwriters or from any other person
for services as a finder in connection with the proposed offering, and the
Company agrees to indemnify and hold harmless the Underwriters and the other
Underwriters, against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all costs of defense and investigation and all attorneys' fees), to
which the Underwriters or person may become subject insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon the claim of any person (other than an employee of the party
claiming indemnity) or entity that he or it is entitled to a finder's fee in
connection with the proposed offering by reason of such person's or entity's
influence or prior contact with the indemnifying party.
9. Substitution of Underwriters. If any Underwriters shall for
any reason not permitted hereunder cancel their obligations to purchase the
First Units hereunder, or shall fail to take up and pay for the number of First
Units set forth opposite their respective names in Schedule A hereto upon tender
of such First Units in accordance with the terms hereof, then:
(a) If the aggregate number of First Units which such
Underwriter or Underwriters agreed but failed to purchase does not exceed ten
percent (10%) of the total number of First Units, the other Underwriters shall
be obligated severally, in proportion to their respective commitments hereunder,
to purchase the First Units which such defaulting Underwriter or Underwriters
agreed but failed to purchase.
(b) If any Underwriter or Underwriters so default and the
agreed number of First Units with respect to which such default or defaults
occurs is more than ten percent (10%) of the total number of First Units, the
remaining Underwriters shall have the right to take up and pay for (in such
proportion as may be agreed upon among them) the First Units which the
defaulting Underwriter or Underwriters agreed but failed to purchase. If such
remaining Underwriters do not, at the First Closing Date, take up and pay for
the First Units which the defaulting Underwriter or Underwriters agreed but
failed to purchase, the time for delivery of the First Units shall be extended
to the next business day to allow the several Underwriters the privilege of
substituting within twenty-four hours (including nonbusiness hours) another
underwriter or underwriters satisfactory to the Company. If no such underwriter
or underwriters shall have been substituted as aforesaid, within such
twenty-four hour period, the time of delivery of the First Units may, at the
option of the Company, be again extended to the next following business day, if
necessary, to allow the Company the privilege of finding within twenty-four
hours (including nonbusiness hours) another underwriter or underwriters to
purchase the First Units which the defaulting Underwriter or Underwriters agreed
but failed to purchase. If it shall be arranged for the remaining Underwriters
or substituted
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<PAGE>
Underwriters to take up the First Units of the defaulting Underwriter or
Underwriters as provided in this Section, (i) the Company or the Representative
shall have the right to postpone the time of delivery for the period of not more
than seven business days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective numbers of First Units to
be purchased by the remaining Underwriters or substituted Underwriters shall be
taken at the basis of the underwriting obligation for all purposes of this
Agreement. If in the event of a default by one or more Underwriters and the
remaining Underwriters shall not take up and pay for all the First Units agreed
to be purchased by the defaulting Underwriters or substitute another underwriter
or underwriters as aforesaid, the Company shall not find or shall not elect to
seek another underwriter or underwriters for such First Units as aforesaid, then
this Agreement shall terminate.
If, following exercise of the option provided in Section 2(b)
hereof, any Underwriter or Underwriters shall for any reason not permitted
hereunder cancel their obligations to purchase Option Units at the Option
Closing Date, or shall fail to take up and pay for the number of Option Units,
which they become obligated to purchase at the Option Closing Date upon tender
of such Option Units in accordance with the terms hereof, then the remaining
Underwriters or substituted Underwriters may take up and pay for the Option
Units of the defaulting Underwriters in the manner provided in Section 9(b)
hereof. If the remaining Underwriters or substituted Underwriters shall not take
up and pay for all such Option Units, the Underwriters shall be entitled to
purchase the number of Option Units for which there is no default or, at their
election, the option shall terminate, the exercise thereof shall be of no
effect.
As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section. In the event of
termination, there shall be no liability on the part of any nondefaulting
Underwriter to the Company, provided that the provisions of this Section 9 shall
to in any event affect the liability of any defaulting Underwriter to the
Company arising out of such default.
10. Effective Date. The Agreement shall become effective upon
its execution except that you may, at your option, delay its effectiveness until
11:00 A.M., New York time on the first full business day following the effective
date of the Registration Statement, or at such earlier time after the effective
date of the Registration Statement as you in your discretion shall first
commence the initial public offering by the Underwriters of any of the Units.
The time of the initial public offering shall mean the time of release by you of
the first newspaper advertisement with respect to the Units, or the time when
the Units are first generally offered by you to dealers by letter or telegram,
whichever shall first occur. This Agreement may be terminated by you at any time
before it becomes effective as provided above, except that Sections 3(c), 6, 7,
8, 13, 14, 15 and 16 shall remain in effect notwithstanding such termination.
11. Termination.
(a) This Agreement, except for Sections 3(c), 6, 7, 8, 13, 14,
15 and 16 hereof, may be terminated at any time prior to the First Closing Date,
and the option referred to in Section 2(b) hereof, if exercised, may be canceled
at any time prior to the Option Closing Date, by
27
<PAGE>
you if in your judgment it is impracticable to offer for sale or to enforce
contracts made by the Underwriters for the resale of the Units agreed to be
purchased hereunder by reason of (i) the Company having sustained a material
loss, whether or not insured, by reason of fire, earthquake, flood, accident or
other calamity, or from any labor dispute or court or government action, order
or decree; (ii) trading in securities on the New York Stock Exchange, the
American Stock Exchange, the Nasdaq SmallCap Market or the Nasdaq National
Market having been suspended or limited; (iii) material governmental
restrictions having been imposed on trading in securities generally (not in
force and effect on the date hereof); (iv) a banking moratorium having been
declared by federal or New York state authorities; (v) an outbreak of
international hostilities or other national or international calamity or crisis
or change in economic or political conditions having occurred; (vi) a pending or
threatened legal or governmental proceeding or action relating generally to the
Company's business, or a notification having been received by the Company of the
threat of any such proceeding or action, which could materially adversely affect
the Company; (vii) except as contemplated by the Prospectus, the Company is
merged or consolidated into or acquired by another company or group or there
exists a binding legal commitment for the foregoing or any other material change
of ownership or control occurs; (viii) the passage by the Congress of the United
States or by any state legislative body or federal or state agency or other
authority of any act, rule or regulation, measure, or the adoption of any
orders, rules or regulations by any governmental body or any authoritative
accounting institute or board, or any governmental executive, which is
reasonably believed likely by the Representative to have a material impact on
the business, financial condition or financial statements of the Company or the
market for the securities offered pursuant to the Prospectus; (ix) any adverse
change in the financial or securities markets beyond normal market fluctuations
having occurred since the date of this Agreement, or (x) any material adverse
change having occurred, since the respective dates of which information is given
in the Registration Statement and Prospectus, in the earnings, business
prospects or general condition of the Company, financial or otherwise, whether
or not arising in the ordinary course of business.
(b) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 11 or in
Section 10 hereof, the Company shall be promptly notified by you, by telephone
or telegram, confirmed by letter, in accordance with Section 14 hereof.
12. Unit Purchase Option. At or before the First Closing Date,
the Company will sell to the Representative (for its own account and not as
representative of the Underwriters), or its designees for a consideration of One
Hundred Seventy Six Dollars ($176), and upon the terms and conditions set forth
in the form of Unit Purchase Option annexed as an exhibit to the Registration
Statement, a Unit Purchase Option to purchase an aggregate of One Hundred
Seventy Six Thousand (176,000) Units. In the event of conflict between the terms
of this Agreement and the Unit Purchase Option, the language of the Unit
Purchase Option shall control.
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<PAGE>
13. Representations, Warranties and Agreements to Survive
Delivery. The respective indemnities, agreements, representations, warranties
and other statements of the Company or its officers, directors, stockholders or
Principal Stockholders, where appropriate, and the undertakings set forth in or
made pursuant to this Agreement will remain in full force and effect, regardless
of any investigation made by or on behalf of the Underwriters, the Company or
any of its officers or directors or any controlling person and will survive
delivery of and payment of the Units and the termination of this Agreement.
14. Notice. Any communications specifically required hereunder
to be in writing, if sent to the Underwriters, will be mailed, delivered and
confirmed to the Representative at D.H. Blair Investment Banking Corp., 44 Wall
Street, 2nd Floor, New York, New York 10005, with a copy sent to Paul, Hastings,
Janofsky & Walker LLP, 399 Park Avenue, New York, New York 10022, or if sent to
the Company, will be mailed, delivered and confirmed to it at HealthCore Medical
Solutions, Inc., 11904 Blue Ridge Boulevard, Grandview, Missouri 64030, with a
copy sent to Bachner, Tally, Polevoy & Misher LLP, 380 Madison Avenue, New York,
New York 10017.
15. Parties in Interest. This Agreement is made solely for the
benefit of the Underwriters, the Representative, on an individual basis, the
Company and, to the extent expressed, the Principal Stockholders, any person
controlling the Company or the Underwriters, directors of the Company, nominees
for directors of the Company (if any) named in the Prospectus, officers of the
Company who have signed the Registration Statement and each of their respective
executors, administrators, successors and assigns and no other person shall
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser, as such purchaser,
from the Underwriters of the Units. All of the obligations of the Underwriters
hereunder are several and not joint.
16. Applicable Law. This Agreement will be governed by, and
construed in accordance with, the laws of the State of New York applicable to
agreements made and to be entirely performed within New York.
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<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company and the Underwriters in accordance with
its terms.
Very truly yours,
HEALTHCORE MEDICAL SOLUTIONS, INC.
By: ________________________________
Name: Neal J. Polan
Title: Chairman and
Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and
accepted as of the date first above written.
D.H. BLAIR INVESTMENT BANKING CORP.
By: ______________________________
Name: Martin A. Bell
Title: Vice Chairman and
General Counsel
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<PAGE>
We hereby agree to be bound by the provisions of Section 3(l)
and (n) and 13 hereof.
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________
31
<PAGE>
Schedule A
Number of First Units Number of Option Units
Underwriters to be Purchased to be Purchased
------------ --------------- ---------------
D.H. Blair Investment [__] [__]
Banking Corp.
32
Option to Purchase
176,000 Units
HEALTHCORE MEDICAL SOLUTIONS, INC.
Unit Purchase Option
Dated: [__], 1997
THIS CERTIFIES THAT D.H. BLAIR INVESTMENT BANKING CORP. (the
"HOLDER") is entitled to purchase from HEALTHCORE MEDICAL SOLUTIONS, INC., a
Delaware corporation (the "COMPANY"), at the prices and during the periods as
hereinafter specified, up to One Hundred Seventy Six Thousand (176,000) Units
("UNITS"), each Unit consisting of one share of the Company's Class A Common
Stock, $.01 par value, as now constituted ("CLASS A COMMON STOCK"), and one
Class A Warrant ("CLASS A WARRANTS" or "WARRANTS"). Each Class A Warrant is
exercisable to purchase one share of Class A Common Stock at an exercise price
of $6.50 from ____, 1997 until [__] , 2002.
The Units have been registered under a Registration Statement
on Form SB-2, (File No. 333-28233) declared effective by the Securities and
Exchange Commission (the "COMMISSION") on [__], 1997 (the "REGISTRATION
STATEMENT"). This Unit Purchase Option (the "OPTION") to purchase One Hundred
Seventy Six Thousand (176,000) Units, subject to adjustment in accordance with
SECTION 8 of this Option (the "OPTION UNITS"), was originally issued pursuant to
an underwriting agreement between the Company and the Holder, as representative
of the several underwriters set forth in such underwriting agreement
(collectively, the "UNDERWRITERS") in connection with a public offering (the
"OFFERING") of One Million Seven Hundred Sixty Thousand (1,760,000) Units (the
"PUBLIC UNITS") through the Underwriters, in consideration of $176 received for
the Options.
Except as specifically otherwise provided herein, the Class A
Common Stock and the Warrants issued pursuant to the Option shall bear the same
terms and conditions as described under the caption "Description of Securities"
in the Registration Statement, and the Warrants shall be governed by the terms
of the Warrant Agreement dated as of [__], 1997 executed in connection with such
Offering (the "WARRANT AGREEMENT"), except that (i) the Holder shall have
registration rights under the Securities Act of 1933, as amended (the "ACT"),
for the Option, the Class A Common Stock and the Warrants included in the Option
Units, and the shares of Class A Common Stock underlying the Warrants, as more
fully described in SECTION 6 of this Option and (ii) the Warrants issuable upon
exercise of the Option will be subject to redemption by the Company pursuant to
the Warrant Agreement at any time after the Option has been exercised and the
Warrants underlying the Option Units are outstanding. Any such redemption shall
be on the same terms and conditions as the Warrants included in the Public Units
(the "PUBLIC WARRANTS"). The Company will list the Class A Common Stock
underlying this Option and, at the Holder's request the Warrants,
<PAGE>
on the Nasdaq Small Cap Market or such other exchange or market as the Class A
Common Stock or Public Warrants may then be listed or quoted. In the event of
any extension of the expiration date or reduction of the exercise price of the
Public Warrants, the same changes to the Warrants included in the Option Units
shall be simultaneously effected.
1. Exercise. The rights represented by this Option shall be
exercised at the prices, subject to adjustment in accordance with SECTION 8 of
this Option (the "EXERCISE PRICE"), and during the periods as follows:
(a) During the period from [__], 1997 to [__], 2000 inclusive,
the Holder shall have no right to purchase any Option Units hereunder, except
that in the event of any merger, consolidation or sale of all or substantially
all the capital stock or assets of the Company or in the case of any statutory
exchange of securities with another corporation (including any exchange effected
in connection with a merger of another corporation into the Company) subsequent
to [__], 1997, the Holder shall have the right to exercise this Option and the
Warrants included herein at such time and receive the kind and amount of shares
of stock and other securities and property (including cash) which a holder of
the number of shares of Class A Common Stock underlying this Option and the
Warrants included in this Option would have owned or been entitled to receive
had this Option been exercised immediately prior thereto.
(b) Between [__], 2000 and [__], 2002 inclusive, the Holder
shall have the option to purchase Option Units hereunder at a price of $6.00 per
Unit.
(c) After [__], 2002 the Holder shall have no right to
purchase any Units hereunder.
2. Mechanics.
(a) The rights represented by this Option may be exercised at
any time within the period above specified, in whole or in part, by (i) the
surrender of this Option (with the purchase form at the end hereof properly
executed) at the principal executive office of the Company (or such other office
or agency of the Company as it may designate by notice in writing to the Holder
at the address of the Holder appearing on the books of the Company); and (ii)
payment to the Company of the exercise price then in effect for the number of
Option Units specified in the above-mentioned purchase form together with
applicable stock transfer taxes, if any. This Option shall be deemed to have
been exercised, in whole or in part to the extent specified, immediately prior
to the close of business on the date this Option is surrendered and payment is
made in accordance with the foregoing provisions of this SECTION 2, and the
person or persons in whose name or names the certificates for shares of Class A
Common Stock and Warrants shall be issuable upon such exercise shall become the
holder or holders of record of such Class A Common Stock and Warrants at that
time and date. The certificates for the Class A Common Stock and Warrants so
purchased shall be delivered to the Holder as soon as practicable but not later
than ten (10) days after the rights represented by this Option shall have been
so exercised.
(b) At any time during the period above specified, during
which this Option may be exercised, the Holder may, at its option, exchange this
Option, in whole or in part (an "OPTION EXCHANGE"), into the number of Option
Units determined in accordance with this SECTION 2(b), by surrendering this
Option at the principal office of the Company or at the office of
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<PAGE>
its stock transfer agent, accompanied by a notice (in the form attached hereto)
stating such Holder's intent to effect such exchange, the number of Option Units
into which this Option is to be exchanged and the date on which the Holder
requests that such Option Exchange occur (the "NOTICE OF EXCHANGE"). The Option
Exchange shall take place on the date specified in the Notice of Exchange or, if
later, the date the Notice of Exchange is received by the Company (the "EXCHANGE
DATE"). Certificates for the shares of Class A Common Stock and Warrants
issuable upon such Option Exchange and, if applicable, a new Option of like
tenor evidencing the balance of the Option Units remaining subject to this
Option, shall be issued as of the Exchange Date and delivered to the Holder
within seven (7) days following the Exchange Date. In connection with any Option
Exchange, this Option shall represent the right to subscribe for and acquire the
number of Option Units (rounded to the next highest integer) equal to (x) the
number of Option Units specified by the Holder in its Notice of Exchange up to
the maximum number of Option Units subject to this Option (the "TOTAL NUMBER")
less (y) the number of Option Units equal to the quotient obtained by dividing
(a) the product of the TOTAL NUMBER and the existing EXERCISE PRICE by (B) the
Fair MARKET VALUE. "FAIR MARKET VALUE" shall mean first, if there is a trading
market as indicated in SUBSECTION (i) below for the Units, such Fair Market
Value of the Units and if there is no such trading market in the Units, then
Fair Market Value shall have the meaning indicated in SUBSECTIONS (ii) THROUGH
(v) below for the aggregate value of all shares of Class A Common Stock and
Warrants which comprise a Unit:
(i) If the Units are listed on a national securities exchange
or listed or admitted to unlisted trading privileges on such exchange or listed
for trading on the Nasdaq National Market or the Nasdaq Small Cap Market, the
Fair Market Value shall be the average of the last reported sale prices or the
average of the means of the last reported bid and asked prices, respectively, of
the Units on such exchange or market for the twenty (20) business days ending on
the last business day prior to the Exchange Date; or
(ii) If the Class A Common Stock or Warrants are listed on a
national securities exchange or admitted to unlisted trading privileges on such
exchange or listed for trading on the Nasdaq National Market or the Nasdaq Small
Cap Market, the Fair Market Value shall be the average of the last reported sale
prices or the average of the means of the last reported bid and asked prices,
respectively, of Class A Common Stock or Warrants, respectively, on such
exchange or market for the twenty (20) business days ending on the last business
day prior to the Exchange Date; or
(iii) If the Class A Common Stock or Warrants are not so
listed or admitted to unlisted trading privileges, the Fair Market Value shall
be the average of the means of the last reported bid and asked prices of the
Class A Common Stock or Warrants, respectively, for the twenty (20) business
days ending on the last business day prior to the Exchange Date; or
(iv) If the Class A Common Stock is not so listed or admitted
to unlisted trading privileges and bid and asked prices are not so reported, the
Fair Market Value shall be an amount, not less than book value thereof as at the
end of the most recent fiscal year of the Company ending prior to the Exchange
Date, determined in such reasonable manner as may be prescribed by the Board of
Directors of the Company; or
(v) If the Warrants are not so listed or admitted to unlisted
trading privileges, and bid and asked prices are not so reported for Warrants,
then Fair Market Value for the Warrants shall be an amount equal to the
difference between (i) the Fair Market Value of the shares
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<PAGE>
of Class A Common Stock and Warrants which may be received upon the exercise of
the Warrants, as determined herein, and (ii) the Warrant Exercise Price.
3. Restrictions on Transfer. Neither this Option nor the
underlying securities shall be transferred, sold, assigned, or hypothecated for
a period of three (3) years commencing from the date hereof except that they may
be transferred to successors of the Holder, and may be assigned in whole or in
part to any person who is an officer of the Holder, any member participating in
the selling group relating to the Offering or any officer of such selling group
member. Any such assignment shall be effected by the Holder (i) executing the
form of assignment at the end hereof and (ii) surrendering this Option for
cancellation at the office or agency of the Company referred to in SECTION 2(a)
hereof, accompanied by a certificate (signed by an officer of the Holder if the
Holder is a corporation), stating that each transferee is a permitted transferee
under this SECTION 3; whereupon the Company shall issue, in the name or names
specified by the Holder (including the Holder) a new Option or Options of like
tenor and representing in the aggregate rights to purchase the same number of
Option Units as are purchasable hereunder.
4. Class A Common Stock. The Company covenants and agrees that
all shares of Class A Common Stock which may be issued as part of the Option
Units purchased hereunder and the Class A Common Stock which may be issued upon
exercise of the Warrants will, upon issuance, be duly and validly issued, fully
paid and nonassessable and no personal liability will attach to the holder
thereof. The Company further covenants and agrees that during the periods within
which this Option may be exercised, the Company will at all times have
authorized and reserved a sufficient number of shares of its Class A Common
Stock to provide for the exercise of this Option and that it will have
authorized and reserved a sufficient number of shares of Class A Common Stock
for issuance upon exercise of the Warrants included in the Option Units.
5. Limitations. This Option shall not entitle the Holder to
any voting rights or any other rights, or subject to the Holder to any
liabilities, as a stockholder of the Company.
6. Registration Rights.
(a) The Company shall advise the Holder or its transferee,
whether the Holder holds the Option or has exercised the Option and holds Option
Units or any of the securities underlying the Option Units, by written notice at
least four weeks prior to the filing of any post-effective amendment to the
Registration Statement or of any new registration statement or post-effective
amendment thereto under the Act covering any securities of the Company, for its
own account or for the account of others, and will for a period of seven years
from the effective date of the Registration Statement, upon the request of the
Holder, include in any such post-effective amendment or registration statement,
such information as may be required to permit a public offering of the Option,
all or any of the Option Units, the Class A Common Stock or Warrants included in
the Option Units or the Class A Common Stock issuable upon the exercise of the
Warrants (the "REGISTRABLE SECURITIES"); provided, however, the right of any
Holder to include its Registrable Securities in any such post-effective
amendment or registration statement may be waived by the written consent of the
Holder, D.H. Blair & Co., Inc. or J. Morton Davis (collectively, as applicable,
the "RIGHTHOLDERS").
(b) If any 50% holder (as defined below in Section 6(c)) or
any of the Rightholders, shall give notice to the Company at any time to the
effect that such holder desires to register under
4
<PAGE>
the Act this Option, the Option Units or any of the underlying securities
contained in the Option Units under such circumstances that a public
distribution (within the meaning of the Act) of any such securities will be
involved then the Company will promptly, but no later than two weeks after
receipt of such notice, file a post-effective amendment to the current
Registration Statement or a new registration statement on Form S-1 or such other
form as the holder requests pursuant to the Act, to the end that the Option, the
Option Units and/or any of the securities underlying the Option Units may be
publicly sold under the Act as promptly as practicable thereafter and the
Company will use its best efforts to cause such registration to become and
remain effective (including the taking of such steps as are necessary to obtain
the removal of any stop order); provided, that such holder shall furnish the
Company with appropriate information in connection therewith as the Company may
reasonably request in writing. The 50% holder or any of the Rightholders, may,
at its option, request the filing of a post-effective amendment to the current
Registration Statement or a new registration statement under the Act on two
occasions during the thirty month period beginning thirty months from the
effective date of the Registration Statement. The Holder may, at its option
request the registration of the Option and/or any of the securities underlying
the Option in a registration statement made by the Company as contemplated by
SECTION 6(a) or in connection with a request made pursuant to this SECTION 6(b)
prior to acquisition of the Option Units issuable upon exercise of the Option
and even though the Holder has not given notice of exercise of the Option. The
50% holder or any of the Rightholders, may, at its option, request such
post-effective amendment or new registration statement during the described
period with respect to the Option, the Option Units as a unit, or separately as
to the Class A Common Stock and/or Warrants included in the Option Units and/or
the Class A Common Stock issuable upon the exercise of the Warrants, and such
registration rights may be exercised by the 50% holder or any of the
Rightholders, prior to or subsequent to the exercise of the Option. Within ten
days after receiving any such notice pursuant to this SECTION 6(b), the Company
shall give notice to the other holders of the Options, advising that the Company
is proceeding with such post-effective amendment or registration statement and
offering to include therein the securities underlying the Options of the other
holders, provided that they shall furnish the Company with such appropriate
information (relating to the intentions of such holders) in connection therewith
as the Company shall reasonably request in writing. In the event the
registration statement is not filed within the period specified herein and in
the event the registration statement is not declared effective under the Act
prior to [__], 2002, then, at the holders' request, the Company shall purchase
the Options from the holder for a per option price equal to the difference
between (i) the Fair Market Value of the Class A Common Stock on the date of
notice multiplied by the number of shares of Class A Common Stock issuable upon
exercise of the Option and the underlying Warrants and (ii) the average per
share purchase price of the Option and each share of Class A Common Stock
underlying the Option. All costs and expenses of the post-effective amendment or
one new registration statement under this SECTION 6(b) shall be borne by the
Company, except that the holders shall bear the fees of their own counsel and
any underwriting discounts or commissions applicable to any of the securities
sold by them. The Company will maintain such registration statement or
post-effective amendment current under the Act for a period of at least six
months (and for up to an additional three months if requested by the Holder)
from the effective date thereof.
(c) The term "50% holder" as used in this SECTION 6 shall mean
the holder of at least 50% of the Class A Common Stock and the Warrants
underlying the Options (considered in the aggregate) and shall include any owner
or combination of owners of such securities, which ownership shall be calculated
by determining the number of shares of Class A Common Stock held
5
<PAGE>
by such owner or owners as well as the number of shares then issuable upon
exercise of the Warrants.
(d) Whenever pursuant to this SECTION 6 a registration
statement relating to any Registrable Securities is filed under the Act, amended
or supplemented, the Company shall (i) supply prospectuses and such other
documents as the Holder may request in order to facilitate the public sale or
other disposition of the Registrable Securities, (ii) use its best efforts to
register and qualify any of the Registrable Securities for sale in such states
as such Holder designates, (iii) furnish indemnification in the manner provided
in SECTION 7 hereof, (iv) notify each Holder of Registrable Securities at any
time when a prospectus relating thereto is required to be delivered under the
Act, of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, contains an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading and, at the
request of any such Holder, prepare and furnish to such Holder a reasonable
number of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus shall not included an untrue statement of a material
fact or omit to state material fact required to be stated therein or necessary
to make the statements therein not misleading and (v) do any and all other acts
and things which may be necessary or desirable to enable such Holders to
consummate the public sale or other disposition of the Registrable Securities,
The Holder shall furnish appropriate information in connection therewith and
indemnification as set forth in SECTION 7.
(e) The Company shall not permit the inclusion of any
securities other than the Registrable Securities to be included in any
registration statement filed pursuant to SECTION 6(b) hereof without the prior
written consent of the 50% holder or the Rightholders.
(f) The Company shall furnish to each Holder participating in
the offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (or, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) if such registration
includes an underwritten public offering, a "cold comfort" letter dated the
effective date of such registration statement and dated the date of the closing
under the underwriting agreement signed by the independent public accountants
who have issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily covered
in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(g) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and to the managing underwriter copies of all correspondence
between the COMMISSION and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonable
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. ("NASD"). Such investigation shall
include access
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<PAGE>
to non-confidential books, records and properties and opportunities to discuss
the business of the Company with its officers and independent auditors, all to
such reasonable extent and at such reasonable times as any such Holder shall
reasonably request.
7. Indemnification.
(a) Whenever pursuant to SECTION 6 a registration statement
(as amended or supplemented) relating to the Registrable Securities is filed
under the Act, the Company will indemnify and hold harmless each holder of the
Registrable Securities covered by such registration statement, amendment or
supplement (such holder being hereinafter called the "DISTRIBUTING HOLDER"), and
each person, if any, who controls (within the meaning of the Act) the
Distributing Holder, and each underwriter (within the meaning of the Act) of
such securities and each person, if any, who controls (within the meaning of the
Act) any such underwriter, against any losses, claims, damages or liabilities,
joint or several (collectively "LOSSES"), to which the Distributing Holder, any
such controlling person or any such underwriter may become subject, under the
Act or otherwise, insofar as such Losses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any such registration statement or any preliminary
prospectus or final prospectus constituting a part thereof or any amendment or
supplement thereto, or arise out of or are based upon the omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; and will reimburse the Distributing Holder
and each such controlling person and underwriter for any legal or other expenses
reasonably incurred by the Distributing Holder or such controlling person or
underwriter in connection with investigating or defending any such Loss,
provided, however, that the Company will not be liable in any such case to the
extent that any such Loss, arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in said
registration statement, said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder specifically for use in the
preparation thereof.
(b) If requested by the Company prior to the filing of any
registration statement covering the Registrable Securities, each Distributing
Holder will agree, severally but not jointly, to indemnify and hold harmless the
Company against any Losses, to which the Company may become subject, under the
Act or otherwise, insofar as such Losses, arise out of or are based upon any
untrue or alleged untrue statement of any material fact contained in said
registration statement, said preliminary prospectus, said final prospectus, or
said amendment or supplement, or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent that such untrue statement or alleged
untrue statement or omission or alleged omission was made in said registration
statement, said preliminary prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder specifically for use in the preparation
thereof; except that the maximum amount which may be recovered from the
Distributing Holder pursuant to this SECTION 7 or otherwise shall be limited to
the amount of net proceeds received by the Distributing Holder from the sale of
the Registrable Securities.
(c) Promptly after receipt by an indemnified party under this
SECTION 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the
7
<PAGE>
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this SECTION 7.
(d) In case any such action is brought against any indemnified
party, and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
SECTION 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
8. Adjustments. In addition to the provisions of SECTION 1(a)
of this Option, the Exercise Price in effect at any time and the number and kind
of securities purchasable upon the exercise of the Options shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Class A Common Stock in shares of
Class A Common Stock, (ii) subdivide or reclassify its outstanding shares of
Class A Common Stock into a greater number of shares, or (iii) combine or
reclassify its outstanding shares of Class A Common Stock into a smaller number
of shares, the Exercise Price in effect at the time of the record date for such
dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall be adjusted so that it shall equal the
price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Class A Common Stock
outstanding after giving effect to such action, and the numerator of which shall
be the number of shares of Class A Common Stock outstanding immediately prior to
such action. Such adjustment shall be made successively whenever any event
listed above shall occur.
(b) Whenever the Exercise Price payable upon exercise of each
Option is adjusted pursuant to SUBSECTION (a) above, (i) the number of shares of
Class A Common Stock included in an Option Unit shall simultaneously be adjusted
by multiplying the number of shares of Class A Common Stock included in Option
Unit immediately prior to such adjustment by the Exercise Price in effect
immediately prior to such adjustment and dividing the product so obtained by the
Exercise Price, as adjusted and (ii) the number of shares of Class A Common
Stock or other securities issuable upon exercise of the Warrants included in the
Option Units and the exercise price of such Warrants shall be adjusted in
accordance with the applicable terms of the Warrant Agreement.
(c) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least five
cents ($0.05) in such price; provided, however, that any adjustments which by
reason of this SUBSECTION (c) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment required to be made
hereunder. All calculations under this SECTION 8 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be. Anything in
this SECTION 8 to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in the Exercise Price, in
addition to those required by this SECTION 8, as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Class A Common
8
<PAGE>
Stock, or any subdivision, reclassification or combination of Class A Common
Stock, hereafter made by the Company shall not result in any federal income tax
liability to the holders of Class A Common Stock or securities convertible into
Class A Common Stock (including Warrants issuable upon exercise of this Option).
(d) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly but no later than 10 days after any request
for such an adjustment by the Holder, cause a notice setting forth the adjusted
Exercise Price and adjusted number of Option Units issuable upon exercise of
each Option and, if requested, information describing the transactions giving
rise to such adjustments, to be mailed to the Holders, at the address set forth
herein, and shall cause a certified copy thereof to be mailed to its transfer
agent, if any. The Company may retain a firm of independent certified public
accountants selected by the board of directors of the Company (who may be the
regular accountants employed by the Company) to make any computation required by
this SECTION 8, and a certificate signed by such firm shall be conclusive
evidence of the correctness of such adjustment.
(e) In the event that at any time, as a result of an
adjustment made pursuant to SUBSECTION (A) above, the Holder of this Option
thereafter shall become entitled to receive any shares of the Company, other
than Class A Common Stock, thereafter the number of such other shares so
receivable upon exercise of this Option shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Class A Common Stock contained in SUBSECTIONS (a)
THROUGH (d), inclusive above.
(f) In case any event shall occur as to which the other
provisions of this SECTION 8 OR SECTION 1(A) hereof are not strictly applicable
but as to which the failure to make any adjustment would not fairly protect the
purchase rights represented by this Option in accordance with the essential
intent and principles hereof then, in each such case, the Holders of Options
representing the right to purchase a majority of the Option Units may appoint a
firm of independent public accountants reasonably acceptable to the Company,
which shall give their opinion as to the adjustment, if any, on a basis
consistent with the essential intent and principles established herein,
necessary to preserve the purchase rights represented by the Options. Upon
receipt of such opinion, the Company will promptly mail a copy thereof to the
Holder of this Option and shall make the adjustments described therein. The fees
and expenses of such independent public accountants shall be borne by the
Company.
9. Governing Law. This Agreement shall be governed by and in
accordance with the laws of the State of New York, without giving effect to the
principles of conflicts of law thereof.
9
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Option to be
signed by its duly authorized officers under its corporate seal, and this Option
to be dated [__], 1997.
HEALTHCORE MEDICAL SOLUTIONS, INC.
By: _____________________________________
Neal J. Polan
Chairman and Chief Executive Officer
(Corporate Seal)
Attest:
_________________________________
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PURCHASE FORM
(To be signed only upon exercise of the Option)
THE UNDERSIGNED, the holder of the foregoing Option, hereby
irrevocably elects to exercise the purchase rights represented by such Option
for, and to purchase thereunder, _______ Units of HEALTHCORE MEDICAL SOLUTIONS,
INC. (the "COMPANY"), each Unit consisting of one share of Class A Common Stock,
$.01 par value, of the Company (the "CLASS A COMMON STOCK"), and one Class A
Warrant to purchase one share of Class A Common Stock and herewith makes payment
of $_________.
Dated: _________, 19__.
______________________________________
Print Name
______________________________________
Address
______________________________________
Signature
11
<PAGE>
NOTICE OF EXCHANGE
(To be signed only upon exchange of the Option)
THE UNDERSIGNED, pursuant to the provisions of the foregoing
Option, hereby elects to exchange such Option for _________ Units of HEALTHCORE
MEDICAL SOLUTIONS, INC. (the "COMPANY"), each Unit consisting of one share of
Class A Common Stock, $.01 par value, of the Company (the "CLASS A COMMON
STOCK"), and one Class A Warrant to purchase one share of Class A Common Stock,
pursuant to the Option Exchange provisions of such Option.
Dated: _____________, 19__.
______________________________________
Print Name
______________________________________
Address
______________________________________
Signature
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<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Option)
THE UNDERSIGNED, hereby sells, assigns, and transfers unto the
right to purchase Units of HEALTHCORE MEDICAL SOLUTIONS, INC. (the "COMPANY")
represented by the foregoing Option to the extent of ___ Units, each Unit
consisting of one share of Class A Common Stock, $.01 par value, of the Company
(the "CLASS A COMMON STOCK"), and are Class A Warrant to purchase one share of
Class A Common Stock and appoints ___ attorney to transfer such rights on the
books of the Company with full power of substitution in the premises.
Dated: _______________, 19__.
______________________________________
Print Name
______________________________________
Address
______________________________________
Signature
13
September 16, 1997
HealthCore Medical Solutions, Inc.
11904 Blue Ridge Boulevard
Grandview, Missouri 64030
Ladies and Gentlemen:
We have acted as counsel for HealthCore Medical Solutions, Inc., a Delaware
corporation (the "Company"), in connection with its registration statement on
Form SB-2 (File No. 333-28233) (the "Registration Statement") filed under the
Securities Act of 1933, as amended (the "Act"), relating to the public offering
of up to 2,024,000 Units, each unit consisting of one share of the Company's
Class A common stock, $.01 par value and one redeemable Class A warrant (the
"Units"), which includes 264,000 additional Units subject to an option granted
to the underwriters to cover over-allotments in connection with the offering.
We have examined the Amended and Restated Certificate of Incorporation and
By-Laws of the Company, the minutes of the various meetings and consents of the
Board of Directors of the Company, originals or copies of all such records and
certificates, and such other documents and records as we have deemed necessary
to form the basis of the opinion expressed below. In such examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity to originals of all documents
submitted to us as copies thereof. As to various questions of fact material to
such opinion, we have relied upon statements and certificates of officers and
representatives of the Company and others.
Based upon the foregoing, we are of the opinion that the maximum of
2,024,000 Units have been duly authorized and, when issued and sold in
accordance with the terms described in the Prospectus forming a part of the
Registration Statement (the "Prospectus"), will be validly issued, fully paid
and nonassessable.
<PAGE>
HealthCore Medical Solutions, Inc.
September 16, 1997
Page 2
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement, and to the use of our name under the caption "Legal
Matters" in the Prospectus.
Very truly yours,
BACHNER, TALLY, POLEVOY & MISHER LLP
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<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
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0
0
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