As filed with the Securities and Exchange Commission on August 1, 1996
Registration No. 333-_______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-1
Registration Statement Under The Securities Act of 1933
--------------------
MEDNET, MPC CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Nevada 5961
- ------------------------------- ----------------------------
(State or Other Jurisdiction of (Primary Standard Industrial
Incorporation or Organization) Classification Code Number)
871-C Grier Drive
Las Vegas, Nevada 89119
88-0215949 (702) 361-3119
- --------------------------------------- ---------------------------------------
(I.R.S. Employer Identification Number) (Address, Including Zip Code, and
Telephone Number, Including Area Code,
of Registrant's Principal Executive
Offices)
M.B. Merryman
President and Chief Executive Officer
871-C Grier Drive
Las Vegas, Nevada 89119
(702) 361-3119
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
Copies of all communications, including all communications sent to the agent
for service, should be sent to:
Richard T. Beard, Esq.
Paul H. Shaphren, Esq.
Ballard Spahr Andrews & Ingersoll
201 South Main Street, Suite 1200
Salt Lake City, UT 84111
(801) 531-3000
Approximate date of commencement of proposed sale to the public: From time to
time after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box |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 effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
--------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
Title of Each Class Proposed Maximum Proposed Maximum Amount of
of Securities to Amount to be Offering Price Per Aggregate Offering Registration
Be Registered Registered Share Price Fee(1)
------------------- ------------- ------------------ ------------------ ------------
<S> <C> <C> <C> <C>
Common Stock, $.001
par value to be sold by
selling stockholder ...................... 5,000,000 1.5625(2) $7,812,500(2) $2,693.97
</TABLE>
(1) The fee is calculated on the basis of 1/29th of 1% of the Proposed Maximum
Aggregate Offering Price.
(2) Calculated in accordance with Rule 457(c), on the basis of the last
reported sales price of the Registrant's Common Stock on July 30, 1996 as
reported by Nasdaq.
The Registrant hereby amends these Registration Statements on such date or dates
as may be necessary to delay their effective date until the Registrant shall
file a further amendment which specifically states that these Registration
Statements shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
MEDNET, MPC CORPORATION
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
<TABLE>
Item Number Prospectus Caption
<S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus....................... Facing Page; Front Cover Page; Cross Reference
Sheet
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................... Inside Front Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges............................ Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Securities Covered by This Prospectus
5. Determination of Offering Price...................... *
6. Dilution............................................. *
7. Selling Security Holders............................. Front Cover Page; Securities Covered by This
Prospectus; Inside Back Cover Page
8. Plan of Distribution................................. Securities Covered by This Prospectus
9. Description of Securities to be Registered........... Description of Securities
10. Interests of Named Experts and Counsel............... *
11. Information with Respect to Registrant............... Prospectus Summary; Acquisition of Home
Pharmacy; Risk Factors; Unaudited Combined
Pro Forma Condensed Consolidated Statements
of Earnings; Price Range of Common Stock and
Dividend Policy Selected Consolidated
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Directors and
Executive Officers; Certain Beneficial Owners and
Management; Certain Relationships and Related
Transactions; Legal Proceedings; Legal Matters;
Experts; Change in Accountants; Consolidated Financial
Statements
12 Disclosure of Commission Position on
Indemnification for Securities Act Liabilities....... *
--------------------
* Inapplicable
</TABLE>
<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 August __, 1996
PROSPECTUS
MEDNET, MPC CORPORATION
5,000,000 Shares of Common Stock
This Prospectus relates to the registration of up to 5,000,000 shares
(the "Shares") of common stock, $.001 par value per share (the "Common Stock")
of Mednet, MPC Corporation (formerly Medi-Mail, Inc.) (the "Company") which are
being officered for sale by Newsun Limited (the "Selling Stockholder"). The
Shares are issuable upon the conversion by the Selling Stockholder of the
Company's Series E Convertible Preferred Stock ("Series E Preferred" and Series
F Convertible Preferred Stock ("Series F Preferred"). The Selling Stockholder
acquired the Series E Preferred, and has the right to acquire the Series F
Preferred, pursuant to a certain Convertible Stock Purchase Agreement, dated as
of July 12, 1996 (the "Stock Purchase Agreement").
Each share of the Series E Preferred and Series F Preferred may, subject
to the restrictions set forth in the immediately following sentence, be
converted at the option of the Selling Stockholder or donees or transferees
therefrom, at any time and from time to time after September 11, 1996 into that
number of fully paid and nonassessble shares of Common Stock determined by
dividing the Adjusted Face Amount (as defined below) on the date of conversion
by the lower of (i) the closing bid price on July 11, 1996, or (ii) 80% of the
average of the closing bid price of the Common Stock for the five trading days
immediately prior to the conversion date. Pursuant to the Stock Purchase
Agreement, the Selling Stockholder may not in each of the first three (3)
fifteen (15) day periods following the date that the Commission declares
effectice the registration statement of which this Prospectus is a part tender
for conversion more than one-third (1/3) of the aggregate number of shares of
Series E Preferred (or Series F Preferred, as the case may be,) purchased by it
or Series F Preferred which may be purchased by it under the Stock Purchase
Agreement.
Upon a liquidiation of the Company, the holders of the Series E
Preferred and the Series F Preferred shall be entitled to receive from the
Company out of the assets legally available for distribution, subject to the
prior preferences on liquidiation of any stock of the Company ranking senior to
the Series E Preferred or Series F Preferred, as the case may be, the sum of (i)
$20.00, plus (ii) an amount equal to 5% per annum simple interest on such $20.00
calculated on the basis of a 360 day year of 12 thirty day months, which
interest shall accrue daily commencing the original issue date for the Preferred
Stock certificates and which shall continue to accrue until all amounts in
respect of the Preferred Stock shall have been paid in full to the holders
thereof (the "Adjusted Face Amount") in respect of each share of Series E
Preferred or Series F Preferred, as the case may be, calculated at the date of
payment to the holder of such stock.
The Company will not receive any proceeds from the resale of the Shares
by the Selling Stockholder.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF
RISK. SEE "RISK FACTORS," BEGINNING ON PAGE 7.
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.
The date of this Prospectus is ___________, 1996.
<PAGE>
The Common Stock is traded in the over-the-counter market and quoted on
Nasdaq under the symbol MMRX. On July 30, 1996, the last reported sales price of
the Common Stock on Nasdaq was $1.5625 per share. See "Price Range of Common
Stock and Dividend Policy".
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL.
--------------------
TABLE OF CONTENTS
AVAILABLE INFORMATION
PROSPECTUS SUMMARY
RISK FACTORS
SECURITIES COVERED BY THIS PROSPECTUS
SELLING STOCKHOLDER
PLAN OF DISTRIBUTION
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
DIRECTORS AND EXECUTIVE OFFICERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
TRANSACTIONS WITH RELATED PARTIES
DESCRIPTION OF SECURITIES
LEGAL PROCEEDINGS
LEGAL MATTERS
EXPERTS
CHANGE IN ACCOUNTANTS
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
-------------------
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
concerning the Company can be inspected and copied at the public reference
facilities maintained by the Commission at its office at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the Regional Offices of the
Commission at Citicorp Center, 300 West Madison Street, Chicago, Illinois 60661;
and Seven World Trade Center, New York, New York 10048. Copies of such material
can be obtained from the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a site on the World Wide Web
(hhtp://www.sec.gov) that contains reports, proxy and information statements and
other information regarding the Company filed electronically with the
Commission.
This Prospectus constitutes a part of Registration Statements on Form S-1
filed by the Company with the Commission under the 1933 Act (the "Registration
Statement"). This Prospectus omits certain information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and related exhibits for further information with respect to the
Company and the shares of Common Stock offered hereby. Statements contained
herein concerning the provisions of any document disclose all material aspects
thereof but are not necessarily complete and, in each instance, reference is
made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus, including information under "Risk Factors."
The Company
The Company was incorporated under the laws of the State of Nevada in
September, 1985 and changed its name from Medi-Mail, Inc. to Mednet, MPC
Corporation in June, 1995. Substantially all of the Company's business is
derived from its activities in the managed prescription care industry. The
Company, together with its subsidiaries Medi-Mail, Inc. ("Medi-Mail"),
Medi-Claim, Inc. ("Medi-Claim"), Medi-Phar, Inc. ("Medi-Phar") and Family
Pharmaceuticals of America, Inc. ("FPA"), acts as an integrated, full service
prescription drug benefits manager serving individual members of retirement
organizations, fraternal organizations, state employee organizations and
commercial organizations ("Affinity Groups"), corporations, self insurance
trusts, insurance companies and other benefit plan sponsors ("Third-Party
Payors" and collectively with the Affinity Groups, "Payors") throughout the
United States. The Company's benefit programs (the "Programs") offer
prescription drug benefits to approximately two million individuals
("Participants"), most of whom receive funded benefits through Third-Party
Payors and/or are members of an Affinity Group.
Description of Prescription Benefits Management Business. The Company
develops and administers client- specific Programs on behalf of more than 400
Payors throughout the United States. The Company attempts to customize its
Programs to meet the Payors' particular benefits strategy combining a number of
managed care features to cost effectively manage the Payor's Program. The
Programs combine mail-service pharmacy features such as enhanced generic
substitution and the convenience of home delivery, with the features of retail
network pharmacy such as automated claims adjudication, real time electronic
networking of retail pharmacies and card programs. Payors can choose a Program
which incorporates on-line electronic claims processing, drug utilization review
and an electronic network linking more than 45,000 retail pharmacies in the
United States, as well as features of a mail-service pharmacy program. In the
alternative, Payors can choose either a mail-service pharmacy program or a
network claims processing program to combine with its other existing
prescription benefits.
Mail-service Pharmacy Operations. The Company's mail-service pharmacy
program is conducted from its Las Vegas and Chicago locations. The Company
services customers throughout the United States. The Company's mail-service
pharmacy program is designed for convenience and to reduce prescription
medication and over-the-counter pharmaceutical costs to individuals,
corporations, labor unions, retirement systems, health and welfare trusts,
insurance companies, federal and state employee plans, health maintenance
organizations and third-party administrators. The mail service pharmacy program
attracts senior citizens, home-bound persons, sight or hearing impaired persons
and users of regularly prescribed medications who are interested in the
convenience of direct delivery of medication and/or lowering their medication
and pharmaceutical expenses. The Company believes that it delivers prescription
medication and over-the-counter pharmaceutical products to the homes of
customers at lower costs, on average, than are generally available through
retail pharmacies. These medications are typically maintenance medications,
which must be taken on an ongoing basis for chronic conditions such as high
blood pressure, arthritis and heart and thyroid conditions. The Company believes
that these conditions account for a majority of prescription medication
expenditures in the United States.
Retail Pharmacy Operations. Through Medi-Phar, the Company operates
in-clinic retail pharmacies, located in San Diego, California and Las Vegas,
Nevada. Operation of the retail pharmacies provided the Company with a working
knowledge of the retail pharmacy business which improved the Company's ability
to market and develop its service, primarily the pharmacy network and claims
processing system of its subsidiary, Medi-Claim. As the Medi-Claim network has
developed, this aspect of the retail pharmacies has become less important. The
Company has closed four and anticipates closing one more of its retail locations
in 1996.
Mednet(R) Claims Processing. The Company's prescription claims administration
programs ("Claims Programs") are conducted through Medi-Claim. In November 1994,
Medi-Claim acquired substantially all of the assets of Medical Services Agency,
Inc. ("MSA"), which operated under the registered service mark of Mednet(R), in
exchange for 1,600,000 shares of Common Stock. The Claims Programs are
sponsor-specific benefit programs through which Medi-Claim processes and
adjudicates paper and electronic prescription drug claims generated through a
network of participating retail pharmacies. The pharmacy network includes
approximately 45,000 retail pharmacies in the United States, each of which
contracts with Medi-Claim to provide prescription dispensing at contracted
rates.
<PAGE>
The first quarter of 1996 marked the first time that the Company
obtained net income for a fiscal quarter. Management believes that the
profitable quarter reflects economies of scale from recent acquisitions,
cost-savings from the consolidation of the Home Pharmacy operations and various
cost cutrting moves implemented in the fourth quarter of 1995. Operations for
the quarter may not be indicative of operations for the entire year. In
particular, the small amount of profit for the quarter ($32,000 or $.001 per
share on net sales of $25,720,000) means that even small fluctuations in costs
or sales could result in future losses. There is no assurance that the Company
will be profitable in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business-Recent
Developments".
As of July 11, 1996, the Company has 32,657,131 shares of Common Stock
outstanding (37,647,131 including the Shares). In addition the Company has
267,500 shares of Series A Preferred Stock, 112,500 shares of Series D
Preferred, and 125,000 shares of Series E Preferred. Pursuant to the terms of
the Stock Purchase Agreement, the Company has also committed to issue 125,000
shares of Series F Preferred, subject to certain conditions precedent.
The Company's executive offices are located at 871-C Grier Drive, Las
Vegas, Nevada 89119, and its telephone number is (702) 361-3119.
The securities offered hereby involve a high degree of risk. See "Risk
Factors".
The Offering
The Common Stock being offered hereby consists of up to 5,000,000 shares
issuable on conversion of the Series E Preferred and the Series F Preferred. See
"Securities Covered by This Prospectus" and "Plan of Distribution".
<PAGE>
Summary Financial Data
Set forth below are summary consolidated financial data for the Company
as of and for the periods indicated. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's Consolidated Financial Statements and
Notes thereto, and other financial statements appearing elsewhere in this
Prospectus.
<TABLE>
Three Months Ended
March 31, Year Ended December 31,
-------------------------- -----------------------------------------------
1996 1995 1995(1) 1994(2)(3) 1993(4)
-------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 25,720,000 $ 28,329,000 $ 114,297,000 $ 67,863,000 $ 25,224,000
Cost of sales (21,852,000) (24,278,000) (98,253,000) (58,793,000) (19,504,000)
Gross profit 3,868,000 4,051,000 16,044,000 9,070,000 5,720,000
Operating Expense (including amortization) (3,414,000) (4,236,000) (26,859,000) (14,794,000) (13,185,000)
Net other income (expense) (422,000) (552,000) (2,517,000) 225,000 (761,000)
-------------------------- -----------------------------------------------
Net income (loss) $ 32,000 $ (737,000) $ (13,332,000) $ (5,499,000) $ (8,226,000)
========================== ===============================================
Net income (loss) per common share $ .00 $ (.03) $ (.53) $ (.26) $ (.49)
Weighted average shares
outstanding 28,762,000 23,817,000 25,383,000 21,353,000 16,675,000
Balance Sheet Data (end of period)(5):
Working capital (deficit) $ (6,533,000) $ 2,749,000 $ (5,138,000) $ 1,420,000 $ 1,310,000
Goodwill and other tangible assets, net 18,034,000 8,882,000 18,582,000 9,308,000 5,406,000
Total assets 44,853,000 22,406,000 41,903,000 22,317,000 13,017,000
Long-term debt less current
portion 2,123,000 1,824,000 1,422,000 595,000 952,000
Redeemable Preferred Stock 5,350,000 -- 5,350,000 -- --
Stockholders' equity $ 6,538,000 $ 11,443,000 $ 9,061,000 $ 11,906,000 $ 7,028,000
<FN>
(1) In September, 1995 the Company acquired substantially all the assets of
Home Pharmacy. The acquisition was accounted for as a purchase. The Company
has elected to consolidate the operations of Home Pharmacy retroactively to
January 1, 1995.
(2) In November, 1994 the Company acquired substantially all the assets of
Medical Services Agency, Inc. (doing business as Mednet) ("MSA"). The
acquisition was accounted for as a purchase. The Company has elected to
consolidate the acquisition of MSA retroactively to January 1, 1994 and
these amounts include interim results of MSA through September 30, 1994 as
determined by management.
(3) In June, 1994 the Company acquired all of the issued and outstanding stock
of Family Pharmaceuticals of America, Inc. The acquisition was accounted
for as a purchase. The Company has elected to consolidate the acquisition
of FPA retroactively to January 1, 1994.
(4) In April, 1993, the Company acquired substantially all the assets of Mail
Rx. The acquisition was accounted for as a purchase.
(5) Figures do not include the proceeds to the Company generated by the sale of
Series E Preferred to the Selling Stockholder subsequent to March 31, 1996.
</FN>
</TABLE>
RISK FACTORS
The Common Stock involves a high degree of risk. Prospective investors
should carefully consider the following factors, among others set forth in this
Prospectus.
Continued Operating Losses. As of December 31, 1995, the Company has
had net losses accumulating to $33,746,000 since commencement of operations on
May 1, 1987, including losses of $13,332,000 in the year ended December 31,
1995. There can be no assurance that the Company will be able to operate at a
profit in the future. Until and unless the results of the Company's operations
improve, there can be no assurance that the Company will be able to sustain its
current rates of growth and increases in sales revenues, or that profitability
can be achieved in the foreseeable future, if at all.
<PAGE>
Need for Capital. The continuation and growth of the Company is
dependent upon its ability to raise equity capital, as well as an increase in
sales to achieve profitability. At March 31, 1996, the Company had working
capital of $(6,533,000). The current working capital of the Company without any
positive cash flow from operations is not sufficient to fund the existing
operations of the Company for any significant period of time. Unless and until
the results of the Company's operations improve and sales increase further to
result in a positive cash flow, the Company will continue to rely on the sale of
equity and debt securities to finance its operations and supplement its working
capital position. There can be no assurance that the Company will succeed in
obtaining such sales or capital financing. Moreover, there can be no assurance
that the costs and conditions associated with raising required capital will be
on favorable terms.
Government Regulation and Sanctions for Alleged Violation. There are
extensive state and federal regulations applicable to the dispensing of
prescription medications. Because sanctions may be imposed for violations of
these laws, compliance is a significant operational requirement for the Company.
The mail-service prescription medication and over-the-counter pharmaceutical
business of the Company is conducted from licensed pharmacies located in Las
Vegas, Nevada and Chicago, Illinois. The retail pharmacies are licensed in
California and Nevada. Nevada, California and Illinois have laws governing a
wide range of matters relating to the operation of pharmacies, and the Company
believes that it is in substantial compliance with these laws. The boards of
pharmacy of these states are empowered to impose sanctions, including license
revocation, for noncompliance.
The Company is aware of twenty-four states in which the Company
operates that presently require out-of-state mail order pharmacy operations to
obtain a license to dispense drug products in those states. The Company is
presently licensed in eight of such states. The Company does not have any
applications for licenses currently pending in other states. The boards of
pharmacy of certain states do not purport to regulate out-of-state mail pharmacy
services. The Company believes that in the most recent two completed fiscal
years approximately 46% of its mail service sales came from states in which the
Company has complied with the disclosure or licensing laws, and that
approximately 34% of its mail service sales were in the eighteen states which
the Company believes do not regulate mail service sales. The Company believes
the provisions purporting to regulate mail service pharmacies are subject to
constitutional or other challenge. Additional states are considering similar
regulation and the risk exists that a substantial number of states may adopt
such legislation in the future. The position of the Company and the industry in
general is that such regulation is an unconstitutional restraint on and
interference with interstate commerce. To date, however, neither the Company nor
any other participant in the industry has formally challenged the existence or
scope of these regulations. Pending a formal determination as to the
constitutionality of these regulations, the Company endeavors to comply with
existing regulations in those states where such compliance is specifically
requested by the state. In each case where registration is specifically
requested, management evaluates licensing costs, requirements and potential
sanctions compared to the potential impact on sales in each of those states. The
Company may consider formal action to challenge specific regulations where the
potential adverse consequences to the Company are significant and compliance
with regulation is unduly burdensome or impractical.
Despite its efforts, the Company may be unable to comply with all
existing and future regulations. Existing and future legislation could increase
the Company's operating expenses as well as operating expenses for the entire
industry. In addition, several states impose substantial fines, penalties or
criminal sanctions for failure to comply with existing regulations. Such fines
could exceed $2,000 per day or per violation, or misdemeanor criminal charges
could be filed against the Company. The Company does not believe that such
fines, penalties or criminal sanctions are likely based on its experience to
date. While increased costs would be passed on to consumers, existing and future
regulations could curtail the scope of the Company's operations should the
Company choose not to conduct business in those states where regulations have
been adopted. Management estimates that any resulting decrease in sales would be
immaterial.
Management of Growth May Negatively Impact Operating Results. The
Company's revenues increased approximately 169% from 1993 to 1994. After giving
effect to the Home Pharmacy acquisition, the Company's revenues increased
approximately 68% from 1994 to 1995. This growth primarily resulted from
acquisitions, and changes to Medi-Claim's contractual obligations to its
customers. There can be no assurance that the Company will continue to expand at
this rate or at all. If the Company does continue to grow, the additional growth
will place burdens on management to manage the growth and ultimately achieve
profitability, and may require the addition of additional management personnel.
There can be no assurance that the Company will be successful in managing its
growth.
<PAGE>
Competition May Negatively Impact Operating Results. The mail service
pharmacy business is highly competitive. The Company competes for the business
of Third-Party Payors and Direct Payors (as hereinafter defined). Many of the
Company's competitors possess substantially greater financial, marketing and
personnel resources than the Company. While management believes that the Company
is competitive in its price, quality and service taken as a whole, there can be
no assurances that, as the mail- service pharmaceutical industry evolves, the
Company will be able to operate profitably given the level of competition within
the industry. Moreover, the Company cannot predict with accuracy the effect of
unspecified, but probable future changes in the domestic health care system
discussed from time to time by the Executive and Legislative branches of the
United States Government. See "Business."
Marketing Constraints May Limit Revenue. The Company's mail-service
pharmacy business is relatively new and, as a result, considerable management
time has been and is currently being spent in presenting the mail order drug
concept to potential customers and discussing programs specially tailored to
each customer's needs. During fiscal 1991, the Company began to shift the focus
of its marketing efforts from Affinity Groups to Third-Party Payors. There is no
assurance that the Company's efforts will be successful or that the Company can
compete favorably with other members of its industry.
Dependence on Key Personnel. Success of the Company is substantially
dependent upon the management efforts and expertise of Dr. Sol Lizerbram,
Director; Dr. M.B. Merryman, President, Chief Executive Officer and Director;
Mr. Dennis Smith, Executive Vice President and Chief Operating Officer; Dr.
David Dalton, Executive Vice President of Corporate Development; and Ms. Jane
Freeman, Executive Vice President - Account Services. The Company intends to
utilize the contacts of Dr. Lizerbram, Dr. Merryman, consultants and outside
sales persons in negotiating agreements with Affinity Groups and Third-Party
Payors. The Company heavily depends upon the skills of Mr. Smith in
administration of the Company's pharmacy operations. A loss of the services of
any of these key individuals could adversely affect the conduct of the Company's
business. While management anticipates that the Company currently has sufficient
personnel resources to compensate for the loss of any single individual, in such
event the Company may be required to obtain other personnel to manage and
operate the Company, and there can be no assurance that the Company would be
able to employ a suitable replacement for any or all of such individuals, or
that a replacement individual could be hired on terms which are acceptable to
the Company. With the exception of Dr. Merryman, the Company currently maintains
no key man insurance on the lives of any of its officers or directors.
Potential Exposure to Uninsured Product Liability Costs. The Company is
subject to many of the liabilities inherent in the retail pharmaceutical
business. The mail order pharmacy business is subject to potential product
liability arising from dispensing wrong prescription drugs and tampering with
products, including tampering while in the public mail distribution system. The
Company has taken anti-tampering precautions by utilizing layered
tamper-evidence packaging and distribution in unmarked outer packaging. Further,
the Company is insured under a product liability insurance policy for pharmacy
dispensing which provides liability protection to the Company of $6,000,000 per
occurrence. However, there is no assurance that product liability claims may
not, if successfully asserted, exceed such insurance coverage, or that the
finances of the Company could withstand the effect of claims in excess of its
insurance coverage.
Lack of Cash Dividends. The Company has paid no cash dividends on its
Common Stock to date, and there are no plans for paying cash dividends on the
Common Stock in the foreseeable future. Any earnings which the Company may
realize will be utilized to pay dividends on the Preferred Stock or retained to
finance the growth of the Company. Certain notes payable currently restrict the
Company's ability to pay cash dividends without the lender's consent. Dividends
on the Common Stock may not be paid unless dividends on all outstanding classes
of Preferred Stock have been paid. Any future dividends will be directly
dependent upon earnings of the Company, its financial requirements and other
factors.
Volatility of Market Price. The price of the Common Stock has
fluctuated significantly. During the period from January 1, 1991 to December 31,
1995, the closing bid price for the Common Stock, as quoted on Nasdaq, has
ranged from a high of $9.25 to a low of $.75. There can be no assurance that the
Common Stock offered hereby can be sold for a profit.
<PAGE>
Shares Eligible for Resale May Negatively Impact Trading Market. At the
date of this Prospectus, approximately 14,386,050 shares of the outstanding
Common Stock are "restricted securities" and may hereafter be sold subject to
compliance with Rule 144 promulgated under the 1933 Act. Rule 144 provides,
among other things, and subject to certain limitations, that a person holding
restricted securities for a period of two years may sell, every three months,
those securities in brokerage transactions in an amount equal to the greater of
(i) 1% of the outstanding Common Stock, or (ii) the average weekly trading
volume, if any, of the Common Stock during the four weeks preceding the sale.
Under certain circumstances, Rule 144 also permits a person who is not an
affiliate of the Company and who has held restricted securities for a period of
three years to sell such securities without any limitations as to amount.
Possible sales of the Common Stock pursuant to Rule 144 may, in the future, have
a depressive effect on the price of the Common Stock in the marketplace.
In addition to the Shares registered hereby, an additional 45% of the
issued and outstanding shares have been registered for resale by selling
shareholders pursuant to other registration statements. The availability of such
shares for resale could have a depressive effect on the price of the Common
Stock in the marketplace.
Rights of Common Stock Subordinate to Existing and Future Preferred
Stock. The Second Amended and Restated Articles of Incorporation of the Company
authorize issuance of a maximum of 2,000,000 shares of preferred stock, par
value $.01 per share (the "Preferred Stock"). The Company currently has
outstanding 267,500 shares of 10% Series A Convertible Exchangeable Preferred
Stock (the "Series A Preferred"), 112,500 shares of its Series D Preferred Stock
("Series D Preferred") and 125,000 shares of its Series E Preferred (all three
series being referred to as the "Preferred Series Shares"). In addition,
pursuant to the terms of the Stock Purchase Agreement, the Company is obligated
to issue 125,000 shares of Series F Preferred if certain conditions precedent
are satisfied. The Series A Preferred is entitled to quarterly dividends,
dividends may not be paid on the Common Stock if such dividends are in arrears.
Series D Preferred and Series E Preferred are not entitled to receive dividends.
All of the Preferred Series Shares are entitled to a preferential distribution
on liquidation of the Company and the Company may be required to redeem the
Preferred Series Shares under certain circumstances. The Series A Preferred is
exchangeable for 10% convertible notes (the "Convertible Notes") of the Company.
Series D Preferred and Series E Preferred are convertible to Common Stock in
accordance with their respective Certificates of Designation. Holders of the
Preferred Series Shares are entitled to vote on any matter submitted to the
stockholders and are entitled to vote as separate classes on certain matters. If
additional Preferred Stock is issued in the future, the terms of a series of
Preferred Stock may be set by the Company's Board of Directors without approval
by the Common Stockholders of the Company and may operate to the significant
disadvantage of holders of outstanding Common Stock. Such terms could include,
among others, preferences as to dividends and distributions on liquidation as
well as separate class voting rights.
SECURITIES COVERED BY THIS PROSPECTUS
The Common Stock being offered by the Selling Stockholder consists of up
to 5,000,000 shares of Common Stock. The shares are issuable on conversion of
the Series E Preferred Shares and/or the Series F Preferred Shares. As of the
date of this Prospectus, the Company has issued 125,000 shares of Series E
Preferred and anticipates issuing 125,000 shares of the Series F Preferred.
Pursuant to the Stock Purchase Agreement, the Selling Stockholder acquired
125,000 shares of Series E Preferred and, when closed, will acquire 125,000
shares of Series F Preferred. Each share of Series E Preferred and Series F
Preferred may be converted at the opinion of the Selling Stockholder or donees
or transferees therefrom, at any time and from time to time after September 11,
1996, into that number of fully paid and nonassessable shares of Common Stock
determined by dividing the Adjusted Face amount on the date of conversion by the
lower of (i) the closing bid price on July 11, 1996, or (ii) 80% of the average
of the closing bid price of the Common Stock for the five trading days
immediately prior to the conversion date (subject to adjustment downward upon
the occurrence of certain events). In the event that the conversion of the
Series E Preferred and Series F Preferred to Common Stock results in the
issuance of less than 5,000,000 shares of Common Stock to the Selling
Stockholder, then the number of shares offered hereunder shall likewise be
limited.
Pursuant to the terms of the Stock Purchase Agreement, once the
Commission declares this Registration Statement effective, the Selling
Stockholder may not in each of the first three (3) fifteen (15) day periods
thereafter tneder for conversion more than one-third (1/3) of the aggregate
number of Series E Preferred Shares purchased, or Series F Preferred Shares
which may be purchased, under the Stock Purchase Agreement.
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the number of shares of Common Stock
beneficially owned by the Selling Stockholder as of July 15, 1996 and being
offered for sale hereby. The Registration Statement of which this Prospectus is
a part was filed by the Company pursuant to registration rights granted to the
Selling Stockholder and does not necessarily indicate a present intent to sell
the Common Stock by the Selling Stockholder.
<TABLE>
NUMBER OF NUMBER OF BENEFICIAL PERCENT OF
SHARES SHARES OWNERSHIP CLASS
SELLING BENEFICIALLY PERCENT BEING AFTER AFTER
STOCKHOLDER OWNED OF CLASS OFFERED OFFERING(1) OFFERING(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Newsun Limited 1,492,537 4.58% 1,492,537 -0- -0-
Total Shares 1,492,537 4.58% 1,492,537 -0- -0-
<PAGE>
<FN>
(1) Calculated based upon the hypothetical conversion of 125,000 shares of
Series E Preferred to Common Stock on July 11, 1996. The actual number of
shares of Common Stock that would be issuable to the Selling Stockholder
upon conversion of the Series E Preferred is determined in part by the
market price of the Common Stock on date of conversion and, therefore,
cannot be determined on the date hereof. The Selling Stockholder; subject
to certain conditions, may acquire 125,000 shares of the Series F Preferred
Shares which would be convertible into shares of Common Stock of the
Company on substantially the same terms as the Series F Preferred Shares.
(2) Assumes all Common Stock offered by the Selling Stockholder is sold.
</FN>
</TABLE>
PLAN OF DISTRIBUTION
The Selling Stockholder has advised the Company that sales of the Common
Stock may be effected from time to time in transactions (which may include block
transactions) on the Nasdaq SmallCap Market, in the over-the-counter market, in
negotiated transactions, through the writing of options on the Common Stock, or
a combination of such methods of sale, at fixed prices which may be changed, at
market prices prevailing at the time of sale, or at negotiated prices. The
Selling Stockholder may effect such transactions by selling Common Stock
directly to purchasers or to or through broker-dealers which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the Selling Stockholder and/or the
purchasers of Common Stock for whom such broker-dealers may act as agents or to
whom they sell as principal, or both. The Selling Stockholder and any
broker-dealers that act in connection with the sale of the Common Stock might be
deemed to be "underwriters" within the meaning of Section 2(11) of the Act and
any commission received by them and any profit on the resale of the Common Stock
as principal might be deemed to be underwriting discounts and commissions under
the Act.
The Selling Stockholder may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the Common
Stock against certain liabilities, including liabilities arising under the Act.
Rule 144 promulgated under the Act allows the public resale of restricted
securities if certain conditions are satisfied, including that the restricted
securities be held for a specified period (currently two years), that current
public information be available about the issuer, that a notice of the sale be
filed and that the sale occur only as a brokers transaction or transaction
directly with a market maker. Subject to satisfaction of the conditions of Rule
144, the Selling Stockholder may sell the Common Stock under Rule 144 in lieu
of, or in addition to, sales hereunder.
This Prospectus also may be used, with the Company's consent, by donees or
other transferees of the Selling Stockholder, or by other persons acquiring the
Common Stock under circumstances requiring or making desirable the use of the
Prospectus for the offer and sale of such shares.
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded in the over-the-counter market and has been
quoted on the Nasdaq SmallCap Market since October 1988. The following table
sets forth the range of high and low bid quotations for the Common Stock as
reported by Nasdaq. The quotations set forth below reflect inter-dealer prices,
do not include retail markup, markdown or commissions, and may not necessarily
represent actual transactions.
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993
------------- ------------- ------------- -------------
Period High Low High Low High Low High Low
- ------ -------------------------------------------------------------
1st Quarter $3.11 $2.29 $3.13 $2.13 $4.00 $2.13 $2.94 $1.81
2nd Quarter 3.13 1.94 3.88 2.19 3.44 2.19 2.94 1.69
3rd Quarter 3.25 2.88 4.31 2.07 5.81 1.50
4th Quarter 2.88 1.81 4.00 2.75 5.31 3.00
The number of record holders of Common Stock as of December 31, 1995, was
812. Management estimates that the number of beneficial owners of the Common
Stock is in excess of 5,000.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Company's Board of Directors, subject to the preferential
dividend rights of the Series A Preferred. Each outstanding share of the Series
A Preferred is entitled to an annual dividend of $2.00 per share, payable in
quarterly installments. In the event of an arrearage in dividends, the Series A
Preferred dividend rate increases to $2.40 per year. The Series D Preferred and
Series E Preferred are not entitled to dividends. Likewise, the Series F
Preferred, when and if issued, will not be entitled to dividends. No dividends
may be paid on the Common Stock unless all dividends on the Preferred Stock have
been paid. No cash dividends on the Common Stock have been declared or paid by
the Company since its inception and the Company does not anticipate that cash
dividends will be paid in the foreseeable future. Certain of the Company's loan
agreements further restrict the Company's ability to pay dividends on its Common
Stock.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain financial data for the Company
for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 and for the
three months ended March 31, 1996 and 1995. The data is qualified in its
entirety by the more detailed financial statements included in this Prospectus.
<TABLE>
Three Months Ended
March 31, Year Ended December 31,
--------------------------- ------------------------------------------------------------------
1996 1995 1995(1) 1994(2)(3) 1993(4) 1992(5) 1991
--------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 25,720,000 $ 28,329,000 $114,297,000 $67,863,000 $25,224,000 $10,293,000 $4,204,000
Cost of sales (21,852,000) (24,278,000) (98,253,000) (58,793,000) (19,504,000) (8,082,000) (3,565,000)
Gross profit 3,868,000 4,051,000 16,044,000 9,070,000 5,720,000 2,211,000 639,000
Operating expenses
(including amortization) (3,414,000) (4,236,000) (26,859,000) (14,794,000) (13,185,000) (4,433,000) (2,162,000)
Net other income (expense)(6) (422,000) (552,000) (2,517,000) 225,000 (761,000) 82,000 (7,000)
---------------------------- ------------------------------------------------------------------
Net income (loss) $ 32,000 $ (737,000) $(13,332,000) $(5,499,000) $(8,226,000) $(2,140,000) $(1,530,000)
=========================== ==================================================================
Net loss per common share $ .00 $ (.03) $ (.53) $ (.26) $ (.49) $ (.24) $ (.26)
Weighted average shares
outstanding 28,762,000 23,817,000 25,383,000 21,353,000 16,675,000 8,929,000 5,729,000
Balance Sheet Data (7):
Working capital $ (6,533,000) $ 2,749,000 $ (5,138,000) $ 1,420,000 $ 1,310,000 $ 2,179,000 $1,478,000
Goodwill and other
intangible assets, net 18,034,000 8,882,000 18,582,000 9,308,000 5,406,000 1,803,000 --
Total assets 44,853,000 22,406,000 41,903,000 22,317,000 13,017,000 7,271,000 3,609,000
Long-term debt less current
portion 2,123,000 1,824,000 1,422,000 595,000 952,000 835,000 400,000
Redeemable Preferred Stock 5,350,000 -- 5,350,000 -- -- -- --
Stockholders' equity $ 6,538,000 $ 11,443,000 $ 9,061,000 $11,906,000 $ 7,028,000 $ 4,814,000 $2,380,000
<FN>
(1) In September, 1995 the Company acquired substantially all the assets of
Home Pharmacy. The acquisition was accounted for as a purchase. The Company
has elected to consolidate the operations of Home Pharmacy retroactively to
January 1, 1995.
(2) In November, 1994 the Company acquired substantially all the assets of
Medical Services Agency, Inc. (d/b/a Mednet) ("MSA"). The acquisition was
accounted for as a purchase. The Company has elected to consolidate the
acquisition of MSA retroactively to January 1, 1994, and these amounts
include interim results of MSA through September 30, 1994 as determined by
management.
(3) In June, 1994 the Company acquired all of the issued and outstanding stock
of FPA. The acquisition was accounted for as a purchase. The Company has
elected to consolidate the acquisition of FPA retroactively to January 1,
1994.
(4) In April, 1993, the Company acquired substantially all the assets of Mail
Rx. The acquisition was accounted for as a purchase.
(5) In January and December of 1992, the Company acquired the assets now owned
by Medi-Phar and Medi-Claim, respectively. The Company has elected to
consolidate the operations of Medi-Phar retroactively to January 1, 1992.
Financial results of Medi-Claim are included for the last month of 1992.
(6) Net other income (expense) includes subsidiary operations for period not
owned.
(7) Figures doe not include the proceeds to the Company generated by the sale
of Series E Preferred Stock to the Selling Stockholder subsequent to the
date of the Balance Sheet.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General.
The Company is in the business of administration of pharmaceutical
benefits, the sale of prescription medication and over-the-counter
pharmaceutical products and related services. The Company's principal sources of
revenue are its mail order pharmacies (58%), its claims processing operations
(36%) and its retail pharmacies (6%). The Company's primary customers are
insurance companies and other Third Party Payors, as well as individual
consumers. The Company believes that it can increase its revenues through the
integration of its mail order pharmacy and claims processing programs.
On September 15, 1995, the Company acquired substantially all of the
assets of Home Pharmacy. The acquisition was accounted for as a purchase. The
Company has elected to consolidate the operations of Home retroactively to
January 1, 1995. See Note 10 to the Consolidated Financial Statements. The
addition of the Home Pharmacy business substantially increased the Company's
revenue from mail service pharmacy and claims processing. In connection with the
Home Pharmacy acquisition, the Company established a new mail service facility
in Chicago, Illinois which also consolidated mail service fulfillment previously
conducted from Owings Mills, Maryland and Mt. Pleasant, South Carolina. The
Company recorded one time charges during 1995 related to this consolidation.
During 1994, the Company acquired FPA and substantially all of the
assets of MSA, both of which were accounted for as purchases. The Company has
elected to consolidate the operations of FPA and MSA retroactive to January 1,
1994. See Note 10 to the Notes of the Consolidated Financial Statements.
Liquidity and Capital Resources.
Current assets increased from $11,236,000 at December 31, 1994 to
$20,932,000 at December 31, 1995 and to $24,309,000 at March 31, 1996. Despite
this increase, working capital was a deficit of $6,533,000 and $5,138,000 at
March 31, 1996 and December 31, 1995, respectively compared to a positive
working capital of $1,420,000 at December 31, 1994. The decrease in working
capital reflects both the short term debt incurred to acquire Home Pharmacy and
the need to finance the increased operations, through trade accounts payable and
other short term sources, through the normal cycle of creating and collecting
accounts receivable. The Company has funded its operations and working capital
expenditures primarily from internally generated cash, proceeds from borrowings
and stock issuances.
Cash consumed in operating activities was $3,187,000 in the three months
ended March 31, 1996 and $3,547,000 and $4,370,000 in the years ended December
31, 1995 and 1994, respectively. The cash consumed was primarily the result of
the Company's loss from operations. Factors contributing to the negative cash
flow from operations for the three months ended March 31, 1996 include an
increase in accounts receivable of $3,365,000 despite the reduced level of
sales. This was caused by maturing obligations of certain state and other
governmental clients with history of slow payment. Other factors are accounts
payable reduction consumed cash as the Company paid down its trade payables.
Cash consumed in investing activities in 1995 ($11,206,000) was primarily used
for the Home Pharmacy acquisition and upgrades to computer hardware and software
to integrate the Home Pharmacy acquisition with the existing mail order pharmacy
business. The cash used in operations and investing activities was provided
principally through sales of common and preferred stock.
In connection with the Home Pharmacy acquisition, the Company issued an
Interim Note in the principal amount of $2,500,000 and a Holdback Note in the
principal amount of $4,650,000 to Arc. At December 31, 1995 the notes are
reflected net of the market value of the escrowed shares. See Note 10 to the
Consolidated Financial Statements. The Interim Note was paid in full in the
first quarter of 1996. The Holdback Note is due in October, 1996, subject to
acceleration in the event of default. The Holdback Note was modified subsequent
to the initial closing to remove contingencies based on future performance of
the acquired business. The Company paid all of the proceeds ($2,500,000) from
the sale of the Series E Preferred to the Selling Stockholder to pay accrued
interest and to reduce the principal balance on the Holdback Note. As of July
30, 1996, the Holdback Note has an outstanding balance due of approximately
$2,236,147. If the Company is unable to obtain funds from the issuance of equity
or debt or from operations to pay the balance of the Holdback Note remaining
after the $2,500,000 payment, management expects Arc will sell all or a portion
of the remaining Collateral Shares to pay the Holdback Note when it comes due.
The Company does not have firm commitments for such financing. The Collateral
Shares were included on the Registration Statement which became effective July
17, 1996. Arc has verbally agreed to waive such potential default pending
registration of the Collateral Shares or refinancing of the Holdback Note.
<PAGE>
The Company does not currently have any plans for material capital
commitments in 1996. The Company may require additional capital from outside
sources (such as equity offerings) to supplement its working capital position.
During the first quarter of 1996, the Company raised $2,100,000 from the sale of
Series C Preferred Stock to a foreign investor. The Company has raised
additional capital in the amount of $8,500,000 from the sale of Series D
Preferred and Series E Preferred. The Company continues to discuss potential
sources of equity capital with investment bankers and believes it will obtain
additional working capital from these sources if necessary. There is no
assurance that it will be able to do so.
On December 27, 1995 the Company obtained a working capital revolving line
of credit in the maximum principal amount of $20,000,000 from Foothill Capital
Corporation ("Foothill"). The line of credit is secured by inventory, accounts
receivable and substantially all other assets of the Company. The maximum
principal amount of the line was intended to accommodate growth of the Company
over the five year term of the Foothill agreement. The amount of actual advances
received under the line at any point in time is limited by the value of
inventory and accounts which qualify as collateral. As of June 30, 1996, the
outstanding balance of the Foothill line was $7,764,130, which management
believes is substantially the maximum which could have been drawn on such date.
Advances under the line bear interest at a prime rate plus 1.5%. While the line
of credit is outstanding, the Company is prohibited from paying dividends on its
common stock and from taking certain other extraordinary actions without the
consent of Foothill. In May 1996, the Company obtained a waiver by Foothill of
the Company's failure to meet certain financial covenants with respect to the
line of credit. Foothill is reviewing a possible adjustment to the covenants for
future periods. If the Company becomes out of covenant in the future, there can
be no assurance that Foothill will again waive compliance. See Note 2 to the
Consolidated Financial Statements.
Commencing at the end of the fourth quarter of 1995, the Company determined
to increase the efficiency of its operations by attempting to sell five of the
Medi-Phar retail outlets and by consolidating the South Carolina distribution
facility with the new Chicago operation. Although the retail outlets have been
contributing approximately $2,300,000 of annual net sales, certain of the
outlets have been operating at a loss and are being sold. The consolidation of
the South Carolina facility is not expected to affect net sales, but should
result in lower costs.
Subsequent to the end of the fiscal year, the Company and its insurance
carrier reached a preliminary settlement on the shareholder class action suit
described at Legal Proceedings. If approved by the court and accepted by the
plaintiff class, the settlement will remove a financial uncertainty and will
allow management to avoid the distractions of fighting litigation. In the fourth
quarter of 1995, the Company reserved its anticipated share of the settlement
amount and related defense costs.
Results of Operations.
The following table sets forth certain financial data as a percentage
of net sales for the periods presented:
<TABLE>
Percent of Sales
------------------------------------------------------
Three Months Ended
March 31, For the Years Ended December 31,
------------------ ---------------------------------
1996 1995 1995 1994 1993
------------------ ---------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (85.0) (85.7) (86.0) (86.6) (77.3)
Selling, general and
administrative expenses
(excluding amortization, merger
expenses and restructure
provisions) (10.3) (11.7) (15.2) (18.3) (35.0)
Earnings (loss) before income
taxes, depreciation and
amortization (EBITDA) 4.7 2.6 (1.2) (4.9) (12.3)
Operating income (loss) 1.7 (.7) (9.5) (8.4) (29.6)
Other income (expense), net (1.6) (1.9) (2.2) 0.3 (3.0)
------------------ -------------------------------
Net income (loss) .1 (2.6) (11.7) (8.1) (32.6)
================== ===============================
</TABLE>
<PAGE>
On April 1, 1994, Medi-Claim assumed the obligation for payments to
members of Medi-Claim's pharmacy network. Prior to April 1, 1994, Medi-Claim was
only obligated to the extent payment was received from the sponsoring
organization. This step was taken to standardize Medi-Claim's procedures with
trends in the industry. As a result of this change, subsequent to April 1, 1994
the Company presents the sales and cost of sales as well as the related accounts
receivable and accounts payable in its consolidated financial statements for
prescriptions filled at participating network pharmacies by insureds covered
under pharmacy plans offered by Medi-Claim's clients, the sponsoring
organizations. The effect of this change was to increase reported revenue by
approximately $16,000,000 compared to previous reporting. If the change had
occurred at the beginning of 1994, an additional approximately $4,000,000 of
revenue would have been reported in 1994.
Three Months Ending March 31, 1996 Compared with 1995
Consolidated net sales for the quarter ended March 31, 1996 decreased 9.2%
to $25,720,000 from $28,329,000 in the corresponding quarter last year. The
decrease in sales over the prior year period was primarily attributable to a
decrease in sales of the mail-order operations of 24.1% ($4,040,000). Not all of
Home Pharmacy's major customers have continued with the Company following the
acquisition. As with turn-over of any of the Company's customers, the Company
expects to obtain new customers to replace revenue previously received from
departing customers, subject to the normal sales and implementation cycles of
the industry. Retail operations have decreased 46.8% ($758,000). The reduction
in retail sales reflects the Company's decision to curtail these operations.
These decreases were partially offset by increases in the claims processing
operations 21.9% ($2,189,000).
Consolidated cost of sales as a percentage of sales and as total dollars
decreased for the quarter compared to the same period in the prior year. The
decrease was mainly due to the changing mix in the Company's sales. Mail-order
cost of sales decreased 25.0% ($3,522,000) and retail operations decreased 46.2%
($530,000) compared to the same period in calendar year 1995. Claims processing
operations increased 17.9% ($1,626,000) compared to the first quarter of 1995.
Selling, general and administrative expenses decreased in total dollars and
as a percentage of net sales for the quarter ended as compared to the same
period of the prior year. The decrease in selling, general and administrative
expenses is due in part to the expected synergy in the mail-order operations
resulting from the Home acquisition in September 1995 as well as cost cutting
measures taken in response to reduced sales.
Operating income before depreciation and amortization increased in total
dollars and as a percentage of net sales for the same period in the prior year.
Operating income before depreciation and amortization increased by 61.6%
($456,000) for the first three months of calendar year 1996 as compared to the
same period in calendar year 1995. Operating income before depreciation and
amortization as a percentage of net sales was 4.7% ($1,196,000) for the first
three months of calendar year 1996 compared to 2.6%($740,000) for the same
period in 1995.
Depreciation and amortization decreased by 19.8% ($183,000) for the first
three months of calendar year 1996 compared to the same period in calendar year
1995. Depreciation and amortization as a percent of net sales were 2.9% for the
period ended March 31, 1996, compared to 3.3% for the same period in the prior
year. The decrease in amortization and depreciation is primarily attributable to
certain intangibles arising from acquisitions in 1994, which were fully
amortized by the first quarter of 1995 and the write down of assets following
the closure of the South Carolina and Baltimore facilities and closure of retail
pharmacies reflected in fiscal 1995. These were partially offset by the
amortization of intangibles acquired during 1995.
Operating income for the quarter ended March 31, 1996 was $454,000 compared
to an operational loss of $185,000 in March 1995. The reduction in the operating
loss is primarily attributable to the decrease in cost of sales, depreciation
and amortization, and synergism from the Home acquisition reflective in selling,
general and administrative expense.
Other Income (expense) decreased in total amount expended and as a
percentage on sales for the quarter ended in March 31, 1996 and for the same
period in 1995, principally caused by the adjustment in the first quarter of
1995 ($225,000) of subsidiary operations for the period not owned. This increase
in interest expense reflects the inclusion of the cost associated with the
Company's revolving credit line initiated in December 1995.
<PAGE>
The net income for the first quarter of 1996 was $32,000 or $.001 per
share on weighted average shares of 28,762,000 compared with a loss of $737,000
or $(.03) per share on 23,817,000 weighted average shares outstanding in the
prior year's first quarter.
1995 Compared With 1994. On September 15, 1995, the Company acquired
the assets of Home Pharmacy from ArcVentures, Inc. The acquisition was accounted
for as a purchase. Consistent with its treatment of prior acquisitions, the
Company has included the operations of the acquired business for the entire year
to date in its operating statements with a single line item to subtract the
profit of the acquired business for periods prior to acquisition.
Primarily as a result of the Home Pharmacy acquisition, consolidated
net sales for the year ended December 31, 1995 increased 68% over the prior year
($114,297,000 in 1995 compared to $67,863,000 in 1994). The increase in sales
includes $30,629,000 from pre-acquisition operations of Home Pharmacy in 1995.
Approximately $4,000,000 of the increase results from the Medi-Claim contract
changes discussed above. The remainder of the increase represents operation of
the Home Pharmacy business by the Company. Although the Company has determined
to reduce its retail pharmacy operations, the impact on future revenues for the
Company as a whole is not expected to be significant. Not all of Home Pharmacy's
major customers have continued with the Company following the acquisition. As
with turn-over of any of the Company's customers, the Company expects to obtain
new customers to replace revenue previously received from departing customers,
subject to the normal sales and implementation cycles of the industry.
Costs of sales for 1995 were approximately 86.0% of sales compared to
86.6% in 1994. As the industry has continued its consolidation to fewer, but
larger, participants, competitive pressures to obtain customers has increased.
This has led to pricing pressures and lowered gross margins for the industry
generally. The slight increase in margin for 1995 compared to 1994 is not
considered by management to be significant, and will likely be offset in the
future by pricing pressures. Gross margins for the retail pharmacy sector have
historically been higher than for the mail service and PBM business. Increased
pressure from large retail chains are eroding margins for in clinic retail
pharmacies. Management therefore does not anticipate that future reductions in
retail revenue will significantly affect the Company's overall gross margin.
The contract with a third party payor or affinity group for the
provision of mail service pharmacy services typically establishes a formula for
determining the price of prescriptions filled under the contract. Although each
contract is separately negotiated, typically the pricing is based on the
published average wholesale price ("AWP") or other standard cost reference of
the drug dispensed, plus or minus a specified percentage, plus a fixed
dispensing fee per prescription. The Company believes such pricing structure is
typical in the industry. The pricing formula allows the Company to pass on to
its customers increases in the AWP of prescribed drugs. The Company typically
could not renegotiate the contract to increase its dispensing fee or the
percentage of AWP charged except in connection with the annual renewal of the
contract.
Expenses for salaries and benefits were 7.5% of sales ($8,617,000) in
1995 compared to 7.7% of sales ($5,214,000) in 1994. The efficiencies expected
from the Company's operation of the Home Pharmacy business which were
implemented in the fourth quarter of 1995 and the first quarter of 1996 will
begin to be reflected in 1996.
<PAGE>
Marketing and advertising expenses decreased slightly in dollar amount
($1,064,000 in 1995 from $1,296,000 in 1994) and therefore decreased as a
percentage of sales to 0.9% from 1.9%. The decrease in marketing expenses
reflects the Company's operating efficiencies and the economies of scale
resulting in part from the Home Pharmacy acquisition.
Other administrative expenses including provisions for doubtful
accounts were $7,691,000 or 6.7% of sales in 1995 compared to $5,889,000 or 8.6%
of sales in 1994. The decrease in these expenses as a percentage of revenue
reflects efficiencies and cost cutting actions implemented by management as well
as economies of scale. Other administrative expenses for the fourth quarter of
1995 were unusually high due to transition costs of consolidating the Home
Pharmacy operations into the Company, the reserve for the class action
litigation settlement and an increased bad debt reserve.
Depreciation and amortization for 1995 was $8,884,000 or 7.8% of sales
compared to $2,395,000 or 3.5% of sales in 1994. The increase in amortization in
1995 reflects approximately $2,744,000 of amortization and impairment of the
Home Pharmacy assets and intangibles. The Home Pharmacy acquisition allowed the
Company to consolidate the Owings Mills and Mt. Pleasant operations in the new
Chicago facility. In addition, this consolidation and the planned reduction in
retail operations resulted in the accelerated amortization in 1995 of
approximately $3,663,000 of intangibles related to the FPA, MailRx and Medi-Phar
acquisitions.
Earnings (loss) before income taxes, depreciation and amortization and
restructuring and merger related expenses (EBITDA) were a loss of $1,328,000 in
1995 compared to a loss of $3,329,000 in 1994. During the first nine months of
1995, the Company had earned an EBITDA profit of $1,294,000. The Company
attributes the EBITDA loss for the year principally to the class action
litigation ($350,000) as well as increases in fourth quarter 1995 expenses,
including a substantial increase in the bad debt reserve for the approximately
$8,000,000 of accounts receivable generated since the acquisition by Home
Pharmacy customers with whom the Company had no prior credit history. In
addition, in the fourth quarter the Company incurred non-recurring expenses
related to integrating the new Chicago operations into the Company and
consolidating the Mt. Pleasant operations into Chicago.
The Company recorded merger related expenses of $250,000 in 1995,
primarily consisting of increased shipping costs incurred to maintain Home
Pharmacy delivery schedules during the transition to the new Chicago facility.
The Company also recorded $353,000 of restructure charges relating to the
decision to phase out the retail stores ($199,000) and consolidate the Mt.
Pleasant facility into Chicago ($154,000). With these items, operating loss for
1995 was $10,815,000 compared to an operating loss of $5,724,000 in 1994.
Interest on debt incurred in connection with the Home Pharmacy
acquisition contributed to the 1995 interest expenses of $1,273,000 compared to
interest expense of $310,000 for 1994. It should be noted that interest expense
does not include dividends paid on preferred stock issued in connection with the
Home Pharmacy acquisition.
1994 as Compared with 1993. Consolidated net sales for the year ended
December 31, 1994 increased 169% over the prior year ($67,863,000 in 1994
compared to $25,224,000 in 1993) with a consolidated loss of $5,499,000 compared
to a loss of $8,226,000 in the prior year. The increase in sales was
attributable to acquisitions, including the June 1994 acquisition of FPA, the
acquisition of MSA in November 1994. In addition, $16,119,000 of claims
processing revenue and costs of sale in 1994 was attributable to contractual
amendments entered into by Medi-Claim described above.
Costs of sales increased as a percentage of net sales from 77.3% in
1993 to 86.6% in 1994. The increase in cost of sales was primarily due to the
changing mix in the Company's sales and the inclusion of Medi-Claim sales, which
had a lower gross margin in 1994 due to the contractual amendments.
Expenses for salaries and benefits increased to $5,214,000 in 1994 from
$4,401,000 in 1993, but declined as a percentage of sales to 7.7% from 17.4%.
This reflects the addition of the FPA and Mednet operations and addition of
other personnel consistent with increased volume. The 1993 salaries and benefits
include $766,000 of Common Shares and cash paid to the President to obtain the
release of certain potential future severance benefits. Similarly, other
selling, general and administrative expenses rose in dollar amount, but declined
as a percentage of sales.
The $2,395,000 depreciation and amortization expense in 1994 compared
to $4,354,000 in 1993 related to primarily intangible assets acquired in
connection with acquisitions.
<PAGE>
During May 1993, the Company entered into an agreement with former
owners of the retail pharmacies purchased during 1992 to induce them to convert
the outstanding balance of the convertible note payable into Common Shares of
the Company. The Agreement provided for the issuance of 249,130 Common Shares
having a market value at the time of $560,542 in satisfaction of the $747,000
balance of the note payable. In addition, the Company agreed that until such
time as the shares issued on conversion were registered, the Company would
continue to make principal and interest payments to the note holders in
accordance with the original terms of the notes. The conversion terms of the
notes had provided that the note holders, at their option, could convert the
outstanding balance of the notes into Common Shares of the Company at a price of
$5.00 per share.
Generally accepted accounting principles as prescribed in Statement of
Financial Accounting Standards No. 84 "Induced Conversions of Convertible Debt"
("SFAS 84") requires recognition of an expense equal to the fair value of the
additional securities or other consideration issued to induce conversion. SFAS
84 is applicable to such transactions regardless of whether, as was the fact
here, the total value of the securities issued on conversion was less than the
balance of the debt. As a result of the transaction and the application of SFAS
84, the Company recorded debt conversion expense of $224,000 in 1993 with an
increase to paid in capital of an equal amount and $203,000 in 1994. The expense
in 1994 represented interest and principal paid on the note in 1994 prior to
registration of the shares issued on conversion.
BUSINESS
General.
Mednet, MPC Corporation (the "Company") was incorporated under the laws
of the State of Nevada in September, 1985. Substantially all of the Company's
business is derived from its activities in the prescription benefits management
industry. The Company, together with its subsidiaries Medi-Mail, Inc.
(Medi-Mail"), Medi-Claim, Inc. ("Medi-Claim"), Medi-Phar, Inc. ("Medi-Phar") and
Family Pharmaceuticals of America, Inc. ("FPA"), acts as an integrated, full
service prescription drug benefits manager serving individual members of
retirement organizations, fraternal organizations, state employee organizations
and commercial organizations ("Affinity Groups"), corporations, self insurance
trusts, insurance companies, and other benefit plan sponsors ("Third-Party
Payors" and collectively with the Affinity Groups, "Payors") throughout the
United States. The Company's benefit programs (the "Programs") offer
prescription drug benefits to approximately two million individuals
("Participants") most of which receive funded benefits through Third Party
Payors and/or are members of an Affinity Group.
The Company's executive offices are located at 871-C Grier Drive, Las
Vegas, Nevada 89119, and its telephone number is (702) 361-3119.
Description of Prescription Benefits Management (PBM) Business
The Company develops and administers client-specific prescription drug
benefit programs ("Programs") on behalf of more than 400 Payors throughout the
U.S. The Company attempts to customize its Programs to meet the Payors'
particular benefits strategy combining a number of managed care features to cost
effectively manage the Payor's entire prescription benefits program. The
Programs combine mail service pharmacy features such as enhanced generic
substitution and the convenience of home delivery, with the feature of retail
network pharmacy such as automated claims adjudication, real time electronic
networking of retail pharmacies and card programs. Payors can choose a Program
which incorporates on-line electronic claims processing, drug utilization
review, and an electronic network linking more than 45,000 retail pharmacies in
the U.S., as well as features of a mail service pharmacy program. In the
alternative, Payors can choose either a mail service pharmacy program or a
network claims processing program.
<PAGE>
Mail Service Pharmacy Operations.
Overview.
For 1995, the Company derived approximately 57.6% of the consolidated
gross sales for the Company and its subsidiaries from its mail service pharmacy
operations. The Company's mail service pharmacy program is conducted from its
Las Vegas, Nevada and Chicago, Illinois locations. The Company services
customers throughout the United States. The Company's mail service pharmacy
program is designed for convenience and to reduce prescription medication and
over-the-counter pharmaceutical costs to individuals, corporations, labor
unions, retirement systems, health and welfare trusts, insurance companies,
federal and state employee plans, health maintenance organizations and
third-party administrators. The mail service pharmacy program attracts senior
citizens, home-bound persons, sight or hearing impaired persons and users of
regularly prescribed medications who are interested in the convenience of direct
delivery of medication and/or lowering their medication and pharmaceutical
expenses. The Company believes that it delivers prescription medication and
over-the-counter pharmaceutical products to the homes of customers at lower
costs, on average, than is generally available through retail pharmacies. These
medications are typically maintenance medications which are defined as
medications which must be taken on an ongoing basis for chronic conditions such
as high blood pressure, arthritis and heart and thyroid conditions. The Company
believes that these conditions account for a majority of prescription medication
expenditures in the United States.
The Company directed its initial efforts toward individuals/members of
Affinity Groups. In 1991, the Company began to direct its marketing efforts to
Third-Party Payors in order to make the Company's services available to their
insureds or members.
On September 15, 1995, the Company acquired the assets of Home Pharmacy
from ArcVentures, Inc. The acquisition is accounted for as a purchase.
Consistent with its treatment of prior acquisitions, the Company has included
the operations of the acquired business for the entire year in its operating
statements for 1995 with a single line item to subtract the profit of the
acquired business for periods prior to acquisition.
Benefit of Mail Service Pharmacies to Direct Payor.
Individual customers and members of Affinity Groups (collectively,
"Direct Payor") benefit from the Company's mail service pharmacies as follows:
o Convenience of pharmacy delivery system that delivers prescription
medication and over-the-counter pharmaceutical products to the home.
o Lower out-of-pocket costs for the medications and pharmaceutical products.
o Typically, a Direct Payor, with approval of a physician, can receive up to
a 90-day supply of prescription medication under the Company's programs as
compared to lower supplies generally dispensed by retail pharmacies.
o A Direct Payor using the 90-day plan can save money due to lower operating
costs, bulk rates provided by the Company and elimination of repetitive
dispensing costs.
Benefit of Mail service Pharmacies to Third-Party Payor.
Managers of corporate funded health benefit plans and other Third Party
Payors have sought ways to contain health care costs, including the costs of
prescription medication benefits. In order to contain the costs of prescription
medication benefits, benefits managers have increasingly used mail service
pharmacy programs for dispensing maintenance prescription medications to plan
participants. The Company's mail service operations provide the following
benefits over traditional indemnity health benefit plans that provide for the
purchase of prescription medications through retail pharmacies:
o Under traditional plans, the Third-Party Payor typically incurs a
dispensing fee and administrative charge each time a prescription
medication is dispensed. Under the Company's plan, a plan participant, with
approval of a physician, can typically receive up to a 90-day supply of
prescription medication as compared to a lower supply generally dispensed
under traditional plans utilizing retail pharmacies. The higher supply
limit of maintenance prescription medication generally available under the
Company's programs provides a cost savings to the Third-Party Payor by
reducing repetitive dispensing fees and, in some cases, administrative
charges.
o Additional cost savings are often realized through the Company's programs
as a result of a significant emphasis on the use of generic drug
substitution as an alternative to more expensive brand name medications.
<PAGE>
The Company has a variety of mail service programs designed to
accommodate client-specific needs. Under a typical funded program, a Third-Party
Payor contracts either directly with the Company or a third-party administrator
to provide prescription medications to plan participants. Plan participants
desiring to use the program mail an order form to the Company, enclosing a
physician's prescription for the ordered prescription medication together with a
nominal payment (the "co-payment"), for each prescription ordered. The
participant may also place an order by calling the Company's toll free telephone
number. The co-payment is fixed by agreement between the Company and the
Third-Party Payor. This type of mail service prescription program is known as a
"funded" plan because the Third-Party Payor provides all of the funding above
the co-payment amount. The Company bills the Third-Party Payor for the cost of
prescriptions less the applicable co-payments already collected.
Medi-Claim Claims Processing
For 1995, the Company derived approximately 36.4% of the consolidated
gross sales for the Company and its subsidiaries from its claims processing
operations.
The Company's prescription claims administration programs ("Programs")
are conducted through Medi-Claim. In November 1994, Medi-Claim acquired
substantially all of the assets of Medical Services Agency, Inc., which operated
under the registered service mark of Mednet(R), in exchange for 1,600,000 shares
of the Company's common stock. The Programs are sponsor-specific benefit
programs through which Medi-Claim processes and adjudicates paper and electronic
prescription drug claims generated through a network of participating retail
pharmacies. The pharmacy network includes approximately 45,000 retail pharmacies
in the U.S., each of which contracts with Medi-Claim to provide prescription
dispensing at contracted rates.
The Medi-Claim Programs utilize point-of-sale electronic data
transmission and automated claims adjudication to manage claims in Programs
covering Participants nationwide. Claims data is transmitted to Medi-Claim
electronically from pharmacies, or by mail from beneficiaries, for adjudication
and payment in accordance with the Payor's particular plan design
specifications.
The Programs are designed to maximize the Payor's control and cost
savings opportunities by combining a number of managed care pharmacy features.
The utilization control mechanisms and claims processing efficiencies of the
Medi-Claim Programs, as well as the price reductions Medi-Claim negotiates from
retail pharmacies, reduce the administrative costs associated with providing
retail pharmacy-based prescription drug benefits coverage. Program design
features also encourage the dispensing of less expensive generic drugs and a
review of pharmaceutical therapy patterns.
The Programs are offered either on a stand-alone basis or are
integrated into major medical plans. In addition, as discussed below, the
Programs are offered in conjunction with the company's mail service pharmacy
programs as an integral part of the combined benefits program.
Description of the Medi-Claim Programs
Medi-Claim currently processes prescription drug claims from its
operations center located in Lemoyne, Pennsylvania. Under the Medi-Claim
Programs, Payors provide Medi-Claim with periodically updated Participant
eligibility data, which is integrated into Medi-Claim's information management
system. Medi-Claim is then able to process prescription claims submitted either
directly by eligible Participants by mail, or through the Medi-Claim nationwide
network of retail pharmacies utilizing point-of-sale electronic data submission.
Once the Medi-Claim system determines the adjudication of the claim,
reimbursement checks and an Explanation of Benefits form are generated and
mailed to the Participant. Medi-Claim strives to process 95% of all claims
within five calendar days of receipt and the remaining claims within ten
calendar days of their receipt, although during many periods of the year the
turnaround time is faster. Over 95% of all claims are electronically
adjudicated.
The process of electronic point-of-sale submissions through the
Medi-Claim network of retail pharmacies is identical to the paper claims process
described above except that claims data is received electronically by Medi-Claim
and processed automatically upon receipt by Medi-Claim's management information
system. The retail pharmacy network can access Medi-Claim's processing system
seven days a week.
<PAGE>
For those Programs which provide eligible Participants with a mail
service pharmacy feature through a third party provider, Medi-Claim provides
eligibility data directly to the mail service pharmacy, which then submits
claims data to Medi-Claim.
Medi-Claim provides its Payors with regular management reports
describing overall Program activity and utilization trends. Medi-Claim account
executives regularly analyze Payor utilization data and make recommendations for
additional opportunities for cost containment. In some cases, Medi-Claim
produces management reports which are designed to highlight unusual utilization
patterns which may indicate that clinical intervention or fraud and abuse
detection may be warranted. Medi-Claim's management reports include all
Participant prescription drug utilization resulting from use of both the network
retail and mail service pharmacies.
Medi-Claim Programs are structured to provide Payors with the ability
to better understand and control the cost of their entire pharmaceutical
benefits Program. Features of the Medi-Claim Programs include:
o Flexible Plan Design. Program designs are flexible to meet the Payor's
particular benefits strategy, therapeutic effectiveness and cost
containment objectives. The Programs include incentives to encourage
Participants to use the most cost effective network retail or mail-
service dispensing location and to purchase the least expensive drug
available, including an emphasis on generic substitution. Programs are
regularly reviewed with Payors in order to target additional areas of
Program savings.
o Comparison of Expected Results to Actual Activity. Medi-Claim regularly
analyzes a Program's projected savings associated with its plan design
features, the use of the Medi-Claim retail pharmacy network, and mail
service pharmacy activity relative to the costs experienced by the
Payor. If deviations from savings expectations are evident, Program
modifications are recommended.
o Management Reports. The Medi-Claim database enables Medi-Claim to
provide Payors with regular detailed management reports of Program
activity and costs. The reports are designed to illustrate Program
results and opportunities for additional cost savings.
o Commitment to Service. Although the primary objective of Medi-Claim's
Payors is to increase therapeutic effectiveness and reduce
pharmaceutical benefit costs, Payors also require the accurate and
rapid processing of claims. Medi-Claim produces a variety of service
level reports which provide Payors with an assessment of critical
claims processing success indicators.
Mednet Integrated Prescription Benefits Programs
The Company offers Mednet integrated prescription benefits programs
that combine the cost savings and convenience of the mail service pharmacy
Programs with the Medi-Claim network-based claims administration programs. With
the integrated program, Payors can achieve cost savings compared with
traditional prescription benefits programs which lack managed care cost
controls.
The Mednet integrated programs offer a variety of additional benefits which are
designed to provide increased therapeutic effectiveness and maximize cost
savings, control and increase compliance.
o Convenient, user-friendly programs with a single point of service and
accountability to ensure rapid problem resolution.
o Coordination of dispensing data collection and analysis from all
aspects of the benefits programs, whether generated from retail network
pharmacies or mail service pharmacy. This ensures ready access to all
information necessary to monitor program activity and develop further
cost saving strategies without relying on the coordination among third
party benefits providers.
o A drug utilization review system that detects potential adverse drug
interactions, allergies, overuse and abuse in all areas of the
prescription benefits system, whether the drugs are dispensed through
mail service or through a network retail pharmacy.
<PAGE>
o Prescription dispensing policies that encourage the use of less
expensive, therapeutically equivalent generic or brand name drugs
regardless of the dispensing location.
o Automated on-line administration of retail pharmacy prescription claims
that gives immediate and accurate claims review, informative
utilization data and eliminates manual review.
o Regular and comprehensive management reports to provide the Payor's
benefits manager with an understanding of usage trends and costs for
the entire prescription benefits program.
Retail Pharmacy Operations
Through Medi-Phar, the Company in 1995 derived gross sales representing
approximately 6.0% of consolidated gross sales for the Company and its
subsidiaries through the operation of the in-clinic retail pharmacies, located
in San Diego, California and Las Vegas, Nevada. Operation of the retail
pharmacies provided the Company with a working knowledge of the retail pharmacy
business which improved the Company's ability to market and develop its service,
primarily the pharmacy network and claims processing system of its subsidiary,
Medi-Claim. As the Medi-Claim network has developed, this aspect of the retail
pharmacies has become less important. The Company has closed four of the retail
locations and anticipates closing one more retail location in 1996.
Financial Information About Industry Segment
The Company operates in only one industry, the administration of
pharmaceutical benefits, the sale of prescription medication and
over-the-counter pharmaceutical products and related services.
Marketing
The Company directed its initial marketing efforts toward the Direct
Payor (individuals/members of Affinity Groups). In 1991, the Company began to
expand its marketing efforts to Third-Party Payors in order to make the
Company's services available to their insured or members. The Company has
significantly increased this emphasis by its acquisition of the Mail Rx assets,
the FPA mail pharmacy operations and the Mednet claim processing operations and
has expanded its marketing efforts to reflect the Mednet integrated Programs
offered by the Company.
The Company's mail order and claims processing programs (collectively,
the "Programs") are marketed nationally through the Company's internal sales
organization of pharmacy benefits professionals and their marketing support
staff.
A significant portion of new accounts are generated by marketing
Programs through existing relationships with Payors. The remainder of new
accounts are generated by direct solicitation of corporate accounts, usually
through telemarketing, direct mail marketing, trade shows and referrals.
Revenues of the Company depend upon the extent to which its Programs
are utilized by the Payors' eligible Participants. Accordingly, the Company's
benefits professionals work with Payors' benefit managers on an ongoing basis
continually to assess utilization levels in the Programs and, where necessary,
to incorporate additional incentives, sometimes in the form of more advantageous
Program terms, to promote increased utilization among Participants.
<PAGE>
Direct Pay Accounts
Affinity Groups offer or endorse the Company's discount mail service
pharmacy as a benefit to their members and include information about the Company
and its services in their promotional materials, newsletters, magazines and
membership drives, but do not engage in active selling on behalf of the Company.
Affinity Group members then deal with and pay the Company directly for
prescription medications and over-the-counter pharmaceutical products and
receive special group discounts.
Third-Party Payor Accounts
In order to facilitate growth and decrease new account acquisition
costs, the Company began in 1991 to develop a base of accounts in the
Third-Party Payor market. In June, 1991 the Company entered into a consulting
agreement ("Agreement") with Irwin Jann, a marketing consultant ("Consultant"),
pursuant to which it agreed to issue warrants ("Warrants") to purchase up to
2,000,000 Common Shares at $3.00 per share. Warrants with respect to 250,000
Common Shares were vested immediately upon signing of the Agreement. Warrants
with respect to an additional 750,000 common shares vested under the Agreement
during 1994. In addition, the Agreement provided that the Company pay to the
Consultant a 1% commission on gross sales from contracts facilitated by the
Consultant. The June 1991 Consulting Agreement expired by its terms on May 31,
1994. As of June 1, 1994, the Company entered into a consultant agreement with
the marketing consultant's professional corporation. Under that agreement, the
consultant or his assigns receive warrants to purchase 1,000,000 common shares
at a price of $3.00 per share, and a commission on gross sales.
Major Customers.
During 1995, National Insurance Services, accounted for approximately
14% of revenue. This customer had accounted for approximately 13% of 1994
revenue. Revenues from this customer as a percentage of total revenue declined
during the first half of 1996 to less than 10%. On July 3, 1996, the customer
informed the Company of its intent to terminate its contract with the Company
effective October 1, 1996. Another customer, the City of Chicago, accounted for
approximately 13% of 1995 revenue. This customer's contract with the Company
subsequently expires. On March 8, 1996 the Company executed a contract granted
in June, 1995 with the Commonwealth of Pennsylvania which management believes
will result in revenues greater than those received from the City of Chicago. No
other single customer accounted for more than 10% of 1995 revenue.
Government Regulation.
There are extensive state and federal regulations applicable to the
dispensing of prescription medications. Since sanctions may be imposed for
violations of these laws, compliance is a significant operational requirement
for the Company.
The mail service prescription medication and over-the-counter
pharmaceutical business of the Company is conducted from two licensed pharmacies
located in Las Vegas, Nevada and Chicago, Illinois. The retail pharmacies are
licensed in California and Nevada. Nevada, California and Illinois have detailed
laws governing a wide range of matters relating to the operation of pharmacies,
and the Company believes that it is in substantial compliance with these laws.
The laws include, among others, provisions requiring pharmacies and pharmacists
to be licensed, as well as provisions as to who may write and dispense the
prescriptions, how prescriptions must be filled, how prescription drugs and
controlled substances must be stored and safeguarded, and after what period of
time they must be disposed of, record retention, and generic substitution. These
requirements are issued by the California, Nevada, and Illinois Boards of
Pharmacy which are empowered to impose sanctions, including license revocation,
for noncompliance. In addition, each pharmacy and pharmacist employed by the
Company is bound by standards of professional practice.
Each state into which the Company mails pharmaceuticals also has laws
and regulations governing the operation of pharmacies and the dispensing of
prescription drugs in that state. In many cases, these statutes include
provisions which purport to regulate out-of-state mail service pharmacies that
mail drugs into that state. The regulations are administered by an
administrative body in each state (typically, a pharmacy board) which is
empowered to impose sanctions, including license revocation, for noncompliance.
In those states where it exists, state regulation of out-of-state pharmacies
essentially can be divided into three categories: disclosure, licensing and
prohibition.
<PAGE>
States with disclosure statutes generally require that out-of-state
pharmacies register with the local board of pharmacy, follow certain procedures
and make certain disclosures, but generally permit the mail service pharmacy to
operate in accordance with the laws of the state in which it is located. States
with licensing statutes generally impose the same licensing requirements and
compliance with local laws on out-of-state pharmacies as on in-state pharmacies.
The Company understands that several states currently impose licensing
requirements on out-of-state pharmacies. In addition to the Company or its
subsidiaries being duly licensed in Nevada, Illinois and South Carolina, the
Company has complied with the disclosure law and registration requirements or
the licensing law to do business as an out-of-state pharmacy in eight states and
is evaluating whether it will register in others. The Company does not have any
applications for licenses currently pending. The boards of pharmacy of certain
states do not purport to regulate out-of-state mail pharmacy services. The
Company believes that in the most recent completed fiscal year approximately 46%
of its mail service sales came from states in which the Company has complied
with the disclosure or licensing laws, and that approximately 34% of its mail
service sales were for the eighteen states which the Company believes do not
regulate mail service sales.
Some states have also enacted laws and regulations which, if
successfully enforced, would effectively limit some of the financial incentives
available to benefits plan sponsors that offer mail service pharmacy programs.
This so-called "freedom-of-choice" legislation generally prohibits a benefits
plan sponsor from requiring its participants to purchase prescription drugs from
a single source. The U.S. Department of Labor has opined that certain types of
"freedom-of-choice" laws and regulations are preempted by the Employee
Retirement Income Security Act of 1974 (ERISA). The Attorney General in one
state has reached a similar conclusion and has raised additional constitutional
issues. Finally, the Bureau of Competition of the Federal Trade Commission has
stated that such legislation may reduce competition and raise prices to
consumers, to the extent it impedes or prevents benefit plan sponsors from
offering programs that take advantage of the economies of scale associated with
single sourcing of pharmaceuticals from a mail service pharmacy.
There has been no formal administrative or judicial efforts to enforce
any of these laws against the Company. The Company has received inquiries from
boards of pharmacy in several states questioning whether the Company is engaged
in business in violation of their state laws. While the Company has
substantially complied with the laws in certain states, it has not complied with
the laws or regulations of all states to which it delivers pharmaceuticals.
Should enforcement of these laws be attempted, the Company believes that these
laws and regulations would be subject to challenge under the United States
Constitution. However, if the laws or regulations were to survive such a
challenge, the Company would likely be subject to penalties and, possibly,
prohibitions and additional costs which could have a material adverse effect on
its mail service pharmacy business.
The Company is aware that some state boards of pharmacy are attempting
to further promote laws and regulations designed to restrict the activities of
mail service pharmacies.
In addition to the above-described laws and regulations, there are federal
statutes and regulations which establish standards for all pharmacies and
pharmacists concerning the labeling, packaging, advertising, and adulteration of
prescription drugs and the dispensing of controlled substances and prescription
drugs. Federal Trade Commission and United States Postal Service regulations
require mail order sellers to engage in truthful advertising, to stock a
reasonably supply of drugs, fill mail orders within thirty days and, if that is
impossible, to inform the consumer of his or her right to a refund. The Company
believes that it is in substantial compliance with the above requirements.
Further, the United States Postal Service has statutory authority to restrict
the transmission through the mails of drugs and medicines to a degree that could
have an adverse effect on the Company's mail service operations. To date, the
United States Postal Service has not exercised this statutory authority.
To the extent that any of the foregoing laws or regulations, existing
or proposed, prohibit or restrict the operation of mail service pharmacies and
are found to be applicable to the Company and enforceable, they could have an
adverse effect on the Company's mail pharmacy service operations as well as on
the operations of all other mail pharmacy service providers. In addition, the
Company would be required to take appropriate steps to effect compliance to
continue doing business in the states where such statutes are enforced and
non-compliance could expose the Company to the imposition of fines and penalties
which, depending upon the number of jurisdictions which impose such fines and
penalties and how they are imposed, could be material. There is no assurance
that the Company would be able to comply with the diverse and possible
contradictory laws of all such states and, consequently, the Company's
operations in such states may be impaired, interrupted or prohibited.
<PAGE>
Despite its efforts, the Company may be unable to comply with all
existing and future regulations. Existing and future legislation could increase
the Company's operating expenses, as well as operating expenses for the entire
industry. In addition, several states impose substantial fines, penalties or
criminal sanctions for failure to comply with existing regulations. Such fines
could exceed $2,000 per day or per violation, or misdemeanor criminal charges
could be filed against the Company. The Company is not aware of any state that
has imposed, or presently intends to impose, any such fine, penalty or charge
against the Company. The Company also believes that such fines, penalties or
charges would be subject to challenge under the United States Constitution, but
is not aware of any such challenge being successfully applied to date.
While increased cost would be passed on to the ultimate subscriber,
such increased costs, if significant, would adversely affect the Company's
business. Moreover, existing and future regulations could curtail the scope of
the Company's operations should the Company choose not to conduct business in
those states where regulations have been adopted.
Competition.
The prescription drug benefit business is highly competitive. The
Company's mail pharmacy business competes for the business of Third-Party Payors
and Direct Payors. The Company's principal mail pharmacy business competitors
for Third-Party Payors are America's Pharmacy, a subsidiary of Systemed, Inc.,
National Rx, a division of Medco Containment, Caremark, and Health Care
Services, Inc., a division of Diagnostek, Inc. Third-Party Payors generally look
to service levels, lower health care costs and reputation. The Company's
principal mail pharmacy business competitors for Direct Payors include Express
Pharmacy Services, a division of Thrift Drug which is a subsidiary of J.C.
Penney, A.A.R.P., a number of smaller mail service pharmacy companies and retail
pharmacies. Individual customers generally look to price, convenience and
service. All of the above referenced entities possess substantially greater
financial, marketing and personnel resources than the Company.
The Company's prescription claims processing services compete with
other prescription drug benefit providers/processors and the larger third-party
prescription drug claims processors such as PCS, Inc., and PAID, a division of
Medco Containment. Additionally, there are numerous smaller regional claims
processors and many insurance companies also process claims in conjunction with
their underwriting of medical insurance programs, as well as for self-insured
plan sponsors.
While Management believes that the Company is competitive in its price,
quality and service taken as a whole, there can be no assurances that, as the
mail service pharmaceutical industry evolves, the Company will be able to
operate profitably given the level of competition within the industry. Moreover,
the Company cannot predict, with accuracy, the effect of unspecified, but
probable future changes in the domestic health care system currently being
discussed by the Executive and Legislative branches of the United States
Government.
Medi-Phar's retail pharmacies compete with other retail pharmacies in
the San Diego, California and Las Vegas, Nevada areas with competitive factors
being location, price, product selection and service.
Inventory.
The Company obtains its medications and pharmaceutical products from
approximately 30 manufacturers, distributors and wholesalers. In order to
minimize the potential risks inherent in relying on any particular supplier, the
Company attempts, whenever possible, to establish and maintain relationships
with more than one supplier of any particular product. Thus, in the event that
one source is unable to supply a needed product, or is unable to offer a
competitive price, the Company may turn to an alternative source. For certain
products, particularly brand name products, there may be only one or a limited
number of suppliers. In the event that the supply of these products becomes
limited, or the price is significantly increased, the Company believes that most
pharmacies dispensing this product will be similarly adversely affected.
The Company maintains an inventory control program such that most
products in the Company's inventory of over-the-counter, brand name and generic
medications are on the shelf 45 days or less. The inventory control program also
includes a buying schedule for products with consistent demand. The flexibility
achieved as a result of the Company's network of suppliers enables the Company
to promptly obtain products which are infrequently demanded by the Company's
customers, thereby saving the cost of keeping such products in inventory. Most
suppliers can deliver orders to the Company within 24 hours.
<PAGE>
Product Liability.
Product liability is a major concern in the mail pharmacy business.
Liabilities may arise from possible dispensing errors, package tampering and
product defects.
The Company has taken anti-tampering precautions by utilizing layered
tamper-evidence packaging on all products it distributes, and its delivery is
made in unmarked outer packaging. These steps are designed to eliminate the
problem with tampering prior to receipt by the customer. The Company maintains a
toll-free telephone number which facilitates customer contact and enables
customers and the Company to verify prescriptions as ordered by the physician or
supplied by the Company. Additionally, the Company maintains an internal quality
control system, pursuant to which each order is checked and verified by pharmacy
personnel after it is filled and before shipping, in an effort to assure that
customers receive the exact prescribed medication.
The Company carries the type of insurance customary in the mail service
and retail pharmacy industry, including professional and product liability
insurance. The Company believes that its insurance protection is adequate for
its present business operations. However, there can be no assurance that the
amount of insurance coverage would be sufficient to cover any potential
liability claim, or that the finances of the Company could withstand the effect
of a claim in excess of its insurance coverage.
Management intends to continue such policies in effect, and provided
the same is available, may increase coverage as the Company's needs dictate. In
addition, the Company is named as an additional insured by many of its
suppliers. Although wholesale and retail pharmacies in general have not, as yet,
experienced any unusual or extraordinary difficulty in obtaining insurance at an
affordable cost, there can be no assurance that the Company will be able to
maintain its coverage in the future.
Mail Pharmacy Distribution.
The Company has two mail service pharmacy and fulfillment facilities.
One is located in Las Vegas, Nevada, and the other in Chicago, Illinois. The Las
Vegas facility was designed by the Company to accommodate the Company's
corporate offices in addition to the variety of the Company's distribution
operations, including inventory storage, order processing, shipping, billing,
customer service and certain marketing and administrative functions, with a view
toward maximizing safety and efficiency.
The Company maintains a toll-free number for incoming orders. Initial
customer orders are typically received by mail. New prescriptions and refills
may be ordered by telephone. All orders are reviewed; doctors are contacted for
verification as required and prescriptions are filled on the premises by
licensed pharmacists employed by the Company. Most orders are shipped to the
customer by United States mail, United Parcel Service or other common carriers.
Payments are handled through major credit card accounts or through direct
billings.
Due to the Company's typical order processing time of less than 48
hours, the Company had no material backlog of orders as of December 31, 1995.
The Company's business is not seasonal to any significant extent.
Employees.
As of June 30, 1996, the Company had a total of 248 employees. Except
for its executive officers (see "DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT") the Company's employees are clerical, sales, customer service,
claims processing and pharmacy related staff paid consistent with industry
standards. None of the Company's employees are covered by a collective
bargaining agreement. The Company believes that it has a good relationship with
its employees.
<PAGE>
Forward Looking Statements.
Statements regarding the Company's expectations as to demand for its
products and services in 1996, the operating efficiencies from operation of the
Home Pharmacy business, and revenue generation from existing or future contracts
and certain other information presented in this report constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Although the Company believes that its expectations with
respect to future results are based on reasonable assumptions within the bounds
of its knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations. In addition to
matters affecting the economy and the Company's industry generally, factors
which could cause actual results to differ from expectations include the
following:
- - Loss of one or more significant customers
- - Reduction in gross profit margins due to competitive pricing pressures
- - Changes in governmental regulation or failure to comply with existing
regulation
- - Changes in the cost or availability of pharmaceuticals not reflected in
reimbursement rates from third party payors
- - Inability to obtain needed additional capital on terms acceptable to the
Company
- - Inability to reduce costs while maintaining customer service
- - Failure to obtain new contracts, due to competitive pressures or otherwise
- - Potential default under line of credit or other material contracts
Properties.
The Company's corporate headquarters are located in Las Vegas, Nevada.
The mail service pharmacy/fulfillment centers are located in Las Vegas, Nevada
and Chicago, Illinois. The Company's claims processing operation is located in
Lemoyne, Pennsylvania. The retail pharmacies are located in San Diego,
California and Las Vegas, Nevada.
The following chart provides more detailed information concerning the
Company's properties:
<TABLE>
Approximate Lease
Size in Sq. Ft. of Expiration
Location Facility (1) Primary Use
- -------- ------------------ ---------- ------------
<S> <C> <C> <C>
Las Vegas, Nevada 17,608 03/98 Mail Order Prescription Pharmacy,
Claims Processing Operations and
Corporate Offices
Chicago, Illinois 13,500 09/00 Mail Order Prescription Pharmacy
Lemoyne, Pennsylvania 3,337 01/02 Claims Processing Operations
Owings Mills, Maryland 6,352 08/96 Subleased
Mount Pleasant, South Carolina 2,790 01/97 Vacant
San Diego County, California 1,100 03/99 Pharmacy
(Poway)
San Diego (3rd Avenue) 1,100 05/00 Vacant
San Diego, California (Plaza
Properties) 800 06/00 Pharmacy
San Diego, California (El Cajon) 1,000 NA(2) Pharmacy
San Diego, California (Gateway) 1,100 03/99 Pharmacy
Las Vegas, Nevada (East Harmon) 540 11/99 Pharmacy
<FN>
(1) Includes all renewal terms.
(2) The term of this lease is month-to-month.
</FN>
</TABLE>
For information with respect to obligations for lease rental, see Note 12 to the
Consolidated Financial Statements. The Company considers its properties to be
suitable and adequate for its present needs.
<PAGE>
Recent Developments
Retention of Donaldson, Lufkin & Jenrette
On May 6, 1996 the Company engaged Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") as its exclusive financial advisor for a period
of one year. DLJ will assist the Company in a review of available financial and
structural alternatives to meet long term strategic objectives. Alternatives to
be considered include, but are not limited to, acquisitions of the assets,
securities or business of another entity or the sale, merger, consolidation or
other business combination with another entity. The Board of Directors has not
made a determination to consider or accept any potential transactions which may
be suggested by DLJ. There is no assurance that DLJ will present any potential
transaction which the company finds acceptable.
If DLJ does advise the Company with respect to a consummated transaction
involving the sale of the Company or its assets, the Company has agreed to pay
DLJ a fee equal to 1.5% of the first $100,000,000 in value received by the
Company or its shareholders and 1% of the value in excess of $100,000,000, with
a minimum fee of $1,000,000. In the case of an acquisition by the Company or
other transaction, the fee will be negotiated between the Company and DLJ.
Bergen Brunswig Dispute.
On June 10, 1996, the Company filed a complaint in the United States
District Court for the District of New Jersey against Bergen Brunswig Drug
Company and its parent corporation Bergen Brunswig Corporation (collectively
"Bergen"). Prior to June 10, 1996, the Company had been purchasing a substantial
portion of its prescription drug requirements through Bergen. The complaint
alleges, among other things, that Bergen breached various terms of its supply
agreements with the Company. On June 11, 1996, Bergen Drug Company filed a
complaint in the United States District Court for the District of Nevada against
the Company, its subsidiaries, Dr. Merryman, Dennis Smith and Tom Warren.
Bergen's complaint seeks to recover $7,500,000 from the corporate defendants
alleged to be owing for products purchased by the Company. The complaint also
seeks to recover an unspecified amount of exemplary damages from all of the
defendants on various theories relating to the Company's purchase of products
including breach of an implied covenant of good faith and fair dealing,
intentional misrepresentation and negligent misrepresentation. See "Legal
Proceedings". The parties have agreed to not require responsive pleadings to be
filed in either action while settlement negotiations are proceeding.
As a result of its dispute with Bergen, the Company has obtained new
suppliers for the prescription drugs previously obtained through Bergen.
Although each brand name prescription drug is generally available from a single
manufacturer, the Company generally has a choice of distributors from whom it
buys drugs. The Company believes that all such drugs are available from its new
suppliers on terms not substantially less favorable to the Company than had been
obtained from Bergen. There can be no assurance that the Company will not
experience problems in the transition to new suppliers, including possible
increased costs and temporary interruptions in supply.
Effective Registration Statement
On July 17, 1996, the SEC declared effective the Company's Registration
Statement on Form S-1, Registration No. 333-00577. By such prior Registration
Statement and prospectus, certain selling stockholders, registered and offered
for sale up to 8,004,207 shares of Common Stock. The shares were comprised of
322,727 shares currently owned by selling stockholders, 1,783,330 shares
issuable upon conversion of the Company's Series A Preferred Stock, (the
"Conversion Shares"), 2,681,972 shares issuable upon the exercise of outstanding
warrants (the "Warrent Shares") and 3,216,178 shares pledged by the Company to
ArcVentures, Inc. ("ARC") as collateral for certain obligations owed by the
Company to ARC (the "Collateral Shares"). As of July 30, 1996, the Company has
paid a portion of the outstanding obligations to ARC and the number of
Collateral Shares has been reduced to 1,608,089. The shares offered hereunder
are in addition to those shares offered in the prior Registration Statement.
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the members of the
Company's Board of Directors and its executive officers, and sets forth the
position with the Company held by each:
Name Age Position
- ---- --- --------
Hon. Leo T. McCarthy** 65 Chairman of the Board of Directors
M. B. Merryman*** 54 President, Chief Executive Officer, Director
Dennis Smith 48 Executive Vice President, Chief Operating
Officer
Jane E. Freeman 42 Executive Vice President - Account Services
Development
Dr. David L. Dalton 47 Executive Vice President - Corporate
Development
Don Bradenbaugh 55 President of Medi-Claim, Inc.
S. E. Roberts 49 Treasurer
Thomas Warren 55 Executive Vice President, Chief Financial
Officer
Julie Ledbetter 25 Corporate Secretary
Byron S. Georgiou* 47 Director
Edward T. Hanley, Jr.*** 39 Director
Edward F. Heil* 51 Director
Dr. Sol Lizerbram* 48 Director
Robert W. Quick** 75 Director
Matthew C. Strauss*** 62 Director
Lincoln R. Ward** 72 Director
Donald Kirsch** 63 Director
Steven F. Mayer* 36 Director
* Term as director expires in 1996.
** Term as director expires in 1997.
*** Term as director expires in 1998.
<PAGE>
The Board of Directors presently maintains an Audit Committee, a Safety
Committee, a Nominating Committee, a Compensation Committee and a Strategic
Planning Committee. Messrs. L. Ward and M. Strauss are members of the Audit
Committee. Messrs. M. Strauss, E. Heil and L. Ward are members of the Safety
Committee. Messrs. E. Heil, R. Quick and B. Georgiou are members of the
Compensation Committee. The Compensation Committee held no meetings during 1995.
Messrs. E. Hanley, S. Lizerbram and L. McCarthy are members of the Nominating
Committee. Messrs. L. McCarthy, B. Georgiou, E. Hanley and S. Lizerbram are
members of the Strategic Planning Committee.
Honorable Leo T. McCarthy. Mr. McCarthy joined the Board of Directors
in June, 1994 and currently serves as its Chairman. He served as Lieutenant
Governor of California for 12 years until his retirement in 1994. During that
period, he chaired the California Commission on Economic Development. Mr.
McCarthy is admitted to the practice of law in California. Mr. McCarthy
graduated from the University of San Francisco and the San Francisco Law School.
Mr. McCarthy serves on the Boards of Linear Technology Corp. and FloWind.
M.B. Merryman. Dr. Merryman has been Chief Executive Officer,
President, and a Director of the Company since December, 1987. He also served as
Treasurer of the Company from December, 1987 until January, 1989. He also served
as Chief Operating Officer from December, 1987 through June, 1992. Additionally,
he served as Chief Financial Officer from December, 1987 through March, 1992.
From November, 1987 to September, 1989, he served as President of Sino Business
Machines, Inc., a Canadian computer company. From May, 1986 to February, 1989,
Dr. Merryman was an officer and Director of China Business Machines Holding
Company, a privately-held concern which is the parent of Sino Business Machines,
Inc.
Dennis Smith. Mr. Smith has been Vice President of the Company since
1987 and was named Executive Vice President and Chief Operating Officer in June
of 1992. Additionally, he served as a director of the Company from June, 1985
until January, 1989. Mr. Smith received his B.A. in 1969 from the University of
Miami. He is experienced in pharmacy operations, as well as other business
activities. He was previously the president of an export/import company,
specializing in business with China. From November, 1983 through January, 1985,
Mr. Smith was the Senior Buyer for pharmaceutical and over-the-counter products
for AARP's Las Vegas pharmaceutical facility. As AARP's Senior Buyer, Mr.
Smith's responsibilities included management of the buying staff responsible for
purchasing $18 million in pharmaceutical products for AARP's mail-service
business.
Jane E. Freeman. Ms. Freeman was named Executive Vice President -
Marketing Services in October 1993. She also served as Vice-President, Client
Services from April 1992 to October 1993. From January 1989 through April 1992,
she served as the Company's Vice President - Sales and Marketing. She was the
General Manager from April, 1988 until January, 1989. Ms. Freeman received her
B.S. degree in Communications from Southern Illinois University in 1976.
Dr. David L. Dalton. Dr. Dalton is an Executive Vice President of
Mednet. Dr. Dalton joined Medi-Mail and Medi-Claim, Inc. in November of 1994 in
connection with the acquisition by Medi-Claim, Inc. of the assets of Medical
Service Agency, Inc., dba Mednet, a pharmacy benefits management company. From
November 1989 until joining the Company, Dr. Dalton served as Chairman,
President and Chief Executive Officer of Medical Service Agency, Inc., dba
Mednet. Prior to that, Dr. Dalton was a Senior Vice President of Reliable Drug,
Inc. from July 1989 until November 1989 and served in several capacities with
Rite Aid Corporation from 1971 through 1989, including Vice President
(Corporate) from 1983 through 1989. He is currently a member of several boards
of directors including Blue Shield of Pennsylvania. Dr. Dalton became a Doctor
of Pharmacy (Maryland Registration) in 1974. He received a B.S. in Pharmacy from
West Virginia University in 1971 and was honored as one of the top ten graduates
over a 100-year span. Dr. Dalton is the President and a principal shareholder of
Managed Care Rx, a retail and institutional specialty care pharmacy.
<PAGE>
Don Bradenbaugh. Mr. Bradenbaugh was named President of Medi-Claim,
Inc. in December, 1995, having served as Vice President of Operations since
1993. From 1981 to 1995, Mr. Bradenbaugh held various positions with Rite Aid
Corporation, including Pharmacy Manager, Pharmacy Operations Supervisor,
Director of Third Party Affairs and Director of Legislative Affairs. Mr.
Bradenbaugh's pharmacy experience includes 14 years of retail store ownership,
14 years of chain pharmacy management and claims processing expertise. Mr.
Bradenbaugh received his Bachelor of Science in Pharmacy degree from the
University of Maryland School of Pharmacy.
S.E. Roberts. Mr. Roberts has been the Treasurer of the Company since
January, 1989 and was Secretary of the Company from October, 1989 through 1991
and again from 1993 to 1995. From 1988 to 1992, he served as Controller of the
Company. Mr. Roberts received his B.S. degree in Accounting from San Diego State
University in 1970. From 1987 to 1989, he was the Research Director of Sino
Business Machines, Inc., a Canadian computer company. From 1978 to 1991, he
served as Controller/Vice President of Eucalyptus Productions, Inc., a
privately-held California corporation specializing in typesetting/graphic arts.
Thomas Warren. Mr. Warren joined the Company in January, 1996 as its
Chief Financial Officer and Executive Vice President. From 1993 to September,
1995, he owned and operated a retail supermarket in Cocoa Beach, Florida. The
supermarket was closed because of the entry of a Walmart supercenter and an
Albertson's in the market area. Personal guaranties of the supermarket's debts
necessitated Mr. Warren and his wife filing for protection under chapter 7 of
the Bankruptcy Code on September 29, 1995. From 1979 to 1993, he held executive
financial positions in the food distribution industry. These include serving as
Chief Financial Officer for The Eli Witt Co. (1991 to 1993), ShopRite
Supermarkets, Inc. (1989 to 1991) and American Seaway Foods - Fisher Foods (1985
to 1989). Mr. Warren received a BBS in Accounting and Finance from Wayne State
University in 1963.
Julie Ledbetter. Ms. Ledbetter has served as Secretary of the Company
since June, 1995. Ms. Ledbetter has served in various capacities with the
Company since 1990 including Accounting Data Entry Clerk, Office Manager and
Assistant to the President.
Byron S. Georgiou. Mr. Georgiou has been a Director of the Company
since January, 1989. He is President of American Partners Capital Group, Inc., a
firm serving the alternative investment needs of institutional investors. Mr.
Georgiou is a co-founder and served from 1983 to 1994 as Managing Partner of the
San Diego law firm of Georgiou, Tosdal, Levine & Smith. From 1980 to 1983, Mr.
Georgiou was Legal Affairs Secretary in the cabinet of California Governor
Edmund G. Brown, Jr. From 1975 to 1980, he served in various capacities with the
California Agricultural Labor Relations Board. He co-founded and since 1985 has
served as Director, General Counsel and Corporate Secretary of California
Infoplace, Inc., a privately-held corporation which operates customer service
kiosks in shopping malls throughout the U.S. Mr. Georgiou received his A.B.
degree with great distinction in 1970 from Stanford University, and J.D. Magna
Cum Laude in 1974 from Harvard Law School.
Edward T. Hanley, Jr. Mr. Hanley was appointed to the Company's Board
of Directors in July of 1993. Since 1990, he has been a partner in the Chicago
law firm of Hanley & Spadoro. From 1984 to 1990, he was a managing attorney of
the prepaid legal department of Borovsky & Ehrlich in Chicago. Mr. Hanley
received his B.A. degree from Carthage College in 1980 and his J.D. degree from
Chicago-Kent College of Law in 1983.
Edward F. Heil. Mr. Heil became a director of the Company in March
1993. He currently manages his real estate investments. He has served as
President and Chief Executive Officer of American Environmental Construction
Company, an Illinois-based corporation, since 1987. Prior to that, he was Chief
Executive Officer and sole owner of E & E Hauling, Inc., a demolition,
excavation and sanitary landfill management company founded by his father.
<PAGE>
Dr. Sol Lizerbram. A founder of the Company, Dr. Lizerbram served as
Chairman of the Board of Directors since its inception in 1985 until 1994. He
continues to serve as a Director of the Company. Dr. Lizerbram is also co-
founder and President of Family Practice Associates of San Diego, Inc., a
multi-specialty primary care medical group. Dr. Lizerbram is also President and
Chairman of the Board of Directors of FPA Medical Management, Inc., a company
that provides management services to certain medical providers. He received his
pharmaceutical degree in 1970 from the Long Island University School of
Pharmacy, and his Doctor of Osteopathy degree in 1977 from the Philadelphia
College of Osteopathic Medicine. Dr. Lizerbram was licensed as a Registered
Pharmacist in the states of New York and Pennsylvania, and is licensed as an
Osteopathic Physician and Surgeon in the states of Pennsylvania and California.
He has received many awards and appointments including: Health Advisor to
California Governor Edmund G. Brown, Jr.; Medical Director, the Prudential
Insurance Company, San Diego; recipient of a California State Senate Resolution
for Recognition of his Contribution to Health Care; Nominee for Entrepreneur of
the Year, INC. Magazine; and President, Jewish National Fund. Additionally, Dr.
Lizerbram is a Trustee of the U.S. Olympic Committee.
Robert W. Quick. Mr. Quick has been a director of the Company since
March, 1988. Mr. Quick, a self- employed entrepreneur, is a founder of the
DeAnza Group of mobile home parks currently comprising over 8,000 lots in
California and the Sunbelt areas. Currently, he maintains an investment interest
in these parks. Additionally, Mr. Quick is an owner of the Indian Run Village in
Chester County, Pennsylvania and is a general partner of Melody Lakes
Properties, a Pennsylvania limited partnership, which owns and operates a
353-unit, five-star manufactured home community located in Quakertown, Bucks
County, Pennsylvania.
Matthew C. Strauss. Mr. Strauss is a co-founder and has served since
1960 as chief executive officer of the real estate investment firm of Leeds &
Strauss Enterprises. Leeds & Strauss has been involved in the development and
management of an extensive portfolio of real estate holdings throughout the
United States. Mr. Strauss has served in the leadership of the United Jewish
Federation of San Diego and the San Diego Hebrew Home. He and his wife, Iris,
have accumulated an international known collection of Modern paintings and
sculpture and serve as trustees of the San Diego Museum of Contemporary Art and
San Diego Opera. Mr. Strauss was a founder of San Diego National Bank and an
early investor in Qualcomm, First Fidelity Acceptance Corporation and Pace
Membership Warehouses, since acquired by K-Mart. He received his bachelor's
degree and national forensic awards in 1955 from San Diego State University.
Lincoln R. Ward. Mr. Ward has served as a director of the Company since
January 1989 and is Chairman of the Audit Committee. He is a retired
Vice-President of Pacific Bell, President of his own business management
consulting firm, and Senior Vice President of Executive Management Systems. In
addition, he serves on the boards of directors of Fleet Aerospace, Inc., ExCell,
the Cellular Connection and MobilWorks. His numerous other board memberships in
the Los Angeles and San Diego areas have included: Economic Development Corp.,
San Diego Chamber of Commerce, United Way, Boy Scouts of America, California
State University-Northridge, Urban League, Mexican and American Foundation, San
Diego State University President's Council, St. Vincent de Paul Village, Mayor's
Committees on both Water Conservation and City Operations, and Advisory Councils
to two universities. He has a business degree from Wayne University, a graduate
degree from Stanford University, and a doctorate (honorary) from National
University.
Donald Kirsch. Mr. Kirsch has served as a director of the Company since
May, 1995 and is Chairman of the Strategic Planning Committee. Mr. Kirsch is
Chairman and President of The Wall Street Group, Inc., a financial services firm
founded in 1959. Mr. Kirsch was a member of the board of directors of Supreme
Equipment & Services Corp. from 1985 to 1993.
Steven F. Mayer. Mr. Mayer has served as a Director of the Company
since November, 1995. Since June, 1994, Mr. Mayer has been the Managing Director
of Aries Capital Group LLC, a private investment firm. Mr. Mayer was an
investment banker with Apollo Advisors, L.P. and Lion Advisors, L.P., affiliated
private investment firms, from April 1992 until June 1994, when he left to
co-found Aries Capital Group. Prior to that time, Mr. Mayer was a lawyer with
Sullivan & Cromwell specializing in mergers, acquisitions, divestitures,
leveraged buyouts and corporate finance. Mr. Mayer is a current or former member
of the Boards of Directors of BDK Holdings, Inc., a textile manufacturer, Roland
International Corporation, a real estate holding company, and The Greater LA
Fund, a non-profit investment group affiliated with Rebuild LA. Mr. Mayer is a
graduate of Princeton University and Harvard Law School.
Executive Compensation.
Summary Compensation. The following table sets forth the aggregate cash
compensation paid by the Company for services rendered during the last three
fiscal years to the Company's Chief Executive Officer and to each of the
Company's other executive officers whose annual salary and bonus for the most
recent fiscal year exceeded $100,000.
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
Annual Compensation Long-Term Compensation Awards
Other Annual All Other
Name and Principal Compensation Restricted Stock Stock Options Compensation
Position Year Salary ($) Bonus ($) ($)(1) Awards ($) (#) ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
M.B. Merryman, 1995 $236,058 $117,500 $25,000(3) 117,500 (2)
CEO and President 1994 $171,870 $106,600 $25,000(3) 107,500 (2)
(2)
1993 $159,500(5) $37,500(6) $777,625(7) 577,500 (6) $9,764(4)
(7) (8)
Dr. David Dalton, 1995 $125,000 $12,000(11) 25,000
Executive Vice 1994 $125,000(10) $ -0- $2,258(11) $4,988(12)
President (9)
Dennis Smith, 1995 $104,277 $ -0- $7,000(13) 25,000
Executive Vice 1994 $ 68,716 $ -0- 20,000
President, Chief 1993 $ 52,432 $ -0- 5,000
Operating Officer
<FN>
(1) Dr. Merryman's other compensation included certain perquisites, of which
$12,000 representing an annualized expense allowance of $1,000 per month
which commenced in May 1992 and $12,000 representing an automobile
allowance of $1,000 per month which commenced in January 1994.
Additionally, he had an automobile allowance of $9,240 per year for 1992.
(2) In 1996, Dr. Merryman received as a bonus $117,500 ($35,000 of which was
advanced in 1995) and an option to purchase 117,500 shares at fair market
value of $2.291 per share. In 1995, Dr. Merryman received as a bonus
$107,500 and an option to purchase 107,500 shares at fair market value of
$3.16 per share. The cash bonus and stock option bonus were measured and
paid/granted in 1995 but were based on performance in 1994.
(3) During 1995 and 1994, Dr. Merryman received $1,000 as compensation for
serving on the Company's board of directors.
(4) A life insurance policy was purchased for Dr. Merryman in December 1992.
The amount reflected here includes the annual premium of $3,954 for the
year the premium became due. The premium due in each of 1993 and 1994 was
paid in 1994 and 1995, respectively. In addition, the Company paid $5,810
for a disability policy for Dr. Merryman in each of 1992, 1993 and 1994.
(5) Included in Dr. Merryman's salary for 1993 are 3,334 shares of common stock
of the Company valued at $7,500, which Dr. Merryman agreed on March 16,
1993 to accept in lieu of a cash raise of $7,500 effective May 1, 1993.
(6) In 1994, Dr. Merryman received as a bonus $37,500 and an option to purchase
37,500 shares at fair market value of $3.52 per share. The cash bonus and
stock option bonus were measured and paid/granted in 1994 but were based on
performance in 1993.
(7) Dr. Merryman's Employment Agreement was amended September 12, 1993.
Pursuant to that amendment, Dr. Merryman agreed to the elimination of
certain severance benefits in exchange for an immediate cash bonus of
$100,000, immediate issuance of 150,000 shares of common stock of the
Company valued at approximately $665,625 or approximately $4.44 per share
and an immediate option to purchase 500,000 shares of common stock of the
Company at a price of $4.50 per share at any time prior to September 11,
1998. The 150,000 shares and the shares underlying the options were
registered on a Form S-8 registration statement filed in February, 1995.
(8) During 1993 Dr. Merryman received an option to purchase 20,000 shares,
exercisable January 15, 1994, and an option to purchase 20,000 shares,
exercisable June 16, 1994. Each Option was granted under the Company's
Incentive Stock Option Plan and is related to compensation for serving on
the Company's board of directors between January 1992 and through June 1993
and June 1994, respectively.
<PAGE>
(9) Dr. Dalton entered into an Employment Agreement with Medi-Claim, Inc. as of
November 19, 1994. Prior to that date, Dr. Dalton was employed by Medical
Services Agency, Inc. (d/b/a Mednet). The amounts set forth herein for Dr.
Dalton reflect amounts received during 1994 by Dr. Dalton from the Company
and Mednet.
(10) During 1994, Dr. Dalton received approximately $110,795 in salary from
Mednet and approximately $14,205 in salary from Medi- Claim, Inc.
(11) Pursuant to Dr. Dalton's Employment Agreement, Dr. Dalton received an
automobile allowance of $1,000 per month, which began as of November 19,
1994. Prior to that time, Dr. Dalton was entitled to use of a car owned by
Mednet, which during 1994 had a value of $758.
(12) The Company paid approximately $4,988 in life insurance premiums in 1994
towards a life insurance policy for Dr. Dalton.
(13) Commencing May, 1995 Mr. Smith received an automobile allowance of $1,000
per month.
</FN>
</TABLE>
Other than the Company's Incentive Stock Option Plan and Nonqualifying Stock
Option Plan, there are no retirement, pension, or profit sharing plans for the
benefit of the Company's officers, directors and employees. The Company does
provide health insurance coverage for its employees and life insurance and
disability insurance for its Chief Executive Officer. The Board of Directors may
recommend and adopt additional programs in the future for the benefit of
officers, directors and employees.
Option Grants in 1995. Information concerning 1995 grants to named
executive officers is reflected in the table below. The amounts shown for each
of the named executive officers as potential realizable values are based on
arbitrarily assumed annualized rates of stock price appreciation of five percent
and ten percent over the full five year term of the options. These potential
realizable values are based solely on arbitrarily assumed rates of price
appreciation required by applicable SEC regulations. Actual gains, if any, on
option exercises and common stockholdings are dependent on the future
performance of the Company and overall stock market conditions. There can be no
assurance that the potential realizable values shown in this table will be
achieved.
<PAGE>
Information concerning 1995 grants to named executive officers is
reflected in the table below. The amounts shown for each of the named executive
officers as potential realizable values are based on assumed annualized rates of
stock price appreciation of five percent and ten percent, respectively, over the
full five year term of the options as required by applicable SEC regulations.
Individual Grants Potential Realizable Value at Assumed
Annual Rates of Stock Price
<TABLE>
Potential
Realizable Value at
% of Total Assumed Annual Rates of
Options Stock Price Appreciation
Granted to For Option Term
Employees Expiration ------------------------
Name Granted (#) in 1995(1) Exercise Price Date (5%) ($) (10%) ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
M.B. Merryman 117,500 43.0% $2.30 1/01 $74,665 $164,990
David Dalton 25,000 9.1% $2.75 5/00 $18,994 $41,973
Dennis Smith 25,000 9.1% $2.75 5/00 $18,994 $41,973
<FN>
(1) During 1996 Dr. Merryman received options to purchase 117,500 shares based
upon 1995 results of operations. These options are considered to have been
granted in 1995 for purposes of the table.
</FN>
</TABLE>
The Incentive Stock Option Plan provides that no option may be granted at an
exercise price less than the fair market value of the Common Shares of the
Company on the date of grant. Options granted pursuant to the Incentive Stock
Plan expire five years from date of grant and may not be exercised during the
initial one year period from initial date of grant.
Aggregated Option Exercises and Year-End Option Values in 1995. The
following table summarizes for each of the named executive officers of the
Company the number of stock options, if any, exercised during 1995, the
aggregate dollar value realized upon exercise, the total number of unexercised
options held at December 31, 1995 and the aggregate dollar value of in-the-money
unexercised options, if any, held at December 31, 1995. Value realized upon
exercise is the difference between the fair market value of the underlying stock
on the exercise date and the exercise price of the option. The value of
unexercised, in-the-money options at December 31, 1995 is the difference between
its exercise price and the fair market value of the underlying stock on December
31, 1995, which was $2.25 per share based on the closing bid price of the Common
Stock on December 31, 1995. The underlying options have not been and, may never
be exercised; and actual gains, if any, on exercise will depend on the value of
the Common Stock on the actual date of exercise. There can be no assurance that
these values will be realized.
<TABLE>
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
12/31/95(#) 12/31/95($)
----------------------------- --------------------------------
Shares Acquired
Name on Exercise(#) Value Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------------- ------------------- ------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
M.B. Merryman -0- -0- 727,500(1) 117,500 $10,000 $0
David Dalton -0- -0- -0- 25,000 -0- $0
Dennis Smith -0- -0- 35,000 25,000 $1,700 $0
<FN>
(1) Includes 107,500 shares that became exercisable on January 1, 1996.
</FN>
</TABLE>
<PAGE>
Long-Term Incentive Plan Awards in 1995. The registrant has no
"long-term incentive plan". As stated in the president's employment contract,
his bonus and raise are based on increasing sales over each prior year. He is
entitled to a $2,500 cash bonus for every $1 million increase in sales from the
prior year. Additionally, he is entitled to 2,500 stock options for each $1
million increase in sales over the prior year. Alternatively, at his option, he
is entitled to a bonus equal to 1% of the reported pre-tax consolidated profit
of the Company for the prior calendar year and an option to purchase 50,000
Common Shares. The options are to be granted at fair market value plus $.10. In
1995, consolidated sales increased over $47 million; the president was entitled
to a $117,500 cash bonus and 117,500 stock options, which he received in 1996.
Pursuant to Dr. Dalton's Employment Agreement, the Board of Directors of the
Company may award a bonus to Dr. Dalton of cash or stock options. However, such
award is subject to the sole discretion of the Board of Directors. No such award
was granted in 1995.
Future Benefits or Pension Plan Disclosure in 1995. The Company has no
such benefit plans.
Director Compensation. During 1995, the Company paid board members $500
per meeting up to a maximum of $2,000 per year. Members of the audit committee
received $250 per committee meeting up to a maximum of $500 per quarter. There
is a Nonqualifying Stock Option Plan ("NQSOP") for the benefit of the
nonemployee directors of the Company and others having rendered significant
services to the Company. An aggregate of 1,615,000 shares of Common Stock have
been reserved to be issued pursuant to the NQSOP. Each non-employee director
receives an automatic grant of 60,000 options of Common Stock, based upon
election to the Board of Directors for a term of three years. Upon completion of
each year of service to the Company 20,000 shares will vest. The options cannot
be exercised until they are held a year and cannot be exercised after ten years
from the date of grant. The exercise prices equal or exceed fair market value on
the date of grant.
Prior to nominating Leo McCarthy as a director, the Company agreed to
award Mr. McCarthy as compensation for serving on the Company's board of
directors, options to purchase an aggregate of 230,000 Common Shares of the
Company. The options with respect to 50,000 shares vested immediately upon his
election as director. The remaining options were granted under the NQSOP in lieu
of the automatic grant described above and will vest with respect to 60,000
shares on each of the first three anniversaries of the date Mr. McCarthy was
elected to the Company's board of directors, provided he is a member of the
board of directors on the respective anniversary date. The exercise price of the
options is $2.85, which represents the market value of the Common Shares on the
date Mr. McCarthy was elected plus $.10. In addition, Mr. McCarthy will receive
$500 plus reasonable expenses for attending each of the board of directors
meetings during the year. After January 3, 1995, Mr. McCarthy will also receive
additional cash compensation equal to 1% of the gross sales generated by
accounts brought to the Company as a result of Mr. McCarthy's efforts.
As of December 31, 1995, approximately 31 options under the NQSOP to purchase an
aggregate of approximately 1,009,000 shares of Common Stock at exercise prices
ranging from $.7738 to $3.81 per share were outstanding.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements.
Dr. Merryman. The Company entered into a five year employment Agreement
with Dr. Merryman, effective May 1, 1992. The term of the Agreement can be
extended for successive additional one-year terms commencing in 1993. On March
16, 1993, the Company authorized a one-year extension of the Agreement.
Beginning May 1, 1993 and thereafter on the anniversary date of the Agreement,
Dr. Merryman's base salary will be increased by an amount equal to one-half of
the cash bonus earned by him for the previous year, provided that the increased
base salary will not exceed an amount equal to one-hundred thirty-five percent
(135%) of the prior year's base salary. Pursuant to the Agreement, the Company
is currently paying an annual salary to Dr. Merryman in the amount of $178,250.
On May 1, 1995, his base salary will increase to $232,000. As of January 1st of
each year, Dr. Merryman will receive an annual bonus of cash and options to
acquire Common Shares. The computation of the bonus is as follows: for each $1
million increase in the Company's consolidated annual gross sales for the
previous calendar year compared to consolidated annual gross sales for the
second previous calendar year, he will receive $2,500 in cash and an option to
purchase 2,500 shares at the Option Price. The Option Price is the average
closing bid price in the last ten trading days of the previous year plus $.10.
In lieu of the annual bonus, Dr. Merryman is entitled to receive cash equal to
one percent of the reported pre-tax consolidated profit of the Company for the
prior calendar year and an option to purchase 50,000 shares at the above defined
Option Price. Dr. Merryman is also entitled to the use of a Company owned or
leased vehicle. He also has a $12,000 discretionary expense allowance. The
Company provides and pays the premium for a policy of life insurance and a
policy of long-term disability insurance for Dr. Merryman.
<PAGE>
Pursuant to an amendment to the Agreement, entered into as of September 12,
1993, all entitlement to severance pay has been eliminated. As consideration for
the deletion Dr. Merryman received an immediate cash bonus of $100,000 and
150,000 Common Shares. Additionally, Dr. Merryman received immediate options to
purchase 500,000 Common Shares at a price of $4.50 per share at any time prior
to September 11, 1998. The Company has registered the 150,000 shares and the
500,000 shares underlying the options on a Form S-8 registration statement filed
in February, 1995. The amendment also eliminated non-competition provisions.
Dr. David Dalton. Medi-Claim, Inc. entered into a three-year Employment
Agreement with Dr. David Dalton as of November 19, 1994. The agreement will
automatically renew for successive two-year terms unless terminated by either
party not less than ninety days prior to the end of the then current term. The
agreement provides for Dr. Dalton to serve as an Executive Vice President of the
Company and President of Medi-Claim, Inc. at the pleasure of the Company's Board
of Directors. Under the agreement, Dr. Dalton is entitled to an annual base
compensation of $125,000, an automobile allowance of $1,000 per month and other
benefits on the same basis as other employees of Medi-Claim, Inc. The agreement
also contains certain non-competition and non-solicitation covenants that extend
in most circumstances to three years after the termination of the Employment
Agreement. Dr. Dalton no longer served as President of Medi-Claim, Inc. as of
December, 1995.
Other.
Stock Option Plans. Effective March, 1988, the Company adopted an
Incentive Stock Option Plan ("ISOP") for the benefit of officers, directors and
key employees of the Company. The ISOP is designed to comply with Section 422(A)
of the Internal Revenue Code of 1986, as amended. An aggregate of 1,165,000
Common Shares of the Company have been reserved for issuance pursuant to the
ISOP. As of December 31, 1995, approximately 48 options to purchase an aggregate
of approximately 588,500 Common Shares at exercise prices ranging from $.7738 to
$3.50 per share were outstanding under the ISOP. The ISOP, designed as an
incentive for key employees, is administered by the Compensation Committee of
the Board of Directors, which selects optionees and determines the number of
Common Shares subject to each option. The ISOP provides that no option may be
granted at an exercise price less than the fair market value of the Common
Shares of the Company on the date of grant. Unless otherwise specified, the
options expire five years from date of grant and may not be exercised during the
initial one year period from initial date of grant.
Effective November, 1988, the Board of Directors adopted a Nonqualifying Stock
Option Plan ("NQSOP") for the benefit of the nonemployee directors of the
Company and others having rendered significant services to the Company. To date,
1,115,000 Common Shares have been reserved to be issued pursuant to the NQSOP.
At the June 16, 1993 annual meeting, stockholders approved instituting a formula
pursuant to which each non-employee director receives an automatic grant of
options to purchase 60,000 Common Shares, based on election for a three year
term, upon completion of each year of service to the Company, 20,000 of the
aforementioned grant will vest. The options cannot be exercised until they are
held a year and cannot be exercised after ten years from the date of grant. The
exercise prices equal or exceed fair market value on the date of grant. As of
December 31, 1995, approximately 31 options to purchase an aggregate of
approximately 1,001,000 Common Shares at exercise prices ranging from $.7738 to
$3.81 per share are outstanding.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
As of July 11, 1996 there were issued and outstanding voting securities
(Common Shares, Series A Preferred, Series D Preferred and Series E Preferred)
entitled to cast a total of 33,162,131 votes on matters which the Common Stock
and Preferred Stock vote as a class.
The following table sets forth information regarding shares of voting
securities of the Company beneficially owned as of July 11, 1996 by: (i) each
person known by the Company to beneficially own 5% or more of the outstanding
voting securities; (ii) by each director or nominee for director, (iii) by each
person named in the summary compensation table and (iv) by all officers and
directors as a group.
<PAGE>
Name and Addresses of Officers, Amount of Percentage of
Directors and Principal Shareholders Common Stock* Voting Securities*
- --------------------------------------------------------------------------------
M.B. Merryman1,2 1,061,502 3.62%
Dr. Sol Lizerbram1,3,4 363,199 1.26%
Edward F. Heil1,5 2,029,000 7.09%
2901 Centre Circle
Downers Grove, IL 60515
Edward T. Hanley, Jr.1,6 415,000 1.43%
Byron S. Georgiou1,7 184,328 **
Robert W. Quick1,8 298,054 1.04%
Matthew C. Strauss1,9 900,000 3.14%
Lincoln R. Ward1,10 160,577 **
Honorable Leo McCarthy1,11 110,000 **
Donald Kirsch1 129,444 **
Steven F. Mayer1 123,412 **
Dr. David L. Dalton11,12 25,000 **
Dennis Smith1,13 203,613 **
Executive Officers and 6,048,129 21.00%
Directors as a group
(15 Individuals)
* Assumes exercise of all exercisable options held by listed security holders
which can be acquired within 60 days from July 11, 1996.
** Less than 1%.
Except as noted, the table does not give effect to an aggregate of
approximately 4,847,834 shares of Common Stock underlying outstanding stock
options and warrants. Outstanding warrants and options entitled the holders
thereof to no voting rights.
The shareholders listed have sole voting and investment power, except
as otherwise noted.
1 Director or executive officer.
2 Includes 27,500 shares underlying an option exercisable commencing
September 3, 1993, 500,000 shares underlying an option exercisable
commencing September 12, 1993, 20,000 shares underlying an option
exercisable commencing January 15, 1994, 15,000 shares underlying an option
exercisable commencing January 1, 1994, 20,000 shares underlying an option
commencing June 16, 1994, 37,500 shares underlying an option exercisable
commencing January 1, 1995 and an option to acquire an additional 107,500
shares exercisable January 1, 1996. In addition, Mr. Merryman has an option
to acquire 117,500 exercisable January 1, 1997. A trust, over which Dr.
Merryman has voting and investment power, holds 12,307 Common Shares.
3 Does not include Common Shares owned by Mr. Joseph Lizerbram, Dr.
Lizerbram's father. Dr. Lizerbram disclaims any beneficial ownership with
respect to said Common Shares. The Company believes Mr. Joseph Lizerbram
owns 25,692 Common Shares.
<PAGE>
4 Includes 11,000 shares underlying an option exercisable commencing November
1, 1989, 31,500 shares underlying an option exercisable commencing October
25, 1991, 20,000 shares underlying an option exercisable commencing
September 3, 1993, 20,000 shares underlying an option exercisable
commencing January 17, 1994 and 40,000 shares from an option to acquire
60,000 shares, which is exercisable with respect to 20,000 commencing June
16, 1994, and with respect to 20,000 shares commencing May 19, 1995. In
addition, Dr. Lizerbram may acquire an additional 20,000 shares under the
60,000 share option after June 16, 1996. A trust, for which Dr. Lizerbram
has voting and investment power, holds 5,000 Common Shares. Also includes
shares held by Dr. Lizerbram's spouse (5,825 Common Shares), his son (1,050
shares) and shares held in an Individual Retirement Account (1,250).
5 Includes 40,000 shares underlying an option to acquire 60,000 shares
exercisable with respect to 20,000 shares commencing June 16, 1994 and with
respect to 20,000 shares commencing May 19, 1995. In addition, Mr. Heil may
acquire 20,000 shares under the 60,000 share option after June 16, 1996.
Three different trusts, for which Mr. Heil has voting and investment power,
hold 704,000 shares of common stock collectively.
6 Includes an option to purchase 40,000 shares, which option is exercisable
20,000 shares after June 16, 1994, and 20,000 shares after May 19, 1995.
Also includes warrants with respect to 375,000 shares that were obtained
pursuant to consulting agreements between the Company and a third-party
consultant.
7 Includes 31,500 shares underlying an option exercisable commencing October
25, 1991, 20,000 shares underlying an option exercisable commencing
September 3, 1993, 20,000 shares underlying an option exercisable
commencing January 17, 1994, 50,000 shares underlying an option exercisable
commencing June 18, 1994 and 60,000 shares underlying an option exercisable
with respect to 20,000 shares commencing June 16, 1994, with respect to
20,000 shares commencing May 19, 1995 and with respect to 20,000 shares
commencing June 16, 1996.
8 Includes 20,000 shares underlying an option exercisable commencing
September 3, 1993, 20,000 shares underlying an option exercisable
commencing January 17, 1994, an option to acquire 40,000 shares which is
exercisable with respect to 20,000 shares commencing June 16, 1994 and
20,000 shares commencing June 16, 1995; and 40,000 shares from an option to
acquire 60,000 shares which is exercisable with respect to with respect to
20,000 shares commencing May 19, 1995 and with respect to 20,000 shares
commencing May 19, 1996. In addition, Mr. Quick may acquire the additional
20,000 shares under the 40,000 share option after June 16, 1996 and an
additional 20,000 shares under the 60,000 share option after May 19, 1997.
9 Includes three different trusts, for which Mr. Strauss has voting and
investment power, which hold an aggregate of 120,000 Common Shares. Also
includes 70,000 shares of Common Stock for six different Uniform Gift
accounts for which Mr. Strauss acts as custodian. Also includes 50,000
shares underlying an option exercisable commencing June 18, 1994 and 40,000
shares underlying an option exercisable with respect to 20,000 shares
commencing June 16, 1994, with respect to 20,000 shares commencing May 19,
1995 and 20,000 shares underlying an option to acquire 60,000 shares
exercisable on May 19, 1996. In addition, Mr. Strauss may acquire the
additional 40,000 shares underlying the 60,000 share option which is
exercisable with respect to 20,000 shares commencing May 19, 1997 and with
respect to the remaining 20,000 shares on May 19, 1998.
10 Includes 20,000 shares underlying an option exercisable commencing
September 3, 1993, 20,000 shares underlying an option exercisable
commencing June 16, 1994, 50,000 shares underlying an option exercisable
commencing June 18, 1994, 20,000 shares underlying an option exercisable
commencing January 17, 1994 and 20,000 shares underlying an option to
acquire 60,000 shares, which is exercisable with respect to 20,000 shares
commencing May 19, 1995. In addition, Mr. Ward may acquire an additional
40,000 shares under the 60,000 share option, which is exercisable with
respect to 20,000 shares after June 17, 1996 and with respect to the 20,000
shares after June 17, 1997. Mr. Ward holds 15,000 shares in an Individual
Retirement Account.
11 Includes 50,000 shares underlying an option exercisable commencing on June
17, 1994 and 60,000 shares underlying an option to acquire 180,000 shares,
which is exercisable with respect to 60,000 shares commencing May 19, 1995.
In addition, Mr. McCarthy may acquire an additional 120,000 shares under
the 180,000 share option, which is exercisable with respect to 60,000
shares after June 17, 1996 and with respect to 60,000 after June 17, 1997.
12 Includes 25,000 shares underlying an option exercisable commencing May 21,
1996.
<PAGE>
13 Includes 10,000 shares underlying an option exercisable commencing
September 3, 1993; 5,000 shares underlying an option commencing July 20,
1994; 20,000 shares underlying an option commencing March 1, 1995; and
25,000 shares underlying an option commencing May 21, 1996.
Changes in Control.
The Company knows of no arrangement, including the pledge by any person
of securities of the Company, which may at a subsequent date result in change of
control of the Company.
TRANSACTIONS WITH RELATED PARTIES
In June 1991, the Company entered into an agreement with a marketing
consultant pursuant to which it agreed to issue warrants to purchase up to
2,000,000 Common Shares ("Warrants"). Warrants with respect to 250,000 shares
were immediately vested upon signing the agreement. An additional 750,000
Warrants were vested in 1994. Mr. Hanley, a director of the Company, holds
vested Warrants with respect to 172,142 shares with respect to that agreement.
The agreement expired by its terms on May 31, 1994. As of June 1, 1994 the
Company entered into a Consultant Agreement with the marketing Consultant's
professional corporation. Under that agreement, the consultant or his assigns
receive warrants to purchase 1,000,000 Common Shares at a price of $3.00 per
share. Mr. Hanley, a director of the Company, was assigned and holds warrants
with respect to 202,858 of those shares. See "Management's Discussion and
Analysis."
DESCRIPTION OF SECURITIES
The Common Shares, par value $.001 per share (the "Common Stock"), of
the Company are registered hereby.
The Company's Restated Articles of Incorporation, as amended, authorize the
issuance of up to 42,000,000 shares of common stock, $.001 par value per share.
As of July 11, 1996, the Company has 32,657,131 shares of Common Stock
outstanding (37,657,131 including the Shares and 6,606,810 shares of Common
Stock reserved for issuance pursuant to outstanding options, warrants,
convertible securities or other rights. Each record holder of Common Stock is
entitled to one vote for each share held on all matters properly submitted to
the stockholders for their vote. Holders of all Common Stock vote as a single
class on all matters.
Holders of outstanding Common Stock are entitled to those dividends
declared by the Board of Directors out of legally available funds; and, in the
event of liquidation, dissolution or winding up of the affairs of the Company,
holders are entitled to receive ratably the net assets of the Company available
to the stockholders subject to the rights, if any, of holders of Preferred
Shares (as defined below). Holders of outstanding Common Stock have no
preemptive, conversion or redemptive rights. All of the issued and outstanding
Common Stock is duly authorized, validly issued, fully paid and nonassessable.
To the extent that additional Common Stock of the Company is issued, the
relative interests of the then existing stockholders may be diluted.
The Company's Restated Articles of Incorporation, as amended, also
provide for 2,000,000 Preferred Shares, par value $.01 (the "Preferred Shares").
The Board of Directors of the Company is vested with the authority to divide the
class of Preferred Shares into series and to fix and determine the relative
rights and preferences of the shares of any such series so established to the
full extent permitted by the laws of the State of Nevada and the Articles of
Incorporation, as amended. The terms of the Preferred Shares could disadvantage
holders of Common Shares. The terms of the Preferred Shares could include, among
other things, preferences to the holders of Preferred Shares over holders of
Common Shares as to dividends and distributions on liquidation. The Company
currently has outstanding 267,500 shares of Series A Preferred, 112,500 shares
of Series D Preferred and 125,000 shares of Series E Preferred.
The transfer agent for the Common Stock is OTR/California Stock
Transfer, Portland, Oregon.
<PAGE>
LEGAL PROCEEDINGS
On or about February 23, 1995, Mark Christiansen, a purported
shareholder of the Company, served the Company with a complaint filed on January
12, 1995 in the United States District Court for the Southern District of
California against the Company and one of its executive officers. The complaint
alleged that, during the period July 1, 1993 through March 31, 1994, the
defendants omitted material information about the Company and misrepresented
information relating to the growth of the Company in violation of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934. The complaint seeks to proceed
as a class action on behalf of certain persons who purchased shares of the
Registrant's common stock during the period July 1, 1993 through March 31, 1994
and who were allegedly damaged. The complaint seeks compensatory damages in an
unspecified amount and costs and expenses relating to the complaint, including
reasonable attorneys' fees.
On March 1, 1996, the parties agreed in principle to a settlement,
which is subject to various conditions including preparation of formal
settlement documents, notice to the class, and Court approval. The broad terms
of the settlement agreement reached on March 1, 1996 are as follows:
a. Without admitting liability, the defendants and the Company's insurance
carrier will pay $800,000 to the plaintiff class, in full settlement of all
claims asserted in the action. The parties will stipulate, solely for
purposes of settlement, to certification of an appropriate class.
b. Defendants will have the right to terminate the settlement agreement in the
event that valid exclusion requests are received from class members who, in
the aggregate, purchased more than a certain percentage, which has been
agreed between the parties but is confidential, of the total shares
purchased by class members during the class period.
c. The proposed settlement has been approved by management, solely in order to
minimize the burden, inconvenience, distraction and expense of litigation.
If for any reason the settlement is not finally consummated, management has
stated that they intend to vigorously contest this action, both with
respect to the question of whether the action should proceed as a class
action, and on the merits.
On June 10, 1996, the Company filed a complaint in the United States
District Court for the District of New Jersey against Bergen Brunswig Drug
Company and its parent corporation Bergen Brunswig Corporation (collectively
"Bergen"). Prior to June 10, 1996, the Company had been purchasing a substantial
portion of its prescription drug requirements through Bergen. The complaint
alleges, among other things, that Bergen breached various terms of its supply
agreements with the Company. On June 11, 1996, Bergen Drug Company filed a
complaint in the United States District Court for the District of Nevada against
the Company, its subsidiaries, Dr. Merryman, Dennis Smith and Tom Warren.
Bergen's complaint seeks to recover $7,500,000 from the corporate defendants
alleged to be owing for products purchased by the Company. The complaint also
seeks to recover an unspecified amount of exemplary damages from all of the
defendants on various theories relating to the Company's purchase of products,
including breach of an implied covenant of good faith and fair dealing,
intentional misrepresentation and negligent misrepresentation. The parties have
agreed to not require responsive pleadings to be filed in either action while
settlement negotiations are proceeding. If a settlement cannot be reached,
management of the Company intends to vigorously defend against the claims in
Bergen's complaint and to vigorously prosecute the Company's complaint against
Bergen.
The Company is not a party to any other legal proceedings which, in its
belief, could have a material adverse effect on the Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon
for the Company by Ballard Spahr Andrews & Ingersoll, Salt Lake City, Utah.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1995
and 1994, the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995 and the related consolidated financial statement schedules, included in
this Prospectus and elsewhere in Registration Statement have been audited by
McGladrey & Pullen, LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
<PAGE>
The balance sheet of Home Pharmacy as of June 30, 1995 and 1994, the
related statements of income, stockholders' equity and cash flows for the three
years ended June 30, 1995 included in the Prospectus and elsewhere in
Registration Statement have been audited by Arthur Andersen, LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The balance sheet of Family Pharmaceuticals of America, Inc., as of
December 31, 1993, the related statements of income, stockholders' equity and
cash flows for the year ended December 31, 1993, included in the Prospectus and
elsewhere in Registration Statement have been audited by McGladrey & Pullen,
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of Medical Service Agency, Inc. as of December
31, 1993, 1992, and 1991 and for the years then ended, included in this
Prospectus and elsewhere in Registration Statement have been audited by McKonly
& Asbury, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
CHANGE IN ACCOUNTANTS
Effective April 19, 1994, the Company dismissed Price Waterhouse
("Price") as its certifying accountant. Price's reports on the Company's
financial statements for the years ended December 31, 1993, 1992 and 1991 did
not contain an adverse opinion or a disclaimer of opinion and were not qualified
as to uncertainty, audit scope, or accounting principles.
The Company's audit committee and board of directors unanimously
approved dismissal of Price.
During the Company's three fiscal years ended December 31, 1993, 1992
and 1991 and the interim period subsequent to December 31, 1993, there were no
disagreements, as defined in Regulation S-K Item 304, with Price on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements would have caused Price to make
a reference to the subject matter of the disagreement in connection with its
reports.
On April 18, 1994, the Company engaged McGladrey & Pullen, LLP to
perform its audits and provide various accounting services thereafter. The
Company and McGladrey & Pullen, LLP did not consult prior to such date regarding
any reportable matter.
There are no other changes in and disagreements on accounting and
financial statement disclosure.
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Title of Documents
MEDNET, MPC CORPORATION
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1995 and 1994
Consolidated Statements of Operations for the years
ended December 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Financial Statement Schedules:
For the three years ended December 31, 1995:
Report of Independent Accountants on the Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
Consolidated Statement of Financial Condition as of March 31, 1996 (unaudited)
Consolidated Statements of Operations for the three months ended
March 31, 1996 and 1995 (unaudited)
Consolidated Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 (unaudited)
Notes to Consolidated Financial Statements
HOME PHARMACY (A DIVISION OF ARCVENTURES, INC.)
Unaudited Statements of Assets and Liabilities at
September 15, 1995 and December 31, 1994
Unaudited Statements of Revenue and Expenses (excluding
income taxes) for the periods ended September 15, 1995,
June 30, 1995, March 31, 1995, December 31, 1994 and
September 30, 1994
Unaudited Statement of Equity for the eight and one-half
months ended September 15, 1995
Unaudited Statements of Cash Flows for the periods ended
September 15, 1995, June 30, 1995 and March 31, 1995
Report of Independent Public Accountants
Statements of Assets and Liabilities at June 30, 1995 and 1994
Statements of Revenues and Expenses (excluding income taxes)
for the years ended June 30, 1995, 1994 and 1993
Statement of Equity for the years ended June 30, 1995,
1994 and 1993
Statements of Cash Flows for the years ended June 30, 1995, 1994 and 1993
<PAGE>
MEDICAL SERVICE AGENCY, INC.
Report of Independent Accountants...............................................
Consolidated Balance Sheets December 31, 1993, 1992 and 1991....................
Consolidated Statements of Income for the Years Ended
December 31, 1993, 1992 and 1991..............................................
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1993, 1992 and 1991........................................
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1992 and 1991..............................................
Notes to Consolidated Financial Statements......................................
FAMILY PHARMACEUTICALS OF AMERICA, INC.
Independent Auditor's Report....................................................
Balance Sheets December 31, 1993 and June 30, 1994 (unaudited)..................
Statements of Income December 31, 1993 and June 30, 1994
and 1993 (unaudited)..........................................................
Statement of Stockholders' Equity December 31, 1993 and
June 30, 1994.................................................................
Statements of Cash Flows Year Ended December 31, 1993 and
Six Months Ended June 30, 1994 and 1993.......................................
Notes to Financial Statements...................................................
<PAGE>
MEDNET, MPC CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1995
<PAGE>
CONTENTS
INDEPENDENT AUDITOR'S REPORT
- ----------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets
Consolidated statements of operations
Consolidated statements of stockholders' equity
Consolidated statements of cash flows
Notes to consolidated financial statements
- ----------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT ON THE SCHEDULE
- ----------------------------------------------------------------------------
Valuation and qualifying accounts - Schedule II
- ----------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Mednet, MPC Corporation
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Mednet, MPC
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mednet, MPC
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
---------------------------
Las Vegas, Nevada
March 8, 1996, except for Note 6
as to which the date is March 27, 1996
<PAGE>
MEDNET, MPC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
ASSETS 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash ......................................................................... $ 42,000 $ 1,711,000
Accounts receivable (Notes 3 and 6) .......................................... 17,798,000 8,087,000
Inventories (Note 6) ......................................................... 2,849,000 1,334,000
Other current assets ......................................................... 243,000 104,000
--------------------------
Total current assets .............................................. 20,932,000 11,236,000
Property and equipment, net (Notes 4 and 6) ..................................... 1,532,000 1,184,000
Intangible assets, net (Note 5) ................................................ 18,582,000 9,308,000
Other assets .................................................................... 857,000 589,000
--------------------------
$41,903,000 $ 22,317,000
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving line of credit (Note 6) ............................................ $ 3,709,000 $ 0
Current portion of long-term debt (Note 6) ................................... 2,739,000 2,258,000
Accounts payable ............................................................. 17,483,000 6,545,000
Accrued expenses ............................................................. 2,139,000 1,013,000
--------------------------
Total current liabilities ......................................... 26,070,000 9,816,000
--------------------------
Long-Term Debt (Note 6) ......................................................... 1,422,000 595,000
--------------------------
Redeemable convertible preferred stock, Series A, $.01 par value, 10% annual
dividends, 2,000,000 shares authorized for all series of preferred stock,
267,500 issued and outstanding,
stated at redemption value (Note 8) .......................................... 5,350,000 0
--------------------------
Commitments and Contingencies (Notes 10 and 12)
Stockholders' Equity (Notes 8, 9, 10, 13 and 15)
Common stock: $.001 par value; 42,000,000 shares authorized,
29,149,118 and 23,797,747 issued and outstanding
at December 31, 1995 and 1994 ............................................. 29,000 24,000
Additional paid-in capital ................................................... 42,778,000 32,138,000
Accumulated deficit .......................................................... (33,746,000) (20,256,000)
--------------------------
Total stockholders' equity ........................................ 9,061,000 11,906,000
--------------------------
$41,903,000 $ 22,317,000
===========================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MEDNET, MPC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales (Notes 10, 11 and 16) $ 114,438,000 $ 67,985,000 $ 25,370,000
Less sales discounts and allowances 141,000 122,000 146,000
-----------------------------------------------
Net sales 114,297,000 67,863,000 25,224,000
Cost of sales (Note 11) 98,253,000 58,793,000 19,504,000
-----------------------------------------------
Gross profit 16,044,000 9,070,000 5,720,000
-----------------------------------------------
Selling, general and administrative expenses:
Salaries and benefits 8,617,000 5,214,000 4,401,000
Marketing and advertising 1,064,000 1,296,000 962,000
Provision for doubtful accounts 1,197,000 706,000 290,000
Other administrative expenses 6,494,000 5,183,000 3,178,000
-----------------------------------------------
Total selling, general and
administrative expenses 17,372,000 12,399,000 8,831,000
-----------------------------------------------
Depreciation and amortization (Note 5) 8,884,000 2,395,000 4,354,000
Restructuring expenses (Note 14) 353,000 0 0
Merger related expenses (Note 14) 250,000 0 0
-----------------------------------------------
Operating loss (10,815,000) (5,724,000) (7,465,000)
-----------------------------------------------
Other income (expense):
Interest expense (1,273,000) (310,000) (250,000)
Subsidiary operations for period not owned
(Note 10) (982,000) 517,000 0
Loss on disposal of property and equipment (335,000) 0 (313,000)
Debt conversion expense 0 (203,000) (224,000)
Other, net 73,000 221,000 26,000
-----------------------------------------------
Total other income (expense) (2,517,000) 225,000 (761,000)
-----------------------------------------------
Net loss $ (13,332,000) $ (5,499,000) $ (8,226,000)
==============================================
Net loss per common share $ (0.53) $ (0.26) $ (0.49)
==============================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MEDNET, MPC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
Class B Class B
Common Stock Common Stock Preferred Stock Additional Stock-
------------------ ------------------ ----------------- Paid-In Accumulated holders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 ....... 9,812,339 $10,000 162,000 $ 0 $ 0 $ 0 $11,335,000 $ (6,531,000) $4,814,000
Conversion of Class B common stock
to common stock ................. 161,501 0 (162,000) 0 0 0 0 0 0
Exercise of warrants and options for
common stock .................... 571,469 1,000 0 0 0 0 717,000 0 718,000
Common stock issued in private
placement 8,610,798 9,000 0 0 0 0 8,251,000 0 8,260,000
Common stock issued as a result of
conversion of note payable to
equity (Note 6) ................. 249,130 0 0 0 0 0 971,000 0 971,000
Common stock issued in exchange for
services and buyout of a
commission agreement (Note 13) .. 219,410 0 0 0 0 0 787,000 0 787,000
Stock issuance costs ............... 0 0 0 0 0 0 (296,000) 0 (296,000)
Net loss ........................... 0 0 0 0 0 0 0 (8,226,000) (8,226,000)
-----------------------------------------------------------------------------------------------
19,624,647 $ 20,000 0 $ 0 0 $ 0 $21,765,000 $(14,757,000) $ 7,028,000
===============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MEDNET, MPC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
Class B Series B
Common Stock Common Stock Preferred Stock Additional Stock-
------------------ --------------- --------------- Paid-In Accumulated holders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 .......... 19,624,647 $20,000 0 $ 0 0 $ 0 $21,765,000 $(14,757,000) $ 7,028,000
Common stock issued in exchange for
services, buyout of a commission
agreement, termination of marketing
partnerships and exercise of
warrants and options (Note 13) ..... 273,100 0 0 0 0 0 489,000 0 489,000
Common stock issued in private ......... 1,900,000 2,000 0 0 0 0 5,421,000 0 5,423,000
placements
Stock issuance costs ................... 0 0 0 0 0 0 (235,000) 0 (235,000)
Common stock issued in the acquisition
of FPA (Note 10) ....................... 400,000 0 0 0 0 0 2,000,000 0 2,000,000
Common stock issued in the acquisition
of Mednet (Note 10) ................. 1,600,000 2,000 0 0 0 0 2,698,000 0 2,700,000
Net loss ............................... 0 0 0 0 0 0 0 (5,499,000) (5,499,000)
------------------------------------------------------------------------------------------
23,797,747 $24,000 0 $ 0 0 $ 0 $32,138,000 $(20,256,000 $11,906,000
===========================================================================================
</TABLE>
<PAGE>
MEDNET, MPC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
Common Stock Common Stock Preferred Stock Additional Stock-
------------------ ------------- ------------------ Paid-In Accumulated holders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 23,797,747 $24,000 0 $ 0 0 $ 0 $32,138,000 $(20,256,000) $11,906,000
Common stock issued in exchange
for services and exercise of
warrants and options (Note 10) 432,623 0 0 0 0 0 327,000 0 327,000
Common stock issued as reduction
of debt 1,774,099 2,000 0 0 0 0 4,833,000 0 4,835,000
Preferred stock issued in private
placements 0 0 0 0 100,000 2,000,000 0 0 2,000,000
Warrants issued in exchange for
services 0 0 0 0 0 0 14,000 0 14,000
Common stock issued in private
placements 2,111,000 2,000 0 0 0 0 4,721,000 0 4,723,000
Series B Preferred stock
conversion to common stock 1,033,649 1,000 0 0 (100,000) (2,000,000) 1,999,000 0 0
Preferred stock dividends 0 0 0 0 0 0 0 (158,000) (158,000)
FPA acquisition shortfall payments
(Note 10) 0 0 0 0 0 0 (957,000) 0 (957,000
Stock issuance costs 0 0 0 0 0 0 (297,000) 0 (297,000)
Net loss 0 0 0 0 0 0 0 (13,332,000) (13,332,000)
------------------------------------------------------------------------------------------------
Balance at December 31, 1995 29,149,118 $29,000 0 $ 0 0 $ 0 $42,778,000 $(33,746,000) $ 9,061,000
================================================================================================
</TABLE>
<PAGE>
MEDNET, MPC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Cash received from customers ................... $103,410,000 $ 62,758,000 $ 24,484,000
Cash paid to suppliers and employees ........... (106,087,000) (66,867,000) (24,513,000)
Interest paid .................................. (870,000) (261,000) (232,000)
--------------------------------------------
Net cash used in operating activities
activities (3,547,000) (4,370,000) (261,000)
--------------------------------------------
Cash Flows From Investing Activities
Proceeds on sale of property and equipment ..... 292,000 0 0
Purchases of property and equipment ............ (1,033,000) (384,000) (235,000)
Payment for purchase of Mail-Rx, net of cash
acquired .................................... 0 0 (7,582,000)
Payment for purchase of Home Pharmacy .......... (8,000,000) 0 0
Sale of short-term investment .................. 0 0 885,000
Costs of acquisitions (Note 10) ................ (2,465,000) (335,000) 0
-------------------------------------------
Net cash used in investing activities (11,206,000) (719,000) (6,932,000)
-------------------------------------------
Cash Flows From Financing Activities
Proceeds from borrowings ....................... 5,925,000 8,000 5,000
Payments on notes payable ...................... (4,115,000) (742,000) (911,000)
Payment of shortfall ........................... (65,000) 0 0
Proceeds from exercise of warrants and options . 285,000 288,000 718,000
Proceeds from issuance of common stock ......... 4,723,000 5,423,000 7,763,000
Proceeds from issuance of preferred stock ...... 7,350,000 0 0
Stock issuance costs ........................... (297,000) (235,000) 0
Debt issuance costs ............................ (722,000) 0 0
Cash acquired in acquisitions (Note 10) ........ 0 838,000 0
--------------------------------------------
Net cash provided by
financing activities ........... 13,084,000 5,580,000 7,575,000
--------------------------------------------
Net increase (decrease) in cash ..... (1,669,000) 491,000 382,000
Cash balance, beginning ........................... 1,711,000 1,220,000 838,000
--------------------------------------------
Cash balance, ending .............................. $ 42,000 $ 1,711,000 $ 1,220,000
============================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MEDNET, MPC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation Of Net Loss To Net Cash Used
In Operating Activities
Net loss $ (13,332,000) $ (5,499,000) $ (8,226,000)
Depreciation and amortization (net of $120,000 of
preacquisition depreciation of Home Pharmacy)
(See Note 10) 8,764,000 2,395,000 4,354,000
Loss on disposal of property and equipment 335,000 313,000
Provision for doubtful accounts receivable 1,197,000 706,000 290,000
Expenses paid by issuance of common stock and warrants 56,000 31,000 1,052,000
Change in assets and liabilities, net of
effects of business combinations
(Increase) in accounts receivable (10,960,000) (2,043,000) (1,090,000)
(Increase) decrease in inventories (1,515,000) 461,000 (368,000)
(Increase) decrease in other current assets (139,000) 356,000 105,000
(Increase) decrease in other assets 141,000 (122,000) 164,000
Increase (decrease) in accounts payable 10,938,000 (1,113,000) 2,972,000
Increase in accrued expenses 968,000 458,000 173,000
---------------------------------------------
Net cash used in operating activities $ (3,547,000) $ (4,370,000) $ (261,000)
---------------------------------------------
Supplemental schedule of noncash investing and financing
activities:
Common stock issuances:
Reduction of debt (Note 10) $ 4,835,000 $ 0 $ 0
-------------------------------------------
Conversion of preferred stock 2,000,000 0 0
-------------------------------------------
Purchase of common stock of FPA 0 2,000,000 0
-------------------------------------------
Purchase of assets of MedNet 0 2,700,000 0
-------------------------------------------
Termination of marketing partnerships 0 166,000 0
-------------------------------------------
Services and commissions 0 0 787,000
-------------------------------------------
Purchase of assets of Mail-Rx 0 0 201,000
-------------------------------------------
Conversion of note payable to equity 0 0 971,000
-------------------------------------------
Account payable converted to notes payable 0 0 2,846,000
-------------------------------------------
Notes payable issued to purchase assets of
Home Pharmacy 7,150,000 0 0
-------------------------------------------
Notes payable issued to settle FPA shortfall 892,000 0 0
-------------------------------------------
Liabilities assumed in acquisitions 0 5,811,000 0
-------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MEDNET, MPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
Mednet, MPC Corporation (formerly Medi-Mail, Inc.) and Subsidiaries ("Mednet" or
the "Company") are in the managed prescription care industry. The Company acts
as an integrated, full service prescription drug benefits manager serving
individual members of retirement organizations, fraternal organizations, state
employee organizations, commercial organizations, corporations, self-insurance
trusts, insurance companies, and other benefit plan sponsors throughout the
United States. The Company operates mail order pharmacies in Las Vegas, Nevada
and Chicago, Illinois, a claims processing operation located in Lemoyne,
Pennsylvania and retail pharmacies in Las Vegas, Nevada and San Diego,
California.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A summary of the Company's significant accounting policies follows:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Mednet, MPC Corporation and its wholly-owned subsidiaries, Medi-Mail, Inc.
("Medi-Mail"), Medi-Claim, Inc. ("Medi-Claim"), Medi-Phar, Inc. ("Medi-Phar"),
and Family Pharmaceuticals of America, Inc. ("FPA"). All significant
intercompany transactions have been eliminated in consolidation.
The Company consolidates the operations of acquired businesses retroactively to
the beginning of the year of acquisition and subtracts the preacquisition net
income or adds the preacquisition net loss of the acquired business for the
period prior to acquisition from/to the consolidated statement of operations.
Cash
The Company maintains cash balances in excess of insured amounts at financial
institutions.
Inventories
Inventories, consisting primarily of prescription drugs, are stated at the lower
of cost or market. Cost is determined using the first-in, first-out method.
Property and equipment
Property and equipment are stated at cost, net of depreciation and amortization.
Depreciation and amortization is computed primarily on the straight-line method
over the following estimated useful lives:
Years
-----
Furniture and fixtures 5
Office equipment 5
Software 3
Leasehold improvements are amortized over the lesser of the lease term or the
estimated useful life of the improvement.
Intangible assets
Intangible assets include the following assets amortized over their estimated
useful lives as follows:
Years
-----
Goodwill 25 years
Tradename 25 years
Customer contracts Length of contracts (primarily 3 years)
Non-compete agreements Length of agreements (primarily 3 years)
Customer lists and other 3 years
Debt issuance costs Length of contracts (primarily 5 years)
<PAGE>
On an annual basis, the Company reviews the recoverability of intangible assets.
The measurement of possible impairment is based primarily on the Company's
ability to recover the carrying value of intangible assets from estimated future
operating cash flows on an undiscounted basis. If an impairment is deemed to
exist, the impairment adjustment is determined based on estimated operating cash
flows on a discounted basis (see Note 5).
Income taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effect of changes in tax laws and rates on the date of enactment.
Net loss per common share
Net loss per common share is based on the weighted average number of shares of
common stock outstanding of 25,383,356, 21,352,923 and 16,675,420 during 1995,
1994 and 1993, respectively. The Company has common stock equivalents consisting
of stock options and warrants. The common stock equivalents are antidilutive and
therefore, are not included in the computation of net loss per common share.
Fair value of financial instruments
The Financial Accounting Standards Board issued SFAS No. 107, Disclosures about
Fair Value of Financial Statements, which is effective December 31, 1995. This
statement requires the disclosure of estimated fair values for all financial
instruments for which it is practicable to estimate fair value.
The carrying amounts of financial instruments including cash, trade receivables,
accounts payable and accrued expenses approximate fair value because of their
short maturity.
The carrying amount of long-term debt and the revolving line of credit
approximate fair value because the interest rates on these instruments either
float with market rates or currently approximate market interest rates.
Accounting for Stock-Based Compensation
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based
Compensation. Statement No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans, such as stock options and
stock purchase plans. The statement generally suggests but does not require
stock-based compensation arrangements for employees be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. Stock-based
compensation for nonemployees is required to be accounted for at the fair value
of the instruments issued. Statement No. 123 will first be required for the
Company's year ending December 31, 1996. Companies that do not elect to change
their accounting for stock-based compensation for employees are required to
disclose the effect on net income and earnings per share as if the provision of
Statement No. 123 were applied. The Company has decided not to adopt the
accounting provisions of this statement for employees' stock-based compensation
arrangements.
Note 2. Results of Operations and Capital Resources
The Company has been built over the past four years through a series of
acquisitions as discussed in Note 10. The Company has been focused on finding
acquisition candidates, financing acquisitions, integrating acquired operations,
building information systems and personnel infrastructures to operate the
Company. In the past three years, the Company has incurred losses of
$13,332,000; $5,499,000 and $8,226,000 for 1995, 1994 and 1993, respectively.
The negative cash flow from operations caused by these losses has placed
significant liquidity strains on the Company, further increasing operating and
financing costs.
<PAGE>
As discussed in Note 6, in December 1995, the Company entered into a
$20,000,000, five-year credit agreement with an asset based lender. Borrowing
available under this arrangement is computed on formulas based on accounts
receivable and inventory levels. In March 1996, the Company has drawn $8,924,000
under this agreement, which was the maximum available under these formulas.
The convenant's under the credit arrangement require the Company to have net
income before interest, taxes, depreciation and amortization per quarter of
$500,000 in 1996 and $1,000,000 in 1997, with corresponding increases in
tangible net worth. The credit arrangement also contains convenants restricting
certain activities without prior approval, including additional borrowings and
additional acquisitions. To achieve the results for 1996 necessary to meet these
convenants, the Company will be required to increase its sales levels, its
corresponding margin, or reduce its operating costs. As compared to the
Company's fourth quarter 1995 operating results, the combination of margin
increases and operating cost decreases needed to achieve these covenant goals
approximates $1,500,000 per quarter. Management's strategies to achieve these
goals involve both internal sales growth at higher rates than previously
achieved, and significant cost reductions.
Management plans to attain sales increases by internal growth include further
increasing revenues through the integration of its mail order pharmacy, claims
processing and retail pharmacy programs in order to provide more services to
existing customers, and through obtaining new contracts in 1996. Although
management believes that the necessary 1996 sales growth goals will be attained,
there can be no assurances that it will.
Subsequent to December 31, 1995, management took certain actions to achieve the
cost reductions necessary to achieve profitable operations in 1996. Management's
actions included restructuring operations to reduce operating costs and increase
efficiencies by consolidating its mail service into two facilities,
restructuring its workforce to achieve greater efficiency, and limiting
nonessential expenditures. Management plans for further reductions include the
planned closing of the five unprofitable retail pharmacies. Although management
believes that the cost reductions put into place will be sufficient, there can
be no assurances that they will.
The Company also has ongoing discussions with investment bankers and lenders
about sources of debt and equity financing. Management currently believes it has
sufficient arrangements in place to meet its operating needs for 1996. However,
no assurances can be made that additional sources of working capital financing
will not be required.
Although the Company expects that its existing contract base and new contracts
signed in 1996, coupled with its planned cost savings, will be sufficient to
allow the Company to generate a profit and provide positive cash flow from
operations in 1996, the Company may require additional capital from outside
sources to supplement its working capital position. The Company has a revolving
line of credit which should substantially fund accounts receivable and inventory
growth. In addition, the Company continues to discuss potential sources of
equity capital with investment bankers and believes it will obtain additional
working capital from these sources if necessary.
<PAGE>
Note 3. Accounts Receivable
1995 1994
- --------------------------------------------------------------------------------
Trade receivables ...................... $ 16,080,000 $ 6,357,000
Rebates receivable ..................... 3,093,000 2,510,000
---------------------------
19,173,000 8,867,000
Less allowance for doubtful accounts ... 1,375,000 780,000
---------------------------
$ 17,798,000 $ 8,087,000
===========================
The Company obtains rebates under various rebate programs from pharmaceutical
companies. Generally, the rebates are based on a per unit rebate amount times
the number of prescriptions filled with products for which rebate programs
exist. The Company has an agreement with a third party processor who files
claims on behalf of the Company for pharmaceutical manufacturer rebates. The
third party processor collects a 10% fee for submitting these claims. Total
rebates reflected in the accompanying income statement of operations were
$4,278,000 in 1995 and $2,501,000 in 1994.
Rebates receivable reflects management's best estimate of rebates, after
collection and claim expenses, the Company will receive in 1996 for
prescriptions filled and claims processed in 1995.
Note 4. Property and Equipment
1995 1994
- --------------------------------------------------------------------------------
Furniture and fixtures $ 360,000 $ 565,000
Office equipment 1,540,000 739,000
Software 694,000 1,234,000
Leasehold improvements 118,000 123,000
---------------------------------
2,712,000 2,661,000
Less accumulated depreciation and amortization 1,180,000 1,477,000
---------------------------------
$ 1,532,000 $ 1,184,000
=================================
Note 5. Intangible Assets and Impairments
Intangible assets arose from the Company's purchase of substantially all of the
assets of Home Pharmacy, Medical Service Agency, Inc. and GBK, Inc. on September
15, 1995, November 16, 1994 and April 30, 1993, respectively and the Company's
purchase of all of the outstanding common stock of Family Pharmaceuticals of
America, Inc. on June 30, 1994. See Note 10 regarding these business
combinations. Intangible assets consist of the following at December 31:
1995 1994
- --------------------------------------------------------------------------------
Goodwill $ 18,229,000 $ 5,900,000
Customer contracts 7,469,000 5,494,000
Non-compete agreements 822,000 722,000
Customer list, tradename and other 1,679,000 2,829,000
---------------------------------
28,199,000 14,945,000
Less accumulated amortization 9,617,000 5,637,000
---------------------------------
Intangible assets, net $ 18,582,000 $ 9,308,000
=================================
<PAGE>
During 1995, the Company closed its Baltimore mail service facilities (GBK, Inc.
acquisition) and consolidated those business operations into the Las Vegas and
South Carolina facilities. At December 31, 1995, the Company had initiated a
plan to close its South Carolina mail service facilities (Family Pharmaceuticals
of America, Inc. acquisition) and consolidate those business operations into its
Las Vegas and Chicago facilities. Also, at December 31, 1995, the Company had
initiated a plan to close five of its retail pharmacy locations (see Note 14).
In addition, certain contracts acquired in the Home Pharmacy acquisition which
were allocated a portion of the purchase price were subsequently cancelled (see
Note 10). As a result, the Company, based on expected remaining discounted cash
flows from these business operations, recorded the following impairments of the
intangible assets acquired:
Net book
value before Impairment
Adjustment Adjustment
-------------------------
Goodwill ............................................ $ 5,181,000 $ 3,384,000
Customer contracts .................................. 5,783,000 2,542,000
Non-compete agreements .............................. 137,000 60,000
Customer lists, trade names and other ............... 1,123,000 85,000
-------------------------
$ 12,224,000 $ 6,071,000
=========================
The impairment adjustment of $6,071,000 is included in depreciation and
amortization in the accompanying consolidated statement of operations.
Note 6. Revolving Line of Credit and Long-Term Debt
Revolving Line of Credit
The Company has a $20,000,000 revolving line of credit with a financing company.
Advances on the line are based on eligible accounts receivable and inventory, as
defined in the agreement. The line bears interest at 1-1/2% over the financing
company's reference rate (8.5% at December 31, 1995) payable monthly, and is
secured by accounts receivable, inventory and equipment. The revolving credit
agreement matures on December 29, 2000. The outstanding balance on the line is
$3,709,000 at December 31, 1995.
The agreement has a prepayment penalty for early termination by the Company or
early termination due to Company defaults, as follows:
First 24 months - Greater of last 6 months interest or $640,000;
Next 24 months - Greater of last 6 months interest or $400,000;
Next 12 months - Greater of last 6 months interest or $200,000.
In addition, the agreement calls for certain other fees, including annual
facility fees and unused commitment fees.
The revolving line of credit has covenants which require the Company, among
other things, to maintain certain financial ratios, including:
Current ratio of at least 1.0 to 1.0
Tangible net worth of at least $500,000 at December 31, 1995,
with the minimum balance increasing $500,000 per quarter
thereafter.
Earnings before interest, taxes, depreciation and amortization
of $500,000 per quarter, cumulatively, in 1996; and $1,000,000
per quarter, cumulatively, in 1997.
In addition, capital expenditures, dividends and increases in officers' salaries
are limited.
The Company was unable to meet the current ratio and the tangible net worth
covenants at December 31, 1995. On March 27, 1996, these covenant violations
were waived by the financing company. In addition, the financing company has
expressed its intention to modify these financial covenants effective March 31,
1996.
<PAGE>
Long-Term Debt
<TABLE>
1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes payable to the former owner of Home Pharmacy (Note 10):
Bearing interest at 1% above prime, ** secured by common shares
placed in escrow and additional pledged shares. The note matures
on October 15, 1996 ......................................................................... $4,650,000 $ 0
Bearing interest at 15%, secured by common shares placed in escrow
and additional pledged shares due February 29, 1996 ......................................... 2,500,000 0
----------------------------
7,150,000 0
Less advance payment through stock issuance ................................................. 4,835,000 0
----------------------------
2,315,000 0
Convertible notes payable, bearing interest at 11%. Accrued interest and
principal matures in May 1997. These notes may be converted by the Company
into common stock at a conversion price of $3 per
share ....................................................................................... 1,124,000 0
Unsecured notes payable to a supplier bearing interest at 9%,
payable semi-annually. Annual principal payments of $218,750
payable on August 30, 1996 and 1997, respectively ........................................... 438,000 556,000
Unsecured note payable to related party bearing interest at 1% over prime,
annual principal payments of $78,550 plus accrued interest
commencing April 1, 1995 and continuing through April 1, 1997 ............................... 157,000 236,000
Unsecured note payable, interest payable monthly at 10%,
maturing March 10, 1996 ..................................................................... 115,000 400,000
Notes payable to a supplier, bearing interest at 8-1/2% and 5%,
paid in full during 1995 .................................................................... 0 1,627,000
Other .......................................................................................... 12,000 34,000
----------------------------
4,161,000 2,853,000
Less current portion ........................................................................... 2,739,000 2,258,000
----------------------------
$1,422,000 $ 595,000
============================
<FN>
** In the event of default under this note agreement, the interest rate
increases by 7%.
</FN>
</TABLE>
Long-term debt as of December 31, 1995 matures in the amount of $2,739,000 in
1996 and $1,422,000 in 1997.
Note 7. Income Taxes
The Company has federal net operating loss carryforwards of approximately
$20,152,000 which are available to offset future taxable earnings of the Company
and expire at varying times through 2010. There are also state net operating
loss carryforwards of lesser amounts which expire at varying times through 2010.
The federal loss carryforwards as of December 31, 1995 have the following
expiration dates:
Expiration Date Amount
------------------
2002 $ 298,000
2003 664,000
2004 1,039,000
2005 1,189,000
2006 567,000
2007 2,994,000
2008 3,912,000
2009 3,360,000
2010 6,129,000
-----------------
$ 20,152,000
=================
<PAGE>
Section 382 of the Internal Revenue Code of 1986 and the related regulations
impose certain limitations on a corporation's ability to use net operating loss
carryforwards if more than a 50% ownership change occurs. State laws generally
conform to the provisions of Section 382. As a result of stock issuances during
1995 and 1994, it is possible that the Company had an ownership change of more
than 50%; therefore, the Company's ability to utilize the net operating loss
carryforwards may be substantially restricted.
Deferred tax assets at December 31 are summarized as follows:
1995 1994
- --------------------------------------------------------------------------------
Net operating loss carryforwards $ 7,417,000 $ 5,333,000
Amortization of intangibles 4,223,000 1,901,000
Reserve on building held for sale 0 133,000
Bad debts 488,000 286,000
Depreciation and other 229,000 64,000
----------------------------------
12,357,000 7,717,000
Less valuation allowance (12,357,000) (7,717,000)
----------------------------------
$ 0 $ 0
==================================
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," requires that a valuation allowance be recorded "when it is more likely
than not" that any portion or all of a deferred tax asset will not be realized.
Due to the inherent uncertainty in forecasts of future events and operating
results, the Company has provided for a valuation allowance in an amount equal
to gross deferred tax assets resulting in no net deferred tax assets at December
31, 1995.
No income tax benefit has been recorded in the consolidated statement of
operations due to the valuation allowances on the deferred tax assets. The net
change in the valuation allowance from 1994 to 1995 of $4,640,000 is due
primarily to the 1995 net operating loss and the difference in amortization
periods for intangible assets for book and tax purposes.
Note 8. Stock Transactions
During September 1995, the Company issued 267,500 shares of Series A redeemable
preferred stock for $20 per share or $5,350,000. The Series A redeemable
preferred shares are entitled to an annual dividend of 10%. Each share is
convertible at the option of the holder (or in some circumstances at the option
of the Company) into 6-2/3 shares of the Company's common stock. In addition,
the Company may, at its option, convert all but not less than all, of the Series
A shares into convertible notes bearing the same rights and terms of the Series
A shares. The Company is entitled to prepay the convertible notes without
penalty. If not previously converted, the Company is obligated to redeem those
shares in 2005.
During August 1995, the Company issued 100,000 shares of Series B convertible
preferred stock for $20 per share or $2,000,000. The proceeds from these
issuances were used to consummate the purchase of the assets of Home Pharmacy.
During October and November 1995, 100,000 shares of Series B stock were
converted into 1,033,649 shares of common stock.
During August 1995, the Company issued 2,111,000 shares of common stock in
private placements raising approximately $4,720,000. The proceeds from these
issuances were used to consummate the purchase of assets of Home Pharmacy.
<PAGE>
During each of the three years ended December 31, 1995, 1994, and 1993, the
Company issued shares of common stock upon the exercise of various warrants and
options for common stock. See Note 9 for a summary of common stock option
activity. The following is a summary of warrant activity for each of the three
years ended December 31, 1995, 1994, and 1993:
<TABLE>
Exercise
Warrants Price Expiration
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1992 3,854,000 $1.14 - $5.57 June 1993 - Nov. 1996
Issued in a Regulation "S" placement 110,000 $2.50 April 30, 1994
Exercised (299,000) $1.14 - $4.00
Expired (750,000) $4.00
----------------------------------------------------------------
Outstanding at December 31, 1993 2,915,000 $1.14 - $5.57 March 1994 - Nov. 1996
Issued in a Regulation "S" placement 100,000 $2.44 March 1999
Issued for services 1,890,000 $3.00 June 1997-May 1999
Exercised (166,000) $1.31-$2.44
Expired (1,800,000) $4.50
----------------------------------------------------------------
Outstanding at December 31, 1994 2,939,000 $1.14-$5.57 January 1995-March 1999
Issued in a Private placement 849,000 $.01-$2.20 None
Issued to induce extension of debt terms 100,000 $5.00 February 1997
Issued in settlement of lawsuit 115,000 $2.75-$3.00 August 2000
Issued for services 256,000 $2.20-$5.56 February
1997-January 2000
Exercised (383,000) $.01-$2.50 -
Expired (100,000) $4.50 -
---------------------------------------------------------------
Outstanding at December 31, 1995 3,776,000 $.01-$5.56 January
1996-August 2000
===============================================================
</TABLE>
All outstanding warrants are exercisable as of December 31, 1995.
During 1994, the Company issued 400,000 shares of common stock valued at
$2,000,000 in connection with the purchase of FPA. Also during 1994, the Company
issued 1,600,000 shares of common stock valued at $2,700,000 in connection with
its purchase of substantially all of the assets of Medical Service Agency, Inc.
See Note 10.
During 1994, the Company raised approximately $5,423,000 from several private
placements, the proceeds of which were used for general operating purposes. The
Company issued 1,900,000 shares of common stock as a result of the private
placements.
During the years ended December 31, 1994 and 1993, the Company issued 13,333
shares of common stock in connection with the Company's buy-out of a commission
agreement.
During 1993, the Company issued 13,000 shares of stock valued at $30,000 in lieu
of rental payments and 39,001 shares of stock valued at $88,000 to officers and
directors of the Company for services rendered.
During September 1993, the Company renegotiated the President's employment
agreement. In connection therewith, the Company issued 150,000 shares of common
stock to the President with a value of $666,000. This amount was recorded as
compensation expense along with $100,000 paid to the President. In addition, the
Company issued to the President options to purchase 500,000 shares of the
Company's stock at an option price of $4.50 per share. These options were issued
outside of the Company's Incentive Stock Option Plan ("ISOP") and Non-Qualifying
Stock Option Plan ("NQSOP") and expire September 11, 1998.
This renegotiated agreement eliminated the President's right to a severance
arrangement with a specified value of $2,000,000 to be paid in cash and common
stock.
During the year ended December 31, 1993, Class B common stock of 161,501 shares
were converted into common stock pursuant to specified terms. At December 31,
1993, all Class B common stock had been converted into the Company's common
stock.
During 1993, the Company raised approximately $8,260,000 from several private
placements, the proceeds of which were used to consummate the purchase of assets
from GBK, Inc. The Company issued 8,610,798 shares of common stock as a result
of the private placements, including 1,500,000 of the shares sold to a director
of the Company in a separate private placement.
<PAGE>
In conjunction with the conversion of a note payable to shares of the Company's
common stock during 1993, the Company issued 249,130 shares.
Note 9. Stock Option Plans
In March 1988, the Company adopted an Incentive Stock Option Plan (ISOP) which
was approved by the stockholders of the Company. The ISOP provides for the grant
of options for common stock to officers, employee-directors and key employees at
an exercise price equal to the fair market value of the stock on the date of the
grant. Options generally become exercisable one year from the date of the grant
and remain exercisable for four years or until three months after termination of
the relationship with the Company other than upon death or disability. There are
no charges to operations made in connection with the ISOP.
The Company has a Non-Qualifying Stock Option Plan (NQSOP). The Plan includes a
formula pursuant to which each non-employee director receives an automatic grant
of 20,000 shares of common stock upon completion of one year of service to the
Company. The options cannot be exercised until they are held a year and cannot
be exercised after ten years from the date of grant. All non-qualified stock
options have been issued with exercise prices equal to or exceeding fair market
value, thus no compensation expense has been recorded related to the NQSOP.
In addition to the formula grants, eligible directors may be granted an option
to purchase 60,000 common shares upon appointment as a director, 20,000 shares
of which shall vest at each of the next three successive meetings following a
complete year of service. The period for which the director's service shall be
calculated runs from the date of each of the Company's annual shareholders'
meetings, or if elected as a Board member between annual shareholders' meetings,
the period is from the date of appointment until the next annual meeting
following a complete year of service.
The following is a summary of option activity for each of the three years ended
December 31, 1995, 1994 and 1993:
<TABLE>
Granted
Options Available ----------------------------------------------
for grant ISOP NQSOP Option Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 300,500 381,450 341,000 $.77 - $2.95
Additional shares reserved 800,000 0 0
Granted (553,000) 93,000 460,000 $1.75 - $2.77
Canceled 219,000 (119,000) (100,000) $1.75 - $2.00
Exercised 0 (152,625) (120,000) $.77 - $1.19
---------------------------------------------------------------------
Balance at December 31, 1993 766,500 202,825 581,000 $.77 - $2.95
Granted (483,500) 183,500 300,000 $2.29 - $3.81
Canceled 25,000 (5,000) (20,000) $1.19 - $1.91
Exercised 0 (33,325) 0 $.77 - $1.19
---------------------------------------------------------------------
Balance at December 31, 1994 308,000 348,000 861,000 $.77 - $3.81
Additional shares reserved 750,000 0 0 -
Granted (411,500) 263,500 148,000 $2.63-$3.31
Exercised 0 (23,000) 0 $.77 - $1.91
---------------------------------------------------------------------
Balance at December 31, 1995 646,500 588,500 1,009,000 $.77 - $3.81
---------------------------------------------------------------------
</TABLE>
At December 31, 1995, 832,000 stock options are exercisable. In addition to the
above stock option plans, the Company has the following stock options, granted
outside of the plans, outstanding as of December 31, 1995:
Options Option Price Expiration
- --------------------------------------------------------------------------------
Granted in 1993 500,000 $4.50 September 1998
Granted in 1994 50,000 $2.85 June 1999
Granted in 1994 150,000 $3.00 June 1997
------------------------------------
Outstanding at December 31, 1995 700,000
=======
<PAGE>
Note 10. Business Combinations
On September 15, 1995, the Company acquired substantially all of the assets of
Home Pharmacy, a division of Arc Ventures, Inc., an Illinois corporation (ARC).
The terms of the purchase agreement have been subsequently amended twice. The
final aggregate purchase price of $15,150,000 (plus $967,000 for purchasing
certain inventories) was comprised of a cash down payment of $8,000,000, and two
promissory notes for $2,500,000 and $4,650,000. The $8,000,000 down payment was
obtained from the proceeds of private placements of common and preferred stock.
The $2,500,000 promissory note is secured by 1,774,000 shares of the Company,
issued to ARC and held in escrow. The $4,650,000 promissory note is secured by a
pledge of 3,265,000 shares of the Company's common stock.
Under the agreement, ARC was to sell the escrow and pledge shares and apply the
proceeds to pay the notes. None of the escrow shares are to be returned to the
Company, however, proceeds or shares of the pledged shares in excess of the
amount needed to pay the notes is returned to the Company. Accordingly, the fair
value of the escrowed shares of $4,835,000 has been reflected as an advance
payment against the notes.
Subsequent to December 31, 1995, the terms of the agreement were modified again
and the balance on the $2,500,000 note, plus accrued interest, was paid in full
in March, 1996. The 1,774,000 shares held in escrow which collateralized the
note were returned to the Company, and were placed in the Company treasury. The
due date on the $4,650,000 note was extended to October 15, 1996. In the event
the note is not paid on June 1, 1996, ARC has the right to sell 277,000 shares
per month of the pledged shares, and apply the proceeds to the note and accrued
interest until it is paid in full, or the remaining is paid on October 15, 1996.
The acquisition was accounted for as a purchase, whereby the assets acquired
were recorded at their fair market value. The excess of cost over net
identifiable assets acquired is reflected as goodwill and is being amortized
over twenty-five years using the straight-line method. The preliminary
allocation of the purchase price was as follows:
Inventory ...................................................... $ 967,000
Fixed assets ................................................... 238,000
Non-compete agreement .......................................... 100,000
Customer contracts ............................................. 5,000,000
Goodwill ....................................................... 12,249,000
-----------
Total (including direct acquisition costs of $2,437,000) ....... $18,554,000
===========
The Company has consolidated operations of Home Pharmacy retroactively to
January 1, 1995; therefore, the preacquisition income of Home Pharmacy of
$982,000 has been deducted from the consolidated statement of operations for the
year ended December 31, 1995. The effect of this consolidation of operations
prior to acquisition was to increase net sales by approximately $30,629,000.
On November 19, 1994, the Company acquired substantially all of the assets of
Medical Service Agency, Inc., a Pennsylvania corporation d/b/a MedNet, a
privately-owned prescription benefits claims processing company. The cost of the
acquisition is as follows:
Purchase price:
Liabilities assumed ............................................ $5,710,000
Issuance of 1,600,000 restricted shares of common stock ........ 2,700,000
----------
$8,410,000
Costs of acquisition incurred .................................. 33,000
----------
$8,443,000
==========
The acquisition was accounted for as a purchase, whereby the assets acquired
were recorded at their fair market value. The excess of cost over net
identifiable assets acquired is reflected as goodwill and is being amortized
over twenty-five years under the straight-line method. The allocation of the
purchase price was as follows:
Cash ............................................................ $ 836,000
Accounts receivable, net of allowance for doubtful accounts ..... 3,627,000
Other current assets ............................................ 205,000
Property and equipment .......................................... 91,000
Customer contracts .............................................. 1,616,000
Customer list ................................................... 320,000
Non-compete agreement ........................................... 134,000
Tradename ....................................................... 750,000
Goodwill ........................................................ 864,000
----------
$8,443,000
==========
<PAGE>
The assets acquired and liabilities assumed were transferred to the Company's
wholly-owned subsidiary, Medi-Claim, concurrent with the acquisition.
The Company has consolidated the operations of MedNet retroactively to January
1, 1994; therefore, the preacquisition loss of $577,000 has been added to the
consolidated statement of operations for the year ended December 31, 1994. The
effect of this consolidation of operations prior to acquisition was to increase
net sales for the year ended December 31, 1994 by approximately $17,835,000.
On June 30, 1994 the Company acquired all of the outstanding common stock of
Family Pharmaceuticals of America, Inc. (FPA), a South Carolina corporation. FPA
was a privately-owned mail-order pharmacy. The cost of the acquisition is as
follows:
Purchase price:
Issuance of 400,000 restricted shares of common stock .......... $2,000,000
Liabilities assumed ............................................ 101,000
Cash paid ...................................................... 57,000
----------
$2,158,000
Costs of acquisition incurred .................................. 46,000
----------
$2,204,000
==========
The acquisition was accounted for as a purchase, whereby the assets acquired
were recorded at their fair market value. The excess of cost over net
identifiable assets acquired is reflected as goodwill and is being amortized
over twenty-five years under the straight-line method. The allocation of the
purchase price was as follows:
Cash ............................................................ $ 2,000
Accounts receivable, net of allowance for doubtful accounts ..... 140,000
Inventory ....................................................... 103,000
Other current assets ............................................ 7,000
Property and equipment .......................................... 7,000
Customer contracts .............................................. 853,000
Customer list ................................................... 169,000
Non-compete agreements .......................................... 71,000
Tradename ....................................................... 70,000
Goodwill ........................................................ 782,000
----------
$2,204,000
==========
The Company guaranteed the value of the common stock issued to acquire FPA at
$5.00 per share. During 1995, the Company paid the selling shareholders of FPA
$957,000 representing the shortfall in this guarantee.
The Company has consolidated the operations of FPA retroactively to January 1,
1994; therefore, the preacquisition net income of $60,000 has been deducted from
the consolidated statement of operations for the year ended December 31, 1994.
The effect of this consolidation of operations prior to acquisition was to
increase net sales by approximately $1,031,000.
On April 30, 1993, the Company acquired substantially all of the assets of GBK,
Inc., a Maryland corporation d/b/a Mail-Rx ("Mail Rx"), a privately-owned
mail-order pharmacy. The aggregate purchase price of $10,250,000 was comprised
of cash payments totaling $6,600,000 (moneys raised from the net proceeds of
several private placements), the execution of a note payable for $1,500,000,
assumed liabilities of $1,949,000, and the issuance of 201,052 shares of the
Company's common stock valued at approximately $201,000.
The $1,500,000 promissory note payable to the seller was paid in full within 30
days of the closing. The $1,500,000 was also obtained from the proceeds of the
private placements.
<PAGE>
The acquisition was accounted for as a purchase, whereby the assets acquired
were recorded at their fair market value. The excess of cost over net
identifiable assets acquired is reflected as goodwill and is being amortized
over twenty-five years using the straight-line method. The allocation of the
purchase price was as follows:
Cash and short-term investments ................................. $ 518,000
Accounts receivable, net of allowance for doubtful accounts ..... 1,471,000
Inventories ..................................................... 414,000
Other current assets ............................................ 26,000
Fixed assets, including software ................................ 911,000
Other long-term assets .......................................... 14,000
Non-compete agreement ........................................... 250,000
Tradename ....................................................... 250,000
Customer list ................................................... 600,000
Custom contracts ................................................ 3,025,000
Goodwill ........................................................ 2,771,000
-----------
Total ............................................. $10,250,000
===========
Unaudited pro forma results of operations of the Company, assuming the Home
Pharmacy, MedNet and FPA acquisitions occurred on January 1, 1994, are presented
below. Adjustments are made to reflect the accounting bases recognized in
recording the combination. These adjustments to net loss consist principally of
amortization of intangible assets ($2,146,000 in 1995 and $3,624,000 in 1994),
interest expense on acquisition debt ($497,000 in 1995 and $628,000 in 1994),
and the elimination of the results of the acquired business' operations for the
period not owned ($982,000 in 1995 and ($517,000) in 1994).
Year Ended December 31,
(Unaudited)
------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Net sales .............................. $ 114,297,000 $ 119,143,000
===================================
Net loss ............................... $ (14,993,000) $ (8,724,000)
===================================
Net loss per common share .............. $ (0.56) $ (0.35)
===================================
Weighted average shares outstanding .... 26,838,858 24,729,214
===================================
Pro forma information does not purport to be indicative of the results that
actually would have been obtained if the combined operations had been conducted
during the periods presented and is not intended to be projection of future
results.
Note 11. Claims Processing Revenues
On April 1, 1994, Medi-Claim assumed the obligation for payments to members of
Medi-Claim's pharmacy network. Prior to April 1, 1994, Medi-Claim was only
obligated to the extent payment was received from the sponsoring organization.
This step was taken to standardize Medi-Claim's procedures with trends in the
industry. As a result of this change, subsequent to April 1, 1994 the Company
presents the sales and cost of sales as well as the related accounts receivable
and accounts payable in its consolidated financial statements for prescriptions
filled at participating network pharmacies by insureds covered under pharmacy
plans offered by Medi-Claim's clients, the sponsoring organizations. Management
estimates that sales and cost of sales are $4,000,000 lower for the year ended
December 31, 1994 than if this change had been implemented at January 1, 1994.
<PAGE>
Note 12. Commitments
The Company leases certain facilities under noncancelable operating leases with
terms ranging from two to fifteen years. Rental expense under these leases
amounted to $1,240,730, $432,000 and $466,000 in 1995, 1994 and 1993,
respectively.
As of December 31, 1995, approximate future minimum lease payments are as
follows:
- --------------------------------------------------------------------------------
1996 $ 431,000
1997 366,000
1998 215,000
1999 211,000
2000 218,000
Thereafter 816,000
----------
$2,257,000
==========
The Company has entered into an employment agreement ("Agreement") with its
President through April 1998 with additional one-year extensions. The Agreement
stipulates the annual salary and bonus to be paid to the President. The bonus is
payable in cash and options and is calculated on the increase in consolidated
gross sales or as a percentage of pretax profits.
Note 13. Warrants Issued for Marketing Services
On April 27, 1994, the Company entered into a Consulting Agreement with a
Consultant, with whom the Company has had previous similar arrangements, and a
group of associated individuals (one of which is a director of the Company) (the
"Consultants") to retain the services of the Consultants in obtaining contacts
with potential accounts for managed prescription care services. Pursuant to the
agreement with the Consultants, the Company issued 1,000,000 five-year warrants
to purchase the Company's common stock at $3.00 per share. The warrants vested
upon issuance and expire in June 1999. The exercise price of the warrants
exceeded the market price of the Company's common stock on the date of the
agreement. The Consultants may earn additional three-year warrants in the future
based upon purchases by new customers introduced by the Consultants if total
sales from these customers exceeds $50,000,000 in any twelve month period. The
exercise price of the three-year warrants shall exceed the market price of the
Company's common stock on the date of issuance by $0.17 per share. The Company
will also pay the Consultants commissions on gross collected billings from sales
generated to these customers. The commissions paid under this agreement have not
been significant.
Note 14. Restructuring and Merger Related Expenses
Restructuring Expenses
Prior to December 31, 1995, the Company began to implement a plan to close its
South Carolina mail service facility in early 1996 and consolidate those
business operations into its Las Vegas and Chicago facilities. The Company also
began to implement a plan to close five of its retail pharmacy locations in
early 1996. The Company has accrued $128,000 of incremental expenses,
principally the costs of lease cancellation and severance expenses, at December
31, 1995.
Also, during 1995, the Company closed its Baltimore mail service facility and
consolidated those business operations into its Las Vegas and South Carolina
facilities. The Company incurred incremental expenses of $225,000 in connection
with this closure. These restructuring expenses, totaling $353,000 for the year
ended December 31, 1995, have been reflected as Restructuring Expenses in the
accompanying consolidated statement of operations.
<PAGE>
Merger Related Expenses
Incremental cost associated with the purchase of Home Pharmacy (See Note 10)
during 1995 were incurred to modify its operations and fulfillment systems to be
compatible with the Company. Incremental costs totaling $250,000 are reflected
as Merger Related Expenses in the accompanying consolidated statement of
operations.
Note 15. Subsequent Events
On February 21, 1996, the Company closed a private placement under Regulation S
to sell 105,000 shares of the Company's Series C Preferred stock for a total
gross proceeds of $2,100,000 ($20 per share). Each of the Series C Preferred
shares carries no annual dividend rate, and is convertible at the option of the
holder, and in certain circumstances at the option of the Company, into shares
of the Company's common stock based on 80% of the market value at the date of
conversion. If the Series C Preferred shares are not previously converted, the
Company is obligated to redeem them in the year 1998.
On or about February 23, 1995, the Company was served with a complaint against
the Company and one of its executive officers alleging the omission of material
public information. The complaint sought compensation damages in an unspecified
amount for the class of certain purchases of the Company's stock who were
allegedly damaged. On March 1, 1996, the parties agreed in principle to a
settlement, which is subject to various conditions including preparation of
formal settlement documents, notice to the class, and court approval. The
Company has reflected as an expense in the accompanying 1995 statement of
operations for the portion of the $800,000 settlement amount which will not be
paid by its insurance carrier, which approximates $410,000.
Note 16. Major Customers
Net sales include sales to one major customer which accounted for approximately
14% of total net sales in 1995 and 13% of total net sales in 1994. Net sales
include sales to another major customer which accounted for approximately 13% of
total net sales in 1995.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
ON THE SCHEDULE
To the Board of Directors
Mednet, MPC Corporation
Las Vegas, Nevada
Our audit of the financial statements of Mednet, MPC Corporation and
subsidiaries included schedule II contained herein, for each of the three years
in the period ended December 31, 1995.
In our opinion, the schedule presents fairly the information required to be set
forth therein in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
---------------------------
Las Vegas, Nevada
March 8, 1996, except for Note 6
as to which the date is March 27, 1996
<PAGE>
MEDNET, MPC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
Additions
Balance at Charged to Balance at
Beginning Cost and Deductions End of
Description of Period Expenses (A) Period
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1995 $ 780,000 $ 1,197,000 $ 602,000 $ 1,375,000
Year ended December 31, 1994 350,000 706,000 276,000 780,000
Year ended December 31, 1993 60,000 290,000 0 350,000
<FN>
(A) Uncollectible accounts written off by charge to the allowance.
</FN>
</TABLE>
<PAGE>
Mednet, MPC Corporation
Consolidated Balance Sheet
March 31,
1996
-----------
Assets
Current assets:
Cash and cash equivalents .............................. $ 415,000
Accounts receivable, less allowance for doubtful
accounts and return of and $1,375,000 at
December 31, 1995 and $970,000 at March 31, 1996 .... 21,568,000
Inventories ............................................ 2,291,000
Other current assets ................................... 35,000
Total current assets ................................ 24,309,000
Property, plant and equipment ............................. 1,690,000
Intangible assets ......................................... 18,034,000
Other assets .............................................. 820,000
------------
$ 44,853,000
============
Liabilities and Stockholders' Equity
Current liabilities:
Revolving line of credit ............................... $ 7,621,000
Accounts payable ....................................... 16,590,000
Accrued expenses ....................................... 2,038,000
Current portion of long-term debt ...................... 4,593,000
------------
30,842,000
Long-term debt ............................................ 2,123,000
Redeemable convertible preferred stock-Series A ........... 5,350,000
Preferred stock: $.01 par value, (105,000 shares - Series C
outstanding at March 31, 1996) ........................... 2,100,000
Common stock: $.001 par value, (42,000,000
shares authorized, 27,625,019 at March 31, 1996
and 29,149,118 at December 31, 1995
issued and outstanding) ................................ 28,000
Additional paid-in capital ................................ 38,258,000
Accumulated deficit ....................................... (33,848,000)
------------
Stockholders' equity ...................................... 6,538,000
------------
Total liabilities and stockholders' equity .......... $ 44,853,000
============
<PAGE>
Mednet, MPC Corporation
Consolidated Statement of Operations
<TABLE>
For the Three Months Ended
March 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Sales ...................................................... $ 25,720,000 $ 28,329,000
Less: cost of sales ........................................ 21,852,000 24,278,000
------------ ------------
Gross profit ............................................... 3,868,000 4,051,000
------------ ------------
Selling, general and administrative expenses ............... 2,672,000 3,311,000
------------ ------------
Operating income before depreciation and amortization 1,196,000 740,000
Depreciation and amortization .............................. 742,000 925,000
Operating income/(loss) ............................. 454,000 (185,000)
Other income (expense):
Interest and dividend income ............................ 14,000 11,000
Interest expense ........................................ (436,000) (244,000)
Subsidiary operations for period not owned .............. -0- (225,000)
Other net ............................................... -0- (94,000)
------------ ------------
Total other income (expense) .......................... (422,000) (552,000)
------------ ------------
Net income/loss ......................................... $ 32,000 $ (737,000)
============ ============
Net income (loss) per common share ...................... .001 (.03)
============ ============
Weighted average equivalent number of shares ............ 28,761,953 23,816,836
============ ============
</TABLE>
<PAGE>
Mednet, MPC Corporation
Consolidated Statements of Cash Flows
<TABLE>
For the Three Months Ended
March 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from (used for) operating activities:
Cash received from customers ..................................... $ 21,950,000 $ 16,960,000
Cash paid to suppliers and employees ............................. (24,715,000) (17,505,000)
Net interest paid ................................................ (422,000) (178,000)
------------ ------------
Net cash used for operating activities ......................... (3,187,000) (723,000)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ............................... (352,000) (260,000)
------------ ------------
Net cash (used for) investing activities ....................... (352,000) (260,000)
------------ ------------
Cash flows from (used for) financing activities:
Proceeds from borrowings ......................................... 3,912,000 -0-
Repayment of borrowings .......................................... (1,913,000) (42,000)
Net proceeds from issuance of common stock ....................... 2,047,000 250,000
------------ ------------
Net cash from financing activities ........................... 4,046,000 208,000
------------ ------------
Net increase (decrease) in cash ..................................... 373,000 (775,000)
Cash balance, beginning of period ................................... 42,000 1,711,000
------------ ------------
Cash balance, end of period ......................................... $ 415,000 $ 936,000
============ ============
Reconciliation of net loss to net cash used for operating activities:
Net income (loss) .............................................. $ 32,000 $ (737,000)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization ............................. 742,000 549,000
Provision for doubtful accounts ........................... (405,000)
Change in assets and liabilities:
(Increase) in accounts receivable ............................ (3,365,000) (623,000)
Decrease (Increase) in inventories ........................... 558,000 (243,000)
Decrease (Increase) in other current assets .................. 208,000 (433,000)
Decrease in other assets ..................................... 37,000 397,000
(Decrease)/Increase in accounts payable ...................... (893,000) 133,000
(Decrease) in accrued expenses ............................... (101,000) 234,000
------------ ------------
Net cash used for operating activities .............................. $ (3,187,000) $ (723,000)
============ ============
</TABLE>
<PAGE>
MEDNET, MPC CORPORATION
Notes to Consolidated Financial Statements
March 31, 1996
(1) Basis of Presentation
The consolidated financial statements included herein include the accounts of
Mednet, MPC Corporation and its subsidiaries (the "Company"), Medi-Mail, Inc.,
Medi-Phar, Inc. and Medi-Claim, Inc. In the opinion of Management, all
adjustments considered necessary for fair presentation have been reflected in
the consolidated financial statements. These adjustments are of a normal,
recurring nature. Operating results for the quarter ended March 31, 1996 are not
necessarily indicative of those expected for the full year. Certain prior year
amounts have been adjusted and reclassified to conform to the 1996 presentation.
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and the rules and
regulations of the Securities and Exchange Commission. These financial
statements have been prepared under the presumption that users of the interim
financial information have either read or have access to the Company's audited
financial statements for the year ended December 31, 1995. Accordingly, footnote
disclosures which would substantially duplicate the disclosures contained in the
Company's December 31, 1995 audited financial statements have been omitted from
these interim financial statements. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
instructions, rules and regulations. Although the Company believes that the
disclosures are adequate to make information presented not misleading, it is
suggested that these unaudited interim consolidated financial statements be read
in conjunction with the audited consolidated financial statements and the note
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
(2) Subsequent Event
In April, 1996, the 105,000 shares of the Company's Series C Preferred Stock
were converted into 1,058,707 shares of Common Stock.
In April, 1996, the Company issued 300,000 shares of its Series D Preferred
Stock to a limited number of foreign investors for which it received gross
proceeds of $6,000,000. The Series D preferred Stock is convertible into Common
Stock at the option of the holder and, under certain conditions, the Company.
Prior to conversion, the Series D Preferred Stock votes a class with the Common
Stock except on matters where class voting is mandated be Nevada law. The Series
D preferred Stock does not have preferential dividend rights.
(3) Commitments and Contingencies
The Company is not a party to any legal proceeding which, in its belief, could
have a material adverse effect on the Company.
<PAGE>
HOME PHARMACY (A Division of ArcVentures, Inc.)
UNAUDITED STATEMENTS OF ASSETS AND LIABILITIES
December 31, September 15,
1994 1995
------------ -------------
ASSETS
CURRENT ASSETS
Receivables:
Trade, less allowance of approximately $300,000 and $279,000 at December 31,
1994 and September 15, 1995,
respectively $3,880,182 $3,505,374
Other 626,159 473,033
Inventories 3,417,957 967,179
Prepaid expenses 76,404 8,900
---------- ----------
Total current assets 8,000,702 4,954,486
Equipment and Leasehold Improvements:
Office and pharmacy equipment 813,840 825,413
Minicomputer 223,245 223,245
Computer software 100,000 100,000
Leasehold improvements 80,398 80,398
Accumulated depreciation (457,482) (563,766)
---------- ----------
Property and Equipment, net 760,001 665,290
---------- ----------
Total Assets $8,760,703 $5,619,776
========== ==========
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable $2,260,305 $2,063,092
Accrued compensation 138,401 62,393
Customer prepayments 100,051 416,909
Other accrued expenses 51,984 16,076
---------- ----------
Total current liabilities 2,550,741 2,558,470
Deferred Rent, net 183,237 148,356
Equity, investment by and advances from
ArcVentures, Inc. 6,026,725 2,912,950
---------- ----------
Total liabilities and equity $8,760,703 $5,619,776
========== ==========
<PAGE>
HOME PHARMACY (A Division of ArcVentures, Inc.)
UNAUDITED STATEMENTS OF REVENUES AND EXPENSES (EXCLUDING INCOME TAXES)
<TABLE>
Nine Twelve Three Three Six Eight 1/2
Months Ended Months Ended Months Ended Months Ended Months Ended Months Ended
September 30, December 31, March 31, June 30, June 30, September 15,
1994 1994 1995 1995 1995 1995
------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $38,278,587 $51,280,451 $10,618,132 $10,558,255 $21,176,387 $30,629,476
Cost of goods sold (32,557,606) (43,786,665) (9,064,611) (8,779,753) (17,844,364) (26,030,628)
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 5,720,981 7,493,786 1,553,521 1,778,502 3,332,023 4,598,848
Selling, general and administrative
expenses 4,609,767 6,188,155 1,273,293 1,183,365 2,456,658 3,520,714
Related-party expense allocations 472,882 619,570 167,436 226,030 393,466 587,402
----------- ----------- ----------- ----------- ----------- -----------
Operating income 638,332 686,061 112,792 369,107 481,899 490,712
Allocated interest expense 129,534 174,643 55,529 17,430 72,959 96,268
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes $ 508,798 $ 511,418 $ 57,263 $ 351,677 $ 408,940 $ 394,444
=========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
HOME PHARMACY (A Division of ArcVentures, Inc.)
UNAUDITED STATEMENT OF EQUITY
FOR THE EIGHT AND ONE HALF MONTHS ENDED SEPTEMBER 15, 1995
Investment By and Advances From ArcVenture, Inc.:
Beginning balance $6,026,725
Income before income taxes for the period 394,444
Advances from (payments to) ArcVentures, Inc., net (3,508,219)
----------
Ending balance $2,912,950
==========
<PAGE>
HOME PHARMACY
(A Division of ArcVentures, Inc.)
UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
Three Three Six Eight 1/2
Months Ended Months Ended Months Ended Months Ended
March 31, June 30, June 30, September 15,
1994 1995 1995 1995
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Income before income taxes $ 57,263 $ 351,677 $ 408,940 $ 394,444
Adjustments to reconcile net income before
income taxes to net cash provided by
(used for) operating activities:
Depreciation and amortization 43,397 42,524 85,921 121,735
Changes in assets and liabilities:
Receivables 404,631 181,200 585,831 527,934
Inventories (195,243) 2,730,957 2,535,714 2,450,778
Prepaid expenses 9,798 34,224 44,022 67,504
Accounts payable, customer prepayments,
and other current liabilities 1,031,314 (970,103) 61,211 7,729
Deferred rent (25,564) (4,050) (29,614) (34,881)
---------- ---------- ---------- ----------
Net cash provided by (used for)
operating activities 1,325,596 2,366,429 3,692,025 3,535,243
Cash Flows Used for Investing Activities,
purchases of property and equipment (6,243) (20,781) (27,024) (27,024)
Cash Flows from Financing Activities,
advances from (payments to) ArcVentures, Inc. (1,319,353) (2,345,648) (3,665,001) 3,508,219)
---------- ---------- ---------- ----------
Net Change in Cash - - - - - - - -
Cash, beginning of year - - - - - - - -
---------- ---------- ---------- ----------
Cash, end of year $ - - $ - - $ - - $ - -
========== ========== ========== ==========
</TABLE>
HOME PHARMACY (A Division of ArcVentures, Inc.)
NOTES TO UNAUDITED STATEMENTS OF ASSETS AND LIABILITIES
(1) Basis of Presentation
The financial statements included herein the separate divisional accounts of
Home Pharmacy, a division of ArcVentures, Inc. In the preparation of these
divisional financial statements, management has allocated certain expenses
incurred by ArcVentures, Inc. on behalf of the Home Pharmacy division. These
allocations may not necessarily be indicative of the costs that may have
incurred by Home Pharmacy during the periods presented had Home Pharmacy
acquired those services on its own.
In management's opinion, all adjustments considered necessary for fair
presentation have been reflected in these financial statements. These
adjustments are of a normal, recurring nature. Operating results for the period
ended September 15, 1995 are not necessarily indicative of those expected for a
full year.
<PAGE>
HOME PHARMACY
(A DIVISION OF ARCVENTURES, INC.)
FINANCIAL STATEMENTS
AS OF JUNE 30, 1995 AND 1994, AND FOR
EACH OF THE THREE YEARS ENDED JUNE 30,
1995
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of ArcVentures, Inc.:
We have audited the accompanying statements of assets and liabilities of HOME
PHARMACY (a division of ArcVentures, Inc., an Illinois corporation) as of June
30, 1995 and 1994, and the related statements of revenues and expenses
(excluding income taxes), equity and cash flows for each of the three years in
the period ended June 30, 1995. These financial statements are the
responsibility of Home Pharmacy'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.
The statements of assets and liabilities, revenues and expenses (excluding
income taxes), equity and cash flows were prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission (for
filings pursuant to the Securities Act of 1933 and the Securities Exchange Act
of 1934) as described in Note 1 and are not intended to be a complete
presentation of Home Pharmacy's results of operations.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets and liabilities of Home Pharmacy as of June
30, 1995 and 1994, and its revenues and expenses (excluding income taxes) and
its cash flows for each of the three years in the period ended June 30, 1995, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois,
October 6, 1995
<PAGE>
HOME PHARMACY
(a division of ArcVentures, Inc.)
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1995, 1994 AND 1993
1995 1994
---------- ----------
ASSETS
Current Assets:
Receivables:
Trade, less allowance of approximately
$270,000, and $275,000 at June 30,
1995 and 1994, respectively $3,411,156 $4,208,026
Other 509,354 435,072
Inventories 882,243 1,542,995
Prepaid expenses 32,382 118,595
---------- ----------
Total current assets 4,835,135 6,304,688
Property and Equipment, net 701,104 833,924
---------- ----------
Total assets $5,536,239 $7,138,612
========== ==========
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable $1,599,446 $1,314,581
Accrued compensation 119,130 173,452
Customer prepayments 874,670 431,435
Other accrued expenses 18,706 57,221
---------- ----------
Total current liabilities 2,611,952 1,976,689
Deferred Rent, net 153,623 182,803
Commitments and Contingencies (Note 9)
Equity, investment by and advances from
ArcVentures, Inc. 2,770,664 4,979,120
---------- ----------
Total liabilities and equity $5,536,239 $7,138,612
========== ==========
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
HOME PHARMACY (A Division of ArcVentures, Inc.)
STATMENTS OF EQUITY
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993
1995 1994 1993
---------- ---------- ----------
Investments By and Advances
from ArcVentures, Inc.:
Beginning balance $4,979,120 $4,588,285 $5,475,625
Income before income taxes for
the year 379,368 144,891 248,527
Advances from (payments to)
ArcVentures, Inc., net (2,587,824) 245,944 (1,135,867)
---------- ---------- ----------
Ending, balance $2,770,664 $4,979,120 $4,588,285
========== ========== ==========
The accompany notes to financial statements are an integral part of these
statements.
<PAGE>
HOME PHARMACY (A Division of ArcVentures, Inc.)
STATEMENTS OF REVENUES AND EXPENSE (EXCLUDING INCOME TAXES)
For the Years Ended June 30, 1995, 1994 and 1993
1995 1994 1993
----------- ----------- -----------
Net revenues $46,887,645 $47,668,586 $39,155,047
Cost of goods sold (40,096,138) (40,661,479) (33,718,341)
----------- ----------- -----------
Gross profit 6,791,507 7,007,107 5,436,706
Selling, general and
administrative expenses 5,540,012 6,107,446 4,524,771
Related-party expense allocations 691,694 585,918 478,359
----------- ----------- -----------
Operating income 559,801 313,743 433,576
Allocated interest expense 180,433 168,852 185,049
----------- ----------- -----------
Income before income
taxes $ 379,368 $ 144,891 $ 248,527
=========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
HOME PHARMACY (A Division of ArcVentures, Inc.)
STATEMENTS OF CASH FLOWS For the Years Ended June
30, 1995, 1994 and 1993
1995 1994 1993
---------- ---------- ----------
Cash Flows from Operating Activities:
Income before income taxes $ 379,368 $ 144,891 $ 248,527
Adjustments to reconcile income before
income taxes to net cash provided
by (used for) operating activities:
Depreciation and amortization 170,623 126,755 66,607
Changes in assets and liabilities:
Receivables 722,588 (1,777,933) 1,055,198
Inventories 660,752 836,423 (322,659)
Prepaid expenses 86,213 (13,867) (56,266)
Accounts payable, customer
prepayments and other current
liabilities 635,263 577,231 609,167
Deferred rent (29,180) 26,072 25,226
---------- --------- ----------
Net cash provided by
(used for) operating
activities 2,625,627 (80,428) 1,625,800
Cash Flows Used for Investing
Activities, purchases of property
and equipment (37,803) (165,516) (489,933)
Cash Flows from Financing Activities,
advances from (payments to) ArcVentures,
Inc., net (2,587,824) 245,944 (1,135,867)
---------- ---------- ----------
Net change in cash - - - - - -
Cash, beginning of year - - - - - -
---------- ---------- ----------
Cash, end of year $ - - $ - - $ - -
========== ========== ==========
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
HOME PHARMACY (A Division of ArcVentures, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NO DATES PER REQUEST)
1. ORGANIZATION AND BASIS OF PRESENTATION:
General
Home Pharmacy, an operating division of ArcVentures, Inc. ("ARC"), is primarily
in the business of operating a mail-order pharmacy. ARC is a wholly owned
subsidiary of ArcVentures Development Corp., which is a wholly owned subsidiary
of Access Health, Inc. Rush-Presbyterian-St. Lukes Medical Center ("RUSH") is
the sole voting member of Access Health, Inc. On September 16, 1995, ARC sold
Home Pharmacy (Note 9).
Basis of Presentation
These financial statements and the related footnotes have been prepared for
purposes of complying with the rules and regulations of the Securities and
Exchange Commission for filings pursuant to the Securities Act of 1933 and the
Securities Exchange Act of 1934.
The accompanying financial statements, for all years presented, include those
assets, liabilities, revenues and expenses (excluding income taxes) directly
attributable to Home Pharmacy's operations. In addition, certain ARC and RUSH
overhead expenses have been allocated to Home Pharmacy and included in the
accompanying statements of revenues and expenses (excluding income taxes) as
related-party allocations. The method of allocating costs has been deemed
reasonable by management (Note 5).
As a result of Home Pharmacy's relationships with its affiliates, the financial
information included herein does not necessarily reflect what the financial
position and results of operations would have been had it operated as a
stand-alone taxable entity during the years covered. Additionally, the
accompanying financial statements may not be indicative of future operations or
financial position.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Inventories
Inventories, primarily consisting of pharmaceutical drugs, are stated at the
lower of cost or market. Cost is determined using the first-in, first-out
method.
Property and Equipment
Property and equipment are capitalized and stated at cost, net of accumulated
depreciation and amortization. Items of an ordinary maintenance or repair nature
are charged directly to operations. Depreciation and amortization are computed
using the straight-line method over the following estimated useful lives:
Asset Description Life
----------------------------- --------------------
Office and pharmacy equipment 10 years
Minicomputer 5 years
Computer software 3 years
Leasehold improvements Shorter of estimated
useful lives or term
of lease
Customer Prepayments
Prepayments represent advances from customers for future shipments of
pharmaceutical drugs.
Income Taxes
Home Pharmacy is not a separate tax-paying entity and does not have a
tax-sharing agreement with ARC. As such, income taxes have not been allocated to
Home Pharmacy.
<PAGE>
Revenue Recognition
Revenue is recognized upon the shipment of pharmaceutical drugs.
3. PROPERTY AND EQUIPMENT:
Property and equipment at June 30 consisted of the following:
1995 1994
---------- ----------
Office and pharmacy equipment $ 825,413 $ 805,761
Minicomputer 223,245 223,245
Computer software 100,000 100,000
Leasehold improvements 80,398 77,698
---------- ----------
1,229,056 1,206,704
Less, accumulated depreciation
and amortization (527,952) (372,780)
---------- ----------
$ 701,104 $ 833,924
========== ==========
4. DEFERRED RENT:
Home Pharmacy's office facility lease contains provisions for a rent-free period
and scheduled rent increases. Deferred rent represents the difference between
recognizing rent expense on a straight-line basis over the lease term and actual
rent paid. This amount will be amortized over the life of the lease.
5. TRANSACTIONS WITH RELATED PARTIES:
Beginning January 1, 1995, ARC assigned certain employees to Home Pharmacy;
prior to that date Home Pharmacy leased its employees from RUSH. ARC and RUSH
pay and provide for the employees' compensation (including all employee fringe
benefits). ARC and RUSH charged Home Pharmacy for the wages and salaries at cost
plus an additional 18% in 1995 and 17% in 1994 and 1993 to cover all employee
fringe benefits. These rates may not be indicative of market rates. Home
Pharmacy bears no ongoing liability for employee benefits as a result of this
leasing arrangement with ARC.
ARC performs certain accounting, legal, communications, data processing,
administrative and other services ("corporate services") that are not
specifically attributable to Home Pharmacy. Charges for corporate services are
allocated to Home Pharmacy on the basis of the underlying cost drivers in each
area. Management believes that the ARC corporate services allocated to Home
Pharmacy are reasonable estimates of the costs of services provided.
In addition, RUSH provides various services to ARC including accounting, legal,
human resources, insurance and other administrative services ("administrative
services"). RUSH and ARC negotiate the RUSH charges for these services based on
RUSH's cost for providing these services. A portion of the RUSH administrative
charges are then allocated to Home Pharmacy based on the same principles used to
allocate ARC corporate services. Management believes that the RUSH charges
allocated to Home Pharmacy are reasonable estimates of the costs of services
provided.
In 1994 and 1993, ARC participated in a centralized cash management program
administered by RUSH. Cash is sent to RUSH and advances were made by RUSH, as
needed, to cover ARC's cash requirements. On July 1, 1994, ARC established its
own centralized cash management system in which Home Pharmacy participates. Cash
sent to ARC or RUSH and advances made by ARC or RUSH attributable to Home
Pharmacy have been treated as an adjustment to the "Equity-Investment By and
Advances From ArcVentures, Inc." account in the accompanying financial
statements. ARC allocates a portion of its interest expense to Home Pharmacy
based on the ratio of Home Pharmacy's cumulative net cash advances to cumulative
net cash advances for ARC as a whole. Management believes that the allocation of
interest expense is representative of financing costs attributable to Home
Pharmacy and that the methodology used to allocate interest expense is
reasonable.
Home Pharmacy fills mail-order pharmaceutical prescriptions for certain RUSH
employees and bills RUSH at arm's length.
<PAGE>
These transactions with related parties are included in the accompanying
statements of revenues and expenses (excluding income taxes). These transactions
(by caption) totaled as follows for the years ended June 30:
1995 1994 1993
---------- ---------- ----------
Related-party transactions:
Net revenues--prescribtion
services for RUSH employees $ 443,159 $ 437,626 $ 490,572
========== ========== ==========
Selling, general and
administration expenses,
leased employee expenses:
ARC 1,434,014 - - - -
RUSH 1,729,073 3,132,163 2,520,807
========== ========== ==========
Related-party expense allocations:
ARC corporate services $ 612,838 $ 477,630 $ 377,284
RUSH administrative services 78,856 108,288 101,075
---------- ---------- ----------
$ 691,694 $ 585,918 $ 478,359
========== ========== ==========
Allocated interest expense
(interest rates at 4.7%, 3.5%,
and 3.7% for 1995, 1994 and
1993, respectively) $ 180,433 $ 168,852 $ 185,049
========== ========== ==========
6. OPERATING LEASES:
Home Pharmacy's office facilities are leased by ARC. The lease expires in the
year 2000. ARC charges Home Pharmacy monthly based upon its estimated occupancy
costs. Lease expense for the years ended June 30, 1995, 1994 and 1993, was
$242,486, $257,948 and $166,336, respectively. These costs have been deemed
reasonable by management and have been charged to selling, general and
administrative expenses in the accompanying statements of revenues and expenses
(excluding income taxes).
Home Pharmacy's allocation of ARC's future minimum lease payments are $47,000
through September 16, 1995, the date of the Home Pharmacy sale (Note 9).
7. CONCENTRATION OF CREDIT RISK:
Home Pharmacy provides credit, in the normal course of business, to self-insured
corporations, insurers and third-party administrators, entitlement programs,
municipalities and individual patients. Home Pharmacy performs ongoing credit
evaluations of its customers and maintains reserves for potential credit losses.
When realized, these losses have been within management's expectations.
In 1995, three customers accounted for 52% of revenues. In 1994 and 1993, three
and two customers accounted for 56% and 48%, respectively, of revenues.
One of the above customers opted not to renew its contract with Home Pharmacy.
The contract expired in December, 1994. This customer accounted for
approximately 12%, 19% and 17% of Home Pharmacy's revenue during 1995, 1994 and
1993, respectively.
8. COMMITMENTS AND CONTINGENCIES:
In the ordinary course of conducting its business, Home Pharmacy may become
subject to disputes from its customers concerning the distribution of
pharmaceutical drugs. As of June 30, 1995, management believes that there is no
material exposure in this area.
9. SUBSEQUENT EVENT:
On September 16, 1995 Mednet, MPC Corporation (Mednet) acquired certain assets
and assumed certain liabilities of Home Pharmacy for $8,000,000 in cash and two
promissory notes for $2,500,000 and $4,650,000, respectively. The $4,650,000
promissory note is contingent on Home Pharmacy's meeting specified performance
levels. Also, Mednet agreed to purchase the inventory on hand at the closing
date.
<PAGE>
MEDICAL SERVICE AGENCY, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
AND
INDEPENDENT AUDITOR'S REPORT
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Medical Service Agency, Inc.
We have audited the accompanying consolidated balance sheets of Medical
Service Agency, Inc. and subsidiary as of December 31, 1993, 1992 and 1991 and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1993. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Medical
Service Agency, Inc. and subsidiary as of December 31, 1993, 1992 and 1991, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1993, in conformity with generally accepted
accounting principles.
/s/ McKonley-Asbury
Harrisburg, Pennsylvania
September 30, 1994
<PAGE>
MEDICAL SERVICE AGENCY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
ASSETS
1993 1992 1991
----------- ----------- ------------
<S> <C> <C> <C>
Current assets
Cash (note 2) .................................................. $ 960,850 $ 636,423 $ 303,970
Accounts receivable
Trade (note 1) ............................................... 1,943,428 834,204 386,559
Employee ..................................................... 489 241
Loan receivable - officer (note 3) ............................. 171,222 103,469 107,256
Other receivables .............................................. 28,396 21,525
Prepaid expenses ............................................... 56,845 59,493
----------- ----------- -----------
Total current assets ................................... 3,161,230 1,655,355 797,785
----------- ----------- ------------
Office properties and equipment,
at cost (notes 1 and 5) ........................................ 246,958 63,896 14,900
Accumulated depreciation ......................................... (41,828) (9,636) (2,606)
----------- ----------- -----------
205,130 54,260 12,294
----------- ----------- ------------
Other assets
Customer contracts (net of amortization
of $63,602 in 1993 and $23,432 in 1992)
(note 4) ..................................................... 538,945 579,115
Deposits and advances .......................................... 1,295 1,000
----------- ----------- ------------
Total other assets .................... 540,240 579,115 1,000
----------- ----------- ------------
$ 3,906,600 $ 2,288,730 $ 811,079
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
1993 1992 1991
----------- --------- ------------
<S> <C> <C> <C>
Current liabilities
Current maturities of long-term
obligations (note 5)
Notes payable .............................................. $ 218,750 $ $
Notes payable - officer .................................... 78,549 78,549
Obligation under capital leases ............................ 7,021
Accounts payable ............................................. 2,414,217 1,097,459 156,333
Accrued expenses ............................................. 69,542 38,977 28,994
Deferred income taxes (notes 1 and 7) ........................ 51,556
----------- ---------- ------------
Total current liabilities ............................ 2,788,079 1,214,985 236,883
----------- ---------- ------------
Long-term obligations (note 5)
Notes payable ................................................ 556,250 775,000 337,500
Notes payable - officer ...................................... 235,647 314,195
Obligation under capital lease ............................... 71,514
Commitments and contingencies (note 10)
----------- ---------- ------------
Total long-term debt obligations ..................... 863,411 1,089,195 337,500
----------- ---------- ------------
Stockholders' equity
Preferred stock, $1 par value; authorized 25,000 shares, issued and
outstanding 8,736 shares (carrying aggregate
liquidation preferences of $449,904) ....................... 8,736
(note 8)
Common stock, $1 par value; authorized
100,000 shares, issued and outstanding
49,500 shares .............................................. 49,500 49,500 45,288
Additional paid-in capital ................................. 911,810 170,546 170,546
Retained earnings .......................................... (714,936) (235,496) 20,862
----------- ----------- ------------
Total stockholders' equity ........................... 255,110 (15,450) 236,696
----------- ----------- ------------
$ 3,906,600 $ 2,288,730 $ 811,079
=========== =========== ============
</TABLE>
<PAGE>
MEDICAL SERVICE AGENCY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
1993 1992 1991
------------ ------------ -------------
<S> <C> <C> <C>
Income
Plan administration .................................. $ 23,454,372 $ 7,723,456 $ 129,266
Manufacturer's reimbursements ........................ 1,166,807 879,229 361,248
Membership ........................................... 25,614 3,702
Consulting ........................................... 83,133 160,502 59,984
Auditing ............................................. 85,567
Workman's compensation ............................... 111,872 55,535
------------ ------------ --------------
Total income .................................................. 24,841,798 8,822,424 636,065
------------ ------------ --------------
Cost of goods sold
Plan administration .................................. 22,815,233 7,409,360
Manufacturer's reimbursements ........................ 552,588 520,363 207,872
Data processing costs ................................ 240,120 87,521
Membership ........................................... 68,140 24,737 162
Consulting ........................................... 70,581 117,977 65,340
Workman's compensation ............................... 93,608 55,380
Commissions .......................................... 130,966 54,068 2,500
------------ ---------- ------------
Total cost of sales ........................................... 23,971,236 8,269,406 275,874
------------ ---------- ------------
Gross profit .................................................. 870,562 553,018 360,191
------------ ---------- ------------
Operating expenses
Selling expenses ..................................... 219,822 109,384 15,502
General and administrative expenses .................. 1,049,170 660,115 189,480
------------ ---------- ------------
Total operating expenses ...................................... 1,268,992 769,499 204,982
------------ ---------- ------------
Operating income .............................................. (398,430) (216,481) 155,209
------------ ---------- ------------
Other income (expense)
Interest income ...................................... 23,381 22,804 3,692
Interest expense ..................................... (104,391) (108,198) (11,594)
------------ ----------- -----------
Total other income (expense) .................................. (81,010) (85,394) (7,902)
------------ ----------- -----------
Net income before taxes ....................................... (479,440) (301,875) 147,307
Income taxes (benefit) (notes 1 and 7) ........................ 0 (49,729) 53,728
------------ ------------ ------------
Net income .................................................... $ (479,440) $ (252,146) $ 93,579
============ ============ ============
Earnings per common share (note 11) ........................... $ (7.70) $ (5.33) $ 2.49
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
MEDICAL SERVICE AGENCY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings Total
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1991 ................. $ $ 33,038 $ 82,796 $ (72,717) $ 43,117
Net income ................................ 93,579 93,579
Issuance of common stock .................. 12,250 87,750 100,000
---------- --------- --------- --------- ----------
Balance - December 31, 1991 ............... 45,288 170,546 20,862 236,696
Net income (loss) ......................... (252,146) (252,146)
Common stock issued for no
consideration ............................ 4,212 (4,212)
---------- --------- ---------- ---------- -----------
Balance - December 31, 1992 ............... 49,500 170,546 (235,496) (15,450)
Net income (loss) ......................... (479,440) (479,440)
Issuance of preferred stock
(note 8) ................................. 8,736 741,264 750,000
--------- --------- --------- --------- ---------
Balance - December 31, 1993 ............... $ 8,736 $ 49,500 $ 911,810 $(714,936) $ 255,110
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
MEDICAL SERVICE AGENCY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
1993 1992 1991
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ........................................... $ (479,440) $ (252,146) $ 93,579
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities
Depreciation and amortization ........................... 72,362 30,462 1,462
Deferred income taxes ................................... (51,556) 53,728
(Increase) decrease in
Accounts receivable .................................. (1,184,096) (465,624) (452,148)
Prepaid expenses ..................................... 2,648 (59,493)
Deposits and advances ................................ (1,295) 1,000
Increase (decrease) in
Accounts payable ..................................... 1,316,758 941,126 154,033
Accrued liabilities .................................. 30,565 9,983 28,919
----------- ------------ -----------
Net cash provided by (used
in) operating activities ....................... (242,498) 153,752 (120,427)
----------- ------------ -----------
Cash flows from investing activities
Purchase of property and equipment .......................... (100,036) (48,996) (6,736)
Acquisition of contracts .................................... (602,547)
----------- ------------ -----------
Net cash used in investing
activities ..................................... (100,036) (651,543) (6,736)
----------- ------------ -----------
Cash flows from financing activities
Long-term borrowings ........................................ 830,244 337,500
Debt reduction
Long-term obligations ..................................... (78,549) (6,695)
Capital lease obligations ................................. (4,490)
Proceeds from issuance of stock ............................. 750,000 100,000
---------- ------------ -----------
Net cash provided by
financing activities ........................... 666,961 830,244 430,805
---------- ------------ -----------
Net increase in cash .......................................... 324,427 332,453 303,642
Cash - beginning .............................................. 636,423 303,970 328
----------- ----------- -----------
Cash - ending ................................................. $ 960,850 $ 636,423 $ 303,970
=========== =========== ===========
Schedule of noncash investing and
financing activities
Purchase of equipment ....................................... $ 183,062
Capital lease obligations ................................... (83,026)
-----------
$ 100,036
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
MEDICAL SERVICE AGENCY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
Formation
The Company was incorporated on June 7, 1989 under the laws of the
Commonwealth of Pennsylvania and is engaged primarily in the business of
administering prescription drug discount programs for corporations and other
organizations. The Company extends credit to its clients which are located
throughout the United States.
Consolidated Basis of Presentation
The 1993 and 1992 financial statements reflect the consolidated
financial position and results of operations of Medical Service Agency, Inc. and
its wholly-owned subsidiary, Sherman Management Group, Inc. Sherman Management
Group, Inc. was acquired in a cash for stock transaction on June 5, 1992, and is
engaged in the same line of business as the parent company. All material
inter-company balances and transactions have been eliminated.
Revenue Recognition
The Company and its wholly-owned subsidiary recognize income under the
accrual method of accounting, consistent with reporting for federal income tax
purposes.
Allowance for Doubtful Accounts
The Company uses the direct write-off method to record bad debts.
Accounts receivable at each balance sheet date represent balances deemed
collectible by the Company, including a receivable $54,331 from Care Choices
Health Plans and a receivable of $68,507 from RxChoice Preferred, both of which
are under contention.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed
using the straight-line method. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is reflected in income for the period. The cost
of maintenance and repairs is charged to income as incurred, whereas significant
renewals and betterments are capitalized and deductions are made for retirements
resulting from renewals or betterments.
Depreciation expense amounted to $32,192, $7,030 and $1,462 in 1993,
1992, and 1991.
Amortization of Contracts
The cost of contracts acquired in the purchase of Sherman Management
Group, Inc. are being amortized on a straight-line basis over a period of 15
years (see notes 4 and 9).
Income Taxes
The Company has elected to adopt the provisions of the Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes,"
retroactively for all periods presented. A provision for deferred income taxes
has been made to reflect the income tax benefit of available net operating loss
carryforwards. Similarly, an offsetting valuation allowance has been established
since the generation of future profits to offset the loss carryforwards is
uncertain.
2. UNINSURED CASH BALANCES
The Company maintains operating account balances at a financial
institution in excess of FDIC insurance limits. At December 31, 1993 the
uninsured balances amounted to $562,293.
<PAGE>
3. LOAN RECEIVABLE - OFFICER
The Company has agreed to permit its majority shareholder to borrow up
to $150,000 on an unsecured basis from the Company. At December 31, 1993, 1992
and 1991, a total of $171,222, $103,469 and $107,256 was outstanding under the
agreement. Amounts so borrowed were due to be repaid on June 7, 1994, together
with interest accrued thereon computed at a rate of 6% per annum. Because the
Company simultaneously owes funds to the shareholder under a stock purchase
agreement (see note 5), the due date for repayment of the advances has been
extended indefinitely, and the requirement to limit advances to $150,000 has
been waived.
4. CONTRACTS
On June 5, 1992, the Company acquired the assets of Sherman Management
Group, Inc., which consisted of contracts with employers to provide
administrative services for prescription drug programs (see note 9). These
contracts are being amortized on a straight-line basis over a period of 15 years
which, in management's opinion, approximates the expected economic life of the
contracts (see note 1). Contracts at December 31, 1993, 1992 and 1991 consist
of:
1993 1992 1991
Contracts ............................ $602,547 $602,547 $ 0
Less accumulated amortization ........ 63,602 23,432
-------- -------- ---------
$538,945 $579,115 $ 0
======== ======== ========
5. LONG-TERM OBLIGATIONS
Long-term obligations at December 31, 1993, 1992 and 1991 consist of
the following:
1993 1992 1991
Installment notes payable, unsecured, payable in annual installments of $218,750
each in 1994, 1996 and 1997 and $118,750 in 1995 plus interest at 9% per
annum ................................... $ 775,000 $ 775,000 $ 337,500
Installment notes payable officer, are due to the principal shareholder of the
Company (see notes 9 and 12), unsecured, payable in annual installments of
$78,549 plus interest at prime plus 1% (a total of 7% at December 31, 1993),
with
maturities through April 1997 .......... 314,196 392,744
---------- ---------- ----------
Total obligations ............... 1,089,196 1,167,744 337,500
Less current maturities ......... 297,299 78,549
---------- ---------- ----------
Total long-term obligations ..... $ 791,897 $1,089,195 $ 337,500
========== ========== ==========
Maturities of long-term obligations in each of the next five years are
approximately as follows:
1994 $ 297,299
1995 $ 197,299
1996 $ 297,299
1997 $ 297,299
1998 $ 0
<PAGE>
Capital Lease Obligation
------------------------
The Company entered into an agreement to lease an automobile under a
capital lease arrangement. The lease agreement provides for a minimum monthly
lease payment of $1,247 through April 1998 plus a lump-sum payment of $42,000 at
the end of the lease period. The leased vehicle has a carrying value of $94,270
at December 31, 1993.
At December 31, 1993, the future minimum lease payments under the
capital lease were as follows:
1994 $ 14,964
1995 14,964
1996 14,964
1997 14,964
1998 46,988
--------
106,844
Less amount representing interest 28,309
--------
Net present value of minimum
capital lease payments 78,535
Less current portion 7,021
--------
Long-term portion $ 71,514
========
The Company is depreciating the net present value of minimum capital
lease payments by the straight-line method over the useful life of the vehicle.
Interest Costs
Total interest costs incurred in 1993, 1992 and 1991 for all notes and
agreements were $104,391, $108,198 and $11,594. Total interest costs paid in
1993, 1992 and 1991 were $85,312, $90,648 and $11,594.
6. LEASES
The Company leases its office facility and certain equipment under
noncancellable lease arrangements. The facility lease has a renewal option for
an additional 5-year period, the rental to be adjusted by the annual percentage
change in the consumer price index.
At December 31, 1993, the future minimum lease payments under these
operating leases were approximately as follows:
1994 $ 45,708
1995 $ 47,787
1996 $ 50,585
1997 $ 4,711
1998 $ 0
Rental expense under these agreements amounted to $42,278, $22,366, and
none for the years ended December 31, 1993, 1992 and 1991.
Income taxes for the years ended December 31, 1993, 1992 and 1991
consist of the following:
1993 1992 1991
-------- -------- ---------
Taxes currently payable
Federal .......................... $ 0 $ 0 $ 0
State ............................ 0 1,827 0
-------- -------- --------
0 1,827 0
-------- -------- --------
Deferred taxes
Federal .......................... 0 (32,990) 35,162
State ............................ 0 (18,566) 18,566
-------- -------- --------
0 (51,556) 53,728
-------- -------- --------
$ 0 $(49,729) $ 53,728
======== ======== ========
Effective income tax rate
(before effect of timing
difference reversals) ........ 0% 0% 36%
========= ========= =========
<PAGE>
7. INCOME TAXES
The differences between the statutory federal income tax rate and the
effective income tax rates are as follows:
1993 1992 1991
Pre-tax income (loss) .......... $(479,440) $(301,875) $ 147,307
Tax at statutory rate .......... $(163,010) $(102,638) $ 50,084
Federal surtax exemption ....... (9,385)
State income tax ............... 18,556
Timing differences ............. 163,010 102,638 (5,527)
$ 0 $ 0 $ 53,728
Deferred income tax expense at December 31, 1993, 1992 and 1991
consisted of the following tax effects of timing differences:
1993 1992 1991
Income recognition ................. $ 0 $(51,556) $ 53,239
Depreciation deduction ............. 0 0 489
$ 0 $(51,556) $ 53,728
The net deferred tax benefits in the accompanying balance sheets
include the following components:
1993 1992 1991
Deferred tax assets ............... $ 73,856 $ 84,160 $ 3,075
Deferred tax liabilities .......... (26,281) (6,222) 0
Deferred tax asset valuation
allowance ........................ (47,575) (77,938) (3,075)
$ 0 $ 0 $ 0
A valuation allowance of 100% of the net of deferred tax assets and
liabilities has been established since the generation of future taxable income
against which to offset the net operating loss carryforwards cannot be predicted
with reasonable certainty.
The Company has net operating losses of $563,961 available to offset
future federal income through 2008, and net operating losses of $578,140
available to offset future Pennsylvania taxable income through 1998.
The Company paid income taxes of $1,827 in 1993, and none in 1992 and
1991.
8. PREFERRED STOCK ISSUE
On March 24, 1993, the Company entered into an agreement with Health
Care Services, Inc. (HCS) whereby HCS agreed to purchase 8,736 shares of Series
A Preferred Stock, representing 15% of all outstanding stock, for consideration
of $450,000. In addition, HCS purchased an option to increase its total stock
holdings to 25% of total outstanding stock for consideration of $300,000. This
option agreement, which is exercisable from April 1, 1994 through March 31,
1999, allows HCS to acquire the additional preferred shares for a total price of
$1,000. The purchase agreement also allows HCS to name one director to the Board
of Directors, and requires the Company to market and promote (under the
supervision and direction of HCS) the RxChoice prescription drug program of HCS.
The Company is required to spend at least $250,000 within one year of March 24,
1993 to promote the program.
<PAGE>
The Series A Preferred Stock has the same voting rights as the common
stock. It is convertible into common stock on a one-for-one basis; this
conversion rate is to be adjusted to equal the ratio of preferred stock to
common stock as of March 24, 1993 should additional common shares be issued
prior to the exchange privilege being exercised. The Series A Preferred
shareholders are to be paid $51.50 per share plus all declared but unpaid
dividends upon the liquidation or dissolution of the Company. These payments are
to be made after satisfaction of all creditors, but before any payment to common
shareholders. After such payments are made to the preferred shareholders, the
preferred and common shareholders will share any remaining assets and
distributions on a pro-rata basis. A merger or consolidation involving the
Company will be deemed a liquidation for purposes of the agreement with HCS,
unless the holders of the Series A Preferred Stock receive in exchange preferred
stock having terms and conditions no less favorable, as determined by a majority
of the holders of the Series A Preferred Stock, than the terms and conditions of
the Series A Preferred Stock.
9. ACQUISITION OF SUBSIDIARY
On June 5, 1992, the Company acquired the stock of Sherman Management
Group, Inc. (SMG) for $105,000 in cash and a long-term note of $392,744 (see
notes 1, 4, 5 and 12) and forgiveness of debt of $98,906. The purchase method
was used to account for the acquisition, and the purchase price was allocated as
follows:
Cash $ 78,555
Accounts receivable 749,182
Contracts 602,547
Accounts payable (833,634)
$ 596,650
The Company is presently operating the business as a subsidiary under
the Sherman Management Group, Inc. name. The accompanying financial statements
include the operation of Sherman Management Group, Inc. from June 5, 1992
through December 31, 1992 and for the 1993 calendar year.
Prior to acquisition, Sherman Management Group, Inc. was owned 100% by
the majority shareholder of Medical Service Agency, Inc.
The costs of acquired contracts is being amortized over the expected
economic life of the contracts (see notes 1 and 4).
Supplemental Pro-Forma Information (Unaudited)
Presented below is a schedule showing results of operations on a
pro-forma basis to reflect the activity of the Company and SMG as though SMG
were consolidated with the Company for all of 1992 and 1991:
1992 1991
(Unaudited) (Unaudited)
Revenue ..................................... $ 11,539,468 $ 2,950,117
Income (loss) before extraordinary items .... $ (251,534) $ 91,760
Net income (loss) ........................... $ (251,534) $ 91,760
Earnings (loss) per share ................... $ (5.32) $ 2.44
10. COMMITMENTS AND CONTINGENCIES
The Company has an employment agreement with its majority shareholder,
and a second employment agreement with another officer/shareholder which provide
for salary continuation, life insurance, and medical insurance. The agreements
have provisions which require the continuation of these benefits for each
unexpired year through December 31, 2002, should certain events occur and
employment is terminated. These events include termination for cause, disability
of the individual(s), or termination by agreement. In addition, in the event of
death of either individual, the Company will continue to pay the spouse of that
individual the then-current compensation for the remaining term of the contract,
however not less than for a one-year period.
<PAGE>
Assuming the occurrence of qualifying events for both individuals, the
following amounts, expressed in dollar amounts in effect as of the date of these
financial statements, would be payable for salaries, life insurance and medical
insurance:
If Activated Amount If Activated Amount
On January 1 Payable On January 1 Payable
1994 $2,013,804 1999 $ 895,024
1995 $1,790,048 2000 $ 671,268
1996 $1,566,292 2001 $ 447,512
1997 $1,342,536 2002 $ 223,756
1998 $1,118,780
11. EARNINGS PER COMMON SHARE
Earnings per common share is based on the weighted average number of
common stock and Series A Preferred Stock outstanding as follows:
1993 1992 1991
Common stock
Shares outstanding from
beginning of period .................... 49,500 45,288 33,038
Issuance of common stock in third
quarter, 1991 .......................... 4,594
Issuance of common stock in 1992 ........ 1,998
49,500 47,286 37,632
Common stock equivalents
8,736 shares Series A Preferred
Stock, issued March 24, 1993,
with option to acquire 7,764
additional shares ...................... 12,748
Weighted average number of shares .......... 62,248 47,286 37,632
Since there were no other potentially dilutive securities, fully
diluted earnings per share was not reported.
12. RELATED PARTY TRANSACTIONS
The Company has a note payable to its principal shareholder in the
amount of $314,196 at December 31, 1993 and $392,744 at December 31, 1992 (see
note 5). At the same time, the shareholder owed the Company $171,222, $103,469
and $107,256 at December 31, 1993, 1992 and 1991 (see note 3). The shareholder
owned 49%, 66% and 72% of the outstanding common stock and common stock
equivalents at December 31, 1993, 1992 and 1991.
13. SUBSEQUENT EVENT
On August 30, 1994, the Company received an offer to purchase
substantially all of its assets. The offer was extended by an unrelated
corporation engaged in the same industry as the Company. The Company intends to
consider this offer, but a definitive agreement had not been signed as of the
date of these financial statements.
<PAGE>
FAMILY PHARMACEUTICALS
OF AMERICA, INC.
FINANCIAL REPORT
DECEMBER 31, 1993
<PAGE>
T A B L E O F C O N T E N T S
PAGE
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
Balance sheets ....................................................
Statements of income ..............................................
Statement of stockholders' equity .................................
Statements of cash flows ..........................................
Notes to financial statements .....................................
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Family Pharmaceuticals of America, Inc.
Mt. Pleasant, South Carolina
We have audited the accompanying balance sheet of Family Pharmaceuticals of
America, Inc. as of December 31, 1993, and the related statements of income,
stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Family Pharmaceuticals of
America, Inc. as of December 31, 1993, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
As explained in Note 5 to the financial statements, on June 30, 1994, Medi-Mail,
Inc. acquired all of the Company's outstanding common stock.
/s/ McGladrey & Pullen, LLP
Las Vegas, Nevada
July 29, 1994
<PAGE>
BALANCE SHEETS
December 31, 1993 and June 30, 1994
<TABLE>
December 31, June 30,
ASSETS 1993 1994
- --------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS ............................................. (Unaudited)
Cash ..................................................... $ 66,807 $ 1,839
Accounts receivables, less allowance for doubtful accounts
$15,000 1993 and 1994 .................................. 115,638 120,601
Other receivable ......................................... -- 20,000
Inventories .............................................. 140,196 102,964
Investment in partnership (Note 2) ....................... 181,782 --
Other current assets ..................................... 10,359 6,769
Total current assets ............................. $ 514,782 $ 252,173
EQUIPMENT, less accumulated depreciation of $84,137 in 1993;
$82,597 in 1994 .......................................... $ 5,312 $ 7,196
$ 520,094 $ 259,369
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Shareholder note payable (Note 3) ........................ $ 50,000 $ --
Accounts payable and accrued expenses .................... 244,882 100,742
Total current liabilities ........................ $ 294,882 $ 100,742
COMMITMENT (Note 4)
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value; 250,000 shares authorized,
185,925 shares issued and outstanding .................. $ 185,925 $ 185,925
Additional paid-in capital ............................... 21,268 21,268
Retained earnings (deficit) .............................. 18,019 (48,566)
$ 225,212 $ 158,627
$ 520,094 $ 259,369
</TABLE>
See Notes to Financial Statements.
<PAGE>
FAMILY PHARMACEUTICALS OF AMERICA, INC.
STATEMENTS OF INCOME Year Ended December 31, 1993
and Six Months Ended June 30,
1994 and 1993
<TABLE>
December 31, June 30, June 30,
1993 1994 1993
- -----------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Net sales ........................................ $ 2,451,427 $ 1,030,686 $ 1,092,144
Cost of goods sold ............................... 2,021,031 796,654 852,595
Gross profit . $ 430,396 $ 234,032 $ 239,549
Selling, general, and administrative expenses .... 615,965 280,125 271,009
Operating loss $ (185,569) $ (46,093) $ (31,460)
Other income (expense):
Partnership income (Note 2) ............. 259,421 -- 165,821
Gain on partnership termination (Note 2) -- 100,000 --
Interest income ......................... 2,905 1,952 1,748
Interest expense ........................ (6,475) (2,230) (4,411)
Net income ... $ 70,282 $ 53,629 $ 131,698
</TABLE>
See Notes to Financial Statements.
<PAGE>
FAMILY PHARMACEUTICALS OF AMERICA, INC.
STATEMENT OF STOCKHOLDERS' EQUITY Year Ended December 31,
1993 and Six Months Ended June 30,
1994
<TABLE>
Additional
Common Stock Paid-In Retained
Shares Dollars Capital Earnings Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 ............. 185,925 $185,925 $ 21,268 $ 97,205 $304,398
Net income ........................... -- -- -- 70,282 70,282
Distribution to stockholders ......... -- -- -- (149,468) (149,468)
Balance, December 31, 1993 ............. 185,925 $185,925 $ 21,268 $ 18,019 $225,212
</TABLE>
See Notes to Financial Statements.
<PAGE>
FAMILY PHARMACEUTICALS OF AMERICA, INC.
STATEMENTS OF CASH FLOWS Year Ended December 31,
1993 and Six Months Ended June 30,
1994 and 1993
<TABLE>
December 31, June 30, June 30,
1993 1994 1993
<S> <C> <C> <C>
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................ $ 70,282 $ 53,629 $ 131,698
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation ..................................................... 2,302 1,150 1,152
Undistributed earnings of partnership ............................ (218,199) -- (104,321)
Gain on partnership termination .................................. -- (100,000) --
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable ................................... (34,023) (4,963) (13,655)
Inventories ........................................... (13,030) 37,232 (9,452)
Other assets .......................................... (124) 556 2,966
Increase (decrease) in accounts payable and
accrued expenses ...................................... 184,760 (144,140) 23,056
Net cash provided by (used in) operating
activities ............................. $ (8,032) $(156,536) $ 31,444
CASH FLOWS FROM INVESTING ACTIVITIES,
Distributions received from partnership ................................... $ 280,946 $ 261,782 $ 105,000
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on line of credit ...................................... $ (75,000) $ -- $ (75,000)
Principal payments on shareholder note payable ............................ (75,250) (50,000) (75,250)
Distributions to shareholders ............................................. (149,468) (120,214) (64,001)
Proceeds from note payable ................................................ 143,250 -- 143,520
Payments on note payable .................................................. (143,250) -- --
Net cash (used in) financing activities ........ $(299,718) $(170,214) $ (70,731)
Increase (decrease) in cash .................... $ (26,804) $ (64,968) $ 65,713
Beginning ................................................................. 93,611 66,807 93,611
Ending .................................................................... $ 66,807 $ 1,839 $ 159,324
Cash payments for interest ................................................ $ 6,475 $ 2,230 $ 4,411
</TABLE>
See Notes to Financial Statements.
<PAGE>
FAMILY PHARMACEUTICALS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business
The Company primarily operates a mail order pharmacy dispensing prescription
drugs to customers throughout the United States.
A summary of the Company's significant accounting policies follows:
Investment in partnership
The investment in the partnership is accounted for by the equity method. Under
this method, the Company's proportionate share of the partnership's net income
is recognized as income and added to the investment account, and distributions
received from the partnership are treated as a reduction of the investment
account. As described in Note 2, the partnership was terminated effective
December 31, 1993.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consist primarily of prescription drugs.
Equipment
Equipment is recorded at cost. Depreciation is computed primarily by the
straight-line method over the estimated useful lives of the assets.
Income taxes
The Company, with the consent of its stockholders, has elected to be taxed under
sections of the federal income tax law which provide that, in lieu of
corporation income taxes, the stockholders separately account for their pro rata
shares of the Company's items of income, deductions, losses and credits. As a
result of this election, no income taxes have been recognized in the
accompanying financial statements.
Unaudited financial statements
The unaudited financial statements included herein have been prepared in
accordance with generally accepted accounting principles. The unaudited
financial statements contain all adjustments (which include only normal and
recurring adjustments) necessary to present fairly the Company's financial
position at June 30, 1994 and the results of operations and its cash flows for
the six months ended June 30, 1994 and 1993.
NOTE 2
PARTNERSHIP TRANSACTIONS
The Company is one of two partners in Family Biomedical Health Services, a
partnership. The Company has a 50% interest in the partnership which primarily
provides infusion therapy supplies and services and other home health care
services. During the year ended December 31, 1993, the Company recorded $259,421
of other income from its interest in the partnership. On January 24, 1994, the
partnership was terminated effective December 31, 1993. Under terms of the
termination agreement, the Company will receive its basis in the partnership as
of December 31, 1993, $181,782, plus an additional $100,000 from the other
partner. As of July 29, 1994, the Company had received $261,782 of the $281,782
it is scheduled to receive under the termination agreement.
The Company has elected to omit disclosure of summarized financial information
of the partnership because it is not part of the Company's continuing operations
due to the termination of the partnership.
<PAGE>
NOTE 3
SHAREHOLDER NOTE PAYABLE
As of December 31, 1993, the Company owed $50,000 to the majority shareholder
under the terms of an unsecured note payable due on demand and bearing interest
at prime (6% at December 31, 1993) plus 1%. The note was paid in full prior to
June 30, 1994.
NOTE 4
LEASE COMMITMENT
The Company leases its facility under the terms of an operating lease which
expires in January 1997. Total rent expense under this lease was $30,812 for the
year ended December 31, 1993.
The approximate future minimum lease payments under the lease as of December 31,
1993 are as follows:
Year Ending
December 31,
1994 $ 30,684
1995 31,511
1996 32,477
1997 2,713
Total minimum lease payments $ 97,385
NOTE 5
SUBSEQUENT EVENT
On June 30, 1994, all of the Company's outstanding common stock was acquired by
Medi-Mail, Inc., a Las Vegas corporation primarily engaged in the managed
prescription care industry.
<PAGE>
PART II
Information Not Required in the Prospectus
Item 13. Other expenses of issuance and distribution.
All expenses of the offering will be paid by the Company. Total estimated
expenses in connection with the issuance and distribution of the Common Shares
are as follows:
SEC Registration Fee $ 2,693.97
Legal Fees and Expenses 30,000.00
Accounting Fees and Expenses 10,000.00
Miscellaneous 2,306.03
Total: $50,000.00
Item 14. Indemnification of Directors and Officers.
Under Sections 78.385 and 78.403 of the Nevada Revised Statutes and Article
IX and Article XI of the Company's Second Amended and Restated Articles of
Incorporation, the Company's directors and officers may be indemnified against
certain liabilities which they may incur in their capacities as such.
Item 15. Recent Sales of Unregistered Securities.
<TABLE>
Amount of Underwriters or Exemption from
Title of Security Date of Sale Securities Sold Other Purchasers* Consideration Registration Claimed
======================== ============== ================ ======================= ======================== =====================
<S> <C> <C> <C> <C>
1992 (commencing June 30, 1992)
- -------------------------------
Options to purchase 9/92 86,000 Six Directors of Medi- Directors Stock Option at Section 4(2)
Common Shares Mail, Inc.1 exercise price of $2.95
per share
Options to purchase 9/92 70,500 Seven employees of Employee Stock Option Section 4(2)
Common Shares Medi-Mail, Inc.2 at exercise price of $2.95
per share
Common Stock 10/92 13,333 Alan Springer Buyout of Commission Section 4(2)
$0.01 par value Agreements
Common Stock $0.01 12/92 333,333 Avesis Pharmacy Acquisition of Avesis Section 4(2)
par value Pharmacy Assets
1993
- ----
Options to purchase 1/93 80,000 Directors of Medi- Directors Stock Option at Section 4(2)
Common Shares Mail, Inc. exercise price of $2.50
per share
Options to purchase 1/93 35,000 M.B. Merryman Employee Stock Options Section 4(2)
Common Shares to purchase 15,000
shares at exercise price
of $2.76 per share and
20,000 shares at exercise
price of $2.50 per share
Warrants to purchase 1/93 50,000 Ladenburg Thalmann Issued pursuant to Section 4(2)
Common Shares at investment banking
$3.00 per share agreement
Warrants to purchase 3/93 40,000 Gabriel Wisdom Issued pursuant to Section 4(2)
Common Shares at agreement to extend First
$2.75 per share Trust Deed dated 3/2/93
Common Stock 3/93 13,000 Ralph and Betty Rent and Settlement Section 4(2)
$0.01 par value Engelstead Agreement
Common Stock 4/93 31,000 Howard Hassman $31,000 Reg. D
$0.01 par value
Common Stock 4/93 4,053,600 Four overseas $3,702,946 Reg. S
$0.01 par value 5/93 distributors: U.S.
Milestone, Alliance
Global, Prime Net and
Spenser Trask
<PAGE>
Amount of Underwriters or Exemption from
Title of Security Date of Sale Securities Sold Other Purchasers* Consideration Registration Claimed
======================== ============== ================ ======================= ======================== =====================
Common Stock 5/93 237,872 Ralph DeFay Conversion of debt Section 4(2)
$0.01 par value Jon Kurtin issued in exchange for
Mike Fisher acquisition of assets of
various retail pharmacies
in San Diego, CA
Common Stock 5/93 1,500,000 Edward Heil $1,500,000 Reg. D
$0.01 par value
Options to purchase 6/93 300,000 Directors of Medi- Director Stock Options at Section 4(2)
Common Shares Mail, Inc. exercise price of $1.75
per share
Options to purchase 6/93 20,000 M.B. Merryman Employee Stock Options Section 4(2)
Common Shares at exercise price of $1.75
per share
Options to purchase 7/93 18,000 Five Employees of Employee Stock Options Section 4(2)
Common Shares Medi-Mail, Inc. at exercise price of $1.91
per share.
Common Stock 8/93 13,333 Alan Springer Buyout of Commission Section 4(2)
$0.01 par value Agreement
Common Stock 8/93 201,052 GBK, Inc. Acquisition of GBK, Section 4(2)
$0.01 par value Inc.'s assets
Options to purchase 9/93 500,000 M.B. Merryman Stock Options issued Section 4(2)
Common Shares outside of Plans at
exercise price of $4.50
per share
1994
- ----
Common Stock 1/94 1,100,000 Alliance Global $3,025,000.00 Reg. S
$0.01 par value (Underwriter)
Options to purchase 1/94 37,500 M.B. Merryman Employee Incentive Section 4(2)
Common Shares Stock Options at exercise
price of $3.52 per share
Warrants to purchase 1/94 100,000 MK Gerinda Consulting services in Section 4(2)
Common Shares at Management connection with Reg. S
$4.50 per share placement
Options to purchase 3/94 96,000 Thirteen Employees of Employee Incentive Section 4(2)
Common Shares Medi-Mail, Inc.3 Stock Options at exercise
price of $3.50 per share
Warrants to purchase 3/94 61,415 John Horton and Issued in connection with Section 4(2)
Common Shares at Horton Trading an agreement with a
$2.44 per share marketing consultant
Warrants to purchase 3/94 37,585 Anthony Riker Ltd. Issued in connection with Section 4(2)
Common Shares at an agreement with a
$2.44 per share marketing consultant
Warrants to purchase 6/94 202,858 Edward T. Hanley, Jr. Issued in connection with Section 4(2)
Common Shares at an agreement with a
$3.00 per share marketing consultant
Warrants to purchase 6/94 358,571 Irwin Jann Issued in connection with Section 4(2)
Common Shares at an agreement with a
$3.00 per share marketing consultant
Warrants to purchase 6/94 398,571 Anthony Riker Ltd. Issued in connection with Section 4(2)
Common Shares at an agreement with a
$3.00 per share marketing consultant
Common Stock 6/94 3,000 Ralph and Betty Rent Section 4(2)
$0.01 par value Engelstead
<PAGE>
Amount of Underwriters or Exemption from
Title of Security Date of Sale Securities Sold Other Purchasers* Consideration Registration Claimed
======================== ============== ================ ======================= ======================== =====================
Common Stock 6/94 400,000 Twelve investors who Acquisition of FPA Section 4(2)
$0.01 par value owned FPA prior to
Medi-Mail's
acquisition4
Options to purchase 6/94 50,000 W.K. Richardson Employee Incentive Section 4(2)
Common Shares Stock Option at exercise
price of $2.29 per share
Options to purchase 6/94 200,000 Three Members of Stock Options issued Section 4(2)
Common Shares Medi-Mail's Audit outside of the Plans at
Committee5 exercise price of $2.85
per share
Options to purchase 6/94 50,000 Leo T. McCarthy Stock Options issued Section 4(2)
Common Shares outside of the Plans at
exercise price of $3.00
per share
Options to purchase 6/94 180,000 Leo T. McCarthy Directors Stock Options Section 4(2)
Common Shares at exercise price of $2.85
per share
Options to purchase 8/94 120,000 Robert W. Quick and Directors Stock Options Section 4(2)
Common Shares Lincoln R. Ward at exercise price of $3.81
per share
Common Stock 8/94 13,333 Alan Springer Buyout of Commission Section 4(2)
$0.01 par value Agreement
Common Stock 9/94 800,000 Alliance Global, as an $2,397,675 Reg. S
$0.01 par value 10/94 overseas distributor
Common Stock 11/94 1,600,000 Medical Service Acquisition of Mednet Reg. D
$0.01 par value Agency, Inc.
Common Stock 12/94 110,771 Twenty-two investors Termination of Section 4(2)
$0.01 par value who owned interests in Medi-Mail marketing
marketing partnerships6 partnerships
1995
- ----
Warrants to purchase 1/95 82,548 Wall Street Group Issued in connection with Section 4(2)
17,978 Common Shares public relations
at $5.56 per share; agreement
38,554 shares at $2.59
per share; and, 26,016
shares at $3.84 per
share
Options to purchase 5/95 120,000 Edward T. Hanley, Jr. Services rendered to Section 4(2)
Common Shares and Matthew Strauss as Medi-Mail, Inc. as
directors of Medi-Mail, directors
Inc.
Warrants to purchase 5/95 100,000 Former shareholders of Settlement of contractual Section 4(2)
Common Shares at FPA, Inc. obligations
$5.00 per share
Common Stock 5/95 1,000,000 Cole Taylor Bank, as Acquisition of Home Section 4(2)
$0.01 par value Escrow Agent Pharmacy
Common Stock, $0.01 5/95 408,020 Three accredited Convertible Notes issued Section 4(2)
par value issuable on investors7 in settlement of FPA
conversion of debt Shortfall
Common Stock, $0.01 5/95 400,000 Four accredited $1,000,000 Section 4(2)
par value issuable on investors8
conversion of debt
Warrant to purchase 5/95 115,000 Gordon Summer Settlement of Litigation Section 4(2)
110,000 Common 9
Shares at $2.75 per
share; and 5,000
Common Shares at
$3.00 per share
<PAGE>
Amount of Underwriters or Exemption from
Title of Security Date of Sale Securities Sold Other Purchasers* Consideration Registration Claimed
======================== ============== ================ ======================= ======================== =====================
Series B Preferred 5/95 100,000 Non-U.S. Investors $2,000,000 Regulation S
Stock
Common Stock, $0.01 9/95 1,060,000 Accredited Investors $2,120,000 Section 4(2)
par value
Series A Preferred 9/95 267,500 Accredited Investors $5,350,000 Section 4(2)
Stock
Warrants to Purchase 9/95 857,283 3 Accredited Investors10Purchase of Series A Section 4(2)
857,283 shares for Preferred and Consulting
aggregate of Services
$1,086,023
Common Stock, $0.01 9/95 1,744,099 Arc Ventures as Acquisition of Home Section 4(2)
purchase pledgee Pharmacy
Common Stock, $0.01 12/95 3,216,178 Arc Ventures as Acquisition of Home Section 4(2)
purchase pledgee Pharmacy
Series C Preferred 2/96 105,000 Non-US Investors $2,100,000 Regulation S
Stock
Series D Preferred 4/96 300,000 Non-US Investors $6,000,000 Regulation S
Stock
Common Stock $.01 2/96 250,000 3 Accredited $500,000 Section 4(2)
purchase Investors (11)
Series E Preferred
Stock 7/96 125,000 Non-US Investor $2,500,000 Regulation S
<FN>
(1) The directors granted options pursuant to Medi-Mail's Non-Qualifying Stock
Option Plan are: Michael Ehrenfeld, Byron S. Georgiou, Gerald Green, Sol
Lizerbram, Robert W. Quick and Lincoln Ward.
(2) The seven employees granted options pursuant to Medi-Mail's Incentive Stock
Option Plan are: Jane E. Freeman, Betsy Loureiro, M.B. Merryman, S.E.
Roberts, Margaret Robinson, Paul Roller and Dennis T. Smith.
(3) The thirteen employees granted options pursuant to Medi-Mail's Incentive
Stock Option Plan are: Pedro Perez, S.E. Roberts, Margaret Robinson, Dennis
Smith, Barbara J. Thompson, Henrietta Beaudoin, Jacqueline D. Busa, Shari
S. Colunga, Karen K. Curtis, Jane E. Freeman, Joyce Heller-Zuenia, Julie A.
Ledbetter and Sherry M. Mack-Miksek.
(4) The twelve accredited investors are: Lee M. McDow; Brent A. Blue; Daniel W.
Pfyfer; Thomas A. Dodd and/or Sally L. Dodd; Thomas A. Dodd and/or Sally L.
Dodd as joint tenants; Luis Quintero; John W. Richards Sr. and Dorothy T.
Richards; John W. Richards Jr.; Walter Kim Richardson; Paul M. Fischer and
Asma Fisher as joint tenants; Edmund J. Elder, Jr.
(5) The three members of the Audit Committee granted options outside of the
Plan are: Byron S. Georgiou, Matthew C. Strauss and Lincoln R. Ward.
(6) The twenty-two accredited investors are: Barry Bellport; Robert De Summa;
Michael Feinstein, Murray Rosenthal; Alan Springer, Albert Barbabes;
Rosenthal Pension Plan; Herman Wetsman; Maneck Wadia; Stephen Ficci; Seth
Flam; Katzman Family Trust; Steven Katzman; David Matus; Michael Rodriguez;
Larry Ender; Derezin; Brier; Totalsen; Michael Coscinga; Michael Axelrod;
Lincoln Ward.
(7) The three accredited investors are: John W. Richards, Jr.; W. Kim
Richardson; Thomas A. Dodd.
(8) The four accredited investors are: Hassman, L.P.; Steven M. Lash; Kevin
Ellis; Seth Flam.
(9) Issued pursuant to the record of proceeding of May 24, 1995.
(10) The three accredited investors are Steven F. Mayer, Norton Herrick and
James Argyropoulos.
(11) The three accredited investors are Matthew Strauss, Steve Strauss and Craig
Sopin.
* Unless otherwise indicated, the sales were made without an underwriter and the
persons listed are the investors.
</FN>
</TABLE>
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
Exhibit
Number Description
- ------- -----------
3.1 Articles of Incorporation of the Company as filed September 17,
1985 with the Secretary of State of the State of Nevada.(1)
3.1.1 Amendment to the Articles of Incorporation of the Company as
filed April 8, 1988 with the Secretary of State of the State of
Nevada.(1)
3.1.2 Amended and Restated Articles of Incorporation of the Company as
filed May 20, 1988 with the Secretary of State of the State of
Nevada.(1)
3.1.3 Second Amended and Restated Articles of Incorporation of the
Company, as filed May 19, 1989 with the Secretary of State of the
State of Nevada.(2)
3.1.4 Certificate of Amendment to Articles of Incorporation of the
Company as filed March 2, 1990 with the Secretary of State of the
State of Nevada.(3)
3.1.5 Certificate of Amendment to Articles of Incorporation of the
Company as filed December 15, 1993 with the Secretary of State of
the State of Nevada.(3)
3.1.6 Certificate of Amendment to Articles of Incorporation of the
Company as filed November 9, 1994.(4)
3.1.7 Certificate of Amendment to Articles of Incorporation of the
Company as filed June 29, 1995.(4)
3.2.1 Certificate of Designation of the 10% Series A Convertible
Exchangeable Preferred Stock.(14)
3.2.2 Certificate of Designation Series B-1 Preferred Shares.(5)
3.2.3 Certificate of Designation Series B-2 Preferred Shares.(5)
3.2.4 Certificate of Designation Series B-3 Preferred Shares.(5)
3.2.5 Certificate of Designation Series C Preferred Shares.(5)
3.2.6. Certificate of Designation of Series D Preferred Shares.*
3.2.7. Certificate of Designation of Series E Preferred Shares.*
3.3.1 By-laws.(1)
3.3.2 Amended and Restated By-laws.(3)
3.3.3 Certificate of Amendment to Amended and Restated By-laws dated
January 27, 1992.(3)
3.3.4 Second Amended and Restated By-laws.(4)
4.1 Specimen certificate for Common Shares, $.001 par value per
share.(1)
4.2 Form of Underwriter's Warrant.(1)
5.1 Form of Opinion of Ballard Spahr Andrews & Ingersoll regarding
the legality of the securities registered under this Registration
Statement.
10.1 1988 Incentive Stock Option Plan.(2)
10.1.1 1992 Amended and Restated Incentive Stock Option Plan.(6)
10.1.2 Amendment No. 1 to 1992 Amended and Restated Incentive Stock
Option Plan.(3)
10.2 1988 Nonqualifying Stock Option Plan.(2)
10.2.1 1992 Amended and Restated Nonqualifying Stock Option Plan.(6)
<PAGE>
10.2.2 Amendment No. 1 to 1992 Amended and Restated Nonqualifying Stock
Option Plan.(3)
10.3 Employment Agreement between the Company and M.B. Merryman, dated
May 1, 1992.(6)
10.3.1 First Amendment to Employment Agreement between the Company and
M.B. Merryman, dated as of September 12, 1993.(3)
10.4 Letter Agreement between the Company and Gordon Summer dated
March 13, 1992.(6)
10.5 Sublease between the Company and Rocky Mountain Bank Note company
dated March 9, 1992.(6)
10.6 Asset Purchase Agreement between the Company, Medi-Claim, Inc.,
and Avesis, Incorporated, dated December 30, 1992.(6)
10.7 Purchase and Sale Agreement between the Company, Medi-Phar, Inc.
and Medco Drugs, dated January 17, 1992.(7)
10.8 Agreement between Avesis, Incorporated and National Insurance
Services, Inc. dated September 1, 1992 acknowledging that the
Company is to provide mail pharmacy services.(6)
10.9 Pharmaceutical Services Agreement between Union Labor Life
Insurance company and the Company, effective March 1, 1992.(6)
10.10 Specimen form of Indemnification Agreement between the Company
and all of its officers and Directors, signed in 1992.(6)
10.11 Asset Purchase Agreement between the Company and G.B.K., Inc.
d/b/a Mail Rx, dated April 15, 1993.(9)
10.12 Consultant Agreement by and between the Company and Irwin G. Jann
& Associates, P.C., dated June 1, 1994.(10)
10.13 Share Exchange Agreement by and among Family Pharmaceuticals of
America, Inc. ("FPA"), the former stockholders of FPA and the
Company, dated June 30, 1994.(11)
10.14 Agreement and Plan of Reorganization by and among Medical Service
Agency, Inc. (doing business as Mednet), Medi-Claim, Inc. and the
Company, dated November 19, 1994.(12)
10.15 Employment Agreement between the Company and David L. Dalton,
dated November 9, 1994.(4)
10.16 Asset Purchase Agreement between the Company and ArcVentures,
Inc. (Home Pharmacy) (14)
10.17 Foothill Revolving Loan Agreement (15)
10.18 Convertible Preferred STock Purchase Agreement between the
Company and Newsun Limited.*
10.19 Registration Rights Agreement between the Company and Newsun
Limited.*
21.1 Subsidiaries of the Registrant.(5)
23.1 Consent of McGladrey & Pullen, LLP, independent public
accountants of the Company.
23.2 Consent of McGladrey & Pullen, LLP, independent public
accountants of FPA.*
23.3 Consent of McKonly & Asbury, independent public accountants of
Medical Service Agency, Inc.*
23.4 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit
5.1).
23.5 Consent of Arthur Andersen, LLP, independent public accountants
of Home Pharmacy*
99.1 Complaint, Mark Christiansen v. Medi-Mail, Inc. et al., Civil No.
940052B(LSP), filed January 12, 1995 (S.D. Calif.).(12)
<PAGE>
* Filed herewith.
(1) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed with respect to the Company's
Registration Statement on Form S-18, as amended, originally filed on
May 3, 1988, Registration No. 33-21599.
(2) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed with respect to the Company's
Registration Statement on Form S-1, as amended, originally filed on
December 22, 1988, Registration No. 33-26282.
(3) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed with respect to the Company's current
report on Form 10-K for the period ended December 31, 1993.
(4) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed with respect to the Company's current
report on Form 10-K for the period ended December 31, 1994.
(5) Pursuant to Rule 12b-32, this Exhibit is incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
(6) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed with respect to the Company's annual
report on Form 10-K for the period ended December 31, 1992.
(7) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed pursuant to Item 7(c) of the Company's
current report on Form 8-K dated January 31, 1992.
(8) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed pursuant to Item 7(c) of the Company's
current report on Form 8-K dated October 14, 1988.
(9) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed pursuant to Item 2 of the Company's
current report on Form 8-K dated April 30, 1993.
(10) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed pursuant to Item 5 of the Company's
current reports on Form 8-K, dated April 28, 1994.
(11) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed pursuant to Item 2 of the Company's
current report on Form 8-K and Form 8-K/A, dated June 30, 1994.
(12) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed pursuant to Item 2 of the Company's
current report on Form 8-K and Form 8-K/A, dated November 19, 1994.
(13) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed pursuant to Item 2 of the Company's
current report on Form 8-K, dated February 23, 1995.
(14) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed with the Company's current report on
Form 8-K, dated September 15, 1995.
(15) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed with respect to the Company's
Registration Statement on Form S-1, as amended, originally filed on
January 31, 1996.
(16) Previously filed.
<PAGE>
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, 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
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, 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 be 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 of 1933, as amended, and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, 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
of 1933, as amended, shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, as amended, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Las Vegas,
State of Nevada, July __, 1996.
MEDNET, MPC CORPORATION
By: /s/ M. B. Merryman
-------------------------------------
M. B. Merryman
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints M. B. Merryman as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ M.B. Merryman
- -------------------------- President, Chief July 31, 1996
M. B. Merryman Executive Officer
and Director (Principal
Executive Officer)
/s/ Thomas Warren
- ------------------------- Chief Financial Officer July 31, 1996
Thomas Warren (Principal Financial and
Accounting Officer)
/s/ Leo T. McCarthy
- ------------------------- Director July 30, 1996
Leo T. McCarthy
- ------------------------- Director July __, 1996
Sol Lizerbram
/s/ Byron S. Georgiou
- ------------------------- Director July 30, 1996
Byron S. Georgiou
/s/ Lincoln R. Ward
- -------------------------- Director July 30, 1996
Lincoln R. Ward
- -------------------------- Director
Edward F. Heil
/s/ Robert W. Quick
- -------------------------- Director July 30, 1996
Robert W. Quick
<PAGE>
/s/ Matthew C. Strauss
- -------------------------- Director July 30, 1996
Matthew C. Strauss
- ------------------------- Director July __, 1996
Edward T. Hanley, Jr.
- ------------------------- Director
Donald Kirsch
- ------------------------- Director
Steven F. Mayer
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF
PREFERENCE SHARES BY RESOLUTION OF THE BOARD OF DIRECTORS
PROVIDING FOR AN ISSUE OF 300,000 PREFERRED SHARES DESIGNATED
AS SERIES D PREFERRED SHARES
MEDNET, MPC CORPORATION (hereinafter referred to as the "Company"), a
corporation organized and existing under the laws of the state of Nevada, in
accordance with Title 7 Section 78.195 of the Private Corporations Law of the
State of Nevada, does certify:
THAT the Board of Directors of the Company, by unanimous consent dated
April 8, 1996, adopted a resolution providing for the issuance of a series of
preferred shares to be designated "Series D Preferred Shares" with a resolution
as follows:
RESOLVED, that the Board of Directors does hereby provide for the
issuance of a series of preferred shares of the Company, of a par value
$.01 per share, to be designated "Series D Preferred Shares"
(hereinafter "Preferred Stock") consisting of 300,000 shares which
number of shares may be increased or decreased (but not below the
number of shares thereof outstanding) from time to time by the Board of
Directors; and to the extent that the designations, powers, preferences
and relative and other special rights and the qualifications,
limitations and restrictions of the Preferred Stock are not stated and
expressed in the Articles of Incorporation, does hereby fix and herein
state and express such designations, powers, preferences and relative
and other special rights and the qualifications, limitations and
restrictions thereof as follows:
1. Designation of Series.
Series D Preferred Shares
2. Number of Shares Constituting Such Series.
300,000 Shares
3. Relationship to Series A and Series C Preferred Shares.
The Company's preferred shares designated as the "10% Series A
Convertible Exchangeable Preferred Stock" ("Series A
Preferred") and the Company's preferred shares designated as
the "Series C Preferred Shares" shall be senior to the
Preferred Stock designated hereby with respect to payment of
dividends and distributions on liquidation. Without the consent
of the holders of the Preferred Stock designated hereby, the
Company shall not issue any additional shares of Series A or C
Preferred not outstanding on the date hereof.
4. Dividends.
The Preferred Stock shall not be entitled to receive dividends,
other than distributions on liquidation as provided herein.
5. Definition of Adjusted Face Amount.
As used herein, the term "Adjusted Face Amount" on any date of
one share of the Preferred Stock shall mean the sum of (i)
$20.00, plus (ii) an amount equal to 4% per annum simple
interest on such $20.00 calculated on the basis of a 360 day
year of 12 thirty day months, which interest shall accrue daily
commencing the original issue date for the Preferred Stock and
which shall continue to accrue until all amounts in respect of
the Preferred Stock shall have been paid in full to the holders
thereof.
<PAGE>
6. Preference on Liquidation.
In the event of any voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company, the
holders of the Preferred Stock shall be entitled to receive
from the Company out of the assets legally available for
distribution upon such dissolution, liquidation or winding up,
the Adjusted Face Amount in respect of each share of Preferred
Stock, calculated at the date of payment to such holders. No
payment could be made to the Preferred Stock on liquidation
prior to the satisfaction of claims of creditors and payment in
full of the liquidation preference of the Series A Preferred
and the Series C Preferred. A sale, conveyance or disposition
of all or substantially all of the assets of the Company shall
be deemed a liquidation under this Paragraph 6; however,
neither the merger nor consolidation of the Company into or
with any other corporation, nor the merger or consolidation of
any other corporation into or with the Company, shall be deemed
to be a dissolution, liquidation or winding up of the Company
within the meaning of this Paragraph , but shall be instead
subject to Paragraph 13 hereof.
Written notice of any voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company,
stating a payment date and the place where the distributable
amounts shall be payable, shall be given, either personally or
by mail to each holder of Preferred Stock, not less than 30
days prior to the payment date stated therein. If mailed, such
notice shall be deemed to be delivered when deposited in the
United States mail addressed to the holder at the holder's
address as it appears on the share transfer books of the
Company, with postage thereon prepaid.
7. Conversion at the Option of the Company.
The Company shall have the right, at its option, any time
commencing one calendar year from the date hereof to cause the
Preferred Stock to be converted into the Common Shares, $.001
par value of the Company ("Common Stock"). Each share of
Preferred Stock is convertible into that number of shares of
Common Stock determined by dividing (i) the Adjusted Face
Amount on the date of conversion by (ii) the "Company
Conversion Price" as defined in Section below. Notwithstanding
the above, the Company is not entitled to require conversion if
the Company makes any planned press release either a) on the
day it provides notice of such mandatory conversion to the
holder or b) prior to the close of trading on the following
business day.
8. Conversion at the Option of the Holder.
The holders of shares of Preferred Stock shall have the right
in their discretion at any time on or after the date 41 days
following the original issuance of the Preferred Stock
certificates to convert any whole number of shares of the
Preferred Stock held by them into Common Stock. Each share of
Preferred Stock is convertible into that number of shares of
Common Stock determined by dividing (i) the Adjusted Face
Amount on the date of conversion by (ii) the "Conversion Price"
as defined below.
Such conversion shall be effectuated by surrendering the
Preferred Stock to be converted by overnight courier to the
Company's registrar and transfer agent ("Transfer Agent") with
a conversion notice (with an advance copy of the conversion
notice to the Transfer Agent and the Company by facsimile),
executed by the holder evidencing such holder's intention to
convert the number of shares of Preferred Stock subject to such
notice, and accompanied, in the event the holder desires to
register the shares of Common Stock in a name other than that
of holder, by proper assignment hereof. The Company and the
Transfer Agent shall deliver the shares of Common Stock subject
to such notice (free of restrictive legend as provided in the
Convertible Preferred Stock Purchase Agreement between the
Company and the original holders of the Preferred Stock) to the
holder within three business days from date of receipt of the
conversion notice and the original of the Preferred Stock
certificate (or a lost certificate affidavit and bond in form
reasonably satisfactory to the Company if the original
certificate has been lost, mutilated or destroyed). If the
holder is converting less than all shares of Preferred Stock
represented by the certificate or certificates tendered by the
holder with the above mentioned conversion notice, the Company
shall promptly deliver to the holder a certificate for such
number of shares of Preferred Stock as have not been converted.
<PAGE>
In all cases the conversion of the Preferred Stock in full on
the terms and at the applicable price contemplated hereby shall
represent payment of the entire Adjusted Face Amount payable to
the Holder hereunder. No fractions of shares or scrip
representing fractions of shares will be issued on conversion,
but the number of shares issuable shall be rounded up to the
nearest whole share. The date on which notice of conversion is
given (the "Date of Conversion") shall be deemed to be the date
set forth in such notice of conversion if the original of the
Preferred Stock certificate (or lost certificate affidavit and
bond as described above) is received by the Transfer Agent
within five business days thereafter. If the original Preferred
Stock certificate (or a lost certificate affidavit and bond in
form reasonably satisfactory to the Company if the original
certificate has been lost, mutilated or destroyed) is not
received by the Transfer Agent within five business days after
the Date of Conversion, the notice of conversion shall become
null and void. No service charge will be made for any such
conversion.
9. Conversion Price.
The Conversion Price for conversion at the option of the holder
shall be the lower of (i) the Closing Bid Price on the
Determination Date, or (ii) 83% of the Market Price.
The Company Conversion Price for conversion at the option of
the Company shall be the lower of (i) the Closing Bid Price as
defined below on the Determination Date, or (ii) 80% of the
Closing Bid Price on the trading day immediately prior to the
date the Company provides notice of mandatory conversion.
"Determination Date" shall be April 10, 1996.
"Closing Bid Price" of the Common Stock for each day shall be
the closing bid price of the Common Stock on such day as
reported on the New York Stock Exchange composite tape, or, if
the Common Stock is not listed or admitted for trading on such
Exchange, on the principal national securities exchange or
market on which the Common Stock is listed or admitted for
trading, or if not listed or admitted for trading on any
national securities exchange, the closing bid price of the
Common Stock on the over-the-counter market as reported by the
National Association of Securities Dealers Automated Quotation
System ("Nasdaq") or if the Common Stock is no longer publicly
traded, the fair market value of the Common Stock as determined
by a nationally recognized or major regional investment banking
firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly
examines the financial statements of the Company)(an
"Appraiser") selected in good faith by the holders of a
majority of the shares of Preferred Stock then outstanding;
provided, that the Company, no later than the fifth calendar
day after receipt of the determination by such Appraiser shall
have the right to select an additional Appraiser, in which case
the fair market value shall be equal to the average of the
determinations by each such Appraiser.
"Market Price" shall mean the average of the Closing Bid Price
for the five trading days immediately prior to the Date of
Conversion (as herein defined).
<PAGE>
10. Redemption Requirement.
The Company is required to redeem any outstanding and
unconverted Preferred Stock on April 9, 1998 (the "Mandatory
Redemption Date"). The redemption price per share of Preferred
Stock (the "Mandatory Redemption Price") shall equal the
Adjusted Face Amount on the Mandatory Redemption Date. The
Mandatory Redemption Price shall be paid by the Company to the
holders of such unconverted Preferred Stock on the Mandatory
Redemption Date. If any portion of the Mandatory Redemption
Price shall not be paid by the Company within 7 calendar days
after the Mandatory Redemption Date, such Mandatory Redemption
Price shall be increased by an amount accruing from the 7th day
to the 21st day after the Mandatory Redemption Date at the rate
of 5% per annum, from the 22nd day to the 60th day at 8% per
annum and from the 61st day until paid at the rate of 12% per
annum.
11. Premium for Early Redemption.
If any Preferred Stock is tendered for conversion at the option
of the holder, the Company shall have the right, at its option,
to redeem such Preferred Stock for cash by giving notice (the
"Early Redemption Notice") to the holder by facsimile, original
to follow by two-day courier, within one business day from the
date facsimile notice of conversion is received by the Company.
The redemption price shall be paid to the holder within seven
calendar days after such facsimile has been given (the "Early
Redemption Date"). The redemption price per share of Preferred
Stock (the "Early Redemption Price") shall be calculated by
multiplying the Adjusted Face Amount as of the proposed
Conversion Date by the greater of a) 120%, or b) a fraction,
the numerator of which shall be the Closing Bid Price on the
proposed Date of Conversion, and the denominator of which shall
be Conversion Price, as defined above, applicable to holder's
notice of conversion. Upon the giving of the Early Redemption
Notice, all conversion rights of the affected Preferred Stock
(notwithstanding the furnishing by the holder hereof of a
notice of conversion to the Company), shall forthwith
terminate, except only the right of the holder to receive the
Early Redemption Price, and except as provided in the following
paragraph of this Section.
If any portion of the Early Redemption Price shall not be paid
by the Company within 7 calendar days after the Early
Redemption Date, such Early Redemption Price shall be increased
by an amount accruing from the 7th day after the Early
Redemption Date at the rate of 12% per annum. If any portion of
the Early Redemption Price remains unpaid more than 7 calendar
days after the Early Redemption Date, then the holder may
elect, by written notice to the Company given within 45 days
after the Early Redemption Date, to either (i) reinstate its
request to convert all Preferred Shares for which the Early
Redemption Price, plus interest, has not been paid in full (the
"Unpaid Shares") in which event the Market Price shall be the
lower of the Market Price calculated for the original
conversion request or the Market Price as of the written notice
of reinstatement, or (ii) withdraw its request to convert the
Unpaid Shares. If the holder elects option (i) above, the
Company shall within three business days of its receipt of such
election deliver to the holder the shares of Common Stock
issuable upon conversion of the Unpaid Shares subject to the
Holder Conversion Notice which gave rise to the Early
Redemption Notice of the Company and otherwise perform its
obligations hereunder with respect thereto; or, if the Holder
elects option (ii) above, the Company shall promptly, and in
any event not later than three business days from receipt of
holder's notice of such election, return to the holder all of
the Unpaid Shares. If the holder elects either of such
remedies, then the Company shall not be entitled to require
early redemption of the Unpaid Shares when they are again
presented for conversion.
<PAGE>
12. Adjustment for Certain Recapitalizations
In the event of any (i) stock split, stock dividend or other
distribution on the Common Stock payable in securities of the
Company, or (ii) other reclassification of the Common Stock, or
(iii) issuance by the Company of rights or warrants to all
holders of Common Stock entitling them to subscribe for or
purchase shares of Common Stock at a price per share less than
the Closing Bid Price of Common Stock on the date of such
issuance, or (iv) distribution to all holders of Common Stock
(and not to holders of Preferred Stock) of evidences of its
indebtedness or assets, the conversion price shall be equitably
adjusted so that the holders shall receive, in exchange for the
conversion price, such securities or other property which they
would have received had they converted the Preferred Stock
immediately prior to such event. The Company shall notify the
holders of the Preferred Stock at least 20 days prior to the
record date of any event which would so require an adjustment
to the Conversion Price including such information as may be
necessary for the holders to determine or estimate the
anticipated adjustments to the Conversion Price.
13. Consolidations or Merger
In case of any consolidation or merger of the Company with or
into another person, or any sale or transfer of all or
substantially all of the assets of the Company or any
compulsory share exchange pursuant to which share exchange the
Common Stock is converted into other securities, cash or
property, then the holders of the Preferred Stock then
outstanding shall have the right thereafter to convert such
shares only into the kind and amount of shares of stock and
other securities and property receivable upon or deemed to be
held following such reclassification, consolidation, merger,
sale, transfer or share exchange by a holder of a number of
shares of the Common Stock of the Company into which such
shares of Preferred Stock could have been converted immediately
prior to such reclassification, consolidation, merger, sale,
transfer or share exchange. The terms of any such
consolidation, merger, sale, transfer or share exchange shall
include such terms so as to continue to give to the holders of
Preferred Stock the right to receive the securities or property
set forth in this Paragraph upon any conversion following such
consolidation, merger, sale, transfer or share exchange. This
provision shall similarly apply to successive consolidations,
mergers, sales, transfers or share exchanges.
14. Voting Rights.
The Preferred Stock shall have one vote per share and, except
as to matters for which Nevada law requires class voting, shall
vote as a single class with the Common Stock.
15. Registration Rights.
The Company has granted registration rights to the holders of
the Preferred Stock, on the Common Stock issuable on
conversion, on the terms and conditions set forth in the
Convertible Preferred Stock Purchase Agreement between the
Company and the original purchaser of the Preferred Stock. The
Company will provide any holder of such registration rights,
upon request, a list of all such holders to facilitate
organization of any registration demand.
<PAGE>
AND THAT the issuance of 300,000 shares of Preferred Stock has been
authorized by the Board of Directors of the Company.
IN WITNESS WHEREOF, the Company has caused this Certificate to be
executed in its corporate name by its President and its corporate seal to be
hereunto affixed and attached by its Secretary this __ day of 7/31/96.
MEDNET, MPC CORPORATION
/s/ Dennis Smith
------------------------------
Dennis Smith
Vice-President
ATTEST:
/s/ Julie Ledbetter
- --------------------------
Julie Ledbetter, Secretary
<PAGE>
STATE OF NEVADA )
:ss.
COUNTY OF CLARK )
I, ________________, a notary public, hereby certify that on this __ day of
7/31/96, personally appeared before me _______________________, an officer of
Mednet, MPC Corporation, who being by me first duly sworn, severally declared
that he is the person who signed the foregoing document, and that the statements
therein contained are true.
My Commission Expires: Notary Public
Residing at:
- -----------------------
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF
PREFERENCE SHARES BY RESOLUTION OF THE BOARD OF DIRECTORS
PROVIDING FOR AN ISSUE OF 125,000 PREFERRED SHARES DESIGNATED
AS SERIES E PREFERRED SHARES
MEDNET, MPC CORPORATION (hereinafter referred to as the "Company"), a
corporation organized and existing under the laws of the state of Nevada, in
accordance with Title 7 Section 78.195 of the Private Corporations Law of the
State of Nevada, does certify:
THAT the Board of Directors of the Company, by unanimous consent dated July
__, 1996, adopted a resolution providing for the issuance of a series of
preferred shares to be designated "Series E Preferred Shares" with a resolution
as follows:
RESOLVED, that the Board of Directors does hereby provide for the
issuance of a series of preferred shares of the Company, of a par value
$.01 per share, to be designated "Series E Preferred Shares"
(hereinafter "Preferred Stock") consisting of 125,000 shares which
number of shares may be increased or decreased (but not below the
number of shares thereof outstanding) from time to time by the Board of
Directors; and to the extent that the designations, powers, preferences
and relative and other special rights and the qualifications,
limitations and restrictions of the Preferred Stock are not stated and
expressed in the Articles of Incorporation, does hereby fix and herein
state and express such designations, powers, preferences and relative
and other special rights and the qualifications, limitations and
restrictions thereof as follows:
1. Designation of Series.
Series E Preferred Shares
2. Number of Shares Constituting Such Series.
125,000 Shares
3. Relationship to Series A, Series C and Series D Preferred Shares.
The Company's preferred shares designated as the "10% Series A
Convertible Exchangeable Preferred Stock" ("Series A Preferred"),
the Company's preferred shares designated as the "Series C
Preferred Shares" ("Series C Preferred") and the Company's
preferred shares designated as the "Series D Preferred Shares"
("Series D Preferred") shall be senior to the Preferred Stock
designated hereby with respect to payment of dividends and
distributions on liquidation. Without the consent of the holders
of the Preferred Stock designated hereby, the Company shall not
issue any additional shares of Series A Preferred, Series C
Preferred or Series D Preferred not outstanding on the date
hereof.
<PAGE>
4. Dividends.
The Preferred Stock shall not be entitled to receive dividends,
other than distributions in liquidation as provided herein.
5. Definition of Adjusted Face Amount.
As used herein, the term "Adjusted Face Amount" on any date of one
share of the Preferred Stock shall mean the sum of (i)$20.00,
plus (ii) an amount equal to 5% per annum simple interest on such
$20.00 calculated on the basis of a 360 day year of 12 thirty day
months, which interest shall accrue daily commencing the original
issue date for the Preferred Stock certificates (the "Original
Issue Date") and which shall continue to accrue until all amounts
in respect of the Preferred Stock shall have been paid in full to
the holders thereof.
6. Preference on Liquidation.
In the event of any voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company, the
holders of the Preferred Stock shall be entitled to receive from
the Company out of the assets legally available for distribution
upon such dissolution, liquidation or winding up, the Adjusted
Face Amount in respect of each share of Preferred Stock,
calculated at the date of payment to such holders. No payment
shall be made to the Preferred Stock on liquidation prior to the
satisfaction of claims of creditors and payment in full of the
liquidation preference of the Series A Preferred, the Series C
Preferred and the Series D Preferred.
A sale, conveyance or disposition of all or substantially all of
the assets of the Company shall be deemed a liquidation under this
Paragraph 6; however, neither the merger nor consolidation of the
Company into or with any other corporation, nor the merger or
consolidation of any other corporation into or with the Company,
shall be deemed to be a dissolution, liquidation or winding up of
the Company within the meaning of this Paragraph 6, but shall be
instead subject to Paragraph 13 hereof.
Written notice of any voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company, stating a
payment date and the place where the distributable amounts shall
be payable, shall be given, either personally or by mail to each
holder of Preferred Stock, not less than 30 days prior to the
payment date stated therein. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail
addressed to the holder at the holder's address as it appears on
the share transfer books of the Company, with postage thereon
prepaid.
<PAGE>
7. Conversion at the Option of the Company.
The Company shall have the right, at any time commencing six
months from the date that the Securities and Exchange Commission
(the "Commission") shall have declared effective under the
Securities Act of 1933, as amended (the "Securities Act"), the
registration statement contemplated by the registration rights
agreement between the Company and the original holder of the
Preferred Stock and dated the Original Issue Date (the
"Registration Rights Agreement"), to cause the Preferred Stock to
be converted into shares of the Company's common stock, $.001 par
value per share (the "Common Stock"), such right to be exercisable
upon no less than thirty days notice to each holder of Preferred
Shares (which notice may not be delivered prior to the effective
date referenced above). Each share of Preferred Stock to be
converted pursuant to the terms hereof at the option of the
Company shall be converted into that number of shares of Common
Stock determined by dividing (i) the Adjusted Face Amount on the
date of conversion by (ii) the "Conversion Price" as defined in
Paragraph 9 below. Notwithstanding the above, the Company is not
entitled to require conversion if the Company makes any planned
press release either (a) on the day it provides notice of such
mandatory conversion to the holder or (b) prior to the close of
trading on the following business day.
8. Conversion at the Option of the Holder.
The holders of shares of Preferred Stock shall have the right in
their discretion at any time on or after the date 61 days
following the Original Issue Date to convert any whole number of
shares of the Preferred Stock held by them into Common Stock;
provided, however, that after the registration statement
contemplated by the Registration Rights Agreement shall have been
declared effective under the Securities Act by the Commission, a
holder may not convert into Common Stock in excess of one-third
(1/3) of the aggregate number of shares of Preferred Stock owned
by such holder (as measured on the Original Issue Date) in each of
the first three 15 day periods following such effective date
(e.g., if a holder was originally issued 99 shares of Preferred
Stock and first con verts on the 16th day following the
effectiveness of the registration statement, such holder would be
entitled to convert up to 66 shares of Preferred Stock on such
day). If at any time after the Original Issue Date the Market
Price is equal to or less than $1.50, then, notwithstanding
anything to the contrary set forth above, the holders of Preferred
Stock shall have the right in their discretion at any time on or
after such date to convert any or all of their shares of Preferred
Stock into shares of Common Stock free of the conversion
limitations set forth in the immediately preceding sentence. Each
share of Preferred Stock is convertible into that number of shares
of Common Stock determined by dividing (i) the Adjusted Face
Amount on the date of conversion by (ii) the Conversion Price.
Such conversion shall be effectuated by surrendering the Preferred
Stock to be converted by overnight courier to the Company's
registrar and transfer agent ("Transfer Agent") with a conversion
notice (with an advance copy of the conversion notice to the
Transfer Agent and the Company by facsimile), executed by the
holder evidencing such holder's intention to convert the number of
shares of Preferred Stock subject to such notice, and accompanied,
in the event the holder desires to register the shares of Common
Stock in a name other than that of holder, by proper assignment
hereof. The Company and the Transfer Agent shall deliver the
shares of Common Stock subject to such notice (free of restrictive
legend as provided in the Convertible Preferred Stock Purchase
Agreement (the "Purchase Agreement") between the Company and the
original holder of the Preferred Stock) to the holder within three
business days from date of receipt of the conversion notice and
the original of the Preferred Stock certificate (or a lost
certificate affidavit and bond in form reasonably satisfactory to
the Company if the original certificate has been lost, mutilated
or destroyed). If the holder is converting less than all shares of
Preferred Stock represented by the certificate or certificates
tendered by the holder with the above mentioned conversion notice,
the Company shall promptly deliver to the holder a certificate for
such number of shares of Preferred Stock as have not been
converted.
<PAGE>
The Company undertakes to, promptly upon its receipt of a
conversion notice tendered by the Purchaser (as defined in the
Purchase Agreement) or its sole designee (and, in any case prior
to the time it effects such conversion), notify the Purchaser (or
such designee) by facsimile of the number of shares of Common
Stock outstanding on such date and the number of shares of Common
Stock which would be issuable to the Purchaser (or its sole
designee, as the case may be) if the conversion requested in such
conversion notice were effected in full, whereupon,
notwithstanding anything to the contrary set forth herein, the
Purchaser (or such designee, as the case may be) may, within one
day of the notice from the Company, revoke such conversion to the
extent that it determines that such conversion would result in the
Purchaser (or such designee) owning in excess of 4.9% of the
outstanding shares of Common Stock on such date, and the Company
shall issue to the Purchaser (or such designee, as the case may
be) one or more certificates representing shares of Preferred
Stock which have not been converted as a result of this provision.
If the Purchaser (or such designee, as the case may be) waives the
applicability of this limitation by notice to the Company
delivered upon its receipt of the Company's notice regarding the
number of outstanding shares of Common Stock or if the Purchaser
fails to respond to the Company's notice within one day
thereafter, the Company shall effect in full the conversion
requested in such notice.
In all cases, the conversion of the Preferred Stock in full on the
terms and at the applicable price contemplated hereby shall
represent payment of the entire Adjusted Face Amount payable to
the Holder hereunder. No fractions of shares or scrip representing
fractions of shares will be issued on conversion, but the number
of shares issuable shall be rounded up to the nearest whole share.
The date on which notice of conversion is given (the "Date of
Conversion") shall be deemed to be the date set forth in such
notice of conversion if the original of the Preferred Stock
certificate (or lost certificate affidavit and bond as described
above) is received by the Transfer Agent within five business days
thereafter. If the original Preferred Stock certificate (or a lost
certificate affidavit and bond in form reasonably satisfactory to
the Company if the original certificate has been lost, mutilated
or destroyed) is not received by the Transfer Agent within five
business days after the Date of Conversion, the notice of
conversion shall become null and void. No service charge will be
made for any such conversion.
9. Conversion Price.
The "Conversion Price" for conversion of Preferred Stock hereunder
shall be the lower of (i) the Closing Bid Price on the
Determination Date or (ii) 80% of the Market Price; provided,
however, if the registration statement to be filed by the Company
in accordance with the Registration Rights Agreement is not
declared effective by the Commission for any reason by the
Effective Date (as defined in the Registration Rights Agreement),
then for each of the first two months after such Effective Date
that such registration statement shall not have been so declared
effective, the discount specified in clause (ii) above shall be
increased by 1% (i.e., 79% at the end of the first such month and
78% at the end of the second such month). The additional discount
contemplated above shall be triggered on the day after the
Effective Date and the day that is one month thereafter.
"Determination Date" shall be July 11, 1996.
<PAGE>
"Closing Bid Price" of the Common Stock for each day shall be the
closing bid price of the Common Stock on such day as reported on
the New York Stock Exchange composite tape, or, if the Common
Stock is not listed or admitted for trading on such Exchange, on
the principal national securities exchange or market on which the
Common Stock is listed or admitted for trading, or if not listed
or admitted for trading on any national securities exchange, the
closing bid price of the Common Stock on the over-the-counter
market as reported by the National Association of Securities
Dealers Automated Quotation System ("Nasdaq") or if the Common
Stock is no longer publicly traded, the fair market value of the
Common Stock as determined by a nationally recognized or major
regional investment banking firm or firm of independent certified
public accountants of recognized standing (which may be the firm
that regularly examines the financial statements of the Company)
(an "Appraiser") selected in good faith by the holders of a
majority of the shares of Preferred Stock then outstanding;
provided, that the Company, no later than the fifth calendar day
after receipt of the determination by such Appraiser shall have
the right to select an additional Appraiser, in which case the
fair market value shall be equal to the average of the
determinations by each such Appraiser.
"Market Price" shall mean the average of the Closing Bid Price for
the five trading days immediately prior to the Date of Conversion
(as herein defined).
10. Redemption/Conversion Option.
The Company may, at its option, redeem or force the conversion of
any outstanding and unconverted Preferred Stock on July 12, 1999
(the "Optional Redemption/Conversion Date"), provided that the
Company notifies the holders no later than the third business day
prior to the Optional Redemption/Conversion Date of its intention
to either redeem or force the conversion of Preferred Stock
pursuant to this paragraph.
If the Company elects to redeem such outstanding and unconverted
shares of Preferred Stock, the redemption price per share (the
"Optional Redemption Price") shall equal the Adjusted Face Amount
on the Optional Redemption Date and shall be paid by the Company
to the holders of such unconverted Preferred Stock on the Optional
Redemption Date. If any portion of the Optional Redemption Price
shall not be paid by the Company within 7 calendar days after the
Optional Redemption Date, such Optional Redemption Price shall be
increased by an amount accruing from the 7th day to the 21st day
after the Optional Redemption Date at the rate of 5% per annum,
from the 22nd day to the 60th day at 8% per annum and from the
61st day until paid at the rate of 12% per annum. However, if any
portion of the Optional Redemption Price remains unpaid more than
7 calendar days after the Optional Redemption/Conversion Date,
then the holder may elect, by written notice to the Company given
within 45 days after the Optional Redemption/Conversion Date, to
either (i) demand conversion in accordance with the formula and
the time frame therefor set forth in Paragraph 8 hereof of all
Preferred Shares for which the Optional Redemption Price, plus
interest, has not been paid in full (the "Unpaid Optional
Redemption Shares"), in which event the Market Price component of
the Conversion Price shall be the lower of the Market Price
calculated on the Optional Redemption/Conversion Date and the
Market Price as of the holder's written demand for conversion, or
(ii)demand that the Company withdraw its election to force such
redemption. If the holder elects option (i)above, the Company
shall within three business days of its receipt of such election
deliver to the holder the shares of Common Stock issuable upon
conversion of the Unpaid Shares subject to such holder conversion
demand and otherwise perform its obligations hereunder with
respect thereto; or, if the Holder elects option (ii)above, the
Company shall promptly, and in any event not later than three
business days from receipt of holder's notice of such election,
return to the holder all of the Unpaid Optional Redemption Shares.
If the holder elects option (i) above, the Company shall not be
entitled to require early redemption of the Unpaid Shares as
contemplated under Paragraph 11 below if they are presented for
conversion at a later date.
<PAGE>
If the Company elects to force the holder to convert its Preferred
Stock, then each share of Preferred Stock shall be converted into
shares of Common Stock in accordance with the formula set forth in
Paragraph 7 hereof and the time frame set forth in Paragraph 8
hereof.
11. Premium for Early Redemption.
If any Preferred Stock is tendered for conversion at the option of
the holder, the Company shall have the right, at its option, to
redeem such Preferred Stock for cash by giving notice (the "Early
Redemption Notice") to the holder by facsimile, original to follow
by two-day courier, within one business day from the date
facsimile notice of conversion is received by the Company. The
redemption price shall be paid to the holder within seven calendar
days after such facsimile has been given (the "Early Redemption
Date"). The redemption price per share of Preferred Stock (the
"Early Redemption Price") shall be calculated by multiplying the
Adjusted Face Amount as of the proposed Conversion Date by the
greater of a)120%, or b) a fraction, the numerator of which shall
be the Closing Bid Price on the proposed Date of Conversion, and
the denominator of which shall be Conversion Price, as defined
above, applicable to holder's notice of conversion. Upon the
giving of the Early Redemption Notice, all conversion rights of
the affected Preferred Stock (notwithstanding the furnishing by
the holder hereof of a notice of conversion to the Company), shall
forthwith terminate, except only the right of the holder to
receive the Early Redemption Price, and except as provided in the
following paragraph of this Paragraph.
If any portion of the Early Redemption Price shall not be paid by
the Company within 7 calendar days after the Early Redemption
Date, such Early Redemption Price shall be increased by an amount
accruing from the 7th day after the Early Redemption Date at the
rate of 12% per annum. If any portion of the Early Redemption
Price remains unpaid more than 7 calendar days after the Early
Redemption Date, then the holder may elect, by written notice to
the Company given within 45 days after the Early Redemption Date,
to either (i)reinstate its request to convert all Preferred
Shares for which the Early Redemption Price, plus interest, has
not been paid in full (the "Unpaid Shares") in which event the
Market Price shall be the lower of the Market Price calculated for
the original conversion request or the Market Price as of the
written notice of reinstatement, or (ii)withdraw its request to
convert the Unpaid Shares. If the holder elects option (i) above,
the Company shall within three business days of its receipt of
such election deliver to the holder the shares of Common Stock
issuable upon conversion of the Unpaid Shares subject to the
holder conversion notice which gave rise to the Early Redemption
Notice of the Company and otherwise perform its obligations
hereunder with respect thereto; or, if the Holder elects option
(ii)above, the Company shall promptly, and in any event not later
than three business days from receipt of holder's notice of such
election, return to the holder all of the Unpaid Shares. If the
holder elects either of such remedies, then the Company shall not
be entitled to require early redemption of the Unpaid Shares when
they are again presented for conversion.
12. Adjustment for Certain Recapitalizations
In the event of any (i) stock split, stock dividend or other
distribution on the Common Stock payable in securities of the
Company, or (ii) other reclassification of the Common Stock, or
(iii) issuance by the Company of rights or warrants to all holders
of Common Stock entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the Closing Bid
Price of Common Stock on the date of such issuance, or (iv)
distribution to all holders of Common Stock (and not to holders of
Preferred Stock) of evidences of its indebtedness or assets, the
conversion price shall be equitably adjusted so that the holders
shall receive, in exchange for the conversion price, such
securities or other property which they would have received had
they converted the Preferred Stock immediately prior to such
event. The Company shall notify the holders of the Preferred Stock
at least 20 days prior to the record date of any event which would
so require an adjustment to the Conversion Price including such
information as may be necessary for the holders to determine or
estimate the anticipated adjustments to the Conversion Price.
<PAGE>
13. Consolidations or Mergers
In case of any consolidation or merger of the Company with or into
another person, or any sale or transfer of all or substantially
all of the assets of the Company or any compulsory share exchange
pursuant to which share exchange the Common Stock is converted
into other securities, cash or property, then the holders of the
Preferred Stock then outstanding shall have the right thereafter
to convert such shares only into the kind and amount of shares of
stock and other securities and property receivable upon or deemed
to be held following such reclassification, consolidation, merger,
sale, transfer or share exchange by a holder of a number of shares
of the Common Stock of the Company into which such shares of
Preferred Stock could have been converted immediately prior to
such reclassification, consolidation, merger, sale, transfer or
share exchange. The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to
continue to give to the holders of Preferred Stock the right to
receive the securities or property set forth in this Paragraph
upon any conversion following such consolidation, merger, sale,
transfer or share exchange. This provision shall similarly apply
to successive consolidations, mergers, sales, transfers or share
exchanges.
14. Voting Rights.
The Preferred Stock shall have one vote per share and, except as
to matters for which Nevada law requires class voting, shall vote
as a single class with the Common Stock.
15. Shares of Common Stock. The Company covenants that it will at all
times reserve and keep available out of its authorized and
unissued Common Stock solely for the purpose of issuance upon
conversion of Preferred Stock as herein provided, free from
preemptive rights or any other actual contingent purchase rights
of persons other than the holders of Preferred Stock, such number
of shares of Common Stock as shall be issuable upon the conversion
of all outstanding shares of Preferred Stock. The Company
covenants that all shares of Common Stock that shall be so
issuable shall, upon issue, be duly and validly authorized, issued
and fully paid and nonassessable.
AND THAT the issuance of 125,000 shares of Preferred Stock has been
authorized by the Board of Directors of the Company.
IN WITNESS WHEREOF, the Company has caused this Certificate to be executed
in its corporate name by its President and its corporate seal to be hereunto
affixed and attached by its Secretary this __ day of August, 1996.
MEDNET, MPC CORPORATION
/s/ Dennis Smith
---------------------------
Dennis Smith
Vice-President
ATTEST:
/s/ Julie Ledbetter
- --------------------------
Julie Ledbetter, Secretary
<PAGE>
STATE OF NEVADA )
:ss.
COUNTY OF CLARK )
I, ________________, a notary public, hereby certify that on this __ day of
August, 1996, personally appeared before me _______________________, an officer
of Mednet, MPC Corporation, who being by me first duly sworn, severally declared
that he is the person who signed the foregoing document, and that the statements
therein contained are true.
My Commission Expires: Notary Public
Residing at: ___________________
August 2, 1996
Board of Directors
Mednet, MPC Corporation
871-C Grier Drive
Las Vegas, Nevada 89119
Re: Mednet, MPC Corporation
Registration Statement on Form S-1
Gentlemen:
We have acted as counsel to Mednet, MPC Corporation, a Nevada corporation
(the "Company"), in connection with the preparation and filing of a Registration
Statement on Form S-1 (the "Registration Statement"), to be filed on or about
July 31, 1996, pertaining to 5,000,000 shares of the Company's common stock,
$.001 par value, issuable by the Company on conversion of the Series E
Convertible Preferred Stock (the "Shares").
We have reviewed the Articles of Incorporation and Bylaws of the Company,
as amended, resolutions of the board of directors of the Company, the
Registration Statement and such other documents as we have deemed appropriate.
As to factual matters we have relied upon certificates supplied to us by
officers of the Company. In rendering the opinion expressed herein, we have
assumed, without investigation, the validity of all documents and the accuracy
of all information supplied to us by the Company. All capitalized terms used
herein and not otherwise defined have the meaning ascribed to them in the
Registration Statement.
Based upon the foregoing, we are of the opinion that the Shares being
registered pursuant to the Registration Statement will be, upon the conversion
of the shares of Series E Convertible Preferred Stock in accordance with the
terms set forth in the Certificate of Designation filed with the Nevada
Secretary of State on July 12, 1996, legally issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to this firm under "Legal Matters" in
the Prospectus contained in the Registration Statement.
Very truly yours,
/s/ BALLARD SPAHR ANDREWS & INGERSOLL
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Mednet, MPC Corporation
Las Vegas, Nevada
We hereby consent to the use in the Registration Statement on Form S-1
registering 5,000,000 shares of common stock of our report dated March 8, 1996,
relating to the consolidated financial statements of Mednet, MPC Corporation and
subsidiaries and our report dated July 29, 1994, relating to the financial
statements of Family Pharmaceuticals of America, Inc., and to the reference to
our Firm under the caption "Experts" in the Prospectus.
/s/ McGladrey & Pullen, LLP
Las Vegas, Nevada
July 31, 1996
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated September 30, 1994, on the
consolidated financial statements of Medical Service Agency, Inc. and subsidiary
and the reference to our firm under the caption "Financial Statements" in the
S-1 Registration Statement for 5,000,000 shares of common stock of MedNet, MPC
Corporation.
/s/ McKonley & Asbury
Harrisburg, Pennsylvania
July 31, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Mednet, MPC Corporation
Las Vegas, Nevada
As independent public accountants, we hereby consent to the use of our report
dated October 6, 1995 (and to all references to our Firm) included in or made a
part of this (the attached) Form S-1 Registration Statement.
/s/ Arthur Andersen, LLP
Chicago, Illinois
July 31, 1996
