As filed with the Securities and Exchange Commission on January 31, 1996
Registration No. 33-____
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
Title of Proposed
Each Class Maximum Aggregate Amount of
of Securities Amount to Be Offering Price Offering Registration
to Be Registered Registered (1) Per Share (2) Price (2) Fee (3)
- ---------------- -------------- -------------- --------- ------------
Common Stock, $.001
par value to be sold by
selling stockholders
including collateral
shares 3,811,725 2.3125 $8,814,614 $3,039.52
Total $8,814,614 $3,039.52
(1) Including such additional shares of Common Stock issuable upon
conversion of the Series A Preferred or Convertible Notes, or upon
exercise of the Warrants, each as defined herein, as a result of
adjustments to the conversion price or exercise 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 January 24,
1996 as reported by Nasdaq.
(3) The fee is calculated on the basis of 1/29th of 1% of the Proposed
Maximum Aggregate Offering Price.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, 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
Item Number Prospectus Caption
- ----------- ------------------
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;
Proposed 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;
Security Ownership of
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
<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.
PROSPECTUS
MEDNET, MPC CORPORATION
3,811,725 Shares of Common Stock
Certain selling stockholders (the "Selling Stockholders") of Mednet,
MPC Corporation (formerly Medi-Mail, Inc.) (the "Company") hereby offer up to
3,811,725 common shares, $.001 par value per share (the "Common Stock"), of the
Company. The Common Stock being offered consists of the following for resale by
the Selling Stockholders: (i) 837,600 shares currently owned by certain of the
Selling Stockholders; (ii) 1,783,330 shares (the "Conversion Shares") issuable
on conversion of the Company's 10% Series A Convertible Exchangeable Preferred
Stock ("Series A Preferred) or Convertible Notes (as defined herein); (iii)
699,518 shares of Common Stock (the "Warrant Shares") issuable by the Company
pursuant to the terms of certain outstanding warrants (the "Warrants"); and (iv)
491,277 shares (the "Collateral Shares") of Common Stock offered hereby that
have been pledged by the Company to ArcVentures, Inc. ("Arc") as collateral for
certain obligations of the Company. The Company will not receive any proceeds
from the resale of the Conversion Shares, the Warrant shares or the shares of
Common Stock owned by the Selling Stockholders. Although the Company will
receive the exercise price of any or all of the outstanding Warrants which are
exercised, up to a maximum of $1,330,928 if all Warrants are exercised, there is
no assurance that any of the Warrants will be exercised. The proceeds from the
sale of the Collateral Shares will be applied to certain debt obligations of the
Company. This Prospectus also relates to such additional shares of Common Stock
as may be issuable upon conversion of the Series A Preferred or Convertible
Notes, or exercise of the Warrants, as a result of adjustments to conversion
price or exercise price in accordance with the terms thereof. See "Securities
Covered by This Prospectus."
The Common Stock is traded in the over-the-counter market and quoted on
Nasdaq under the symbol MMRX. On January 24, 1996, the last reported sales price
of the Common Stock on Nasdaq was $2.3125 per share. See "Price Range of Common
Stock and Dividend Policy."
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 January 30,
1996.
<PAGE>
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 .....................................
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 ............................................................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................
DESCRIPTION OF SECURITIES .................................................
LEGAL PROCEEDINGS .........................................................
LEGAL MATTERS .............................................................
EXPERTS ...................................................................
CHANGE IN ACCOUNTANTS .....................................................
-------------------
<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.
This Prospectus constitutes a part of a Registration Statement 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 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 clientspecific 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, Chicago and Mount Pleasant, South
Carolina 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 provides the Company with a working
knowledge of the retail pharmacy business which improves the Company's ability
to market and develop its services. The Company also believes that the operation
of the local retail pharmacies provides the Company with additional knowledge
and background to continue developing the pharmacy network and claims processing
system of its subsidiary, Medi-Claim.
<PAGE>
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.
As of the date of this Prospectus, the Company has 25,997,643 shares of
Common Stock outstanding (28,971,768 including the Conversion Shares, the
Warrant Shares and the Collateral Shares) and 4,718,382 shares of Common Stock
reserved for issuance pursuant to outstanding options, warrants, convertible
securities or other rights.
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 the following shares
which may be resold by the Selling Stockholders:
(i) 837,600 shares currently owned by the Selling Stockholders;
(ii) The Conversion Shares, comprising 1,783,330 shares issuable on
conversion of the Series A Preferred or Convertible Notes;
(iii) The Warrant Shares, comprising 699,518 shares which the Selling
Stockholders may acquire on exercise of warrants; and
(iv) The Collateral Shares, comprising 491,277 shares which have been
pledged by the Company to Arc to secure certain obligations arising from the
Home Pharmacy acquisitions.
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>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------------------- -----------------------------
1994(1)(2) 1993(3) 1992(4) 1995(5) 1994(1)(2)
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ....................... $ 67,863,000 $ 25,224,000 $ 10,293,000 $ 83,693,000 $ 48,869,000
Cost of sales ................... (58,793,000) (19,504,000) (8,082,000) (71,262,000) (42,519,000)
Gross profit .................... 9,070,000 5,720,000 2,211,000 12,431,000 6,350,000
Selling, general and
administrative expenses
(including amortization) ...... (14,794,000) (13,185,000) (4,433,000) (12,991,000) (9,293,000)
Subsidiary operations for
period not owned .............. 517,000 -- 37,000 (982,000) 321,000
Net other income (expense)(6) ... (292,000) (761,000) 45,000 (730,000) (341,000)
Net loss ........................ $ (5,499,000) $ (8,226,000) $ (2,140,000) $ (2,272,000) $ (2,963,000)
Net loss per common share........ $ (.26) $ (.49) $ (.24) $ (.09) $ (.14)
Weighted average shares
outstanding ................... 21,353,000 16,675,000 8,929,000 24,041,758 21,011,662
Balance Sheet Data (end of period):
Working capital ................. $ 1,420,000 $ 1,310,000 $ 2,179,000 $ 2,365,000 $ 3,879,000
Intangible assets, net .......... 9,308,000 5,406,000 1,803,000 19,225,000 6,063,000
Total assets .................... 22,317,000 13,017,000 7,271,000 39,588,000 16,519,000
Long-term debt less current
portion ....................... 595,000 952,000 835,000 3,649,000 455,000
Redeemable Preferred Stock ...... -- -- -- 5,350,000 --
Stockholders' equity ............ $ 11,906,000 $ 7,028,000 $ 4,814,000 $ 15,369,000 $ 11,156,000
<FN>
(1) 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.
(2) 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.
(3) In April, 1993, the Company acquired substantially all the assets of
Mail Rx. The acquisition was accounted for as a purchase.
(4) 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. Results of Medi-Claim are included for the last month
of 1992.
(5) 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.
(6) Net other income (expense) excludes subsidiary operations for period
not owned.
</FN>
</TABLE>
<PAGE>
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.
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 licensed pharmacies located in Las Vegas, Nevada;
Chicago, Illinois and Mount Pleasant, South Carolina. The retail pharmacies are
licensed in California and Nevada. Nevada, California, South Carolina 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 23 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 13 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 51% of its mail service sales came from states in which the
Company has complied with the disclosure or licensing laws, and that
approximately 43% of its mail service sales were in the 27 states which the
Company believes do not regulate mail service sales. The remaining 6% of sales
were in jurisdictions in which 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
results 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. The Company's revenues increased approximately
169% from 1993 to 1994. After giving effect to the Home Pharmacy acquisition,
the Company's revenues for the nine months ended September 30, 1995 increased
approximately 71.3% over the first nine months of 1994. This growth resulted
from acquisitions, internal growth 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>
Continued Operating Losses. As of December 31, 1994, the Company has
had net losses accumulating to $20,256,000 since commencement of operations on
May 1, 1987, including losses of $5,499,000 in the year ended December 31, 1994.
In addition, the Company had a net loss of $2,272,000 for the nine months ended
September 30, 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.
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 September 30, 1995, the Company had working
capital of $2,365,000. 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.
Competition. 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
mailservice 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. 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 Subsidiary Operations; and Ms. Jane
Freeman, Executive Vice President - Marketing 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 and Ms. Freeman in marketing
the Company's services. 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 and Dr. David Dalton, Vice-president of Subsidiary Operations
the Company currently maintains no key man insurance on the lives of any of its
officers or directors.
Product Liability. 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.
<PAGE>
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.
Shares Eligible for Resale. At the date of this Prospectus,
approximately 11,562,818 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.
The shares covered by this Prospectus represent over 23% of the issued
and outstanding shares of Common Stock. An additional 22% 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.
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"). The Series A Preferred
is entitled to quarterly dividends, and dividends may not be paid on the Common
Stock if such dividends are in arrears. The Series A Preferred is entitled to a
preferential distribution on liquidation of the Company and the Company may be
required to redeem the Series A Preferred under certain circumstances. The
Series A Preferred is exchangeable for 10% convertible notes (the "Convertible
Notes") of the Company. Holders of the Series A Preferred are entitled to vote
on any matter submitted to the stockholders and are entitled to vote as a class
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 Stockholders consists of
837,600 shares currently owned by the Selling Stockholders, 1,783,330 Conversion
Shares, 699,518 Warrant Shares and 491,277 Collateral Shares.
The Conversion Shares.
The 1,783,330 Conversion Shares are issuable on conversion of the
Series A Preferred or the Convertible Notes into which the Series A Preferred
may be exchanged. As of the date of this Prospectus, the Company has outstanding
267,500 shares of Series A Preferred. Each share of Series A Preferred is
convertible into 6.67 shares of Common Stock at the option of the holder. The
number of shares of Common Stock into which the Series A Preferred or
Convertible Notes is convertible will be increased if the Company issues Common
stock for less than $2.50 per share and is subject to further adjustment in
certain circumstances, such as stock splits or recapitalizations. See "Selling
Stockholders".
<PAGE>
The Warrant Shares.
The 699,518 Warrant Shares are issuable by the Company pursuant to the
terms of the Warrants. The number of shares of Common Stock for which certain of
the Warrants may be exercised will be increased if the Company issues Common
Stock for less than $2.50 per share and is subject to further adjustment in
certain circumstances such as stock splits or recapitalizations. Although the
Company will receive the exercise price of any or all outstanding Warrants
exercised up to a maximum of $1,330,928 if all Warrants are exercised, there is
no assurance that any of the Warrants will be exercised. It is anticipated that
any proceeds received by the Company on exercise of the Warrants will be used
for working capital purposes. The Company will not pay commissions or
solicitation fees with respect to exercise of the Warrants. The Company does not
intend to solicit exercise of the Warrants, other than delivery of this
Prospectus to Warrant holders and responding to inquiries from Warrant holders.
The Company will not receive any proceeds from the resale of the Warrant Shares
issued upon exercise of the Warrants.
The Collateral Shares.
On September 15, 1995 the Company pledged an initial 3,456,000
collateral shares to ArcVentures, Inc. ("Arc") in connection with the Company's
acquisition of Arc's Home Pharmacy division. The Company subsequently pledged to
Arc an additional 491,277 Collateral Shares covered by this Prospectus and
1,043,000 shares not covered by this Prospectus. The Collateral Shares secure
two obligations of the Company to Arc: an interim note in the original principal
amount of $2,500,000 (the "Interim Note") and an obligation with a principal
balance of $4,650,000 (the "Holdback Note").
The Company has pledged the 491,277 Collateral Shares covered by this
Prospectus and an additional 2,714,901 shares to Arc to secure the Company's
payment of the Holdback Note in the original principal amount of $4,650,000. The
Company may be required to pledge additional shares to again bring the value of
the pledged shares to 150% of the Holdback Note balance (including an estimated
90 days interest) (i) at the end of each 90 day period, (ii) if the value of the
pledged shares based upon a running twenty trading day average drops below 125%
of the Holdback Note balance (including estimated interest), or (iii) if the
value of the pledged shares based upon a running five trading day average drops
below 120% of the Holdback Note balance (including estimated interest). If such
an Event of Default occurs, including failure to pay the Interim Note when due,
failure to promptly deposit additional shares or other default under the
Company's ongoing obligations to Arc, Arc may cause the Holdback Note to be
immediately due and payable. Arc is entitled to sell up to 270,000 Collateral
Shares per month, commencing April 1, 1996, to prepay the Holdback Note. Arc is
not entitled to sell the balance of the Collateral Shares unless (i) the
Holdback Note has come due, either at the end of its 13 month stated term or
following acceleration, and (ii) the Company has failed to pay the Holdback Note
following demand therefor by Arc. The Company will not receive any proceeds from
the Collateral Shares in the event they are sold by Arc, but the proceeds will
be applied to the Holdback Note. Any Collateral Shares not sold by Arc will
become treasury shares of the Company following payment in full of the Interim
Note and the Holdback Note.
Other Common Stock
This prospectus also relates to the resale by certain of the Selling
Stockholders of 837,600 shares of Common Stock previously acquired by them as
dividend payment on the Series A Preferred or in private placements. The Company
will not receive any proceeds from the resale of such shares.
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the names of the Selling Stockholders
and the number of shares of Common Stock beneficially owned by the Selling
Stockholders as of January 2, 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 certain Selling Stockholders
and does not necessarily indicate a present intent to sell the Common Stock by
any Selling Stockholders.
<TABLE>
SELLING NUMBER OF PERCENT NUMBER OF BENEFICIAL PERCENT OF
STOCKHOLDER SHARES OF CLASS SHARES OWNERSHIP CLASS
BENEFICIALLY BEING AFTER AFTER
OWNED OFFERED OFFERING(1) OFFERING(2)
----------- ------------ -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Norton Herrick(3) 1,300,403 4.8% 1,300,403 0 0
James Argyropoulos(4) 433,468 1.6% 433,468 0 0
Steven F. Mayer(5) 123,412 * 123,412 0 0
William E. Cherry(6) 500,000 1.9% 500,000 0 0
Danny W. Evins(6) 50,000 * 50,000 0 0
Ronald E. Farmer(6) 166,666 * 166,666 0 0
Frank Koretsky(6) 6,666 * 6,666 0 0
Michael and Roseanne 0
Koretsky(6) 20,000 * 20,000 0
B&M Miller Family 0
Ventures(6) 8,333 * 8,333 0
Miller, Milove & Kob
PSPT(6) 16,666 * 16,666 0 0
Peacegate Associates(6) 8,333 * 8,333 0 0
Norman and Rosalyn
Schechter(6) 6,666 * 6,666
Anthony Riker, Ltd(7) 743,208 2.8% 43,208 700,000 2.4%
Horton Trading, Ltd(7) 25,769 25,769
John T. Horton(7) 45,985 45,985
Matthew Strauss(8) 880,000 3.2% 50,000 830,000 2.6%
ArcVentures, Inc.(9) 4,990,277 16.1% 491,277 4,499,000 14.8%
Hassman, L.P. 169,351 * 169,351 0 *
Steven M. Lash 10,368 10,368 0 0
Kevin Ellis 167,577 * 167,577 0 0
Seth Flam 167,577 * 167,577 0 0
------------- ----------- ---------- --------- ------
Total Shares 3,811,725
==========
<FN>
* Less than 1%
(1) Assumes all Common Stock offered by the Selling Stockholders are sold.
(2) Percentage of class after the offering assumes that all Collateral Shares
are sold by Arc, that all Warrants are exercised and all Series A Preferred
is converted.
(3) Includes 277,676 shares issuable on exercise of Warrants and 750,000 shares
issuable on conversion of Series A Preferred.
(4) Includes 183,468 shares issuable on exercise of Warrants and 250,000 shares
issuable on conversion of Series A Preferred.
(5) Mr. Mayer is a director of the Company. Beneficial ownership includes
123,412 Warrant Shares issuable on exercise of warrants, but does not
include options for 20,000 shares which are not currently exercisable. See
"Security Ownership of Certain Beneficial Owners and Management."
(6) The offered shares are issuable on conversion of Series A Preferred. See
"Security Ownership of Certain Beneficial Owners and Management."
(7) Shares being offered are Warrant Shares issuable on exercise of warrants.
Beneficial ownership includes shares issuable on exercise of warrants not
included herein.
<PAGE>
(8) Mr. Strauss is a director of the Company. Beneficial ownership includes
190,000 shares held indirectly as custodian or co-trustee. Beneficial
ownership also includes 90,000 share which Mr. Strauss has the right to
acquire on exercise of currently exercisable options, but excludes options
for 60,000 shares which are not currently exercisable. See "Security
Ownership of Certain Beneficial Owners and Management."
(9) The Common Stock beneficially owned by Arc consists of the 491,277
Collateral Shares offered hereby and an additional 4,499,000 shares
securing the Interim Note and Holdback Note.
</FN>
</TABLE>
This Prospectus also may be used, with the Company's consent, by donees
of the Selling Stockholders, 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.
PLAN OF DISTRIBUTION
The Selling Stockholders have 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 Stockholders 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 Stockholders 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 Stockholders 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 Stockholders 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.
The Company and certain of the Selling Stockholders have agreed to indemnify
each other and certain other persons against certain liabilities in connection
with the offering of the Common Stock, 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 Stockholders 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
of the Selling Stockholders, 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.
Exercise of Warrants.
The Company will not pay commissions or solicitation fees with respect
to exercise of the Warrants. The Company does not intend to solicit exercise of
the Warrants, other than responding to inquiries from Warrant holders.
Warrant holders desiring to exercise their Warrants must complete the
"Notice of Exercise" form attached to their Warrant. The completed notice,
together with the original Warrant certificate or agreement and payment in full
for the exercise price, should be sent to the Company at 871-C Grier Drive, Las
Vegas, Nevada 89119, Attention: Corporate Secretary. Certificates for Common
Stock issuable on exercise of the Warrants will be returned to the exercising
Warrant holder as soon as practicable thereafter.
<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.
<TABLE>
Year Ended December 31,
--------------------------------------------------------------------------------
1995(1) 1994 1993 1992
---------------- --------------- -------------- ---------------
Period High Low High Low High Low High Low
- ------ ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $3.13 $2.13 $4.00 $2.13 $2.94 $1.81 $9.25 $3.88
2nd Quarter 3.88 2.19 3.44 2.19 2.94 1.69 6.38 3.25
3rd Quarter 3.25 2.88 4.31 2.07 5.81 1.50 4.38 2.25
4th Quarter 2.88 1.81 4.00 2.75 5.31 3.00 3.63 2.38
</TABLE>
- --------------------
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. 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, 1994, 1993, 1992, 1991 and 1990 and the nine
months ended September 30, 1995 and 1994 and is qualified in its entirety by the
more detailed financial statements included in this Prospectus.
<TABLE>
Nine Months
Ended
Year Ended December 31, September 30,
--------------------------------------------------------------------- -------------------------
1994(1)(2) 1993(3) 1992(4) 1991 1990 1995(5) 1994(1)(2)
------------ ------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ................... $ 67,863,000 $ 25,224,000 $10,293,000 $ 4,204,000 $ 3,254,000 $83,693,000 $48,869,000
Cost of sales ............... (58,793,000) (19,504,000) (8,082,000) (3,565,000) (2,692,000) (71,262,000) (42,519,000)
Gross profit ................ 9,070,000 5,720,000 2,211,000 639,000 562,000 12,431,000 6,350,000
Selling, general and
administrative expenses
(including amortization) ... (14,794,000) (13,185,000) (4,433,000) (2,450,000) (1,740,000) (12,991,000) (9,293,000)
Subsidiary operations for
period not owned .......... 517,000 -- 37,000 -- -- 982,000) 321,000
Net other income (expense)(6) (292,000) (761,000) 45,000 280,000 93,000 (730,000) (341,000)
Net loss .................... $ (5,499,000) $ (8,226,000) $(2,140,000) $(1,530,000) $ (1,085,000) $(2,272,000) $(2,963,000)
Net loss per common share ... $ (.26) $ (.49) $ (.24) $ (.26) $ (.24) $ (.09) $ (.14)
Weighted average shares
outstanding ............... 21,353,000 16,675,000 8,929,000 5,729,000 4,584,042 24,041,758 21,011,662
Balance Sheet Data:
Working capital ............. $ 1,420,000 $ 1,310,000 $ 2,179,000 $ 1,478,000 (142,000) 2,365,000 $ 3,879,000
Intangible assets, net ...... 9,308,000 5,406,000 1,803,000 -0- -0- 19,225,000 6,063,000
Total assets ................ 22,317,000 13,017,000 7,271,000 3,609,000 1,355,000 39,588,000 16,519,000
Long-term debt less current
portion ................... 595,000 952,000 835,000 400,000 305,000 3,649,000 455,000
Redeemable Preferred Stock .. -- -- -- -- -- 5,350,000 --
Stockholders' equity ........ $ 11,906,000 $ 7,028,000 $ 4,814,000 $ 2,380,000 $ 263,000 $15,369,000 $11,156,000
- --------------------
(1) 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.
(2) 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.
(3) In April, 1993, the Company acquired substantially all the assets of Mail
Rx. The acquisition was accounted for as a purchase.
(4) 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.
(5) 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.
(6) Net other income (expense) excludes subsidiary operations for period not
owned.
<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, its claims processing operations and its
retail pharmacies. 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, claims processing and retail pharmacy
programs.
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.
In June, 1995 the Company changed its name from Medi-Mail, Inc. to
Mednet, MPC Corporation.
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 4 to the September 30, 1995 Consolidated Financial
Statements.
Liquidity and Capital Resources.
Current assets increased from $11,236,000 at December 31, 1994 to
$17,585,000 at September 30, 1995. The increase in working capital consists of
an increase in accounts receivable, inventory and other current assets of
$4,638,000, $1,532,000 and $250,000, respectively, which was partially offset by
an increase in accounts payable and current portion of long-term debt of
$4,146,000 and $1,318,000 respectively.
The Company has funded its operations and working capital expenditures
primarily from internally generated cash, proceeds from borrowings and stock
issuances. Working capital at September 30, 1995 was $2,365,000 compared to
$1,420,000 at December 31, 1994. The increase in working capital of 66.5% or
$945,000, resulted primarily from the extension of a note payable ($1,245,974,
maturity date February 1, 1995, 5% interest) into a five-year note at a variable
interest rate of prime plus 2% and the sales of convertible debentures
($1,000,000) less working capital used to fund the Company's operations plus the
Home Pharmacy assets.
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. The Company believes that the Interim
Note will be substantially paid through Arc's sale of the Collateral Shares
prior to April 1, 1996. The Holdback Note is due in October, 1996, subject to
acceleration in the event of default. The Company does not have firm commitments
for financing to pay the Holdback Note when it comes due. Commencing in April,
1996, Arc can sell up to 270,000 of the Collateral Shares each month to prepay
the Holdback Note.
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
amount of actual advances received under the line is limited by the value of
acceptable inventory and accounts and the Company does not currently have
sufficient acceptable collateral to fully draw down the line. As of January 19,
1996, the outstanding balance of the Foothill line was $6,849,000. 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.
<PAGE>
Commencing at the end of the fourth quarter of 1995, the Company will
attempt to increase the efficiency of its operations by selling five of the
Medi-Phar retail outlets and 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, the outlets have been
operating at a loss. The consolidation of the South Carolina facility is not
expected to affect net sales, but should result in lower costs. The Company has
not yet determined the size of the reserve for potential restructuring charges
if one is required.
Results of Operations.
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 following table sets forth certain financial data as a percentage of net
sales for the periods presented:
Percent of Sales
---------------------------------------------------------------------------
For the Nine Months
For the Years Ended December 31, Ended September 30,
---------------------------------------- -----------------------
1994 1993 1992 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales ..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ................................. (86.6) (77.3) (78.5) (85.2) (87.0)
Selling, general and
administrative expenses
(including amortization) ...................... (21.8) (52.3) (43.1) (15.5) (19.0)
Operating loss ................................ (8.4) (29.6) (21.6) (0.7) (6.0)
Other income (expense), net ................... 0.3 (3.0) 0.8 (2.0) (0.1)
------ ------- ------ ------ ------
Net loss ...................................... (8.1) (32.6) (20.8) (2.7) (6.1)
====== ======= ====== ====== =====
</TABLE>
- --------------------
Nine Months Ended September 30, 1995 and 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 for the nine
months ended September 30, 1995 with a single line item to subtract the profit
of the acquired business for periods prior to acquisition.
Consolidated net sales for the quarter ended September 30, 1995
increased by 49.3% or $9,069,000 from $18,380,000 for the prior year's quarter
to $27,449,000. The sales increase is attributable to $9,453,000 from
pre-acquisition operations of Home Pharmacy.
Year to date net sales increased by 71.3% or $34,824,000 over the first
nine months of 1994. The sales increase is primarily attributable to $30,629,000
from pre-acquisition operations of Home Pharmacy. Approximately $4,000,000 of
the increase can be attributed to Medi-Claim's assumption of sponsors' payment
obligations discussed above not having been effective until April 1, 1994.
Costs of sales decreased as a percentage of net sales but increased in
total dollars for the quarter ended September 30, 1995 and the nine months
ending September 30, 1995 compared to the same periods in the prior year. The
fluctuation in cost of sales as a percentage and in dollar amount is primarily
attributable to increased gross margin from Medi-Claim sales resulting from
changes in product mix, increased higher margin mail service sales from Home
Pharmacy and unusually high inventory costs in the prior year's quarter. The
increase in the absolute dollar value is mainly due to the inclusion of the
operations of Home Pharmacy.
<PAGE>
Selling, general and administrative expenses decreased as a percentage
of net sales but increased in total dollars for the quarter ended September 30,
1995 and the nine months ending in September 30, 1995 compared to the same
periods in the prior year. The increase in total dollars is primarily due to the
inclusion of Home Pharmacy operations. The decrease in percentage reflects
spreading of fixed costs over a larger sales base and economies of scale.
The Company's results from operations before depreciation and
amortization (EBITDA) for both the quarter and the nine months increased as a
percentage of net sales and in total dollars. The Company had EBITDA profit of
$289,000 and $1,294,000 for the three and nine months ended September 30, 1995,
respectively, compared to EBITDA losses of $1,168,000 and $1,426,000 for the
three and nine month periods of the prior year.
The Company's depreciation and amortization expense consists of the
depreciation of property and equipment and the amortization of intangibles
arising from acquisitions. Depreciation and amortization increased by 266.7% or
$472,000 for the quarter ended September 30, 1995 compared to the same period in
calendar year 1994. Depreciation and amortization as a percent of net sales were
1.51% for the quarter ended September 30, 1995, compared to .96% for the same
period in the prior year.
Depreciation and amortization increased by 22% or $337,000 for the nine
months ended September 30, 1995 compared to the same period in calendar year
1994. Depreciation and amortization as a percent of net sales were 2.21% for the
nine months ended September 30, 1995 compared to 3.10% for the same period of
1994. The increase in depreciation and amortization for the 3 and 9 month
periods is primarily attributable to amortization in the later periods, of the
intangibles recorded from an acquisition in the fourth quarter of 1994.
The operating loss of $360,000 for the quarter ended September 30, 1995
decreased by 73.2% or $985,000 over the comparable prior year's quarter. The
operating loss of $560,000 decreased by 81% or $2,383,000 for the nine months
ended in September 30, 1995 compared to the same period in 1994.
Other income (expense) increased for both the quarter and the nine
months compared to the same periods in the prior year, primarily due to the
effect for the adjustment for subsidiary operations for the period not owned of
($982,000) in 1995 and $321,000 in 1994. In addition, interest expense increased
in 1995.
The net loss for the third quarter of 1995 was $770,000 or (.03) per
share on weighted average shares of 24,338,791 compared with a loss of
$1,394,000 or (.07) per share on 21,433,191 weighted shares outstanding in the
prior year's third quarter.
The net loss for the nine months ended September 30, 1995 was
$2,272,000 or (.09) per share on weighted average shares of 24,041,758 compared
with a loss of $2,963,000 or (.14) per share on 21,011,662 weighted shares
outstanding in the same period of 1994. As stated above, 1995 results of
operations includes an adjustment of ($982,000) for Home Pharmacy operations for
the period prior to acquisition. The pro forma statement of operations for the
nine months ended September 30, 1995 contains adjustments for amortization of
acquisition intangibles ($338,000) and interest on acquisition debt($338,000)
resulting in a pro forma net loss of $1,966,000.
<PAGE>
1994 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 recent acquisitions, including the June 1994 acquisition of FPA,
the acquisition of the MSA assets in November 1994, and a $13,747,000 increase
in claims processing sales apart from those attributable to the acquisition of
Mednet. The increase in claims processing revenue as attributable to contractual
amendments entered into by Medi-Claim with participating pharmacies, which
resulted in reporting the sales and cost of sales for all prescriptions filled
by participating pharmacies for insureds of Medi-Claim's clients. Such sales and
cost of sales for 1994 were approximately $16,119,000. Although cost of sales
increased as a percentage of net sales from 77.3% to 86.6%, the increase in
volume and a reduction in operating expenses as a percentage of gross sales
resulted in a decrease in net loss as a percentage of gross sales from 32.6% to
8.1%. The decrease in operating expenses as a percentage of gross sales was in
part attributable to increased cost efficiency and the spreading of fixed costs
over increased volume as a result of the acquisitions of FPA, MSA assets and
Mail Rx.
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 have a very low
gross margin). Future changes in gross margin will depend to a great extent on
the relative mix of mail-service and PBM revenue. In addition, the Company has
expanded its claims processing operations through the acquisition of the MSA
assets. The Company believes that the expansion of its claims processing
operations and the integration of those operations with the Company's mail order
and retail pharmacies will facilitate future growth in both the claims
processing and mail order pharmacy operations.
Sales at retail pharmacies owned by Medi-Phar accounted for
approximately 9.7% of the Company's 1994 consolidated gross sales. During 1994,
Medi-Phar entered into leases for three additional retail pharmacies in Las
Vegas, Nevada. Two of the pharmacies are now operating.
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 MSA operations and addition of other
personnel consistent with increased volume. The 1993 salaries and benefits
include $766,000 of Common Stock and cash paid to Dr. Merryman to terminate
certain potential future severance benefits. Similarly, other selling, general
and administrative expenses rose in dollar amount, but declined as a percentage
of sales.
The $2,098,000 amortization expense in 1994 compared to $3,994,000 in
1993 related to intangible assets acquired in connection with recent
acquisitions.
During May 1993, the Company entered into an agreement with former
owners of the retail pharmacies purchased during 1992 requiring them to convert
the outstanding balance of the convertible note payable into Common Stock of the
Company. The agreement provided for the issuance of 249,130 shares of Common
Stock (having a market value at the time of $561,000) 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, which has
occurred, 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 Stock at
a price of $5.00 per share.
Generally accepted accounting principles require recognition of an
expense equal to the fair value of the additional securities or other
consideration issued to induce conversion. Accordingly, the Company recorded
debt conversion expenses of $224,000 in 1993 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. The Company will incur no
material debt conversion expense during 1995 related to this conversion.
1993 Compared With 1992. Consolidated net sales for the year ended
December 31, 1993 increased 145% over the prior year ($25,224,000 in 1993
compared to $10,293,000 in 1992) with a consolidated loss of $8,226,000 compared
to a loss of $2,140,000 in the prior year. The increase in sales was primarily
attributable to acquisitions, including the April 1993 acquisition of Mail Rx, a
20% increase in sales from the Las Vegas, Nevada facility, a 9% increase in
retail pharmacy sales and a $497,000 increase in claims processing sales.
Although the Company was able to reduce its operating loss exclusive of
amortization as a percentage of net sales from 20.6% to 13.8%, increased volume
and the amortization of expense resulted in a larger net loss in 1993 than in
1992.
<PAGE>
Expenses for salaries and benefits increased to $4,401,000 in 1993 from
$2,224,000 in 1992, but declined as a percentage of sales to 17.4% from 21.6%.
This reflects the addition of the subsequently closed Owings Mills, Maryland
facility in connection with the Mail Rx acquisition and addition of other
personnel consistent with increased volume. Also included in this amount is
$766,000 of Common Stock and cash paid to Dr. Merryman to terminate certain
potential future severance benefits. Similarly, other selling, general and
administrative expenses rose in dollar amount, but declined as a percentage of
sales.
BUSINESS
General.
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, Medi-Claim, Medi-Phar and FPA, acts as
an integrated, full-service prescription drug benefits manager serving Affinity
Groups and Third-Party Payors throughout the United States. The Programs offer
prescription drug benefits to approximately two million Participants, most of
whom receive funded benefits through Third Party Payors and/or are members of an
Affinity Group.
On September 15, 1995, the Company acquired the mail service pharmacy
and claims processing businesses of Home Pharmacy, a division of ArcVentures,
Inc. ("Arc"). The respective Home Pharmacy businesses are being transferred to
the Company's Medi-Mail and Medi-Claim subsidiaries. In connection with the
acquisition, Medi-Mail established a mail service pharmacy facility in Chicago,
Illinois.
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 entire prescription benefits 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 the its other existing prescription benefits.
Mail-Service Pharmacy Operations.
Overview. The Company's mail-service pharmacy program is conducted from
its Las Vegas, Nevada, Chicago, Illinois and Mount Pleasant, South Carolina
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.
The Company directed its initial marketing efforts toward individuals
and 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.
<PAGE>
On June 30, 1994, the Company acquired all of the outstanding stock of
FPA, a mail order pharmacy based in Mount Pleasant, South Carolina. The common
stock of FPA was acquired in exchange for 400,000 shares of Common Stock (the
"Medi-Mail Shares") issued directly to the existing shareholders of FPA (the
"FPA Shareholders"). The Company guaranteed the FPA Shareholders a price of
$5.00 per share. In the event the Medi-Mail Shares were sold at a price less
than $5.00 per share, the Company agreed to pay the difference to the FPA
Shareholders in cash (the "FPA Shortfall"). Payment of the FPA Shortfall was
secured by certain assets of the Company. The Company and the Shareholders
subsequently agreed that the Company would pay $140,982 and issue the FPA
Shareholders convertible notes for $750,805 due April 1, 1996 with respect to
the FPA Shortfall. These notes have been paid. In addition, the Company issued
the FPA Shareholders a warrant to purchase up to 100,000 shares of common stock
at $5.00 per share.
Benefit of Mail-service Pharmacies to Direct Payors. Individual
customers and members of Affinity Groups (collectively, "Direct Payors") 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 Payors. 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. The Company believes that to contain the costs of
prescription medication benefits, benefit 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 the 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.
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.
<PAGE>
Medi-Claim(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.
The Claims Programs utilize point-of-sale electronic data transmission
and automated claims adjudication to manage claims in Claims 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 Claims 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 Claims 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 Claims Programs are offered either on a stand-alone basis or are
integrated into major medical plans. In addition, as discussed below, the Claims
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 Claims Programs. Medi-Claim currently processes
prescription drug claims from its operations centers located in Las Vegas,
Nevada and Lemoyne, Pennsylvania. Under the Claims Programs, Payors provide
Medi-Claim with periodically updated Participant eligibility data, which is
integrated into Medi-Claim's management information 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 receipt, although during many periods of the year the
turnaround time is faster. Over 95% of all claims are electronically
adjudicated, on manual or paper claims.
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.
For those Claims 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.
Certain Claims Programs acquired as part of the Home acquisition are
being administered by third parties until the conversion to the Medi-Claim
systems are completed.
Medi-Claim provides its Payors with regular management reports
describing overall Claims 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.
<PAGE>
Claims 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. Claims Program designs are flexible to
meet the Payor's particular benefits strategy, therapeutic
effectiveness and cost containment objectives. The Claims
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.
Claims Programs are regularly reviewed with Payors in order to
target additional areas of Claims Program savings.
o Comparison of Expected Results to Actual Activity. Medi-Claim
regularly analyzes a Claims Program's projected savings
associated with its plan design features, the use of the
MediClaim retail pharmacy network, and mail-service pharmacy
activity relative to the costs experienced by the Payor. If
deviations from savings expectations are evident, Claims
Program modifications are recommended.
o Management Reports. The Medi-Claim database enables Medi-Claim
to provide Payors with regular detailed management reports of
Claims Program activity and costs. The reports are designed to
illustrate Claims 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.
Medi-Claim Integrated Prescription Benefits Programs. The Company
offers Medi-Claim integrated prescription benefits programs that combine the
cost savings and convenience of the mail-service pharmacy Programs with the
MediClaim retail 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 Medi-Claim 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 pharmacies. 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.
o Prescription dispensing policies that encourage the use of
less expensive, therapeutically equivalent generic or brand
name drugs regardless of the dispensing location.
<PAGE>
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 operates
in-clinic retail pharmacies located in San Diego, California and Las Vegas,
Nevada. Operation of the retail pharmacies provides the Company with a working
knowledge of the retail pharmacy business which improves the Company's ability
to market and develop its services. The Company also believes that the operation
of the local retail pharmacies provides the Company with additional knowledge
and background to continue developing the pharmacy network and claims processing
system of its subsidiary, Medi-Claim.
Marketing.
The Company directed its initial marketing efforts toward the Direct
Payor. 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
Medi-Claim claim processing operations and has expanded its marketing efforts to
reflect the Medi-Claim integrated Programs offered by the Company.
The Company's mail order and claims processing programs (collectively,
the "Integrated 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
Integrated 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 Integrated
Programs are utilized by the Payors' eligible Participants. Accordingly, the
Company's benefit managers work with Payors' benefit managers on an ongoing
basis to assess utilization levels in the Integrated Programs and, where
necessary, to incorporate additional incentives, sometimes in the form of more
advantageous Integrated Program terms, to promote increased utilization among
Participants.
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 1994, the Company entered into
a consulting agreement pursuant to which the consultant agreed to use its best
efforts to market the Company's managed prescription care services.
In 1994, the Company acquired the assets of FPA. Such acquisition gave
the Company a physical presence in the southeast region of the United States and
substantially increased its potential contacts for acquiring Third-Party Payor
accounts. Management believes that the Third-Party Payor business will continue
to increase through expansion of current accounts and acquisition of new
accounts.
<PAGE>
The Company also maintains a membership relations program which
provides customer service, provides a refill reminder service notifying the
customer when a prescription is scheduled to be refilled and helps customers to
understand the pharmacy benefits offered by their Affinity Groups and
Third-Party Payors.
Retail Pharmacies. The retail pharmacies currently owned and operated
by Medi-Phar are located in medical complexes and generally service patients
referred by physicians located in the medical complexes. Medi-Phar spends
minimal resources on marketing.
Major Customers.
Affinity Group members deal directly with the Company and are
considered the Company's customers. Only one Third-Party Payor group accounted
for 10% or more of the Company's consolidated sales for 1994 or 1993.
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 licensed pharmacies
located in Las Vegas, Nevada, Chicago, Illinois and Mount Pleasant, South
Carolina. The retail pharmacies are licensed in California and Nevada. Nevada,
California, Maryland, Illinois and South Carolina 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 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. Regulations are
promulgated pursuant to these laws by the California, Nevada, Maryland, Illinois
and South Carolina boards of pharmacy which boards 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.
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. The Company has complied with the
disclosure law and registration requirements or the licensing law in 13 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 two completed fiscal years
approximately 51% of its mail-service sales came from states in which the
Company has complied with the disclosure or licensing laws, and that
approximately 43% of its mail-service sales were in the 27 states which the
Company believes do not regulate mail-service sales. The remaining 6% of sales
were in jurisdictions in which the Company believes the provisions purporting to
regulate mail service pharmacies are subject to constitutional or other
challenge.
<PAGE>
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-ofchoice" 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 reasonable 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 with respect to the Company.
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-service pharmacy operations as well as on
the operations of all other mail-service pharmacy 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.
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.
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 some increased costs resulting from government regulation 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.
<PAGE>
Competition.
The prescription drug benefit business is highly competitive. The
Company's mail-service pharmacy business competes for the business of
Third-Party Payors and Direct Payors. The Company's principal mail-service
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, AARP, 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 discussed from time
to time by several states and the federal government.
Medi-Phar's retail pharmacies compete with other retail pharmacies in
the San Diego, California and Las Vegas, Nevada areas with competitive factors
of 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-service 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 insurance 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-Service Pharmacy Distribution.
The Company has three mail-service pharmacy and fulfillment facilities
located in Las Vegas, Nevada, Chicago, Illinois and Mount Pleasant, South
Carolina. 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 Chicago and
Mount Pleasant facilities similarly accommodate a majority of distribution
operations for shipments to the midwestern, eastern and southeastern United
States.
The Company maintains a toll-free telephone 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, 1994.
The Company's business is not seasonal to any significant extent.
Employees.
As of December 31, 1994, the Company had 154 full-time employees and 20
part-time employees. Except for its executive officers, the Company's employees
are clerical, sales, customer service, claims processing and pharmacy related
staff paid consistent with industry standards. See "Directors and Executive
Officers." None of the Company's employees is covered by a collective bargaining
agreement. The Company believes that it has a good relationship with its
employees.
<PAGE>
Properties.
The Company's corporate headquarters is located in Las Vegas, Nevada.
The mail-service pharmacy/fulfillment centers are located in Las Vegas, Nevada,
Chicago, Illinois and Mount Pleasant, South Carolina. The Company's claims
processing operations are located in Las Vegas, Nevada and Lemoyne,
Pennsylvania. The retail pharmacies are located in San Diego, California and Las
Vegas, Nevada. The Company considers its properties to be suitable and adequate
for its present needs.
The following chart provides information concerning the Company's
properties:
<TABLE>
Approximate Size
in Sq. Lease
Location Ft. of Facility Expiration(1) Primary Use
- -------- --------------- ------------- -----------
<S> <C> <C> <C>
Las Vegas, Nevada 17,608 03/98 Mail-order Prescription
Pharmacy, Claims Processing
Operations and Corporate
Offices
Mount Pleasant, South Carolina 2,790 01/97 Customer Service and
mail-order Prescription
Pharmacy
Lemoyne, Pennsylvania 3,337 01/02 Claims Processing Operations
San Diego County, California 1,100 03/99 Pharmacy
(Poway)
San Diego, California (Del Mar) 1,000 08/00 Pharmacy
San Diego, California (3rd Ave.) 1,100 05/00 Pharmacy
San Diego, California (Mira Mesa) 1,200 08/97 Pharmacy
San Diego, California (Plaza 800 06/00 Pharmacy
Properties)
San Diego, California (El Cajon) 1,000 NA(2) Pharmacy
San Diego, California (Gateway) 1,100 03/99 Pharmacy
Las Vegas, Nevada (Buffalo) 800 (3) Pharmacy
Las Vegas, Nevada (East Harmon) 540 11/99 Pharmacy
Las Vegas, Nevada (East Sahara) 444 07/99 Pharmacy
Owings Mills, Maryland 6,352 08/96 Subleased
Chicago, Illinois 13,500 09/00 Mail order Prescription
Pharmacy
- --------------------
<FN>
(1) Includes all renewal terms.
(2) The term of this lease is month-to-month.
(3) Five years from completion.
</FN>
</TABLE>
<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:
<TABLE>
Name Age Position
- ---- --- --------
<S> <C> <C>
Hon. Leo T. McCarthy** ................................. 64 Chairman of the Board of Directors
M. B. Merryman*** ...................................... 53 President, Chief Executive Officer, Director
Dennis Smith ........................................... 47 Executive Vice President - Subsidiary Operations, Chief
Operating Officer
Jane E. Freeman ........................................ 41 Executive Vice President - Corporate Development
Dr. David L. Dalton .................................... 46 Executive Vice President, President of Medi-Claim
S. E. Roberts .......................................... 48 Treasurer and Secretary of Medi-Mail
Thomas Warren .......................................... 55 Chief Financial Officer
Julie Ledbetter ........................................ 25 Corporate Secretary
Byron S. Georgiou* ..................................... 46 Director
Edward T. Hanley, Jr.*** ............................... 38 Director
Edward F. Heil* ........................................ 50 Director
Dr. Sol Lizerbram* ..................................... 47 Director
Robert W. Quick** ...................................... 74 Director
Matthew C. Strauss*** .................................. 62 Director
Lincoln R. Ward** ...................................... 71 Director
Steven F. Mayer* ....................................... 36 Director
Donald Kirsch** ........................................ 63 Director
- --------------------
<FN>
* Term as director expires in 1996.
** Term as director expires in 1997.
*** Term as director expires in 1998.
</FN>
</TABLE>
The Board of Directors maintains an Audit Committee, a Safety
Committee, a Compensation Committee, a Nominating Committee and a Strategic
Planning Committee. Messrs. Ward and Strauss are members of the Audit Committee.
Messrs. Strauss, Heil and Ward are members of the Safety Committee. Messrs.
Heil, Quick and Georgiou are members of the Compensation Committee. Messrs.
Hanley, Lizerbram and McCarthy are members of the Nominating Committee. Messrs.
McCarthy, Georgiou, Hanley and 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 Directors of Linear Technology Corp.,
FloWind Corp. and the International Shopping Network.
<PAGE>
Dr. 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. 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. In
1995, he received a Doctor of Human Letters from the College of Osteopathic
Medicine of the Pacific.
Dennis Smith. Mr. Smith has been Vice President of the Company from
1987 to 1992 and was named Executive Vice President and Chief Operating Officer
in June 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. Prior to joining the Company he was 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
Company's 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 Executive Vice President -
Subsidiary Operations and President of Medi- Claim. Dr. Dalton joined Medi-Mail
and Medi-Claim, in November 1994 in connection with the Company's acquisition of
Mednet. From November 1989 until joining the Company, Dr. Dalton served as
Chairman, President and Chief Executive Officer of 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 recently 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
specialty care pharmacy.
S.E. Roberts. Mr. Roberts has been Treasurer of the Company since
January 1989 and was Secretary of the Company from October 1989 through 1991. In
1993, he resumed the position of Secretary. 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 corporation specializing in typesetting/graphic arts.
Thomas Warren. Mr. Warren joined the Company in January, 1996 as its
Chief Financial Officer. From 1993 to September, 1995 he owned and operated a
retail supermarket in Cocoa Beach, Florida. The supermarket was closed due to
the entry of a Walmart Supercenter and Albertsons 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.
<PAGE>
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.
Dr. Sol Lizerbram. A founder of the Company, Dr. Lizerbram served as
Chairman of the Board of Directors since its inception 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 sun belt 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, manufactured home community located in Quakertown, 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. Mr. Strauss serves as a
trustee 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.
Dr. Lincoln R. Ward. Dr. 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 Executive Vice President of Princeton/Masters International, Ltd. 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 and Graduate
Degree from Stanford and a Doctorate (honorary) from National University.
<PAGE>
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 of The Wall Street Group, Inc. a financial services firm founded in
1959.
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 Table. 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 $100,000.
<TABLE>
Annual Compensation Long-Term Compensation Awards
-------------------------- ---------------------------------------------------------
Other Annual Restricted All Other
Name and Principal Compensation Stock Stock Options Compensation
Position Year Salary ($) Bonus ($) ($) Awards ($) (#) ($)
- ------------------ ---- ---------- ---------- ------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
M.B. Merryman, CEO .......... 1994 $171,870 $107,500(2) $ 25,000(3) 107,500(2) $ 9,764(4)
and President(1) ............
1993 $159,500(5) $ 37,500(6) $ 777,625(7) 577,500(6) $ 9,764(4)
(7)&(8) (7)
1992 $130,062 $274,996 $ 33,678 42,500(9) $ 9,764(4)
(9)(10)
Dr. David Dalton, ........... 1994 $125,000(12) $ -0- $ 2,258(13) $ 4,988(14)
Executive Vice
President - Subsidiary
Operations and
President of Medi-
Claim (11)
- --------------------
<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 for 1992.
(2) In 1995, Dr. Merryman received as a bonus $107,500 and an option to
purchase 107,500 shares at $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 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 is 3,334 shares of Common
Stock 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 $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.
<PAGE>
(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 valued
at approximately $665,625 or approximately $4.44 per share and an
immediate option to purchase 500,000 shares of Common Stock 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 from January 1992 to June 1994.
(9) Dr. Merryman received in 1993 as a bonus for 1992 performance $15,000
in cash and an option to purchase 15,000 shares at $2.77 per share
which is included in the option column but not the bonus column. The
cash bonus and stock option bonus were measured and paid/granted in
1993 but were based on performance in 1992. The 42,500 options in the
stock option column include 27,500 options granted in 1992 and the
15,000 options earned in 1992 but granted in 1993.
(10) Includes a stock bonus valued at $259,996. The stock bonus comprises
88,736 shares of Common Stock which Dr. Merryman received on May 1,
1993. The bonus was awarded in 1992 for past services pursuant to his
Employment Agreement with the Company, dated May 1, 1992.
(11) Dr. Dalton entered into an Employment Agreement with Medi-Claim as of
November 19, 1994. Prior to that date, Dr. Dalton was employed by
Mednet. The amounts set forth herein for Dr. Dalton reflect amounts
received during 1994 by Dr. Dalton from the Company and Mednet.
(12) During 1994, Dr. Dalton received approximately $110,795 in salary from
Mednet and approximately $14,205 in salary from Medi-Claim.
(13) Pursuant to Dr. Dalton's Employment Agreement, Dr. Dalton received a
car 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, the use of which during 1994 had a value of $758.
(14) Mednet paid approximately $4,988 in life insurance premiums in 1994
towards a life insurance policy for Dr. Dalton.
</FN>
</TABLE>
Other than the Company's Incentive Stock Option Plan and Nonqualified
Stock Option Plan ("NQSOP"), there are no retirement, pension, or profit sharing
plans for the benefit of the Company's officers, directors and employees. The
Company provides health insurance coverage for its employees and life insurance
and disability insurance for its Chief Executive Officer. The Board of Directors
may recommend and adopt additional programs in the future for the benefit of
officers, directors and employees.
<PAGE>
Option Grants in 1994. Information concerning 1994 grants to named
executive officers is reflected in the table below. The amounts shown for each
of the named executive officers as potential realizable values are based on
assumed annualized rates of stock price appreciation of five percent and ten
percent, respectively, over the full five year term of the options as required
by applicable SEC regulations.
<TABLE>
Individual Grants
- ------------------------------------------------------------------------
Potential Realizable Value at
% of Total Annual Rates of Stock Price
Number of Options Appreciation
Securities Granted to for Option Term
Underlying Employees Exercise -----------------------------
Options in price Expiration (5%) (10%)
Name Granted (#) 1994(1)(2) ($/share) Date ($) ($)
- ---- ----------- ---------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
M.B. Merryman 37,500(1) 12.89% $ 3.52 01/01/99 $ 36,469 $ 80,587
107,500(2) 36.94% $ 3.16 01/01/00 $ 93,853 $207,390
- --------------------
<FN>
(1) An option to acquire 37,500 shares was earned in 1993 but granted in
1994. For purposes of calculating the percent of total options granted
to employees, this option is treated as granted in 1994.
(2) An option to acquire 107,500 shares was earned in 1994 but granted in
1995. For purposes of calculating the percent of total options granted
to employees, this option is treated as granted in 1994.
</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 Stock of the
Company on the date of grant. Options granted pursuant to the Incentive Stock
Plan expire five years from the date of grant and may not be exercised during
the initial one year period from the date of grant.
Dr. Dalton received no option grants during 1994. However, in
connection with the Plan of Reorganization between the Company, Medi-Claim and
Mednet dated November 19, 1994, Dr. Dalton received 787,879 shares of Common
Stock of the Company. These shares were received by Dr. Dalton in liquidation of
his interest in Mednet and not as compensation.
Aggregated Option Exercises and Year-End Option Values in 1994. The
following table summarizes for each of the named executive officers of the
Company the number of stock options, if any, exercised during 1994, the
aggregate dollar value realized upon exercise, the total number of unexercised
options held at December 31, 1994 and the aggregate dollar value of in-the-money
unexercised options, if any, held at December 31, 1994. 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, 1994 is the difference between
its exercise price and the fair market value of the underlying stock on December
31, 1994, which was $2.875 per share based on the closing bid price of the
Common Stock on December 31, 1994. The underlying options have not been, and may
never be, exercised, and actual gains, if any, on exercise will depend on the
value of the Common Stock on the actual date of exercise. There can be no
assurance that these values will be realized.
<PAGE>
<TABLE>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Options at 12/31/94(#) Money Options at 12/31/94($)
Shares Acquired ---------------------------- -----------------------------
Name on Exercise(#) Value Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ----------------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
M.B. Merryman 31,500 $91,782 620,000(1) 107,500(2) $90,031(1) $0
David Dalton -0- -0- -0-
- -------------------
<FN>
(1) Includes 37,500 shares that became exercisable on January 1, 1995.
(2) Includes 107,500 shares issued in 1995 but earned in 1994, but does not
include 37,500 shares that became exercisable on January 1, 1995.
</FN>
</TABLE>
<PAGE>
Director Compensation. During 1994, 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.
Directors are also reimbursed for their reasonable expenses in attending
meetings.
The Company maintains a NQSOP for the benefit of the non-employee
directors of the Company and others having rendered significant services to the
Company. As of May 19, 1995, 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 to purchase Common Stock 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 for one 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 Mr. 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 shares of Common Stock.
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 Stock 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, 1994, options under the NQSOP to purchase an
aggregate of approximately 861,000 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 "Employment Agreement"). The term
of the Employment Agreement can be extended for successive additional one-year
terms commencing in 1993, and, on March 16, 1993, the Company authorized a
one-year extension of the Employment Agreement. Beginning May 1, 1993 and
thereafter on the anniversary date of the Employment 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 Employment 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 increased to $232,000. As of January 1st of each
year, Dr. Merryman will receive an annual bonus of cash and options to acquire
shares of Common Stock. 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
per share. 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 or in lieu thereof a $1,000 per month automobile
allowance. 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 Employment Agreement, entered into as
of September 12, 1993, all entitlement to severance pay has been eliminated. As
consideration for the termination of his right to receive severance pay, Dr.
Merryman received an immediate cash bonus of $100,000 and 150,000 shares of
Common Stock. Additionally, Dr. Merryman received immediate options to purchase
500,000 shares of Common Stock 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. Dalton. Medi-Claim entered into a three-year employment agreement
with Dr. 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 at the
pleasure of the Company's Board of Directors and President of MediClaim. 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. Dr. Dalton's employment agreement
also contains certain non-competition and non-solicitation covenants that extend
in most circumstances to three years after the termination of the agreement.
Incentive Stock Option Plan.
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 of the Internal Revenue
Code of 1986, as amended. An aggregate of 1,615,000 shares of Common Stock have
been reserved for issuance pursuant to the ISOP. As of December 31, 1994,
approximately 33 options to purchase an aggregate of approximately 348,000
shares of Common Stock at exercise prices ranging from $.7738 to $3.50 per share
were outstanding under the ISOP. In addition, as of January 1, 1995, an option
to acquire 107,500 shares of Common Stock at an exercise price of $3.16 under
the ISOP was granted to Dr. Merryman in connection with his Employment
Agreement. 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 shares of Common Stock 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 Stock 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.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information regarding shares of Common
Stock beneficially owned as of January 2, 1996 by: (i) each person known by the
Company to beneficially own 5% or more of the outstanding Common Stock, (ii)
each director or nominee for director, (iii) each person named in the summary
compensation table and (iv) all officers and directors as a group. Except as
otherwise noted, the stockholders listed below have sole voting and investment
power.
Name and Addresses of Officers, Directors Amount of Percentage of
and Principal Stockholders Common Stock* Class*
- ----------------------------------------- ------------- -------------
M.B. Merryman(1)(2) 954,002 3.6%
871-C Grier Drive
Las Vegas, Nevada 89119
Dr. Sol Lizerbram(1)(3)(4) 363,199 1.4%
4205 Fairmount Avenue
San Diego, CA 92105
Edward F. Heil(1)(5) 2,029,000 7.8%
2901 Centre Circle
Downers Grove, IL 60515
Edward T. Hanley, Jr.(1)(6) 415,000 1.6%
29 South LaSalle Street
Suite 735
Chicago, IL 60603
Byron S. Georgiou(1)(7) 164,328 **
750 B Street, 31st Floor
San Diego, CA 92101
Robert W. Quick(1)(8) 278,054 1.1%
1045 N. West End Boulevard
Quakertown, PA 18951
Matthew C. Strauss(1)(9) 880,000 3.2%
11975 El Camino Real, Suite 103
San Diego, CA 92130
Lincoln R. Ward(1)(10) 159,278 **
9191 Town Centre Dr., Suite 105
San Diego, CA 92122
Honorable Leo T. McCarthy(1)(11) 110,000 **
400 Magellan Avenue
San Francisco, CA 94110
Donald Kirsch(12) 109,444 **
32 East 57th Street
New York, NY 10022
Steven F. Mayer(13) 143,412 **
Aries Capital Group, LLC
11766 Wilshire Blvd., Suite 870
Los Angeles, CA 90025
ArcVentures, Inc.(14)
820 W. Jackson Blvd., Suite 800
Chicago, IL 60607 4,990,277 16.1%
Executive Officers and 6,528,031 23.3%
Directors as a group
(17 Individuals)
<PAGE>
* Assumes exercise of all exercisable options and warrants held by listed
security holders which can be acquired within 60 days from January 2,
1996.
** Less than 1%.
(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, 37,500 shares underlying
an option exercisable commencing January 1, 1995, and 20,000 shares
underlying an option commencing June 16, 1994. In addition, Dr.
Merryman has an option to acquire an additional 107,500 shares
exercisable January 1, 1996. A trust, over which Dr. Merryman has
voting and investment power, holds 12,307 shares of Common Stock.
(3) Does not include Common Stock owned by Mr. Joseph Lizerbram, Dr.
Lizerbram's father. Dr. Lizerbram disclaims any beneficial ownership
with respect to said Common Stock. The Company believes Mr. Joseph
Lizerbram owns 25,692 shares of Common Stock.
(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 common 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 shares of Common Stock. Also includes
shares held by Dr. Lizerbram's spouse (5,825 shares of Common Stock)
and his son (1,050 shares).
(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) Represents 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. In addition, Mr. Hanley holds an
option to acquire 60,000 shares exercisable with respect to 20,000
shares on approximately May 15, 1996; with respect to an additional
20,000 shares on approximately May 19, 1997; and with respect to an
additional 20,000 shares on approximately May 19, 1998.
(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 40,000 shares
underlying an option to acquire 60,000 shares, which is 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. Georgiou may
acquire an additional 20,000 shares under the 60,000 share option after
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 and 40,000 shares underlying an option
exercisable with respect to 20,000 shares commencing June 16, 1994 and
with respect to 20,000 shares commencing May 19, 1995.
<PAGE>
(9) Includes three different trusts, for which Mr. Strauss has voting and
investment power, which hold an aggregate of 380,000 Common Stock. 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 and with respect to 20,000 shares
commencing May 19, 1995. In addition, Mr. Strauss holds an option to
acquire 60,000 shares exercisable with respect to 20,000 shares on
approximately May 15, 1996; with respect to an additional 20,000 shares
on approximately May 19, 1997; and with respect to an additional 20,000
shares on approximately 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 12, 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 20,000 shares after June 17, 1997. Mr.
Ward holds 30,577 shares in a defined benefit plan.
(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 shares after June 17, 1997.
(12) Includes 26,896 shares held by a corporation controlled by Mr. Kirsch
and 82,548 shares underlying exercisable warrants held by such
corporation. Does not include 20,000 shares underlying options
exercisable commencing May 19, 1996 held by Mr. Kirsch.
(13) Includes 123,412 Warrant Shares. Does not include shares under the
20,000 Share option, which is exercisable with respect to 20,000 shares
after September 15, 1996.
(14) The Common Stock beneficially owned by Arc consists of the 491,277
Collateral Shares offered hereby and an additional 4,499,000 shares
securing the Interim Note and Holdback Note.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 shares of Common Stock. 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 such 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 shares of Common Stock 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. The consultant or his assigns are
entitled to receive additional warrants, exercisable at $.167 over the market
value on the date of grant, if future sales under the agreement exceed specified
levels.
<PAGE>
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 the date of this Prospectus, the Company has 25,997,643 shares of
Common Stock outstanding (28,971,768 including the Conversion Shares, the
Warrant Shares and the Collateral Shares) and 4,718,382 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.
The transfer agent for the Common Stock is OTR/California Stock
Transfer, Portland, Oregon.
LEGAL PROCEEDINGS
On or about February 23, 1995, 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 of 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 Company'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. The Company believes these claims are meritless and is
vigorously defending this action.
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, 1994
and December 31, 1993, the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1994 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 and December 31, 1992
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 fiscal years ended December 31, 1993 and December
31, 1992 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
Page
MEDNET, MPC CORPORATION
Consolidated Balance Sheet September 30, 1995
and December 31, 1994...............................................
Consolidated Statement of Operations for the Three Months
Ended September 30, 1995 and 1994...................................
Consolidated Statement of Operations for the Nine Months
Ended September 30, 1995 and 1994...................................
Statement of Cash Flow for the Nine Months Ended
September 30, 1995 and 1994.........................................
Notes to Interim Consolidated Financial Statements
September 30, 1995..................................................
Independent Auditor's Report..........................................
Consolidated Balance Sheets December 31, 1994 and 1993................
Consolidated Statements of Operation for the Years Ended
December 31, 1994, 1993 and 1992....................................
Consolidated Statements of Stockholders' Equity for
the years Ended December 31, 1994, 1993 and 1992....................
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1994, 1993 and 1992..............................
Notes to Consolidated Financial Statements............................
UNAUDITED PRO FORMA INCOME STATEMENTS OF MEDNET,
MPC CORPORATION AND HOME PHARMACY
Pro Forma Income Statement for the Twelve Months
Ended December 31, 1994.............................................
Pro Forma Income Statement for the Nine Months
Ended September 30, 1995............................................
Notes to Pro Forma Income 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....................
Statements 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.......................................................
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
Consolidated Balance Sheet
<TABLE>
Sept. 30, Dec. 31,
1995 1994
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ......................... $ 1,634,000 $ 1,711,000
Accounts receivable, less allowance for doubtful
accounts and return of and $780,000 at
December 31, 1994 and $878,000 at Sept. 30, 1995 12,725,000 8,087,000
Inventories ....................................... 2,866,000 1,334,000
Other current assets .............................. 360,000 104,000
------------ ------------
Total current assets ........................... 17,585,000 11,236,000
Property, plant and equipment ........................ 1,583,000 1,184,000
Intangible assets .................................... 19,225,000 9,308,000
Other assets ......................................... 1,195,000 589,000
------------ ------------
Total assets ................................... $ 39,588,000 $ 22,317,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .................................. $ 10,691,000 $ 6,545,000
Accrued expenses .................................. 953,000 1,013,000
Current portion of long-term debt ................. 3,576,000 2,258,000
------------ ------------
Total current liabilities ...................... 15,220,000 9,816,000
Long-term debt ....................................... 3,649,000 595,000
Redeemable preferred stock, Series A: authorized,
issued and outstanding 267,500 shares; 10%
cumulative dividends ................................ 5,350,000 -0-
Preferred stock, Series B: $.01 par value, issued and
outstanding 100,000 shares .......................... 1,000,000 -0-
Common stock: $.001 par value, (25,997,643 and
23,797,747 issued and outstanding at Sept. 30, 1995
and Dec. 31, 1994) .................................. 26,000 24,000
Additional paid-in capital ........................... 36,873,000 32,138,000
Accumulated deficit .................................. (22,530,000) (20,256,000)
------------ ------------
Stockholders' equity ................................. 15,369,000 11,906,000
------------ ------------
Total liabilities and stockholders' equity ..... $ 39,588,000 $ 22,317,000
============ ============
</TABLE>
<PAGE>
Mednet, MPC Corporation
Consolidated Statement of Operations
For the Three Months Ended
September 30,
---------------------------
1995 1994
------------ ------------
Sales $ 27,449,000 $ 18,380,000
Less: cost of sales 23,390,000 16,681,000
------------ ------------
Gross profit 4,059,000 1,699,000
------------ ------------
Selling, general and administrative expenses:
Salaries and benefits 2,133,000 860,000
Marketing and advertising 238,000 318,000
Other administrative expenses 1,399,000 1,689,000
------------ ------------
Total selling, general and administrative
expenses 3,770,000 2,867,000
------------ ------------
Operating income (loss) before depreciation
and amortization 289,000 (1,168,000)
Depreciation and amortization 649,000 177,000
------------ ------------
Operating profit/(loss) (360,000) (1,345,000)
Other income (expense):
Interest, dividend and rental income 11,000 20,000
Interest expense (200,000) (91,000)
Subsidiary operations for period not owned (180,000) 196,000
Other net (41,000) (174,000)
------------ ------------
Total other income (expense) (410,000) (49,000)
------------ ------------
Net loss $ (770,000) $ (1,394,000)
============ ============
Net loss per common share $ (.03) $ (.07)
============ ============
Weighted average equivalent number of share 24,338,791 21,433,191
============ ============
<PAGE>
Mednet, MPC Corporation
Consolidated Statement of Operations
For the Nine Months Ended
September 30,
----------------------------
1995 1994
------------ ------------
Sales .......................................... $ 83,693,000 $ 48,869,000
Less: cost of sales ............................ 71,262,000 42,519,000
------------ ------------
Gross profit ................................... 12,431,000 6,350,000
------------ ------------
Selling, general and administrative expenses:
Salaries and benefits ....................... 6,398,000 3,384,000
Marketing and advertising ................... 731,000 608,000
Other administrative expenses ............... 4,008,000 3,784,000
------------ ------------
Total selling, general and administrative
expenses ................................. 11,137,000 7,776,000
------------ ------------
Operating income (loss) before
depreciation and amortization......... 1,294,000 (1,426,000)
Depreciation and amortization ................. 1,854,000 1,517,000
------------ ------------
Operating profit/(loss) ................ (560,000) (2,943,000)
Other income (expense):
Interest, dividend and rental income ....... 31,000 48,000
Interest expense ........................... (627,000) (314,000)
Subsidiary operations for period not owned . (982,000) 321,000
Other net .................................. (134,000) (75,000)
----------- ------------
Total other income (expense) ............ (1,712,000) (20,000)
----------- ------------
Net loss ................................... $ (2,272,000) $ (2,963,000)
============ ============
Net loss per common share ................. $ (.09) $ (.14)
============ ============
Weighted average equivalent number of
shares .................................. 24,041,758 21,011,662
============ ============
<PAGE>
Mednet, MPC Corporation
Statement of Cash Flow
<TABLE>
For the Nine Months Ended
September 30,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from (used for) operating activities:
Cash received from customers ..................................... $ 79,055,000 $ 31,655,000
Cash paid to suppliers and employees ............................. (80,707,000) (34,745,000)
Net interest paid ................................................ (596,000) (221,000)
Rental income .................................................... -0- 10,000
Other net ........................................................ (134,000) 25,000
------------ ------------
Net cash used for operating activities ........................ (2,382,000) (3,276,000)
------------ ------------
Cash flows from (used for) investing activities:
Purchase of property and equipment ............................... (774,000) (630,000)
Purchase of intangible assets .................................... (11,458,000) -0-
------------ ------------
Net cash from (used for) investing activities ................. (12,232,000) (630,000)
------------ ------------
Cash flows from (used for) financing activities:
Repayment of borrowings .......................................... (1,152,000) (1,374,000)
Net proceeds from issuance of common stock ....................... 4,889,000 5,152,000
Net proceeds from issuance of preferred stock .................... 7,300,000 -0-
Net proceeds from borrowings ..................................... 3,500,000 -0-
------------ ------------
Net cash from (used for) financing activities ................. 14,537,000 3,778,000
------------ ------------
Net (decrease) increase in cash ..................................... (77,000) (128,000)
Cash balance, beginning of period ................................... 1,711,000 1,220,000
------------ ------------
Cash balance, end of period ......................................... $ 1,634,000 $ 1,092,000
============ ============
Reconciliation of net loss to net cash used for operating activities:
Net loss ......................................................... $ (2,272,000) $ (2,963,000)
Adjustments to reconcile net loss to net cash
used for operating activities:
Net gain of subsidiaries for period not owned ................. 982,000 -0-
Depreciation and amortization ................................. 1,854,000 1,517,000
Change in assets and liabilities:
(Increase) in accounts receivable ............................. (4,638,000) (2,944,000)
(Increase) Decrease in inventories ............................ (1,532,000) 132,000
(Increase) Decrease in other current assets ................... (256,000) 244,000
(Increase) in other assets .................................... (606,000) (10,000)
(Decrease) in accrued expenses ................................ (60,000) (214,000)
Increase in accounts payable .................................. 4,146,000 962,000
------------ ------------
Net cash used for operating activities .............................. $ (2,382,000) $ (3,276,000)
============ ============
</TABLE>
<PAGE>
MEDNET, MPC CORPORATION
Notes to Consolidated Financial Statements
September 30, 1995
(1) Basis of Presentation
The consolidated financial statements included herein include the accounts of
Mednet and its subsidiaries (the "Company"), Medi-Mail, Inc., Medi-Phar, Inc.,
Medi-Claim, Inc. and Family Pharmaceutical of America, 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 September 30,
1995 are not necessarily indicative of those expected for the full year. Certain
prior year amounts have been adjusted and reclassified to conform to the 1995
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, 1994. Accordingly, footnote
disclosures which would substantially duplicate the disclosures contained in the
Company's December 31, 1994 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 notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
(2) Subsequent Event
In October 1995, Foothill Capital Corporation conditionally approved a $20
million revolving line of credit. The financing is expected to be concluded on
or before November 17, 1995.
(3) Commitments and Contingencies
On or about February 23, 1995, a purported shareholder of the Company served the
Company with a complaint filed on January 12, 1995 in the United Stated District
Court for the Southern District of California against the Company and one of its
executive officers. The complaint alleged that, during the period of 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 Company'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 attorney's fees. The Company believes these
claims are meritless and is vigorously defending this action.
The Company is not a party to any other legal proceeding which, in its belief,
could have a material adverse effect on the Company.
<PAGE>
(4) Business Combinations
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 to date in its operating
statements for the nine months ended September 30, 1995 with a single line item
to subtract the profit of the acquired business for periods prior to
acquisition.
The effect of this consolidation of operations prior to acquisition was to
increase net sales for the nine months ended September 30, 1995 by approximately
$30,629,000. The pre-acquisition gain of $982,000 has been deducted to the
consolidated statements of operations for the nine months ended September 30,
1995.
The purchase price paid for the assets was as follows:
Purchase Price:
Cash paid .......................................... $ 8,000,000
Promissory notes payable ........................... 2,500,000
-----------
10,500,000
Cost of acquisition incurred ....................... 1,587,000
-----------
$12,087,000
===========
The acquisition was accounted for as a purchase whereby the assets acquired were
recorded at their fair market value. The excess of cost over the net
identifiable assets acquired is reflected as goodwill and is being amortized
over 25 years under the straight-line method. The allocation of the purchase
price was as follows:
Inventory .............................................. $ 500,000
Property & equipment ................................... 400,000
Customer contracts ..................................... 2,407,000
Covenant-not to compete ................................ 100,000
Goodwill ............................................... 8,680,000
-----------
$12,087,000
===========
(5) Special Item
On September 15, 1995, the Company sold its building in San Diego, California,
and realized a gain of $34,000.
<PAGE>
MEDI-MAIL, INC.
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1994
<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
Medi-Mail, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Medi-Mail, Inc.
and subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1994. 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 Medi-Mail, Inc. and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Las Vegas, Nevada
March 24, 1995
<PAGE>
MEDI-MAIL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
1994 1993
----------- -----------
ASSETS (Notes 10 and 15)
Current Assets:
Cash $ 1,711,000 $ 1,220,000
Accounts receivable, less allowance for
doubtful accounts of $780,000 and $350,000
at December 31, 1994 and 1993 (Notes 3
and 6) 8,087,000 2,982,000
Inventories 1,334,000 1,692,000
Other current assets 104,000 453,000
------------ -----------
Total current assets 11,236,000 6,347,000
Property and equipment, net (Note 4) 1,184,000 1,002,000
Intangible assets, net (Note 5) 9,308,000 5,406,000
Other assets 589,000 262,000
----------- -----------
$22,317,000 $13,017,000
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable (Notes 12 and 15) $ 6,545,000 $ 2,770,000
Accrued expenses 1,013,000 424,000
Current portion of long-term debt (Note 6) 2,258,000 1,843,000
----------- -----------
Total current liabilities 9,816,000 5,037,000
----------- -----------
Long-Term Debt (Note 6) 595,000 952,000
----------- -----------
Commitments and Contingencies (Notes 10 and 13)
Stockholders' Equity (Notes 9, 10 and 14)
Preferred stock: $.01 par value, 2,000,000
shares authorized, 0 shares issued and
outstanding - -
Common stock, $.001 par value; 42,000,000
shares authorized, 23,797,747 and 19,624,647
issued and outstanding at December 31, 1994
and 1993 24,000 20,000
Additional paid-in capital 32,138,000 21,765,000
Accumulated deficit (20,256,000) (14,757,000)
----------- -----------
Total stockholders' equity 11,906,000 7,028,000
----------- -----------
$22,317,000 $13,017,000
=========== ===========
See Notes to Consolidated Financial Statements.
<PAGE>
MEDI-MAIL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Sales (Notes 10 and 12) $67,985,000 $25,370,000 $10,590,000
Less sales discounts and allowances 122,000 146,000 297,000
----------- ----------- -----------
Net sales 67,863,000 25,224,000 10,293,000
Cost of sales (Notes 10 and 12) 58,793,000 19,504,000 8,082,000
----------- ----------- -----------
Gross profit 9,070,000 5,720,000 2,211,000
----------- ----------- -----------
Selling, general and administrative expenses:
Salaries and benefits 5,214,000 4,401,000 2,224,000
Marketing and advertising 1,296,000 962,000 487,000
Amortization of intangibles 2,098,000 3,994,000 99,000
Provision for doubtful accounts 706,000 290,000 100,000
Other administrative expenses 5,480,000 3,538,000 1,523,000
----------- ----------- -----------
Total selling, general and
administrative expenses 14,794,000 13,185,000 4,433,000
----------- ----------- -----------
Operating loss (5,724,000) (7,465,000) (2,222,000)
----------- ----------- -----------
Other income (expense):
Interest expense (310,000) (250,000) (115,000)
Subsidiary operations for period not
owned (Note 10) 517,000 - - 37,000
Write-down of building held for sale (Note 4) - - (313,000) - -
Debt conversion expense (Note 6) (203,000) (224,000) - -
Other, net 221,000 26,000 160,000
----------- ----------- -----------
Total other income (expense) 225,000 (761,000) 82,000
----------- ----------- -----------
Net loss $(5,499,000) $(8,226,000) $(2,140,000)
=========== =========== ===========
Net loss per common share $ (.26) $ (.49) $ (.24)
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MEDI-MAIL, INC. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
Class B Notes
Common Stock Common Stock Receivable Additional
------------------ ------------------ from Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Stockholder Capital Deficit Equity
--------- ------ -------- ------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 7,393,232 $7,400 845,548 $ 900 $(5,000) $6,768,000 $(4,391,000) $2,380,000
Conversion of Class B common
stcok to common stock 684,047 700 (684,047) (700) - - - - - - - -
Common stock issued in private
placements 169,670 200 - - - - - - 509,000 - - 509,200
Exercise of warrants and options
for common stock 869,477 800 - - - - - - 1,800,000 - - 1,800,800
Common stock issued to purchase
Medi-Phar, Inc. assets 196,875 200 - - - - - - 1,013,000 - - 1,013,200
Common stock issued to purchase
Medi-Claim, Inc., assets, net of
registration costs 333,333 300 - - - - - - 518,000 - - 518,300
Repayment of stockholder note
receivable - - - - - - - - 5,000 - - - - 5,000
Common stock issued in exchange for
services and buyout of a commission
agreement 52,550 100 - - - - - - 192,000 - - 192,100
Common stock issued in exchange for
computer software and hardware 113,155 100 - - - - - - 379,000 - - 379,100
Employee stock bonus - - - - - - - - - - 260,000 - - 260,000
Other - - - - - - - - - - 71,000 - - 71,000
Stock issuance costs - - - - - - - - - - (175,000) - - (175,000)
Net loss - - - - - - - - - - - - (2,140,000) (2,140,000)
---------- ------ -------- ------ -------- ----------- ----------- -----------
Balance at December 31, 1992 $9,812,339 $9,800 161,501 $ 200 $ - - $11,335,000 $(6,531,000) $4,814,000
========== ====== ======== ====== ======== =========== =========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MEDI-MAIL, INC. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
Class B
Common Stock Common Stock Additional
------------------- ------------------ Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
--------- ------ -------- ------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ 9,812,339 $ 9,800 161,501 $ 200 $11,335,000 $ (6,531,000) $4,814,000
Conversion of Class B common
stock to common stock 161,501 200 (161,501) (200) - - - - - -
Exercise of warrants and options
for common stock 571,469 600 - - - - 717,000 - - 717,600
Common stock issued in private
placements 8,610,798 8,800 - - - - 8,251,000 - - 8,259,800
Stock issuance costs - - - - - - - - (296,000) - - (296,000)
Common stock issued in exchange for
services and buyout of a commission
agreement 219,410 300 - - - - 787,000 - - 787,300
Common stock issued as a result of
conversion of note payable to
equity (Note 6) 249,130 300 - - - - 971,000 - - 971,300
Net loss - - - - - - - - - - (8,226,000) (8,226,000)
----------- ------- -------- ------ ----------- ------------ ----------
Balance at December 31, 1993 $19,624,647 $20,000 - - $ - - $21,765,000 $(14,757,000) $7,028,000
=========== ======= ======== ====== =========== ============ ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MEDI-MAIL, INC. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
Common Stock Additional
----------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
----------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $19,624,647 $20,000 $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 273,100 100 489,000 - - 489,100
Common stock issued in private
placements 1,900,000 1,900 5,421,000 - - 5,422,900
Common stock issued in the acquisition
of FPA (Note 10) 400,000 400 1,999,600 - - 2,000,000
Common stock issued in the acquisition
of MedNet (Note 10) 1,600,000 1,600 2,698,400 - - 2,700,000
Stock issuance costs - - - - (235,000) - - (235,000)
Net loss - - - - - - (5,499,000) (5,499,000)
----------- ------- ----------- ------------ -----------
Balance at December 31, 1994 $23,797,747 $24,000 $32,138,000 $(20,256,000) $11,906,000
=========== ======= =========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MEDI-MAIL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Cash received from customers $62,758,000 $24,484,000 $10,087,000
Cash paid to suppliers (66,867,000) (24,513,000) (11,725,000)
Interest paid (261,000) (232,000) (45,000)
----------- ----------- -----------
Net cash used in operating activities (4,370,000) (261,000) (1,683,000)
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment (384,000) (235,000) (239,000)
Payment for purchase of Mail-Rx, net of
cash acquired - - (7,582,000) - -
Purchases of intangible assets (198,000) - - (82,000)
Sale (purchase) of short-term investment - - 885,000 (885,000)
Costs of acquisitions (Note 10) (137,000) - - - -
----------- ----------- -----------
Net cash used in investing activities (719,000) (6,932,000) (1,206,000)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from borrowings 8,000 5,000 56,000
Repayment of borrowings (742,000) (911,000) (82,000)
Proceeds from issuance of warrants and options 288,000 718,000 5,000
Proceeds from issuance of common stock 5,423,000 7,763,000 2,257,000
Stock issuance costs (235,000) - - - -
Cash acquired in acquisitions (Note 10) 838,000 - - - -
----------- ----------- -----------
Net cash provided by financing
activities 5,580,000 7,575,000 2,236,000
----------- ----------- -----------
Net increase (decrease) in cash 491,000 382,000 (653,000)
Cash balance, beginning 1,220,000 838,000 1,491,000
----------- ----------- -----------
Cash balance, ending $ 1,711,000 $ 1,220,000 $ 838,000
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MEDI-MAIL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Reconciliation of Net Loss to Net Cash Used
In Operating Activities:
Net loss $(5,499,000) $(8,226,000) $(2,140,000)
Depreciation and amortization 2,395,000 4,354,000 325,000
Provision for losses on accounts receivable 706,000 290,000 100,000
Write-down of building held for sale - - 313,000 - -
Expenses paid by issuance of common stock 31,000 1,052,000 121,000
Change in assets and liabilities, net of
effects of business combinations:
(Increase) in accounts receivable (2,043,000) (1,090,000) (435,000)
(Increase) decrease in inventories 461,000 (368,000) (82,000)
(Increase) decrease in other current
assets 356,000 105,000 (292,000)
(Increase) decrease in other assets (122,000) 164,000 108,000
Increase (decrease) in accounts payable (1,113,000) 2,972,000 517,000
Increase in accrued expenses 458,000 173,000 95,000
----------- ----------- -----------
Net cash used in operating activities $(4,370,000) $ (261,000) $(1,683,000)
=========== =========== ===========
Supplemental schedule of noncash investing
and financing activities:
Common stock issuances:
Purchase of assets at Mail-Rx $ - - $ 201,000 $ - -
Conversion of note payable to equity - - 971,000 - -
Purchase of assets of Medi-Phar, Inc.
and Medi-Claim, Inc. - - - - 1,531,000
Purchase of common stock of FPA 2,000,000 - - - -
Purchase of assets of MedNet 2,700,000 - - - -
Termination of marketing partnerships 166,000 - - - -
Purchase of equipment and in exchange for
prepaid inventory - - - - 379,000
Services and commissions - - 787,000 192,000
Accounts payable converted to notes payable - - 2,846,000 - -
Notes payable issued to purchase assets of
Medi-Phar, Inc. - - - - 827,000
Liabilities assumed in acquisitions 5,811,000 - - - -
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MEDI-MAIL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies
Nature of business
- ------------------
Medi-Mail, Inc. and Subsidiaries ("Medi-Mail" or the "Company") is in the
prescription benefits management 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.
A summary of the Company's significant accounting policies follows:
Principles of consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of
Medi-Mail, Inc. and its wholly-owned subsidiaries, 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.
In the past, the Company has elected to consolidate the operations of certain
acquired businesses retroactively to the beginning of the year of acquisition
and subtract the preacquisition net income or add the preacquisition net loss of
the acquired business for the period prior to acquisition from/to the
consolidated statement of operations. Beginning in 1994, the Company has elected
to account for all business acquisitions in this manner.
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 1 year)
Non-compete agreements Length of agreements (primarily 3 years)
Customer lists and other 8 months - 3 years
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. In management's opinion, no such
impairment exists at December 31, 1994.
<PAGE>
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 21,352,923, 16,675,420 and 8,929,476 during 1994,
1993 and 1992, 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.
2. Results of Operations and Capital Resources
The Company incurred net losses of $5,499,000, $8,226,000 and $2,140,000 for the
years ended December 31, 1994, 1993 and 1992, respectively. The Company believes
that its mail service sales volume and revenues will continue to increase as a
result of continuing marketing efforts and contracts negotiated during 1993 and
1994, as well as new contracts signed in 1995 that will increase revenues
beginning in the second quarter of 1995. As a result of the low margins inherent
in the mail service pharmacy industry, the Company is dependent upon increasing
its mail service sales volume in order to achieve profitability and to meet its
long-term liquidity needs. Accordingly, the Company is exploring business and
asset acquisitions in an effort to increase the Company's revenues, increase
efficiency and achieve profitability and intends to conserve working capital
through the use of Common Shares as consideration in acquisitions of assets or
other businesses whenever possible. Although the Company expects that its
existing contact base and new contracts signed in 1995 will be sufficient to
provide positive cash flow from operations in 1995, the Company may require
additional capital from outside sources (such as equity offerings) to supplement
its working capital position. 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.
3. Accounts Receivable
1994 1993
---------- ----------
Trade receivables $6,357,000 $3,332,000
Rebate receivables 2,510,000 - -
---------- ----------
8,867,000 3,332,000
Less allowance for doubtful accounts 780,000 350,000
---------- ----------
$8,087,000 $2,982,000
========== ==========
4. Property and Equipment
1994 1993
---------- ----------
Furniture and fixtures $ 565,000 $ 460,000
Office equipment 739,000 566,000
Software 1,234,000 540,000
Leasehold improvements 123,000 109,000
---------- ----------
2,661,000 1,675,000
Less accumulated depreciation and
amortization 1,477,000 673,000
---------- ----------
$1,184,000 $1,002,000
========== ==========
During the second quarter ended June 30, 1993, the Company reclassified an
office building located in San Diego, California to property held for sale. As a
result of management's intention to sell the building, the Company recorded a
provision for estimated losses on the sale of the building of $313,000 for the
year ended December 31, 1993.
<PAGE>
5. Intangible Assets
Intangible assets arose from the Company's purchase of substantially all of the
assets of Medical Service Agency, Inc. and GBK, Inc. on November 16, 1994 and
April 30, 1993, respectively, the Company's purchase of all of the outstanding
common stock of Family Pharmaceuticals of America, Inc. on June 30, 1994, and
purchases by Medi-Phar and Medi-Claim during 1992. See Note 10 regarding these
business combinations. Intangible assets consist of the following at December
31:
1994 1993
----------- -----------
Goodwill $ 5,900,000 $ 4,254,000
Customer contracts 5,494,000 3,025,000
Non-compete agreements 722,000 518,000
Customer list, tradename and other 2,829,000 1,702,000
----------- -----------
14,945,000 9,499,000
Less accumulated amortization 5,637,000 4,093,000
----------- -----------
Intangible assets, net $ 9,308,000 $ 5,406,000
=========== ===========
6. Long-Term Debt and Notes Payable
1994 1993
---------- ----------
Notes payable to a supplier, bearing
interest at 8-1/2% and 5%, principal
and interest of $155,000 payable
monthly, maturing February 1, 1995.
The notes are secured by accounts
receivable $1,627,000 $2,325,000
Unsecured notes payable to a supplier
bearing interest at 9%, payable
semi-annually. Annual principal
payments of $118,750, $218,750 and
$218,750 payable on August 30, 1995,
1996, and 1997, respectively. 556,000 - -
Note payable secured by first trust deed
on building. Interest payable monthly
at 10%, maturing October 11, 1995. 400,000 400,000
Unsecured note payable to related party
bearing interest at 7.5%, annual
principal payments of $78,550 plus
accrued interest commencing April 1,
1995 and continuing through April 1,
1997 236,000 - -
Other 34,000 70,000
---------- ----------
2,853,000 2,795,000
Less current portion 2,258,000 1,843,000
---------- ----------
$ 595,000 $ 952,000
========== ==========
Long-term debt as of December 31, 1994 matures in the amount of $2,258,000 in
1995, $298,000 in 1996 and $297,000 in 1997.
During 1994, the Company became delinquent on its payments under the notes to a
supplier. Subsequent to December 31, 1994, the Company received a demand notice
on all amounts due to the supplier. The Company and supplier have subsequently
agreed to how the supplier will be paid in 1995. All amounts owed to the
supplier have been classified with the current portion of long-term debt at
December 31, 1994.
During May 1993, the Company entered into an agreement with the former owners of
the retail pharmacies purchased during 1992 to convert the outstanding balance
of a convertible note payable into shares of the Company's common stock. The
original conversion terms of the note had provided that the note holders, at
their option, could convert the outstanding balance of the note into common
stock of the Company at a price of $5.00 per share. The agreement reached in
1993 provided for the issuance of 249,130 shares having a market value at the
time of $561,000 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 note.
<PAGE>
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 upon 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 for the year ended December
31, 1993. The Company continued to make principal and interest payments on the
note until the shares were registered on January 5, 1995. $203,000 was recorded
as additional debt conversion expense for the year ended December 31, 1994
related to these payments.
7. Income Taxes
The Company has federal net operating loss carryforwards of approximately
$13,950,000 which are available to offset to future taxable earnings of the
Company and expire at varying times through 2009. There are also state net
operating loss carryforwards of lesser amounts which expire at varying times
through 2009. No benefit for these loss carryforwards has been recognized in the
financial statements.
The federal loss carryforwards as of December 31, 1994 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 3,287,000
-----------
$13,950,000
===========
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
1994 and 1993, 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 are summarized as follows:
1994 1993
---------- ----------
Net operating loss carryforwards $5,333,000 $3,832,000
Amortization of intangibles 1,901,000 1,503,000
Reserve on building held for sale 133,000 133,000
Bad debts 286,000 126,000
Depreciation 64,000 34,000
---------- ----------
7,717,000 5,628,000
Less valuation allowance 7,717,000 5,628,000
---------- ----------
$ - - $ - -
========== ==========
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 net deferred tax assets of $0 at
December 31, 1994.
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 1993 to 1994 of $2,089,000 is due
primarily to the 1994 net operating loss and the difference in amortization
periods for intangible assets for book and tax purposes.
8. Stock Transactions
During the years ended December 31, 1993 and 1992, Class B common stock totaling
161,501 shares and 684,047 shares, respectively, 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.
<PAGE>
In February 1992, a second closing of a private placement conducted in 1991
resulted in the Company issuing an additional 169,670 units, each consisting of
one share of common stock and one warrant to purchase an additional share for
$5.57 for $509,000. The warrants expire in November 1996. The investment banker
who assisted in this private placement is entitled to purchase 58,167 units for
$5.57 per unit until November 12, 1996.
During 1992, the Company issued 196,875 shares of common stock valued at
$1,013,200 related to the purchase of seven retail pharmacies. The Company also
issued 333,333 shares of common stock valued at $518,300 related to the purchase
of a claims processing business (Note 10).
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.
In conjunction with the conversion of a note payable to shares of the Company's
common stock (Note 6) during 1993, the Company issued 249,130 shares.
During 1992 the Company issued 16,600 shares of common stock valued at $92,000
to the Company's former attorneys in exchange for legal services.
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 each of the three years ended December 31, 1994, 1993, and 1992, 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.
In January 1992, the Company executed a settlement agreement with a former
officer, director and employee of the Company. Pursuant to the terms of the
settlement agreement, the Company received $71,000 from the sale of
approximately 12,000 shares of the Company's common stock.
During 1992, the Company transferred 88,736 shares of Class B common stock to
the President of the Company in connection with his employment agreement. The
value of the stock on the date of transfer, $260,000, was recorded as
compensation expense.
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 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 9.
During each of the three years ended December 31, 1994, 1993, and 1992, 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, 1994, 1993, and 1992:
<PAGE>
Exercise
Warrants Price Expiration
--------- ----------- -----------------------
Outstanding at December 31, 1991 4,292,000 $1.14-$5.57 June 1993-May 1996
Issued in private placement 187,000 $5.57 November 1996
Issued in services 50,000 $4.50 January 1994
Exercised (675,000) $1.14-$4.00 - -
--------- ----------- -----------------------
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
========= =========== =======================
All outstanding warrants are exercisable as of December 31, 1994.
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.
Additionally, the Company has a Non-Qualifying Stock Option Plan (NQSOP). At the
January 17, 1992 annual meeting, stockholders approved instituting 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.
An additional amendment to the NQSOP was approved by the stockholders of the
Company at the June 16, 1993 annual meeting. That amendment provides that
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.
<PAGE>
The following is a summary of option activity for each of the three years ended
December 31, 1994, 1993 and 1992:
Options
Available
For
Grant ISOP NQSOP Option Price
--------- -------- -------- -------------
Outstanding at December 31, 1991 $ - - $302,500 $315,000 $.77 - $1.73
Additional shares reserved 600,000 - - - - - -
Granted (299,500) 173,500 126,000 $2.95
Exercised - - (94,550) (100,000) $.77-$1.73
-------- -------- -------- ------------
Outstanding at December 31, 1992 300,500 381,450 341,000 $.77-$2.95
Additional shares reserved 800,000 - - - - - -
Granted (553,000) 93,000 460,000 $1.75-$2.77
Canceled 219,000 (119,000) (100,000) $1.75-$2.00
Exercised - - (152,625) (120,000) $.77-$1.19
-------- -------- -------- ------------
Outstanding 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 - - (33,325) - - $.77-$1.19
------- -------- -------- ------------
Outstanding at December 31, 1994 668,000 348,000 861,000 $.77-$3.81
======= ======== ======== ============
<PAGE>
At December 31, 1994, 724,500 stock options are exercisable. In addition to the
above stock option plans, the Company has the following stock options, issued
outside of the plans, outstanding as of December 31, 1994:
Option
Options Price Expiration
------- ------ --------------
Issued in 1993 500,000 $4.50 September 1998
Issued in 1994 50,000 $2.85 June 1999
Issued in 1994 150,000 $3.00 June 1997
-------
Outstanding at December 31, 1994 700,000
=======
10. Business Combinations
On November 19, 1994, the Company acquired substantially all of the assets of
Medical Service Agency, Inc., a Pennsylvania corporation d/b/a MedNet
("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
==========
<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 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
==========
The assets acquired and liabilities assumed were transferred to the Company's
wholly-owned subsidiary, Medi-Claim, concurrent with the acquisition.
The restricted shares of common stock issued in the acquisition carry
registration rights allowing the holders of such shares, upon the demand by
holders representing at least 49% of said shares, to cause the shares to be
registered during the period January 1, 1996 to January 1, 1997, if the shares
have not been previously registered.
In connection with the acquisition, the Company acquired an option to purchase
all of the then existing assets, subject to the trade liabilities of Managed
Care Rx Corporation, a Pennsylvania corporation ("Managed Care"). The former
majority owner of MedNet, a current officer of the Company is the majority owner
of Managed Care. The purchase price is defined in the option agreement as the
annualized gross sales of Managed Care for the three months immediately
preceding the exercise of the option. The option expires upon the earlier of the
termination of the offer or 10 days after an independent, third-party offer to
purchase Managed Care is tendered.
The Company has elected to consolidate 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 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
==========
<PAGE>
The Company's restricted common stock issued to effect this acquisition was
subsequently registered with the Securities and Exchange Commission in a
registration statement filing effective January 5, 1995.
In the event the selling shareholders of FPA, sell, between January 1, 1995 and
March 10, 1995, for less than $5.00 per common share, their common shares of the
Company acquired in the acquisition, the FPA acquisition agreement requires the
Company to pay to the selling shareholders, in cash, the difference between
$5.00 per common share and the price per share realized (shortfall), for each
share sold during the stated period. Subsequent to December 31, 1994, the
Company was notified that it will be required to pay approximately $828,000 to
the selling FPA shareholders as a result of these sales of the Company's stock.
As of December 31, 1994, the Company has not recorded a liability for this
shortfall. The Company expects to record a decrease to additional paid-in
capital of approximately $828,000 during 1995 as a result of making the
shortfall payments. The shortfall payments are secured by substantially all of
the assets and all of the outstanding common stock of FPA.
The Company has elected to consolidate 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.
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
===========
<PAGE>
On January 31, 1992, the Company's wholly-owned subsidiary, Medi-Phar, acquired
substantially all of the assets of four retail pharmacies. On July 2, 1992,
Medi-Phar exercised its option to acquire the assets of three additional
pharmacies. The purchase price for all seven pharmacies was $1,840,000 which was
satisfied through the issuance of 196,875 shares of the Company's common stock
valued at $1,013,000 and promissory notes aggregating $827,000. Of the 196,875
shares issued, 47,750 are restricted and unregistered. In the event the value of
the shares is less that $4.00 per share when the restrictions lapse, the Company
has the obligation to issue up to 44,000 additional shares. The acquisition was
accounted for as a purchase and as a result the Company recorded $1,179,000 in
goodwill and $268,000 in other intangibles.
The Company has elected to consolidate the operations of the pharmacies
retroactively to January 1, 1992; therefore, the preacquisition loss of $37,000
has been added to the consolidated statement of operations for the year ended
December 31, 1992.
In December 1992, the Company's wholly-owned subsidiary, Medi-Claim purchased
substantially all of the assets of the pharmacy division of a business. The
aggregate purchase price was $572,000. Medi-Claim issued 35,000 shares of
registered common stock and 298,333 shares of unregistered common stock of
Medi-Mail, Inc. valued at $518,000 to consummate the purchase.
Unaudited pro forma results of operations of the Company, assuming the MedNet,
FPA and Mail Rx acquisitions occurred on January 1, 1993, are presented below.
Adjustments are made to reflect the accounting bases recognized in recording the
combination. These adjustments consist principally of amortization of assets,
including goodwill, of $1,134,000 and $2,839,000 for the years ended December
31, 1994 and 1993, respectively. Additionally, loss per share has been adjusted
to reflect the stock issued in each acquisition as outstanding on January 1,
1993.
Years Ended December 31,
--------------------------
1994 1993
----------- -----------
Net sales $67,863,000 $61,236,000
=========== ===========
Net loss $(6,117,000) $(8,234,000)
=========== ===========
Net loss per common share $ (0.27) $ (0.39)
=========== ===========
Weighted average shares outstanding $22,955,115 $21,005,378
=========== ===========
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.
11. Marketing Partnerships
During 1990 and 1991 the Company organized two limited partnerships in order to
raise funds to telemarket its mail order pharmacy to new customers. The Company
was the general partner of and had a 1% ownership interest in the partnerships.
On December 31, 1994 the partnerships were terminated and the assets of the
partnerships, primarily customer lists, were transferred to the Company. In
consideration for the customer lists the Company issued 110,771 shares of common
stock, valued at $166,000, to the former limited partners. No gain or loss was
recorded by the Company upon the termination of the partnerships.
12. 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. Such sales
and cost of sales included in the Company's consolidated statement of operations
for the year ended December 31, 1994 are approximately $16,119,000 and
$16,119,000, respectively.
<PAGE>
13. Commitments and Contingencies
The Company leases certain facilities under non-cancelable operating leases with
terms ranging from two to six years. Rental expense under these leases amounted
to $432,000, $466,000 and $318,000 in 1994, 1993 and 1992, respectively.
As of December 31, 1994, future minimum lease payments are as follows:
1995 $ 428,000
1996 366,000
1997 231,000
1998 131,000
1999 59,000
----------
$1,215,000
==========
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.
On or about February 23, 1995, the Company was served with a complaint against
the Company and one of its executive officers. The complaint alleges that, the
defendants omitted material information about the Company and misrepresented
information relating to the growth of the Company. The complaint seeks to
proceed as a class action on behalf of certain persons who purchased shares of
the Company's common stock during the period July 1, 1993 through March 31, 1994
and who were allegedly damaged. The Company believes that the complaint is
without merit. If the plaintiff succeeds on his own behalf, the financial impact
to the Company is not expected to be material. The complaint has not been
certified as a class action. In addition, the Company is party to various claims
and lawsuits in the normal course of business. These matters are expected to be
resolved with no material impact on the Company's financial condition, liquidity
or operations.
14. Warrants Issued for Marketing Services
In June 1991, the Company entered into a Consulting Agreement ("Agreement") with
a marketing consultant ("Consultant") pursuant to which it agreed to issue
warrants to purchase up to 2,000,000 common shares at $3.00 per share. Warrants
with respect to 250,000 shares were vested immediately upon signing of the
Agreement and issuance of the warrants. Pursuant to the terms of the Agreement,
the balance of the warrants were to vest upon the Company signing contracts with
third party payors through the efforts of the Consultant. The contracts, as
amended, are required to have annual projected gross revenues of $5,000,000 (to
vest 500,000 shares), additional projected gross sales of $5,000,000 for an
aggregate of $10,000,0000 (to vest an additional 250,000 shares) and additional
projected gross sales of $20,000,000 for an aggregate of $30,000,000 (to vest
the remaining 1,000,0000 shares). Vesting was initially required to occur by the
end of May 1992, which was subsequently extended to the end of May 1993 and then
May 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.
<PAGE>
On February 15, 1993, the Company vested 500,000 of the warrants pursuant to the
Agreement. On July 20, 1993, the Company's Board of Directors modified the terms
of the original agreement to provide for early vesting of the remaining
1,250,000 warrants for various reasons, including anticipation of the imminent
receipt of future contracts. Generally accepted accounting principles requires
the Company to recognize an increase in additional paid-in capital as well as a
charge to operations at the time the warrants are vested if the price of the
Company's stock exceeded the $3.00 exercise price of the warrants. As the market
values of the common stock on February 15, 1993 and July 20, 1993 were less than
the warrant exercise price, the Company did not record a charge to operations in
its unaudited quarterly financial statements for the periods ended March 31,
1993, June 30, 1993 and September 30, 1993.
Subsequent to December 31, 1993, the Company engaged a valuation firm to value
the anticipated revenues from the related contracts. Pursuant to such valuation,
it was determined that the Company was not obligated to vest any of the warrants
during the year ended December 31, 1993. Furthermore, the Company received, in
February, 1994, a request from the Consultant that the 1,750,000 warrants vested
during 1993 be divested. Accordingly, the Company complied with the request and
on March 29, 1994 the 1,750,000 warrants were divested. Subsequent to the
divesture, the Company caused 750,000 warrants to vest, for a net total of
1,000,000 warrants vested under the agreement. The agreement was allowed to
expire in May 1994.
Because there was no charge against operations related to the vesting of the
warrants, the subsequent divesting of the warrants had no effect on the
Company's 1993 or 1994 operating results or financial position as of December
31, 1993.
On April 27, 1994, the Company entered into a second Consulting Agreement with
the Consultant 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 issurance by $0.17
per share. The Company will also pay the Consultants commissions on gross
collected billings from sales generated to these customers.
15. Subsequent Events
On January 20, 1995, the Company entered into an agreement with a supplier
converting trade accounts payable of $1,092,023 to a note payable. The note is
due on demand, or if no demand is made, in monthly installments of $23,472,
including interest, maturing February 20, 2000. The note bears interest at a
bank's prime rate plus 2%. The note and any other existing or future amounts
owed to the supplier are secured by substantially all assets of the Company.
Note 16. Major Customer
Net sales for the year ended December 31, 1994 include sales to a customer which
accounted for approximately 13% of total net sales.
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON THE SCHEDULE
To the Board of Directors
Medi-Mail, Inc.
Las Vegas, Nevada
Our audit of the financial statements of Medi-Mail, Inc. and subsidiaries
included schedule II contained herein, for each of the three years in the period
ended December 31, 1994.
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 24, 1995
<PAGE>
MEDI-MAIL, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Additions
Balance Charged Balance
At To At
Beginning Cost and Deductions End of
Description Of Period Expenses (A) Period
- ----------- --------- --------- ---------- ---------
Allowance for doubtful accounts:
Year ended December 31, 1994 $350,000 $706,000 $276,000 $780,000
Year ended December 31, 1993 55,000 295,000 - - 350,000
Year ended December 31, 1992 20,000 100,000 65,000 55,000
(A) Uncollectible accounts written off by charge to the allowance.
<PAGE>
MEDNET, MPC CORPORATION
UNAUDITED PRO FORMA INCOME STATEMENTS
These pro forma financial statements reflect the September 15, 1995 acquisition
of Home Pharmacy. The pro forma income statment is presented as if the
transaction occurred at the beginning of the nine months ended September 30,
1995 and the year ended December 31, 1994. A pro forma balance sheet is not
presented because the balance sheet as reported in the Company's Form 10-Q for
the quarter ended September 30, 1995 included the acquisition.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The pro forma operations
and financial information do not purport to represent what the Company's
financial position or results of operations would actually have been had the
transactions in fact occurred on such date or to project the Company's financial
position or results of operations for any future date or period.
A further description of the purchase business combination, nature and pro forma
adjustments follow the pro forma financial statements.
<PAGE>
Mednet, MPC Corporation
Unaudited Pro Forma Income Statement
Year Ended December 31, 1994
<TABLE>
Pro Forma
Mednet Home Pharmacy Adjustments Pro Forma
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales ......................................................... 67,863,000 51,281,000 119,144,000
Cost of Sales ..................................................... 58,793,000 43,787,000 102,580,000
Gross Profit ...................................................... 9,070,000 7,494,000 16,564,000
Selling, general and administrative expenses ...................... 14,794,000 6,188,000 451,000 21,433,000
Note 2
Related-party expense allocations ................................. 620,000 (620,000) 0
Note 2
Operating (loss) .................................................. (5,724,000) 686,000 169,000 (4,869,000)
Other income (expenses):
Debt conversion cost .............................................. (203,000) (203,000)
Interest expense .................................................. (310,000) (175,000) (397,000) (882,000)
Interest income ................................................... 49,000 Note 2 49,000
Rental income ..................................................... 4,000 4,000
Other, net ........................................................ 168,000 168,000
Total Other Income (Loss) ......................................... (292,000) (175,000) (397,000) (864,000)
Net Income (Loss) ................................................. (6,016,000) 511,000 (228,000) (5,733,000)
Net (Loss) Per Common Share ...................................... (0.24)
Weighted Average Shares .......................................... 24,265,185
</TABLE>
<PAGE>
Mednet, MPC Corporation
Unaudited Pro Forma Income Statement
Nine Months Ended September 30, 1995
<TABLE>
Pro Forma
Mednet Adjustments Pro
Forma
---------------------------------------------------
<S> <C> <C> <C>
Net Sales ................................................. 83,693,000 83,693,000
Cost of Sales ............................................. 71,262,000 71,262,000
Gross Profit .............................................. 12,431,000 12,431,000
Selling, general and administrative expenses .............. 12,991,000 338,000 13,329,000
Note 2
Operating (loss) .......................................... (560,000) (338,000) (898,000)
Other income (expenses):
Subsidiary operations for period not owned ................ (982,000) 982,000 0
Interest expense .......................................... (627,000) (338,000) (965,000)
Interest income ........................................... 31,000 Note 2 31,000
Other, net ................................................ (134,000) (134,000)
Total Other Income (Loss) ................................. (1,712,000) 644,000 (1,068,000)
Net Income (Loss) ......................................... (2,272,000) 306,000 (1,966,000)
Net (Loss) Per Common Share ............................... (0.07)
Weighted Average Shares ................................... 26,827,221
</TABLE>
<PAGE>
Mednet, MPC Corporation
Notes to Pro Forma Income Statements
Note 1. Acquisition of Home Pharmacy
On September 15, 1995, Mednet, MPC Corporation (the "Company") completed the
acquisition of the assets (excluding cash and like assets) of Home Pharmacy, a
division of ArcVentures, Inc. pursuant to an Asset Purchase Agreement dated July
29, 1995.
Home Pharmacy is a mail service pharmacy and prescription benefits management
company based in Chicago, Illinois. The Company intends to fully integrate the
acquired mail service business with its existing Medi-Mail business. The Home
Pharmacy prescription benefits management business will be integrated with the
Company's Medi-Claim subsidiary headquartered in LeMoyne, Pennsylvania.
The assets acquired included customer contracts, computers and other equipment,
the right to the name "Home Pharmacy" and certain other intellectual property.
The Company acquired up to $1,000,000 of Home Pharmacy's inventory, but did not
acquire the balance of Home's inventory or its cash or like assets.
The Company has elected to consolidate the operations of Home Pharmacy
retroactively to January 1, 1995 in accordance with ARB 51. Accordingly, the
pre-acquisition income of Home Pharmacy of $982,000 has been deducted in the
consolidated operations for the period ended September 30, 1995.
Note 2. Pro Forma Adjustments The following is a description and summary of the
pro forma adjustments related to the accompanying balance sheets.
Nine months Twelve months
ended ended
Sept. 30, 1995 Dec. 31, 1994
-------------- -------------
(1) Amortization of acquisition goodwill 338,000 451,000
To record estimated amotization of acquisition
goodwill
(2) Interest expense 338,000 397,000
To record interest expense associated with
financing the acquisition of Home Pharmacy
(3) Subsidiary operations for period 982,000 --
not owned
To record pre-acquisition income of Home Pharmacy
(4) Related-party expense allocations -- 620,000
To record elimination of original parent company
overhead expenses
Note 3. Net Income Per Share Information
The Pro Forma net loss per share and number of common shares outstanding have
been calculated using the weighted average number of shares assumed to be
outstanding as if the acquisition of Home Pharmacy had occurred on January 1,
1994 with respect to the year ended December 31, 1994 and on January 1, 1995
with respect to the nine months ended September 30, 1995.
<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>
<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 ....................................... $ 3,041
Legal Fees and Expenses .................................... 20,000
Accounting Fees and Expenses ............................... 15,000
Miscellaneous .............................................. 11,959
Total: ................................... $50,000
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> <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
<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.
</FN>
</TABLE>
<PAGE>
<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> <C>
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
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
<PAGE>
Amount of Underwriters or Exemption from
Title of Security Date of Sale Securities Sold Other Purchasers* Consideration Registration Claimed
======================== ============== ================ ======================= ======================== =====================
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 6/94 398,571 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
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
<FN>
(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.
</FN>
</TABLE>
<PAGE>
<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> <C>
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
<FN>
(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.
</FN>
</TABLE>
<PAGE>
<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> <C>
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
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 Investors10 Purchase 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 2,456,000 Arc Ventures as Acquisition of Home Section 4(2)
purchase pledgeee Pharmacy
Common Stock, $0.01 12/95 1,534,277 Arc Ventures as Acquisition of Home Section 4(2)
purchase pledgee Pharmacy
<FN>
* Unless otherwise indicated, the sales were made without an underwriter
and the persons listed are in the investors.
(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) To be 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.
</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)
3.2 Amendment to Articles of Incorporation of the Company as filed April
8, 1988 with the Secretary of State of the State of Nevada.(1)
3.3 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)
3.4 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)
3.5 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)
3.6 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)
3.7 Certificate of Amendment to Articles of Incorporation of the Company
as filed November 9, 1994.(4)
3.8 Certificate of Amendment to Articles of Incorporation of the Company
as filed June 29, 1995.(13)
3.9 By-laws.(1)
3.10 Amended and Restated By-laws.(3)
3.11 Certificate of Amendment to Amended and Restated By-laws dated January
27, 1992.(3)
3.12 Second Amended and Restated By-laws.(4)
4.1 Specimen certificate for Common Stock, $.001 par value per share.(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.(5)
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.(5)
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.(5)
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.(5)
10.5 Sublease between the Company and Rocky Mountain Bank Note Company
dated March 9, 1992.(5)
10.6 Asset Purchase Agreement between the Company, Medi-Claim, Inc., and
Avesis, Incorporated dated December 30, 1992.(5)
10.7 Purchase and Sale Agreement between the Company, Medi-Phar, Inc. and
Medco Drugs dated January 17, 1992.(6)
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.(5)
<PAGE>
10.9 Pharmaceutical Services Agreement between Union Labor Life Insurance
Company and the Company effective March 1, 1992.(5)
10.10 Agreement between the Company and PACE Membership Warehouse, Inc.
dated September 14, 1988.(7)
10.11 Letters of Agreement between the Company and Hanover, Direct, Inc.
dated December 8, 1992 and September 22, 1992.(5)
10.12 Contract dated July 16, 1992 between Ingels, Inc. and the Company to
procure its spokesperson.(5)
10.13 Specimen form of Indemnification Agreement between the Company and all
of its officers and directors, signed in 1992.(5)
10.14 Asset Purchase Agreement between the Company and G.B.K., Inc. d/b/a
Mail Rx dated April 15, 1993.(8)
10.15 Consultant Agreement by and between the Company and Irwin G. Jann &
Associates, P.C., dated June 1, 1994.(9)
10.16 Share Exchange Agreement by and among Family Pharmaceuticals of
America, Inc. ("FPA"), the former stockholders of FPA and the Company
dated June 30, 1994.(10)
10.17 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.(11)
10.18 Employment Agreement between the Company and David L. Dalton, dated
November 9, 1994.(4)
10.19 Foothill Revolving Loan Agreement*
21.1 Subsidiaries of the Registrant.(4)
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)
- --------------------
* 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 Annual
Report on Form 10-K for the year 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 Annual
Report on Form 10-K for the year ended December 31, 1994.
<PAGE>
(5) 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 year ended December 31, 1992.
(6) 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.
(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 October 14, 1988.
(8) 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.
(9) 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 Report on Form 8-K dated April 28, 1994.
(10) 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.
(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 November 19, 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 dated February 23, 1995.
(13) 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 Report on Form 8-K dated June 29, 1995.
<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.
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, January 30, 1996.
MEDNET, MPC CORPORATION
By: /s/ M. B. Merryman
-------------------------------------
M. B. Merryman
President and Chief Executive Officer
<PAGE>
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 January 30, 1996
- ----------------- Executive Officer
M. B. Merryman and Director (Principal
Executive Officer)
/s/ Thomas Warren Chief Financial Officer January 30, 1996
- ----------------- (Principal Financial and
Thomas Warren Accounting Officer)
/s/ Leo T. McCarthy Director January 31, 1996
- -------------------
Leo T. McCarthy,
/s/ Sol Lizerbram Director January 30, 1996
- -----------------
Sol Lizerbram,
/s/ Byron S. Georgiou Director January 30, 1996
- ---------------------
Byron S. Georgiou
Director
- -------------------
Lincoln R. Ward
Director
- ------------------
Edward F. Heil
Director
- -------------------
Robert W. Quick
/s/ Matthew C. Strauss Director January 24, 1996
- ----------------------
Matthew C. Strauss
/s/ Edward T. Hanley, Jr. Director January 31, 1996
- -------------------------
Edward T. Hanley, Jr.
Director
- -----------------
Donald Kirsch
Director
- -------------------
Steven F. Mayer
Exhibit 5.1
January 30, 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 January 26, 1996 pertaining to 3,811,725 shares of the Company's
common stock, $.001 par value of which 499,277 shares have been pledged to
ArcVentures, Inc. as collateral (the "Collateral Shares"), up to 699,518 are
issuable by the Company pursuant to the terms of certain outstanding warrants or
convertible notes (the "Warrant Shares"), 1,783,330 are issuable on conversion
of the Series A Preferred (the "Conversion Shares") and 837,600 shares are
currently owned by certain of the Selling Stockholders (the "Other 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:
(a) at such time as ArcVentures, Inc. becomes entitled to sell the
Collateral Shares being registered pursuant to the Registration
Statement, the Collateral Shares will be legally issued, fully paid and
non-assessable;
(b) the Warrant Shares being registered pursuant to the Registration
Statement will be, upon the Company's receipt of the exercise price of
the option or warrant being exercised or the Company's receipt of the
notes being converted, legally issued, fully paid and non- assessable;
(c) the Conversion Shares being registered pursuant to the Registration
Statement will be, upon the conversion of the Series A Preferred or
Convertible Notes in accordance with their terms, legally issued, fully
paid and non-assessable; and
(d) The Other Shares being registered pursuant to the Registration
Statement are 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
LOAN AND SECURITY AGREEMENT
by and between
MEDNET, MPC CORPORATION
MEDI-MAIL, INC.
FAMILY PHARMACEUTICALS OF AMERICA, INC.
MEDI-CLAIM, INC.
MEDI-PHAR, INC.
and
FOOTHILL CAPITAL CORPORATION
Dated as of December 26, 1995
<PAGE>
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT, is entered into as of December 26, 1995,
between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"),
with a place of business located at 11111 Santa Monica Boulevard, Suite 1500,
Los Angeles, California 90025-3333 and Mednet, MPC Corporation, having a chief
executive office at and mailing address of 871-C Grier Drive, Las Vegas, Nevada
89119, Medi-Mail, Inc. a Nevada corporation, with mailing address of 871-C Grier
Drive, Las Vegas, Nevada 89119, Family Pharmaceuticals of America, Inc. a South
Carolina corporation, with a mailing address of 966 Houston Northcutt Boulevard,
Suite E, Mount Pleasant, South Carolina 29464, MediClaim, Inc. a Nevada
corporation with a mailing address of 20 Erford Road, LeMoyne, Pennsylvania
17043 and Medi-Phar, Inc. a Nevada corporation with a mailing address of POB
420954, San Diego, California 92142, jointly and severally (Mednet, MPC
Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc.,
MediClaim, Inc. and Medi-Phar, Inc. are collectively and individually, as the
context may require, referred to herein as "Borrower"). Notwithstanding that
each of Medi-Mail, Inc., Family Pharmaceuticals of America, Inc., Medi-Claim,
Inc. and Medi-Phar, Inc. may have separate and distinct mailing addresses, each
of such entities comprising Borrower has a chief executive office, c/o their
parent company Mednet, MPC Corporation of 871-C Grier Drive, Las Vegas, Nevada
89119.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement, the following
terms shall have the following definitions:
"Account Debtor" means any Person who is or who may become obligated under,
with respect to, or on account of an Account.
"Accounts" means all currently existing and hereafter arising accounts,
contract rights, and all other forms of obligations owing to Borrower arising
out of the sale of goods or the rendition of services by Borrower, irrespective
of whether earned by performance, and any and all credit insurance, guaranties,
or security therefor.
<PAGE>
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with, that
Person. For purposes of this definition, "control" as applied to any Person
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of that Person, whether through the
ownership of voting securities, by contract, or otherwise.
"Agreement" means this Loan and Security Agreement and any extensions,
riders, supplements, notes, amendments, or modifications to or in connection
with this Loan and Security Agreement.
"Authorized Officer" means any officer of Borrower.
"Average Unused Portion of Maximum Amount" means (a) the Maximum Amount
less (b) the sum of: (i) the average Daily Balance of advances made by Foothill
under Section 2.1 that were outstanding during the immediately preceding month,
plus (ii) the average Daily Balance of the undrawn L/Cs and L/C Guarantees
issued by Foothill under Section 2.2 that were outstanding during the
immediately preceding month.
"Bankruptcy Code" means the United States Bankruptcy Code (11
U.S.C. ss. 101 et seq.), as amended, and any successor statute.
"Borrower" has the meaning set forth in the preamble to this
Agreement.
"Borrower's Books" means all of Borrower's books and records including:
ledgers; records indicating, summarizing, or evidencing Borrower's properties or
assets (including the Collateral) or liabilities; all information relating to
Borrower's business operations or financial condition; and all computer
programs, disc or tape files, printouts, runs, or other computer prepared
information.
"Borrowing Base" shall mean the sum of the individual borrowing base
calculations which are set forth in Section 2.1 for each of Mednet, MPC
Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc.,
Medi-Phar, Inc. and Medi-Claim,
Inc.
"Business Day" means any day which is not a Saturday, Sunday,
<PAGE>
or other day on which national banks are authorized or required to
close.
"Change of Control" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly,
of more than 20% of the total voting power of all classes of stock then
outstanding of Borrower normally entitled to vote in the election of directors.
"Closing Date" means the date of the initial advance hereunder or the date
of the initial issuance of an L/C or an L/C Guaranty hereunder, whichever occurs
first.
"Code" means the California Uniform Commercial Code.
"Collateral" means each of the following: the Accounts; Borrower's Books;
the Equipment; the General Intangibles; the Inventory; the Negotiable
Collateral; any money, or other assets of Borrower which now or hereafter come
into the possession, custody, or control of Foothill; and the proceeds and
products, whether tangible or intangible, of any of the foregoing including
proceeds of insurance covering any or all of the Collateral, and any and all
Accounts, Borrower's Books, Equipment, General Intangibles, Inventory,
Negotiable Collateral, money, deposit accounts, or other tangible or intangible
property resulting from the sale, exchange, collection, or other disposition of
any of the foregoing, or any portion thereof or interest therein, and the
proceeds thereof.
"Consolidated Current Assets" means, as of any date of determination, the
aggregate amount of all current assets of Borrower calculated on a consolidated
basis that would, in accordance with GAAP, be classified on a balance sheet as
current assets.
"Consolidated Current Liabilities" means, as of any date of determination,
the aggregate amount of all current liabilities of Borrower calculated on a
consolidated basis that would, in accordance with GAAP, be classified on a
balance sheet as current liabilities. For purposes of this definition, all
advances outstanding under this Agreement shall be deemed to be current
liabilities without regard to whether they would be deemed to be so under GAAP.
<PAGE>
"Daily Balance" means the amount of an Obligation owed at the
end of a given day.
"Dilution Reserve" means, as of the date of any determination of any of the
individual borrowing bases referred to in Section 2.1 of this Agreement, the
amount of five percent (5%), which Foothill has deemed sufficient as a reduction
in the advance rate against Eligible Accounts-Medi-Claim, Inc. and Eligible
Accounts-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals
of America, Inc. and Medi-Phar, Inc. for bad debt write-downs, discounts,
advertising, returns, promotions, credits, allowances, contra-accounts and other
offsets which reduce the value of the respective Accounts.
"Early Termination Premium" has the meaning set forth in
Section 3.5.
"Eligible Accounts" shall refer to the Eligible Accounts-Medi-
Claim, Inc. and the Eligible Accounts-Mednet, MPC Corporation,
Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and
Medi-Phar, Inc. collectively.
"Eligible Accounts-Medi-Claim, Inc." means those Accounts from which
payments are to be directed and made to a Lockbox Bank from Account Debtors
listed on Schedule A-1 attached hereto, evidenced by a written and signed (by
all parties thereto) contract which has not by its stated terms expired and
which is fully enforceable by Foothill as secured party and assignee of
Medi-Claim, Inc. pursuant to the provisions of this Agreement, the
identification of which is set forth on Schedule A-1 attached hereto, a copy of
which has been submitted to, reviewed by and approved by Foothill in its
reasonable discretion; such Account being created by Borrower in the ordinary
course of its business and arising out of Borrower's rendition of services in
connection with the processing of claims relating to the sale and/or provision
of pharmaceutical medications, drugs or similar goods, that strictly comply with
all of Borrower's representations and warranties to Foothill; that are, and at
all times shall continue to be, acceptable to Foothill in all respects;
provided, however, that standards of eligibility may be fixed and revised from
time to time by Foothill in Foothill's reasonable credit judgment. With respect
to the written contracts referred to above, after the Closing Date all contracts
for Eligible Accounts-Medi-Claim, Inc. shall be in the form attached to Schedule
A-1. Borrower and Lender agree and acknowledge that as of the Closing Date no
advances will be made against Eligible
<PAGE>
Accounts-Medi-Claim, Inc. as there are, at such time, no EligibleMedi-Claim,
Inc. Accounts and Borrower and Lender further agree that no advances will be
made against Eligible-Medi-Claim, Inc. Accounts until such time as the existing
contracts between MediClaim, Inc. and its Account Debtors are amended to a form
approved by Foothill and such Account Debtors contracts are included on Schedule
A-1 attached hereto.
Eligible Accounts-Medi-Claim, Inc. for purposes of this definition
shall not include the following:
(a) Accounts that the Account Debtor has failed to pay within one hundred
twenty (120) days of invoice date or Accounts with selling terms of more than
thirty (30) days and all Accounts owed by an Account Debtor that has failed to
pay fifty percent (50%) or more of its Accounts owed to Borrower within one
hundred twenty (120) days of invoice date;
(b) Accounts with respect to which the Account Debtor is an
officer, employee, Affiliate, or agent of Borrower;
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or other terms
by reason of which the payment by the Account Debtor may be conditional or
Accounts to which there exist a setoff, defense, counterclaim, the contract
terms for which contain language creating or suggesting that sums to be paid
thereunder are or could be subject to an actual, express, parol or constructive
trust or other impairment to payment of such Accounts;
(d) Accounts with respect to which the Account Debtor is not a resident of
the United States, and which are not either (i) covered by credit insurance in
form and amount, and by an insurer, satisfactory to Foothill, or (ii) supported
by one or more letters of credit that are assignable by their terms and have
been delivered to Foothill in an amount, of a tenor, and issued by a financial
institution, acceptable to Foothill;
(e) Accounts with respect to which the Account Debtor is the
United States or any department, agency, or instrumentality of the
United States;
(f) Accounts with respect to which Borrower is or may become liable to the
Account Debtor for goods sold or services rendered by the Account Debtor to
Borrower;
<PAGE>
(g) Accounts with respect to an Account Debtor of Medi-Claim,
Inc. whose total obligations owing to Medi-Claim, Inc. exceed ten
percent (10%) of all Eligible Accounts-Medi-Claim, Inc. to the
extent that the obligations owing by such Account Debtors exceed
ten percent (10%) of all Eligible Accounts-Medi-Claim, Inc.;
provided however that Accounts from the two largest Account Debtors
of Medi-Claim, Inc. (acceptable to or pre-approved by Foothill) in
excess of ten percent (10%) of all Eligible Accounts-Medi-Claim,
Inc. may each be eligible for inclusion up to fifteen percent (15%)
of all Eligible Accounts-Medi-Claim, Inc.;
(h) Accounts with respect to which the Account Debtor disputes liability or
makes any claim with respect thereto, or is subject to any Insolvency
Proceeding, or becomes insolvent, or goes out of business;
(i) Accounts the collection of which Foothill, in its reasonable credit
judgment, believes to be doubtful by reason of the Account Debtor's financial
condition;
(j) Accounts that are payable in other than United States
Dollars;
(k) Accounts that represent progress payments or other advance billings
that are due prior to the completion of performance by Borrower of the subject
contract for goods or services or Accounts which represent accrued sales;
(l) Accounts which are Rebate Receivables unless specifically approved by
Foothill for inclusion as Eligible Account-Medi-Claim, Inc. in which event such
specifically approved Rebate Receivables shall nonetheless be included only to
the extent allowed by Foothill;
(m) Accounts which represent sums due from consumers or
represent the co-pay or first dollar pay amounts from consumers;
and
(n) Accounts which Foothill deems in its reasonable credit judgement not to
be Eligible Accounts (including but not limited to all Accounts due from APS).
Schedule A-1 may be amended by the addition or deletion of Account Debtors and
by the addition and deletion of written and signed (by all parties thereto)
contracts which have not by their stated terms expired and which are fully
enforceable by Foothill as secured
<PAGE>
party and assignee of Medi-Claim, Inc. pursuant to the provisions of this
Agreement between Borrower and Account Debtors upon review and acceptance by
Foothill but Foothill reserves the right at all times to exercise its reasonable
discretion to determine whether any particular Account Debtor or contract form
shall qualify to be an Eligible Account-Medi-Claim, Inc. Borrower understands
and agrees that changes in laws applicable to pharmaceutical and health care
reimbursement may be the basis for Foothill's summary determination that certain
otherwise or previously determined Eligible Accounts-Medi-Claim, Inc. will not
after a date certain continue to be Eligible Accounts-Medi-Claim, Inc.
"Eligible Accounts-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family
Pharmaceuticals of America, Inc. and Medi-Phar, Inc." calculated on an
individual basis for each of Mednet, MPC Corporation, Medi-Mail, Inc., Family
Pharmaceuticals of America, Inc. and Medi-Phar, Inc., means those Accounts from
which payments are to be directed and made to a Lockbox Bank from Account
Debtors; such Account being created by Mednet, MPC Corporation, Medi-Mail, Inc.,
Family Pharmaceuticals of America, Inc. or Medi-Phar, Inc. in the ordinary
course of its business and arising out of Mednet, MPC Corporation's, Medi-Mail,
Inc.'s, Family Pharmaceuticals of America, Inc.'s or Medi-Phar, Inc.'s sale of
pharmaceutical medications, drugs or similar goods or the rendition of services
in connection with the sale and/or provision of pharmaceutical medications,
drugs or similar goods, that strictly comply with all of Mednet, MPC
Corporation's, Medi-Mail, Inc.'s, Family Pharmaceuticals of America, Inc.'s or
Medi-Phar, Inc.'s representations and warranties to Foothill; that are, and at
all times shall continue to be, acceptable to Foothill in all respects;
provided, however, that standards of eligibility may be fixed and revised from
time to time by Foothill in Foothill's reasonable credit judgment.
Eligible Accounts-Mednet, MPC Corporation, Inc., Medi-Mail, Inc.,
Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. for
purposes of this definition shall not include the following:
(a) Accounts that the Account Debtor has failed to pay within one hundred
twenty (120) days of invoice date or Accounts with selling terms of more than
thirty (30) days and all Accounts owed by an Account Debtor that has failed to
pay fifty percent (50%) or more of its Accounts owed to Borrower within one
hundred twenty (120) days of invoice date;
<PAGE>
(b) Accounts with respect to which the Account Debtor is an
officer, employee, Affiliate, or agent of Borrower;
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or other terms
by reason of which the payment by the Account Debtor may be conditional or
Accounts to which there exist a setoff, defense, counterclaim or Accounts which
create or suggest that sums to be paid thereunder are or could be subject to an
actual, express, parol or constructive trust or other impairment to payment of
such Accounts;
(d) Accounts with respect to which the Account Debtor is not a resident of
the United States, and which are not either (i) covered by credit insurance in
form and amount, and by an insurer, satisfactory to Foothill, or (ii) supported
by one or more letters of credit that are assignable by their terms and have
been delivered to Foothill in an amount, of a tenor, and issued by a financial
institution, acceptable to Foothill;
(e) Accounts with respect to which the Account Debtor is the
United States or any department, agency, or instrumentality of the
United States;
(f) Accounts with respect to which Borrower is or may become liable to the
Account Debtor for goods sold or services rendered by the Account Debtor to
Borrower;
(g) Accounts with respect to an Account Debtor of Mednet, MPC
Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America,
Inc. and Medi-Phar, Inc. whose total obligations owing to Mednet,
MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of
America, Inc. and Medi-Phar, Inc. exceed ten percent (10%) of all
Eligible Accounts-Mednet, MPC Corporation, Medi-Mail, Inc., Family
Pharmaceuticals of America, Inc. and Medi-Phar, Inc., Inc. to the
extent that the obligations owing by such Account Debtors exceed
ten percent (10%) of all Eligible Accounts-Mednet, MPC Corporation,
Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-
Phar, Inc.; provided however that Accounts from the two largest
Account Debtors of Mednet, MPC Corporation, Medi-Mail, Inc., Family
Pharmaceuticals of America, Inc. and Medi-Phar, Inc. (as a group
and otherwise acceptable to or pre-approved by Foothill) in excess
of ten percent (10%) of all Eligible Accounts-Mednet, MPC
Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America,
Inc. and Medi-Phar, Inc. may be eligible for inclusion up to
<PAGE>
fifteen percent (15%) of all Eligible Accounts-Mednet, MPC
Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America,
Inc. and Medi-Phar, Inc.;
(h) Accounts with respect to which the Account Debtor disputes liability or
makes any claim with respect thereto, or is subject to any Insolvency
Proceeding, or becomes insolvent, or goes out of business;
(i) Accounts the collection of which Foothill, in its reasonable credit
judgment, believes to be doubtful by reason of the Account Debtor's financial
condition;
(j) Accounts that are payable in other than United States
Dollars;
(k) Accounts that represent progress payments or other advance billings
that are due prior to the completion of performance by Borrower of the subject
contract for goods or services or Accounts which represent accrued sales;
(l) Accounts which are Rebate Receivables unless specifically
approved by Foothill for inclusion as Eligible Account-Mednet, MPC
Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America,
Inc. and Medi-Phar, Inc. in which event such specifically approved
Rebate Receivables shall nonetheless be included only to the extent
allowed by Foothill and shall be net of any prepayment by the
Account Debtor and net of any amounts payable by any Borrower
entity to any other party;
(m) Accounts which represent sums due from Account Debtors of Medi-Phar,
Inc. until such time as all existing security interests and liens on such
Accounts are released of record with all applicable filing authorities in
California;
(n) Accounts due to Medi-Mail, Inc. which in the reasonable credit
judgement of Foothill may not be collectible in whole or in part due to the
Borrower or any one or more of them not having the required license, permit or
registration from jurisdictions requiring such for the shipment of
pharmaceuticals by mail or other methods from such jurisdiction or from
jurisdictions requiring a license, permit or registration for the shipment of
pharmaceuticals by mail or other methods into such jurisdiction;
(o) Accounts which represent sums due from consumers or
<PAGE>
represent the co-pay or first dollar pay amounts from consumers;
and
(p) Accounts which Foothill deems in its reasonable credit judgement not to
be Eligible Accounts (including but not limited to all Accounts due from APS).
Foothill reserves the right at all times to exercise its reasonable discretion
to determine whether any particular Account Debtor shall qualify to be an
Eligible Account. Borrower understands and agrees that changes in laws
applicable to pharmaceutical and health care reimbursement may be the basis for
Foothill's summary determination that certain otherwise or previously determined
Eligible AccountsEligible Accounts-Mednet, MPC Corporation, Inc., Medi-Mail,
Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. will not after
a date certain continue to be Eligible Accounts-Eligible Accounts-Mednet, MPC
Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and
Medi-Phar, Inc.
"Eligible Inventory" means Inventory consisting of good and marketable
first quality medications, prescription drugs and pharmacy items, as to which
there shall be no legal or contractual limitations restricting, proscribing or
otherwise prohibiting, in any way, the ability of the Borrower to freely sell,
transfer or otherwise dispose of same (other than licensing laws as to which
Borrower is in full compliance), which have effective use and shelf life dates
which have not expired as of the date of determination, held for sale in the
ordinary course of Borrower's business, located at Borrower's premises
identified on Schedule E-1 and with respect to such premises Foothill shall have
received a landlord waiver and license agreement or an Agreement of Lessor to
Borrower's Assignment of Lease in form satisfactory to Foothill, and which are
acceptable to Foothill in all respects (provided, however, that standards of
eligibility may be fixed and revised from time to time by Foothill in Foothill's
reasonable credit judgment), and that strictly comply with all of Borrower's
representations and warranties to Foothill. Eligible Inventory shall not include
slow moving or obsolete items, items subject to recall by manufacturers,
distributors or any federal or state regulatory agency or unit, restrictive or
custom items, packaging and shipping materials, supplies used or consumed in
Borrower's business, Inventory at any location other than those set forth on
Schedule E-1 or if with respect to such premises Foothill shall not have
received a landlord waiver and license agreement or an Agreement of Lessor to
Borrower's Assignment of Lease in form
<PAGE>
satisfactory to Foothill, Inventory subject to a security interest or lien in
favor of any third Person, bill and hold items, Inventory that is not subject to
Foothill's perfected security interest, returned or defective goods, "seconds,"
or Inventory acquired on consignment. Inventory shall not be Eligible Inventory
if Borrower shall not have a current license to sell at retail such item, if a
license is necessary, or Borrower shall not have obtained the required licenses
or made the required registrations with applicable governmental authorities in
connection with the operation of its business within a State or in connection
with the operation of a mail order pharmacy in the State of such pharmacy's
location and in each state into which pharmaceutical items are sold or
delivered. Eligible Inventory shall be valued at the lower of Borrower's cost or
market value.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, machine tools, motors, equipment, furniture, furnishings, fixtures,
vehicles (including motor vehicles and trailers), tools, parts, dies, jigs,
goods (other than consumer goods, farm products, or Inventory), wherever
located, and any interest of Borrower in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, or any predecessor, successor, or superseding laws of
the United States of America, together with all regulations promulgated
thereunder.
"ERISA Affiliate" means any trade or business (whether or not incorporated)
which, within the meaning of Section 414 of the IRC, is: (i) under common
control with Borrower; (ii) treated, together with Borrower, as a single
employer; (iii) treated as a member of an affiliated service group of which
Borrower is also treated as a member; or (iv) is otherwise aggregated with the
Borrower for purposes of the employee benefits requirements listed in IRC
Section 414(m)(4).
"ERISA Event" means any one or more of the following: (i) a Reportable
Event with respect to a Qualified Plan or a Multiemployer Plan; (ii) a
Prohibited Transaction with respect to any Plan; (iii) a complete or partial
withdrawal by Borrower or any ERISA Affiliate from a Multiemployer Plan; (iv)
the complete or partial withdrawal of Borrower or an ERISA Affiliate from a
Qualified Plan during a plan year in which it was, or was treated
<PAGE>
as, a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (v) a
failure to make full payment when due of all amounts which, under the provisions
of any Plan or applicable law, Borrower or any ERISA Affiliate is required to
make; (vi) the filing of a notice of intent to terminate, or the treatment of a
plan amendment as a termination, under Sections 4041 or 4041A of ERISA; (vii) an
event or condition which might reasonably be expected to constitute grounds
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Qualified Plan or Multiemployer Plan; (viii) the
imposition of any liability under Title IV of ERISA, other than PBGC premiums
due but not delinquent under Section 4007 of ERISA, upon Borrower or any ERISA
Affiliate; and (ix) a violation of the applicable requirements of Sections 404
or 405 of ERISA, or the exclusive benefit rule under Section 403(c) of ERISA, by
any fiduciary or disqualified person with respect to any Plan for which Borrower
or any ERISA Affiliate may be directly or indirectly liable.
"Event of Default" has the meaning set forth in Section 8.
"FEIN" means Federal Employer Identification Number.
"Foothill" has the meaning set forth in the preamble to this
Agreement.
"Foothill Expenses" means all: costs or expenses (including taxes,
photocopying, notarization, telecommunication and insurance premiums) required
to be paid by Borrower under any of the Loan Documents that are paid or advanced
by Foothill; documentation, filing, recording, publication, appraisal (including
periodic Collateral appraisals), real estate survey, environmental audit, and
search fees assessed, paid, or incurred by Foothill in connection with
Foothill's transactions with Borrower; costs and expenses incurred by Foothill
in the disbursement of funds to Borrower (by wire transfer or otherwise);
charges paid or incurred by Foothill resulting from the dishonor of checks;
costs and expenses paid or incurred by Foothill to correct any default or
enforce any provision of the Loan Documents, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral, or any portion thereof,
irrespective of whether a sale is consummated; costs and expenses paid or
incurred by Foothill in examining Borrower's Books; costs and expenses of third
party claims or any other suit paid or incurred by Foothill in enforcing or
defending the Loan Documents; and Foothill's reasonable
<PAGE>
attorneys fees and expenses incurred in advising, structuring, drafting,
reviewing, administering, amending, terminating, enforcing (including attorneys
fees and expenses incurred in connection with a "workout," a "restructuring," or
an Insolvency Proceeding concerning Borrower), defending, or concerning the Loan
Documents, irrespective of whether suit is brought.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, consistently applied.
"General Intangibles" means all of Borrower's present and future general
intangibles and other personal property (including contract rights, rights
arising under common law, statutes, or regulations, choses or things in action,
goodwill, patents, trade names, trademarks, servicemarks, copyrights,
blueprints, drawings, purchase orders, customer lists, monies due or recoverable
from pension funds, route lists, rights to payment and other rights under any
royalty or licensing agreements, infringements, claims, computer programs,
computer discs, computer tapes, literature, reports, catalogs, deposit accounts,
insurance premium rebates, tax refunds, and tax refund claims), other than
goods, Accounts, and Negotiable Collateral.
"Hazardous Materials" means all or any of the following: (a) substances
that are defined or listed in, or otherwise classified pursuant to, any
applicable laws or regulations as "hazardous substances," "hazardous materials,"
"hazardous wastes," "toxic substances," or any other formulation intended to
define, list, or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity,
or "EP toxicity"; (b) oil, petroleum, or petroleum derived substances, natural
gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and
other wastes associated with the exploration, development, or production of
crude oil, natural gas, or geothermal resources; (c) any flammable substances or
explosives or any radioactive materials; and (d) asbestos in any form or
electrical equipment which contains any oil or dielectric fluid containing
levels of polychlorinated biphenyls in excess of fifty (50) parts per million.
"Indebtedness" means: (a) all obligations of Borrower for borrowed money;
(b) all obligations of Borrower evidenced by bonds, debentures, notes, or other
similar instruments (other than Preferred Class A and Class B Stock) and all
reimbursement or other
<PAGE>
obligations of Borrower in respect of letters of credit, letter of credit
guaranties, bankers acceptances, interest rate swaps, controlled disbursement
accounts, or other financial products; (c) all obligations under capital leases;
(d) all obligations or liabilities of others secured by a lien or security
interest on any property or asset of Borrower, irrespective of whether such
obligation or liability is assumed; and (e) any obligation of Borrower
guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made,
discounted, or sold with recourse to Borrower) any indebtedness, lease,
dividend, letter of credit, or other obligation of any other Person.
"Insolvency Proceeding" means any proceeding commenced by or against any
Person under any provision of the Bankruptcy Code or under any other bankruptcy
or insolvency law, including assignments for the benefit of creditors, formal or
informal moratoria, compositions, extensions generally with its creditors, or
proceedings seeking reorganization, arrangement, or other similar relief.
"Inventory" means all present and future inventory in which Borrower has
any interest, including medications, prescription drugs and pharmacy items held
for sale and all of Borrower's present and future packing and shipping
materials, wherever located, and any documents of title representing any of the
above.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"L/C" has the meaning set forth in Section 2.2(a).
"L/C Guaranty" has the meaning set forth in Section 2.2(a).
"Loan Documents" means this Agreement, the Lockbox Agreements, any other
note or notes executed by Borrower and payable to Foothill, and any other
agreement entered into in connection with this Agreement.
"Lockbox Account" shall mean the depositary account established pursuant to
the respective Lockbox Agreement.
"Lockbox Agreements" means those certain Lockbox Operating Procedural
Agreements and those certain Depository Account Agreements, in form and
substance satisfactory to Foothill, each of which is among Borrower, Foothill,
and one of the Lockbox Banks.
<PAGE>
"Lockbox Banks" means as to Medi-Mail, Inc. in Nevada-First
Interstate Bank of Nevada; as to Medi-Mail, Inc. in Chicago-First
Chicago Bank and Trust Company; as to Medi-Mail, Inc. in South
Carolina-NationsBank; as to Medi-Claim, Inc.- Mellon Bank and Trust
Company; as to Medi-Phar, Inc. in Nevada-First-Interstate Bank of
Nevada; as to Medi-Phar, Inc. in California-First Interstate Bank.
"Maximum Amount" has the meaning set forth in Section 2.1(c).
"Multiemployer Plan" means a multiemployer plan as defined in Sections
3(37) or 4001(a)(3) of ERISA or Section 414 of the IRC in which employees of
Borrower or an ERISA Affiliate participate or to which Borrower or any ERISA
Affiliate contribute or are required to contribute.
"Negotiable Collateral" means all of Borrower's present and future letters
of credit, notes, drafts, instruments, certificated and uncertificated
securities (including the shares of stock of subsidiaries of Borrower),
documents, personal property leases (wherein Borrower is the lessor), chattel
paper, and Borrower's Books relating to any of the foregoing.
"Obligations" means all loans, advances, debts, principal, interest
(including any interest that, but for the provisions of the Bankruptcy Code,
would have accrued), contingent reimbursement obligations owing to Foothill
under any outstanding L/Cs or L/C Guarantees, premiums (including Early
Termination Premiums), liabilities (including all amounts charged to Borrower's
loan account pursuant to any agreement authorizing Foothill to charge Borrower's
loan account), obligations, fees, lease payments, guaranties, covenants, and
duties owing by Borrower to Foothill of any kind and description (whether
pursuant to or evidenced by the Loan Documents, by any note or other instrument,
or pursuant to any other agreement between Foothill and Borrower, and
irrespective of whether for the payment of money), whether direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter arising,
and including any debt, liability, or obligation owing from Borrower to others
that Foothill may have obtained by assignment or otherwise, and further
including all interest not paid when due and all Foothill Expenses that Borrower
is required to pay or reimburse by the Loan Documents, by law, or otherwise.
"Old Lender" shall mean McKesson Corporation, Bergen Brunswig
Drug Company and John W. Richards, Jr., John W. Richards, Sr., W.
Kim Richardson and Thomas A. Dodd.
<PAGE>
"Overadvance" has the meaning set forth in Section 2.4.
"Pay-Off Letter" means a letter or letters, in form and substance
reasonably satisfactory to Foothill, from Old Lender respecting the amount
necessary to repay in full all of the obligations of Borrower owing to Old
Lender and obtain a termination or release of all of the security interests or
liens existing in favor of Old Lender in and to the properties or assets of
Borrower.
"PBGC" means the Pension Benefit Guaranty Corporation as defined in Title
IV of ERISA, or any successor thereto.
"Permitted Liens" means: (a) liens and security interests held by Foothill;
(b) liens for unpaid taxes that are not yet due and payable; (c) liens and
security interests set forth on Schedule P-1 attached hereto; (d) purchase money
security interests and liens of lessors under capital leases to the extent that
the acquisition or lease of the underlying asset was permitted under Section
7.10, and so long as the security interest or lien only secures the purchase
price of the asset; (e) easements, rights of way, reservations, covenants,
conditions, restrictions, zoning variances, and other similar encumbrances that
do not materially interfere with the use or value of the property subject
thereto; (f) obligations and duties as lessee under any lease existing on the
date of this Agreement; (g) mechanics', materialmen's, warehousemen's, or
similar liens that arise by operation of law; and (h) exceptions listed in the
title insurance or commitment therefor to be delivered by Borrower hereunder.
"Permitted Protest" means the right of Borrower to protest any lien, tax,
rental payment, or other charge, other than any such lien or charge that secures
the Obligations, provided (i) a reserve with respect to such obligation is
established on the books of Borrower in an amount that is reasonably
satisfactory to Foothill, (ii) any such protest is instituted and diligently
prosecuted by Borrower in good faith, and (iii) Foothill is satisfied that,
while any such protest is pending, there will be no impairment of the
enforceability, validity, or priority of any of the liens or security interests
of Foothill in and to the property or assets of Borrower.
"Person" means and includes natural persons, corporations, limited
partnerships, general partnerships, joint ventures, trusts, land trusts,
business trusts, or other organizations, irrespective
<PAGE>
of whether they are legal entities, and governments and agencies
and political subdivisions thereof.
"Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA)
which Borrower or any ERISA Affiliate sponsors or maintains or to which Borrower
or any ERISA Affiliate makes, is making, or is obligated to make contributions,
including any Multiemployer Plan or Qualified Plan.
"Prohibited Transaction" means any transaction described in Section 406 of
ERISA which is not exempt by reason of Section 408 of ERISA, and any transaction
described in Section 4975(c) of the IRC which is not exempt by reason of Section
4975(c) of the IRC.
"Qualified Plan" means a pension plan (as defined in Section 3(2) of ERISA)
intended to be tax-qualified under Section 401(a) of the IRC which Borrower or
any ERISA Affiliate sponsors, maintains, or to which any such person makes, is
making, or is obligated to make, contributions, or, in the case of a
multiple-employer plan (as described in Section 4064(a) of ERISA), has made
contributions at any time during the immediately preceding period covering at
least five (5) plan years, but excluding any Multiemployer Plan.
"Rebate Receivable" means an Account arising under a written agreement
entitled "Pharmaceutical Rebate Services Agreement" or any other agreement
whereby a receivable is anticipated from a pharmaceutical manufacturer or
distributor for a rebate resulting from volume purchases or under any
circumstance where a deduction or refund or remuneration, in cash or in kind,
from a stipulated payment, charge or rate, not taken out in advance of payment,
but handed back after payment of the stipulated payment which is obtained by
Borrower and such refund of remuneration arises from the purchase or sale of
drugs or other pharmaceutical items.
"Reference Rate" means the highest of the variable rates of interest, per
annum, most recently announced by (a) Bank of America, N.T. & S.A., (b) Mellon
Bank, N.A., and (c) Citibank, N.A., or any successor to any of the foregoing
institutions, as its "prime rate" or "reference rate," as the case may be, as
established from time to time, irrespective of whether such announced rate is
the best rate available from such financial institution.
"Renewal Date" has the meaning set forth in Section 3.3.
"Reportable Event" means any event described in Section 4043
<PAGE>
(other than Subsections (b)(7) and (b)(9)) of ERISA.
"Secondary Dilution Reserve" means, as of the date of any determination of
the individual borrowing base calculations for each of the individual Borrower's
borrowing bases, an additional amount in excess of the Dilution Reserve,
sufficient to reduce Foothill's advance rate against Eligible
Accounts-Medi-Claim, Inc. and Eligible Accounts-Mednet, MPC Corporation, Inc.,
Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. by
one percentage point for each percentage point by which the amount (expressed as
a percentage and based upon the experience of the immediately prior three (3)
months) of Borrower's Accounts that are subject to bad debt write-downs,
discounts, advertising, returns, promotions, credits, allowances,
contra-accounts and other offsets which reduce the value of the respective
Accounts or other dilution is in excess of one percent (1%).
"Solvent" means, with respect to any Person on a particular date, that on
such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in business or a transaction, and is not about to engage in business or a
transaction, for which such Person's properties and assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practices in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that reasonably can
be expected to become an actual or matured liability.
"Tangible Net Worth" means, as of the date any determination
thereof is to be made, the difference of: (a) Borrower's total
stockholder's equity; minus (b) the sum of: (i) all intangible
assets of Borrower; (ii) all of Borrower's prepaid expenses; and
<PAGE>
(iii) all amounts due to Borrower from Affiliates, calculated on a
consolidated basis.
"Unfunded Benefit Liability" means the excess of a Plan's benefit
liabilities (as defined in Section 4001(a)(16) of ERISA) over the current value
of such Plan's assets, determined in accordance with the assumptions used by the
Plan's actuaries for funding the Plan pursuant to Section 412 of the IRC for the
applicable plan year.
"Voidable Transfer" has the meaning set forth in Section 15.8.
1.2 Accounting Terms. All accounting terms not specifically defined herein shall
be construed in accordance with GAAP. When used herein, the term "financial
statements" shall include the notes and schedules thereto. Whenever the term
"Borrower" is used in respect of a financial covenant or a related definition,
it shall be understood to mean Borrower on a consolidated basis unless the
context clearly requires otherwise.
1.3 Code. Any terms used in this Agreement that are defined in the Code shall be
construed and defined as set forth in the Code unless otherwise defined herein.
1.4 Construction. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, references to the
singular include the plural, the term "including" is not limiting, and the term
"or" has, except where otherwise indicated, the inclusive meaning represented by
the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement. Section, subsection, clause,
schedule, and exhibit references are to this Agreement unless otherwise
specified. Any reference in this Agreement or in the Loan Documents to this
Agreement or any of the Loan Documents shall include all alterations,
amendments, changes, extensions, modifications, renewals, replacements,
substitutions, and supplements, thereto and thereof, as applicable.
1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this
Agreement shall be deemed incorporated herein by reference.
1.6 Joint and Several Borrowing. Each of Mednet, MPC Corporation,
<PAGE>
Medi-Mail, Inc., Family Pharmaceuticals of America, Inc., MediClaim, Inc. and
Medi-Phar, Inc. agree that for borrowing purposes a separate borrowing base
shall be calculated for each entity in accordance with Section 2.1 of this
Agreement and that no entity shall be entitled to receive a greater advance than
the borrowing base calculated for each such entity in accordance with the
provisions of Section 2.1 of this Agreement. All advances hereunder shall be
made to Mednet, MPC Corporation as the parent corporation for itself and as
agent for each of the other individual Borrower entities and Mednet, MPC
Corporation and each of the other individual entities agrees that Mednet, MPC
Corporation shall be responsible for the allocation and distribution to each of
the individual Borrower entities such amounts of each advance as are necessary
to meet the operating and administrative needs of each company. Each of
Medi-Mail, Inc., Family Pharmaceuticals of America, Inc., Medi-Claim, Inc. and
MediPhar, Inc. constitute and appoint Mednet, MPC Corporation as their
respective agent for borrowing purposes to receive all advances hereunder and
that they as an integrated family of companies will allocate and distribute such
amounts of each Advance as shall be necessary such that Foothill need only deal
with and advance to Mednet, MPC Corporation.
2. LOAN AND TERMS OF PAYMENT.
2.1 Revolving Advances.
(a) Subject to the terms and conditions of this Agreement, Foothill agrees
to make revolving advances to Borrower in an amount at any one time outstanding
not to exceed the aggregate sum of all of the individual borrowing bases for
each of the individual entities constituting Borrower (the sum of the individual
borrowing bases are hereinafter referred to as "Borrowing Base") less the
undrawn or unreimbursed amount of L/Cs and L/C Guarantees outstanding hereunder.
For purposes of this Agreement, the individual borrowing bases, as of any date
of determination, shall mean the sum of:
(i) an amount equal to the lesser of:
(a) eighty-five percent (85%) of the amount of Eligible
Accounts-Medi-Claim, Inc. less the Dilution Reserve and less the
Secondary Dilution Reserve, if any, (Borrower acknowledges and
agrees that as of the Closing Date no advances will be made against
Eligible Accounts-Medi-Claim, Inc. as there are no Eligible
<PAGE>
Accounts-Medi-Claim, Inc. on the Closing Date; such advances to be made only
after Foothill has reviewed and approved for inclusion on Schedule A-1 hereto
all written contracts and contract amendment letters submitted by Borrower) plus
for each of the other entities comprising Borrower, calculated separately,
eighty-five percent (85%) of the amount of Eligible Accounts-Mednet, MPC
Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and
Medi-Phar, Inc. less the Dilution Reserve (applied to each such entity
calculation) and less the Secondary Dilution Reserve (applied to each such
entity calculation), if any. With respect to the calculations in this subsection
(i), Accounts arising from contracts entitled "Chain Pharmacy Network Agreement"
shall be included only to the extent the receivables are otherwise Eligible
Receivables and shall be net of any prepayment by the Account Debtor and net of
any trust funds or prepayments by such Account Debtor or Accounts arising under
contracts entitled "Sponsor Agreement" but with respect to such Sponsor
Agreement receivables, the receivables which shall be eligible shall be net of
any prepaid amounts by such Account Debtors; or
(b) an amount equal to Borrower's collections with respect to
Accounts for the immediately preceding thirty (30) day period; plus
(ii) for an initial period of ninety (90) days after the Closing Date, provided
that monthly physical inventories are performed and the results thereof are
satisfactory to Foothill, in its sole discretion, and further provided the
landlords, owners and sublessors of the locations at which the Inventory
consisting of Eligible Inventory is located have provided to Foothill an
appropriate landlord waiver and consent or Agreement of Landlord to Borrowers
Assignment of Lease, an amount equal to the lowest of: (x) sixty percent (60%)
of the amount of Eligible Inventory, (y) 50% of the amount of credit
availability created by Section 2.1(a)(i) above or (z) One Million Two Hundred
Thousand Dollars ($1,200,000). Borrower acknowledges and agrees that ninety (90)
days after the Closing Date no further advances will be made against Inventory
unless Borrower has implemented a perpetual inventory reporting and tracking
system (a perpetual inventory reporting and tracking system is one that is
consistent with industry standards and proves after testing, that variances, in
count or cost of all covered inventory items, are less than 3% from the actual
cost or count of such covered inventory after physical count and audit)
acceptable to Foothill in its sole discretion and a test of such perpetual
inventory reporting and tracking system by Foothill with the results of such
test being satisfactory to
<PAGE>
Foothill in its sole discretion. After Foothill has been satisfied with the
implementation and performance of the perpetual inventory reporting and tracking
system monthly physical inventories need not continue to be performed and
advances against Eligible Inventory may be made by Foothill, in its sole
discretion, an amount equal to the lowest of: (x) sixty percent (60%) of the
amount of Eligible Inventory, (y) 50% of the amount of credit availability
created by Section 2.1(a)(i) above or (z) Six Million Dollars ($6,000,000).
Foothill agrees that if Borrower is able to implement the perpetual inventory
reporting and tracking system referred to above which is acceptable to Foothill
in its sole discretion and the test of such system is satisfactory to Foothill
in its sole discretion prior to ninety (90) days after the Closing Date, then
the One Million Two Hundred Thousand ($1,200,000) Dollar limitation set forth in
Section 2.1(a)(ii)(z) above shall be eliminated and a limitation of Six Million
($6,000,000) Dollars shall be inserted in lieu therefor.
(b) Anything to the contrary in Section 2.1(a) above notwithstanding,
Foothill may reduce its advance rates based upon Eligible Accounts or Eligible
Inventory without declaring an Event of Default if it determines, in its
reasonable discretion, that there is a material impairment of the prospect of
repayment of all or any portion of the Obligations or a material impairment of
the value or priority of Foothill's security interests in the Collateral.
(c) Foothill shall have no obligation to make advances hereunder to
the extent they would cause the aggregate outstanding Obligations at any time to
exceed Twenty Million Dollars ($20,000,000) ("Maximum Amount").
(d) Foothill is authorized to make advances under this Agreement based
upon telephonic or other instructions received from anyone purporting to be an
Authorized Officer of Borrower, or without instructions if pursuant to Section
2.5(d). Borrower agrees to establish and maintain a single designated deposit
account for the purpose of receiving the proceeds of the advances requested by
Borrower and made by Foothill hereunder. Unless otherwise agreed by Foothill and
Borrower, any advance requested by Borrower and made by Foothill hereunder shall
be made to such designated deposit account. Amounts borrowed pursuant to this
Section 2.1 may be repaid and, subject to the terms and conditions of this
Agreement, reborrowed at any time during the term of this Agreement.
<PAGE>
2.2 Letters of Credit and Letter of Credit Guarantees.
(a) Subject to the terms and conditions of this Agreement,
Foothill agrees to issue commercial or standby letters of credit for the account
of Borrower (each, an "L/C") or to issue standby letters of credit or guarantees
of payment (each such letter of credit or guaranty, an "L/C Guaranty") with
respect to commercial or standby letters of credit issued by another Person for
the account of Borrower in an aggregate face amount not to exceed the lesser of:
(i) the Borrowing Base less the amount of advances outstanding pursuant to
Section 2.1, or (ii) Three Million Dollars ($3,000,000). Borrower expressly
understands and agrees that Foothill shall have no obligation to arrange for the
issuance by other financial institutions of letters of credit that are to be the
subject of L/C Guarantees. Borrower and Foothill acknowledge and agree that
certain of the letters of credit that are to be the subject of L/C Guarantees
may be outstanding on the Closing Date. Each L/C and each letter of credit that
is the subject of an L/C Guaranty shall have an expiry date no later than sixty
(60) days prior to the date on which this Agreement is scheduled to terminate
under Section 3.3 (without regard to any potential renewal term) and all such
L/Cs and letters of credit (and the applicable L/C Guarantees) shall be in form
and substance acceptable to Foothill in its sole discretion. Foothill shall not
have any obligation to issue L/Cs or L/C Guarantees to the extent that the face
amount of all outstanding L/Cs and L/C Guarantees, plus the amount of advances
outstanding pursuant to Section 2.1, would exceed Twenty Million Dollars
($20,000,000). The L/Cs and the L/C Guarantees issued under this Section 2.2
shall be used by Borrower, consistent with this Agreement, for its general
working capital purposes or to support its obligations with respect to workers'
compensation premiums or other similar obligations. If Foothill is obligated to
advance funds under an L/C or L/C Guaranty, the amount so advanced immediately
shall be deemed to be an advance made by Foothill to Borrower pursuant to
Section 2.1 and, thereafter, shall bear interest at the rates then applicable
under Section 2.5.
(b) Borrower hereby agrees to indemnify, save, defend, and hold
Foothill harmless from any loss, cost, expense, or liability, including payments
made by Foothill, expenses, and reasonable attorneys fees incurred by Foothill
arising out of or in connection with any L/Cs or L/C Guarantees. Borrower agrees
to be bound by the issuing bank's regulations and interpretations of any letters
of credit guarantied by Foothill and opened to or for Borrower's account or by
Foothill's interpretations of any L/C
<PAGE>
issued by Foothill to or for Borrower's account, even though this interpretation
may be different from Borrower's own, and Borrower understands and agrees that
Foothill shall not be liable for any error, negligence, or mistakes, whether of
omission or commission, in following Borrower's instructions or those contained
in the L/Cs or any modifications, amendments, or supplements thereto. Borrower
understands that the L/C Guarantees may require Foothill to indemnify the
issuing bank for certain costs or liabilities arising out of claims by Borrower
against such issuing bank. Borrower hereby agrees to indemnify, save, defend,
and hold Foothill harmless with respect to any loss, cost, expense (including
attorneys fees), or liability incurred by Foothill under any L/C Guaranty as a
result of Foothill's indemnification of any such issuing bank.
(c) Borrower hereby authorizes and directs any bank that issues a
letter of credit guaranteed by Foothill to deliver to Foothill all instruments,
documents, and other writings and property received by the issuing bank pursuant
to such letter of credit, and to accept and rely upon Foothill's instructions
and agreements with respect to all matters arising in connection with such
letter of credit and the related application. Borrower may or may not be the
"applicant" or "account party" with respect to such letter of credit.
(d) Any and all service charges, commissions, fees, and costs incurred
by Foothill relating to the letters of credit guaranteed by Foothill shall be
considered Foothill Expenses for purposes of this Agreement and immediately
shall be reimbursable by Borrower to Foothill. On the first day of each month,
Borrower will pay Foothill a fee equal to two and one-half percent (2.5%) per
annum times the average Daily Balance of the L/Cs and L/C Guarantees that were
outstanding during the immediately preceding month. Service charges,
commissions, fees, and costs may be charged to Borrower's loan account at the
time the service is rendered or the cost is incurred.
(e) Immediately upon the termination of this Agreement, Borrower
agrees to either: (i) provide cash collateral to be held by Foothill in an
amount equal to the maximum amount of Foothill's obligations under L/Cs plus the
maximum amount of Foothill's obligations to any Person under outstanding L/C
Guarantees, or (ii) cause to be delivered to Foothill releases of all of
Foothill's obligations under its outstanding L/Cs and L/C Guarantees. At
Foothill's discretion, any proceeds of Collateral received by
<PAGE>
Foothill after the occurrence and during the continuation of an Event of Default
may be held as the cash collateral required by this Section 2.2(e).
2.3 Intentionally Deleted.
2.4 Overadvances. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Foothill pursuant to Sections 2.1 and 2.2 is
greater than either the dollar or percentage limitations set forth in Sections
2.1 or 2.2 (an "Overadvance"), Borrower immediately shall pay to Foothill, in
cash, the amount of such excess to be used by Foothill first, to repay
non-contingent Obligations and, thereafter, to be held by Foothill as cash
collateral to secure Borrower's obligation to repay Foothill for all amounts
paid pursuant to L/Cs or L/C Guarantees.
2.5 Interest: Rates, Payments, and Calculations.
(a) Interest Rate. All Obligations, except for undrawn L/Cs and L/C
Guarantees shall bear interest, on the average Daily Balance, at a per annum
rate of one and one-half (1.5) percentage points above the Reference Rate.
(b) Default Rate. (i) All Obligations, except for undrawn L/Cs and L/C
Guarantees shall bear interest, from and after the occurrence and during the
continuance of an Event of Default, at a per annum rate equal to five (5.0)
percentage points above the Reference Rate. (ii) From and after the occurrence
and during the continuance of an Event of Default, the fee provided in Section
2.2(d) shall be increased to a fee equal to seven and one-half percent (7.5%)
per annum times the average Daily Balance of the undrawn L/Cs and L/C Guarantees
that were outstanding during the immediately preceding month.
(c) Minimum Interest. In no event shall the rate of
interest chargeable hereunder be less than eight percent (8%) per
annum.
(d) Payments. Interest hereunder shall be due and payable, in arrears,
on the first day of each month during the term hereof. Borrower hereby
authorizes Foothill, at its option, without prior notice to Borrower, to charge
such interest, all Foothill Expenses (as and when incurred), and all
installments or other payments due under any other note or other Loan Document
to
<PAGE>
Borrower's loan account, which amounts thereafter shall accrue interest at the
rate then applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(e) Computation. The Reference Rate as of the date of this Agreement
is eight and one-half percent (8.50%) per annum. In the event the Reference Rate
is changed from time to time hereafter, the applicable rate of interest
hereunder automatically and immediately shall be increased or decreased by an
amount equal to such change in the Reference Rate. All interest and fees
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
(f) Intent to Limit Charges to Maximum Lawful Rate. In no event shall
the interest rate or rates payable under this Agreement, plus any other amounts
paid in connection herewith, exceed the highest rate permissible under any law
that a court of competent jurisdiction shall, in a final determination, deem
applicable. Borrower and Foothill, in executing this Agreement, intend legally
to agree upon the rate or rates of interest and manner of payment stated within
it; provided, however, that, anything contained herein to the contrary
notwithstanding, if said rate or rates of interest or manner of payment exceeds
the maximum allowable under applicable law, then, ipso facto as of the date of
this Agreement, Borrower is and shall be liable only for the payment of such
maximum as allowed by law, and payment received from Borrower in excess of such
legal maximum, whenever received, shall be applied to reduce the principal
balance of the Obligations to the extent of such excess.
2.6 Crediting Payments; Application of Collections. The receipt of any wire
transfer of funds, check, or other item of payment by Foothill (whether from
transfers to Foothill by the Lockbox Banks pursuant to the Lockbox Agreements or
otherwise) immediately shall be applied to provisionally reduce the Obligations,
but shall not be considered a payment on account unless such wire transfer is of
immediately available federal funds and is made to the appropriate deposit
account of Foothill or unless and until such check or other item of payment is
honored when presented for payment. From and after the Closing Date, Foothill
shall be entitled to charge Borrower for four (4) Business Days of `clearance'
at the rate set forth in Section 2.5(a) or Section 2.5(b)(i), as applicable, on
all collections, checks, wire
<PAGE>
transfers, or other items of payment that are received by Foothill (regardless
of whether forwarded by the Lockbox Banks to Foothill, whether provisionally
applied to reduce the Obligations, or otherwise). This across-the-board four (4)
Business Day clearance charge on all receipts is acknowledged by the parties to
constitute an integral aspect of the pricing of Foothill's facility to Borrower,
and shall apply irrespective of the characterization of whether receipts are
owned by Borrower or Foothill, and irrespective of the level of Borrower's
Obligations to Foothill. Should any check or item of payment not be honored when
presented for payment, then Borrower shall be deemed not to have made such
payment, and interest shall be recalculated accordingly. Anything to the
contrary contained herein notwithstanding, any wire transfer, check, or other
item of payment shall be deemed received by Foothill only if it is received into
Foothill's Operating Account (as such account is identified in the Lockbox
Agreements) on or before 11:00 a.m. Los Angeles time. If any wire transfer,
check, or other item of payment is received into Foothill's Operating Account
(as such account is identified in the Lockbox Agreements) after 11:00 a.m. Los
Angeles time it shall be deemed to have been received by Foothill as of the
opening of business on the immediately following Business Day.
At any time that all Obligations are paid in full and there exists a credit
balance resulting from remittances from Borrower's Account Debtors or the
receipt of funds from Borrower which overpay Obligations, Foothill shall
transmit to Borrower such credit balance.
2.7 Statements of Obligations. Foothill shall render statements to Borrower
of the Obligations, including principal, interest, fees, and including an
itemization of all charges and expenses constituting Foothill Expenses owing,
and such statements shall be conclusively presumed to be correct and accurate
and constitute an account stated between Borrower and Foothill unless, within
thirty (30) days after receipt thereof by Borrower, Borrower shall deliver to
Foothill by registered or certified mail at its address specified in Section 12,
written objection thereto describing the error or errors contained in any such
statements.
2.8 Fees. Borrower shall pay to Foothill the following fees:
(a) Closing Fee. A one time closing fee of Two Hundred
Thousand Dollars ($200,000) which has been earned, in full, and is
due and payable by Borrower to Foothill in installments of Twenty
<PAGE>
Thousand Dollars ($20,000) on this date and continuing on the first day of each
calendar month commencing January 1, 1996 and continuing through and including
September 1, 1996;
(b) Unused Line Fee. On the first day of each month
during the term of this Agreement, a fee in an amount equal to one-
half percent (0.5%) per annum times the Average Unused Portion of
the Maximum Amount;
(c) Annual Facility Fee. On the Closing Date and on
each anniversary of the Closing Date, a fee in an amount equal to
One Hundred Thousand Dollars ($100,000) such fee to be fully earned
on each such anniversary;
(d) Financial Examination, Documentation, and Appraisal Fees.
Foothill's customary fee of Six Hundred Dollars ($600) per day per examiner,
plus out-of-pocket expenses for each financial analysis and examination of
Borrower performed by Foothill or its agents; Foothill's customary appraisal fee
of One Thousand Dollars ($1,000) per day per appraiser, plus out-of-pocket
expenses for each appraisal of the Collateral performed by Foothill or its
agents; and, on each anniversary of the Closing Date, Foothill's customary fee
of One Thousand Dollars ($1,000) per year for its loan documentation review; and
(e) Servicing Fee. On the first day of each month
during the term of this Agreement, and thereafter so long as any
<PAGE>
Obligations are outstanding, a servicing fee in an amount equal to Three
Thousand Five Hundred Dollars ($3,500) per month.
In addition to the monthly Servicing Fee, Borrower shall on the Closing Date pay
to Lender the sum of Fifteen Thousand Dollars ($15,000) as a prepaid Additional
Servicing Fee. If during the ninety days (90) days following the Closing Date,
Foothill shall after audit be satisfied with the accuracy of Borrower's books
and records and reporting systems in connection with Borrower's Chicago,
Illinois operations, Borrower shall be entitled to a refund on a per diem basis
of such amount of the prepaid Additional Servicing Fee as is calculated from the
date of Foothill's audit report through the ninetieth day after the Closing
Date. If however, Borrower shall not have satisfied Foothill with respect to the
accuracy of Borrower's books and records and reporting systems in connection
with Borrower's Chicago, Illinois operations on or before the ninetieth day
after the Closing Date, then Foothill shall continue to charge and Borrower
shall continue to pay on a monthly basis, without per diem refund, an Additional
Servicing Fee of Five Thousand Dollars ($5,000) per month until such time as
Foothill is satisfied with the accuracy of Borrower's books and records and
reporting systems in connection with Borrower's Chicago, Illinois operations.
Subsequent to the ninetieth day after the Closing Date, so long as Foothill is
not satisfied with the accuracy of Borrower's books and records and reporting
systems in connection with Borrower's Chicago, Illinois operations, Foothill may
determine any of the Collateral from the Chicago, Illinois operations of
Borrower to be ineligible for Advances.
(f) Deposit. Foothill acknowledges receipt of a deposit in the sum of
$75,000 paid pursuant to a Section 13 of a Letter of Intent dated October 14,
1995 which $75,000 deposit shall be applied against Foothill's expenses in
connection with its auditing of Borrower and its businesses, financial, legal
and collateral investigations and determinations in the underwriting, approving,
documenting, closing and funding of the financial accommodations represented by
this Agreement and in connection with costs and expenses incurred by it and its
counsel in the above activities. Borrower understands that the amount of the
above referenced costs and charges may exceed the $75,000 on deposit and that
Borrower is obligated to pay and/or reimburse Foothill for all such expenses
without regard to the amount tendered to Foothill as such deposit.
3. CONDITIONS; TERM OF AGREEMENT.
<PAGE>
3.1 Conditions Precedent to Initial Advance, L/C, or L/C Guaranty. The
obligation of Foothill to make the initial advance or to provide the initial L/C
or L/C Guaranty is subject to the fulfillment, to the satisfaction of Foothill
and its counsel, of each of the following conditions on or before the Closing
Date:
<PAGE>
(a) the Closing Date shall occur on or before December
31, 1995;
(b) Old Lender shall have executed and delivered the Pay-Off Letter,
together with UCC termination statements and other documentation evidencing the
termination of its liens and security interests in and to the properties and
assets of Borrower or a subordination agreement in form and substance
satisfactory to Foothill in its sole discretion;
(c) All applicable parties and creditors shall have executed and
delivered UCC termination statements and other documentation evidencing the
termination of its liens and security interests in and to the properties and
assets of Borrower or a subordination agreement in form and substance
satisfactory to Foothill in its sole discretion;
(d) Foothill shall have received searches reflecting the
filing of its financing statements;
(e) Foothill shall have received each of the following documents, duly
executed, and each such document shall be in full force and effect and such
other documents and agreements as may be required or deemed necessary by
Foothill, duly executed and in full force and effect:
i. Loan and Security Agreement with
Schedule A-1 - List of Approved Medi-Claim, Inc. Account
Debtors and Approved Written Contracts
Schedule E-1 - Eligible Inventory and Locations Thereof,
Schedule P-1 - Permitted Liens,
Schedule 5.9 - Litigation and
ii. UCC, Tax and Judgment Lien Searches on
(i) Medi-Mail, Inc.
(ii) Family Pharmaceuticals of America, Inc.
(iii) Medi-Claim, Inc.
(iv) Medi-Phar, Inc.
(v) Mednet, MPC Corporation
(vi) GBK, Inc.
(vii) Medical Services Agency, Inc.
(viii)The Home Pharmacy
(ix) ArcVentures, Inc.
<PAGE>
(x) Tel-Drug, Inc.
with Secretary of State of
Nevada
California
South Carolina
Pennsylvania
Illinois
South Carolina
Maryland
Local Searches in/with
Cook County, Illinois
Cumberland County, Pennsylvania
Charleston County, South Carolina
iii. Assignment of Trademarks
Medi-Mail, Inc.
1-800-RX Delivery
1-800-RX Discount
RX for the 90's
Medi-Claim
Medi-Phar
Mednet
iv. Lockbox Operating Procedural
Agreements and Depository Account Agreements
as to Medi-Mail, Inc. in Nevada-First Interstate Bank of
Nevada;
as to Medi-Mail, Inc. in Chicago-First Chicago Bank and
Trust Company;
as to Medi-Mail, Inc. in South Carolina-NationsBank;
as to Medi-Claim, Inc.- Mellon Bank and Trust Company;
as to Medi-Phar, Inc. in Nevada-First-Interstate Bank of
Nevada; and
as to Medi-Phar, Inc. in California-First Interstate Bank
v. UCC Financing Statements With Respect
to
(i) Medi-Mail, Inc.
(ii) Family Pharmaceuticals of America, Inc.
(iii) Medi-Claim, Inc.
(iv) Medi-Phar, Inc.
<PAGE>
(v) Mednet, MPC Corporation
with the Secretary of State of
Nevada
California
South Carolina
Pennsylvania
Illinois
and with Local Filing Authorities in
Cook County, Illinois
Prothonotary of Cumberland County, Pennsylvania
County Clerk of Charleston County, South Carolina
vi. Conditional Assignment of Leases for
Chief Executive Offices of
Medi-Mail, Inc.
Family Pharmaceuticals of America, Inc.
Medi-Claim, Inc.
Medi-Phar, Inc.
Mednet, MPC Corporation
vii. Copies of Leases
viii.Agreements of Lessor to Conditional Assignment of Leases or
Landlord's Licenses and Waiver Agreements (This condition shall be a
condition precedent to advances against Inventory; provided however
that Borrower agrees within 30 days of the date of this Agreement to
utilize its best efforts to obtain the Lessor's Agreement from
Borrower's Landlord at the location of its Chief Executive Office in
Las Vegas, Nevada)
ix. Certified Copies of Certificate of
Incorporation
(i) Medi-Mail, Inc.
(ii) Family Pharmaceuticals of America, Inc.
(iii) Medi-Claim, Inc.
(iv) Medi-Phar, Inc.
(v) Mednet, MPC Corporation
x. Officer Certified Copy of Bylaws
(i) Medi-Mail, Inc.
<PAGE>
(ii) Family Pharmaceuticals of America, Inc.
(iii) Medi-Claim, Inc.
(iv) Medi-Phar, Inc.
(v) Mednet, MPC Corporation
xi. Certificate of Authority To Do Business
and/or Good Standing Certificates in Nevada, South
Carolina, Illinois, California and Pennsylvania for
(i) Medi-Mail, Inc.
(ii) Family Pharmaceuticals of America, Inc.
(iii) Medi-Claim, Inc.
(iv) Medi-Phar, Inc.
(v) Mednet, MPC Corporation
xii. Secretary Certificates of Directors
Resolutions
and Certificate of Incumbency
(i) Medi-Mail, Inc.
(ii) Family Pharmaceuticals of America, Inc.
(iii) Medi-Claim, Inc.
(iv) Medi-Phar, Inc.
(v) Mednet, MPC Corporation
xiii.For advances on Home Pharmacy Accounts Completion of
Audit by Foothill and for advances on Medi-Phar, Inc.
Accounts and Inventory, the elimination of existing UCC
liens on Medi-Phar, Inc. California accounts receivable
and Inventory
xiv.Verification that all contracts giving rise to Accounts are acceptable
to Foothill and either written in name of Borrower or assigned to
Borrower with applicable consents of other parties to contracts
xv. Most recent Management Letter from Accountants to be
reviewed and approved by Foothill
xvi. Financial projections for the next 12 months to be
provided to Foothill and approved by Foothill
xvii.Borrower must have performed and Foothill must have observed physical
inventories of all Inventory at all of Borrower's locations where
Inventory to be advanced against is located and the results of such
physical inventory must be satisfactory to Foothill
<PAGE>
(f) Foothill shall have received certificates of corporate status with
respect to Borrower, each dated within fifteen (15) days of the Closing Date,
such certificates to be issued by the Secretary of State of the states in which
its failure to be duly qualified or licensed would have a material adverse
effect on the financial condition or properties and assets of Borrower, which
certificates shall indicate that Borrower is in good standing;
(g) Foothill shall have received the certified copies of the policies
of insurance, together with the endorsements thereto, as are required by Section
6.12 hereof, the form and substance of which shall be satisfactory to Foothill
and its counsel;
(h) Foothill shall have received duly executed certificates of title
with respect to that portion of the Collateral that is subject to certificates
of title;
(i) Foothill shall have received landlord waivers and, if requested by
Foothill, mortgagee waivers from the lessors and mortgagees of the locations
where the Inventory or Equipment is located prior to including Inventory in the
Borrowing Base;
(j) Foothill shall have received an opinion of
Borrower's counsel in form and substance satisfactory to Foothill
in its sole discretion;
(k) Foothill shall have received satisfactory evidence that all
returns required to be filed by Borrower have been timely filed and all taxes
upon Borrower or its properties, assets, income and franchises (including real
property taxes and payroll taxes) have been paid prior to delinquency, except
such taxes that are the subject of a Permitted Protest;
(l) Borrower shall be in compliance with all laws, rules and
regulations concerning the operation of its respective businesses and have
obtained and furnished to Foothill all licenses and permits, together with
collateral assignments of such of the licenses and permits as Foothill may
require; and
(m) all other documents and legal matters in connection with the
transactions contemplated by this Agreement shall have been delivered or
executed or recorded and shall be in form and substance satisfactory to Foothill
and its counsel.
<PAGE>
3.2 Conditions Precedent to All Advances, L/Cs, or L/C Guarantees. The
following shall be conditions precedent to all advances, L/Cs, or L/C Guarantees
hereunder:
(a) the representations and warranties contained in this Agreement and
the other Loan Documents shall be true and correct in all respects on and as of
the date of such advance, L/C, or L/C Guaranty, as though made on and as of such
date (except to the extent that such representations and warranties relate
solely to an earlier date);
(b) no Event of Default or event which with the giving of notice or
passage of time would constitute an Event of Default shall have occurred and be
continuing on the date of such advance, L/C, or L/C Guaranty, nor shall either
result from the making thereof;
(c) no injunction, writ, restraining order, or other order of any
nature prohibiting, directly or indirectly, the making of such advance or the
issuance of such L/C or L/C Guaranty shall have been issued and remain in force
by any governmental authority against Borrower, Foothill, or any of their
Affiliates;
(d) Borrower will have entered into a written contract with the firm
of Starshak & Associates to perform the functions, through one of its employees
or associates, of a full time Chief Financial Officer of Borrower on an interim
basis, and such individual must be functioning as such interim full time Chief
Financial Officer in Borrower's day to day operations until a permanent Chief
Financial Officer, acceptable to Foothill in its reasonable discretion, is
employed and such designated individual functions as such full time permanent
Chief Financial Officer in Borrower's day to day operations; and
(e) For Advances subsequent to March 31, 1996, McGladrey & Pullen, LLP
shall have performed a review, in form, scope and substance satisfactory to
Foothill, of Borrower's accounting systems, procedures and processes and the
suggestions and corrective measures set forth in the written report to Borrower
of such review shall have been or be implemented (within a time period deemed
acceptable and reasonable by Foothill) by Borrower.
.
3.3 Term; Automatic Renewal. This Agreement shall become
effective upon the execution and delivery hereof by Borrower and
<PAGE>
Foothill and shall continue in full force and effect for a term ending on the
date (the "Renewal Date") that is five (5) years from the Closing Date and
automatically shall be renewed for successive two (2) year periods thereafter,
unless sooner terminated pursuant to the terms hereof. Either party may
terminate this Agreement effective on the Renewal Date or on any two (2) year
anniversary of the Renewal Date by giving the other party at least ninety (90)
days prior written notice by registered or certified mail, return receipt
requested. The foregoing notwithstanding, Foothill shall have the right to
terminate its obligations under this Agreement immediately and without notice
upon the occurrence and during the continuation of an Event of Default.
3.4 Effect of Termination. On the date of termination, all Obligations
(including contingent reimbursement obligations under any outstanding L/Cs or
L/C Guarantees) immediately shall become due and payable without notice or
demand. No termination of this Agreement, however, shall relieve or discharge
Borrower of Borrower's duties, Obligations, or covenants hereunder, and
Foothill's continuing security interests in the Collateral shall remain in
effect until all Obligations have been fully and finally discharged and
Foothill's obligation to provide advances hereunder is terminated. If Borrower
has sent a notice of termination pursuant to the provisions of Section 3.3, but
fails to pay all Obligations on the date set forth in said notice, then Foothill
may, but shall not be required to, renew this Agreement for an additional term
of two (2) years.
3.5 Early Termination by Borrower. The provisions of Section 3.3 that allow
termination of this Agreement by Borrower only on the Renewal Date and certain
anniversaries thereof notwithstanding, Borrower has the option, at any time upon
ninety (90) days prior written notice to Foothill, to terminate this Agreement
by paying to Foothill, in cash, the Obligations (including an amount equal to
the full amount of the L/Cs or L/C Guarantees), together with a premium (the
"Early Termination Premium") equal to the greater of: (a) the total interest and
L/C and L/C Guaranty fees for the immediately preceding six (6) months or (b)
Six Hundred Thousand Dollars ($600,000) if termination occurs within the first
twenty four months (24) after the date of this Agreement or Four Hundred
Thousand Dollars ($400,000) if termination occurs during the twenty fifth (25th)
through the forty-eighth months (48th) after the date of this Agreement or Two
Hundred Thousand Dollars ($200,000) if termination occurs during the forty-ninth
(49th) through the sixtieth months (60th) after the date of this Agreement.
<PAGE>
Notwithstanding anything contained in this Section to the contrary, in the
event that Foothill declares an Event of Default as a result of a violation of
Section 8.2 predicated upon a violation or non-compliance with Section 7.9 and
the violation or non-compliance with Section 7.9 is a result of a Change of
Control not involving any officer or director of Borrower or any Affiliate of
any officer or director of Borrower, Borrower shall have a period of forty-five
(45) days from the date of written notice from Foothill of declaration of such
Event of Default to repay all Obligations with the application of an Early
Termination Premium but at the rate of fifty percent (50%) of the amount of such
Early Termination Premium which otherwise would be due as of the date of the
notice of such Event of Default.
Notwithstanding anything contained in this Section to the contrary,
Borrower shall during the six (6) months following the Closing Date retain
William Welnhofer of Starshak & Associates for such period of time as is
necessary to supervise and to undertake the performance of the responsibility of
obtaining written amendments to each of the contracts giving rise to a potential
Eligible Medi-Claim Account for both the sponsor agreements and for the pharmacy
agreements and shall cause William Welnhofer on a monthly basis to report to
Foothill as to the progress being made. If after the sixth (6th) month following
the Closing Date Foothill shall not be satisfied with the efforts of Borrower or
Borrower through the efforts of William Welnhofer shall not have achieved the
amendments to all such contracts, during the seventh, eight and ninth months
after the Closing Date, Borrower may after payment to Foothill of all
installments of the Closing Fee set forth in Section 2.8 (a) prepay on or before
the last day of the ninth month after the Closing Date the Obligations without
premium or penalty.
3.6 Termination Upon Event of Default. If Foothill terminates this
Agreement upon the occurrence of an Event of Default, in view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Foothill's
lost profits as a result thereof, Borrower shall pay to Foothill upon the
effective date of such termination, a premium in an amount equal to the Early
Termination Premium. The Early Termination Premium shall be presumed to be the
amount of damages sustained by Foothill as the result of the early termination
and Borrower agrees that it is reasonable under the circumstances currently
existing. The Early Termination Premium provided for in this Section 3.6 shall
be deemed included in the Obligations. The Early Termination Premium
<PAGE>
shall not be charged or collected in the event that Foothill exercises its
remedies set forth in Section 9 of this Agreement and conducts a commercially
reasonable public or private sale of the Collateral to obtain payment of the
Obligations.
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Borrower hereby grants to Foothill a
continuing security interest in all currently existing and hereafter acquired or
arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Foothill's security interests in
the Collateral shall attach to all Collateral without further act on the part of
Foothill or Borrower. Anything contained in this Agreement or any other Loan
Document to the contrary notwithstanding, except for the sale of Inventory to
buyers in the ordinary course of business, Borrower has no authority, express or
implied, to dispose of any item or portion of the Collateral.
4.2 Negotiable Collateral. In the event that any Collateral, including
proceeds, is evidenced by or consists of Negotiable Collateral, Borrower shall,
immediately upon the request of Foothill, endorse and assign such Negotiable
Collateral to Foothill and deliver physical possession of such Negotiable
Collateral to Foothill.
4.3 Collection of Accounts, General Intangibles, Negotiable Collateral. On
or before the Closing Date, Foothill, Borrower, and the Lockbox Banks shall
enter into the Lockbox Agreements, in form and substance satisfactory to
Foothill in its sole discretion, pursuant to which all of Borrower's cash
receipts, checks, and other items of payment (including, insurance proceeds,
proceeds of cash sales, rental proceeds, and tax refunds) will be forwarded to
Foothill on a daily basis. At any time following an Event of Default or at any
time that Foothill in the exercise of its reasonable credit judgement deems
itself insecure or believes that the prospect for repayment of the Obligations
is impaired or unlikely, Foothill or Foothill's designee may: (a) notify
customers or Account Debtors of Borrower that the Accounts, General Intangibles,
or Negotiable Collateral have been assigned to Foothill or that Foothill has a
security interest therein; and (b) collect the Accounts, General Intangibles,
and Negotiable Collateral directly and charge the collection costs and expenses
to Borrower's loan account. Borrower agrees that it will hold in
<PAGE>
trust for Foothill, as Foothill's trustee, any cash receipts, checks, and other
items of payment (including, insurance proceeds, proceeds of cash sales, rental
proceeds, and tax refunds) that it receives and immediately will deliver said
cash receipts, checks, and other items of payment to Foothill in their original
form as received by Borrower. Borrower may request remittance to it of any
credit balance reflected on its account at any time when all Obligations have
been paid in full.
4.4 Delivery of Additional Documentation Required. At any time upon the
request of Foothill, Borrower shall execute and deliver to Foothill all
financing statements, continuation financing statements, fixture filings,
security agreements, chattel mortgages, pledges, assignments, endorsements of
certificates of title, applications for title, affidavits, reports, notices,
schedules of accounts, letters of authority, and all other documents that
Foothill may reasonably request, in form satisfactory to Foothill, to perfect
and continue perfected Foothill's security interests in the Collateral and in
order to fully consummate all of the transactions contemplated hereby and under
the other the Loan Documents.
4.5 Power of Attorney. Borrower hereby irrevocably makes, constitutes, and
appoints Foothill (and any of Foothill's officers, employees, or agents
designated by Foothill) as Borrower's true and lawful attorney, with power to:
(a) if Borrower refuses to, or fails timely to execute and deliver any of the
documents described in Section 4.4, sign the name of Borrower on any of the
documents described in Section 4.4; (b) at any time that an Event of Default has
occurred and is continuing or Foothill deems itself insecure (in accordance with
Section 1208 of the Code), sign Borrower's name on any invoice or bill of lading
relating to any Account, drafts against Account Debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to Account
Debtors; (c) send requests for verification of Accounts; (d) endorse Borrower's
name on any checks, notices, acceptances, money orders, drafts, or other item of
payment or security that may come into Foothill's possession; (e) at any time
that an Event of Default has occurred and is continuing or Foothill deems itself
insecure (in accordance with Section 1208 of the Code), notify the post office
authorities to change the address for delivery of Borrower's mail to an address
designated by Foothill, to receive and open all mail addressed to Borrower, and
to retain all mail relating to the Collateral and forward all other mail to
Borrower; (f) at any time that an Event of Default has occurred and is
continuing or Foothill deems itself
<PAGE>
insecure (in accordance with Section 1208 of the Code), make, settle, and adjust
all claims under Borrower's policies of insurance and make all determinations
and decisions with respect to such policies of insurance; and (g) at any time
that an Event of Default has occurred and is continuing or Foothill deems itself
insecure (in accordance with Section 1208 of the Code), settle and adjust
disputes and claims respecting the Accounts directly with Account Debtors, for
amounts and upon terms which Foothill determines to be reasonable, and Foothill
may cause to be executed and delivered any documents and releases which Foothill
determines to be necessary. The appointment of Foothill as Borrower's attorney,
and each and every one of Foothill's rights and powers, being coupled with an
interest, is irrevocable until all of the Obligations have been fully and
finally repaid and performed and Foothill's obligation to extend credit
hereunder is terminated.
4.6 Right to Inspect. Foothill (through any of its officers, employees, or
agents) shall have the right, from time to time hereafter to inspect Borrower's
Books and to check, test, and appraise the Collateral in order to verify
Borrower's financial condition or the amount, quality, value, condition of, or
any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants to Foothill as follows:
5.1 No Prior Encumbrances. Borrower has good and
indefeasible title to the Collateral free and clear of liens,
claims, security interests, or encumbrances, except for Permitted
Liens.
5.2 Eligible Accounts. The Eligible Accounts-Medi-Claim, Inc. set forth on
Schedule A-1 represent an agreed upon listing of Accounts represented by written
contracts reviewed and approved by Foothill and none of the Contracts listed on
Schedule A-1 have been revised or modified or will be revised or modified from
the dates listed on Schedule A-1 without the prior written consent of Foothill.
The Eligible Accounts-Medi-Claim, Inc. pursuant to the contracts set forth on
Schedule A-1, are at the time of the creation thereof and as of each date on
which Borrower includes them in a Borrowing Base calculation or certification,
bona fide existing obligations created by the sale and delivery of Inventory or
the rendition of
<PAGE>
services to Account Debtors in the ordinary course of Borrower's business, and
to the knowledge of Borrower are unconditionally owed to Borrower without
defenses, disputes, offsets, counterclaims, or rights of return or cancellation.
The property or service giving rise to such Eligible Accounts has been delivered
to the Account Debtor, or to the Account Debtor's agent for immediate shipment
to and unconditional acceptance by the Account Debtor. At the time of the
creation of an Eligible Account-Medi-Claim, Inc. and as of each date on which
Borrower includes an Eligible Account-Medi-Claim, Inc. in a Borrowing Base
calculation or certification, Borrower has not received notice of actual or
imminent bankruptcy, insolvency, or material impairment of the financial
condition of any applicable Account Debtor regarding such Eligible
Account-Medi-Claim, Inc.
The Eligible Accounts-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family
Pharmaceuticals of America, Inc. and Medi-Phar, Inc. are at the time of the
creation thereof and as of each date on which Borrower includes them in a
Borrowing Base calculation or certification, bona fide existing obligations
created by the sale and delivery of Inventory or the rendition of services to
Account Debtors in the ordinary course of Borrower's business, and to the
knowledge of Borrower are unconditionally owed to Borrower without defenses,
disputes, offsets, counterclaims, or rights of return or cancellation. The
property or service giving rise to such Eligible Accounts has been delivered to
the Account Debtor, or to the Account Debtor's agent for immediate shipment to
and unconditional acceptance by the Account Debtor. At the time of the creation
of an Eligible Account-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family
Pharmaceuticals of America, Inc. and Medi-Phar, Inc. and as of each date on
which Borrower includes an Eligible Account-Mednet, MPC Corporation, Inc.,
Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. in
a Borrowing Base calculation or certification, Borrower has not received notice
of actual or imminent bankruptcy, insolvency, or material impairment of the
financial condition of any applicable Account Debtor regarding such Eligible
Account-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals
of America, Inc. and Medi-Phar, Inc.
5.3 Eligible Inventory. All Eligible Inventory is now and at
all times hereafter shall be of good and merchantable quality and
to Borrower's knowledge free from defects.
5.4 Location of Inventory and Equipment. The Inventory and
Equipment are not stored with a bailee, warehouseman, or similar
<PAGE>
party (without Foothill's prior written consent) and are located only at the
locations identified on Schedule E-1 or otherwise permitted by Section 6.15.
5.5 Inventory Records. Borrower now keeps, and hereafter at all times shall
keep, correct and accurate records itemizing and describing the kind, type,
quality, and quantity of the Inventory, and Borrower's cost therefor.
5.6 Location of Chief Executive Office; FEIN. The chief
executive office of Borrower is located at the address indicated in
the preamble to this Agreement and Borrower's FEIN is 88-034-1212
for Medi-Mail, Inc., 57-073-0615 for Family Pharmaceuticals of
America, Inc., 86-073-8707 for Medi-Claim, Inc. and 88-027-9533 for
Medi-Phar, Inc. and 88-021-5949 for Mednet, MPC Corporation.
5.7 Due Organization and Qualification; No Subsidiaries. Borrower is duly
organized and existing and in good standing under the laws of the state of its
incorporation and qualified and licensed to do business in, and in good standing
in, any state where the failure to be so licensed or qualified could reasonably
be expected to have a material adverse effect on the business, operations,
condition (financial or otherwise), finances, or prospects of Borrower or on the
value of the Collateral to Foothill. Borrower, other than Mednet, MPC
Corporation has no subsidiaries.
5.8 Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's corporate powers, have
been duly authorized, and are not in conflict with nor constitute a breach of
any provision contained in Borrower's Articles or Certificate of Incorporation,
or By-laws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which its properties or assets may
be bound.
5.9 Litigation. There are no actions or proceedings pending by or against
Borrower before any court or administrative agency and Borrower does not have
knowledge or belief of any pending, threatened, or imminent litigation,
governmental investigations, or claims, complaints, actions, or prosecutions
involving Borrower, except for: (a) ongoing collection matters in which Borrower
is the plaintiff; (b) matters disclosed on Schedule 5.9; and (c) and matters
arising after the date hereof that, if decided adversely to Borrower, would not
materially impair the prospect of repayment of
<PAGE>
the Obligations or materially impair the value or priority of
Foothill's security interests in the Collateral.
5.10 No Material Adverse Change in Financial Condition. All financial
statements relating to Borrower that have been delivered by Borrower to Foothill
have been prepared in accordance with GAAP and fairly present Borrower's
financial condition as of the date thereof and Borrower's results of operations
for the period then ended. There has not been a material adverse change in the
financial condition of Borrower since the date of the latest financial
statements submitted to Foothill on or before the Closing Date.
5.11 Solvency. Borrower is Solvent. No transfer of property is being made
by Borrower and no obligation is being incurred by Borrower in connection with
the transactions contemplated by this Agreement or the other Loan Documents with
the intent to hinder, delay, or defraud either present or future creditors of
Borrower.
5.12 Employee Benefits. Borrower neither has nor maintains any Plan but
nothing contained in this Agreement shall be construed to prohibit Borrower from
adopting a Plan provided that Borrower shall provide Foothill with a copy of
such Plan at least thirty (30) days prior to adoption thereof.
5.13 Environmental Condition. None of Borrower's properties or assets has
ever been used by Borrower or, to the best of Borrower's knowledge, by previous
owners or operators in the disposal of, or to produce, store, handle, treat,
release, or transport, any Hazardous Materials. None of Borrower's properties or
assets has ever been designated or identified in any manner pursuant to any
environmental protection statute as a Hazardous Materials disposal site, or a
candidate for closure pursuant to any environmental protection statute. No lien
arising under any environmental protection statute has attached to any revenues
or to any real or personal property owned or operated by Borrower. Borrower has
not received a summons, citation, notice, or directive from the Environmental
Protection Agency or any other federal or state governmental agency concerning
any action or omission by Borrower resulting in the releasing or disposing of
Hazardous Materials into the environment.
5.14 Reliance by Foothill; Cumulative. Each warranty and
representation contained in this Agreement automatically shall be
<PAGE>
deemed repeated with each advance or issuance of an L/C or L/C Guaranty and
shall be conclusively presumed to have been relied on by Foothill regardless of
any investigation made or information possessed by Foothill. The warranties and
representations set forth herein shall be cumulative and in addition to any and
all other warranties and representations that Borrower now or hereafter shall
give, or cause to be given, to Foothill.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, and
unless Foothill shall otherwise consent in writing, Borrower shall do all of the
following:
6.1 Accounting System. Borrower shall maintain a standard and modern system
of accounting in accordance with GAAP with ledger and account cards or computer
tapes, discs, printouts, and records pertaining to the Collateral which contain
information as from time to time may be requested by Foothill. Borrower also
shall keep proper books of account showing all sales, claims, and allowances on
its Inventory.
6.2 Collateral Reports. Borrower shall deliver to Foothill, no later than
the tenth (10th) day of each month during the term of this Agreement, a detailed
aging, by total, of the Accounts, a reconciliation statement, and a summary
aging, by vendor, of all accounts payable and any book overdraft. Where
applicable original sales invoices evidencing daily sales shall be mailed by
Borrower to each Account Debtor with, at Foothill's request, a copy to Foothill,
and, at Foothill's direction, the invoices shall indicate on their face that the
Account has been assigned to Foothill and that all payments are to be made
directly to Foothill. Borrower shall deliver to Foothill, as Foothill may from
time to time require, collection reports, sales journals, invoices, original
delivery receipts, customer's purchase orders, shipping instructions, bills of
lading, and other documentation respecting shipment arrangements. Absent such a
request by Foothill, copies of all such documentation shall be held by Borrower
as custodian for Foothill.
Borrower shall on or before the Closing Date provide Foothill with a copy of
each written contract now in existence or hereafter created which give rise to
an Eligible Account. Borrower agrees to make no changes, revisions or
modifications to any written contract
<PAGE>
giving rise to an Eligible Account without the prior written consent of
Foothill. With respect to any change, revision or modification agreed to by
Foothill, Borrower shall on or before the tenth (10th) day of each calendar
month provide Foothill with a copy of all amendments, revisions and
modifications to each written contract which gives rise to an Account showing
the acceptance of such amendment, revision or modification and execution by all
parties to such contract and Borrower shall provide a copy of any newly entered
into written contract giving rise to an Account. With respect to any new written
contract giving rise to an Account, Borrower understands that neither such
written contract nor the Account arising therefrom shall qualify as an Eligible
Account until affirmative approval and acceptance by Foothill of the terms
thereof.
In addition, from time to time, Borrower shall deliver to Foothill such other
and additional information or documentation as Foothill may request including
but not limited to reports on a weekly basis as to the market value of the
pharmaceutical items comprising Eligible Inventory.
6.3 Schedules of Accounts. With such regularity as Foothill shall require,
Borrower shall provide Foothill with schedules describing all Accounts.
Foothill's failure to request such schedules or Borrower's failure to execute
and deliver such schedules shall not affect or limit Foothill's security
interests or other rights in and to the Accounts.
6.4 Financial Statements, Reports, Certificates. Each of the individual
entities comprising Borrower agrees to deliver to Foothill: (a) as soon as
available, but in any event within thirty (30) days after the end of each month
during each of Borrower's fiscal years, a company prepared balance sheet, income
statement, and cash flow statement covering Borrower's operations during such
period; and (b) as soon as available, but in any event within ninety (90) days
after the end of each of Borrower's fiscal years, consolidated and consolidating
financial statements of Borrower for each such fiscal year, audited by McGladrey
& Pullen, LLP or other independent certified public accountants reasonably
acceptable to Foothill and certified, without any qualifications, by such
accountants to have been prepared in accordance with GAAP, together with a
certificate of such accountants addressed to Foothill stating that such
accountants do not have knowledge of the existence of any event or condition
constituting an Event of Default, or that would, with the passage of time or the
giving of
<PAGE>
notice, constitute an Event of Default. Such audited financial statements shall
include a balance sheet, profit and loss statement, and cash flow statement,
and, if prepared, the Accountants' Letter to Management.
Together with the above, Borrower shall cause Borrower to deliver to
Foothill Mednet, MPC Corporation's Form 10-Q Quarterly Reports, Form 10-K Annual
Reports, and Form 8-K Current Reports, and any other filings made by Mednet, MPC
Corporation with the Securities and Exchange Commission, if any, as soon as the
same are filed, or any other information that is provided by Mednet, MPC
Corporation to its shareholders, and any other report reasonably requested by
Foothill relating to the Collateral or the financial condition of Borrower.
Each month, together with the financial statements provided pursuant to
Section 6.4(a), Borrower shall deliver to Foothill a certificate signed by the
chief financial officer of Borrower and each of the entities comprising Borrower
to the effect that: (i) all reports, statements, or computer prepared
information of any kind or nature delivered or caused to be delivered to
Foothill hereunder have been prepared in accordance with GAAP (except for year
end adjustments) and fairly present the financial condition of Borrower; (ii)
Borrower is in timely compliance with all of its covenants and agreements
hereunder; (iii) the representations and warranties of Borrower contained in
this Agreement and the other Loan Documents are true and correct in all material
respects on and as of the date of such certificate, as though made on and as of
such date (except to the extent that such representations and warranties relate
solely to an earlier date); and (iv) on the date of delivery of such certificate
to Foothill there does not exist any condition or event that constitutes an
Event of Default (or, in each case, to the extent of any non-compliance,
describing such non-compliance as to which he or she may have knowledge and what
action Borrower has taken, is taking, or proposes to take with respect thereto).
Borrower shall have issued written instructions to McGladrey & Pullen, LLP
or its then current firm of independent certified public accountants authorizing
them to communicate with Foothill and to release to Foothill whatever financial
information concerning Borrower that Foothill may request. Borrower hereby
irrevocably authorizes and directs all auditors, accountants, or other third
parties to deliver to Foothill, at Borrower's expense, copies of Borrower's
financial statements, papers related thereto,
<PAGE>
and other accounting records of any nature in their possession, and to disclose
to Foothill any information, other than that which is claimed to be privileged
under the "attorney-client" privilege, they may have regarding Borrower's
business affairs and financial conditions.
6.5 Tax Returns. Borrower agrees to deliver to Foothill copies of each of
Borrower's future federal income tax returns, and any amendments thereto, within
thirty (30) days of the filing thereof with the Internal Revenue Service.
6.6 Intentionally Deleted.
6.7 Designation of Inventory. Borrower shall now and from time to time
hereafter, but not less frequently than weekly, execute and deliver to Foothill
a designation of Inventory specifying Borrower's cost and the wholesale market
value thereof and further specifying such other information as Foothill may
reasonably request.
6.8 Returns. Returns and allowances, if any, as between Borrower and its
Account Debtors shall be on the same basis and in accordance with the usual
customary practices of Borrower, as they exist at the time of the execution and
delivery of this Agreement. If, at a time when no Event of Default has occurred
and is continuing, any Account Debtor returns any Inventory to Borrower,
Borrower promptly shall determine the reason for such return and, if Borrower
accepts such return, adjust its books and generate a return report (with a copy
to be sent to Foothill) with respect to such Account Debtor. If, at a time when
an Event of Default has occurred and is continuing, any Account Debtor returns
any Inventory to Borrower, Borrower promptly shall determine the reason for such
return and, if Foothill consents (which consent shall not be unreasonably
withheld), issue a credit memorandum (with a copy to be sent to Foothill) in the
appropriate amount to such Account Debtor. On a daily basis, Borrower shall
notify Foothill of all returns and recoveries and of all disputes and claims.
6.9 Title to Equipment. Upon Foothill's request, Borrower immediately shall
deliver to Foothill, properly endorsed, any and all evidences of ownership of,
certificates of title, or applications for title to any items of Equipment.
6.10 Maintenance of Equipment. Borrower shall keep and
maintain the Equipment in good operating condition and repair
<PAGE>
(ordinary wear and tear excepted), and make all necessary replacements thereto
so that the value and operating efficiency thereof shall at all times be
maintained and preserved. Borrower shall not permit any item of Equipment to
become a fixture to real estate or an accession to other property, and the
Equipment is now and shall at all times remain personal property.
6.11 Taxes. All assessments and taxes, whether real, personal, or
otherwise, due or payable by, or imposed, levied, or assessed against Borrower
or any of its property have been paid, and shall hereafter be paid in full,
before delinquency or before the expiration of any extension period. Borrower
shall make due and timely payment or deposit of all federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute and
deliver to Foothill, on demand, appropriate certificates attesting to the
payment thereof or deposit with respect thereto. Borrower will make timely
payment or deposit of all tax payments and withholding taxes required of it by
applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Foothill with proof satisfactory to Foothill indicating that Borrower
has made such payments or deposits.
6.12 Insurance.
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as are ordinarily insured against by
other owners in similar businesses. Borrower also shall maintain business
interruption, public liability, product liability, and property damage insurance
relating to Borrower's ownership and use of the Collateral as well as insurance
against larceny, embezzlement, and criminal misappropriation.
(b) All such policies of insurance shall be in such form, with such
companies, and in such amounts as may be reasonably satisfactory to Foothill.
All such policies of insurance (except those of public liability and property
damage) shall contain a 438BFU lender's loss payable endorsement, or an
equivalent endorsement in a form satisfactory to Foothill, showing Foothill as
sole loss payee thereof, and shall contain a waiver of warranties, and shall
specify that the insurer must give at least ten (10) days prior written notice
to Foothill before canceling its policy for any reason. Borrower shall deliver
to Foothill certified copies of
<PAGE>
such policies of insurance and evidence of the payment of all premiums therefor.
All proceeds payable under any such policy shall be payable to Foothill to be
applied on account of the Obligations.
6.13 Financial Covenants. Borrower shall maintain:
(a) Current Ratio. At all times, a ratio of
Consolidated Current Assets divided by Consolidated Current
Liabilities of at least one to one (1.0 to 1.0);
(b) Tangible Net Worth. At Borrower's fiscal year end 1995 a Tangible
Net Worth of at least Five Hundred Thousand Dollars ($500,000) ("Base Tangible
Net Worth") and at the end of each fiscal quarter thereafter a Tangible Net
Worth equal to the Base Tangible Net Worth plus the sum of Five Hundred Thousand
Dollars ($500,000) times the number of quarters since Borrower's fiscal year end
1995 (ie. at Borrower's fiscal year end 1996 Borrower's Tangible Net Worth shall
be the Base Tangible Net Worth of $500,000 plus the sum of $500,000 times 4
representing the quarters elapsed since Borrower's fiscal year end 1995); and
<PAGE>
(c) Earnings Before Interest, Taxes, Depreciation and Amortization.
Tested on a fiscal quarter end basis, commencing as of the end of Borrower's
first fiscal quarter 1996, net earnings from operations before interest, taxes,
depreciation and amortization on a cumulative basis for such periods shall be at
least the following:
Fiscal Quarter Yearly Cumulative Earnings Before
Interest, Taxes, Depreciation and
Amortization
1st Fiscal Quarter-1996 $ 500,000
2nd Fiscal Quarter-1996 $1,000,000
3rd Fiscal Quarter-1996 $1,500,000
4th Fiscal Quarter-1996 $2,000,000
1st Fiscal Quarter-1997 $1,000,000
2nd Fiscal Quarter-1997 $2,000,000
3rd Fiscal Quarter-1997 $3,000,000
4th Fiscal Quarter-1997 $4,000,000
6.14 No Setoffs or Counterclaims. All payments hereunder and under the
other Loan Documents made by or on behalf of Borrower shall be made without
setoff or counterclaim and free and clear of, and without deduction or
withholding for or on account of, any federal, state, or local taxes.
6.15 Location of Inventory and Equipment. Borrower shall keep the Inventory
and Equipment only at the locations identified on Schedule E-1; provided,
however, that Borrower may amend Schedule E-1 so long as such amendment occurs
by written notice to Foothill not less than thirty (30) days prior to the date
on which the Inventory or Equipment is moved to such new location, so long as
such new location is within the continental United States, and so long as, at
the time of such written notification, Borrower provides any financing
statements or fixture filings necessary to perfect and continue perfected
Foothill's security interests in such assets and also provides to Foothill a
landlord's waiver in form and substance satisfactory to Foothill.
6.16 Compliance with Laws. Borrower shall comply in all material respects
with the requirements of all applicable laws, rules, regulations, and orders of
any governmental authority, including the Fair Labor Standards Act and the
Americans With Disabilities Act, other than laws, rules, regulations, and orders
<PAGE>
the non-compliance with which, individually or in the aggregate, would not have
and could not reasonably be expected to have a material adverse effect on the
business, operations, condition (financial or otherwise), finances, or prospects
of Borrower or on the value of the Collateral to Foothill.
Foothill acknowledges that Borrower has not registered or become
<PAGE>
licensed in the following jurisdictions: Alabama, Alaska, Arkansas, Delaware,
Florida, Kansas, Kentucky, Maine, Minnesota, Mississippi, Missouri, Montana, New
Mexico, North Dakota, Oklahoma, Rhode Island, South Carolina, Tennessee, Texas,
Utah, Virginia or Wisconsin. Notwithstanding the above acknowledgement, Borrower
is currently of the opinion that it is in compliance with and continue to be in
compliance in all respects with all requirements of all laws, rules, regulations
and orders of any Federal, State, Regional or Local governmental authority
requiring licensing or registration to do business generally, to conduct the
operations of a pharmacy, to sell and distribute pharmaceuticals in interstate
commerce or to administer or process claims for payment or reimbursement for the
provision of medical or health related services or goods.
6.17 Employee Benefits.
(a) Borrower shall deliver to Foothill a written statement by the chief
financial officer of Borrower specifying the nature of any of the following
events and the actions which Borrower proposes to take with respect thereto
promptly, and in any event within ten (10) days of becoming aware of any of
them, and when known, any action taken or threatened by the Internal Revenue
Service, PBGC, Department of Labor, or other party with respect thereto: (i) an
ERISA Event with respect to any Plan; (ii) the incurrence of an obligation to
pay a premium to the PBGC under Section 4006(a)(3)(E) of ERISA with respect to
any Plan; and (iii) any lien on the assets of Borrower arising in connection
with any Plan.
(b) Borrower shall also promptly furnish to Foothill copies prepared or
received by Borrower or an ERISA Affiliate of: (i) at the request of Foothill,
each annual report (Internal Revenue Service Form 5500 series) and all
accompanying schedules, actuarial reports, financial information concerning the
financial status of any Plan, and schedules showing the amounts contributed to
any Plan by or on behalf of Borrower or its ERISA Affiliates for the most recent
three (3) plan years; (ii) all notices of intent to terminate or to have a
trustee appointed to administer any Plan; (iii) all written demands by the PBGC
under Subtitle D of Title IV of ERISA; (iv) all notices required to be sent to
employees or to the PBGC under Section 302 of ERISA or Section 412 of the IRC;
(v) all written notices received with respect to a Multiemployer Plan concerning
(x) the imposition or amount of withdrawal liability pursuant to Section 4202 of
ERISA, (y) a termination described in Section 4041A of ERISA, or (z) a
reorganization or
<PAGE>
insolvency described in Subtitle E of Title IV of ERISA; (vi) the adoption of
any new Plan that is subject to Title IV of ERISA or Section 412 of the IRC by
Borrower or any ERISA Affiliate; (vii) the adoption of any amendment to any Plan
that is subject to Title IV of ERISA or Section 412 of the IRC, if such
amendment results in a material increase in benefits or Unfunded Benefit
Liability; or (viii) the commencement of contributions by Borrower or any ERISA
Affiliate to any Plan that is subject to Title IV of ERISA or Section 412 of the
IRC.
6.18 Leases. Borrower shall pay when due all rents and other amounts
payable under any leases to which Borrower is a party or by which Borrower's
properties and assets are bound, unless such payments are the subject of a
Permitted Protest. To the extent that Borrower fails timely to make payment of
such rents and other amounts payable when due under its leases, Foothill shall
be entitled, in its discretion, and without the necessity of declaring an Event
of Default, to reserve an amount equal to such unpaid amounts from the loan
availability created under Section 2.1 hereof.
6.19 Legal Change. Borrower shall immediately advise Foothill of any legal
change, whether statutory, administrative, judicial or otherwise, that would, in
any way, limit or restrict the ability of Borrower to sell, transfer or
otherwise dispose of its Eligible Inventory or which would limit the ability of
Foothill to exercise its rights against the Eligible Inventory hereunder or as a
secured creditor under the Code and Foothill may, in its sole discretion, revise
the definition of Eligible Inventory hereunder or the advance rates under
Section 2.1(b) above in response to any such legal change.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder shall
be available and until full and final payment of the Obligations, Borrower will
not do any of the following without Foothill's prior written consent, which
consent shall be requested by Borrower only in good faith and considered for
being granted by Foothill in accordance with the standards of good faith and
fair dealing as set forth in and interpreted under the Code:
7.1 Indebtedness. Create, incur, assume, permit, guarantee, or otherwise
become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:
<PAGE>
(a) Indebtedness evidenced by this Agreement;
(b) Indebtedness set forth in the latest financial
statements of Borrower submitted to Foothill on or prior to the
Closing Date;
(c) Indebtedness secured by Permitted Liens; and
(d) refinancings, renewals, or extensions of Indebtedness permitted
under clauses (b) and (c) of this Section 7.1 (and continuance or renewal of any
Permitted Liens associated therewith) so long as: (i) the terms and conditions
of such refinancings, renewals, or extensions do not materially impair the
prospects of repayment of the Obligations by Borrower, (ii) the net cash
proceeds of such refinancings, renewals, or extensions do not result in an
increase in the aggregate principal amount of the Indebtedness so refinanced,
renewed, or extended, (iii) such refinancings, renewals, refundings, or
extensions do not result in a shortening of the average weighted maturity of the
Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that
Indebtedness that is refinanced was subordinated in right of payment to the
Obligations, then the subordination terms and conditions of the refinancing
Indebtedness must be at least as favorable to Foothill as those applicable to
the refinanced Indebtedness.
7.2 Liens. Create, incur, assume, or permit to exist, directly or
indirectly, any lien on or with respect to any of its property or assets, of any
kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(d) and so long as the replacement liens secure only those assets or
property that secured the original Indebtedness).
7.3 Restrictions on Fundamental Changes. Enter into any acquisition,
merger, consolidation, reorganization, or recapitalization, or reclassify its
capital stock, or liquidate, wind up, or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, assign, lease, transfer, or
otherwise dispose of, in one transaction or a series of transactions, all or any
substantial part of its business, property, or assets, whether now owned or
hereafter acquired, or acquire by purchase or otherwise all or substantially all
of the properties, assets, stock, or other evidence of beneficial
<PAGE>
ownership of any Person.
7.4 Extraordinary Transactions and Disposal of Assets. Enter into any
transaction not in the ordinary and usual course of Borrower's business,
including the sale, lease, or other disposition of, moving, relocation, or
transfer, whether by sale or otherwise, of any of Borrower's properties or
assets (other than sales of Inventory to buyers in the ordinary course of
Borrower's business as currently conducted).
7.5 Change Name. Change Borrower's name, FEIN, business
structure, or identity, or add any new fictitious name.
7.6 Guarantee. Guarantee or otherwise become in any way liable with respect
to the obligations of any third Person except by endorsement of instruments or
items of payment for deposit to the account of Borrower or which are transmitted
or turned over to Foothill.
7.7 Restructure. Make any change in the aggregate of Borrower's financial
structure or the principal nature of the aggregate of Borrower's business
operations, or the date of its fiscal year.
7.8 Prepayments. Except in connection with a refinancing permitted by
Section 7.1(d), prepay any Indebtedness owing to any third Person.
7.9 Change of Control. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
7.10 Capital Expenditures. Make any capital expenditure, or any commitment
therefor, in excess of Five Hundred Thousand Dollars ($500,000) for any
individual transaction or where the aggregate amount of such capital
expenditures, made or committed for in any fiscal year, is in excess of One
Million Dollars ($1,000,000).
7.11 Consignments. Consign any Inventory or sell any
Inventory on bill and hold, sale or return, sale on approval, or
other conditional terms of sale.
7.12 Distributions. Make any distribution or declare or
pay any cash dividends on or purchase, acquire, redeem, or retire
any of Borrower's capital stock, of any class, whether now or
hereafter outstanding other than as currently required by
<PAGE>
Borrower's Preferred Class A and Class B Stock.
7.13 Accounting Methods. Modify or change its method of accounting or enter
into, modify, or terminate any agreement currently existing, or at any time
hereafter entered into with any third party accounting firm or service bureau
for the preparation or storage of Borrower's accounting records without said
accounting firm or service bureau agreeing to provide Foothill information
regarding the Collateral or Borrower's financial condition. Borrower waives the
right to assert a confidential relationship, if any, it may have with any
accounting firm or service bureau in connection with any information requested
by Foothill pursuant to or in accordance with this Agreement, and agrees that
Foothill may contact directly any such accounting firm or service bureau in
order to obtain such information.
7.14 Investments. Directly or indirectly make or acquire any beneficial
interest in (including stock, partnership interest, or other securities of), or
make any loan, advance, or capital contribution to, any Person.
7.15 Transactions with Affiliates. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms, that are fully disclosed to Foothill, and that are no
less favorable to Borrower than would be obtained in arm's length transaction
with a non-Affiliate.
7.16 Suspension. Suspend or go out of a substantial
portion of its business.
7.17 Compensation. Increase the annual fee or per-meeting fees paid to
directors during any year by more than fifteen percent (15%) over the prior
year; pay or accrue total cash compensation, during any year, to officers and
senior management employees, other than Dr. Merryman, in an aggregate amount in
excess of one hundred fifteen percent (115%) of that paid or accrued in the
prior year for all such officers and senior management employees other than Dr.
Merryman. With respect to Dr. Merryman, Foothill consents to the provisions of
the existing Board of Directors approved compensation agreement between Borrower
and Dr. Merryman.
7.18 Use of Proceeds. Use the proceeds of the advances
made hereunder for any purpose other than: (a) on the Closing Date,
<PAGE>
to repay in full the outstanding principal, accrued interest, and accrued fees
and expenses owing to Old Lender; (b) to pay transactional costs and expenses
incurred in connection with this Agreement; and (c) thereafter, consistent with
the terms and conditions hereof, for its lawful and permitted corporate
purposes.
7.19 Change in Location of Chief Executive Office; Inventory and Equipment
with Bailees. Borrower covenants and agrees that it will not, without thirty
(30) days prior written notification to Foothill, relocate its chief executive
office to a new location and so long as, at the time of such written
notification, Borrower provides any financing statements or fixture filings
necessary to perfect and continue perfected Foothill's security interests and
also provides to Foothill a landlord's waiver in form and substance satisfactory
to Foothill. The Inventory and Equipment shall not at any time now or hereafter
be stored with a bailee, warehouseman, or similar party without Foothill's prior
written consent.
7.20 Change or Modification of Written Contracts Regarding Accounts or Dr.
Merryman's Compensation. Borrower covenants and agrees that it will not modify
or revise in any manner, without the written consent of Foothill any of the
written contracts identified on Schedule A-1 or any other contract giving rise
to an Eligible Account against which Foothill has made or may make an Advance.
Borrower further covenants and agrees that it will not modify or revise in any
manner, without the written consent of Foothill the terms of the current
compensation agreement between Borrower and Dr. Merryman to provide in any way
an increase in any sum or amount provided for in such compensation agreement.
7.21 Creation or Adoption of a Plan. Borrower covenants and agrees not to
create or adopt a Plan without the consent of Foothill and providing Foothill
with the required prior notice referred to Section 5.12.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an event of
default (each, an "Event of Default") under this Agreement:
8.1 If Borrower fails to pay when due and payable or when declared due and
payable, any portion of the Obligations (whether of principal, interest
(including any interest which, but for the
<PAGE>
provisions of the Bankruptcy Code, would have accrued on such amounts), fees and
charges due Foothill, reimbursement of Foothill Expenses, or other amounts
constituting Obligations);
8.2 If Borrower fails or neglects to perform, keep, or observe any term,
provision, condition, covenant, or agreement contained in this Agreement, in any
of the Loan Documents, or in any other present or future agreement between
Borrower and Foothill provided however that Borrower shall have a grace period
of five (5) calendar days from the due date of performance or observance of any
term, provision, condition, covenant or agreement contained in Sections 6.2,
6.3, 6.4, 6.5 and 6.7 prior to such failure or neglect being an Event of Default
under this Section;
8.3 If there is a material impairment of the prospect of repayment of any
portion of the Obligations owing to Foothill or a material impairment of the
value or priority of Foothill's security interests in the Collateral;
8.4 If any material portion of Borrower's properties or assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any third Person;
8.5 If an Insolvency Proceeding is commenced by Borrower;
8.6 If an Insolvency Proceeding is commenced against Borrower
and any of the following events occur: (a) Borrower consents to
the institution of the Insolvency Proceeding against it; (b) the
petition commencing the Insolvency Proceeding is not timely
<PAGE>
controverted; (c) the petition commencing the Insolvency Proceeding is not
dismissed within forty-five (45) calendar days of the date of the filing
thereof; provided, however, that, during the pendency of such period, Foothill
shall be relieved of its obligation to make additional advances or issue
additional L/Cs or L/C Guarantees hereunder; (d) an interim trustee is appointed
to take possession of all or a substantial portion of the properties or assets
of, or to operate all or any substantial portion of the business of, Borrower;
or (e) an order for relief shall have been issued or entered therein;
8.7 If Borrower is enjoined, restrained, or in any way prevented by court
order or administrative agency of any State in which Borrower conducts business
from continuing to conduct all or any material part of its business affairs;
8.8 If a notice of lien, levy, or assessment is filed of record with
respect to any of Borrower's properties or assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, or if any taxes or debts owing
at any time hereafter to any one or more of such entities becomes a lien,
whether choate or otherwise, upon any of Borrower's properties or assets and the
same is not paid on the payment date thereof;
8.9 If a judgment or other claim becomes a lien or encumbrance upon any
material portion of Borrower's properties or assets;
8.10 If there is a default in any material agreement to which Borrower is a
party with one or more third Persons resulting in a right by such third Persons,
irrespective of whether exercised, to accelerate the maturity of Borrower's
obligations thereunder;
8.11 If Borrower makes any payment on account of Indebtedness that has been
contractually subordinated in right of payment to the payment of the
Obligations, except to the extent such payment is permitted by the terms of the
subordination provisions applicable to such Indebtedness;
8.12 If any misstatement or misrepresentation exists now or hereafter in
any warranty, representation, statement, or report made to Foothill by Borrower
or any officer, employee, agent, or director of Borrower, or if any such
warranty or representation is
<PAGE>
withdrawn ;
8.13 If the obligation of any Borrower or other Person
under any Loan Document is limited or terminated by operation of
<PAGE>
law or by the third Person thereunder, or any Person under any Loan
Document becomes the subject of an Insolvency Proceeding; or
8.14 If (a) with respect to any Plan, there shall occur any of the
following which could reasonably be expected to have a material adverse effect
on the financial condition of Borrower: (i) the violation of any of the
provisions of ERISA; (ii) the loss by a Plan intended to be a Qualified Plan of
its qualification under Section 401(a) of the IRC; (iii) the incurrence of
liability under Title IV of ERISA; (iv) a failure to make full payment when due
of all amounts which, under the provisions of any Plan or applicable law,
Borrower or any ERISA Affiliate is required to make; (v) the filing of a notice
of intent to terminate a Plan under Sections 4041 or 4041A of ERISA; (vi) a
complete or partial withdrawal of Borrower or an ERISA Affiliate from any Plan;
(vii) the receipt of a notice by the plan administrator of a Plan that the PBGC
has instituted proceedings to terminate such Plan or appoint a trustee to
administer such Plan; (viii) a commencement or increase of contributions to, or
the adoption of or the amendment of, a Plan; and (ix) the assessment against
Borrower or any ERISA Affiliate of a tax under Section 4980B of the IRC; or (b)
the Unfunded Benefit Liability of all of the Plans of Borrower and its ERISA
Affiliates shall, in the aggregate, exceed One Hundred Thousand Dollars
($100,000).
8.15 If Borrower fails to obtain or maintain any license, permit or
registration required by any federal, state, regional or local governmental unit
for the operation of its business in any State or for the sale of pharmaceutical
items and goods from, within or to a State.
8.16 If any federal, state, regional or local governmental unit commences a
cease and desist action prohibiting Borrower from doing business generally or
for a specific act or acts against Borrower or if an enforcement action against
Borrower is commenced against Borrower by any federal, state, regional or local
governmental unit which has or may result, in the reasonable judgement of
Foothill, in a material adverse impact on the business or financial condition of
Borrower.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence, and during the
continuation, of an Event of Default Foothill may, at its election,
without notice of its election and without demand, do any one or
<PAGE>
more of the following, all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise,
immediately due and payable;
(b) Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement, under any of the Loan Documents, or under any
other agreement between Borrower and Foothill;
(c) Terminate this Agreement and any of the other Loan Documents as to
any future liability or obligation of Foothill, but without affecting Foothill's
rights and security interests in the Collateral and without affecting the
Obligations;
(d) Settle or adjust disputes and claims directly with Account Debtors
for amounts and upon terms which Foothill considers advisable, and in such
cases, Foothill will credit Borrower's loan account with only the net amounts
received by Foothill in payment of such disputed Accounts after deducting all
Foothill Expenses incurred or expended in connection therewith;
(e) Cause Borrower to hold all returned Inventory in trust for
Foothill, segregate all returned Inventory from all other property of Borrower
or in Borrower's possession and conspicuously label said returned Inventory as
the property of Foothill;
(f) Without notice to or demand upon Borrower, make such payments and
do such acts as Foothill considers necessary or reasonable to protect its
security interests in the Collateral. Borrower agrees to assemble the Collateral
if Foothill so requires, and to make the Collateral available to Foothill as
Foothill may designate. Borrower authorizes Foothill to enter the premises where
the Collateral is located, to take and maintain possession of the Collateral, or
any part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien that in Foothill's determination appears to conflict with its
security interests and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants
Foothill a license to enter into possession of such premises and to occupy the
same, without charge, for up to one hundred twenty (120) days in order to
exercise any of Foothill's rights or remedies provided herein, at law, in
equity, or otherwise;
<PAGE>
(g) Without notice to Borrower (such notice being expressly waived),
and without constituting a retention of any collateral in satisfaction of an
obligation (within the meaning of Section 9505 of the Code), set off and apply
to the Obligations any and all (i) balances and deposits of Borrower held by
Foothill (including any amounts received in the Lockbox Accounts), or (ii)
indebtedness at any time owing to or for the credit or the account of Borrower
held by Foothill;
(h) Hold, as cash collateral, any and all balances and deposits of
Borrower held by Foothill, and any amounts received in the Lockbox Accounts, to
secure the full and final repayment of all of the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral. Foothill is hereby granted a license or other right to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to Foothill's
benefit;
(j) Sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in such
manner and at such places (including Borrower's premises) as Foothill determines
is commercially reasonable. It is not necessary that the Collateral be present
at any such sale;
(k) Foothill shall give notice of the disposition of the
Collateral as follows:
(1) Foothill shall give Borrower and each holder of a security
interest in the Collateral who has filed with Foothill a written request for
notice, a notice in writing of the time and place of public sale, or, if the
sale is a private sale or some other disposition other than a public sale is to
be made of the Collateral, then the time on or after which the private sale or
other disposition is to be made;
(2) The notice shall be personally delivered or
mailed, postage prepaid, to Borrower as provided in Section 12, at
<PAGE>
least five (5) days before the date fixed for the sale, or at least five (5)
days before the date on or after which the private sale or other disposition is
to be made; no notice needs to be given prior to the disposition of any portion
of the Collateral that is perishable or threatens to decline speedily in value
or that is of a type customarily sold on a recognized market. Notice to Persons
other than Borrower claiming an interest in the Collateral shall be sent to such
addresses as they have furnished to Foothill;
(3) If the sale is to be a public sale, Foothill also shall give
notice of the time and place by publishing a notice one time at least five (5)
days before the date of the sale in a newspaper of general circulation in the
county in which the sale is to be held;
(l) Foothill may credit bid and purchase at any public
sale; and
(m) Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrower. Any excess will be
returned, without interest and subject to the rights of third Persons, by
Foothill to Borrower.
9.2 Remedies Cumulative. Foothill's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Foothill shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Foothill of one
right or remedy shall be deemed an election, and no waiver by Foothill of any
Event of Default shall be deemed a continuing waiver. No delay by Foothill shall
constitute a waiver, election, or acquiescence by it.
10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes, rents, assessments,
insurance premiums, or otherwise) due to third Persons, or fails to make any
deposits or furnish any required proof of payment or deposit, all as required
under the terms of this Agreement, then, to the extent that Foothill determines
that such failure by Borrower could have a material adverse effect on Foothill's
interests in the Collateral in its discretion and without prior notice to
Borrower, Foothill may do any or all of the following: (a) make payment of the
same or any part thereof; (b) set up such reserves in Borrower's loan account as
Foothill deems
<PAGE>
necessary to protect Foothill from the exposure created by such failure; or (c)
obtain and maintain insurance policies of the type described in Section 6.12,
and take any action with respect to such policies as Foothill deems prudent. Any
such amounts paid by Foothill shall constitute Foothill Expenses. Any such
payments made by Foothill shall not constitute an agreement by Foothill to make
similar payments in the future or a waiver by Foothill of any Event of Default
under this Agreement. Foothill need not inquire as to, or contest the validity
of, any such expense, tax, security interest, encumbrance, or lien and the
receipt of the usual official notice for the payment thereof shall be conclusive
evidence that the same was validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 Demand; Protest; etc. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Foothill on which Borrower may in any way be
liable.
11.2 Foothill's Liability for Collateral. So long as Foothill complies with
its obligations, if any, under Section 9207 of the Code, Foothill shall not in
any way or manner be liable or responsible for: (a) the safekeeping of the
Collateral; (b) any loss or damage thereto occurring or arising in any manner or
fashion from any cause; (c) any diminution in the value thereof; or (d) any act
or default of any carrier, warehouseman, bailee, forwarding agency, or other
Person. All risk of loss, damage, or destruction of the Collateral shall be
borne by Borrower.
11.3 Indemnification. Borrower agrees to defend, indemnify, save, and hold
Foothill and its officers, employees, and agents harmless against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
Person arising out of or relating to the transactions contemplated by this
Agreement or any other Loan Document, and (b) all losses (including attorneys
fees and disbursements) in any way suffered, incurred, or paid by Foothill as a
result of or in any way arising out of, following, or consequential to the
transactions contemplated by this Agreement or any other Loan Document other
than those losses caused by Foothill's gross negligence or wilful misconduct.
This provision shall survive the termination of this Agreement.
<PAGE>
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other Loan Document shall be in
writing and (except for financial statements and other informational documents
which may be sent by first-class mail, postage prepaid) shall be personally
delivered or sent by registered or certified mail, postage prepaid, return
receipt requested, or by prepaid telex, TWX, telefacsimile, or telegram (with
messenger delivery specified) to Borrower or to Foothill, as the case may be, at
its address set forth below:
If to any Borrower:
871-C Grier Drive
Las Vegas, Nevada 89119
Attn.: Dr. Michael B. Merryman
Telefacsimile No. 702-361-2422
If to Foothill: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn.: Business Finance Division Manager
Telefacsimile No. (310) 575-3435
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. All notices or demands sent in accordance with this Section 12, other
than notices by Foothill in connection with Sections 9504 or 9505 of the Code,
shall be deemed received on the earlier of the date of actual receipt or three
(3) days after the deposit thereof in the mail. Borrower acknowledges and agrees
that notices sent by Foothill in connection with Sections 9504 or 9505 of the
Code shall be deemed sent when deposited in the mail or transmitted by
telefacsimile or other similar method set forth above.
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES
HERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED
HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING
EFFECT TO ITS CONFLICT OF LAWS PRINCIPLES. THE PARTIES AGREE THAT
<PAGE>
ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE
TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY
OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL, IN ANY
OTHER COURT WHERE THE BORROWER HAS A PLACE OF BUSINESS OR CONDUCTS OPERATIONS OR
COLLATERAL IS LOCATED AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER
IN CONTROVERSY. EACH OF BORROWER AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED
UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM
NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 13. BORROWER AND FOOTHILL HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND FOOTHILL REPRESENT THAT EACH
HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A
TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers delivered to
Foothill may be destroyed or otherwise disposed of by Foothill four (4) months
after they are delivered to or received by Foothill, unless Borrower requests,
in writing, the return of said documents, schedules, or other papers and makes
arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 Effectiveness. This Agreement shall be binding and
deemed effective when executed by Borrower and Foothill.
15.2 Successors and Assigns. This Agreement shall bind and inure to the
benefit of the respective successors and assigns of each of the parties;
provided, however, that Borrower may not assign this Agreement or any rights or
duties hereunder without Foothill's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Foothill
shall release Borrower from its Obligations. Foothill may assign
<PAGE>
this Agreement and its rights and duties hereunder and no consent or approval by
Borrower is required in connection with any such assignment. Foothill reserves
the right to sell, assign, transfer, negotiate, or grant participations in all
or any part of, or any interest in Foothill's rights and benefits hereunder. In
connection with any such assignment or participation, Foothill may disclose all
documents and information which Foothill now or hereafter may have relating to
Borrower or Borrower's business. To the extent that Foothill assigns its rights
and obligations hereunder to a third Person, Foothill thereafter shall be
released from such assigned obligations to Borrower and such assignment shall
effect a novation between Borrower and such third Person.
15.3 Section Headings. Headings and numbers have been
set forth herein for convenience only. Unless the contrary is
compelled by the context, everything contained in each section
applies equally to this entire Agreement.
15.4 Interpretation. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against Foothill or Borrower,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
15.5 Severability of Provisions. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
15.6 Amendments in Writing. This Agreement can only be
amended by a writing signed by both Foothill and Borrower.
15.7 Counterparts; Telefacsimile Execution. This Agreement may be executed
in any number of counterparts and by different parties on separate counterparts,
each of which, when executed and delivered, shall be deemed to be an original,
and all of which, when taken together, shall constitute but one and the same
Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of a manually executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver a manually executed
counterpart of this Agreement but the failure to deliver a manually executed
<PAGE>
counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.
15.8 Revival and Reinstatement of Obligations. If the incurrence or payment
of the Obligations by Borrower of the Obligations or the transfer by either or
both of such parties to Foothill of any property of either or both of such
parties should for any reason subsequently be declared to be void or voidable
under any state or federal law relating to creditors' rights, including
provisions of the Bankruptcy Code relating to fraudulent conveyances,
preferences, and other voidable or recoverable payments of money or transfers of
property (collectively, a "Voidable Transfer"), and if Foothill is required to
repay or restore, in whole or in part, any such Voidable Transfer, or elects to
do so upon the reasonable advice of its counsel, then, as to any such Voidable
Transfer, or the amount thereof that Foothill is required or elects to repay or
restore, and as to all reasonable costs, expenses, and attorneys fees of
Foothill related thereto, the liability of Borrower automatically shall be
revived, reinstated, and restored and shall exist as though such Voidable
Transfer had never been made.
15.9 Confidential Information. Foothill will hold all material information
obtained by it from Borrower pursuant to this Agreement concerning the affairs
and business of Borrower not otherwise generally available to the public (the
"Confidential Information") in accordance with Foothill's reasonable and
customary procedures for handling confidential information. It is understood and
agreed by Borrower that Foothill may make disclosures (a) reasonably required by
any bona fide potential or actual assignee, transferee, or participant in
connection with any contemplated or actual assignment or transfer by Foothill of
an interest herein or any participation interest in Foothill's rights hereunder,
(b) of information that has become public as a result of disclosures made by
Persons other than Foothill, its Affiliates, assignees, transferees, or
participants, or (c) as required or requested by any court, governmental or
administrative agency, pursuant to any subpoena or other legal process, or by
any law, statute, regulation, or court order. Unless prohibited by applicable
law, statute, regulation or court order, Foothill shall use reasonable efforts
to notify Borrower of any request by any court, governmental or administrative
agency, or pursuant to any subpoena or other legal process for disclosure of any
Confidential Information concurrent with, or where practicable, prior to the
disclosure thereof.
<PAGE>
15.10 Foothill Purchase of Stock of Borrower. Foothill agrees, during the
term of this Agreement, that Foothill will not directly or indirectly purchase
or sell shares of Borrower's common stock without Borrower's consent.
15.11 Integration. This Agreement, together with the other Loan Documents,
reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in Los Angeles, California.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By__________________________
Title:_______________________
Mednet, MPC Corporation,
a Nevada corporation
By M. B. Merryman
Title: President
Medi-Mail, Inc.,
a Nevada corporation
By M. B. Merryman
Title: Vice President
Family Pharmaceuticals of America, Inc.,
a South Carolina corporation
<PAGE>
By M. B. Merryman
Title: Vice President
<PAGE>
Medi-Claim, Inc.,
a Nevada corporation
By M. B. Merryman
Title: Vice President
Medi-Phar, Inc.,
a Nevada corporation
By M. B. Merryman
Title: Vice President
STATE OF CALIFORNIA )
) ss. Los Angeles
COUNTY OF LOS ANGELES)
On December 26, 1995 before me, the undersigned officer,
personally appeared M. B. Merryman, known to me (or satisfactorily
proven) and acknowledged that he executed the within document as
Vice President of Medi-Mail, Inc., Family Pharmaceuticals of
America, Inc., Medi-Claim, Inc. and Medi-Phar, Inc. and as
President of Mednet, MPC Corporation.
IN WITNESS WHEREOF I hereunto set my hand.
Notary Public
<PAGE>
SCHEDULE A-1
List of Approved Account Debtors and
Approved Written Contracts For Medi-Claim, Inc.
and Approved Form of Medi-Claim, Inc. Contracts
No Eligible-Medi-Claim, Inc. Account Debtors exist at the Closing
Date.
No Eligible-Medi-Claim, Inc. Accounts exits at the Closing Date.
No forms of Acceptable Medi-Claim, Inc. Eligible Contracts exist at
the Closing Date. ->
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Mednet, MPC Corporation
Las Vegas, Nevada
We hereby consent to the use in this Registration Statement covering 3,811,725
shares of common stock on Form S-1 of our report dated March 24, 1995, relating
to the consolidated financial statements of Medi-Mail, Inc. 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
January 26, 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 Form S-1 Registration Statement of MedNet, MPC Corporation
for the registration of 3,845,111 shares of common stock, and in the Post
Effective Amendment No. 2 of the registration statement for 7,423,024 shares of
common stock that MedNet, MPC Corporation expects to file with the Securities
and Exchange Commission in January 1996.
\s\McKonly & Asbury
Harrisburg, Pennsylvania
January 26, 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
January 26, 1996
