As filed with the Securities and Exchange Commission on June 30, 2005
REGISTRATION NO. 333 - [ ]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
_________________________
NATIONAL HEALTH PARTNERS, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Indiana 7389 04-3786176
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(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
National Health Partners, Inc.
120 Gibraltar Road, Suite 107
Horsham, PA 19044
(215) 682-7114
_________________________
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive office
and principal place of business)
David M. Daniels
Chief Executive Officer
National Health Partners, Inc.
120 Gibraltar Road, Suite 107
Horsham, PA 19044
(215) 682-7114
_________________________
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following the effectiveness of this
Registration Statement.
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, 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 this Form is a post-effective amendment filed pursuant to Rule
462(d) 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, check the following box: [ ]
CALCULATION OF REGISTRATION FEE
Amount of Proposed Maximum Proposed Maximum
Title of Each Class of Shares to be Offering Aggregate Amount of
Securities to be Registered Registered (1) Price Per Share Offering Price Registration Fee
- ---------------------------- -------------- ----------------- ----------------- -----------------
common stock 6,725,125 $0.40 (2) $2,690,050 (2) $316.62 (2)
common stock 400,000 $0.40 (2) $160,000 (2) $ 18.84 (2)
underlying options
common stock 8,534,250 $0.40 (2) $3,413,700 (2) $401.80 (2)
underlying warrants
(1) Represents shares of common stock that may be offered by certain
selling security holders. Pursuant to Rule 416 under the Securities
Act, this registration statement also covers an indeterminate number of
additional shares of common stock issuable with respect to the shares
being registered hereunder by reason of any stock dividend, stock
split, recapitalization or other similar transaction effected without
the receipt of consideration that increases the number of the
registrant's outstanding shares of common stock.
(2) Estimated pursuant to Rule 457(a) under the Securities Act for the
purpose of determining the registration fee.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information in this prospectus is not complete and may be changed. The
selling security holders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED JUNE 30, 2005
PRELIMINARY PROSPECTUS
[GRAPHIC OMITTED]
NATIONAL HEALTH PARTNERS, INC.
15,659,375 shares of common stock
The 15,659,375 shares of our common stock, $.001 par value per share,
are being offered by the selling security holders identified in this prospectus.
The shares were issued by us in private placement transactions. Of the shares
being registered, 400,000 shares are issuable upon the exercise of options and
8,534,250 shares are issuable upon the exercise of warrants. The selling
security holders may sell all or a portion of their shares through public or
private transactions at prevailing market prices or at privately negotiated
prices.
We will not receive any part of the proceeds from sales of these shares
by the selling security holders.
___________________________
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 2 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this preliminary prospectus is June 30, 2005.
TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY................................................................................................1
RISK FACTORS......................................................................................................2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................15
DESCRIPTION OF BUSINESS..........................................................................................24
MANAGEMENT.......................................................................................................44
EXECUTIVE COMPENSATION...........................................................................................46
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................50
DESCRIPTION OF SECURITIES........................................................................................52
SHARES ELIGIBLE FOR FUTURE SALE..................................................................................54
SELLING SECURITY HOLDERS.........................................................................................56
USE OF PROCEEDS..................................................................................................59
PLAN OF DISTRIBUTION.............................................................................................59
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES..............................62
LEGAL MATTERS....................................................................................................63
EXPERTS .........................................................................................................63
FINANCIAL STATEMENTS............................................................................................F-1
___________________________
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN
ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION PROVIDED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
___________________________
i
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in
this prospectus. This summary does not contain all of the information that you
should consider before investing in the common stock. You should read carefully
the entire prospectus, including "Risk Factors" and the financial statements and
notes thereto, before making an investment decision.
NATIONAL HEALTH PARTNERS, INC.
The healthcare industry is in a state of turmoil. Increasing costs have
forced employers to reduce or eliminate available insurance coverage and/or
require employees to contribute heavily to premiums, especially for family
members. As a result, more Americans are being forced to self-insure and pay a
growing portion of the cost of their healthcare.
We are a national healthcare savings organization that provides
affordable healthcare programs to predominantly underserved markets in the
healthcare industry through a national healthcare savings network called
"CARExpress." CARExpress is a sophisticated network of hospitals, doctors,
dentists, pharmacists and other healthcare providers comprised of an aggregate
of over 1,000,000 medical professionals nationwide that have agreed to render
their services and products to CARExpress members at substantially discounted
prices. CARExpress enables a person to engage in point-of-service transactions
directly with these providers and receive discounts from the provider that are
similar to those received by a person employed by a large corporation with
hundreds of thousands of employees.
Our discount health membership programs provide a low-cost,
non-insurance alternative to individuals who are seeking to reduce their
out-of-pocket healthcare costs not covered by insurance or who are unable to
obtain healthcare insurance due to their medical history, age or occupation. For
a monthly fee, our members obtain discounts that are typically between 10% and
50% percent off the retail price of participating healthcare provider products
and services. Acceptance into our health programs is unrestricted, and our
programs may be utilized by the member's entire household. We believe our
commitment to flexibility in product design, systems and operations for a range
of distribution models will contribute directly to our success and help
distinguish us from our competitors.
Our principal executive offices are located at 120 Gibraltar Road,
Suite 107, Horsham, Pennsylvania 19044, and our telephone number is (215)
682-7114. We maintain a Web site at www.carexpresshealth.com. Information
contained on our Web site does not constitute part of this prospectus.
THE OFFERING
This prospectus covers the public sale of 15,659,375 shares of common
stock to be sold by the selling security holders identified in this prospectus.
Of this amount, 400,000 shares are issuable upon the exercise of options and
8,534,250 shares are issuable upon the exercise of warrants.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following risk factors in addition to other
information in this prospectus before purchasing our common stock. The risks and
uncertainties described below are those that we currently deem to be material
and that we believe are specific to our company and our industry. In addition to
these risks, our business may be subject to risks currently unknown to us. If
any of these or other risks actually occurs, our business may be adversely
affected, the trading price of our common stock may decline and you may lose all
or part of your investment.
RISKS ASSOCIATED WITH OUR BUSINESS
WE ARE AN EARLY-STAGE COMPANY WITH AN UNPROVEN BUSINESS MODEL, WHICH MAKES IT
DIFFICULT FOR US TO EVALUATE OUR CURRENT BUSINESS AND FUTURE PROSPECTS.
We have only a limited operating history upon which to base an
evaluation of our current business and future prospects. We have only been
offering our CARExpress membership programs since 2003. As a result, the revenue
and income potential of our business is unproven. In addition, we have very
limited historical data with respect to sales of our CARExpress membership cards
because we have been selling them for less than two years. Because of our
limited operating history and because the health savings industry is rapidly
evolving, we have limited insight into trends that may emerge and affect our
business. We may make errors in predicting and reacting to relevant business
trends, which could harm our business.
Before purchasing our common stock, you should consider an investment
in our common stock in light of the risks, uncertainties and difficulties
frequently encountered by early-stage companies in new and rapidly evolving
markets such as ours, including those described herein. We may not be able to
successfully address any or all of these risks. Failure to adequately address
such risks could cause our business, financial condition and results of
operations to suffer.
WE HAVE A HISTORY OF LOSSES AND, BECAUSE WE EXPECT OUR OPERATING EXPENSES TO
INCREASE IN THE FUTURE, WE DO NOT EXPECT TO BECOME PROFITABLE IN THE NEAR TERM,
IF EVER.
We have experienced net losses in each fiscal quarter since our
inception and as of March 31, 2005, had an accumulated deficit of approximately
$3.9 million. We incurred net losses to common shareholders of approximately
$505,000 during the three months ended March 31, 2005, approximately $2.6
million during the year ended December 31, 2004, and approximately $267,000
during the year ended December 31, 2003. We expect to continue to incur
significant net losses for the foreseeable future. We also expect our operating
expenses to increase substantially as we:
o develop new discount healthcare membership programs;
o recruit and hire additional personnel, including customer service and
support staff and marketing representatives;
2
o leverage and develop relationships with additional preferred provider
organizations ("PPOs") and providers of healthcare services;
o upgrade our operational and financial systems, procedures and controls;
and
o comply with Securities and Exchange Commission ("SEC") reporting
requirements and fulfill the other responsibilities we will have as a
public company.
WE MAY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE, WHICH FUNDS MAY NOT BE
AVAILABLE OR, IF AVAILABLE, MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS.
We expect that our operating expenses will increase substantially over
the next 12 months. In addition, we may experience a material decrease in
liquidity due to unforeseen capital requirements or other events and
uncertainties. As a result, we may need to raise additional funds, and such
funds may not be available on favorable terms, if at all. If we cannot raise
funds on acceptable terms, we may not be able to sell or create new CARExpress
membership programs, execute on our business plan, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
This may seriously harm our business, financial condition and results of
operations.
WE MUST DEVELOP AND EXPAND OUR USE OF MARKETING REPRESENTATIVES TO INCREASE
REVENUE AND IMPROVE OUR OPERATING RESULTS.
Our success will depend in large part upon our ability to attract,
retain and motivate the network of independent marketing representatives who
principally market our CARExpress membership programs. We will need to expand
our existing relationships and enter into new relationships with marketing
representatives in order to increase our current and future market share and
revenue. We compete with all types of network marketing companies throughout the
United States for new marketing representatives. We can provide no assurance
that we will be able to maintain and expand our existing relationships or enter
into new relationships, or that any new relationships will be available on
commercially reasonable terms. If we are unable to maintain and expand our
existing relationships or enter into new relationships, we may lose customer
introductions, co-marketing benefits and sales, and our operating results may
suffer.
OUR INCREASING RELIANCE ON MARKETING REPRESENTATIVES COULD RESULT IN REDUCED
REVENUE GROWTH BECAUSE WE HAVE LITTLE CONTROL OVER THEM OR THEIR MARKETING
REPRESENTATIVES.
We anticipate that sales by marketing representatives will account for
a larger percentage of our total revenue in future periods. None of these
parties is obligated to continue selling our products or to make any purchases
from us. Our ability to generate increased revenue depends significantly upon
the ability and willingness of our marketing representatives to market and sell
our CARExpress membership programs throughout the United States. If they are
unsuccessful in their efforts or are unwilling or unable to market and sell our
CARExpress membership programs, our operating results may suffer.
We cannot control the level of effort these parties expend or the
extent to which any of them will be successful in marketing and selling our
CARExpress membership programs. Our independent marketing representatives
typically offer and sell our CARExpress membership programs on a part-time
basis, and may engage in other business activities. These marketing
representatives may give higher priority to the products or services of our
competitors, reducing their efforts devoted to marketing our CARExpress
membership programs. We may not be able to prevent these parties from devoting
greater resources to support our competitors' products and reducing or
eliminating their efforts to sell our CARExpress membership programs.
3
DEVELOPING AND MAINTAINING RELATIONSHIPS WITH PREFERRED PROVIDER ORGANIZATIONS
ARE CRITICAL TO OUR SUCCESS AND THE LOSS OF ANY SUCH RELATIONSHIPS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
As part of our business operations, we must develop and maintain
relationships with preferred provider organizations and other provider networks
within each market area that our services are offered. Developing and
maintaining relationships with healthcare providers within a preferred provider
organization is in part based on professional relationships and the reputation
of our management and marketing personnel. Our preferred provider organization
relationships may be adversely affected by events beyond our control, including
departures of key personnel and alterations in professional relationships. The
loss of a preferred provider organization within a geographic market area may
not be replaced on a timely basis, if at all. The loss of a preferred provider
organization for any reason could have a material adverse effect on our
business, financial condition, and results of operations.
WE CURRENTLY RELY HEAVILY ON A SMALL NUMBER OF PREFERRED PROVIDER ORGANIZATIONS,
THE LOSS OF ANY ONE OF WHICH OR THE CHANGE IN OUR RELATIONSHIP WITH ANY ONE OF
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
PPONext, International Med-Care, CareMark, Cigna and Optum are some of
the principal preferred provider organizations through which our members receive
savings on healthcare services through our CARExpress membership programs. The
loss of any of these preferred provider organizations or a disruption of our
members' access to any of these preferred provider organizations could adversely
affect our business. While we currently enjoy a good relationship with each of
these preferred provider organizations, we can provide no assurance that we will
continue to have a good relationship with any of them in the future, or that
they may choose to partner with one of our competitors or compete directly with
our CARExpress membership programs. If, for any reason, we should lose a
provider relationship and be unable to promptly replace it with a new one, we
may be unable to offer certain benefits to members, which could have a negative
impact on our sales.
BECAUSE WE EXPECT TO DERIVE SUBSTANTIALLY ALL OF OUR FUTURE REVENUES FROM OUR
CAREXPRESS MEMBERSHIP PROGRAMS, ANY FAILURE OF THESE PROGRAMS TO SATISFY
CUSTOMER DEMANDS OR TO ACHIEVE MEANINGFUL MARKET ACCEPTANCE MAY SERIOUSLY HARM
OUR BUSINESS.
Substantially all of our revenues come from fees for our CARExpress
membership programs, which has not gained widespread market acceptance. We
expect our CARExpress membership programs to continue to account for
substantially all of our revenues for the foreseeable future. If, for any
reason, revenues derived from sales of our CARExpress membership programs
decline or do not grow as rapidly as we anticipate, our operating results and
our business may be significantly impaired. If our CARExpress membership
programs fail to meet the needs of our target customers, or if they do not
compare favorably in breadth and price to competing products, our growth may be
limited. We cannot assure you that our CARExpress membership programs will
achieve any meaningful market acceptance. If we cannot develop a market for our
products, or if they develop more slowly than expected, our business, financial
condition and results of operations may suffer.
4
Our future financial performance will also depend on our ability to
diversify our program offerings by successfully designing, developing and
selling new and unique enhancements to discount healthcare membership programs.
We cannot assure you that we will be successful in achieving market acceptance
of any new programs that we develop. Any failure or delay in diversifying our
existing offering of discount healthcare membership programs could harm our
business, financial condition and results of operations.
WE MAY NOT BE ABLE TO DEVELOP ACCEPTABLE NEW DISCOUNT HEALTHCARE MEMBERSHIP
PROGRAMS AT A RATE REQUIRED BY OUR RAPIDLY CHANGING MARKET.
Our future success depends on our ability to develop new discount
healthcare membership programs that keep pace with the rapidly evolving health
savings industry and that address the changing needs of our customers. We may
not be successful in either developing such programs or timely introducing them
to the market. Uncertainties about the timing and nature of changes to
healthcare regulations and the evolution of the health savings industry could
delay our development of new programs or increase the expenses in developing
them. The failure of our future discount healthcare membership programs to
satisfy the needs of our customers may limit or reduce the market for these
programs, result in customer dissatisfaction, and seriously harm our business,
financial condition and results of operations.
WE MAY BECOME SUBJECT TO GOVERNMENT REGULATION MUCH LIKE AN INSURANCE COMPANY,
WHICH MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
We offer and sell our CARExpress membership programs without license by
any federal, state, or local regulatory licensing agency or commission, with the
exception of the State of Florida. By comparison, companies that provide
insurance benefits and operate healthcare management organizations and preferred
provider organizations are regulated by state licensing agencies and
commissions. These regulations cover operations, including scope of benefits,
rate formula, delivery systems, utilization review procedures, quality
assurance, enrollment requirements, claim payments, marketing and advertising.
State insurance regulatory agencies and commissions may, in the future,
determine that our CARExpress membership programs are subject to governmental
regulation, which may adversely affect or limit our future operations.
Compliance with these statutes and regulations are costly and may limit
our operations. Statutes and regulations applicable to other healthcare
organizations with which we may contract, such as patient freedom of choice
rights and anti-discrimination rights, may force our healthcare management
organizations and preferred provider organizations to withdraw as our network
providers.
5
OUR OPERATIONS MAY BE AFFECTED BY FUTURE CHANGES IN INSURANCE LAWS AND
REGULATIONS.
Our CARExpress membership programs are not regulated as insurance
products, and our marketing representatives are not required to be licensed as
insurance brokers to be able to sell our CARExpress membership programs.
Congress or state legislatures may in the future seek to bring our CARExpress
membership programs and sales activities under the jurisdiction of insurance
regulators. Should that occur, we may face material costs of compliance with the
new laws and regulations, and if we cannot comply, we may be prohibited from
selling our programs in certain jurisdictions.
If we become subject to any licensing or regulatory requirements, our
failure to comply with any such requirements could lead to a revocation,
suspension or loss of licensing status, termination of contracts, and legal and
administrative enforcement actions. In addition, the use of the internet in the
marketing and distribution of our CARExpress membership programs is relatively
new and presents certain regulatory issues, such as whether internet service
providers, gateways or cybermalls are engaged in the solicitation or sale of
insurance policies or otherwise transacting business requiring licensure under
the laws of one or more states. Regulatory requirements are subject to change
from time to time and may become more restrictive in the future, thereby making
compliance more difficult or expensive or otherwise affecting or restricting our
ability to conduct our business as now conducted or proposed to be conducted.
OUR USE OF MARKETING REPRESENTATIVES COULD SUBJECT US TO ENFORCEMENT ACTIONS,
PENALTIES AND NEGATIVE PUBLICITY IF ANY SUCH REPRESENTATIVES DO NOT COMPLY WITH
APPLICABLE FEDERAL AND STATE REGULATIONS.
Our marketing representatives are subject to federal and state laws and
regulations administered by the Federal Trade Commission and various state
agencies. These laws and regulations include securities, franchise investment,
business opportunity, and criminal laws prohibiting the use of "pyramid" or
"endless chain" types of selling organizations. These regulations are generally
directed at ensuring that product and service sales are ultimately made to
consumers (as opposed to other marketing representatives) and that advancement
within the network marketing organization is based on sales of products and
services, rather than on investment in the company or other non-retail sales
related criteria.
The compensation structure of a network marketing organization is very
complex. Compliance with all of the applicable regulations and laws is uncertain
because of the evolving interpretations of existing laws and regulations, and
the enactment of new laws and regulations pertaining in general to network
marketing organizations and product and service distribution. Accordingly, there
is the risk that the network marketing organizations that we use may be found to
not comply with applicable laws and regulations. Such a finding could:
o result in enforcement action and imposition of penalty;
o require modification of the marketing representative network system;
o result in negative publicity; or
o have a negative effect on distributor morale and loyalty.
6
Any of these consequences could have a material adverse effect on our business,
financial condition and results of operations.
OUR SYSTEMS MAY BE VULNERABLE TO SECURITY RISKS OR SERVICE DISRUPTIONS THAT
COULD HARM OUR BUSINESS.
Although we have taken measures to secure our systems against security
risks and other causes of disruption of electronic services, our servers are
vulnerable to physical or electronic break-ins and service disruptions, which
could lead to interruptions, delays, loss of data or the inability to process
customer requests. Such events could be very expensive to remedy, could damage
our reputation and could discourage existing and potential customers from using
our products. Any such events could substantially harm our business, results of
operations and financial condition.
OUR CONTINUED GROWTH COULD STRAIN OUR PERSONNEL AND INFRASTRUCTURE RESOURCES,
AND IF WE ARE UNABLE TO IMPLEMENT APPROPRIATE CONTROLS AND PROCEDURES TO MANAGE
OUR GROWTH, WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN.
We are beginning to experience rapid growth in our operations, which is
placing, and will continue to place, a significant strain on our management,
administrative, operational and financial infrastructure. Our future success
will depend in part upon the ability of our senior management to manage growth
effectively. This will require us to hire and train additional personnel to
manage our expanding operations. In addition, we will be required to continue to
improve our operational, financial and management controls and our reporting
systems and procedures. If we fail to successfully manage our growth, we may be
unable to execute upon our business plan.
WE FACE INCREASING COMPETITION FROM MORE ESTABLISHED COMPANIES THAT HAVE
SIGNIFICANTLY GREATER RESOURCES THAN WE DO, WHICH MAY PLACE PRESSURE ON OUR
PRICING AND WHICH COULD PREVENT US FROM INCREASING REVENUE OR ATTAINING
PROFITABILITY.
The health savings industry is rapidly evolving and competition for
members is becoming increasingly intense. Our CARExpress membership programs are
similar to or directly in competition with products and services offered by our
direct competitors. Some of our healthcare providers may provide, either
directly or through third parties, programs that directly compete with our
programs. If discount healthcare membership products and services become
standard features of healthcare companies, the demand for our CARExpress
membership programs may decrease. In addition, the preferred provider
organizations and provider networks that we use may decide to develop or sell
competing products instead of our CARExpress membership programs. Moreover, even
if our CARExpress membership programs provide a greater breadth of products and
services and greater price discounts than programs offered by other companies
operating in the health savings industry, potential customers might accept this
limited functionality in lieu of purchasing our CARExpress membership programs
due to their lack of familiarity with our programs.
7
Some of our competitors enjoy substantial competitive advantages, such
as:
o programs that are functionally similar or superior to our membership
programs;
o established reputations relating to membership programs;
o greater name recognition and larger marketing budgets and resources;
o established marketing relationships and access to larger customer
bases; and
o substantially greater financial, personal and other resources.
We compete with numerous well-established companies that design and
implement membership programs. Our current principal competitors include
companies that offer healthcare products and services through membership
programs much like our CARExpress membership programs, as well as insurance
companies, preferred provider organization networks and other organizations that
offer health benefit programs to their customers. Some of our competitors may be
companies that have programs that are functionally similar or superior to our
health membership programs. Most of our competitors possess substantially
greater financial, marketing, personnel and other resources than us.
We can provide no assurance that our current or future competitors will
not:
o provide healthcare benefit programs comparable or superior to our
programs at lower membership prices;
o adapt more quickly to evolving healthcare industry trends or
changing industry requirements;
o respond more quickly and effectively to new or changing
opportunities, technologies, standards or customer requirements;
o increase their emphasis on programs similar to ours to more
effectively compete with us; or
o successfully recruit independent marketing representatives by
offering more attractive sales commissions.
For these and other reasons, we may not be able to compete successfully against
our current and future competitors. Increased competition may result in price
reductions, reduced gross margins, and loss of market share, any of which could
have a material, adverse effect on our business, financial condition and results
of operations.
OUR FAILURE TO ADEQUATELY PROTECT OUR CAREXPRESS BRAND AND OTHER INTELLECTUAL
PROPERTY COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
Intellectual property is important to our success. We generally rely
upon confidentiality procedures and contractual provisions to protect our
CARExpress brand and our other intellectual property, and we intend to apply for
legal protection for certain of our intellectual property in the future. Any
such legal protection we obtain may be challenged by others or invalidated
through administrative process or litigation. Furthermore, legal standards
relating to the validity, enforceability and scope of protection of intellectual
property rights are uncertain, and adequate legal protection of our intellectual
property may not be available to us in every country in which we intend to sell
our products. The laws of some foreign countries may not be as protective of
intellectual property rights as United States laws, and their mechanisms for
enforcement of intellectual property rights may be inadequate. As a result, our
means of protecting our proprietary technology and brands may be inadequate.
Furthermore, despite our efforts, we may be unable to prevent third parties from
infringing upon or misappropriating our intellectual property. Any such
infringement or misappropriation could have a material adverse effect on our
business, financial condition and results of operations.
8
IF WE ACQUIRE ANY HEALTHCARE COMPANIES OR PRODUCTS IN THE FUTURE, SUCH COMPANIES
AND PRODUCTS COULD PROVE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS.
We may acquire or make investments in complementary healthcare
companies, businesses, assets, products and services in the future. We have not
made any such acquisitions or investments to date, and therefore, our ability to
make acquisitions or investments is unproven. Acquisitions and investments
involve numerous risks, including:
o difficulties in integrating operations, technologies, services and
personnel;
o the diversion of financial and management resources from existing
operations;
o the risk of entering new markets;
o the potential loss of key employees; and
o the inability to generate sufficient revenue to offset acquisition
or investment costs.
In addition, if we finance any acquisitions by issuing convertible debt
or equity securities, our existing stockholders may be diluted which could
affect the market price of our stock. As a result, if we fail to properly
evaluate and execute any acquisitions or investments, our business and prospects
may be seriously harmed.
WE ARE DEPENDENT ON OUR MANAGEMENT TEAM, AND THE LOSS OF ANY KEY MEMBER OF THIS
TEAM MAY PREVENT US FROM IMPLEMENTING OUR BUSINESS PLAN IN A TIMELY MANNER.
Our success depends largely upon the continued services of our
executive officers and other key management and development personnel. While we
have entered into employment agreements with each of our executive officers,
they may terminate their employment with us at any time without penalty. We do
not maintain key person life insurance policies on any of our employees. The
loss of one or more of our key employees could seriously harm our business,
financial condition or results of operations. In such an event we may be unable
to recruit personnel to replace these individuals in a timely manner, or at all,
on acceptable terms.
BECAUSE COMPETITION FOR OUR TARGET EMPLOYEES IS INTENSE, WE MAY NOT BE ABLE TO
ATTRACT AND RETAIN THE HIGHLY-SKILLED EMPLOYEES THAT WE NEED TO SUPPORT OUR
PLANNED GROWTH.
To execute our growth plan, we must attract and retain highly-qualified
personnel. We need to hire additional personnel in virtually all operational
areas, including selling and marketing, research and development, operations and
technical support, customer service and administration. Competition for these
personnel remains intense, especially for individuals with high levels of
experience in designing and developing health savings programs. We may not be
successful in attracting and retaining qualified personnel. Many of the
companies with which we compete for experienced personnel have greater resources
than we have. If we fail to attract new personnel or retain and motivate our
current personnel, our business and future growth prospects could be severely
harmed.
9
RISKS ASSOCIATED WITH OUR INDUSTRY
THE HEALTH SAVINGS INDUSTRY IS RAPIDLY EVOLVING, AND IF WE ARE NOT SUCCESSFUL IN
PROMOTING THE BENEFITS OF OUR CAREXPRESS MEMBERSHIP PROGRAMS AND OUR CAREXPRESS
BRAND, OUR GROWTH MAY BE LIMITED.
Based on our experience with consumers, we believe that many consumers
are not familiar with the health savings industry and the benefits provided by
discount healthcare membership programs. In addition, there may be a
time-limited opportunity to achieve and maintain a significant share of the
market for healthcare membership programs due in part to the rapidly evolving
nature of the health savings industry and the substantial resources available to
our existing and potential competitors. If employers do not recognize or
acknowledge these problems, then the market for our CARExpress membership
programs may develop more slowly than we expect, which could adversely affect
our operating results.
Developing and maintaining awareness of our CARExpress brand is
critical to achieving widespread acceptance of our existing and future
CARExpress membership programs. Furthermore, we believe that the importance of
brand recognition will increase as competition in our market develops.
Successful promotion of our CARExpress brand will depend largely on the
effectiveness of our marketing efforts and on our ability to develop reliable
and useful CARExpress membership programs at competitive prices. If we fail to
successfully promote our CARExpress brand, or if our expenses to promote and
maintain our CARExpress brand are greater than anticipated, our financial
condition and results of operations could suffer.
THE SUCCESS OF OUR BUSINESS DEPENDS UPON THE CONTINUED GROWTH AND ACCEPTANCE OF
HEALTH MEMBERSHIP PROGRAMS AS A SUITABLE ALTERNATIVE OR SUPPLEMENT TO
TRADITIONAL HEALTH INSURANCE.
Expansion in the sales of our CARExpress membership programs depends on
the acceptance of health membership programs as a suitable alternative or
supplement to traditional health insurance. Health membership programs could
lose their viability as an alternative to health insurance due to changes in
healthcare laws and regulations, an inadequate number of healthcare providers
participating in the programs, customer dissatisfaction with the method of
making payments and receiving discounts, and new alternative healthcare
solutions. If healthcare membership programs do not gain widespread market
acceptance, the demand for our CARExpress membership programs could be
significantly reduced, which could have a material adverse effect on our
business, financial condition and results of operations.
10
EVOLVING REGULATION OF THE HEALTH SAVINGS INDUSTRY MAY AFFECT US ADVERSELY.
As the health savings industry continues to evolve, increasing
regulation by federal, state or foreign agencies becomes more likely. The
delivery of discount health care products and services is subject to federal,
state and local regulation, including the prohibition of business corporations
from providing medical care, the fraud and abuse provisions of the Medicare and
Medicaid statutes, state laws that prohibit referral fees and fee splitting, and
regulations applicable to insurance companies and organizations that provide
healthcare services. Compliance with changes in applicable regulations could
materially increase the associated operating costs. Non-compliance with these
laws and regulations could cause us to become the subject of a variety of
enforcement or private actions, subject us or our management personnel to fines
or various forms of civil or criminal prosecution, and result in negative
publicity potentially damaging our reputation, network relationships, client
relationships and the relationship with program members, representatives and
consumers in general. Our failure to comply with current, as well as newly
enacted or adopted federal and state regulations, could have a material adverse
effect upon our business, financial condition and results of operations
RISKS ASSOCIATED WITH OUR STOCK
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
The sale of a large number of shares of our common stock available for
sale in the market after this offering, or the belief that such sales could
occur, could cause a drop in the market price of our common stock. We currently
have 17,054,200 shares of common stock outstanding, all of which are "restricted
securities" as that term is defined in Rule 144 of the Securities Act. We are
registering 6,725,125 of these restricted shares in this offering. We are also
registering an additional 400,000 shares of common stock underlying currently
outstanding options and an additional 8,534,250 shares of common stock
underlying currently outstanding warrants. The shares registered in this
offering will be freely tradable without restriction or further registration
under the Securities Act, unless the shares are purchased by our affiliates.
Immediately after the effectiveness of the registration statement of
which this prospectus is a part, 6,725,125 shares of our outstanding shares of
common stock will be freely tradable without restriction or further registration
under the Securities Act, unless the shares are purchased by our affiliates. The
remaining 10,329,075 shares of common stock outstanding after the effectiveness
of the registration statement will continue to be restricted securities.
None of our directors, executive officers and other stockholders are
subject to lock-up agreements or market stand-off provisions that limit their
ability to sell common stock.
11
WE INTEND TO ATTEMPT TO RAISE ADDITIONAL FUNDS IN THE FUTURE, AND SUCH
ADDITIONAL FUNDING MAY BE DILUTIVE TO STOCKHOLDERS OR IMPOSE OPERATIONAL
RESTRICTIONS.
We intend to raise additional capital in the future to help fund our
operations through sales of shares of our common stock or securities convertible
into shares of our common stock, as well as issuances of debt. Such additional
financing may be dilutive to our stockholders, and debt financing, if available,
may involve restrictive covenants which may limit our operating flexibility. If
additional capital is raised through the issuances of shares of our common stock
or securities convertible into shares of our common stock, the percentage
ownership of existing stockholders will be reduced. These stockholders may
experience additional dilution in net book value per share and any additional
equity securities may have rights, preferences and privileges senior to those of
the holders of our common stock. In addition, certain of our outstanding
warrants contain provisions that provide for a downward adjustment in the
exercise price in the event that we issue shares of our common stock or
securities convertible or exercisable into shares of our common stock at a price
less than the exercise price in effect at the time of the issuance of such
securities, which could result in additional dilution to our stockholders.
THE MARKET PRICE OF OUR COMMON STOCK IS LIKELY TO BE HIGHLY VOLATILE AND SUBJECT
TO WIDE FLUCTUATIONS.
The market price of our common stock is likely to be highly volatile
and could be subject to wide fluctuations in response to a number of factors
that are beyond our control, including:
o announcements of new programs or services by our competitors;
o demand for our CARExpress membership programs, including
fluctuations in license renewals; and
o fluctuations in revenue from the network marketing organizations
that we use.
In addition, the market price of our common stock could be subject to
wide fluctuations in response to:
o quarterly variations in our revenues and operating expenses;
o announcements of new programs or services by us; and
o our ability to accommodate the future growth in our operations.
In addition, the stock market has experienced significant price and
volume fluctuations that have particularly affected the market price of the
stock of many early-stage companies and that often have been unrelated or
disproportionate to the operating performance of these companies. Market
fluctuations such as these may seriously harm the market price of our common
stock. Further, securities class action suits have been filed against companies
following periods of market volatility in the price of their securities. If such
an action is instituted against us, we may incur substantial costs and a
diversion of management attention and resources, which would seriously harm our
business, financial condition and results of operations.
12
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND THESE FLUCTUATIONS MAY
CAUSE OUR STOCK PRICE TO FALL.
Our operating results will likely vary in the future primarily as the
result of fluctuations in our billings, revenues and operating expenses. We
expect that our operating expenses will increase substantially in the future as
we expand our selling and marketing activities, increase our research and
development efforts, and hire additional personnel. If our results of operations
do not meet the expectations of current or potential investors, the price of our
common stock may decline.
OUR SHARES OF COMMON STOCK ARE NOT LISTED ON ANY NATIONAL SECURITIES EXCHANGE OR
ESTABLISHED ELECTRONIC TRADING SYSTEM.
Our shares of common stock do not currently trade on a national
securities exchange or any other established electronic trading system. We
intend to submit an application to the OTC Bulletin Board immediately after the
effective date of the registration statement of which this prospectus is a part.
We can provide no assurance, however, that such application will be submitted
or, if it is, that it will be accepted by the OTC Bulletin Board or that our
shares of common stock will be approved for trading on the OTC Bulletin Board.
The failure of our shares to be approved for trading on the OTC Bulletin Board
will have the effect of limiting the trading activity of our common stock and
reducing the liquidity of an investment in our common stock.
APPLICABLE SEC RULES GOVERNING THE TRADING OF "PENNY STOCKS" MAY LIMIT THE
TRADING AND LIQUIDITY OF OUR COMMON STOCK WHICH MAY AFFECT THE TRADING PRICE OF
OUR COMMON STOCK.
In the event our shares of common stock are not listed on a national
securities exchange, an electronic trading system, or the pink sheets, our
common stock will very likely be considered a "penny stock" as defined under
Rule 3a51-1 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and will be subject to SEC rules and regulations that impose limitations
upon the manner in which our shares can be publicly traded. These regulations
require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule explaining the penny stock market and the associated risks.
Under these regulations, certain brokers who recommend such securities to
persons other than established customers or certain accredited investors must
make a special written suitability determination regarding such a purchaser and
receive such purchaser's written agreement to a transaction prior to sale. These
regulations may have the effect of limiting the trading activity of our common
stock and reducing the liquidity of an investment in our common stock.
13
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included or incorporated by reference in
this prospectus, including, without limitation, statements regarding our future
financial position, business strategy, budgets, projected revenues, projected
costs and plans and objective of management for future operations, are
forward-looking statements. In addition, forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "expects," "intends," "plans," "projects," "estimates," "anticipates,"
or "believes" or the negative thereof or any variation thereon or similar
terminology or expressions.
These forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from results proposed in
such statements. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from our expectations include, but are not
limited to:
o our ability to fund future growth and implement our business
strategy;
o demand for and acceptance of our CARExpress membership programs;
o our dependence on a small number of preferred provider organizations
for healthcare providers;
o our ability to develop and expand the market for our CARExpress
membership programs;
o our ability to market our CARExpress membership programs;
o growth and market acceptance of the health savings industry;
o competition in the health savings industry and our markets;
o our ability to attract and retain qualified personnel and marketing
representatives;
o legislative or regulatory changes in the healthcare industry;
o the condition of the securities and capital markets;
o general economic and business conditions, either nationally or
internationally or in the jurisdictions in which we are doing
business;
and statements of assumption underlying any of the foregoing, as well as any
other factors set forth under the caption "Risk Factors" on page 2 of this
prospectus and "Management's Discussions an Analysis of Financial Condition and
Results of Operation" below.
All subsequent written and oral forward-looking statements attributable
to us, or persons acting on our behalf, are expressly qualified in their
entirety by the foregoing. Except as required by law, we assume no duty to
update or revise our forward-looking statements based on changes in internal
estimates or expectations or otherwise.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this prospectus contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
included in this prospectus are based on information available to us on the date
hereof, and we assume no obligation to update any such forward-looking
statements. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
those set forth under the caption "Risk Factors" on page 2 of this prospectus
and elsewhere in this prospectus. The following should be read in conjunction
with our audited financial statements beginning on page F-1 of this prospectus.
OVERVIEW
We are a leading national healthcare savings organization that designs
and offers discount healthcare membership programs to uninsured and underinsured
individuals. Our membership programs encompass all aspects of healthcare,
including physicians, hospitals, ancillary services, dentists, prescription
drugs, vision care, hearing aids, chiropractic and alternative care, 24-hour
nurse line, and medical supplies and equipment. We offer our discount healthcare
membership programs through a national healthcare savings network called
CARExpress. CARExpress is one of the largest and most comprehensive healthcare
savings network in the United States. Through CARExpress, we can provide members
access to healthcare providers affiliated with some of the largest and most
prestigious national health networks in the country.
Our strategy is to sustain and expand our position as one of the
leading providers of unique healthcare membership service programs. We intend to
focus predominantly in underserved markets where individuals either have limited
healthcare benefits or no insurance. We have developed programs that give
individuals access to healthcare providers at reduced fees, and offer value and
savings to healthcare consumers throughout the country. Through product design,
competitive membership pricing and strong distribution channel partners, we plan
to fill a significant void in the healthcare market that insurance plans have
not addressed.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements and accompanying
notes, which have been prepared in accordance with accounting principals
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. When making these estimates and
assumptions, we consider our historical experience, our knowledge of economic
and market factors and various other factors that we believe to be reasonable
under the circumstances. Actual results may differ under different estimates and
assumptions.
The accounting estimates and assumptions discussed in this section are
those that we consider to be the most critical to an understanding of our
financial statements because they inherently involve significant judgments and
uncertainties.
15
Revenue Recognition
We recognize membership revenues on each monthly anniversary date.
Membership revenues are reduced by the amount of refunds estimated to be
incurred. For members that are billed directly, collection of the billed amount
is collected almost entirely by automated clearing house electronic check or by
electronic charge to the members' credit card. The settlement of those charges
typically occurs within one or two days. In a minority of cases, the membership
fees may be billed to the member by our third-party business partners, after
which our portion of such revenue is remitted to us on a periodic basis.
Commission Expense
We pay commissions to our independent marketing representatives,
brokers and agents in the month following the month during which a member has
enrolled in one or more of our CARExpress membership programs and the related
monthly membership fees have been received by us. We do not pay advanced
commissions to marketing representatives, brokers and agents on membership
sales. The amounts of the commissions are based upon established commission
schedules and are determined and accrued based upon the recognition of the
related healthcare membership revenue.
Income Taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate our taxes in each of the jurisdictions
in which we operate. This process involves us estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items, such as deferred revenue, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities that are
included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in our statement of operations.
16
Management judgment is required in determining our provision for income
taxes, our deferred tax assets and liabilities, and any valuation allowance
recorded against our net deferred tax assets. As of December 31, 2004, we had a
full valuation allowance against our deferred tax assets because the
determination was made that it is more likely than not that all of the deferred
tax assets may not be realized in the foreseeable future due to historical
operating losses. Going forward, we will assess the continued need for the
valuation allowance. After we have demonstrated profitability for a period of
time and begin utilizing a significant portion of the deferred tax assets, we
may reverse the valuation allowance, likely resulting in a significant benefit
to the statements of operations in some future period. At this time, we cannot
reasonably estimate when, or if, this reversal might occur.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, FASB issued Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("SFAS No. 123R"), which revised
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123R establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123R requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS No. 123R, only certain pro forma disclosures of fair
value were required. SFAS No. 123R will be effective for small business issuers
as of the beginning of the first interim or annual reporting period that begins
after December 15, 2005. The impact of the adoption of this new accounting
pronouncement would be similar to our calculation of the pro forma impact on net
income of SFAS 123 included in "Note 8 - Stock Options" to our consolidated
financial statements beginning on page F-18.
For a more complete discussion of our accounting policies and
procedures, see our Notes to Consolidated Financial Statements beginning on page
F-14.
COMPARISON OF THREE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
Revenues
Revenues consist of the monthly membership fees that we receive from
members of our CARExpress membership programs and commissions that we receive
from the sale of insurance products that are sold in combination with our
CARExpress membership programs. Revenues increased $9,895, or 116.6%, to $18,379
for the three months ended March 31, 2005 from $8,484 for the three months ended
March 31, 2004. The increase of $9,895 was primarily a result of increased sales
of our CARExpress membership programs to new customers. Approximately 30% of
revenues recognized for the three months ended March 31, 2005 were derived from
sales of our CARExpress membership programs to first-time members. The remaining
70% of revenues was generated from existing members. We expect growth in
revenues to accelerate over the next 12 months as we continue to enter into
sales and marketing agreements with retailers, outlets, unions and associations,
execute upon our advertising and marketing campaigns, and design and sell unique
discount healthcare membership solutions to new and existing customers.
17
Operating Expenses
Operating expenses consist primarily of salary expense, general and
administrative expenses, professional fees and rent expenses.
Salary Expense. Salary expense consists of all salaries, stock
compensation, benefits and related compensation that we pay to our employees.
Salary expense increased $176,472 to $213,139 for the three months ended March
31, 2005, from $36,667 for the three months ended March 31, 2004. The increase
of $176,472 was due primarily to the fact that only four employees were paid for
only one month in 2004 while nine employees were paid for three months in 2005.
Each of our executive officers is party to an employment agreement with us
pursuant to which they will receive a fixed increase in salary on January 1 of
each year of the remaining term of their respective agreement, and may be paid
bonuses and other compensation at the discretion of our board of directors. A
summary of the material terms of these employment agreements is provided below
under "Executive Compensation" and under "Note 4 - Commitments and Contingencies
- - Employment Agreements" of our unaudited consolidated financial statements for
the three months ended March 31, 2005. In addition, we may retain additional
executive management personnel with substantial experience in the healthcare or
health savings industry. As a result, we expect salary expense to increase over
the next 12 months.
General and Administrative Expenses. General and administrative
expenses consist of computer and telecommunication equipment costs, marketing
and advertising expenses, Web site development expenses, sales commissions for
marketing representatives, brokers and agents, and other general and
administrative expenses. General and administrative expenses increased $111,464
to $116,610 for the three months ended March 31, 2005 from $5,146 for the three
months ended March 31, 2004. The increase of $111,464 resulted primarily from
$36,631 for advertising and marketing campaigns that we commenced for our
CARExpress membership programs, an increase of $15,491 for expenses associated
with business transactions and moving, and an increase of $5,440 for commissions
paid to our marketing representatives, brokers and agents associated with
increased sales of our CARExpress membership programs. We expect general and
administrative expenses to continue to increase over the next 12 months as we
engage in larger and more frequent marketing and advertising campaigns for our
CARExpress membership programs, such as direct mail, print ad, television and
internet campaigns, hire additional personnel for our customer service
department, and add more personnel to support our expanding sales and marketing
efforts, and as increased sales of our CARExpress membership programs result in
higher overall sales commission expenses.
Professional Fees. Professional fees consist of fees paid to our
independent accountants, lawyers and other professionals. Professional fees
increased $74,232 to $115,189 for the three months ended March 31, 2005 from
$40,957 for the three months ended March 31, 2004. The increase of $74,232 was
due primarily to professional fees associated with the completion of audited
financial statements for our fiscal year ended December 31, 2004, and various
capital-raising and business transactions that we commenced or completed during
the quarter. We expect professional fees to increase over the next 12 months as
we incur additional fees in connection with our preparation and filing of the
registration statement of which this prospectus is a part and our compliance
with SEC public reporting and corporate governance requirements upon the
effectiveness of our the registration statement, and as we continue to engage in
business transactions associated with the anticipated growth of our business.
18
Rent Expense. Rent expense consists of the rent that we pay under the
lease for our principal executive offices. Rent expense increased $31,925 to
$50,913 for the three months ended March 31, 2005 from $18,988 for the three
months ended March 31, 2004. The increase of $31,925 resulted primarily from our
decision to move into a larger facility in April 2004 that provides us with 17
executive offices, a fully equipped state-of-the-art computer and
telecommunications room, and the capacity to expand our customer service base to
approximately 80 customer service agents. A summary of the material terms of
this lease is provided under "Note 4 - Commitments and Contingencies - Facility
Lease" of our unaudited consolidated financial statements for the three months
ended March 31, 2005. We expect rent expense to increase over the next 12 months
as a result of annual increases in our lease payments for this facility and the
commencement of our payments under the lease that we entered into on July 1,
2005 for our facility in Sarasota, Florida.
COMPARISON OF YEARS ENDED DECEMBER 31, 2004 AND 2003
Revenue
Revenues decreased $22,442 to $27,929 for the year ended December 31,
2004 from $50,371 for the year ended December 31, 2003. The decrease of $22,442
was primarily a result our decision to reduce marketing efforts on direct sales
of our CARExpress membership programs to consumers and instead focus our
marketing efforts on sales of our CARExpress membership programs to retailers,
outlets, unions and associations. Approximately 30% of our revenues for the year
ended December 31, 2004 were derived from sales of our CARExpress membership
programs to retailers, outlets, unions and associations, compared to 70% for the
year ended December 31, 2003.
Operating Expenses
Salary Expense. Salary expense increased $496,369 to $577,248 for the
year ended December 31, 2004 from $80,879 for the year ended December 31, 2003.
The increase of $496,369 was due primarily to an increase in the number of
personnel from one part-time employee in 2003 to 9 full-time employees and one
part-time employee during 2004.
General and Administrative Expenses. General and administrative
expenses (not including marketing and advertising expenses, which are described
below under "Advertising Expense") increased $328,543 to $407,141 for the year
ended December 31, 2004 from $78,598 for the year ended December 31, 2004. The
increase of $328,543 resulted primarily from $39,099 in additional taxes paid
due to the increased payroll in 2004, $100,152 of additional travel and
entertainment expense associated with marketing, contract negotiation and other
business activities, $13,515 of additional supply costs as a result of increased
personnel and activities, $5,734 increased in costs for additional computers,
moving expenses of $6,618 for the move to our new offices, and $6,883 for
computer repairs.
19
Professional Fees. We incurred professional fees of $1,178,898 during
our fiscal year ended December 31, 2004. We did not incur any professional fees
during our fiscal year ended December 31, 2003 as we did not engage in any
business transactions or activities requiring the services of independent
accountants, lawyers or other professionals during that year. The $1,178,898 of
professional fees that we incurred during our fiscal year ended December 31,
2004 was comprised primarily of professional fees associated with tax
preparation, outside auditing, non-employee compensation for accounting and
marketing activities during January and February 2004, and various business
transactions that we commenced or completed during the year.
Advertising Expense. Advertising expense consisted of costs that we
incurred in connection with the various advertising and marketing campaigns for
our CARExpress membership programs, such as direct mail, print ad, television
and internet campaigns. We incurred advertising expense of $170,377 during the
year ended December 31, 2004. We did not incur any advertising expense during
the year ended December 31, 2003 as we did not engage in any marketing and
advertising activities during that year. The $170,377 of advertising expense
that we incurred during the year ended December 31, 2004 was comprised primarily
of the direct mail, print ad, television and internet campaigns that we
commenced during the year.
Rent Expense. Rent expense increased $67,737 to $119,906 for the year
ended December 31, 2004 from $52,169 for the year ended December 31, 2004. The
increase of $67,737 resulted primarily from our decision to move into a larger
facility in April 2004 that provides us with 17 executive offices, a fully
equipped state-of-the-art computer and telecommunications room, and the capacity
to expand our customer service base to approximately 80 customer service agents.
Loss on Extinguishment of Debt
Loss on extinguishment of debt consists of losses realized upon the
extinguishment of our existing debt obligations and the write-off of associated
unamortized debt issuance costs. We incurred loss on extinguishment of debt of
$83,393 for our fiscal year ended December 31, 2004. We did not incur any loss
on extinguishment of debt for our fiscal year ended December 31, 2003. The loss
on extinguishment of debt of $83,393 that we incurred during our fiscal year
ended December 31, 2004 consisted of losses realized upon the issuance of shares
of our common stock and the payment of cash in exchange for the extinguishment
of debt obligations and the write-off of unamortized debt issuance costs
resulting therefrom that we had incurred in connection with the funding of our
business operations. Since we do not intend to fund our future operations by
means of the issuance of debt, and since we had only 23,742 in notes payable
outstanding on December 31, 2004, we do not expect to incur any material loss on
extinguishment of debt during the next 12 months.
20
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations primarily through
private sales of equity securities and the use of short-term and long-term debt.
As of March 31, 2005, we had a cash and cash equivalents balance of $73,258.
Net cash used in operating activities was $429,745 for the three months
ended March 31, 2005 compared to $462,673 for the three months ended March 31,
2004. The $32,928 decrease in cash used in operating activities was primarily
due to an increase in accounts payable and accrued expenses of approximately
$376,000 and a decrease in spending on current assets of approximately $50,000,
partially offset by increased net loss of approximately $401,000. Net cash used
in operating activities was $1,622,875 for our fiscal year ended December 31,
2004, compared to $130,520 for our fiscal year ended December 31, 2003. The
$1,492,355 increase was due primarily to and increase in net loss of
approximately $2,324,000, and a decrease in accounts payable and accrued
expenses of approximately $270,000 and interest payable of approximately
$44,000, partially offset by an increase in noncash compensation consisting of
shares of our common stock issued in exchange for professional, consulting,
advisory and other services of approximately $1,049,000 and loss on the
extinguishment of debt and related costs of approximately $83,000.
Net cash used in investing activities was $25,000 for the three months
ended March 31, 2005 compared to $11,411 for the three months ended March 31,
2004. The $13,589 increase in cash used by investing activities was due to our
payment of notes receivable of $25,000, partially offset by a decrease in
purchases of fixed assets and Web site costs of approximately $11,000. Net cash
used in investing activities was $161,956 for our fiscal year ended December 31,
2004. We did not have any cash flows from investing activities for our fiscal
year ended December 31, 2003. The $161,956 increase was due to an increase in
purchases of fixed assets and Web site costs.
Net cash provided by financing activities was $71,088 for the three
months ended March 31, 2005 compared to $768,040 for the three months ended
March 31, 2004. The $696,952 decrease in net cash provided by financing
activities was due primarily to a decrease in proceeds from sales of shares of
our common stock and subscriptions payable of approximately $706,000 and an
increase in certificates of deposits of approximately $35,000, partially offset
by a decrease in payments on notes payable of approximately $43,000. Net cash
provided by financing activities was $2,206,576 for our fiscal year ended
December 31, 2004 compared to $114,551 for our fiscal year ended December 31,
2003. The $2,092,025 increase in cash flows from financing activities was due
primarily to an increase in proceeds from sales of our common stock and
subscriptions payable of approximately $2,403,000, partially offset by an
increase in payments on our notes payable of approximately $203,000 and a
decrease in proceeds from the issuance of notes payable of approximately
$106,000.
We had working capital of $239,967 at December 31, 2004.
21
Our primary sources of financing over the past twelve (12) months are
set forth below.
In August 2004, we completed a private offering of 2,777,000 shares of
our common stock, Class A warrants to acquire 1,388,500 shares of our common
stock, and Class B warrants to acquire 1,388,500 shares of our common stock, for
aggregate cash consideration of $1,388,500. These securities were sold in units
comprised of two shares of common stock, one Class A warrant and one Class B
warrant. The units were sold at a purchase price of $1.00 per unit. Each Class A
warrant is initially exercisable into one share of our common Stock at an
exercise price of $1.00 per share. Each Class B Warrant is initially exercisable
into one share of our common stock at an exercise price of $2.00 per share.
In September 2004, we completed a private offering of 173,968 shares of
our common stock, Class A warrants to acquire 86,984 shares of our common stock,
and Class B warrants to acquire 86,984 shares of our common stock, for aggregate
cash consideration of $86,984. These securities were sold in units comprised of
two shares of common stock, one Class A warrant and one Class B warrant. The
units were sold at a purchase price of $1.00 per unit. Each Class A warrant is
initially exercisable into one share of our common Stock at an exercise price of
$1.00 per share. Each Class B Warrant is initially exercisable into one share of
our common stock at an exercise price of $2.00 per share.
In April 2005, we completed a private offering of 2,448,751 shares of
our common stock, Class A warrants to acquire 816,250 shares of our common
stock, and Class B warrants to acquire 816,250 shares of our common stock, for
aggregate cash consideration of $979,501. These securities were sold in units
comprised of three shares of common stock, one Class A warrant and one Class B
warrant. The units were sold at a purchase price of $1.20 per unit. Each Class A
warrant is initially exercisable into one share of our common Stock at an
exercise price of $1.00 per share. Each Class B Warrant is initially exercisable
into one share of our common stock at an exercise price of $2.00 per share.
In May 2005, we completed a private offering of 635,750 shares of our
common stock, Class A warrants to acquire 317,875 shares of our common stock,
and Class B warrants to acquire 317,875 shares of our common stock, for
aggregate cash consideration of $254,300. These securities were sold in units
comprised of three shares of common stock, one Class A warrant and one Class B
warrant. The units were sold at a purchase price of $1.20 per unit. Each Class A
warrant is initially exercisable into one and one-half shares of our common
Stock at an exercise price of $.60 per share. Each Class B warrant is initially
exercisable into one and one-half shares of our common stock at an exercise
price of $.80 per share.
In May 2005, we completed a private offering of 1,800,000 shares of our
common stock, Class A warrants to acquire 1,800,000 shares of our common stock,
and Class B warrants to acquire 1,800,000 shares of our common stock, for
aggregate consideration of $720,000. These securities were sold in units
comprised of three shares of common stock, three Class A warrants and three
Class B warrants. The units were sold at a purchase price of $1.20 per unit.
Each Class A warrant is initially exercisable into one share of our common Stock
at an exercise price of $.60 per share. Each Class B warrant is initially
exercisable into one share of our common stock at an exercise price of $.80 per
share.
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In June 2005, we completed a private offering of 1,490,000 shares of
our common stock, Class A warrants to acquire 1,490,000 shares of our common
stock, and Class B warrants to acquire 1,490,000 shares of our common stock, for
aggregate cash consideration of $596,000. These securities were sold in units
comprised of three shares of common stock, three Class A warrants and three
Class B warrants. The units were sold at a purchase price of $1.20 per unit.
Each Class A warrant is initially exercisable into one share of our common Stock
at an exercise price of $.60 per share. Each Class B warrant is initially
exercisable into one share of our common stock at an exercise price of $.80 per
share.
The forgoing constitutes our principal sources of financing during the
past twelve (12) months. We do not currently maintain a line of credit or term
loan with any commercial bank or other financial institution. To date, our
capital needs have been principally met through the receipt of proceeds from
sales of our equity and debt securities.
We believe that our current cash resources will be sufficient to
sustain our current operations for the next twelve (12) months. We intend to
continue to invest our cash in excess of current operating requirements in
interest-bearing, investment-grade securities. We intend to obtain additional
cash resources within the next twelve (12) months to finance the growth of our
business through sales of debt or equity securities and through proceeds
received from the exercise of outstanding options and warrants by our security
holders. The sale of additional equity or convertible debt securities would
result in additional dilution to our shareholders. The issuance of additional
debt would result in increased expenses and could subject us to covenants that
may have the effect of restricting our operations. We have not made arrangements
to obtain additional financing and we can provide no assurance that financing,
if required, will be available in amount or on terms acceptable to us, if at
all. If we are unable to obtain additional funds when they are needed or if such
funds cannot be obtained on terms favorable to us, we may be required to delay
or scale back any plans we may have to acquire such companies, businesses,
assets or technologies.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2005, we did not have any relationships with
unconsolidated entities or financial partners, such as entities often referred
to as structured finance or special purpose entities, that had been established
for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.
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DESCRIPTION OF BUSINESS
OVERVIEW
We are a national healthcare savings organization founded in 1989 and
reorganized in 2001 by healthcare and finance experts to address the need for
affordable healthcare nationwide. We create, market and distribute membership
savings programs to predominantly underserved markets in the healthcare industry
through a national healthcare savings network called CARExpress ("CARExpress").
CARExpress is a sophisticated network of hospitals, doctors, dentists,
pharmacists and other healthcare providers comprised of an aggregate of over
1,000,000 medical professionals that have agreed to render their services and
products to CARExpress members at substantially discounted prices. CARExpress
enables a person to engage in point-of-service transactions directly with these
providers and receive discounts from the provider that are similar to those
received by a person employed by a large corporation with hundreds of thousands
of employees.
Our programs offer savings on healthcare services to persons who are
uninsured, underinsured, or who have elected to purchase only high deductible or
limited benefit medical insurance policies, by providing access to the same
preferred provider organizations ("PPOs") that are utilized by many insurance
companies and employers who self-fund at least a portion of their employees'
healthcare risk. Our programs are also used to supplement benefit plans and fill
in the gaps created by the need to reduce health benefits to keep the costs of
health insurance reasonable. These programs are sold primarily through a network
marketing strategy under the name CARExpress, but are also offered through
resellers who have privately labeled or co-branded the CARExpress services and
through employers as part of an employee benefit plan.
HEALTHCARE INDUSTRY
The healthcare industry remains in a state of turmoil and crisis. The
U.S. Department of Commerce estimates that 15.6% of all Americans, or 45 million
individuals, were without health insurance coverage in 2003, up from 15.2%, or
43.6 million individuals, in 2002, an increase of 1.4 million people, and that
21% of all Americans, or 61 million individuals, had only marginal coverage in
2003. The percentage of people working full-time without health insurance in
2003 was 17.5%, an increase of 16.8% from 2002. According to CMS, Office of the
Actuary, National Health Statistics Group and the U.S. Census Bureau,
iProceed.com, the Centers for Medicare and Medicaid Services estimates that
healthcare expenditures in the United States topped $1.7 trillion in 2003.
Several factors have contributed to the increase in the cost of
healthcare, including the following:
Over Utilization of the Healthcare System. American citizens are
utilizing healthcare services at an ever-increasing rate. Behind this phenomenon
is the fact that insurance plans and healthcare management organizations are
structured to encourage usage. Small co-payments, generally from $10 or $15 per
office visit, encourage insured consumers to use the healthcare system more
frequently because they do not perceive themselves ultimately as having to pay
the full costs of the medical services received.
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Strict State Insurance Regulations. A number of insurance companies
have pulled out of certain states due to state regulations that no longer
provide for a viable operating environment. As a result of these health coverage
cancellations, those formerly insured individuals and families are required to
pay more for their insurance coverage, cannot obtain any coverage because of
pre-existing conditions, or simply remain uninsured for healthcare.
Escalating Tensions Between Medical Providers and Payors. Tensions
between medical providers and payors are escalating. The medical decision is
often no longer in the hands of the doctor and the patient. Rather,
administrators at healthcare management organizations and insurance companies
determine the procedures to be performed. Doctors and hospitals, having
experienced decreases in their income and profits, are demanding higher
compensation, particularly from the healthcare management organizations.
These increasing costs have led to limitations on reimbursement from
insurance companies, HMOs and government sources and have generated demand for
products and services designed to control healthcare costs. Many employers have
responded to the increased cost of providing health insurance to their employees
by reducing or eliminating available insurance coverage and/or by requiring
employees to contribute heavily to premiums, especially for family members.
As a result, more Americans are being forced to self-insure and pay a
growing portion of the cost of their healthcare. Some are entirely uninsured.
Others can only afford or choose only a high deductible or limited benefit
health insurance policy. In either case, this patient population increasingly
forgoes medical procedures or relies on emergency care for its healthcare needs
and often incurs prohibitive expenses. Additionally, costs of healthcare (in
doctors' offices and hospitals) for this patient population are often far higher
than the amount an insured and the insurance company would pay for the same
healthcare services for its insureds. The uninsured and underinsured patients
have had no one to negotiate healthcare service costs on their behalf.
Market demand is significant for any product that can accomplish one or
more of the following:
o provide a low-cost alternative to health insurance for the 90-plus
million Americans who have either no insurance or only catastrophic
insurance coverage;
o provide the 65% of small businesses that do not provide health
benefits to employees with an affordable way to provide benefits to
their employees;
o reduce the cost of claims and re-insurance premiums for large
corporations, unions and insurance companies;
o provide quality care at a price that is both affordable to consumers
and that will pay providers a reasonable profit for their services;
and
o provide supplemental benefits, such as dental, vision, elective
surgery, chiropractic and alternative care, that are not covered by
insurance plans.
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HEALTH SAVINGS INDUSTRY
The health savings industry is in its infancy, with annual aggregate
sales of only about $1 billion to date. We believe that within the next decade
more than 100 million Americans are expected to utilize some version of a health
savings program and that the potential market for the healthcare savings
industry for uninsured individuals alone may grow to over $27 billion a year.
Membership service programs offer selected products and services from a
variety of vendors with the objective of enhancing the existing relationship
between businesses and their customers. When designed, marketed, and managed
effectively, membership service programs can be of significant value to:
o Consumers, who become members of the membership program;
o Vendors, through sales and marketing of their products and services;
and
o Wholesale clients, through which the program memberships are offered
or sold in connection with other benefits or sales.
Product vendors and service providers are seeking more cost-effective
and efficient methods to expand their customer base and market share, other than
through the traditional mass-marketing channels of distribution. In addition,
vendors are seeking to reach new customers and strengthen relationships with
existing customers.
OUR CAREXPRESS HEALTHCARE SOLUTION
Overview
We offer a discount healthcare membership solution designed in response
to rising healthcare costs and the growing number of people that can no longer
afford traditional insurance coverage. Our healthcare solution is based upon the
following underlying principles: (i) healthcare decisions must be put back in
the hands of the doctor and the patient, without undue oversight by parties with
only economic interests in the decision; (ii) responsibility for
over-utilization of healthcare products and services due to low co-pays and
deductibles must be put back in the hands of the patient; and (iii) healthcare
must be affordable for patients, while providing the medical providers with
adequate payment on a timely basis for services provided.
Our solutions address these underlying principles in the following
manner:
o we assist our program members in saving between 10% and 50% on
healthcare products and services by informing them who the most
cost-effective healthcare providers in their area are and providing
them access to these providers;
o we allow the patient and the healthcare provider to decide treatment
protocols with no interference from any third party;
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o we facilitate the financial transaction between the healthcare
provider and patient-member by enabling the provider to receive
prompt payment; and
o we provide the patient with an incentive to minimize utilization of
healthcare products and services to achieve cost savings, regardless
of whether the patient has a high deductible insurance policy or is
self-insured, because the patient-member is directly responsible for
a significant portion of his or her medical expenses.
We believe that our emphasis on discount health services addresses two
significant concerns in the healthcare industry: cost containment and the rising
number of people who are uninsured or underinsured. We believe that our discount
health programs provide a low-cost, non-insurance alternative to individuals who
are seeking to reduce their out-of-pocket healthcare costs not covered by
insurance or who are unable to obtain healthcare insurance due to their medical
history, age or occupation. For a monthly fee, our members obtain discounts that
are typically between 10% and 50% percent off the retail price of participating
healthcare provider products and services. Acceptance into our health programs
is unrestricted, and our programs may be utilized by the member's entire
household.
Our CARExpress Membership Programs
We design and offer discount healthcare membership programs for
uninsured and underinsured individuals. Our membership programs encompass all
aspects of healthcare, including physicians, hospitals, ancillary services,
dentists, prescription drugs, vision care, hearing aids, chiropractic and
alternative care, 24-hour nurse line, and medical supplies and equipment. We
offer our discount healthcare membership programs through a national healthcare
savings network called CARExpress ("CARExpress"). CARExpress is one of the
largest and most comprehensive healthcare savings network in the United States.
Through CARExpress, we can provide members access to healthcare providers
affiliated with PPONext, International Med-Care, CareMark, Cigna and Optum, five
of the largest and most prestigious national health networks in the country.
Through these and other networks, we provide members access to over 1,000,000
healthcare providers in the United States, including more than 70% of practicing
doctors and surgeons, 70% of all acute care hospitals and 90% of all pharmacies.
Our CARExpress membership programs allow everyone in the country to utilize just
about any type of healthcare service wherever it is available, whether the
person needs a comprehensive healthcare package or simply needs supplemental
healthcare benefits, such as dental or vision care or prescriptions.
Memberships in our programs are offered and sold through our direct
sales force and through independent marketing consultants. Memberships in our
CARExpress programs range in price from $9.95 to $39.95 per month, depending
upon the program selected. Healthcare products and services are bundled, priced
and marketed utilizing relationship marketing strategies to target the profiled
needs of our customers. The discounts realized by our members typically range
from between 10% and 50% off providers' usual and customary fees. Our CARExpress
membership programs require members to pay the provider at the time of service,
thereby eliminating the need for any insurance claims filing. These discounts,
which are similar to managed care discounts, typically save the individual more
than the cost of the program itself.
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Our CARExpress membership programs are not insurance. There is no
undertaking by us to pay any portion of any fee for services or prescriptions
purchased using our CARExpress membership cards. Rather, our CARExpress
membership programs provide consumers with access to providers who are members
of PPOs or other provider networks and who have agreed in advance to honor our
CARExpress membership cards and accept previously-negotiated reductions in their
fees from patients who pay cash for their products and services. CARExpress
members simply present their CARExpress membership card to the participating
provider at the time of the service to qualify for the discount.
We believe that millions of Americans can benefit in some manner from
joining our CARExpress membership programs, regardless of whether they have
health insurance or not. In general, we believe that our CARExpress membership
programs are most attractive and beneficial to the following people and
organizations:
o people without insurance coverage, including self-employed
individuals and part-time or temporary employees;
o people with gaps in their insurance coverage;
o people who have been turned down for insurance coverage due to a
pre-existing condition clause;
o people who have been turned down for insurance because of age,
occupation, medical history, lifestyle or other reasons;
o people who have reached the yearly and/or lifetime benefit limits of
their insurance policy;
o people who choose alternative healthcare solutions that are often
not covered by HMOs, PPOs, or other insurance, or who seek providers
not covered by their present health plans;
o small business owners who want to provide their employees with a
low-cost healthcare program;
o employees whose employers have terminated or curtailed employee
health benefits;
o people who may be underinsured because of restrictions or provisions
in their managed care plans, such as limited coverage, high
deductibles or co-insurance limits;
o small businesses, chambers of commerce, employers of temporary or
part-time personnel and other businesses seeking affordable health
benefits for their employees in order to promote employee loyalty
and differentiate their companies in the marketplace; and
o unions, associations, trade groups and other organizations seeking
to increase membership and promote member/customer loyalty by
providing or offering a discount health benefit.
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How CARExpress Works
Most members pay for the program on a monthly basis, either through
automatic bank draft or credit card. Individuals who do not wish to use either
of these payment methods are required to pay annually at the time of enrollment.
Groups of 20 or more can also choose to be billed on a monthly basis. Members
may cancel their membership at any time by returning their identification cards,
along with a written notice of cancellation. There is a 30-day money-back
guarantee so that if a member is not completely satisfied with the program, the
member will be refunded the program fee upon the return of the identification
cards. Upon enrollment, new members receive a member kit that includes
instructions on using the program, provider directories for their area and a
CARExpress membership card. Except with respect to hospitals, members select a
participating provider, make their appointment, present their CARExpress
membership care and receive their discount at the time of service. There are no
claim forms or bills to be processed. Both the member and provider are finished
with the transaction.
In order to obtain discounts from participating hospitals, our members
complete a payment pre-certification process which will make their medical visit
similar to other medical payment insurance plans. The member calls our contract
partner to arrange for pre-certification and prepayment using a major credit
card or certified funds. Our contract partner assigns a case manager who
coordinates and oversees the member's hospital stay. The member makes no payment
to the provider at the time services are rendered but simply presents his
CARExpress membership card. The provider bills our contract partner and our
contract partner pays the provider and charges the discounted amount to the
member. The member subsequently receives a statement of savings indicating the
original amount billed, the amount charged after savings were applied and the
total amount saved.
Benefits of Using CARExpress
Our CARExpress membership programs provide benefits to our members,
unions, associations, and organizations, as well as providers and healthcare
networks.
Benefits to Members. We believe that members will be attracted to our
CARExpress membership programs because they provide members with access to
healthcare products and services on a discounted basis and because of their
flexibility and ease of use. Membership in our CARExpress membership programs is
unrestricted and provides benefits to individuals who, because of their medical
history, age or occupation, are unable to obtain health insurance. Our
CARExpress membership programs cover each person in the member's immediate
family and can be used as often as they wish. In addition, unlike many insurance
or managed care programs, members have no paperwork or claims to prepare and no
waiting periods.
Benefits to Unions/Associations/Organizations. We believe that our
CARExpress membership programs will be attractive to unions, associations,
corporations and other organizations with large memberships or employee bases
because they can assist these organizations in their efforts to attract and
retain members and employees by enabling them to offer a more complete
healthcare benefits package. Similarly, as competition among HMOs for
participants intensifies, we believe that our CARExpress membership programs
will enable HMOs to offer a more complete array of potential healthcare
benefits. Due to the low cost of our CARExpress membership programs, these
organizations may offer them to part-time employees who often are not eligible
for healthcare benefits offered to full-time employees. Moreover, because our
CARExpress membership programs are discount health programs and not insurance
products, these organizations can offer discounts to their members or employees
without bearing any economic risk in excess of the annual cost of the program.
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Benefits to Providers and Healthcare Networks. We believe that
physicians, hospitals and other healthcare providers will be attracted to our
CARExpress membership programs because our programs will help the providers
increase their customer base. While members will pay fees and charges that are
less than those paid by non-members, the incremental business from members
offers an additional source of revenue to the providers, with little or no
increase in their overhead costs. In addition, healthcare providers are paid at
the time of service, reducing the in-office billing procedures and cost and
allowing the provider to immediately collect payment. We believe that our
CARExpress membership programs are also attractive to provider networks because
they increase the likelihood that providers will affiliate with provider
networks in order to gain access to more members.
STRATEGY
Our strategy is to sustain and expand our position as one of the
leading providers of unique healthcare membership service programs. We intend to
focus predominantly in underserved markets where individuals either have limited
healthcare benefits or no insurance. We have developed programs that give
individuals access to healthcare providers at reduced fees, and offer value and
savings to healthcare consumers throughout the country. Through product design,
competitive membership pricing and strong distribution channel partners, we plan
to fill a significant void in the healthcare market that insurance plans have
not addressed.
Key elements of our strategy are as follows:
Develop Unique Healthcare Service Programs For Broad Markets. Our focus
is on the continued development and introduction of unique programs that address
the health and lifestyle needs of targeted consumer groups. We continually
research our markets to keep abreast of trends in the demand for consumer-paid
healthcare. We intend to further develop and expand our marketing capabilities
by increasing the content currently available on our Web site, developing
programs to offer our CARExpress membership programs directly to affinity
groups, such as unions, small businesses, trade associations and charitable
organizations, and expanding our in-house marketing staff. We intend to increase
sales of our CARExpress membership programs by adding related discounted
products and services, such as accidental death coverage. We also may acquire
additional products and services complementary to our CARExpress membership
programs to expand the breadth of our healthcare solutions, and may start up or
acquire other companies engaged in healthcare or related industries. We
anticipate that this plan will allow us to obtain a larger share of the
healthcare market through existing marketing channels and through establishment
of new customer relationships.
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Recruit Independent Marketing Representatives. Growth in sales of our
CARExpress membership programs is dependent upon our independent marketing
representatives continuing to market CARExpress membership programs and recruit
independent marketing representatives. We intend to continually increase our
support for these marketing representatives to maximize the volume generated
through this sales channel by training our sales reps to completely and
accurately explain the benefits, limitations, and use of our CARExpress
membership programs. We also plan to improve the productivity of our existing
marketing representatives through lead development, marketing support, sales
assistance and training. Recurring revenue from members of unions and
associations is dependent upon marketing representatives continuously marketing
our products to their customer base. We intend to continue to focus our efforts
on retaining our existing marketing representatives and obtaining new marketing
representatives through our direct sales team.
Leverage and Develop Multiple Network Partners. We are constantly
seeking and negotiating new agreements with PPOs and other provider networks.
While we currently have contractual relationships with several of the largest
and most prestigious preferred provider organizations in the country for access
to savings on healthcare provider products and services, we need to continuously
assess the capabilities of that network and work towards providing alternative
network solutions for our members. We believe that our large provider base
enhances our CARExpress membership programs with market credibility, and we
intend to leverage this credibility to further our market penetration.
Provide High Quality Customer Service. In order to achieve our
anticipated growth and to ensure member, provider and marketing representative
loyalty, we continue to develop and invest significantly in our member service
systems. We recently moved into a sophisticated customer service center from
which both cardholders and providers can get prompt, courteous, and complete
information about all aspects of our CARExpress membership programs. We have
also developed a proprietary computer database system that provides customer
service representatives immediate access to provider demographic data and member
information, including the components of each member program or plan and the
details a member requires to properly utilize the program.
Develop a Corporate-Level Sales Team. To complement individual and
group sales and lead generation accomplished through our marketing
representatives, we have undertaken a strategy to promote sales to groups and
self-funded employers with a corporate-level sales team having experience with
the group insurance market and the operations of a third party administrator.
PRODUCTS
We offer several distinct CARExpress membership programs that provide
members with access to distinct discounted healthcare products and services, and
design healthcare membership programs for unions, associations, corporations and
other organizations that combine our CARExpress membership programs with certain
insurance products on a co-branded basis.
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CARExpress Membership Programs
We currently offer five standard CARExpress membership programs that
provide benefits that range from prescription drug and vision care to
comprehensive physician, hospital, vision, dental and other care. A description
of each of these programs is provided below.
Comprehensive Care Program. This program is designed for individuals
and families with no health insurance. It provides members with access to all of
our CARExpress products and services, including physician, hospital and
ancillary care, dental and vision care, retail and mail order pharmacy, 24-hour
nurse line, hearing care, chiropractic and complementary alternative care, and
medical supplies and equipment. Our comprehensive care program targets those
with little or no insurance, or those with just catastrophic coverage. We
believe that our comprehensive care program will be of particular interest to
consumers who are not covered by group health or individual benefit plans. The
monthly retail price for this membership program is $39.95 per family.
Supplemental Care Program. This program is designed for individuals and
families who are underinsured. It offers everything that our comprehensive care
program except for access to doctors and hospitals. Our supplemental care
program generally presumes the member has some level of basic medical insurance
coverage. It offers services that are typically not covered under a traditional
health insurance plan or an insurance plan that may have certain coverage
limits. This program typically is marketed as an add-on service alongside an
existing health plan or as a stand-alone plan for those who have health
insurance but with minimal benefits for prescription or other ancillary
services. The monthly retail price for this membership program is $29.95 per
family.
Preferred Program. This program is designed for individuals and
families who are under-insured and need to save on the basic health services not
covered under a traditional health insurance plan. It offers savings on
prescriptions, vision and dental care, and a 24-hour nurse line. The monthly
retail price for this membership program is $19.95 per family.
Dental & Vision Care Program. This program is designed for individuals
and families who typically have health insurance, but who do not have either
dental care or vision care. The monthly retail price for this membership program
is $14.95 per family.
Prescription & Vision Care Program. This program is designed to offer
members an inexpensive way to save money on prescriptions and vision care. This
program is our low-cost entry program from which we up-sell to our other
CARExpress membership programs. The monthly retail price for this program is
$9.95 per family.
CARExpress Insurance Programs
We also design healthcare membership programs for organizations,
associations and corporations that combine our CARExpress membership programs
with various types of insurance products. The use of these products in
conjunction with our CARExpress membership programs can provide an affordable
solution to individuals and groups who previously could not afford fully
inclusive medical plans, and can provide greater assurance of payment to the
healthcare providers. These products are bundled, priced and marketed utilizing
relationship marketing strategies or direct marketing to target the profiled
needs of the clients' particular member base.
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Insurance products that are suitable for combination with our
CARExpress membership programs include:
Catastrophic Health Insurance. This type of insurance usually takes the
form of a high deductible major medical policy in which the insurance company
pays nothing until expenditures reach a threshold that is typically between
$2,500 and $20,000. We have identified several A+ rated insurance companies that
may offer the CARExpress program as a supplement to their catastrophic health
insurance products. The consumer would use one of our CARExpress membership
programs to reduce his or her out-of-pocket costs until he or she reaches the
deductible amount and then use the insurance for all additional expenses.
Mini-Med Programs. Mini-Med programs are insurance options offered by
insurance companies that restrict claim losses by limiting the amount of
insurance that can be paid. For example, the amount of insurance that would be
payable to an individual for a particular outpatient hospital procedure could be
limited to $1,000. Our CARExpress membership programs can be designed as a
supplement to insurance companies' Mini-Med programs. The consumer would then
use CARExpress to reduce their out-of-pocket costs and use the Mini-Med program
to reimburse them a fixed amount per visit.
We offer these insurance products directly, through National Health
Brokerage Group, and indirectly, through insurance companies and independent
third parties. National Health Brokerage Group operates in many ways like an
insurance agency with respect to these combined products. It is fully licensed
in all states in which it sells these combined products and offers these
products for sale only through marketing representatives who are licensed
insurance agents.
CUSTOMERS
The target customers of CARExpress products are individuals who are
uninsured and underinsured.
Our primary target customer group is comprised of the 45 million
Americans who have no health insurance of any kind and the 61 million Americans
who are underinsured. This group includes self-employed individuals and
part-time or temporary employees, and people who have been turned down for
insurance because of age, occupation, medical history, lifestyle or other
reasons. For this group, CARExpress is an effective and low cost alternative to
health insurance.
Our secondary target customer group includes the approximately 61
million Americans who lack complete health insurance coverage. This group
includes people with gaps in their insurance coverage, employees paying large
deductibles or premiums, and employees who do not receive adequate insurance
coverage for family members. It also includes people who are underinsured
because of restrictions or provisions in their managed care plans, such as
limited coverage, high deductibles or co-insurance limits, people who have been
turned down for insurance coverage for a medical procedure due to a pre-existing
condition clause, and people who have been turned down for insurance because of
age, occupation, medical history, lifestyle or other reasons. The supplementary
programs offered by CARExpress allow an individual to purchase whatever benefits
they need to fill the gaps in their insurance coverage.
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We believe that our CARExpress membership programs are attractive to
small businesses, chambers of commerce, employers of temporary or part-time
personnel and other businesses seeking affordable health benefits for their
employees in order to promote employee loyalty and differentiate their companies
in the marketplace, as well as unions, associations, trade groups and other
organizations seeking to increase membership and promote member and customer
loyalty by providing or offering a discount health benefit. We believe our
CARExpress membership programs are also attractive to people who choose
alternative healthcare solutions that are often not covered by HMOs, PPOs or
other insurance companies, or who seek providers not covered by their present
health plans.
SALES CHANNELS
We sell our CARExpress membership programs through three primary sales
channels: (i) retail chains and outlets, (ii) unions, associations and other
organizations, and (iii) consumers.
Retail Chains and Outlets. This channel is comprised of various retail
chains and outlets that sell products to consumers on a retail level, such as
grocery stores, pharmacy chains and convenience stores. Because the retail
market offers a large target audience, immediate sales and enhanced credibility,
we are committed to marketing CARExpress membership programs to the retail
market. Retail distribution of our CARExpress membership programs offers us
several benefits, including: (i) a large pool of potential target customers,
(ii) increased credibility from being aligned with well-named retailers, (iii)
private labeling opportunities with the retailers, and (iv) high visibility
through in-store membership displays.
Unions, Associations and Other Organizations. This channel is comprised
primarily of unions, associations, trade groups, corporations and similar
organizations that have a large number of employees or members. Unlike retail
chains and outlets, this sales channel presents us with the opportunity to
acquire a large group of members. Group accounts provide higher retention rates
for memberships because of factors such as: (i) union sponsorship of its
members, (ii) corporate subsidizing of monthly membership fees, and (iii) lower
cost memberships to employees resulting from significantly lower prices charged
to the corporation.
Consumers. This channel is comprised primarily of individual consumers
who we target directly through television, radio, newspapers, magazines and the
Internet. Direct sales to consumers provide us with higher long-term margins on
sales because we do not have to pay commissions to any intermediary organization
of which the consumer is a member. In addition, the advertising and marketing
campaigns that we engage in to target consumers provide us with increased market
awareness and support for the retail chains, outlets, unions and associations
comprising our other sales channels.
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SUPPLIERS
We do not contract directly with any physicians, dentists, hearing care
specialists, eye care specialists or other healthcare providers. Instead, we
contract with numerous PPOs and other medical networks for access to the
discounted rates they have negotiated with their healthcare providers. We only
select and utilize those PPOs that we believe can deliver adequate savings to
our members while providing support for our CARExpress membership programs with
the healthcare providers. We pay each PPO utilized a per member per month fee
for use of their provider network which is determined in part based on the
number of providers participating in the network. Each PPO is only paid for
those members authorized to utilize the network. Our PPO agreements are
generally for a one-year term, may be terminated by either party on 90 days'
notice and renew automatically unless so terminated. PPOs may cancel their
contracts with us, but in most cases, subject to notice provisions to provide
time to locate a substitute network. Most of our PPO agreements are not
exclusive, and most contain provisions maintaining the confidentiality of the
terms of the agreement.
The principal suppliers of the over 1,000,000 healthcare providers that
comprise CARExpress are PPONext, International Med-Care, CareMark, Cigna and
Optum, five of the largest and most prestigious preferred provider organizations
in the country. Under our various agreements with them, they guarantee our
members access to their network of healthcare providers in varying combinations
of specialties and at varying discounts from the scheduled prices for covered
services. Although we have arrangements in place with secondary networks, these
PPOs currently supply the provider commitments for almost all of our members. If
we lose our arrangement with any these PPOs for any reason, we would attempt to
establish a primary relationship with one of our secondary suppliers. If we are
unable to replace the lost arrangement with a similar arrangement with another
provider network, however, our business may be adversely effected.
We can provide no assurance that our contracts with these PPOs will not
expire or be terminated by us or them, nor can we provide any assurance that we
will be able to replace the revenues generated under these agreements in the
event they do expire or are terminated. Accordingly, the expiration or
termination of these relationships may substantially reduce our revenues and,
thus, have a material adverse effect on our business, financial performance and
operations.
MARKETING AND DISTRIBUTION
Historically, we have generated sales leads from healthcare contacts
linked to our executive officers, referrals from our board of directors and the
efforts of sales professionals. In 2004, we initiated sales and marketing
programs to expand our visibility in the industry and to increase the pool of
sales leads.
We market our CARExpress membership programs directly through value
infomercials, newspaper inserts, and strategic use of life style oriented
publications. We also market and support our CARExpress membership programs
through a sophisticated, interactive Web site that is accessible to members,
healthcare providers and PPOs. Those accessing our Web site are able to review
our CARExpress membership plans, a list of our healthcare providers and their
locations, products and services provided by our healthcare providers, discounts
available to members for their products and services, and special promotions.
Individuals accessing our Web site can also purchase one of our CARExpress
membership programs by filling out an application online. Eventually,
password-protected areas of the Web site will permit members to obtain news and
information specific to their interests, and sales reps to access the training
materials, schedules, and individual commission information.
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We also market our CARExpress membership programs indirectly through:
(i) independent marketing representatives, (ii) broker and agents, (iii) retail
chains and outlets, (iv) small businesses and trade associations, and (v) unions
and associations.
Independent Marketing Representatives. We utilize the services of
independent marketing representatives to market our CARExpress membership
programs to prospective customers. To receive the right to market and sell our
CARExpress membership programs, marketing representatives sign a standard
representative agreement. Marketing representatives of CARExpress membership
programs are not required to be licensed insurance agents unless they are
selling these programs in combination with insurance products through National
Health Brokerage Group. Marketing representatives are paid fees received from
each member they enroll for the life of that member's enrollment with
CARExpress. Marketing representatives may also recruit other representatives and
earn override commissions on sales made by those representatives. We pay up to
50% in commissions down through five levels of marketing representatives. In
addition, we have established bonus pools that allow marketing representatives
who have achieved certain levels of enrollments to receive additional
commissions measured by our revenues attributable to the CARExpress membership
programs.
Broker and Agents. Our commission-sharing arrangement with brokers and
agents enables them to market and distribute our CARExpress membership programs
and cards to individual consumers through large employer groups, insurance
brokers and associations. Our CARExpress membership programs are not competitive
with the insurance products they sell, but instead are viewed as complementary
product offerings. Brokers and agents who sell healthcare benefits programs to
employers and individuals may use our CARExpress membership programs as a
value-added offering to the traditional insurance products that they sell.
Retail Chains and Outlets. We market our CARExpress membership programs
to retail chains and outlets that in turn provide or sell our CARExpress
membership cards to their constituencies in a co-branded program. Our
private-label program equips organizations with an added-value service that
further positions them as a resource for wide-ranging healthcare. These
organizations utilize their own systems to generate membership sales and
typically earn a marketing fee for each membership. The customized sales model
is ideal for large pharmacy chains, as well as trade groups and healthcare
provider organizations. We are offering features to encourage new subscribers to
try out our CARExpress membership programs, including early cancellation
privileges, refund guarantees, and "trial" periods of free or discounted
membership.
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Small Businesses and Trade Associations. We use small businesses, trade
associations, charitable organizations and other similar organizations to market
our CARExpress membership programs. Under these types of arrangements, we
customize our CARExpress membership cards by adding the sponsoring organization
name and/or logo on the card and provide access to our networks as well as all
required fulfillment services. We believe that these private label cards are
attractive to these organizations because the cards will enable them to more
closely identify themselves with the benefits provided to their members.
Moreover, we believe that the preexisting relationship between the sponsor and
its employees or members will enhance the likelihood that the employee or member
will purchase our CARExpress membership cards.
Unions and Associations. We market our CARExpress membership programs
to unions, associations, companies, third party administrators and similar
organizations. We expect that these organizations will either fund our
CARExpress membership programs on behalf of their members or employees so that
every eligible individual in the organization becomes a member or offer our
CARExpress membership programs to their members or employees as an option where
each individual will be responsible for purchasing his or her CARExpress
membership program and paying the monthly fee either directly or through a
payroll deduction plan. We also expect to market our CARExpress membership
programs directly to members or employees of these organizations with the full
endorsement of the sponsoring organization, particularly in cases where the
organization offers our CARExpress membership programs as an option to its
members or employees.
CUSTOMER SERVICE, TRAINING AND SUPPORT
We believe that superior customer support is critical to retaining and
expanding our customer base and to strengthening the affinity of those
individuals who are offered our CARExpress membership programs through unions,
associations and other organizations. Currently, we maintain a call center at
our corporate headquarters in Horsham, Pennsylvania. Our call center is
available to members and may be accessed via e-mail or toll-free numbers, Monday
through Friday, from 9:00 a.m. to 6:00 p.m. Eastern Standard Time. We also
utilize an outside call center for after-hours calls so that we are able to
provide full 24-hour toll-free coverage for our members. Our call center
provides dependable and timely resolution of customer technical inquiries and is
available to customers by telephone and e-mail. Our call center staff delivers
education, training and pre-sales support to our members, marketing
representatives and providers. We also offer online training to our customers
and resellers to provide them with the knowledge and skills to successfully
deploy, use and maintain our products. Our customer service team is responsible
for handling general customer inquires, answering questions about the ordering
process, updating and maintaining customer account information, investigating
the status of orders and payments, as well as processing customer orders. In
addition, our customer service team proactively updates customers on a variety
of topics, including release dates of new products and updates to existing
products.
We provide customer service to our:
o members, in order to assure that they achieve the best available
savings when utilizing our CARExpress membership programs;
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o marketing representatives, so that they can be more effective in
marketing and selling our CARExpress membership programs; and
o healthcare providers, who require assistance in understanding how
our CARExpress membership programs work and in verifying eligibility
and arranging for the payment of the amount billed to the patient
for each procedure performed.
In order to achieve our anticipated growth and to ensure client, member
and marketing representative loyalty, we continue to develop and invest
significantly in our customer service systems and staff. We recently moved into
a fully-equipped facility with a state-of-the-art computer and
telecommunications room that is wired to handle our growing needs and provides
us with the capacity to expand our customer service base to approximately 80
customer service agents. Our proprietary computer database system provides our
customer service representatives immediate access to provider demographic data
and member information, including the components of each member program or plan
and the details a member requires to properly utilize the program. All new
customer service representatives are required to complete a training course
before beginning to take calls and attend on-the-job training thereafter.
Through our training programs, systems and software, we seek to provide members
with friendly, rapid and effective answers to questions. We continue to work
closely with our healthcare providers and organizations to ensure that their
representatives are knowledgeable about our CARExpress membership programs.
We provide extensive training to our marketing representatives to
assure that they accurately represent our products and services. This training
is available in a variety of forms, including a training manual, audio- and
videotapes, local and regional training meetings and weekly conference calls.
The training encompasses both product training as well as marketing training and
sales techniques.
We have also implemented policies and procedures in place to control
any advertising or promotions that are utilized by our marketing
representatives. We believe these policies and procedures are necessary to
assure the proper representation of the program at all times and include the
pre-approval of all advertising, adherence to anti-spamming and anti-fax
blasting rules, and limits where representatives can advertise. A
representative's failure to follow these rules can result in fines to the
representative or termination of the representative's relationship with us.
TECHNOLOGY
We have made substantial investments in our proprietary technology and
management information systems. We recently completed the installation of a
state-of-the-art telecommunication network and purchased additional computers
for our customer service department. These systems were designed in-house and
are used in most aspects of our business, including:
o maintaining member eligibility and demographic information;
o maintaining representative information including genealogy
reporting;
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o paying commissions;
o maintaining a database of all providers and offering provider
locator services;
o drafting members' accounts on a monthly basis; and
o tracking of cash receipts and revenues.
We have created an extensive Web site for our CARExpress membership
programs that provides information about the various services, allows for
provider searches, answers questions, provides savings schedules, and allows new
members and representatives to enroll online. It also allows representatives to
access support and training files and to view their genealogy and commission
information through a password-protected area.
COMPETITION
The medical savings industry is rapidly evolving and competition for
members is becoming increasingly intense. Competitors vary in size and in scope
and breadth of the products and services they offer. We offer membership
programs that provide products and services similar to or directly in
competition with products and services offered by PPOs, HMOs, healthcare
membership programs, retail pharmacies, mail order prescription companies, and
other ancillary healthcare insurance organizations. Competition for new
representatives is also intense, as these individuals have a variety of products
that they can choose to market, whether competing with us in the healthcare
market or not.
We believe that success in the health savings industry is dependent
upon the ability of companies to:
o identify retail markets and outlets, unions and associations, and
consumers that may benefit from health membership programs;
o maintain contracts with reputable preferred provider organization
networks that offer substantial healthcare savings;
o identify, develop and market unique membership healthcare programs;
o develop and implement effective marketing campaigns;
o provide programs comparable or superior to those of competitors at
competitive prices;
o enhance the quality and breadth of the membership programs offered;
o maintain and improve the quality and extent of customer service
offered to providers and members;
o offer substantial savings on the major-medical costs such as
hospital and surgical costs;
o combine the programs with affordable insurance plans that have high
deductibles or set pre-defined payment for hospitalization;
o adapt quickly to evolving industry trends or changing market
requirements;
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o satisfy investigations on the part of state attorney generals,
insurance commissioners and other regulatory bodies; and
o hire and retain marketing representatives and finance promotions for
the recruiting of new members.
Our principal competitors include Best Benefits, CareEntree, Family
Care, People's Prescription Plan, AmeriPlan, Full Access Medical and New
Benefits, Inc. We also face current and potential competition from insurance
carriers, third-party administrators, retail pharmacies, financial institutions,
federal and state governments, PPOs, HMOs and other healthcare networks. In
addition, a number of companies offer medical discount programs that are
localized geographically, or specialized in certain service categories such as
dental, chiropractic, or pharmacy only. Recently, several of the major drug
manufacturers have begun, or announced plans to begin, offering prescription
discount cards applicable to their own drug brands only.
Some of our current and potential competitors have longer operating
histories and significantly greater financial, technical, marketing,
administrative and other resources than we do. They may have significantly
greater name recognition, established marketing relationships and access to a
larger installed base of customers. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to design customized products to better address
customer needs. Accordingly, new competitors or alliances among competitors may
emerge and rapidly acquire significant market share. Increased competition may
result in price reductions, reduced gross margins and loss of market share, any
of which could have a material adverse affect on our business, financial
condition and results of operations.
REGULATORY AND LEGISLATIVE ISSUES
We are subject to a variety of laws and regulations applicable to
companies engaged in the healthcare industry. Because the nature of our services
is relatively new and the health savings industry is rapidly evolving, we may
not be able to accurately predict which regulations will be applied to our
business and we may become subject to new or amended regulations.
Insurance Regulations. The delivery of our discount healthcare products
and services is subject to federal, state and local regulation, including the
prohibition of business corporations from providing medical care, the fraud and
abuse provisions of the Medicare and Medicaid statutes, state laws that prohibit
referral fees and fee splitting, and regulations applicable to insurance
companies and organizations that provide healthcare services. Our CARExpress
membership programs are not insurance programs and we are not subject to
regulation as an insurance company or as a seller of insurance. However,
regulations in certain states currently regulate or restrict the offering of our
programs.
Occasionally, we receive inquires from insurance commissioners in
various states that require us to supply information about our CARExpress
membership programs to the insurance commissioner or other state regulatory
agency. To date, these agencies have concurred with our view that these programs
are not a form of insurance and are being sold in a proper manner. We can
provide no assurance that this situation will not change in the future, or that
an insurance commissioner will not successfully challenge our ability to offer
our programs without compliance with state insurance regulation. Furthermore,
several states have recently enacted or introduced legislation and/or
regulations that may affect the manner by which we sell our programs. Because
this legislation is new, we do not yet know the scope of that effect and there
is a risk that compliance with such legislation and/or regulations could have
material adverse affect on our operations and financial condition. There is also
the risk that a state will adopt regulations or enact legislation restricting or
prohibiting the sale of our medical discount programs in the state.
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Our failure to comply with current, as well as newly enacted or adopted
federal and state regulations, could have a material adverse effect upon our
business, financial condition and results of operations in addition to the
following:
o non-compliance may cause us to become the subject of a variety of
enforcement or private actions;
o compliance with changes in applicable regulations could materially
increase the associated operating costs;
o non-compliance with any rules and regulations enforced by a federal
or state consumer protection authority may subject us or our
management personnel to fines or various forms of civil or criminal
prosecution; and
o non-compliance or alleged non-compliance may result in negative
publicity potentially damaging our reputation, network
relationships, client relationships and the relationship with
program members, representatives and consumers in general.
Product Claims and Advertising Laws. The Federal Trade Commission and
certain states regulate advertising, product claims, and other consumer matters.
The Federal Trade Commission may institute enforcement actions against companies
for false and misleading advertising of consumer products. In addition, the
Federal Trade Commission has increased its scrutiny of the use of testimonials,
including those used by us and our marketing representatives. We have not been
the target of Federal Trade Commission enforcement action since entering the
health savings industry in 2001. We can provide no assurance, however, that:
o the Federal Trade Commission will not question our advertising or
other operations in the future;
o a state will not interpret product claims presumptively valid under
federal law as illegal under that state's regulations; or
o future Federal Trade Commission regulations or decisions will not
restrict the permissible scope of such claims.
We are also subject to the risk of claims by marketing representatives
and their customers who may file actions on their own behalf, as a class or
otherwise, and may file complaints with the Federal Trade Commission or state or
local consumer affairs offices. These agencies may take action on their own
initiative against us for alleged advertising or product claim violations, or on
a referral from independent marketing representatives, customers or others.
Remedies sought in these actions may include consent decrees and the refund of
amounts paid by the complaining independent marketing representatives or
consumer, refunds to an entire class of independent marketing representatives or
customers, client refunds, or other damages, as well as changes in our method of
doing business. A complaint based on the practice of one marketing
representative, whether or not we authorized the practice, could result in an
order affecting some or all of our marketing representatives in a particular
state. Also, an order in one state could influence courts or government agencies
in other states considering similar matters. Proceedings resulting from these
complaints could result in significant defense costs, settlement payments or
judgments and could have a material adverse effect on us.
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Marketing Laws and Regulations. Our marketing activities are subject to
scrutiny by various state and federal governmental regulatory agencies to ensure
compliance with securities, franchise investment, business opportunity, and
criminal laws prohibiting the use of "pyramid" or "endless chain" types of
selling organizations. These regulations are generally directed at ensuring that
advancement within a network marketing organization is based on sales of the
organization's products rather than investment in the organization or other
non-sales related criteria. For instance, in certain markets there are limits on
the extent that marketing representatives may earn royalties on sales generated
by marketing representatives that were not directly sponsored by the marketing
representative. The compensation structure of these selling organizations is
very complex, and compliance with all of the applicable laws is uncertain in
light of evolving interpretation of existing laws and the enactment of new laws
and regulations pertaining to this type of product distribution. We are not
aware of any legal actions pending or threatened by any governmental authority
against us regarding the legality of our network marketing operations.
We continually review the requirements of various states regarding the
structure and operation of our network marketing to ensure that it complies with
all of the applicable laws and regulations pertaining to network sales
organizations. Based on these efforts and the experience of our management, we
believe that we are in compliance with all applicable federal and state
regulatory requirements. We have not, however, obtained no-action letters or
advance rulings from any federal or state security regulator or other
governmental agency concerning the legality of our network operations, nor are
we relying on a formal opinion of counsel to that effect. Thus, it is possible
that one or more of our network marketing organizations could be found to not
comply with applicable laws and regulations. Our failure to comply with these
regulations could have a material adverse effect on us in a particular market or
in general.
Health Insurance Portability and Accountability Act. In December 2000,
The Department of Health and Human Services issued final privacy regulations
pursuant to the Health Insurance Portability and Accountability Act of 1996
("HIPAA") that became effective in April 2003. HIPAA and the applicable
regulations impose extensive restrictions on the use and disclosure of
individually identifiable health information by certain entities. Also as part
of HIPAA, the Department of Health and Human Services has issued final
regulations standardizing electronic transactions between health plans,
providers and clearinghouses. Health plans, providers and clearinghouses are
required to conform their electronic and data processing systems with HIPAA's
electronic transaction requirements. While we believe that we are not currently
required to comply with HIPAA, we may in the future be required to comply with
certain of these regulations for certain aspects of our business. Because these
regulations are new, we do not know how the interpretation and enforcement of
the regulations may affect us. Sanctions for failing to comply with standards
issued pursuant to HIPAA include criminal penalties and civil sanctions.
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Franchise Laws and Regulations. The Federal Trade Commission, as well
as the securities regulators in states having a franchise law, may assert that
our relationships with marketing representatives are subject to the
registration, disclosure and reporting requirements applicable to franchises.
Although we intend to structure our marketing relationships so as to avoid
application of franchise laws, we may from time to time have to expend resources
in refuting such franchise law claims, and if we are found to be in violation
may have to pay civil penalties, be enjoined from doing business in the
jurisdiction, or expend funds to bring our operations into compliance with those
laws.
INTELLECTUAL PROPERTY RIGHTS
Our intellectual property rights are important to our business. We rely
upon confidentiality procedures and contractual provisions to protect our
business, proprietary technology and CARExpress brand. Our general policy is to
enter into confidentiality agreements with our employees and consultants, and
nondisclosure agreements with all other parties to whom we disclose confidential
information. We do not have any trademark registrations for our CARExpress brand
or patents relating to our proprietary technologies, nor do we have any
applications for such rights pending. We intend to apply for legal protection
for certain of our intellectual property in the future. However, we can provide
no assurance that we will receive such legal protection or that, if received,
such legal protection will be adequate to protect our intellectual property
rights.
EMPLOYEES
As of June 28, 2005, we had nine employees. Of this number, eight were
full-time employees and one was a part-time employee. We also had 16
consultants. None of our employees are represented by a labor union, and we have
never experienced a work stoppage. We believe that our relations with our
employees are good.
PROPERTIES
Our corporate headquarters and principal offices are located at 120
Gibraltar Road, Suite 107, Horsham, Pennsylvania 19044, where we lease
approximately 7,100 square feet of space for a monthly rent payment of
approximately $13,000. This lease expires on May 15, 2007. We also entered into
a lease for additional offices at 2033 Main Street, Suite 501, Sarasota, Florida
34237. We will lease approximately 4,000 square feet of space for a monthly rent
payment of approximately $7,500. This lease will commence on July 1, 2005 and
will expire on July 1, 2010. We believe that our office space is adequate to
support our current operations and that adequate additional space is available
to support our operations over the next 12 months.
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LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings. We may
from time to time become involved in litigation relating to claims arising in
the ordinary course of our business.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following chart sets forth certain information about each director
and executive officer of the Company.
Name Age Positions Held
---- --- --------------
David M. Daniels 48 Chairman, Chief Executive Officer and President
Roger H. Folts 66 Chief Financial Officer and Secretary
Patricia S. Bathurst 50 Vice President - Marketing
The following is a brief summary of the business experience of each of
the above-named individuals:
David M. Daniels has served as our Chief Executive Officer and a member
of our board of directors since February 2004, and has served as our President
since February 2005. From 1998 to February 2004, Mr. Daniels provided financing
and management consulting services to several companies operating in the
manufacturing, technology and services industries. Mr. Daniels served as the
Chief Financial Officer of North American Technologies Group, Inc., a research
and development company, from 1994 to 1995, and served as the President and
Chief Operating Officer from 1995 to 1998. Mr. Daniels founded Industrial Pipe
Fittings, Inc., a manufacturer of industrial fittings for the high density
polyethylene market, in 1994 and served as the Chairman, President & Chief
Executive Officer until 1998. Prior to 1994, Mr. Daniels served in several
capacities with Morgan Stanley Dean Witter, achieving the position of First Vice
President of the company in 1986. Mr. Daniels is a graduate of the Georgia
Military Academy and the University of Houston, where he received a B.A. in
finance.
Roger H. Folts has served as our Chief Financial Officer since March
2001 and as our Secretary since February 2004. From 1989 to 2000, Mr. Folts also
served as Chief Financial Officer and Treasurer and as a member of the board of
directors of National Health and Safety Corporation, a provider of healthcare
services utilizing national provider networks. From 1989 to the present, Mr.
Folts has served as an adjunct professor in the Business Administration
Department of Philadelphia University teaching a course in business strategy.
Prior to 1989, Mr. Folts served as an executive officer for various companies
operating in the manufacturing, healthcare and information technology
industries. Mr. Folts received a B.A. from Harvard College and an MBA from the
University of Chicago with an accounting and math methods major.
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Patricia S. Bathurst has served as our Vice President - Marketing since
March 2001. From 1989 to 2000, Ms. Bathurst served as the Vice President of
Marketing for National Health and Safety Corporation, where she was responsible
for all of the marketing, advertising and promotional functions for the company.
From 1985 to 1989, Ms. Bathurst served as the Director of Marketing of Horizon
Healthcare Group, Inc., a provider of healthcare services utilizing national
provider networks that she co-founded in 1985. Prior to 1985, Ms. Bathurst
served as the Director of Administration and Customer Service for Phoenix
International Corporation, a provider of healthcare services utilizing national
provider networks. Ms. Bathurst is a graduate of Temple University with a B.A.
in business administration.
BOARD OF DIRECTORS
Our board of directors consists of David M. Daniels, Jay Rosen and
Ronald F. Westman. Each director serves until the next annual meeting of
shareholders or until his successor is duly elected and qualified. Officers are
elected annually by our board of directors and serve at the discretion of the
Board. We do not currently have any committees of our board of directors.
DIRECTORS COMPENSATION
We provide our non-employee directors with a standard compensation
package for serving as a member of our board of directors. Non-employee
directors receive an option to acquire 350,000 shares of our common stock and up
to $1,000 for attendance in person at any meetings of the board of directors
Members of our board of directors receive no compensation for serving on our
board of directors requiring travel. The options have a five year term, and
exercise price of $.40 per share, and vest as follows: (i) 100,000 shares on the
date of grant, and (ii) 250,000 shares on the first anniversary of the date of
grant. We do not provide any compensation to our employee directors.
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EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation earned by the executive officers named below during the fiscal
years ended December 31, 2004, 2003 and 2002.
SUMMARY COMPENSATION TABLE
Name and Fiscal Other Annual Restricted Stock
Principal Position Year Salary ($) Compensation ($) (3) Awards (#)
- ------------------ ------ ---------- --------------------- -----------------
David M. Daniels (1) 2004 148,000 13,748 1,748,250
President and
Chief Executive Officer
Roger H. Folts 2004 113,500 7,270 45,300
Chief Financial Officer and 2003 -0- 13,685 -0-
Secretary 2002 -0- 31,105 -0-
Patricia S. Bathurst 2004 88,000 10,000 107,600
Vice President -- Marketing 2003 -0- 60,000 -0-
2002 -0- 57,500 -0-
R. Dennis Bowers (2) 2004 48,000 14,612 -0-
Former President and 2003 -0- 12,476 -0-
Chief Executive Officer 2002 -0- 2,611 -0-
(1) Mr. Daniels was appointed our Chief Executive Officer on February 17, 2004
and our President on February 13, 2005.
(2) Mr. Bowers served as our Chief Executive Officer from March 1, 2001 until
February 13, 2004, and served as our President from March 1, 2001 until January
31, 2005.
(3) Consists of non-salary cash compensation earned for services performed on
our behalf.
We have entered into employment agreements with each of Mr. Daniels,
Mr. Folts and Ms. Bathurst. Under these agreements, we agreed to pay Mr.
Daniels, Mr. Folts and Ms. Bathurst an annualized base salary of $231,000,
$158,400 and $132,000, respectively, for our fiscal year ended December 31,
2005, issued Mr. Daniels an option to acquire 2,500,000 shares of our common
stock, and issued each of Mr. Folts and Ms. Bathurst an option to acquire
1,000,000 shares of our common stock. A summary of these employment agreements
and the stock options granted thereunder is provided herein under "Executive
Compensation - Employment Contracts and Arrangements."
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
We did not grant any options or stock appreciation rights to any named
executive officer during our fiscal year ended December 31, 2004.
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth for each named executive officer,
information regarding the number and value of stock options held by such officer
at December 31, 2004, each on an aggregated basis. We have not issued any SARs
to any of our named executive officers. No stock options were exercised by any
of our executive officers during our fiscal year ended December 31, 2004.
Number Of Unexercised Value Of Unexercised
Options At Fiscal In-The-Money Options At Fiscal
Year-End Exercisable/ Year-End Exercisable/
Name Unexercisable (#) Unexercisable ($) (1)
- ---- ---------------------- ------------------------------
David M. Daniels 625,000 / 1,875,000 *
Patricia S. Bathurst 250,000 / 750,000 *
Roger H. Folts 250,000 / 750,000 *
R. Dennis Bowers -0- / -0- *
* Not applicable.
(1) We believe that the fair market value of the shares of our common stock
issuable upon the exercise of the options granted to our named executive
officers was equivalent to the $.40 per share exercise price of the options at
December 31, 2004. As a result, we believe that none of the options held by our
named executive officers were in-the-money at December 31, 2004.
LONG-TERM INCENTIVE PLANS AND AWARDS IN LAST FISCAL YEAR
We did not make any awards under long-term incentive plans to any of
our named executive officers during the fiscal year ended December 31, 2004.
EMPLOYMENT CONTRACTS AND ARRANGEMENTS
We have entered into employment agreements with each of our executive
officers. The following summary of these employment agreements and the stock
options granted thereunder is intended as a summary only and is subject to and
qualified in its entirety by reference to the employment agreements and the
options, a copy of which have been filed as exhibits to the registration
statement of which this prospectus forms a part.
47
David M. Daniels
On May 13, 2005, we entered into an employment agreement with David M.
Daniels to serve as our Chief Executive Officer effective February 1, 2005. The
agreement is for an initial term of five years and renews automatically for
successive one-year periods unless earlier terminated or prior notice of
non-renewal is provided by either party. Under the agreement, Mr. Daniels is
entitled to an annual base salary of $231,000 with annual increases on January 1
of each year of a minimum of 10% of the annual base salary for the immediately
preceding year, and is eligible for an annual bonus and incentive compensation
awards in an amount and form to be determined by our board of directors in its
sole discretion. Pursuant to the agreement, Mr. Daniels received an option to
acquire 2,500,000 shares of our common stock.
Roger H. Folts
On May 13, 2005, we entered into an employment agreement with Roger H.
Folts to serve as our Chief Financial Officer effective February 1, 2005. The
agreement is for an initial term of three years and renews automatically for
successive one-year periods unless earlier terminated or prior notice of
non-renewal is provided by either party. Under the agreement, Mr. Folts is
entitled to an annual base salary of $158,400 with annual increases on January 1
of each year of a minimum of 10% of the annual base salary for the immediately
preceding year, and is eligible for an annual bonus and incentive compensation
awards in an amount and form to be determined by our board of directors in its
sole discretion. Pursuant to the agreement, Mr. Folts received an option to
acquire 1,000,000 shares of our common stock.
Patricia S. Bathurst
On May 13, 2005, we entered into an employment agreement with Patricia
S. Bathurst to serve as our Vice President - Marketing effective February 1,
2005. The agreement is for an initial term of five years and renews
automatically for successive one-year periods unless earlier terminated or prior
notice of non-renewal is provided by either party. Under the agreement, Ms.
Bathurst is entitled to an annual base salary of $132,000 with annual increases
on January 1 of each year of a minimum of 10% of the annual base salary for the
immediately preceding year, and is eligible for an annual bonus and incentive
compensation awards in an amount and form to be determined by our board of
directors in its sole discretion. Pursuant to the agreement, Ms. Bathurst
received an option to acquire 1,000,000 shares of our common stock.
Each employment agreement provides that if we terminate the employment
of the applicable executive officer without "cause" or the officer terminates
his or her employment with us for "good reason," as such terms are defined in
the agreements, the officer is immediately entitled to two years' annual base
salary, the full annual base salary to which the officer would otherwise have
been entitled during the remainder of the initial term, and all other
compensation and benefits to which the officer would have been entitled had the
officer been employed by us for the remainder of the initial term. "Good reason"
includes a "change in control," which includes: (i) the acquisition by any
person of 30% or more of the combined voting power of our outstanding
securities; (ii) a change in the majority of our board of directors that was not
approved by at least 50% of our board of directors; (iii) the completion of a
reorganization, merger or consolidation of us, or the sale or other disposition
of at least 80% of our assets; or (iv) approval by our stockholders of a
liquidation or dissolution of us.
48
Each option granted under the employment agreements is for a term of 10
years, has an exercise price of $.40 per share, and vests in four equal
installments commencing on the date of grant and continuing on February 1 of
each of the following three years. In the event the employment of the applicable
executive officer is terminated for any reason other than for "cause," as such
term is defined in the employment agreements, the option vests in full
immediately and may be exercised at any time prior to the expiration date of the
option. In the event we terminate the employment of the applicable executive
officer without "cause" or the officer terminates his or her employment with us
for "good reason" (including a "change in control"), as such terms are defined
in the employment agreements, we are required to use our best efforts to prepare
and file a registration statement with the SEC within 180 days of the date of
termination to register the public resale of the shares underlying the officer's
option.
49
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 28, 2005, information with
respect to the securities holdings of all persons that we have reason to
believe, pursuant to filings with the SEC, may be deemed the beneficial owner of
more than five percent (5%) of our outstanding common stock. The following table
also sets forth, as of such date, the beneficial ownership of our common stock
by all executive officers and directors, individually and as a group.
The beneficial owners and amount of securities beneficially owned have
been determined in accordance with Rule 13d-3 under the Exchange Act and, in
accordance therewith, includes all shares of our common stock that may be
acquired by such beneficial owners within 60 days of June 28, 2005 upon the
exercise or conversion of any options, warrants or other convertible securities.
Unless otherwise indicated, each person or entity named below has sole voting
and investment power with respect to all common stock beneficially owned by that
person or entity, subject to the matters set forth in the footnotes to the table
below, and has an address of 120 Gibraltar Road, Suite 107, Horsham,
Pennsylvania 19044.
Amount and Nature
of Beneficial Percentage
Name and Address of Beneficial Owner Ownership (1) of Class (1)
- ------------------------------------ -------------------- --------------
David M. Daniels 1,623,050(2) 9.5%
Roger H. Folts 345,300(3) 2.0%
Patricia S. Bathurst 357,600(4) 2.1%
Ronald F. Westman 5,680,000(5) 33.3%
Jay Rosen 280,000(6) 1.6%
R. Dennis Bowers 1,181,250 6.9%
P.O. Box 74
Lahaska, PA 18974
James Creed 866,833(7) 5.4%
Ben Giese 927,000(8) 5.5%
Dennis Lastine 1,095,000(9) 6.4%
Jesus Lozano 1,650,000(10) 9.7%
Jose Lozano 1,800,000(11) 10.6%
All officers and directors as a group (5 persons) 8,285,950(12) 48.6%
50
_________
* Less than 1%.
(1) This table has been prepared based on 17,054,200 shares of common stock
outstanding on June 28, 2005.
(2) Includes 625,000 shares issuable upon the exercise of options.
(3) Includes 250,000 shares issuable upon the exercise of options.
(4) Includes 250,000 shares issuable upon the exercise of options.
(5) Includes 100,000 shares issuable upon the exercise of options and
3,720,000 shares issuable upon the exercise of warrants.
(6) Includes 100,000 shares issuable upon the exercise of options and 120,000
shares issuable upon the exercise of warrants.
(7) Includes 408,332 shares issuable upon the exercise of warrants.
(8) Includes 434,000 shares issuable upon the exercise of warrants.
(9) Includes 537,500 shares issuable upon the exercise of warrants.
(10) Includes 1,100,000 shares issuable upon the exercise of warrants.
(11) Includes 1,200,000 shares issuable upon the exercise of warrants.
(12) Includes 1,325,000 shares issuable upon the exercise of options and
3,840,000 shares issuable upon the exercise of warrants.
51
DESCRIPTION OF SECURITIES
The following summary of our capital stock, our articles of
incorporation, our bylaws and the Indiana Business Corporation Act ("IBCA") is
intended as a summary only and is subject to and qualified in its entirety by
reference to our articles of incorporation and bylaws, which have been filed as
exhibits to the registration statement of which this prospectus forms a part,
and the applicable provisions of the IBCA.
COMMON STOCK
We are authorized to issue 100,000,000 shares of common stock, $.001
par value per share, of which 17,017,200 shares are currently outstanding.
Holders of shares of our common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders and are not entitled to
cumulative voting rights. Our shares of our common stock do not carry any
preemptive, conversion or subscription rights, and there are no sinking fund or
redemption provisions applicable to the shares of our common stock. Holders of
our common stock are entitled to receive dividends and other distributions in
cash, stock or property as may be declared by our board of directors from time
to time out of our assets or funds legally available for dividends or other
distributions, subject to dividend or distribution preferences that may be
applicable to any then outstanding shares of our preferred stock. In the event
of our voluntary or involuntary liquidation, dissolution or winding up, holders
of shares of our common stock are entitled to share ratably in the assets
legally available for distribution to stockholders after payment of all debts
and other liabilities and satisfaction of the liquidation preference, if any,
granted to the holders of any of our preferred stock then outstanding. All
outstanding shares of our common stock are fully paid and nonassessable.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION,
OUR BYLAWS AND THE IBCA
The following provisions of our articles of incorporation, our bylaws
and the IBCA may discourage takeover attempts of us that may be considered by
some stockholders to be in their best interest. The effect of such provisions
could delay or frustrate a merger, tender offer or proxy contest, the removal of
incumbent directors, or the assumption of control by stockholders, even if such
proposed actions would be beneficial to our stockholders. Such effect could
cause the market price of our common stock to decrease or could cause temporary
fluctuations in the market price of our common stock that otherwise would not
have resulted from actual or rumored takeover attempts.
Special Meetings of Shareholders
Our bylaws and the provisions of the IBCA provide that special meetings
of our shareholders may be called only by our Chief Executive Officer or a
majority of our directors. This provision may discourage a third party from
making a tender offer or otherwise attempting to obtain control of us because
the provision effectively limits stockholder election of directors to annual
meetings of our stockholders
52
Director Vacancies
Our bylaws provide that any vacancies in our board of directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause will be filled by the board of directors or, if less than
a quorum, by the vote of our remaining directors. This provision may discourage
a third party from making a tender offer or otherwise attempting to obtain
control of us because the provision effectively limits stockholder election of
directors to annual and special meetings of the stockholders.
Amendments to Our Bylaws
Our bylaws provide that they may be amended only by the vote of a
majority of our board of directors. This provision may discourage a third party
from making a tender offer or otherwise attempting to obtain control of us
because the provision makes it more difficult for stockholders to amend the
provisions in our bylaws relating to special meetings of shareholders and
director vacancies.
No Cumulative Voting
Our articles of incorporation and bylaws to not provide for cumulative
voting in the election of directors. The absence of cumulative voting rights may
limit the ability of minority stockholders to effect changes to our board of
directors and delay or prevent a change in control or change in management of
us.
HOLDERS
As of June 28, 2005, the number of stockholders of record of our common
stock was 127.
DIVIDENDS
We have not paid any cash dividends on our common stock to date, nor do
we intend to pay any cash dividends on our common stock in the foreseeable
future. We intend to retain future earnings, if any, to finance the operation
and development of our business.
TRANSFER AGENT
The transfer agent for our common stock is Interwest Transfer Company,
Inc., 1981 East Murray Holladay Road, Suite 100, P.O. Box 17136, Salt Lake City,
UT 84117.
53
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our
common stock. Future market sales or the availability of shares for sale may
decrease the market price of our common stock prevailing from time to time. Only
a portion of our outstanding shares of common stock will be available for sale
upon the completion of this offering due to contractual and legal restrictions
on resale. Nevertheless, sales of substantial amounts of our common stock in the
public market, or the perception that such sales could occur, could adversely
affect the market price of our common stock and could impair our ability to
raise capital through the sale of our equity or equity-related securities on a
date and at a price that we deem appropriate.
Upon the completion of this offering, 17,054,200 shares of our common
stock will be outstanding. In addition, 400,000 shares of our common stock will
be issuable upon the exercise of outstanding options and 8,534,250 shares of our
common stock will be issuable upon the exercise of outstanding warrants. Of
these shares, 6,725,125 shares will be freely tradable without restriction or
further registration under the Securities Act, unless held by our "affiliates"
as that term is defined under Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 or Rule 701 under the Securities Act, which are
summarized below, or another exemption from registration.
We may issue additional shares of our common stock, or securities
convertible or exercisable into shares of our common stock, from time to time
for capital-raising purposes, future acquisitions or other purposes. In the
event any such transactions are significant, the number of shares of common
stock or securities convertible or exercisable into shares of common stock that
we may issue may in turn be significant. In addition, we may grant registration
rights covering any securities issued in connection with any such transactions.
RULE 144
In general, under Rule 144, as currently in effect, beginning 90 days
after the date of this prospectus, any person or group of persons whose shares
are required to be aggregated, including an affiliate, who has beneficially
owned shares of our common stock for a period of at least one year is entitled
to sell, within any three-month period, a number of shares that does not exceed
the greater of:
o 1% of the number of shares of our common stock then outstanding,
which will equal approximately 170,542 shares immediately after this
offering based on the number of shares of common stock outstanding
as of June 28, 2005; or
o the average weekly trading volume in our common stock on the
Over-the-Counter Bulletin Board during the four calendar weeks
preceding the date on which a Notice on Form 144 with respect to
such sale is filed with the SEC.
Sales under Rule 144 are also subject to provisions relating to note and manner
of sale requirements and the availability of current public information about
us.
54
RULE 144(K)
Under Rule 144(k), a person that is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale and that has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell the shares without complying with the notice, manner of sale,
volume limitation or current public information provisions of Rule 144.
RULE 701
Under Rule 701 of the Securities Act, as currently in effect, shares of
our common stock acquired, or that may be acquired upon exercise of currently
outstanding options, warrants or other rights, under our stock or other
compensatory plans or agreements may be resold beginning 90 days after the
effective date of the registration statement of which this prospectus is a part
if such resale is conducted in accordance with the applicable provisions of Rule
144. If the security holders is not an affiliate of us, such sale may be made
subject only to the manner of sale provisions of Rule 144. If such person is an
affiliate of us, such sale may be made without compliance with the one-year
holding period requirement of Rule 144, but subject to the notice, manner of
sale, volume limitation and current public information provisions of Rule 144.
Some of our officers, directors, employees and consultants who purchased shares
of our common stock or securities convertible into shares of our common stock
under a written compensatory plan or contract may be entitled to rely on the
resale provisions of Rule 701.
STOCK INCENTIVE PLAN
We intend to file a registration statement on Form S-8 under the
Securities Act covering 3,000,000 shares of our common stock to be reserved for
issuance under a stock incentive plan. We may include additional securities
issued under other written compensatory benefit plans or agreements. We intend
to file the Form S-8 registration statement with the SEC within 180 days of the
date of this prospectus. The registration statement is expected to be effective
upon filing. Shares registered under the Form S-8 registration statement and
held by non-affiliates will be available for sale in the open market after the
effective date of the Form S-8 registration statement, subject to vesting and
contractual restrictions. Those held by affiliates will also be subject to the
volume limitation provisions of Rule 144.
REGISTRATION RIGHTS
Most of the shares of our common stock to which this prospectus relates
are being registered by us in satisfaction of our obligation to register such
shares on behalf of the selling security holders. We granted these registration
rights to the selling security holders prior to the date of the initial filing
of the registration statement of which this prospectus is a part in connection
with their prior investment in us. These security holders have certain
"piggy-back" registration rights on registration statements filed subsequent to
the effective date of the registration statement of which this prospectus is a
part. We will bear the expenses incurred in connection with the filing of any
such registration statements.
55
LOCK-UP ARRANGEMENTS
None of our officers, directors or employees, nor any of the selling
stockholders, are parties to any agreements or arrangements relating to the
disposition of any of our shares of common stock in connection with this
offering, except as set forth above under "Registration Rights."
SELLING SECURITY HOLDERS
The selling security holders identified in the following table are
offering for sale 15,659,375 shares of our common stock of which 400,000 are
issuable upon the exercise of options and 8,534,250 are issuable upon exercise
of warrants. All of the shares of common stock and warrants were issued to the
selling security holders in private placement transactions.
The following table sets forth as of June 28, 2005:
o The name of each selling security holder and any material
relationship between us and such selling security holder based upon
information currently available to us;
o The number of shares owned beneficially by each selling security
holder before the offering;
o The percentage ownership of each selling security holder prior to
the offering;
o The number of shares offered hereunder by each selling security
holder;
o The number of shares owned beneficially by each selling security
holder after the offering; and
o the percentage ownership of each selling security holder after the
offering.
The information presented in this table has been calculated based on
the assumption that all options and warrants will be exercised prior to
completion of the offering, that all shares offered hereby will be sold, and
that no other shares of our common stock will be acquired or disposed of by the
selling security holder prior to the termination of this offering. The
beneficial ownership set forth below has been determined in accordance with Rule
13d-3 under the Securities Exchange Act of 1934, as amended. Except as indicated
by footnote, and subject to applicable community property laws, we believe that
the beneficial owners of the common stock listed below have sole voting power
and investments power with respect to their shares.
Beneficial Ownership of Beneficial Ownership of
Selling Security Holders Selling Security Holders
Prior to the Offering After the Offering
----------------------------- -------------------------------
Number of
Shares Offered
Name of Selling Security Holder Number Percent Hereby Number Percent
- -------------------------------- ------- ------- --------------- ------- -------
Steve Adelstein 628,500 3.7% 296,250 332,250 1.9%
B. Alink 75,000 * 37,500 37,500 *
H. Baas 208,333 1.2% 104,167 104,167 *
Thomas Barker 60,000 * 30,000 30,000 *
Frederick Bates 5,000 * 2,500 2,500 *
Marco Boschetti 70,000 * 35,000 35,000 *
Mayo Boschetti 30,000 * 15,000 15,000 *
Gordon Cantley 195,000 1.1% 87,500 107,500 *
Renee Carrell 160,000 * 80,000 80,000 *
Andrew Catignani 50,000 * 25,000 25,000 *
Mark Clark 20,000 * 10,000 10,000 *
Charles Cleland, Jr. 390,000 2.3% 195,000 195,000 1.1%
Charles Cleland, Sr. 120,000 * 60,000 60,000 *
56
Beneficial Ownership of Beneficial Ownership of
Selling Security Holders Selling Security Holders
Prior to the Offering After the Offering
----------------------------- -------------------------------
Number of
Shares Offered
Name of Selling Security Holder Number Percent Hereby Number Percent
- -------------------------------- ------- ------- --------------- ------- -------
Evans Connelly 60,000 * 30,000 30,000 *
Freeman Correa, Jr. 60,000 * 30,000 30,000 *
James Creed 866,833 5.1% 422,917 443,917 2.6%
Gertrude Daniels 20,000 * 10,000 10,000 *
Julia Daniels 20,000 * 10,000 10,000 *
Andreas Eggenberger 150,000 * 75,000 75,000 *
Daniel Eggenberger 150,000 * 75,000 75,000 *
Elsid IV (1) 780,000 4.6% 390,000 390,000 2.3%
Eric A. Farrow 200,000 1.2% 100,000 100,000 *
Federal Corp (2) 120,000 * 60,000 60,000 *
Jon Fisher 50,000 * 25,000 25,000 *
Gwen and Louis Forman 50,000 * 25,000 25,000 *
Lukas Frei 50,000 * 25,000 25,000 *
Lukas and Luzia Weber Frei 50,000 * 25,000 25,000 *
GE Global Entertainment (3) 575,000 3.4% 287,500 287,500 1.7%
Ben Giese 927,000 5.4% 442,500 484,500 2.8%
Michael Gillis 165,000 * 82,500 82,500 *
Basil and Susan Gray 25,000 * 12,500 12,500 *
Basil Gray 22,500 * 11,250 11,250 *
Susan Gray 6,700 * 1,250 5,450 *
Edward Harris 110,534 * 47,916 62,617 *
Guenthe Henkel 150,000 * 80,000 80,000 *
Walter Hill 375,200 2.2% 175,000 200,200 1.2%
Jean Hill 100,000 * 50,000 50,000 *
Robert Hillier 320,000 1.9% 160,000 160,000 *
Ramon Huber 150,000 * 75,000 75,000 *
Rita Huerzeler 50,000 * 25,000 25,000 *
RWA Huuskes-Krabbe 62,500 * 31,250 31,250 *
Lawrence Jellen 255,000 1.5% 125,000 130,000 *
Marold Kamai 100,000 * 50,000 50,000 *
L&L Investments (4) 202,000 1.2% 95,000 107,000 *
Paul Langton 37,500 * 18,750 18,750 *
H.T. Larzelere 136,000 * 62,500 73,500 *
Dennis Lastine 1,095,000 6.4% 547,500 547,500 3.2%
Jesus Lozano 1,650,000 9.7% 825,000 825,000 4.8%
Jose Lozano 1,800,000 10.6% 1,800,000 0 *
T. Lustgarten 50,000 * 25,000 25,000 *
Thoney Martin 150,000 * 75,000 75,000 *
Jorg Meier 50,000 * 25,000 25,000 *
57
Beneficial Ownership of Beneficial Ownership of
Selling Security Holders Selling Security Holders
Prior to the Offering After the Offering
----------------------------- -------------------------------
Number of
Shares Offered
Name of Selling Security Holder Number Percent Hereby Number Percent
- -------------------------------- ------- ------- --------------- ------- -------
Richard Merrit 25,000 * 12,500 12,500 *
Michael Mitsuka 310,000 1.8% 155,000 155,000 *
Thomas Moser 210,000 1.2% 105,000 105,000 *
M.T. Anthesia 75,000 * 37,500 37,500 *
Claire Mumenthaler 50,000 * 25,000 25,000 *
Freek Nietsch 112,500 * 56,250 56,250 *
Rene Ortega, Jr. 470,000 2.8% 220,000 250,000 1.5%
Park Financial (5) 411,000 2.4% 205,500 205,000 1.2%
Philipp Portenier 110,000 * 55,000 55,000 *
Guy Quigley 100,000 * 50,000 50,000 *
Suzi Ragsdale 208,333 1.2% 104,167 104,167 *
Michael Reichstein 50,000 * 25,000 25,000 *
William Ritger 800,000 4.7% 400,000 400,000 2.3%
Jay Rosen (6) 180,000 1.1% 90,000 90,000 *
Peter Rosner 100,000 * 50,000 50,000 *
Robert Sage 550,000 3.2% 275,000 275,000 1.6%
Martin Salm 50,000 * 25,000 25,000 *
Peter Schaetti 100,000 * 50,000 50,000 *
Thomas Schaetti 50,000 * 25,000 25,000 *
Ernst Schoenbaechler 600,000 3.5% 300,000 300,000 1.8%
Hans Schulte 150,000 * 75,000 75,000 *
Keith Shelly (7) 815,000 4.8% 400,000 415,000 2.4%
Kenneth Shelly 145,067 * 70,833 74,233 *
Tammi Shnider 180,000 1.1% 90,000 90,000 *
J. Kimo Spencer 120,000 * 60,000 60,000 *
Adrian Spring 100,000 * 50,000 50,000 *
James Sutherland 5,000 * 2,500 2,500 *
John Szychowski 85,000 * 37,500 47,500 *
Nathanne Tankersley 300,000 1.8% 150,000 150,000 *
Stuart Tiplitsky 247,700 1.5% 112,500 135,200 *
Manuel Torres, Jr. 62,500 * 31,250 31,250 *
Trident Marketing 400,000 2.3% 400,000 0 *
International, Inc. (8)
Marvin Vaught 236,000 1.4% 110,000 126,000 *
Michael Verhunce 360,000 2.1% 180,000 180,000 1.1%
Gabriel Vidales 1,350,000 7.9% 675,000 675,000 4.0%
Stefan Waldner 50,000 * 25,000 25,000 *
Wegelin & Co. (9) 290,000 1.7% 145,000 145,000 *
Sandra Weibel 60,000 * 30,000 30,000 16.4
Ronald Westman (10) 5,580,000 32.7% 2,790,000 2,790,000 16.4%
Ronda Westman 300,000 1.8% 150,000 150,000 *
58
Beneficial Ownership of Beneficial Ownership of
Selling Security Holders Selling Security Holders
Prior to the Offering After the Offering
----------------------------- -------------------------------
Number of
Shares Offered
Name of Selling Security Holder Number Percent Hereby Number Percent
- -------------------------------- ------- ------- --------------- ------- -------
Urs Wigger 100,000 * 50,000 50,000 *
Warren Wise 295,250 1.7% 147,625 147,625 *
Julie Wukie 25,000 * 12,500 12,500 *
Jerome Ziarko 286,000 1.7% 137,500 148,500 *
* Represents less than one percent (1%) of our shares outstanding.
(1) The power to vote and dispose of these shares is controlled by Andrea
Vargas.
(2) The power to vote and dispose of these shares is controlled by Robert Sage.
(3) The power to vote and dispose of these shares is controlled by Daniel
Eggenberger.
(4) The power to vote and dispose of these shares is controlled by H.T.
Larzelere.
(5) The power to vote and dispose of these shares is controlled by Gordon
Cantley.
(6) Mr. Rosen has served as a director of the Company since June 29, 2005.
(7) Mr. Shelley was a director of the Company from February 13, 2005 until June
1, 2005
(8) The power to vote and dispose of these shares is controlled by David
Reilly.
(9) The power to vote and dispose of these shares is controlled by Marcel
Ruegg.
(10) Mr. Westman has served as a director of the Company since June 29, 2005.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling security holders. If all of the options and warrants for which the
underlying shares of common stock that are being registered hereby are exercised
by the applicable selling security holders, we will receive approximately
$11,467,850 in proceeds upon the exercise thereof. We intend to use the
proceeds from any such exercises for general working capital purposes.
PLAN OF DISTRIBUTION
We are registering all of the shares of common stock offered by this
prospectus on behalf of the selling security holders. The selling security
holders may sell any or all of the shares, subject to federal and state
securities law, but are under no obligation to do so. The selling security
holders will act independently of us in making decisions with respect to the
timing, manner and size of each sale of the common stock covered hereby.
The selling security holders, or their pledges, donees, transferees or
any of their other successors-in-interest, may sell all or a portion of the
common stock offered hereby from time to time directly or through one or more
underwriters, brokers, dealers or agents on any stock exchange or automated
interdealer quotation system on which the securities are listed, in the
over-the-counter market, in privately negotiated transactions or otherwise. The
shares of common stock may be sold in one or more transactions at fixed prices,
at market prices prevailing at the time of the sale, at varying prices
determined at the time of sale, or at negotiated prices. These sales may be
effected in any one or more of the following methods:
o cross trades or block trades in which the broker or dealer so
engaged will attempt to sell the shares as agent, but may position
and resell a portion of the block as principal to facilitate the
transaction;
o purchases by a broker, dealer or underwriter as principal and resale
by such broker, dealer or underwriter for its own account pursuant
to this prospectus;
o an exchange distribution in accordance with the rules of any stock
exchange on which the securities may be listed;
o ordinary brokerage transactions and transactions in which the broker
solicits purchases;
59
o privately negotiated transactions;
o short sales;
o through the writing of options, swaps or other derivatives on the
securities, regardless of whether the options, swaps or derivatives
are listed on an exchange;
o through the distribution of the securities by any selling security
holder to its partners, members or stockholders;
o any combinations of any of these methods of sale; and
o any other manner permitted by law.
The selling security holders may also sell shares under Rule 144 of the
Securities Act, if available, rather than under this prospectus.
The selling security holders may sell their shares to or through
underwriters, brokers, dealers or agents, in which event the underwriters,
brokers, dealers or agents may receive discounts, concessions, commissions or
other fees from the selling security holders, or discounts, concessions,
commissions or other fees from purchasers of the shares of common stock for whom
they may act as agent or to whom they may sell as principal. These discounts,
concessions, commissions or fees as to particular underwriters, brokers, dealers
or agents may be in excess of those customary in the types of transactions
involved.
The selling security holders may also enter into hedging transactions
with brokers or dealers that may in turn engage in short sales of the common
stock in the course of hedging in positions they assume. The selling security
holders may also sell shares of common stock short and deliver shares of our
common stock covered by this prospectus to close out short positions and loan or
pledge shares of our common stock to brokers or dealers that in turn may sell
such shares.
The selling security holders may additionally pledge, hypothecate or
grant a security interest in some or all of the shares of our common stock owned
by them and, if such holders default in the performance of their secured
obligations, the pledges or secured parties may offer and sell the shares of our
common stock from time to time under this prospectus or any amendment to this
prospectus, if necessary, to include the pledge, transferee or other successors
in interest as selling security holders under this prospectus. The selling
security holders may also transfer or donate their shares of our common stock in
other circumstances, in which case the transferees, donees, pledges or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The selling security holders and any underwriters, brokers, dealers or
agents that participate in the distribution of the shares offered hereby may be
deemed "underwriters" within the meaning of the Securities Act. In that event,
any discounts, concessions, commissions or fees received by them and any profit
on the resale of the shares sold by them may be deemed to be underwriting
discounts or commissions under the Securities Act.
The selling security holders and any other person participating in the
distribution of the shares of our common stock being offered hereby will be
subject to applicable provisions of the Securities and Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, including,
without limitation, Regulation M. These regulations may limit the timing of
purchases and sales of any of the shares of our common stock by the selling
security holders and may restrict the ability of any person engaged in the
distribution of the shares to engage in market-making activities with respect to
our common stock.
60
We have agreed to indemnify certain of the selling security holders
against liabilities, including certain liabilities under the Securities Act,
pursuant to the terms of the agreements by which the selling securities holders
purchased their shares of our common stock being registered hereby. We may be
indemnified by certain of the selling security holders against civil
liabilities, including liabilities under the Securities Act, that may arise from
any written information furnished by such selling security holders specifically
for use in this prospectus, pursuant to the terms of the agreements by which the
selling securities holders purchased their shares of our common stock being
registered hereby.
We will not receive any proceeds from the sale of the shares of our
common stock registered hereby. We will pay all expenses incurred in connection
with this registration of the shares of our common stock under the Securities
Act, including registration and filing fees, fees an expenses of compliance with
securities or blue sky laws, listing fees, printing and engraving expenses,
messenger and delivery expenses, and fees and disbursements of our counsel,
accountants and other persons retained by us, but excluding commissions and
discounts incurred by the selling security holders in connection with the resale
of such shares.
We cannot assure you that the selling security holders will sell all or
any portion of the securities offered hereby.
61
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Indiana Business Corporation Act (the "IBCA") provides that an
Indiana corporation may indemnify an individual made a party to a proceeding
because the individual is or was a director against liability incurred in the
proceeding provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was unlawful. Unless limited by its articles of
incorporation, an Indiana corporation must indemnify a director who was wholly
successful, on the merits or otherwise, in the defense of any proceeding to
which the director was a party because the director is or was a director of the
corporation against reasonable expenses incurred by the director in connection
with the proceeding. Our articles of incorporation do not limit our obligations
to so indemnify our directors.
The IBCA also provides that, unless the corporation's articles of
incorporation provide otherwise: (i) an officer of an Indiana corporation,
whether or not a director, is entitled to mandatory indemnification and is
entitled to apply for court-ordered indemnification to the same extent as a
director; (ii) the corporation may indemnify and advance expenses to an officer,
employee or agent of the corporation, whether or not a director, to the same
extent as to a director; and (iii) the corporation may also indemnify and
advance expenses to an officer, employee or agent, whether or not a director, to
the extent, consistent with public policy, it is permitted to do so by its
articles of incorporation, bylaws, general or specific action of its board of
directors, or contract. Our articles of incorporation do not limit our ability
to so indemnify our officers.
We are authorized to enter into indemnification agreements with our
directors, officers, employees and agents, and those serving at the request of
the corporation as a director, officer, employee or agent of another corporation
or enterprise, which may, in some cases, be broader than the specific
indemnification provisions set forth in the IBCA. In addition, we are authorized
to purchase and maintain insurance on behalf of these persons to indemnify them
for expenses and liabilities incurred by them by reason of their being or having
been such a director, officer, employee or agent, regardless of whether we have
the power to indemnify such persons against such expenses and liabilities under
our articles of incorporation, our bylaws, the IBCA, or otherwise. We have not
entered into any such agreements or obtained such insurance.
The limitation of liability and indemnification provisions of the IBCA
may discourage stockholders from bringing a lawsuit against our directors for
breach of their fiduciary duty of care. These provisions may also reduce the
likelihood of derivative litigation against our directors, officers, employees
and agents, and those serving at the request of the corporation as a director,
officer, employee or agent of another corporation or enterprise, even though an
action, if successful, might benefit us and our stockholders. The price of our
shares may be adversely affected to the extent we pay the costs of settlement
and damage awards against such persons pursuant to these indemnification
provisions.
62
We believe that the limitation of liability, indemnification and
insurance provisions of the IBCA are useful to attract and retain qualified
officers, directors, employees and agents. No material litigation or proceeding
involving any of our officers, directors, employees or agents is currently
pending for which indemnification or advancement of expenses is being sought.
The effect of these indemnification provisions is to authorize
indemnification for liabilities arising under the Securities Act and the
Exchange Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our officers, directors and controlling
persons pursuant to our articles of incorporation, our bylaws, the IBCA or
otherwise, we have been advised that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
LEGAL MATTERS
The validity of the shares of common stock offered hereby are being
passed upon for us by Carson Boxberger LLP, 1400 One Summit Square, Fort Wayne,
Indiana 46802.
EXPERTS
The audited consolidated financial statements as of December 31, 2004
and for the year then ended have been audited by HJ Associates, our independent
accountants. We have included these financial statements in this registration
statement in reliance upon the reports of such firm given their authority as
experts in accounting and auditing.
63
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement we filed with the
United States Securities and Exchange Commission. You should rely only on the
information provided in this prospectus. We have not authorized anyone to
provide you with information different from that contained in this prospectus.
The selling security holders are offering to sell, and seeking offers to buy,
shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. Applicable SEC rules may require us
to update this prospectus in the future. This preliminary prospectus is subject
to completion prior to this offering.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). You
may read and copy any report, statement or other information that we file with
the SEC at the SEC Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain further information on the operation of the Public
Reference room by calling the SEC at 1-800-SEC-0330. These SEC filings are also
available to the public at the SEC's Internet site at http://www.sec.gov, as
well as our Internet site at http://carexpresshealth.com. Information contained
on our Web site does not constitute part of this prospectus.
This prospectus is part of a registration statement that we filed with
the SEC. This prospectus and any accompanying prospectus supplement do not
contain all of the information included in the registration statement, and
certain statements contained in this prospectus and any accompanying prospectus
supplement about the provisions or contents of any contract, agreement or any
other document referred to herein are not necessarily complete. For each of
these contracts, agreements or documents filed as an exhibit to the registration
statement, we refer you to the actual exhibit for a more complete description of
the matters involved. In addition, we have omitted certain parts of the
registration statement in accordance with the rules and regulations of the SEC.
To obtain all of the information that we filed with the SEC in connection
herewith, we refer you to the registration statement, including its exhibits and
schedules. You should assume that the information contained in this prospectus
and any accompanying prospectus supplement is accurate only as of the date
appearing on the front of the prospectus or prospectus supplement, respectively.
As a company listed on the OTC Bulletin Board, we are not required to
deliver an annual report to our shareholders. However, we intend to provide an
annual report to our shareholders containing audited financial statements in
connection with the annual meeting of shareholders that we intend to hold
following the completion of our fiscal year ended December 31, 2005.
64
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
F-1
C O N T E N T S
Report of Independent Registered Public Accounting Firm.................... F-3
Consolidated Balance Sheet................................................. F-4
Consolidated Statements of Operations...................................... F-5
Consolidated Statements of Stockholders' Equity ........................... F-6
Consolidated Statements of Cash Flows...................................... F-7
Notes to the Consolidated Financial Statements............................. F-9
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
National Health Partners, Inc. and Subsidiary
Board of Directors
Horsham, Pennsylvania
We have audited the accompanying consolidated balance sheet of National Health
Partners, Inc. and Subsidiary as of December 31, 2004 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 2004 and 2003. 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 audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 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 consolidated financial position of
National Health Partners, Inc. and Subsidiary as of December 31, 2004 and the
results of their operations and their cash flows for the years ended December
31, 2004 and 2003 in conformity with United States generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 6 to the
consolidated financial statements, the Company's recurring losses and cash used
by operations raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
6. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
HJ & Associates, LLC
Salt Lake City, Utah
February 9, 2005
F-3
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Balance Sheet
ASSETS
------
December 31,
2004
--------------
CURRENT ASSETS
Cash $ 421,915
--------------
Total Current Assets 421,915
--------------
FIXED ASSETS, NET (Note 2) 142,454
--------------
OTHER ASSETS
Deposits 19,000
--------------
Total Other Assets 19,000
--------------
TOTAL ASSETS $ 583,369
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 41,649
Accrued expenses (Note 3) 75,955
Notes payable (Note 4) 57,251
Deferred revenue (Note 1) 7,093
--------------
Total Current Liabilities 181,948
--------------
LONG TERM LIABILITIES
Notes payable 23,742
--------------
Total Long Term Liabilities 23,742
--------------
Total Liabilities 205,690
--------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY
Common stock, $0.001, 100,000,000 shares authorized,
9,636,200 shares issued and outstanding 9,637
Additional paid in capital 3,727,874
Stock subscriptions payable 14,650
Accumulated deficit (3,374,482)
--------------
Total Stockholders' Equity 377,679
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 583,369
==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the Years Ended
December 31,
---------------------------------
2004 2003
------------- -------------
REVENUE $ 27,929 $ 50,371
COST OF SALES 54,263 84,477
------------- -------------
Gross Deficit (26,334) (34,106)
------------- -------------
EXPENSES
Professional fees 1,178,898 -
Rent expense 119,906 52,169
Advertising expense 170,377 -
Salary expense 577,248 80,879
Depreciation expense 19,502 -
General and administrative 407,141 78,598
------------- -------------
Total Expenses 2,473,072 211,646
------------- -------------
Loss from Operations (2,499,406) (245,752)
------------- -------------
OTHER (EXPENSE)
Loss on extinguishment of debt (83,388) -
Interest expense (7,106) (20,422)
------------- -------------
Total Other (Expense) (90,494) (20,422)
------------- -------------
NET LOSS $ (2,589,900) $ (266,174)
============= =============
BASIC LOSS PER SHARE $ (0.42) $ (0.16)
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 6,233,471 1,687,500
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Common Stock Additional
-------------------------- Paid in Accumulated
Shares Amount Capital Deficit
---------- ---------- -------------- --------------
Balance, December 31, 2002 1,687,500 $ 1,687 $ 14,568 $ (518,408)
Net loss for the year ended
December 31, 2003 - - - (266,174)
--------- --------- ------------- ------------
Balance, December 31, 2003 1,687,500 1,687 14,568 (784,582)
Common stock issued for extinguishments of
debt at an average price of $0.46 per share 618,200 618 283,512 -
Common stock issued for services at an
average price of $0.50 per share 2,098,250 2,099 1,047,027 -
Units issued for cash at an average price of
$0.47 per unit 5,232,250 5,233 2,382,767 -
Net loss for the year ended
December 31, 2004 - - - (2,589,900)
--------- --------- ------------- ------------
Balance, December 31, 2004 9,636,200 $ 9,637 $ 3,727,874 $ (3,374,482)
========= ========= ============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
------------------------------------
2004 2003
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,589,900) $ (266,174)
Adjustments to reconcile net loss to net cash used by
operating activities:
Common stock issued for services 1,049,126 -
Depreciation expense 19,502 -
Loss on extinguishments of debt 83,393 -
Changes in operating assets and liabilities:
Increase in deposits (15,000) -
Increase (decrease) in deferred revenue 7,093 (1,162)
Increase in interest payable (23,529) 20,272
Increase (decrease) in accounts payable - related party (16,350) 30,893
Increase (decrease) in accounts payable and accrued
expenses (137,210) 85,651
-------------- ----------
Net Cash Used by Operating Activities (1,622,875) (130,520)
-------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets and website costs (161,956) -
-------------- ----------
Net Cash Used by Investing Activities (161,956) -
-------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in cash overdraft (840) 840
Proceeds from notes payable 11,000 116,711
Payments on notes payable (196,234) -
Payments on notes payable - related party (10,000) (3,000)
Proceeds from common stock and subscription payable 2,402,650 -
-------------- ----------
Net Cash Provided by Financing Activities 2,206,576 114,551
-------------- ----------
NET INCREASE (DECREASE) IN CASH 421,745 (15,969)
CASH AT BEGINNING OF YEAR 170 16,139
-------------- ----------
CASH AT END OF YEAR $ 421,915 $ 170
============== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
For the Years Ended
December 31,
--------------------------------
2004 2003
----------- ---------
CASH PAID DURING THE PERIOD FOR:
Interest $ - $ -
Income taxes $ - $ -
SCHEDULE OF NON CASH FINANCING ACTIVITIES
Common stock issued for services $ 1,049,126 $ -
Common stock issued for extinguishment of debt $ 284,130 $ -
The accompanying notes are an integral part of
these consolidated financial statements.
F-8
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - NATURE OF ORGANIZATION
This summary of significant accounting policies of National Health
Partners, Inc. is presented to assist in understanding the Company's
financial statements. The financial statements and notes are
representations of the Company's management, which is responsible for
their integrity and objectivity. These accounting policies conform to
accounting principles generally accepted in the United States of
America and have been consistently applied in the preparation of the
financial statements.
a. Organization and Business Activities
National Health Partners, Inc. (Hereinafter referred to as the Company)
was organized on March 10, 1989, under the laws of the State of
Indiana. The Company was incorporated under the name of Spectrum Vision
Systems of Indiana, Inc. on March 13, 2001, the Company changed its
name to National Health Partners, Inc.
On December 15, 2004, National Health Brokerage Group, Inc (Brokerage)
was organized as a wholly owned subsidiary of National Health Partners,
Inc.
b. Accounting Method
The Company's financial statements are prepared using the accrual
method of accounting. The Company has elected a December 31 year-end.
c. Cash and Cash Equivalents
For the purpose of the statement of cash flows, the Company considers
all highly liquid investments purchased with a maturity of three months
or less to be cash equivalents.
d. Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
e. Basic Loss Per Share
The computation of basic loss per share of common stock is based on the
weighted average number of shares of common stock outstanding during
the periods presented. The Company has excluded 10,724,791, and -0-
common stock equivalents for the years ended December 31, 2004 and
2003, respectively.
F-9
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - NATURE OF ORGANIZATION (Continued)
e. Basic Loss Per Share (Continued)
For the Years Ended
December 31,
------------------------------
2004 2003
-------------- -------------
Loss $ (2,589,900) $ (266,174)
Shares 6,233,471 1,687,500
------------- ------------
Per Share Amount $ (0.42) $ (0.16)
============= ============
f. 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 bases. 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 effects of changes in tax laws and rates on the date of
enactment.
Net deferred tax assets consist of the following components as of
December 31, 2004 and 2003:
December 31,
--------------------------------
2004 2003
----------- ------------
Deferred tax assets:
NOL Carryover $ 862,385 $ 295,800
Deferred tax liabilities:
Depreciation (29,630) -
Valuation allowance (832,755) (295,800)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
F-10
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - NATURE OF ORGANIZATION (Continued)
f. Income Taxes (continued)
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal and state income tax rates of
39% to pretax income from continuing operations for the years ended
December 31, 2004 and 2003 due to the following:
December 31,
---------------------------------
2004 2003
-------------- -------------
Book Income $ (1,000,900) $ (103,850)
Meals and Entertainment 22,275 2,750
Loss on Extinguishment of Debt 32,520 -
Stock for Services/Options Expense 409,150 -
Valuation allowance 536,955 101,100
------------- ------------
$ - $ -
============= ============
At December 31, 2004, the Company had net operating loss carryforwards
of approximately $2,200,000 that may be offset against future taxable
income from the year 2004 through 2024. No tax benefit has been
reported in the December 31, 2004 financial statements since the
potential tax benefit is offset by a valuation allowance of the same
amount.
Due to the change in ownership provisions of the Tax Reform Act of
1986, net operating loss carryforwards for Federal income tax reporting
purposes are subject to annual limitations. Should a change in
ownership occur, net operating loss carryforwards may be limited as to
use in future years.
g. Revenue Recognition
The Company recognizes revenue upon the receipt of payment. The Company
provides discount health care memberships. The Company's cost of sales
consists of health care provider costs. The Company pre-bills for the
next months services. Accordingly there was deferred revenue of $7,093.
h. Newly Issued Accounting Pronouncements
During the year ended December 31, 2004, the Company adopted the
following accounting pronouncements:
On December 16, 2004 the FASB issued SFAS No. 123(R), Share-Based
Payment, which is an amendment to SFAS No. 123, Accounting for
Stock-Based Compensation. This new standard eliminates the ability to
account for share-based compensation transactions using Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and generally requires such transactions to be accounted
F-11
NATIONAL HEALTH PARTNERS, INC. AND SUBISIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - NATURE OF ORGANIZATION (Continued)
h. Newly Issued Accounting Pronouncements (Continued)
for using a fair-value-based method and the resulting cost recognized
in our financial statements. This new standard is effective for awards
that are granted, modified or settled in cash in interim and annual
periods beginning after June 15, 2005. In addition, this new standard
will apply to unvested options granted prior to the effective date. We
will adopt this new standard effective for the fourth fiscal quarter of
2005, and have not yet determined what impact this standard will have
on our financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an
amendment of ARB No. 43, Chapter 4. This Statement amends the guidance
in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43,
Chapter 4, previously stated that ". . . under some circumstances,
items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires
that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal." In addition, this
Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Management does not
believe the adoption of this Statement will have any immediate material
impact on the Company.
In December 2004, the FASB issued SFAS No. 152, Accounting for Real
Estate Time-sharing Transactions, which amends FASB statement No. 66,
Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP)
04-2, Accounting for Real Estate Time-Sharing Transactions. This
statement also amends FASB Statement No. 67, Accounting for Costs and
Initial Rental Operations of Real Estate Projects, to state that the
guidance for (a) incidental operations and (b) costs incurred to sell
real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject
to the guidance in SOP 04-2. This Statement is effective for financial
statements for fiscal years beginning after June 15, 2005. Management
believes the adoption of this Statement will have no impact on the
financial statements of the Company.
In December 2004, the FASB issued SFAS No.153, Exchange of Nonmonetary
Assets. This Statement addresses the measurement of exchanges of
nonmonetary assets. The guidance in APB Opinion No. 29, Accounting for
Nonmonetary Transactions, is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the
assets exchanged. The guidance in that Opinion, however, included
certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a
F-12
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - NATURE OF ORGANIZATION (Continued)
h. Newly Issued Accounting Pronouncements (Continued)
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetrary exchange has commercial substance
if the future cash flows of the entity are expected to change
significantly as a result of the exchange. This Statement is effective
for financial statements for fiscal years beginning after June 15,
2005. Earlier application is permitted for nonmonetary asset exchanges
incurred during fiscal years beginning after the date of this statement
is issued. Management believes the adoption of this Statement will have
no impact on the financial statements of the Company.
The implementation of the provisions of these pronouncements are not
expected to have a significant effect on the Company's consolidated
financial statement presentation.
i. Advertising and Marketing
The Company follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense for the year ended December
31, 2004 and 2003 was $170,371 and $-, respectively.
j. Stock Options
As permitted by FASB Statement 148 "Accounting for Stock Based
Compensation", the Company elected to measure and record compensation
cost relative to employee stock option costs in accordance with
Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations and make proforma
disclosures of net income and earnings per share as if the fair value
method of valuing stock options had been applied. Under APB Opinion 25,
compensation cost is recognized for stock options granted to employees
when the option price is less than the market price of the underlying
common stock on the date of grant.
k. Fixed Assets
Fixes assets are recorded at cost. Major additions and improvements are
capitalized. Minor replacements, maintenance and repairs that do not
increase the useful lives of the assets are expensed as incurred.
Depreciation expense is calculated on a straight line basis over the
useful lives of the fixed assets as follows:
Computers 3 years
Furniture 5 years
Telephone 5 years
Website 3 years
F-13
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - NATURE OF ORGANIZATION (Continued)
l. Principles of Consolidation
The financial statements include the balances of National Health
Partners, Inc. and its wholly owned subsidiary, National Health
Brokerage Group, Inc. All material balances have been eliminated in
consolidation.
NOTE 2 - FIXED ASSETS
Fixed assets consisted of the following at December 31, 2004:
Computer equipment $ 22,024
Furniture 7,572
Telephone system 43,153
Website 89,207
Less accumulated depreciation (19,502)
-------------
Net Fixed Assets $ 142,454
=============
Depreciation expense for the years ended December 31, 2004 and 2003 was
$19,502 and $-, respectively.
NOTE 3 - ACCRUED EXPENSES
Accrued expenses are amounts due to U.S. Script for services provided
to the Company. Balance at December 31, 2004 was $75,955.
NOTE 4 - NOTES PAYABLE
Note payable to U.S. Script bearing
interest at 5.00% per annum requiring
monthly payments of $5,000, unsecured. $ 80,993
Less current portion (57,251)
-----------
Long term portion $ 23,742
===========
Future maturities of long term debt are as follows:
2005 $ 57,251
2006 23,742
-----------
$ 80,993
===========
F-14
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Facility Lease
--------------
The Company entered into a facility lease on December 1, 2001 which was
amended on April 20, 2004. This is a three year lease expiring on
November 2007. This lease required a deposit of $19,000. The starting
monthly payment is $8,386 for the first year and increases each
subsequent year.
Future minimum lease payments under this facility lease are as follows:
Facility Lease
--------------
Year ended December 31,
2005 $ 100,633
2006 158,049
2007 52,684
----------
$ 311,336
==========
Equipment Leases
----------------
On July 8, 2004, the Company entered into an equipment lease for a
period of 60 months. The monthly lease payment is $131.
Future minimum payments under this operating lease is as follows:
Year ended December 31, 2005 $ 1,572
2006 1,572
2007 1,572
2008 1,572
2009 524
----------
$ 6,812
==========
Employment Agreements
---------------------
The Company has entered into the following employment agreements with
the following officers of the Company on August 1, 2004
Per Year Amount
------------------------------------------------------------
Officer Term 2005 2006 2007 2008 2009
------------------------- ------- --------- ----------- ---------- ---------- -----------
Chief Executive Officer 5 years $ 282,000 $ 310,200 $ 341,220 $ 375,342 $ 240,844
President 5 years $ 282,000 $ 310,200 $ 341,220 $ 375,342 $ 240,844
Chief Financial Officer 3 years $ 188,400 $ 207,240 $ 132,979 $ - $ -
Vice President Marketing 5 years $ 162,000 $ 178,000 $ 195,800 $ 215,380 $ 138,202
$ 914,400 $ 1,005,640 $1,011,219 $ 966,064 $ 613,819
========= =========== ========== ========== ===========
F-15
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements (Continued)
---------------------
Additionally the officers as a combined group are eligible for bonuses
of up to 7% of the pretax profit of the Company.
NOTE 6 - GOING CONCERN
The Company's financial statements are prepared using accounting
principles generally accepted in the United States of America
applicable to a going concern which contemplates the realization of
assets and liquidation of liabilities in the normal course of business.
The Company has historically incurred significant losses, which raises
substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that
might result from the outcome of this uncertainty. Management intends
to raise over $1,000,000 in a private placement.
The Company has started a marketing campaign through several major
chains. The Company has upgraded its computer and phone systems in
anticipation of increased business.
NOTE 7 - EQUITY TRANSACTIONS
Share Issuances
---------------
On February 17, 2004, the Company entered into an agreement to issue
150,000 shares of common stock for the extinguishment of debt. The
shares were valued at $0.50 per share and resulted in an extinguishment
of debt of $66,117 and a loss on extinguishment of debt of $8,883.
On February 17, 2004, the Company issued 1,748,250 shares of common
stock for services. The shares were issued to the chief executive
officer and were valued at $0.50 per share for total consideration of
$874,125.
On February 17, 2004, the Company issued 100,000 shares of common stock
for consulting services. The shares were valued at $0.50 per share for
total consideration of $50,000.
On March 4, 2004, the Company issued 95,300 shares of common stock to
the Company's CFO for unpaid consulting fees. The shares were valued at
$0.50 per share and resulted in the extinguishment of $35,940 of debt.
The loss on extinguishment of debt of $11,710 was debited to additional
paid in capital because of the related party nature of the stock
issuance.
F-16
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 7 - EQUITY TRANSACTIONS (Continued)
Share Issuances (Continued)
---------------
On March 4, 2004, the Company issued 107,600 shares of common stock to
a related party for unpaid consulting fees. The shares were valued at
$0.50 per share and resulted in the extinguishment of $40,540 of debt.
The loss on extinguishment of debt of $13,260 was debited to additional
paid in capital because of the related party nature of the stock
issuance.
On March 4, 2004, the Company issued 175,000 shares of common stock for
unpaid consulting fees. The shares were valued at $0.50 per share and
resulted in the extinguishment of $22,294 of debt and a loss on
extinguishment of debt of $65,206.
On March 19, 2004, the Company issued 100,000 shares of common stock
for services. The shares were valued at $0.50 per share for total
consideration of $50,000.
On March 31, 2004, the Company entered into an agreement to issue
59,600 share of common stock and pay $10,000 as a partial payment on an
outstanding loan. The shares were valued at $0.50 per share and
resulted in an extinguishment of debt of $25,960 and a loss on
extinguishment of debt of $3,840.
On March 31, 2004, the Company entered into an agreement to issue 5,200
shares of common stock for the extinguishment of debt. The shares were
valued at $0.50 per share and resulted in the extinguisment of debt of
$2,104 and a loss on extinguishment of debt of $496.
On March 31, 2004, the Company entered into an agreement to issue
25,500 shares of common stock for the extinguishment of debt. The
shares were valued at $0.50 per share and resulted in the extinguisment
of debt of $7,782 and a loss on extinguishment of debt of $4,963.
On March 31, 2004 the Company issued 50,000 shares of common stock for
services rendered. The shares were valued at $0.50 per share for total
consideration of $25,000.
On August 24, 2004, the Company issued 100,000 shares of common stock
as payment for legal services. The shares were valued at $0.50 per
share for total consideration of $50,000.
Private Placements
------------------
On February 18, 2004, the Company approved a private placement to issue
up to 5,000,000 shares of common stock at $0.50 per share. The Company
will issue 7,500,000 units at $1.00 each. Each unit will consist of 2
shares of common stock, 1 Class A Warrant, 1 Class B Warrant. Each
warrant gives the holder the right to purchase 1 share of common stock
up to 2,500,000 shares for Class A Warrants and 2,500,000 shares for
Class B Warrants. The Company issued 2,777,000 shares of common stock
and received $1,388,500.
F-17
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 7 - EQUITY TRANSACTIONS (Continued)
Private Placements (Continued)
------------------
On May 2004, the Company approved a private placement to issue up to
5,000,000 shares of common stock at $0.50 per share. The Company will
issue 7,500,000 units at $1.00 each. Each unit will consist of 2 shares
of common stock, 1 Class A Warrant, 1 Class B Warrant. Each warrant
give the holder the right to purchase 1 share of common stock up to
2,500,000 shares for Class A Warrants and 2,500,000 shares for Class B
Warrants. The Company issued 174,000 shares of common stock and
received $87,000.
In September 2004, the Company approved a private placement to issue up
to 9,000,000 shares of common stock and 3,000,000 Class A warrants as
well as 3,000,000 Class B warrants. The shares and warrants were to be
sold in units comprised of 3 shares of common stock, 1 Class A warrant
and 1 Class B warrant for $1.20 per unit. The Company issued 2,281, 250
shares of common stock and received $912,500 of cash.
Amendments to Articles of Incorporation
---------------------------------------
On February 17, 2004, the Company approved a forward stock split of
3,375 to 1. At the same time, the Company amended its Articles of
Incorporation to increase the number of authorized shares from 1,000 no
par common stock to 10,000,000 no par common stock. On June 30, 2004
the Company amended its Articles of Incorporation to reflect a par
value of $0.001 per share and increase the number of authorized shares
to 100,000,000. All references to common stock have been retroactively
restated.
NOTE 8 - STOCK OPTIONS
On September 28, 2004, the Company granted 7,000,000 options to
officers and directors of the Company. All of the options are
exercisable at $0.40 per share, vest immediately and expire on
September 28, 2014.
On December 23, 2004, the Company granted 15,000 options to employees
of the Company. All of the options are exercisable at $0.40 per share,
vest immediately and expire on December 23, 2007.
Under FASB Statement 148, the Company estimates the fair value of each
stock award at the grant date by using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants,
respectively; dividend yield of zero percent for all years; expected
volatility of 359%; risk-free interest rates of 3.5 percent and
expected lives of 9.75 years, for the year ended December 31, 2004.
F-18
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 8 - STOCK OPTIONS (Continued)
Had compensation cost for the Company's stock options granted to
directors and employees been based on the fair value as determined by
the Black-Scholes option pricing model at the grant date under the
accounting provisions of SFAS No. 123, the Company would have recorded
an additional expense of $2,805,985 for the year ended December 31,
2004. Also under these same provisions, the Company's net loss would
have been changed by the pro forma amounts indicated below:
For the Years Ended
December 31,
-------------------------------
2004 2003
-------------- ------------
Net loss:
As reported $ (2,589,900) $ (266,174)
Pro forma $ (5,395,885) $ (266,174)
Basic loss per share:
As reported $ (0.42) $ (0.16)
Pro forma $ (0.87) $ (0.16)
A summary of the status of the Company's stock option as of December
31, 2004:
2004
---------------------------
Weighted
Average
Exercise
Shares Price
----------- -----------
Outstanding, beginning of year - $ -
Granted 7,015,000 0.40
Exercised - -
--------- ----------
Outstanding, end of year 7,015,000 $ 0.40
--------- ----------
Exercisable, end of year 7,015,000 $ 0.40
--------- ----------
Outstanding
----------------------------------------------------
Weighted
Average Weighted
Number Remaining Average
Range of Outstanding Contractual Exercise
Exercise Prices at 12/31/04 Life Price
--------------- ----------- ------------ --------
0.40 7,015,000 9.95 0.40
============ ======== ======
F-19
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 9 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2004 and 2003, related parties
were paid $10,000 and $3,000 in cash as payments on notes payable.
See also Note 7 for related party equity transactions.
NOTE 10 - SUBSEQUENT EVENTS
On January 27, 2005 the Board of Directors passed a resolution to
conduct a private offering of securities to the participants in the
February and August Offerings pursuant to which the Company will issue
to each participant that number of additional shares of Common Stock,
Class A Warrants and Class B Warrants that is equal to twenty-five
percent of the number of shares of Common Stock, Class A Warrants and
Class B Warrants purchased by the participants in the February and
August Offerings as consideration for the participants agreeing to the
amendment of the Offering Documents.
On January 31, 2005 a letter of termination was sent to Ronald B.
King.
On January 31, 2005 a letter of termination was sent to R. Dennis
Bowers.
Shareholders voted to replace King and Bowers as Directors with
outside shareholders Steve Adelstein and Keith Shelly.
On February 2, 2005 a Board of Directors meeting was held and Steve
Adelstein was unanimously elected Chairman and David Daniels was
elected Chief Executive Officer and President.
An additional $40,000 has been raised as part of the Private Placement
authorized in September 2004.
F-20
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
To the Board of Directors
National Health Partners, Inc.
Horsham, PA
We have reviewed the accompanying condensed balance sheet of National Health
Partners, Inc. as of March 31, 2005, and the related condensed statements of
operations, stockholders equity and cash flows for the three month periods ended
March 31, 2005 and 2004. These condensed financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with the standards of the Public Company Accounting Oversight Board, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed financial statements for them to be in conformity with
U.S. generally accepted accounting principles.
HJ & Associates, LLC
May 18, 2005
F-21
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Balance Sheet
ASSETS
------
March 31,
2005
-----------
(Unaudited)
CURRENT ASSETS
Cash $ 38,258
Certificate of deposit 35,000
Note receivable 25,000
Other current assets 850
----------
Total Current Assets 99,108
----------
FIXED ASSETS, NET 130,649
----------
OTHER ASSETS
Deposits 19,000
----------
Total Other Assets 19,000
----------
TOTAL ASSETS $ 248,757
==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 96,663
Accrued expenses 88,460
Notes payable 43,188
Deferred revenue 3,109
----------
Total Current Liabilities 231,420
----------
LONG TERM LIABILITIES
Notes payable 23,742
----------
Total Long Term Liabilities 23,742
----------
Total Liabilities 255,162
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001, 100,000,000 shares authorized,
10,680,950 shares issued and outstanding 10,681
Additional paid in capital 3,849,630
Stock subscriptions payable 12,000
Accumulated deficit (3,878,716)
----------
Total Stockholders' Equity (Deficit) (6,405)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 248,757
==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-22
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended
March 31,
---------------------------------
2005 2004
--------------- -------------
REVENUE $ 18,379 $ 8,484
COST OF SALES 14,020 6,448
-------------- -------------
Gross Profit 4,359 2,036
-------------- -------------
EXPENSES
Professional fees 115,189 40,957
Rent expense 50,913 18,988
Salary expense 213,139 36,667
Depreciation expense 11,805 -
General and administrative 116,610 5,146
-------------- -------------
Total Expenses 507,656 101,758
-------------- -------------
Loss from Operations (503,297) (99,922)
-------------- -------------
OTHER (EXPENSE)
Interest expense (937) (3,358)
-------------- -------------
Total Other (Expense) (937) (3,358)
-------------- -------------
NET LOSS $ (504,234) $ (103,080)
============== =============
BASIC LOSS PER SHARE $ (0.05) $ (0.02)
============== =============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 10,230,768 4,840,514
============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-23
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity (Deficit)
Common Stock Additional
------------------------------- Paid in Accumulated
Shares Amount Capital Deficit
---------- --------- ------------- --------------
Balance, December 31, 2004 9,636,200 $ 9,636 $ 3,727,874 $ (3,374,482)
Common stock issued for cash at an
average price of $0.40 per share
(unaudited) 307,000 307 122,493 -
Common stock issued to amend prior
issuance to $0.40 per share (unaudited) 737,750 738 (738) -
Net loss for the quarter ended
March 31, 2005 (unaudited) - - - (504,234)
---------- --------- ------------- -------------
Balance, March 31, 2005 (unaudited) 10,680,950 $ 10,681 $ 3,849,630 $ (3,878,716)
========== ========= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-24
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
---------------------------------
2005 2004
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (504,234) $ (103,080)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation expense 11,805 -
Changes in operating assets and liabilities:
Increase in other current assets (850) (50,766)
Increase (decrease) in deferred revenue (3,984) -
Increase (decrease) in accounts payable and accrued
expenses 67,518 (308,827)
----------- ------------
Net Cash Used by Operating Activities (429,745) (462,673)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Note receivable (25,000) -
Purchase of fixed assets and website costs - (11,411)
----------- ------------
Net Cash Used by Investing Activities (25,000) (11,411)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in certificate of deposits (35,000) -
Increase (decrease) in cash overdraft - (840)
Payments on notes payable (14,063) (3,254)
Payments on notes payable - related party - (53,980)
Proceeds from common stock and subscription payable 120,151 826,114
----------- ------------
Net Cash Provided by Financing Activities 71,088 768,040
----------- ------------
NET INCREASE (DECREASE) IN CASH (383,657) 293,956
CASH AT BEGINNING OF PERIOD 421,915 170
----------- ------------
CASH AT END OF PERIOD $ 38,258 $ 294,126
=========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-25
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Three Months Ended
March 31,
------------------------------
2005 2004
-------- ----------
CASH PAID DURING THE PERIOD FOR:
Interest $ 937 $ 3,358
Income taxes $ - $ -
SCHEDULE OF NON CASH FINANCING ACTIVITIES
The accompanying notes are an integral part of these
consolidated financial statements.
F-26
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
March 31, 2005
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been condensed or omitted in accordance with such rules
and regulations. The information furnished in the interim financial
statements include normal recurring adjustment and reflects all
adjustments, which, in the opinion of management, are necessary for a
fair presentation of such financial statements. Although management
believes the disclosures and information presented are adequate to make
the information not misleading, it is suggested that these interim
condensed financial statements be read in conjunction with the
Company's most recent audited financial statements and notes thereto.
Operating results for the three months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
NOTE 2 - FIXED ASSETS
Fixed assets consisted of the following at March 31, 2005:
Computer equipment $ 22,024
Furniture 7,572
Telephone system 43,153
Website 89,207
Less accumulated depreciation (31,307)
----------
Net Fixed Assets $ 130,649
==========
Depreciation expense for the three months ended March 31, 2005 and 2004
was $11,805 and $-, respectively.
NOTE 3 - NOTES PAYABLE
Note payable to U.S. Script bearing
interest at 5.00% per annum requiring
monthly payments of $5,000, unsecured. $ 66,930
Less current portion (43,188)
-----------
Long term portion $ 23,742
===========
Future maturities of long term debt are as follows:
2005 $ 43,188
2006 23,742
-----------
$ 66,930
===========
F-27
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
March 31, 2005
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Facility Lease
--------------
The Company entered into a facility lease on December 1, 2001 which was
amended on April 20, 2004. This is a three year lease expiring on
November 2007. This lease required a deposit of $19,000. The starting
monthly payment is $8,386 for the first year and increases each
subsequent year.
Future minimum lease payments under this facility lease are as follows:
Facility Lease
--------------
Year ended December 31,
2005 $ 100,633
2006 158,049
2007 52,684
------------
$ 311,336
============
Equipment Leases
----------------
On July 8, 2004, the Company entered into an equipment lease for a
period of 60 months. The monthly lease payment is $131.
Future minimum payments under this operating lease is as follows:
Year ended December 31, 2005 $ 1,572
2006 1,572
2007 1,572
2008 1,572
2009 524
----------
$ 6,812
==========
Employment Agreements
---------------------
The Company had entered into employment agreements with officers of the
Company. These contracts were cancelled and renegotiated as follows on
February 1, 2005.
Per Year Amount
------------------------------------------------------------------------
Officer Term 2005 2006 2007 2008 2009 2010
---------------- -------- ---------- --------- ---------- --------- --------- ---------
Chief Executive
Officer 5 years $ 211,750 $ 252,175 $ 277,393 $ 305,132 $ 335,645 $ 27,970
Chief Financial
Officer 3 years $ 145,209 $ 172,920 $ 190,212 $ 15,851 $ - $ -
Vice President
Marketing 5 years $ 121,000 $ 144,000 $ 158,510 $ 174,361 $ 191,797 $ 15,983
$ 477,959 $ 569,195 $ 626,115 $ 495,344 $ 527,442 $ 43,954
========== ========= ========= ========= ========= =========
F-28
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
March 31, 2005
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements (Continued)
---------------------
Additionally the officers as a combined group are eligible for bonuses
at the discretion of the board of directors.
NOTE 5 - EQUITY TRANSACTIONS
Share Issuances
---------------
Between January 2005 and March 2005, the Company issued 307,000 shares
of common stock for $122,800 or $0.40 per share. These shares were
issued pursuant to the private placement approved in September, 2004.
The Company issued 757,750 shares of common stock to previous investors
as consideration for the investors agreeing to amendments to the
offering documents. Investors who had purchased units at $0.50 per
share, were given sufficient shares to bring their investment price
down to $0.40 per share based on the September offering. No value was
ascribed to these shares because no additional cash or services were
received by the Company.
NOTE 6 - STOCK OPTIONS
Under FASB Statement 148, the Company estimates the fair value of each
stock award at the grant date by using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants,
respectively; dividend yield of zero percent for all years; expected
volatility of 314%; risk-free interest rates of 3.5 percent and
expected lives of 9.75 years, for the period ended March 31, 2005.
Effective February 1, 2005, the Company cancelled 7,000,000 options
which had been granted to officers and directors of the Company. The
Company granted 4,500,000 options as part of the new employment
agreements. The options are exercisable at $0.40 per option and vest as
follows: 25% immediately and 25% per year for the next 3 years. The
options have a term of ten years from the grant date.
F-29
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
March 31, 2005
NOTE 6 - STOCK OPTIONS (Continued)
Had compensation cost for the Company's stock options granted to
directors and employees been based on the fair value as determined by
the Black-Scholes option pricing model at the grant date under the
accounting provisions of SFAS No. 123, the Company would have recorded
an additional expense of $450,000 for the three months ended March 31,
2005. Also under these same provisions, the Company's net loss would
have been changed by the pro forma amounts indicated below:
For the Three Months Ended
March 31,
-------------------------------
2005 2004
------------- ------------
Net loss:
As reported $ (504,234) $ (103,080)
Pro forma $ (954,234) $ (103,080)
Basic loss per share:
As reported $ (0.05) $ (0.02)
Pro forma $ (0.09) $ (0.02)
A summary of the status of the Company's stock options as of March 31,
2005:
2005
---------------------------
Weighted
Average
Exercise
Shares Price
---------- -----------
Outstanding, beginning of period 7,015,000 $ 0.40
Granted 4,500,000 0.40
Cancelled (7,000,000) (0.40)
--------- ----------
Outstanding, end of period 4,515,000 $ 0.40
--------- ----------
Exercisable, end of period 1,140,000 $ 0.40
--------- ----------
Outstanding
---------------------------------------------------
Weighted
Average Weighted
Number Remaining Average
Range of Outstanding Contractual Exercise
Exercise Prices at 3/31/05 Life Price
--------------- ------------- ------------- ---------
0.40 4,515,000 9.95 0.40
========= ==== ====
F-30
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
March 31, 2005
NOTE 7 - SUBSEQUENT EVENTS
Subsequent to March 31, 2005, the Company has raised $634,500 in cash
proceeds from a private placement. The Company has issued 1,586,250
shares.
The Company sold 600,000 units (1,800,000 shares) at a purchase price
of $1.20 per unit for 2,740,000 free trading shares of Infiniom Lass,
Inc. Each unit consists of three shares of the Company's common stock,
one Class A warrant exercisable into 1.5 shares of the Company's common
stock and one Class B warrant exercisable into 1.5 share of the
Company's common stock. Each Class A warrant is exercisable at $0.60
per warrant for a period of 18 months, each Class B warrant is
exercisable at $0.80 per warrant for a period of 3 years. If the
proceeds from the sale of the Infinium stock do not equal $720,000,
then the investor is required to make up the difference in either
additional Infinium stock or cash, if the proceeds exceed $720,000,
then the Company is required to return any excess proceeds over
$720,000. As of May 18, 2005, the Company has received $221,039 from
the sale of Infinium shares.
F-31
15,659,375 SHARES
[GRAPHIC OMITTED]
NATIONAL HEALTH PARTNERS, INC.
COMMON STOCK
__________________________
P R O S P E C T U S
__________________________
JUNE ___, 2005
UNTIL ____ (THE 90TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Indiana Business Corporation Act (the "IBCA") provides that an
Indiana corporation may indemnify an individual made a party to a proceeding
because the individual is or was a director against liability incurred in the
proceeding provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was unlawful. Unless limited by its articles of
incorporation, an Indiana corporation must indemnify a director who was wholly
successful, on the merits or otherwise, in the defense of any proceeding to
which the director was a party because the director is or was a director of the
corporation against reasonable expenses incurred by the director in connection
with the proceeding. Our articles of incorporation do not limit our obligations
to so indemnify our directors.
The IBCA also provides that, unless the corporation's articles of
incorporation provide otherwise: (i) an officer of an Indiana corporation,
whether or not a director, is entitled to mandatory indemnification and is
entitled to apply for court-ordered indemnification to the same extent as a
director; (ii) the corporation may indemnify and advance expenses to an officer,
employee or agent of the corporation, whether or not a director, to the same
extent as to a director; and (iii) the corporation may also indemnify and
advance expenses to an officer, employee or agent, whether or not a director, to
the extent, consistent with public policy, it is permitted to do so by its
articles of incorporation, bylaws, general or specific action of its board of
directors, or contract. Our articles of incorporation do not limit our ability
to so indemnify our officers.
We are authorized to enter into indemnification agreements with our
directors, officers, employees and agents, and those serving at the request of
the corporation as a director, officer, employee or agent of another corporation
or enterprise, which may, in some cases, be broader than the specific
indemnification provisions set forth in the IBCA. In addition, we are authorized
to purchase and maintain insurance on behalf of these persons to indemnify them
for expenses and liabilities incurred by them by reason of their being or having
been such a director, officer, employee or agent, regardless of whether we have
the power to indemnify such persons against such expenses and liabilities under
our articles of incorporation, our bylaws, the IBCA, or otherwise. We have not
entered into any such agreements or obtained such insurance.
Reference is made to Item 28 for our undertakings with respect
to indemnification of liabilities arising under the Securities Act of 1933, as
amended.
II-1
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by us in
connection with the sale of the common stock being registered by this
registration statement. All amounts shown are estimates, except for the
Securities and Exchange Commission ("SEC") registration fee.
SEC registration fee.......................................... $ 738
Printing and engraving expenses............................... 5,000
Accounting fees and expenses.................. 50,000
Legal fees and expenses....................................... 50,000
Miscellaneous expenses........................................ 5,000
------------
Total.................................................... $110,738
============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since June 1, 2002, we have issued and sold the following securities
without registration under the Securities Act of 1933, as amended (the
"Securities Act"):
During February and March 2004, we issued 618,200 shares of our common
stock to certain of our debt holders in partial consideration for the
extinguishment of our debt obligations to them. The securities were issued to a
limited number of accredited investors in private placement transactions exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) of the Securities Act directly by us without engaging in any advertising or
general solicitation of any kind and without payment of underwriting discounts
or commissions to any person.
During February and March 2004, we issued 2,098,250 shares of our
common stock to certain of our employees, consultants and advisors in exchange
for services that they rendered to us. The securities were issued to a limited
number of accredited investors in private placement transactions exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act directly by us without engaging in any advertising or general
solicitation of any kind and without payment of underwriting discounts or
commissions to any person.
In August 2004, we issued 100,000 shares of our common stock to a
consultant in connection with consulting and advisory services that were
rendered to us. The securities were issued to an accredited investor in a
private placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act directly by us
without engaging in any advertising or general solicitation of any kind and
without payment of underwriting discounts or commissions to any person.
In August 2004, we completed a private offering of 2,777,000 shares of
our common stock, Class A warrants to acquire 1,388,500 shares of our common
stock, and Class B warrants to acquire 1,388,500 shares of our common stock, for
aggregate cash consideration of $1,388,500. These securities were sold in units
comprised of two shares of common stock, one Class A warrant and one Class B
warrant. The units were sold at a purchase price of $1.00 per unit. Each Class A
warrant is initially exercisable into one share of our common stock at an
exercise price of $1.00 per share during a period of 180 days beginning on the
date a registration statement covering the public resale of certain of the
shares underlying the warrants is declared effective by the SEC and terminating
on November 30, 2005. Each Class B warrant is initially exercisable into one
share of our common stock at an exercise price of $2.00 per share during a
period of 360 days beginning on the date a registration statement covering the
public resale of certain of the shares underlying the warrants is declared
effective by the SEC and terminating on November 30, 2005. We issued these
securities to a limited number of accredited investors in a private offering
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder
without engaging in any advertising or general solicitation of any kind.
II-2
In September 2004, we completed a private offering of 173,968 shares of
our common stock, Class A warrants to acquire 86,984 shares of our common stock,
and Class B warrants to acquire 86,984 shares of our common stock, for aggregate
cash consideration of $86,984. These securities were sold in units comprised of
two shares of common stock, one Class A warrant and one Class B warrant. The
units were sold at a purchase price of $1.00 per unit. Each Class A warrant is
initially exercisable into one share of our common stock at an exercise price of
$1.00 per share during a period of 180 days beginning on the date a registration
statement covering the public resale of certain of the shares underlying the
warrants is declared effective by the SEC and terminating on November 30, 2005.
Each Class B warrant is initially exercisable into one share of our common stock
at an exercise price of $2.00 per share during a period of 360 days beginning on
the date a registration statement covering the public resale of certain of the
shares underlying the warrants is declared effective by the SEC and terminating
on November 30, 2005. We issued these securities to a limited number of
accredited investors in a private offering exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act and/or Rule 506 promulgated thereunder without engaging in any advertising
or general solicitation of any kind.
In March 2005, we completed a private offering of 737,742 shares of our
common stock, Class A warrants to acquire 368,871 shares of our common stock,
and Class B warrants to acquire 368,871 shares of our common stock. These
securities were sold in units comprised of two shares of common stock, one Class
A warrant and one Class B warrant. These units were issued to each person that
purchased units in our private offering of units completed in August 2004 (the
"August 2004 Offering") and our private offering of units completed in September
2004 (the "September 2004 Offering"; together with the August 2004 Offering, the
"Offerings"), and the number of units issued was equal to 25% of the aggregate
number of units purchased in the Offerings. The units were issued to each person
in exchange for each person agreeing to an extension of the date by which we
would use our best efforts to file a registration statement with the SEC for
certain of securities purchased in the Offerings from a date that was within two
months of the date they purchased units in the Offerings to June 30, 2005. Each
Class A warrant is initially exercisable into one share of our common stock at
an exercise price of $1.00 per share during a period of 180 days beginning on
the date a registration statement covering the public resale of certain of the
shares underlying the warrants is declared effective by the SEC and terminating
on November 30, 2006. Each Class B warrant is initially exercisable into one
share of our common stock at an exercise price of $2.00 per share during a
period of 360 days beginning on the date a registration statement covering the
public resale of certain of the shares underlying the warrants is declared
effective by the SEC and terminating on November 30, 2006. We issued these
securities to a limited number of accredited investors in a private offering
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act without engaging in any advertising or
general solicitation of any kind.
In April 2005, we completed a private offering of 2,448,751 shares of
our common stock, Class A warrants to acquire 816,250 shares of our common
stock, and Class B warrants to acquire 816,250 shares of our common stock, for
aggregate cash consideration of $979,501. These securities were sold in units
comprised of three shares of common stock, one Class A warrant and one Class B
warrant. The units were sold at a purchase price of $1.20 per unit. Each Class A
warrant is initially exercisable into one share of our common stock at an
exercise price of $1.00 per share during a period of 180 days beginning on the
date a registration statement covering the public resale of certain of the
shares underlying the warrants is declared effective by the SEC and terminating
on November 30, 2005. Each Class B warrant is initially exercisable into one
share of our common stock at an exercise price of $2.00 per share during a
period of 360 days beginning on the date a registration statement covering the
public resale of certain of the shares underlying the warrants is declared
effective by the SEC and terminating on November 30, 2005. We issued these
securities to a limited number of accredited investors in a private offering
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder
without engaging in any advertising or general solicitation of any kind.
II-3
In May 2005, we completed a private offering of 635,750 shares of our
common stock, Class A warrants to acquire 317,875 shares of our common stock,
and Class B warrants to acquire 317,875 shares of our common stock, for
aggregate cash consideration of $254,300. These securities were sold in units
comprised of three shares of common stock, one Class A warrant and one Class B
warrant. The units were sold at a purchase price of $1.20 per unit. Each Class A
warrant is initially exercisable into one and one-half shares of our common
stock at an exercise price of $.60 per share during a period of 18 months
beginning on the date a registration statement covering the public resale of
certain of the shares underlying the warrants is declared effective by the SEC
and terminating on December 31, 2007. Each Class B warrant is initially
exercisable into one and one-half shares of our common stock at an exercise
price of $.80 per share during a period of three years beginning on the date a
registration statement covering the public resale of certain of the shares
underlying the warrants is declared effective by the SEC and terminating on
December 31, 2008. We issued these securities to a limited number of accredited
investors in a private offering exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act and/or Rule 506
promulgated thereunder without engaging in any advertising or general
solicitation of any kind.
In May 2005, we issued 1,800,000 shares of our common stock, Class A
warrants to acquire 1,800,000 shares of our common stock, and Class B warrants
to acquire 1,800,000 shares of our common stock to an accredited investor for
aggregate consideration 2,740,000 shares of common stock of Infinium Labs, Inc.,
a Delaware corporation, that the accredited investor owned and that was then
valued at $720,000. Our securities were sold in units comprised of three shares
of common stock, three Class A warrants and three Class B warrants. The units
were sold at a purchase price of $1.20 per unit. Each Class A warrant is
initially exercisable into one share of our common stock at an exercise price of
$.60 per share during a period of 18 months beginning on the date a registration
statement covering the public resale of certain of the shares underlying the
warrants is declared effective by the SEC and terminating on December 31, 2007.
Each Class B warrant is initially exercisable into one share of our common stock
at an exercise price of $.80 per share during a period of three years beginning
on the date a registration statement covering the public resale of certain of
the shares underlying the warrants is declared effective by the SEC and
terminating on December 31, 2008. These securities were issued to one accredited
investor in a private placement transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act directly by us without engaging in any advertising or general solicitation
of any kind and without payment of underwriting discounts or commissions to any
person.
II-4
In June 2005, we completed a private offering of 1,490,000 shares of
our common stock, Class A warrants to acquire 1,490,000 shares of our common
stock, and Class B warrants to acquire 1,490,000 shares of our common stock to a
limited number of accredited investors for aggregate cash consideration of
$596,000. These securities were sold in units comprised of three shares of
common stock, three Class A warrants and three Class B warrants. The units were
sold at a purchase price of $1.20 per unit. Each Class A warrant is initially
exercisable into one share of our common stock at an exercise price of $.60 per
share during a period of 18 months beginning on the date a registration
statement covering the public resale of certain of the shares underlying the
warrants is declared effective by the SEC and terminating on December 31, 2007.
Each Class B warrant is initially exercisable into one share of our common stock
at an exercise price of $.80 per share during a period of three years beginning
on the date a registration statement covering the public resale of certain of
the shares underlying the warrants is declared effective by the SEC and
terminating on December 31, 2008. These securities were issued to a limited
number of accredited investors in a private placement transaction exempt from
the registration requirements of the Securities Act pursuant to Section 4(2) of
the Securities Act directly by us without engaging in any advertising or general
solicitation of any kind and without payment of underwriting discounts or
commissions to any person.
In June 2005, we issued an aggregate of 2,587,000 shares of our common
stock, Class A warrants to acquire 737,000 shares of our common stock, Class B
warrants to acquire 737,000 shares of our common stock, and Class C warrants to
acquire 1,625,000 shares of our common stock to a limited number of accredited
investors in exchange for various consulting services to be rendered to us. Each
Class A warrant is initially exercisable into one share of our common Stock at
an exercise price of $.60 per share during a period of 18 months beginning on
the date a registration statement covering the public resale of certain of the
shares underlying the warrants is declared effective by the SEC and terminating
on December 31, 2007. Each Class B warrant is initially exercisable into one
share of our common stock at an exercise price of $.80 per share during a period
of three years beginning on the date a registration statement covering the
public resale of certain of the shares underlying the warrants is declared
effective by the SEC and terminating on December 31, 2008. Each Class C warrant
is initially exercisable into one share of our common stock at an exercise price
of $.60 per share and terminate on December 31, 2006. The securities were issued
to a limited number of accredited investors in private placement transactions
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act directly by us without engaging in any
advertising or general solicitation of any kind and without payment of
underwriting discounts or commissions to any person.
ITEM 27. EXHIBITS
The following exhibits are filed as part of this registration statement:
Exhibit No. Exhibit
----------- -------
3.1* Articles of Incorporation
3.2* Bylaws
3.3* Certificate of Amendment to Articles of Incorporation
3.4 Amended and Restated Bylaws
4.1* Specimen Stock Certificate
5.1* Opinion of Carson Boxberger LLP
10.1 Employment Agreement, dated May 13, 2005, by an between
the Company and David M. Daniels
10.2 Employment Agreement, dated May 13, 2005, by an between
the Company and Roger H. Folts
10.3 Employment Agreement, dated May 13, 2005, by an between
the Company and Patricia S. Bathurst
II-5
Exhibit No. Exhibit
----------- -------
10.4 Option to Acquire Shares of Common Stock, dated May 13,
2005, issued by the Company to David M. Daniels
10.5 Option to Acquire Shares of Common Stock, dated May 13,
2005, issued by the Company to Roger H. Folts
10.6 Option to Acquire Shares of Common Stock, dated May 13,
2005, issued by the Company to Patricia S. Bathurst
10.7* Network Access Agreement, dated April 30, 2001, between the
Company and Careington International Corporation
10.8* Optum Services Agreement, dated July 26, 2001, between the
Company and United Healthcare Services
10.9* Network Access and Repricing Agreement, dated September 18,
2002, between the Company and First Access, Inc.
10.10* Network Leasing Agreement, dated December 18, 2003, between
the Company and National Builders, Inc.
10.11* Managed Pharmacy Benefit Services Agreement, dated October
1, 2004, between the Company and Advance PCS Health
21.1 Subsidiaries of the Company
23.1 Consent H J & Associates, LLC
23.2* Consent of Carson Boxberger LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on the signature page)
* To be filed by amendment.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to:
1. file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended (the "Securities Act"); (ii) reflect in the prospectus any facts or
events arising after the effective date of the registration statement which,
individually or together, represent a fundamental change in the information in
the registration statement; and (iii) include any additional or changed material
information on the plan of distribution.
2. for the purpose of determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of such securities at that time to be the
initial bona fide offering thereof.
3. file a post-effective amendment to remove from registration any of
the securities being registered that remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form SB-2 and authorized this
amendment to the registration statement to be signed on its behalf by the
undersigned, in the City of Horsham, Commonwealth of Pennsylvania, on June 30,
2005.
NATIONAL HEALTH PARTNERS, INC.
By: /s/ David M. Daniels
---------------------------
David M. Daniels
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this amendment to the registration statement has been signed by the
following persons in the capacities and on the dates stated:
Signature Title Date
- ---------- ------ -----
/s/ David M. Daniels Chief Executive Officer and Chairman June 30, 2005
- ------------------------- of the Board (Principal Executive
David M. Daniels Officer)
/s/ Roger H. Folts Chief Financial Officer (Principal June 30, 2005
- -------------------------- Financial and Accounting Officer)
Roger H. Folts
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose
signature appears below constitutes and appoints David M. Daniels and Roger H.
Folts, each with full authority to act without the others, 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 to this registration statement, and to file the same, with
all exhibits thereto, and all 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 and about the premises, as fully to all
intents and purposes as he or she 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.
Signature Title Date
- ---------- ------ -----
/s/ Jay Rosen Director June 30, 2005
- ----------------------
Jay Rosen
/s/ Ronald F. Westman Director June 30, 2005
- ----------------------
Ronald F. Westman
Exhibit Index
Exhibit Exhibit Description
------- -------------------
3.4 Amended and Restated Bylaws
10.1 Employment Agreement, dated May 13, 2005, by an between the
Company and David M. Daniels
10.2 Employment Agreement, dated May 13, 2005, by an between the
Company and Roger H. Folts
10.3 Employment Agreement, dated May 13, 2005, by an between the
Company and Patricia S. Bathurst
10.4 Option to Acquire Shares of Common Stock, dated May 13,
2005, issued by the Company to David M. Daniels
10.5 Option to Acquire Shares of Common Stock, dated May 13,
2005, issued by the Company to Roger H. Folts
10.6 Option to Acquire Shares of Common Stock, dated May 13,
2005, issued by the Company to Patricia S. Bathurst
21.1 Subsidiaries of the Company
23.1 Consent H J & Associates, LLC