AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 23, 2006
REGISTRATION NO. 333 - 126315
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
AMENDMENT NO. 6
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
_________________________
NATIONAL HEALTH PARTNERS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Indiana 7389 04-3786176
----------------------------------- ------------------------------ ------------------------------------
(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
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(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
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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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
Title of Each Class of Shares to be Offering Maximum Aggregate Amount of Registration
Securities to be Registered Registered (1) Price Per Share (2) Offering Price (2) Fee (2) (3)
- ---------------------------- -------------- ------------------- ------------------- ----------------------
common stock 5,445,125 $1.50 $8,167,688 $961.34
common stock 4,813,010 $1.50 $7,219,515 $849.74
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.
(3) Previously paid by the registrant.
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 JANUARY 23, 2006
PRELIMINARY PROSPECTUS
[GRAPHIC OMITTED]
NATIONAL HEALTH PARTNERS, INC.
10,258,135 shares of common stock
The 10,258,135 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, 4,813,010 shares are issuable upon the exercise of warrants.
The selling security holders may sell all or a portion of their shares
at a fixed price of $1.50 per share until the shares are listed on the OTC
Bulletin Board, and thereafter through public or private transactions at
prevailing market prices or at privately negotiated prices. We can provide no
assurance that the shares will be approved for listing on the OTC Bulletin Board
or that a public market will develop for the shares.
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 3 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 prospectus is ________________, 2006.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY................................................................................................1
RISK FACTORS......................................................................................................3
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS..................................................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................20
DESCRIPTION OF BUSINESS..........................................................................................37
MANAGEMENT.......................................................................................................62
EXECUTIVE COMPENSATION...........................................................................................64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................69
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................71
DESCRIPTION OF SECURITIES........................................................................................73
SHARES ELIGIBLE FOR FUTURE SALE..................................................................................75
THE OFFERING.....................................................................................................78
DETERMINATION OF OFFERING PRICE..................................................................................84
SELLING SECURITY HOLDERS.........................................................................................85
USE OF PROCEEDS..................................................................................................95
PLAN OF DISTRIBUTION.............................................................................................95
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES..............................98
LEGAL MATTERS....................................................................................................99
EXPERTS..........................................................................................................99
ABOUT THIS PROSPECTUS...........................................................................................100
WHERE YOU CAN FIND MORE INFMORMATION............................................................................100
INDEX TO 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 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 10,258,135 shares of common
stock to be sold by the selling security holders identified in this prospectus.
Of this amount, 4,813,010 shares are issuable upon the exercise of warrants.
1
The selling security holders may sell all or a portion of their shares
at a fixed price of $1.50 per share until the shares are listed on the OTC
Bulletin Board, and thereafter through public or private transactions at
prevailing market prices or at privately negotiated prices. We can provide no
assurance that the shares will be approved for listing on the OTC Bulletin Board
or that a public market will develop for the shares.
2
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 entered the health savings industry in 2001 to address the need for
affordable healthcare nationwide. From 2001 to 2004, we engaged in limited
operations due to our lack of available capital. During that time, our employees
performed relatively limited duties and our operations were focused almost
exclusively on building CARExpress. In early 2004, we took a number of steps to
increase our business and generate revenues, including hiring our current Chief
Executive Officer, raising capital through private placements of our equity
securities, and marketing our CARExpress membership programs to the public, and
during 2005, entered into agreements with various marketing companies that are
generating an increasing number of members and sales of our programs. While we
are actively engaged in marketing our CARExpress membership programs to the
public and are experiencing rapid growth in members and sales of our CARExpress
membership programs, we have generated only minimal revenues to date. In
addition, since we have only been offering our CARExpress membership programs
since 2003, we have very limited historical data with respect to sales of our
CARExpress membership cards.
As a result of these factors, the revenue and income potential of our
business is unproven, and we have only a limited operating history upon which to
base an evaluation of our current business and future prospects. 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.
3
WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES TO CONTINUE INTO THE SECOND
QUARTER OF 2006.
We have experienced net losses in each fiscal quarter since our
inception and as of September 30, 2005, had an accumulated deficit of
approximately $6.6 million. We incurred net losses to common shareholders of
approximately $3.2 million during the nine months ended September 30, 2005,
approximately $2.6 million during the year ended December 31, 2004, and
approximately $267,000 during the year ended December 31, 2003. As a result of
these conditions, the report of our independent accountants issued in connection
with the audit of our financial statements as of and for our fiscal year ended
December 31, 2004 contained a qualification raising a substantial doubt about
our ability to continue as a going concern.
We expect the number of CARExpress members generated each month through
Trident Marketing International, Inc., Hispanic Global LLC and other marketing
representatives that we have or may enter into agreements to increase over the
next 12 months and expect our monthly membership growth over the next six months
to average between 20% and 25%. In addition, we expect our retention rates to
improve over the next 12 months and our cash flows from sales of our CARExpress
membership programs through Trident and Hispanic Global to turn positive during
the first quarter of 2006 as the recurring membership fees from our increasing
membership base overtake the costs associated with obtaining the new members we
are generating. As a result, we expect our net losses to begin to decrease
during the first quarter of 2006, we expect to begin generating net profits by
June 30, 2006, and we expect the quarter ended September 30, 2006 to be the
first full fiscal quarter for which we will generate a net profit. We can
provide no assurance that we will generate new members as projected, that our
member retention rates will improve over the next 12 months, that our cash flows
from sales of our CARExpress membership programs will turn positive during the
first quarter of 2006, that we will begin generating net profits from operations
during the second quarter of 2006, or that we will be profitable for our fiscal
quarter ended September 30, 2006. As a result, we can provide you with no
assurance that net losses will not continue beyond the second quarter of 2006.
WE WILL NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE TO COVER OUR LONG-TERM
CONTRACTUAL OBLIGATIONS, NOTES PAYABLE AND OPERATING EXPENSES, WHICH FUNDS MAY
NOT BE AVAILABLE OR, IF AVAILABLE, MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS.
We have significant long-term contractual obligations that we must
satisfy over the next several years. We have entered into employment agreements
with David M. Daniels, Roger H. Folts and Patricia S. Bathurst, three of our
executive officers, and have entered into office leases for our office space in
Horsham, Pennsylvania and Sarasota, Florida. The following summarizes our
contractual obligations under these agreements and leases as of September 30,
2005:
Contractual
Obligations Total 2006 2007 2008 2009 2010
- ------------ ------- ------- -------- -------- -------- ---------
Employment
Agreements $2,285,342 $573,540 $630,894 $500,722 $531,468 $48,718
Office Leases 710,194 258,553 170,803 108,373 112,708 59,757
---------- -------- -------- -------- -------- --------
Total $2,995,536 $832,093 $801,697 $609,095 $644,176 $108,475
========== ======== ======== ======== ======== ========
In addition, we have agreed to pay Alex Soufflas and David A. Taylor, our other
two executive officers, an annualized base salary of $158,400 and $132,000,
respectively, which amounts are not reflected in the table above since we have
not entered into written employment agreements with them. If we are unable to
satisfy these obligations as they come due, our business may be materially and
adversely affected.
4
We currently have outstanding indebtedness to third parties in the
aggregate principal amount of approximately $210,000, all of which is due within
the next 6 months. This indebtedness consists primarily of promissory notes that
we recently issued in the aggregate principal amount of $180,000, all of which
is due within the next three months. We also expect to incur additional
operating expenses over the next 12 months as we:
o develop new discount healthcare membership programs;
o recruit and hire additional personnel, including customer service and
support staff and marketing representatives;
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 also experience a material decrease in liquidity due to unforeseen
capital requirements or other events and uncertainties.
We believe that our current cash resources will not be sufficient to
sustain our current operations for the next 12 months. As a result, we will need
to raise additional funds during the next 12 months. While we recently obtained
$180,000 through the issuance of promissory notes, we have not made arrangements
to obtain additional financing and we can provide no assurance that additional
financing will be available in an amount or on terms acceptable to us, if at
all. If we cannot raise funds when they are needed or if such funds cannot be
obtained on acceptable terms, we may not be able to pay our costs and expenses
as they are incurred, 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 independent marketing representatives who 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 retail products and services 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.
5
OUR RELIANCE ON MARKETING REPRESENTATIVES COULD RESULT IN REDUCED REVENUE GROWTH
BECAUSE WE HAVE LITTLE CONTROL OVER THEM OR THEIR MARKETING REPRESENTATIVES.
Independent marketing representatives currently account for
substantially all of our revenues. 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.
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, Optum and Careington
International are 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. Our agreements with these organizations are not
exclusive, so these organizations may choose to partner with one of our
competitors or compete directly with our CARExpress membership programs. In
addition, these agreements may be terminated by either party on between 45 and
180 days' prior written notice. If these organizations choose to partner with
our competitors or compete directly with out CARExpress membership programs, our
business could be adversely affected. In addition, 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.
6
WE CURRENTLY GENERATE ALMOST ALL OF OUR REVENUES THROUGH TRIDENT MARKETING
INTERNATIONAL, INC. AND HISPANIC GLOBAL LLC.
Trident Marketing International, Inc. and Hispanic Global LLC currently
generate almost all of our revenues for us. Although we are attempting to expand
the number of companies selling our CARExpress membership programs, we expect
that a limited number of companies will continue to generate almost all of our
revenues for the foreseeable future. In the event Trident or Hispanic Global
ceases to sell our CARExpress membership programs to prospective members, or if
prospective members do not purchase our CARExpress membership programs through
Trident or Hispanic Global, our business, financial condition and results of
operations could be materially and adversely affected.
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.
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.
7
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. By
comparison, companies that provide insurance benefits and operate healthcare
management organizations and preferred provider organizations are regulated by
federal and state licensing agencies and commissions and are subject to federal
and state legislation, such as the Health Insurance Portability and
Accountability Act of 1996. These regulations cover operations, including scope
of benefits, rate formula, delivery systems, utilization review procedures,
quality assurance, enrollment requirements, claim payments, marketing and
advertising. Federal and 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 is 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.
WE MAY NEED TO COMPLY WITH INSURANCE BROKERAGE LAWS IN THE EVENT WE SELL OUR
CAREXPRESS MEMBERSHIP PROGRAMS IN COMBINATION WITH INSURANCE PRODUCTS.
We intend in the future to sell our CARExpress membership programs in
combination with insurance products through National Health Brokerage Group, our
wholly-owned subsidiary. While we have obtained insurance licenses for National
Health Brokerage Group in some states, we have not yet engaged in the sale of
these combined products. The sale of insurance products and licensing of
insurance brokers and agents are subject to regulation and supervision
predominantly by state authorities. While the scope of regulation and form of
supervision may vary from state to state, insurance laws relating to the sale of
insurance products and licensing of insurance brokers and agents are often
complex and generally grant broad discretion to supervisory authorities in
adopting regulations. States have broad powers over the granting, renewing and
revoking of licenses and approvals, marketing activities and the receipt of
commissions. In the event we decide to sell CARExpress membership programs in
combination with insurance products in the future through National Health
Brokerage Group, we will need to comply with the insurance brokerage laws and
regulations of each state in which we wish to sell the combined products. Our
failure to comply with the rules and regulations of any of these states may
result in the revocation of our license to sell combined products in that state
and may subject us to fines and penalties.
8
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 through changes to insurance laws and regulations. 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 insurance licensing or regulatory
requirements, whether as a result of changes in insurance laws bringing our
CARExpress membership programs under the jurisdiction of federal and state
insurance agencies or as a result of National Health Brokerage Group becoming
licensed to sell our CARExpress membership programs in combination with
insurance products and engaging in sales of the combined products, 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 INDEPENDENT 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.
The independent marketing representatives that we utilize, and the
manner by which such marketing representatives recruit additional marketing
representatives to market our CARExpress membership programs and the number of
levels of marketing representatives through which the marketing representative
recruitment process extends, 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.
9
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 an enforcement action and imposition of a penalty against us or
the network marketing organization;
o require the network marketing organization to modify its marketing
representative network system;
o result in negative publicity to us or the network marketing organization;
or
o have a negative affect on the morale and loyalty of the marketing
representatives in the network marketing organization.
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.
10
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.
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;
11
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.
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.
12
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 David M. Daniels, Roger H. Folts
and Patricia S. Bathurst, they may terminate their employment with us at any
time without penalty. Since we have not entered into employment agreements with
Alex Soufflas or David A. Taylor, they may also 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.
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.
13
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.
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 5,445,125 of these restricted shares in this offering. We are also
registering an additional 4,813,010 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.
14
Immediately after the effectiveness of the registration statement of
which this prospectus is a part, 5,445,125 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 11,609,075 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.
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.
WE HAVE ISSUED A SIGNIFICANT NUMBER OF SECURITIES TO ADVISORS AND CONSULTANTS TO
THE COMPANY AND MAY ISSUE ADDITIONAL SECURITIES TO ADVISORS AND CONSULTANTS TO
THE COMPANY IN THE FUTURE.
We issued 350,000 shares of our common stock to consultants and
advisors in 2004 as compensation for services rendered, and issued 2,587,000
shares of our common stock, options exercisable into 400,000 shares of our
common stock and warrants exercisable into 3,099,000 shares of our common stock
to consultants and advisors in 2005 as compensation for services rendered. We
may issue additional shares of our common stock or securities convertible or
exercisable into shares of our common stock to advisors, consultants or other
business partners in the future as compensation for services rendered or to be
rendered. The issuance of additional securities to such persons will result in
dilution to existing stockholders since the percentage ownership of such
stockholders will be reduced.
15
THE OFFERING PRICE OF THE SHARES OF OUR COMMON STOCK OFFERED HEREBY MAY NOT BEAR
ANY RELATION TO THE ACTUAL TRADING PRICE OF OUR COMMON STOCK.
The selling security holders may sell all or a portion of their shares
of common stock at a fixed price of $1.50 per share until the shares are listed
on the OTC Bulletin Board, and thereafter through public or private transactions
at prevailing market prices or at privately negotiated prices. The average cost
of the shares of common stock being sold by the selling security holders hereby
is approximately $.40 per share. The offering price of the shares offered hereby
does not necessarily bear any relation to our assets, book value, financial
condition or other established valuation criteria. Accordingly, the offering
price of the shares may not be indicative of the actual value of our common
stock or the prices that may prevail at any time or from time to time in the
event a public market for our common stock develops. We can provide you with no
assurance that a public market for our common stock will develop and continue or
that our common stock will ever trade at a price at or higher than the offering
price in this offering.
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.
16
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 to incur additional operating expenses in the future as we expand our
selling and marketing activities, develop new discount healthcare membership
programs, hire additional personnel and comply with SEC reporting requirements.
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 have
submitted an application to the OTC Bulletin Board to list our shares of common
stock for trading 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 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.
IF OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS CHOOSE TO ACT
TOGETHER, THEY MAY BE ABLE TO CONTROL OUR MANAGEMENT AND OPERATIONS, WHICH MAY
PREVENT US FROM TAKING ACTIONS THAT MAY BE FAVORABLE TO YOU.
Our executive officers, directors and principal stockholders, and their
respective affiliates, beneficially own approximately 56.5% of our outstanding
common stock. These stockholders, acting together, have the ability to exert
substantial influence over all matters requiring approval by our stockholders,
including the election and removal of directors and any proposed merger,
17
consolidation or sale of all or substantially all of our assets. In addition,
they could dictate the management of our business and affairs. This
concentration of ownership could have the effect of delaying, deferring or
preventing a change in control of us or impeding a merger or consolidation,
takeover or other business combination that could be favorable to you.
18
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. 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
and other provider networks for healthcare providers;
o our dependence upon Trident and Hispanic Global for substantially
all of our revenue;
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 3 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.
19
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 3 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 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
nurseline, medical supplies and equipment, and long-term care facilities. We
offer our discount healthcare membership programs through a national healthcare
savings network called CARExpress. Through CARExpress, we can provide members
access to healthcare providers affiliated with PPOs and other provider networks.
We entered the health savings industry in 2001 to address the need for
affordable healthcare nationwide. From 2001 to 2004, we engaged in limited
operations due to our lack of available capital. During that time, our employees
performed relatively limited duties and our operations were focused almost
exclusively on building CARExpress. In early 2004, we took a number of steps to
increase our business and generate revenues, including hiring our current Chief
Executive Officer, raising capital through private placements of our equity
securities, and marketing our CARExpress membership programs to the public
directly through mail, print ad, television and internet campaigns, and
indirectly through independent marketing representatives, brokers and agents,
retail chains and outlets, small businesses and trade associations, and unions
and associations. We also moved into a larger facility 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, and completed the development of our
Website.
From late 2004 through the first six months of 2005, we began to more
actively pursue opportunities to sell our CARExpress membership programs. In
March 2005, we entered into an agreement with Trident Marketing International,
Inc., a customer interaction solutions and marketing company, to market and sell
our CARExpress membership programs, and engaged in our first test marketing
campaign with Trident during the second quarter of 2005. We also entered into
agreements with several consultants and advisors in the second quarter of 2005
for the marketing and promotion of our business and CARExpress membership
programs, advice with respect to our marketing strategies, product development
and business development, and assistance regarding the identification and
evaluation of opportunities for us to engage in joint ventures, strategic
partnerships and alliances with companies offering complementary products and
services. While we actively engaged in marketing our CARExpress membership
programs to the public and focused our efforts on generating sales of our
CARExpress membership programs, we generated only minimal revenues during this
period of time.
20
Our strategy is to sustain and expand our position as a provider of
unique healthcare membership service programs. The target market for our
programs is comprised of individuals who have either limited health benefits or
no health benefits. Our market share of this market is less than one percent and
has been less than one percent since our inception. Since we are not currently
large enough to pursue and support the entire market, we intend to pursue
specific opportunities that we may identify in this market through our various
marketing and distribution channels. Through product design, competitive
membership pricing and a variety of distribution channel partners, we intend to
pursue opportunities in the healthcare market that insurance plans have not
addressed.
RECENT DEVELOPMENTS
We have recently begun to experience a substantial increase in our
membership base and revenues. As of January 1, 2006, we had approximately 4,300
CARExpress members, compared to approximately 400 members at June 30, 2005. We
achieved revenues of approximately $48,300 for the three months ended September
30, 2005, compared to approximately $17,000 for the three months ended June 30,
2005, and estimate that our revenues for the three months ended December 31,
2005 were approximately $170,000. Approximately $38,100, or 79%, of our revenues
for the three months ended September 30, 2005 were generated by independent
marketing representatives. Approximately $160,000, or 94%, of our revenues for
the three months ended December 31, 2005 were generated by independent marketing
representatives. The remainder of the revenues that we generated during these
periods was generated primarily by small businesses and trade associations and
unions and associations.
The growth in our members and revenues can be attributed primarily to
our relationships with Trident Marketing International, Inc, and Hispanic Global
LLC, a customer interaction solutions and marketing company that focuses on the
Hispanic community. Approximately 3,200, or 74%, of our current members have
been generated through Trident and approximately 600, or 14%, of our current
members have been generated through Hispanic Global. For the three months ended
September 30, 2005, Trident generated approximately $38,100, or 79%, of our
revenues, and Hispanic Global generated approximately $40, or less than 1%, of
our revenues. We estimate that for the three months ended December 31, 2005,
Trident generated approximately $135,000, or 79%, of our revenues, and Hispanic
Global generated approximately $25,000, or 15%, of our revenues.
We originally entered into our agreement with Trident in March 2005.
During the second quarter of 2005, we engaged in a test marketing campaign with
Trident but generated only a minimal number of members. In July 2005, we engaged
in a second test marketing campaign with Trident through which we offered a
12-day free-trial program to prospective members. As a result of this marketing
campaign, we generated a greater number of members and Trident began to more
actively market our CARExpress membership programs to the public. Trident
generated approximately 405, 1,090 and 1,385 of our current members during the
months of October, November and December 2005, respectively.
21
On August 12, 2005, we entered into an agreement with Hispanic Global
LLC to market and sell our CARExpress membership programs. Hispanic Global
engaged in a test marketing campaign of our CARExpress membership programs
through which we offered prospective members a 12-day free trial program very
similar to the program we offered through Trident. As a result of this test
marketing campaign, Hispanic Global increased its marketing of our CARExpress
membership programs and began to generate a significant number of members for
us. Hispanic Global generated approximately 150, 210 and 175 of our current
members during the months of October, November and December 2005, respectively.
We have entered into agreements with several other marketing companies
during the past three months and are currently engaging in test marketing
campaigns with some of these marketing companies through which we are offering
our 12-day free-trial program. We have generated minimal revenues to date and
incurred minimal expenses to date under these agreements and do not know when,
if ever, any of these agreements will be material to our business, financial
condition and results of operations. In addition, we are currently in
negotiations with several other companies regarding the sale of our CARExpress
membership programs and anticipate entering into agreements with some of these
companies during the next three months. We can provide no assurance that we will
enter into agreements with companies with which we are currently in negotiations
or, if we do, that the agreements will result in new members and revenues to us.
OPERATIONAL METRICS
Our revenues consist almost exclusively of recurring monthly membership
fees that we receive from members of our CARExpress membership programs. To
generate revenue, we engage in marketing campaigns offering money-back
guarantees and free-trial periods as an incentive for prospective members to try
our CARExpress membership programs. In addition, we pay commissions to our
marketing representatives and other distribution partners that typically include
an up-front fee for the acquisition of new members. Upon becoming paying
members, the members pay us membership fees each month for the duration of their
membership.
The average membership fee per member per month that we receive is
approximately $35. Approximately 90% of the CARExpress membership programs that
we have sold to our current members consist of our Comprehensive Care Program
which is sold at a monthly retail price of $39.95. The remaining CARExpress
membership programs that we have sold to our current members consist of a mix of
our less expensive programs. We receive each member's initial monthly payment
and billing information at the beginning of the first monthly membership period.
Monthly payments for subsequent periods are received at the beginning of the
applicable period. For those memberships sold in connection with our 12-day
free-trial period, we receive the member's billing information at the beginning
of the free-trial period. After the 12-day free-trial period is complete, the
member is charged for the next monthly membership period unless the member
cancels the membership prior to the expiration of the free-trial period. The
member's payment is then recognized as revenue evenly over the monthly
membership period. Monthly membership payments are recognized as revenue evenly
over the applicable monthly membership period. As a result, there is a delay of
four weeks between the date we receive a monthly membership fee and the date we
recognize the entire monthly membership fee as revenue. Since first offering our
12-day free-trial periods in July 2005, we have successfully converted
approximately 80% of our free-trial members to paying members.
22
We pay the marketing representatives fees that are typically comprised
of a commission of between 35% and 50% of the sale price of the CARExpress
membership program and/or an up-front fee of between $3 and $20 per member. The
amount of the commissions and up-front fees that we pay to marketing
representatives are determined based on the type of membership programs being
sold by the marketing representatives and the number of members being generated
over a set period of time by the marketing representatives. We typically pay
marketing representatives the up-front fee for obtaining a new member regardless
of whether the member becomes a paying member. However, we only pay marketing
representatives commissions for membership periods during which we are receiving
membership fees; we do not pay marketing representatives commissions during
free-trial periods. Marketing representatives are paid these commissions for the
life of the members' enrollment with CARExpress. Our obligation to pay a
marketing representative a commission for a particular month accrues on the date
we receive payment of the monthly membership fee from the member for that month.
No minimum member retention period is required for a commission payment to be
earned by our marketing representatives for paying members.
The up-front fee that we pay to the independent marketing
representative for obtaining a new member combined with the commission that we
pay to the independent marketing representatives for a paying member's first
monthly membership period is typically equal in amount to the membership fee
that we receive from the paying member for the first monthly membership period.
Since we recognize monthly membership payments as revenue evenly over the
applicable monthly membership period and since our obligation to pay a marketing
representative a commission for a particular month accrues on the date we
receive payment of the monthly membership fee from the member, it takes
approximately four weeks for the amount of revenues that we recognize from the
membership to equal the costs of obtaining the new paying member. As a result,
our costs of obtaining new members typically exceed the revenue that we generate
from the members during the first four weeks of the membership, in the case of
memberships sold without our 12-day free-trial period, or the first six weeks of
the membership, in the case of memberships sold with our 12-day free-trial
period.
A key metric towards evaluating our success in the future will be our
member retention rates. Member retention rates represent the percentage of new
members that we acquire that we are able to retain for a specified period of
time. Since we incur a large portion of our costs up front and receive recurring
membership fees throughout the term of the membership, the longer we are able to
retain the members we acquire, the greater the income potential of the
CARExpress membership programs that we sell. We believe that the key to
obtaining a high member retention rate is to target our marketing campaigns
towards those individuals and organizations most in need of our programs and
most capable of paying for our programs, and those individuals and organizations
that will be the most loyal to us and our programs.
23
We have been selling our CARExpress membership programs for only a
short period of time and have generated only a minimal number of members to
date. As a result, our ability to evaluate our member retention rates is
hampered by the relatively little information available to us for evaluation. As
we continue to engage in test marketing campaigns, we will be able to determine,
based on member demographics, which types of members and member groups are most
suitable for our CARExpress membership programs. During the next 12 months, we
expect our member retention rates to fluctuate significantly as a result of a
variety of factors, including:
o the type of CARExpress membership programs being sold;
o the marketing campaign being used to sell our CARExpress membership
programs;
o the financial condition and loyalty of our members;
o the distribution channel selling our CARExpress membership programs;
and
o the type and amount of compensation being paid to marketing
representatives and other parties to sell our CARExpress membership
programs.
Set forth below is the approximate number of our members at specified
measurement dates and estimates of our member retention rate at the measurement
dates:
Number 3-Month 6-Month
Measurement Date of Members Retention Rate Retention Rate
---------------- ---------- -------------- --------------
January 1, 2006 4,300 60% 50%
June 30, 2005 400 70% 65%
December 31, 2004 350 70% 65%
June 30, 2004 300 50% 45%
December 31, 2003 600 75% 70%
The retention rates specified above represent the percentage of members that
purchased a CARExpress membership program within the three and six month periods
immediately preceding the applicable measurement date and that were still
members of CARExpress on the measurement date. Since we have been selling our
CARExpress membership programs for only a short period of time and have acquired
only a minimal number of members to date, our future retention rates may differ
significantly from the retention rates set forth above.
24
OUTLOOK
We expect the number of CARExpress members generated each month through
Trident and Hispanic Global to continue to increase for the foreseeable future
as Trident and Hispanic Global follow through on their plans to increase the
number of sales persons marketing our CARExpress membership programs to the
public. We also expect to generate additional members over the next 12 months
through additional marketing companies with which we have entered into
agreements or with which we expect to enter into agreements within the next
three months, and to engage in test marketing campaigns with some of these
marketing companies through which we will offer our 12-day free-trial program.
As a result, we expect our monthly membership growth for the next six months to
average between 20% and 25%, and we expect to achieve a membership base of over
12,000 members during the first half of 2006.
We expect our retention rates to improve over the next 12 months as we
obtain additional information regarding member demographics and target our test
marketing campaigns at prospective members and member groups that are most
suitable for our CARExpress membership programs. In addition, we expect our cash
flows from sales of our CARExpress membership programs through Trident and
Hispanic Global to turn positive during the first quarter of 2006 as the
recurring membership fees from our increasing membership base overtake the costs
associated with obtaining the new members we are generating. As a result, we
expect our net losses from operations to begin to decrease during the first
quarter of 2006. We believe that, using an average monthly membership growth
rate over the next six months of 20% and our historical 6-month retention rate
of 50% to reflect any uncertainties regarding our future sales levels and member
retention rates, we will need to obtain a membership base of approximately
10,000 members to achieve profitability. As a result, we expect to begin
generating net profits from operations by June 30, 2006 and expect the quarter
ended September 30, 2006 to be our first full fiscal quarter for which we will
generate net profits from operations.
We can provide no assurance that Trident and Hispanic Global will
continue to generate new members for us, that our membership base will increase
as projected, that we will successfully enter into new agreements for the sale
of our CARExpress membership programs or that we will generate new members and
revenues under our current and new agreements. In addition, we can provide no
assurance that our member retention rates will improve over the next 12 months,
that our cash flows from sales of our CARExpress membership programs will turn
positive during the first quarter of 2006, that we will begin generating net
profits from operations by June 30, 2006, or that we will be profitable for our
fiscal quarter ended September 30, 2006.
25
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.
Revenue Recognition
We sell discount healthcare membership cards in return for monthly
membership fees. We recognize these membership fees as revenues when persuasive
evidence of an arrangement exists, services have been rendered, the price is
fixed and determinable, and collectibility is reasonably assured. We
electronically debit customer accounts for the monthly membership fees. At the
beginning of each membership period, the membership fees are typically charged
to the member's credit card, resulting in deferred revenue. We then recognize
the membership fees as revenue after the services have been rendered. In the
event we sell membership programs offering a free-trial period, we do not
recognize membership revenue until the trial term expires, at which point
membership revenues are recognized as services are rendered.
Valuation of Stock-Based Compensation
We account for employee stock-based compensation under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations. APB 25 requires that we recognize
compensation cost for stock options issued to employees to the extent the fair
value of our common stock exceeds the exercise price of the options on the date
of grant. We have presented the required disclosures of Financial Accounting
Standards No. 123, "Accounting For Stock-Based Compensation" ("SFAS No. 123"),
as amended by Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure" and, accordingly, make
pro forma disclosures for net income and earnings per share as if the fair value
method of valuing options had been applied.
26
We account for non-employee stock-based compensation in accordance with
SFAS No. 123, "Accounting For Stock-Based Compensation" and Emerging Issues Task
Force No. 96-18 "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling, Goods or Services"
("EITF 96-18"). SFAS No. 123 and EITF 96-18 require that we account for our
option and warrant grants to non-employees based on the fair value of the
options and warrants granted.
We use the Black-Scholes pricing model to determine the fair value of
the options and warrants we grant to employees and non-employees. We are
required to make certain assumptions in connection with this determination, the
most important of which involves the calculation of volatility with respect to
the price of our common stock. The computation of volatility is intended to
produce a volatility value that is representative of our expectations about the
future volatility of the price of our common stock over an expected term. At
this point in time, we are only able to use our past share price history to
determine volatility. We cannot predict how the price of our shares of common
stock will react on the open market in the event they are listed for trading on
the OTC Bulletin Board. As a result, the volatility value we have calculated may
differ from the future volatility of the price of our shares of common stock.
We will adopt Statement of Financial Accounting Standards No. 123R,
"Share-Based Payment" ("SFAS No. 123R"), which revised SFAS No. 123, on January
1, 2006. A summary of SFAS No. 123R is provided below under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Recent Accounting Pronouncements."
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 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. As a result, we will adopt SFAS No. 123R on January 1,
2006. The impact of the adoption of this new accounting pronouncement on our
results of operations for our fiscal year ended December 31, 2004 and our
nine-month period ended September 30, 2005 would be similar to our calculation
of the pro forma impact on net income of Statement of Financial Accounting
Standards No. 123 included in Note 1j. to our audited consolidated financial
statements and Note 1c. to our unaudited consolidated financial statements,
respectively. We are unable to determine what, if any, impact the adoption of
SFAS No. 123R will have on our financial condition and results of operations for
future periods.
For a more complete discussion of our accounting policies and
procedures, see our Notes to Consolidated Financial Statements beginning on page
F-8.
27
COMPARISON OF NINE-MONTH PERIODS ENDED SEPTEMBER 30, 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 CARExpress membership programs sold in combination with
third-party insurance products. To date, revenues have consisted almost
exclusively of the monthly membership fees we receive from members of our
CARExpress membership programs. Revenues increased $54,343, or 185%, to $83,658
for the nine months ended September 30, 2005 from $29,315 for the nine months
ended September 30, 2004. The increase of $54,343 was primarily a result of
increased sales of our CARExpress membership programs to new customers and
existing members.
Approximately 80% of our revenues generated during the nine months
ended September 30, 2005 was derived from sales of our CARExpress membership
programs to first-time members, compared to approximately 20% during the nine
months ended September 30, 2004. The remainder of the revenues that we generated
during these periods was derived from existing members. For the nine months
ended September 30, 2005, we derived approximately 60% of our revenues from
independent marketing representatives, approximately 10% of our revenues from
small businesses and trade associations, approximately 15% of our revenues from
unions and associations, and approximately 10% of our revenues from retailers
and outlets. We derived nominal revenues from brokers and agents during the nine
months ended September 30, 2005. By comparison, for the nine months ended
September 30, 2004, we derived approximately 50% of our revenues from
independent marketing representatives, approximately 10% of our revenues from
small businesses and trade associations, and approximately 20% of our revenues
from unions and associations. We derived nominal revenues from retailers and
outlets and brokers and agents during the nine months ended September 30, 2004.
The remainder of the revenues that we generated during these periods was derived
primarily from sales of our CARExpress membership programs by us directly to
consumers.
We expect growth in revenues to accelerate over the next 12 months as
Trident and Hispanic Global increase the number of sales persons marketing our
CARExpress membership programs and as we continue to enter into sales and
marketing agreements with independent marketing representatives, brokers and
agents, retailers and outlets, small businesses and trade associations, and
unions and associations, execute upon our advertising and marketing campaigns,
and design and sell unique discount healthcare membership solutions to new and
existing customers. We also expect to begin generating commissions from the sale
of CARExpress membership programs sold in combination with third-party insurance
products over the next 12 months. The percentage of future revenues derived from
first-time and existing members and the percentage of future revenues derived
from independent marketing representatives, brokers and agents, retailers and
outlets, small businesses and trade associations, and unions and associations
may differ significantly from the percentages set forth in the comparisons of
the nine-month periods and years discussed in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as we have been
selling our CARExpress membership programs for only a short period of time and
have generated minimal revenues to date.
28
Cost of Sales
Cost of sales consists primarily of sales salaries for employees
directly involved in generating and supporting sales of our CARExpress
membership programs, sales commissions paid primarily to independent marketing
representatives, brokers and agents, depreciation and amortization expense
relating to our computers, phone system and website, which provides broker
support and information to customers and potential customers, and healthcare
provider network costs, which consist of fees we pay to our various suppliers
for access to their provider networks, costs that we incur in connection with
the various advertising and marketing campaigns for our CARExpress membership
programs, such as direct mail, print ad, television and internet campaigns, rent
expense associated with our cost of sales, and all of our other selling and
marketing expenses. We include all of our selling and marketing expenses in our
cost of sales because our selling and marketing activities are an integral part
of the sale of our CARExpress membership programs. Cost of sales increased
$32,610, or 11%, to $318,331 for the nine months ended September 30, 2005, from
$285,721 for the nine months ended September 30, 2004. The increase of $32,610
was due primarily to an increase of $36,260 for sales commissions, $27,604 in
depreciation expense relating to our computers, phone system and website,
$12,959 in rent expense, and $6,044 in healthcare provider network costs,
partially offset by a decrease of $48,351 for sales salaries for employees
directly involved in generating and supporting sales of our CARExpress
membership programs. We expect cost of sales to increase over the next 12 months
as increased sales of our CARExpress membership programs result in higher
overall sales commission expenses being paid to independent marketing
representatives.
General and Administrative Expenses
General and administrative expenses consist primarily of salary
expense, professional fees, rent expense, and other general and administrative
expenses.
Salary Expense. Salary expense consists of all salaries and related
compensation that we pay to our employees and the payroll taxes associated
therewith that are not associated with our cost of sales. Salary expense
decreased $582,134 to $574,907 for the nine months ended September 30, 2005,
from $1,157,041 for the nine months ended September 30, 2004. The decrease of
$582,134 was due to our issuance of 1,748,250 shares of our common stock valued
at $874,125 to David M. Daniels in February 2004 as a signing bonus in
connection with Mr. Daniels accepting his appointment as our Chief Executive
Officer, partially offset by an increase of $275,740 for salaries and related
compensation resulting from the fact that only six employees were paid for only
seven months in 2004 while nine employees were paid for nine months in 2005, and
$16,251 in additional taxes paid due to the increased payroll in 2005. We are
party to an employment agreement with each of David M. Daniels, Roger H. Folts
and Patricia S. Bathurst, three of our executive officers, pursuant to which
they will receive a fixed increase in salary on January 1 of each year of the
remaining term of their respective agreements, and may be paid bonuses and other
compensation at the discretion of our board of directors. In addition, we have
entered into employment arrangements with Alex Soufflas and David A. Taylor. A
summary of the material terms of these employment agreements and arrangements
and our financial obligations thereunder is provided below under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Contractual Obligations" and "Executive Compensation," and under "Note 4 -
Commitments and Contingencies - Employment Agreements" of our unaudited
consolidated financial statements for the nine months ended September 30, 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.
29
Professional Fees. Professional fees consist of fees paid to our
independent accountants, lawyers and other professionals. Professional fees
increased $1,420,360 to $1,633,343 for the nine months ended September 30, 2005
from $212,983 for the nine months ended September 30, 2004. The increase of
$1,420,360 was due primarily to an increase of $19,852 in fees paid to our
independent accountant in connection with the preparation of our audited
financial statements for our fiscal year ended December 31, 2004, an increase of
$117,636 in legal fees paid in connection with the various capital-raising and
business transactions that we commenced or completed during the period, and an
increase of $1,370,449 in stock compensation paid to our various consultants and
advisors for financial advisory services and marketing and advisory services,
partially offset by a decrease of $87,457 in computer system and hardware
consulting expenses due to the costs of our new computer system being amortized
in connection with the completion and proper functioning of the computer system.
A description of the securities that we issued to our consultants and advisors
in 2005 is provided below under "The Offering - June 2005 Sale of Common Stock,
Class A Warrants, Class B Warrants and Class C Warrants to Consultants" and Note
4 to our unaudited financial statements for the nine months ended September 30,
2005, and a summary of the agreements we entered into with consultants and
advisors for marketing and advisory services and a description of these services
is provided below under "Description of Business - Marketing Consultants and
Advisors." We expect professional fees to decrease substantially over the next
12 months because we recognized all of the remaining deferred consulting expense
associated with fees paid to our various consultants and advisors for services
during the quarter ended December 31, 2005 and because we believe that any stock
compensation expense that we will incur over the next 12 months will be
substantially less in amount than the amount of stock compensation expense we
incurred during the past 12 months. We expect this decrease in professional fees
to be minimally offset by increases in the cost of our compliance with SEC
reporting requirements that we will have as a public company and increases in
the costs that we will incur as we attempt to enter into agreements with
additional independent marketing representatives, brokers and agents, retailers
and outlets, small businesses and trade associations, and unions and
associations for the marketing and sale of our CARExpress membership programs.
Rent Expense. Rent expense consists of the rent that we pay under the
lease for our principal executive offices that is not associated with our cost
of sales. Rent expense increased $51,836 to $127,634 for the nine months ended
September 30, 2005 from $75,798 for the nine months ended September 30, 2004.
The increase of $51,836 resulted primarily from our decision to move into a
larger facility in Horsham, Pennsylvania 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, and rent payments that we made under
the lease we entered into on July 1, 2005 for our facility in Sarasota, Florida.
A summary of the material terms of these leases is provided under "Note 4 -
Commitments and Contingencies - PA Facility Lease" and "- FL Facility Lease,"
respectively, of our unaudited consolidated financial statements for the nine
months ended September 30, 2005. We expect rent expense to increase over the
next 12 months as a result of annual increases in our lease payments for these
facilities.
30
Other General and Administrative Expenses. Other general and
administrative expenses consist of filing fees for general business
transactions, moving expenses, health insurance costs and other miscellaneous
general and administrative expenses not associated with our cost of sales. Other
general and administrative expenses decreased $39,040 to $291,222 for the nine
months ended September 30, 2005 from $330,262 for the nine months ended
September 30, 2004. The decrease of $39,040 resulted primarily from a decrease
of $14,216 in travel and entertainment expense, a decrease of $5,770 in
maintenance expense and a decrease in several miscellaneous fees and expenses
included in other general and administrative expenses, partially offset by an
increase of $5,644 for filing fees associated with our various business
transactions, $6,694 for moving expenses related to our new office space in
Sarasota, Florida, and an increase of $7,256 in health insurance costs for the
employees hired in 2005. We expect other general and administrative expenses to
increase over the next 12 months as we incur additional expenses for filing
fees, health insurance costs, travel and entertainment and other miscellaneous
items associated with the general growth in our business.
Common Stock Issued for Releases
- --------------------------------
Common stock issued for releases consists of the cost of the shares of
common stock issued to previous investors for an amendment and release to their
securities purchase agreements. We incurred expenses for common stock issued for
releases of $295,100 for the nine months ended September 30, 2005. We did not
incur any such expenses for the nine months ended September 30, 2004. The
expenses for common stock issued for releases of $295,100 that we incurred for
the nine months ended September 30, 2005 resulted from our issuance of 737,750
shares of our common stock valued at $295,100 to previous investors in exchange
for their execution of an amendment and release to their securities purchase
agreements (a description of this transaction is set forth below under "The
Offering - March 2005 Offering of Common Stock, Class A Warrants and Class B
Warrants"). We do not expect to incur any additional expenses for common stock
issued for releases over the next 12 months because we do not expect to issue
any additional securities to previous investors for amendments and releases to
their securities purchase agreements.
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 25% of our revenues generated
during the year ended December 31, 2004 was derived from sales of our CARExpress
membership programs to first-time members, compared to 20% during the year ended
December 31, 2003. The remainder of the revenues that we generated during these
periods was derived from existing members. For the year ended December 31, 2004,
we derived approximately 50% of our revenues from independent marketing
representatives, 10% of our revenues from small businesses and trade
associations, and 20% of our revenues from unions and associations. We derived
nominal revenues from brokers and agents and retailers and outlets during the
year ended December 31, 2004. By comparison, for the year ended December 31,
2003, we derived approximately 50% of our revenues from independent marketing
representatives, 5% of our revenues from small businesses and trade
associations, and 10% of our revenues from unions and associations. We derived
nominal revenues from brokers and agents and retailers and outlets during the
year ended December 31, 2003. The remainder of the revenues that we generated
during these periods was derived primarily from sales of our CARExpress
membership programs by us directly to consumers.
Cost of Sales
Cost of sales increased $313,767 to $443,382 for the year ended
December 31, 2004, from $129,615 for the year ended December 31, 2003. The
increase of $313,767 was due to an increase of $154,238 in sales salaries for
employees directly involved in generating and supporting sales of our CARExpress
membership programs, an increase of $170,377 for advertising and marketing
expenses, an increase of $13,547 in rent expense and the incurrence of $16,209
for depreciation expense relating to our computers, phone system and website,
partially offset by a decrease of $30,214 in healthcare provider network costs
and $10,390 in sales commissions.
31
General and Administrative Expenses
Salary Expense. Salary expense increased $1,255,335 to $1,323,738 for
the year ended December 31, 2004 from $68,403 for the year ended December 31,
2003. The increase of $1,255,335 was due to our issuance of 1,748,250 shares of
our common stock valued at $874,125 to David M. Daniels in February 2004 as a
signing bonus in connection with Mr. Daniels accepting his appointment as our
Chief Executive Officer, an increase of $342,131 in additional salaries and
related compensation resulting from 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, and $39,099 in additional taxes paid due to the increased
payroll in 2004.
Professional Fees. We incurred professional fees of $304,773 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 $304,773 of
professional fees that we incurred during our fiscal year ended December 31,
2004 was comprised primarily of $106,875 in legal fees incurred in connection
with various business transactions that we commenced or completed during the
year, $17,726 of professional fees associated with accounting and tax services
performed by our independent accountants, $19,971 of consulting fees in
connection with setting up the computers and computer network in our new office,
and $147,129 of consulting fees for general accounting and marketing activities
performed during January and February 2004 prior to the hiring of full-time
employees.
Rent Expense. Rent expense increased $54,190 to $95,925 for the year
ended December 31, 2004 from $41,735 for the year ended December 31, 2003. The
increase of $54,190 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.
Other General and Administrative Expenses. Other general and
administrative expenses increased $303,147 to $359,517 for the year ended
December 31, 2004 from $56,370 for the year ended December 31, 2003. The
increase of $303,147 resulted primarily from an increase of $78,569 in health
insurance costs for the employees hired in 2004, $100,152 of additional travel
and entertainment expense associated with marketing, contract negotiation and
other business activities, an increase of $31,400 for general marketing
activities, $13,515 of additional supply costs as a result of increased
personnel and activities, an increase of $10,006 for postage, a $5,734 increase
in costs for additional computers, moving expenses of $6,618 for the move to our
new offices in Horsham, Pennsylvania, $6,883 for computer repairs, an increase
of $36,086 for customer service expenses and an increase of $13,415 for
telephone expenses.
32
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
$83,388 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 $83,388 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 $80,993 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.
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 September 30, 2005, we had a cash and cash equivalents balance of
$445,717.
Net cash used by operating activities was $1,496,845 for the nine
months ended September 30, 2005 compared to $1,235,671 for the nine months ended
September 30, 2004. The $261,174 increase in cash used in operating activities
was primarily due to increased net loss of approximately $1,141,000 and a
decrease in expenses for common stock issued for services of approximately
$139,000, partially offset by an increase in the fair value of warrants expensed
of approximately $755,000, an increase in accounts payable and accrued expenses
of approximately $146,000 and a decrease in spending on current assets of
approximately $83,000. 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 by investing activities was $94,329 for the nine months
ended September 30, 2005 compared to $71,185 for the nine months ended September
30, 2004. The $23,144 increase in cash used by investing activities was due to
our payment of notes receivable of $25,000 and our investment in a certificate
of deposit of $35,000, partially offset by a decrease in purchases of fixed
assets and Web site costs of approximately $37,000. 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.
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Net cash provided by financing activities was $1,579,976 for the nine
months ended September 30, 2005 compared to $1,379,473 for the nine months ended
September 30, 2004. The $200,503 increase in net cash provided by financing
activities was due primarily to an increase in proceeds from sales of securities
of approximately $324,000 and a decrease in payments on notes payable of
approximately $312,000, partially offset by a decrease in proceeds from sales of
shares of our common stock and subscriptions payable of approximately $437,000.
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 $328,929 at September 30, 2005.
Our primary sources of capital over the past 18 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 174,000 shares of
our common stock, Class A warrants to acquire 87,000 shares of our common stock,
and Class B warrants to acquire 87,000 shares of our common stock, for aggregate
cash consideration of $87,000. 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 February 2005, we completed a private offering of 2,448,750 shares
of our common stock, Class A warrants to acquire 816,252 shares of our common
stock, and Class B warrants to acquire 816,252 shares of our common stock, for
aggregate cash consideration of $979,500. 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.
34
In April 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 consisting of 2,740,000 shares of common stock of
Infinium Labs, Inc., a Delaware corporation, that was then valued at $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.
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 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.
In November and December 2005, we issued promissory notes in the
aggregate principal amount of $180,000 to a small group of accredited investors
for aggregate cash consideration of $180,000. The notes have a maturity date
that is 90 days after the date we received the funds from the respective
investors and accrue interest at the rate of 15% per annum. The principal and
accrued interest are payable by the company on the maturity date and may be
prepaid by us in whole or in part at any time prior to the maturity date at our
option without penalty.
The forgoing constitutes our principal sources of capital during the
past 18 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. The company has used the proceeds from the private
offerings it completed in 2004 and 2005 to pay virtually all of the costs and
expenses it incurred during these years. These costs and expenses were comprised
of operating expenses, which consisted of the salary expenses, professional
fees, rent expenses and other general and administrative expenses discussed
above, and the costs of sales discussed above to the extent such costs of sales
exceeded revenues.
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We believe that our current cash resources will not be sufficient to
sustain our current operations for the next 12 months. We will need to obtain
additional cash resources within the next 12 months to enable us to pay our
ongoing costs and expenses as they are incurred, repay our outstanding
indebtedness to third parties in the aggregate amount of approximately $210,000,
all of which is due within the next 6 months, and finance the growth of our
business. We intend to obtain these funds through sales of debt or equity
securities and through proceeds received from the exercise of outstanding
options and warrants by our security holders. We intend to continue to invest
our cash in excess of current operating requirements in interest-bearing,
investment-grade securities. 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. While we
recently obtained $180,000 through the issuance of promissory notes, we have not
made arrangements to obtain additional financing and we can provide no assurance
that additional financing will be available in an 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
unable to execute upon our business plan or pay our costs and expenses as they
are incurred, which could have a material, adverse effect on our business,
financial condition and results of operations.
CONTRACTUAL OBLIGATIONS
The following summarizes our material long-term contractual obligations
as of December 31, 2005:
Contractual
Obligations Total 2006 2007 2008 2009 2010
- ----------- ----- ------ ------ ----- ----- -----
Employment Agreements (1) $2,285,342 $573,540 $630,894 $500,722 $531,468 $48,718
Office Leases (2) 710,194 258,553 170,803 108,373 112,708 59,757
---------- -------- -------- -------- -------- --------
Total $2,995,536 $832,093 $801,697 $609,095 $644,176 $108,475
========== ======== ======== ======== ======== ========
(1) We have entered into written employment agreements with David M. Daniels,
Roger H. Folts and Patricia S. Bathurst. While we have entered into employment
arrangements with Alex Soufflas and David A. Taylor, we have not entered into
written employment agreements with them, and thus this table does not reflect
any amounts that will be paid to them in the future. Under the terms of our
employment arrangements with Mr. Soufflas and Mr. Taylor, we agreed to pay Mr.
Soufflas and Mr. Taylor an annualized base salary of $158,400 and $132,000,
respectively. A summary of these employment agreements and arrangements is
provided herein under "Executive Compensation - Employment Contracts and
Arrangements."
(2) We have entered into two office leases. One is for our office space in
Horsham, Pennsylvania and the other is for our office space in Sarasota,
Florida. A summary of these office leases is provided herein under "Description
of Business - Properties."
To date, we have made payments under these obligations with proceeds received
from sales of our equity and debt securities. We intend to make future payments
due under these obligations with proceeds from additional sales of our equity
and debt securities and cash generated from the sale of our CARExpress
membership programs.
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OFF-BALANCE SHEET ARRANGEMENTS
As of December 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.
DESCRIPTION OF BUSINESS
OVERVIEW
National Health Partners, Inc. (d/b/a "International Health Partners,
Inc.") is 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 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 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. The
percentage of people working full-time without health insurance in 2003 was
17.5%, an increase from 16.8% in 2002. Several factors have contributed to the
increase in the cost of healthcare, including the following:
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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.
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 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;
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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.
HEALTH SAVINGS INDUSTRY
The problems facing the healthcare industry and the need for solutions
to these problems fostered the development of the health savings industry. The
health savings industry is generally comprised of organizations that offer
discount health programs to uninsured and underinsured individuals that enable
these individuals to purchase the healthcare products and services they need at
discounted prices. Discount health programs provide these individuals with a
low-cost alternative to insurance that assists them in reducing their
out-of-pocket healthcare costs. Discount health programs have typically been
offered to these individuals in the form of traditional membership service
programs.
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 the growing number of people who can no longer afford traditional insurance
coverage.
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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% 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, and currently have approximately 4,300
members. 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 nurseline,
medical supplies and equipment, and long term care facilities, which include
skilled nursing facilities, assisted living facilities, respite care and home
health care. We offer our discount healthcare membership programs through a
national healthcare savings network called CARExpress ("CARExpress"). Through
CARExpress, we can provide members access to healthcare providers affiliated
with preferred provider organizations such as PPONext, International Med-Care,
CareMark, Cigna, Optum and Careington International. Through these and other
networks, we provide members access to over 1,000,000 healthcare providers in
the United States. 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.
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.
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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.
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 card to the provider and receive their discount at the time of
service. The provider may verify an individual's membership status by calling a
phone number imprinted on the CARExpress membership card or reviewing electronic
files that we have submitted to the provider. There are no claim forms or bills
to be processed. Both the member and provider are finished with the transaction.
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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 the plan
administrator, which is currently International Med-Care, to arrange for
pre-certification and prepayment using a major credit card or certified funds.
The plan administrator 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 the plan administrator and the plan administrator 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.
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.
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STRATEGY
Our strategy is to sustain and expand our position as a provider 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.
Recruit Independent Marketing Representatives. Growth in sales of our
CARExpress membership programs is dependent upon our independent marketing
representatives continuing to market our CARExpress membership programs and
recruit additional independent marketing representatives to market our
CARExpress membership programs. We intend to continually increase our support
for these marketing representatives to maximize the volume generated through
this sales channel by training our customer service staff 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.
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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 preferred
provider organizations and other provider networks 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.
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.
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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
nurseline, hearing care, chiropractic and complementary alternative care,
medical supplies and equipment, and long-term care facilities. 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 nurseline. 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 Membership Programs Combined With Insurance Products
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.
Insurance products that are suitable for combination with our
CARExpress membership programs include:
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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.
Our CARExpress membership programs are currently sold in combination
with insurance products indirectly, through insurance companies and independent
third parties. We intend to sell these combined products directly in the future
through National Health Brokerage Group, Inc., our wholly-owned subsidiary. We
plan to operate National Health Brokerage Group like an insurance brokerage with
respect to sales of these combined products. We plan to obtain the necessary
licenses in all states in which National Health Brokerage Group may sell our
CARExpress membership programs in combination with insurance products and offer
these combined products for sale 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. 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. We generated approximately 10% of our
revenues from this sales channel for the nine months ended September 30, 2005
and do not currently have any agreements in place with any retail chains and
outlets.
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. We currently sell our CARExpress membership programs to
members of the International Brotherhood of Trade Unions and IndCom Association,
Inc. and have agreements in place with several small businesses, none of which
are currently material to our business and operations. We generated
approximately 25% of our revenues from this sales channel during the nine months
ended September 30, 2005.
Consumers. This channel is comprised primarily of individual consumers
who are targeted 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. We currently sell
substantially all of our CARExpress membership programs through Trident
Marketing International, Inc. and Hispanic Global LLC, and have agreements in
place with several other independent marketing representatives and organizations
and several brokers, none of which are currently material to our business and
operations. We generated approximately 65% of our revenues from this sales
channel during the nine months ended September 30, 2005. Trident and Hispanic
Global accounted for substantially all of the revenues generated by this sales
channel for this period.
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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 or their affiliates and other provider networks for
access to the discounted rates they have negotiated with their healthcare
providers. We only select and utilize those provider networks that we believe
can deliver adequate savings to our members while providing adequate support for
our CARExpress membership programs with the healthcare providers. We typically
pay a per member per month fee for use of a provider network which is determined
in part based on the number of providers participating in the network, the
number of CARExpress members accessing the network, and the particular products
and services utilized by the CARExpress members. We only pay fees for those
members authorized to utilize the network. The agreements through which we have
contracted for access to the PPO or other provider networks are generally for a
term of between one and two years, may be terminated by either party on between
45 and 180 days' prior written notice, and renew automatically for additional
terms unless so terminated. Most of these agreements are not exclusive as it is
not customary in the health savings industry for PPOs to agree to work
exclusively with a single healthcare savings organization, 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, Optum
and Careington International. Under our various agreements with these PPOs or
their respective affiliates, our members are guaranteed 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 of 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 affected.
Below is a summary of the material terms of the agreements through
which we obtain access to the PPO Next, International Med-Care, CareMark, Cigna,
Optum and Careington International provider networks. The summary is subject to
and qualified in its entirety by reference to the agreements, a copy of which
have been filed as exhibits to the registration statement of which this
prospectus forms a part.
Our agreement with First Access, Inc. provides CARExpress with access
to the network of healthcare providers of PPONext and International Medcare at
discounted rates, and services consisting of pre-certification of members,
re-pricing of claims, claim resolution and healthcare provider relations. The
healthcare provider networks of PPONext and International Medcare are comprised
of an aggregate of approximately 610,000 physicians, 5,300 hospitals and acute
care facilities, and 33,000 ancillary healthcare providers, including
laboratory, radiology, rehabilitation, mental health and physical therapy
providers. We make monthly payments under this agreement equal to the greater of
a flat fee or a monthly rate based on the number of CARExpress members utilizing
the PPONext and International Medcare networks. This agreement is for an
approximate 15-month term that commenced September 1, 2002 and continues
indefinitely unless terminated by either party on 90 days' prior written notice.
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Our agreement with AdvancePCS, L.P. (now known as Caremark) provides
CARExpress with access to the Caremark pharmacy network at discounted rates and
provides pharmacy benefit management services, including the electronic
maintenance of prescription, price, eligibility and plan information, the
negotiation of discounts and rebates on pharmaceutical products with
pharmaceutical companies, and the preparation of reports of services performed.
The Caremark pharmacy network is comprised of an aggregate of 45,000 retail
pharmacies plus a mail order pharmacy option. This agreement was entered into on
July 1, 2001 and may be terminated by either party on 60 days' prior written
notice.
Our agreement with National Benefit Builders, Inc. provides CARExpress
with access to the CIGNA dental network at discounted rates. The CIGNA dental
network is comprised of an aggregate of approximately 50,000 dentists and other
dental service providers. We make monthly payments under this agreement equal to
the greater of a flat fee or a monthly rate based on the number of CARExpress
members utilizing the CIGNA network. This agreement is for a two-year term that
commenced March 1, 2004 and renews automatically for additional one-year terms
unless terminated by either party pursuant to a written notice provided at least
60 days prior the expiration of the then current term.
Our agreement with United HealthCare Services, Inc. provides CARExpress
with access to the network of nurses of Optum at discounted rates. The Optum
nurses provide a nurseline 24 hours per day for general health information, the
identification of specific health-related concerns and the provision of
educational information regarding those concerns. Optum also provides an
audiotape library covering over 1,100 healthcare topics that are accessible by
CARExpress members. We make monthly payments under this agreement equal to the
greater of a flat fee or a monthly rate based on the number of CARExpress
members utilizing the Optum services and the type of Optum services utilized.
This agreement is for a one-year term that commenced October 1, 2001 and renews
automatically for additional one-year terms unless terminated by either party on
90 days' prior written notice.
Our agreement with Careington International Corporation provides
CARExpress with access to its network of dentists at discounted rates. The
Careington dental network is comprised of an aggregate of approximately 28,000
dentists and other dental service providers. We make monthly payments under this
agreement based on the number of CARExpress members utilizing the Careington
network. This agreement is for a two-year term that commenced on April 30, 2001
and renews automatically for additional two-years terms unless terminated by
either party pursuant to a written notice provided at least 45 days prior the
expiration of the then current term or pursuant to 180 days' prior written
notice.
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We can provide no assurance that our contracts with these PPOs and
their affiliates 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. In
addition, we can provide no assurance that these organizations will refrain from
partnering with one of our competitors or competing directly with our CARExpress
membership programs. Accordingly, the expiration or termination of these
relationships, or the decision by these organizations to partner with one of our
competitors or compete directly with us, may substantially reduce our revenues
and, thus, have a material adverse effect on our business, financial performance
and operations.
MARKETING AND DISTRIBUTION
Prior to 2004, we generated sales leads from brokers, agents and
referrals from our executive officers and 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.
We also market our CARExpress membership programs indirectly through:
(i) independent marketing representatives, (ii) brokers and agents, (iii) retail
chains and outlets, (iv) small businesses and trade associations, and (v) unions
and associations. We are offering features to encourage new subscribers to try
out our CARExpress membership programs, including refund guarantees and "trial"
periods of free or discounted membership.
Independent Marketing Representatives. We utilize the services of
approximately 25 independent marketing representatives and organizations to
market our CARExpress membership programs to prospective customers, such as
individual consumers and employers typically having less than 50 employees.
Independent marketing representatives and organizations are sales persons or
groups of typically between 2 and 25 sales persons, respectively, that market
our CARExpress membership programs directly to prospective customers through
face-to-face contact and such media as television, radio, internet and print
ads. We estimate that a total of between 150 and 200 such sales persons
currently market our CARExpress membership programs to prospective customers.
The independent marketing representatives that we utilize typically offer and
sell our CARExpress membership programs on a part-time basis, and may engage in
other related or unrelated business activities, including selling the products
or services of our competitors. Most of the prospective customers to whom the
independent marketing representatives market our programs are current clients of
the marketing representatives who have purchased products or services through
the marketing representatives in the past. The other prospective customers are
new clients that the marketing representatives have identified through their own
efforts. To receive the right to market and sell our CARExpress membership
programs, marketing representatives sign a standard representative agreement.
These agreements are typically for a term of one year and renew automatically
for additional one-year terms unless written notice of termination is delivered
by either party at least 30 days prior to the then-current term. 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.
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We pay the marketing representatives fees that are typically comprised
of a commission of between 35% and 50% of the sale price of the CARExpress
membership program and/or an up-front fee of between $3 and $20 per member. The
amount of the commissions and up-front fees that we pay to marketing
representatives are determined based on the type of membership programs being
sold by the marketing representatives and the number of members being generated
over a set period of time by the marketing representatives. We typically pay
marketing representatives the up-front fee for obtaining a new member regardless
of whether the member becomes a paying member. However, we only pay marketing
representatives commissions for membership periods during which we are receiving
membership fees; we do not pay marketing representatives commissions during
free-trial periods. Marketing representatives are paid these commissions for the
life of the members' enrollment with CARExpress. Our obligation to pay a
marketing representative a commission for a particular month accrues on the date
we receive payment of the monthly membership fee from the member for that month.
No minimum member retention period is required for a commission payment to be
earned by our marketing representatives for paying members.
Marketing representatives may also recruit other representatives to
sell our CARExpress membership programs and receive a portion of the commissions
earned by the other representatives on sales made by those representatives.
While the process of marketing representatives recruiting other marketing
representatives can extend through as many as five levels of marketing
representatives, it typically extends to only between one and three levels.
Regardless of how many marketing representatives are involved in the sale of a
particular CARExpress membership program, the aggregate commissions that we
typically pay on the sale of the program do not exceed between 35% and 50% of
the sale price of the program. We have also established bonus programs through
which marketing representatives who achieve sales of an agreed-upon number of
CARExpress membership programs can receive additional commissions of between 5%
and 10% of the sale price of the programs.
While we have agreements in place with approximately 25 independent
marketing representatives and organizations, we have generated most of our
current members under our agreements with Trident Marketing International, Inc.
and Hispanic Global LLC. We entered into our agreements with Trident and
Hispanic Global in March 2005 and August 2005, respectively. Under these
agreements, Trident and Hispanic Global agreed to market our CARExpress
membership programs to prospective customers, such as individual consumers and
employers typically having less than 50 employees. We agreed to pay Trident
commissions and an up-front fee for each new member it acquires for us that
varies depending upon the type of membership program that was sold. We agreed to
pay Hispanic Global a fee equal to the hourly wages it pays to the sales persons
it is utilizing to sell our CARExpress membership programs rather than
commissions as well as an upfront fee for each new member it acquires for us
that varies depending upon the type of membership program that was sold and the
number of members that were generated over set periods of time. In addition, in
June 2005 we entered into a marketing incentive plan with Trident to provide
Trident with an added incentive to market and sell our CARExpress membership
programs. Under the plan, we issued an option to acquire 400,000 shares of our
common stock to Trident. The option was initially exercisable into shares of our
common stock at an exercise price of $.50 per share upon the achievement of
various revenue targets during 2005 and expires on June 24, 2006. Trident did
not achieve any of these revenue targets. As a result, the option is not
exercisable into any shares of our common stock. We agreed to file a
registration statement with the SEC within six months of the date of the option
to register all of the shares of common stock underlying the option. Since the
option is not exercisable into any shares of our common stock, we are not
registering any of the underlying shares. Under the terms of the option, we will
not incur any penalty in connection with our decision to not register any of the
underlying shares. The marketing incentive plan terminated on December 31, 2005.
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Trident and Hispanic Global market our CARExpress membership programs
directly to prospective customers through face-to-face contact and such media as
television, radio, internet and print ads. They offer and sell our CARExpress
membership programs on a part-time basis, and may engage in other related or
unrelated business activities, including selling the products or services of our
competitors to our prospective customers. Most of the prospective customers to
whom Trident and Hispanic Global market our programs are current clients of
theirs who have purchased products or services through them in the past. The
other prospective customers are new clients that Trident and Hispanic Global
have identified through their own efforts. Our CARExpress membership programs
are currently being sold by only a small percentage of the sales persons
employed by Trident and Hispanic Global. As a result, Trident and Hispanic
Global have an adequate number of sales persons available to support our
projected growth in sales of our CARExpress membership programs for the
foreseeable future. Each of these agreements is for a term of one year and
renews automatically for additional one-year terms unless written notice of
termination is delivered by either us or the applicable party at least 30 days
prior to the then-current term.
Brokers 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. We
currently have agreements in place with several brokers, none of which are
currently material to our business and operations.
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 will typically market our CARExpress membership programs
themselves by adding our CARExpress membership cards to floor and display racks
where other prepaid, discount and gift cards are sold, and will typically earn a
marketing fee of between 30% and 40% for each membership sold. The customized
sales model is best suited for large pharmacy chains, as well as trade groups
and healthcare provider organizations. We do not currently have agreements in
place with any retail chains and outlets.
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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. These organizations may purchase
our CARExpress membership programs for their employees or members, or subsidize
a portion of the monthly membership fees of our programs for their employees or
members. No fee will typically be paid by us to the organizations if the
organizations opt to purchase or subsidize our programs. Alternatively, these
organizations may simply offer our programs to their employees or members,
allowing their employees or members to decide whether to participate on an
individual basis. In this event, we will typically pay the organizations a
marketing fee of between 10% and 30% for each membership sold. We currently have
agreements in place with several small businesses, none of which are currently
material to our business and operations.
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 purchase or subsidize our
CARExpress membership programs on behalf of their members or employees so that
every eligible individual in the organization becomes a member. No fee will
typically be paid by us to the organizations if the organizations opt to
purchase or subsidize our programs. We also expect that these organizations may
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, in which case we will typically pay the
organizations a marketing fee of between 10% and 30% for each membership sold.
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. We currently sell
our CARExpress membership programs to members of the International Brotherhood
of Trade Unions and IndCom Association, Inc.
MARKETING CONSULTANTS AND ADVISORS
In May and June 2005, we entered into agreements with several
consultants and advisors for the provision of marketing and advisory services on
our behalf. These services generally consist of the marketing and promotion of
our business and CARExpress membership programs, support for our marketing
activities, advise with respect to our marketing strategies, product development
and business development, and assistance regarding the identification and
evaluation of opportunities for us to engage in joint ventures, strategic
partnerships and alliances with companies offering complementary products and
services. Under the terms of these agreements, we agreed to compensate the
consultants and advisors in shares of our common stock and/or warrants
exercisable into shares of our common stock to assist us in conserving our cash
resources and to provide the consultants and advisors with an incentive to help
us succeed in our efforts to grow our business. We also provided the consultants
and advisors with registration rights with respect to certain of these shares.
Each of these agreements is for a term ending on December 30, 2005. The names of
these consultants and advisors and a description of the securities issued to
them is provided below under "The Offering - June 2005 Sale of Common Stock,
Class A Warrants, Class B Warrants and Class C Warrants to Consultants" and Note
4 to our unaudited consolidated financial statements for the nine months ended
September 30, 2005.
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CUSTOMER SERVICE, TRAINING AND SUPPORT
We believe that 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, where we employ five full-time customer
service representatives and utilize the services of several temporary customer
service representatives on an as-needed basis. 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 7:00 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;
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 intend to continue to develop and
invest in our customer service systems and staff. In 2004, we 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.
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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
In 2004, we completed the installation of a state-of-the-art
telecommunication network and purchased additional computers for our customer
service department. Our management information 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;
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 also 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.
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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;
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, Care Entree, Family
Care, People's Benefit Services, AmeriPlan, Full Access Medical and New
Benefits, Inc. People's Benefit Services, AmeriPlan and New Benefits focus
generally on the provision of retail and mail order pharmacy services and vision
and dental care, and thus compete with only a portion of our CARExpress
membership programs. Best Benefits, Care Entree, Family Care and Full Access
Medical provide a broader range of products and services including hospital,
physician, 24-hour nurseline, chiropractic and nursing home care, and thus
compete with our full range of CARExpress membership programs. Our principal
competitors generally offer their discount health membership programs at a
monthly or annual fee that is equal to or greater than the monthly fees that we
charge for comparable CARExpress membership programs, and offer cancellation
privileges, refund guarantees, and "trial" periods of free or discounted
memberships similar in nature and amount to those that we offer.
56
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 sale of our CARExpress membership programs
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 in connection
with the sale of our CARExpress membership programs. However, a few states, such
as Florida, Illinois and Kansas, currently regulate or restrict companies
offering discount health savings programs by requiring such companies to obtain
a license or register with them prior to offering such programs there.
57
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 CARExpress membership programs without compliance with state insurance
regulations. Furthermore, states may adopt regulations or enact legislation that
may affect the manner by which we sell our CARExpress membership programs or
restrict or prohibit the sale of our CARExpress membership programs. A few
states, such as Florida, Illinois and Kansas, currently regulate or restrict the
manner by which companies may offer discount health savings programs by
requiring the companies to obtain a license or register with them and comply
with applicable regulations regarding the sale of such programs. Compliance with
such regulations or legislation could have a material adverse affect on our
operations and financial condition.
In addition, we intend to sell our CARExpress membership programs in
combination with various types of insurance products, such as catastrophic
health insurance and Mini-Med programs, through National Health Brokerage Group,
our wholly-owned subsidiary. The sale of insurance products and licensing of
insurance brokers and agents are subject to regulation and supervision
predominantly by state authorities. While the scope of regulation and form of
supervision may vary from state to state, insurance laws relating to the sale of
insurance products and licensing of insurance brokers and agents are often
complex and generally grant broad discretion to supervisory authorities in
adopting regulations. States have broad powers over the granting, renewing and
revoking of licenses and approvals, marketing activities and the receipt of
commissions. While we have obtained insurance licenses for National Health
Brokerage Group in some states, we have not yet engaged in the sale of our
CARExpress membership programs in combination with insurance products. In the
event we decide to sell these combined products in the future, we will need to
comply with the insurance brokerage laws and regulations of each state in which
we wish to sell the combined products. If we do not comply with the rules and
regulations of any of these states, the regulatory authorities of the applicable
state may revoke our license to sell combined products in that state and may
subject us to fines and penalties.
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.
58
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.
Marketing Laws and Regulations. While we do not employ any network
marketing personnel and do not intend to employ any such personnel in the
future, we utilize the services of independent marketing representatives to
market our CARExpress membership programs to the public. The marketing
activities of the marketing representatives that we utilize, including the
manner by which such marketing representatives recruit additional marketing
representatives to market our CARExpress membership programs and the number of
levels of marketing representatives through which the marketing representative
recruitment process extends, may be subject to scrutiny by various state and
federal governmental regulatory agencies to ensure compliance with securities,
franchise investment, business opportunity, marketing 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, some of these regulations place limits
on the extent to which marketing representatives may receive commissions on
sales of products or services generated by marketing representatives that were
not directly recruited 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
the network marketing operations of the marketing representatives that we
utilize.
59
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. We believe that we are not currently
required to comply with HIPAA since our CARExpress membership programs are not
insurance. In the event we obtain the necessary insurance licenses for National
Health Brokerage Group and decide to sell CARExpress membership programs in
combination with insurance products, we may in the future be required to comply
with HIPAA. In the event we do become subject to HIPAA, we will be subject to
HIPAA's extensive restrictions on the use and disclosure of individually
identifiable health information by certain entities. This may subject us to
increased costs of compliance which may have a negative impact on our business
and operations. Sanctions for failing to comply with standards issued pursuant
to HIPAA include criminal penalties and civil sanctions.
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.
60
EMPLOYEES
As of January 23, 2006, we had 16 employees. Of this number, 15 were
full-time employees, comprised of our management and full-time customer service
personnel, and one was a part-time employee. We also utilize the services of one
consultant and approximately 25 independent marketing representatives. We do not
employ the independent marketing representatives, the individuals working for
our after-hours call center or the temporary customer service representatives
that are used on an as-needed basis. 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 30, 2007. We also entered into
a lease for additional offices at 2033 Main Street, Suite 501, Sarasota, Florida
34237. We lease approximately 4,000 square feet of space for a monthly rent
payment of approximately $8,200. This lease commenced on July 1, 2005 and will
expire on June 30, 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.
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 67 Chief Financial Officer and Secretary
Patricia S. Bathurst 51 Vice President - Marketing
Alex Soufflas 31 General Counsel and Executive Vice President
David A. Taylor 48 Vice President - Sales
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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, including Market Pathways
Financial Relations, Inc., a financial consulting firm, from April 2000 until
February 2004, The Research Works, Inc., an equity research firm, from April
2001 until December 2003, and XRAYMEDIA, Inc., an advertising agency, from
September 2001 until February 2004. 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 and 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.
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.
Alex Soufflas has served as our General Counsel and Executive Vice
President since August 2005. From May 2004 to August 2005, Mr. Soufflas was an
attorney at Duane Morris LLP, a national law firm, where he specialized in
securities, mergers & acquisitions, contracts and general corporate counseling.
Prior to that, Mr. Soufflas specialized in general corporate law as an attorney
at Spector Gadon & Rosen, P.C., a Philadelphia-based law firm, from April 2003
to May 2004, and at Sullivan & Worcester, LLP, a Boston-based law firm, from
September 2000 to October 2002. Mr. Soufflas received a B.S. in accounting from
Purdue University and a juris doctor from Boston College Law School.
62
David A. Taylor has served as our Vice President - Sales since August
2005. From March 2005 to August 2005, Mr. Taylor was a partner and served as the
Chief Financial Officer and Senior Vice President of Trident Marketing
International, Inc., a customer interaction solutions company, and from April
1998 to March 2005, Mr. Taylor served as the Vice President - Sales Operations
and Systems for Z-Tel Communications, a communications service provider. Prior
to that, Mr. Taylor served in various capacities for Delta Air Lines, Inc., an
international airline, serving as a financial planner from 1991 to 1992, the
Controller - Corporate Services from 1992 to 1994, the General Manager -
Marketing Services from 1994 to 1995, and the Director - Purchasing, Contract
Services and Sales from 1995 to April 1998. Mr. Taylor received a B.A. in
business administration from Oswego State University and an MBA from Dowling
College.
BOARD OF DIRECTORS
Our board of directors consists of a single director, who is David M.
Daniels. Mr. Daniels will serve 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
$1,000 plus reasonable travel expenses for attendance in person at any meetings
of the board of directors for which attendance in person was specifically
requested by the chairman of the board of directors. The options have a
five-year term, an exercise price of $.40 per share, and vest as follows: (i)
100,000 shares on the date of grant, and (ii) 250,000 shares on the first
anniversary of the date of grant if the director is a member of the Board of
Directors of the Company on the first anniversary of the date of grant and the
director has been a member of the Board of Directors of the Company continuously
during the period commencing on the date of grant and ending on the first
anniversary of the date of grant. We do not provide any director compensation to
our employee directors.
63
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation earned by the executive officers named below during the fiscal
years ended December 31, 2005, 2004 and 2003.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- -----------------------
Awards Payouts
Other Annual ------ -------
Compen- Restricted Securities All Other
Name and Fiscal sation Stock Underlying Compen-
Principal Position Year Salary ($) Bonus ($) ($)(4) Awards ($) Options (#) sation ($)(5)
- ------------------- ------ ---------- ---------- ------------- ----------- ------------ ---------------
David M. Daniels (1) 2005 235,241 -0- -0- -0- 2,500,000 34,067
President and 2004 148,000 12,000 1,748 874,125(6) -0- -0-
Chief Executive Officer
Roger H. Folts 2005 160,900 -0- -0- 1,000(7) 1,000,000 -0-
Chief Financial Officer and 2004 113,500 -0- 7,270 18,120(8) -0- -0-
Secretary 2003 -0- -0- 13,685 -0- -0- -0-
Patricia S. Bathurst 2005 134,500 -0- -0- -0- 1,000,000 -0-
Vice President -- Marketing 2004 88,000 -0- 10,000 43,040(9) -0- -0-
2003 -0- -0- 60,000 -0- -0- -0-
Alex Soufflas (2) 2005 59,400 -0- -0- -0- 1,000,000 -0-
General Counsel and
Executive Vice President
David A. Taylor (3) 2005 49,500 -0- -0- 27,500(10) 1,000,000 -0-
Vice President -- Sales
(1) Mr. Daniels was appointed our Chief Executive Officer on February 17, 2004
and our President on February 13, 2005.
(2) Mr. Soufflas was appointed our General Counsel and Executive Vice President
on August 15, 2005.
(3) Mr. Taylor was appointed our Vice President - Sales on August 15, 2005.
(4) Consists of non-salary cash consulting fees paid to the applicable
executive officers prior to our implementation of salaries for them in
March 2004.
(5) Consists of the dollar value of insurance premiums paid by the registrant
with respect to term life insurance for the benefit of the applicable
executive officer as well as amounts reimbursed to the applicable executive
officer for the payment of taxes thereon.
(6) Represents 1,748,250 shares of common stock at an ascribed value of $.40
per share.
(7) Represents 2,500 shares of common stock at an ascribed value of $.40 per
share.
(8) Represents 45,300 shares of common stock at an ascribed value of $.40 per
share.
(9) Represents 107,600 shares of common stock at an ascribed value of $.40 per
share.
(10) Represents 68,750 shares of common stock at an ascribed value of $.40 per
share.
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. In addition, we have agreed to pay Mr.
Soufflas and Mr. Taylor an annualized base salary of $158,400 and $132,000,
respectively, and issued each of Mr. Soufflas and Mr. Taylor an option to
acquire 1,000,000 shares of our common stock. A summary of the employment
agreements and arrangements and the stock options granted thereunder is provided
herein under "Executive Compensation - Employment Contracts and Arrangements."
64
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
The following table sets forth, for each named executive officer,
information regarding options granted to the officers during our fiscal year
ended December 31, 2004. We have not granted any stock appreciation rights
("SARs") to any of our named executive officers.
Percent of
Number of Total Options
Securities Granted to Exercise or
Underlying Employees in Base Price
Name Options Granted (#) Fiscal Year ($ / Sh) Expiration Date
- ---- ---------------------- ------------- ----------- --------------
David M. Daniels 2,500,000 32.8% 0.40 May 12, 2015
Patricia S. Bathurst 1,000,000 13.1% 0.40 May 12, 2015
Roger H. Folts 1,000,000 13.1% 0.40 May 12, 2015
Alex Soufflas 1,000,000 13.1% 0.40 August 14, 2015
David A. Taylor 1,000,000 13.1% 0.40 August 14, 2015
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 the officers
at December 31, 2005, 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, 2005.
65
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 / 1,875,000 687,500 / 2,062,500
Patricia S. Bathurst 250,000 / 750,000 275,000 / 825,000
Roger H. Folts 250,000 / 750,000 275,000 / 825,000
Alex Soufflas -0- / 1,000,000 -0- / 1,100,000
David A. Taylor -0- / 1,000,000 -0- / 1,100,000
* Not applicable.
(1) Based on the offering price of $1.50 per share.
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, 2005.
EMPLOYMENT CONTRACTS AND ARRANGEMENTS
We have entered into employment agreements with David M. Daniels, Roger
H. Folts and Patricia S. Bathurst, and have entered into employment arrangements
with Alex Soufflas and David A. Taylor. The following summary of these
employment agreements and arrangements 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.
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.
66
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.
Alex Soufflas
On August 15, 2005, we entered into an employment arrangement with Alex
Soufflas to serve as our General Counsel and Executive Vice President. Under the
arrangement, Mr. Soufflas is entitled to an annual base salary of $158,400 and
received an option to acquire 1,000,000 shares of our common stock.
David A. Taylor
On August 15, 2005, we entered into an employment arrangement with
David A. Taylor to serve as our Vice President - Sales. Under the arrangement,
Mr. Taylor is entitled to an annual base salary of $132,000 and received an
option to acquire 1,000,000 shares of our common stock.
The employment agreements with Mr. Daniels, Mr. Folts and Ms. Bathurst
provide 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.
67
The options granted to Mr. Daniels, Mr. Folts and Ms. Bathurst under
their applicable employment agreements are for a term of 10 years, have an
exercise price of $.40 per share, and vest 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 officer's 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. In
the event the employment of the applicable executive officer is terminated for
"cause," the option terminates immediately.
The options granted to Mr. Soufflas and Mr. Taylor under their
applicable employment arrangements are for a term of 10 years, have an exercise
price of $.40 per share, and vest in four equal annual installments commencing
on February 1, 2006. 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 option, the option may be exercised to the extent exercisable on
the date of such termination of employment until the earlier of the date that is
90 days after the date of such termination of employment or the expiration date
of the option. In the event the employment of the applicable executive officer
is terminated for "cause," the option terminates immediately.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 23, 2006, 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 January 23, 2006 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.
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Amount and Nature
of Beneficial Percentage
Name and Address of Beneficial Owner Ownership (1) of Class (1)
- ------------------------------------- ------------------ --------------
David M. Daniels 2,248,050 (2) 13.2%
Roger H. Folts 595,300 (3) 3.5%
Patricia S. Bathurst 607,600 (4) 3.6%
Alex Soufflas 250,000 (5) 1.5%
David A. Taylor 250,000 (6) 1.5%
Ronald F. Westman 5,680,000 (7) 33.3%
R. Dennis Bowers 1,181,250 6.9%
P.O. Box 94
Lahaska, PA 18974
James Creed 866,834 (8) 5.1%
Ben Giese 927,000 (9) 5.4%
Dennis Lastine 1,095,000 (10) 6.4%
Jesus Lozano 1,650,000 (11) 9.7%
Jose Lozano 1,800,000 (12) 10.6%
All officers and directors as a group (5 persons) 3,950,950 (13) 23.2%
__________
* Less than 1%.
(1) This table has been prepared based on 17,054,200 shares of common stock
outstanding on January 23, 2006.
(2) Includes 1,250,000 shares issuable upon the exercise of options that have
an exercise price of $.40 per share.
(3) Includes 500,000 shares issuable upon the exercise of options that have an
exercise price of $.40 per share.
(4) Includes 500,000 shares issuable upon the exercise of options that have an
exercise price of $.40 per share.
(5) Includes 250,000 shares issuable upon the exercise of options that have an
exercise price of $.40 per share.
(6) Includes 250,000 shares issuable upon the exercise of options that have an
exercise price of $.40 per share.
(7) Includes 100,000 shares issuable upon the exercise of options that have an
exercise price of $.40 per share, 1,860,000 shares issuable upon the
exercise of warrants that have an exercise price of $.60 per share, and
1,860,000 shares issuable upon the exercise of warrants that have an
exercise price of $.80 per share.
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(8) Includes 204,167 shares issuable upon the exercise of warrants that have
an exercise price of $1.00 per share and 204,167 shares issuable upon the
exercise of warrants that have an exercise price of $2.00 per share.
(9) Includes 150,000 shares issuable upon the exercise of warrants that have
an exercise price of $.60 per share, 142,000 shares issuable upon the
exercise of warrants that have an exercise price of $1.00 per share, and
142,000 shares issuable upon the exercise of warrants that have an
exercise price of $2.00 per share.
(10) Includes 30,000 shares issuable upon the exercise of warrants that have an
exercise price of $.60 per share, 30,000 shares issuable upon the exercise
of warrants that have an exercise price of $.80 per share, 238,750 shares
issuable upon the exercise of warrants that have an exercise price of
$1.00 per share, and 238,750 shares issuable upon the exercise of warrants
that have an exercise price of $2.00 per share.
(11) Includes 550,000 shares issuable upon the exercise of warrants that have
an exercise price of $.60 per share and 550,000 shares issuable upon the
exercise of warrants that have an exercise price of $.80 per share.
(12) Includes 600,000 shares issuable upon the exercise of warrants that have
an exercise price of $.60 per share and 600,000 shares issuable upon the
exercise of warrants that have an exercise price of $.80 per share.
(13) Includes 2,750,000 shares issuable upon the exercise of options that have
an exercise price of $.40 per share.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 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 Ronald F. Westman for
aggregate consideration consisting of 2,740,000 shares of common stock of
Infinium Labs, Inc., a Delaware corporation, that Mr. Westman owned and that
were then valued at $720,000. Under the terms of the agreement, in the event we
obtained less than $720,000 from the sale of the Infinium Labs shares, Mr.
Westman was required to pay the difference to us in cash or additional shares of
Infinium Labs common stock. We completed the sale of the last of our shares of
common stock of Infinium Labs on September 7, 2005, resulting in aggregate gross
proceeds from the sale of all 2,740,000 shares of $320,506. Mr. Westman paid the
remaining funds to us in cash on September 16, 2005. Mr. Westman beneficially
owns approximately 33.3% of our common stock and served as a member of our board
of directors from June 29, 2005 to September 26, 2005. We sold the shares of our
common stock and warrants to Mr. Westman at a price per share of $.40, which is
the same price we received for shares of our common stock sold in the private
offerings we conducted immediately prior to and after the date of the
transaction with Mr. Westman.
In May 2005, we entered into a consulting agreement with Jose Lozano.
Under the agreement, Mr. Lozano agreed to perform marketing and advisory
services consisting primarily of the marketing and promotion of us and our
products and services, support for our marketing and related activities, and
consultation and advice with respect to our marketing strategies, product
development, business development and opportunities, joint ventures, strategic
partnerships and alliances, and general corporate and marketing matters. In
consideration for these services, we agreed to issue Mr. Lozano 600,000 shares
of our common stock, Class A warrants to acquire 600,000 shares of our common
stock, and Class B warrants to acquire 600,000 shares of our common stock, and
agreed to include all of the shares of common stock issued and all of the shares
of common stock underlying the warrants in a registration statement to be filed
with the SEC by June 30, 2005. Each Class A warrant is 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 the registration statement is declared
effective by the SEC and expires on December 31, 2007. Each Class B warrant is
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 the registration
statement is declared effective by the SEC and expires on December 31, 2008.
Upon receiving the shares of common stock and warrants, Mr. Lozano became the
beneficial owner of approximately 10.6% of our common stock. The agreement is
for a term ending on December 30, 2005. We believe that the compensation we are
paying to Mr. Lozano under this agreement approximates the fair value of the
services to be provided by Mr. Lozano during the term of the agreement.
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In June 2005, we entered into a lease for additional office space in
the Centerpointe Office Building located at 2033 Main Street, Suite 501,
Sarasota, Florida 34237. The lease is for approximately 4,000 square feet of
space for a monthly rent payment of approximately $7,500, commenced on July 1,
2005 and expires on July 1, 2010. Centerpointe Office Building is owned by
Centerpointe Property, LLC. Ronald F. Westman owns all of the outstanding
membership interests in Centerpointe Property, LLC jointly with his wife,
beneficially owns approximately 33.3% of our common stock, and served as a
member of our board of directors from June 29, 2005 to September 26, 2005. The
rent per square foot that we pay for this office space is the same price per
square foot that the other tenants in the building pay for office space in this
building.
In October 2005, we entered into a severance arrangement with R. Dennis
Bowers. Under this arrangement, we agreed to pay Mr. Bowers $20,000 upon
entering into the arrangement and agreed to enter into a 15-month consulting
agreement with Mr. Bowers. Under the consulting agreement, Mr. Bowers agreed to
market and promote us and our products to prospective customers whom Mr. Bowers
may identify from time to time. In consideration for these services, we agreed
to pay Mr. Bowers a monthly consulting fee of $9,500 in cash or, if certain
conditions are met, $10,000 in shares of our common stock, the form of such
payment to be decided upon at our sole discretion, the first of such payments to
be made on October 13, 2005 and the remainder of such payments to be made
monthly beginning October 22, 2005 and ending November 22, 2005. We also agreed
to pay Mr. Bowers commissions ranging from between 40% and 50% of the gross
revenues that we receive from sales of our products generated by Mr. Bowers. The
agreement is for a term ending on January 5, 2007. Mr. Bowers served as our
Chief Executive Officer from March 1, 2001 until February 13, 2004, our
President from March 1, 2001 to January 31, 2005, and our Chairman of the Board
from March 1, 2001 to February 13, 2005. Mr. Bowers beneficially owns
approximately 6.9% of our common stock. We believe that the compensation we are
paying to Mr. Bowers under this agreement approximates the fair value of the
services to be provided by Mr. Bowers during the term of the agreement.
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DESCRIPTION OF SECURITIES
The following summary of our capital stock, our articles of
incorporation, our bylaws and the Indiana Business Corporation Law ("IBCL") 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 IBCL.
COMMON STOCK
We are authorized to issue 100,000,000 shares of common stock, $.001
par value per share, of which 17,054,200 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 IBCL
The following provisions of our articles of incorporation, our bylaws
and the IBCL 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 IBCL 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
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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 January 23, 2006, the number of stockholders of record of our
common stock was 128.
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.
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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, 7,645,000 shares of our common stock
will be issuable upon the exercise of outstanding options and 15,636,004 shares
of our common stock will be issuable upon the exercise of outstanding warrants.
Of these shares, 5,445,125 shares of our common stock and 4,813,010 shares of
our common stock underlying outstanding warrants 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 January 23, 2006; 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 notice and
manner of sale requirements and the availability of current public information
about us.
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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 are 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.
COMPENSATORY PLANS AND AGREEMENTS
We intend to file one or more registration statements on Form S-8 under
the Securities Act to register shares of our common stock that we may reserve
for issuance under stock incentive, stock option or similar plans, shares of our
common stock that were previously issued to certain of our employees,
consultants and advisors, and shares of our common stock that we may in the
future issue to certain of our employees, consultants and advisors. The first of
these registration statements is expected to be filed soon after the date of
this prospectus and will be effective immediately upon filing. Shares registered
under these registration statements and held by non-affiliates will be available
for sale in the open market, 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.
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OFFERING PERIOD RESTRICTIONS
We are currently registering 4,813,010 shares of our common stock
underlying outstanding warrants, all of which become exercisable on the
effective date of the registration statement of which this prospectus forms a
part. All of these warrants are exercisable for a fixed period of time
commencing on the effective date of the registration statement of which this
prospectus forms a part and contain varying exercise prices and expiration
dates. A summary of the exercise periods, exercise prices and expiration dates
of these warrants is set forth below.
Exercise Period Commencing
Number of on Effective Date of
Shares Registration
Underlying Exercise Statement
Warrants Price ($) Expiration Date
--------- --------- --------------------------- ----------------
267,500 .60 180 Days December 31, 2006
1,330,317 1.00 180 Days November 30, 2006
1,330,317 2.00 360 Days November 30, 2006
942,438 .60 18 Months November 30, 2007
942,438 .80 3 Years November 30, 2008
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."
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THE OFFERING
This prospectus covers the public sale of 10,258,135 shares of common
stock to be sold by the selling security holders identified in this prospectus.
Of this amount, 4,813,010 shares are issuable upon the exercise of warrants.
This prospectus also covers any additional shares of our common stock that we
may issue or that may be issuable by reason of any stock split, stock dividend
or similar transaction involving our common stock.
The selling security holders may sell all or a portion of their shares
at a fixed price of $1.50 per share until the shares are listed on the OTC
Bulletin Board, and thereafter through public or private transactions at
prevailing market prices or at privately negotiated prices. We can provide no
assurance that the shares will be approved for listing on the OTC Bulletin Board
or that a public market will develop for the shares.
Set forth below is a description of the shares of our common stock
being registered for resale hereby.
August 2004 Offering of Common Stock, Class A Warrants and Class B Warrants
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 (the "August 2004 Offering"). 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 expires 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 expires on November 30, 2006. We originally
agreed to use our reasonable best efforts to file a registration statement with
the SEC within two months of the date of termination of the offering to register
50% of the shares of our common stock issued in the offering and 50% of the
shares of our common stock underlying the Class A warrants and Class B warrants
issued in the offering. We subsequently extended this deadline to June 30, 2005
in exchange for the issuance of the securities described below under "March 2005
Offering of Common Stock, Class A Warrants and Class B Warrants." The
registration statement of which this prospectus is a part is being filed in part
to satisfy our obligation to register these shares.
This prospectus covers the public resale of 1,388,500 shares of common
stock, 694,250 shares of common stock issuable upon the exercise of the Class A
warrants and 694,250 shares of common stock issuable upon exercise of the Class
B Warrants.
77
September 2004 Offering of Common Stock, Class A Warrants and Class B Warrants
In September 2004, we completed a private offering of 174,000 shares of
our common stock, Class A warrants to acquire 87,000 shares of our common stock,
and Class B warrants to acquire 87,000 shares of our common stock, for aggregate
cash consideration of $87,000 (the "September 2004 Offering"). 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 expires 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 expires on November 30, 2006. We originally
agreed to use our reasonable best efforts to file a registration statement with
the SEC within two months of the date of termination of the offering to register
50% of the shares of our common stock issued in the offering and 50% of the
shares of our common stock underlying the Class A warrants and Class B warrants
issued in the offering. We subsequently extended this deadline to June 30, 2005
in exchange for the issuance of the securities described below under "March 2005
Offering of Common Stock, Class A Warrants and Class B Warrants." The
registration statement of which this prospectus is a part is being filed in part
to satisfy our obligation to register these shares.
This prospectus covers the public resale of 87,000 shares of common
stock, 43,500 shares of common stock issuable upon the exercise of the Class A
warrants and 43,500 shares of common stock issuable upon exercise of the Class B
Warrants.
February 2005 Offering of Common Stock, Class A Warrants and Class B Warrants
In February 2005, we completed a private offering of 2,448,750 shares
of our common stock, Class A warrants to acquire 816,252 shares of our common
stock, and Class B warrants to acquire 816,252 shares of our common stock, for
aggregate cash consideration of $979,500 (the "February 2005 Offering"). 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 expires 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 expires on November 30, 2006. We agreed to use
our reasonable best efforts to file a registration statement with the SEC within
six months of the date of termination of the offering to register 50% of the
shares of our common stock issued in this offering and 50% of the shares of our
common stock underlying the Class A warrants and Class B warrants issued in this
offering. The registration statement of which this prospectus is a part is being
filed in part to satisfy our obligation to register these shares.
78
This prospectus covers the public resale of 1,224,375 shares of common
stock, 408,128 shares of common stock issuable upon the exercise of the Class A
warrants and 408,128 shares of common stock issuable upon exercise of the Class
B Warrants.
March 2005 Offering of Common Stock, Class A Warrants and Class B Warrants
In March 2005, we completed a private offering of 737,750 shares of our
common stock, Class A warrants to acquire 368,875 shares of our common stock,
and Class B warrants to acquire 368,875 shares of our common stock (the "March
2005 Offering"). 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 the August 2004 Offering and the
September 2004 Offering (collectively, the "August and September 2004
Offerings"), and the number of units issued was equal to 25% of the aggregate
number of units purchased in the August and September 2004 Offerings. The units
were issued to each person in exchange for each person agreeing to an amendment
to their respective securities purchase agreements for the August and September
2004 Offerings pursuant to which the date by which we would use our reasonable
best efforts to file a registration statement with the SEC for certain of the
securities purchased in the August and September 2004 Offerings was extended
from a date that was within two months of the date of termination of the August
and September 2004 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 expires 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 expires on
November 30, 2006. We agreed to use our reasonable best efforts to file a
registration statement with the SEC by June 30, 2005 to register 50% of the
shares of our common stock issued in this offering and 50% of the shares of our
common stock underlying the Class A warrants and Class B warrants issued in this
offering. The registration statement of which this prospectus is a part is being
filed in part to satisfy our obligation to register these shares.
This prospectus covers the public resale of 368,875 shares of common
stock, 184,439 shares of common stock issuable upon the exercise of the Class A
warrants and 184,439 shares of common stock issuable upon exercise of the Class
B Warrants.
79
April 2005 Sale of Common Stock, Class A Warrants and Class B Warrants to Ronald
F. Westman
In April 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 Ronald F. Westman, one of our
former directors, for aggregate consideration consisting of 2,740,000 shares of
common stock of Infinium Labs, Inc., a Delaware corporation, that Mr. Westman
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 expires 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 expires on December 31, 2008. We agreed to use our reasonable best
efforts to file a registration statement with the SEC within six months of the
closing date of the transaction to register 50% of the shares of our common
stock issued in this offering and 50% of the shares of our common stock
underlying the Class A warrants and Class B warrants issued in this transaction.
The registration statement of which this prospectus is a part is being filed in
part to satisfy our obligation to register these shares.
The securities purchase agreement governing this transaction contained
price protection provisions that provided that: (i) in the event we obtained
less than $720,000 from the sale of the Infinium Labs shares, Mr. Westman would
pay the difference to us in cash or additional shares of Infinium Labs common
stock, and (ii) in the event we obtained more than $720,000 from the sale of the
Infinium Labs shares, we would pay the difference to Mr. Westman in cash. We
completed the sale of the last of our shares of common stock of Infinium Labs on
September 7, 2005, resulting in aggregate gross proceeds from the sale of all
2,740,000 shares of $320,506. Mr. Westman paid the remaining funds to us in cash
on September 16, 2005.
Mr. Westman requested that we register only 650,000 out of the 900,000
shares of our common stock purchased in this transaction that are subject to
registration rights, and that we register none of the shares of our common stock
underlying the Class A warrants and Class B warrants purchased in this
transaction that are subject to registration rights. Pursuant to the terms of
the securities purchase agreement governing this transaction, we will not incur
any penalty in connection with Mr. Westman's request that we register only
650,000 shares of common stock that he purchased in this transaction.
This prospectus thus covers the public resale of 650,000 shares of
common stock issued to Mr. Westman in this transaction.
May 2005 Offering of Common Stock, Class A Warrants and Class B Warrants
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 (the "May 2005 Offering"). 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 expires on December 31, 2007. Each Class B
80
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 expires on December 31, 2008. We agreed to use our reasonable best efforts
to file a registration statement with the SEC within six months of the date of
termination of the offering to register 50% of the shares of our common stock
issued in this offering and 50% of the shares of our common stock underlying the
Class A warrants and Class B warrants issued in this offering. The registration
statement of which this prospectus is a part is being filed in part to satisfy
our obligation to register these shares.
This prospectus covers the public resale of 317,875 shares of common
stock, 158,938 shares of common stock issuable upon the exercise of the Class A
warrants and 158,938 shares of common stock issuable upon exercise of the Class
B Warrants.
June 2005 Offering of Common Stock, Class A Warrants and Class B Warrants
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 (the "June 2005 Offering"). 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 expires 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 expires on December 31, 2008. We agreed to use our reasonable best
efforts to file a registration statement with the SEC within six months of the
date of termination of the offering to register 50% of the shares of our common
stock issued in this offering and 50% of the shares of our common stock
underlying the Class A warrants and Class B warrants issued in this offering.
The registration statement of which this prospectus is a part is being filed in
part to satisfy our obligation to register these shares.
Ronald F. Westman purchased 20,000 units in this offering comprised of
60,000 shares of our common stock, Class A warrants to acquire 60,000 shares of
our common stock, and Class B warrants to acquire 60,000 shares of our common
stock. Mr. Westman requested that we register none of the shares of our common
stock purchased in this offering that are subject to registration rights, and
that we register none of the shares of our common stock underlying the Class A
warrants and Class B warrants purchased in this offering that are subject to
registration rights. Pursuant to the terms of the offering, we will not incur
any penalty in connection with Mr. Westman's request that we register none of
the shares of common stock that he purchased in this offering.
81
This prospectus thus covers the public resale of 715,000 shares of
common stock, 715,000 shares of common stock issuable upon the exercise of the
Class A warrants and 715,000 shares of common stock issuable upon the exercise
of the Class B Warrants.
June 2005 Sale of Common Stock, Class A Warrants, Class B Warrants and Class C
Warrants to Consultants
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 expires 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 expires 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 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 expires on December 31, 2006. We agreed to
file a registration statement with the SEC by June 30, 2005 to register 100% of
the shares of our common stock and 100% of the shares of our common stock
underlying the Class A warrants and Class B warrants with respect to an
aggregate of 1,800,000 shares of common stock issued to these investors, and 50%
of the shares of our common stock and 50% of the shares of our common stock
underlying the Class A warrants, Class B and Class C warrants with respect to an
aggregate of 3,886,000 shares of our common stock issued to these investors. The
registration statement of which this prospectus is a part is being filed in part
to satisfy certain of our obligations to register these shares. The names of
each of these consultants, a description of the securities issued to each of
them and the value ascribed to each such issuance for financial accounting
purposes is provided below under Note 4 to our unaudited consolidated financial
statements for the nine months ended September 30, 2005, and a summary of the
agreements we entered into with consultants and advisors for marketing and
advisory services and a description of these services is provided above under
"Description of Business - Marketing Consultants and Advisors."
Some of the consultants and advisors requested that we not register an
aggregate of 1,080,000 shares of our common stock, 600,000 shares of common
stock issuable upon the exercise of the Class A warrants, 600,000 shares of
common stock issuable upon exercise of the Class B warrants, and 545,000 shares
of common stock issuable upon exercise of the Class C warrants that are subject
to registration rights. Pursuant to the terms of the consulting agreements under
which these securities were issued, we will not incur any penalty in connection
with their request that we not register these shares.
82
This prospectus thus covers the public resale of 513,500 shares of
common stock, 68,500 shares of common stock issuable upon the exercise of the
Class A warrants, 68,500 shares of common stock issuable upon exercise of the
Class B warrants, and 267,500 shares of common stock issuable upon exercise of
the Class C warrants.
Shares Acquired in Private Transactions with Third Parties
This prospectus covers the public resale of 180,000 shares of common
stock acquired by certain of the selling security holders from third parties in
privately negotiated transactions.
DETERMINATION OF OFFERING PRICE
The selling security holders may sell all or a portion of their shares of common
stock at a fixed price of $1.50 per share until the shares are listed on the OTC
Bulletin Board, and thereafter through public or private transactions at
prevailing market prices or at privately negotiated prices. In determining the
initial public offering price for the shares, the material factors that we
considered are as follows:
o Our business potential and prospects;
o The industry in which we operate;
o Our management;
o Our relative cash requirements;
o Our capital structure;
o Current market conditions;
o The price paid by investors for shares of our common stock in our
private offerings in 2004 and 2005; and
o The price we believe a purchaser will be willing to pay for shares
of our common stock when the shares are listed on the OTC Bulletin
Board.
83
The offering price of the shares offered hereby does not necessarily
bear any relation to our assets, book value, financial condition or other
established valuation criteria. Accordingly, the offering price of the shares
may not be indicative of the actual value of our common stock or the prices that
may prevail at any time or from time to time in the event a public market for
our common stock develops. We can provide you with no assurance that a public
market for our common stock will develop and continue or that our common stock
will ever trade at a price at or higher than the offering price in this
offering.
SELLING SECURITY HOLDERS
The selling security holders identified in the following table are
offering for resale 10,258,135 shares of our common stock of which 4,813,010 are
issuable upon exercise of warrants. All of the shares of common stock, options
and warrants were previously issued to the selling security holders in private
placement transactions. A description of these transactions is set forth above
under "The Offering."
The following table sets forth as of January 23, 2006:
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.
84
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
- -------------------------------- ------ ------- --------------- -------- ---------
Steven Adelstein (1) 628,500 3.7% 240,001 388,499 2.3%
Bart Alink (2) 112,500 * 56,250 56,250 *
AUW, Inc. (3) 112,500 * 56,251 56,249 *
Harry Baas (4) 208,334 1.2% 104,168 104,166 *
William Barker (5) 60,000 * 30,000 30,000 *
Frederick Bates, Jr. (6) 5,000 * 2,500 2,500 *
Marco Boschetti (7) 50,000 * 25,000 25,000 *
Maya Boschetti (8) 50,000 * 25,000 25,000 *
Gordon Cantley (9) 606,000 3.6% 87,500 518,500 3.0%
Rene Carrel (10) 160,000 * 80,000 80,000 *
Andrew Catignani (11) 50,000 * 25,000 25,000 *
Mark Clark (12) 20,000 * 10,000 10,000 *
Charles Cleland, Jr. (13) 390,000 2.3% 180,000 210,000 1.2%
Charles Cleland, Sr. (14) 180,000 1.1% 90,000 90,000 *
Evans Connelly (15) 60,000 * 30,000 30,000 *
Freeman Correa, Jr. (16) 60,000 * 30,000 30,000 *
James Creed (17) 866,834 5.1% 422,918 443,916 2.6%
Gertrude Daniels (18) 20,000 * 10,000 10,000 *
Julia Daniels (19) 20,000 * 10,000 10,000 *
Andreas Eggenberger (20) 150,000 * 75,000 75,000 *
Daniel Eggenberger (21) 725,000 4.3% 75,000 650,000 3.8%
El CID IV (22) 780,000 4.6% 390,000 390,000 2.3%
FDRL Corp (23) 120,000 * 60,000 60,000 *
Jon and Amy Fisher (24) 50,000 * 25,000 25,000 *
Gwen Forman (25) 50,000 * 25,000 25,000 *
Lukas Frei (26) 50,000 * 25,000 25,000 *
Lukas Frei and Luzia Frei-Weber (27) 50,000 * 25,000 25,000 *
GE Globo Entertainment (28) 575,000 3.4% 287,500 287,500 1.7%
Ben Giese (29) 927,000 5.4% 292,500 634,500 3.7%
Michael and Beverly Gillis (30) 165,000 * 82,500 82,500 *
Basil and Susan Gray (31) 54,200 * 25,000 25,000 *
Edward Harris (32) 110,534 * 47,918 62,616 *
Gunther Heinkel (33) 160,000 * 80,000 80,000 *
Jean Hill (34) 100,000 * 50,000 50,000 *
Walter Hill (35) 375,200 2.2% 150,000 225,200 1.3%
Robert Hillier (36) 320,000 1.9% 135,000 185,000 1.1%
Ramon Huber (37) 150,000 * 75,000 75,000 *
Rita Huerzeler (38) 50,000 * 25,000 25,000 *
85
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
- -------------------------------- ------ ------- --------------- -------- ---------
RWA Huuskes-Krabbe (39) 62,500 * 31,250 31,250 *
Lawrence Jellen (40) 255,000 1.5% 125,000 130,000 *
Marold Kamai (41) 100,000 * 50,000 50,000 *
L&L Investments (42) 202,000 1.2% 95,000 107,000 *
Paul Langton (43) 37,500 * 18,751 18,749 *
Henry Tripler Larzelere, Jr. (44) 338,000 2.0% 62,500 275,500 1.6%
Dennis Lastine (45) 1,095,000 6.4% 547,500 547,500 3.2%
Jesus Lozano (46) 1,650,000 9.7% 825,000 825,000 4.8%
Thomas Lustgarten (47) 50,000 * 25,000 25,000 *
Jorg Meier (48) 50,000 * 25,000 25,000 *
Richard Merritt (49) 25,000 * 12,500 12,500 *
Metropolitan Anethesia Alliance
401K PS PL (50) 75,000 * 37,500 37,500 *
Michael Mitsuka (51) 310,000 1.8% 155,000 155,000 *
Thomas Moser (52) 210,000 1.2% 105,000 105,000 *
Claire Mumenthaler (53) 50,000 * 25,000 25,000 *
Freek Nietsch (54) 112,500 * 56,250 56,250 *
Rene Ortega, Jr. (55) 470,000 2.8% 205,000 265,000 1.6%
Park Financial Group, Inc. (56) 411,000 2.4% 205,500 205,500 1.2%
Philipp Portenier (57) 110,000 * 55,000 55,000 *
Guy Quigley (58) 100,000 * 50,000 50,000 *
Suzanne Ragsdale (59) 208,334 1.2% 104,168 104,166 *
Michael Reichstein (60) 50,000 * 25,000 25,000 *
William Ritger (61) 800,000 4.7% 400,000 400,000 2.4%
Jay Rosen (62) 280,000 1.6% 90,000 190,000 1.1%
Robert Sage (63) 670,000 3.9% 275,000 395,000 2.3%
Martin Salm (64) 50,000 * 25,000 25,000 *
Peter Schaetti (65) 100,000 * 50,000 50,000 *
Thomas Schaetti (66) 50,000 * 25,000 25,000 *
Ernst Schoenbaechler (67) 600,000 3.5% 125,000 475,000 2.8%
Keith Shelly (68) 815,000 4.8% 175,000 640,000 3.8%
Kenneth Shelly (69) 145,068 * 70,834 74,234 *
Tammi Shnider (70) 180,000 1.1% 90,000 90,000 *
J. Kimo Spencer (71) 120,000 * 60,000 60,000 *
Adrian Spring (72) 100,000 * 50,000 50,000 *
James Sutherland (73) 5,000 * 2,500 2,500 *
John Szychowski (74) 85,000 * 37,500 47,500 *
Nathanne Tankersley (75) 300,000 1.8% 150,000 150,000 *
Martin Thony (76) 150,000 * 75,000 75,000 *
Stuart Tiplitsky (77) 247,700 1.5% 87,500 160,200 *
Manuel Torres, Jr. (78) 62,500 * 31,251 31,249 *
Marvin Vaught (79) 236,000 1.4% 110,000 126,000 *
Gabriel Vidales (80) 1,350,000 7.9% 675,000 675,000 4.0%
Stefan Waldner (81) 50,000 * 25,000 25,000 *
Wegelin & Co. (82) 250,000 1.5% 125,000 125,000 *
Sandra Weibel (83) 100,000 * 50,000 50,000 *
Ronald Westman (84) 5,680,000 33.3% 650,000 5,030,000 29.5%
Ronda Westman (85) 300,000 1.8% 150,000 150,000 *
Urs Wigger (86) 100,000 * 50,000 50,000 *
Warren Wise (87) 295,250 1.7% 147,625 147,625 *
Julie Wukie (88) 25,000 * 12,500 12,500 *
Jerome Ziarko (89) 286,000 1.7% 137,500 148,500 *
86
* Represents less than one percent (1%) of our shares outstanding.
(1) The registered shares consist of: (i) 94,500 shares of common stock,
47,250 shares underlying Class A warrants and 47,250 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 23,625
shares of common stock, 11,813 shares underlying Class A warrants and
11,813 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 56,250 shares of common stock, 18,750 shares
underlying Class A warrants and 18,750 shares underlying Class B
warrants acquired in the February 2005 Offering; less (iv) 90,000
shares of common stock transferred to a third party in a privately
negotiated transaction. Mr. Adelstein served as a director of the
Company from February 13, 2005 until April 4, 2005.
(2) The registered shares consist of: (i) 15,000 shares of common stock,
7,500 shares underlying Class A warrants and 7,500 shares underlying
Class B warrants acquired in the September 2004 Offering; (ii) 3,750
shares of common stock, 1,875 shares underlying Class A warrants and
1,875 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 11,250 shares of common stock, 3,750 shares
underlying Class A warrants and 3,750 shares underlying Class B
warrants acquired in the February 2005 Offering.
(3) The registered shares consist of: (i) 22,500 shares of common stock,
11,250 shares underlying Class A warrants and 11,250 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 5,625
shares of common stock, 2,813 shares underlying Class A warrants and
2,813 shares underlying Class B warrants acquired in the March 2005
Offering. The power to vote and dispose of these shares is controlled
by Steven Adelstein.
(4) The registered shares consist of: (i) 25,000 shares of common stock,
12,500 shares underlying Class A warrants and 12,500 shares underlying
Class B warrants acquired in the September 2004 Offering; (ii) 6,250
shares of common stock, 3,125 shares underlying Class A warrants and
3,125 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 25,000 shares of common stock, 8,334 shares
underlying Class A warrants and 8,334 shares underlying Class B
warrants acquired in the February 2005 Offering.
(5) The registered shares consist of 15,000 shares of common stock, 7,500
shares underlying Class A warrants and 7,500 shares underlying Class B
warrants acquired in the May 2005 Offering.
(6) The registered shares consist of: (i) 1,000 shares of common stock, 500
shares underlying Class A warrants and 500 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 250 shares of
common stock, 125 shares underlying Class A warrants and 125 shares
underlying Class B warrants acquired in the March 2005 Offering.
87
(7) The registered shares consist of 15,000 shares of common stock, 5,000
shares underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(8) The registered shares consist of 15,000 shares of common stock, 5,000
shares underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(9) The registered shares consist of: (i) 25,000 shares of common stock,
12,500 shares underlying Class A warrants and 12,500 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 6,250
shares of common stock, 3,125 shares underlying Class A warrants and
3,125 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 15,000 shares of common stock, 5,000 shares
underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering. Mr. Cantley is an
affiliate of Park Financial Group, Inc., a registered broker-dealer.
Mr. Cantley purchased the securities in the ordinary course of business
and, at the time he purchased the securities, had no agreements or
understandings, directly or indirectly, with any person to distribute
the securities.
(10) The registered shares consist of: (i) 30,000 shares of common stock,
10,000 shares underlying Class A warrants and 10,000 shares underlying
Class B warrants acquired in the February 2005 Offering; and (ii)
15,000 shares of common stock, 7,500 shares underlying Class A warrants
and 7,500 shares underlying Class B warrants acquired in the May 2005
Offering.
(11) The registered shares consist of: (i) 10,000 shares of common stock,
5,000 shares underlying Class A warrants and 5,000 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 2,500
shares of common stock, 1,250 shares underlying Class A warrants and
1,250 shares underlying Class B warrants acquired in the March 2005
Offering.
(12) The registered shares consist of 10,000 shares of common stock acquired
from a third party in a privately negotiated transaction.
(13) The registered shares consist of 60,000 shares of common stock, 60,000
shares underlying Class A warrants and 60,000 shares underlying Class B
warrants acquired in the June 2005 Offering.
(14) The registered shares consist of 30,000 shares of common stock, 30,000
shares underlying Class A warrants and 30,000 shares underlying Class B
warrants acquired in the June 2005 Offering.
(15) The registered shares consist of 15,000 shares of common stock, 7,500
shares underlying Class A warrants and 7,500 shares underlying Class B
warrants acquired in the May 2005 Offering.
(16) The registered shares consist of 15,000 shares of common stock, 7,500
shares underlying Class A warrants and 7,500 shares underlying Class B
warrants acquired in the May 2005 Offering.
(17) The registered shares consist of: (i) 140,000 shares of common stock,
70,000 shares underlying Class A warrants and 70,000 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 35,000
shares of common stock, 17,500 shares underlying Class A warrants and
17,500 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 43,750 shares of common stock, 14,584 shares
underlying Class A warrants and 14,584 shares underlying Class B
warrants acquired in the February 2005 Offering.
(18) The registered shares consist of 10,000 shares of common stock acquired
from a third party in a privately negotiated transaction.
88
(19) The registered shares consist of 10,000 shares of common stock acquired
from a third party in a privately negotiated transaction.
(20) The registered shares consist of 45,000 shares of common stock, 15,000
shares underlying Class A warrants and 15,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(21) The registered shares consist of 45,000 shares of common stock, 15,000
shares underlying Class A warrants and 15,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(22) The registered shares consist of 240,000 shares of common stock and
150,000 shares underlying Class C warrants acquired in June 2005 in
exchange for marketing and advisory services. The power to vote and
dispose of these shares is controlled by Andrea Vargas.
(23) The registered shares consist of 30,000 shares of common stock and
30,000 shares underlying Class C warrants acquired in June 2005 in
exchange for marketing and advisory services. The power to vote and
dispose of these shares is controlled by Robert Sage.
(24) The registered shares consist of: (i) 10,000 shares of common stock,
5,000 shares underlying Class A warrants and 5,000 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 2,500
shares of common stock, 1,250 shares underlying Class A warrants and
1,250 shares underlying Class B warrants acquired in the March 2005
Offering.
(25) The registered shares consist of: (i) 10,000 shares of common stock,
5,000 shares underlying Class A warrants and 5,000 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 2,500
shares of common stock, 1,250 shares underlying Class A warrants and
1,250 shares underlying Class B warrants acquired in the March 2005
Offering.
(26) The registered shares consist of 15,000 shares of common stock, 5,000
shares underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(27) The registered shares consist of 15,000 shares of common stock, 5,000
shares underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(28) The registered shares consist of: (i) 15,000 shares of common stock,
5,000 shares underlying Class A warrants and 5,000 shares underlying
Class B warrants acquired in the February 2005 Offering; and (ii)
175,000 shares of common stock and 87,500 shares underlying Class C
warrants acquired in June 2005 in exchange for marketing and advisory
services. The power to vote and dispose of these shares is controlled
by Daniel Eggenberger.
(29) The registered shares consist of: (i) 100,000 shares of common stock,
50,000 shares underlying Class A warrants and 50,000 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 25,000
shares of common stock, 12,500 shares underlying Class A warrants and
12,500 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 25,500 shares of common stock, 8,500 shares
underlying Class A warrants and 8,500 shares underlying Class B
warrants acquired in the February 2005 Offering.
(30) The registered shares consist of: (i) 33,000 shares of common stock,
16,500 shares underlying Class A warrants and 16,500 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 8,250
shares of common stock, 4,125 shares underlying Class A warrants and
4,125 shares underlying Class B warrants acquired in the March 2005
Offering.
(31) The registered shares consist of: (i) 5,000 shares of common stock,
2,500 shares underlying Class A warrants and 2,500 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 1,250
shares of common stock, 625 shares underlying Class A warrants and 625
shares underlying Class B warrants acquired in the March 2005 Offering;
and (iii) 7,500 shares of common stock, 2,500 shares underlying Class A
warrants and 2,500 shares underlying Class B warrants acquired in the
February 2005 Offering.
89
(32) The registered shares consist of: (i) 15,000 shares of common stock,
7,500 shares underlying Class A warrants and 7,500 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 3,750
shares of common stock, 1,875 shares underlying Class A warrants and
1,875 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 6,250 shares of common stock, 2,084 shares
underlying Class A warrants and 2,084 shares underlying Class B
warrants acquired in the February 2005 Offering.
(33) The registered shares consist of: (i) 30,000 shares of common stock,
10,000 shares underlying Class A warrants and 10,000 shares underlying
Class B warrants acquired in the February 2005 Offering; and (ii)
15,000 shares of common stock, 7,500 shares underlying Class A warrants
and 7,500 shares underlying Class B warrants acquired in the May 2005
Offering.
(34) The registered shares consist of: (i) 20,000 shares of common stock,
10,000 shares underlying Class A warrants and 10,000 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 5,000
shares of common stock, 2,500 shares underlying Class A warrants and
2,500 shares underlying Class B warrants acquired in the March 2005
Offering.
(35) The registered shares consist of: (i) 60,000 shares of common stock,
30,000 shares underlying Class A warrants and 30,000 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 15,000
shares of common stock, 7,500 shares underlying Class A warrants and
7,500 shares underlying Class B warrants acquired in the March 2005
Offering.
(36) The registered shares consist of 45,000 shares of common stock, 45,000
shares underlying Class A warrants and 45,000 shares underlying Class B
warrants acquired in the June 2005 Offering.
(37) The registered shares consist of 45,000 shares of common stock, 15,000
shares underlying Class A warrants and 15,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(38) The registered shares consist of 15,000 shares of common stock, 5,000
shares underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(39) The registered shares consist of 18,750 shares of common stock, 6,250
shares underlying Class A warrants and 6,250 shares underlying Class B
warrants acquired in the February 2005 Offering.
(40) The registered shares consist of: (i) 50,000 shares of common stock,
25,000 shares underlying Class A warrants and 25,000 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 12,500
shares of common stock, 6,250 shares underlying Class A warrants and
6,250 shares underlying Class B warrants acquired in the March 2005
Offering.
(41) The registered shares consist of: (i) 20,000 shares of common stock,
10,000 shares underlying Class A warrants and 10,000 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 5,000
shares of common stock, 2,500 shares underlying Class A warrants and
2,500 shares underlying Class B warrants acquired in the March 2005
Offering.
(42) The registered shares consist of: (i) 20,000 shares of common stock,
10,000 shares underlying Class A warrants and 10,000 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 5,000
shares of common stock, 2,500 shares underlying Class A warrants and
2,500 shares underlying Class B warrants acquired in the March 2005
Offering; (iii) 15,000 shares of common stock, 7,500 shares underlying
Class A warrants and 7,500 shares underlying Class B warrants acquired
in the May 2005 Offering; and (iv) 15,000 shares of common stock
acquired from a third party in a privately negotiated transaction. The
power to vote and dispose of these shares is controlled by H.T.
Larzelere.
(43) The registered shares consist of: (i) 7,500 shares of common stock,
3,750 shares underlying Class A warrants and 3,750 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 1,875
shares of common stock, 938 shares underlying Class A warrants and 938
shares underlying Class B warrants acquired in the March 2005 Offering.
90
(44) The registered shares consist of: (i) 15,000 shares of common stock,
7,500 shares underlying Class A warrants and 7,500 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 3,750
shares of common stock, 1,875 shares underlying Class A warrants and
1,875 shares underlying Class B warrants acquired in the March 2005
Offering; (iii) 15,000 shares of common stock, 5,000 shares underlying
Class A warrants and 5,000 shares underlying Class B warrants acquired
in the February 2005 Offering; and (iv) 7,500 shares of common stock,
3,750 shares underlying Class A warrants and 3,750 shares underlying
Class B warrants acquired in the May 2005 Offering; less (v) 15,000
shares of common stock transferred to a third party in a privately
negotiated transaction.
(45) The registered shares consist of: (i) 175,000 shares of common stock,
87,500 shares underlying Class A warrants and 87,500 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 43,750
shares of common stock, 21,875 shares underlying Class A warrants and
21,875 shares underlying Class B warrants acquired in the March 2005
Offering; (iii) 30,000 shares of common stock, 10,000 shares underlying
Class A warrants and 10,000 shares underlying Class B warrants acquired
in the February 2005 Offering; and (iv) 30,000 shares of common stock,
15,000 shares underlying Class A warrants and 15,000 shares underlying
Class B warrants acquired in the May 2005 Offering.
(46) The registered shares consist of 275,000 shares of common stock,
275,000 shares underlying Class A warrants and 275,000 shares
underlying Class B warrants acquired in the June 2005 Offering.
(47) The registered shares consist of 15,000 shares of common stock, 5,000
shares underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(48) The registered shares consist of 15,000 shares of common stock, 5,000
shares underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(49) The registered shares consist of: (i) 5,000 shares of common stock,
2,500 shares underlying Class A warrants and 2,500 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 1,250
shares of common stock, 625 shares underlying Class A warrants and 625
shares underlying Class B warrants acquired in the March 2005 Offering.
(50) The registered shares consist of: (i) 15,000 shares of common stock,
7,500 shares underlying Class A warrants and 7,500 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 3,750
shares of common stock, 1,875 shares underlying Class A warrants and
1,875 shares underlying Class B warrants acquired in the March 2005
Offering. The power to vote and dispose of these shares is controlled
by William J. Gorline.
(51) The registered shares consist of: (i) 50,000 shares of common stock,
25,000 shares underlying Class A warrants and 25,000 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 12,500
shares of common stock, 6,250 shares underlying Class A warrants and
6,250 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 15,000 shares of common stock, 7,500 shares
underlying Class A warrants and 7,500 shares underlying Class B
warrants acquired in the May 2005 Offering.
(52) The registered shares consist of: (i) 45,000 shares of common stock,
15,000 shares underlying Class A warrants and 15,000 shares underlying
Class B warrants acquired in the February 2005 Offering; and (ii)
15,000 shares of common stock, 7,500 shares underlying Class A warrants
and 7,500 shares underlying Class B warrants acquired in the May 2005
Offering.
(53) The registered shares consist of 15,000 shares of common stock, 5,000
shares underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(54) The registered shares consist of: (i) 15,000 shares of common stock,
7,500 shares underlying Class A warrants and 7,500 shares underlying
Class B warrants acquired in the September 2004 Offering; (ii) 3,750
shares of common stock, 1,875 shares underlying Class A warrants and
1,875 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 11,250 shares of common stock, 3,750 shares
underlying Class A warrants and 3,750 shares underlying Class B
warrants acquired in the February 2005 Offering.
91
(55) The registered shares consist of: (i) 70,000 shares of common stock,
35,000 shares underlying Class A warrants and 35,000 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 17,500
shares of common stock, 8,750 shares underlying Class A warrants and
8,750 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 15,000 shares of common stock, 7,500 shares
underlying Class A warrants and 7,500 shares underlying Class B
warrants acquired in the May 2005 Offering.
(56) The registered shares consist of 68,500 shares of common stock, 68,500
shares underlying Class A warrants and 68,500 shares underlying Class B
warrants acquired in June 2005 in exchange for acting as financial
advisor and placement agent in connection with the June 2005 Offering.
Park Financial Group, Inc. is a registered broker-dealer and thus, an
underwriter. Park Financial Group, Inc. purchased the securities in the
ordinary course of business and, at the time it purchased the
securities, had no agreements or understandings, directly or
indirectly, with any person to distribute the securities. The power to
vote and dispose of these shares is controlled by Gordon Cantley.
(57) The registered shares consist of: (i) 15,000 shares of common stock,
5,000 shares underlying Class A warrants and 5,000 shares underlying
Class B warrants acquired in the February 2005 Offering; and (ii)
15,000 shares of common stock, 7,500 shares underlying Class A warrants
and 7,500 shares underlying Class B warrants acquired in the May 2005
Offering.
(58) The registered shares consist of: (i) 20,000 shares of common stock,
10,000 shares underlying Class A warrants and 10,000 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 5,000
shares of common stock, 2,500 shares underlying Class A warrants and
2,500 shares underlying Class B warrants acquired in the March 2005
Offering.
(59) The registered shares consist of 62,500 shares of common stock, 20,834
shares underlying Class A warrants and 20,834 shares underlying Class B
warrants acquired in the February 2005 Offering.
(60) The registered shares consist of 15,000 shares of common stock, 5,000
shares underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(61) The registered shares consist of: (i) 100,000 shares of common stock,
50,000 shares underlying Class A warrants and 50,000 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 25,000
shares of common stock, 12,500 shares underlying Class A warrants and
12,500 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 75,000 shares of common stock, 37,500 shares
underlying Class A warrants and 37,500 shares underlying Class B
warrants acquired in the May 2005 Offering.
(62) The registered shares consist of 30,000 shares of common stock, 30,000
shares underlying Class A warrants and 30,000 shares underlying Class B
warrants acquired in the June 2005 Offering. Mr. Rosen served as a
director of the Company from June 29, 2005 to September 26, 2005.
(63) The registered shares consist of: (i) 100,000 shares of common stock,
50,000 shares underlying Class A warrants and 50,000 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 25,000
shares of common stock, 12,500 shares underlying Class A warrants and
12,500 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 15,000 shares of common stock, 5,000 shares
underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(64) The registered shares consist of 15,000 shares of common stock, 5,000
shares underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(65) The registered shares consist of 30,000 shares of common stock, 10,000
shares underlying Class A warrants and 10,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(66) The registered shares consist of 15,000 shares of common stock, 5,000
shares underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
92
(67) The registered shares consist of 75,000 shares of common stock, 25,000
shares underlying Class A warrants and 25,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(68) The registered shares consist of: (i) 70,000 shares of common stock,
35,000 shares underlying Class A warrants and 35,000 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 17,500
shares of common stock, 8,750 shares underlying Class A warrants and
8,750 shares underlying Class B warrants acquired in the March 2005
Offering. Mr. Shelly served as a director of the Company from February
13, 2005 until June 1, 2005.
(69) The registered shares consist of: (i) 10,000 shares of common stock,
5,000 shares underlying Class A warrants and 5,000 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 2,500
shares of common stock, 1,250 shares underlying Class A warrants and
1,250 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 27,500 shares of common stock, 9,167 shares
underlying Class A warrants and 9,167 shares underlying Class B
warrants acquired in the February 2005 Offering.
(70) The registered shares consist of 90,000 shares of common stock acquired
from a third party in a privately negotiated transaction.
(71) The registered shares consist of 30,000 shares of common stock, 15,000
shares underlying Class A warrants and 15,000 shares underlying Class B
warrants acquired in the May 2005 Offering.
(72) The registered shares consist of 30,000 shares of common stock, 10,000
shares underlying Class A warrants and 10,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(73) The registered shares consist of: (i) 1,000 shares of common stock, 500
shares underlying Class A warrants and 500 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 250 shares of
common stock, 125 shares underlying Class A warrants and 125 shares
underlying Class B warrants acquired in the March 2005 Offering.
(74) The registered shares consist of: (i) 10,000 shares of common stock,
5,000 shares underlying Class A warrants and 5,000 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 2,500
shares of common stock, 1,250 shares underlying Class A warrants and
1,250 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 7,500 shares of common stock, 2,500 shares
underlying Class A warrants and 2,500 shares underlying Class B
warrants acquired in the February 2005 Offering.
(75) The registered shares consist of 150,000 shares of common stock
acquired from a third party in a privately negotiated transaction.
(76) The registered shares consist of 45,000 shares of common stock, 15,000
shares underlying Class A warrants and 15,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(77) The registered shares consist of: (i) 35,000 shares of common stock,
17,500 shares underlying Class A warrants and 17,500 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 8,750
shares of common stock, 4,375 shares underlying Class A warrants and
4,375 shares underlying Class B warrants acquired in the March 2005
Offering.
(78) The registered shares consist of 15,625 shares of common stock, 7,813
shares underlying Class A warrants and 7,813 shares underlying Class B
warrants acquired in the May 2005 Offering.
(79) The registered shares consist of: (i) 44,000 shares of common stock,
22,000 shares underlying Class A warrants and 22,000 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 11,000
shares of common stock, 5,500 shares underlying Class A warrants and
5,500 shares underlying Class B warrants acquired in the March 2005
Offering.
93
(80) The registered shares consist of 225,000 shares of common stock,
225,000 shares underlying Class A warrants and 225,000 shares
underlying Class B warrants acquired in the June 2005 Offering.
(81) The registered shares consist of 15,000 shares of common stock, 5,000
shares underlying Class A warrants and 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(82) The registered shares consist of 75,000 shares of common stock, 25,000
shares underlying Class A warrants and 25,000 shares underlying Class B
warrants acquired in the February 2005 Offering. The power to vote and
dispose of these shares is controlled by Marcel Ruegg.
(83) The registered shares consist of 30,000 shares of common stock, 10,000
shares underlying Class A warrants and 10,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(84) The registered shares consist of 650,000 shares of common stock
acquired in April 2005 in connection with the acquisition of 1,800,000
shares of common stock, Class A warrants to acquire 1,800,000 shares of
common stock and Class B warrants to acquire 1,800,000 shares of common
stock in exchange for aggregate consideration of $720,000. Mr. Westman
served as a director of the Company from June 29, 2005 to September 26,
2005.
(85) The registered shares consist of 50,000 shares of common stock, 50,000
shares underlying Class A warrants and 50,000 shares underlying Class B
warrants acquired in the June 2005 Offering.
(86) The registered shares consist of 30,000 shares of common stock, 10,000
shares underlying Class A warrants and 10,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(87) The registered shares consist of: (i) 32,000 shares of common stock,
16,000 shares underlying Class A warrants and 16,000 shares underlying
Class B warrants acquired in the September 2004 Offering; (ii) 8,000
shares of common stock, 4,000 shares underlying Class A warrants and
4,000 shares underlying Class B warrants acquired in the March 2005
Offering; (iii) 28,875 shares of common stock, 9,625 shares underlying
Class A warrants and 9,625 shares underlying Class B warrants acquired
in the February 2005 Offering; and (iv) 9,750 shares of common stock,
4,875 shares underlying Class A warrants and 4,875 shares underlying
Class B warrants acquired in the May 2005 Offering.
(88) The registered shares consist of: (i) 5,000 shares of common stock,
2,500 shares underlying Class A warrants and 2,500 shares underlying
Class B warrants acquired in the August 2004 Offering; and (ii) 1,250
shares of common stock, 625 shares underlying Class A warrants and 625
shares underlying Class B warrants acquired in the March 2005 Offering.
(89) The registered shares consist of: (i) 20,000 shares of common stock,
10,000 shares underlying Class A warrants and 10,000 shares underlying
Class B warrants acquired in the August 2004 Offering; (ii) 5,000
shares of common stock, 2,500 shares underlying Class A warrants and
2,500 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 52,500 shares of common stock, 17,500 shares
underlying Class A warrants and 17,500 shares underlying Class B
warrants acquired in the February 2005 Offering.
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
$5,670,863 in proceeds upon the exercise thereof. We intend to use the proceeds
from any such exercises for general working capital purposes.
94
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 in one or more transactions
directly or through one or more underwriters, brokers, dealers or agents at a
fixed price of $1.50 per share until the shares are listed on the OTC Bulletin
Board. Thereafter, the shares may be sold at fixed prices, at market prices
prevailing at the time of the sale, at varying prices determined at the time of
sale, or at privately 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;
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.
95
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.
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.
96
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Indiana Business Corporation Law (the "IBCL") 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 IBCL 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 IBCL. 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 IBCL, or otherwise. We have not
entered into any such agreements or obtained such insurance.
The limitation of liability and indemnification provisions of the IBCL
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.
97
We believe that the limitation of liability, indemnification and
insurance provisions of the IBCL 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 IBCL 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 is being
passed upon for us by Carson Boxberger LLP, 1400 One Summit Square, Fort Wayne,
Indiana 46802.
EXPERTS
The audited consolidated balance sheet as of December 31, 2004 and the
audited consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 2004 and 2003 have been audited by H J &
Associates, LLC, 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.
98
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 100 F Street, N.E., 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://www.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.
Since our shares of common stock are not currently listed on a national
securities exchange or any other established electronic trading system, we are
not required to deliver an annual report to our shareholders. While 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 will
not be required to deliver an annual report to our shareholders, even if our
shares of common stock are approved for listing on the OTC Bulletin Board.
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.
99
C O N T E N T S
Report of Independent Registered Public Accounting Firm........................................................... F-2
Consolidated Balance Sheet at December 31, 2004................................................................... F-3
Consolidated Statements of Operations For the Years Ended December 31, 2004 and 2003.............................. F-4
Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 2004 and 2003.................... F-5
Consolidated Statements of Cash Flows For the Years Ended December 31, 2004 and 2003.............................. F-6
Notes to the Consolidated Financial Statements - December 31, 2004 and 2003....................................... F-8
Consolidated Balance Sheet at September 30, 2005 (Unaudited)..................................................... F-23
Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2005 and 2004 (Unaudited) F-25
Consolidated Statements of Stockholders' Equity For the Nine Months Ended September 30, 2005 (Unaudited)..........F-26
Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2005 and 2004 (Unaudited).......... F-27
Notes to the Consolidated Financial Statements - September 30, 2005.............................................. F-28
F-1
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 examing, 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-2
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-3
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 443,382 129,615
----------- ----------
Gross Deficit (415,453) (79,244)
----------- ----------
GENERAL AND ADMINISTRATIVE EXPENSES 2,083,953 166,508
----------- ----------
Loss from Operations (2,499,406) (245,752)
----------- ----------
OTHER INCOME (EXPENSE)
Loss on extinguishment of debt (83,388) -
Interest expense (7,106) (20,422)
----------- ----------
Total Other Income (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-4
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 350,000 350 174,651 -
Common stock issued for sign-on bonus at
an average price of $0.50 per share 1,748,250 1,749 872,376 -
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-5
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-6
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-7
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.
The Company sells membership programs that encompass all aspects
of healthcare, including physicians, hospitals, ancillary
services, dentists, prescription drugs and vision care through a
national healthcare savings network called "CARExpress." The
Company markets its programs directly through infomercials,
newspapers, publications and its website, and indirectly through
independent marketing representatives, brokers and agents, retail
chains and outlets, small businesses and trade associates, and
unions and associations. The Company derives almost all of its
revenue from the monthly membership fees it receives from members
of its membership programs. It also receives commissions from the
sale of its membership programs that are sold in combination with
third-party insurance products.
The independent marketing representatives that the Company
utilizes sign a standard representative agreement with the
Company. The Company typically pays aggregate commissions to the
marketing representatives of between 35% and 50% of the sale price
of the membership programs and/or an up-front fee of between $3
and $20 per member. Marketing representatives are paid these
commissions for each member they enroll for the life of that
member's enrollment with CARExpress. Marketing representatives may
also recruit other representatives to sell the Company's
membership programs and receive a portion of the commissions
earned by the other representatives on sales made by those
representatives. The Company also has bonus programs through which
marketing representatives who achieve sales of an agreed-upon
number of membership programs can receive additional commissions
of between 5% and 10% of the sale price of the programs. The
marketing representatives do not pay the Company any initial or
ongoing fees as a result of their relationship with the Company.
They typically offer and sell the Company's membership programs on
a part-time basis and may engage in other related or unrelated
business activities, including selling the products or services of
the Company's competitors. The Company's agreements with the
marketing representatives are generally for a term of one year and
renew automatically for additional one-year terms unless written
notice of termination is delivered by either party at least 30
days prior to the then-current term. None of the company's
employees are compensated on a basis similar to the independent
marketing representatives.
F-8
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - NATURE OF ORGANIZATION (Continued)
a. Organization and Business Activities (Continued)
The Company contracts with PPOs and other provider networks, or
their affiliates, for access to the discounted rates they have
negotiated with their healthcare providers. The principal
suppliers of the healthcare providers that comprise CARExpress are
PPONext, International Med-Care, CareMark, Cigna, Optum and
Careington International. The Company selects and utilizes only
those provider networks that it believes can deliver adequate
savings to its members while providing adequate support for its
CARExpress membership programs with the healthcare providers. The
Company typically pays a per member per month fee for use of a
provider network which is determined in part based on the number
of providers participating in the network, the number of
CARExpress members accessing the network, and the particular
products and services utilized by the CARExpress members. The
agreements through which the Company has contracted for access to
the PPO or other provider networks are generally for a term of
between one and two years, may be terminated by either party on
between 45 and 180 days' prior written notice, and renew
automatically for additional terms unless so terminated. Most of
these agreements are not exclusive, and most contain provisions
maintaining the confidentiality of the terms of the agreement.
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.
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
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, because of
its net loss, has excluded 10,724,791, and -0- common stock
equivalents for the years ended December 31, 2004 and 2003,
respectively because they are anti-dilutive in nature.
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 and Cost of Sales
The Company provides discount health care memberships in return
for monthly membership fees. The Company recognizes revenue when
1) persuasive evidence of an arrangement exists, 2) services have
been rendered, 3) the price is fixed and determinable, and 4)
collectibility is reasonably assured. The Company electronically
debits customer accounts for the monthly membership fees. The date
a monthly membership begins varies for each individual member
depending upon when the particular member purchased a membership.
At the beginning of each membership period, the membership fees
are typically charged to the member's credit card, resulting in a
debit to cash and a credit to deferred revenue. The Company then
recognizes revenue as services are rendered by debiting deferred
revenue and crediting revenue. The Company typically receives cash
within 5 days of the date a member's account is debited. At
December 31, 2004, the Company had deferred revenue of $7,093.
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)
g. Revenue Recognition and Cost of Sales (Continued)
The Company offers a 30-day money-back guarantee to customers.
Customers can cancel their membership during the first 30 days of
their initial membership period and receive a full refund. After
that, customers can cancel their membership at the end of any
subsequent monthly membership period. If a customer cancels
services and the credit card has already been processed for the
next monthly membership period, a refund check will be issued.
When refunds are issued, the Company debits deferred revenue and
credits cash. As noted previously, revenue is recognized as
services are rendered. Accordingly, if a customer cancels a
membership for the next monthly membership period, no revenue will
be recognized for that period. For the years ended December 31,
2004 and 2003, the Company had minimal cancellations and refunds.
The Company's cost of sales consists of sales salaries for
employees directly involved in selling its products, sales
commissions, advertising and marketing expenses associated with
the sale of its products, healthcare provider costs, rent expense
associated with the Company's sales activities, depreciation and
amortization expenses, and all of the Company's other selling and
marketing expenses. Depreciation and amortization expenses
included in cost of sales are related to assets associated with
the Company's computer equipment, telephone system and website,
which are an integral part of the Company's selling and marketing
activities. The Company had sales commission expense of $11,838
and $22,228 for the years ended December 31, 2004 and 2003,
respectively.
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 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 fiscal year ended
December 31, 2006, 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.
F-12
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)
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 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.
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)
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.
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. The Company excluded the shares issuable upon the
exercise of options from the calculation of diluted earnings per
share because they are anti-dilutive in nature. As a result, the
diluted earnings per share are equal to the basic earnings per
share.
For the Years Ended
December 31,
---------------------------------
2004 2003
--------------- --------------
Net Profit as Reported (Loss) $ (2,589,900) $ (266,174)
Stock-based employee compensation cost,
net of related tax effects included in net
income as reported - -
Stock-based employee compensation cost,
net of related tax effects if the fair value based
method had been applied (2,805,985) -
Pro Forma Net Profit (Loss) $ (5,395,885) $ (266,174)
Earnings per Share:
Basic & diluted - as reported $ (0.42) $ (0.16)
Basic & diluted - pro forma $ (0.87) $ (0.16)
F-14
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - NATURE OF ORGANIZATION (Continued)
k. Fixed Assets
Fixed 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
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.
F-15
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
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.
U.S. Script is not a related party to the Company. U.S. Script had
paid some of the Company's accounts payable in 2001 and 2002 and,
in conjunction with the note payable (Note 4) has agreed to take
payments of $5,000 per month until all amounts are paid in full.
U.S. Script has provided no other services to the Company.
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
==========
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Facility Lease
The Company entered into a facility lease on December 1, 2001
which was amended on April 22, 2004. This is a three year lease
expiring on May 30, 2007. This lease required a deposit of
$19,000. The starting monthly payment, including operating
expenses is $12,579 for the first year and increases each
subsequent year.
F-16
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
Facility Lease (Continued)
Future minimum lease payments under this facility lease are as
follows:
Facility Lease
Year ended December 31,
2005 $ 154,064
2006 158,356
2007 66,598
-----------------
$ 379,018
=================
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 are 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.
Future minimum payments under these employment agreements are as
follows:
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
=========== =========== ========== =========== ===========
Additionally the officers as a combined group are eligible for
bonuses of up to 7% of the pretax profit of the Company.
F-17
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
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 as an incentive for employment to the Chief Executive
Officer. The shares valued at $0.50 per share for total
consideration of $874,125 and are included in salary expense.
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.
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.
F-18
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 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
extinguishment 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,
up to 2,500,000 shares for Class A Warrants and up to 2,500,000
shares for Class B Warrants. The Company will issue up to
2,500,000 units at $1.00 each. Each unit will consist of 2 shares
of common stock, 1 Class A Warrant, and 1 Class B Warrant. Each
warrant gives the holder the right to purchase 1 share of common
stock. The Company issued 2,777,000 shares of common stock and
received $1,388,500 during the period of February 18, 2004 through
August 17, 2004.
In August 2004, the Company approved a private placement to issue
up to 5,000,000 shares of common stock at $0.50 per share, up to
2,500,000 shares for Class A Warrants and up to 2,500,000 shares
for Class B Warrants. The Company will issue up to 2,500,000 units
at $1.00 each. Each unit will consist of 2 shares of common stock,
1 Class A Warrant, and 1 Class B Warrant. Each warrant gives the
holder the right to purchase 1 share of common stock. The Company
issued 175,000 shares of common stock and received $87,000 during
the period from August 30, 2004 to September 8, 2004.
F-19
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)
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 during the period from September 30, 2004 to
December 13, 2004.
All Class A warrants issued in these three private placements have
an exercise price of $1.00 per share, are exercisable for a period
of 180 days commencing on the effective date of a registration
statement covering certain of the shares underlying the warrants,
and expire on November 30, 2006.
All Class B warrants issued in these three private placements have
an exercise price of $2.00 per share, are exercisable for a period
of 360 days commencing on the effective date of a registration
statement covering certain of the shares underlying the warrants,
and expire on November 30, 2006.
The Company granted registration rights in these three private
placements covering fifty percent of all shares issued and fifty
percent of all shares underlying the Class A warrants and Class B
warrants.
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 a weighted-average contractual
term of 9.95 years, for the year ended December 31, 2004.
F-20
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 8 - STOCK OPTIONS (Continued)
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
=========== ============= =========
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.
F-21
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 10 - SUBSEQUENT EVENTS (Continued)
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-22
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Balance Sheet
ASSETS
September 30,
2005
------------
(Unaudited)
CURRENT ASSETS
Cash $ 410,717
Certificate of deposit 35,000
Note receivable 25,000
Other current assets 1,030
------------
Total Current Assets 471,747
------------
FIXED ASSETS, NET (Note 2) 138,400
------------
OTHER ASSETS
Deposits 19,000
------------
Total Other Assets 19,000
------------
TOTAL ASSETS $ 629,147
============
The accompanying notes are an integral part of these consolidated
financial statements
F-23
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30,
2005
------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 15,104
Accrued expenses 75,955
Notes payable (Note 3) 38,320
Deferred revenue 13,439
------------
Total Current Liabilities 142,818
------------
LONG TERM LIABILITIES -
Total Liabilities 142,818
------------
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001, 100,000,000 shares authorized,
17,054,200 shares issued and outstanding 17,054
Additional paid in capital 7,927,066
Deferred consulting expense (Note 4) (904,219)
Accumulated deficit (6,553,572)
------------
Total Stockholders' Equity (Deficit) 486,329
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 629,147
============
The accompanying notes are an integral part of these consolidated
financial statements.
F-24
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------- --------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
REVENUE $ 48,282 $ 8,723 $ 83,658 $ 29,315
COST OF SALES 126,391 127,618 318,331 285,721
------------ ------------ ------------ ------------
Gross Deficit (78,109) (118,895) (234,673) (256,406)
------------ ------------ ------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES 1,366,179 386,322 2,627,106 1,776,084
------------ ------------ ------------ ------------
Loss From Operations (1,444,288) (505,217) (2,861,779) (2,032,490)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Common stock issued for release - - (295,100) -
Interest expense (604) (1,303) (2,326) (5,574)
Other expense (1,736) - (19,885) -
------------ ------------ ------------ ------------
Total Other Income (Expense) (2,340) (1,303) (317,311) (5,574)
------------ ------------ ------------ ------------
NET LOSS $ (1,446,628) $ (506,520) $ (3,179,090) $ (2,038,064)
------------ ------------ ------------ ------------
BASIC LOSS PER SHARE $ (0.09) $ (0.07) $ (0.24) $ (0.40)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 17,054,200 6,880,494 13,502,263 5,039,440
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-25
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Common Stock Additional Stock Deferred
----------------------- Paid in Subscriptions Consulting Accumulated
Shares Amount Capital Payable Expense Deficit
---------- -------- ----------- --------- ---------- ------------
Balance, December 31, 2004 9,636,200 $ 9,636 $ 3,727,874 $ 14,650 $ - $ (3,374,482)
Common stock issued for
subscriptions payable (unaudited) 36,625 37 14,613 (14,650) - -
Common stock issued for cash at an
average price of $0.40 per share
(unaudited) 2,256,625 2,256 900,394 - - -
Common stock issued to prior
Investors for releases at
$0.40 per share (unaudited) 737,750 738 294,362 - - -
Common stock issued for stock
swap - related party (unaudited) 1,800,000 1,800 718,200 - - -
Common stock issued for consulting
agreements at $0.40 per share
(unaudited) 2,587,000 2,587 1,032,214 - (420,000) -
Fair value of warrants granted with
consulting agreements (unaudited) - - 1,239,409 - (484,219) -
Net loss for the nine months ended
September 30, 2005 (unaudited) - - - - - (3,179,090)
---------- -------- ----------- --------- ---------- ------------
Balance, Sept. 30, 2005 (unaudited) 17,054,200 $ 17,054 $ 7,927,066 $ - $ (904,219) $ (6,553,572)
========== ======== =========== ========= ========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-26
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
---------------------------------
2005 2004
------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (3,179,090) $ (2,038,064)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation expense 38,383 10,267
Common stock issued for services 909,900 1,049,125
Fair value of warrants expensed 755,190 -
Changes in operating assets and liabilities:
Increase in other current assets (1,030) (84,440)
Increase (decrease) in deferred revenue 6,346 -
Increase (decrease) in accounts payable and accrued expenses (26,544) (172,559)
------------ ------------
Net Cash Used by Operating Activities (1,496,845) (1,235,671)
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Certificate of deposit (35,000) -
Note receivable (25,000) -
Purchase of fixed assets and website costs (34,329) (71,185)
------------ ------------
Net Cash Used by Investing Activities (94,329) (71,185)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in cash overdraft - (840)
Payments on notes payable (42,673) (322,332)
Payments on notes payable - related party - (32,400)
Proceeds from common stock and subscription payable 1,298,444 1,735,045
Proceeds from sale of securities 324,205 -
------------ ------------
Net Cash Provided (Used) by Financing Activities 1,579,976 1,379,473
------------ ------------
NET INCREASE (DECREASE) IN CASH (11,198) 72,617
CASH AT BEGINNING OF PERIOD 421,915 170
------------ ------------
CASH AT END OF PERIOD $ 410,717 $ 72,787
============ ============
CASH PAID DURING THE PERIOD FOR:
Interest $ 2,326 $ 5,574
Income tax $ - $ -
SCHEDULE OF NON CASH FINANCING ACTIVITIES
Common stock issued to prior investors for releases $ 295,100 $ -
Common stock issued for services $ 614,800 $ 1,049,125
Common stock issued for deferred consulting expense $ 420,000 -
Fair value of warrants granted for consulting agreements $ 1,239,409 -
The accompanying notes are an integral part of these consolidated
financial statements.
F-27
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
September 30, 2005
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
a. Summary of Significant Accounting Policies
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 September 30, 2005 and
nine months ended September 30, 2005, are not necessarily indicative of
the results that may be expected for the year ending December 31, 2005.
Certain amounts have been reclassified to conform with current period
presentation.
b. Revenue Recognition and Cost of Sales
The Company provides discount health care memberships in return for
monthly membership fees. The Company recognizes revenue when 1)
persuasive evidence of an arrangement exists, 2) services have been
rendered, 3) the price is fixed and determinable, and 4) collectibility
is reasonably assured. The Company electronically debits customer
accounts for the monthly membership fees. The date a monthly membership
begins varies for each individual member depending upon when the
particular member purchased a membership. At the beginning of each
membership period, the membership fees are typically charged to the
member's credit card, resulting in a debit to cash and a credit to
deferred revenue. The Company then recognizes revenue as services are
rendered by debiting deferred revenue and crediting revenue. The
Company typically receives cash within 5 days of the date a member's
account is debited. At September 30, 2005, the Company had deferred
revenue of $13,439.
The Company offers a 30-day money-back guarantee to customers.
Customers can cancel their membership during the first 30 days of their
initial membership period and receive a full refund. After that,
customers can cancel their membership at the end of any subsequent
monthly membership period. If a customer cancels services and the
credit card has already been processed for the next monthly membership
period, a refund check will be issued. When refunds are issued, the
Company debits deferred revenue and credits cash. As noted previously,
revenue is recognized as services are rendered. Accordingly, if a
customer cancels a membership for the next monthly membership period,
no revenue will be recognized for that period. For the nine months
ended September 30, 2005, the Company had cancellations and refunds of
$17,153.
F-28
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
September 30, 2005
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION (Continued)
b. Revenue Recognition and Cost of Sales (Continued)
The Company offers a 12-day free trial to customers. The Company does
not recognize any membership revenue during the term of the free trial
period. In the event the customer continues the membership after the
free trial period expires, the Company recognizes revenue as services
are rendered.
The Company's cost of sales consists of sales salaries for employees
directly involved in selling its products, sales commissions,
advertising and marketing expenses associated with the sale of its
products, healthcare provider costs, rent expense associated with the
Company's sales activities, depreciation and amortization expenses, and
all of the Company's other selling and marketing expenses. Depreciation
and amortization expenses included in cost of sales are related to
assets associated with the Company's computer equipment, telephone
system and website, which are an integral part of the Company's selling
and marketing activities. The Company had sales commission expense of
$48,098 and $11,838 for the nine months ended September 30, 2005 and
2004, respectively.
c. 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 290%; risk-free interest rates of 3.5 percent and a
weighted-average contractual term of 9 years, for the period ended
September 30, 2005.
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 $620,815 for the nine months ended September
30, 2005. Also under these same provisions, the Company's net loss
would have been changed to the pro forma amounts indicated below. The
Company excluded the shares issuable upon the exercise of options from
the calculation of diluted earnings per share because they are
anti-dilutive in nature. As a result, the diluted earnings per share
are equal to the basic earnings per share.
For the Nine Months Ended
September 30,
----------------------------
2005 2004
------------ ------------
Net Profit as Reported (Loss) $ (3,179,090) $ (2,038,064)
Stock-based employee compensation cost,
net of related tax effects included in net
income as reported - -
Stock-based employee compensation cost,
net of related tax effects if the fair value
based method had been applied (620,815) -
Pro Forma Net Profit (Loss) $ (3,799,905) $ (2,038,064)
Earnings per Share:
Basic & diluted - as reported $ (0.24) $ (0.40)
Basic & diluted - pro forma $ (0.28) $ (0.40)
F-29
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
September 30, 2005
NOTE 2 - FIXED ASSETS
Fixed assets consisted of the following at September 30, 2005:
Computer equipment $ 41,618
Furniture 11,322
Telephone System 52,261
Website 89,207
Software 1,877
Less accumulated depreciation (57,885)
---------
Net Fixed Assets $ 138,400
=========
Depreciation expense for the nine months ended September 30, 2005 and
2004 was $38,383 and $10,267, 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. $ 38,320
Less current portion (38,320)
---------
Long term portion $ -0-
=========
NOTE 4 - COMMITMENTS AND CONTINGENCIES
PA Facility Lease
The Company entered into a facility lease on December 1, 2001, which
was amended on April 22, 2004. This is a three-year lease expiring May
30, 2007. This lease required a deposit of $19,000. The starting
monthly payment, including operating expenses is $12,579 for the first
year and increases each subsequent year.
Future minimum lease payments under this facility lease are as follows:
PA Facility Lease
-----------------
Year ended December 31,
2005 $ 39,072
2006 158,356
2007 66,598
---------
Total $ 264,026
=========
F-30
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
September 30, 2005
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
FL Facility Lease
The Company entered into a FL facility lease on July 1, 2005. This
lease is a five-year lease expiring on June 30, 2010. This lease
requires an $18,000 security deposit to be paid on October 1, 2005. The
starting monthly payment, including parking and Florida tax is $8,186.
Future minimum lease payments under this facility lease are as follows:
FL Facility Lease
-----------------
Year ended December 31,
2005 $ 24,558
2006 100,197
2007 104,205
2008 108,373
2009 112,708
2010 59,757
---------
Total $ 509,798
=========
Equipment Leases
Only 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 are as follows:
Year ended December 31,
2005 $ 393
2006 1,572
2007 1,572
2008 1,572
2009 524
---------
Total $ 5,633
=========
F-31
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
September 30, 2005
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements
The Company had entered into employment agreements with the officers of
the Company on September 28, 2004. These contracts were cancelled and
new contracts entered into effective February 1, 2005.
Future minimum payments under these employment agreements are as
follows:
Year Ended December 31,
----------------------------------------------------------------------------
Officer Term 2005 2006 2007 2008 2009 2010
--------------- ---- --------- --------- --------- --------- --------- --------
Chief Executive
Officer 5 yr. $ 57,750 $ 254,100 $ 279,510 $ 307,461 $ 338,207 $ 31,002
Chief Financial
Officer 3 yr. $ 39,600 $ 174,240 $ 191,664 $ 17,569 $ - $ -
VP Marketing 5 yr. $ 33,000 $ 145,200 $ 159,720 $ 175,692 $ 193,261 $ 17,716
--------- --------- --------- --------- --------- --------
Total $ 130,350 $ 573,540 $ 630,894 $ 500,722 $ 531,468 $ 48,718
========= ========= ========= ========= ========= ========
Additionally the officers as a combined group are eligible for bonuses
at the discretion of the board of directors.
Consulting Agreements
In May and June 2005, the Company entered into agreements with several
consultants and advisors for the provision of marketing and advisory
services on its behalf. These services generally consist of the
marketing and promotion of the Company's business and products, support
for the Company's marketing activities, advice with respect to its
marketing strategies, product development and business development, and
assistance regarding the identification and evaluation of opportunities
for it to engage in joint ventures, strategic partnerships and
alliances with companies offering complementary products and services.
Under the terms of these agreements, the Company agreed to compensate
the consultants and advisors in shares of its common stock and/or
warrants exercisable into shares of its common stock. The Company also
provided the consultants and advisors with registration rights with
respect to certain of these shares. With the exception of one
agreement, which has been performed in full, these agreements terminate
on December 30, 2005 unless extended by mutual agreement of the
parties. A description of the shares of common stock and warrants
issued to these consultants and advisors and the registration rights
granted to them is set forth under "Note 5 - Equity Transactions -
Share Issuances." The future consulting expense to be recognized under
these agreements, and the number and ascribed value of the shares of
common stock and warrants issued to these consultants and advisors for
which consulting expense is to be recognized in the future, is as
follows:
F-32
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
September 30, 2005
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
Consulting Agreements (Continued)
Consulting
Expense
Recorded in
Shares of the Nine
Common Total Months Ended Deferred
Stock Stock Consulting September 30, Consulting
Name Price Issued Expense 2005 Expense
- ---------------------- ------ ---------- ---------- ------------- ----------
Lozano, Jose $ 0.40 600,000 $ 240,000 $ 137,143 $ 102,857
Park Financial 0.40 137,000 54,800 54,800 -
El CID IV 0.40 480,000 192,000 109,715 82,285
FDRL Corp. 0.40 60,000 24,000 13,714 10,286
GE Globo 0.40 350,000 140,000 80,000 60,000
Giese, Ben 0.40 150,000 60,000 34,286 25,714
Ortega, Rene 0.40 30,000 12,000 6,857 5,143
Schoenbaichler, Ernst 0.40 175,000 70,000 40,000 30,000
Schulte, Hans 0.40 100,000 40,000 22,857 17,143
Shelly, Keith 0.40 300,000 120,000 68,571 51,429
Tiplitsky, Stuart 0.40 25,000 10,000 5,714 4,286
Verhunce, Michael 0.40 180,000 72,000 41,143 30,857
--------- ---------- --------- ----------
Total 2,587,000 $1,034,800 $ 614,800 $ 420,000
========= ========== ========= ==========
Series A Warrants Consulting
------------------------------- Expense
Recorded in
Fair Shares of the Nine
Value Common Months Ended Deferred
Exercise Per Stock Total September 30, Consulting
Name Price Share Granted Fair Value 2005 Expense
- ------------ -------- ------ --------- ---------- ------------- ----------
Lozano, Jose $ 0.60 $ 0.40 600,000 $ 239,928 $ 137,101 $ 102,827
Park Financial 0.60 0.40 137,000 54,784 54,784 -
------- ------ --------- --------- --------- ---------
Total 737,000 $ 294,712 $ 191,885 $ 102,827
========= ========= ========= =========
Series B Warrants Consulting
------------------------------- Expense
Recorded in
Fair Shares of the Nine
Value Common Months Ended Deferred
Exercise Per Stock Total September 30, Consulting
Name Price Share Granted Fair Value 2005 Expense
- ------------ -------- ------ --------- ---------- ------------- ----------
Lozano, Jose $ 0.80 $ 0.40 600,000 $ 239,917 $ 137,096 $ 102,821
Park Financial 0.60 0.40 137,000 54,781 54,781 -
------- ------ --------- --------- --------- ---------
Total 737,000 $ 294,698 $ 191,877 $ 102,821
========= ========= ========= =========
F-33
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
September 30, 2005
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
Consulting Agreements (Continued)
Series C Warrants Consulting
------------------------------- Expense
Recorded in
Fair Shares of the Nine
Value Common Months Ended Deferred
Exercise Per Stock Total September 30, Consulting
Name Price Share Granted Fair Value 2005 Expense
- --------------------- -------- ------ --------- ---------- ------------- ----------
El CID IV $ 0.60 $ 0.40 300,000 $ 120,000 $ 68,572 $ 51,428
FDRL Corp. 0.60 0.40 60,000 24,000 13,714 10,286
GE Globo 0.60 0.40 175,000 70,000 40,000 30,000
Giese, Ben 0.60 0.40 150,000 60,000 34,286 25,714
Hill, Walter 0.60 0.40 50,000 20,000 11,428 8,572
Hillier, Bob 0.60 0.40 50,000 20,000 11,428 8,572
Ortega, Rene 0.60 0.40 30,000 12,000 6,857 5,143
Schoenbaichler, Ernst 0.60 0.40 175,000 70,000 40,000 30,000
Schulte, Hans 0.60 0.40 50,000 20,000 11,429 8,571
Shelly, Keith 0.60 0.40 150,000 60,000 34,285 25,715
Tiplitsky, Stuart 0.60 0.40 25,000 10,000 5,714 4,286
Verhunce, Michael 0.60 0.40 180,000 72,000 41,143 30,857
Cleland, Charles Jr. 0.60 0.40 30,000 12,000 6,857 5,143
Farrow, Eric A. 0.60 0.40 200,000 80,000 45,715 34,285
--------- --------- --------- ---------
Total 1,625,000 $ 650,000 $ 371,428 $ 278,572
========= ========= ========= =========
The Company estimates the fair value of warrants granted at the grant
date by using the Black-Scholes option pricing model with the following
weighted average assumption: an expected volatility of 422%; a
risk-free interest rate of 3.5% and a weighted-average contractual term
of 2.21 years.
The Company follows EITF 96-18 to recognize the fair value of warrants
granted. Under EITF 96-18, the fair value of the warrants should be
recognized as the services are rendered. The Company is recognizing the
cost of services evenly over the term of the agreements since the
services are being rendered on an ongoing basis during the term of the
agreements.
F-34
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
September 30, 2005
NOTE 5 - EQUITY TRANSACTIONS
Share Issuances
Between January and April 2005, the Company issued 36,625 shares of
common stock for $14,650, or $.40 per share, received prior to December
31, 2004, and issued 130,875 shares of common stock for $52,350, or
$0.40 per share, received subsequent to December 31, 2004. The shares
were issued pursuant to the private placement approved in September
2004. The shares were sold in units consisting of 3 shares of common
stock, 1 Class A warrant and 1 Class B warrant for $1.20 per unit. Each
warrant gives the holder the right to purchase 1 share of common stock.
All Class A warrants have an exercise price of $1.00 per share, are
exercisable for a period of 180 days commencing on the effective date
of a registration statement covering certain of the shares underlying
the warrants, and expire on November 30, 2006. All Class B warrants
have an exercise price of $2.00 per share, are exercisable for a period
of 360 days commencing on the effective date of a registration
statement covering certain of the shares underlying the warrants, and
expire on November 30, 2006. The Company granted registration rights
covering fifty percent of all shares issued and fifty percent of all
shares underlying the Class A warrants and Class B warrants.
In March 2005, the Company issued 737,750 shares of common stock to
previous investors participating in the private placements approved in
February and May 2004. In these private placements, the Company had
originally agreed to use its reasonable best efforts to file a
registration statement with the SEC within two months of the date of
termination of the private placements to register 50% of the shares of
our common stock issued and 50% of the shares of our common stock
underlying the Class A warrants and Class B warrants issued. The
Company issued the additional shares to these previous investors in
consideration for the investors agreeing to an amendment to their
securities purchase agreements for the private placements pursuant to
which: (i) the date by which the Company agreed to use its reasonable
best efforts to file a registration statement with the SEC was extended
from a date that was within two months of the date the private
placements were terminated to June 30, 2005, and (ii) the Company was
released from any liability for any possible breach of the securities
purchase agreements arising out of the Company's previous filing
obligation to use its reasonable best efforts to file a registration
statement with the SEC within two months of the date the private
placements were terminated. The shares were issued pursuant to a
private placement approved in January 2005. The Company ascribed an
aggregate value of $295,100 to the shares, equivalent to $.40 per
share. The shares were sold in units consisting of 2 shares of common
stock, 1 Class A warrant and 1 Class B warrant. Each warrant gives the
holder the right to purchase 1 share of common stock. All Class A
warrants have an exercise price of $1.00 per share, are exercisable for
a period of 180 days commencing on the effective date of a registration
statement covering certain of the shares underlying the warrants, and
expire on November 30, 2006. All Class B warrants have an exercise
price of $2.00 per share, are exercisable for a period of 360 days
commencing on the effective date of a registration statement covering
certain of the shares underlying the warrants, and expire on November
30, 2006. The Company granted registration rights covering fifty
percent of all shares issued and fifty percent of all shares underlying
the Class A warrants and Class B warrants.
F-35
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
September 30, 2005
NOTE 5 - EQUITY TRANSACTIONS (Continued)
Share Issuances (Continued)
In April 2005, the Company issued 1,800,000 shares of common stock,
Class A warrants to acquire 1,800,000 shares of common stock and Class
B warrants to acquire 1,800,000 shares of common stock to Ronald F.
Westman, a related party, in exchange for 2,740,000 shares of Infinium
Labs, Inc. then valued at $720,000. The shares were sold in units
consisting of 3 shares of common stock, 3 Class A warrants and 3 Class
B warrants for $1.20 per unit. Each warrant gives the holder the right
to purchase 1 share of common stock. All Class A warrants have an
exercise price of $.60 per share, are exercisable for a period of 18
months commencing on the effective date of a registration statement
covering certain of the shares underlying the warrants, and expire on
December 31, 2007. All Class B warrants have an exercise price of $.80
per share, are exercisable for a period of three years commencing on
the effective date of a registration statement covering certain of the
shares underlying the warrants, and expire on December 31, 2008. The
Company granted registration rights covering fifty percent of all
shares issued and fifty percent of all shares underlying the Class A
warrants and Class B warrants. If the proceeds from the sale of the
Infinium shares 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 to
the investor any excess proceeds over $720,000. As of June 30, 2005,
the Company has received $221,039 from the sale of Infinium shares.
Between April and May 2005, the Company issued 635,750 shares of common
stock for $254,300 or $.40 per share. These shares were issued pursuant
to a private placement approved in May 2005. The shares were sold in
units consisting of 3 shares of common stock, 1 Class A warrant and 1
Class B warrant for $1.20 per unit. Each warrant gives the holder the
right to purchase 1 share of common stock. All Class A warrants have an
exercise price of $.60 per share, are exercisable for a period of 18
months commencing on the effective date of a registration statement
covering certain of the shares underlying the warrants, and expire on
December 31, 2007. All Class B warrants have an exercise price of $.80
per share, are exercisable for a period of three years commencing on
the effective date of a registration statement covering certain of the
shares underlying the warrants, and expire on December 31, 2008. The
Company granted registration rights covering fifty percent of all
shares issued and fifty percent of all shares underlying the Class A
warrants and Class B warrants.
Between May and June 2005, the Company issued 1,490,000 shares of
common stock for $596,000 or $.40 per share. These shares were issued
pursuant to a private placement approved in May 2005. The shares were
sold in units consisting of 3 shares of common stock, 3 Class A
warrants and 3 Class B warrants for $1.20 per unit. Each warrant gives
the holder the right to purchase 1 share of common stock. All Class A
warrants have an exercise price of $.60 per share, are exercisable for
a period of 18 months commencing on the effective date of a
registration statement covering certain of the shares underlying the
warrants, and expire on December 31, 2007. All Class B warrants have an
exercise price of $.80 per share, are exercisable for a period of three
years commencing on the effective date of a registration statement
covering certain of the shares underlying the warrants, and expire on
December 31, 2008. The Company granted registration rights covering
fifty percent of all shares issued and fifty percent of all shares
underlying the Class A warrants and Class B warrants.
F-36
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
September 30, 2005
NOTE 5 - EQUITY TRANSACTIONS (Continued)
Share Issuances (Continued)
In June the Company issued 2,587,000 shares of common stock, Class A
warrants to acquire 737,000 shares, Class B warrants to acquire 737,000
shares, and Class C warrants to acquire 1,625,000 shares to consultants
for services per several consulting agreements. Each warrant gives the
holder the right to purchase 1 share of common stock. All Class A
warrants have an exercise price of $.60 per share, are exercisable for
a period of 18 months commencing on the effective date of a
registration statement covering certain of the shares underlying the
warrants, and expire on December 31, 2007. All Class B warrants have an
exercise price of $.80 per share, are exercisable for a period of three
years commencing on the effective date of a registration statement
covering certain of the shares underlying the warrants, and expire on
December 31, 2008. All Class C warrants have an exercise price of $.60
per share, are exercisable for a period of 180 days commencing on the
effective date of a registration statement covering certain of the
shares underlying the warrants, and expire on December 31, 2006. The
Company granted registration rights covering one hundred percent of the
shares issued and one hundred percent of the shares underlying the
Class A warrants and Class B warrants with respect to an aggregate of
1,800,000 shares of common stock, and fifty percent of the shares
issued and fifty percent of all shares underlying the Class A warrants,
Class B warrants and Class C warrants with respect to an aggregate of
3,886,000 shares of common stock.
NOTE 6 - STOCK OPTIONS
Employee and Director Stock Options
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.
On May 1, 2005, the Company granted an option to acquire 150,000 shares
of common stock to a new employee of the Company. The option has an
exercise price of $.40 per share and vested in full on the date of
grant. The option has a term of five years.
On June 29, 2005, the Company granted an option to acquire 350,000
shares of common stock to each of two of its directors. The options
have an exercise price of $.40 per share and vest as follows: 100,000
shares on the date of grant and 250,000 shares on the first anniversary
of the date of grant if the director is a member of the board of
directors on the first anniversary of the date of grant and the
director has been a member of the board of directors continuously
during the period commencing on the date of grant and ending on the
first anniversary of the date of grant. The options have a term of five
years.
On August 15, 2005, the Company granted an option to acquire 1,000,000
shares of common stock to each of two of its officers. The options have
an exercise price of $0.40 per share and vest in four equal annual
installments commencing on February 1, 2006. The options have a term of
ten years.
F-37
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
September 30, 2005
NOTE 6 - STOCK OPTIONS (Continued)
Employee and Director Stock Options (Continued)
On September 20, 2005, the Company granted an option to acquire 250,000
shares of common stock to a new employee of the Company. The option has
an exercise price of $.40 per share and vests as follows: (i) 50,000
shares on the date of grant, and (ii) the remaining 200,000 shares in
four equal annual installments commencing on June 20, 2006. The option
has a term of five years.
A summary of the status of the Company's employee and director stock
options as of September 30, 2005:
2005
---------------------------
Weighted
Average
Exercise
Shares Price
---------- ---------
Outstanding, beginning of period 7,015,000 $ 0.40
Granted 7,600,000 0.40
Cancelled (7,000,000) 0.40
---------- ---------
Outstanding, end of period 7,615,000 $ 0.40
---------- ---------
Exercisable, end of period 1,540,000 $ 0.40
---------- ---------
Outstanding
---------------------------
Weighted
Average Weighted
Range of Number Remaining Average
Exercise Outstanding Contractual Exercise
Prices at 9/30/05 Life Price
-------- ----------- ---------- ---------
0.40 7,615,000 8.94 0.40
========= ========== =========
Incentive Stock Options
On June 24, 2005, a Marketing Incentive Plan was entered into between
the Company and Trident Marketing International, Inc. ("Trident")
whereby Trident received an option to purchase up to 400,000 shares of
common stock at an exercise price of $.50 per share. The option has a
term of one year and vests as follows:
(a) 50,000 shares upon the Company receiving aggregate net monthly
revenues of at least $100,000 from Trident accounts during its fiscal
quarter ended September 30, 2005;
(b) 50,000 shares upon the Company receiving aggregate net monthly
revenues of at least $150,000 from Trident accounts during its fiscal
quarter ended September 30, 2005;
(c) 50,000 shares upon the Company receiving aggregate net monthly
revenues of at least $200,000 from Trident accounts during its fiscal
quarter ended December 31, 2005;
F-38
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
September 30, 2005
NOTE 6 - STOCK OPTIONS (Continued)
Incentive Stock Options (Continued)
(d) 50,000 shares upon the Company receiving aggregate net monthly
revenues of at least $300,000 from Trident accounts during its fiscal
quarter ended December 31, 2005;
(e) 100,000 shares upon the Company receiving aggregate net monthly
revenues of at least $500,000 from Trident accounts during its fiscal
year ended December 31, 2005; and
(f) 100,000 shares upon the Company receiving aggregate net monthly
revenues of at least $750,000 from Trident accounts during its fiscal
year ended December 31, 2005.
In the event the Company receives aggregate net monthly revenues of at
least $750,000 from Trident accounts during its fiscal year ended
December 31, 2005, the option shall be immediately exercisable into
400,000 shares. In no event shall the option be exercisable into more
than 400,000 shares. The Company granted registration rights covering
all of the shares underlying the option.
NOTE 7 - SIGNIFICANT ACTIVITY
On June 30, 2005, the Company filed a Registration Statement on Form
SB-2 with the Securities and Exchange Commission.
NOTE 8 - SUBSEQUENT EVENTS
On October 5, 2005, the Company entered into a severance arrangement
with R. Dennis Bowers, the Company's former President and Chief
Executive Officer. Under the arrangement, the Company agreed to pay Mr.
Bowers $20,000 and entered into a 15-month consulting agreement with
Mr. Bowers. Under the consulting agreement, Mr. Bowers agreed to market
and promote the Company and its products to prospective customers whom
Mr. Bowers may identify from time to time. In consideration for these
services, the Company agreed to pay Mr. Bowers a monthly consulting fee
of $9,500 in cash or, if certain conditions are met, $10,000 in shares
of the Company's common stock, the form of such payment to be decided
upon at the Company's sole discretion, the first of such payments to be
made on October 13, 2005 and the remainder of such payments to be made
monthly beginning October 22, 2005 and ending November 22, 2005. The
Company also agreed to pay Mr. Bowers commissions ranging from between
40% and 50% of the gross revenues that the Company receives from sales
of its products generated by Mr. Bowers. The agreement is for a term
ending on January 5, 2007.
In November and December 2005, the Company issued promissory notes in
the aggregate principal amount of $180,000 to a small group of
accredited investors for aggregate cash consideration of $180,000. The
notes have a maturity date that is 90 days after the date the Company
received the funds from the respective investors and accrue interest at
the rate of 15% per annum. The principal and accrued interest are
payable by the Company on the maturity date and may be prepaid by the
Company in whole or in part at any time prior to the maturity date at
the Company's option without penalty.
F-39
10,258,135 SHARES
[graphic omitted]
NATIONAL HEALTH PARTNERS, INC.
COMMON STOCK
__________________________
P R O S P E C T U S
__________________________
________, 2006
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 Law (the "IBCL") 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 IBCL 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 IBCL. 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 IBCL, 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......................... $1,811
Printing and engraving expenses.............. 5,000
Accounting fees and expenses................. 10,000
Legal fees and expenses...................... 45,000
Miscellaneous expenses....................... 5,000
-------
Total................................... $66,811
=======
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"):
In February 2004, we issued 100,000 shares of our common stock to an
individual 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 February 2004, we issued 1,748,250 shares of our common stock to
David M. Daniels in connection with Mr. Daniels accepting his appointment as our
Chief Executive Officer. 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 February and March 2004, we issued an aggregate of 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.
In March 2004, we issued 150,000 shares of our common stock to two
individuals in exchange for marketing services that were rendered to us. The
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.
II-2
In August 2004, we issued 100,000 shares of our common stock to an
individual 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 expires 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 expires on November 30, 2006. We agreed to use our reasonable best
efforts to file a registration statement with the SEC within two months of the
date of termination of the offering to register 50% of the shares of our common
stock issued in the offering and 50% of the shares of our common stock
underlying the Class A warrants and Class B warrants issued in the offering. 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 September 2004, we completed a private offering of 174,000 shares of
our common stock, Class A warrants to acquire 87,000 shares of our common stock,
and Class B warrants to acquire 87,000 shares of our common stock, for aggregate
cash consideration of $87,000. 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 expires 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 expires on
November 30, 2006. We agreed to use our reasonable best efforts to file a
registration statement with the SEC within two months of the date of termination
of the offering to register 50% of the shares of our common stock issued in the
offering and 50% of the shares of our common stock underlying the Class A
warrants and Class B warrants issued in the offering. 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 February 2005, we completed a private offering of 2,448,750 shares
of our common stock, Class A warrants to acquire 816,252 shares of our common
stock, and Class B warrants to acquire 816,252 shares of our common stock, for
aggregate cash consideration of $979,500. 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 expires 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 expires on November 30, 2006. We agreed to use our reasonable best
efforts to file a registration statement with the SEC within six months of the
date of termination of the offering to register 50% of the shares of our common
stock issued in this offering and 50% of the shares of our common stock
underlying the Class A warrants and Class B warrants issued in this offering. 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 737,750 shares of our
common stock, Class A warrants to acquire 368,875 shares of our common stock,
and Class B warrants to acquire 368,875 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 amendment to their respective
securities purchase agreements for the Offerings pursuant to which the date by
which we would use our reasonable best efforts to file a registration statement
with the SEC for certain of the securities purchased in the Offerings was
extended from a date that was within two months of the date of termination of
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 expires 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 expires on
November 30, 2006. We agreed to use our reasonable best efforts to file a
registration statement with the SEC by June 30, 2005 to register 50% of the
shares of our common stock issued in this offering and 50% of the shares of our
common stock underlying the Class A warrants and Class B warrants issued in this
offering. 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.
II-4
In April 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 consisting of 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 expires 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 expires on December 31, 2008. We agreed to use our reasonable best
efforts to file a registration statement with the SEC within six months of the
closing date of the transaction to register 50% of the shares of our common
stock issued in this offering and 50% of the shares of our common stock
underlying the Class A warrants and Class B warrants issued in this transaction.
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.
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 expires 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 expires on December 31, 2008. We
agreed to use our reasonable best efforts to file a registration statement with
the SEC within six months of the date of termination of the offering to register
50% of the shares of our common stock issued in this offering and 50% of the
shares of our common stock underlying the Class A warrants and Class B warrants
issued in this offering. 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-5
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 expires 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 expires on
December 31, 2008. We agreed to use our reasonable best efforts to file a
registration statement with the SEC within six months of the date of termination
of the offering to register 50% of the shares of our common stock issued in this
offering and 50% of the shares of our common stock underlying the Class A
warrants and Class B warrants issued in this offering. 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 expires 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 expires 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 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 expires on December 31, 2006. We agreed to
file a registration statement with the SEC by June 30, 2005 to register 100% of
the shares of our common stock and 100% of the shares of our common stock
underlying the Class A warrants and Class B warrants with respect to an
aggregate of 1,800,000 shares of common stock issued to these investors, and 50%
of the shares of our common stock and 50% of the shares of our common stock
underlying the Class A warrants, Class B and Class C warrants with respect to an
aggregate of 3,886,000 shares of our common stock issued to these investors. 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.
II-6
In June 2005, we issued an option to acquire 400,000 shares of our
common stock to Trident Marketing International, Inc., an accredited investor,
in exchange for services to be rendered to us in connection with the marketing
of our various CARExpress membership programs. The option was initially
exercisable into shares of our common stock at an exercise price of $.50 per
share upon the achievement of various performance objectives during 2005, and
expires on June 24, 2006. We agreed to file a registration statement with the
SEC within six months of the date of the option to register all of the shares of
common stock underlying the option. 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.
In November and December 2005, we issued promissory notes in the
aggregate principal amount of $180,000 to a small group of accredited investors
for aggregate cash consideration of $180,000. The notes have a maturity date
that is 90 days after the date we received the applicable funds and accrue
interest at the rate of 15% per annum. The principal and accrued interest are
payable on the maturity date and may be prepaid by us in whole or in part at any
time prior to the maturity date at our option without penalty. 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.
II-7
ITEM 27. EXHIBITS
The following exhibits are filed as part of this registration
statement:
Exhibit No. Exhibit
----------- -------
3.1* Restated Articles of Incorporation
3.2* 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
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 October 1, 2001, between the
Company and United HealthCare Services, Inc.
10.9*+ Network Access and Repricing Agreement, dated September 1,
2002, between the Company and First Access, Inc.
10.10*+ Network Leasing Agreement, dated December 18, 2003, between
the Company and National Benefit Builders, Inc.
10.11*+ AdvancePCS, L.P. Managed Pharmaceutical Benefit Agreement,
dated July 1, 2001, between the Company and AdvancePCS, L.P.
10.12* Agreement of Lease, dated April 22, 2004, between Liberty
Property Limited Partnership and the Company
10.13* Commercial Office Lease, dated June 13, 2005, between
Centerpointe Property, LLC and the Company
II-8
10.14* Form of Securities Purchase Agreement by and between the
Company and shareholders participating in the August 2004
Offering, September 2004 Offering, March 2005 Offering,
February 2005 Offering, May 2005 Offering and June 2005
Offering
10.15* Securities Purchase Agreement, dated April 12, 2005, by and
between the Company and Ronald F. Westman
10.16* Option to Acquire Shares of Common Stock, dated June 29, 2005,
issued by the Company to Ronald F. Westman
10.17* Option to Acquire Shares of Common Stock, dated June 29, 2005,
issued by the Company to Jay Rosen
10.18* Option to Acquire Shares of Common Stock, dated August 15,
2005, issued by the Company to Alex Soufflas
10.19* Option to Acquire Shares of Common Stock, dated August 15,
2005, issued by the Company to David A. Taylor
10.20* Summary of the terms of the Company's employment arrangement
with Alex Soufflas
10.21* Summary of the terms of the Company's employment arrangement
with David A. Taylor
10.22* Form of Class A Warrant issued by the Company to the
shareholders participating in the August 2004 Offering,
September 2004 Offering, March 2005 Offering, February 2005
Offering, May 2005 Offering and June 2005 Offering
10.23* Form of Class B Warrant issued by the Company to the
shareholders participating in the August 2004 Offering,
September 2004 Offering, March 2005 Offering, February 2005
Offering, May 2005 Offering and June 2005 Offering
10.24* Form of First Amendment to Securities Purchase Agreement and
Release by and between the Company and the shareholders
participating in the August 2004 Offering and the September
2004 Offering
10.25* Form of Class A Warrant issued by the Company to consultants
and advisors in June 2005
10.26* Form of Class B Warrant issued by the Company to consultants
and advisors in June 2005
10.27* Form of Class C Warrant issued by the Company to consultants
and advisors in June 2005
10.28* CARExpess Broker Agreement, dated March 28, 2005, by and
between the Company and Trident Marketing International, Inc.
10.29* Marketing Incentive Plan, dated June 24, 2005, by and between
the Company and Trident Marketing International, Inc.
II-9
10.30* Option, dated June 24, 2005, issued by the Company to Trident
Marketing International, Inc. 10.31 CARExpess Broker
Agreement, dated August 12, 2005, by and between the Company
and Hispanic Global LLC
10.31* CARExpress Broker Agreement, dated August 12, 2005, by and
between the Company and Hispanic Global LLC
10.32* Consulting Agreement, dated May 16, 2005, by and between the
Company and Jose Lozano
10.33* Consulting Agreement, dated June 24, 2005, by and between the
Company and El CID IV
10.34* Consulting Agreement, dated October 5, 2005, by and between
the Company and R. Dennis Bowers
10.35* Promissory Note, dated November 11, 2005, issued by the
Company to Rene Ortega, Jr.
10.36* Promissory Note, dated November 16, 2005, issued by the
Company to Uwe Weibel
10.37* Promissory Note, dated November 16, 2005, issued by the
Company to Daniel Eggenberger
10.38* Promissory Note, dated December 7, 2005, issued by the Company
to Ronda Westman
21.1* Subsidiaries of the Company
23.1 Consent of 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)
* Previously filed.
+ Certain information in this document has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
II-10
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 which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) include any additional or changed material information
on the plan of distribution.
2. for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering thereof.
3. file a post-effective amendment to remove from registration any of
the securities being registered that remain unsold at the end of the offering.
4. for determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned small business issuer undertakes that in a primary
offering of securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i) any preliminary prospectus or prospectus of the
undersigned small business issuer relating to the offering required to be filed
pursuant to Rule 424 (ss.230.424 of this chapter);
(ii) any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned small business issuer or used or
referred to by the undersigned small business issuer;
(iii) the portion of any other free writing prospectus
relating to the offering containing material information about the undersigned
small business issuer or its securities provided by or on behalf of the
undersigned small business issuer; and
(iv) any other communication that is an offer in the offering
made by the undersigned small business issuer to the purchaser.
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-11
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
registration statement to be signed on its behalf by the undersigned, in the
City of Horsham, Commonwealth of Pennsylvania, on January 23, 2006.
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 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 January 23, 2006
- ------------------------------ of the Board (Principal Executive
David M. Daniels Officer)
/s/ Roger H. Folts Chief Financial Officer (Principal January 23, 2006
- ------------------------------ Financial and Accounting Officer)
Roger H. Folts
EXHIBIT INDEX
Exhibit Exhibit Description
------- -------------------
5.1 Opinion of Carson Boxberger LLP
23.1 Consent of H J & Associates, LLC
23.2 Consent of Carson Boxberger LLP (included in Exhibit 5.1)