AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 2006
REGISTRATION NO. 333 - 126315
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------------
NATIONAL HEALTH PARTNERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Indiana 7389 04-3786176
------------------------------- -------------------------------- -----------------------------------
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
National Health Partners, Inc.
120 Gibraltar Road, Suite 107
Horsham, PA 19044
(215) 682-7114
------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive office and principal
place of business)
David M. Daniels
Chief Executive Officer
National Health Partners, Inc.
120 Gibraltar Road, Suite 107
Horsham, PA 19044
(215) 682-7114
------------------------
(Name, address, including zip code, and telephone number, including area code, of agent for service)
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following the effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box: |_|
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.
EXPLANATORY NOTE
This Post-Effective Amendment No. 1 to Registration Statement on
Form SB-2 is being filed for the sole purpose of updating the financial
statements and other information, and to reflect sales and other changes in
beneficial ownership of our shares by the selling security holders.
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 OCTOBER 27, 2006
PRELIMINARY PROSPECTUS
[GRAPHIC OMITTED]
NATIONAL HEALTH PARTNERS, INC.
5,432,443 shares of common stock
The 5,432,443 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, 3,177,693 shares are issuable upon the exercise of warrants.
The selling shareholders may sell the shares covered by this prospectus
through public or private transactions at prevailing market prices or at
privately negotiated prices. We will not receive any part of the proceeds from
sales of these shares by the selling security holders.
Our common stock trades on the OTC Bulletin Board under the symbol
"NHPR." The closing price of our common stock on the OTC Bulletin Board on
October 25, 2006, was $1.13 per share.
---------------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 2 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ____________, 2006.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY................................................................................................1
RISK FACTORS......................................................................................................2
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS..................................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................17
DESCRIPTION OF BUSINESS..........................................................................................34
MANAGEMENT.......................................................................................................56
EXECUTIVE COMPENSATION...........................................................................................58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................64
DESCRIPTION OF SECURITIES........................................................................................66
THE OFFERING.....................................................................................................68
SELLING SECURITY HOLDERS.........................................................................................72
USE OF PROCEEDS..................................................................................................80
PLAN OF DISTRIBUTION.............................................................................................80
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES..............................83
LEGAL MATTERS....................................................................................................84
EXPERTS..........................................................................................................84
ABOUT THIS PROSPECTUS............................................................................................85
WHERE YOU CAN FIND MORE INFORMATION..............................................................................85
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
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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.
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
"CARExpressTM." 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 5,432,443 shares of common
stock to be sold by the selling security holders identified in this prospectus.
Of this amount, 3,177,693 shares are issuable upon the exercise of warrants.
The selling shareholders may sell the shares covered by this prospectus
through public or private transactions at prevailing market prices or at
privately negotiated prices. We will not receive any part of the proceeds from
sales of these shares by the selling security holders.
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, our industry and our stock. 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 relatively
limited operations due to our lack of available capital. During that time, our
employees performed limited duties and our operations were focused almost
exclusively on building CARExpress. In early 2004, we took a number of steps to
grow 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.
During 2005, we 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.
2
WE HAVE A HISTORY OF LOSSES AND THE REPORT OF OUR INDEPENDENT ACCOUNTANTS ISSUED
IN CONNECTION WITH THE MOST RECENT AUDIT OF OUR FINANCIAL STATEMENTS CONTAINED A
QUALIFICATION RAISING A SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A
GOING CONCERN.
We have experienced net losses in each fiscal quarter since our
inception and as of June 30, 2006, had an accumulated deficit of approximately
$10.4 million. We incurred net losses to common shareholders of approximately
$4.5 million for the year ended December 31, 2005 and approximately $2.5 million
during the six months ended June 30, 2006. 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, 2005
contained a qualification raising a substantial doubt about our ability to
continue as a going concern. While we expect that our net losses from operations
will decrease during the next six months, we can provide no assurance that this
will occur. As a result, we may continue to generate losses for the foreseeable
future.
WE WILL NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE TO COVER OUR LONG-TERM
CONTRACTUAL OBLIGATIONS 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 are a party to employment agreements
with David M. Daniels, Alex Soufflas, Patricia S. Bathurst and David A. Taylor
pursuant to which we are paying each of them an annualized base salary of
$254,100, $210,000, $145,200 and $162,000, respectively, for 2006. We must also
make payments under the operating lease for our office space in Horsham,
Pennsylvania in the aggregate amount of approximately $100,000 over the
remainder of the term of the lease. A summary of the material terms of the
employment agreements and the lease and our financial obligations thereunder is
provided below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Contractual Obligations." If we are unable
to satisfy these obligations as they come due, our business may be materially
and adversely affected.
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 and distribution partners;
o leverage and develop relationships with additional preferred provider
organizations ("PPOs") and provider networks;
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 have as a
public company.
We may also experience a material decrease in liquidity due to unforeseen
capital requirements or other events and uncertainties.
3
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. 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 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 AND DISTRIBUTION PARTNERS TO
INCREASE REVENUE AND IMPROVE OUR OPERATING RESULTS.
Our success will depend in large part upon our ability to attract,
retain and motivate the marketing and distribution partners that market our
CARExpress membership programs. We will need to expand our existing
relationships and enter into new relationships with marketing and distribution
partners in order to increase our current and future market share and revenue.
We compete with all types of retail product and service companies throughout the
United States and overseas for marketing and distribution partners. 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 with
marketing and distribution partners, we may lose customer introductions,
co-marketing benefits and sales, and our operating results may suffer.
OUR RELIANCE ON MARKETING COMPANIES COULD RESULT IN REDUCED REVENUE GROWTH
BECAUSE WE HAVE LITTLE CONTROL OVER THEM OR THEIR MARKETING REPRESENTATIVES.
Marketing companies currently account for substantially all of our
revenues. None of these companies is obligated to continue selling our
CARExpress membership programs. Our ability to generate increased revenue
depends significantly upon the ability and willingness of our marketing
companies 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 programs, our operating results may suffer.
We cannot control the level of effort these companies expend or the
extent to which any of them will be successful in marketing and selling our
CARExpress membership programs. Our marketing companies typically offer and sell
our programs on a part-time basis, and may engage in other business activities.
These marketing companies may give higher priority to the products or services
of our competitors and reduce their efforts devoted to marketing our programs.
We may not be able to prevent our marketing companies from devoting greater
resources to support our competitors' products and reducing or eliminating their
efforts to sell our programs.
4
DEVELOPING AND MAINTAINING RELATIONSHIPS WITH PPOS 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 PPOs and other provider networks within each market area that
our services are offered. Developing and maintaining relationships with PPOs is
based in part on professional relationships and the reputation of our management
and marketing personnel. Our PPO relationships may be adversely affected by
events beyond our control, including departures of key personnel and alterations
in professional relationships. The loss of a PPO within a geographic market area
that is not be replaced on a timely basis, or at all, could have a material
adverse effect on our business, financial condition, and results of operations.
WE CURRENTLY RELY ON A SMALL NUMBER OF PPOS, 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.
CareMark, Aetna, Optum, Integrated Health, Three Rivers and
International Med-Care are the principal PPOs through which our members receive
savings on healthcare products and services through our CARExpress membership
programs. Our agreements with these PPOs are not exclusive, so they may choose
to partner with one of our competitors or compete directly with our programs. In
addition, these agreements may be terminated by either party on between 45 and
180 days' prior written notice. While we currently have a good relationship with
each of these PPOs, we can provide no assurance that we will continue to have a
good relationship with any of them in the future. If these organizations choose
to partner with our competitors or compete directly with out 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.
WE CURRENTLY GENERATE ALMOST ALL OF OUR REVENUES THROUGH A LIMITED NUMBER OF
MARKETING AND DISTRIBUTION PARTNERS.
A limited number of marketing and distribution partners currently
generate almost all of our revenues for us. Although we are attempting to expand
the number of marketing and distribution partners selling our CARExpress
membership programs, we expect that a limited number of marketing and
distribution partners will continue to generate almost all of our revenues for
the foreseeable future. In the event any of these marketing and distribution
partners cease to sell our programs to prospective members, or if prospective
members do not purchase our programs through these marketing and distribution
partners, 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.
5
Substantially all of our revenues come from monthly membership fees
that we receive from the sale of our CARExpress membership programs. 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.
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 achieving market
acceptance of any new programs that we develop. 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 CARExpress 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.
6
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 ("HMOs") and PPOs 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 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 laws and anti-discrimination laws, may force our
healthcare PPOs to withdraw as our provider networks.
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 marketing
or 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 market and sell our 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 engage in these activities.
Our failure to comply with the rules and regulations of any of these states may
result in the revocation of our license to sell these combined products in that
state and may subject us to fines and penalties.
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 and distribution partners 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 MARKETING COMPANIES COULD SUBJECT US TO ENFORCEMENT ACTIONS,
PENALTIES AND NEGATIVE PUBLICITY IF ANY SUCH COMPANIES DO NOT COMPLY WITH
APPLICABLE FEDERAL AND STATE REGULATIONS.
7
The marketing companies that we utilize and the manner by which such
marketing representatives recruit additional marketing companies to market our
CARExpress membership programs 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 companies) and that advancement within
the marketing company is based on sales of products and services, rather than on
investment in the company or other non-retail sales related criteria. 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 marketing companies and
product and service distribution. Accordingly, there is the risk that the
marketing companies that we use may be found to be in violation with applicable
laws and regulations. Such a finding could:
o result in an enforcement action and imposition of a penalty against
us or the marketing company;
o require the marketing company to modify its marketing representative
network system;
o result in negative publicity to us or the marketing company; or
o have a negative affect on the morale and loyalty of the marketing
representatives in the marketing company.
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
purchasing our CARExpress membership programs. 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 experiencing 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 management to manage growth
effectively. This may 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.
8
WE FACE INCREASING COMPETITION FROM MORE ESTABLISHED COMPANIES THAT HAVE
SIGNIFICANTLY GREATER RESOURCES THAN WE DO THAT MAY PLACE PRESSURE ON OUR
PRICING AND THAT 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 many
of our direct and potential 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 programs become
standard features of healthcare companies, the demand for our CARExpress
membership programs may decrease. In addition, the PPOs 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 offering 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, PPOs and provider networks, and other organizations that offer health
benefit programs to their customers. Some of our competitors may be companies
that have programs that are functionally similar or superior to our health
membership programs. Most of our competitors possess substantially greater
financial, marketing, personnel and other resources than us.
We can provide no assurance that our current or future competitors will
not:
o provide healthcare benefit programs comparable or superior to our
programs at lower membership prices;
o adapt more quickly to evolving healthcare industry trends or changing
industry requirements;
o respond more quickly and effectively to new or changing
opportunities, technologies, standards or customer requirements;
o increase their emphasis on programs similar to ours to more
effectively compete with us; or
o successfully recruit marketing companies by offering more attractive
compensation plans.
9
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
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. We have applied for
trademark registration for our CARExpress brand and may apply for legal
protection for certain of our other intellectual property in the future. Any
such legal protection we obtain may be challenged by others or invalidated
through administrative process or litigation. 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.
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. Each of
our executive officers may terminate their employment with us at any time
without penalty. We do not maintain key person life insurance policies on any of
our employees. The loss of one or more of our key employees could seriously harm
our business, financial condition or results of operations. In such an event we
may be unable to recruit personnel to replace these individuals in a timely
manner, or at all, on acceptable terms.
BECAUSE COMPETITION FOR OUR TARGET EMPLOYEES IS INTENSE, WE MAY NOT BE ABLE TO
ATTRACT AND RETAIN THE HIGHLY-SKILLED EMPLOYEES THAT WE NEED TO SUPPORT OUR
PLANNED GROWTH.
To execute our growth plan, we must attract and retain highly-qualified
personnel. We need to hire additional personnel in virtually all operational
areas, including selling and marketing, 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.
10
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.
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
limited-time 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 people do not recognize or
acknowledge these benefits, the market for our CARExpress membership programs
may develop more slowly than we expect, which could adversely affect our
operating results.
Developing and maintaining awareness of our CARExpress brand is
critical to achieving widespread acceptance of our existing and future
CARExpress membership programs. Furthermore, we believe that the importance of
brand recognition will increase as competition in our market develops.
Successful promotion of our CARExpress brand will depend largely on the
effectiveness of our marketing efforts and on our ability to develop reliable
and useful CARExpress membership programs at competitive prices. If we fail to
successfully promote our CARExpress brand, or if our expenses to promote and
maintain our CARExpress brand are greater than anticipated, our financial
condition and results of operations could suffer.
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THE SUCCESS OF OUR BUSINESS DEPENDS UPON THE CONTINUED GROWTH AND ACCEPTANCE OF
DISCOUNT HEALTHCARE MEMBERSHIP PROGRAMS AS A SUITABLE ALTERNATIVE OR SUPPLEMENT
TO TRADITIONAL HEALTH INSURANCE.
Growth in sales of our CARExpress membership programs depends on the
acceptance of health membership programs as a suitable alternative or supplement
to traditional health insurance. Discount healthcare 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 discount 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 and state agencies becomes more likely. The sale of
discount healthcare 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. 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, our PPO relationships, and our
relationships with 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.
As of the date of this prospectus, we had 29,308,231 shares of common
stock outstanding. Of this amount, 10,531,026 are freely tradable without
restriction or available for sale under Rule 144 of the Securities Act of 1933,
as amended (the "Securities Act"), unless the shares are purchased by our
affiliates. The remaining 18,777,205 shares of common stock outstanding are
"restricted securities" as that term is defined under Rule 144 of the Securities
Act. We are registering 2,254,750 of these restricted shares in this offering.
We are also registering an additional 3,177,693 shares of common stock
underlying currently outstanding warrants. Immediately after the effectiveness
of the registration statement of which this prospectus is a part, 12,785,776
shares of our outstanding shares of common stock will be freely tradable without
restriction or available for sale under Rule 144 of the Securities Act, unless
the shares are purchased by our affiliates. The remaining 16,522,455 shares of
common stock outstanding after the effectiveness of the registration statement
will continue to be restricted securities. None of our directors, executive
officers or employees is subject to lock-up agreements or market stand-off
provisions that limit their ability to sell shares of our common stock. The sale
of a large number of shares of our common stock, or the belief that such sales
may occur, could cause a drop in the market price of our common stock.
12
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 BUSINESS PARTNERS, SERVICE
PROVIDERS, CONSULTANTS AND ADVISORS AND MAY ISSUE ADDITIONAL SECURITIES TO SUCH
PERSONS IN THE FUTURE.
Since January 1, 2004, we have issued 6,142,325 shares of our common
stock, options exercisable into 400,000 shares of our common stock and warrants
exercisable into 4,629,000 shares of our common stock to business partners,
service providers, consultants and advisors as compensation for services
rendered or to be rendered in the future. We may issue additional shares of our
common stock or securities convertible or exercisable into shares of our common
stock to such persons 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.
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 marketing and distribution partners
that we use.
In addition, the market price of our common stock could be subject to
wide fluctuations in response to:
13
o quarterly variations in our revenues and operating expenses;
o announcements of new programs or services by us; and
o our ability to accommodate 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.
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 our shareholders or
the investment community, the price of our common stock may decline.
THERE IS NO ESTABLISHED PUBLIC MARKET FOR OUR COMMON STOCK.
There is no established public market for our common stock. Our common
stock began trading on the OTC Bulletin Board on March 30, 2006. While our
common stock currently trades on the OTC Bulletin Board, it does not trade on
any regional or national securities exchange or the Nasdaq Stock Market.
Securities trading on the OTC Bulletin Board are generally substantially less
liquid than securities trading on national and regional securities exchanges or
the Nasdaq Stock Market. We can provide you with no assurance that an
established public market will develop for our common stock or, if such a market
develops, that it will be sustained.
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.
Our common stock is a "penny stock" as defined under Rule 3a51-1 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and is
accordingly subject to SEC rules and regulations that impose limitations upon
the manner in which our common stock 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
14
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 38% of our outstanding
common stock. These stockholders, acting together, have the ability to exert
substantial influence over any matters requiring approval by our stockholders,
including the election and removal of directors and any proposed merger,
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.
15
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included or incorporated by reference in
this prospectus, including, without limitation, statements regarding our future
financial position, business strategy, budgets, projected revenues and costs,
and plans and objectives 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 limited number of PPOs and other provider
networks for healthcare providers;
o our dependence upon a limited number of marketing and distribution
partners 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;
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 captions "Risk Factors" on page 2 of this
prospectus and "Management's Discussions an Analysis of Financial Condition and
Results of Operation" below.
All subsequent written and oral forward-looking statements attributable
to us, or persons acting on our behalf, are expressly qualified in their
entirety by the foregoing. Except as required by law, we assume no duty to
update or revise our forward-looking statements based on changes in internal
estimates or expectations or otherwise.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this prospectus contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
included in this prospectus are based on information available to us on the date
hereof, and we assume no obligation to update any such forward-looking
statements. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
those set forth under the caption "Risk Factors" on page 2 of this prospectus
and elsewhere in this prospectus. The following should be read in conjunction
with our audited financial statements beginning on page F-1 of this prospectus.
OVERVIEW
We are a national healthcare savings organization that was formed by
healthcare professionals to address the need for affordable healthcare
nationwide. We create, market and sell discount healthcare membership 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 over 1,000,000 medical professionals that have agreed to
render their services and products to CARExpress members at discounted prices.
CARExpress enables people to engage in point-of-service transactions directly
with these providers and pay discounted prices that are similar in amount to
those paid by insurance companies on behalf of their insureds. Our programs
offer savings on healthcare services to persons who are uninsured and
underinsured and to those who purchase only high deductible or limited benefit
medical insurance policies by providing access to the same PPOs that are
utilized by employers that self-fund at least a portion of their employees'
healthcare costs. 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. We sell our programs directly and indirectly
through resellers that privately label or co-brand our programs and employers
that offer our programs to their employees.
We are actively engaged in marketing our CARExpress membership programs
to the public and our primary strategic objectives are to generate increased
sales of our CARExpress membership programs and 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
currently less than one percent and has been les than one percent since our
inception. Since we are not currently large enough to pursue and support the
entire market, we intend to continue to pursue specific opportunities that we
identify in this market through our various marketing and distribution channels.
Through product design, competitive membership pricing and a variety of
marketing and distribution partners, we are pursuing opportunities in the
healthcare market that insurance companies have not addressed.
17
RECENT DEVELOPMENTS
We have experienced a substantial increase in our membership base and
revenues over the past 12 months. As of June 30, 2006, we had approximately
6,300 CARExpress members, compared to approximately 400 members at June 30,
2005. We achieved revenues of $317,024 for the three-month period ended June 30,
2006, compared to revenues of $16,997 for the three-month period ended June 30,
2005. We have entered into agreements with several marketing and distribution
partners and are currently engaging in test marketing campaigns with some of
them. In addition, we are currently in negotiations with several other companies
regarding the sale of our CARExpress membership programs.
We began offering our CARExpress Visa/MasterCard program to the public
during June 2006. Many of the people who are uninsured or underinsured do not
have a debit or credit card. As a result, this program is ideally suited for
them. CARExpress members participating in the program place money on their card
and can use the card to pay their CARExpress monthly membership fees. They can
also use the card for all healthcare purchases they make through CARExpress.
We intend to sell CARExpress membership programs in combination with
low-cost insurance products such as Mini-Med programs and catastrophic health
insurance as part of our unique "wrap-around" program. We intend to market and
sell our "wrap-around" programs directly through National Health Brokerage
Group, Inc., our wholly-owned subsidiary, and indirectly through insurance
companies and independent third parties. The combination of our CARExpress
programs with these low-cost insurance products provides an innovative and
affordable solution to individuals who previously could not afford a
comprehensive medical plan. These products will be bundled, priced and marketed
utilizing relationship marketing strategies or direct marketing to target the
profiled needs of the organization's employees or members.
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. 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 95% 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.
18
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. 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.
A key metric for evaluating our success is 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 that are most in need of our programs, most
capable of paying for our programs, and most loyal to us and our programs.
Member retention rates can be influenced by 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 our marketing and
distribution partners to sell our CARExpress membership programs.
We have obtained valuable information regarding member demographics
through the test marketing campaigns that we have conducted over the last 12
months and are focusing our marketing and advertising campaigns on members and
member groups that we have identified as being most suitable for our CARExpress
membership programs. As a result, we expect our retention rates to improve over
the next 12 months as we pursue these opportunities through our various
marketing and distribution channels.
OUTLOOK
Our strategy is to continue to expand our position as a provider of
unique healthcare membership service programs. We implemented several strategic
growth initiatives during the first half of 2006 through which we achieved new
contracts and strategic partnerships with a number of marketing and distribution
companies. We have also initiated several measures in anticipation of our future
growth, including hiring additional customer service staff and transitioning our
current customer service staff from one shift to two shifts to ensure adequate
coverage for our members. We expect to generate future revenues and members
primarily through our relationship with Trident Marketing and through sales of
our CARExpress "wrap-around" programs, as well as new strategic collaborations
and joint ventures that we are in the process of negotiating. We intend to
finance each of these projects through cash on hand, internally generated cash
flows from operating activities and proceeds from the exercise of outstanding
warrants. We will use any additional investments that we receive to accelerate
the expansion of each of our advertising campaigns and programs and more quickly
realize recurring monthly membership fees.
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As a result of our expanding relationship with Trident Marketing and
the rollout of our CARExpress "wrap-around" programs, we expect the number of
CARExpress members generated each month to increase for the foreseeable future.
We also expect to generate additional members over the next 12 months through
new strategic collaborations and joint ventures that we are in the process of
negotiating. 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. As a result, we expect our net
losses from operations to decrease during the next six months as the recurring
membership fees from our increasing membership base overtake the costs
associated with obtaining the new members we are generating.
We can provide no assurance 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
or that our net losses from operations will decrease during the next six months.
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, delivery or performance has occurred, the
sales price is fixed and determinable, and collectibility is reasonably assured.
At the beginning of each membership period, the membership fee is charged to the
member's credit card, resulting in deferred revenue. We then recognize the
membership fees as revenue as the services are rendered. Shipping and handling
fees that we receive for the shipment of membership packages to new members are
included in our membership fees and recorded as deferred revenue. These fees are
then recognized as revenue on a straight-line basis over the longer of the
initial contractual term or the expected period during which the services will
be performed if the relationship with the member is expected to extend beyond
the initial contractual term and the member continues to benefit from the
payment of the fees.
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Stock-Based Compensation
We account for employee stock-based compensation using the fair value
recognition provisions of Financial Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). We adopted SFAS
123R on January 1, 2006 using the modified prospective transition method. Under
this method, compensation cost recognized for the three- and six-month periods
ended June 30, 2006 includes: (a) compensation cost for all share-based payments
granted, but not yet vested as of January 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of SFAS 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R. Such amounts have been reduced by the Company's
estimate of forfeitures of all unvested awards. 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."
Prior to January 1, 2006, we accounted for our employee stock-based
compensation under the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Under APB 25, when the exercise price of stock-based compensation
granted to employees equals the market price of the common stock on the date of
grant, no compensation expense is recorded. When the exercise price of
stock-based compensation granted to employees is less than the market price of
the common stock on the date of grant, compensation expense is recognized over
the vesting period. Since all of our currently issued employee stock-based
compensation had been issued prior to January 1, 2006 at an exercise price equal
to or greater than the market price of our common stock on the date of grant, we
did not previously recognize any expense as a result of the issuances.
We account for non-employee stock-based compensation in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based
Compensation" ("SFAS 123") 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 123 and EITF
96-18 require that we account for our stock-based compensation grants to
non-employees based on the fair value of the stock-based compensation on the
date of grant.
We use the Black-Scholes pricing model to determine the fair value of
the stock-based compensation that 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. We
used our past share price history to determine volatility and cannot predict how
the price of our shares of common stock will react on the open market in the
future since our common stock has only been trading on the OTC Bulletin Board
since March 30, 2006. As a result, the volatility value that we calculated may
differ from the future volatility of the price of our shares of common stock.
21
For a more complete discussion of our accounting policies and
procedures, see our Notes to Consolidated Financial Statements beginning on page
F-8.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which
replaces Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). SFAS 123R establishes standards for
accounting for transactions in which an entity exchanges its equity instruments
for goods or services or incurs liabilities in exchange for goods or services
that are based on the fair value of the entity's equity instruments. It focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS 123R requires that entities
account for share-based payments using the fair value based method rather than
the intrinsic value method of accounting in APB 25 and that entities disclose
information about the nature of the share-based payment transactions and the
effects of those transactions on the financial statements. SFAS 123R requires an
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award over
the period during which an employee is required to provide service for the
award. The grant-date fair value of employee stock options and similar
instruments must be estimated using option-pricing models adjusted for the
unique characteristics of those instruments unless observable market prices for
the same or similar instruments are available. SFAS 123R also requires an entity
to measure the cost of employee services received in exchange for an award of
liability instruments based on its current fair value and that the fair value of
that award be remeasured at each reporting date through the settlement date.
SFAS No. 123R became effective for small business issuers as of the beginning of
the first interim or annual reporting period that began after December 15, 2005.
We adopted SFAS No. 123R on January 1, 2006 using the modified prospective
method. The adoption of SFAS 123R is expected to continue to have an adverse
impact on our results of operations in future periods.
In March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"), which provides guidance on the implementation
of SFAS 123R. In particular, it provides guidance related to valuation methods,
accounting for income tax effects of share-based payments, modifications of
employee stock options prior to the adoption of SFAS 123R, classification of
compensation expense, capitalization of compensation cost related to share-based
payment arrangements, first-time adoption of SFAS 123R in an interim period, and
other disclosures subject to the adoption of SFAS 123R. We apply the principles
of SAB 107 in conjunction with SFAS 123R.
22
In May 2005, the FASB issued FASB Statement No. 154, "Accounting
Changes and Error Corrections" ("SFAS 154"). SFAS 154 replaces APB Opinion No.
20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements - An Amendment of APB Opinion 28" and establishes
retrospective application as the required method for reporting a change in
accounting principle. SFAS 154 provides guidance for determining whether
retrospective application of a change in accounting principle is impracticable
and reporting a change when retrospective application is impracticable. The
reporting of a correction of an error by restating previously issued financial
statements is also addressed. SFAS 154 became effective for accounting changes
and correction of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS 154 did not have a material impact on our consolidated
financial statements.
COMPARISON OF THE THREE-MONTH PERIODS ENDED JUNE 30, 2006 AND JUNE 30, 2005
Revenues
Revenues consist of the monthly membership fees that we receive from
members of our CARExpress membership programs and fees 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 $300,027 to $317,024 for the three-month period
ended June 30, 2006 from $16,997 for the corresponding period in 2005. The
increase of $300,027 resulted from increased sales of our CARExpress membership
programs to new members.
Approximately 95% of the revenues that we generated during the
three-month period ended June 30, 2006 was derived from sales of our CARExpress
membership programs to first-time members, compared to approximately 20% during
the corresponding period in 2005. The remainder of the revenues that we
generated during these periods was derived from existing members. We expect
revenues to increase over the next 12 months as Trident continues to devote
additional resources to sales of our programs, as we begin selling our
CARExpress "wrap-around" programs, and as we enter into new strategic
collaborations and joint ventures that we are currently in the process of
negotiating.
Direct Costs
Direct costs consist of sales commissions that we pay to our marketing
and distribution partners and fees that we pay to our PPOs and provider networks
for access to their networks. Direct costs increased $201,016 to $252,772 for
the three-month period ended June 30, 2006, from $51,756 for the corresponding
period in 2005. The increase of $201,016 was due primarily to an increase of
$169,559 for sales commissions and $31,457 for PPO and provider network costs.
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 and PPO and provider networks costs.
23
Selling and Marketing Expenses
Selling and marketing expenses consist of advertising expenses,
marketing expenses, salaries and other compensation paid to employees selling
and marketing our CARExpress membership programs, rent expense allocated to our
selling and marketing activities, depreciation and amortization expense
allocated to our selling and marketing activities, and all other selling and
marketing expenses incurred by us. Selling and marketing expenses increased
$792,842 to $841,357 for the three-month period ended June 30, 2006, from
$48,515 for the corresponding period in 2005. The increase of $792,842 was due
primarily to an increase of $726,276 for our Hispanic advertising campaign and
other marketing campaigns and activities and $64,173 for sales salaries and
equity compensation. We expect selling and marketing expenses to increase during
the remainder of 2006 as we continue to engage in marketing and advertising
campaigns and activities.
General and Administrative Expenses
General and administrative expenses consist primarily of employee
compensation expense, professional fees, rent expense, and other general and
administrative expenses.
Employee Compensation Expense. Employee compensation 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 selling and
marketing activities. Employee compensation expense increased $239,313 to
$442,289 for the three-month period ended June 30, 2006, from $202,976 for the
corresponding period in 2005. The increase of $239,313 was due primarily to an
increase of $142,492 of stock option expense resulting from our adoption of
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment"
("SFAS No. 123R"), on January 1, 2006, an increase of $43,608 in salary and
payroll tax expense associated primarily with our addition of two executive
officers during the third quarter of 2005, and an increase of $35,419 in expense
associated with restricted stock awards granted to our executive officers in
2006. We are party to employment agreements with David M. Daniels, Alex
Soufflas, Patricia S. Bathurst and David A. Taylor. A summary of the material
terms of these employment agreements 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." We intend to retain additional executive management personnel and
other employees in connection with the anticipated growth of our business. As a
result, we expect employee compensation expense to increase over the next 12
months.
Professional Fees. Professional fees consist of fees paid to our
independent accountants, lawyers and other professionals. Professional fees
decreased $342,043 to $190,781 for the three-month period ended June 30, 2006
from $532,824 for the corresponding period in 2005. The decrease of $342,043 was
due primarily to a decrease of $341,136 in cash and equity-based compensation
paid to service providers and consultants for various services. We expect
professional fees to increase over the next 12 months as we recognize additional
expense associated with the equity-based compensation that we have paid to
service providers and consultants, incur additional accounting and legal fees
associated with our business operations, and incur additional costs associated
with the negotiation and execution of agreements with additional marketing and
distribution partners.
24
Rent Expense. Rent expense consists of the rent that we pay under the
lease for our office facilities that is not associated with our selling and
marketing activities. Rent expense increased $6,346 to $25,377 for the
three-month period ended June 30, 2006 from $19,031 for the corresponding period
in 2005. The increase of $6,346 resulted primarily from the annual increases in
our lease payments for our facility in Horsham, Pennsylvania. We expect rent
expense to increase over the next 12 months due to the annual increases in rent
that we pay under the lease for our facility in Horsham, Pennsylvania.
Other General and Administrative Expenses. Other general and
administrative expenses consist of costs for supplies, computer hardware and
system costs, costs for temporary customer service representatives, health
insurance costs, financial printer costs, transfer agent costs, general business
expenses, severance expense and miscellaneous general and administrative
expenses that are not associated with our selling and marketing activities.
Other general and administrative expenses increased $116,541 to $210,670 for the
three-month period ended June 30, 2006 from $94,129 for the corresponding period
in 2005. The increase of $116,541 resulted primarily from an increase of $29,006
in bank service charges associated with new member transactions, $10,827 in
insurance costs, $19,243 for supplies, $12,234 for telephone expenses, $40,256
for temporary call center representatives, and $15,460 for travel and
entertainment. We expect other general and administrative expenses to increase
over the next 12 months as we incur additional expenses for financial printer
costs, transfer agent fees, health insurance costs, travel and entertainment,
temporary customer service representatives, supplies, computer hardware and
systems, and other miscellaneous items associated with the general growth in our
business.
Gain on the Extinguishment of Debt
Gain on the extinguishment of debt consists of the gain that we
recognized in connection with our termination of the lease for our office space
in Sarasota, Florida on April 1, 2006. We issued shares of our common stock to
Centerpointe Property, LLC in full payment of all rent and other expenses that
were due and payable under the lease and a mutual release from any and all
claims arising out of the lease. We recognized a gain on the extinguishment of
debt of $35,932 during the three months ended June 30, 2006 in connection with
the issuance of these shares. We did not recognize any such gain during the
three-month period ended June 30, 2005. We do not expect to incur any similar
gains on the extinguishment of debt in the foreseeable future.
Net Loss
Our net loss increased $660,944 to $1,594,053 during the three-month
period ended June 30, 2006, from $933,109 during the corresponding period in
2005. The increase was primarily the result of increases of $201,016 of direct
costs incurred in connection with the sale of our membership programs, $726,276
for our Hispanic advertising campaign and other marketing campaigns and
activities, $239,313 in employee compensation expense (of which $142,492
consisted of non-cash stock option expense associated with our adoption of SFAS
No. 123R on January 1, 2006) and $116,540 in other general and administrative
expenses, partially offset by an increase of $300,027 in revenues and a decrease
of $341,136 in cash and equity-based compensation paid to services providers and
consultants for various services. We expect our net losses from operations to
decrease during the next six months as the recurring membership fees from our
increasing membership base overtake the costs associated with obtaining the new
members we are generating.
25
COMPARISON OF THE SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND JUNE 30, 2005
Revenues
Revenues increased $606,052 to $641,428 for the six-month period ended
June 30, 2006 from $35,376 for the corresponding period in 2005. The increase of
$606,052 resulted from increased sales of our CARExpress membership programs to
new members. Approximately 95% of the revenues that we generated during the
six-month period ended June 30, 2006 was derived from sales of our CARExpress
membership programs to first-time members, compared to approximately 20% during
the corresponding period in 2005. The remainder of the revenues that we
generated during these periods was derived from existing members.
Direct Costs
Direct costs increased $335,278 to $401,859 for the six-month period
ended June 30, 2006, from $66,581 for the corresponding period in 2005. The
increase of $335,278 was due to an increase of $275,640 for sales commissions
and $59,638 for PPO and provider network costs.
Selling and Marketing Expenses
Selling and marketing expenses increased $818,336 to $943,694 for the
six-month period ended June 30, 2006, from $125,358 for the corresponding period
in 2005. The increase of $818,336 was due primarily to an increase of $706,161
for our Hispanic advertising campaign and other marketing campaigns and
activities and $105,625 for sales salaries and equity compensation.
General and Administrative Expenses
Employee Compensation Expense. Employee compensation expense increased
$774,010 to $1,181,762 for the six-month period ended June 30, 2006, from
$407,752 for the corresponding period in 2005. The increase of $774,010 was due
to primarily to an increase of $584,981 of stock option expense resulting from
our adoption of Statement of Financial Accounting Standards No. 123R,
"Share-Based Payment" ("SFAS No. 123R"), on January 1, 2006, an increase of
$138,509 in salary and payroll tax expense associated primarily with our
addition of two executive officers during the third quarter of 2005, and an
increase of $36,486 in expense associated with restricted stock awards granted
to our executive officers in 2006.
Professional Fees. Professional fees decreased $339,876 to $308,136 for
the six-month period ended June 30, 2006 from $648,012 for the corresponding
period in 2005. The decrease of $339,876 was due primarily to a decrease of
$266,328 in cash and equity-based compensation paid to services providers and
consultants for various services and a decrease of $84,189 in legal fees due to
a reduction in the amount of legal work outsourced to third parties, partially
offset by an increase of $15,468 in fees paid to our independent accountant in
connection with the preparation of our Registration Statement on Form SB-2 and
our audited financial statements.
26
Rent Expense. Rent expense increased $16,142 to $75,903 for the
six-month period ended June 30, 2006 from $59,761 for the corresponding period
in 2005. The increase of $16,142 resulted primarily from the annual increases in
our lease payments for our facility in Horsham, Pennsylvania and rent payments
that we made under the lease for our facility in Sarasota, Florida. We
terminated the lease for our facility in Sarasota, Florida on April 1, 2006.
Other General and Administrative Expenses. Other general and
administrative expenses increased $166,726 to $329,389 for the six-month period
ended June 30, 2006 from $162,663 for the corresponding period in 2005. The
increase of $166,726 resulted primarily from an increase of $54,777 in bank
service charges associated with new member transactions, an increase of $55,996
for financial printer costs associated with the preparation of our filings with
the SEC, an increase of $27,686 for supplies and an increase of $41,316 for
temporary call center representatives.
Gain on the Extinguishment of Debt
Gain on the extinguishment of debt consists of the gain that we
recognized in connection with our termination of the lease for our office space
in Sarasota, Florida upon the issuance of common stock to Centerpointe Property,
LLC on April 1, 2006 in full payment of all rent and other expenses that were
due and payable under the lease and a mutual release from any and all claims
arising out of the lease. We recognized a gain on the extinguishment of debt of
$35,932 during the six months ended June 30, 2006 in connection with the
issuance of these shares. We did not recognize any such gain during the
six-month period ended June 30, 2005.
Common Stock Issued for Releases
Common stock issued for releases consists of the cost of the shares of
common stock issued to previous investors in consideration for an amendment to
their securities purchase agreements and a release from certain potential claims
thereunder. We incurred expenses for common stock issued for releases of
$295,100 for the six-month period ended June 30, 2005. We did not incur any such
expenses for the six-month period ended June 30, 2006. The expenses for common
stock issued for releases in 2005 resulted from our issuance of 737,750 shares
of our common stock to previous investors in exchange for their execution of an
amendment to their securities purchase agreements for the securities that they
purchased from us in the private offerings that we completed in August 2004 and
September 2004 and a release from any potential claims thereunder. We do not
expect to incur any additional expenses for common stock issued for releases in
the foreseeable future.
27
Net Loss
Our net loss increased $785,985 to $2,518,523 during the six-month
period ended June 30, 2006, from $1,732,538 during the corresponding period in
2005. The increase was primarily the result of increases of $335,278 in direct
costs incurred in connection with the sale of our membership programs, $706,161
for our Hispanic advertising campaign and other marketing campaigns and
activities, $774,010 in employee compensation expense (of which $584,981
consisted of non-cash stock option expense associated with our adoption of SFAS
No. 123R on January 1, 2006) and $166,726 in other general and administrative
expenses, partially offset by an increase of $606,052 in revenues, a decrease in
professional fees of $339,876 and a decrease in non-cash expense for common
stock issued for releases of $295,100.
COMPARISON OF YEARS ENDED DECEMBER 31, 2005 AND 2004
Revenues
Revenues consist of the monthly membership fees that we receive from
members of our CARExpress membership programs and fees 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 $218,044 to $245,973 for the year ended December
31, 2005 from $27,929 for the year ended December 31, 2004. The increase of
$218,044 was primarily a result of increased sales of our CARExpress membership
programs to new customers and existing members.
Direct Costs
Direct costs consist of sales commissions that we pay to our marketing
and distribution partners and fees that we pay to our PPOs and provider networks
for access to their networks. Direct costs increased $284,565 to $350,666 for
the year ended December 31, 2005, from $66,101 for the year ended December 31,
2004. The increase of $284,565 was due to an increase of $263,340 for sales
commissions and $21,224 for PPO and provider network costs.
Selling and Marketing Expenses
Selling and marketing expenses consist of advertising expenses,
marketing expenses, salaries paid to employees selling and marketing our
CARExpress membership programs, rent expense allocated to our selling and
marketing activities, depreciation and amortization expense allocated to our
selling and marketing activities, and all other selling and marketing expenses
incurred by us. Selling and marketing expenses decreased $135,589 to $241,692
for the year ended December 31, 2005, from $377,281 for the year ended December
31, 2004. The decrease of $135,589 was due primarily to a decrease of $118,939
for advertising and marketing campaigns and $64,405 for sales salaries,
partially offset by an increase of $16,411 for allocated rent and $20,920 for
Web site amortization.
General and Administrative Expenses
General and administrative expenses consist primarily of salary
expense, professional fees, rent expense, and other general and administrative
expenses.
28
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 selling and marketing activities.
Salary expense decreased $425,901 to $897,837 for the year ended December 31,
2005, from $1,323,738 for the year ended December 31, 2004. The decrease of
$425,901 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 $430,212 for salaries and related
compensation resulting from an increase in the number of executive officers and
other individuals who we employed during 2005 and $18,012 in additional taxes
paid due to the increased payroll in 2005.
Professional Fees. Professional fees consist of fees paid to our
independent accountants, lawyers and other professionals. Professional fees
increased $2,301,592 to $2,606,365 for the year ended December 31, 2005 from
$304,773 for the year ended December 31, 2004. The increase of $2,301,592 was
due primarily to an increase of $41,727 in fees paid to our independent
accountant for services in connection with the preparation and filing of our
Registration Statement on Form SB-2 and our audited and interim financial
statements, $79,727 in legal fees paid in connection with the various
capital-raising and business transactions that we commenced or completed during
the year and the preparation of the Registration Statement on Form SB-2,
$2,000,065 in stock compensation paid to consultants and advisors for various
consulting and advisory services, and $209,200 for placement agent fees,
partially offset by a decrease of $12,324 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 the consultants and advisors
is provided below under "The Offering" and Note 7 to our audited consolidated
financial statements for the year ended December 31, 2005. A summary of the
agreements that we entered into with the consultants and advisors is provided
below under "Description of Business - Service Providers, Consultants and
Advisors."
Rent Expense. Rent expense consists of the rent that we pay under the
lease for our office facilities that is not associated with our selling and
marketing activities. Rent expense increased $65,646 to $161,571 for the year
ended December 31, 2005 from $95,925 for the year ended December 31, 2004. The
increase of $65,646 resulted primarily from the annual increases in our lease
payments for our facility in Horsham, Pennsylvania and rent payments that we
began making under the lease for our facility in Sarasota, Florida that we
entered into on July 1, 2005. A summary of the material terms of these leases is
provided under "Note 6 - Commitments and Contingencies" of our audited
consolidated financial statements for the year ended December 31, 2005. We
terminated the lease for our facility in Sarasota, Florida on April 1, 2006.
Other General and Administrative Expenses. Other general and
administrative expenses consist of costs for supplies, computer hardware and
system costs, costs for temporary customer service representatives, health
insurance costs, general business expenses, severance expense and miscellaneous
general and administrative expenses that are not associated with our selling and
marketing activities. Other general and administrative expenses decreased
$143,030 to $216,487 for the year ended December 31, 2005 from $359,517 for the
year ended December 31, 2004. The decrease of $143,030 resulted primarily from a
decrease of $39,162 in travel and entertainment expense, $24,136 in insurance
expense, $25,000 in general business expenses, $16,242 in computer hardware and
systems costs, and a decrease in several miscellaneous fees and expenses
included in other general and administrative expenses, partially offset by an
increase of $26,465 for supplies, $29,610 for costs of temporary customer
service representatives and $20,000 in employee severance expense.
29
Common Stock Issued for Releases
Common stock issued for releases consists of the cost of the shares of
common stock issued to previous investors in consideration for an amendment to
their securities purchase agreements and a release from certain potential claims
thereunder. We incurred expenses for common stock issued for releases of
$295,100 for the year ended December 31, 2005. We did not incur any such
expenses for the year ended December 31, 2004. The expenses for common stock
issued for releases of $295,100 that we incurred in 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 to their securities
purchase agreements for the securities that they purchased from us in the
private offerings that we completed in August 2004 and September 2004 and a
release from certain potential claims thereunder.
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, 2005. 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.
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 debt. We had
working capital of $1,347,824 at June 30, 2006.
30
Net cash used by operating activities was $1,677,862 for the six-month
period ended June 30, 2006 compared to $1,000,582 for the corresponding period
in 2005. The $677,280 increase in cash used by operating activities was due
primarily to an increase in net loss of $785,985, a decrease in other non-cash
compensation expense of $260,769 resulting from the recognition of the fair
value of stock-based compensation to employees, service providers and
consultants, and a decrease in non-cash expense associated with the issuance of
common stock for releases of $295,100, partially offset by an increase in
non-cash stock option expense of $584,981 resulting from our adoption of SFAS
No. 123R on January 1, 2006. Net cash used by operating activities was
$1,915,381 for the year ended December 31, 2005 compared to $1,622,875 for the
year ended December 31, 2004. The $292,506 increase in cash used in operating
activities was due primarily to increased net loss of approximately $1,940,000,
partially offset by an increase in the fair value of warrants expensed of
approximately $1,130,000, an increase in common stock issued for releases of
approximately $295,000, and an increase in accounts payable and accrued expenses
of approximately $222,000.
Net cash used by investing activities was $7,975 for the six-month
period ended June 30, 2006 compared to net cash provided by investing activities
of $139,776 for the corresponding period in 2005. The $147,751 difference in
cash flows from investing activities was due to a decrease of $223,135 in
proceeds from the sale of marketable securities, a decrease of $35,000 in
certificates of deposit acquired in 2005 and disposed of in 2006, and an
increase of $20,333 in property and equipment, partially offset by a decrease of
$25,000 in notes receivable. Net cash provided by investing activities was
$223,180 for the year ended December 31, 2005 compared to net cash used by
investing activities of $161,956 for the year ended December 31, 2004. The
$385,136 increase in cash provided by investing activities was due primarily to
an increase in proceeds from the sale of marketable securities of approximately
$320,000 and a decrease in purchases of fixed assets and Web site costs of
approximately $125,000.
Net cash provided by financing activities was $2,584,098 for the
six-month period ended June 30, 2006 compared to $879,373 for the corresponding
period in 2005. The $1,704,725 increase in cash provided by financing activities
was due to an increase of $364,509 in proceeds from the sale of common stock and
stock subscriptions for common stock and $1,484,938 in proceeds received upon
the exercise of outstanding warrants, partially offset by an increase of
$144,722 in payment of notes payable. Net cash provided by financing activities
was $1,380,093 for the year ended December 31, 2005 compared to $2,206,576 for
the year ended December 31, 2004. The $826,483 decrease in net cash provided by
financing activities was due primarily to a decrease in proceeds from the sale
of our common stock of approximately $1,086,000, partially offset by an increase
in proceeds from the issuance of notes payable of approximately $169,000 and a
decrease in payments on notes payable of approximately $149,000.
Our primary sources of capital over the past 12 months are set forth
below.
In November and December 2005, we issued promissory notes in the
aggregate principal amount of $180,000 to a limited number of accredited
investors for aggregate cash consideration of $180,000. The notes had a maturity
date that was 90 days after the date we received the funds from the respective
investors and accrued interest at the rate of 15% per annum. The principal and
accrued interest was payable by us on the maturity date and could be prepaid by
us in whole or in part at any time prior to the maturity date at our option
without penalty. We paid the principal and accrued interest on each of these
promissory notes in accordance with their terms.
In May 2006, we completed a private offering of 211,934 shares of
common stock, Class A warrants to acquire 105,967 shares of our common stock,
and Class B warrants to acquire 105,967 shares of our common stock for aggregate
cash consideration of $127,160. 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 $1.20 per unit. The Class A warrants are
initially exercisable into one share of our common stock at an exercise price of
$.60 per share, are exercisable for a period of 18 months commencing on the date
of issuance, and expire at the end of the exercise period. The Class B warrants
are initially exercisable into one share of our common stock at an exercise
price of $.80 per share, are exercisable for a period of 36 months commencing on
the date of issuance, and expire at the end of the exercise period.
31
In August 2006, we completed a private offering of 1,705,000 shares of
common stock, Class A warrants to acquire 1,705,000 shares of our common stock,
and Class B warrants to acquire 1,705,000 shares of our common stock for
aggregate cash consideration of $1,364,000. These securities were sold in units
comprised of one share of common stock, one Class A warrant and one Class B
warrant. The units were sold at a purchase price of $0.80 per unit. The Class A
warrants were initially exercisable into one share of our common Stock at an
exercise price of $.80 per share until August 31, 2006, the expiration date. The
Class B warrants are initially exercisable into one share of our common stock at
an exercise price of $1.00 per share, are exercisable until November 30, 2006,
and expire at the end of the exercise period.
In September 2006, we completed a private offering of 710,000 shares of
common stock, Class A warrants to acquire 710,000 shares of our common stock,
and Class B warrants to acquire 710,000 shares of our common stock for aggregate
cash consideration of $355,000. These securities were sold in units comprised of
one share of common stock, one Class A warrant and one Class B warrant. The
units were sold at a purchase price of $0.50 per unit. The Class A warrants were
initially exercisable into one share of our common stock at an exercise price of
$0.50 per share until October 16, 2006, the expiration date. The Class B
warrants are initially exercisable into one share of our common stock at an
exercise price of $0.50 per share, are exercisable until August 31, 2007, and
expire at the end of the exercise period.
In October 2006, we completed a private offering of 510,000 shares of
common stock, Class A warrants to acquire 510,000 shares of our common stock,
Class B warrants to acquire 510,000 shares of our common stock, Class C warrants
to acquire 510,000 shares of our common stock, and Class D warrants to acquire
510,000 shares of our common stock for aggregate cash consideration of $255,000.
These securities were sold in units comprised of one share of common stock, one
Class A warrant, one Class B warrant, one Class C warrant and one Class D
warrant. The units were sold at a purchase price of $0.50 per unit. The Class A
warrants were initially exercisable into one share of our common Stock at an
exercise price of $0.50 per share, were exercisable until October 16, 2006, and
expired at the end of the exercise period. The Class B warrants are initially
exercisable into one share of our common stock at an exercise price of $0.50 per
share, are exercisable until November 30, 2006 and expire at the end of the
exercise period. The Class C warrants are initially exercisable into one share
of our common stock at an exercise price of $0.50 per share, are exercisable
until August 31, 2007, and expire at the end of the exercise period. The Class D
warrants are initially exercisable into one share of our common stock at an
exercise price of $0.80 per share, are exercisable until November 30, 2007, and
expire at the end of the exercise period.
During the period beginning January 1, 2006 and ending October 23,
2006, we issued 2,372,397 shares of common stock upon the exercise of warrants
at exercise prices ranging between $0.50 and $2.00 per share for aggregate gross
cash proceeds of $1,836,063.
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To date, our capital needs have been met principally through the sales
of our equity and debt securities. We do not currently maintain a line of credit
or term loan with any commercial bank or other financial institution. We have
used the proceeds from the exercise of warrants and our private offerings of
securities to pay virtually all of the costs and expenses we 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 our revenues.
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 and finance the growth of our
business. We intend to obtain these funds through internally generated cash
flows from operating activities and proceeds received upon the exercise of
outstanding warrants by our security holders. In the event these funds are
insufficient, we may also engage in additional sales of debt or equity
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. 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) $1,945,429 $442,860 $439,230 $483,153 $531,468 $48,718
Office Leases (2) 323,868 258,553 65,315 -0- -0- -0-
---------- -------- -------- -------- -------- -------
Total $2,269,297 $701,413 $504,545 $483,153 $531,468 $48,718
========== ======== ======== ======== ======== =======
(1) At December 31, 2005, we were a party to employment agreements with David M.
Daniels, Roger H. Folts and Patricia S. Bathurst. On March 29, 2006, we entered
into employment agreements with Alex Soufflas and David A. Taylor pursuant to
which we agreed to pay them an annualized base salary of $210,000 and $162,000,
respectively. On February 8, 2006, Mr. Folts resigned as our Chief Financial
Officer and Secretary and we terminated our employment agreement with him. We
agreed to pay Mr. Folts the amount of salary to which he would have been
entitled under his employment agreement through March 31, 2006. As a result,
this table reflects only those payments to Mr. Folts that we are obligated to
pay through March 31, 2006. A summary of these employment agreements and
arrangements is provided under "Executive Compensation - Employment Contracts
and Arrangements."
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(2) At December 31, 2005, we were a party to two office leases. One is for our
office space in Horsham, Pennsylvania and the other is for our office space in
Sarasota, Florida. On April 1, 2006, we terminated our lease for the office
space in Florida. As a result, this table reflects only those payments actually
made under the Florida lease. A summary of these office leases is provided 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.
OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2006, 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 professionals to address the need for
affordable healthcare nationwide. We create, market and sell discount healthcare
membership 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 over 1,000,000 medical professionals
that have agreed to render their services and products to CARExpress members at
discounted prices. CARExpress enables people to engage in point-of-service
transactions directly with these providers and pay discounted prices that are
similar in amount to those paid by insurance companies on behalf of their
insureds.
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 PPOs
that are utilized by employers that self-fund at least a portion of their
employees' healthcare costs. 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 through a
network marketing strategy under the name CARExpress, through resellers that
privately label or co-brand our CARExpress membership programs, and through
employers as part of their employee benefit plans.
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BACKGROUND
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 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 2005, we began to more actively pursue
opportunities to sell our CARExpress membership programs. During 2005, we
entered into agreements with several marketing and distribution partners to
market and sell our CARExpress membership programs, and engaged in our first
test marketing campaign 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.
Our strategy is to sustain and expand our position as a provider of
unique healthcare membership service programs. We are currently actively engaged
in marketing our CARExpress membership programs to the public and are focused on
generating increased sales of our CARExpress membership programs. The target
market for our programs is comprised of individuals who have either limited
health benefits or no health benefits. 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 marketing and distribution partners, we intend to
pursue opportunities in the healthcare market that insurance companies have not
addressed.
HEALTHCARE INDUSTRY
The U.S. Department of Commerce estimates that 15.9% of all Americans,
or 46.6 million individuals, were without health insurance coverage in 2005, up
from 15.6%, or 45.3 million individuals, in 2004, an increase of 1.3 million
people. According to the National Coalition on Healthcare, the primary reason
for this increase is that rapidly rising health insurance premiums have caused
many employers to reduce or discontinue health insurance coverage. 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 HMOs 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 as having to pay the full cost of the medical products and
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 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.
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 HMOs and insurance companies determine the procedures to be
performed through their coverage policies. In addition, doctors and hospitals,
having experienced decreases in their income and profits, are demanding higher
compensation, particularly from HMOs.
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 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.
We believe 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 fee 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 need for solutions to the problems facing the healthcare industry
led to 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 assist them in reducing their out-of-pocket healthcare costs.
Discount health programs are typically offered to these individuals in the form
of traditional membership service programs.
OUR CAREXPRESS HEALTHCARE SOLUTION
Overview
We offer discount healthcare membership programs designed in response
to the growing number of people who can no longer obtain adequate health
insurance. Our programs provide a lower-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 are
able to pay discounted prices 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 our discount healthcare membership programs for uninsured and
underinsured individuals. Our membership programs encompass all aspects of
healthcare, including physicians, hospitals, ancillary services, dentists,
prescription drugs, vision care, hearing aids, chiropractic services,
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 programs
through a national healthcare savings network called CARExpress. We provide
CARExpress members with access to healthcare providers affiliated with PPOs such
as CareMark, Aetna, Optum, Integrated Health, Three Rivers and International
Med-Care through which our members can utilize the products and services of over
1,000,000 healthcare providers in the United States. Our CARExpress membership
programs enable people across 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.
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We sell our CARExpress membership programs directly and indirectly
through marketing representatives, brokers and other third parties. Our programs
typically range in price from $9.95 to $39.95 per month, depending upon the
program selected. We also offer features to encourage potential members to try
out our CARExpress membership programs, including refund guarantees and "trial"
periods of free or discounted membership. Healthcare products and services are
bundled, priced and marketed utilizing relationship marketing strategies to
target the profiled needs of our customers. The discounted prices paid 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 to file any
insurance claims. These discounts are designed to save the individual
substantially more than the cost of the program itself.
Our CARExpress membership programs are not insurance. There is no
undertaking by us to pay a portion of any fee for services or prescriptions
purchased using our CARExpress membership cards. Rather, our CARExpress
membership programs provide consumers with access to healthcare providers who,
through their affiliations with PPOs, have agreed in advance to honor our
CARExpress membership cards and accept the discounted fees set by the PPOs.
CARExpress members simply present their CARExpress membership card to the
participating provider at the time of the service to receive the discounted
price.
We believe that millions of Americans can benefit in some manner from
joining CARExpress, whether they have health insurance or not. We believe that
our CARExpress membership programs are most attractive 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;
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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
People gain access to our network of healthcare providers by paying us
monthly membership fees. Most members pay for our programs on a monthly basis,
either through automatic bank drafts or credit cards. People 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. We offer 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 membership 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.
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 a third-party
plan administrator 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 or her 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 businesses, and healthcare providers and provider
networks.
Benefits to Members. We believe our CARExpress membership programs are
attractive to our members because our programs provide them with access to a
variety of healthcare products and services at discounted prices. 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.
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Benefits to Unions, Associations and Businesses. We believe that our
CARExpress membership programs are attractive to unions, associations,
businesses and other organizations with large numbers of members or employees
because our programs 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 Healthcare Providers and Provider Networks. We believe that
our CARExpress membership programs are attractive to physicians, hospitals and
other healthcare providers because our programs help healthcare providers and
provider networks 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 billing procedures and cost
associated with insurance 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 healthcare
providers will affiliate with the provider networks so as to gain access to a
greater number of potential customers and patients.
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 or no healthcare
benefits. We have developed programs that give individuals access to healthcare
providers at reduced fees that offer value and savings to people 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 companies 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 products and
services, such as accidental death coverage.
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Recruit Marketing and Distribution Partners. Growth in sales of our
CARExpress membership programs is dependent upon our marketing and distribution
partners continuing to market our CARExpress membership programs to prospective
customers and recruit additional marketing and distribution partners to market
our CARExpress membership programs to prospective customers. We intend to
continue to focus our efforts on retaining our existing marketing and
distribution partners and obtaining new marketing and distribution partners
through our direct sales team. We also intend to continue to support our
marketing and distribution partners 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
marketing and distribution partners through lead development, marketing support,
sales assistance and training.
Leverage PPOs and Provider Networks. We intend to negotiate agreements
with additional PPOs and other provider networks. While we currently have
contractual relationships with several PPOs, we need to continuously assess the
capabilities of our PPOs and work towards making alternative healthcare
solutions available to 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, healthcare provider and marketing and
distribution partner loyalty, we continue to develop and invest significantly in
our customer service systems. Our customer service center provides cardholders
and healthcare providers with 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 with 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 and
distribution partners, we are attempting to promote sales of our CARExpress
membership programs to groups and self-funded employers through a
corporate-level sales team with experience in group insurance market and the
operations of third-party administrators.
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CUSTOMERS
The target customers of CARExpress products are individuals who are
uninsured or underinsured.
Our primary target customer group is comprised of the 46 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 through their employers. 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.
PROGRAMS
We offer several distinct CARExpress membership programs that provide
members with access to distinct discounted healthcare products and services. We
also design healthcare membership programs for unions, associations, businesses
and other organizations that sell our CARExpress membership programs in
combination with third-party 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.
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 only
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.
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Supplemental Care Program. This program is designed for individuals and
families who are underinsured and offers everything our comprehensive care
program offers, 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 product 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. 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:
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 benefit by offering our CARExpress programs as a supplement to their
catastrophic health insurance products. A consumer may 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.
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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 and 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 and distribution partners
that are licensed insurance agents.
HEALTHCARE PROVIDERS
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 that 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 CareMark, Aetna, Optum, Integrated Health, Three Rivers
and International Med-Care. Under our various agreements with these PPOs or
their respective affiliates, our members are provided with access to their
network of healthcare providers in varying combinations of specialties and at
varying discounts from the scheduled prices for covered products and services.
Although we have arrangements in place with several 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.
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CareMark. 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. Our
agreement with CareMark was entered into on July 1, 2001 and may be terminated
by either party on 60 days' prior written notice.
Aetna. National Benefit Builders provides CARExpress with access to the
Aetna dental network at discounted rates. The Aetna dental network is comprised
of an aggregate of approximately 65,000 dentists and other dental service
providers. We make monthly payments to National Benefit Builders equal to the
greater of a flat fee or a monthly rate based on the number of CARExpress
members utilizing the Aetna dental network. Our agreement with National Benefit
Builders 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 written notice provided at least 60 days prior the expiration of the
then current term.
Optum. United HealthCare Services 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 to United HealthCare Services 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. Our agreement with
United HealthCare Services 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.
Integrated Health, Three Rivers and International Medcare. Competitive
Health, Inc. provides CARExpress with access to the network of healthcare
providers of Integrated Health, Three Rivers 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 Integrated Health, Three Rivers 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 to Competitive
Health equal to the greater of a flat fee or a monthly rate based on the number
of CARExpress members utilizing these networks. Our Agreement with Competitive
Health 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
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 services available to
our CARExpress members 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 any of these
organizations to partner with one of our competitors or compete directly with
us, may have a material adverse effect on our business, financial performance
and results of operations.
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MARKETING AND DISTRIBUTION
We market our CARExpress membership programs directly to individual
consumers through television, radio, newspapers, magazines and the Internet. We
also market and support our CARExpress membership programs through our Web site.
Our Web site enables consumers to review our CARExpress membership programs, our
healthcare providers and their locations, the products and services available
through our healthcare providers, and the discounts and special promotions
available to members for their products and services. Consumers can also
purchase our CARExpress membership programs through our Web site by filling out
an application online. 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 marketing and distribution
channels.
We also market our CARExpress membership programs indirectly through:
(i) marketing companies, (ii) brokers and agents, (iii) retail chains and
outlets, (iv) small businesses and trade associations, and (v) unions and
associations.
Marketing Companies. We utilize the services of marketing companies to
market our CARExpress membership programs to prospective customers, such as
individual consumers and employers typically having less than 50 employees.
Marketing companies are groups of sales persons 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 marketing companies
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 marketing companies market our programs are
current clients of the marketing companies who have purchased products or
services through the marketing companies in the past. The other prospective
customers are new clients that the marketing companies have identified through
their own efforts. To receive the right to market and sell our CARExpress
membership programs, marketing companies sign a standard services 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. Our marketing
companies 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 our marketing companies fees that are typically comprised of a
commission on the sale price of the CARExpress membership program and/or an
up-front fee per member generated. The amount of the commissions and up-front
fees that we pay to marketing companies are determined based on the type of
membership programs being sold by the marketing companies and the number of
members being generated over a set period of time by the marketing companies. We
typically pay marketing companies the up-front fee for obtaining a new member
only if the member becomes a paying member, and we only pay marketing companies
commissions for membership periods during which we are receiving membership
fees. Marketing companies are paid these commissions for the life of the
members' enrollment with CARExpress. Marketing companies may also recruit other
companies or individuals to sell our CARExpress membership programs and receive
a portion of the commissions earned by these other representatives on sales that
they make. While the process of marketing representatives recruiting other
marketing representatives can extend through as many as five levels, it
typically extends to between only one and three levels. Our obligation to pay a
marketing company a commission for a particular month accrues on the date we
receive payment of the monthly membership fee from the member for that month.
Typically, a minimum member retention period of one to two months is required
for a commission payment to be earned by our marketing companies for paying
members.
Brokers and Agents. We sell our CARExpress membership programs through
brokers and agents by entering into commission-sharing arrangements with them
under which they market and sell our CARExpress membership programs to
individual consumers through large employer groups, insurance brokers and
associations. Our CARExpress membership programs are not competitive with the
insurance products they sell, but instead are viewed as complementary product
offerings. Brokers and agents who sell healthcare benefits programs to employers
and individuals may use our CARExpress membership programs as a value-added
offering to the traditional insurance products that they sell.
Retail Chains and Outlets. We market our CARExpress membership programs
to retail chains and outlets that sell products to consumers on a retail level,
such as grocery stores, pharmacy chains and convenience stores. Retail
distribution of our CARExpress membership programs offers us several benefits,
including a large pool of potential target customers, increased credibility from
being aligned with well-named retailers, private labeling opportunities with the
retailers, and visibility through in-store membership displays. 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 for each membership sold.
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 such organizations if the
organizations opt to purchase or subsidize our programs. Alternatively, these
organizations may simply offer their employees or members the opportunity to
purchase our programs directly from us or through a payroll deduction plan. In
this event, we will typically pay such organizations a marketing fee for each
membership sold.
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Unions and Associations. We market our CARExpress membership programs
to unions, associations, corporations and similar organizations. These
organizations provide us with the opportunity to acquire a large group of
members. Group accounts provide us with higher retention rates for memberships
because of factors such as organization sponsorship of its members or employees,
subsidizing of monthly membership fees by such organizations, and lower cost
memberships to members or employees resulting from significantly lower prices
charged to the organization. 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 their employees or members the opportunity to purchase our programs
directly from us or through a payroll deduction plan. In this event, we will
typically pay the organizations a marketing fee for each membership sold.
SERVICE PROVIDERS, CONSULTANTS AND ADVISORS
Over the past 12 months, we have entered into agreements with several
service providers, consultants and advisors for the provision of various
services on our behalf. These services generally consist of such activities as
the sale of our CARExpress membership programs, marketing and promotion of our
business and CARExpress membership programs, support for our marketing
activities, advice with respect to our marketing strategies, product development
and business development, 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,
management consulting services, and advice regarding strategic planning, mergers
and acquisitions, capital expenditures, and general corporate and organizational
matters. 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 rather than cash so as to conserve
our cash resources and provide the service providers, consultants and advisors
with an incentive to help us succeed in our efforts to grow our business. These
agreements are for terms ranging between six months and five years.
CUSTOMER SERVICE, TRAINING AND SUPPORT
We believe that providing superior customer support is critical to our
business. Currently, we maintain a call center at our corporate headquarters in
Horsham, Pennsylvania, where we employ full-time customer service
representatives and utilize the services of 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 11:00 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, employers and other sponsoring organizations,
and healthcare providers and provider networks. 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.
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In order to achieve our anticipated growth and to ensure client, member
and marketing and distribution partner 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 with immediate access to provider demographic data and member
information, including the components of each member program or plan and the
details a member requires to properly utilize the program. All new customer
service representatives are required to complete a training course before
beginning to take calls and attend on-the-job training thereafter. Through our
training programs, systems and software, we seek to provide members with
friendly, rapid and effective answers to questions. We continue to work closely
with our healthcare providers and organizations to ensure that their
representatives are knowledgeable about our CARExpress membership programs.
We provide extensive training to our sales representatives to assure
that they accurately represent our products and services. This training is
available in a variety of forms, including a training manual, audiotapes 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 sales
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 the representatives can advertise our programs.
The failure of a representative to follow these rules can result in termination
of the representative's relationship with us.
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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.
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;
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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 and distribution partners 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.
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.
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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.
Compliance with such regulations or legislation could have a material adverse
affect on our operations and financial condition.
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. If we do
not comply with the regulations or legislation of these states, we may be
prevented from selling our programs in these states or may be subject to fines
and penalties that could have a material adverse affect on our operations and
financial condition.
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 insurance brokers and 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.
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Our failure to comply with current, as well as newly enacted or
adopted, federal and state regulations could have a material adverse effect upon
our business, financial condition and results of operations in addition to the
following:
o non-compliance may cause us to become the subject of a variety of
enforcement or private actions;
o compliance with changes in applicable regulations could materially
increase the associated operating costs;
o non-compliance with any rules and regulations enforced by a federal
or state consumer protection authority may subject us or our
management personnel to fines or various forms of civil or criminal
prosecution; and
o non-compliance or alleged non-compliance may result in negative
publicity potentially damaging our reputation, network relationships,
client relationships and the relationship with program members,
representatives and consumers in general.
Product Claims and Advertising Laws. The Federal Trade Commission and
certain states regulate advertising, product claims, and other consumer matters.
The Federal Trade Commission may institute enforcement actions against companies
for false and misleading advertising of consumer products. In addition, the
Federal Trade Commission has increased its scrutiny of the use of testimonials,
similar to 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 marketing representatives, customers or others. Remedies sought
in these actions may include consent decrees and the refund of amounts paid by
the complaining marketing representatives or consumer, refunds to an entire
class of marketing representatives or customers, client refunds, or other
damages, as well as changes in our method of doing business. A complaint based
on the practice of one marketing representative, whether or not we authorized
the practice, could result in an order affecting some or all of our marketing
representatives in a particular state. Also, an order in one state could
influence courts or government agencies in other states considering similar
matters. Proceedings resulting from these complaints could result in significant
defense costs, settlement payments or judgments and could have a material
adverse effect on us.
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Marketing Laws and Regulations. 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 marketing companies to market our CARExpress
membership programs to the public. The marketing activities of the marketing
companies that we utilize, including the manner by which such marketing
companies 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.
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.
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Franchise Laws and Regulations. The Federal Trade Commission, as well
as the securities regulators in states that have franchise laws, may assert that
our relationships with marketing representatives are subject to the
registration, disclosure and reporting requirements applicable to franchises.
Although we 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. We have applied for
trademark registration for our CARExpress brand and may apply for legal
protection for certain of our other intellectual property in the future.
However, we can provide no assurance that we will receive such legal protection
or that, if received, such legal protection will be adequate to protect our
intellectual property rights.
EMPLOYEES
As of October 25, 2006, we had 17 employees. Of this number, 14 were
full-time employees, comprised of our management and full-time customer service
personnel, and three were part-time employees. We utilize the services of
approximately 20 consultants and advisors as well as after-hours call center
representatives and temporary customer service representatives. We do not employ
the individuals working for our after-hours call center or the temporary
customer service representatives. 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 believe that our
office space is adequate to support our current operations and that adequate
additional space is available to support projected growth in our operations over
the next 12 months.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following chart sets forth certain information about each of our
directors and executive officers.
Name Age Positions Held
- ---- --- --------------
David M. Daniels 49 Chairman, Chief Executive Officer and
President
Alex Soufflas 32 Chief Financial Officer, Executive Vice
President and Secretary
David A. Taylor 49 Senior Vice President - National Sales
Patricia S. Bathurst 52 Vice President - Marketing
The following is a brief summary of the business experience of each of
the above-named individuals:
David M. Daniels has served as our Chief Executive Officer and a member
of our board of directors since February 2004, and has served as our President
since February 2005. From 1998 to February 2004, Mr. Daniels provided financing
and management consulting services to several companies operating in the
manufacturing, technology and services industries, 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.
Alex Soufflas has served as our Chief Financial Officer and Secretary
since February 2006 and has served as our Executive Vice President since August
2005. Mr. Soufflas served as our General Counsel from August 2005 until February
2006. From May 2004 to August 2005, Mr. Soufflas was an attorney at Duane Morris
LLP, a national law firm, where he specialized in public and private securities
offerings, mergers & acquisitions, contracts and 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.
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David A. Taylor has served as our Senior Vice President - National
Sales since February 2006 and served as our Vice President - Sales from August
2005 to February 2006. 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, Inc., 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, Controller - Corporate Services from 1992 to 1994, General Manager -
Marketing Services from 1994 to 1995, and 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.
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 for Horizon
Healthcare Group, Inc., a provider of healthcare services utilizing national
provider networks that she co-founded in 1985. Prior to 1985, Ms. Bathurst
served as the Director of Administration and Customer Service for Phoenix
International Corporation, a provider of healthcare services utilizing national
provider networks. Ms. Bathurst is a graduate of Temple University with a B.A.
in business administration.
BOARD OF DIRECTORS
David M. Daniels, our Chief Executive Officer and President, is the
sole member of our board of directors. 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 our board of directors. 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
$1,000 plus reasonable travel expenses for attendance in person at any meetings
of the board of directors for which attendance in person was specifically
requested by the chairman of the board of directors. We do not provide any
compensation to our employee directors.
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EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation earned by the executive officers named below during the fiscal
years ended December 31, 2005, 2004 and 2003.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Other Annual Restricted Securities All Other
Name and Fiscal Compen- Stock Underlying Compen-
Principal Position Year Salary ($) Bonus ($) sation ($)(5) Awards ($) Options (#) sation ($)(6)
- ------------------ ---- ---------- --------- ----- ---------- ----------- ----------
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(7) -0- -0-
Chief Executive Officer
Alex Soufflas (2) 2005 59,400 -0- -0- -0- 1,000,000 -0-
Chief Financial Officer,
Executive Vice President and
Secretary
David A. Taylor (3) 2005 49,500 -0- -0- 11,000(8) 1,000,000 -0-
Senior Vice President -
National Sales
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-
Roger H. Folts (4) 2005 160,900 -0- -0- 1,000(10) 1,000,000 -0-
Former Chief Financial 2004 113,500 -0- 7,270 18,120(11) -0- -0-
Officer and Secretary 2003 -0- -0- 13,685 -0- -0- -0-
(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 Chief Financial Officer and Secretary on
February 15, 2006 and, in connection therewith, resigned as our General Counsel.
Mr. Soufflas was appointed our Executive Vice President on August 15, 2005.
(3) Mr. Taylor was appointed our Senior Vice President - National Sales on
February 15, 2006 and, in connection therewith, resigned as our Vice President -
Sales.
(4) Mr. Folts resigned as our Chief Financial Officer and Secretary on February
8, 2006.
(5) Consists of non-salary cash consulting fees that we paid to the applicable
executive officers prior to our implementation of salaries for them in March
2004.
(6) Consists of the dollar value of insurance premiums that we paid 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.
(7) Represents 1,748,250 shares of common stock at an ascribed value of $.40 per
share.
(8) Represents 27,500 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 2,500 shares of common stock at an ascribed value of $.40 per
share.
(11)Represents 45,300 shares of common stock at an ascribed value of $.40 per
share.
58
We are a party to employment agreements with each of David M. Daniels,
Alex Soufflas, David A. Taylor and Patricia M. Bathurst. Under these agreements,
we are currently paying Messrs. Daniels, Soufflas and Taylor and Ms. Bathurst an
annualized base salary of $254,100, $210,000, 162,000 and $145,200,
respectively. We have issued Mr. Daniels an option to acquire 2,500,000 shares
of our common stock and have issued each of Messrs. Soufflas and Taylor and Ms.
Bathurst an option to acquire 1,000,000 shares of our common stock. In addition,
we recently issued restricted stock awards to each of Messrs. Daniels, Soufflas
and Taylor and Ms. Bathurst with respect to 450,000, 300,000, 375,000 and
225,000 shares of our common stock, respectively. A summary of these employment
agreements and securities is provided under "Executive Compensation - Employment
Contracts and Arrangements."
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
The following table sets forth, for each named executive officer,
information regarding options granted to the officers during our fiscal year
ended December 31, 2005. We have not granted any stock appreciation rights to
any of our named executive officers.
Percent of
Total
Number of Options
Securities Granted to Exercise or
Underlying Employees Base
Options in Fiscal Price
Name Granted (#) Year ($ / 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 stock
appreciation rights 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.
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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 original 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 are a party to employment agreements with David M. Daniels, Alex
Soufflas, Patricia S. Bathurst and David A. Taylor. A summary of the material
terms of these employment agreements and the stock options and restricted stock
awards granted to each of these executive officers is provided below.
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. On March 28, 2006, we granted Mr.
Daniels a restricted stock award with respect to 450,000 shares of our common
stock.
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Alex Soufflas
On March 29, 2006, we entered into an employment agreement with Alex
Soufflas to serve as our Chief Financial Officer and Executive Vice President
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. Soufflas is entitled to an annual base salary of $210,000 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. On August 15, 2005, we granted
Mr. Soufflas an option to acquire 1,000,000 shares of our common stock and March
28, 2006, we granted Mr. Soufflas a restricted stock award with respect to
300,000 shares of our common stock.
David A. Taylor
On March 29, 2006, we entered into an employment agreement with David
A. Taylor to serve as our Senior Vice President - National Sales 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.
Taylor is entitled to an annual base salary of $162,000 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. On August 15, 2005, we granted Mr. Taylor an
option to acquire 1,000,000 shares of our common stock and March 28, 2006, we
granted Mr. Taylor a restricted stock award with respect to 375,000 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. On March 28,
2006, we granted Ms. Bathurst a restricted stock award with respect to 225,000
shares of our common stock.
The employment agreements with Mr. Daniels 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.
The employment agreements with Messrs. Soufflas and Taylor 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 entitled to
receive an amount equal to the annual base salary such officer was receiving on
the date of termination to be paid over a period of 12 months. "Good reason"
includes a "change in control," which includes: (i) the acquisition by any
person of 50% 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 all or substantially all of our assets; or (iv) approval by our stockholders
of a liquidation or dissolution of us.
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The options we granted to Mr. Daniels, Mr. Folts and Ms. Bathurst 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 1st 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 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 officer's 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.
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The restricted stock awards that we granted to Messrs. Daniels,
Soufflas and Taylor and Ms. Bathurst vest in three equal annual installments
commencing on the date of grant. 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," as such terms are defined in such
officer's respective employment agreement, the officer's restricted stock award
vests in full immediately. "Good reason" includes a "change in control," which
includes: (i) the acquisition by any person of 50% 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 all or substantially all of our assets;
or (iv) approval by our stockholders of a liquidation or dissolution of us. In
the event the employment of the applicable executive officer is terminated for
"cause," any shares of common stock that have not vested as of the date of
termination are forfeited to us and cancelled.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 25, 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 October 25, 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.
Amount and Nature
of Beneficial Percentage
Name and Address of Beneficial Owner Ownership (1) of Class (1)
- ------------------------------------ ------------- ------------
David M. Daniels 2,698,050 (2) 9.2%
Patricia S. Bathurst 832,600 (3) 2.8%
Alex Soufflas 550,000 (4) 1.9%
David A. Taylor 652,500 (5) 2.2%
Roger H. Folts 1,050,000 (6) 3.6%
Ronald F. Westman 5,313,000 (7) 18.1%
Jesus Lozano 1,650,000 (8) 5.6%
Robert Sage 1,615,000 (9) 5.5%
All officers and directors as a group (4 persons) 5,783,150 (10) 19.7%
- ---------------------
* Less than 1%.
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(1) This table has been prepared based on 29,308,231 shares of our common stock
outstanding on October 25, 2006.
(2) Includes 1,250,000 shares issuable upon the exercise of options that have an
exercise price of $.40 per share and 450,000 shares underlying restricted stock
awards.
(3) Includes 500,000 shares issuable upon the exercise of options that have an
exercise price of $.40 per share and 225,000 shares underlying restricted stock
awards.
(4) Includes 250,000 shares issuable upon the exercise of options that have an
exercise price of $.40 per share and 300,000 shares underlying restricted stock
awards.
(5) Includes 250,000 shares issuable upon the exercise of options that have an
exercise price of $.40 per share and 375,000 shares underlying restricted stock
awards.
(6) Includes 1,000,000 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.
(8) 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.
(9) Includes 750,000 shares issuable upon the exercise of warrants that have an
exercise price of $.50 per share, 60,000 shares issuable upon the exercise of
warrants that have an exercise price of $.60 per share, 250,000 shares issuable
upon the exercise of warrants that have an exercise price of $.80 per share, and
135,000 shares issuable upon the exercise of warrants that have an exercise
price of $2.00 per share.
(10) Includes 3,750,000 shares issuable upon the exercise of options that have
an exercise price of $.40 per share and 1,350,000 shares underlying restricted
stock awards.
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 18.1% 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.
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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 18.3% 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.
On February 8, 2006, Roger H. Folts resigned as our Chief Financial
Officer and Secretary. Concurrently therewith, we entered into a termination and
mutual release with Mr. Folts effective February 1, 2006 pursuant to which his
employment agreement was terminated effective February 1, 2006, and we and Mr.
Folts agreed to release each other from any and all claims that they may now
hold or may in the future hold arising out of the employment agreement or Mr.
Folts' employment with or separation from us. We also entered into a consulting
agreement with Mr. Folts on February 8, 2006 pursuant to which Mr. Folts agreed
to provide accounting and related services to us on a full-time basis until June
30, 2006 and thereafter on a part-time basis until February 1, 2009, and in
exchange for which we agreed to issue him 300,000 shares of our common stock and
continue paying him the salary he was receiving under his employment agreement
until March 31, 2006.
On April 1, 2006, we terminated the lease for our facility in Sarasota,
Florida. Under the termination and release agreement: (i) the Commercial Office
Lease dated June 13, 2005 between us and Centerpointe Property, LLC was
terminated effective April 1, 2006; (ii) we issued 10,000 shares of our common
stock to Centerpointe Property, LLC in full payment of all rent and other
expenses that were due and payable under the lease on April 1, 2006; and (iii)
both parties agreed to release each other from any and all claims that they may
now hold or may in the future hold arising out of the lease. We did not incur
any material early termination penalties in connection with the termination of
the lease. Ronald F. Westman owns all of the outstanding membership interests in
Centerpointe Property, LLC jointly with his wife, beneficially owns
approximately 18.3% of our common stock, and served as a member of our board of
directors from June 29, 2005 to September 26, 2005.
We have entered into employment agreements with each of David M.
Daniels, Alex Soufflas, Patricia S. Bathurst and David A. Taylor and have issued
stock options and restricted stock awards to each of them. A description of the
employment agreements, stock options and restricted stock awards is set forth
under "Executive Compensation -- Employment Contracts and Arrangements" of this
prospectus.
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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 29,308,231 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 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 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 do 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.
MARKET INFORMATION
Our common stock commenced trading on the OTC Bulletin Board under the
symbol "NHPR" on March 30, 2006. The following table sets forth the range of
high and low bid prices for shares of our common stock on the OTC Bulletin Board
for the periods indicated, as reported by Nasdaq. These quotations represent
inter-dealer prices, without retail mark-up, markdown or commission, and may not
represent actual transactions.
Fiscal Year Ending December 31, 2006 High Low
------------------------------------ ---- ---
Quarter ended March 31, 2006 $0.85 $0.40
Quarter ended June 30, 2006 $2.15 $0.65
Quarter ended September 30, 2006 $1.61 $0.52
The last price of the Company's common stock as reported on the OTC
Bulletin Board on October 25, 2006, was $1.13 per share.
HOLDERS
As of October 25, 2006, the number of stockholders of record of our
common stock was 130.
67
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.
THE OFFERING
This prospectus covers the public sale of 5,432,443 shares of common
stock to be sold by the selling security holders identified in this prospectus.
Of this amount, 3,177,693 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 offer the shares covered by this
prospectus at fixed prices, at prevailing market prices at the time of sale, at
varying prices or negotiated prices, in negotiated transactions, or in trading
markets for our common stock. We will not receive any proceeds from this
offering.
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. The Class A warrants were initially exercisable into one share
of our common stock at an exercise price of $1.00 per share during a period
beginning January 27, 2006 and ending July 26, 2006 and are no longer
exercisable. The Class B warrants are initially exercisable into one share of
our common stock at an exercise price of $2.00 per share during a period
beginning January 27, 2006 and ending November 30, 2006, the expiration date. 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.
68
This prospectus covers the public resale of 466,250 shares of common
stock and 694,250 shares of common stock issuable upon exercise of the Class B
Warrants.
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. The Class A warrants were initially exercisable into one share of our
common stock at an exercise price of $1.00 per share during a period beginning
January 27, 2006 and ending July 26, 2006 and are no longer exercisable. The
Class B warrants are initially exercisable into one share of our common stock at
an exercise price of $2.00 per share during a period beginning January 27, 2006
and ending November 30, 2006, the expiration date. 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 55,000 shares of common
stock 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. The Class A warrants were initially exercisable into one
share of our common stock at an exercise price of $1.00 per share during a
period beginning January 27, 2006 and ending July 26, 2006 and are no longer
exercisable. The Class B warrants are initially exercisable into one share of
our common stock at an exercise price of $2.00 per share during a period
beginning January 27, 2006 and ending November 30, 2006, the expiration date. 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.
69
This prospectus covers the public resale of 718,000 shares of common
stock and 393,128 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. The Class A warrants were
initially exercisable into one share of our common stock at an exercise price of
$1.00 per share during a period beginning January 27, 2006 and ending July 26,
2006 and are no longer exercisable. The Class B warrants are initially
exercisable into one share of our common stock at an exercise price of $2.00 per
share during a period beginning January 27, 2006 and ending November 30, 2006,
the expiration date. 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 156,000 shares of common
stock and 184,439 shares of common stock issuable upon exercise of the Class B
Warrants.
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. The Class A warrants are initially exercisable into one and
one-half shares of our common stock at an exercise price of $.60 per share
during a period beginning January 27, 2006 and ending July 27, 2007, and expire
on December 31, 2007. The Class B warrants are initially exercisable into one
and one-half shares of our common stock at an exercise price of $.80 per share
during a period beginning January 27, 2006 and ending December 31, 2008, the
expiration date. 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.
70
This prospectus covers the public resale of 211,000 shares of common
stock, 143,938 shares of common stock issuable upon the exercise of the Class A
warrants and 151,438 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. The
Class A warrants are initially exercisable into one share of our common stock at
an exercise price of $.60 per share during a period beginning January 27, 2006
and ending July 27, 2007, and expire on December 31, 2007. The Class B warrants
are initially exercisable into one share of our common stock at an exercise
price of $.80 per share during a period beginning January 27, 2006 and ending
December 31, 2008, the expiration date. 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 thus covers the public resale of 580,000 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. The
Class A warrants are initially exercisable into one share of our common stock at
an exercise price of $.60 per share during a period beginning January 27, 2006
and ending July 27, 2007, and expire on December 31, 2007. The Class B warrants
are initially exercisable into one share of our common stock at an exercise
price of $.80 per share during a period beginning January 27, 2006 and ending
December 31, 2008, the expiration date. The Class C warrants were initially
exercisable into one share of our common stock at an exercise price of $1.00 per
share during a period beginning January 27, 2006 and ending July 26, 2006 and
are no longer exercisable. 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. 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 - Service
Providers, Consultants and Advisors."
71
This prospectus thus covers the public resale of 68,500 shares of
common stock, 68,500 shares of common stock issuable upon the exercise of the
Class A warrants, and 68,500 shares of common stock issuable upon exercise of
the Class B warrants.
SELLING SECURITY HOLDERS
The selling security holders identified in the following table are
offering for resale 5,432,443 shares of our common stock of which 3,177,693 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 October 25, 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.
72
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) 293,438 1.00% 77,813 215,625 *
Bart Alink (2) 86,250 * 43,125 43,125 *
AUW, Inc. (3) 53,438 * 19,688 33,750 *
Harry Baas (4) 160,418 * 80,209 80,209 *
William Barker (5) 45,000 * 15,000 30,000 *
Frederick Bates, Jr. (6) 2,375 * 1,875 500 *
Marco Boschetti (7) 30,000 * 5,000 25,000 *
Maya Boschetti (8) 25,000 * 5,000 20,000 *
Gordon Cantley (9) 522,750 1.78% 26,875 495,875 1.69%
Rene Carrel (10) 135,000 * 55,000 80,000 *
Andrew Catignani (11) 18,750 * 6,250 12,500 *
Charles Cleland, Jr. (12) 260,000 * 140,000 120,000 *
Charles Cleland, Sr. (13) 165,000 * 75,000 90,000 *
Evans Connelly (14) 45,000 * 15,000 30,000 *
Freeman Correa, Jr. (15) 60,000 * 30,000 30,000 *
James Creed (16) 622,918 2.13% 102,084 520,834 1.78%
Andreas Eggenberger (17) 120,000 * 45,000 75,000 *
Daniel Eggenberger (18) 485,000 1.65% 60,000 425,000 1.45%
Jon and Amy Fisher (19) 17,500 * 8,750 8,750 *
Gwen Forman (20) 17,500 * 8,750 8,750 *
Lukas Frei (21) 50,000 * 20,000 30,000 *
Lukas Frei and Luzia 40,000 * 20,000 20,000 *
Frei-Weber (22)
GE Globo Entertainment (23) 200,000 * 5,000 195,000 *
Ben Giese (24) 722,084 2.46% 102,250 619,834 2.11%
Michael and Beverly Gillis (25) 41,250 * 20,625 20,625 *
Basil and Susan Gray (26) 11,250 * 5,625 5,625 *
Edward Harris (27) 87,618 * 36,459 51,159 *
Gunther Heinkel (28) 127,500 * 57,500 70,000 *
Jean Hill (29) 25,000 * 12,500 12,500 *
Walter Hill (30) 420,000 1.43% 37,500 382,500 1.31%
Robert Hillier (31) 270,000 * 135,000 135,000 *
Ramon Huber (32) 220,000 * 60,000 160,000 *
Rita Huerzeler (33) 40,000 * 15,000 25,000 *
RWA Huuskes-Krabbe (34) 50,000 * 25,000 25,000 *
Lawrence Jellen (35) 218,750 * 93,750 125,000 *
Marold Kamai (36) 50,000 * 12,500 37,500 *
L&L Investments (37) 180,000 * 47,500 132,500 *
Paul Langton (38) 113,126 * 14,063 99,063 *
Henry Tripler Larzelere, Jr. (39) 295,000 1.01% 36,875 258,125 *
Dennis Lastine (40) 1,006,250 3.43% 428,125 578,125 1.97%
73
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
- ------------------------------- ------ ------- ------ ------ -------
Jesus Lozano (41) 1,650,000 5.63% 825,000 825,000 2.81%
Thomas Lustgarten (42) 40,000 * 20,000 20,000 *
Jorg Meier (43) 30,000 * 10,000 20,000 *
Richard Merritt (44) 15,625 * 3,125 12,500 *
Metropolitan Anethesia Alliance 26,250 * 9,375 16,875 *
401K PS PL (45)
Michael Mitsuka (46) 143,750 * 38,750 105,000 *
Thomas Moser (47) 195,000 * 90,000 105,000 *
Claire Mumenthaler (48) 35,000 * 10,000 25,000 *
Freek Nietsch (49) 86,250 * 43,125 43,125 *
Rene Ortega, Jr. (50) 1,055,000 3.60% 58,750 996,250 3.40%
Park Financial Group, Inc. (51) 274,000 * 205,500 68,500 *
Philipp Portenier (52) 78,500 * 23,500 55,000 *
Guy Quigley (53) 75,000 * 37,500 37,500 *
Suzanne Ragsdale (54) 156,668 * 73,334 83,334 *
Michael Reichstein (55) 40,000 * 20,000 20,000 *
William Ritger (56) 1,075,000 3.67% 337,500 737,500 2.52%
Jay Rosen (57) 250,000 * 60,000 190,000 *
Robert Sage (58) 1,615,000 5.51% 67,500 1,547,500 5.28%
Martin Salm (59) 45,000 * 20,000 25,000 *
Peter Schaetti (60) 100,000 * 40,000 60,000 *
Thomas Schaetti (61) 195,000 * 20,000 175,000 *
Ernst Schoenbaechler (62) 383,000 1.31% 58,000 325,000 1.11%
Keith Shelly (63) 335,000 1.14% 43,750 291,250 *
Kenneth Shelly (64) 50,834 * 15,417 35,417 *
J. Kimo Spencer (65) 120,000 * 60,000 60,000 *
Adrian Spring (66) 60,000 * 20,000 40,000 *
James Sutherland (67) 1,750 * 875 875 *
John Szychowski (68) 137,500 * 28,750 108,750 *
Martin Thony (69) 45,000 * 15,000 30,000 *
Stuart Tiplitsky (70) 148,950 * 65,625 83,325 *
Manuel Torres, Jr. (71) 46,875 * 15,626 31,249 *
Marvin Vaught (72) 207,000 * 82,500 124,500 *
Gabriel Vidales (73) 1,325,000 4.52% 650,000 675,000 2.30%
Stefan Waldner (74) 35,000 * 5,000 30,000 *
Wegelin & Co. (75) 174,500 * 49,500 125,000 *
Sandra Weibel (76) 90,000 * 40,000 50,000 *
Ronda Westman (77) 275,000 * 125,000 150,000 *
Urs Wigger (78) 80,000 * 40,000 40,000 *
Warren Wise (79) 257,375 * 39,375 218,000 *
Julie Wukie (80) 18,750 * 9,375 9,375 *
Jerome Ziarko (81) 947,500 3.23% 50,000 897,500 3.06%
* Represents less than one percent (1%) of our shares outstanding.
74
(1) The registered shares consist of: (i) 47,250 shares underlying Class B
warrants acquired in the August 2004 Offering; (ii) 11,813 shares underlying
Class B warrants acquired in the March 2005 Offering; and (iii) 18,750 shares
underlying Class B warrants acquired in the February 2005 Offering. 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 and
7,500 shares underlying Class B warrants acquired in the September 2004
Offering; (ii) 3,750 shares of common stock and 1,875 shares underlying Class B
warrants acquired in the March 2005 Offering; and (iii) 11,250 shares of common
stock and 3,750 shares underlying Class B warrants acquired in the February 2005
Offering.
(3) The registered shares consist of: (i) 11,250 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 5,625 shares of common
stock 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 and
12,500 shares underlying Class B warrants acquired in the September 2004
Offering; (ii) 6,250 shares of common stock and 3,125 shares underlying Class B
warrants acquired in the March 2005 Offering; and (iii) 25,000 shares of common
stock and 8,334 shares underlying Class B warrants acquired in the February 2005
Offering.
(5) The registered shares consist of 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 and 500
shares underlying Class B warrants acquired in the August 2004 Offering; and
(ii) 250 shares of common stock and 125 shares underlying Class B warrants
acquired in the March 2005 Offering.
(7) The registered shares consist of 5,000 shares underlying Class B warrants
acquired in the February 2005 Offering.
(8) The registered shares consist of 5,000 shares underlying Class B warrants
acquired in the February 2005 Offering.
(9) The registered shares consist of: (i) 12,500 shares underlying Class B
warrants acquired in the August 2004 Offering; (ii) 6,250 shares of common stock
and 3,125 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 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 and
10,000 shares underlying Class B warrants acquired in the February 2005
Offering; and (ii) 15,000 shares of common stock acquired in the May 2005
Offering.
75
(11) The registered shares consist of: (i) 5,000 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 1,250 shares underlying
Class B warrants acquired in the March 2005 Offering.
(12) The registered shares consist of 20,000 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.
(13) The registered shares consist of 15,000 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.
(14) The registered shares consist of 7,500 shares underlying Class A warrants
and 7,500 shares underlying Class B warrants acquired in the May 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: (i) 70,000 shares underlying Class B
warrants acquired in the August 2004 Offering; (ii) 17,500 shares underlying
Class B warrants acquired in the March 2005 Offering; and (iii) 14,584 shares
underlying Class B warrants acquired in the February 2005 Offering.
(17) The registered shares consist of 45,000 shares of common stock acquired in
the February 2005 Offering.
(18) The registered shares consist of 45,000 shares of common stock and 15,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(19) The registered shares consist of: (i) 5,000 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 2,500 shares of common
stock and 1,250 shares underlying Class B warrants acquired in the March 2005
Offering.
(20) The registered shares consist of: (i) 5,000 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 2,500 shares of common
stock and 1,250 shares underlying Class B warrants acquired in the March 2005
Offering.
(21) The registered shares consist of 15,000 shares of common stock and 5,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(22) The registered shares consist of 15,000 shares of common stock and 5,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(23) The registered shares consist of 5,000 shares underlying Class B warrants
acquired in the February 2005 Offering. The power to vote and dispose of these
shares is controlled by Daniel Eggenberger.
(24) The registered shares consist of: (i) 50,000 shares underlying Class B
warrants acquired in the August 2004 Offering; (ii) 5,750 shares of common stock
and 12,500 shares underlying Class B warrants acquired in the March 2005
Offering; and (iii) 25,500 shares of common stock and 8,500 shares underlying
Class B warrants acquired in the February 2005 Offering.
(25) The registered shares consist of: (i) 16,500 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 4,125 shares underlying
Class B warrants acquired in the March 2005 Offering.
(26) The registered shares consist of: (i) 2,500 shares underlying Class B
warrants acquired in the August 2004 Offering; (ii) 625 shares underlying Class
B warrants acquired in the March 2005 Offering; and (iii) 2,500 shares
underlying Class B warrants acquired in the February 2005 Offering.
(27) The registered shares consist of: (i) 15,000 shares of common stock and
7,500 shares underlying Class B warrants acquired in the August 2004 Offering;
(ii) 3,750 shares of common stock and 1,875 shares underlying Class B warrants
acquired in the March 2005 Offering; and (iii) 6,250 shares of common stock and
2,084 shares underlying Class B warrants acquired in the February 2005 Offering.
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(28) The registered shares consist of: (i) 17,500 shares of common stock 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.
(29) The registered shares consist of: (i) 10,000 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 2,500 shares underlying
Class B warrants acquired in the March 2005 Offering.
(30) The registered shares consist of: (i) 30,000 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 7,500 shares underlying
Class B warrants acquired in the March 2005 Offering.
(31) 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.
(32) The registered shares consist of 45,000 shares of common stock and 15,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(33) The registered shares consist of 10,000 shares of common stock and 5,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(34) The registered shares consist of 18,750 shares of common stock and 6,250
shares underlying Class B warrants acquired in the February 2005 Offering.
(35) The registered shares consist of: (i) 50,000 shares of common stock and
25,000 shares underlying Class B warrants acquired in the August 2004 Offering;
and (ii) 12,500 shares of common stock and 6,250 shares underlying Class B
warrants acquired in the March 2005 Offering.
(36) The registered shares consist of: (i) 10,000 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 2,500 shares underlying
Class B warrants acquired in the March 2005 Offering.
(37) The registered shares consist of: (i) 10,000 shares underlying Class B
warrants acquired in the August 2004 Offering; (ii) 2,500 shares underlying
Class B warrants acquired in the March 2005 Offering; (iii) 5,000 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.
(38) The registered shares consist of: (i) 7,500 shares of common stock and
3,750 shares underlying Class B warrants acquired in the August 2004 Offering;
and (ii) 1,875 shares of common stock and 938 shares underlying Class B warrants
acquired in the March 2005 Offering.
(39) The registered shares consist of: (i) 3,750 shares of common stock and
7,500 shares underlying Class B warrants acquired in the August 2004 Offering;
(ii) 3,750 shares of common stock and 1,875 shares underlying Class B warrants
acquired in the March 2005 Offering; (iii) 15,000 shares of common stock 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.
(40) The registered shares consist of: (i) 175,000 shares of common stock and
87,500 shares underlying Class B warrants acquired in the August 2004 Offering;
(ii) 43,750 shares of common stock and 21,875 shares underlying Class B warrants
acquired in the March 2005 Offering; (iii) 30,000 shares of common stock 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.
(41) 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.
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(42) The registered shares consist of 15,000 shares of common stock and 5,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(43) The registered shares consist of 5,000 shares of common stock and 5,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(44) The registered shares consist of: (i) 2,500 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 625 shares underlying
Class B warrants acquired in the March 2005 Offering.
(45) The registered shares consist of: (i) 7,500 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 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.
(46) The registered shares consist of: (i) 25,000 shares underlying Class B
warrants acquired in the August 2004 Offering; (ii) 6,250 shares underlying
Class B warrants acquired in the March 2005 Offering; and (iii) 7,500 shares
underlying Class B warrants acquired in the May 2005 Offering.
(47) The registered shares consist of: (i) 45,000 shares of common stock 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.
(48) The registered shares consist of 5,000 shares of common stock and 5,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(49) The registered shares consist of: (i) 15,000 shares of common stock and
7,500 shares underlying Class B warrants acquired in the September 2004
Offering; (ii) 3,750 shares of common stock and 1,875 shares underlying Class B
warrants acquired in the March 2005 Offering; and (iii) 11,250 shares of common
stock and 3,750 shares underlying Class B warrants acquired in the February 2005
Offering.
(50) The registered shares consist of: (i) 35,000 shares underlying Class B
warrants acquired in the August 2004 Offering; (ii) 8,750 shares underlying
Class B warrants acquired in the March 2005 Offering; and (iii) 7,500 shares
underlying Class A warrants and 7,500 shares underlying Class B warrants
acquired in the May 2005 Offering.
(51) 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.
(52) The registered shares consist of: (i) 5,000 shares underlying Class B
warrants acquired in the February 2005 Offering; and (ii) 3,500 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: (i) 20,000 shares of common stock and
10,000 shares underlying Class B warrants acquired in the August 2004 Offering;
and (ii) 5,000 shares of common stock and 2,500 shares underlying Class B
warrants acquired in the March 2005 Offering.
(54) The registered shares consist of 52,500 shares of common stock and 20,834
shares underlying Class B warrants acquired in the February 2005 Offering.
(55) The registered shares consist of 15,000 shares of common stock and 5,000
shares underlying Class B warrants acquired in the February 2005 Offering.
78
(56) The registered shares consist of: (i) 100,000 shares of common stock and
50,000 shares underlying Class B warrants acquired in the August 2004 Offering;
(ii) 25,000 shares of common stock 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.
(57) The registered shares consist of 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.
(58) The registered shares consist of: (i) 50,000 shares underlying Class B
warrants acquired in the August 2004 Offering; (ii) 12,500 shares underlying
Class B warrants acquired in the March 2005 Offering; and (iii) 5,000 shares
underlying Class B warrants acquired in the February 2005 Offering.
(59) The registered shares consist of 15,000 shares of common stock and 5,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(60) The registered shares consist of 30,000 shares of common stock and 10,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(61) The registered shares consist of 15,000 shares of common stock and 5,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(62) The registered shares consist of 33,000 shares of common stock and 25,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(63) The registered shares consist of: (i) 35,000 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 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.
(64) The registered shares consist of: (i) 5,000 shares underlying Class B
warrants acquired in the August 2004 Offering; (ii) 1,250 shares underlying
Class B warrants acquired in the March 2005 Offering; and (iii) 9,167 shares
underlying Class B warrants acquired in the February 2005 Offering.
(65) 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.
(66) The registered shares consist of 10,000 shares of common stock and 10,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(67) The registered shares consist of: (i) 500 shares underlying Class B
warrants acquired in the August 2004 Offering; and (ii) 250 shares of common
stock and 125 shares underlying Class B warrants acquired in the March 2005
Offering.
(68) The registered shares consist of: (i) 10,000 shares of common stock and
5,000 shares underlying Class B warrants acquired in the August 2004 Offering;
(ii) 2,500 shares of common stock and 1,250 shares underlying Class B warrants
acquired in the March 2005 Offering; and (iii) 7,500 shares of common stock and
2,500 shares underlying Class B warrants acquired in the February 2005 Offering.
(69) The registered shares consist of 15,000 shares underlying Class B
warrants acquired in the February 2005 Offering.
(70) The registered shares consist of: (i) 35,000 shares of common stock and
17,500 shares underlying Class B warrants acquired in the August 2004 Offering;
and (ii) 8,750 shares of common stock and 4,375 shares underlying Class B
warrants acquired in the March 2005 Offering.
(71) The registered shares consist of 7,813 shares underlying Class A warrants
and 7,813 shares underlying Class B warrants acquired in the May 2005 Offering.
79
(72) The registered shares consist of: (i) 44,000 shares of common stock and
22,000 shares underlying Class B warrants acquired in the August 2004 Offering;
and (ii) 11,000 shares of common stock and 5,500 shares underlying Class B
warrants acquired in the March 2005 Offering.
(73) The registered shares consist of 200,000 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.
(74) The registered shares consist of 5,000 shares underlying Class B warrants
acquired in the February 2005 Offering.
(75) The registered shares consist of 24,500 shares of common stock 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.
(76) The registered shares consist of 30,000 shares of common stock and 10,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(77) The registered shares consist of 25,000 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.
(78) The registered shares consist of 30,000 shares of common stock and 10,000
shares underlying Class B warrants acquired in the February 2005 Offering.
(79) The registered shares consist of: (i) 16,000 shares underlying Class B
warrants acquired in the September 2004 Offering; (ii) 4,000 shares underlying
Class B warrants acquired in the March 2005 Offering; (iii) 9,625 shares
underlying Class B warrants acquired in the February 2005 Offering; and (iv)
4,875 shares underlying Class A warrants and 4,875 shares underlying Class B
warrants acquired in the May 2005 Offering.
(80) The registered shares consist of: (i) 5,000 shares of common stock and
2,500 shares underlying Class B warrants acquired in the August 2004 Offering;
and (ii) 1,250 shares of common stock and 625 shares underlying Class B warrants
acquired in the March 2005 Offering.
(81) The registered shares consist of: (i) 10,000 shares underlying Class B
warrants acquired in the August 2004 Offering; (ii) 2,500 shares underlying
Class B warrants acquired in the March 2005 Offering; and (iii) 20,000 shares of
common stock 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 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 $3,935,048 in proceeds
upon the exercise thereof. We intend to use the proceeds from any such exercises
for general working capital purposes.
PLAN OF DISTRIBUTION
We are registering all of the shares of common stock offered by this
prospectus on behalf of the selling security holders. The selling security
holders may sell any or all of the shares, subject to federal and state
securities law, but are under no obligation to do so. The selling security
holders will act independently of us in making decisions with respect to the
timing, manner and size of each sale of the common stock covered hereby.
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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
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.
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.
81
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. In no event shall any
broker-dealer receive fees, commissions and markups which, in the aggregate,
would exceed eight percent (8%).
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.
Any National Association of Securities Dealer ("NASD") member
participating in the distribution of the shares offered under this prospectus
will be subject to compliance with NASD rules and regulations, including rules
governing the timely filing of documents and disclosures with the Corporate
Financing Department of the NASD prior to any sales pursuant to NASD Rule
2710(b), limitation on the payment of underwriting compensation under NASD Rules
2710(c) and 2710(i), and restrictions on the sale, transfer, assignment or
hypothecation of unregistered shares acquired by the member for a period of 180
days after January 27, 2006, the effective date of the registration statement of
which this prospectus forms a part, pursuant to NASD Rule 2710(g).
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In any public equity offering, other than a public equity offering by
us that can meet the requirements in subparagraphs (b)(7)(C)(i) or (ii) of NASD
Rule 2710, any common or preferred stock, options, warrants, and other equity
securities of us, including debt securities convertible to or exchangeable for
equity securities of us, that are unregistered and acquired by an underwriter
and related person during 180 days prior to the required filing date, or
acquired after the required filing date, of the registration statement and
deemed to be underwriting compensation by the NASD, and securities excluded from
underwriting compensation pursuant to subparagraph (d)(5) of NASD Rule 2710,
shall not be sold during the offering, or sold, transferred, assigned, pledged,
or hypothecated, or be the subject of any hedging, short sale, derivative, put,
or call transaction that would result in the effective economic disposition of
the securities, by any person for a period of 180 days immediately following the
date of effectiveness or commencement of sales of the public offering, except as
provided in subparagraph (g)(2) of NASD Rule 2710.
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.
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.
83
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.
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 has been
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, 2005 and the
audited consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 2005 and 2004 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.
84
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement we filed with the
United States Securities and Exchange Commission ("SEC"). 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.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with 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.nationalhealthpartners.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, as
applicable.
As a company listed on the OTC Bulletin Board, we are not required to
deliver an annual report to our shareholders. However, we intend to provide an
annual report to our shareholders containing audited financial statements in
connection with the annual meeting of shareholders that we intend to hold
following the completion of our fiscal year ending December 31, 2006.
85
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Report of Independent Registered Public Accounting Firm............................... F-2
Consolidated Balance Sheet at December 31, 2005....................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 2005
and 2004.............................................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 2005 and 2004............................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005
and 2004.............................................................................. F-6
Notes to the Consolidated Financial Statements - December 31, 2005 and 2004........... F-8
Consolidated Balance Sheet at June 30, 2006 (Unaudited) .............................. F-29
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2006 and 2005 (Unaudited).................................... F-30
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2006 and 2005 (Unaudited)........................................... F-31
Notes to the Consolidated Financial Statements - June 30, 2006 (Unaudited)............ F-33
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
National Health Partners, Inc. and Subsidiary
Horsham, Pennsylvania
We have audited the accompanying consolidated balance sheet of National Health
Partners, Inc. and Subsidiary as of December 31, 2005 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years ended December 31, 2005 and 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
National Health Partners, Inc. and Subsidiary as of December 31, 2005 and the
results of their operations and their cash flows for the years ended December
31, 2005 and 2004 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 2 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
2. 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
March 20, 2006
F-2
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Balance Sheet
December 31,
2005
------------
ASSETS
Current assets:
Cash and cash equivalents $ 109,807
Certificate of deposit 35,717
Other current assets 4,042
------------
Total current assets 149,566
------------
Property and equipment, net 127,263
Deposits 19,000
------------
Total assets $ 295,829
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 70,432
Accounts payable - related party 16,373
Accrued expenses 75,955
Deferred revenue 68,641
Deferred compensation 29,000
Notes payable 203,742
------------
Total current liabilities 464,143
------------
Total liabilities 464,143
------------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.001 par value, 100,000,000 shares
authorized, 17,054,200 shares issued and outstanding 17,054
Additional paid-in capital 7,717,866
Accumulated deficit (7,903,234)
------------
Total stockholders' equity (deficit) (168,314)
------------
Total liabilities and stockholders' equity (deficit) $ 295,829
============
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,
----------------------------
2005 2004
------------ ------------
Net revenue $ 245,973 $ 27,929
Direct costs 350,666 66,101
------------ ------------
Gross deficit (104,693) (38,172)
------------ ------------
Operating expenses:
Selling and marketing 241,692 377,281
General and administrative 3,882,260 2,083,953
------------ ------------
Total operating expenses 4,123,952 2,461,234
------------ ------------
Loss from operations (4,228,645) (2,499,406)
------------ ------------
Other income (expense):
Interest income 717 ---
Interest expense (5,724) (7,106)
Common stock issued for releases (295,100) ---
Loss on extinguishment of debt --- (83,388)
------------ ------------
Total other income (expense) (300,107) (90,494)
------------ ------------
Net loss $ (4,528,752) $ (2,589,900)
============ ============
Loss per share - basic and diluted $ (0.32) $ (0.42)
============ ============
Weighted average number of shares
outstanding - basic and diluted 14,397,546 6,233,471
============ ============
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 (Deficit)
Total
Common Stock Additional Deferred Stock Stockholders'
-------------------------- Paid-in Subscription Accumulated Equity
Shares Amount Capital Payable Deficit (Deficit)
------------ ------------ ------------ -------------- ------------ -------------
BALANCE AT DECEMBER 31, 2003 1,687,500 $ 1,688 $ 14,568 $ --- $ (784,582) $ (768,326)
Common stock issued for
extinguishment of debt at
$0.46 per share 618,200 618 283,512 --- --- 284,130
Common stock issued for
services at $0.50 per share 350,000 350 174,650 --- --- 175,000
Common stock issued as
signing bonus at $0.50 per
share 1,748,250 1,748 872,377 --- --- 874,125
Common stock issued for cash
at an average price of $0.46
per share 5,232,250 5,232 2,382,768 --- --- 2,388,000
Common stock to be issued for
stock subscription payable at
$0.40 per share --- --- --- 14,650 --- 14,650
Net loss --- --- --- --- (2,589,900) (2,589,900)
------------ ------------ ------------ -------------- ------------ -------------
BALANCE AT DECEMBER 31, 2004 9,636,200 9,637 3,727,874 14,650 (3,374,482) 377,679
Common stock issued for stock
subscription payable at $0.40
per share 36,625 37 14,613 (14,650) --- ---
Common stock issued for cash
at $0.40 per share 2,256,625 2,256 900,395 --- --- 902,651
Common stock issued to prior
investors for releases at
$0.40 per share 737,750 737 294,362 --- --- 295,099
Common stock issued for stock
exchange at $0.40 per
share -- related party 1,800,000 1,800 718,200 --- --- 720,000
Common stock issued for
services at $0.40 per share 2,587,000 2,587 1,032,213 --- --- 1,034,800
Warrants issued for services
at $0.40 per share --- --- 1,239,409 --- --- 1,239,409
Stock offering costs --- --- (209,200) --- --- (209,200)
Net loss --- --- --- --- (4,528,752) (4,528,752)
------------ ------------ ------------ -------------- ------------ -------------
BALANCE AT DECEMBER 31, 2005 17,054,200 $ 17,054 $ 7,717,866 $ --- $ (7,903,234) $ (168,314)
============ ============ ============ ============== ============ =============
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,
----------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,528,752) $ (2,589,900)
Adjustments to reconcile net loss to net cash used by
operating activities:
Common stock issued for services 980,000 1,049,126
Warrants issued for services 1,129,809 ---
Common stock issued for releases 295,100 ---
Depreciation 51,800 19,502
Bad debt - note receivable 25,000 ---
Loss on extinguishment of debt --- 83,388
Changes in operating assets and liabilities:
Increase in other current assets (4,042) ---
Increase in deposits --- (15,000)
Increase (decrease) in accounts payable and accrued expenses 28,783 (160,734)
Increase (decrease) in accounts payable - related party 16,373 (16,350)
Increase in deferred revenue 61,548 7,093
Increase in deferred compensation 29,000 ---
------------ ------------
Net cash used by operating activities (1,915,381) (1,622,875)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable securities 320,506 ---
Payment for note receivable (25,000) ---
Increase in certificates of deposit (35,717) ---
Purchase of fixed assets and website costs (36,609) (161,956)
------------ ------------
Net cash provided (used) by investing activities 223,180 (161,956)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in cash overdraft --- (840)
Proceeds from sale of common stock 1,302,144 2,388,000
Payment of stock offering costs (44,800) ---
Proceeds from stock subscription payable --- 14,650
Proceeds from issuance of notes payable 180,000 11,000
Payments on notes payable (57,251) (196,234)
Payments on notes payable - related party --- (10,000)
------------ ------------
Net cash provided by financing activities 1,380,093 2,206,576
------------ ------------
Net increase (decrease) in cash (312,108) 421,745
Cash at beginning of year 421,915 170
------------ ------------
Cash at end of year $ 109,807 $ 421,915
============ ============
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,
----------------------------
2005 2004
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for taxes $ --- $ ---
Cash paid for interest 2,722 ---
SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Common stock issued for services $ 980,000 $ 1,049,126
Warrants issued for services $ 1,129,809 $ ---
Common stock issued for extinguishment of debt $ --- $ 284,130
Common stock issued to prior investors for releases $ 295,100 $ ---
Common stock issued for stock offering costs $ 164,400 $ ---
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 1. DESCRIPTION OF BUSINESS.
National Health Partners, Inc. (the "Company") was organized on
March 10, 1989 as Spectrum Vision Systems of Indiana, Inc. under the laws of the
State of Indiana. The Company changed its name to National Health Partners, Inc.
on March 13, 2001. On December 15, 2004, National Health Brokerage Group, Inc.
was organized as a wholly-owned subsidiary of the Company.
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
marketing representatives, brokers and agents, retail chains and outlets, small
businesses and trade associates, and unions and associations. The Company
derives substantially all of its revenue from the monthly membership fees it
receives from members of its membership programs.
The Company typically pays aggregate commissions to 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 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 marketing representatives.
The Company contracts with preferred provider organizations ("PPOs")
and other provider networks 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 that 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
Company's agreements with 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 non-exclusive and contain
confidentiality provisions.
F-8
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is provided to assist
the reader in understanding the Company's financial statements. The financial
statements and notes thereto are representations of the Company's management.
The Company's management 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.
BASIS OF PRESENTATION
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.
On February 17, 2004, the Company amended its Articles of Incorporation
to increase the number of shares of common stock authorized for issuance from
1,000 to 10,000,000 and approved a forward stock split of 3,375 to 1. On June
30, 2004, the Company amended its Articles of Incorporation to increase the
number of shares of common stock authorized for issuance from 10,000,000 to
100,000,000 and to change the par value of its shares of common stock from no
par value per share to $0.001 par value per share. All references to common
stock have been restated retroactively to reflect the foregoing amendments to
the Company's Articles of Incorporation.
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 intercompany balances and transactions have been eliminated in
consolidation.
RECLASSIFICATIONS
Certain amounts in the 2004 financial statements have been reclassified
to conform to the 2005 presentation. These reclassifications did not result in
any change to the previously reported total assets, net loss or stockholders'
equity.
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 amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
F-9
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company sells discount health care membership programs in return
for monthly membership fees. The date a monthly membership begins varies for
each individual member depending upon when the particular member purchased the
membership. The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery or performance has occurred, the sales price is
fixed and determinable, and collectibility is reasonably assured. At the
beginning of each membership period, the membership fee is charged to the
member's credit card and recorded as deferred revenue. The Company then
recognizes revenue as services are rendered. Shipping and handling fees that the
Company receives for the shipment of membership packages to new members are
included in its membership fees and recorded as deferred revenue. These fees are
then recognized as revenue on a straight-line basis over the longer of the
initial contractual term or the expected period during which the services will
be performed if the relationship with the member is expected to extend beyond
the initial contractual term and the member continues to benefit from the
payment of the fees. The Company typically receives cash within 5 days of the
date the membership fee is charged to the member's credit card. At December 31,
2005, the Company had deferred revenue of $68,641. The Company had minimal
deferred revenue at December 31, 2004.
The Company typically offers a 30-day money-back guarantee to its
members. Members can cancel their membership during the first 30 days of their
initial membership period and receive a full refund. After that, members can
cancel their membership at the end of any subsequent monthly membership period.
If a member cancels his or her membership and the member's credit card has
already been processed for the next monthly membership period, a refund check
will be issued to the member and no revenue will be recognized for that period.
For the year ended December 31, 2005, the Company had cancellations and refunds
of $54,982. The Company had minimal cancellations and refunds for the year ended
December 31, 2004.
The Company offers a 12-day free trial to some of its members. The
Company does not recognize any membership revenue during the free-trial period.
In the event the member continues the membership after the free-trial period
expires, the Company charges the member's credit card and recognizes revenue as
services are rendered.
DIRECT COSTS
The Company's direct costs consist of sales commissions and fees paid
to PPOs and provider networks. The Company incurred sales commission expense of
$275,178 and $11,838 and network provider costs of $75,487 and $54,263 for the
years ended December 31, 2005 and 2004, respectively.
SELLING AND MARKETING EXPENSES
The Company's selling and marketing expenses consist of advertising
expenses, marketing expenses, salaries paid to employees selling and marketing
the Company's CARExpress membership programs, rent expense allocated to the
Company's selling and marketing activities, depreciation and amortization
expense allocated to the Company's selling and marketing activities, and all
other selling and marketing expenses incurred by the Company. Depreciation and
F-10
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SELLING AND MARKETING EXPENSES (CONTINUED)
amortization expense included in selling and marketing expense is derived from
the Company's telephones and website, and in part from the Company's computers,
all of which are an integral part of the Company's selling and marketing
activities.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. APB 25 requires that the Company recognize compensation cost
for stock options issued to employees to the extent the fair value of its common
stock exceeds the exercise price of the options on the date of grant.
Accordingly, no compensation expense has been recognized for options granted to
employees with an exercise price greater than or equal to the market value of
its common stock on the date of grant.
The Company accounts for non-employee stock-based compensation in
accordance with Statement of Financial Accounting Standards No. 123, "Accounting
For Stock-Based Compensation" ("SFAS 123") 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 123 and EITF 96-18 require that the Company account for its option and
warrant grants to non-employees based on the fair value of the options and
warrants granted.
The Company uses the Black-Scholes pricing model to determine the fair
value of the options and warrants that it grants to employees and non-employees.
The Company is 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 its common stock. The computation of
volatility is intended to produce a volatility value that is representative of
the Company's expectations about the future volatility of the price of its
common stock over an expected term. The Company used its past share price
history to determine volatility and cannot predict how the price of its shares
of common stock will react on the open market in the event they are listed for
trading on the OTC Bulletin Board or a national securities exchange. As a
result, the volatility value that the Company calculated may differ from the
future volatility of the price of its shares of common stock.
Under SFAS 123, as amended by Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"), the Company is required to make pro forma disclosures
for net income and earnings per share as if the fair value method of valuing
employee stock-based compensation had been applied. Pursuant to SFAS 148, the
Company estimates the fair value of its employee stock-based compensation on the
date of grant by using the Black-Scholes pricing model assuming a dividend yield
of zero percent for all years, an expected volatility of 290%, a risk-free
interest rate of 3.5% and a weighted-average contractual term of 8.51 years. The
risk-free interest rate was determined using government securities with original
maturities similar to the respective expected life of the equity instruments on
the date of grant.
F-11
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
Had compensation expense 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 123, the Company would have recorded additional compensation
expense of $623,774 and $2,805,985 and would have had a net loss of $5,152,526
and $5,395,885 for the years ended December 31, 2005 and 2004, respectively.
For the Years Ended
December 31,
----------------------------
2005 2004
------------ ------------
Net income (loss) as reported $ (4,528,752) $ (2,589,000)
Stock-based employee compensation
cost included in net income (loss) as
reported, net of related tax effects --- ---
Stock-based employee compensation
cost under the fair value based method,
net of related tax effects (623,774) (2,805,985)
------------ ------------
Pro forma net income (loss) $ (5,152,526) $ (5,395,885)
============ ============
Earnings (loss) per share:
Basic & diluted - as reported $ (0.32) $ (0.42)
Basic & diluted - pro forma $ (0.36) $ (0.87)
INCOME TAXES
The Company uses the liability method of accounting for income taxes
under which deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized as part of the provision for income taxes in the period that
includes the enactment date. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized in the
future.
F-12
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
Net deferred tax assets consisted of the following components at
December 31, 2005 and 2004, respectively:
December 31,
----------------------------
2005 2004
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 1,653,900 $ 862,385
Deferred tax liabilities:
Depreciation (22,400) (29,630)
Valuation allowance (1,631,500) (832,755)
------------ ------------
Net deferred tax asset $ --- $ ---
============ ============
At December 31, 2005, the Company had net operating loss carry-forwards
of approximately $2,800,000 that may be offset against future taxable income
from the years 2006 through 2026. No tax benefit has been reported in the
December 31, 2005 financial statements since the potential tax benefit is offset
by a valuation allowance of the same amount.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to ownership change limitations provided by
the Internal Revenue Code of 1986, as well as similar state and foreign
provisions. These ownership changes may limit the amount of net operating loss
carryforwards that can be utilized annually to offset future taxable income and
tax, respectively. Subsequent ownership changes could further affect the
limitation in future years. These annual limitation provisions may result in the
expiration of certain net operating losses and credits before utilization.
In calculating the amount of pretax income from continuing operations
for the years ended December 31, 2005 and 2004, the amount of income tax
calculated under accounting principles generally accepted in the United States
of America differed from the amount of income tax determined under United States
federal and state income tax provisions as follows:
December 31,
----------------------------
2005 2004
------------ ------------
Book Income $ (1,766,000) $ (1,000,900)
Meals and entertainment 2,800 22,275
Depreciation (25,677) ---
Accrued compensation 29,000 ---
Stock compensation 1,002,030 409,150
Loss on extinguishment of debt --- 32,520
Valuation allowance 757,847 536,955
------------ ------------
$ --- $ ---
============ ============
F-13
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE
Basic loss per share is based on the weighted average number of shares
of the Company's common stock outstanding during the applicable year, and is
calculated by dividing the reported net loss for the applicable year by the
weighted average number of shares of common stock outstanding during the
applicable year. The Company calculates diluted loss per share by dividing the
reported net loss for the applicable year by the weighted average number of
shares of common stock outstanding during the applicable year as adjusted to
give effect to the exercise of all potentially dilutive options and warrants
outstanding at the end of the year. An aggregate of 23,681,004 and 10,724,791
shares of common stock underlying options and warrants that were outstanding on
December 31, 2005 and 2004, respectively, have been excluded from the
computation of diluted earnings per share because they are anti-dilutive. As a
result, basic loss per share was equal to diluted loss per share for each year.
For the Years Ended
December 31,
----------------------------
2005 2004
------------ ------------
Net Loss $ (4,528,725) $ (2,589,900)
Weighted average shares outstanding 14,397,546 6,233,471
------------ ------------
Earnings (loss) per share -
basic and diluted $ (0.32) $ (0.42)
============ ============
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less on the date of purchase to be cash equivalents.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash and cash equivalents,
accounts payable, accrued liabilities, notes payable and other short-term
liabilities in the consolidated balance sheets approximate their fair value due
to the short-tem maturity of these instruments and obligations.
DERIVATIVE FINANCIAL INSTRUMENTS
In connection with the Company's issuance of common stock and warrants
to certain consultants to the Company, the Company evaluated the terms and
conditions of the common stock and warrants to determine whether the warrants
represented embedded or freestanding derivative instruments under the provisions
of Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and Emerging Issues Task Force
No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). The Company
determined that the warrants did not represent freestanding derivative
instruments and that the warrants did not meet the requirements for liability
classification under EITF 00-19. As a result, the fair value of the warrants is
reflected in the Company's additional paid-in capital. The fair value of the
Company's derivative financial
F-14
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
instruments are estimated using the Black-Scholes pricing model which takes into
consideration the estimated term of the warrants, the volatility of the price of
the Company's common stock, interest rates and the probability that the warrants
will be exercised.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are calculated
using the straight-line basis over the estimated useful lives of the related
assets. The estimated useful lives of the Company's property and equipment are
as follows:
Computer equipment 3 years
Computer software 3 years
Furniture and fixtures 5 years
Telephone equipment 5 years
Website equipment 3 years
The cost of major improvements to the Company's property and equipment
are capitalized. The cost of maintenance and repairs that do not improve or
extend the life of the applicable assets are expensed as incurred. When assets
are retired or otherwise disposed of, the cost and accumulated depreciation and
amortization are removed from the accounts and any resulting gain or loss is
reported in the period realized.
The Company reviews property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount of assets
may not be recoverable. Recoverability is measured by comparison of the carrying
amount of the assets to the future undiscounted net cash flows that the assets
are expected to generate. If the assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of these assets exceeds the fair value of the assets.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which
replaces Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). SFAS 123R establishes standards for
accounting for transactions in which an entity exchanges its equity instruments
for goods or services or incurs liabilities in exchange for goods or services
that are based on the fair value of the entity's equity instruments. It focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS 123R requires that entities
account for share-based payments using the fair value based method rather than
the intrinsic value method of accounting in APB 25 and that entities disclose
information about the nature of the share-based payment transactions and the
effects of those transactions on the financial statements. SFAS 123R requires an
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the
F-15
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
award over the period during which an employee is required to provide service
for the award. The grant-date fair value of employee stock options and similar
instruments must be estimated using option-pricing models adjusted for the
unique characteristics of those instruments unless observable market prices for
the same or similar instruments are available. SFAS 123R also requires an entity
to measure the cost of employee services received in exchange for an award of
liability instruments based on its current fair value and that the fair value of
that award be remeasured at each reporting date through the settlement date.
SFAS No. 123R becomes effective for small business issuers as of the beginning
of the first interim or annual reporting period that begins after December 15,
2005. The Company will adopt SFAS No. 123R on January 1, 2006 using the modified
prospective method. The adoption of SFAS 123R is expected to have an adverse
impact on the Company's results of operations in future periods.
In March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"), which provides guidance on the implementation
of SFAS 123R. In particular, it provides guidance related to valuation methods,
accounting for income tax effects of share-based payments, modifications of
employee stock options prior to the adoption of SFAS 123R, classification of
compensation expense, capitalization of compensation cost related to share-based
payment arrangements, first-time adoption of SFAS 123R in an interim period, and
other disclosures subject to the adoption of SFAS 123R. The Company will apply
the principles of SAB 107 in conjunction with the adoption of SFAS 123R.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting
Changes and Error Corrections" ("SFAS 154"). SFAS 154 replaces APB Opinion No.
20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements - An Amendment of APB Opinion 28" and establishes
retrospective application as the required method for reporting a change in
accounting principle. SFAS 154 provides guidance for determining whether
retrospective application of a change in accounting principle is impracticable
and reporting a change when retrospective application is impracticable. The
reporting of a correction of an error by restating previously issued financial
statements is also addressed. SFAS 154 is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005. The
Company expects that the adoption of SFAS 154 will not have a material impact on
its consolidated financial statements.
F-16
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2005
and 2004, respectively:
December 31,
----------------------------
2005 2004
------------ ------------
Computers $ 43,012 $ 22,024
Software 2,762 ---
Furniture 11,322 7,572
Telephone 52,262 43,153
Website 89,207 89,207
Less: accumulated depreciation (71,302) (19,502)
------------ ------------
Net property and equipment $ 127,263 $ 142,454
============ ============
Depreciation expense for the years ended December 31, 2005 and 2004 was $51,800
and $19,502, respectively.
NOTE 4. ACCRUED EXPENSES
Accrued expenses consist of amounts due to an unrelated third party for
its payment of certain Company liabilities in 2001 and 2002. In conjunction with
the note payable discussed in Note 5, the third party agreed to accept payments
of $5,000 per month until all amounts are paid in full. The balance of accrued
expenses at December 31, 2005 and 2004 was $75,955.
NOTE 5. NOTES PAYABLE
Notes payable outstanding at December 31, 2005 and 2004 consisted of
the following:
Note payable bearing interest
at 5.00% per annum requiring
monthly payments of $5,000 $ 23,742
Notes payable bearing interest at
15% per annum and due during
the first quarter of 2006 180,000
------------
Total $ 203,742
============
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company's commitments and contingencies consist of operating leases
for its office space in Pennsylvania and Florida, an equipment lease for certain
of its computer equipment and employment agreements with certain of its
executive officers.
F-17
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES
The Company has entered into operating leases for its executive offices
in Horsham, Pennsylvania and its office space in Sarasota, Florida.
Pennsylvania Facility
The Company entered into a lease for a facility located in Horsham,
Pennsylvania 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.
Future minimum lease payments under this facility lease are as follows:
Fiscal Year Amount
----------- ------------
2006 $ 158,356
2007 66,598
------------
$ 224,954
============
Florida Facility
The Company entered into a lease for a facility located in Sarasota,
Florida on July 1, 2005. This lease is a five-year lease expiring on June 30,
2010. This lease required 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:
Fiscal Year Amount
----------- ------------
2006 $ 100,197
2007 104,205
2008 108,373
2009 112,708
2010 59,757
------------
$ 485,240
============
EQUIPMENT LEASE
On July 8, 2004, the Company entered into an equipment lease for
computer equipment for a period of 60 months. The monthly lease payment is $131.
F-18
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
EQUIPMENT LEASE (CONTINUED)
Future minimum payments under this equipment lease are as follows:
Fiscal Year Amount
----------- ------------
2006 $ 1,572
2007 1,572
2008 1,572
2009 524
------------
$ 5,240
============
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with three of its
executive officers. Future minimum payments under these employment agreements
are as follows:
Fiscal Year
--------------------------------------------------------------
Officer Term 2006 2007 2008 2009 2010
- -------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Chief Executive Officer 5 years $ 254,100 $ 279,510 $ 307,461 $ 338,207 $ 31,002
Chief Financial Officer 3 years 174,240 191,664 17,569 --- ---
Vice President - Marketing 5 years 145,200 159,720 175,692 193,261 17,716
---------- ---------- ---------- ---------- ----------
$ 573,540 $ 630,894 $ 500,722 $ 531,468 $ 48,718
========== ========== ========== ========== ==========
The officers are also eligible for annual bonuses and other incentive
compensation at the discretion of the board of directors.
NOTE 7. COMMON STOCK AND WARRANTS
The Company's authorized capital consisted of 100,000,000 and
10,000,000 shares of common stock, $0.001 par value per share, at December 31,
2005 and 2004, respectively, of which 17,054,200 and 9,636,200 shares of common
stock were outstanding at December 31, 2005 and 2004, respectively. Warrants
exercisable into an aggregate of 15,636,004 and 4,471,834 shares of the
Company's common stock were outstanding on December 31, 2005 and 2004,
respectively.
The Company estimates the fair value of its warrants on the date of
grant by using the Black-Scholes pricing model assuming a dividend yield of zero
percent for all years, an expected volatility of 422%, a risk-free interest rate
of 3.5% and a weighted-average contractual term of 1.96 years. The Company
follows Emerging Issues Task Force No. 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
F-19
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 7. COMMON STOCK AND WARRANTS (CONTINUED)
agreements since the services are being rendered on an ongoing basis during the
term of the agreements.
NON CAPITAL-RAISING TRANSACTIONS
In February 2004, the Company issued 150,000 shares of common stock to
a note holder for the extinguishment of $66,117 of debt. The shares were valued
at $0.50 per share and resulted in a loss on extinguishment of debt of $8,883.
In February 2004, the Company issued 1,748,250 shares of common stock
to its Chief Executive Officer in connection with his acceptance of employment
with the Company. The shares were valued at $0.50 per share for total
consideration of $874,125.
In February 2004, the Company issued 100,000 shares of common stock to
a consultant for consulting services. The shares were valued at $0.50 per share
for total consideration of $50,000.
In March 2004, the Company issued an aggregate of 202,900 shares of
common stock to two of its executive officers as payment for an aggregate of
$76,480 of unpaid consulting fees. The shares were valued at $0.50 per share and
resulted in a loss on extinguishment of debt of $24,970. The loss was debited to
additional paid-in capital because the transactions were related-party
transactions.
In March 2004, the Company issued 175,000 shares of common stock to a
consultant as payment for $22,294 of unpaid consulting fees. The shares were
valued at $0.50 per share and resulted in a loss on extinguishment of debt of
$65,206.
In March 2004, the Company issued an aggregate of 150,000 shares of
common stock to consultants for consulting services. The shares were valued at
$0.50 per share for total consideration of $75,000.
In March 2004, the Company issued an aggregate of 59,600 shares of
common stock and paid an aggregate of $29,500 to three of its executive officers
for the extinguishment of an aggregate of $55,460 of loans payable. The shares
were valued at $0.50 per share and resulted in a loss on extinguishment of debt
of $3,840. The loss was debited to additional paid-in capital because the
transactions were related-party transactions.
In March 2004, the Company issued an aggregate of 30,700 shares of
common stock to note holders for the extinguishment of an aggregate of $9,886 of
debt. The shares were valued at $0.50 per share and resulted in a loss on
extinguishment of debt of $5,459.
In August 2004, the Company issued 100,000 shares of common stock to a
consultant for consulting services. The shares were valued at $0.50 per share
for total consideration of $50,000.
In June 2005, the Company issued 2,450,000 shares of common stock,
Class A warrants to acquire 600,000 shares, Class B warrants to acquire 600,000
shares, and Class C warrants to acquire 1,625,000 shares to consultants for
services pursuant to several consulting agreements. Each warrant gives the
holder the right to purchase one share of common stock. All Class A
F-20
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 7. COMMON STOCK AND WARRANTS (CONTINUED)
NON CAPITAL-RAISING TRANSACTIONS (CONTINUED)
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 3,537,500 of these shares. The shares, Class A
warrants, Class B warrants and Class C warrants were valued at $0.40 per share
for total consideration of $2,110,000.
CAPITAL-RAISING TRANSACTIONS
Between February 2004 and August 2004, the Company issued 2,777,000
shares of common stock for aggregate gross proceeds of $1,388,500, or $.50 per
share. The shares were sold in units consisting of two shares of common stock,
one Class A warrant and one Class B warrant at a purchase price of $1.00 per
unit. Each warrant gives the holder the right to purchase one 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.
Between August 2004 and September 2004, the Company issued 174,000
shares of common stock for aggregate gross proceeds of $87,000, or $.50 per
share. The shares were sold in units consisting of two shares of common stock,
one Class A warrant and one Class B warrant at a purchase price of $1.00 per
unit. Each warrant gives the holder the right to purchase one 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.
Between September 2004 and April 2005, the Company issued 2,448,750
shares of common stock for aggregate gross proceeds of $979,500, or $.40 per
share. The Company issued 2,281,250 of these shares for $912,500 during prior to
December 31, 2004. Subsequent to December 31, 2004, the Company issued 36,625 of
these shares for $14,650 that was received prior to December 31, 2004, and
issued 130,875 of these shares for $52,350 that was received
F-21
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 7. COMMON STOCK AND WARRANTS (CONTINUED)
CAPITAL-RAISING TRANSACTIONS (CONTINUED)
subsequent to December 31, 2004. The shares were sold in units consisting of
three shares of common stock, one Class A warrant and one Class B warrant at a
purchase price of $1.20 per unit. Each warrant gives the holder the right to
purchase one 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 completed in August
and September 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 the common stock that it issued and 50% of the
shares of common stock underlying the Class A warrants and Class B warrants that
it 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 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 obligation to use
its reasonable best efforts to file a registration statement with the SEC. The
Company ascribed an aggregate value of $295,100 to the shares issued in March
2005, equivalent to $.40 per share. These shares were sold in units consisting
of two shares of common stock, one Class A warrant and one Class B warrant. Each
warrant gives the holder the right to purchase one 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 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 three shares of
common stock, three Class A warrants and three Class B warrants at a purchase
price of $1.20 per unit. Each warrant gives the holder the right to purchase one
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
F-22
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 7. COMMON STOCK AND WARRANTS (CONTINUED)
CAPITAL-RAISING TRANSACTIONS (CONTINUED)
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 were less than $720,000, the investor was
required to make up the difference in either additional Infinium stock or cash.
If the proceeds from the sale of the Infinium shares were greater than $720,000,
the Company was required to return the excess proceeds to the investor. The
Company completed the sale of the last of its shares of common stock of Infinium
Labs on September 7, 2005, resulting in aggregate gross proceeds of $320,506
from the sale of all 2,740,000 shares. The investor paid the remaining funds to
the Company in cash on September 16, 2005.
Between April and May 2005, the Company issued 635,750 shares of common
stock for aggregate gross proceeds of $254,300 or $.40 per share. The shares
were sold in units consisting of three shares of common stock, one Class A
warrant and one Class B warrant at a purchase price of $1.20 per unit. Each
warrant gives the holder the right to purchase one 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 aggregate gross proceeds of $596,000 or $.40 per share. The
shares were sold in units consisting of three shares of common stock, three
Class A warrants and three Class B warrants at a purchase price of $1.20 per
unit. Each warrant gives the holder the right to purchase one 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. Park Financial Group,
Inc., a registered broker-dealer, served as the Company's placement agent for
this offering. The Company paid Park Financial Group a placement agent fee
consisting of $44,800 and 137,000 units that were identical to the units sold in
the offering. The Company granted registration rights covering fifty percent of
all shares issued to the investors and Park Financial Group and fifty percent of
all shares underlying the Class A warrants and Class B warrants issued to the
investors and Park Financial Group.
NOTE 8. STOCK OPTIONS
Stock options exercisable into an aggregate of 8,045,000 and 7,015,000
shares of the Company's common stock were outstanding on December 31, 2005 and
2004, respectively.
F-23
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 8. STOCK OPTIONS (CONTINUED)
The Company estimates the fair value of its stock options on the date
of grant by using the Black-Scholes pricing model in accordance with the
provisions of Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure." Under the
Black-Scholes pricing model, the Company assumed a dividend yield of zero
percent, an expected volatility of 290%, a risk-free interest rate of 3.5
percent and a weighted-average remaining contractual life of 8.51 years for the
stock options outstanding at December 31, 2005.
In September 2004, the Company issued options to acquire an aggregate
of 7,000,000 shares of common stock to its executive officers. The options had
an exercise price of $0.40 per share, vested in full on the date of issuance and
had a term of 10 years.
In December 2004, the Company issued options to acquire an aggregate of
15,000 shares of common stock to six of its employees. The options have an
exercise price of $0.40 per share, vested in full on the date of issuance and
expire on have a term of three years.
In May 2005, the Company cancelled the options to acquire an aggregate
of 7,000,000 shares of common stock previously issued to its executive officers
in September 2004. The cancellation was effective February 1, 2005.
In May 2005, the Company issued an option to acquire 150,000 shares of
common stock to a new employee. The option has an exercise price of $.40 per
share, vested in full on the date of grant, and has a term of five years.
In May 2005, the Company issued options to acquire an aggregate of
4,500,000 shares of common stock to three of its executive officers. The options
have an exercise price of $0.40 per share and vest as follows: 25% on the date
of grant and 25% per year commencing February 1, 2006. The options have a term
of 10 years.
In June 2005, the Company issued an option to acquire up to 400,000
shares of common stock to a business partner. The option has an exercise price
of $0.50, vests upon the achievement of various performance criteria by December
31, 2005, and has a term of one year. None of the performance criteria had been
met by December 31, 2005. As a result, the option will not vest as to any of the
underlying shares.
In June 2005, the Company issued options to acquire 700,000 shares of
common stock to two of its non-employee 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
remains 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. Each of these directors
discontinued their service as members of the board of directors prior to the
first anniversary of the date of grant. As a result, these options will not vest
as to an aggregate of 500,000 of the underlying shares.
In August 2005, the Company issued options to acquire an aggregate of
2,000,000 shares of common stock to two new executive officers. The options have
an exercise price of $0.40 per share, vest in four equal annual installments
commencing February 1, 2006, and have a term of 10 years.
F-24
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 8. STOCK OPTIONS (CONTINUED)
In September 2005, the Company issued an option to acquire 250,000
shares of common stock to a new employee. 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.
In December 2005, the Company issued options for an aggregate of 30,000
shares of common stock to seven of its employees. The options are exercisable at
$0.40 per share, vested in full on the date of grant and have a term of three
years.
A summary of the stock options issued during the year ended December
31, 2005 is as follows:
Weighted
Average
Exercise
Shares Price
------------ ------------
Outstanding, December 1, 2005 7,015,000 $ 0.40
Granted 8,030,000 0.41
Cancelled (7,000,000) 0.40
------------ ------------
Outstanding, December 31, 2005 8,045,000 $ 0.41
============ ============
Exercisable, December 31, 2005 1,570,000 $ 0.40
============ ============
Weighted
Average Weighted
Number Remaining Average
Range of Outstanding Contractual Exercise
Exercise Prices at 12/31/05 Life Price
--------------- ----------- ------------ ------------
$0.40 - $0.50 8,045,000 8.51 $ 0.41
=========== ============ ============
NOTE 9. RELATED-PARTY TRANSACTIONS
In February 2004, the Company issued 1,748,250 shares of common stock
to its Chief Executive Officer in connection with his acceptance of employment
with the Company. The shares were valued at $0.50 per share for total
consideration of $874,125.
In March 2004, the Company issued an aggregate of 202,900 shares of
common stock to two of its executive officers as payment for an aggregate of
$76,480 of unpaid consulting fees. The shares were valued at $0.50 per share and
resulted in a loss on extinguishment of debt of $24,970. The loss was debited to
additional paid-in capital because the transaction was a related-party
transaction.
F-25
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 9. RELATED-PARTY TRANSACTIONS (CONTINUED)
In March 2004, the Company issued an aggregate of 59,600 shares of
common stock and paid an aggregate of $29,500 to three of its executive officers
for the extinguishment of an aggregate of $55,460 of loans payable. The shares
were valued at $0.50 per share and resulted in a loss on extinguishment of debt
of $3,840. The loss was debited to additional paid-in capital because of the
transaction was a related-party transaction.
In June 2005, the Company entered into a lease for office space in
Sarasota, Florida. The lease is for approximately 4,000 square feet of space,
commenced on July 1, 2005, requires initial monthly payments of $8,186, and
expires on July 1, 2010. The office building is owned by a principal stockholder
of the Company who served as a member of the Company's board of directors from
June 29, 2005 to September 26, 2005.
NOTE 10. PROPOSED PUBLIC OFFERING
On June 30, 2005, the Company filed a registration statement on Form
SB-2, File No. 333-126315, with the Securities and Exchange Commission ("SEC")
in connection with the proposed public offering of 10,258,135 shares of common
stock to be sold by certain selling security holders. As of December 31, 2005,
the registration statement had not been declared effective by the SEC. The
Company will not receive any proceeds from the offering.
NOTE 11. SUBSEQUENT EVENTS
On January 27, 2006, the registration statement on Form SB-2, File No.
333-126315, was declared effective by the SEC.
On January 30, 2006, the Company filed a registration statement on Form
S-8, File No. 333-131379, with the SEC covering the public sale of 2,925,000
shares of common stock to be sold by certain selling security holders.
On February 2, 2006, the Company adopted the National Health Partners,
Inc. 2006 Stock Incentive Plan. Under the plan, 4,500,000 shares of common stock
may be granted to employees, officers and directors of, and consultants and
advisors to, the Company under awards that may be made in the form of stock
options, warrants, stock appreciation rights, restricted stock, restricted
units, unrestricted stock and such other equity-based or equity-related awards.
As of March 30, 2006, awards for an aggregate of 4,323,250 shares of common
stock had been issued under the plan. The plan terminates on February 1, 2016.
On February 6, 2006, the Company filed a registration statement on Form
S-8, File No. 333-131589, with the SEC covering the public sale of the 4,500,000
shares of common stock available for issuance under the National Health
Partners, Inc. 2006 Stock Incentive Plan.
On February 8, 2006, Roger H. Folts resigned as the Chief Financial
Officer and Secretary of the Company. Concurrently therewith, the Company
entered into a termination and mutual release with Mr. Folts pursuant to which
his employment agreement with the Company was terminated effective February 1,
2006 and the Company and Mr. Folts released each other from any obligations or
claims arising in connection with his employment with the Company. Also on that
date, Mr. Folts entered into a consulting agreement with the Company. Under the
terms of the
F-26
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 11. SUBSEQUENT EVENTS (CONTINUED)
consulting agreement, Mr. Folts agreed to provide accounting and related
services to the Company on a full-time basis until June 30, 2006, and thereafter
on a part-time basis until February 1, 2009. In exchange for his services, the
Company agreed to continue paying Mr. Folts the salary he was receiving under
his employment agreement until March 31, 2006, and agreed to issue 300,000
shares of common stock to Mr. Folts, a maximum of 25,000 of which may be sold
per calendar month during the period commencing April 1, 2006 and ending
December 31, 2006.
On February 15, 2006, Alex Soufflas was appointed the Chief Financial
Officer and Secretary of the Company effective February 1, 2006 and in
connection therewith, resigned as General Counsel of the Company.
On February 15, 2006, David A. Taylor was appointed Senior Vice
President - National Sales of the Company effective February 1, 2006 and in
connection therewith, resigned as Vice President - Sales of the Company.
On February 17, 2006, the Company entered into agreements with two of
its note holders pursuant to which the maturity date of the promissory notes
previously issued to the note holders on November 16, 2005 was extended to June
30, 2006.
On March 4, 2006, the Company entered into agreements with one of its
note holders pursuant to which the maturity date of the promissory note
previously issued to the note holder on December 7, 2005 was extended to April
7, 2006.
On March 24, 2006, the Company approved the issuance of 36,250 shares
of common stock to employees in partial payment of accrued salaries.
On March 28, 2006, the Company issued restricted stock awards to David
M. Daniels, Alex Soufflas, Patricia S. Bathurst and David A. Taylor for 450,000,
300,000, 225,000 and 375,000 shares of common stock, respectively. The awards
vest in three equal annual installments commencing on the first anniversary of
the date of grant.
On March 29, 2006, the Company entered into an employment agreement
with Alex Soufflas to continue serving as its Chief Financial Officer and
Executive Vice President effective February 1, 2006. The employment 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. Soufflas is entitled to an
annual base salary of $210,000 with annual increases on January 1st 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 the Company's board of directors.
On March 29, 2006, the Company entered into an employment agreement
with David A. Taylor to continue serving as its Senior Vice President - National
Sales effective February 1, 2006. The employment 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. Taylor is entitled to an annual base salary of
$162,000 with annual increases on January 1st of each year of a minimum of 10%
of the annual base salary for
F-27
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
NOTE 11. SUBSEQUENT EVENTS (CONTINUED)
the immediately preceding year, and is eligible for an annual bonus and
incentive compensation awards in an amount and form to be determined by the
Company's board of directors.
As of March 30, 2006, the Company had received $509,375 in connection
with the exercise of warrants held by certain of the Company's warrant holders.
F-28
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Balance Sheet (Unaudited)
June 30,
2006
------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,008,068
Prepaid expense 545,329
Deposits 35,478
Other current assets 10,000
------------
Total current assets 1,598,875
------------
Property and equipment, net 141,617
Prepaid expense 1,150,031
------------
Total assets $ 2,890,523
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 89,201
Accrued expenses 60,000
Deferred revenue 101,850
------------
Total current liabilities 251,051
------------
Long-term liabilities:
Accrued expenses 10,010
------------
Total liabilities 261,061
------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value, 100,000,000 shares
authorized, 23,671,981 shares issued and outstanding 23,672
Additional paid-in capital 12,377,027
Accumulated deficit (10,421,757)
Stock subscriptions 1,140,000
Deferred compensation (489,480)
------------
Total stockholders' equity 2,629,462
------------
Total liabilities and stockholders' equity $ 2,890,523
============
The accompanying notes are an integral part of these consolidated financial
statements
F-29
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2006 2005 2006 2005
----------- ------------ ----------- -----------
Net revenue $ 317,024 $ 16,997 $ 641,428 $ 35,376
Direct costs 252,772 51,756 401,859 66,581
----------- ----------- ----------- -----------
Gross profit 64,252 (34,759) 239,569 (31,205)
----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing 841,357 48,515 943,694 125,358
General and administrative 869,117 848,960 1,895,190 1,278,188
----------- ----------- ----------- -----------
Total operating expenses 1,710,474 897,475 2,838,884 1,403,546
----------- ----------- ----------- -----------
Loss from operations (1,646,222) (932,234) (2,599,315) (1,434,751)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 21,936 -- 55,018 --
Interest expense (5,699) (785) (12,130) (1,723)
Gain on extinguishment of debt 35,932 -- 35,932 --
Common stock issued for releases -- -- -- (295,100)
Other income (expense) -- (90) 1,972 (964)
----------- ----------- ----------- -----------
Total other income (expense) 52,169 (875) 80,792 (297,787)
----------- ----------- ----------- -----------
Net loss $(1,594,053) $ (933,109) $(2,518,523) $(1,732,538)
=========== =========== =========== ===========
Loss per share -- basic and diluted $ (0.07) $ (0.07) $ (0.12) $ (0.15)
=========== =========== =========== ===========
Weighted average number of shares
outstanding -- basic and diluted 22,901,201 13,146,837 21,131,779 11,696,858
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements
F-30
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended
June 30,
-------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,518,523) $(1,732,538)
Adjustments to reconcile net loss to net cash used by
operating activities:
Common stock issued for services 156,138 194,800
Warrants issued for services 48,863 270,970
Options issued for services 584,981 --
Common stock issued for releases -- 295,100
Depreciation 29,338 24,725
Changes in operating assets and liabilities:
Increase in deposits (16,478) --
Increase in other current assets (5,958) (20,039)
Increase (decrease) in accounts payable and accrued
expenses 30,641 (29,979)
Decrease in accounts payable -- related party (16,373) --
Increase (decrease) in deferred revenue 33,209 (3,621)
Decrease in notes payable (23,742) --
Increase in deferred compensation 20,042 --
----------- -----------
Net cash used by operating activities (1,677,862) (1,000,582)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable securities -- 223,135
Increase in notes receivable -- (25,000)
Decrease (increase) in certificates of deposit 35,717 (35,000)
Increase in property and equipment (43,692) (23,359)
----------- -----------
Net cash provided (used) by investing activities (7,975) 139,776
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 127,160 888,001
Proceeds from stock subscriptions 1,140,000 14,650
Proceeds from exercise of warrants 1,484,938 --
Payments on notes payable (168,000) (23,278)
----------- -----------
Net cash provided by financing activities 2,584,098 879,373
----------- -----------
Net increase in cash 898,261 18,567
Cash at beginning of year 109,807 421,915
----------- -----------
Cash at end of quarter $ 1,008,068 $ 440,482
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements
F-31
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Six Months Ended
June 30,
------------------------
2006 2005
---------- ----------
SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Common stock issued for services $ 156,138 $ 194,800
Warrants issued for services $ 48,863 $ 270,970
Stock options issued for services $ 584,981 $ --
Common stock issued for releases $ -- $ 295,100
The accompanying notes are an integral part of these consolidated financial
statements
F-32
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2006
NOTE 1. DESCRIPTION OF BUSINESS
National Health Partners, Inc. (the "Company") was organized on March
10, 1989 as Spectrum Vision Systems of Indiana, Inc. under the laws of the State
of Indiana. The Company changed its name to National Health Partners, Inc. on
March 13, 2001. On December 15, 2004, National Health Brokerage Group, Inc. was
organized as a wholly-owned subsidiary of the Company. 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 marketing representatives,
brokers and agents, retail chains and outlets, small businesses and trade
associates, and unions and associations. The Company derives substantially all
of its revenue from the monthly membership fees it receives from members of its
membership programs.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and in conformity with the instructions to Form 10-QSB
and Article 10 of Regulation S-X and the related rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, the disclosures included in these financial statements
are adequate to make the information presented not misleading.
The unaudited consolidated financial statements included in this
document have been prepared on the same basis as the annual consolidated
financial statements and in management's opinion, reflect all adjustments,
including normal recurring adjustments, necessary to present fairly the
Company's financial position, results of operations and cash flows for the
interim periods presented. The unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and the notes thereto for the year ended December 31, 2005 included in the
Company's Annual Report on Form 10-KSB. The results of operations for the three
and six months ended June 30, 2006, respectively, are not necessarily indicative
of the results that the Company will have for any subsequent quarter or full
fiscal year.
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 amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. The financial statements include the balances of National
Health Partners, Inc. and its wholly-owned subsidiary, National Health Brokerage
Group, Inc. All material intercompany balances and transactions have been
eliminated in consolidation. Certain amounts in the financial statements for
2005 have been reclassified to conform to the 2006 presentation. These
reclassifications did not result in any change to the previously reported total
assets, net loss or stockholders' equity.
Except as described in Note 3 below, as of June 30, 2006, the
Company's significant accounting policies and estimates, which are detailed in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 2005,
have not changed materially.
F-33
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2006
NOTE 3. STOCK COMPENSATION EXPENSE
Effective January 1, 2006, the Company adopted the fair value
recognition provisions of Financial Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), using the modified
prospective transition method. SFAS 123R replaced Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") and superseded APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under the modified prospective transition method,
compensation cost recognized for the three-month period ended March 31, 2006
includes: (a) compensation cost for all share-based payments granted, but not
yet vested as of January 1, 2006, based on the grant-date fair value estimated
in accordance with the original provisions of SFAS 123, and (b) compensation
cost for all share-based payments granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of SFAS
123R. Such amounts have been reduced by the Company's estimate of forfeitures of
all unvested awards.
Prior to January 1, 2006, the Company accounted for its stock options
under the recognition and measurement provisions of APB 25 for all stock options
granted to employees. Under APB 25, when the exercise price of stock-based
compensation granted to employees equals the market price of the common stock on
the date of grant, no compensation expense is recorded. When the exercise price
of stock-based compensation granted to employees is less than the market price
of the common stock on the date of grant, compensation expense is recognized
over the vesting period. For stock-based compensation granted to non-employees,
the Company recognizes compensation expense in accordance with the requirements
of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock Based Compensation" (Statement 123). Statement 123 requires that companies
recognize compensation expense based on the estimated fair value of options
granted to non-employees over their vesting period, which is generally the
period during which services are rendered by such non-employees.
As a result of adopting SFAS 123R on January 1, 2006, the Company
recognized $142,492 and $584,981 of stock option expense that it would not have
otherwise recognized during the three and six months ended June 30, 2006,
respectively, under APB 25. As a result, the Company's net loss for the three
and six months ended June 30, 2006 was $(1,594,053) and $(2,518,523),
respectively, and its basic and diluted net loss per share was $(0.07) and
$(0.12), respectively. Had the Company continued to account for stock options
under APB 25, its net loss for the three and six months ended June 30, 2006
would have been $(1,451,561) and $(1,933,542) and its basic and diluted net loss
per share would have been $(0.06) and $(0.09), respectively.
The following table illustrates the effect on net loss and net loss
per share for the three and six months ended June 30, 2005 had the Company
adopted SFAS 123R on January 1, 2005:
F-34
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2006
NOTE 3. STOCK COMPENSATION EXPENSE (CONTINUED)
For the Three For the Six
Months Ended Months Ended
June 30, 2005 June 30, 2005
------------- -------------
Net loss as reported $ (933,109) $(1,732,538)
Stock-based employee compensation
cost included in net income (loss) as
reported, net of related tax effects -- --
Stock-based employee compensation
cost under the fair value based method,
net of related tax effects (126,545) (487,335)
----------- -----------
Pro forma net income (loss) $(1,059,654) $(2,219,873)
=========== ===========
Earnings (loss) per share:
Basic & diluted - as reported $ (0.07) $ (0.15)
Basic & diluted - pro forma $ (0.08) $ (0.19)
NOTE 4. LOSS PER SHARE
Basic loss per share is based on the weighted average number of shares
of the Company's common stock outstanding during the applicable three- and
six-month periods, and is calculated by dividing the reported net loss for the
applicable three- and six-month periods by the weighted average number of shares
of common stock outstanding during the applicable three- and six month periods.
The Company calculates diluted loss per share by dividing the reported net loss
for the applicable three- and six-month periods by the weighted average number
of shares of common stock outstanding during the applicable three- and six-month
periods as adjusted to give effect to the exercise of all potentially dilutive
options and warrants outstanding at the end of the applicable three- and
six-month periods. An aggregate of 23,193,677 and 21,401,004 shares of common
stock underlying options and warrants that were outstanding on June 30, 2006 and
2005, respectively, have been excluded from the computation of diluted earnings
per share because they are anti-dilutive. As a result, basic loss per share was
equal to diluted loss per share for each three- and six-month periods.
F-35
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2006
NOTE 4. LOSS PER SHARE (CONTINUED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net loss as reported $(1,594,053) $ (933,109) $(2,518,523) $(1,732,538)
Weighted average number of shares
outstanding - basic and diluted 22,901,201 13,146,837 21,131,779 11,696,858
----------- ----------- ----------- -----------
Earnings (loss) per share - basis and
diluted $ (0.07) $ (0.07) $ (0.12) $ (0.15)
=========== =========== =========== ===========
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2006 and
2005, respectively:
June 30,
--------------------
2006 2005
--------- --------
Computers $ 56,813 $ 32,524
Software 6,109 --
Furniture 11,322 11,322
Telephone 78,807 52,262
Website 89,207 89,207
Less: accumulated depreciation (100,641) (44,227)
--------- --------
Property and equipment, net $ 141,617 $141,088
========= ========
Depreciation expense for the three months ended June 30, 2006 and 2005 was
$14,910 and $8,076, respectively, and for the six months ended June 30, 2006 and
2005 was $29,338 and $14,428, respectively.
NOTE 6. ACCRUED EXPENSES
Accrued expenses consist of amounts due to an unrelated third party
for its payment of certain Company liabilities in 2001 and 2002. In conjunction
with a note payable bearing interest at 5% that was paid off in 2006, the third
party agreed to accept payments of $5,000 per month until all amounts are paid
in full. The balance of accrued expenses at June 30, 2006 and 2005 was $70,010
and $75,955, respectively.
F-36
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2006
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company's material commitments and contingencies consist of an
operating lease for its office space in Pennsylvania and employment agreements
with its executive officers.
OPERATING LEASES
The Company entered into a lease for a facility located in Horsham,
Pennsylvania 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 security
deposit of $19,000. The starting monthly payment is $12,579 for the first year
and increases each subsequent year.
Future minimum lease payments under this facility lease are as
follows:
Fiscal Year Amount
----------- --------
2006 $ 79,025
2007 65,854
--------
$144,879
========
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of its
executive officers. Future minimum payments under these employment agreements
are as follows:
Fiscal Year Amount
----------- ----------
2006 $ 449,175
2007 848,430
2008 933,273
2009 655,252
2010 48,718
----------
$2,934,848
==========
NOTE 8. 2006 STOCK INCENTIVE PLAN
On February 2, 2006, the Company adopted the National Health Partners,
Inc. 2006 Stock Incentive Plan. Under the plan, 4,500,000 shares of common stock
may be granted to employees, officers and directors of, and consultants and
advisors to, the Company under awards that may be made in the form of stock
options, warrants, stock appreciation rights, restricted stock, restricted
units, unrestricted stock and such other equity-based or equity-related awards.
As of June 30, 2006, awards for an aggregate of 4,346,575 shares of common stock
had been issued under the plan. The plan terminates on February 1, 2016. On
February 6, 2006, the Company filed a registration statement on Form S-8, File
No. 333-131589, with the SEC covering the public sale of the 4,500,000 shares of
common stock available for issuance under the National Health Partners, Inc.
2006 Stock Incentive Plan.
F-37
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2006
NOTE 9. COMMON STOCK AND WARRANTS
The Company's authorized capital consisted of 100,000,000 shares of
common stock, $0.001 par value per share, at June 30, 2006 and 2005,
respectively, of which 23,671,981 and 17,054,200 shares of common stock were
outstanding at June 30, 2006 and 2005, respectively. Warrants exercisable into
an aggregate of 15,548,677 and 15,636,004 shares of the Company's common stock
were outstanding on June 30, 2006 and 2005, respectively.
The Company estimates the fair value of warrants issued for services on
the date of grant by using the Black-Scholes pricing model. Under this model,
the Company used the following weighted-average assumptions to determine the
fair value of the warrants issued for services during the six months ended June
30, 2006: a dividend yield of zero percent, an expected volatility of 278%, a
risk-free interest rate of 3.5% and a remaining contractual term of 4.05 years.
The Company follows Emerging Issues Task Force No. 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.
NON CAPITAL-RAISING TRANSACTIONS
On February 8, 2006, the Company issued 300,000 shares of common stock
to Roger H. Folts, the Company's former Chief Financial Officer, in partial
consideration for certain accounting and related services to be provided to the
Company under a consulting agreement. The shares were valued at $0.40 per share
for total consideration of $120,000. The Company recognized $10,028 and $15,647
of expense during the three and six months ended June 30, 2006, respectively, in
connection with the issuance of these shares.
In February and March 2006, the Company issued 2,507,000 shares of
common stock and warrants to acquire 1,530,000 shares to service providers and
consultants for services pursuant to several agreements. Each warrant gives the
holder the right to purchase one share of common stock. All warrants have an
exercise price of $.60 per share, are exercisable for a period of 24 months from
the date of warrant, and expire on March 31, 2008. The shares and warrants were
valued at $0.40 per share for total consideration of $1,584,200. The Company
recognized $111,401 and $154,987 of expense during the three and six months
ended June 30, 2006, respectively, in connection with the issuance of these
shares and warrants.
On March 24, 2006, the Company issued 36,250 shares of common stock to
employees in partial payment of accrued salaries. The shares were valued at
$0.40 per share for total consideration of $14,500, all of which was recognized
as expense during the six months ended June 30, 2006.
F-38
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2006
NOTE 9. COMMON STOCK AND WARRANTS (CONTINUED)
On March 28, 2006, the Company issued restricted stock awards to David
M. Daniels, Alex Soufflas, Patricia S. Bathurst and David A. Taylor for 450,000,
300,000, 225,000 and 375,000 shares of common stock, respectively. The awards
vest in three equal annual installments commencing on the first anniversary of
the date of grant. The shares were valued at $0.40 per share for total
consideration of $540,000. The Company recognized $49,042 and $50,520 of expense
during the three and six months ended June 30, 2006, respectively, in connection
with the issuance of these shares.
On April 1, 2006, the Company issued 10,000 shares of common stock to
Centerpointe Property, LLC in connection with the termination of its lease for
the office space in Sarasota, Florida in full payment of all rent and other
expenses that were due and payable, and the Company and Centerpointe agreed to
release each other from any and all claims that they may now hold or may in the
future hold arising out of the lease. The Company did not incur any material
early termination penalties in connection with the termination of the Lease. The
shares were valued at $0.50 per share for total consideration of $5,000, all of
which was recognized as expense during the three months ended June 30, 2006. The
Company recognized a gain on the extinguishment of debt in the amount of $35,932
during the three months ended June 30, 2006 in connection with the issuance of
these shares.
On April 1, 2006, the Company issued 350,000 shares of common stock to
a consultant pursuant to a consulting agreement. The shares were valued at $0.50
per share for total consideration of $175,000. The Company recognized $14,370 of
expense during the three months ended June 30, 2006.
In April, May and June 2006, the Company issued 23,325 shares of
common stock to a consultant pursuant to a consulting agreement. The shares were
issued at the closing price of the Company's common stock on the day immediately
preceding the date of issuance for total consideration of $30,000, all of which
was recognized as expense during the three months ended June 30, 2006.
CAPITAL-RAISING TRANSACTIONS
In May 2006, the Company completed a private offering of 211,934
shares of common stock. The shares were sold for $0.60 per share for aggregate
gross proceeds of $127,160. The shares were sold in units consisting of two
shares of common stock, one Class A warrant and one Class B warrant at a
purchase price of $1.20 per unit. Each warrant gives the holder the right to
purchase one share of common stock. All Class A warrants have an exercise price
of $0.60 per share, are exercisable for a period of 18 months commencing on the
date of issuance, and expire at the end of the exercise period. All Class B
warrants have an exercise price of $0.80 per share, are exercisable for a period
of 36 months commencing on the date of issuance, and expire at the end of the
exercise period.
During the six months ended June 30, 2006, the Company received
aggregate gross proceeds of $1,484,938 from the exercise of warrants held by
certain of the Company's security holders. The Company issued a total of
1,829,272 shares in connection therewith at exercise prices ranging from $0.60
to $2.00.
F-39
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2006
NOTE 10. STOCK OPTIONS
Stock options exercisable into an aggregate of 7,645,000 shares of the
Company's common stock were outstanding on June 30, 2006, of which 3,745,000
were vested. The weighted average exercise price of the stock options
outstanding on June 30, 2006 was $0.40. The Company estimates the fair value of
its stock options on the date of grant by using the Black-Scholes pricing model
in accordance with the provisions of Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
Under the Black-Scholes pricing model, the Company used the following
weighted-average assumptions to determine the fair value of the stock options
issued: a dividend yield of zero percent, an expected volatility of 282%, a
risk-free interest rate of 3.5 percent and a remaining contractual life of 8.51
years. No stock options were issued or exercised during the six months ended
June 30, 2006.
NOTE 11. RELATED-PARTY TRANSACTIONS
On February 8, 2006, Roger H. Folts resigned as the Chief Financial
Officer and Secretary of the Company. Concurrently therewith, the Company
entered into a termination and mutual release with Mr. Folts pursuant to which
his employment agreement with the Company was terminated effective February 1,
2006 and the Company and Mr. Folts released each other from any obligations or
claims arising in connection with his employment with the Company. Also on that
date, Mr. Folts entered into a consulting agreement with the Company. Under the
terms of the consulting agreement, Mr. Folts agreed to provide accounting and
related services to the Company on a full-time basis until June 30, 2006, and
thereafter on a part-time basis until February 1, 2009. In exchange for his
services, the Company agreed to continue paying Mr. Folts the salary he was
receiving under his employment agreement until March 31, 2006, and agreed to
issue 300,000 shares of common stock to Mr. Folts, a maximum of 25,000 of which
may be sold per calendar month during the period commencing April 1, 2006 and
ending December 31, 2006.
On March 28, 2006, the Company issued restricted stock awards to David
M. Daniels, Alex Soufflas, Patricia S. Bathurst and David A. Taylor for 450,000,
300,000, 225,000 and 375,000 shares of common stock, respectively. The awards
vest in three equal annual installments commencing on the first anniversary of
the date of grant.
On March 29, 2006, the Company entered into an employment agreement
with Alex Soufflas to continue serving as its Chief Financial Officer and
Executive Vice President effective February 1, 2006. The employment 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. Soufflas is entitled to an
annual base salary of $210,000 with annual increases on January 1st 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 the Company's board of directors.
F-40
NATIONAL HEALTH PARTNERS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2006
On March 29, 2006, the Company entered into an employment agreement
with David A. Taylor to continue serving as its Senior Vice President - National
Sales effective February 1, 2006. The employment 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. Taylor is entitled to an annual base salary of
$162,000 with annual increases on January 1st 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 the Company's board of directors.
On April 1, 2006, the Company entered into a Termination and Mutual
Release with Centerpointe Property, LLC. Under the agreement, the lease between
the Company and Centerpointe with respect to the office space the Company was
leasing in Sarasota, Florida was terminated effective April 1, 2006, the Company
issued 10,000 shares of its common stock to Centerpointe in full payment of all
rent and other expenses that were due and payable under the lease, and the
Company and Centerpointe agreed to release each other from any and all claims
that they may now hold or may in the future hold arising out of the lease. The
Company did not incur any material early termination penalties in connection
with the termination of the Lease. Ronald F. Westman and his wife own all of the
outstanding membership interests in Centerpointe. Mr. Westman beneficially owns
approximately 24% of the Company's common stock and served as a member of the
Company's board of directors from June 29, 2005 to September 26, 2005.
NOTE 12. INITIAL PUBLIC OFFERING
On January 27, 2006, the Company's registration statement on Form
SB-2, File No. 333-126315, was declared effective by the Securities and Exchange
Commission in connection with the initial public offering of 10,258,135 shares
of common stock to be sold by certain selling security holders. The Company did
not receive any proceeds from the offering.
NOTE 13. SUBSEQUENT EVENTS
On August 9, 2006, the Company completed a private offering of
1,705,000 shares of common stock for aggregate gross proceeds of $1,364,000. The
shares were sold in units consisting of one share of common stock, one Class A
warrant and one Class B warrant at a purchase price of $0.80 per unit. Each
warrant gives the holder the right to purchase one share of common stock. All
Class A warrants have an exercise price of $0.80 per share, are exercisable
until August 31, 2006, and expire at the end of the exercise period. All Class B
warrants have an exercise price of $1.00 per share, are exercisable until
November 30, 2006, and expire at the end of the exercise period. The Company
granted registration rights covering all shares of common stock issued by the
Company upon the exercise of the warrants.
Between July 1, 2006 and August 11, 2006, the Company received
aggregate gross proceeds of $261,125 from the exercise of warrants held by
certain of the Company's security holders.
F-41
5,432,443 SHARES
[GRAPHIC OMITTED]
NATIONAL HEALTH PARTNERS, INC.
COMMON STOCK
--------------------------
P R O S P E C T U S
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_______________, 2006
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 incurred 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........................... 12,000
Legal fees and expenses................................ 50,000
Miscellaneous expenses................................. 6,000
------------
Total............................................. $74,811
============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since October 1, 2003, 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. The Class A
warrants were initially exercisable into one share of our common stock at an
exercise price of $1.00 per share during a period beginning January 27, 2006 and
ending July 26, 2006 and are no longer exercisable. The Class B warrants are
initially exercisable into one share of our common stock at an exercise price of
$2.00 per share during a period beginning January 27, 2006 and ending November
30, 2006, the expiration date. 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. The Class A warrants were
initially exercisable into one share of our common stock at an exercise price of
$1.00 per share during a period beginning January 27, 2006 and ending July 26,
2006 and are no longer exercisable. The Class B warrants are initially
exercisable into one share of our common stock at an exercise price of $2.00 per
share during a period beginning January 27, 2006 and ending November 30, 2006,
the expiration date. 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. The Class A
warrants were initially exercisable into one share of our common stock at an
exercise price of $1.00 per share during a period beginning January 27, 2006 and
ending July 26, 2006 and are no longer exercisable. The Class B warrants are
initially exercisable into one share of our common stock at an exercise price of
$2.00 per share during a period beginning January 27, 2006 and ending November
30, 2006, the expiration date. 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. The Class A warrants were initially exercisable
into one share of our common stock at an exercise price of $1.00 per share
during a period beginning January 27, 2006 and ending July 26, 2006 and are no
longer exercisable. The Class B warrants are initially exercisable into one
share of our common stock at an exercise price of $2.00 per share during a
period beginning January 27, 2006 and ending November 30, 2006, the expiration
date. 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. The
Class A warrants are initially exercisable into one share of our common stock at
an exercise price of $.60 per share during a period beginning January 27, 2006
and ending July 27, 2007, and expire on December 31, 2007. The Class B warrants
are initially exercisable into one share of our common stock at an exercise
price of $.80 per share during a period beginning January 27, 2006 and ending
December 31, 2008, the expiration date. 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. The Class A
warrants are initially exercisable into one share of our common stock at an
exercise price of $.60 per share during a period beginning January 27, 2006 and
ending July 27, 2007, and expire on December 31, 2007. The Class B warrants are
initially exercisable into one share of our common stock at an exercise price of
$.80 per share during a period beginning January 27, 2006 and ending December
31, 2008, the expiration date. 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 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. The Class A warrants are initially
exercisable into one share of our common stock at an exercise price of $.60 per
share during a period beginning January 27, 2006 and ending July 27, 2007, and
expire on December 31, 2007. The Class B warrants are initially exercisable into
one share of our common stock at an exercise price of $.80 per share during a
period beginning January 27, 2006 and ending December 31, 2008, the expiration
date. 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.
II-5
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. The
Class A warrants are initially exercisable into one share of our common stock at
an exercise price of $.60 per share during a period beginning January 27, 2006
and ending July 27, 2007, and expire on December 31, 2007. The Class B warrants
are initially exercisable into one share of our common stock at an exercise
price of $.80 per share during a period beginning January 27, 2006 and ending
December 31, 2008, the expiration date. The Class C warrants were 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.
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
expired 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.
II-6
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.
On February 8, 2006, we issued 300,000 shares of common stock to Roger
H. Folts, our former Chief Financial Officer and Secretary, in partial
consideration for accounting and related services to be provided to us. Of this
amount, 250,000 shares were not registered under the Securities Act. 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.
On April 1, 2006, we issued 10,000 shares of common stock to
Centerpointe Property, LLC in connection with the termination of the Commercial
Office Lease dated June 13, 2005 with respect to the office space located in
Sarasota, Florida in consideration for which all rent and other expenses that
were due and payable under the lease were deemed paid in full, and we and
Centerpointe released each other from any and all claims that we may now hold or
may in the future hold arising out of the lease. 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.
On April 1, 2006, we issued 350,000 shares of common stock to an
accredited investor in exchange for consulting and advisory services. 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 2006, we completed a private offering of 211,934 shares of
common stock, Class A warrants to acquire 105,967 shares of our common stock,
and Class B warrants to acquire 105,967 shares of our common stock for aggregate
cash consideration of $127,160. 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 $1.20 per unit. The Class A warrants are
initially exercisable into one share of our common stock at an exercise price of
$.60 per share, are exercisable for a period of 18 months commencing on the date
of issuance, and expire at the end of the exercise period. The Class B warrants
are initially exercisable into one share of our common stock at an exercise
price of $.80 per share, are exercisable for a period of 36 months commencing on
the date of issuance, and expire at the end of the exercise period. 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 and without payment of
underwriting discounts or commissions to any person.
II-7
In August 2006, we completed a private offering of 1,705,000 shares of
common stock, Class A warrants to acquire 1,705,000 shares of our common stock,
and Class B warrants to acquire 1,705,000 shares of our common stock for
aggregate cash consideration of $1,364,000. These securities were sold in units
comprised of one share of common stock, one Class A warrant and one Class B
warrant. The units were sold at a purchase price of $0.80 per unit. The Class A
warrants were initially exercisable into one share of our common stock at an
exercise price of $.80 per share, were exercisable until August 31, 2006, and
expired at the end of the exercise period. The Class B warrants are initially
exercisable into one share of our common stock at an exercise price of $1.00 per
share, are exercisable until November 30, 2006, and expire at the end of the
exercise period. We paid placement agent fees consisting of 248,000 units
identical to the units sold in the offering. We agreed to use our reasonable
best efforts to file a registration statement with the SEC to register all
shares of common stock issued by us upon the exercise of the warrants. We issued
these securities to a limited number of accredited investors in a private
offering exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act without engaging in any
advertising or general solicitation of any kind.
In September 2006, we completed a private offering of 710,000 shares of
common stock, Class A warrants to acquire 710,000 shares of our common stock,
and Class B warrants to acquire 710,000 shares of our common stock for aggregate
cash consideration of $355,000. These securities were sold in units comprised of
one share of common stock, one Class A warrant and one Class B warrant. The
units were sold at a purchase price of $0.50 per unit. The Class A warrants were
initially exercisable into one share of our common Stock at an exercise price of
$0.50 per share, were exercisable until October 16, 2006, and expired at the end
of the exercise period. The Class B warrants are initially exercisable into one
share of our common stock at an exercise price of $0.50 per share, are
exercisable until August 31, 2007, and expire at the end of the exercise period.
We paid finder fees consisting of 106,500 units identical to the units sold in
the offering. We agreed to use our reasonable best efforts to file a
registration statement with the SEC to register all shares of common stock
issued in this offering and all shares of common stock issued by us upon the
exercise of the warrants by November 30, 2006. We issued these securities to a
limited number of accredited investors in a private offering exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act without engaging in any advertising or general solicitation of
any kind.
On September 20, 2006, we issued 200,000 shares of common stock, Class
A warrants to acquire 200,000 shares of our common stock, Class B warrants to
acquire 200,000 shares of our common stock, and Class C warrants to acquire
200,000 shares of our common stock to an accredited investor for aggregate cash
consideration of $100,000. These securities were sold in units comprised of two
shares of common stock, two Class A warrants, two Class B warrants and two Class
C warrants. The units were sold at a purchase price of $1.00 per unit. The Class
A warrants are initially exercisable into one share of our common Stock at an
exercise price of $0.50 per share, are exercisable until November 30, 2006, and
expire at the end of the exercise period. The Class B warrants are initially
exercisable into one share of our common stock at an exercise price of $0.50 per
share, are exercisable until August 31, 2007, and expire at the end of the
exercise period. The Class C warrants are initially exercisable into one share
of our common stock at an exercise price of $0.80 per share, are exercisable
until November 30, 2007, and expire at the end of the exercise period. We paid
finder fees consisting of 15,000 units identical to the units sold in the
offering. We agreed to use our reasonable best efforts to file a registration
statement with the SEC to register all shares of common stock issued in this
offering and all shares of common stock issued by us upon the exercise of the
warrants by November 30, 2006. 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.
II-8
In October 2006, we completed a private offering of 510,000 shares of
common stock, Class A warrants to acquire 510,000 shares of our common stock,
Class B warrants to acquire 510,000 shares of our common stock, Class C warrants
to acquire 510,000 shares of our common stock, and Class D warrants to acquire
510,000 shares of our common stock for aggregate cash consideration of $255,000.
These securities were sold in units comprised of one share of common stock, one
Class A warrant, one Class B warrant, one Class C warrant and one Class D
warrant. The units were sold at a purchase price of $0.50 per unit. The Class A
warrants were initially exercisable into one share of our common Stock at an
exercise price of $0.50 per share, were exercisable until October 16, 2006, and
expired at the end of the exercise period. The Class B warrants are initially
exercisable into one share of our common stock at an exercise price of $0.50 per
share, are exercisable until November 30, 2006 and expire at the end of the
exercise period. The Class C warrants are initially exercisable into one share
of our common stock at an exercise price of $0.50 per share, are exercisable
until August 31, 2007, and expire at the end of the exercise period. The Class D
warrants are initially exercisable into one share of our common stock at an
exercise price of $0.80 per share, are exercisable until November 30, 2007, and
expire at the end of the exercise period. We paid finder fees consisting of
76,500 units identical to the units sold in the offering. We agreed to use our
reasonable best efforts to file a registration statement with the SEC to
register all shares of common stock issued in this offering and all shares of
common stock issued by us upon the exercise of the warrants by November 30,
2006. We issued these securities to a limited number of accredited investors in
a private offering exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) of the Securities Act without engaging in any
advertising or general solicitation of any kind.
In October 2006, we completed a private offering of Class A warrants to
acquire 1,500,000 shares of our common stock and Class B warrants to acquire
1,500,000 shares of our common stock for aggregate cash consideration of $3,000.
These securities were sold in units comprised of 50,000 Class A warrants and
50,000 Class B warrants. The units were sold at a purchase price of $100 per
unit. The Class A warrants are initially exercisable into one share of our
common Stock at an exercise price of $0.60 per share, are exercisable until
November 30, 2006, and expire at the end of the exercise period. The Class B
warrants are initially exercisable into one share of our common stock at an
exercise price of $0.80 per share, are exercisable until November 30, 2007, and
expire at the end of the exercise period. We paid finder fees consisting of 1.5
units identical to the units sold in the offering. We agreed to use our
reasonable best efforts to file a registration statement with the SEC to
register: (i) all shares of common stock issued by us upon the exercise of the
warrants if the holder exercises all of its warrants in full by November 30,
2006, or (ii) 50% of the shares of common stock issued by us upon the exercise
of the warrants if the holder does not exercise all of its warrants in full by
November 30, 2006. We issued these securities to a limited number of accredited
investors in a private offering exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act without engaging
in any advertising or general solicitation of any kind.
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During the period beginning January 1, 2006 and ending October 23,
2006, we issued 2,372,397 shares of common stock upon the exercise of warrants
at exercise prices ranging between $0.50 and $2.00 per share for aggregate gross
cash proceeds of $1,836,063. We issued these securities to a limited number of
accredited investors in private offerings 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.
We have issued stock options and restricted stock awards to each of
David M. Daniels, Alex Soufflas, Patricia S. Bathurst and David A. Taylor, our
four executive officers. A description of the stock options and restricted stock
awards is set forth under "Executive Compensation -- Employment Contracts and
Arrangements" of the prospectus contained within this registration statement.
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.
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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
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
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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.
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
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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
10.39 National Health Partners, Inc. 2006 Stock Incentive Plan (incorporated
by reference to Exhibit 99.1 to the registration statement on Form
S-8, File No. 333-131589, filed with the SEC on February 6, 2006)
10.40 Termination and Mutual Release, dated February 8, 2006, by and between
the Company and Roger H. Folts (incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K filed with the SEC on February
15, 2006)
10.41 Consulting Agreement, dated February 8, 2006, by and between the
Company and Roger H. Folts (incorporated by reference to Exhibit 10.2
to the Current Report on Form 8-K filed with the SEC on February 15,
2006)
10.42 Amendment No. 1 to Promissory Note, dated February 17, 2006, by and
between the Company and Uwe Weibel (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on
February 23, 2006)
10.43 Amendment No. 1 to Promissory Note, dated February 17, 2006, by and
between the Company and Daniel Eggenberger (incorporated by reference
to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC
on February 23, 2006)
10.44 Amendment No. 1 to Promissory Note, dated March 4, 2006, by and
between the Company and Ronda Westman (incorporated by reference to
Exhibit 10.44 to the Annual Report on Form 10-KSB filed with the SEC
on March 31, 2006)
10.45 Employment Agreement, dated March 29, 2006, by and between the Company
and Alex Soufflas (incorporated by reference to Exhibit 10.45 to the
Annual Report on Form 10-KSB filed with the SEC on March 31, 2006)
10.46 Employment Agreement, dated March 29, 2006, by and between the Company
and David A. Taylor (incorporated by reference to Exhibit 10.46 to the
Annual Report on Form 10-KSB filed with the SEC on March 31, 2006)
II-13
10.47 Restricted Stock Award Agreement, dated March 28, 2006, by and between
the Company and David M. Daniels (incorporated by reference to Exhibit
10.47 to the Annual Report on Form 10-KSB filed with the SEC on March
31, 2006)
10.48 Restricted Stock Award Agreement, dated March 28, 2006, by and between
the Company and Alex Soufflas (incorporated by reference to Exhibit
10.48 to the Annual Report on Form 10-KSB filed with the SEC on March
31, 2006)
10.49 Restricted Stock Award Agreement, dated March 28, 2006, by and between
the Company and Patricia S. Bathurst (incorporated by reference to
Exhibit 10.49 to the Annual Report on Form 10-KSB filed with the SEC
on March 31, 2006)
10.50 Restricted Stock Award Agreement, dated March 28, 2006, by and between
the Company and David A. Taylor (incorporated by reference to Exhibit
10.50 to the Annual Report on Form 10-KSB filed with the SEC on March
31, 2006)
10.51 Termination and Mutual Release, dated April 1, 2006, by and between
Centerpointe Property, LLC and the Company (incorporated by reference
to Exhibit 10.1 to the Quarterly Report on Form 10-QSB filed with the
SEC on March 31, 2006)
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1
to the Annual Report on Form 10-KSB filed with the SEC on March 31,
2006)
23.1 Consent of H J & Associates, LLC
23.2* Consent of Carson Boxberger LLP
* 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-14
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;
II-15
(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-16
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 October 27, 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 October 27, 2006
- --------------------- of the Board (Principal Executive
David M. Daniels Officer)
/s/ Alex Soufflas Chief Financial Officer (Principal October 27, 2006
- --------------------- Financial and Accounting Officer)
Alex Soufflas
EXHIBIT INDEX
Exhibit Exhibit Description
- ------- -------------------
23.1 Consent of H J & Associates, LLC