-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AWngCSRKHqzq1qy/ii9ji1QYozNqiHJEeLoD7F/XkAQOLqqbhMbAylzHU2yrcsSk GVJzTiTxvQnsq2RfDgYITg== 0000743530-96-000006.txt : 19960206 0000743530-96-000006.hdr.sgml : 19960206 ACCESSION NUMBER: 0000743530-96-000006 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19960202 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDNET MPC CORP CENTRAL INDEX KEY: 0000832485 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 880215949 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-94550 FILM NUMBER: 96510954 BUSINESS ADDRESS: STREET 1: 871 C GRIER DR CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7023613119 MAIL ADDRESS: STREET 1: 871 C GRIER DR CITY: LAS VEGAS STATE: NV ZIP: 89119 FORMER COMPANY: FORMER CONFORMED NAME: MEDI MAIL INC /NV/ DATE OF NAME CHANGE: 19920703 S-1/A 1 As filed with the Securities and Exchange Commission on February 2, 1996 Registration No. 33-94550 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- POST-EFFECTIVE AMENDMENT NO. 2 TO FORM S-1 Registration Statement Under The Securities Act of 1933 -------------------- MEDNET, MPC CORPORATION (formerly Medi-Mail, Inc.) (Exact Name of Registrant as Specified in Its Charter) Nevada 5961 (State or Other Jurisdiction of (Primary Standard Industrial Incorporation or Organization) Classification Code Number) 871-C Grier Drive Las Vegas, Nevada 89119 88-0215949 (702) 361-3119 - ------------------------------- -------------------------------------------- (I.R.S. Employer Identification (Address, Including Zip Code, and Number) Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) M.B. Merryman President and Chief Executive Officer 871-C Grier Drive Las Vegas, Nevada 89119 (702) 361-3119 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Copies of all communications, including all communications sent to the agent for service, should be sent to: Richard T. Beard, Esq. Paul H. Shaphren, Esq. Ballard Spahr Andrews & Ingersoll 201 South Main Street, Suite 1200 Salt Lake City, UT 84111 (801) 531-3000 Approximate date of commencement of proposed sale to the public: From time to time after the Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box |X| -------------------- CALCULATION OF REGISTRATION FEE Title of Each Class Proposed Maximum Proposed Maximum Amount of of Securities to Amount to be Offering Price Per Aggregate Offering Registration be Registered Registered Share(2) Price(2) Fee(1)(2)(3) - ------------------------ ------------ ------------------ ------------------ ------------ Common Stock, $.001 par value for collateral obligations 1,000,000 $3.125 $3,125,000 $1,077.59 Common Stock underlying Warrants or convertible notes 1,923,024 $3.125 $6,009,450 $2,072.22 Common Stock for future acquisitions and future collateral obligations 4,500,000 $3.125 $14,062,500 $4,849.14 Total 7,423,024(1) $23,196,950 $7,998.95 (1) Includes up to 5,500,000 shares which, with the consent of the Registrant, may be resold by persons who received shares covered by the Registration Statement in connection with acquisitions and who may wish to sell such shares under circumstances requiring or making desirable use of the prospectus herein contained. Such shares have not been included in the calculation of the Registration Fee. (2) Calculated in accordance with Rule 457(c) on the basis of the last reported sales price of the Registrant's Common Stock on July 11, 1995 as reported by Nasdaq. (3) The fee is calculated on the basis of 1/29th of 1% of the Proposed Maximum Aggregate Offering Price.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. MEDNET, MPC CORPORATION CROSS REFERENCE SHEET Pursuant to Item 501(b) of Regulation S-K Item Number Prospectus Caption - ----------- ------------------ 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus Facing Page; Front Cover Page; Cross Reference Sheet 2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges Prospectus Summary; Risk Factors 4. Use of Proceeds Securities Covered by This Prospectus 5. Determination of Offering Price * 6. Dilution Securities Covered by This Prospectus 7. Selling Security Holders Front Cover Page; Securities Covered by This Prospectus; Inside Back Cover Page 8. Plan of Distribution Securities Covered by This Prospectus 9. Description of Securities to be Registered Description of Securities 10 Interests of Named Experts and Counsel * 11 Information with Respect to Registrant Prospectus Summary; Proposed Acquisition of . Home Pharmacy; Risk Factors; Unaudited Combined Pro Forma Condensed Consolidated Statements of Earnings; Price Range of Common Stock and Dividend Policy; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Directors and Executive Officers; Security Ownership of Certain Beneficial Owners and Management; Certain Relationships and Related Transactions; Legal Proceedings; Legal Matters; Experts; Change in Accountants; Consolidated Financial Statements 12 Disclosure of Commission Position on Indemnification for Securities Act Liabilities * ____________________ * Inapplicable PROSPECTUS MEDNET, MPC CORPORATION 6,422,024 Shares of Common Stock Of the 6,422,024 common shares, $.001 par value per share (the "Common Stock"), of Mednet, MPC Corporation (formerly Medi-Mail, Inc.) (the "Company") covered by this Amended Prospectus, 4,499,000 shares (the "Collateral Shares") of Common Stock offered hereby have been pledged by the Company to ArcVentures, Inc. ("Arc") as collateral for certain obligations or potential obligations of the Company, of which 1,774,099 shares may be immediately resold by Arc. See "Acquisition Of Home Pharmacy." The Company will not receive any proceeds from the Collateral Shares in the event they are sold by Arc. This Prospectus also relates to 1,923,024 shares of Common Stock (the "Warrant Shares") issuable by the Company pursuant to the terms of certain outstanding warrants or convertible notes (collectively the "Warrants"). The exercise or conversion prices of the Warrants range from $2.4375 per share to $5.00 per share. Although the Company will receive the exercise price of any or all of the outstanding Warrants which are exercised or converted, up to a maximum of $3,817,500 in cash and $1,950,808 in conversion of debt if all Warrants are exercised or converted, there is no assurance that any of the Warrants will be exercised or converted. The Company will not receive any proceeds from the resale of Common Stock issued upon exercise or conversion of the Warrants. To the extent they were not utilized as Collateral Shares, up to 2,500,000 shares of Common Stock covered by this Prospectus (the "Acquisition Shares") may be offered and issued from time to time by the Company in connection with future acquisitions of other businesses, properties or securities in business combination transactions in accordance with Rule 415(a)(1)(viii) of Regulation C under the Securities Act of 1933, as amended (the "1933 Act"). Any Collateral Shares not sold by Arc pursuant to the Pledge will become Acquisition Shares. This Prospectus may also be used, with the Company's prior consent, by persons or entities who have received or will receive Acquisition Shares in connection with such acquisitions and who wish to offer and sell such shares under circumstances requiring or making desirable its use and by certain transferees of such persons or entities. See "Securities Covered By This Prospectus." The Common Stock is traded in the over-the-counter market and quoted on Nasdaq under the symbol MMRX. On January 24, 1996, the last reported sales price of the Common Stock on Nasdaq was $2.3125 per share. See "Price Range of Common Stock and Dividend Policy." THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS," BEGINNING ON PAGE 7. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Amended Prospectus is February 1, 1996. Prior to this Amendment, this Prospectus also related to an offering of up to 2,000,000 shares by the Company for cash consideration of $2.50 per share. The Cash Offering terminated following the sale of 1,001,000 shares for gross proceeds of $2,502,500. - -------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL. -------------------- TABLE OF CONTENTS AVAILABLE INFORMATION ..................................................... PROSPECTUS SUMMARY ........................................................ RISK FACTORS .............................................................. SECURITIES COVERED BY THIS PROSPECTUS ..................................... PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY ........................... SELECTED CONSOLIDATED FINANCIAL DATA ...................................... MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................................... BUSINESS .................................................................. DIRECTORS AND EXECUTIVE OFFICERS .......................................... SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .......................................................... CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................ DESCRIPTION OF SECURITIES ................................................. LEGAL PROCEEDINGS ......................................................... LEGAL MATTERS ............................................................. EXPERTS ................................................................... CHANGE IN ACCOUNTANTS ..................................................... ------------------- AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information concerning the Company can be inspected and copied at the public reference facilities maintained by the Commission at its office at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the Regional Offices of the Commission at Citicorp Center, 300 West Madison Street, Chicago, Illinois 60661; and Seven World Trade Center, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. This Prospectus constitutes a part of a Registration Statement on Form S-1 filed by the Company with the Commission under the 1933 Act (the "Registration Statement"). This Prospectus omits certain information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits for further information with respect to the Company and the shares of Common Stock offered hereby. Statements contained herein concerning the provisions of any document are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus, including information under "Risk Factors." The Company The Company was incorporated under the laws of the State of Nevada in September, 1985 and changed its name from Medi-Mail, Inc. to Mednet, MPC Corporation in June, 1995. Substantially all of the Company's business is derived from its activities in the managed prescription care industry. The Company, together with its subsidiaries Medi-Mail, Inc. ("Medi-Mail"), Medi-Claim, Inc. ("Medi-Claim"), Medi-Phar, Inc. ("Medi-Phar") and Family Pharmaceuticals of America, Inc. ("FPA"), acts as an integrated, full service prescription drug benefits manager serving individual members of retirement organizations, fraternal organizations, state employee organizations and commercial organizations ("Affinity Groups"), corporations, self insurance trusts, insurance companies and other benefit plan sponsors ("Third-Party Payors" and collectively with the Affinity Groups, "Payors") throughout the United States. The Company's benefit programs (the "Programs") offer prescription drug benefits to approximately two million individuals ("Participants"), most of whom receive funded benefits through Third-Party Payors and/or are members of an Affinity Group. Description of Prescription Benefits Management Business. The Company develops and administers clientspecific Programs on behalf of more than 400 Payors throughout the United States. The Company attempts to customize its Programs to meet the Payors' particular benefits strategy combining a number of managed care features to cost effectively manage the Payor's Program. The Programs combine mail-service pharmacy features such as enhanced generic substitution and the convenience of home delivery, with the features of retail network pharmacy such as automated claims adjudication, real time electronic networking of retail pharmacies and card programs. Payors can choose a Program which incorporates on-line electronic claims processing, drug utilization review and an electronic network linking more than 45,000 retail pharmacies in the United States, as well as features of a mail-service pharmacy program. In the alternative, Payors can choose either a mail-service pharmacy program or a network claims processing program to combine with its other existing prescription benefits. Mail-service Pharmacy Operations. The Company's mail-service pharmacy program is conducted from its Las Vegas, Chicago and Mount Pleasant, South Carolina locations. Mail-service operations are being transferred to the MediMail subsidiary. The Company services customers throughout the United States. The Company's mail-service pharmacy program is designed for convenience and to reduce prescription medication and over-the-counter pharmaceutical costs to individuals, corporations, labor unions, retirement systems, health and welfare trusts, insurance companies, federal and state employee plans, health maintenance organizations and third-party administrators. The mail service pharmacy program attracts senior citizens, home-bound persons, sight or hearing impaired persons and users of regularly prescribed medications who are interested in the convenience of direct delivery of medication and/or lowering their medication and pharmaceutical expenses. The Company believes that it delivers prescription medication and over-the-counter pharmaceutical products to the homes of customers at lower costs, on average, than are generally available through retail pharmacies. These medications are typically maintenance medications, which must be taken on an ongoing basis for chronic conditions such as high blood pressure, arthritis and heart and thyroid conditions. The Company believes that these conditions account for a majority of prescription medication expenditures in the United States. Retail Pharmacy Operations. Through Medi-Phar, the Company operates in-clinic retail pharmacies, located in San Diego, California and Las Vegas, Nevada. Operation of the retail pharmacies provides the Company with a working knowledge of the retail pharmacy business which improves the Company's ability to market and develop its services. The Company also believes that the operation of the local retail pharmacies provides the Company with additional knowledge and background to continue developing the pharmacy network and claims processing system of its subsidiary, Medi-Claim. Mednet(R) Claims Processing. The Company's prescription claims administration programs ("Claims Programs") are conducted through Medi-Claim. In November 1994, Medi-Claim acquired substantially all of the assets of Medical Services Agency, Inc. ("MSA"), which operated under the registered service mark of Mednet(R), in exchange for 1,600,000 shares of Common Stock. The Claims Programs are sponsor-specific benefit programs through which Medi-Claim processes and adjudicates paper and electronic prescription drug claims generated through a network of participating retail pharmacies. The pharmacy network includes approximately 45,000 retail pharmacies in the United States, each of which contracts with Medi-Claim to provide prescription dispensing at contracted rates. The Company's executive offices are located at 871-C Grier Drive, Las Vegas, Nevada 89119, and its telephone number is (702) 361-3119. The securities offered hereby involve a high degree of risk. See "Risk Factors". Summary Financial Data Set forth below are summary consolidated financial data for the Company as of and for the periods indicated. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's Consolidated Financial Statements and Notes thereto, and other financial statements appearing elsewhere in this Prospectus. Nine Months Ended Year Ended December 31, September 30, ----------------------------------------------- -------------------------- 1994(1)(2) 1993(3) 1992(4) 1995(5) 1994(1)(2) ----------- ----------- ----------- ----------- ----------- Statement of Operations Data: Net sales............................ $67,863,000 $25,224,000 $10,293,000 $83,693,000 $48,869,000 Cost of sales........................ (58,793,000) (19,504,000) (8,082,000) (71,262,000) (42,519,000) Gross profit......................... 9,070,000 5,720,000 2,211,000 12,431,000 6,350,000 Selling, general and administrative expenses (including amortization)........... (14,794,000) (13,185,000) (4,433,000) (12,991,000) (9,293,000) Subsidiary operations for period not owned................... 517,000 -- 37,000 ( 982,000) 321,000 Net other income (expense)(6)........ ( 292,000) ( 761,000) 45,000 ( 730,000) ( 341,000) Net loss............................. $( 2,963,00 $( 5,499,000) $( 8,226,000) $( 2,140,000) $(2,272,000) 0) Net loss per common share............ $ (.26) $ (.49) $ (.24) $(.09) $(.14) Weighted average shares outstanding........................ 21,353,000 16,675,000 8,929,000 24,041,758 21,011,662 Balance Sheet Data (end of period): Working capital...................... $ 1,420,000 $ 1,310,000 $ 2,179,000 $ 2,365,000 $3,879,000 Intangible assets, net............... 9,308,000 5,406,000 1,803,000 19,225,000 6,063,000 Total assets......................... 22,317,000 13,017,000 7,271,000 39,588,000 16,519,000 Long-term debt less current portion............................ 595,000 952,000 835,000 3,649,000 455,000 Redeemable Preferred Stock........... -- -- -- 5,350,000 -- Stockholders' equity................. $11,906,000 $ 7,028,000 $ 4,814,000 $15,369,000 $11,156,000 (1) In November, 1994 the Company acquired substantially all the assets of Medical Services Agency, Inc. (doing business as Mednet) ("MSA"). The acquisition was accounted for as a purchase. The Company has elected to consolidate the acquisition of MSA retroactively to January 1, 1994 and these amounts include interim results of MSA through September 30, 1994 as determined by management. (2) In June, 1994 the Company acquired all of the issued and outstanding stock of Family Pharmaceuticals of America, Inc. The acquisition was accounted for as a purchase. The Company has elected to consolidate the acquisition of FPA retroactively to January 1, 1994. (3) In April, 1993, the Company acquired substantially all the assets of Mail Rx. The acquisition was accounted for as a purchase. (4) In January and December of 1992, the Company acquired the assets now owned by Medi-Phar and Medi-Claim, respectively. The Company has elected to consolidate the operations of Medi-Phar retroactively to January 1, 1992. Results of Medi-Claim are included for the last month of 1992. (5) In September, 1995 the Company acquired substantially all the assets of Home Pharmacy. The acquisition was accounted for as a purchase. The Company has elected to consolidate the operations of Home Pharmacy retroactively to January 1, 1995. (6) Net other income (expense) excludes subsidiary operations for period not owned.
RISK FACTORS The Common Stock involves a high degree of risk. Prospective investors should carefully consider the following factors, among others set forth in this Prospectus. Government Regulation. There are extensive state and federal regulations applicable to the dispensing of prescription medications. Since sanctions may be imposed for violations of these laws, compliance is a significant operational requirement for the Company. The mail-service prescription medication and over-the-counter pharmaceutical business of the Company is conducted from licensed pharmacies located in Las Vegas, Nevada; Chicago, Illinois and Mount Pleasant, South Carolina. The retail pharmacies are licensed in California and Nevada. Nevada, California, South Carolina and Illinois have laws governing a wide range of matters relating to the operation of pharmacies, and the Company believes that it is in substantial compliance with these laws. The boards of pharmacy of these states are empowered to impose sanctions, including license revocation, for noncompliance. The Company is aware of 23 states in which the Company operates that presently require out-of-state mail order pharmacy operations to obtain a license to dispense drug products in those states. The Company is presently licensed in 13 of such states. The Company does not have any applications for licenses currently pending in other states. The boards of pharmacy of certain states do not purport to regulate out-of-state mail pharmacy services. The Company believes that in the most recent two completed fiscal years approximately 51% of its mail service sales came from states in which the Company has complied with the disclosure or licensing laws, and that approximately 43% of its mail service sales were in the 27 states which the Company believes do not regulate mail service sales. The remaining 6% of sales were in jurisdictions in which the Company believes the provisions purporting to regulate mail service pharmacies are subject to constitutional or other challenge. Additional states are considering similar regulation and the risk exists that a substantial number of states may adopt such legislation in the future. The position of the Company and the industry in general is that such regulation is an unconstitutional restraint on and interference with interstate commerce. To date, however, neither the Company nor any other participant in the industry has formally challenged the existence or scope of these regulations. Pending a formal determination as to the constitutionality of these regulations, the Company endeavors to comply with existing regulations in those states where such compliance is specifically requested by the state. In each case where registration is specifically requested, management evaluates licensing costs, requirements and potential sanctions compared to the potential impact on sales in each of those states. The Company may consider formal action to challenge specific regulations where the potential adverse consequences to the Company are significant and compliance with regulation is unduly burdensome or impractical. Despite its efforts, the Company may be unable to comply with all existing and future regulations. Existing and future legislation could increase the Company's operating expenses as well as operating expenses for the entire industry. In addition, several states impose substantial fines, penalties or criminal sanctions for failure to comply with existing regulations. Such fines could exceed $2,000 per day or per violation, or misdemeanor criminal charges could be filed against the Company. The Company does not believe that such results are likely based on its experience to date. While increased costs would be passed on to consumers, existing and future regulations could curtail the scope of the Company's operations should the Company choose not to conduct business in those states where regulations have been adopted. Management estimates that any resulting decrease in sales would be immaterial. Management of Growth. The Company's revenues increased approximately 169% from 1993 to 1994. After giving effect to the Home Pharmacy acquisition, the Company's revenues for the nine months ended September 30, 1995 increased approximately 71.3% over the first nine months of 1994. This growth resulted from acquisitions, internal growth and changes to Medi-Claim's contractual obligations to its customers. There can be no assurance that the Company will continue to expand at this rate or at all. If the Company does continue to grow, the additional growth will place burdens on management to manage the growth and ultimately achieve profitability, and may require additional management personnel. There can be no assurance that the Company will be successful in managing its growth. Continued Operating Losses. As of December 31, 1994, the Company has had net losses accumulating to $20,256,000 since commencement of operations on May 1, 1987, including losses of $5,499,000 in the year ended December 31, 1994. In addition, the Company had a net loss of $2,272,000 for the nine months ended September 30, 1995. There can be no assurance that the Company will be able to operate at a profit in the future. Until and unless the results of the Company's operations improve, there can be no assurance that the Company will be able to sustain its current rates of growth and increases in sales revenues, or that profitability can be achieved in the foreseeable future, if at all. Need for Capital. The continuation and growth of the Company is dependent upon its ability to raise equity capital, as well as an increase in sales to achieve profitability. At September 30, 1995, the Company had working capital of $2,365,000. Unless and until the results of the Company's operations improve and sales increase further to result in a positive cash flow, the Company will continue to rely on the sale of equity and debt securities to finance its operations and supplement its working capital position. There can be no assurance that the Company will succeed in obtaining such sales or capital financing. Moreover, there can be no assurance that the costs and conditions associated with raising required capital will be on favorable terms. Competition. The mail service pharmacy business is highly competitive. The Company competes for the business of Third-Party Payors and Direct Payors (as hereinafter defined). Many of the Company's competitors possess substantially greater financial, marketing and personnel resources than the Company. While management believes that the Company is competitive in its price, quality and service taken as a whole, there can be no assurances that, as the mailservice pharmaceutical industry evolves, the Company will be able to operate profitably given the level of competition within the industry. Moreover, the Company cannot predict with accuracy the effect of unspecified, but probable future changes in the domestic health care system currently being discussed by the Executive and Legislative branches of the United States Government. See "Business." Marketing Constraints. The Company's mail-service pharmacy business is relatively new and, as a result, considerable management time has been and is currently being spent in presenting the mail order drug concept to potential customers and discussing programs specially tailored to each customer's needs. During fiscal 1991, the Company began to shift the focus of its marketing efforts from Affinity Groups to Third-Party Payors. There is no assurance that the Company's efforts will be successful or that the Company can compete favorably with other members of its industry. Dependence on Key Personnel. Success of the Company is substantially dependent upon the management efforts and expertise of Dr. Sol Lizerbram, Director; Dr. M.B. Merryman, President, Chief Executive Officer and Director; Mr. Dennis Smith, Executive Vice President and Chief Operating Officer; Dr. David Dalton, Executive Vice President of Subsidiary Operations; and Ms. Jane Freeman, Executive Vice President - Marketing Services. The Company intends to utilize the contacts of Dr. Lizerbram, Dr. Merryman, consultants and outside sales persons in negotiating agreements with Affinity Groups and Third-Party Payors. The Company heavily depends upon the skills of Mr. Smith in administration of the Company's pharmacy operations and Ms. Freeman in marketing the Company's services. A loss of the services of any of these key individuals could adversely affect the conduct of the Company's business. While management anticipates that the Company currently has sufficient personnel resources to compensate for the loss of any single individual, in such event the Company may be required to obtain other personnel to manage and operate the Company, and there can be no assurance that the Company would be able to employ a suitable replacement for any or all of such individuals, or that a replacement individual could be hired on terms which are acceptable to the Company. With the exception of Dr. Merryman and Dr. David Dalton, Vice-president of Subsidiary Operations the Company currently maintains no key man insurance on the lives of any of its officers or directors. Product Liability. The Company is subject to many of the liabilities inherent in the retail pharmaceutical business. The mail order pharmacy business is subject to potential product liability arising from dispensing wrong prescription drugs and tampering with products, including tampering while in the public mail distribution system. The Company has taken anti-tampering precautions by utilizing layered tamper-evidence packaging and distribution in unmarked outer packaging. Further, the Company is insured under a product liability insurance policy for pharmacy dispensing which provides liability protection to the Company of $6,000,000 per occurrence. However, there is no assurance that product liability claims may not, if successfully asserted, exceed such insurance coverage, or that the finances of the Company could withstand the effect of claims in excess of its insurance coverage. Lack of Cash Dividends. The Company has paid no cash dividends on its Common Stock to date, and there are no plans for paying cash dividends on the Common Stock in the foreseeable future. Any earnings which the Company may realize will be utilized to pay dividends on the Preferred Stock or retained to finance the growth of the Company. Certain notes payable currently restrict the Company's ability to pay cash dividends without the lender's consent. Dividends on the Common Stock may not be paid unless dividends on all outstanding classes of Preferred Stock have been paid. Any future dividends will be directly dependent upon earnings of the Company, its financial requirements and other factors. Volatility of Market Price. The price of the Common Stock has fluctuated significantly. During the period from January 1, 1991 to November 30, 1995, the closing bid price for the Common Stock, as quoted on Nasdaq, has ranged from a high of $9.25 to a low of $.75. There can be no assurance that the Common Stock offered hereby can be sold for a profit. Shares Eligible for Resale. At the date of this Prospectus, approximately 11,562,818 shares of the outstanding Common Stock are "restricted securities" and may hereafter be sold subject to compliance with Rule 144 promulgated under the 1933 Act. Rule 144 provides, among other things, and subject to certain limitations, that a person holding restricted securities for a period of two years may sell, every three months, those securities in brokerage transactions in an amount equal to the greater of (i) 1% of the outstanding Common Stock, or (ii) the average weekly trading volume, if any, of the Common Stock during the four weeks preceding the sale. Under certain circumstances, Rule 144 also permits a person who is not an affiliate of the Company and who has held restricted securities for a period of three years to sell such securities without any limitations as to amount. Possible sales of the Common Stock pursuant to Rule 144 may, in the future, have a depressive effect on the price of the Common Stock in the marketplace. The shares covered by this Prospectus represent over 23% of the issued and outstanding shares of Common Stock. An additional 22% of the issued and outstanding shares have been registered for resale by Selling Shareholders pursuant to other registration statements. The availability of such shares for resale could have a depressive effect on the price of the Common Stock in the marketplace. Preferred Stock. The Second Amended and Restated Articles of Incorporation of the Company authorize issuance of a maximum of 2,000,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). The Company currently has outstanding 267,500 shares of 10% Series A Convertible Exchangeable Preferred Stock (the "Series A Preferred"). The Series A Preferred is entitled to quarterly dividends, and dividends may not be paid on the Common Stock if such dividends are in arrears. The Series A Preferred is entitled to a preferential distribution on liquidation of the Company and the Company may be required to redeem the Series A Preferred under certain circumstances. The Series A Preferred is exchangeable for 10% convertible notes (the "Convertible Notes") of the Company. Holders of the Series A Preferred are entitled to vote on any matter submitted to the stockholders and are entitled to vote as a class on certain matters. If additional Preferred Stock is issued in the future, the terms of a series of Preferred Stock may be set by the Company's Board of Directors without approval by the Common Stockholders of the Company and may operate to the significant disadvantage of holders of outstanding Common Stock. Such terms could include, among others, preferences as to dividends and distributions on liquidation as well as separate class voting rights. SECURITIES COVERED BY THIS PROSPECTUS The Collateral Shares. On September 15, 1995 the Company pledged an initial 3,456,000 Collateral Shares to ArcVentures, Inc. ("Arc") in connection with the Company's acquisition of Arc's Home Pharmacy division. The Company subsequently pledged to Arc an additional 1,043,000 Collateral Shares covered by this prospectus and 491,277 shares not covered by this prospectus. The Collateral Shares secure two obligations of the Company to Arc: an interim note in the original principal amount of $2,500,000 (the "Interim Note") and an obligation with a principal balance of up to $4,650,000 contingent on the performance of the Home business and certain other conditions (the "Holdback Note"). Arc is immediately entitled to begin selling the 1,774,099 Collateral Shares securing the Interim Note, and the Company anticipates that sales will commence on, or shortly after, the effective date of this Amended Prospectus. The Company anticipates that sales by Arc may be effected from time to time (by Arc or broker-dealers acting as agents for Arc or as principals) by or for the account of Arc on Nasdaq, other exchanges, in the over-the-counter market, in negotiated transactions, or otherwise at prices anticipated to be reasonably related to market prices at the time of sale. Arc has agreed that it will not sell more than 50% of the Collateral Shares securing the Interim Note in any one day. The proceeds from such sales, after deduction of commissions and other selling costs, will be applied to the accrued interest and principal of the Interim Note. In the event that the net proceeds exceed the balance of the Interim Note, any additional net proceeds received by Arc will be applied to the Holdback Note. If the net proceeds from the sale of the 1,774,099 Collateral Shares are not sufficient to pay the Interim Note in full, the Company will be required, within 5 days of notice from Arc, to pay the remaining balance in cash. The Company's obligation to pay such shortfall is secured by the remaining Collateral Shares. The Company may be required to pledge additional Collateral Shares to again bring the value of the pledged Collateral Shares to 150% of the Interim Note balance (including an estimated 90 days interest) (i) at the end of each 90 day period, (ii) if the value of the Collateral Shares based upon a running twenty trading day average drops below 125% of the Interim Note balance (including estimated interest), or (iii) if the value of the Collateral Shares based upon a running five trading day average drops below 120% of the Holdback Note balance (including estimated interest). The Company has pledged 2,714,901 of the Collateral Shares covered by this prospectus and an additional 491,277 shares to Arc to secure the Company's payment of the Holdback Note in the original principal amount of $4,650,000. The Company may be required to pledge additional Collateral Shares to again bring the value of the pledged Collateral Shares to 150% of the Holdback Note balance (including an estimated 90 days interest) (i) at the end of each 90 day period, (ii) if the value of the Collateral Shares based upon a running twenty trading day average drops below 125% of the Holdback Note balance (including estimated interest), or (iii) if the value of the Collateral Shares based upon a running five trading day average drops below 120% of the Holdback Note balance (including estimated interest). If such an Event of Default occurs, including failure to pay the Interim Note when due, failure to promptly deposit additional Collateral Shares or other default under the Company's ongoing obligations to Arc, Arc may cause the Holdback Note to be immediately due and payable. Arc is entitled to sell up to 270,000 Collateral Shares per month, commencing April 1, 1996, to prepay the Holdback Note. Arc is not entitled to sell the balance of the Collateral Shares unless (i) the Holdback Note has come due, either at the end of its 13 month stated term or following acceleration, and (ii) the Company has failed to pay the Holdback Note following demand therefor by Arc. The Company anticipates that sales by Arc may be effected from time to time (by Arc or broker-dealers acting as agents for Arc or as principals) by or for the account of Arc on Nasdaq, other exchanges, in the over-the-counter market, in negotiated transactions, or otherwise at prices anticipated to be reasonably related to market prices at the time of sale. The Company will not receive any proceeds from the Collateral Shares in the event they are sold by Arc, but the proceeds will be applied to the Holdback Note. Any Collateral Shares not sold by Arc will be returned to the Company and may become Acquisition Shares, as described below. The Acquisition Shares. To the extent that they are not sold as Collateral Shares, up to 2,500,000 shares of Common Stock covered by this Prospectus are available for use in future acquisitions of other businesses, properties or securities in business combination transactions, which may relate to businesses similar or dissimilar to the Company's businesses. The consideration offered by the Company in such acquisitions in addition to the Acquisition Shares covered by this Prospectus may include cash, debt or other securities (which may be convertible into shares of Common Stock covered by this Prospectus), or assumption by the Company of liabilities of the business being acquired, or a combination thereof. It is contemplated that the terms of each acquisition will be determined by negotiations between the Company and the management or the owners of the businesses or properties to be acquired or the owners of the securities (including newly issued securities) to be acquired, with the Company taking into account the quality of management, the past and potential earning power and growth of the businesses, properties or securities to be acquired, and other relevant factors. It is anticipated that shares of Common Stock issued in acquisitions will be valued at a price reasonably related to the market value of the Common Stock at the time the basic terms of the acquisition are tentatively agreed upon or at or about the time or times of delivery of the Acquisition Shares. Any Collateral Shares not sold by Arc pursuant to the Pledge will become Acquisition Shares. With the prior consent of the Company, this Prospectus may also be used by persons or entities who have received or will receive Acquisition Shares covered by this Prospectus in connection with acquisitions of businesses, properties or securities and who may wish to sell such stock under circumstances requiring or making desirable use of this Prospectus and by certain transferees of such persons or entities. The Company's consent to such use may be conditioned upon such persons or entities agreeing not to offer more than a specified number of shares following amendments to this Prospectus, which the Company may agree to use its best efforts to prepare and file at certain intervals. The Company may require that any such offering be effected in an organized manner through securities dealers. Sales by means of this Prospectus by persons other than the Company may be made from time to time privately at prices to be individually negotiated with the purchasers, or publicly through transactions on Nasdaq (which may involve crosses and block transactions), other exchanges or in the over-the-counter market, at prices reasonably related to market prices at the time of sale or at negotiated prices. Broker-dealers participating in such transactions may act as agent or as principal and may receive commissions from the purchasers as well as from the sellers. The Company may indemnify any broker-dealer participating in such transactions against certain liabilities, including liabilities under the 1933 Act. Profits, commissions and discounts on sales by persons who may be deemed to be underwriters within the meaning of the 1933 Act may be deemed underwriting compensation under the 1933 Act. Stockholders may also offer shares of Common Stock issued in past and future acquisitions or purchased from the Company by means of prospectuses under other registration statements or pursuant to exemptions from the registration requirements of the 1933 Act, including sales which meet the requirements of Rule 144 or 145(d) under the 1933 Act, and stockholders should seek the advice of their own counsel with respect to the legal requirements for such sales. The Warrant Shares. The Warrant Shares are issuable by the Company pursuant to the terms of the Warrants. The exercise or conversion price of the Warrants range from $2.4375 per share to $5.00 per share. Although the Company will receive the exercise price of any or all outstanding Warrants exercised up to a maximum of $3,817,500 in cash and $1,950,808 in conversion of debt if all Warrants are exercised or converted, there is no assurance that any of the Warrants will be exercised or converted. It is anticipated that any proceeds received by the Company on exercise of the Warrants will be used for working capital purposes. The Company will not pay commissions or solicitation fees with respect to exercise of the Warrants. The Company does not intend to solicit exercise of the Warrants, other than delivery of this Prospectus to Warrant holders and responding to inquiries from Warrant holders. The Company will not receive any proceeds from the resale of the Warrant Shares issued upon exercise of the Warrants. The following table describes the Warrants to which this Prospectus relates. Any Warrant not exercised in full by the expiration date indicated in the table will no longer be exercisable. Exercise or Gross Proceeds Conversion Expiration if Fully Warrant Holder Shares Price Date Exercised - -------------- ------ ----------- ---------- -------------- Ed Hanley(1) 202,858 3.0000 06/99 $ 608,574 SBB Limited Partnership 398,571 3.0000 06/99 1,195,713 Charles A. Stearns 30,000 3.0000 06/99 90,000 Warren R. Stearns 10,000 3.0000 06/99 30,000 Anthony Riker, Ltd. 358,571 3.0000 06/99 1,075,713 Gordon and Joyce Summer(2) 110,000 2.7500 06/00 302,500 Gordon and Joyce Summer(2) 5,000 3.0000 06/00 15,000 John W. Richards, Jr. (3)(5) 246,154 2.4375 04/96(4) 600,000 W. Kim Richardson(3) 23,571 2.4375 04/96(4) 57,454 Thomas A. Dodd(3) 38,298 2.4375 04/96(4) 93,351 John W. Richards, Jr., John W. Richards, Sr., W. Kim Richardson and Thomas A Dodd, tenants in common(3)(5) 100,000 5.0000 05/97 500,000 Hassman, L.P.(6) 130,667 3.0000 05/97(7) 392,001 Steven M. Lash 8,000 3.0000 05/97(7) 24,000 Kevin Ellis 130,667 3.0000 05/97(7) 392,001 Seth Flam 130,667 3.0000 05/97(7) 392,001 --------- ---------- 1,923,024 $5,768,308 ========= ========== (1) Mr. Hanley is a director of the Company. See "Certain Relationships and Related Transactions". (2) Mr. Summer is a former employee of the Company. The warrants were issued to him in settlement of certain litigation. Certain of the Warrants may be assigned to the law firm representing Mr. Summer in the litigation. See "Legal Proceedings". (3) These persons were shareholders of FPA. (4) The shares are issuable on conversion of notes given with respect to the FPA shortfall. The Company may prepay the notes on thirty days notice. (5) Mr. Richards is an officer of a subsidiary of the Company. (6) Howard Hassman controls Hassman, L.P. Mr. Hassman is a principal shareholder of the Company. (7) The shares are issuable on conversion of notes. At any time after May, 1996, the Company may prepay the notes on thirty days notice. Dilution to Exercising Warrant Holders. As of September 30, 1995, the Company had 25,997,643 Common Shares issued and outstanding. The Company's book value on such date was $15,369,000 and its net tangible book value on such date was a deficit of $3,856,000 or $(.15) per share. Net tangible book value represents the amount of the Company's tangible assets as shown on its balance sheet in excess of its liabilities. There is no assurance that any Warrants will be exercised. The amount of dilution (exercise price per share less net tangible book value per share following exercise) suffered by an exercising warrant holder will depend on a number of factors, including the exercise price of the warrant and the total number of Warrants being exercised. The following table illustrates the dilution to be incurred by investors acquiring Common Shares upon exercise of Warrants assuming exercise of (i) only 1 Warrant of the stated price, and (ii) all Warrants of the same or lower priced class. Based on the January 24, 1996 price of $2 5/16, none of the Warrants are in the money. The table assumes no changes from the September 30, 1995 balance sheet other than receipt of proceeds from the exercise of the Warrants. Warrants Exercised at $2.4375 ----------------------------- Only 1 All Warrants Warrant Priced at Exercised $2.4375 or less Exercised ---------- ---------------- Net Tangible Book Value per Common $ (.15) $ (.15) Share at September 30, 1995 Net Tangible Book Value per Common (.15) (.12) Share after Exercise(1) Increase per Share Attributable to Exercise N/A .03 of Warrants Dilution to Purchasers of Common Shares $ 2.59 $ 2.56 Dilution as Percentage of Exercise 106.3% 105.0% Price (1) Includes the deficit net tangible book value available to the Common Shares at September 30, 1995 plus gross proceeds from exercise of the Warrants of $2.44 and $750,806 respectively, less expenses of the offering estimated by the Company at $50,000. Warrants Exercised at $2.75 --------------------------- Only 1 All Warrants Warrant Priced at Exercised $2.75 or less Exercised --------- ------------- Net Tangible Book Value per Common $(.15) $(.15) Share at September 30, 1995 Net Tangible Book Value per Common (.15) (.11) Share after Exercise(1) Increase per Share Attributable to Exercise N/A .04 of Warrants Dilution to Purchasers of Common Shares $2.90 $2.86 Dilution as Percentage of Exercise 105.5% 104.0% Price (1) Includes the deficit net tangible book value available to the Common Shares at September 30, 1995 plus gross proceeds from exercise of the Warrants of $2.75, $1,053,306 and $1,053,306 respectively, less expenses of the offering estimated by the Company at $50,000. Warrants Exercised at $3.00 --------------------------- Only 1 All Warrants Warrant Priced at Exercised $3.00 or less Exercised --------- ------------- Net Tangible Book Value per Common $(.15) $(.15) Share at September 30, 1995 Net Tangible Book Value per Common (.15) .05 Share after Exercise(1) Increase per Share Attributable to Exercise N/A .20 of Warrants Dilution to Purchasers of Common Shares $3.15 $2.95 Dilution as Percentage of Exercise 105.0% 98.3% Price (1) Includes the deficit net tangible book value available to the Common Shares at September 30, 1995 plus gross proceeds from exercise of the Warrants of $3.00 and $5,268,308 respectively, less expenses of the offering estimated by the Company at $50,000. Warrants Exercised at $5.00 --------------------------- Only 1 All Warrants Warrant Priced at Exercised $5.00 or less Exercised --------- ------------- Net Tangible Book Value per Common $(.15) $(.15) Share at September 30, 1995 Net Tangible Book Value per Common (.15) .07 Share after Exercise(1) Increase per Share Attributable to Exercise N/A .22 of Warrants Dilution to Purchasers of Common Shares $5.15 $4.93 Dilution as Percentage of Exercise 103.0% 98.6% Price (1) Includes the deficit net tangible book value available to the Common Shares at September 30, 1995 plus gross proceeds from exercise of the Warrants of $5.00 and $5,768,308 respectively, less expenses of the offering estimated by the Company at $50,000. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock is traded in the over-the-counter market and has been quoted on the Nasdaq SmallCap Market since October 1988. The following table sets forth the range of high and low bid quotations for the Common Stock as reported by Nasdaq. The quotations set forth below reflect inter-dealer prices, do not include retail markup, markdown or commissions, and may not necessarily represent actual transactions. Year Ended December 31, ---------------------------------------------------------------------------------------------- 1995 1994 1993 1992 -------------------- --------------------- -------------------- --------------- Period High Low High Low High Low High Low - ------ ------- ------- -------- -------- ------- -------- ------- ------ 1st Quarter ............... $ 3.13 $ 2.13 $ 4.00 $ 2.13 $ 2.94 $ 1.81 $ 9.25 $ 3.88 2nd Quarter ............... 3.88 2.19 3.44 2.19 2.94 1.69 6.38 3.25 3rd Quarter ............... 3.25 2.88 4.31 2.07 5.81 1.50 4.38 2.25 4th Quarter ............... 2.88 1.81 4.00 2.75 5.31 3.00 3.63 2.38
The number of record holders of Common Stock as of March 21, 1995, was 812. Management estimates that the number of beneficial owners of the Common Stock is in excess of 5,000. Holders of Common Stock are entitled to receive such dividends as may be declared by the Company's Board of Directors, subject to the preferential dividend rights of the Series A Preferred. Each outstanding share of the Series A Preferred is entitled to an annual dividend of $2.00 per share, payable in quarterly installments. In the event of an arrearage in dividends, the Series A Preferred dividend rate increases to $2.40 per year. No dividends may be paid on the Common Stock unless all dividends on the Preferred Stock have been paid. No cash dividends on the Common Stock have been declared or paid by the Company since its inception and the Company does not anticipate that cash dividends will be paid in the foreseeable future. Certain of the Company's loan agreements further restrict the Company's ability to pay dividends on its Common Stock. SELECTED CONSOLIDATED FINANCIAL DATA The following table summarizes certain financial data for the Company for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 and the nine months ended September 30, 1995 and 1994 and is qualified in its entirety by the more detailed financial statements included in this Prospectus. Nine Months Ended Year Ended December 31, September 30, 1994(1)(2) 1993(3) 1992(4) 1995(5) 1994(1)(2) Statement of Operations Data: Net sales............................ $67,863,000 $25,224,000 $10,293,000 $83,693,000 $48,869,000 Cost of sales........................ (58,793,000) (19,504,000) (8,082,000) (71,262,000) (42,519,000) Gross profit......................... 9,070,000 5,720,000 2,211,000 12,431,000 6,350,000 Selling, general and administrative expenses (including amortization)........... (14,794,000) (13,185,000) (4,433,000) (12,991,000) (9,293,000) Subsidiary operations for period not owned................... 517,000 -- 37,000 ( 982,000) 321,000 Net other income (expense)(6)........ ( 292,000) ( 761,000) 45,000 ( 730,000) ( 341,000) Net loss............................. $( 5,499,000) $( 8,226,000) $( 2,140,000) $(2,272,000) $(2,963,000) ============ ============ ============ =========== =========== Net loss per common share............ $ (.26) $ (.49) $ (.24) $(.09) $(.14) Weighted average shares outstanding........................ 21,353,000 16,675,000 8,929,000 24,041,758 21,011,662 Balance Sheet Data (end of period): Working capital...................... $ 1,420,000 $ 1,310,000 $ 2,179,000 $ 2,365,000 $3,879,000 Intangible assets, net............... 9,308,000 5,406,000 1,803,000 19,225,000 6,063,000 Total assets......................... 22,317,000 13,017,000 7,271,000 39,588,000 16,519,000 Long-term debt less current portion............................ 595,000 952,000 835,000 3,649,000 455,000 Redeemable Preferred Stock........... -- -- -- 5,350,000 -- Stockholders' equity................. $11,906,000 $ 7,028,000 $ 4,814,000 $15,369,000 $11,156,000 (1) In November, 1994 the Company acquired substantially all the assets of Medical Services Agency, Inc. (d/b/a Mednet) ("MSA"). The acquisition was accounted for as a purchase. The Company has elected to consolidate the acquisition of MSA retroactively to January 1, 1994, and these amounts include interim results of MSA through September 30, 1994 as determined by management. (2) In June, 1994 the Company acquired all of the issued and outstanding stock of FPA. The acquisition was accounted for as a purchase. The Company has elected to consolidate the acquisition of FPA retroactively to January, 1994. (3) In April, 1993, the Company acquired substantially all the assets of Mail Rx. The acquisition was accounted for as a purchase. (4) In January and December of 1992, the Company acquired the assets now owned by Medi-Phar and Medi-Claim, respectively. The Company has elected to consolidate the operations of Medi-Phar retroactively to January 1, 1992. Financial results of Medi-Claim are included for the last month of 1992. (5) In September, 1995 the Company acquired substantially all the assets of Home Pharmacy. The acquisition was accounted for as a purchase. The Company has elected to consolidate the operations of Home Pharmacy retroactively to January 1, 1995. (6) Net other income (expense) excludes subsidiary operations for period not owned.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General. The Company is in the business of administration of pharmaceutical benefits, the sale of prescription medication and over-the-counter pharmaceutical products and related services. The Company's principal sources of revenue are its mail order pharmacies, its claims processing operations and its retail pharmacies. The Company's primary customers are insurance companies and other Third Party Payors, as well as individual consumers. The Company believes that it can increase its revenues through the integration of its mail order pharmacy, claims processing and retail pharmacy programs. During 1994, the Company acquired FPA and substantially all of the assets of MSA, both of which were accounted for as purchases. The Company has elected to consolidate the operations of FPA and MSA retroactive to January 1, 1994. See Note 10 to the Notes of the Consolidated Financial Statements. In June, 1995 the Company changed its name from Medi-Mail, Inc. to Mednet, MPC Corporation. On September 15, 1995, the Company acquired substantially all of the assets of Home Pharmacy. The acquisition was accounted for as a purchase. The Company has elected to consolidate the operations of Home retroactively to January 1, 1995. See Note 4 to the September 30, 1995 Consolidated Financial Statements. Liquidity and Capital Resources. Current assets increased from $11,236,000 at December 31, 1994 to $17,585,000 at September 30, 1995. The increase in working capital consists of an increase in accounts receivable, inventory and other current assets of $4,638,000, $1,532,000 and $250,000, respectively, which was partially offset by an increase in accounts payable and current portion of long-term debt of $4,146,000 and $1,318,000 respectively. The Company has funded its operations and working capital expenditures primarily from internally generated cash, proceeds from borrowings and stock issuances. Working capital at September 30, 1995 was $2,365,000 compared to $1,420,000 at December 31, 1994. The increase in working capital of 66.5% or $945,000, resulted primarily from the extension of a note payable ($1,245,974, maturity date February 1, 1995, 5% interest) into a five-year note at a variable interest rate of prime plus 2% and the sales of convertible debentures ($1,000,000) less working capital used to fund the Company's operations plus the Home Pharmacy assets. In connection with the Home Pharmacy acquisition, the Company issued an Interim Note in the principal amount of $2,500,000 and a Holdback Note in the principal amount of $4,650,000 to Arc. The Company believes that the Interim Note will be substantially paid through Arc's sale of the Collateral Shares prior to April 1, 1996. The Holdback Note is due in October, 1996, subject to acceleration in the event of default. The Holdback Note was modified subsequent to the initial closing to remove contingencies based on future performance. The Company does not have firm commitments for financing to pay the Holdback Note when it comes due. Commencing in April, 1996, Arc can sell up to 270,000 of the Collateral Shares each month to prepay the Holdback Note. On December 27, 1995 the Company obtained a working capital revolving line of credit in the maximum principal amount of $20,000,000 from Foothill Capital Corporation ("Foothill"). The line of credit is secured by inventory, accounts receivable and substantially all other assets of the Company. The amount of actual advances received under the line is limited by the value of acceptable inventory and accounts and the Company does not currently have sufficient acceptable collateral to fully draw down the line. As of January 19, 1996, the outstanding balance of the Foothill line was $6,849,000. Advances under the line bear interest at a prime rate plus 1.5%. While the line of credit is outstanding, the Company is prohibited from paying dividends on its common stock and from taking certain other extraordinary actions without the consent of Foothill. Commencing at the end of the fourth quarter of 1995, the Company will attempt to increase the efficiency of its operations by selling five of the Medi-Phar retail outlets and consolidating the South Carolina distribution facility with the new Chicago operation. Although the retail outlets have been contributing approximately $2,300,000 of annual net sales, the outlets have been operating at a loss. The consolidation of the South Carolina facility is not expected to affect net sales, but should result in lower costs. The Company has not yet determined the size of the reserve for potential restructuring charges if one is required. Results of Operations. On April 1, 1994, Medi-Claim assumed the obligation for payments to members of Medi-Claim's pharmacy network. Prior to April 1, 1994, Medi-Claim was only obligated to the extent payment was received from the sponsoring organization. This step was taken to standardize Medi-Claim's procedures with trends in the industry. As a result of this change, subsequent to April 1, 1994 the Company presents the sales and cost of sales as well as the related accounts receivable and accounts payable in its consolidated financial statements for prescriptions filled at participating network pharmacies by insureds covered under pharmacy plans offered by Medi-Claim's clients, the sponsoring organizations. The following table sets forth certain financial data as a percentage of net sales for the periods presented: Percent of Sales -------------------------------------------------------------------- For the Nine Months For the Years Ended December 31, Ended September 30, ------------------------------------- ---------------------- 1994 1993 1992 1995 1994 ------ ------ ------ ------ ------ Net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.................... (86.6) (77.3) (78.5) (85.2) (87.0) Selling, general and administrative expenses (including amortization)......... (21.8) (52.3) (43.1) (15.5) (19.0) Operating loss................... (8.4) (29.6) (21.6) (0.7) (6.0) Other income (expense), net...... 0.3 (3.0) 0.8 (2.0) (0.1) Net loss......................... (8.1) (32.6) (20.8) (2.7) (6.1)
- -------------------------- Nine Months Ended September 30, 1995 and 1994 On September 15, 1995, the Company acquired the assets of Home Pharmacy from ArcVentures, Inc. The acquisition was accounted for as a purchase. Consistent with its treatment of prior acquisitions, the Company has included the operations of the acquired business for the entire year to date in its operating statements for the nine months ended September 30, 1995 with a single line item to subtract the profit of the acquired business for periods prior to acquisition. Consolidated net sales for the quarter ended September 30, 1995 increased by 49.3% or $9,069,000 from $18,380,000 for the prior year's quarter to $27,449,000. The sales increase is attributable to $9,453,000 from pre-acquisition operations of Home Pharmacy. Year to date net sales increased by 71.3% or $34,824,000 over the first nine months of 1994. The sales increase is primarily attributable to $30,629,000 from pre-acquisition operations of Home Pharmacy. Approximately $4,000,000 of the increase can be attributed to Medi-Claim's assumption of sponsors' payment obligations discussed above not having been effective until April 1, 1994. Costs of sales decreased as a percentage of net sales but increased in total dollars for the quarter ended September 30, 1995 and the nine months ending September 30, 1995 compared to the same periods in the prior year. The fluctuation in cost of sales as a percentage and in dollar amount is primarily attributable to increased gross margin from Medi-Claim sales resulting from changes in product mix, increased higher margin mail service sales from Home Pharmacy and unusually high inventory costs in the prior year's quarter. The increase in the absolute dollar value is mainly due to the inclusion of the operations of Home Pharmacy. Selling, general and administrative expenses decreased as a percentage of net sales but increased in total dollars for the quarter ended September 30, 1995 and the nine months ending in September 30, 1995 compared to the same periods in the prior year. The increase in total dollars is primarily due to the inclusion of Home Pharmacy operations. The decrease in percentage reflects spreading of fixed costs over a larger sales base and economies of scale. The Company's results from operations before depreciation and amortization (EBITDA) for both the quarter and the nine months increased as a percentage of net sales and in total dollars. The Company had EBITDA profit of $289,000 and $1,294,000 for the three and nine months ended September 30, 1995, respectively, compared to EBITDA losses of $1,168,000 and $1,426,000 for the three and nine month periods of the prior year. The Company's depreciation and amortization expense consists of the depreciation of property and equipment and the amortization of intangibles arising from acquisitions. Depreciation and amortization increased by 266.7% or $472,000 for the quarter ended September 30, 1995 compared to the same period in calendar year 1994. Depreciation and amortization as a percent of net sales were 1.51% for the quarter ended September 30, 1995, compared to .96% for the same period in the prior year. Depreciation and amortization increased by 22% or $337,000 for the nine months ended September 30, 1995 compared to the same period in calendar year 1994. Depreciation and amortization as a percent of net sales were 2.21% for the nine months ended September 30, 1995 compared to 3.10% for the same period of 1994. The increase in depreciation and amortization for the 3 and 9 month periods is primarily attributable to amortization in the later periods, of the intangibles recorded from an acquisition in the fourth quarter of 1994. The operating loss of $360,000 for the quarter ended September 30, 1995 decreased by 73.2% or $985,000 over the comparable prior year's quarter. The operating loss of $560,000 decreased by 81% or $2,383,000 for the nine months ended in September 30, 1995 compared to the same period in 1994. Other income (expense) increased for both the quarter and the nine months compared to the same periods in the prior year, primarily due to the effect for the adjustment for subsidiary operations for the period not owned of ($982,000) in 1995 and $321,000 in 1994. In addition, interest expense increased in 1995. The net loss for the third quarter of 1995 was $770,000 or (.03) per share on weighted average shares of 24,338,791 compared with a loss of $1,394,000 or (.07) per share on 21,433,191 weighted shares outstanding in the prior year's third quarter. The net loss for the nine months ended September 30, 1995 was $2,272,000 or (.09) per share on weighted average shares of 24,041,758 compared with a loss of $2,963,000 or (.14) per share on 21,011,662 weighted shares outstanding in the same period of 1994. As stated above, 1995 results of operations includes an adjustment of ($982,000) for Home Pharmacy operations for the period prior to acquisition. The pro forma statement of operations for the nine months ended September 30, 1995 contains adjustments for amortization of acquisition intangibles ($338,000) and interest on acquisition debt ($338,000) resulting in a pro forma net loss of $1,966,000. 1994 Compared With 1993. Consolidated net sales for the year ended December 31, 1994 increased 169% over the prior year ($67,863,000 in 1994 compared to $25,224,000 in 1993) with a consolidated loss of $5,499,000 compared to a loss of $8,226,000 in the prior year. The increase in sales was attributable to acquisitions, including the June 1994 acquisition of FPA, the acquisition of the MSA assets in November 1994, and a $13,747,000 increase in claims processing sales apart from those attributable to the acquisition of Mednet. The increase in claims processing revenue was attributable to contractual amendments entered into by Medi-Claim with participating pharmacies, which resulted in reporting the sales and cost of sales for all prescriptions filled by participating pharmacies for insureds of Medi-Claim's clients. Such sales and cost of sales for 1994 were approximately $16,119,000. Although cost of sales increased as a percentage of net sales from 77.3% to 86.6%, the increase in volume and a reduction in operating expenses as a percentage of gross sales resulted in a decrease in net loss as a percentage of gross sales from 32.6% to 8.1%. The decrease in operating expenses as a percentage of gross sales was in part attributable to increased cost efficiency and the spreading of fixed costs over increased volume as a result of the acquisitions of FPA, MSA assets and Mail Rx. The increase in cost of sales was primarily due to the changing mix in the Company's sales and the inclusion of Medi-Claim sales (which have a very low gross margin). Future changes in gross margin will depend to a great extent on the relative mix of mail-service and PBM revenue. In addition, the Company has expanded its claims processing operations through the acquisition of the MSA assets. The Company believes that the expansion of its claims processing operations and the integration of those operations with the Company's mail order and retail pharmacies will facilitate future growth in both the claims processing and mail order pharmacy operations. Sales at retail pharmacies owned by Medi-Phar accounted for approximately 9.7% of the Company's 1994 consolidated gross sales. During 1994, Medi-Phar entered into leases for three additional retail pharmacies in Las Vegas, Nevada. Two of the pharmacies are now operating. Expenses for salaries and benefits increased to $5,214,000 in 1994 from $4,401,000 in 1993, but declined as a percentage of sales to 7.7% from 17.4%. This reflects the addition of the FPA and MSA operations and addition of other personnel consistent with increased volume. The 1993 salaries and benefits include $766,000 of Common Stock and cash paid to Dr. Merryman to terminate certain potential future severance benefits. Similarly, other selling, general and administrative expenses rose in dollar amount, but declined as a percentage of sales. The $2,098,000 amortization expense in 1994 compared to $3,994,000 in 1993 related to intangible assets acquired in connection with recent acquisitions. During May 1993, the Company entered into an agreement with former owners of the retail pharmacies purchased during 1992 requiring them to convert the outstanding balance of the convertible note payable into Common Stock of the Company. The agreement provided for the issuance of 249,130 shares of Common Stock (having a market value at the time of $561,000) in satisfaction of the $747,000 balance of the note payable. In addition, the Company agreed that until such time as the shares issued on conversion were registered, which has occurred, the Company would continue to make principal and interest payments to the note holders in accordance with the original terms of the notes. The conversion terms of the notes had provided that the note holders, at their option, could convert the outstanding balance of the notes into Common Stock at a price of $5.00 per share. Generally accepted accounting principles require recognition of an expense equal to the fair value of the additional securities or other consideration issued to induce conversion. Accordingly, the Company recorded debt conversion expenses of $224,000 in 1993 and $203,000 in 1994. The expense in 1994 represented interest and principal paid on the note in 1994 prior to registration of the shares issued on conversion. The Company will incur no material debt conversion expense during 1995 related to this conversion. 1993 Compared With 1992. Consolidated net sales for the year ended December 31, 1993 increased 145% over the prior year ($25,224,000 in 1993 compared to $10,293,000 in 1992) with a consolidated loss of $8,226,000 compared to a loss of $2,140,000 in the prior year. The increase in sales was primarily attributable to acquisitions, including the April 1993 acquisition of Mail Rx, a 20% increase in sales from the Las Vegas, Nevada facility, a 9% increase in retail pharmacy sales and a $497,000 increase in claims processing sales. Although the Company was able to reduce its operating loss exclusive of amortization as a percentage of net sales from 20.6% to 13.8%, increased volume and the amortization of expense resulted in a larger net loss in 1993 than in 1992. Expenses for salaries and benefits increased to $4,401,000 in 1993 from $2,224,000 in 1992, but declined as a percentage of sales to 17.4% from 21.6%. This reflects the addition of the subsequently closed Owings Mills, Maryland facility in connection with the Mail Rx acquisition and addition of other personnel consistent with increased volume. Also included in this amount is $766,000 of Common Stock and cash paid to Dr. Merryman to terminate certain potential future severance benefits. Similarly, other selling, general and administrative expenses rose in dollar amount, but declined as a percentage of sales. BUSINESS General. The Company was incorporated under the laws of the State of Nevada in September, 1985. Substantially all of the Company's business is derived from its activities in the prescription benefits management industry. The Company, together with its subsidiaries Medi-Mail, Medi-Claim, Medi-Phar and FPA, acts as an integrated, full-service prescription drug benefits manager serving Affinity Groups and Third-Party Payors throughout the United States. The Programs offer prescription drug benefits to approximately two million Participants, most of whom receive funded benefits through Third Party Payors and/or are members of an Affinity Group. On September 15, 1995, the Company acquired the mail service pharmacy and claims processing businesses of Home Pharmacy, a division of ArcVentures, Inc. ("Arc"). The respective Home businesses are being transferred to the Company's Medi-Mail and Medi-Claim subsidiaries. In connection with the acquisition, Medi-Mail established a mail service pharmacy facility in Chicago, Illinois. Description of Prescription Benefits Management Business. The Company develops and administers client-specific Programs on behalf of more than 400 Payors throughout the United States. The Company attempts to customize its Programs to meet the Payors' particular benefits strategy combining a number of managed care features to cost effectively manage the Payor's entire prescription benefits program. The Programs combine mail-service pharmacy features such as enhanced generic substitution and the convenience of home delivery, with the features of retail network pharmacy such as automated claims adjudication, real time electronic networking of retail pharmacies and card programs. Payors can choose a Program which incorporates on-line electronic claims processing, drug utilization review and an electronic network linking more than 45,000 retail pharmacies in the United States, as well as features of a mail-service pharmacy program. In the alternative, Payors can choose either a mail-service pharmacy program or a network claims processing program to combine with the its other existing prescription benefits. Mail-Service Pharmacy Operations. Overview. The Company's mail-service pharmacy program is conducted from its Las Vegas, Nevada, Chicago, Illinois and Mount Pleasant, South Carolina locations. The Company services customers throughout the United States. The Company's mail-service pharmacy program is designed for convenience and to reduce prescription medication and over-the-counter pharmaceutical costs to individuals, corporations, labor unions, retirement systems, health and welfare trusts, insurance companies, federal and state employee plans, health maintenance organizations and third-party administrators. The mail-service pharmacy program attracts senior citizens, home-bound persons, sight or hearing impaired persons and users of regularly prescribed medications who are interested in the convenience of direct delivery of medication and/or lowering their medication and pharmaceutical expenses. The Company believes that it delivers prescription medication and over-the-counter pharmaceutical products to the homes of customers at lower costs, on average, than are generally available through retail pharmacies. These medications are typically maintenance medications, which must be taken on an ongoing basis for chronic conditions such as high blood pressure, arthritis and heart and thyroid conditions. The Company believes that these conditions account for a majority of prescription medication expenditures in the United States. The Company directed its initial marketing efforts toward individuals and members of Affinity Groups. In 1991, the Company began to direct its marketing efforts to Third-Party Payors in order to make the Company's services available to their insureds or members. On June 30, 1994, the Company acquired all of the outstanding stock of FPA, a mail order pharmacy based in Mount Pleasant, South Carolina. The common stock of FPA was acquired in exchange for 400,000 shares of Common Stock (the "Medi-Mail Shares") issued directly to the existing shareholders of FPA (the "FPA Shareholders"). The Company guaranteed the FPA Shareholders a price of $5.00 per share. In the event the Medi-Mail Shares were sold at a price less than $5.00 per share, the Company agreed to pay the difference to the FPA Shareholders in cash (the "FPA Shortfall"). Payment of the FPA Shortfall was secured by certain assets of the Company. The Company and the Shareholders subsequently agreed that the Company would pay $140,982 and issue the FPA Shareholders convertible notes for $750,805 due April 1, 1996 with respect to the FPA Shortfall. These notes have been paid. In addition, the Company issued the FPA Shareholders a warrant to purchase up to 100,000 shares of common stock at $5.00 per share. Benefit of Mail-service Pharmacies to Direct Payors. Individual customers and members of Affinity Groups (collectively, "Direct Payors") benefit from the Company's mail-service pharmacies as follows: o Convenience of pharmacy delivery system that delivers prescription medication and over-the-counter pharmaceutical products to the home. o Lower out-of-pocket costs for the medications and pharmaceutical products. o Typically, a Direct Payor, with approval of a physician, can receive up to a 90-day supply of prescription medication under the Company's programs as compared to lower supplies generally dispensed by retail pharmacies. o A Direct Payor using the 90-day plan can save money due to lower operating costs, bulk rates provided by the Company and elimination of repetitive dispensing costs. Benefit of Mail-Service Pharmacies to Third-Party Payors. Managers of corporate funded health benefit plans and other Third Party Payors have sought ways to contain health care costs, including the costs of prescription medication benefits. The Company believes that to contain the costs of prescription medication benefits, benefit managers have increasingly used mail-service pharmacy programs for dispensing maintenance prescription medications to plan participants. The Company's mail-service operations provide the following benefits over traditional indemnity health benefit plans that provide for the purchase of prescription medications through retail pharmacies: o Under traditional plans, the Third-Party Payor typically incurs a dispensing fee and administrative charge each time a prescription medication is dispensed. Under the Company's plan, a plan participant, with the approval of a physician, can typically receive up to a 90-day supply of prescription medication as compared to a lower supply generally dispensed under traditional plans utilizing retail pharmacies. The higher supply limit of maintenance prescription medication generally available under the Company's programs provides a cost savings to the Third-Party Payor by reducing repetitive dispensing fees and, in some cases, administrative charges. o Additional cost savings are often realized through the Company's programs as a result of a significant emphasis on the use of generic drug substitution as an alternative to more expensive brand name medications. The Company has a variety of mail-service programs designed to accommodate client-specific needs. Under a typical funded program, a Third-Party Payor contracts either directly with the Company or a third-party administrator to provide prescription medications to plan participants. Plan participants desiring to use the program mail an order form to the Company, enclosing a physician's prescription for the ordered prescription medication together with a nominal payment (the "co-payment"), for each prescription ordered. The participant may also place an order by calling the Company's toll-free telephone number. The co-payment is fixed by agreement between the Company and the Third-Party Payor. This type of mail-service prescription program is known as a "funded" plan because the Third-Party Payor provides all of the funding above the co-payment amount. The Company bills the Third-Party Payor for the cost of prescriptions less the applicable co-payments already collected. Medi-Claim(R) Claims Processing. The Company's prescription claims administration programs ("Claims Programs") are conducted through Medi-Claim. In November 1994, Medi-Claim acquired substantially all of the assets of Medical Services Agency, Inc. ("MSA"), which operated under the registered service mark of Mednet(R), in exchange for 1,600,000 shares of Common Stock. The Claims Programs are sponsor-specific benefit programs through which Medi-Claim processes and adjudicates paper and electronic prescription drug claims generated through a network of participating retail pharmacies. The pharmacy network includes approximately 45,000 retail pharmacies in the United States, each of which contracts with Medi-Claim to provide prescription dispensing at contracted rates. The Claims Programs utilize point-of-sale electronic data transmission and automated claims adjudication to manage claims in Claims Programs covering Participants nationwide. Claims data is transmitted to Medi-Claim electronically from pharmacies, or by mail from beneficiaries, for adjudication and payment in accordance with the Payor's particular plan design specifications. The Claims Programs are designed to maximize the Payor's control and cost savings opportunities by combining a number of managed care pharmacy features. The utilization control mechanisms and claims processing efficiencies of the Claims Programs, as well as the price reductions Medi-Claim negotiates from retail pharmacies, reduce the administrative costs associated with providing retail pharmacy-based prescription drug benefits coverage. Program design features also encourage the dispensing of less expensive generic drugs and a review of pharmaceutical therapy patterns. The Claims Programs are offered either on a stand-alone basis or are integrated into major medical plans. In addition, as discussed below, the Claims Programs are offered in conjunction with the Company's mail-service pharmacy programs as an integral part of the combined benefits program. Description of the Claims Programs. Medi-Claim currently processes prescription drug claims from its operations centers located in Las Vegas, Nevada and Lemoyne, Pennsylvania. Under the Claims Programs, Payors provide Medi-Claim with periodically updated Participant eligibility data, which is integrated into Medi-Claim's management information system. Medi-Claim is then able to process prescription claims submitted either directly by eligible Participants by mail, or through the Medi-Claim nationwide network of retail pharmacies utilizing point-of-sale electronic data submission. Once the Medi-Claim system determines the adjudication of the claim, reimbursement checks and an Explanation of Benefits form are generated and mailed to the Participant. Medi-Claim strives to process 95% of all claims within five calendar days of receipt and the remaining claims within ten calendar days of receipt, although during many periods of the year the turnaround time is faster. Over 95% of all claims are electronically adjudicated, on manual or paper claims. The process of electronic point-of-sale submissions through the Medi-Claim network of retail pharmacies is identical to the paper claims process described above except that claims data is received electronically by Medi-Claim and processed automatically upon receipt by Medi-Claim's management information system. The retail pharmacy network can access Medi-Claim's processing system seven days a week. For those Claims Programs which provide eligible Participants with a mail-service pharmacy feature through a third party provider, Medi-Claim provides eligibility data directly to the mail-service pharmacy, which then submits claims data to Medi-Claim. Certain Claims Programs acquired as part of the Home acquisition are being administered by third parties until the conversion to the Medi-Claim systems are completed. Medi-Claim provides its Payors with regular management reports describing overall Claims Program activity and utilization trends. Medi-Claim account executives regularly analyze Payor utilization data and make recommendations for additional opportunities for cost containment. In some cases, Medi-Claim produces management reports which are designed to highlight unusual utilization patterns which may indicate that clinical intervention or fraud and abuse detection may be warranted. Medi-Claim's management reports include all Participant prescription drug utilization resulting from use of both the network retail and mail-service pharmacies. Claims Programs are structured to provide Payors with the ability to better understand and control the cost of their entire pharmaceutical benefits Program. Features of the Medi-Claim Programs include: o Flexible Plan Design. Claims Program designs are flexible to meet the Payor's particular benefits strategy, therapeutic effectiveness and cost containment objectives. The Claims Programs include incentives to encourage Participants to use the most cost effective network retail or mail-service dispensing location and to purchase the least expensive drug available, including an emphasis on generic substitution. Claims Programs are regularly reviewed with Payors in order to target additional areas of Claims Program savings. o Comparison of Expected Results to Actual Activity. Medi-Claim regularly analyzes a Claims Program's projected savings associated with its plan design features, the use of the MediClaim retail pharmacy network, and mail-service pharmacy activity relative to the costs experienced by the Payor. If deviations from savings expectations are evident, Claims Program modifications are recommended. o Management Reports. The Medi-Claim database enables Medi-Claim to provide Payors with regular detailed management reports of Claims Program activity and costs. The reports are designed to illustrate Claims Program results and opportunities for additional cost savings. o Commitment to Service. Although the primary objective of Medi-Claim's Payors is to increase therapeutic effectiveness and reduce pharmaceutical benefit costs, Payors also require the accurate and rapid processing of claims. Medi-Claim produces a variety of service level reports which provide Payors with an assessment of critical claims processing success indicators. Medi-Claim Integrated Prescription Benefits Programs. The Company offers Medi-Claim integrated prescription benefits programs that combine the cost savings and convenience of the mail-service pharmacy Programs with the MediClaim retail network-based claims administration programs. With the integrated program, Payors can achieve cost savings compared with traditional prescription benefits programs which lack managed care cost controls. The Medi-Claim integrated programs offer a variety of additional benefits which are designed to provide increased therapeutic effectiveness and maximize cost savings, control and increase compliance. o Convenient, user-friendly programs with a single point of service and accountability to ensure rapid problem resolution. o Coordination of dispensing data collection and analysis from all aspects of the benefits programs, whether generated from retail network pharmacies or mail-service pharmacies. This ensures ready access to all information necessary to monitor program activity and develop further cost saving strategies without relying on the coordination among third party benefits providers. o A drug utilization review system that detects potential adverse drug interactions, allergies, overuse and abuse in all areas of the prescription benefits system, whether the drugs are dispensed through mail-service or through a network retail pharmacy. o Prescription dispensing policies that encourage the use of less expensive, therapeutically equivalent generic or brand name drugs regardless of the dispensing location. o Automated on-line administration of retail pharmacy prescription claims that gives immediate and accurate claims review, informative utilization data and eliminates manual review. o Regular and comprehensive management reports to provide the Payor's benefits manager with an understanding of usage trends and costs for the entire prescription benefits program. Retail Pharmacy Operations. Through Medi-Phar, the Company operates in-clinic retail pharmacies located in San Diego, California and Las Vegas, Nevada. Operation of the retail pharmacies provides the Company with a working knowledge of the retail pharmacy business which improves the Company's ability to market and develop its services. The Company also believes that the operation of the local retail pharmacies provides the Company with additional knowledge and background to continue developing the pharmacy network and claims processing system of its subsidiary, Medi-Claim. Marketing. The Company directed its initial marketing efforts toward the Direct Payor. In 1991, the Company began to expand its marketing efforts to Third-Party Payors in order to make the Company's services available to their insured or members. The Company has significantly increased this emphasis by its acquisition of the Mail Rx assets, the FPA mail pharmacy operations and the Medi-Claim claim processing operations and has expanded its marketing efforts to reflect the Medi-Claim integrated Programs offered by the Company. The Company's mail order and claims processing programs (collectively, the "Integrated Programs") are marketed nationally through the Company's internal sales organization of pharmacy benefits professionals and their marketing support staff. A significant portion of new accounts are generated by marketing Integrated Programs through existing relationships with Payors. The remainder of new accounts are generated by direct solicitation of corporate accounts, usually through telemarketing, direct mail marketing, trade shows and referrals. Revenues of the Company depend upon the extent to which its Integrated Programs are utilized by the Payors' eligible Participants. Accordingly, the Company's benefit managers work with Payors' benefit managers on an ongoing basis to assess utilization levels in the Integrated Programs and, where necessary, to incorporate additional incentives, sometimes in the form of more advantageous Integrated Program terms, to promote increased utilization among Participants. Direct Pay Accounts. Affinity Groups offer or endorse the Company's discount mail-service pharmacy as a benefit to their members and include information about the Company and its services in their promotional materials, newsletters, magazines and membership drives, but do not engage in active selling on behalf of the Company. Affinity Group members then deal with and pay the Company directly for prescription medications and over-the-counter pharmaceutical products and receive special group discounts. Third-Party Payor Accounts. In order to facilitate growth and decrease new account acquisition costs, the Company began in 1991 to develop a base of accounts in the Third-Party Payor market. In June 1994, the Company entered into a consulting agreement pursuant to which the consultant agreed to use its best efforts to market the Company's managed prescription care services. In 1994, the Company acquired the assets of FPA. Such acquisition gave the Company a physical presence in the southeast region of the United States and substantially increased its potential contacts for acquiring Third-Party Payor accounts. Management believes that the Third-Party Payor business will continue to increase through expansion of current accounts and acquisition of new accounts. The Company also maintains a membership relations program which provides customer service, provides a refill reminder service notifying the customer when a prescription is scheduled to be refilled and helps customers to understand the pharmacy benefits offered by their Affinity Groups and Third-Party Payors. Retail Pharmacies. The retail pharmacies currently owned and operated by Medi-Phar are located in medical complexes and generally service patients referred by physicians located in the medical complexes. Medi-Phar spends minimal resources on marketing. Major Customers. Affinity Group members deal directly with the Company and are considered the Company's customers. Only one Third-Party Payor group accounted for 10% or more of the Company's consolidated sales for 1994 or 1993. Government Regulation. There are extensive state and federal regulations applicable to the dispensing of prescription medications. Since sanctions may be imposed for violations of these laws, compliance is a significant operational requirement for the Company. The mail-service prescription medication and over-the-counter pharmaceutical business of the Company is conducted from licensed pharmacies located in Las Vegas, Nevada, Chicago, Illinois and Mount Pleasant, South Carolina. The retail pharmacies are licensed in California and Nevada. Nevada, California, Maryland, Illinois and South Carolina have laws governing a wide range of matters relating to the operation of pharmacies, and the Company believes that it is in substantial compliance with these laws. The laws include, among others, provisions requiring pharmacies and pharmacists to be licensed, as well as provisions as to who may write and dispense the prescriptions, how prescriptions must be filled, how prescription drugs and controlled substances must be stored and safeguarded, and after what period of time they must be disposed of, record retention, and generic substitution. Regulations are promulgated pursuant to these laws by the California, Nevada, Maryland, Illinois and South Carolina boards of pharmacy which boards are empowered to impose sanctions, including license revocation, for noncompliance. In addition, each pharmacy and pharmacist employed by the Company is bound by standards of professional practice. Each state into which the Company mails pharmaceuticals also has laws and regulations governing the operation of pharmacies and the dispensing of prescription drugs in that state. In many cases, these statutes include provisions which purport to regulate out-of-state mail-service pharmacies that mail drugs into that state. The regulations are administered by an administrative body in each state (typically, a pharmacy board) which is empowered to impose sanctions, including license revocation, for noncompliance. In those states where it exists, state regulation of out-of-state pharmacies essentially can be divided into three categories: disclosure, licensing and prohibition. States with disclosure statutes generally require that out-of-state pharmacies register with the local board of pharmacy, follow certain procedures and make certain disclosures, but generally permit the mail-service pharmacy to operate in accordance with the laws of the state in which it is located. States with licensing statutes generally impose the same licensing requirements and compliance with local laws on out-of-state pharmacies as on in-state pharmacies. The Company understands that several states currently impose licensing requirements on out-of-state pharmacies. The Company has complied with the disclosure law and registration requirements or the licensing law in 13 states and is evaluating whether it will register in others. The Company does not have any applications for licenses currently pending. The boards of pharmacy of certain states do not purport to regulate out-of-state mail pharmacy services. The Company believes that in the most recent two completed fiscal years approximately 51% of its mail-service sales came from states in which the Company has complied with the disclosure or licensing laws, and that approximately 43% of its mail-service sales were in the 27 states which the Company believes do not regulate mail-service sales. The remaining 6% of sales were in jurisdictions in which the Company believes the provisions purporting to regulate mail service pharmacies are subject to constitutional or other challenge. Some states have also enacted laws and regulations which, if successfully enforced, would effectively limit some of the financial incentives available to benefits plan sponsors that offer mail-service pharmacy programs. This so-called "freedom-of-choice" legislation generally prohibits a benefits plan sponsor from requiring its participants to purchase prescription drugs from a single source. The U.S. Department of Labor has opined that certain types of "freedom-ofchoice" laws and regulations are preempted by the Employee Retirement Income Security Act of 1974 (ERISA). The Attorney General in one state has reached a similar conclusion and has raised additional constitutional issues. Finally, the Bureau of Competition of the Federal Trade Commission has stated that such legislation may reduce competition and raise prices to consumers, to the extent it impedes or prevents benefit plan sponsors from offering programs that take advantage of the economies of scale associated with single sourcing of pharmaceuticals from a mail-service pharmacy. There has been no formal administrative or judicial efforts to enforce any of these laws against the Company. The Company has received inquiries from boards of pharmacy in several states questioning whether the Company is engaged in business in violation of their state laws. While the Company has substantially complied with the laws in certain states, it has not complied with the laws or regulations of all states to which it delivers pharmaceuticals. Should enforcement of these laws be attempted, the Company believes that these laws and regulations would be subject to challenge under the United States Constitution. However, if the laws or regulations were to survive such a challenge, the Company would likely be subject to penalties and, possibly, prohibitions and additional costs which could have a material adverse effect on its mail-service pharmacy business. The Company is aware that some state boards of pharmacy are attempting to further promote laws and regulations designed to restrict the activities of mail-service pharmacies. In addition to the above-described laws and regulations, there are federal statutes and regulations which establish standards for all pharmacies and pharmacists concerning the labeling, packaging, advertising, and adulteration of prescription drugs and the dispensing of controlled substances and prescription drugs. Federal Trade Commission and United States Postal Service regulations require mail order sellers to engage in truthful advertising, to stock a reasonable supply of drugs, fill mail orders within thirty days and, if that is impossible, to inform the consumer of his or her right to a refund. The Company believes that it is in substantial compliance with the above requirements. Further, the United States Postal Service has statutory authority to restrict the transmission through the mails of drugs and medicines to a degree that could have an adverse effect on the Company's mail-service operations. To date, the United States Postal Service has not exercised this statutory authority with respect to the Company. To the extent that any of the foregoing laws or regulations, existing or proposed, prohibit or restrict the operation of mail-service pharmacies and are found to be applicable to the Company and enforceable, they could have an adverse effect on the Company's mail-service pharmacy operations as well as on the operations of all other mail-service pharmacy providers. In addition, the Company would be required to take appropriate steps to effect compliance to continue doing business in the states where such statutes are enforced and non-compliance could expose the Company to the imposition of fines and penalties which, depending upon the number of jurisdictions which impose such fines and penalties and how they are imposed, could be material. There is no assurance that the Company would be able to comply with the diverse and possible contradictory laws of all such states and, consequently, the Company's operations in such states may be impaired, interrupted or prohibited. Despite its efforts, the Company may be unable to comply with all existing and future regulations. Existing and future legislation could increase the Company's operating expenses, as well as operating expenses for the entire industry. In addition, several states impose substantial fines, penalties or criminal sanctions for failure to comply with existing regulations. Such fines could exceed $2,000 per day or per violation, or misdemeanor criminal charges could be filed against the Company. The Company is not aware of any state that has imposed, or presently intends to impose, any such fine, penalty or charge. The Company also believes that such fines, penalties or charges would be subject to challenge under the United States Constitution, but is not aware of any such challenge being successfully applied to date. While some increased costs resulting from government regulation would be passed on to the ultimate subscriber, such increased costs, if significant, would adversely affect the Company's business. Moreover, existing and future regulations could curtail the scope of the Company's operations should the Company choose not to conduct business in those states where regulations have been adopted. Competition. The prescription drug benefit business is highly competitive. The Company's mail-service pharmacy business competes for the business of Third-Party Payors and Direct Payors. The Company's principal mail-service pharmacy business competitors for Third-Party Payors are America's Pharmacy, a subsidiary of Systemed, Inc.; National Rx, a division of Medco Containment; Caremark; and Health Care Services, Inc., a division of Diagnostek, Inc. Third-Party Payors generally look to service levels, lower health care costs and reputation. The Company's principal mail pharmacy business competitors for Direct Payors include Express Pharmacy Services, a division of Thrift Drug which is a subsidiary of J.C. Penney, AARP, a number of smaller mail-service pharmacy companies and retail pharmacies. Individual customers generally look to price, convenience and service. All of the above referenced entities possess substantially greater financial, marketing and personnel resources than the Company. The Company's prescription claims processing services compete with other prescription drug benefit providers/processors and the larger third-party prescription drug claims processors such as PCS, Inc., and PAID, a division of Medco Containment. Additionally, there are numerous smaller regional claims processors and many insurance companies also process claims in conjunction with their underwriting of medical insurance programs, as well as for self-insured plan sponsors. While management believes that the Company is competitive in its price, quality and service taken as a whole, there can be no assurances that, as the mail-service pharmaceutical industry evolves, the Company will be able to operate profitably given the level of competition within the industry. Moreover, the Company cannot predict, with accuracy, the effect of unspecified, but probable future changes in the domestic health care system discussed from time to time by several states and the federal government. Medi-Phar's retail pharmacies compete with other retail pharmacies in the San Diego, California and Las Vegas, Nevada areas with competitive factors of location, price, product selection and service. Inventory. The Company obtains its medications and pharmaceutical products from approximately 30 manufacturers, distributors and wholesalers. In order to minimize the potential risks inherent in relying on any particular supplier, the Company attempts, whenever possible, to establish and maintain relationships with more than one supplier of any particular product. Thus, in the event that one source is unable to supply a needed product, or is unable to offer a competitive price, the Company may turn to an alternative source. For certain products, particularly brand name products, there may be only one or a limited number of suppliers. In the event that the supply of these products becomes limited, or the price is significantly increased, the Company believes that most pharmacies dispensing this product will be similarly adversely affected. The Company maintains an inventory control program such that most products in the Company's inventory of over-the-counter, brand name and generic medications are on the shelf 45 days or less. The inventory control program also includes a buying schedule for products with consistent demand. The flexibility achieved as a result of the Company's network of suppliers enables the Company to promptly obtain products which are infrequently demanded by the Company's customers, thereby saving the cost of keeping such products in inventory. Most suppliers can deliver orders to the Company within 24 hours. Product Liability. Product liability is a major concern in the mail-service pharmacy business. Liabilities may arise from possible dispensing errors, package tampering and product defects. The Company has taken anti-tampering precautions by utilizing layered tamper-evidence packaging on all products it distributes, and its delivery is made in unmarked outer packaging. These steps are designed to eliminate the problem with tampering prior to receipt by the customer. The Company maintains a toll-free telephone number which facilitates customer contact and enables customers and the Company to verify prescriptions as ordered by the physician or supplied by the Company. Additionally, the Company maintains an internal quality control system, pursuant to which each order is checked and verified by pharmacy personnel after it is filled and before shipping, in an effort to assure that customers receive the exact prescribed medication. The Company carries the type of insurance customary in the mail-service and retail pharmacy industry, including professional and product liability insurance. The Company believes that its insurance protection is adequate for its present business operations. However, there can be no assurance that the amount of insurance coverage would be sufficient to cover any potential liability claim, or that the finances of the Company could withstand the effect of a claim in excess of its insurance coverage. Management intends to continue such insurance policies in effect, and provided the same is available, may increase coverage as the Company's needs dictate. In addition, the Company is named as an additional insured by many of its suppliers. Although wholesale and retail pharmacies in general have not, as yet, experienced any unusual or extraordinary difficulty in obtaining insurance at an affordable cost, there can be no assurance that the Company will be able to maintain its coverage in the future. Mail-Service Pharmacy Distribution. The Company has three mail-service pharmacy and fulfillment facilities located in Las Vegas, Nevada, Chicago, Illinois and Mount Pleasant, South Carolina. The Las Vegas facility was designed by the Company to accommodate the Company's corporate offices in addition to the variety of the Company's distribution operations, including inventory storage, order processing, shipping, billing, customer service and certain marketing and administrative functions, with a view toward maximizing safety and efficiency. The Chicago and Mount Pleasant facilities similarly accommodate a majority of distribution operations for shipments to the midwestern, eastern and southeastern United States. The Company maintains a toll-free telephone number for incoming orders. Initial customer orders are typically received by mail. New prescriptions and refills may be ordered by telephone. All orders are reviewed, doctors are contacted for verification as required and prescriptions are filled on the premises by licensed pharmacists employed by the Company. Most orders are shipped to the customer by United States mail, United Parcel Service or other common carriers. Payments are handled through major credit card accounts or through direct billings. Due to the Company's typical order processing time of less than 48 hours, the Company had no material backlog of orders as of September 30, 1995. The Company's business is not seasonal to any significant extent. Employees. As of December 31, 1994, the Company had 154 full-time employees and 20 part-time employees. Except for its executive officers, the Company's employees are clerical, sales, customer service, claims processing and pharmacy related staff paid consistent with industry standards. See "Directors and Executive Officers." None of the Company's employees is covered by a collective bargaining agreement. The Company believes that it has a good relationship with its employees. Properties. The Company's corporate headquarters is located in Las Vegas, Nevada. The mail-service pharmacy/fulfillment centers are located in Las Vegas, Nevada, Chicago, Illinois and Mount Pleasant, South Carolina. The Company's claims processing operations are located in Las Vegas, Nevada and Lemoyne, Pennsylvania. The retail pharmacies are located in San Diego, California and Las Vegas, Nevada. The Company considers its properties to be suitable and adequate for its present needs. The following chart provides information concerning the Company's properties: Approximate Size in Sq. Ft. Lease Location of Facility Expiration(1) Primary Use - -------- --------------- ------------- ----------- Las Vegas, Nevada 17,608 03/98 Mail-order Prescription Pharmacy, Claims Processing Operations and Corporate Offices Mount Pleasant, South Carolina 2,790 01/97 Customer Service and mail-order Prescription Pharmacy Lemoyne, Pennsylvania 3,337 01/02 Claims Processing Operations San Diego County, California 1,100 03/99 Pharmacy (Poway) San Diego, California (Del Mar) 1,000 08/00 Pharmacy San Diego, California (3rd Ave.) 1,100 05/00 Pharmacy San Diego, California (Mira Mesa) 1,200 08/97 Pharmacy San Diego, California (Plaza 800 06/00 Pharmacy Properties) San Diego, California (El Cajon) 1,000 NA(2) Pharmacy San Diego, California (Gateway) 1,100 03/99 Pharmacy Las Vegas, Nevada (Buffalo) 800 (3) Pharmacy Las Vegas, Nevada (East Harmon) 540 11/99 Pharmacy Las Vegas, Nevada (East Sahara) 444 07/99 Pharmacy Owings Mills, Maryland 6,352 08/96 Subleased Chicago, Illinois 13,500 09/00 Mail order Prescription Pharmacy - -------------------- (1) Includes all renewal terms. (2) The term of this lease is month-to-month. (3) The lease expires 60 months following completion of the premises.
DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the names and ages of the members of the Company's Board of Directors and its executive officers, and sets forth the position with the Company held by each: Name Age Position - ---- --- -------- Hon. Leo T. McCarthy** 64 Chairman of the Board of Directors M. B. Merryman*** 53 President, Chief Executive Officer, Director Dennis Smith 47 Executive Vice President - Subsidiary Operations, Chief Operating Officer Jane E. Freeman 41 Executive Vice President - Corporate Development Dr. David L. Dalton 46 Executive Vice President, President f Medi-Claim S. E. Roberts 48 Treasurer and Secretary of Medi-Mail Thomas Warren 55 Chief Financial Officer Julie Ledbetter 25 Corporate Secretary Byron S. Georgiou* 46 Director Edward T. Hanley, Jr.*** 38 Director Edward F. Heil* 50 Director Dr. Sol Lizerbram* 47 Director Robert W. Quick** 74 Director Matthew C. Strauss*** 62 Director Lincoln R. Ward** 71 Director Donald Kirsch** 63 Director Steven F. Mayer* 36 Director - -------------------- * Term as director expires in 1996. ** Term as director expires in 1997. *** Term as director expires in 1998. The Board of Directors maintains an Audit Committee, a Safety Committee, a Compensation Committee, a Nominating Committee and a Strategic Planning Committee. Messrs. Ward and Strauss are members of the Audit Committee. Messrs. Strauss, Heil and Ward are members of the Safety Committee. Messrs. Heil, Quick and Georgiou are members of the Compensation Committee. Messrs. Hanley, Lizerbram and McCarthy are members of the Nominating Committee. Messrs. McCarthy, Georgiou, Hanley and Lizerbram are members of the Strategic Planning Committee. Honorable Leo T. McCarthy. Mr. McCarthy joined the Board of Directors in June 1994 and currently serves as its Chairman. He served as Lieutenant Governor of California for 12 years until his retirement in 1994. During that period, he chaired the California Commission on Economic Development. Mr. McCarthy is admitted to the practice of law in California. Mr. McCarthy graduated from the University of San Francisco and the San Francisco Law School. Mr. McCarthy serves on the Boards of Directors of Linear Technology Corp., FloWind Corp. and the International Shopping Network. Dr. M.B. Merryman. Dr. Merryman has been Chief Executive Officer, President, and a director of the Company since December, 1987. He also served as Treasurer of the Company from December 1987 until January 1989. Additionally, he served as Chief Financial Officer from December 1987 through March 1992. From November 1987 to September 1989, he served as President of Sino Business Machines, Inc., a Canadian computer company. From May 1986 to February 1989, Dr. Merryman was an officer and director of China Business Machines Holding Company, a privately-held concern which is the parent of Sino Business Machines, Inc. In 1995, he received a Doctor of Human Letters from the College of Osteopathic Medicine of the Pacific. Dennis Smith. Mr. Smith has been Vice President of the Company from 1987 to 1992 and was named Executive Vice President and Chief Operating Officer in June 1992. Additionally, he served as a director of the Company from June 1985 until January 1989. Mr. Smith received his B.A. in 1969 from the University of Miami. He is experienced in pharmacy operations, as well as other business activities. Prior to joining the Company he was the president of an export/import company specializing in business with China. From November 1983 through January 1985, Mr. Smith was the Senior Buyer for pharmaceutical and over-the-counter products for AARP's Las Vegas pharmaceutical facility. As AARP's Senior Buyer, Mr. Smith's responsibilities included management of the buying staff responsible for purchasing $18 million in pharmaceutical products for AARP's mail-service business. Jane E. Freeman. Ms. Freeman was named Executive Vice President - Marketing Services in October 1993. She also served as Vice President - Client Services from April 1992 to October 1993. From January 1989 through April 1992, she served as the Company's Vice President - Sales and Marketing. She was the Company's General Manager from April 1988 until January 1989. Ms. Freeman received her B.S. degree in Communications from Southern Illinois University in 1976. Dr. David L. Dalton. Dr. Dalton is Executive Vice President - Subsidiary Operations and President of Medi- Claim. Dr. Dalton joined Medi-Mail and Medi-Claim, in November 1994 in connection with the Company's acquisition of Mednet. From November 1989 until joining the Company, Dr. Dalton served as Chairman, President and Chief Executive Officer of Mednet. Prior to that, Dr. Dalton was a Senior Vice President of Reliable Drug, Inc. from July 1989 until November 1989 and served in several capacities with Rite Aid Corporation from 1971 through 1989, including Vice President (Corporate) from 1983 through 1989. He is currently a member of several boards of directors including Blue Shield of Pennsylvania. Dr. Dalton became a Doctor of Pharmacy (Maryland Registration) in 1974. He received a B.S. in Pharmacy from West Virginia University in 1971 and was recently honored as one of the top ten graduates over a 100- year span. Dr. Dalton is the President and a principal shareholder of Managed Care Rx, a specialty care pharmacy. S.E. Roberts. Mr. Roberts has been Treasurer of the Company since January 1989 and was Secretary of the Company from October 1989 through 1991. In 1993, he resumed the position of Secretary. From 1988 to 1992, he served as Controller of the Company. Mr. Roberts received his B.S. degree in Accounting from San Diego State University in 1970. From 1987 to 1989, he was the Research Director of Sino Business Machines, Inc., a Canadian computer company. From 1978 to 1991, he served as Controller/Vice President of Eucalyptus Productions, Inc., a privately-held corporation specializing in typesetting/graphic arts. Thomas Warren. Mr. Warren joined the Company in January, 1996 as its Chief Financial Officer. From 1993 to September, 1995 he owned and operated a retail supermarket in Cocoa Beach, Florida. The supermarket was closed due to the entry of a Walmart Supercenter and Albertsons in the market area. Personal guaranties of the supermarket's debts necessitated Mr. Warren and his wife filing for protection under Chapter 7 of the Bankruptcy Code on September 29, 1995. From 1979 to 1993, he held executive financial positions in the food distribution industry. These include serving as chief financial officer for The Eli Witt Co. (1991 to 1993), ShopRite Supermarkets, Inc. (1989 to 1991) and American Seaway Foods - Fisher Foods (1985 to 1989). Mr. Warren received a BBS in Accounting and Finance from Wayne State University in 1963. Byron S. Georgiou. Mr. Georgiou has been a director of the Company since January 1989. He is President of American Partners Capital Group, Inc., a firm serving the alternative investment needs of institutional investors. Mr. Georgiou is a co-founder and served from 1983 to 1994 as Managing Partner of the San Diego law firm of Georgiou, Tosdal, Levine & Smith. From 1980 to 1983, Mr. Georgiou was Legal Affairs Secretary in the cabinet of California Governor Edmund G. Brown, Jr. From 1975 to 1980, he served in various capacities with the California Agricultural Labor Relations Board. He co-founded and since 1985 has served as director, General Counsel and Corporate Secretary of California Infoplace, Inc., a privately-held corporation which operates customer service kiosks in shopping malls throughout the U.S. Mr. Georgiou received his A.B. degree with great distinction in 1970 from Stanford University, and J.D. Magna Cum Laude in 1974 from Harvard Law School. Edward T. Hanley, Jr. Mr. Hanley was appointed to the Company's Board of Directors in July of 1993. Since 1990 he has been a partner in the Chicago law firm of Hanley & Spadoro. From 1984 to 1990, he was a managing attorney of the prepaid legal department of Borovsky & Ehrlich in Chicago. Mr. Hanley received his B.A. degree from Carthage College in 1980 and his J.D. degree from Chicago-Kent College of Law in 1983. Edward F. Heil. Mr. Heil became a director of the Company in March 1993. He currently manages his real estate investments. He has served as President and Chief Executive Officer of American Environmental Construction Company, an Illinois-based corporation, since 1987. Prior to that, he was Chief Executive Officer and sole owner of E & E Hauling, Inc., a demolition, excavation and sanitary landfill management company founded by his father. Dr. Sol Lizerbram. A founder of the Company, Dr. Lizerbram served as Chairman of the Board of Directors since its inception until 1994. He continues to serve as a director of the Company. Dr. Lizerbram is also co-founder and President of Family Practice Associates of San Diego, Inc., a multi-specialty primary care medical group. Dr. Lizerbram is also President and Chairman of the Board of Directors of FPA Medical Management, Inc., a company that provides management services to certain medical providers. He received his pharmaceutical degree in 1970 from the Long Island University School of Pharmacy, and his Doctor of Osteopathy degree in 1977 from the Philadelphia College of Osteopathic Medicine. Dr. Lizerbram was licensed as a Registered Pharmacist in the States of New York and Pennsylvania, and is licensed as an Osteopathic Physician and Surgeon in the States of Pennsylvania and California. He has received many awards and appointments including: Health Advisor to California Governor Edmund G. Brown, Jr.; Medical Director, the Prudential Insurance Company, San Diego; recipient of a California State Senate Resolution for Recognition of his Contribution to Health Care; Nominee for Entrepreneur of the Year, INC. Magazine; and President, Jewish National Fund. Additionally, Dr. Lizerbram is a Trustee of the U.S. Olympic Committee. Robert W. Quick. Mr. Quick has been a director of the Company since March, 1988. Mr. Quick, a self- employed entrepreneur, is a founder of the DeAnza Group of mobile home parks currently comprising over 8,000 lots in California and the sun belt areas. Currently, he maintains an investment interest in these parks. Additionally, Mr. Quick is an owner of the Indian Run Village in Chester County, Pennsylvania and is a general partner of Melody Lakes Properties, a Pennsylvania limited partnership, which owns and operates a 353-unit, manufactured home community located in Quakertown, Pennsylvania. Matthew C. Strauss. Mr. Strauss is a co-founder and has served since 1960 as chief executive officer of the real estate investment firm of Leeds & Strauss Enterprises. Leeds & Strauss has been involved in the development and management of an extensive portfolio of real estate holdings throughout the United States. Mr. Strauss has served in the leadership of the United Jewish Federation of San Diego and the San Diego Hebrew Home. Mr. Strauss serves as a trustee of the San Diego Museum of Contemporary Art and San Diego Opera. Mr. Strauss was a founder of San Diego National Bank and an early investor in Qualcomm, First Fidelity Acceptance Corporation and Pace Membership Warehouses, since acquired by K-Mart. He received his bachelor's degree and national forensic awards in 1955 from San Diego State University. Dr. Lincoln R. Ward. Dr. Ward has served as a director of the Company since January 1989 and is Chairman of the Audit Committee. He is a retired vice president of Pacific Bell, President of his own business management consulting firm, and Executive Vice President of Princeton/Masters International, Ltd. In addition, he serves on the boards of directors of Fleet Aerospace, Inc., ExCell, the Cellular Connection and MobilWorks. His numerous other board memberships in the Los Angeles and San Diego areas have included: Economic Development Corp., San Diego Chamber of Commerce, United Way, Boy Scouts of America, California State University-Northridge, Urban League, Mexican and American Foundation, San Diego State University President's Council, St. Vincent de Paul Village, Mayor's Committees on both Water Conservation and City Operations, and Advisory Councils to two universities. He has a business degree from Wayne University and Graduate Degree from Stanford and a Doctorate (honorary) from National University. Donald Kirsch. Mr. Kirsch has served as a director of the Company since May, 1995 and is Chairman of the Strategic Planning Committee. Mr. Kirsch is Chairman of The Wall Street Group, Inc. a financial services firm founded in 1959. Steven F. Mayer. Mr. Mayer has served as a director of the Company since November, 1995. Since June 1994, Mr. Mayer has been the Managing Director of Aries Capital Group LLC, a private investment firm. Mr. Mayer was an investment banker with Apollo Advisors, L.P. and Lion Advisors, L.P., affiliated private investment firms, from April 1992 until June 1994, when he left to co-found Aries Capital Group. Prior to that time, Mr. Mayer was a lawyer with Sullivan & Cromwell specializing in mergers, acquisitions, divestitures, leveraged buyouts and corporate finance. Mr. Mayer is a current or former member of the Boards of Directors of BDK Holdings, Inc., a textile manufacturer, Roland International Corporation, a real estate holding company, and The Greater LA Fund, a non-profit investment group affiliated with Rebuild LA. Mr. Mayer is a graduate of Princeton University and Harvard Law School. Executive Compensation. Summary Compensation Table. The following table sets forth the aggregate cash compensation paid by the Company for services rendered during the last three fiscal years to the Company's Chief Executive Officer and to each of the Company's other executive officers whose annual salary and bonus for the most recent fiscal year exceeded $100,000. Annual Compensation Long-Term Compensation Awards --------------------------------------- ------------------------------------------------ Other Annual All Other Name and Principal Compensation Restricted Stock Stock Options Compensation Position Year Salary ($) Bonus ($) ($) Awards ($) (#) ($) - ------------------ ---- ----------- --------- ------------ ---------------- ------------- ------------ M.B. Merryman, CEO 1994 $171,870 $107,500 $ 25,000(3) 107,500(2) $9,764(4) and President(1) (2) 1993 $159,500(5) $37,500(6) $777,625(7) 577,500 (6) $9,764(4) (7) (8) 1992 $130,062 $274,996 $ 33,678 42,500(9) $9,764(4) (9)(10) Dr. David Dalton, 1994 $125,000(12) $ -0- $ 2,258(13) $4,988(14) Executive Vice President - Subsidiary Operations and President of Medi- Claim (11) - -------------------- (1) Dr. Merryman's other compensation included certain perquisites, of which $12,000 representing an annualized expense allowance of $1,000 per month which commenced in May 1992 and $12,000 representing an automobile allowance of $1,000 per month which commenced in January 1994. Additionally, he had an automobile allowance of $9,240 for 1992. (2) In 1995, Dr. Merryman received as a bonus $107,500 and an option to purchase 107,500 shares at $3.16 per share. The cash bonus and stock option bonus were measured and paid/granted in 1995 but were based on performance in 1994. (3) During 1994, Dr. Merryman received $1,000 as compensation for serving on the Company's board of directors. (4) A life insurance policy was purchased for Dr. Merryman in December 1992. The amount reflected here includes the annual premium of $3,954 for the year the premium became due. The premium due in each of 1993 and 1994 was paid in 1994 and 1995, respectively. In addition, the Company paid $5,810 for a disability policy for Dr. Merryman in each of 1992, 1993 and 1994. (5) Included in Dr. Merryman's salary for 1993 is 3,334 shares of Common Stock valued at $7,500, which Dr. Merryman agreed on March 16, 1993 to accept in lieu of a cash raise of $7,500 effective May 1, 1993. (6) In 1994, Dr. Merryman received as a bonus $37,500 and an option to purchase 37,500 shares at $3.52 per share. The cash bonus and stock option bonus were measured and paid/granted in 1994 but were based on performance in 1993. (7) Dr. Merryman's Employment Agreement was amended September 12, 1993. Pursuant to that amendment, Dr. Merryman agreed to the elimination of certain severance benefits in exchange for an immediate cash bonus of $100,000, immediate issuance of 150,000 shares of Common Stock valued at approximately $665,625 or approximately $4.44 per share and an immediate option to purchase 500,000 shares of Common Stock at a price of $4.50 per share at any time prior to September 11, 1998. The 150,000 shares and the shares underlying the options were registered on a Form S-8 registration statement filed in February, 1995. (8) During 1993 Dr. Merryman received an option to purchase 20,000 shares, exercisable January 15, 1994, and an option to purchase 20,000 shares, exercisable June 16, 1994. Each option was granted under the Company's Incentive Stock Option Plan and is related to compensation for serving on the Company's board of directors from January 1992 to June 1994. (9) Dr. Merryman received in 1993 as a bonus for 1992 performance $15,000 in cash and an option to purchase 15,000 shares at $2.77 per share which is included in the option column but not the bonus column. The cash bonus and stock option bonus were measured and paid/granted in 1993 but were based on performance in 1992. The 42,500 options in the stock option column include 27,500 options granted in 1992 and the 15,000 options earned in 1992 but granted in 1993. (10) Includes a stock bonus valued at $259,996. The stock bonus comprises 88,736 shares of Common Stock which Dr. Merryman received on May 1, 1993. The bonus was awarded in 1992 for past services pursuant to his Employment Agreement with the Company, dated May 1, 1992. (11) Dr. Dalton entered into an Employment Agreement with Medi-Claim as of November 19, 1994. Prior to that date, Dr. Dalton was employed by Mednet. The amounts set forth herein for Dr. Dalton reflect amounts received during 1994 by Dr. Dalton from the Company and Mednet.\ (12) During 1994, Dr. Dalton received approximately $110,795 in salary from Mednet and approximately $14,205 in salary from Medi-Claim. (13) Pursuant to Dr. Dalton's Employment Agreement, Dr. Dalton received a car allowance of $1,000 per month, which began as of November 19, 1994. Prior to that time, Dr. Dalton was entitled to use of a car owned by Mednet, the use of which during 1994 had a value of $758. (14) Mednet paid approximately $4,988 in life insurance premiums in 1994 towards a life insurance policy for Dr. Dalton.
Other than the Company's Incentive Stock Option Plan and Nonqualifying Stock Option Plan ("NQSOP"), there are no retirement, pension, or profit sharing plans for the benefit of the Company's officers, directors and employees. The Company provides health insurance coverage for its employees and life insurance and disability insurance for its Chief Executive Officer. The Board of Directors may recommend and adopt additional programs in the future for the benefit of officers, directors and employees. Option Grants in 1994. Information concerning 1994 grants to named executive officers is reflected in the table below. The amounts shown for each of the named executive officers as potential realizable values are based on assumed annualized rates of stock price appreciation of five percent and ten percent, respectively, over the full five year term of the options as required by applicable SEC regulations. Individual Grants -------------------------------------------------------------------------------- Potential Realizable Value at % of Total Annual Rates of Stock Price Number of Options Appreciation Securities Granted to for Option Term Underlying Employees Exercise ----------------------------- Options in price Expiration (5%) (10%) Name Granted (#) 1994(1)(2) ($/share) Date ($) ($) ---- ----------- ---------- --------- ---------- ------- -------- M.B. Merryman 37,500(1) 12.89% $3.52 01/01/99 $36,469 $ 80,587 107,500(2) 36.94% $3.16 01/01/00 $93,853 $207,390 - -------------------- (1) An option to acquire 37,500 shares was earned in 1993 but granted in 1994. For purposes of calculating the percent of total options granted to employees, this option is treated as granted in 1994. (2) An option to acquire 107,500 shares was earned in 1994 but granted in 1995. For purposes of calculating the percent of total options granted to employees, this option is treated as granted in 1994.
The Incentive Stock Option Plan provides that no option may be granted at an exercise price less than the fair market value of the Common Stock of the Company on the date of grant. Options granted pursuant to the Incentive Stock Plan expire five years from the date of grant and may not be exercised during the initial one year period from the date of grant. Dr. Dalton received no option grants during 1994. However, in connection with the Plan of Reorganization between the Company, Medi-Claim and MSA dated November 19, 1994, Dr. Dalton received 787,879 shares of Common Stock of the Company. These shares were received by Dr. Dalton in liquidation of his interest in MSA and not as compensation. Aggregated Option Exercises and Year-End Option Values in 1994. The following table summarizes for each of the named executive officers of the Company the number of stock options, if any, exercised during 1994, the aggregate dollar value realized upon exercise, the total number of unexercised options held at December 31, 1994 and the aggregate dollar value of in-the-money unexercised options, if any, held at December 31, 1994. Value realized upon exercise is the difference between the fair market value of the underlying stock on the exercise date and the exercise price of the option. The value of unexercised, in-the-money options at December 31, 1994 is the difference between its exercise price and the fair market value of the underlying stock on December 31, 1994, which was $2.875 per share based on the closing bid price of the Common Stock on December 31, 1994. The underlying options have not been, and may never be, exercised, and actual gains, if any, on exercise will depend on the value of the Common Stock on the actual date of exercise. There can be no assurance that these values will be realized. Number of Securities Underlying Unexercised Value of Unexercised In-the- Options at 12/31/94(#) Money Options at 12/31/94($) Name Shares Acquired ---------------------------- ------------------------------ on Exercise(#) Value Realized($) Exercisable Unexercisable Exercisable Unexercisable - ---- --------------- ----------------- ----------- ------------- ----------- ------------- M.B. Merryman 31,500 $91,782 620,000(1) 107,500(2) $90,031(1) $0 David Dalton -0- -0- -0- - ------------------- (1) Includes 37,500 shares that became exercisable on January 1, 1995. (2) Includes 107,500 shares issued in 1995 but earned in 1994, but does not include 37,500 shares that became exercisable on January 1, 1995.
Director Compensation. During 1994, the Company paid board members $500 per meeting, up to a maximum of $2,000 per year. Members of the Audit Committee received $250 per committee meeting, up to a maximum of $500 per quarter. Directors are also reimbursed for their reasonable expenses in attending meetings. The Company maintains a NQSOP for the benefit of the non-employee directors of the Company and others having rendered significant services to the Company. As of May 19, 1995, 1,615,000 shares of Common Stock have been reserved to be issued pursuant to the NQSOP. Each non-employee director receives an automatic grant of 60,000 options to purchase Common Stock upon election to the Board of Directors for a term of three years. Upon completion of each year of service to the Company 20,000 shares will vest. The options cannot be exercised until they are held for one year and cannot be exercised after ten years from the date of grant. The exercise prices equal or exceed fair market value on the date of grant. Prior to nominating Mr. McCarthy as a director, the Company agreed to award Mr. McCarthy as compensation for serving on the Company's board of directors, options to purchase an aggregate of 230,000 shares of Common Stock. The options with respect to 50,000 shares vested immediately upon his election as director. The remaining options were granted under the NQSOP in lieu of the automatic grant described above and will vest with respect to 60,000 shares on each of the first three anniversaries of the date Mr. McCarthy was elected to the Company's board of directors, provided he is a member of the board of directors on the respective anniversary date. The exercise price of the options is $2.85, which represents the market value of the Common Stock on the date Mr. McCarthy was elected, plus $.10. In addition, Mr. McCarthy will receive $500 plus reasonable expenses for attending each of the board of directors meetings during the year. After January 3, 1995, Mr. McCarthy will also receive additional cash compensation equal to 1% of the gross sales generated by accounts brought to the Company as a result of Mr. McCarthy's efforts. As of December 31, 1994, options under the NQSOP to purchase an aggregate of approximately 861,000 shares of Common Stock at exercise prices ranging from $.7738 to $3.81 per share were outstanding. Employment Contracts and Termination of Employment and Change-In-Control Arrangements. Dr. Merryman. The Company entered into a five year Employment Agreement with Dr. Merryman, effective May 1, 1992 (the "Employment Agreement"). The term of the Employment Agreement can be extended for successive additional one-year terms commencing in 1993, and, on March 16, 1993, the Company authorized a one-year extension of the Employment Agreement. Beginning May 1, 1993 and thereafter on the anniversary date of the Employment Agreement, Dr. Merryman's base salary will be increased by an amount equal to one-half of the cash bonus earned by him for the previous year, provided that the increased base salary will not exceed an amount equal to one-hundred thirty-five percent (135%) of the prior year's base salary. Pursuant to the Employment Agreement, the Company is currently paying an annual salary to Dr. Merryman in the amount of $178,250. On May 1, 1995, his base salary increased to $232,000. As of January 1st of each year, Dr. Merryman will receive an annual bonus of cash and options to acquire shares of Common Stock. The computation of the bonus is as follows: for each $1 million increase in the Company's consolidated annual gross sales for the previous calendar year compared to consolidated annual gross sales for the second previous calendar year, he will receive $2,500 in cash and an option to purchase 2,500 shares at the option price. The option price is the average closing bid price in the last ten trading days of the previous year plus $.10 per share. In lieu of the annual bonus, Dr. Merryman is entitled to receive cash equal to one percent of the reported pre-tax consolidated profit of the Company for the prior calendar year and an option to purchase 50,000 shares at the above defined option price. Dr. Merryman is also entitled to the use of a Company owned or leased vehicle or in lieu thereof a $1,000 per month automobile allowance. He also has a $12,000 discretionary expense allowance. The Company provides and pays the premium for a policy of life insurance and a policy of long-term disability insurance for Dr. Merryman. Pursuant to an amendment to the Employment Agreement, entered into as of September 12, 1993, all entitlement to severance pay has been eliminated. As consideration for the termination of his right to receive severance pay, Dr. Merryman received an immediate cash bonus of $100,000 and 150,000 shares of Common Stock. Additionally, Dr. Merryman received immediate options to purchase 500,000 shares of Common Stock at a price of $4.50 per share at any time prior to September 11, 1998. The Company has registered the 150,000 shares and the 500,000 shares underlying the options on a Form S-8 registration statement filed in February, 1995. The amendment also eliminated non-competition provisions. Dr. Dalton. Medi-Claim entered into a three-year employment agreement with Dr. Dalton as of November 19, 1994. The agreement will automatically renew for successive two-year terms unless terminated by either party not less than ninety days prior to the end of the then current term. The agreement provides for Dr. Dalton to serve as an Executive Vice President of the Company at the pleasure of the Company's Board of Directors and President of MediClaim. Under the agreement, Dr. Dalton is entitled to an annual base compensation of $125,000, an automobile allowance of $1,000 per month and other benefits on the same basis as other employees of Medi-Claim. Dr. Dalton's employment agreement also contains certain non-competition and non-solicitation covenants that extend in most circumstances to three years after the termination of the agreement. Incentive Stock Option Plan. Effective March 1988, the Company adopted an Incentive Stock Option Plan ("ISOP") for the benefit of officers, directors and key employees of the Company. The ISOP is designed to comply with Section 422 of the Internal Revenue Code of 1986, as amended. An aggregate of 1,615,000 shares of Common Stock have been reserved for issuance pursuant to the ISOP. As of December 31, 1994, approximately 33 options to purchase an aggregate of approximately 348,000 shares of Common Stock at exercise prices ranging from $.7738 to $3.50 per share were outstanding under the ISOP. In addition, as of January 1, 1995, an option to acquire 107,500 shares of Common Stock at an exercise price of $3.16 under the ISOP was granted to Dr. Merryman in connection with his Employment Agreement. The ISOP, designed as an incentive for key employees, is administered by the Compensation Committee of the Board of Directors, which selects optionees and determines the number of shares of Common Stock subject to each option. The ISOP provides that no option may be granted at an exercise price less than the fair market value of the Common Stock of the Company on the date of grant. Unless otherwise specified, the options expire five years from date of grant and may not be exercised during the initial one year period from initial date of grant. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding shares of Common Stock beneficially owned as of July 1, 1995 by: (i) each person known by the Company to beneficially own 5% or more of the outstanding Common Stock, (ii) each director or nominee for director, (iii) each person named in the summary compensation table and (iv) all officers and directors as a group. Except as otherwise noted, the stockholders listed below have sole voting and investment power. Name and Addresses of Officers, Directors Amount of Percentage of and Principal Shareholders Common Stock* Voting Securities* M.B. Merryman(1)(2) 954,002 3.6% 871-C Grier Drive Las Vegas, Nevada 89119 Dr. Sol Lizerbram(1)(3)(4) 363,199 1.4% 4205 Fairmount Avenue San Diego, CA 92105 Edward F. Heil(1)(5) 2,029,000 7.8% 2901 Centre Circle Downers Grove, IL 60515 Edward T. Hanley, Jr.(1)(6) 415,000 1.6% 29 South LaSalle Street Suite 735 Chicago, IL 60603 Byron S. Georgiou(1)(7) 164,328 ** 750 B Street, 31st Floor San Diego, CA 92101 Robert W. Quick(1)(8) 278,054 1.1% 1045 N. West End Boulevard Quakertown, PA 18951 Matthew C. Strauss(1)(9) 880,000 3.2% 11975 El Camino Real, Suite 103 San Diego, CA 92130 Lincoln R. Ward(1)(10) 159,278 ** 9191 Town Centre Dr., Suite 105 San Diego, CA 92122 Honorable Leo T. McCarthy(1)(11) 110,000 ** 400 Magellan Avenue San Francisco, CA 94110 Donald Kirsch(12) 109,444 ** 32 East 57th Street New York, NY 10022 Steven F. Mayer(13) 123,412 ** Aries Capital Group, LLC 11766 Wilshire Blvd., Suite 870 Los Angeles, CA 90025 ArcVentures, Inc.(14) 4,990,277 16.1% 820 W. Jackson Blvd., Suite 800 Chicago, Il 60607 Executive Officers and 6,528,031 23.3% Directors as a group (17 Individuals) - ---------------- * Assumes exercise of all exercisable options and warrants held by listed security holders which can be acquired within 60 days from January 2, 1996. ** Less than 1%. (1) Director or executive officer. (2) Includes 27,500 shares underlying an option exercisable commencing September 3, 1993, 500,000 shares underlying an option exercisable commencing September 12, 1993, 20,000 shares underlying an option exercisable commencing January 15, 1994, 15,000 shares underlying an option exercisable commencing January 1, 1994, 37,500 shares underlying an option exercisable commencing January 1, 1995, and 20,000 shares underlying an option commencing June 16, 1994. In addition, Dr. Merryman has an option to acquire an additional 107,500 shares exercisable January 1, 1996. A trust, over which Dr. Merryman has voting and investment power, holds 12,307 shares of Common Stock. (3) Does not include Common Stock owned by Mr. Joseph Lizerbram, Dr. Lizerbram's father. Dr. Lizerbram disclaims any beneficial ownership with respect to said Common Stock. The Company believes Mr. Joseph Lizerbram owns 25,692 shares of Common Stock. (4) Includes 11,000 shares underlying an option exercisable commencing November 1, 1989, 31,500 shares underlying an option exercisable commencing October 25, 1991, 20,000 shares underlying an option exercisable commencing September 3, 1993, 20,000 shares underlying an option exercisable commencing January 17, 1994 and 40,000 shares from an option to acquire 60,000 shares, which is exercisable with respect to 20,000 commencing June 16, 1994, and with respect to 20,000 shares commencing May 19, 1995. In addition, Dr. Lizerbram may acquire an additional 20,000 common shares under the 60,000 share option after June 16, 1996. A trust, for which Dr. Lizerbram has voting and investment power, holds 5,000 shares of Common Stock. Also includes shares held by Dr. Lizerbram's spouse (5,825 shares of Common Stock) and his son (1,050 shares). (5) Includes 40,000 shares underlying an option to acquire 60,000 shares exercisable with respect to 20,000 shares commencing June 16, 1994 and with respect to 20,000 shares commencing May 19, 1995. In addition, Mr. Heil may acquire 20,000 shares under the 60,000 share option after June 16, 1996. Three different trusts, for which Mr. Heil has voting and investment power, hold 704,000 shares of Common Stock collectively. (6) Represents an option to purchase 40,000 shares, which option is exercisable 20,000 shares after June 16, 1994, and 20,000 shares after May 19, 1995. Also includes warrants with respect to 375,000 shares that were obtained pursuant to consulting agreements between the Company and a third-party consultant. In addition, Mr. Hanley holds an option to acquire 60,000 shares exercisable with respect to 20,000 shares on approximately May 15, 1996; with respect to an additional 20,000 shares on approximately May 19, 1997; and with respect to an additional 20,000 shares on approximately May 19, 1998. (7) Includes 31,500 shares underlying an option exercisable commencing October 25, 1991, 20,000 shares underlying an option exercisable commencing September 3, 1993, 20,000 shares underlying an option exercisable commencing January 17, 1994, 50,000 shares underlying an option exercisable commencing June 18, 1994 and 40,000 shares underlying an option to acquire 60,000 shares, which is exercisable with respect to 20,000 shares commencing June 16, 1994 and with respect to 20,000 shares commencing May 19, 1995. In addition, Mr. Georgiou may acquire an additional 20,000 shares under the 60,000 share option after June 16, 1996. (8) Includes 20,000 shares underlying an option exercisable commencing September 3, 1993, 20,000 shares underlying an option exercisable commencing January 17, 1994 and 40,000 shares underlying an option exercisable with respect to 20,000 shares commencing June 16, 1994 and with respect to 20,000 shares commencing May 19, 1995. (9) Includes three different trusts, for which Mr. Strauss has voting and investment power, which hold an aggregate of 380,000 shares of Common Stock. Also includes 70,000 shares of Common Stock for six different Uniform Gift accounts for which Mr. Strauss acts as custodian. Also includes 50,000 shares underlying an option exercisable commencing June 18, 1994 and 40,000 shares underlying an option exercisable with respect to 20,000 shares commencing June 16, 1994 and with respect to 20,000 shares commencing May 19, 1995. In addition, Mr. Strauss holds an option to acquire 60,000 shares exercisable with respect to 20,000 shares on approximately May 15, 1996; with respect to an additional 20,000 shares on approximately May 19, 1997; and with respect to an additional 20,000 shares on approximately May 19, 1998. (10) Includes 20,000 shares underlying an option exercisable commencing September 3, 1993, 20,000 shares underlying an option exercisable commencing June 16, 1994, 50,000 shares underlying an option exercisable commencing June 18, 1994, 20,000 shares underlying an option exercisable commencing January 12, 1994 and 20,000 shares underlying an option to acquire 60,000 shares, which is exercisable with respect to 20,000 shares commencing May 19, 1995. In addition, Mr. Ward may acquire an additional 40,000 shares under the 60,000 share option, which is exercisable with respect to 20,000 shares after June 17, 1996, and with respect to 20,000 shares after June 17, 1997. Mr. Ward holds 15,000 shares in an Individual Retirement Account. Mr. Ward holds 30,577 shares in a defined benefit plan. (11) Includes 50,000 shares underlying an option exercisable commencing on June 17, 1994 and 60,000 shares underlying an option to acquire 180,000 shares, which is exercisable with respect to 60,000 shares commencing May 19, 1995. In addition, Mr. McCarthy may acquire an additional 120,000 shares under the 180,000 share option, which is exercisable with respect to 60,000 shares after June 17, 1996 and with respect to 60,000 shares after June 17, 1997. (12) Includes 26,896 shares held by a corporation controlled by Mr. Kirsch and 82,548 shares underlying exercisable warrants held by such corporation. Does not include 20,000 shares underlying options exercisable commencing May 19, 1996 held by Mr. Kirsch. (13) Includes 123,412 Warrant Shares. does not include shares under the 20,000 Share option, which is exercisable with respect to 20,000 shares after September 15, 1996. (14) The Common Stock beneficially owned by Arc consists of the 491,277 Collateral Shares offered hereby and an additional 4,499,000 shares securing the Interim Note and Holdback Note. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In June 1991, the Company entered into an agreement with a marketing consultant pursuant to which it agreed to issue warrants to purchase up to 2,000,000 shares of Common Stock. Warrants with respect to 250,000 shares were immediately vested upon signing the agreement. An additional 750,000 warrants were vested in 1994. Mr. Hanley, a director of the Company, holds vested warrants with respect to 172,142 shares with respect to such agreement. The agreement expired by its terms on May 31, 1994. As of June 1, 1994 the Company entered into a consultant agreement with the marketing consultant's professional corporation. Under that agreement, the consultant or his assigns receive warrants to purchase 1,000,000 shares of Common Stock at a price of $3.00 per share. Mr. Hanley, a director of the Company, was assigned and holds warrants with respect to 202,858 of those shares. The consultant or his assigns are entitled to receive additional warrants, exercisable at $.167 over the market value on the date of grant, if future sales under the agreement exceed specified levels. DESCRIPTION OF SECURITIES The Common Shares, par value $.001 per share (the "Common Stock"), of the Company are registered hereby. The Company's Restated Articles of Incorporation, as amended, authorize the issuance of up to 42,000,000 common shares, $.001 par value per share. As of the date of this Prospectus, the Company has 25,997,643 shares of Common Stock outstanding (28,971,768 including the shares issuable on conversion of the Series A Preferred, the Warrant Shares and the Collateral Shares) and 4,718,382 shares of Common Stock reserved for issuance pursuant to outstanding options, warrants, convertible securities or other rights. Each record holder of Common Stock is entitled to one vote for each share held on all matters properly submitted to the stockholders for their vote. Holders of all Common Stock vote as a single class on all matters. Holders of outstanding Common Stock are entitled to those dividends declared by the Board of Directors out of legally available funds; and, in the event of liquidation, dissolution or winding up of the affairs of the Company, holders are entitled to receive ratably the net assets of the Company available to the stockholders subject to the rights, if any, of holders of Preferred Shares (as defined below). Holders of outstanding Common Stock have no preemptive, conversion or redemptive rights. All of the issued and outstanding Common Stock is duly authorized, validly issued, fully paid and nonassessable. To the extent that additional Common Stock of the Company is issued, the relative interests of the then existing stockholders may be diluted. The Company's Restated Articles of Incorporation, as amended, also provide for 2,000,000 Preferred Shares, par value $.01 (the "Preferred Shares"). The Board of Directors of the Company is vested with the authority to divide the class of Preferred Shares into series and to fix and determine the relative rights and preferences of the shares of any such series so established to the full extent permitted by the laws of the State of Nevada and the Articles of Incorporation, as amended. The terms of the Preferred Shares could disadvantage holders of Common Shares. The terms of the Preferred Shares could include, among other things, preferences to the holders of Preferred Shares over holders of Common Shares as to dividends and distributions on liquidation. The Company currently has outstanding 267,500 shares of Series A Preferred. The transfer agent for the Common Stock is OTR/California Stock Transfer, Portland, Oregon. LEGAL PROCEEDINGS On or about February 23, 1995, a purported shareholder of the Company served the Company with a complaint filed on January 12, 1995 in the United States District Court for the Southern District of California against the Company and one of its executive officers. The complaint alleged that, during the period of July 1, 1993 through March 31, 1994, the defendants omitted material information about the Company and misrepresented information relating to the growth of the Company in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks to proceed as a class action on behalf of certain persons who purchased shares of the Company's Common Stock during the period July 1, 1993 through March 31, 1994 and who were allegedly damaged. The complaint seeks compensatory damages in an unspecified amount and costs and expenses relating to the complaint, including reasonable attorneys' fees. The Company believes these claims are meritless and is vigorously defending this action. The Company is not a party to any other legal proceedings which, in its belief, could have a material adverse effect on the Company. LEGAL MATTERS The validity of the Common Stock offered hereby has been passed upon for the Company by Ballard Spahr Andrews & Ingersoll, Salt Lake City, Utah. EXPERTS The consolidated balance sheets of the Company as of December 31, 1994 and December 31, 1993, the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994 and the related consolidated financial statement schedules, included in this Prospectus and elsewhere in Registration Statement have been audited by McGladrey & Pullen, LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The balance sheet of Home Pharmacy as of June 30, 1995 and 1994, the related statements of income, stockholders' equity and cash flows for the three years ended June 30, 1995 included in the Prospectus and elsewhere in Registration Statement have been audited by Arthur Andersen, LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The balance sheet of Family Pharmaceuticals of America, Inc., as of December 31, 1993, the related statements of income, stockholders' equity and cash flows for the year ended December 31, 1993, included in the Prospectus and elsewhere in Registration Statement have been audited by McGladrey & Pullen, LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Medical Service Agency, Inc. as of December 31, 1993, 1992, and 1991 and for the years then ended, included in this Prospectus and elsewhere in Registration Statement have been audited by McKonly & Asbury, independent accountants, given on the authority of said firm as experts in auditing and accounting. CHANGE IN ACCOUNTANTS Effective April 19, 1994, the Company dismissed Price Waterhouse ("Price") as its certifying accountant. Price's reports on the Company's financial statements for the years ended December 31, 1993 and December 31, 1992 did not contain an adverse opinion or a disclaimer of opinion and were not qualified as to uncertainty, audit scope, or accounting principles. The Company's audit committee and board of directors unanimously approved dismissal of Price. During the Company's fiscal years ended December 31, 1993 and December 31, 1992 and the interim period subsequent to December 31, 1993, there were no disagreements, as defined in Regulation S-K Item 304, with Price on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements would have caused Price to make a reference to the subject matter of the disagreement in connection with its reports. On April 18, 1994, the Company engaged McGladrey & Pullen, LLP to perform its audits and provide various accounting services thereafter. The Company and McGladrey & Pullen, LLP did not consult prior to such date regarding any reportable matter. There are no other changes in and disagreements on accounting and financial statement disclosure. INDEX TO FINANCIAL STATEMENTS Page MEDNET, MPC CORPORATION Consolidated Balance Sheet September 30, 1995 and December 31, 1994............................................... Consolidated Statement of Operations for the Three Months Ended September 30, 1995 and 1994................................... Consolidated Statement of Operations for the Nine Months Ended September 30, 1995 and 1994................................... Statement of Cash Flow for the Nine Months Ended September 30, 1995 and 1994......................................... Notes to Interim Consolidated Financial Statements September 30, 1995.................................................. Independent Auditor's Report.......................................... Consolidated Balance Sheets December 31, 1994 and 1993................ Consolidated Statements of Operation for the Years Ended December 31, 1994, 1993 and 1992.................................... Consolidated Statements of Stockholders' Equity for the years Ended December 31, 1994, 1993 and 1992.................... Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992.............................. Notes to Consolidated Financial Statements............................ UNAUDITED PRO FORMA INCOME STATEMENTS OF MEDNET, MPC CORPORATION AND HOME PHARMACY Pro Forma Income Statement for the Twelve Months Ended December 31, 1994............................................. Pro Forma Income Statement for the Nine Months Ended September 30, 1995............................................ Notes to Pro Forma Income Statements.................................. HOME PHARMACY (A DIVISION OF ARCVENTURES, INC.) Unaudited Statements of Assets and Liabilities at September 15, 1995 and December 31, 1994............................ Unaudited Statements of Revenue and Expenses (excluding income taxes) for the periods ended September 15, 1995, June 30, 1995, March 31, 1995, December 31, 1994 and September 30, 1994.................................................. Unaudited Statement of Equity for the eight and one-half months ended September 15, 1995..................................... Unaudited Statements of Cash Flows for the periods ended September 15, 1995, June 30, 1995 and March 31, 1995................ Report of Independent Public Accountants.............................. Statements of Assets and Liabilities at June 30, 1995 and 1994........ Statements of Revenues and Expenses (excluding income taxes) for the years ended June 30, 1995, 1994 and 1993.................... Statements of Equity for the years ended June 30, 1995, 1994 and 1993....................................................... Statements of Cash Flows for the years ended June 30, 1995, 1994 and 1993....................................................... MEDICAL SERVICE AGENCY, INC. Report of Independent Accountants..................................... Consolidated Balance Sheets December 31, 1993, 1992 and 1991.......... Consolidated Statements of Income for the Years Ended December 31, 1993, 1992 and 1991.................................... Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1992 and 1991.............................. Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991.................................... Notes to Consolidated Financial Statements............................ FAMILY PHARMACEUTICALS OF AMERICA, INC. Independent Auditor's Report.......................................... Balance Sheets December 31, 1993 and June 30, 1994 (unaudited)........ Statements of Income December 31, 1993 and June 30, 1994 and 1993 (unaudited)................................................ Statement of Stockholders' Equity December 31, 1993 and June 30, 1994....................................................... Statements of Cash Flows Year Ended December 31, 1993 and Six Months Ended June 30, 1994 and 1993............................. Notes to Financial Statements......................................... Mednet, MPC Corporation Consolidated Balance Sheet Sept. 30, Dec. 31, 1995 1994 ------------ ------------ Assets Current assets: Cash and cash equivalents ......................... $ 1,634,000 $ 1,711,000 Accounts receivable, less allowance for doubtful accounts and return of and $780,000 at December 31, 1994 and $878,000 at Sept. 30, 1995 12,725,000 8,087,000 Inventories ....................................... 2,866,000 1,334,000 Other current assets .............................. 360,000 104,000 ------------ ------------ Total current assets ........................... 17,585,000 11,236,000 Property, plant and equipment ........................ 1,583,000 1,184,000 Intangible assets .................................... 19,225,000 9,308,000 Other assets ......................................... 1,195,000 589,000 ------------ ------------ Total assets ................................... $ 39,588,000 $ 22,317,000 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable .................................. $ 10,691,000 $ 6,545,000 Accrued expenses .................................. 953,000 1,013,000 Current portion of long-term debt ................. 3,576,000 2,258,000 ------------ ------------ Total current liabilities ...................... 15,220,000 9,816,000 Long-term debt ....................................... 3,649,000 595,000 Redeemable preferred stock, Series A: authorized, issued and outstanding 267,500 shares; 10% cumulative dividends ................................ 5,350,000 -0- Preferred stock, Series B: $.01 par value, issued and outstanding 100,000 shares .......................... 1,000,000 -0- Common stock: $.001 par value, (25,997,643 and 23,797,747 issued and outstanding at Sept. 30, 1995 and Dec. 31, 1994) .................................. 26,000 24,000 Additional paid-in capital ........................... 36,873,000 32,138,000 Accumulated deficit .................................. (22,530,000) (20,256,000) ------------ ------------ Stockholders' equity ................................. 15,369,000 11,906,000 ------------ ------------ Total liabilities and stockholders' equity ..... $ 39,588,000 $ 22,317,000 ============ ============
Mednet, MPC Corporation Consolidated Statement of Operations For the Three Months Ended September 30, --------------------------- 1995 1994 ------------ ------------ Sales $ 27,449,000 $ 18,380,000 Less: cost of sales 23,390,000 16,681,000 ------------ ------------ Gross profit 4,059,000 1,699,000 ------------ ------------ Selling, general and administrative expenses: Salaries and benefits 2,133,000 860,000 Marketing and advertising 238,000 318,000 Other administrative expenses 1,399,000 1,689,000 ------------ ------------ Total selling, general and administrative expenses 3,770,000 2,867,000 ------------ ------------ Operating income (loss) before depreciation and amortization 289,000 (1,168,000) Depreciation and amortization 649,000 177,000 ------------ ------------ Operating profit/(loss) (360,000) (1,345,000) Other income (expense): Interest, dividend and rental income 11,000 20,000 Interest expense (200,000) (91,000) Subsidiary operations for period not owned (180,000) 196,000 Other net (41,000) (174,000) ------------ ------------ Total other income (expense) (410,000) (49,000) ------------ ------------ Net loss $ (770,000) $ (1,394,000) ============ ============ Net loss per common share $ (.03) $ (.07) ============ ============ Weighted average equivalent number of share 24,338,791 21,433,191 ============ ============ Mednet, MPC Corporation Consolidated Statement of Operations For the Nine Months Ended September 30, ---------------------------- 1995 1994 ------------ ------------ Sales .......................................... $ 83,693,000 $ 48,869,000 Less: cost of sales ............................ 71,262,000 42,519,000 ------------ ------------ Gross profit ................................... 12,431,000 6,350,000 ------------ ------------ Selling, general and administrative expenses: Salaries and benefits ....................... 6,398,000 3,384,000 Marketing and advertising ................... 731,000 608,000 Other administrative expenses ............... 4,008,000 3,784,000 ------------ ------------ Total selling, general and administrative expenses ................................. 11,137,000 7,776,000 ------------ ------------ Operating income (loss) before depreciation and amortization......... 1,294,000 (1,426,000) Depreciation and amortization ................. 1,854,000 1,517,000 ------------ ------------ Operating profit/(loss) ................ (560,000) (2,943,000) Other income (expense): Interest, dividend and rental income ....... 31,000 48,000 Interest expense ........................... (627,000) (314,000) Subsidiary operations for period not owned . (982,000) 321,000 Other net .................................. (134,000) (75,000) ----------- ------------ Total other income (expense) ............ (1,712,000) (20,000) ----------- ------------ Net loss ................................... $ (2,272,000) $ (2,963,000) ============ ============ Net loss per common share ................. $ (.09) $ (.14) ============ ============ Weighted average equivalent number of shares .................................. 24,041,758 21,011,662 ============ ============ Mednet, MPC Corporation Statement of Cash Flow For the Nine Months Ended September 30, ---------------------------- 1995 1994 ------------ ------------ Cash flows from (used for) operating activities: Cash received from customers ..................................... $ 79,055,000 $ 31,655,000 Cash paid to suppliers and employees ............................. (80,707,000) (34,745,000) Net interest paid ................................................ (596,000) (221,000) Rental income .................................................... -0- 10,000 Other net ........................................................ (134,000) 25,000 ------------ ------------ Net cash used for operating activities ........................ (2,382,000) (3,276,000) ------------ ------------ Cash flows from (used for) investing activities: Purchase of property and equipment ............................... (774,000) (630,000) Purchase of intangible assets .................................... (11,458,000) -0- ------------ ------------ Net cash from (used for) investing activities ................. (12,232,000) (630,000) ------------ ------------ Cash flows from (used for) financing activities: Repayment of borrowings .......................................... (1,152,000) (1,374,000) Net proceeds from issuance of common stock ....................... 4,889,000 5,152,000 Net proceeds from issuance of preferred stock .................... 7,300,000 -0- Net proceeds from borrowings ..................................... 3,500,000 -0- ------------ ------------ Net cash from (used for) financing activities ................. 14,537,000 3,778,000 ------------ ------------ Net (decrease) increase in cash ..................................... (77,000) (128,000) Cash balance, beginning of period ................................... 1,711,000 1,220,000 ------------ ------------ Cash balance, end of period ......................................... $ 1,634,000 $ 1,092,000 ============ ============ Reconciliation of net loss to net cash used for operating activities: Net loss ......................................................... $ (2,272,000) $ (2,963,000) Adjustments to reconcile net loss to net cash used for operating activities: Net gain of subsidiaries for period not owned ................. 982,000 -0- Depreciation and amortization ................................. 1,854,000 1,517,000 Change in assets and liabilities: (Increase) in accounts receivable ............................. (4,638,000) (2,944,000) (Increase) Decrease in inventories ............................ (1,532,000) 132,000 (Increase) Decrease in other current assets ................... (256,000) 244,000 (Increase) in other assets .................................... (606,000) (10,000) (Decrease) in accrued expenses ................................ (60,000) (214,000) Increase in accounts payable .................................. 4,146,000 962,000 ------------ ------------ Net cash used for operating activities .............................. $ (2,382,000) $ (3,276,000) ============ ============
MEDNET, MPC CORPORATION Notes to Consolidated Financial Statements September 30, 1995 (1) Basis of Presentation The consolidated financial statements included herein include the accounts of Mednet and its subsidiaries (the "Company"), Medi-Mail, Inc., Medi-Phar, Inc., Medi-Claim, Inc. and Family Pharmaceutical of America, Inc. In the opinion of Management, all adjustments considered necessary for fair presentation have been reflected in the consolidated financial statements. These adjustments are of a normal, recurring nature. Operating results for the quarter ended September 30, 1995 are not necessarily indicative of those expected for the full year. Certain prior year amounts have been adjusted and reclassified to conform to the 1995 presentation. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission. These financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the Company's audited financial statements for the year ended December 31, 1994. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the Company's December 31, 1994 audited financial statements have been omitted from these interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such instructions, rules and regulations. Although the Company believes that the disclosures are adequate to make information presented not misleading, it is suggested that these unaudited interim consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (2) Subsequent Event In October 1995, Foothill Capital Corporation conditionally approved a $20 million revolving line of credit. The financing is expected to be concluded on or before November 17, 1995. (3) Commitments and Contingencies On or about February 23, 1995, a purported shareholder of the Company served the Company with a complaint filed on January 12, 1995 in the United Stated District Court for the Southern District of California against the Company and one of its executive officers. The complaint alleged that, during the period of July 1, 1993 through March 31, 1994, the defendants omitted material information about the Company and misrepresented information relating to the growth of the Company in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks to proceed as a class action on behalf of certain persons who purchased shares of the Company's Common Stock during the period July 1, 1993 through March 31, 1994 and who were allegedly damaged. The complaint seeks compensatory damages in an unspecified amount and costs and expenses relating to the complaint, including reasonable attorney's fees. The Company believes these claims are meritless and is vigorously defending this action. The Company is not a party to any other legal proceeding which, in its belief, could have a material adverse effect on the Company. (4) Business Combinations On September 15, 1995, the Company acquired the assets of Home Pharmacy from ArcVentures, Inc. The acquisition is accounted for as a purchase. Consistent with its treatment of prior acquisitions, the Company has included the operations of the acquired business for the entire year to date in its operating statements for the nine months ended September 30, 1995 with a single line item to subtract the profit of the acquired business for periods prior to acquisition. The effect of this consolidation of operations prior to acquisition was to increase net sales for the nine months ended September 30, 1995 by approximately $30,629,000. The pre-acquisition gain of $982,000 has been deducted to the consolidated statements of operations for the nine months ended September 30, 1995. The purchase price paid for the assets was as follows: Purchase Price: Cash paid .......................................... $ 8,000,000 Promissory notes payable ........................... 2,500,000 ----------- 10,500,000 Cost of acquisition incurred ....................... 1,587,000 ----------- $12,087,000 =========== The acquisition was accounted for as a purchase whereby the assets acquired were recorded at their fair market value. The excess of cost over the net identifiable assets acquired is reflected as goodwill and is being amortized over 25 years under the straight-line method. The allocation of the purchase price was as follows: Inventory .............................................. $ 500,000 Property & equipment ................................... 400,000 Customer contracts ..................................... 2,407,000 Covenant-not to compete ................................ 100,000 Goodwill ............................................... 8,680,000 ----------- $12,087,000 =========== (5) Special Item On September 15, 1995, the Company sold its building in San Diego, California, and realized a gain of $34,000. MEDI-MAIL, INC. CONSOLIDATED FINANCIAL REPORT DECEMBER 31, 1994 Contents INDEPENDENT AUDITOR'S REPORT - --------------------------------------------------------------- -------- CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets Consolidated statements of operations Consolidated statements of stockholders' equity Consolidated statements of cash flows Notes to consolidated financial statements - --------------------------------------------------------------- -------- INDEPENDENT AUDITOR'S REPORT ON THE SCHEDULE - --------------------------------------------------------------- -------- Valuation and qualifying accounts - Schedule II - --------------------------------------------------------------- -------- Independent Auditor's Report To the Board of Directors Medi-Mail, Inc. Las Vegas, Nevada We have audited the accompanying consolidated balance sheets of Medi-Mail, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Medi-Mail, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Las Vegas, Nevada March 24, 1995 MEDI-MAIL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1994 and 1993 1994 1993 ----------- ----------- ASSETS (Notes 10 and 15) Current Assets: Cash $ 1,711,000 $ 1,220,000 Accounts receivable, less allowance for doubtful accounts of $780,000 and $350,000 at December 31, 1994 and 1993 (Notes 3 and 6) 8,087,000 2,982,000 Inventories 1,334,000 1,692,000 Other current assets 104,000 453,000 ------------ ----------- Total current assets 11,236,000 6,347,000 Property and equipment, net (Note 4) 1,184,000 1,002,000 Intangible assets, net (Note 5) 9,308,000 5,406,000 Other assets 589,000 262,000 ----------- ----------- $22,317,000 $13,017,000 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Accounts payable (Notes 12 and 15) $ 6,545,000 $ 2,770,000 Accrued expenses 1,013,000 424,000 Current portion of long-term debt (Note 6) 2,258,000 1,843,000 ----------- ----------- Total current liabilities 9,816,000 5,037,000 ----------- ----------- Long-Term Debt (Note 6) 595,000 952,000 ----------- ----------- Commitments and Contingencies (Notes 10 and 13) Stockholders' Equity (Notes 9, 10 and 14) Preferred stock: $.01 par value, 2,000,000 shares authorized, 0 shares issued and outstanding - - Common stock, $.001 par value; 42,000,000 shares authorized, 23,797,747 and 19,624,647 issued and outstanding at December 31, 1994 and 1993 24,000 20,000 Additional paid-in capital 32,138,000 21,765,000 Accumulated deficit (20,256,000) (14,757,000) ----------- ----------- Total stockholders' equity 11,906,000 7,028,000 ----------- ----------- $22,317,000 $13,017,000 =========== =========== See Notes to Consolidated Financial Statements. MEDI-MAIL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1994, 1993 and 1992 1994 1993 1992 ----------- ----------- ----------- Sales (Notes 10 and 12) $67,985,000 $25,370,000 $10,590,000 Less sales discounts and allowances 122,000 146,000 297,000 ----------- ----------- ----------- Net sales 67,863,000 25,224,000 10,293,000 Cost of sales (Notes 10 and 12) 58,793,000 19,504,000 8,082,000 ----------- ----------- ----------- Gross profit 9,070,000 5,720,000 2,211,000 ----------- ----------- ----------- Selling, general and administrative expenses: Salaries and benefits 5,214,000 4,401,000 2,224,000 Marketing and advertising 1,296,000 962,000 487,000 Amortization of intangibles 2,098,000 3,994,000 99,000 Provision for doubtful accounts 706,000 290,000 100,000 Other administrative expenses 5,480,000 3,538,000 1,523,000 ----------- ----------- ----------- Total selling, general and administrative expenses 14,794,000 13,185,000 4,433,000 ----------- ----------- ----------- Operating loss (5,724,000) (7,465,000) (2,222,000) ----------- ----------- ----------- Other income (expense): Interest expense (310,000) (250,000) (115,000) Subsidiary operations for period not owned (Note 10) 517,000 - - 37,000 Write-down of building held for sale (Note 4) - - (313,000) - - Debt conversion expense (Note 6) (203,000) (224,000) - - Other, net 221,000 26,000 160,000 ----------- ----------- ----------- Total other income (expense) 225,000 (761,000) 82,000 ----------- ----------- ----------- Net loss $(5,499,000) $(8,226,000) $(2,140,000) =========== =========== =========== Net loss per common share $ (.26) $ (.49) $ (.24) =========== =========== ===========
See Notes to Consolidated Financial Statements. MEDI-MAIL, INC. AND SUBSIDIARES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1994, 1993 and 1992 Class B Notes Common Stock Common Stock Receivable Additional ------------------ ------------------ from Paid-In Accumulated Stockholders' Shares Amount Shares Amount Stockholder Capital Deficit Equity --------- ------ -------- ------- ----------- ---------- ------------ ------------- Balance at December 31, 1991 7,393,232 $7,400 845,548 $ 900 $(5,000) $6,768,000 $(4,391,000) $2,380,000 Conversion of Class B common stcok to common stock 684,047 700 (684,047) (700) - - - - - - - - Common stock issued in private placements 169,670 200 - - - - - - 509,000 - - 509,200 Exercise of warrants and options for common stock 869,477 800 - - - - - - 1,800,000 - - 1,800,800 Common stock issued to purchase Medi-Phar, Inc. assets 196,875 200 - - - - - - 1,013,000 - - 1,013,200 Common stock issued to purchase Medi-Claim, Inc., assets, net of registration costs 333,333 300 - - - - - - 518,000 - - 518,300 Repayment of stockholder note receivable - - - - - - - - 5,000 - - - - 5,000 Common stock issued in exchange for services and buyout of a commission agreement 52,550 100 - - - - - - 192,000 - - 192,100 Common stock issued in exchange for computer software and hardware 113,155 100 - - - - - - 379,000 - - 379,100 Employee stock bonus - - - - - - - - - - 260,000 - - 260,000 Other - - - - - - - - - - 71,000 - - 71,000 Stock issuance costs - - - - - - - - - - (175,000) - - (175,000) Net loss - - - - - - - - - - - - (2,140,000) (2,140,000) ---------- ------ -------- ------ -------- ----------- ----------- ----------- Balance at December 31, 1992 $9,812,339 $9,800 161,501 $ 200 $ - - $11,335,000 $(6,531,000) $4,814,000 ========== ====== ======== ====== ======== =========== =========== ==========
See Notes to Consolidated Financial Statements. MEDI-MAIL, INC. AND SUBSIDIARES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1994, 1993 and 1992 Class B Common Stock Common Stock Additional ------------------- ------------------ Paid-In Accumulated Stockholders' Shares Amount Shares Amount Capital Deficit Equity --------- ------ -------- ------- ----------- ----------- ------------ Balance at December 31, 1992 $ 9,812,339 $ 9,800 161,501 $ 200 $11,335,000 $ (6,531,000) $4,814,000 Conversion of Class B common stock to common stock 161,501 200 (161,501) (200) - - - - - - Exercise of warrants and options for common stock 571,469 600 - - - - 717,000 - - 717,600 Common stock issued in private placements 8,610,798 8,800 - - - - 8,251,000 - - 8,259,800 Stock issuance costs - - - - - - - - (296,000) - - (296,000) Common stock issued in exchange for services and buyout of a commission agreement 219,410 300 - - - - 787,000 - - 787,300 Common stock issued as a result of conversion of note payable to equity (Note 6) 249,130 300 - - - - 971,000 - - 971,300 Net loss - - - - - - - - - - (8,226,000) (8,226,000) ----------- ------- -------- ------ ----------- ------------ ---------- Balance at December 31, 1993 $19,624,647 $20,000 - - $ - - $21,765,000 $(14,757,000) $7,028,000 =========== ======= ======== ====== =========== ============ ==========
See Notes to Consolidated Financial Statements. MEDI-MAIL, INC. AND SUBSIDIARES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1994, 1993 and 1992 Common Stock Additional ----------------------- Paid-In Accumulated Stockholders' Shares Amount Capital Deficit Equity ----------- ------- ----------- ------------ ------------- Balance at December 31, 1992 $19,624,647 $20,000 $21,765,000 $(14,757,000) $ 7,028,000 Common stock issued in exchange for services, buyout of a commission agreement, termination of marketing partnerships and exercise of warrants and options 273,100 100 489,000 - - 489,100 Common stock issued in private placements 1,900,000 1,900 5,421,000 - - 5,422,900 Common stock issued in the acquisition of FPA (Note 10) 400,000 400 1,999,600 - - 2,000,000 Common stock issued in the acquisition of MedNet (Note 10) 1,600,000 1,600 2,698,400 - - 2,700,000 Stock issuance costs - - - - (235,000) - - (235,000) Net loss - - - - - - (5,499,000) (5,499,000) ----------- ------- ----------- ------------ ----------- Balance at December 31, 1994 $23,797,747 $24,000 $32,138,000 $(20,256,000) $11,906,000 =========== ======= =========== ============ ===========
See Notes to Consolidated Financial Statements. MEDI-MAIL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1994, 1993 and 1992 1994 1993 1992 ----------- ----------- ----------- Cash Flows from Operating Activities: Cash received from customers $62,758,000 $24,484,000 $10,087,000 Cash paid to suppliers (66,867,000) (24,513,000) (11,725,000) Interest paid (261,000) (232,000) (45,000) ----------- ----------- ----------- Net cash used in operating activities (4,370,000) (261,000) (1,683,000) ----------- ----------- ----------- Cash Flows from Investing Activities: Purchases of property and equipment (384,000) (235,000) (239,000) Payment for purchase of Mail-Rx, net of cash acquired - - (7,582,000) - - Purchases of intangible assets (198,000) - - (82,000) Sale (purchase) of short-term investment - - 885,000 (885,000) Costs of acquisitions (Note 10) (137,000) - - - - ----------- ----------- ----------- Net cash used in investing activities (719,000) (6,932,000) (1,206,000) ----------- ----------- ----------- Cash Flows from Financing Activities: Proceeds from borrowings 8,000 5,000 56,000 Repayment of borrowings (742,000) (911,000) (82,000) Proceeds from issuance of warrants and options 288,000 718,000 5,000 Proceeds from issuance of common stock 5,423,000 7,763,000 2,257,000 Stock issuance costs (235,000) - - - - Cash acquired in acquisitions (Note 10) 838,000 - - - - ----------- ----------- ----------- Net cash provided by financing activities 5,580,000 7,575,000 2,236,000 ----------- ----------- ----------- Net increase (decrease) in cash 491,000 382,000 (653,000) Cash balance, beginning 1,220,000 838,000 1,491,000 ----------- ----------- ----------- Cash balance, ending $ 1,711,000 $ 1,220,000 $ 838,000 =========== =========== ===========
See Notes to Consolidated Financial Statements. MEDI-MAIL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1994, 1993 and 1992 1994 1993 1992 ----------- ----------- ----------- Reconciliation of Net Loss to Net Cash Used In Operating Activities: Net loss $(5,499,000) $(8,226,000) $(2,140,000) Depreciation and amortization 2,395,000 4,354,000 325,000 Provision for losses on accounts receivable 706,000 290,000 100,000 Write-down of building held for sale - - 313,000 - - Expenses paid by issuance of common stock 31,000 1,052,000 121,000 Change in assets and liabilities, net of effects of business combinations: (Increase) in accounts receivable (2,043,000) (1,090,000) (435,000) (Increase) decrease in inventories 461,000 (368,000) (82,000) (Increase) decrease in other current assets 356,000 105,000 (292,000) (Increase) decrease in other assets (122,000) 164,000 108,000 Increase (decrease) in accounts payable (1,113,000) 2,972,000 517,000 Increase in accrued expenses 458,000 173,000 95,000 ----------- ----------- ----------- Net cash used in operating activities $(4,370,000) $ (261,000) $(1,683,000) =========== =========== =========== Supplemental schedule of noncash investing and financing activities: Common stock issuances: Purchase of assets at Mail-Rx $ - - $ 201,000 $ - - Conversion of note payable to equity - - 971,000 - - Purchase of assets of Medi-Phar, Inc. and Medi-Claim, Inc. - - - - 1,531,000 Purchase of common stock of FPA 2,000,000 - - - - Purchase of assets of MedNet 2,700,000 - - - - Termination of marketing partnerships 166,000 - - - - Purchase of equipment and in exchange for prepaid inventory - - - - 379,000 Services and commissions - - 787,000 192,000 Accounts payable converted to notes payable - - 2,846,000 - - Notes payable issued to purchase assets of Medi-Phar, Inc. - - - - 827,000 Liabilities assumed in acquisitions 5,811,000 - - - -
See Notes to Consolidated Financial Statements. MEDI-MAIL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business and Significant Accounting Policies Nature of business - ------------------ Medi-Mail, Inc. and Subsidiaries ("Medi-Mail" or the "Company") is in the prescription benefits management industry. The Company acts as an integrated, full service prescription drug benefits manager serving individual members of retirement organizations, fraternal organizations, state employee organizations, commercial organizations, corporations, self-insurance trusts, insurance companies, and other benefit plan sponsors throughout the United States. A summary of the Company's significant accounting policies follows: Principles of consolidation - --------------------------- The accompanying consolidated financial statements include the accounts of Medi-Mail, Inc. and its wholly-owned subsidiaries, Medi-Claim, Inc. ("Medi-Claim"), Medi-Phar, Inc. ("Medi-Phar"), and Family Pharmaceuticals of America, Inc. ("FPA"). All significant intercompany transactions have been eliminated in consolidation. In the past, the Company has elected to consolidate the operations of certain acquired businesses retroactively to the beginning of the year of acquisition and subtract the preacquisition net income or add the preacquisition net loss of the acquired business for the period prior to acquisition from/to the consolidated statement of operations. Beginning in 1994, the Company has elected to account for all business acquisitions in this manner. Inventories - ----------- Inventories, consisting primarily of prescription drugs, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and equipment - ---------------------- Property and equipment are stated at cost, net of depreciation and amortization. Depreciation and amortization is computed primarily on the straight-line method over the following estimated useful lives: Years ----- Furniture and fixtures 5 Office equipment 5 Software 3 Leasehold improvements are amortized over the lesser of the lease term or the estimated useful life of the improvement. Intangible assets - ----------------- Intangible assets include the following assets amortized over their estimated useful lives as follows: Years ----- Goodwill 25 years Tradename 25 years Customer contracts Length of contracts (primarily 1 year) Non-compete agreements Length of agreements (primarily 3 years) Customer lists and other 8 months - 3 years On an annual basis, the Company reviews the recoverability of intangible assets. The measurement of possible impairment is based primarily on the Company's ability to recover the carrying value of intangible assets from estimated future operating cash flows on an undiscounted basis. In management's opinion, no such impairment exists at December 31, 1994. Income taxes - ------------ Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment. Net loss per common share - ------------------------- Net loss per common share is based on the weighted average number of shares of common stock outstanding of 21,352,923, 16,675,420 and 8,929,476 during 1994, 1993 and 1992, respectively. The Company has common stock equivalents consisting of stock options and warrants. The common stock equivalents are antidilutive and therefore, are not included in the computation of net loss per common share. 2. Results of Operations and Capital Resources The Company incurred net losses of $5,499,000, $8,226,000 and $2,140,000 for the years ended December 31, 1994, 1993 and 1992, respectively. The Company believes that its mail service sales volume and revenues will continue to increase as a result of continuing marketing efforts and contracts negotiated during 1993 and 1994, as well as new contracts signed in 1995 that will increase revenues beginning in the second quarter of 1995. As a result of the low margins inherent in the mail service pharmacy industry, the Company is dependent upon increasing its mail service sales volume in order to achieve profitability and to meet its long-term liquidity needs. Accordingly, the Company is exploring business and asset acquisitions in an effort to increase the Company's revenues, increase efficiency and achieve profitability and intends to conserve working capital through the use of Common Shares as consideration in acquisitions of assets or other businesses whenever possible. Although the Company expects that its existing contact base and new contracts signed in 1995 will be sufficient to provide positive cash flow from operations in 1995, the Company may require additional capital from outside sources (such as equity offerings) to supplement its working capital position. The Company continues to discuss potential sources of equity capital with investment bankers and believes it will obtain additional working capital from these sources if necessary. 3. Accounts Receivable 1994 1993 ---------- ---------- Trade receivables $6,357,000 $3,332,000 Rebate receivables 2,510,000 - - ---------- ---------- 8,867,000 3,332,000 Less allowance for doubtful accounts 780,000 350,000 ---------- ---------- $8,087,000 $2,982,000 ========== ========== 4. Property and Equipment 1994 1993 ---------- ---------- Furniture and fixtures $ 565,000 $ 460,000 Office equipment 739,000 566,000 Software 1,234,000 540,000 Leasehold improvements 123,000 109,000 ---------- ---------- 2,661,000 1,675,000 Less accumulated depreciation and amortization 1,477,000 673,000 ---------- ---------- $1,184,000 $1,002,000 ========== ========== During the second quarter ended June 30, 1993, the Company reclassified an office building located in San Diego, California to property held for sale. As a result of management's intention to sell the building, the Company recorded a provision for estimated losses on the sale of the building of $313,000 for the year ended December 31, 1993. 5. Intangible Assets Intangible assets arose from the Company's purchase of substantially all of the assets of Medical Service Agency, Inc. and GBK, Inc. on November 16, 1994 and April 30, 1993, respectively, the Company's purchase of all of the outstanding common stock of Family Pharmaceuticals of America, Inc. on June 30, 1994, and purchases by Medi-Phar and Medi-Claim during 1992. See Note 10 regarding these business combinations. Intangible assets consist of the following at December 31: 1994 1993 ----------- ----------- Goodwill $ 5,900,000 $ 4,254,000 Customer contracts 5,494,000 3,025,000 Non-compete agreements 722,000 518,000 Customer list, tradename and other 2,829,000 1,702,000 ----------- ----------- 14,945,000 9,499,000 Less accumulated amortization 5,637,000 4,093,000 ----------- ----------- Intangible assets, net $ 9,308,000 $ 5,406,000 =========== =========== 6. Long-Term Debt and Notes Payable 1994 1993 ---------- ---------- Notes payable to a supplier, bearing interest at 8-1/2% and 5%, principal and interest of $155,000 payable monthly, maturing February 1, 1995. The notes are secured by accounts receivable $1,627,000 $2,325,000 Unsecured notes payable to a supplier bearing interest at 9%, payable semi-annually. Annual principal payments of $118,750, $218,750 and $218,750 payable on August 30, 1995, 1996, and 1997, respectively. 556,000 - - Note payable secured by first trust deed on building. Interest payable monthly at 10%, maturing October 11, 1995. 400,000 400,000 Unsecured note payable to related party bearing interest at 7.5%, annual principal payments of $78,550 plus accrued interest commencing April 1, 1995 and continuing through April 1, 1997 236,000 - - Other 34,000 70,000 ---------- ---------- 2,853,000 2,795,000 Less current portion 2,258,000 1,843,000 ---------- ---------- $ 595,000 $ 952,000 ========== ========== Long-term debt as of December 31, 1994 matures in the amount of $2,258,000 in 1995, $298,000 in 1996 and $297,000 in 1997. During 1994, the Company became delinquent on its payments under the notes to a supplier. Subsequent to December 31, 1994, the Company received a demand notice on all amounts due to the supplier. The Company and supplier have subsequently agreed to how the supplier will be paid in 1995. All amounts owed to the supplier have been classified with the current portion of long-term debt at December 31, 1994. During May 1993, the Company entered into an agreement with the former owners of the retail pharmacies purchased during 1992 to convert the outstanding balance of a convertible note payable into shares of the Company's common stock. The original conversion terms of the note had provided that the note holders, at their option, could convert the outstanding balance of the note into common stock of the Company at a price of $5.00 per share. The agreement reached in 1993 provided for the issuance of 249,130 shares having a market value at the time of $561,000 in satisfaction of the $747,000 balance of the note payable. In addition, the Company agreed that until such time as the shares issued on conversion were registered, the Company would continue to make principal and interest payments to the note holders, in accordance with the original terms of the note. Generally accepted accounting principles as prescribed in Statement of Financial Accounting Standards No. 84 "Induced Conversions of Convertible Debt" ("SFAS 84") requires recognition of an expense equal to the fair value of the additional securities or other consideration issued upon conversion. SFAS 84 is applicable to such transactions regardless of whether, as was the fact here, the total value of the securities issued on conversion was less than the balance of the debt. As a result of the transaction and the application of SFAS 84, the Company recorded debt conversion expense of $224,000 for the year ended December 31, 1993. The Company continued to make principal and interest payments on the note until the shares were registered on January 5, 1995. $203,000 was recorded as additional debt conversion expense for the year ended December 31, 1994 related to these payments. 7. Income Taxes The Company has federal net operating loss carryforwards of approximately $13,950,000 which are available to offset to future taxable earnings of the Company and expire at varying times through 2009. There are also state net operating loss carryforwards of lesser amounts which expire at varying times through 2009. No benefit for these loss carryforwards has been recognized in the financial statements. The federal loss carryforwards as of December 31, 1994 have the following expiration dates: Expiration Date Amount --------------- ---------- 2002 $ 298,000 2003 664,000 2004 1,039,000 2005 1,189,000 2006 567,000 2007 2,994,000 2008 3,912,000 2009 3,287,000 ----------- $13,950,000 =========== Section 382 of the Internal Revenue Code of 1986 and the related regulations impose certain limitations on a corporation's ability to use net operating loss carryforwards if more than a 50% ownership change occurs. State laws generally conform to the provisions of Section 382. As a result of stock issuances during 1994 and 1993, it is possible that the Company had an ownership change of more than 50%; therefore, the Company's ability to utilize the net operating loss carryforwards may be substantially restricted. Deferred tax assets are summarized as follows: 1994 1993 ---------- ---------- Net operating loss carryforwards $5,333,000 $3,832,000 Amortization of intangibles 1,901,000 1,503,000 Reserve on building held for sale 133,000 133,000 Bad debts 286,000 126,000 Depreciation 64,000 34,000 ---------- ---------- 7,717,000 5,628,000 Less valuation allowance 7,717,000 5,628,000 ---------- ---------- $ - - $ - - ========== ========== Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires that a valuation allowance be recorded "when it is more likely than not" that any portion or all of a deferred tax asset will not be realized. Due to the inherent uncertainty in forecasts of future events and operating results, the Company has provided for a valuation allowance in an amount equal to gross deferred tax assets resulting in net deferred tax assets of $0 at December 31, 1994. No income tax benefit has been recorded in the consolidated statement of operations due to the valuation allowances on the deferred tax assets. The net change in the valuation allowance from 1993 to 1994 of $2,089,000 is due primarily to the 1994 net operating loss and the difference in amortization periods for intangible assets for book and tax purposes. 8. Stock Transactions During the years ended December 31, 1993 and 1992, Class B common stock totaling 161,501 shares and 684,047 shares, respectively, were converted into common stock pursuant to specified terms. At December 31, 1993, all Class B common stock had been converted into the Company's common stock. In February 1992, a second closing of a private placement conducted in 1991 resulted in the Company issuing an additional 169,670 units, each consisting of one share of common stock and one warrant to purchase an additional share for $5.57 for $509,000. The warrants expire in November 1996. The investment banker who assisted in this private placement is entitled to purchase 58,167 units for $5.57 per unit until November 12, 1996. During 1992, the Company issued 196,875 shares of common stock valued at $1,013,200 related to the purchase of seven retail pharmacies. The Company also issued 333,333 shares of common stock valued at $518,300 related to the purchase of a claims processing business (Note 10). During 1993, the Company raised approximately $8,260,000 from several private placements, the proceeds of which were used to consummate the purchase of assets from GBK, Inc. The Company issued 8,610,798 shares of common stock as a result of the private placements, including 1,500,000 of the shares sold to a director of the Company in a separate private placement. In conjunction with the conversion of a note payable to shares of the Company's common stock (Note 6) during 1993, the Company issued 249,130 shares. During 1992 the Company issued 16,600 shares of common stock valued at $92,000 to the Company's former attorneys in exchange for legal services. During September 1993, the Company renegotiated the President's employment agreement. In connection therewith, the Company issued 150,000 shares of common stock to the President with a value of $666,000. This amount was recorded as compensation expense along with $100,000 paid to the President. In addition, the Company issued to the President options to purchase 500,000 shares of the Company's stock at an option price of $4.50 per share. These options were issued outside of the Company's Incentive Stock Option Plan ("ISOP") and Non-Qualifying Stock Option Plan ("NQSOP") and expire September 11, 1998. This renegotiated agreement eliminated the President's right to a severance arrangement with a specified value of $2,000,000 to be paid in cash and common stock. During each of the three years ended December 31, 1994, 1993, and 1992, the Company issued 13,333 shares of common stock in connection with the Company's buy-out of a commission agreement. During 1993, the Company issued 13,000 shares of stock valued at $30,000 in lieu of rental payments and 39,001 shares of stock valued at $88,000 to officers and directors of the Company for services rendered. In January 1992, the Company executed a settlement agreement with a former officer, director and employee of the Company. Pursuant to the terms of the settlement agreement, the Company received $71,000 from the sale of approximately 12,000 shares of the Company's common stock. During 1992, the Company transferred 88,736 shares of Class B common stock to the President of the Company in connection with his employment agreement. The value of the stock on the date of transfer, $260,000, was recorded as compensation expense. During 1994, the Company raised approximately $5,423,000 from several private placements, the proceeds of which were used for general operating purposes. The Company issued 1,900,000 shares of common stock as a result of the private placements. During 1994, the Company issued 400,000 shares of common stock valued at $2,000,000 in connection with the purchase of FPA. Also during 1994, the Company issued 1,600,000 shares of common stock valued at $2,700,000 in connection with its purchase of substantially all of the assets of Medical Service Agency, Inc. See Note 9. During each of the three years ended December 31, 1994, 1993, and 1992, the Company issued shares of common stock upon the exercise of various warrants and options for common stock. See Note 9 for a summary of common stock option activity. The following is a summary of warrant activity for each of the three years ended December 31, 1994, 1993, and 1992: Exercise Warrants Price Expiration --------- ----------- ----------------------- Outstanding at December 31, 1991 4,292,000 $1.14-$5.57 June 1993-May 1996 Issued in private placement 187,000 $5.57 November 1996 Issued in services 50,000 $4.50 January 1994 Exercised (675,000) $1.14-$4.00 - - --------- ----------- ----------------------- Outstanding at December 31, 1992 3,854,000 $1.14-$5.57 June 1993-Nov. 1996 Issued in a Regulation "S" placement 110,000 $2.50 April 30, 1994 Exercised (299,000) $1.14-$4.00 - - Expired (750,000) $4.00 - - --------- ----------- ----------------------- Outstanding at December 31, 1993 2,915,000 $1.14-$5.57 March 1994-Nov. 1996 Issued in a Regulation "S" placement 100,000 $2.44 March 1999 Issued for services 1,890,000 $3.00 June 1997-May 1999 Exercised (166,000) $1.31-$2.44 - - Expired (1,800,000) $4.50 - - --------- ----------- ----------------------- Outstanding at December 31, 1994 2,939,000 $1.14-$5.57 January 1995-March 1999 ========= =========== ======================= All outstanding warrants are exercisable as of December 31, 1994. 9. Stock Option Plans In March 1988, the Company adopted an Incentive Stock Option Plan (ISOP) which was approved by the stockholders of the Company. The ISOP provides for the grant of options for common stock to officers, employee-directors and key employees at an exercise price equal to the fair market value of the stock on the date of the grant. Options generally become exercisable one year from the date of the grant and remain exercisable for four years or until three months after termination of the relationship with the Company other than upon death or disability. There are no charges to operations made in connection with the ISOP. Additionally, the Company has a Non-Qualifying Stock Option Plan (NQSOP). At the January 17, 1992 annual meeting, stockholders approved instituting a formula pursuant to which each non-employee director receives an automatic grant of 20,000 shares of common stock upon completion of one year of service to the Company. The options cannot be exercised until they are held a year and cannot be exercised after ten years from the date of grant. All non-qualified stock options have been issued with exercise prices equal to or exceeding fair market value, thus no compensation expense has been recorded related to the NQSOP. An additional amendment to the NQSOP was approved by the stockholders of the Company at the June 16, 1993 annual meeting. That amendment provides that eligible directors may be granted an option to purchase 60,000 common shares upon appointment as a director, 20,000 shares of which shall vest at each of the next three successive meetings following a complete year of service. The period for which the director's service shall be calculated runs from the date of each of the Company's annual shareholders meetings, or if elected as a Board member between annual shareholders meetings, the period is from the date of appointment until the next annual meeting following a complete year of service. The following is a summary of option activity for each of the three years ended December 31, 1994, 1993 and 1992: Options Available For Grant ISOP NQSOP Option Price --------- -------- -------- ------------- Outstanding at December 31, 1991 $ - - $302,500 $315,000 $.77 - $1.73 Additional shares reserved 600,000 - - - - - - Granted (299,500) 173,500 126,000 $2.95 Exercised - - (94,550) (100,000) $.77-$1.73 -------- -------- -------- ------------ Outstanding at December 31, 1992 300,500 381,450 341,000 $.77-$2.95 Additional shares reserved 800,000 - - - - - - Granted (553,000) 93,000 460,000 $1.75-$2.77 Canceled 219,000 (119,000) (100,000) $1.75-$2.00 Exercised - - (152,625) (120,000) $.77-$1.19 -------- -------- -------- ------------ Outstanding at December 31, 1993 766,500 202,825 581,000 $.77-$2.95 Granted (483,500) 183,500 300,000 $2.29-$3.81 Canceled 25,000 (5,000) (20,000) $1.19-$1.91 Exercised - - (33,325) - - $.77-$1.19 ------- -------- -------- ------------ Outstanding at December 31, 1994 668,000 348,000 861,000 $.77-$3.81 ======= ======== ======== ============ At December 31, 1994, 724,500 stock options are exercisable. In addition to the above stock option plans, the Company has the following stock options, issued outside of the plans, outstanding as of December 31, 1994: Option Options Price Expiration ------- ------ -------------- Issued in 1993 500,000 $4.50 September 1998 Issued in 1994 50,000 $2.85 June 1999 Issued in 1994 150,000 $3.00 June 1997 ------- Outstanding at December 31, 1994 700,000 ======= 10. Business Combinations On November 19, 1994, the Company acquired substantially all of the assets of Medical Service Agency, Inc., a Pennsylvania corporation d/b/a MedNet ("MedNet"), a privately-owned prescription benefits claims processing company. The cost of the acquisition is as follows: Purchase price: Liabilities assumed $5,710,000 Issuance of 1,600,000 restricted shares of common stock 2,700,000 ---------- $8,410,000 Costs of acquisition incurred 33,000 ---------- $8,443,000 ========== The acquisition was accounted for as a purchase, whereby the assets acquired were recorded at their fair market value. The excess of cost over net identifiable assets acquired is reflected as goodwill and is being amortized over twenty-five years under the straight-line method. The allocation of the purchase price was as follows: Cash $ 836,000 Accounts receivable, net of allowance for doubtful accounts 3,627,000 Other current assets 205,000 Property and equipment 91,000 Customer contracts 1,616,000 Customer list 320,000 Non-compete agreement 134,000 Tradename 750,000 Goodwill 864,000 ---------- $8,443,000 ========== The assets acquired and liabilities assumed were transferred to the Company's wholly-owned subsidiary, Medi-Claim, concurrent with the acquisition. The restricted shares of common stock issued in the acquisition carry registration rights allowing the holders of such shares, upon the demand by holders representing at least 49% of said shares, to cause the shares to be registered during the period January 1, 1996 to January 1, 1997, if the shares have not been previously registered. In connection with the acquisition, the Company acquired an option to purchase all of the then existing assets, subject to the trade liabilities of Managed Care Rx Corporation, a Pennsylvania corporation ("Managed Care"). The former majority owner of MedNet, a current officer of the Company is the majority owner of Managed Care. The purchase price is defined in the option agreement as the annualized gross sales of Managed Care for the three months immediately preceding the exercise of the option. The option expires upon the earlier of the termination of the offer or 10 days after an independent, third-party offer to purchase Managed Care is tendered. The Company has elected to consolidate the operations of MedNet retroactively to January 1, 1994; therefore, the preacquisition loss of $577,000 has been added to the consolidated statement of operations for the year ended December 31, 1994. The effect of this consolidation of operations prior to acquisition was to increase net sales by approximately $17,835,000. On June 30, 1994 the Company acquired all of the outstanding common stock of Family Pharmaceuticals of America, Inc. (FPA), a South Carolina corporation. FPA was a privately-owned mail-order pharmacy. The cost of the acquisition is as follows: Purchase price: Issuance of 400,000 restricted shares of common stock $2,000,000 Liabilities assumed 101,000 Cash paid 57,000 ---------- $2,158,000 Costs of acquisition incurred 46,000 ---------- $2,204,000 ========== The acquisition was accounted for as a purchase, whereby the assets acquired were recorded at their fair market value. The excess of cost over net identifiable assets acquired is reflected as goodwill and is being amortized over twenty-five years under the straight-line method. The allocation of the purchase price was as follows: Cash $ 2,000 Accounts receivable, net of allowance for doubtful accounts 140,000 Inventory 103,000 Other current assets 7,000 Property and equipment 7,000 Customer contracts 853,000 Customer list 169,000 Non-compete agreements 71,000 Tradename 70,000 Goodwill 782,000 ---------- $2,204,000 ========== The Company's restricted common stock issued to effect this acquisition was subsequently registered with the Securities and Exchange Commission in a registration statement filing effective January 5, 1995. In the event the selling shareholders of FPA, sell, between January 1, 1995 and March 10, 1995, for less than $5.00 per common share, their common shares of the Company acquired in the acquisition, the FPA acquisition agreement requires the Company to pay to the selling shareholders, in cash, the difference between $5.00 per common share and the price per share realized (shortfall), for each share sold during the stated period. Subsequent to December 31, 1994, the Company was notified that it will be required to pay approximately $828,000 to the selling FPA shareholders as a result of these sales of the Company's stock. As of December 31, 1994, the Company has not recorded a liability for this shortfall. The Company expects to record a decrease to additional paid-in capital of approximately $828,000 during 1995 as a result of making the shortfall payments. The shortfall payments are secured by substantially all of the assets and all of the outstanding common stock of FPA. The Company has elected to consolidate the operations of FPA retroactively to January 1, 1994; therefore, the preacquisition net income of $60,000 has been deducted from the consolidated statement of operations for the year ended December 31, 1994. The effect of this consolidation of operations prior to acquisition was to increase net sales by approximately $1,031,000. On April 30, 1993, the Company acquired substantially all of the assets of GBK, Inc., a Maryland corporation d/b/a Mail-Rx ("Mail Rx"), a privately-owned mail-order pharmacy. The aggregate purchase price of $10,250,000 was comprised of cash payments totaling $6,600,000 (moneys raised from the net proceeds of several private placements), the execution of a note payable for $1,500,000, assumed liabilities of $1,949,000, and the issuance of 201,052 shares of the Company's common stock valued at approximately $201,000. The $1,500,000 promissory note payable to the seller was paid in full within 30 days of the closing. The $1,500,000 was also obtained from the proceeds of the private placements. The acquisition was accounted for as a purchase, whereby the assets acquired were recorded at their fair market value. The excess of cost over net identifiable assets acquired is reflected as goodwill and is being amortized over twenty-five years using the straight-line method. The allocation of the purchase price was as follows: Cash and short-term investments $ 518,000 Accounts receivable, net of allowance for doubtful accounts 1,471,000 Inventories 414,000 Other current assets 26,000 Fixed assets, including software 911,000 Other long-term assets 14,000 Non-compete agreement 250,000 Tradename 250,000 Customer list 600,000 Custom contracts 3,025,000 Goodwill 2,771,000 ----------- Total $10,250,000 =========== On January 31, 1992, the Company's wholly-owned subsidiary, Medi-Phar, acquired substantially all of the assets of four retail pharmacies. On July 2, 1992, Medi-Phar exercised its option to acquire the assets of three additional pharmacies. The purchase price for all seven pharmacies was $1,840,000 which was satisfied through the issuance of 196,875 shares of the Company's common stock valued at $1,013,000 and promissory notes aggregating $827,000. Of the 196,875 shares issued, 47,750 are restricted and unregistered. In the event the value of the shares is less that $4.00 per share when the restrictions lapse, the Company has the obligation to issue up to 44,000 additional shares. The acquisition was accounted for as a purchase and as a result the Company recorded $1,179,000 in goodwill and $268,000 in other intangibles. The Company has elected to consolidate the operations of the pharmacies retroactively to January 1, 1992; therefore, the preacquisition loss of $37,000 has been added to the consolidated statement of operations for the year ended December 31, 1992. In December 1992, the Company's wholly-owned subsidiary, Medi-Claim purchased substantially all of the assets of the pharmacy division of a business. The aggregate purchase price was $572,000. Medi-Claim issued 35,000 shares of registered common stock and 298,333 shares of unregistered common stock of Medi-Mail, Inc. valued at $518,000 to consummate the purchase. Unaudited pro forma results of operations of the Company, assuming the MedNet, FPA and Mail Rx acquisitions occurred on January 1, 1993, are presented below. Adjustments are made to reflect the accounting bases recognized in recording the combination. These adjustments consist principally of amortization of assets, including goodwill, of $1,134,000 and $2,839,000 for the years ended December 31, 1994 and 1993, respectively. Additionally, loss per share has been adjusted to reflect the stock issued in each acquisition as outstanding on January 1, 1993. Years Ended December 31, -------------------------- 1994 1993 ----------- ----------- Net sales $67,863,000 $61,236,000 =========== =========== Net loss $(6,117,000) $(8,234,000) =========== =========== Net loss per common share $ (0.27) $ (0.39) =========== =========== Weighted average shares outstanding $22,955,115 $21,005,378 =========== =========== Pro forma information does not purport to be indicative of the results that actually would have been obtained if the combined operations had been conducted during the periods presented and is not intended to be projection of future results. 11. Marketing Partnerships During 1990 and 1991 the Company organized two limited partnerships in order to raise funds to telemarket its mail order pharmacy to new customers. The Company was the general partner of and had a 1% ownership interest in the partnerships. On December 31, 1994 the partnerships were terminated and the assets of the partnerships, primarily customer lists, were transferred to the Company. In consideration for the customer lists the Company issued 110,771 shares of common stock, valued at $166,000, to the former limited partners. No gain or loss was recorded by the Company upon the termination of the partnerships. 12. Claims Processing Revenues On April 1, 1994, Medi-Claim assumed the obligation for payments to members of Medi-Claim's pharmacy network. Prior to April 1, 1994, Medi-Claim was only obligated to the extent payment was received from the sponsoring organization. This step was taken to standardize Medi-Claim's procedures with trends in the industry. As a result of this change, subsequent to April 1, 1994 the Company presents the sales and cost of sales as well as the related accounts receivable and accounts payable in its consolidated financial statements for prescriptions filled at participating network pharmacies by insureds covered under pharmacy plans offered by Medi-Claim's clients, the sponsoring organizations. Such sales and cost of sales included in the Company's consolidated statement of operations for the year ended December 31, 1994 are approximately $16,119,000 and $16,119,000, respectively. 13. Commitments and Contingencies The Company leases certain facilities under non-cancelable operating leases with terms ranging from two to six years. Rental expense under these leases amounted to $432,000, $466,000 and $318,000 in 1994, 1993 and 1992, respectively. As of December 31, 1994, future minimum lease payments are as follows: 1995 $ 428,000 1996 366,000 1997 231,000 1998 131,000 1999 59,000 ---------- $1,215,000 ========== The Company has entered into an employment agreement ("Agreement") with its President through April 1998 with additional one-year extensions. The Agreement stipulates the annual salary and bonus to be paid to the President. The bonus is payable in cash and options and is calculated on the increase in consolidated gross sales or as a percentage of pretax profits. On or about February 23, 1995, the Company was served with a complaint against the Company and one of its executive officers. The complaint alleges that, the defendants omitted material information about the Company and misrepresented information relating to the growth of the Company. The complaint seeks to proceed as a class action on behalf of certain persons who purchased shares of the Company's common stock during the period July 1, 1993 through March 31, 1994 and who were allegedly damaged. The Company believes that the complaint is without merit. If the plaintiff succeeds on his own behalf, the financial impact to the Company is not expected to be material. The complaint has not been certified as a class action. In addition, the Company is party to various claims and lawsuits in the normal course of business. These matters are expected to be resolved with no material impact on the Company's financial condition, liquidity or operations. 14. Warrants Issued for Marketing Services In June 1991, the Company entered into a Consulting Agreement ("Agreement") with a marketing consultant ("Consultant") pursuant to which it agreed to issue warrants to purchase up to 2,000,000 common shares at $3.00 per share. Warrants with respect to 250,000 shares were vested immediately upon signing of the Agreement and issuance of the warrants. Pursuant to the terms of the Agreement, the balance of the warrants were to vest upon the Company signing contracts with third party payors through the efforts of the Consultant. The contracts, as amended, are required to have annual projected gross revenues of $5,000,000 (to vest 500,000 shares), additional projected gross sales of $5,000,000 for an aggregate of $10,000,0000 (to vest an additional 250,000 shares) and additional projected gross sales of $20,000,000 for an aggregate of $30,000,000 (to vest the remaining 1,000,0000 shares). Vesting was initially required to occur by the end of May 1992, which was subsequently extended to the end of May 1993 and then May 1994. In addition, the Agreement provided that the Company pay to the Consultant a 1% commission on gross sales from contracts facilitated by the Consultant. On February 15, 1993, the Company vested 500,000 of the warrants pursuant to the Agreement. On July 20, 1993, the Company's Board of Directors modified the terms of the original agreement to provide for early vesting of the remaining 1,250,000 warrants for various reasons, including anticipation of the imminent receipt of future contracts. Generally accepted accounting principles requires the Company to recognize an increase in additional paid-in capital as well as a charge to operations at the time the warrants are vested if the price of the Company's stock exceeded the $3.00 exercise price of the warrants. As the market values of the common stock on February 15, 1993 and July 20, 1993 were less than the warrant exercise price, the Company did not record a charge to operations in its unaudited quarterly financial statements for the periods ended March 31, 1993, June 30, 1993 and September 30, 1993. Subsequent to December 31, 1993, the Company engaged a valuation firm to value the anticipated revenues from the related contracts. Pursuant to such valuation, it was determined that the Company was not obligated to vest any of the warrants during the year ended December 31, 1993. Furthermore, the Company received, in February, 1994, a request from the Consultant that the 1,750,000 warrants vested during 1993 be divested. Accordingly, the Company complied with the request and on March 29, 1994 the 1,750,000 warrants were divested. Subsequent to the divesture, the Company caused 750,000 warrants to vest, for a net total of 1,000,000 warrants vested under the agreement. The agreement was allowed to expire in May 1994. Because there was no charge against operations related to the vesting of the warrants, the subsequent divesting of the warrants had no effect on the Company's 1993 or 1994 operating results or financial position as of December 31, 1993. On April 27, 1994, the Company entered into a second Consulting Agreement with the Consultant and a group of associated individuals (one of which is a director of the Company) (the "Consultants") to retain the services of the Consultants in obtaining contacts with potential accounts for managed prescription care services. Pursuant to the agreement with the Consultants, the Company issued 1,000,000 five-year warrants to purchase the Company's common stock at $3.00 per share. The warrants vested upon issuance and expire in June 1999. The exercise price of the warrants exceeded the market price of the Company's common stock on the date of the agreement. The Consultants may earn additional three-year warrants in the future based upon purchases by new customers introduced by the Consultants if total sales from these customers exceeds $50,000,000 in any twelve month period. The exercise price of the three-year warrants shall exceed the market price of the Company's common stock on the date of issurance by $0.17 per share. The Company will also pay the Consultants commissions on gross collected billings from sales generated to these customers. 15. Subsequent Events On January 20, 1995, the Company entered into an agreement with a supplier converting trade accounts payable of $1,092,023 to a note payable. The note is due on demand, or if no demand is made, in monthly installments of $23,472, including interest, maturing February 20, 2000. The note bears interest at a bank's prime rate plus 2%. The note and any other existing or future amounts owed to the supplier are secured by substantially all assets of the Company. Note 16. Major Customer Net sales for the year ended December 31, 1994 include sales to a customer which accounted for approximately 13% of total net sales. INDEPENDENT AUDITOR'S REPORT ON THE SCHEDULE To the Board of Directors Medi-Mail, Inc. Las Vegas, Nevada Our audit of the financial statements of Medi-Mail, Inc. and subsidiaries included schedule II contained herein, for each of the three years in the period ended December 31, 1994. In our opinion, the schedule presents fairly the information required to be set forth therein in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Las Vegas, Nevada March 24, 1995 MEDI-MAIL, INC. VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II Additions Balance Charged Balance At To At Beginning Cost and Deductions End of Description Of Period Expenses (A) Period - ----------- --------- --------- ---------- --------- Allowance for doubtful accounts: Year ended December 31, 1994 $350,000 $706,000 $276,000 $780,000 Year ended December 31, 1993 55,000 295,000 - - 350,000 Year ended December 31, 1992 20,000 100,000 65,000 55,000 (A) Uncollectible accounts written off by charge to the allowance. MEDNET, MPC CORPORATION UNAUDITED PRO FORMA INCOME STATEMENTS These pro forma financial statements reflect the September 15, 1995 acquisition of Home Pharmacy. The pro forma income statment is presented as if the transaction occurred at the beginning of the nine months ended September 30, 1995 and the year ended December 31, 1994. A pro forma balance sheet is not presented because the balance sheet as reported in the Company's Form 10-Q for the quarter ended September 30, 1995 included the acquisition. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable. The pro forma operations and financial information do not purport to represent what the Company's financial position or results of operations would actually have been had the transactions in fact occurred on such date or to project the Company's financial position or results of operations for any future date or period. A further description of the purchase business combination, nature and pro forma adjustments follow the pro forma financial statements. Mednet, MPC Corporation Unaudited Pro Forma Income Statement Year Ended December 31, 1994 Pro Forma Mednet Home Pharmacy Adjustments Pro Forma ----------------------------------------------------------- Net Sales ......................................................... 67,863,000 51,281,000 119,144,000 Cost of Sales ..................................................... 58,793,000 43,787,000 102,580,000 Gross Profit ...................................................... 9,070,000 7,494,000 16,564,000 Selling, general and administrative expenses ...................... 14,794,000 6,188,000 451,000 21,433,000 Note 2 Related-party expense allocations ................................. 620,000 (620,000) 0 Note 2 Operating (loss) .................................................. (5,724,000) 686,000 169,000 (4,869,000) Other income (expenses): Debt conversion cost .............................................. (203,000) (203,000) Interest expense .................................................. (310,000) (175,000) (397,000) (882,000) Interest income ................................................... 49,000 Note 2 49,000 Rental income ..................................................... 4,000 4,000 Other, net ........................................................ 168,000 168,000 Total Other Income (Loss) ......................................... (292,000) (175,000) (397,000) (864,000) Net Income (Loss) ................................................. (6,016,000) 511,000 (228,000) (5,733,000) Net (Loss) Per Common Share ...................................... (0.24) Weighted Average Shares .......................................... 24,265,185
Mednet, MPC Corporation Unaudited Pro Forma Income Statement Nine Months Ended September 30, 1995 Pro Forma Mednet Adjustments Pro Forma --------------------------------------------------- Net Sales ................................................. 83,693,000 83,693,000 Cost of Sales ............................................. 71,262,000 71,262,000 Gross Profit .............................................. 12,431,000 12,431,000 Selling, general and administrative expenses .............. 12,991,000 338,000 13,329,000 Note 2 Operating (loss) .......................................... (560,000) (338,000) (898,000) Other income (expenses): Subsidiary operations for period not owned ................ (982,000) 982,000 0 Interest expense .......................................... (627,000) (338,000) (965,000) Interest income ........................................... 31,000 Note 2 31,000 Other, net ................................................ (134,000) (134,000) Total Other Income (Loss) ................................. (1,712,000) 644,000 (1,068,000) Net Income (Loss) ......................................... (2,272,000) 306,000 (1,966,000) Net (Loss) Per Common Share ............................... (0.07) Weighted Average Shares ................................... 26,827,221
Mednet, MPC Corporation Notes to Pro Forma Income Statements Note 1. Acquisition of Home Pharmacy On September 15, 1995, Mednet, MPC Corporation (the "Company") completed the acquisition of the assets (excluding cash and like assets) of Home Pharmacy, a division of ArcVentures, Inc. pursuant to an Asset Purchase Agreement dated July 29, 1995. Home Pharmacy is a mail service pharmacy and prescription benefits management company based in Chicago, Illinois. The Company intends to fully integrate the acquired mail service business with its existing Medi-Mail business. The Home Pharmacy prescription benefits management business will be integrated with the Company's Medi-Claim subsidiary headquartered in LeMoyne, Pennsylvania. The assets acquired included customer contracts, computers and other equipment, the right to the name "Home Pharmacy" and certain other intellectual property. The Company acquired up to $1,000,000 of Home Pharmacy's inventory, but did not acquire the balance of Home's inventory or its cash or like assets. The Company has elected to consolidate the operations of Home Pharmacy retroactively to January 1, 1995 in accordance with ARB 51. Accordingly, the pre-acquisition income of Home Pharmacy of $982,000 has been deducted in the consolidated operations for the period ended September 30, 1995. Note 2. Pro Forma Adjustments The following is a description and summary of the pro forma adjustments related to the accompanying balance sheets. Nine months Twelve months ended ended Sept. 30, 1995 Dec. 31, 1994 -------------- ------------- (1) Amortization of acquisition goodwill 338,000 451,000 To record estimated amotization of acquisition goodwill (2) Interest expense 338,000 397,000 To record interest expense associated with financing the acquisition of Home Pharmacy (3) Subsidiary operations for period 982,000 -- not owned To record pre-acquisition income of Home Pharmacy (4) Related-party expense allocations -- 620,000 To record elimination of original parent company overhead expenses Note 3. Net Income Per Share Information The Pro Forma net loss per share and number of common shares outstanding have been calculated using the weighted average number of shares assumed to be outstanding as if the acquisition of Home Pharmacy had occurred on January 1, 1994 with respect to the year ended December 31, 1994 and on January 1, 1995 with respect to the nine months ended September 30, 1995. HOME PHARMACY (A Division of ArcVentures, Inc.) UNAUDITED STATEMENTS OF ASSETS AND LIABILITIES December 31, September 15, 1994 1995 ------------ ------------- ASSETS CURRENT ASSETS Receivables: Trade, less allowance of approximately $300,000 and $279,000 at December 31, 1994 and September 15, 1995, respectively $3,880,182 $3,505,374 Other 626,159 473,033 Inventories 3,417,957 967,179 Prepaid expenses 76,404 8,900 ---------- ---------- Total current assets 8,000,702 4,954,486 Equipment and Leasehold Improvements: Office and pharmacy equipment 813,840 825,413 Minicomputer 223,245 223,245 Computer software 100,000 100,000 Leasehold improvements 80,398 80,398 Accumulated depreciation (457,482) (563,766) ---------- ---------- Property and Equipment, net 760,001 665,290 ---------- ---------- Total Assets $8,760,703 $5,619,776 ========== ========== LIABILITIES AND EQUITY Current Liabilities: Accounts payable $2,260,305 $2,063,092 Accrued compensation 138,401 62,393 Customer prepayments 100,051 416,909 Other accrued expenses 51,984 16,076 ---------- ---------- Total current liabilities 2,550,741 2,558,470 Deferred Rent, net 183,237 148,356 Equity, investment by and advances from ArcVentures, Inc. 6,026,725 2,912,950 ---------- ---------- Total liabilities and equity $8,760,703 $5,619,776 ========== ========== HOME PHARMACY (A Division of ArcVentures, Inc.) UNAUDITED STATEMENTS OF REVENUES AND EXPENSES (EXCLUDING INCOME TAXES) Nine Twelve Three Three Six Eight 1/2 Months Ended Months Ended Months Ended Months Ended Months Ended Months Ended September 30, December 31, March 31, June 30, June 30, September 15, 1994 1994 1995 1995 1995 1995 ------------- ------------ ------------ ------------ ------------ ------------- Net revenues $38,278,587 $51,280,451 $10,618,132 $10,558,255 $21,176,387 $30,629,476 Cost of goods sold (32,557,606) (43,786,665) (9,064,611) (8,779,753) (17,844,364) (26,030,628) ----------- ----------- ----------- ----------- ----------- ----------- Gross profit 5,720,981 7,493,786 1,553,521 1,778,502 3,332,023 4,598,848 Selling, general and administrative expenses 4,609,767 6,188,155 1,273,293 1,183,365 2,456,658 3,520,714 Related-party expense allocations 472,882 619,570 167,436 226,030 393,466 587,402 ----------- ----------- ----------- ----------- ----------- ----------- Operating income 638,332 686,061 112,792 369,107 481,899 490,712 Allocated interest expense 129,534 174,643 55,529 17,430 72,959 96,268 ----------- ----------- ----------- ----------- ----------- ----------- Income before income taxes $ 508,798 $ 511,418 $ 57,263 $ 351,677 $ 408,940 $ 394,444 =========== =========== =========== =========== =========== ===========
HOME PHARMACY (A Division of ArcVentures, Inc.) UNAUDITED STATEMENT OF EQUITY FOR THE EIGHT AND ONE HALF MONTHS ENDED SEPTEMBER 15, 1995 Investment By and Advances From ArcVenture, Inc.: Beginning balance $6,026,725 Income before income taxes for the period 394,444 Advances from (payments to) ArcVentures, Inc., net (3,508,219) ---------- Ending balance $2,912,950 ========== HOME PHARMACY (A Division of ArcVentures, Inc.) UNAUDITED STATEMENTS OF CASH FLOWS Three Three Six Eight 1/2 Months Ended Months Ended Months Ended Months Ended March 31, June 30, June 30, September 15, 1994 1995 1995 1995 ------------ ------------ ------------ ------------- Cash Flows from Operating Activities: Income before income taxes $ 57,263 $ 351,677 $ 408,940 $ 394,444 Adjustments to reconcile net income before income taxes to net cash provided by (used for) operating activities: Depreciation and amortization 43,397 42,524 85,921 121,735 Changes in assets and liabilities: Receivables 404,631 181,200 585,831 527,934 Inventories (195,243) 2,730,957 2,535,714 2,450,778 Prepaid expenses 9,798 34,224 44,022 67,504 Accounts payable, customer prepayments, and other current liabilities 1,031,314 (970,103) 61,211 7,729 Deferred rent (25,564) (4,050) (29,614) (34,881) ---------- ---------- ---------- ---------- Net cash provided by (used for) operating activities 1,325,596 2,366,429 3,692,025 3,535,243 Cash Flows Used for Investing Activities, purchases of property and equipment (6,243) (20,781) (27,024) (27,024) Cash Flows from Financing Activities, advances from (payments to) ArcVentures, Inc. (1,319,353) (2,345,648) (3,665,001) 3,508,219) ---------- ---------- ---------- ---------- Net Change in Cash - - - - - - - - Cash, beginning of year - - - - - - - - ---------- ---------- ---------- ---------- Cash, end of year $ - - $ - - $ - - $ - - ========== ========== ========== ==========
HOME PHARMACY (A DIVISION OF ARCVENTURES, INC.) FINANCIAL STATEMENTS AS OF JUNE 30, 1995 AND 1994, AND FOR EACH OF THE THREE YEARS ENDED JUNE 30, 1995 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of ArcVentures, Inc.: We have audited the accompanying statements of assets and liabilities of HOME PHARMACY (a division of ArcVentures, Inc., an Illinois corporation) as of June 30, 1995 and 1994, and the related statements of revenues and expenses (excluding income taxes), equity and cash flows for each of the three years in the period ended June 30, 1995. These financial statements are the responsibility of Home Pharmacy's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The statements of assets and liabilities, revenues and expenses (excluding income taxes), equity and cash flows were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for filings pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934) as described in Note 1 and are not intended to be a complete presentation of Home Pharmacy's results of operations. In our opinion, the financial statements referred to above present fairly, in all material respects, the assets and liabilities of Home Pharmacy as of June 30, 1995 and 1994, and its revenues and expenses (excluding income taxes) and its cash flows for each of the three years in the period ended June 30, 1995, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Chicago, Illinois, October 6, 1995 HOME PHARMACY (a division of ArcVentures, Inc.) STATEMENTS OF ASSETS AND LIABILITIES JUNE 30, 1995, 1994 AND 1993 1995 1994 ---------- ---------- ASSETS Current Assets: Receivables: Trade, less allowance of approximately $270,000, and $275,000 at June 30, 1995 and 1994, respectively $3,411,156 $4,208,026 Other 509,354 435,072 Inventories 882,243 1,542,995 Prepaid expenses 32,382 118,595 ---------- ---------- Total current assets 4,835,135 6,304,688 Property and Equipment, net 701,104 833,924 ---------- ---------- Total assets $5,536,239 $7,138,612 ========== ========== LIABILITIES AND EQUITY Current Liabilities: Accounts payable $1,599,446 $1,314,581 Accrued compensation 119,130 173,452 Customer prepayments 874,670 431,435 Other accrued expenses 18,706 57,221 ---------- ---------- Total current liabilities 2,611,952 1,976,689 Deferred Rent, net 153,623 182,803 Commitments and Contingencies (Note 9) Equity, investment by and advances from ArcVentures, Inc. 2,770,664 4,979,120 ---------- ---------- Total liabilities and equity $5,536,239 $7,138,612 ========== ========== The accompanying notes to financial statements are an integral part of these statements. HOME PHARMACY (A Division of ArcVentures, Inc.) STATMENTS OF EQUITY FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993 1995 1994 1993 ---------- ---------- ---------- Investments By and Advances from ArcVentures, Inc.: Beginning balance $4,979,120 $4,588,285 $5,475,625 Income before income taxes for the year 379,368 144,891 248,527 Advances from (payments to) ArcVentures, Inc., net (2,587,824) 245,944 (1,135,867) ---------- ---------- ---------- Ending, balance $2,770,664 $4,979,120 $4,588,285 ========== ========== ========== The accompany notes to financial statements are an integral part of these statements. HOME PHARMACY (A Division of ArcVentures, Inc.) STATEMENTS OF REVENUES AND EXPENSE (EXCLUDING INCOME TAXES) For the Years Ended June 30, 1995, 1994 and 1993 1995 1994 1993 ----------- ----------- ----------- Net revenues $46,887,645 $47,668,586 $39,155,047 Cost of goods sold (40,096,138) (40,661,479) (33,718,341) ----------- ----------- ----------- Gross profit 6,791,507 7,007,107 5,436,706 Selling, general and administrative expenses 5,540,012 6,107,446 4,524,771 Related-party expense allocations 691,694 585,918 478,359 ----------- ----------- ----------- Operating income 559,801 313,743 433,576 Allocated interest expense 180,433 168,852 185,049 ----------- ----------- ----------- Income before income taxes $ 379,368 $ 144,891 $ 248,527 =========== =========== =========== The accompanying notes to financial statements are an integral part of these statements. HOME PHARMACY (A Division of ArcVentures, Inc.) STATEMENTS OF CASH FLOWS For the Years Ended June 30, 1995, 1994 and 1993 1995 1994 1993 ---------- ---------- ---------- Cash Flows from Operating Activities: Income before income taxes $ 379,368 $ 144,891 $ 248,527 Adjustments to reconcile income before income taxes to net cash provided by (used for) operating activities: Depreciation and amortization 170,623 126,755 66,607 Changes in assets and liabilities: Receivables 722,588 (1,777,933) 1,055,198 Inventories 660,752 836,423 (322,659) Prepaid expenses 86,213 (13,867) (56,266) Accounts payable, customer prepayments and other current liabilities 635,263 577,231 609,167 Deferred rent (29,180) 26,072 25,226 ---------- --------- ---------- Net cash provided by (used for) operating activities 2,625,627 (80,428) 1,625,800 Cash Flows Used for Investing Activities, purchases of property and equipment (37,803) (165,516) (489,933) Cash Flows from Financing Activities, advances from (payments to) ArcVentures, Inc., net (2,587,824) 245,944 (1,135,867) ---------- ---------- ---------- Net change in cash - - - - - - Cash, beginning of year - - - - - - ---------- ---------- ---------- Cash, end of year $ - - $ - - $ - - ========== ========== ========== The accompanying notes to financial statements are an integral part of these statements. HOME PHARMACY (A Division of ArcVentures, Inc.) NOTES TO FINANCIAL STATEMENTS (NO DATES PER REQUEST) 1. ORGANIZATION AND BASIS OF PRESENTATION: General Home Pharmacy, an operating division of ArcVentures, Inc. ("ARC"), is primarily in the business of operating a mail-order pharmacy. ARC is a wholly owned subsidiary of ArcVentures Development Corp., which is a wholly owned subsidiary of Access Health, Inc. Rush-Presbyterian-St. Lukes Medical Center ("RUSH") is the sole voting member of Access Health, Inc. On September 16, 1995, ARC sold Home Pharmacy (Note 9). Basis of Presentation These financial statements and the related footnotes have been prepared for purposes of complying with the rules and regulations of the Securities and Exchange Commission for filings pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934. The accompanying financial statements, for all years presented, include those assets, liabilities, revenues and expenses (excluding income taxes) directly attributable to Home Pharmacy's operations. In addition, certain ARC and RUSH overhead expenses have been allocated to Home Pharmacy and included in the accompanying statements of revenues and expenses (excluding income taxes) as related-party allocations. The method of allocating costs has been deemed reasonable by management (Note 5). As a result of Home Pharmacy's relationships with its affiliates, the financial information included herein does not necessarily reflect what the financial position and results of operations would have been had it operated as a stand-alone taxable entity during the years covered. Additionally, the accompanying financial statements may not be indicative of future operations or financial position. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Inventories Inventories, primarily consisting of pharmaceutical drugs, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and Equipment Property and equipment are capitalized and stated at cost, net of accumulated depreciation and amortization. Items of an ordinary maintenance or repair nature are charged directly to operations. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: Asset Description Life ----------------------------- -------------------- Office and pharmacy equipment 10 years Minicomputer 5 years Computer software 3 years Leasehold improvements Shorter of estimated useful lives or term of lease Customer Prepayments Prepayments represent advances from customers for future shipments of pharmaceutical drugs. Income Taxes Home Pharmacy is not a separate tax-paying entity and does not have a tax-sharing agreement with ARC. As such, income taxes have not been allocated to Home Pharmacy. Revenue Recognition Revenue is recognized upon the shipment of pharmaceutical drugs. 3. PROPERTY AND EQUIPMENT: Property and equipment at June 30 consisted of the following: 1995 1994 ---------- ---------- Office and pharmacy equipment $ 825,413 $ 805,761 Minicomputer 223,245 223,245 Computer software 100,000 100,000 Leasehold improvements 80,398 77,698 ---------- ---------- 1,229,056 1,206,704 Less, accumulated depreciation and amortization (527,952) (372,780) ---------- ---------- $ 701,104 $ 833,924 ========== ========== 4. DEFERRED RENT: Home Pharmacy's office facility lease contains provisions for a rent-free period and scheduled rent increases. Deferred rent represents the difference between recognizing rent expense on a straight-line basis over the lease term and actual rent paid. This amount will be amortized over the life of the lease. 5. TRANSACTIONS WITH RELATED PARTIES: Beginning January 1, 1995, ARC assigned certain employees to Home Pharmacy; prior to that date Home Pharmacy leased its employees from RUSH. ARC and RUSH pay and provide for the employees' compensation (including all employee fringe benefits). ARC and RUSH charged Home Pharmacy for the wages and salaries at cost plus an additional 18% in 1995 and 17% in 1994 and 1993 to cover all employee fringe benefits. These rates may not be indicative of market rates. Home Pharmacy bears no ongoing liability for employee benefits as a result of this leasing arrangement with ARC. ARC performs certain accounting, legal, communications, data processing, administrative and other services ("corporate services") that are not specifically attributable to Home Pharmacy. Charges for corporate services are allocated to Home Pharmacy on the basis of the underlying cost drivers in each area. Management believes that the ARC corporate services allocated to Home Pharmacy are reasonable estimates of the costs of services provided. In addition, RUSH provides various services to ARC including accounting, legal, human resources, insurance and other administrative services ("administrative services"). RUSH and ARC negotiate the RUSH charges for these services based on RUSH's cost for providing these services. A portion of the RUSH administrative charges are then allocated to Home Pharmacy based on the same principles used to allocate ARC corporate services. Management believes that the RUSH charges allocated to Home Pharmacy are reasonable estimates of the costs of services provided. In 1994 and 1993, ARC participated in a centralized cash management program administered by RUSH. Cash is sent to RUSH and advances were made by RUSH, as needed, to cover ARC's cash requirements. On July 1, 1994, ARC established its own centralized cash management system in which Home Pharmacy participates. Cash sent to ARC or RUSH and advances made by ARC or RUSH attributable to Home Pharmacy have been treated as an adjustment to the "Equity-Investment By and Advances From ArcVentures, Inc." account in the accompanying financial statements. ARC allocates a portion of its interest expense to Home Pharmacy based on the ratio of Home Pharmacy's cumulative net cash advances to cumulative net cash advances for ARC as a whole. Management believes that the allocation of interest expense is representative of financing costs attributable to Home Pharmacy and that the methodology used to allocate interest expense is reasonable. Home Pharmacy fills mail-order pharmaceutical prescriptions for certain RUSH employees and bills RUSH at arm's length. These transactions with related parties are included in the accompanying statements of revenues and expenses (excluding income taxes). These transactions (by caption) totaled as follows for the years ended June 30: 1995 1994 1993 ---------- ---------- ---------- Related-party transactions: Net revenues--prescribtion services for RUSH employees $ 443,159 $ 437,626 $ 490,572 ========== ========== ========== Selling, general and administration expenses, leased employee expenses: ARC 1,434,014 - - - - RUSH 1,729,073 3,132,163 2,520,807 ========== ========== ========== Related-party expense allocations: ARC corporate services $ 612,838 $ 477,630 $ 377,284 RUSH administrative services 78,856 108,288 101,075 ---------- ---------- ---------- $ 691,694 $ 585,918 $ 478,359 ========== ========== ========== Allocated interest expense (interest rates at 4.7%, 3.5%, and 3.7% for 1995, 1994 and 1993, respectively) $ 180,433 $ 168,852 $ 185,049 ========== ========== ========== 6. OPERATING LEASES: Home Pharmacy's office facilities are leased by ARC. The lease expires in the year 2000. ARC charges Home Pharmacy monthly based upon its estimated occupancy costs. Lease expense for the years ended June 30, 1995, 1994 and 1993, was $242,486, $257,948 and $166,336, respectively. These costs have been deemed reasonable by management and have been charged to selling, general and administrative expenses in the accompanying statements of revenues and expenses (excluding income taxes). Home Pharmacy's allocation of ARC's future minimum lease payments are $47,000 through September 16, 1995, the date of the Home Pharmacy sale (Note 9). 7. CONCENTRATION OF CREDIT RISK: Home Pharmacy provides credit, in the normal course of business, to self-insured corporations, insurers and third-party administrators, entitlement programs, municipalities and individual patients. Home Pharmacy performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. When realized, these losses have been within management's expectations. In 1995, three customers accounted for 52% of revenues. In 1994 and 1993, three and two customers accounted for 56% and 48%, respectively, of revenues. One of the above customers opted not to renew its contract with Home Pharmacy. The contract expired in December, 1994. This customer accounted for approximately 12%, 19% and 17% of Home Pharmacy's revenue during 1995, 1994 and 1993, respectively. 8. COMMITMENTS AND CONTINGENCIES: In the ordinary course of conducting its business, Home Pharmacy may become subject to disputes from its customers concerning the distribution of pharmaceutical drugs. As of June 30, 1995, management believes that there is no material exposure in this area. 9. SUBSEQUENT EVENT: On September 16, 1995 Mednet, MPC Corporation (Mednet) acquired certain assets and assumed certain liabilities of Home Pharmacy for $8,000,000 in cash and two promissory notes for $2,500,000 and $4,650,000, respectively. The $4,650,000 promissory note is contingent on Home Pharmacy's meeting specified performance levels. Also, Mednet agreed to purchase the inventory on hand at the closing date. MEDICAL SERVICE AGENCY, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 AND INDEPENDENT AUDITOR'S REPORT INDEPENDENT AUDITOR'S REPORT Board of Directors and Shareholders Medical Service Agency, Inc. We have audited the accompanying consolidated balance sheets of Medical Service Agency, Inc. and subsidiary as of December 31, 1993, 1992 and 1991 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Medical Service Agency, Inc. and subsidiary as of December 31, 1993, 1992 and 1991, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. /s/ McKonley-Asbury Harrisburg, Pennsylvania September 30, 1994 MEDICAL SERVICE AGENCY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993, 1992 AND 1991 ASSETS 1993 1992 1991 ----------- ----------- ------------ Current assets Cash (note 2) .................................................. $ 960,850 $ 636,423 $ 303,970 Accounts receivable Trade (note 1) ............................................... 1,943,428 834,204 386,559 Employee ..................................................... 489 241 Loan receivable - officer (note 3) ............................. 171,222 103,469 107,256 Other receivables .............................................. 28,396 21,525 Prepaid expenses ............................................... 56,845 59,493 ----------- ----------- ----------- Total current assets ................................... 3,161,230 1,655,355 797,785 ----------- ----------- ------------ Office properties and equipment, at cost (notes 1 and 5) ........................................ 246,958 63,896 14,900 Accumulated depreciation ......................................... (41,828) (9,636) (2,606) ----------- ----------- ----------- 205,130 54,260 12,294 ----------- ----------- ------------ Other assets Customer contracts (net of amortization of $63,602 in 1993 and $23,432 in 1992) (note 4) ..................................................... 538,945 579,115 Deposits and advances .......................................... 1,295 1,000 ----------- ----------- ------------ Total other assets .................... 540,240 579,115 1,000 ----------- ----------- ------------ $ 3,906,600 $ 2,288,730 $ 811,079 =========== =========== ============
The accompanying notes are an integral part of these financial statements. LIABILITIES AND STOCKHOLDERS' EQUITY 1993 1992 1991 ----------- --------- ------------ Current liabilities Current maturities of long-term obligations (note 5) Notes payable .............................................. $ 218,750 $ $ Notes payable - officer .................................... 78,549 78,549 Obligation under capital leases ............................ 7,021 Accounts payable ............................................. 2,414,217 1,097,459 156,333 Accrued expenses ............................................. 69,542 38,977 28,994 Deferred income taxes (notes 1 and 7) ........................ 51,556 ----------- ---------- ------------ Total current liabilities ............................ 2,788,079 1,214,985 236,883 ----------- ---------- ------------ Long-term obligations (note 5) Notes payable ................................................ 556,250 775,000 337,500 Notes payable - officer ...................................... 235,647 314,195 Obligation under capital lease ............................... 71,514 Commitments and contingencies (note 10) ----------- ---------- ------------ Total long-term debt obligations ..................... 863,411 1,089,195 337,500 ----------- ---------- ------------ Stockholders' equity Preferred stock, $1 par value; authorized 25,000 shares, issued and outstanding 8,736 shares (carrying aggregate liquidation preferences of $449,904) ....................... 8,736 (note 8) Common stock, $1 par value; authorized 100,000 shares, issued and outstanding 49,500 shares .............................................. 49,500 49,500 45,288 Additional paid-in capital ................................. 911,810 170,546 170,546 Retained earnings .......................................... (714,936) (235,496) 20,862 ----------- ----------- ------------ Total stockholders' equity ........................... 255,110 (15,450) 236,696 ----------- ----------- ------------ $ 3,906,600 $ 2,288,730 $ 811,079 =========== =========== ============
MEDICAL SERVICE AGENCY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 1993 1992 1991 ------------ ------------ ------------- Income Plan administration .................................. $ 23,454,372 $ 7,723,456 $ 129,266 Manufacturer's reimbursements ........................ 1,166,807 879,229 361,248 Membership ........................................... 25,614 3,702 Consulting ........................................... 83,133 160,502 59,984 Auditing ............................................. 85,567 Workman's compensation ............................... 111,872 55,535 ------------ ------------ -------------- Total income .................................................. 24,841,798 8,822,424 636,065 ------------ ------------ -------------- Cost of goods sold Plan administration .................................. 22,815,233 7,409,360 Manufacturer's reimbursements ........................ 552,588 520,363 207,872 Data processing costs ................................ 240,120 87,521 Membership ........................................... 68,140 24,737 162 Consulting ........................................... 70,581 117,977 65,340 Workman's compensation ............................... 93,608 55,380 Commissions .......................................... 130,966 54,068 2,500 ------------ ---------- ------------ Total cost of sales ........................................... 23,971,236 8,269,406 275,874 ------------ ---------- ------------ Gross profit .................................................. 870,562 553,018 360,191 ------------ ---------- ------------ Operating expenses Selling expenses ..................................... 219,822 109,384 15,502 General and administrative expenses .................. 1,049,170 660,115 189,480 ------------ ---------- ------------ Total operating expenses ...................................... 1,268,992 769,499 204,982 ------------ ---------- ------------ Operating income .............................................. (398,430) (216,481) 155,209 ------------ ---------- ------------ Other income (expense) Interest income ...................................... 23,381 22,804 3,692 Interest expense ..................................... (104,391) (108,198) (11,594) ------------ ----------- ----------- Total other income (expense) .................................. (81,010) (85,394) (7,902) ------------ ----------- ----------- Net income before taxes ....................................... (479,440) (301,875) 147,307 Income taxes (benefit) (notes 1 and 7) ........................ 0 (49,729) 53,728 ------------ ------------ ------------ Net income .................................................... $ (479,440) $ (252,146) $ 93,579 ============ ============ ============ Earnings per common share (note 11) ........................... $ (7.70) $ (5.33) $ 2.49 ============ ============ ============
The accompanying notes are an integral part of these financial statements. MEDICAL SERVICE AGENCY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 Additional Preferred Common Paid-In Retained Stock Stock Capital Earnings Total Balance - January 1, 1991 ................. $ $ 33,038 $ 82,796 $ (72,717) $ 43,117 Net income ................................ 93,579 93,579 Issuance of common stock .................. 12,250 87,750 100,000 ---------- --------- --------- --------- ---------- Balance - December 31, 1991 ............... 45,288 170,546 20,862 236,696 Net income (loss) ......................... (252,146) (252,146) Common stock issued for no consideration ............................ 4,212 (4,212) ---------- --------- ---------- ---------- ----------- Balance - December 31, 1992 ............... 49,500 170,546 (235,496) (15,450) Net income (loss) ......................... (479,440) (479,440) Issuance of preferred stock (note 8) ................................. 8,736 741,264 750,000 --------- --------- --------- --------- --------- Balance - December 31, 1993 ............... $ 8,736 $ 49,500 $ 911,810 $(714,936) $ 255,110 ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements MEDICAL SERVICE AGENCY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 1993 1992 1991 ----------- ----------- ------------ Cash flows from operating activities Net income (loss) ........................................... $ (479,440) $ (252,146) $ 93,579 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization ........................... 72,362 30,462 1,462 Deferred income taxes ................................... (51,556) 53,728 (Increase) decrease in Accounts receivable .................................. (1,184,096) (465,624) (452,148) Prepaid expenses ..................................... 2,648 (59,493) Deposits and advances ................................ (1,295) 1,000 Increase (decrease) in Accounts payable ..................................... 1,316,758 941,126 154,033 Accrued liabilities .................................. 30,565 9,983 28,919 ----------- ------------ ----------- Net cash provided by (used in) operating activities ....................... (242,498) 153,752 (120,427) ----------- ------------ ----------- Cash flows from investing activities Purchase of property and equipment .......................... (100,036) (48,996) (6,736) Acquisition of contracts .................................... (602,547) ----------- ------------ ----------- Net cash used in investing activities ..................................... (100,036) (651,543) (6,736) ----------- ------------ ----------- Cash flows from financing activities Long-term borrowings ........................................ 830,244 337,500 Debt reduction Long-term obligations ..................................... (78,549) (6,695) Capital lease obligations ................................. (4,490) Proceeds from issuance of stock ............................. 750,000 100,000 ---------- ------------ ----------- Net cash provided by financing activities ........................... 666,961 830,244 430,805 ---------- ------------ ----------- Net increase in cash .......................................... 324,427 332,453 303,642 Cash - beginning .............................................. 636,423 303,970 328 ----------- ----------- ----------- Cash - ending ................................................. $ 960,850 $ 636,423 $ 303,970 =========== =========== =========== Schedule of noncash investing and financing activities Purchase of equipment ....................................... $ 183,062 Capital lease obligations ................................... (83,026) ----------- $ 100,036 ===========
The accompanying notes are an integral part of these financial statements. MEDICAL SERVICE AGENCY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES Formation The Company was incorporated on June 7, 1989 under the laws of the Commonwealth of Pennsylvania and is engaged primarily in the business of administering prescription drug discount programs for corporations and other organizations. The Company extends credit to its clients which are located throughout the United States. Consolidated Basis of Presentation The 1993 and 1992 financial statements reflect the consolidated financial position and results of operations of Medical Service Agency, Inc. and its wholly-owned subsidiary, Sherman Management Group, Inc. Sherman Management Group, Inc. was acquired in a cash for stock transaction on June 5, 1992, and is engaged in the same line of business as the parent company. All material inter-company balances and transactions have been eliminated. Revenue Recognition The Company and its wholly-owned subsidiary recognize income under the accrual method of accounting, consistent with reporting for federal income tax purposes. Allowance for Doubtful Accounts The Company uses the direct write-off method to record bad debts. Accounts receivable at each balance sheet date represent balances deemed collectible by the Company, including a receivable $54,331 from Care Choices Health Plans and a receivable of $68,507 from RxChoice Preferred, both of which are under contention. Property and Equipment Property and equipment are carried at cost. Depreciation is computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized and deductions are made for retirements resulting from renewals or betterments. Depreciation expense amounted to $32,192, $7,030 and $1,462 in 1993, 1992, and 1991. Amortization of Contracts The cost of contracts acquired in the purchase of Sherman Management Group, Inc. are being amortized on a straight-line basis over a period of 15 years (see notes 4 and 9). Income Taxes The Company has elected to adopt the provisions of the Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes," retroactively for all periods presented. A provision for deferred income taxes has been made to reflect the income tax benefit of available net operating loss carryforwards. Similarly, an offsetting valuation allowance has been established since the generation of future profits to offset the loss carryforwards is uncertain. 2. UNINSURED CASH BALANCES The Company maintains operating account balances at a financial institution in excess of FDIC insurance limits. At December 31, 1993 the uninsured balances amounted to $562,293. 3. LOAN RECEIVABLE - OFFICER The Company has agreed to permit its majority shareholder to borrow up to $150,000 on an unsecured basis from the Company. At December 31, 1993, 1992 and 1991, a total of $171,222, $103,469 and $107,256 was outstanding under the agreement. Amounts so borrowed were due to be repaid on June 7, 1994, together with interest accrued thereon computed at a rate of 6% per annum. Because the Company simultaneously owes funds to the shareholder under a stock purchase agreement (see note 5), the due date for repayment of the advances has been extended indefinitely, and the requirement to limit advances to $150,000 has been waived. 4. CONTRACTS On June 5, 1992, the Company acquired the assets of Sherman Management Group, Inc., which consisted of contracts with employers to provide administrative services for prescription drug programs (see note 9). These contracts are being amortized on a straight-line basis over a period of 15 years which, in management's opinion, approximates the expected economic life of the contracts (see note 1). Contracts at December 31, 1993, 1992 and 1991 consist of: 1993 1992 1991 Contracts ............................ $602,547 $602,547 $ 0 Less accumulated amortization ........ 63,602 23,432 -------- -------- --------- $538,945 $579,115 $ 0 ======== ======== ======== 5. LONG-TERM OBLIGATIONS Long-term obligations at December 31, 1993, 1992 and 1991 consist of the following: 1993 1992 1991 Installment notes payable, unsecured, payable in annual installments of $218,750 each in 1994, 1996 and 1997 and $118,750 in 1995 plus interest at 9% per annum ................................... $ 775,000 $ 775,000 $ 337,500 Installment notes payable officer, are due to the principal shareholder of the Company (see notes 9 and 12), unsecured, payable in annual installments of $78,549 plus interest at prime plus 1% (a total of 7% at December 31, 1993), with maturities through April 1997 .......... 314,196 392,744 ---------- ---------- ---------- Total obligations ............... 1,089,196 1,167,744 337,500 Less current maturities ......... 297,299 78,549 ---------- ---------- ---------- Total long-term obligations ..... $ 791,897 $1,089,195 $ 337,500 ========== ========== ========== Maturities of long-term obligations in each of the next five years are approximately as follows: 1994 $ 297,299 1995 $ 197,299 1996 $ 297,299 1997 $ 297,299 1998 $ 0 Capital Lease Obligation ------------------------ The Company entered into an agreement to lease an automobile under a capital lease arrangement. The lease agreement provides for a minimum monthly lease payment of $1,247 through April 1998 plus a lump-sum payment of $42,000 at the end of the lease period. The leased vehicle has a carrying value of $94,270 at December 31, 1993. At December 31, 1993, the future minimum lease payments under the capital lease were as follows: 1994 $ 14,964 1995 14,964 1996 14,964 1997 14,964 1998 46,988 -------- 106,844 Less amount representing interest 28,309 -------- Net present value of minimum capital lease payments 78,535 Less current portion 7,021 -------- Long-term portion $ 71,514 ======== The Company is depreciating the net present value of minimum capital lease payments by the straight-line method over the useful life of the vehicle. Interest Costs Total interest costs incurred in 1993, 1992 and 1991 for all notes and agreements were $104,391, $108,198 and $11,594. Total interest costs paid in 1993, 1992 and 1991 were $85,312, $90,648 and $11,594. 6. LEASES The Company leases its office facility and certain equipment under noncancellable lease arrangements. The facility lease has a renewal option for an additional 5-year period, the rental to be adjusted by the annual percentage change in the consumer price index. At December 31, 1993, the future minimum lease payments under these operating leases were approximately as follows: 1994 $ 45,708 1995 $ 47,787 1996 $ 50,585 1997 $ 4,711 1998 $ 0 Rental expense under these agreements amounted to $42,278, $22,366, and none for the years ended December 31, 1993, 1992 and 1991. Income taxes for the years ended December 31, 1993, 1992 and 1991 consist of the following: 1993 1992 1991 -------- -------- --------- Taxes currently payable Federal .......................... $ 0 $ 0 $ 0 State ............................ 0 1,827 0 -------- -------- -------- 0 1,827 0 -------- -------- -------- Deferred taxes Federal .......................... 0 (32,990) 35,162 State ............................ 0 (18,566) 18,566 -------- -------- -------- 0 (51,556) 53,728 -------- -------- -------- $ 0 $(49,729) $ 53,728 ======== ======== ======== Effective income tax rate (before effect of timing difference reversals) ........ 0% 0% 36% ========= ========= ========= 7. INCOME TAXES The differences between the statutory federal income tax rate and the effective income tax rates are as follows: 1993 1992 1991 Pre-tax income (loss) .......... $(479,440) $(301,875) $ 147,307 Tax at statutory rate .......... $(163,010) $(102,638) $ 50,084 Federal surtax exemption ....... (9,385) State income tax ............... 18,556 Timing differences ............. 163,010 102,638 (5,527) $ 0 $ 0 $ 53,728 Deferred income tax expense at December 31, 1993, 1992 and 1991 consisted of the following tax effects of timing differences: 1993 1992 1991 Income recognition ................. $ 0 $(51,556) $ 53,239 Depreciation deduction ............. 0 0 489 $ 0 $(51,556) $ 53,728 The net deferred tax benefits in the accompanying balance sheets include the following components: 1993 1992 1991 Deferred tax assets ............... $ 73,856 $ 84,160 $ 3,075 Deferred tax liabilities .......... (26,281) (6,222) 0 Deferred tax asset valuation allowance ........................ (47,575) (77,938) (3,075) $ 0 $ 0 $ 0 A valuation allowance of 100% of the net of deferred tax assets and liabilities has been established since the generation of future taxable income against which to offset the net operating loss carryforwards cannot be predicted with reasonable certainty. The Company has net operating losses of $563,961 available to offset future federal income through 2008, and net operating losses of $578,140 available to offset future Pennsylvania taxable income through 1998. The Company paid income taxes of $1,827 in 1993, and none in 1992 and 1991. 8. PREFERRED STOCK ISSUE On March 24, 1993, the Company entered into an agreement with Health Care Services, Inc. (HCS) whereby HCS agreed to purchase 8,736 shares of Series A Preferred Stock, representing 15% of all outstanding stock, for consideration of $450,000. In addition, HCS purchased an option to increase its total stock holdings to 25% of total outstanding stock for consideration of $300,000. This option agreement, which is exercisable from April 1, 1994 through March 31, 1999, allows HCS to acquire the additional preferred shares for a total price of $1,000. The purchase agreement also allows HCS to name one director to the Board of Directors, and requires the Company to market and promote (under the supervision and direction of HCS) the RxChoice prescription drug program of HCS. The Company is required to spend at least $250,000 within one year of March 24, 1993 to promote the program. The Series A Preferred Stock has the same voting rights as the common stock. It is convertible into common stock on a one-for-one basis; this conversion rate is to be adjusted to equal the ratio of preferred stock to common stock as of March 24, 1993 should additional common shares be issued prior to the exchange privilege being exercised. The Series A Preferred shareholders are to be paid $51.50 per share plus all declared but unpaid dividends upon the liquidation or dissolution of the Company. These payments are to be made after satisfaction of all creditors, but before any payment to common shareholders. After such payments are made to the preferred shareholders, the preferred and common shareholders will share any remaining assets and distributions on a pro-rata basis. A merger or consolidation involving the Company will be deemed a liquidation for purposes of the agreement with HCS, unless the holders of the Series A Preferred Stock receive in exchange preferred stock having terms and conditions no less favorable, as determined by a majority of the holders of the Series A Preferred Stock, than the terms and conditions of the Series A Preferred Stock. 9. ACQUISITION OF SUBSIDIARY On June 5, 1992, the Company acquired the stock of Sherman Management Group, Inc. (SMG) for $105,000 in cash and a long-term note of $392,744 (see notes 1, 4, 5 and 12) and forgiveness of debt of $98,906. The purchase method was used to account for the acquisition, and the purchase price was allocated as follows: Cash $ 78,555 Accounts receivable 749,182 Contracts 602,547 Accounts payable (833,634) $ 596,650 The Company is presently operating the business as a subsidiary under the Sherman Management Group, Inc. name. The accompanying financial statements include the operation of Sherman Management Group, Inc. from June 5, 1992 through December 31, 1992 and for the 1993 calendar year. Prior to acquisition, Sherman Management Group, Inc. was owned 100% by the majority shareholder of Medical Service Agency, Inc. The costs of acquired contracts is being amortized over the expected economic life of the contracts (see notes 1 and 4). Supplemental Pro-Forma Information (Unaudited) Presented below is a schedule showing results of operations on a pro-forma basis to reflect the activity of the Company and SMG as though SMG were consolidated with the Company for all of 1992 and 1991: 1992 1991 (Unaudited) (Unaudited) Revenue ..................................... $ 11,539,468 $ 2,950,117 Income (loss) before extraordinary items .... $ (251,534) $ 91,760 Net income (loss) ........................... $ (251,534) $ 91,760 Earnings (loss) per share ................... $ (5.32) $ 2.44 10. COMMITMENTS AND CONTINGENCIES The Company has an employment agreement with its majority shareholder, and a second employment agreement with another officer/shareholder which provide for salary continuation, life insurance, and medical insurance. The agreements have provisions which require the continuation of these benefits for each unexpired year through December 31, 2002, should certain events occur and employment is terminated. These events include termination for cause, disability of the individual(s), or termination by agreement. In addition, in the event of death of either individual, the Company will continue to pay the spouse of that individual the then-current compensation for the remaining term of the contract, however not less than for a one-year period. Assuming the occurrence of qualifying events for both individuals, the following amounts, expressed in dollar amounts in effect as of the date of these financial statements, would be payable for salaries, life insurance and medical insurance: If Activated Amount If Activated Amount On January 1 Payable On January 1 Payable 1994 $2,013,804 1999 $ 895,024 1995 $1,790,048 2000 $ 671,268 1996 $1,566,292 2001 $ 447,512 1997 $1,342,536 2002 $ 223,756 1998 $1,118,780 11. EARNINGS PER COMMON SHARE Earnings per common share is based on the weighted average number of common stock and Series A Preferred Stock outstanding as follows: 1993 1992 1991 Common stock Shares outstanding from beginning of period .................... 49,500 45,288 33,038 Issuance of common stock in third quarter, 1991 .......................... 4,594 Issuance of common stock in 1992 ........ 1,998 49,500 47,286 37,632 Common stock equivalents 8,736 shares Series A Preferred Stock, issued March 24, 1993, with option to acquire 7,764 additional shares ...................... 12,748 Weighted average number of shares .......... 62,248 47,286 37,632 Since there were no other potentially dilutive securities, fully diluted earnings per share was not reported. 12. RELATED PARTY TRANSACTIONS The Company has a note payable to its principal shareholder in the amount of $314,196 at December 31, 1993 and $392,744 at December 31, 1992 (see note 5). At the same time, the shareholder owed the Company $171,222, $103,469 and $107,256 at December 31, 1993, 1992 and 1991 (see note 3). The shareholder owned 49%, 66% and 72% of the outstanding common stock and common stock equivalents at December 31, 1993, 1992 and 1991. 13. SUBSEQUENT EVENT On August 30, 1994, the Company received an offer to purchase substantially all of its assets. The offer was extended by an unrelated corporation engaged in the same industry as the Company. The Company intends to consider this offer, but a definitive agreement had not been signed as of the date of these financial statements. FAMILY PHARMACEUTICALS OF AMERICA, INC. FINANCIAL REPORT DECEMBER 31, 1993 T A B L E O F C O N T E N T S PAGE INDEPENDENT AUDITOR'S REPORT FINANCIAL STATEMENTS Balance sheets .................................................... Statements of income .............................................. Statement of stockholders' equity ................................. Statements of cash flows .......................................... Notes to financial statements ..................................... INDEPENDENT AUDITOR'S REPORT To the Board of Directors Family Pharmaceuticals of America, Inc. Mt. Pleasant, South Carolina We have audited the accompanying balance sheet of Family Pharmaceuticals of America, Inc. as of December 31, 1993, and the related statements of income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Family Pharmaceuticals of America, Inc. as of December 31, 1993, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. As explained in Note 5 to the financial statements, on June 30, 1994, Medi-Mail, Inc. acquired all of the Company's outstanding common stock. /s/ McGladrey & Pullen, LLP Las Vegas, Nevada July 29, 1994 BALANCE SHEETS December 31, 1993 and June 30, 1994 December 31, June 30, ASSETS 1993 1994 - -------------------------------------------------------------------------------------- CURRENT ASSETS ............................................. (Unaudited) Cash ..................................................... $ 66,807 $ 1,839 Accounts receivables, less allowance for doubtful accounts $15,000 1993 and 1994 .................................. 115,638 120,601 Other receivable ......................................... -- 20,000 Inventories .............................................. 140,196 102,964 Investment in partnership (Note 2) ....................... 181,782 -- Other current assets ..................................... 10,359 6,769 Total current assets ............................. $ 514,782 $ 252,173 EQUIPMENT, less accumulated depreciation of $84,137 in 1993; $82,597 in 1994 .......................................... $ 5,312 $ 7,196 $ 520,094 $ 259,369 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Shareholder note payable (Note 3) ........................ $ 50,000 $ -- Accounts payable and accrued expenses .................... 244,882 100,742 Total current liabilities ........................ $ 294,882 $ 100,742 COMMITMENT (Note 4) STOCKHOLDERS' EQUITY Common stock, $1.00 par value; 250,000 shares authorized, 185,925 shares issued and outstanding .................. $ 185,925 $ 185,925 Additional paid-in capital ............................... 21,268 21,268 Retained earnings (deficit) .............................. 18,019 (48,566) $ 225,212 $ 158,627 $ 520,094 $ 259,369
See Notes to Financial Statements. FAMILY PHARMACEUTICALS OF AMERICA, INC. STATEMENTS OF INCOME Year Ended December 31, 1993 and Six Months Ended June 30, 1994 and 1993 December 31, June 30, June 30, 1993 1994 1993 - ----------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) Net sales ........................................ $ 2,451,427 $ 1,030,686 $ 1,092,144 Cost of goods sold ............................... 2,021,031 796,654 852,595 Gross profit . $ 430,396 $ 234,032 $ 239,549 Selling, general, and administrative expenses .... 615,965 280,125 271,009 Operating loss $ (185,569) $ (46,093) $ (31,460) Other income (expense): Partnership income (Note 2) ............. 259,421 -- 165,821 Gain on partnership termination (Note 2) -- 100,000 -- Interest income ......................... 2,905 1,952 1,748 Interest expense ........................ (6,475) (2,230) (4,411) Net income ... $ 70,282 $ 53,629 $ 131,698
See Notes to Financial Statements. FAMILY PHARMACEUTICALS OF AMERICA, INC. STATEMENT OF STOCKHOLDERS' EQUITY Year Ended December 31, 1993 and Six Months Ended June 30, 1994 Additional Common Stock Paid-In Retained Shares Dollars Capital Earnings Total - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1992 ............. 185,925 $185,925 $ 21,268 $ 97,205 $304,398 Net income ........................... -- -- -- 70,282 70,282 Distribution to stockholders ......... -- -- -- (149,468) (149,468) Balance, December 31, 1993 ............. 185,925 $185,925 $ 21,268 $ 18,019 $225,212
See Notes to Financial Statements. FAMILY PHARMACEUTICALS OF AMERICA, INC. STATEMENTS OF CASH FLOWS Year Ended December 31, 1993 and Six Months Ended June 30, 1994 and 1993 December 31, June 30, June 30, 1993 1994 1993 (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................................ $ 70,282 $ 53,629 $ 131,698 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation ..................................................... 2,302 1,150 1,152 Undistributed earnings of partnership ............................ (218,199) -- (104,321) Gain on partnership termination .................................. -- (100,000) -- Change in assets and liabilities: (Increase) decrease in: Accounts receivable ................................... (34,023) (4,963) (13,655) Inventories ........................................... (13,030) 37,232 (9,452) Other assets .......................................... (124) 556 2,966 Increase (decrease) in accounts payable and accrued expenses ...................................... 184,760 (144,140) 23,056 Net cash provided by (used in) operating activities ............................. $ (8,032) $(156,536) $ 31,444 CASH FLOWS FROM INVESTING ACTIVITIES, Distributions received from partnership ................................... $ 280,946 $ 261,782 $ 105,000 CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on line of credit ...................................... $ (75,000) $ -- $ (75,000) Principal payments on shareholder note payable ............................ (75,250) (50,000) (75,250) Distributions to shareholders ............................................. (149,468) (120,214) (64,001) Proceeds from note payable ................................................ 143,250 -- 143,520 Payments on note payable .................................................. (143,250) -- -- Net cash (used in) financing activities ........ $(299,718) $(170,214) $ (70,731) Increase (decrease) in cash .................... $ (26,804) $ (64,968) $ 65,713 Beginning ................................................................. 93,611 66,807 93,611 Ending .................................................................... $ 66,807 $ 1,839 $ 159,324 Cash payments for interest ................................................ $ 6,475 $ 2,230 $ 4,411
See Notes to Financial Statements. FAMILY PHARMACEUTICALS OF AMERICA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business The Company primarily operates a mail order pharmacy dispensing prescription drugs to customers throughout the United States. A summary of the Company's significant accounting policies follows: Investment in partnership The investment in the partnership is accounted for by the equity method. Under this method, the Company's proportionate share of the partnership's net income is recognized as income and added to the investment account, and distributions received from the partnership are treated as a reduction of the investment account. As described in Note 2, the partnership was terminated effective December 31, 1993. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consist primarily of prescription drugs. Equipment Equipment is recorded at cost. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets. Income taxes The Company, with the consent of its stockholders, has elected to be taxed under sections of the federal income tax law which provide that, in lieu of corporation income taxes, the stockholders separately account for their pro rata shares of the Company's items of income, deductions, losses and credits. As a result of this election, no income taxes have been recognized in the accompanying financial statements. Unaudited financial statements The unaudited financial statements included herein have been prepared in accordance with generally accepted accounting principles. The unaudited financial statements contain all adjustments (which include only normal and recurring adjustments) necessary to present fairly the Company's financial position at June 30, 1994 and the results of operations and its cash flows for the six months ended June 30, 1994 and 1993. NOTE 2 PARTNERSHIP TRANSACTIONS The Company is one of two partners in Family Biomedical Health Services, a partnership. The Company has a 50% interest in the partnership which primarily provides infusion therapy supplies and services and other home health care services. During the year ended December 31, 1993, the Company recorded $259,421 of other income from its interest in the partnership. On January 24, 1994, the partnership was terminated effective December 31, 1993. Under terms of the termination agreement, the Company will receive its basis in the partnership as of December 31, 1993, $181,782, plus an additional $100,000 from the other partner. As of July 29, 1994, the Company had received $261,782 of the $281,782 it is scheduled to receive under the termination agreement. The Company has elected to omit disclosure of summarized financial information of the partnership because it is not part of the Company's continuing operations due to the termination of the partnership. NOTE 3 SHAREHOLDER NOTE PAYABLE As of December 31, 1993, the Company owed $50,000 to the majority shareholder under the terms of an unsecured note payable due on demand and bearing interest at prime (6% at December 31, 1993) plus 1%. The note was paid in full prior to June 30, 1994. NOTE 4 LEASE COMMITMENT The Company leases its facility under the terms of an operating lease which expires in January 1997. Total rent expense under this lease was $30,812 for the year ended December 31, 1993. The approximate future minimum lease payments under the lease as of December 31, 1993 are as follows: Year Ending December 31, 1994 $ 30,684 1995 31,511 1996 32,477 1997 2,713 Total minimum lease payments $ 97,385 - - NOTE 5 SUBSEQUENT EVENT On June 30, 1994, all of the Company's outstanding common stock was acquired by Medi-Mail, Inc., a Las Vegas corporation primarily engaged in the managed prescription care industry. PART II Information Not Required in the Prospectus Item 13. Other expenses of issuance and distribution. All expenses of the offering will be paid by the Company. Total estimated expenses in connection with the issuance and distribution of the Common Shares are as follows: SEC Registration Fee ....................................... $ 8,000 Legal Fees and Expenses .................................... 20,000 Accounting Fees and Expenses ............................... 15,000 Miscellaneous .............................................. 7,000 Total: ................................... $50,000 Item 14. Indemnification of Directors and Officers. Under Sections 78.385 and 78.403 of the Nevada Revised Statutes and Article IX and Article XI of the Company's Second Amended and Restated Articles of Incorporation, the Company's directors and officers may be indemnified against certain liabilities which they may incur in their capacities as such. Item 15. Recent Sales of Unregistered Securities. Amount of Underwriters or Exemption from Title of Security Date of Sale Securities Sold Other Purchasers* Consideration Registration Claimed ======================== ============== ================ ======================= ======================== ===================== 1992 (commencing June 30, 1992) - ------------------------------- Options to purchase 9/92 86,000 Six Directors of Medi- Directors Stock Option at Section 4(2) Common Shares Mail, Inc.1 exercise price of $2.95 per share Options to purchase 9/92 70,500 Seven employees of Employee Stock Option Section 4(2) Common Shares Medi-Mail, Inc.2 at exercise price of $2.95 per share Common Stock 10/92 13,333 Alan Springer Buyout of Commission Section 4(2) $0.01 par value Agreements Common Stock $0.01 12/92 333,333 Avesis Pharmacy Acquisition of Avesis Section 4(2) par value Pharmacy Assets 1993 Options to purchase 1/93 80,000 Directors of Medi- Directors Stock Option at Section 4(2) Common Shares Mail, Inc. exercise price of $2.50 per share - -------- 1 The directors granted options pursuant to Medi-Mail's Non-Qualifying Stock Option Plan are: Michael Ehrenfeld, Byron S. Georgiou, Gerald Green, Sol Lizerbram, Robert W. Quick and Lincoln Ward. 2 The seven employees granted options pursuant to Medi-Mail's Incentive Stock Option Plan are: Jane E. Freeman, Betsy Loureiro, M.B. Merryman, S.E. Roberts, Margaret Robinson, Paul Roller and Dennis T. Smith.
Amount of Underwriters or Exemption from Title of Security Date of Sale Securities Sold Other Purchasers* Consideration Registration Claimed ======================== ============== ================ ======================= ======================== ===================== Options to purchase 1/93 35,000 M.B. Merryman Employee Stock Options Section 4(2) Common Shares to purchase 15,000 shares at exercise price of $2.76 per share and 20,000 shares at exercise price of $2.50 per share Warrants to purchase 1/93 50,000 Ladenburg Thalmann Issued pursuant to Section 4(2) Common Shares at investment banking $3.00 per share agreement Warrants to purchase 3/93 40,000 Gabriel Wisdom Issued pursuant to Section 4(2) Common Shares at agreement to extend First $2.75 per share Trust Deed dated 3/2/93 Common Stock 3/93 13,000 Ralph and Betty Rent and Settlement Section 4(2) $0.01 par value Engelstead Agreement Common Stock 4/93 31,000 Howard Hassman $31,000 Reg. D $0.01 par value Common Stock 4/93 4,053,600 Four overseas $3,702,946 Reg. S $0.01 par value 5/93 distributors: U.S. Milestone, Alliance Global, Prime Net and Spenser Trask Common Stock 5/93 237,872 Ralph DeFay Conversion of debt Section 4(2) $0.01 par value Jon Kurtin issued in exchange for Mike Fisher acquisition of assets of various retail pharmacies in San Diego, CA Common Stock 5/93 1,500,000 Edward Heil $1,500,000 Reg. D $0.01 par value Options to purchase 6/93 300,000 Directors of Medi- Director Stock Options at Section 4(2) Common Shares Mail, Inc. exercise price of $1.75 per share Options to purchase 6/93 20,000 M.B. Merryman Employee Stock Options Section 4(2) Common Shares at exercise price of $1.75 per share Options to purchase 7/93 18,000 Five Employees of Employee Stock Options Section 4(2) Common Shares Medi-Mail, Inc. at exercise price of $1.91 per share. Common Stock 8/93 13,333 Alan Springer Buyout of Commission Section 4(2) $0.01 par value Agreement Common Stock 8/93 201,052 GBK, Inc. Acquisition of GBK, Section 4(2) $0.01 par value Inc.'s assets Options to purchase 9/93 500,000 M.B. Merryman Stock Options issued Section 4(2) Common Shares outside of Plans at exercise price of $4.50 per share
Amount of Underwriters or Exemption from Title of Security Date of Sale Securities Sold Other Purchasers* Consideration Registration Claimed ======================== ============== ================ ======================= ======================== ===================== Common Stock 1/94 1,100,000 Alliance Global $3,025,000.00 Reg. S $0.01 par value (Underwriter) Options to purchase 1/94 37,500 M.B. Merryman Employee Incentive Section 4(2) Common Shares Stock Options at exercise price of $3.52 per share Warrants to purchase 1/94 100,000 MK Gerinda Consulting services in Section 4(2) Common Shares at Management connection with Reg. S $4.50 per share placement Options to purchase 3/94 96,000 Thirteen Employees of Employee Incentive Section 4(2) Common Shares Medi-Mail, Inc.3 Stock Options at exercise price of $3.50 per share Warrants to purchase 3/94 61,415 John Horton and Issued in connection with Section 4(2) Common Shares at Horton Trading an agreement with a $2.44 per share marketing consultant Warrants to purchase 3/94 37,585 Anthony Riker Ltd. Issued in connection with Section 4(2) Common Shares at an agreement with a $2.44 per share marketing consultant Warrants to purchase 6/94 202,858 Edward T. Hanley, Jr. Issued in connection with Section 4(2) Common Shares at an agreement with a $3.00 per share marketing consultant Warrants to purchase 6/94 398,571 Irwin Jann Issued in connection with Section 4(2) Common Shares at an agreement with a $3.00 per share marketing consultant Warrants to purchase 6/94 398,571 Anthony Riker Ltd. Issued in connection with Section 4(2) Common Shares at an agreement with a $3.00 per share marketing consultant Common Stock 6/94 3,000 Ralph and Betty Rent Section 4(2) $0.01 par value Engelstead Common Stock 6/94 400,000 Twelve investors who Acquisition of FPA Section 4(2) $0.01 par value owned FPA prior to Medi-Mail's acquisition4 Options to purchase 6/94 50,000 W.K. Richardson Employee Incentive Section 4(2) Common Shares Stock Option at exercise price of $2.29 per share - -------- 3 The thirteen employees granted options pursuant to Medi-Mail's Incentive Stock Option Plan are: Pedro Perez, S.E. Roberts, Margaret Robinson, Dennis Smith, Barbara J. Thompson, Henrietta Beaudoin, Jacqueline D. Busa, Shari S. Colunga, Karen K. Curtis, Jane E. Freeman, Joyce Heller-Zuenia, Julie A. Ledbetter and Sherry M. Mack-Miksek. 4 The twelve accredited investors are: Lee M. McDow; Brent A. Blue; Daniel W. Pfyfer; Thomas A. Dodd and/or Sally L. Dodd; Thomas A. Dodd and/or Sally L. Dodd as joint tenants; Luis Quintero; John W. Richards Sr. and Dorothy T. Richards; John W. Richards Jr.; Walter Kim Richardson; Paul M. Fischer and Asma Fisher as joint tenants; Edmund J. Elder, Jr.
Amount of Underwriters or Exemption from Title of Security Date of Sale Securities Sold Other Purchasers* Consideration Registration Claimed ======================== ============== ================ ======================= ======================== ===================== 1994 - ---- Options to purchase 6/94 200,000 Three Members of Stock Options issued Section 4(2) Common Shares Medi-Mail's Audit outside of the Plans at Committee5 exercise price of $2.85 per share Options to purchase 6/94 50,000 Leo T. McCarthy Stock Options issued Section 4(2) Common Shares outside of the Plans at exercise price of $3.00 per share Options to purchase 6/94 180,000 Leo T. McCarthy Directors Stock Options Section 4(2) Common Shares at exercise price of $2.85 per share Options to purchase 8/94 120,000 Robert W. Quick and Directors Stock Options Section 4(2) Common Shares Lincoln R. Ward at exercise price of $3.81 per share Common Stock 8/94 13,333 Alan Springer Buyout of Commission Section 4(2) $0.01 par value Agreement Common Stock 9/94 800,000 Alliance Global, as an $2,397,675 Reg. S $0.01 par value 10/94 overseas distributor Common Stock 11/94 1,600,000 Medical Service Acquisition of Mednet Reg. D $0.01 par value Agency, Inc. Common Stock 12/94 110,771 Twenty-two investors Termination of Section 4(2) $0.01 par value who owned interests in Medi-Mail marketing marketing partnerships6 partnerships 1995 - ---- Warrants to purchase 1/95 82,548 Wall Street Group Issued in connection with Section 4(2) 17,978 Common Shares public relations at $5.56 per share; agreement 38,554 shares at $2.59 per share; and, 26,016 shares at $3.84 per share Options to purchase 5/95 120,000 Edward T. Hanley, Jr. Services rendered to Section 4(2) Common Shares and Matthew Strauss as Medi-Mail, Inc. as directors of Medi-Mail, directors Inc. Warrants to purchase 5/95 100,000 Former shareholders of Settlement of contractual Section 4(2) Common Shares at FPA, Inc. obligations $5.00 per share Common Stock 5/95 1,000,000 Cole Taylor Bank, as Acquisition of Home Section 4(2) $0.01 par value Escrow Agent Pharmacy - -------- 5 The three members of the Audit Committee granted options outside of the Plan are: Byron S. Georgiou, Matthew C. Strauss and Lincoln R. Ward. 6 The twenty-two accredited investors are: Barry Bellport; Robert De Summa; Michael Feinstein, Murray Rosenthal; Alan Springer, Albert Barbabes; Rosenthal Pension Plan; Herman Wetsman; Maneck Wadia; Stephen Ficci; Seth Flam; Katzman Family Trust; Steven Katzman; David Matus; Michael Rodriguez; Larry Ender; Derezin; Brier; Totalsen; Michael Coscinga; Michael Axelrod; Lincoln Ward.
Amount of Underwriters or Exemption from Title of Security Date of Sale Securities Sold Other Purchasers* Consideration Registration Claimed ======================== ============== ================ ======================= ======================== ===================== Common Stock, $0.01 5/95 408,020 Three accredited Convertible Notes issued Section 4(2) par value issuable on investors7 in settlement of FPA conversion of debt Shortfall Common Stock, $0.01 5/95 400,000 Four accredited $1,000,000 Section 4(2) par value issuable on investors8 conversion of debt Warrant to purchase 5/95 115,000 Gordon Summer Settlement of Litigation Section 4(2) 110,000 Common 9 Shares at $2.75 per share; and 5,000 Common Shares at $3.00 per share - -------- * Unless otherwise indicated, the sales were made without an underwriter and the persons listed are the investors. 7 The three accredited investors are: John W. Richards, Jr.; W. Kim Richardson; Thomas A. Dodd. 8 The four accredited investors are: Hassman, L.P.; Steven M. Lash; Kevin Ellis; Seth Flam. 9 To be issued pursuant to the record of proceeding of May 24, 1995.
Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits Exhibit Number Description 3.1 Articles of Incorporation of the Company as filed September 17, 1985 with the Secretary of State of the State of Nevada.(1) 3.2 Amendment to Articles of Incorporation of the Company as filed April 8, 1988 with the Secretary of State of the State of Nevada.(1) 3.3 Amended and Restated Articles of Incorporation of the Company as filed May 20, 1988 with the Secretary of State of the State of Nevada.(1) 3.4 Second Amended and Restated Articles of Incorporation of the Company as filed May 19, 1989 with the Secretary of State of the State of Nevada.(2) 3.5 Certificate of Amendment to Articles of Incorporation of the Company as filed March 2, 1990 with the Secretary of State of the State of Nevada.(3) 3.6 Certificate of Amendment to Articles of Incorporation of the Company as filed December 15, 1993 with the Secretary of State of the State of Nevada.(3) 3.7 Certificate of Amendment to Articles of Incorporation of the Company as filed November 9, 1994.(4) 3.8 Certificate of Amendment to Articles of Incorporation of the Company as filed June 29, 1995.(13) 3.9 By-laws.(1) 3.10 Amended and Restated By-laws.(3) 3.11 Certificate of Amendment to Amended and Restated By-laws dated January 27, 1992.(3) 3.12 Second Amended and Restated By-laws.(4) 4.1 Specimen certificate for Common Stock, $.001 par value per share.(1) 5.1 Form of Opinion of Ballard Spahr Andrews & Ingersoll regarding the legality of the securities registered under this Registration Statement.** 10.1 1988 Incentive Stock Option Plan.(2) 10.1.1 1992 Amended and Restated Incentive Stock Option Plan.(5) 10.1.2 Amendment No. 1 to 1992 Amended and Restated Incentive Stock Option Plan.(3) 10.2 1988 Nonqualifying Stock Option Plan.(2) 10.2.1 1992 Amended and Restated Nonqualifying Stock Option Plan.(5) 10.2.2 Amendment No. 1 to 1992 Amended and Restated Nonqualifying Stock Option Plan.(3) 10.3 Employment Agreement between the Company and M.B. Merryman dated May 1, 1992.(5) 10.3.1 First Amendment to Employment Agreement between the Company and M.B. Merryman dated as of September 12, 1993.(3) 10.4 Letter Agreement between the Company and Gordon Summer dated March 13, 1992.(5) 10.5 Sublease between the Company and Rocky Mountain Bank Note Company dated March 9, 1992.(5) 10.6 Asset Purchase Agreement between the Company, Medi-Claim, Inc., and Avesis, Incorporated dated December 30, 1992.(5) 10.7 Purchase and Sale Agreement between the Company, Medi-Phar, Inc. and Medco Drugs dated January 17, 1992.(6) 10.8 Agreement between Avesis, Incorporated and National Insurance Services, Inc. dated September 1, 1992 acknowledging that the Company is to provide mail pharmacy services.(5) 10.9 Pharmaceutical Services Agreement between Union Labor Life Insurance Company and the Company effective March 1, 1992.(5) 10.10 Agreement between the Company and PACE Membership Warehouse, Inc. dated September 14, 1988.(7) 10.11 Letters of Agreement between the Company and Hanover, Direct, Inc. dated December 8, 1992 and September 22, 1992.(5) 10.12 Contract dated July 16, 1992 between Ingels, Inc. and the Company to procure its spokesperson.(5) 10.13 Specimen form of Indemnification Agreement between the Company and all of its officers and directors, signed in 1992.(5) 10.14 Asset Purchase Agreement between the Company and G.B.K., Inc. d/b/a Mail Rx dated April 15, 1993.(8) 10.15 Consultant Agreement by and between the Company and Irwin G. Jann & Associates, P.C., dated June 1, 1994.(9) 10.16 Share Exchange Agreement by and among Family Pharmaceuticals of America, Inc. ("FPA"), the former stockholders of FPA and the Company dated June 30, 1994.(10) 10.17 Agreement and Plan of Reorganization by and among Medical Service Agency, Inc. (doing business as Mednet), Medi-Claim, Inc. and the Company dated November 19, 1994.(11) 10.18 Employment Agreement between the Company and David L. Dalton, dated November 9, 1994.(4) 10.19 Foothill Revolving Loan Agreement.* 21.1 Subsidiaries of the Registrant.(4) 23.1 Consent of McGladrey & Pullen, LLP, independent public accountants of the Company.* 23.2 Consent of McGladrey & Pullen, LLP, independent public accountants of FPA.* 23.3 Consent of McKonly & Asbury, independent public accountants of Medical Service Agency, Inc. 23.5 Consent of Arthur Andersen, LLP, independent public accountants of Home Pharmacy.* 99.1 Complaint, Mark Christiansen v. Medi-Mail, Inc. et al., Civil No. 940052B(LSP), filed January 12, 1995 (S.D. Calif.)(12) - -------------------- * Filed herewith. ** Previously filed. (1) Pursuant to Rule 12b-32, this Exhibit is incorporated herein by reference to the exhibits filed with respect to the Company's Registration Statement on Form S-18, as amended, originally filed on May 3, 1988, Registration No. 33-21599. (2) Pursuant to Rule 12b-32, this Exhibit is incorporated herein by reference to the exhibits filed with respect to the Company's Registration Statement on Form S-1, as amended, originally filed on December 22, 1988, Registration No. 33-26282. (3) Pursuant to Rule 12b-32, this Exhibit is incorporated herein by reference to the exhibits filed with respect to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. (4) Pursuant to Rule 12b-32, this Exhibit is incorporated herein by reference to the exhibits filed with respect to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (5) Pursuant to Rule 12b-32, this Exhibit is incorporated herein by reference to the exhibits filed with respect to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. (6) Pursuant to Rule 12b-32, this Exhibit is incorporated herein by reference to the exhibits filed pursuant to Item 7(c) of the Company's Current Report on Form 8-K dated January 31, 1992. (7) Pursuant to Rule 12b-32, this Exhibit is incorporated herein by reference to the exhibits filed pursuant to Item 7(c) of the Company's Current Report on Form 8-K dated October 14, 1988. (8) Pursuant to Rule 12b-32, this Exhibit is incorporated herein by reference to the exhibits filed pursuant to Item 2 of the Company's Current Report on Form 8-K dated April 30, 1993. (9) Pursuant to Rule 12b-32, this Exhibit is incorporated herein by reference to the exhibits filed pursuant to Item 5 of the Company's Current Report on Form 8-K dated April 28, 1994. (10) Pursuant to Rule 12b-32, this Exhibit is incorporated herein by reference to the exhibits filed pursuant to Item 2 of the Company's Current Report on Form 8-K and Form 8-K/A dated June 30, 1994. (11) Pursuant to Rule 12b-32, this Exhibit is incorporated herein by reference to the exhibits filed pursuant to Item 2 of the Company's Current Report on Form 8-K and Form 8-K/A dated November 19, 1994. (12) Pursuant to Rule 12b-32, this Exhibit is incorporated herein by reference to the exhibits filed pursuant to Item 2 of the Company's Current Report on Form 8-K dated February 23, 1995. (13) Pursuant to Rule 12b-32, this Exhibit is incorporated herein by reference to the exhibits filed pursuant to Item 5 of the Company's Current Report on Form 8-K dated June 29, 1995. Item 17. Undertakings. (a) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended; (ii) To reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, as amended, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled be controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Las Vegas, State of Nevada, January 31, 1996. MEDNET, MPC CORPORATION By: /S/ M. B. Merryman ------------------------------------- M. B. Merryman President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints M. B. Merryman as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ M.B. Merryman President, Chief January 31, 1996 - ----------------- Executive Officer M. B. Merryman and Director (Principal Executive Officer) /s/ Thomas Warren Chief Financial Officer January 31, 1996 - --------------- (Principal Financial and Thomas Warren Accounting Officer) /s/ Leo T. McCarthy Director January 31, 1996 - ------------------- Leo T. McCarthy, by M. B. Merryman, Attorney-in-fact /s/ Sol Lizerbram Director January 31, 1996 - ----------------- Sol Lizerbram, by M. B. Merryman, Attorney-in-fact /s/ Byron S. Georgiou Director January 31, 1996 - --------------------- Byron S. Georgiou, by M. B. Merryman, Attorney-in-fact /s/ Lincoln R. Ward Director January 31, 1996 - ------------------- Lincoln R. Ward, by M. B. Merryman, Attorney-in-fact /s/ Edward F. Heil Director January 31, 1996 - ------------------ Edward F. Heil, by M. B. Merryman, Attorney-in-fact /s/ Robert W. Quick Director January 31, 1996 - ------------------- Robert W. Quick, by M. B. Merryman, Attorney-in-fact /s/ Matthew C. Strauss Director January 31, 1996 - ---------------------- Matthew C. Strauss, by M. B. Merryman, Attorney-in-fact /s/ Director - ------------------------- Edward T. Hanley, Jr. /s/ Donald Kirsch Director January 31, 1996 - ----------------- Donald Kirsch, by M. B. Merryman, Attorney-in-fact EX-10 2 LOAN AND SECURITY AGREEMENT by and between MEDNET, MPC CORPORATION MEDI-MAIL, INC. FAMILY PHARMACEUTICALS OF AMERICA, INC. MEDI-CLAIM, INC. MEDI-PHAR, INC. and FOOTHILL CAPITAL CORPORATION Dated as of December 26, 1995 LOAN AND SECURITY AGREEMENT This LOAN AND SECURITY AGREEMENT, is entered into as of December 26, 1995, between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), with a place of business located at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025-3333 and Mednet, MPC Corporation, having a chief executive office at and mailing address of 871-C Grier Drive, Las Vegas, Nevada 89119, Medi-Mail, Inc. a Nevada corporation, with mailing address of 871-C Grier Drive, Las Vegas, Nevada 89119, Family Pharmaceuticals of America, Inc. a South Carolina corporation, with a mailing address of 966 Houston Northcutt Boulevard, Suite E, Mount Pleasant, South Carolina 29464, MediClaim, Inc. a Nevada corporation with a mailing address of 20 Erford Road, LeMoyne, Pennsylvania 17043 and Medi-Phar, Inc. a Nevada corporation with a mailing address of POB 420954, San Diego, California 92142, jointly and severally (Mednet, MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc., MediClaim, Inc. and Medi-Phar, Inc. are collectively and individually, as the context may require, referred to herein as "Borrower"). Notwithstanding that each of Medi-Mail, Inc., Family Pharmaceuticals of America, Inc., Medi-Claim, Inc. and Medi-Phar, Inc. may have separate and distinct mailing addresses, each of such entities comprising Borrower has a chief executive office, c/o their parent company Mednet, MPC Corporation of 871-C Grier Drive, Las Vegas, Nevada 89119. The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of an Account. "Accounts" means all currently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale of goods or the rendition of services by Borrower, irrespective of whether earned by performance, and any and all credit insurance, guaranties, or security therefor. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For purposes of this definition, "control" as applied to any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities, by contract, or otherwise. "Agreement" means this Loan and Security Agreement and any extensions, riders, supplements, notes, amendments, or modifications to or in connection with this Loan and Security Agreement. "Authorized Officer" means any officer of Borrower. "Average Unused Portion of Maximum Amount" means (a) the Maximum Amount less (b) the sum of: (i) the average Daily Balance of advances made by Foothill under Section 2.1 that were outstanding during the immediately preceding month, plus (ii) the average Daily Balance of the undrawn L/Cs and L/C Guarantees issued by Foothill under Section 2.2 that were outstanding during the immediately preceding month. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C. ss. 101 et seq.), as amended, and any successor statute. "Borrower" has the meaning set forth in the preamble to this Agreement. "Borrower's Books" means all of Borrower's books and records including: ledgers; records indicating, summarizing, or evidencing Borrower's properties or assets (including the Collateral) or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disc or tape files, printouts, runs, or other computer prepared information. "Borrowing Base" shall mean the sum of the individual borrowing base calculations which are set forth in Section 2.1 for each of Mednet, MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc., Medi-Phar, Inc. and Medi-Claim, Inc. "Business Day" means any day which is not a Saturday, Sunday, or other day on which national banks are authorized or required to close. "Change of Control" shall be deemed to have occurred at such time as a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than 20% of the total voting power of all classes of stock then outstanding of Borrower normally entitled to vote in the election of directors. "Closing Date" means the date of the initial advance hereunder or the date of the initial issuance of an L/C or an L/C Guaranty hereunder, whichever occurs first. "Code" means the California Uniform Commercial Code. "Collateral" means each of the following: the Accounts; Borrower's Books; the Equipment; the General Intangibles; the Inventory; the Negotiable Collateral; any money, or other assets of Borrower which now or hereafter come into the possession, custody, or control of Foothill; and the proceeds and products, whether tangible or intangible, of any of the foregoing including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Borrower's Books, Equipment, General Intangibles, Inventory, Negotiable Collateral, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "Consolidated Current Assets" means, as of any date of determination, the aggregate amount of all current assets of Borrower calculated on a consolidated basis that would, in accordance with GAAP, be classified on a balance sheet as current assets. "Consolidated Current Liabilities" means, as of any date of determination, the aggregate amount of all current liabilities of Borrower calculated on a consolidated basis that would, in accordance with GAAP, be classified on a balance sheet as current liabilities. For purposes of this definition, all advances outstanding under this Agreement shall be deemed to be current liabilities without regard to whether they would be deemed to be so under GAAP. "Daily Balance" means the amount of an Obligation owed at the end of a given day. "Dilution Reserve" means, as of the date of any determination of any of the individual borrowing bases referred to in Section 2.1 of this Agreement, the amount of five percent (5%), which Foothill has deemed sufficient as a reduction in the advance rate against Eligible Accounts-Medi-Claim, Inc. and Eligible Accounts-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. for bad debt write-downs, discounts, advertising, returns, promotions, credits, allowances, contra-accounts and other offsets which reduce the value of the respective Accounts. "Early Termination Premium" has the meaning set forth in Section 3.5. "Eligible Accounts" shall refer to the Eligible Accounts-Medi- Claim, Inc. and the Eligible Accounts-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. collectively. "Eligible Accounts-Medi-Claim, Inc." means those Accounts from which payments are to be directed and made to a Lockbox Bank from Account Debtors listed on Schedule A-1 attached hereto, evidenced by a written and signed (by all parties thereto) contract which has not by its stated terms expired and which is fully enforceable by Foothill as secured party and assignee of Medi-Claim, Inc. pursuant to the provisions of this Agreement, the identification of which is set forth on Schedule A-1 attached hereto, a copy of which has been submitted to, reviewed by and approved by Foothill in its reasonable discretion; such Account being created by Borrower in the ordinary course of its business and arising out of Borrower's rendition of services in connection with the processing of claims relating to the sale and/or provision of pharmaceutical medications, drugs or similar goods, that strictly comply with all of Borrower's representations and warranties to Foothill; that are, and at all times shall continue to be, acceptable to Foothill in all respects; provided, however, that standards of eligibility may be fixed and revised from time to time by Foothill in Foothill's reasonable credit judgment. With respect to the written contracts referred to above, after the Closing Date all contracts for Eligible Accounts-Medi-Claim, Inc. shall be in the form attached to Schedule A-1. Borrower and Lender agree and acknowledge that as of the Closing Date no advances will be made against Eligible Accounts-Medi-Claim, Inc. as there are, at such time, no EligibleMedi-Claim, Inc. Accounts and Borrower and Lender further agree that no advances will be made against Eligible-Medi-Claim, Inc. Accounts until such time as the existing contracts between MediClaim, Inc. and its Account Debtors are amended to a form approved by Foothill and such Account Debtors contracts are included on Schedule A-1 attached hereto. Eligible Accounts-Medi-Claim, Inc. for purposes of this definition shall not include the following: (a) Accounts that the Account Debtor has failed to pay within one hundred twenty (120) days of invoice date or Accounts with selling terms of more than thirty (30) days and all Accounts owed by an Account Debtor that has failed to pay fifty percent (50%) or more of its Accounts owed to Borrower within one hundred twenty (120) days of invoice date; (b) Accounts with respect to which the Account Debtor is an officer, employee, Affiliate, or agent of Borrower; (c) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the Account Debtor may be conditional or Accounts to which there exist a setoff, defense, counterclaim, the contract terms for which contain language creating or suggesting that sums to be paid thereunder are or could be subject to an actual, express, parol or constructive trust or other impairment to payment of such Accounts; (d) Accounts with respect to which the Account Debtor is not a resident of the United States, and which are not either (i) covered by credit insurance in form and amount, and by an insurer, satisfactory to Foothill, or (ii) supported by one or more letters of credit that are assignable by their terms and have been delivered to Foothill in an amount, of a tenor, and issued by a financial institution, acceptable to Foothill; (e) Accounts with respect to which the Account Debtor is the United States or any department, agency, or instrumentality of the United States; (f) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower; (g) Accounts with respect to an Account Debtor of Medi-Claim, Inc. whose total obligations owing to Medi-Claim, Inc. exceed ten percent (10%) of all Eligible Accounts-Medi-Claim, Inc. to the extent that the obligations owing by such Account Debtors exceed ten percent (10%) of all Eligible Accounts-Medi-Claim, Inc.; provided however that Accounts from the two largest Account Debtors of Medi-Claim, Inc. (acceptable to or pre-approved by Foothill) in excess of ten percent (10%) of all Eligible Accounts-Medi-Claim, Inc. may each be eligible for inclusion up to fifteen percent (15%) of all Eligible Accounts-Medi-Claim, Inc.; (h) Accounts with respect to which the Account Debtor disputes liability or makes any claim with respect thereto, or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; (i) Accounts the collection of which Foothill, in its reasonable credit judgment, believes to be doubtful by reason of the Account Debtor's financial condition; (j) Accounts that are payable in other than United States Dollars; (k) Accounts that represent progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services or Accounts which represent accrued sales; (l) Accounts which are Rebate Receivables unless specifically approved by Foothill for inclusion as Eligible Account-Medi-Claim, Inc. in which event such specifically approved Rebate Receivables shall nonetheless be included only to the extent allowed by Foothill; (m) Accounts which represent sums due from consumers or represent the co-pay or first dollar pay amounts from consumers; and (n) Accounts which Foothill deems in its reasonable credit judgement not to be Eligible Accounts (including but not limited to all Accounts due from APS). Schedule A-1 may be amended by the addition or deletion of Account Debtors and by the addition and deletion of written and signed (by all parties thereto) contracts which have not by their stated terms expired and which are fully enforceable by Foothill as secured party and assignee of Medi-Claim, Inc. pursuant to the provisions of this Agreement between Borrower and Account Debtors upon review and acceptance by Foothill but Foothill reserves the right at all times to exercise its reasonable discretion to determine whether any particular Account Debtor or contract form shall qualify to be an Eligible Account-Medi-Claim, Inc. Borrower understands and agrees that changes in laws applicable to pharmaceutical and health care reimbursement may be the basis for Foothill's summary determination that certain otherwise or previously determined Eligible Accounts-Medi-Claim, Inc. will not after a date certain continue to be Eligible Accounts-Medi-Claim, Inc. "Eligible Accounts-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc." calculated on an individual basis for each of Mednet, MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc., means those Accounts from which payments are to be directed and made to a Lockbox Bank from Account Debtors; such Account being created by Mednet, MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. or Medi-Phar, Inc. in the ordinary course of its business and arising out of Mednet, MPC Corporation's, Medi-Mail, Inc.'s, Family Pharmaceuticals of America, Inc.'s or Medi-Phar, Inc.'s sale of pharmaceutical medications, drugs or similar goods or the rendition of services in connection with the sale and/or provision of pharmaceutical medications, drugs or similar goods, that strictly comply with all of Mednet, MPC Corporation's, Medi-Mail, Inc.'s, Family Pharmaceuticals of America, Inc.'s or Medi-Phar, Inc.'s representations and warranties to Foothill; that are, and at all times shall continue to be, acceptable to Foothill in all respects; provided, however, that standards of eligibility may be fixed and revised from time to time by Foothill in Foothill's reasonable credit judgment. Eligible Accounts-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. for purposes of this definition shall not include the following: (a) Accounts that the Account Debtor has failed to pay within one hundred twenty (120) days of invoice date or Accounts with selling terms of more than thirty (30) days and all Accounts owed by an Account Debtor that has failed to pay fifty percent (50%) or more of its Accounts owed to Borrower within one hundred twenty (120) days of invoice date; (b) Accounts with respect to which the Account Debtor is an officer, employee, Affiliate, or agent of Borrower; (c) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the Account Debtor may be conditional or Accounts to which there exist a setoff, defense, counterclaim or Accounts which create or suggest that sums to be paid thereunder are or could be subject to an actual, express, parol or constructive trust or other impairment to payment of such Accounts; (d) Accounts with respect to which the Account Debtor is not a resident of the United States, and which are not either (i) covered by credit insurance in form and amount, and by an insurer, satisfactory to Foothill, or (ii) supported by one or more letters of credit that are assignable by their terms and have been delivered to Foothill in an amount, of a tenor, and issued by a financial institution, acceptable to Foothill; (e) Accounts with respect to which the Account Debtor is the United States or any department, agency, or instrumentality of the United States; (f) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower; (g) Accounts with respect to an Account Debtor of Mednet, MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. whose total obligations owing to Mednet, MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. exceed ten percent (10%) of all Eligible Accounts-Mednet, MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc., Inc. to the extent that the obligations owing by such Account Debtors exceed ten percent (10%) of all Eligible Accounts-Mednet, MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi- Phar, Inc.; provided however that Accounts from the two largest Account Debtors of Mednet, MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. (as a group and otherwise acceptable to or pre-approved by Foothill) in excess of ten percent (10%) of all Eligible Accounts-Mednet, MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. may be eligible for inclusion up to fifteen percent (15%) of all Eligible Accounts-Mednet, MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc.; (h) Accounts with respect to which the Account Debtor disputes liability or makes any claim with respect thereto, or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; (i) Accounts the collection of which Foothill, in its reasonable credit judgment, believes to be doubtful by reason of the Account Debtor's financial condition; (j) Accounts that are payable in other than United States Dollars; (k) Accounts that represent progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services or Accounts which represent accrued sales; (l) Accounts which are Rebate Receivables unless specifically approved by Foothill for inclusion as Eligible Account-Mednet, MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. in which event such specifically approved Rebate Receivables shall nonetheless be included only to the extent allowed by Foothill and shall be net of any prepayment by the Account Debtor and net of any amounts payable by any Borrower entity to any other party; (m) Accounts which represent sums due from Account Debtors of Medi-Phar, Inc. until such time as all existing security interests and liens on such Accounts are released of record with all applicable filing authorities in California; (n) Accounts due to Medi-Mail, Inc. which in the reasonable credit judgement of Foothill may not be collectible in whole or in part due to the Borrower or any one or more of them not having the required license, permit or registration from jurisdictions requiring such for the shipment of pharmaceuticals by mail or other methods from such jurisdiction or from jurisdictions requiring a license, permit or registration for the shipment of pharmaceuticals by mail or other methods into such jurisdiction; (o) Accounts which represent sums due from consumers or represent the co-pay or first dollar pay amounts from consumers; and (p) Accounts which Foothill deems in its reasonable credit judgement not to be Eligible Accounts (including but not limited to all Accounts due from APS). Foothill reserves the right at all times to exercise its reasonable discretion to determine whether any particular Account Debtor shall qualify to be an Eligible Account. Borrower understands and agrees that changes in laws applicable to pharmaceutical and health care reimbursement may be the basis for Foothill's summary determination that certain otherwise or previously determined Eligible AccountsEligible Accounts-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. will not after a date certain continue to be Eligible Accounts-Eligible Accounts-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. "Eligible Inventory" means Inventory consisting of good and marketable first quality medications, prescription drugs and pharmacy items, as to which there shall be no legal or contractual limitations restricting, proscribing or otherwise prohibiting, in any way, the ability of the Borrower to freely sell, transfer or otherwise dispose of same (other than licensing laws as to which Borrower is in full compliance), which have effective use and shelf life dates which have not expired as of the date of determination, held for sale in the ordinary course of Borrower's business, located at Borrower's premises identified on Schedule E-1 and with respect to such premises Foothill shall have received a landlord waiver and license agreement or an Agreement of Lessor to Borrower's Assignment of Lease in form satisfactory to Foothill, and which are acceptable to Foothill in all respects (provided, however, that standards of eligibility may be fixed and revised from time to time by Foothill in Foothill's reasonable credit judgment), and that strictly comply with all of Borrower's representations and warranties to Foothill. Eligible Inventory shall not include slow moving or obsolete items, items subject to recall by manufacturers, distributors or any federal or state regulatory agency or unit, restrictive or custom items, packaging and shipping materials, supplies used or consumed in Borrower's business, Inventory at any location other than those set forth on Schedule E-1 or if with respect to such premises Foothill shall not have received a landlord waiver and license agreement or an Agreement of Lessor to Borrower's Assignment of Lease in form satisfactory to Foothill, Inventory subject to a security interest or lien in favor of any third Person, bill and hold items, Inventory that is not subject to Foothill's perfected security interest, returned or defective goods, "seconds," or Inventory acquired on consignment. Inventory shall not be Eligible Inventory if Borrower shall not have a current license to sell at retail such item, if a license is necessary, or Borrower shall not have obtained the required licenses or made the required registrations with applicable governmental authorities in connection with the operation of its business within a State or in connection with the operation of a mail order pharmacy in the State of such pharmacy's location and in each state into which pharmaceutical items are sold or delivered. Eligible Inventory shall be valued at the lower of Borrower's cost or market value. "Equipment" means all of Borrower's present and hereafter acquired machinery, machine tools, motors, equipment, furniture, furnishings, fixtures, vehicles (including motor vehicles and trailers), tools, parts, dies, jigs, goods (other than consumer goods, farm products, or Inventory), wherever located, and any interest of Borrower in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any predecessor, successor, or superseding laws of the United States of America, together with all regulations promulgated thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) which, within the meaning of Section 414 of the IRC, is: (i) under common control with Borrower; (ii) treated, together with Borrower, as a single employer; (iii) treated as a member of an affiliated service group of which Borrower is also treated as a member; or (iv) is otherwise aggregated with the Borrower for purposes of the employee benefits requirements listed in IRC Section 414(m)(4). "ERISA Event" means any one or more of the following: (i) a Reportable Event with respect to a Qualified Plan or a Multiemployer Plan; (ii) a Prohibited Transaction with respect to any Plan; (iii) a complete or partial withdrawal by Borrower or any ERISA Affiliate from a Multiemployer Plan; (iv) the complete or partial withdrawal of Borrower or an ERISA Affiliate from a Qualified Plan during a plan year in which it was, or was treated as, a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (v) a failure to make full payment when due of all amounts which, under the provisions of any Plan or applicable law, Borrower or any ERISA Affiliate is required to make; (vi) the filing of a notice of intent to terminate, or the treatment of a plan amendment as a termination, under Sections 4041 or 4041A of ERISA; (vii) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Qualified Plan or Multiemployer Plan; (viii) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon Borrower or any ERISA Affiliate; and (ix) a violation of the applicable requirements of Sections 404 or 405 of ERISA, or the exclusive benefit rule under Section 403(c) of ERISA, by any fiduciary or disqualified person with respect to any Plan for which Borrower or any ERISA Affiliate may be directly or indirectly liable. "Event of Default" has the meaning set forth in Section 8. "FEIN" means Federal Employer Identification Number. "Foothill" has the meaning set forth in the preamble to this Agreement. "Foothill Expenses" means all: costs or expenses (including taxes, photocopying, notarization, telecommunication and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or advanced by Foothill; documentation, filing, recording, publication, appraisal (including periodic Collateral appraisals), real estate survey, environmental audit, and search fees assessed, paid, or incurred by Foothill in connection with Foothill's transactions with Borrower; costs and expenses incurred by Foothill in the disbursement of funds to Borrower (by wire transfer or otherwise); charges paid or incurred by Foothill resulting from the dishonor of checks; costs and expenses paid or incurred by Foothill to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated; costs and expenses paid or incurred by Foothill in examining Borrower's Books; costs and expenses of third party claims or any other suit paid or incurred by Foothill in enforcing or defending the Loan Documents; and Foothill's reasonable attorneys fees and expenses incurred in advising, structuring, drafting, reviewing, administering, amending, terminating, enforcing (including attorneys fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning Borrower), defending, or concerning the Loan Documents, irrespective of whether suit is brought. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means all of Borrower's present and future general intangibles and other personal property (including contract rights, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), other than goods, Accounts, and Negotiable Collateral. "Hazardous Materials" means all or any of the following: (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity"; (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources; (c) any flammable substances or explosives or any radioactive materials; and (d) asbestos in any form or electrical equipment which contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million. "Indebtedness" means: (a) all obligations of Borrower for borrowed money; (b) all obligations of Borrower evidenced by bonds, debentures, notes, or other similar instruments (other than Preferred Class A and Class B Stock) and all reimbursement or other obligations of Borrower in respect of letters of credit, letter of credit guaranties, bankers acceptances, interest rate swaps, controlled disbursement accounts, or other financial products; (c) all obligations under capital leases; (d) all obligations or liabilities of others secured by a lien or security interest on any property or asset of Borrower, irrespective of whether such obligation or liability is assumed; and (e) any obligation of Borrower guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with recourse to Borrower) any indebtedness, lease, dividend, letter of credit, or other obligation of any other Person. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Inventory" means all present and future inventory in which Borrower has any interest, including medications, prescription drugs and pharmacy items held for sale and all of Borrower's present and future packing and shipping materials, wherever located, and any documents of title representing any of the above. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "L/C" has the meaning set forth in Section 2.2(a). "L/C Guaranty" has the meaning set forth in Section 2.2(a). "Loan Documents" means this Agreement, the Lockbox Agreements, any other note or notes executed by Borrower and payable to Foothill, and any other agreement entered into in connection with this Agreement. "Lockbox Account" shall mean the depositary account established pursuant to the respective Lockbox Agreement. "Lockbox Agreements" means those certain Lockbox Operating Procedural Agreements and those certain Depository Account Agreements, in form and substance satisfactory to Foothill, each of which is among Borrower, Foothill, and one of the Lockbox Banks. "Lockbox Banks" means as to Medi-Mail, Inc. in Nevada-First Interstate Bank of Nevada; as to Medi-Mail, Inc. in Chicago-First Chicago Bank and Trust Company; as to Medi-Mail, Inc. in South Carolina-NationsBank; as to Medi-Claim, Inc.- Mellon Bank and Trust Company; as to Medi-Phar, Inc. in Nevada-First-Interstate Bank of Nevada; as to Medi-Phar, Inc. in California-First Interstate Bank. "Maximum Amount" has the meaning set forth in Section 2.1(c). "Multiemployer Plan" means a multiemployer plan as defined in Sections 3(37) or 4001(a)(3) of ERISA or Section 414 of the IRC in which employees of Borrower or an ERISA Affiliate participate or to which Borrower or any ERISA Affiliate contribute or are required to contribute. "Negotiable Collateral" means all of Borrower's present and future letters of credit, notes, drafts, instruments, certificated and uncertificated securities (including the shares of stock of subsidiaries of Borrower), documents, personal property leases (wherein Borrower is the lessor), chattel paper, and Borrower's Books relating to any of the foregoing. "Obligations" means all loans, advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), contingent reimbursement obligations owing to Foothill under any outstanding L/Cs or L/C Guarantees, premiums (including Early Termination Premiums), liabilities (including all amounts charged to Borrower's loan account pursuant to any agreement authorizing Foothill to charge Borrower's loan account), obligations, fees, lease payments, guaranties, covenants, and duties owing by Borrower to Foothill of any kind and description (whether pursuant to or evidenced by the Loan Documents, by any note or other instrument, or pursuant to any other agreement between Foothill and Borrower, and irrespective of whether for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including any debt, liability, or obligation owing from Borrower to others that Foothill may have obtained by assignment or otherwise, and further including all interest not paid when due and all Foothill Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. "Old Lender" shall mean McKesson Corporation, Bergen Brunswig Drug Company and John W. Richards, Jr., John W. Richards, Sr., W. Kim Richardson and Thomas A. Dodd. "Overadvance" has the meaning set forth in Section 2.4. "Pay-Off Letter" means a letter or letters, in form and substance reasonably satisfactory to Foothill, from Old Lender respecting the amount necessary to repay in full all of the obligations of Borrower owing to Old Lender and obtain a termination or release of all of the security interests or liens existing in favor of Old Lender in and to the properties or assets of Borrower. "PBGC" means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto. "Permitted Liens" means: (a) liens and security interests held by Foothill; (b) liens for unpaid taxes that are not yet due and payable; (c) liens and security interests set forth on Schedule P-1 attached hereto; (d) purchase money security interests and liens of lessors under capital leases to the extent that the acquisition or lease of the underlying asset was permitted under Section 7.10, and so long as the security interest or lien only secures the purchase price of the asset; (e) easements, rights of way, reservations, covenants, conditions, restrictions, zoning variances, and other similar encumbrances that do not materially interfere with the use or value of the property subject thereto; (f) obligations and duties as lessee under any lease existing on the date of this Agreement; (g) mechanics', materialmen's, warehousemen's, or similar liens that arise by operation of law; and (h) exceptions listed in the title insurance or commitment therefor to be delivered by Borrower hereunder. "Permitted Protest" means the right of Borrower to protest any lien, tax, rental payment, or other charge, other than any such lien or charge that secures the Obligations, provided (i) a reserve with respect to such obligation is established on the books of Borrower in an amount that is reasonably satisfactory to Foothill, (ii) any such protest is instituted and diligently prosecuted by Borrower in good faith, and (iii) Foothill is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the liens or security interests of Foothill in and to the property or assets of Borrower. "Person" means and includes natural persons, corporations, limited partnerships, general partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) which Borrower or any ERISA Affiliate sponsors or maintains or to which Borrower or any ERISA Affiliate makes, is making, or is obligated to make contributions, including any Multiemployer Plan or Qualified Plan. "Prohibited Transaction" means any transaction described in Section 406 of ERISA which is not exempt by reason of Section 408 of ERISA, and any transaction described in Section 4975(c) of the IRC which is not exempt by reason of Section 4975(c) of the IRC. "Qualified Plan" means a pension plan (as defined in Section 3(2) of ERISA) intended to be tax-qualified under Section 401(a) of the IRC which Borrower or any ERISA Affiliate sponsors, maintains, or to which any such person makes, is making, or is obligated to make, contributions, or, in the case of a multiple-employer plan (as described in Section 4064(a) of ERISA), has made contributions at any time during the immediately preceding period covering at least five (5) plan years, but excluding any Multiemployer Plan. "Rebate Receivable" means an Account arising under a written agreement entitled "Pharmaceutical Rebate Services Agreement" or any other agreement whereby a receivable is anticipated from a pharmaceutical manufacturer or distributor for a rebate resulting from volume purchases or under any circumstance where a deduction or refund or remuneration, in cash or in kind, from a stipulated payment, charge or rate, not taken out in advance of payment, but handed back after payment of the stipulated payment which is obtained by Borrower and such refund of remuneration arises from the purchase or sale of drugs or other pharmaceutical items. "Reference Rate" means the highest of the variable rates of interest, per annum, most recently announced by (a) Bank of America, N.T. & S.A., (b) Mellon Bank, N.A., and (c) Citibank, N.A., or any successor to any of the foregoing institutions, as its "prime rate" or "reference rate," as the case may be, as established from time to time, irrespective of whether such announced rate is the best rate available from such financial institution. "Renewal Date" has the meaning set forth in Section 3.3. "Reportable Event" means any event described in Section 4043 (other than Subsections (b)(7) and (b)(9)) of ERISA. "Secondary Dilution Reserve" means, as of the date of any determination of the individual borrowing base calculations for each of the individual Borrower's borrowing bases, an additional amount in excess of the Dilution Reserve, sufficient to reduce Foothill's advance rate against Eligible Accounts-Medi-Claim, Inc. and Eligible Accounts-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. by one percentage point for each percentage point by which the amount (expressed as a percentage and based upon the experience of the immediately prior three (3) months) of Borrower's Accounts that are subject to bad debt write-downs, discounts, advertising, returns, promotions, credits, allowances, contra-accounts and other offsets which reduce the value of the respective Accounts or other dilution is in excess of one percent (1%). "Solvent" means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Tangible Net Worth" means, as of the date any determination thereof is to be made, the difference of: (a) Borrower's total stockholder's equity; minus (b) the sum of: (i) all intangible assets of Borrower; (ii) all of Borrower's prepaid expenses; and (iii) all amounts due to Borrower from Affiliates, calculated on a consolidated basis. "Unfunded Benefit Liability" means the excess of a Plan's benefit liabilities (as defined in Section 4001(a)(16) of ERISA) over the current value of such Plan's assets, determined in accordance with the assumptions used by the Plan's actuaries for funding the Plan pursuant to Section 412 of the IRC for the applicable plan year. "Voidable Transfer" has the meaning set forth in Section 15.8. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrower" is used in respect of a financial covenant or a related definition, it shall be understood to mean Borrower on a consolidated basis unless the context clearly requires otherwise. 1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4 Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. Any reference in this Agreement or in the Loan Documents to this Agreement or any of the Loan Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, and supplements, thereto and thereof, as applicable. 1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 1.6 Joint and Several Borrowing. Each of Mednet, MPC Corporation, Medi-Mail, Inc., Family Pharmaceuticals of America, Inc., MediClaim, Inc. and Medi-Phar, Inc. agree that for borrowing purposes a separate borrowing base shall be calculated for each entity in accordance with Section 2.1 of this Agreement and that no entity shall be entitled to receive a greater advance than the borrowing base calculated for each such entity in accordance with the provisions of Section 2.1 of this Agreement. All advances hereunder shall be made to Mednet, MPC Corporation as the parent corporation for itself and as agent for each of the other individual Borrower entities and Mednet, MPC Corporation and each of the other individual entities agrees that Mednet, MPC Corporation shall be responsible for the allocation and distribution to each of the individual Borrower entities such amounts of each advance as are necessary to meet the operating and administrative needs of each company. Each of Medi-Mail, Inc., Family Pharmaceuticals of America, Inc., Medi-Claim, Inc. and MediPhar, Inc. constitute and appoint Mednet, MPC Corporation as their respective agent for borrowing purposes to receive all advances hereunder and that they as an integrated family of companies will allocate and distribute such amounts of each Advance as shall be necessary such that Foothill need only deal with and advance to Mednet, MPC Corporation. 2. LOAN AND TERMS OF PAYMENT. 2.1 Revolving Advances. (a) Subject to the terms and conditions of this Agreement, Foothill agrees to make revolving advances to Borrower in an amount at any one time outstanding not to exceed the aggregate sum of all of the individual borrowing bases for each of the individual entities constituting Borrower (the sum of the individual borrowing bases are hereinafter referred to as "Borrowing Base") less the undrawn or unreimbursed amount of L/Cs and L/C Guarantees outstanding hereunder. For purposes of this Agreement, the individual borrowing bases, as of any date of determination, shall mean the sum of: (i) an amount equal to the lesser of: (a) eighty-five percent (85%) of the amount of Eligible Accounts-Medi-Claim, Inc. less the Dilution Reserve and less the Secondary Dilution Reserve, if any, (Borrower acknowledges and agrees that as of the Closing Date no advances will be made against Eligible Accounts-Medi-Claim, Inc. as there are no Eligible Accounts-Medi-Claim, Inc. on the Closing Date; such advances to be made only after Foothill has reviewed and approved for inclusion on Schedule A-1 hereto all written contracts and contract amendment letters submitted by Borrower) plus for each of the other entities comprising Borrower, calculated separately, eighty-five percent (85%) of the amount of Eligible Accounts-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. less the Dilution Reserve (applied to each such entity calculation) and less the Secondary Dilution Reserve (applied to each such entity calculation), if any. With respect to the calculations in this subsection (i), Accounts arising from contracts entitled "Chain Pharmacy Network Agreement" shall be included only to the extent the receivables are otherwise Eligible Receivables and shall be net of any prepayment by the Account Debtor and net of any trust funds or prepayments by such Account Debtor or Accounts arising under contracts entitled "Sponsor Agreement" but with respect to such Sponsor Agreement receivables, the receivables which shall be eligible shall be net of any prepaid amounts by such Account Debtors; or (b) an amount equal to Borrower's collections with respect to Accounts for the immediately preceding thirty (30) day period; plus (ii) for an initial period of ninety (90) days after the Closing Date, provided that monthly physical inventories are performed and the results thereof are satisfactory to Foothill, in its sole discretion, and further provided the landlords, owners and sublessors of the locations at which the Inventory consisting of Eligible Inventory is located have provided to Foothill an appropriate landlord waiver and consent or Agreement of Landlord to Borrowers Assignment of Lease, an amount equal to the lowest of: (x) sixty percent (60%) of the amount of Eligible Inventory, (y) 50% of the amount of credit availability created by Section 2.1(a)(i) above or (z) One Million Two Hundred Thousand Dollars ($1,200,000). Borrower acknowledges and agrees that ninety (90) days after the Closing Date no further advances will be made against Inventory unless Borrower has implemented a perpetual inventory reporting and tracking system (a perpetual inventory reporting and tracking system is one that is consistent with industry standards and proves after testing, that variances, in count or cost of all covered inventory items, are less than 3% from the actual cost or count of such covered inventory after physical count and audit) acceptable to Foothill in its sole discretion and a test of such perpetual inventory reporting and tracking system by Foothill with the results of such test being satisfactory to Foothill in its sole discretion. After Foothill has been satisfied with the implementation and performance of the perpetual inventory reporting and tracking system monthly physical inventories need not continue to be performed and advances against Eligible Inventory may be made by Foothill, in its sole discretion, an amount equal to the lowest of: (x) sixty percent (60%) of the amount of Eligible Inventory, (y) 50% of the amount of credit availability created by Section 2.1(a)(i) above or (z) Six Million Dollars ($6,000,000). Foothill agrees that if Borrower is able to implement the perpetual inventory reporting and tracking system referred to above which is acceptable to Foothill in its sole discretion and the test of such system is satisfactory to Foothill in its sole discretion prior to ninety (90) days after the Closing Date, then the One Million Two Hundred Thousand ($1,200,000) Dollar limitation set forth in Section 2.1(a)(ii)(z) above shall be eliminated and a limitation of Six Million ($6,000,000) Dollars shall be inserted in lieu therefor. (b) Anything to the contrary in Section 2.1(a) above notwithstanding, Foothill may reduce its advance rates based upon Eligible Accounts or Eligible Inventory without declaring an Event of Default if it determines, in its reasonable discretion, that there is a material impairment of the prospect of repayment of all or any portion of the Obligations or a material impairment of the value or priority of Foothill's security interests in the Collateral. (c) Foothill shall have no obligation to make advances hereunder to the extent they would cause the aggregate outstanding Obligations at any time to exceed Twenty Million Dollars ($20,000,000) ("Maximum Amount"). (d) Foothill is authorized to make advances under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Officer of Borrower, or without instructions if pursuant to Section 2.5(d). Borrower agrees to establish and maintain a single designated deposit account for the purpose of receiving the proceeds of the advances requested by Borrower and made by Foothill hereunder. Unless otherwise agreed by Foothill and Borrower, any advance requested by Borrower and made by Foothill hereunder shall be made to such designated deposit account. Amounts borrowed pursuant to this Section 2.1 may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. 2.2 Letters of Credit and Letter of Credit Guarantees. (a) Subject to the terms and conditions of this Agreement, Foothill agrees to issue commercial or standby letters of credit for the account of Borrower (each, an "L/C") or to issue standby letters of credit or guarantees of payment (each such letter of credit or guaranty, an "L/C Guaranty") with respect to commercial or standby letters of credit issued by another Person for the account of Borrower in an aggregate face amount not to exceed the lesser of: (i) the Borrowing Base less the amount of advances outstanding pursuant to Section 2.1, or (ii) Three Million Dollars ($3,000,000). Borrower expressly understands and agrees that Foothill shall have no obligation to arrange for the issuance by other financial institutions of letters of credit that are to be the subject of L/C Guarantees. Borrower and Foothill acknowledge and agree that certain of the letters of credit that are to be the subject of L/C Guarantees may be outstanding on the Closing Date. Each L/C and each letter of credit that is the subject of an L/C Guaranty shall have an expiry date no later than sixty (60) days prior to the date on which this Agreement is scheduled to terminate under Section 3.3 (without regard to any potential renewal term) and all such L/Cs and letters of credit (and the applicable L/C Guarantees) shall be in form and substance acceptable to Foothill in its sole discretion. Foothill shall not have any obligation to issue L/Cs or L/C Guarantees to the extent that the face amount of all outstanding L/Cs and L/C Guarantees, plus the amount of advances outstanding pursuant to Section 2.1, would exceed Twenty Million Dollars ($20,000,000). The L/Cs and the L/C Guarantees issued under this Section 2.2 shall be used by Borrower, consistent with this Agreement, for its general working capital purposes or to support its obligations with respect to workers' compensation premiums or other similar obligations. If Foothill is obligated to advance funds under an L/C or L/C Guaranty, the amount so advanced immediately shall be deemed to be an advance made by Foothill to Borrower pursuant to Section 2.1 and, thereafter, shall bear interest at the rates then applicable under Section 2.5. (b) Borrower hereby agrees to indemnify, save, defend, and hold Foothill harmless from any loss, cost, expense, or liability, including payments made by Foothill, expenses, and reasonable attorneys fees incurred by Foothill arising out of or in connection with any L/Cs or L/C Guarantees. Borrower agrees to be bound by the issuing bank's regulations and interpretations of any letters of credit guarantied by Foothill and opened to or for Borrower's account or by Foothill's interpretations of any L/C issued by Foothill to or for Borrower's account, even though this interpretation may be different from Borrower's own, and Borrower understands and agrees that Foothill shall not be liable for any error, negligence, or mistakes, whether of omission or commission, in following Borrower's instructions or those contained in the L/Cs or any modifications, amendments, or supplements thereto. Borrower understands that the L/C Guarantees may require Foothill to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify, save, defend, and hold Foothill harmless with respect to any loss, cost, expense (including attorneys fees), or liability incurred by Foothill under any L/C Guaranty as a result of Foothill's indemnification of any such issuing bank. (c) Borrower hereby authorizes and directs any bank that issues a letter of credit guaranteed by Foothill to deliver to Foothill all instruments, documents, and other writings and property received by the issuing bank pursuant to such letter of credit, and to accept and rely upon Foothill's instructions and agreements with respect to all matters arising in connection with such letter of credit and the related application. Borrower may or may not be the "applicant" or "account party" with respect to such letter of credit. (d) Any and all service charges, commissions, fees, and costs incurred by Foothill relating to the letters of credit guaranteed by Foothill shall be considered Foothill Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrower to Foothill. On the first day of each month, Borrower will pay Foothill a fee equal to two and one-half percent (2.5%) per annum times the average Daily Balance of the L/Cs and L/C Guarantees that were outstanding during the immediately preceding month. Service charges, commissions, fees, and costs may be charged to Borrower's loan account at the time the service is rendered or the cost is incurred. (e) Immediately upon the termination of this Agreement, Borrower agrees to either: (i) provide cash collateral to be held by Foothill in an amount equal to the maximum amount of Foothill's obligations under L/Cs plus the maximum amount of Foothill's obligations to any Person under outstanding L/C Guarantees, or (ii) cause to be delivered to Foothill releases of all of Foothill's obligations under its outstanding L/Cs and L/C Guarantees. At Foothill's discretion, any proceeds of Collateral received by Foothill after the occurrence and during the continuation of an Event of Default may be held as the cash collateral required by this Section 2.2(e). 2.3 Intentionally Deleted. 2.4 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to Foothill pursuant to Sections 2.1 and 2.2 is greater than either the dollar or percentage limitations set forth in Sections 2.1 or 2.2 (an "Overadvance"), Borrower immediately shall pay to Foothill, in cash, the amount of such excess to be used by Foothill first, to repay non-contingent Obligations and, thereafter, to be held by Foothill as cash collateral to secure Borrower's obligation to repay Foothill for all amounts paid pursuant to L/Cs or L/C Guarantees. 2.5 Interest: Rates, Payments, and Calculations. (a) Interest Rate. All Obligations, except for undrawn L/Cs and L/C Guarantees shall bear interest, on the average Daily Balance, at a per annum rate of one and one-half (1.5) percentage points above the Reference Rate. (b) Default Rate. (i) All Obligations, except for undrawn L/Cs and L/C Guarantees shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a per annum rate equal to five (5.0) percentage points above the Reference Rate. (ii) From and after the occurrence and during the continuance of an Event of Default, the fee provided in Section 2.2(d) shall be increased to a fee equal to seven and one-half percent (7.5%) per annum times the average Daily Balance of the undrawn L/Cs and L/C Guarantees that were outstanding during the immediately preceding month. (c) Minimum Interest. In no event shall the rate of interest chargeable hereunder be less than eight percent (8%) per annum. (d) Payments. Interest hereunder shall be due and payable, in arrears, on the first day of each month during the term hereof. Borrower hereby authorizes Foothill, at its option, without prior notice to Borrower, to charge such interest, all Foothill Expenses (as and when incurred), and all installments or other payments due under any other note or other Loan Document to Borrower's loan account, which amounts thereafter shall accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. (e) Computation. The Reference Rate as of the date of this Agreement is eight and one-half percent (8.50%) per annum. In the event the Reference Rate is changed from time to time hereafter, the applicable rate of interest hereunder automatically and immediately shall be increased or decreased by an amount equal to such change in the Reference Rate. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. (f) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrower and Foothill, in executing this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto as of the date of this Agreement, Borrower is and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrower in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.6 Crediting Payments; Application of Collections. The receipt of any wire transfer of funds, check, or other item of payment by Foothill (whether from transfers to Foothill by the Lockbox Banks pursuant to the Lockbox Agreements or otherwise) immediately shall be applied to provisionally reduce the Obligations, but shall not be considered a payment on account unless such wire transfer is of immediately available federal funds and is made to the appropriate deposit account of Foothill or unless and until such check or other item of payment is honored when presented for payment. From and after the Closing Date, Foothill shall be entitled to charge Borrower for four (4) Business Days of `clearance' at the rate set forth in Section 2.5(a) or Section 2.5(b)(i), as applicable, on all collections, checks, wire transfers, or other items of payment that are received by Foothill (regardless of whether forwarded by the Lockbox Banks to Foothill, whether provisionally applied to reduce the Obligations, or otherwise). This across-the-board four (4) Business Day clearance charge on all receipts is acknowledged by the parties to constitute an integral aspect of the pricing of Foothill's facility to Borrower, and shall apply irrespective of the characterization of whether receipts are owned by Borrower or Foothill, and irrespective of the level of Borrower's Obligations to Foothill. Should any check or item of payment not be honored when presented for payment, then Borrower shall be deemed not to have made such payment, and interest shall be recalculated accordingly. Anything to the contrary contained herein notwithstanding, any wire transfer, check, or other item of payment shall be deemed received by Foothill only if it is received into Foothill's Operating Account (as such account is identified in the Lockbox Agreements) on or before 11:00 a.m. Los Angeles time. If any wire transfer, check, or other item of payment is received into Foothill's Operating Account (as such account is identified in the Lockbox Agreements) after 11:00 a.m. Los Angeles time it shall be deemed to have been received by Foothill as of the opening of business on the immediately following Business Day. At any time that all Obligations are paid in full and there exists a credit balance resulting from remittances from Borrower's Account Debtors or the receipt of funds from Borrower which overpay Obligations, Foothill shall transmit to Borrower such credit balance. 2.7 Statements of Obligations. Foothill shall render statements to Borrower of the Obligations, including principal, interest, fees, and including an itemization of all charges and expenses constituting Foothill Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and Foothill unless, within thirty (30) days after receipt thereof by Borrower, Borrower shall deliver to Foothill by registered or certified mail at its address specified in Section 12, written objection thereto describing the error or errors contained in any such statements. 2.8 Fees. Borrower shall pay to Foothill the following fees: (a) Closing Fee. A one time closing fee of Two Hundred Thousand Dollars ($200,000) which has been earned, in full, and is due and payable by Borrower to Foothill in installments of Twenty Thousand Dollars ($20,000) on this date and continuing on the first day of each calendar month commencing January 1, 1996 and continuing through and including September 1, 1996; (b) Unused Line Fee. On the first day of each month during the term of this Agreement, a fee in an amount equal to one- half percent (0.5%) per annum times the Average Unused Portion of the Maximum Amount; (c) Annual Facility Fee. On the Closing Date and on each anniversary of the Closing Date, a fee in an amount equal to One Hundred Thousand Dollars ($100,000) such fee to be fully earned on each such anniversary; (d) Financial Examination, Documentation, and Appraisal Fees. Foothill's customary fee of Six Hundred Dollars ($600) per day per examiner, plus out-of-pocket expenses for each financial analysis and examination of Borrower performed by Foothill or its agents; Foothill's customary appraisal fee of One Thousand Dollars ($1,000) per day per appraiser, plus out-of-pocket expenses for each appraisal of the Collateral performed by Foothill or its agents; and, on each anniversary of the Closing Date, Foothill's customary fee of One Thousand Dollars ($1,000) per year for its loan documentation review; and (e) Servicing Fee. On the first day of each month during the term of this Agreement, and thereafter so long as any Obligations are outstanding, a servicing fee in an amount equal to Three Thousand Five Hundred Dollars ($3,500) per month. In addition to the monthly Servicing Fee, Borrower shall on the Closing Date pay to Lender the sum of Fifteen Thousand Dollars ($15,000) as a prepaid Additional Servicing Fee. If during the ninety days (90) days following the Closing Date, Foothill shall after audit be satisfied with the accuracy of Borrower's books and records and reporting systems in connection with Borrower's Chicago, Illinois operations, Borrower shall be entitled to a refund on a per diem basis of such amount of the prepaid Additional Servicing Fee as is calculated from the date of Foothill's audit report through the ninetieth day after the Closing Date. If however, Borrower shall not have satisfied Foothill with respect to the accuracy of Borrower's books and records and reporting systems in connection with Borrower's Chicago, Illinois operations on or before the ninetieth day after the Closing Date, then Foothill shall continue to charge and Borrower shall continue to pay on a monthly basis, without per diem refund, an Additional Servicing Fee of Five Thousand Dollars ($5,000) per month until such time as Foothill is satisfied with the accuracy of Borrower's books and records and reporting systems in connection with Borrower's Chicago, Illinois operations. Subsequent to the ninetieth day after the Closing Date, so long as Foothill is not satisfied with the accuracy of Borrower's books and records and reporting systems in connection with Borrower's Chicago, Illinois operations, Foothill may determine any of the Collateral from the Chicago, Illinois operations of Borrower to be ineligible for Advances. (f) Deposit. Foothill acknowledges receipt of a deposit in the sum of $75,000 paid pursuant to a Section 13 of a Letter of Intent dated October 14, 1995 which $75,000 deposit shall be applied against Foothill's expenses in connection with its auditing of Borrower and its businesses, financial, legal and collateral investigations and determinations in the underwriting, approving, documenting, closing and funding of the financial accommodations represented by this Agreement and in connection with costs and expenses incurred by it and its counsel in the above activities. Borrower understands that the amount of the above referenced costs and charges may exceed the $75,000 on deposit and that Borrower is obligated to pay and/or reimburse Foothill for all such expenses without regard to the amount tendered to Foothill as such deposit. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to Initial Advance, L/C, or L/C Guaranty. The obligation of Foothill to make the initial advance or to provide the initial L/C or L/C Guaranty is subject to the fulfillment, to the satisfaction of Foothill and its counsel, of each of the following conditions on or before the Closing Date: (a) the Closing Date shall occur on or before December 31, 1995; (b) Old Lender shall have executed and delivered the Pay-Off Letter, together with UCC termination statements and other documentation evidencing the termination of its liens and security interests in and to the properties and assets of Borrower or a subordination agreement in form and substance satisfactory to Foothill in its sole discretion; (c) All applicable parties and creditors shall have executed and delivered UCC termination statements and other documentation evidencing the termination of its liens and security interests in and to the properties and assets of Borrower or a subordination agreement in form and substance satisfactory to Foothill in its sole discretion; (d) Foothill shall have received searches reflecting the filing of its financing statements; (e) Foothill shall have received each of the following documents, duly executed, and each such document shall be in full force and effect and such other documents and agreements as may be required or deemed necessary by Foothill, duly executed and in full force and effect: i. Loan and Security Agreement with Schedule A-1 - List of Approved Medi-Claim, Inc. Account Debtors and Approved Written Contracts Schedule E-1 - Eligible Inventory and Locations Thereof, Schedule P-1 - Permitted Liens, Schedule 5.9 - Litigation and ii. UCC, Tax and Judgment Lien Searches on (i) Medi-Mail, Inc. (ii) Family Pharmaceuticals of America, Inc. (iii) Medi-Claim, Inc. (iv) Medi-Phar, Inc. (v) Mednet, MPC Corporation (vi) GBK, Inc. (vii) Medical Services Agency, Inc. (viii)The Home Pharmacy (ix) ArcVentures, Inc. (x) Tel-Drug, Inc. with Secretary of State of Nevada California South Carolina Pennsylvania Illinois South Carolina Maryland Local Searches in/with Cook County, Illinois Cumberland County, Pennsylvania Charleston County, South Carolina iii. Assignment of Trademarks Medi-Mail, Inc. 1-800-RX Delivery 1-800-RX Discount RX for the 90's Medi-Claim Medi-Phar Mednet iv. Lockbox Operating Procedural Agreements and Depository Account Agreements as to Medi-Mail, Inc. in Nevada-First Interstate Bank of Nevada; as to Medi-Mail, Inc. in Chicago-First Chicago Bank and Trust Company; as to Medi-Mail, Inc. in South Carolina-NationsBank; as to Medi-Claim, Inc.- Mellon Bank and Trust Company; as to Medi-Phar, Inc. in Nevada-First-Interstate Bank of Nevada; and as to Medi-Phar, Inc. in California-First Interstate Bank v. UCC Financing Statements With Respect to (i) Medi-Mail, Inc. (ii) Family Pharmaceuticals of America, Inc. (iii) Medi-Claim, Inc. (iv) Medi-Phar, Inc. (v) Mednet, MPC Corporation with the Secretary of State of Nevada California South Carolina Pennsylvania Illinois and with Local Filing Authorities in Cook County, Illinois Prothonotary of Cumberland County, Pennsylvania County Clerk of Charleston County, South Carolina vi. Conditional Assignment of Leases for Chief Executive Offices of Medi-Mail, Inc. Family Pharmaceuticals of America, Inc. Medi-Claim, Inc. Medi-Phar, Inc. Mednet, MPC Corporation vii. Copies of Leases viii.Agreements of Lessor to Conditional Assignment of Leases or Landlord's Licenses and Waiver Agreements (This condition shall be a condition precedent to advances against Inventory; provided however that Borrower agrees within 30 days of the date of this Agreement to utilize its best efforts to obtain the Lessor's Agreement from Borrower's Landlord at the location of its Chief Executive Office in Las Vegas, Nevada) ix. Certified Copies of Certificate of Incorporation (i) Medi-Mail, Inc. (ii) Family Pharmaceuticals of America, Inc. (iii) Medi-Claim, Inc. (iv) Medi-Phar, Inc. (v) Mednet, MPC Corporation x. Officer Certified Copy of Bylaws (i) Medi-Mail, Inc. (ii) Family Pharmaceuticals of America, Inc. (iii) Medi-Claim, Inc. (iv) Medi-Phar, Inc. (v) Mednet, MPC Corporation xi. Certificate of Authority To Do Business and/or Good Standing Certificates in Nevada, South Carolina, Illinois, California and Pennsylvania for (i) Medi-Mail, Inc. (ii) Family Pharmaceuticals of America, Inc. (iii) Medi-Claim, Inc. (iv) Medi-Phar, Inc. (v) Mednet, MPC Corporation xii. Secretary Certificates of Directors Resolutions and Certificate of Incumbency (i) Medi-Mail, Inc. (ii) Family Pharmaceuticals of America, Inc. (iii) Medi-Claim, Inc. (iv) Medi-Phar, Inc. (v) Mednet, MPC Corporation xiii.For advances on Home Pharmacy Accounts Completion of Audit by Foothill and for advances on Medi-Phar, Inc. Accounts and Inventory, the elimination of existing UCC liens on Medi-Phar, Inc. California accounts receivable and Inventory xiv.Verification that all contracts giving rise to Accounts are acceptable to Foothill and either written in name of Borrower or assigned to Borrower with applicable consents of other parties to contracts xv. Most recent Management Letter from Accountants to be reviewed and approved by Foothill xvi. Financial projections for the next 12 months to be provided to Foothill and approved by Foothill xvii.Borrower must have performed and Foothill must have observed physical inventories of all Inventory at all of Borrower's locations where Inventory to be advanced against is located and the results of such physical inventory must be satisfactory to Foothill (f) Foothill shall have received certificates of corporate status with respect to Borrower, each dated within fifteen (15) days of the Closing Date, such certificates to be issued by the Secretary of State of the states in which its failure to be duly qualified or licensed would have a material adverse effect on the financial condition or properties and assets of Borrower, which certificates shall indicate that Borrower is in good standing; (g) Foothill shall have received the certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.12 hereof, the form and substance of which shall be satisfactory to Foothill and its counsel; (h) Foothill shall have received duly executed certificates of title with respect to that portion of the Collateral that is subject to certificates of title; (i) Foothill shall have received landlord waivers and, if requested by Foothill, mortgagee waivers from the lessors and mortgagees of the locations where the Inventory or Equipment is located prior to including Inventory in the Borrowing Base; (j) Foothill shall have received an opinion of Borrower's counsel in form and substance satisfactory to Foothill in its sole discretion; (k) Foothill shall have received satisfactory evidence that all returns required to be filed by Borrower have been timely filed and all taxes upon Borrower or its properties, assets, income and franchises (including real property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (l) Borrower shall be in compliance with all laws, rules and regulations concerning the operation of its respective businesses and have obtained and furnished to Foothill all licenses and permits, together with collateral assignments of such of the licenses and permits as Foothill may require; and (m) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Foothill and its counsel. 3.2 Conditions Precedent to All Advances, L/Cs, or L/C Guarantees. The following shall be conditions precedent to all advances, L/Cs, or L/C Guarantees hereunder: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all respects on and as of the date of such advance, L/C, or L/C Guaranty, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Event of Default or event which with the giving of notice or passage of time would constitute an Event of Default shall have occurred and be continuing on the date of such advance, L/C, or L/C Guaranty, nor shall either result from the making thereof; (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the making of such advance or the issuance of such L/C or L/C Guaranty shall have been issued and remain in force by any governmental authority against Borrower, Foothill, or any of their Affiliates; (d) Borrower will have entered into a written contract with the firm of Starshak & Associates to perform the functions, through one of its employees or associates, of a full time Chief Financial Officer of Borrower on an interim basis, and such individual must be functioning as such interim full time Chief Financial Officer in Borrower's day to day operations until a permanent Chief Financial Officer, acceptable to Foothill in its reasonable discretion, is employed and such designated individual functions as such full time permanent Chief Financial Officer in Borrower's day to day operations; and (e) For Advances subsequent to March 31, 1996, McGladrey & Pullen, LLP shall have performed a review, in form, scope and substance satisfactory to Foothill, of Borrower's accounting systems, procedures and processes and the suggestions and corrective measures set forth in the written report to Borrower of such review shall have been or be implemented (within a time period deemed acceptable and reasonable by Foothill) by Borrower. . 3.3 Term; Automatic Renewal. This Agreement shall become effective upon the execution and delivery hereof by Borrower and Foothill and shall continue in full force and effect for a term ending on the date (the "Renewal Date") that is five (5) years from the Closing Date and automatically shall be renewed for successive two (2) year periods thereafter, unless sooner terminated pursuant to the terms hereof. Either party may terminate this Agreement effective on the Renewal Date or on any two (2) year anniversary of the Renewal Date by giving the other party at least ninety (90) days prior written notice by registered or certified mail, return receipt requested. The foregoing notwithstanding, Foothill shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.4 Effect of Termination. On the date of termination, all Obligations (including contingent reimbursement obligations under any outstanding L/Cs or L/C Guarantees) immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower of Borrower's duties, Obligations, or covenants hereunder, and Foothill's continuing security interests in the Collateral shall remain in effect until all Obligations have been fully and finally discharged and Foothill's obligation to provide advances hereunder is terminated. If Borrower has sent a notice of termination pursuant to the provisions of Section 3.3, but fails to pay all Obligations on the date set forth in said notice, then Foothill may, but shall not be required to, renew this Agreement for an additional term of two (2) years. 3.5 Early Termination by Borrower. The provisions of Section 3.3 that allow termination of this Agreement by Borrower only on the Renewal Date and certain anniversaries thereof notwithstanding, Borrower has the option, at any time upon ninety (90) days prior written notice to Foothill, to terminate this Agreement by paying to Foothill, in cash, the Obligations (including an amount equal to the full amount of the L/Cs or L/C Guarantees), together with a premium (the "Early Termination Premium") equal to the greater of: (a) the total interest and L/C and L/C Guaranty fees for the immediately preceding six (6) months or (b) Six Hundred Thousand Dollars ($600,000) if termination occurs within the first twenty four months (24) after the date of this Agreement or Four Hundred Thousand Dollars ($400,000) if termination occurs during the twenty fifth (25th) through the forty-eighth months (48th) after the date of this Agreement or Two Hundred Thousand Dollars ($200,000) if termination occurs during the forty-ninth (49th) through the sixtieth months (60th) after the date of this Agreement. Notwithstanding anything contained in this Section to the contrary, in the event that Foothill declares an Event of Default as a result of a violation of Section 8.2 predicated upon a violation or non-compliance with Section 7.9 and the violation or non-compliance with Section 7.9 is a result of a Change of Control not involving any officer or director of Borrower or any Affiliate of any officer or director of Borrower, Borrower shall have a period of forty-five (45) days from the date of written notice from Foothill of declaration of such Event of Default to repay all Obligations with the application of an Early Termination Premium but at the rate of fifty percent (50%) of the amount of such Early Termination Premium which otherwise would be due as of the date of the notice of such Event of Default. Notwithstanding anything contained in this Section to the contrary, Borrower shall during the six (6) months following the Closing Date retain William Welnhofer of Starshak & Associates for such period of time as is necessary to supervise and to undertake the performance of the responsibility of obtaining written amendments to each of the contracts giving rise to a potential Eligible Medi-Claim Account for both the sponsor agreements and for the pharmacy agreements and shall cause William Welnhofer on a monthly basis to report to Foothill as to the progress being made. If after the sixth (6th) month following the Closing Date Foothill shall not be satisfied with the efforts of Borrower or Borrower through the efforts of William Welnhofer shall not have achieved the amendments to all such contracts, during the seventh, eight and ninth months after the Closing Date, Borrower may after payment to Foothill of all installments of the Closing Fee set forth in Section 2.8 (a) prepay on or before the last day of the ninth month after the Closing Date the Obligations without premium or penalty. 3.6 Termination Upon Event of Default. If Foothill terminates this Agreement upon the occurrence of an Event of Default, in view of the impracticability and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Foothill's lost profits as a result thereof, Borrower shall pay to Foothill upon the effective date of such termination, a premium in an amount equal to the Early Termination Premium. The Early Termination Premium shall be presumed to be the amount of damages sustained by Foothill as the result of the early termination and Borrower agrees that it is reasonable under the circumstances currently existing. The Early Termination Premium provided for in this Section 3.6 shall be deemed included in the Obligations. The Early Termination Premium shall not be charged or collected in the event that Foothill exercises its remedies set forth in Section 9 of this Agreement and conducts a commercially reasonable public or private sale of the Collateral to obtain payment of the Obligations. 4. CREATION OF SECURITY INTEREST. 4.1 Grant of Security Interest. Borrower hereby grants to Foothill a continuing security interest in all currently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Foothill's security interests in the Collateral shall attach to all Collateral without further act on the part of Foothill or Borrower. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for the sale of Inventory to buyers in the ordinary course of business, Borrower has no authority, express or implied, to dispose of any item or portion of the Collateral. 4.2 Negotiable Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Borrower shall, immediately upon the request of Foothill, endorse and assign such Negotiable Collateral to Foothill and deliver physical possession of such Negotiable Collateral to Foothill. 4.3 Collection of Accounts, General Intangibles, Negotiable Collateral. On or before the Closing Date, Foothill, Borrower, and the Lockbox Banks shall enter into the Lockbox Agreements, in form and substance satisfactory to Foothill in its sole discretion, pursuant to which all of Borrower's cash receipts, checks, and other items of payment (including, insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds) will be forwarded to Foothill on a daily basis. At any time following an Event of Default or at any time that Foothill in the exercise of its reasonable credit judgement deems itself insecure or believes that the prospect for repayment of the Obligations is impaired or unlikely, Foothill or Foothill's designee may: (a) notify customers or Account Debtors of Borrower that the Accounts, General Intangibles, or Negotiable Collateral have been assigned to Foothill or that Foothill has a security interest therein; and (b) collect the Accounts, General Intangibles, and Negotiable Collateral directly and charge the collection costs and expenses to Borrower's loan account. Borrower agrees that it will hold in trust for Foothill, as Foothill's trustee, any cash receipts, checks, and other items of payment (including, insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds) that it receives and immediately will deliver said cash receipts, checks, and other items of payment to Foothill in their original form as received by Borrower. Borrower may request remittance to it of any credit balance reflected on its account at any time when all Obligations have been paid in full. 4.4 Delivery of Additional Documentation Required. At any time upon the request of Foothill, Borrower shall execute and deliver to Foothill all financing statements, continuation financing statements, fixture filings, security agreements, chattel mortgages, pledges, assignments, endorsements of certificates of title, applications for title, affidavits, reports, notices, schedules of accounts, letters of authority, and all other documents that Foothill may reasonably request, in form satisfactory to Foothill, to perfect and continue perfected Foothill's security interests in the Collateral and in order to fully consummate all of the transactions contemplated hereby and under the other the Loan Documents. 4.5 Power of Attorney. Borrower hereby irrevocably makes, constitutes, and appoints Foothill (and any of Foothill's officers, employees, or agents designated by Foothill) as Borrower's true and lawful attorney, with power to: (a) if Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of Borrower on any of the documents described in Section 4.4; (b) at any time that an Event of Default has occurred and is continuing or Foothill deems itself insecure (in accordance with Section 1208 of the Code), sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to Account Debtors; (c) send requests for verification of Accounts; (d) endorse Borrower's name on any checks, notices, acceptances, money orders, drafts, or other item of payment or security that may come into Foothill's possession; (e) at any time that an Event of Default has occurred and is continuing or Foothill deems itself insecure (in accordance with Section 1208 of the Code), notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Foothill, to receive and open all mail addressed to Borrower, and to retain all mail relating to the Collateral and forward all other mail to Borrower; (f) at any time that an Event of Default has occurred and is continuing or Foothill deems itself insecure (in accordance with Section 1208 of the Code), make, settle, and adjust all claims under Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance; and (g) at any time that an Event of Default has occurred and is continuing or Foothill deems itself insecure (in accordance with Section 1208 of the Code), settle and adjust disputes and claims respecting the Accounts directly with Account Debtors, for amounts and upon terms which Foothill determines to be reasonable, and Foothill may cause to be executed and delivered any documents and releases which Foothill determines to be necessary. The appointment of Foothill as Borrower's attorney, and each and every one of Foothill's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and Foothill's obligation to extend credit hereunder is terminated. 4.6 Right to Inspect. Foothill (through any of its officers, employees, or agents) shall have the right, from time to time hereafter to inspect Borrower's Books and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Foothill as follows: 5.1 No Prior Encumbrances. Borrower has good and indefeasible title to the Collateral free and clear of liens, claims, security interests, or encumbrances, except for Permitted Liens. 5.2 Eligible Accounts. The Eligible Accounts-Medi-Claim, Inc. set forth on Schedule A-1 represent an agreed upon listing of Accounts represented by written contracts reviewed and approved by Foothill and none of the Contracts listed on Schedule A-1 have been revised or modified or will be revised or modified from the dates listed on Schedule A-1 without the prior written consent of Foothill. The Eligible Accounts-Medi-Claim, Inc. pursuant to the contracts set forth on Schedule A-1, are at the time of the creation thereof and as of each date on which Borrower includes them in a Borrowing Base calculation or certification, bona fide existing obligations created by the sale and delivery of Inventory or the rendition of services to Account Debtors in the ordinary course of Borrower's business, and to the knowledge of Borrower are unconditionally owed to Borrower without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. The property or service giving rise to such Eligible Accounts has been delivered to the Account Debtor, or to the Account Debtor's agent for immediate shipment to and unconditional acceptance by the Account Debtor. At the time of the creation of an Eligible Account-Medi-Claim, Inc. and as of each date on which Borrower includes an Eligible Account-Medi-Claim, Inc. in a Borrowing Base calculation or certification, Borrower has not received notice of actual or imminent bankruptcy, insolvency, or material impairment of the financial condition of any applicable Account Debtor regarding such Eligible Account-Medi-Claim, Inc. The Eligible Accounts-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. are at the time of the creation thereof and as of each date on which Borrower includes them in a Borrowing Base calculation or certification, bona fide existing obligations created by the sale and delivery of Inventory or the rendition of services to Account Debtors in the ordinary course of Borrower's business, and to the knowledge of Borrower are unconditionally owed to Borrower without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. The property or service giving rise to such Eligible Accounts has been delivered to the Account Debtor, or to the Account Debtor's agent for immediate shipment to and unconditional acceptance by the Account Debtor. At the time of the creation of an Eligible Account-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. and as of each date on which Borrower includes an Eligible Account-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. in a Borrowing Base calculation or certification, Borrower has not received notice of actual or imminent bankruptcy, insolvency, or material impairment of the financial condition of any applicable Account Debtor regarding such Eligible Account-Mednet, MPC Corporation, Inc., Medi-Mail, Inc., Family Pharmaceuticals of America, Inc. and Medi-Phar, Inc. 5.3 Eligible Inventory. All Eligible Inventory is now and at all times hereafter shall be of good and merchantable quality and to Borrower's knowledge free from defects. 5.4 Location of Inventory and Equipment. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party (without Foothill's prior written consent) and are located only at the locations identified on Schedule E-1 or otherwise permitted by Section 6.15. 5.5 Inventory Records. Borrower now keeps, and hereafter at all times shall keep, correct and accurate records itemizing and describing the kind, type, quality, and quantity of the Inventory, and Borrower's cost therefor. 5.6 Location of Chief Executive Office; FEIN. The chief executive office of Borrower is located at the address indicated in the preamble to this Agreement and Borrower's FEIN is 88-034-1212 for Medi-Mail, Inc., 57-073-0615 for Family Pharmaceuticals of America, Inc., 86-073-8707 for Medi-Claim, Inc. and 88-027-9533 for Medi-Phar, Inc. and 88-021-5949 for Mednet, MPC Corporation. 5.7 Due Organization and Qualification; No Subsidiaries. Borrower is duly organized and existing and in good standing under the laws of the state of its incorporation and qualified and licensed to do business in, and in good standing in, any state where the failure to be so licensed or qualified could reasonably be expected to have a material adverse effect on the business, operations, condition (financial or otherwise), finances, or prospects of Borrower or on the value of the Collateral to Foothill. Borrower, other than Mednet, MPC Corporation has no subsidiaries. 5.8 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's corporate powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles or Certificate of Incorporation, or By-laws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which its properties or assets may be bound. 5.9 Litigation. There are no actions or proceedings pending by or against Borrower before any court or administrative agency and Borrower does not have knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrower, except for: (a) ongoing collection matters in which Borrower is the plaintiff; (b) matters disclosed on Schedule 5.9; and (c) and matters arising after the date hereof that, if decided adversely to Borrower, would not materially impair the prospect of repayment of the Obligations or materially impair the value or priority of Foothill's security interests in the Collateral. 5.10 No Material Adverse Change in Financial Condition. All financial statements relating to Borrower that have been delivered by Borrower to Foothill have been prepared in accordance with GAAP and fairly present Borrower's financial condition as of the date thereof and Borrower's results of operations for the period then ended. There has not been a material adverse change in the financial condition of Borrower since the date of the latest financial statements submitted to Foothill on or before the Closing Date. 5.11 Solvency. Borrower is Solvent. No transfer of property is being made by Borrower and no obligation is being incurred by Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrower. 5.12 Employee Benefits. Borrower neither has nor maintains any Plan but nothing contained in this Agreement shall be construed to prohibit Borrower from adopting a Plan provided that Borrower shall provide Foothill with a copy of such Plan at least thirty (30) days prior to adoption thereof. 5.13 Environmental Condition. None of Borrower's properties or assets has ever been used by Borrower or, to the best of Borrower's knowledge, by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials. None of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, or a candidate for closure pursuant to any environmental protection statute. No lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned or operated by Borrower. Borrower has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.14 Reliance by Foothill; Cumulative. Each warranty and representation contained in this Agreement automatically shall be deemed repeated with each advance or issuance of an L/C or L/C Guaranty and shall be conclusively presumed to have been relied on by Foothill regardless of any investigation made or information possessed by Foothill. The warranties and representations set forth herein shall be cumulative and in addition to any and all other warranties and representations that Borrower now or hereafter shall give, or cause to be given, to Foothill. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, and unless Foothill shall otherwise consent in writing, Borrower shall do all of the following: 6.1 Accounting System. Borrower shall maintain a standard and modern system of accounting in accordance with GAAP with ledger and account cards or computer tapes, discs, printouts, and records pertaining to the Collateral which contain information as from time to time may be requested by Foothill. Borrower also shall keep proper books of account showing all sales, claims, and allowances on its Inventory. 6.2 Collateral Reports. Borrower shall deliver to Foothill, no later than the tenth (10th) day of each month during the term of this Agreement, a detailed aging, by total, of the Accounts, a reconciliation statement, and a summary aging, by vendor, of all accounts payable and any book overdraft. Where applicable original sales invoices evidencing daily sales shall be mailed by Borrower to each Account Debtor with, at Foothill's request, a copy to Foothill, and, at Foothill's direction, the invoices shall indicate on their face that the Account has been assigned to Foothill and that all payments are to be made directly to Foothill. Borrower shall deliver to Foothill, as Foothill may from time to time require, collection reports, sales journals, invoices, original delivery receipts, customer's purchase orders, shipping instructions, bills of lading, and other documentation respecting shipment arrangements. Absent such a request by Foothill, copies of all such documentation shall be held by Borrower as custodian for Foothill. Borrower shall on or before the Closing Date provide Foothill with a copy of each written contract now in existence or hereafter created which give rise to an Eligible Account. Borrower agrees to make no changes, revisions or modifications to any written contract giving rise to an Eligible Account without the prior written consent of Foothill. With respect to any change, revision or modification agreed to by Foothill, Borrower shall on or before the tenth (10th) day of each calendar month provide Foothill with a copy of all amendments, revisions and modifications to each written contract which gives rise to an Account showing the acceptance of such amendment, revision or modification and execution by all parties to such contract and Borrower shall provide a copy of any newly entered into written contract giving rise to an Account. With respect to any new written contract giving rise to an Account, Borrower understands that neither such written contract nor the Account arising therefrom shall qualify as an Eligible Account until affirmative approval and acceptance by Foothill of the terms thereof. In addition, from time to time, Borrower shall deliver to Foothill such other and additional information or documentation as Foothill may request including but not limited to reports on a weekly basis as to the market value of the pharmaceutical items comprising Eligible Inventory. 6.3 Schedules of Accounts. With such regularity as Foothill shall require, Borrower shall provide Foothill with schedules describing all Accounts. Foothill's failure to request such schedules or Borrower's failure to execute and deliver such schedules shall not affect or limit Foothill's security interests or other rights in and to the Accounts. 6.4 Financial Statements, Reports, Certificates. Each of the individual entities comprising Borrower agrees to deliver to Foothill: (a) as soon as available, but in any event within thirty (30) days after the end of each month during each of Borrower's fiscal years, a company prepared balance sheet, income statement, and cash flow statement covering Borrower's operations during such period; and (b) as soon as available, but in any event within ninety (90) days after the end of each of Borrower's fiscal years, consolidated and consolidating financial statements of Borrower for each such fiscal year, audited by McGladrey & Pullen, LLP or other independent certified public accountants reasonably acceptable to Foothill and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP, together with a certificate of such accountants addressed to Foothill stating that such accountants do not have knowledge of the existence of any event or condition constituting an Event of Default, or that would, with the passage of time or the giving of notice, constitute an Event of Default. Such audited financial statements shall include a balance sheet, profit and loss statement, and cash flow statement, and, if prepared, the Accountants' Letter to Management. Together with the above, Borrower shall cause Borrower to deliver to Foothill Mednet, MPC Corporation's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and any other filings made by Mednet, MPC Corporation with the Securities and Exchange Commission, if any, as soon as the same are filed, or any other information that is provided by Mednet, MPC Corporation to its shareholders, and any other report reasonably requested by Foothill relating to the Collateral or the financial condition of Borrower. Each month, together with the financial statements provided pursuant to Section 6.4(a), Borrower shall deliver to Foothill a certificate signed by the chief financial officer of Borrower and each of the entities comprising Borrower to the effect that: (i) all reports, statements, or computer prepared information of any kind or nature delivered or caused to be delivered to Foothill hereunder have been prepared in accordance with GAAP (except for year end adjustments) and fairly present the financial condition of Borrower; (ii) Borrower is in timely compliance with all of its covenants and agreements hereunder; (iii) the representations and warranties of Borrower contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); and (iv) on the date of delivery of such certificate to Foothill there does not exist any condition or event that constitutes an Event of Default (or, in each case, to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrower has taken, is taking, or proposes to take with respect thereto). Borrower shall have issued written instructions to McGladrey & Pullen, LLP or its then current firm of independent certified public accountants authorizing them to communicate with Foothill and to release to Foothill whatever financial information concerning Borrower that Foothill may request. Borrower hereby irrevocably authorizes and directs all auditors, accountants, or other third parties to deliver to Foothill, at Borrower's expense, copies of Borrower's financial statements, papers related thereto, and other accounting records of any nature in their possession, and to disclose to Foothill any information, other than that which is claimed to be privileged under the "attorney-client" privilege, they may have regarding Borrower's business affairs and financial conditions. 6.5 Tax Returns. Borrower agrees to deliver to Foothill copies of each of Borrower's future federal income tax returns, and any amendments thereto, within thirty (30) days of the filing thereof with the Internal Revenue Service. 6.6 Intentionally Deleted. 6.7 Designation of Inventory. Borrower shall now and from time to time hereafter, but not less frequently than weekly, execute and deliver to Foothill a designation of Inventory specifying Borrower's cost and the wholesale market value thereof and further specifying such other information as Foothill may reasonably request. 6.8 Returns. Returns and allowances, if any, as between Borrower and its Account Debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. If, at a time when no Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to Borrower, Borrower promptly shall determine the reason for such return and, if Borrower accepts such return, adjust its books and generate a return report (with a copy to be sent to Foothill) with respect to such Account Debtor. If, at a time when an Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to Borrower, Borrower promptly shall determine the reason for such return and, if Foothill consents (which consent shall not be unreasonably withheld), issue a credit memorandum (with a copy to be sent to Foothill) in the appropriate amount to such Account Debtor. On a daily basis, Borrower shall notify Foothill of all returns and recoveries and of all disputes and claims. 6.9 Title to Equipment. Upon Foothill's request, Borrower immediately shall deliver to Foothill, properly endorsed, any and all evidences of ownership of, certificates of title, or applications for title to any items of Equipment. 6.10 Maintenance of Equipment. Borrower shall keep and maintain the Equipment in good operating condition and repair (ordinary wear and tear excepted), and make all necessary replacements thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Borrower shall not permit any item of Equipment to become a fixture to real estate or an accession to other property, and the Equipment is now and shall at all times remain personal property. 6.11 Taxes. All assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrower or any of its property have been paid, and shall hereafter be paid in full, before delinquency or before the expiration of any extension period. Borrower shall make due and timely payment or deposit of all federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Foothill, on demand, appropriate certificates attesting to the payment thereof or deposit with respect thereto. Borrower will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Foothill with proof satisfactory to Foothill indicating that Borrower has made such payments or deposits. 6.12 Insurance. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as are ordinarily insured against by other owners in similar businesses. Borrower also shall maintain business interruption, public liability, product liability, and property damage insurance relating to Borrower's ownership and use of the Collateral as well as insurance against larceny, embezzlement, and criminal misappropriation. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as may be reasonably satisfactory to Foothill. All such policies of insurance (except those of public liability and property damage) shall contain a 438BFU lender's loss payable endorsement, or an equivalent endorsement in a form satisfactory to Foothill, showing Foothill as sole loss payee thereof, and shall contain a waiver of warranties, and shall specify that the insurer must give at least ten (10) days prior written notice to Foothill before canceling its policy for any reason. Borrower shall deliver to Foothill certified copies of such policies of insurance and evidence of the payment of all premiums therefor. All proceeds payable under any such policy shall be payable to Foothill to be applied on account of the Obligations. 6.13 Financial Covenants. Borrower shall maintain: (a) Current Ratio. At all times, a ratio of Consolidated Current Assets divided by Consolidated Current Liabilities of at least one to one (1.0 to 1.0); (b) Tangible Net Worth. At Borrower's fiscal year end 1995 a Tangible Net Worth of at least Five Hundred Thousand Dollars ($500,000) ("Base Tangible Net Worth") and at the end of each fiscal quarter thereafter a Tangible Net Worth equal to the Base Tangible Net Worth plus the sum of Five Hundred Thousand Dollars ($500,000) times the number of quarters since Borrower's fiscal year end 1995 (ie. at Borrower's fiscal year end 1996 Borrower's Tangible Net Worth shall be the Base Tangible Net Worth of $500,000 plus the sum of $500,000 times 4 representing the quarters elapsed since Borrower's fiscal year end 1995); and (c) Earnings Before Interest, Taxes, Depreciation and Amortization. Tested on a fiscal quarter end basis, commencing as of the end of Borrower's first fiscal quarter 1996, net earnings from operations before interest, taxes, depreciation and amortization on a cumulative basis for such periods shall be at least the following: Fiscal Quarter Yearly Cumulative Earnings Before Interest, Taxes, Depreciation and Amortization 1st Fiscal Quarter-1996 $ 500,000 2nd Fiscal Quarter-1996 $1,000,000 3rd Fiscal Quarter-1996 $1,500,000 4th Fiscal Quarter-1996 $2,000,000 1st Fiscal Quarter-1997 $1,000,000 2nd Fiscal Quarter-1997 $2,000,000 3rd Fiscal Quarter-1997 $3,000,000 4th Fiscal Quarter-1997 $4,000,000 6.14 No Setoffs or Counterclaims. All payments hereunder and under the other Loan Documents made by or on behalf of Borrower shall be made without setoff or counterclaim and free and clear of, and without deduction or withholding for or on account of, any federal, state, or local taxes. 6.15 Location of Inventory and Equipment. Borrower shall keep the Inventory and Equipment only at the locations identified on Schedule E-1; provided, however, that Borrower may amend Schedule E-1 so long as such amendment occurs by written notice to Foothill not less than thirty (30) days prior to the date on which the Inventory or Equipment is moved to such new location, so long as such new location is within the continental United States, and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Foothill's security interests in such assets and also provides to Foothill a landlord's waiver in form and substance satisfactory to Foothill. 6.16 Compliance with Laws. Borrower shall comply in all material respects with the requirements of all applicable laws, rules, regulations, and orders of any governmental authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not have and could not reasonably be expected to have a material adverse effect on the business, operations, condition (financial or otherwise), finances, or prospects of Borrower or on the value of the Collateral to Foothill. Foothill acknowledges that Borrower has not registered or become licensed in the following jurisdictions: Alabama, Alaska, Arkansas, Delaware, Florida, Kansas, Kentucky, Maine, Minnesota, Mississippi, Missouri, Montana, New Mexico, North Dakota, Oklahoma, Rhode Island, South Carolina, Tennessee, Texas, Utah, Virginia or Wisconsin. Notwithstanding the above acknowledgement, Borrower is currently of the opinion that it is in compliance with and continue to be in compliance in all respects with all requirements of all laws, rules, regulations and orders of any Federal, State, Regional or Local governmental authority requiring licensing or registration to do business generally, to conduct the operations of a pharmacy, to sell and distribute pharmaceuticals in interstate commerce or to administer or process claims for payment or reimbursement for the provision of medical or health related services or goods. 6.17 Employee Benefits. (a) Borrower shall deliver to Foothill a written statement by the chief financial officer of Borrower specifying the nature of any of the following events and the actions which Borrower proposes to take with respect thereto promptly, and in any event within ten (10) days of becoming aware of any of them, and when known, any action taken or threatened by the Internal Revenue Service, PBGC, Department of Labor, or other party with respect thereto: (i) an ERISA Event with respect to any Plan; (ii) the incurrence of an obligation to pay a premium to the PBGC under Section 4006(a)(3)(E) of ERISA with respect to any Plan; and (iii) any lien on the assets of Borrower arising in connection with any Plan. (b) Borrower shall also promptly furnish to Foothill copies prepared or received by Borrower or an ERISA Affiliate of: (i) at the request of Foothill, each annual report (Internal Revenue Service Form 5500 series) and all accompanying schedules, actuarial reports, financial information concerning the financial status of any Plan, and schedules showing the amounts contributed to any Plan by or on behalf of Borrower or its ERISA Affiliates for the most recent three (3) plan years; (ii) all notices of intent to terminate or to have a trustee appointed to administer any Plan; (iii) all written demands by the PBGC under Subtitle D of Title IV of ERISA; (iv) all notices required to be sent to employees or to the PBGC under Section 302 of ERISA or Section 412 of the IRC; (v) all written notices received with respect to a Multiemployer Plan concerning (x) the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA, (y) a termination described in Section 4041A of ERISA, or (z) a reorganization or insolvency described in Subtitle E of Title IV of ERISA; (vi) the adoption of any new Plan that is subject to Title IV of ERISA or Section 412 of the IRC by Borrower or any ERISA Affiliate; (vii) the adoption of any amendment to any Plan that is subject to Title IV of ERISA or Section 412 of the IRC, if such amendment results in a material increase in benefits or Unfunded Benefit Liability; or (viii) the commencement of contributions by Borrower or any ERISA Affiliate to any Plan that is subject to Title IV of ERISA or Section 412 of the IRC. 6.18 Leases. Borrower shall pay when due all rents and other amounts payable under any leases to which Borrower is a party or by which Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. To the extent that Borrower fails timely to make payment of such rents and other amounts payable when due under its leases, Foothill shall be entitled, in its discretion, and without the necessity of declaring an Event of Default, to reserve an amount equal to such unpaid amounts from the loan availability created under Section 2.1 hereof. 6.19 Legal Change. Borrower shall immediately advise Foothill of any legal change, whether statutory, administrative, judicial or otherwise, that would, in any way, limit or restrict the ability of Borrower to sell, transfer or otherwise dispose of its Eligible Inventory or which would limit the ability of Foothill to exercise its rights against the Eligible Inventory hereunder or as a secured creditor under the Code and Foothill may, in its sole discretion, revise the definition of Eligible Inventory hereunder or the advance rates under Section 2.1(b) above in response to any such legal change. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower will not do any of the following without Foothill's prior written consent, which consent shall be requested by Borrower only in good faith and considered for being granted by Foothill in accordance with the standards of good faith and fair dealing as set forth in and interpreted under the Code: 7.1 Indebtedness. Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement; (b) Indebtedness set forth in the latest financial statements of Borrower submitted to Foothill on or prior to the Closing Date; (c) Indebtedness secured by Permitted Liens; and (d) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not materially impair the prospects of repayment of the Obligations by Borrower, (ii) the net cash proceeds of such refinancings, renewals, or extensions do not result in an increase in the aggregate principal amount of the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, refundings, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that Indebtedness that is refinanced was subordinated in right of payment to the Obligations, then the subordination terms and conditions of the refinancing Indebtedness must be at least as favorable to Foothill as those applicable to the refinanced Indebtedness. 7.2 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any lien on or with respect to any of its property or assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced under Section 7.1(d) and so long as the replacement liens secure only those assets or property that secured the original Indebtedness). 7.3 Restrictions on Fundamental Changes. Enter into any acquisition, merger, consolidation, reorganization, or recapitalization, or reclassify its capital stock, or liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its business, property, or assets, whether now owned or hereafter acquired, or acquire by purchase or otherwise all or substantially all of the properties, assets, stock, or other evidence of beneficial ownership of any Person. 7.4 Extraordinary Transactions and Disposal of Assets. Enter into any transaction not in the ordinary and usual course of Borrower's business, including the sale, lease, or other disposition of, moving, relocation, or transfer, whether by sale or otherwise, of any of Borrower's properties or assets (other than sales of Inventory to buyers in the ordinary course of Borrower's business as currently conducted). 7.5 Change Name. Change Borrower's name, FEIN, business structure, or identity, or add any new fictitious name. 7.6 Guarantee. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the account of Borrower or which are transmitted or turned over to Foothill. 7.7 Restructure. Make any change in the aggregate of Borrower's financial structure or the principal nature of the aggregate of Borrower's business operations, or the date of its fiscal year. 7.8 Prepayments. Except in connection with a refinancing permitted by Section 7.1(d), prepay any Indebtedness owing to any third Person. 7.9 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.10 Capital Expenditures. Make any capital expenditure, or any commitment therefor, in excess of Five Hundred Thousand Dollars ($500,000) for any individual transaction or where the aggregate amount of such capital expenditures, made or committed for in any fiscal year, is in excess of One Million Dollars ($1,000,000). 7.11 Consignments. Consign any Inventory or sell any Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale. 7.12 Distributions. Make any distribution or declare or pay any cash dividends on or purchase, acquire, redeem, or retire any of Borrower's capital stock, of any class, whether now or hereafter outstanding other than as currently required by Borrower's Preferred Class A and Class B Stock. 7.13 Accounting Methods. Modify or change its method of accounting or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrower's accounting records without said accounting firm or service bureau agreeing to provide Foothill information regarding the Collateral or Borrower's financial condition. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Foothill pursuant to or in accordance with this Agreement, and agrees that Foothill may contact directly any such accounting firm or service bureau in order to obtain such information. 7.14 Investments. Directly or indirectly make or acquire any beneficial interest in (including stock, partnership interest, or other securities of), or make any loan, advance, or capital contribution to, any Person. 7.15 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms, that are fully disclosed to Foothill, and that are no less favorable to Borrower than would be obtained in arm's length transaction with a non-Affiliate. 7.16 Suspension. Suspend or go out of a substantial portion of its business. 7.17 Compensation. Increase the annual fee or per-meeting fees paid to directors during any year by more than fifteen percent (15%) over the prior year; pay or accrue total cash compensation, during any year, to officers and senior management employees, other than Dr. Merryman, in an aggregate amount in excess of one hundred fifteen percent (115%) of that paid or accrued in the prior year for all such officers and senior management employees other than Dr. Merryman. With respect to Dr. Merryman, Foothill consents to the provisions of the existing Board of Directors approved compensation agreement between Borrower and Dr. Merryman. 7.18 Use of Proceeds. Use the proceeds of the advances made hereunder for any purpose other than: (a) on the Closing Date, to repay in full the outstanding principal, accrued interest, and accrued fees and expenses owing to Old Lender; (b) to pay transactional costs and expenses incurred in connection with this Agreement; and (c) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted corporate purposes. 7.19 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees. Borrower covenants and agrees that it will not, without thirty (30) days prior written notification to Foothill, relocate its chief executive office to a new location and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Foothill's security interests and also provides to Foothill a landlord's waiver in form and substance satisfactory to Foothill. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Foothill's prior written consent. 7.20 Change or Modification of Written Contracts Regarding Accounts or Dr. Merryman's Compensation. Borrower covenants and agrees that it will not modify or revise in any manner, without the written consent of Foothill any of the written contracts identified on Schedule A-1 or any other contract giving rise to an Eligible Account against which Foothill has made or may make an Advance. Borrower further covenants and agrees that it will not modify or revise in any manner, without the written consent of Foothill the terms of the current compensation agreement between Borrower and Dr. Merryman to provide in any way an increase in any sum or amount provided for in such compensation agreement. 7.21 Creation or Adoption of a Plan. Borrower covenants and agrees not to create or adopt a Plan without the consent of Foothill and providing Foothill with the required prior notice referred to Section 5.12. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: 8.1 If Borrower fails to pay when due and payable or when declared due and payable, any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due Foothill, reimbursement of Foothill Expenses, or other amounts constituting Obligations); 8.2 If Borrower fails or neglects to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Foothill provided however that Borrower shall have a grace period of five (5) calendar days from the due date of performance or observance of any term, provision, condition, covenant or agreement contained in Sections 6.2, 6.3, 6.4, 6.5 and 6.7 prior to such failure or neglect being an Event of Default under this Section; 8.3 If there is a material impairment of the prospect of repayment of any portion of the Obligations owing to Foothill or a material impairment of the value or priority of Foothill's security interests in the Collateral; 8.4 If any material portion of Borrower's properties or assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any third Person; 8.5 If an Insolvency Proceeding is commenced by Borrower; 8.6 If an Insolvency Proceeding is commenced against Borrower and any of the following events occur: (a) Borrower consents to the institution of the Insolvency Proceeding against it; (b) the petition commencing the Insolvency Proceeding is not timely controverted; (c) the petition commencing the Insolvency Proceeding is not dismissed within forty-five (45) calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Foothill shall be relieved of its obligation to make additional advances or issue additional L/Cs or L/C Guarantees hereunder; (d) an interim trustee is appointed to take possession of all or a substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, Borrower; or (e) an order for relief shall have been issued or entered therein; 8.7 If Borrower is enjoined, restrained, or in any way prevented by court order or administrative agency of any State in which Borrower conducts business from continuing to conduct all or any material part of its business affairs; 8.8 If a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's properties or assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a lien, whether choate or otherwise, upon any of Borrower's properties or assets and the same is not paid on the payment date thereof; 8.9 If a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's properties or assets; 8.10 If there is a default in any material agreement to which Borrower is a party with one or more third Persons resulting in a right by such third Persons, irrespective of whether exercised, to accelerate the maturity of Borrower's obligations thereunder; 8.11 If Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; 8.12 If any misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement, or report made to Foothill by Borrower or any officer, employee, agent, or director of Borrower, or if any such warranty or representation is withdrawn ; 8.13 If the obligation of any Borrower or other Person under any Loan Document is limited or terminated by operation of law or by the third Person thereunder, or any Person under any Loan Document becomes the subject of an Insolvency Proceeding; or 8.14 If (a) with respect to any Plan, there shall occur any of the following which could reasonably be expected to have a material adverse effect on the financial condition of Borrower: (i) the violation of any of the provisions of ERISA; (ii) the loss by a Plan intended to be a Qualified Plan of its qualification under Section 401(a) of the IRC; (iii) the incurrence of liability under Title IV of ERISA; (iv) a failure to make full payment when due of all amounts which, under the provisions of any Plan or applicable law, Borrower or any ERISA Affiliate is required to make; (v) the filing of a notice of intent to terminate a Plan under Sections 4041 or 4041A of ERISA; (vi) a complete or partial withdrawal of Borrower or an ERISA Affiliate from any Plan; (vii) the receipt of a notice by the plan administrator of a Plan that the PBGC has instituted proceedings to terminate such Plan or appoint a trustee to administer such Plan; (viii) a commencement or increase of contributions to, or the adoption of or the amendment of, a Plan; and (ix) the assessment against Borrower or any ERISA Affiliate of a tax under Section 4980B of the IRC; or (b) the Unfunded Benefit Liability of all of the Plans of Borrower and its ERISA Affiliates shall, in the aggregate, exceed One Hundred Thousand Dollars ($100,000). 8.15 If Borrower fails to obtain or maintain any license, permit or registration required by any federal, state, regional or local governmental unit for the operation of its business in any State or for the sale of pharmaceutical items and goods from, within or to a State. 8.16 If any federal, state, regional or local governmental unit commences a cease and desist action prohibiting Borrower from doing business generally or for a specific act or acts against Borrower or if an enforcement action against Borrower is commenced against Borrower by any federal, state, regional or local governmental unit which has or may result, in the reasonable judgement of Foothill, in a material adverse impact on the business or financial condition of Borrower. 9. FOOTHILL'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default Foothill may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the Loan Documents, or under any other agreement between Borrower and Foothill; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of Foothill, but without affecting Foothill's rights and security interests in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Foothill considers advisable, and in such cases, Foothill will credit Borrower's loan account with only the net amounts received by Foothill in payment of such disputed Accounts after deducting all Foothill Expenses incurred or expended in connection therewith; (e) Cause Borrower to hold all returned Inventory in trust for Foothill, segregate all returned Inventory from all other property of Borrower or in Borrower's possession and conspicuously label said returned Inventory as the property of Foothill; (f) Without notice to or demand upon Borrower, make such payments and do such acts as Foothill considers necessary or reasonable to protect its security interests in the Collateral. Borrower agrees to assemble the Collateral if Foothill so requires, and to make the Collateral available to Foothill as Foothill may designate. Borrower authorizes Foothill to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien that in Foothill's determination appears to conflict with its security interests and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Foothill a license to enter into possession of such premises and to occupy the same, without charge, for up to one hundred twenty (120) days in order to exercise any of Foothill's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of Section 9505 of the Code), set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Foothill (including any amounts received in the Lockbox Accounts), or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Foothill; (h) Hold, as cash collateral, any and all balances and deposits of Borrower held by Foothill, and any amounts received in the Lockbox Accounts, to secure the full and final repayment of all of the Obligations; (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Foothill is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Foothill's benefit; (j) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Foothill determines is commercially reasonable. It is not necessary that the Collateral be present at any such sale; (k) Foothill shall give notice of the disposition of the Collateral as follows: (1) Foothill shall give Borrower and each holder of a security interest in the Collateral who has filed with Foothill a written request for notice, a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Collateral, then the time on or after which the private sale or other disposition is to be made; (2) The notice shall be personally delivered or mailed, postage prepaid, to Borrower as provided in Section 12, at least five (5) days before the date fixed for the sale, or at least five (5) days before the date on or after which the private sale or other disposition is to be made; no notice needs to be given prior to the disposition of any portion of the Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market. Notice to Persons other than Borrower claiming an interest in the Collateral shall be sent to such addresses as they have furnished to Foothill; (3) If the sale is to be a public sale, Foothill also shall give notice of the time and place by publishing a notice one time at least five (5) days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held; (l) Foothill may credit bid and purchase at any public sale; and (m) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. Any excess will be returned, without interest and subject to the rights of third Persons, by Foothill to Borrower. 9.2 Remedies Cumulative. Foothill's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Foothill shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Foothill of one right or remedy shall be deemed an election, and no waiver by Foothill of any Event of Default shall be deemed a continuing waiver. No delay by Foothill shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If Borrower fails to pay any monies (whether taxes, rents, assessments, insurance premiums, or otherwise) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, to the extent that Foothill determines that such failure by Borrower could have a material adverse effect on Foothill's interests in the Collateral in its discretion and without prior notice to Borrower, Foothill may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves in Borrower's loan account as Foothill deems necessary to protect Foothill from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type described in Section 6.12, and take any action with respect to such policies as Foothill deems prudent. Any such amounts paid by Foothill shall constitute Foothill Expenses. Any such payments made by Foothill shall not constitute an agreement by Foothill to make similar payments in the future or a waiver by Foothill of any Event of Default under this Agreement. Foothill need not inquire as to, or contest the validity of, any such expense, tax, security interest, encumbrance, or lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Foothill on which Borrower may in any way be liable. 11.2 Foothill's Liability for Collateral. So long as Foothill complies with its obligations, if any, under Section 9207 of the Code, Foothill shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person. All risk of loss, damage, or destruction of the Collateral shall be borne by Borrower. 11.3 Indemnification. Borrower agrees to defend, indemnify, save, and hold Foothill and its officers, employees, and agents harmless against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other Person arising out of or relating to the transactions contemplated by this Agreement or any other Loan Document, and (b) all losses (including attorneys fees and disbursements) in any way suffered, incurred, or paid by Foothill as a result of or in any way arising out of, following, or consequential to the transactions contemplated by this Agreement or any other Loan Document other than those losses caused by Foothill's gross negligence or wilful misconduct. This provision shall survive the termination of this Agreement. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or by prepaid telex, TWX, telefacsimile, or telegram (with messenger delivery specified) to Borrower or to Foothill, as the case may be, at its address set forth below: If to any Borrower: 871-C Grier Drive Las Vegas, Nevada 89119 Attn.: Dr. Michael B. Merryman Telefacsimile No. 702-361-2422 If to Foothill: FOOTHILL CAPITAL CORPORATION 11111 Santa Monica Boulevard Suite 1500 Los Angeles, California 90025-3333 Attn.: Business Finance Division Manager Telefacsimile No. (310) 575-3435 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. All notices or demands sent in accordance with this Section 12, other than notices by Foothill in connection with Sections 9504 or 9505 of the Code, shall be deemed received on the earlier of the date of actual receipt or three (3) days after the deposit thereof in the mail. Borrower acknowledges and agrees that notices sent by Foothill in connection with Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the mail or transmitted by telefacsimile or other similar method set forth above. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS PRINCIPLES. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL, IN ANY OTHER COURT WHERE THE BORROWER HAS A PLACE OF BUSINESS OR CONDUCTS OPERATIONS OR COLLATERAL IS LOCATED AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF BORROWER AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13. BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND FOOTHILL REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. DESTRUCTION OF BORROWER'S DOCUMENTS. All documents, schedules, invoices, agings, or other papers delivered to Foothill may be destroyed or otherwise disposed of by Foothill four (4) months after they are delivered to or received by Foothill, unless Borrower requests, in writing, the return of said documents, schedules, or other papers and makes arrangements, at Borrower's expense, for their return. 15. GENERAL PROVISIONS. 15.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrower and Foothill. 15.2 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrower may not assign this Agreement or any rights or duties hereunder without Foothill's prior written consent and any prohibited assignment shall be absolutely void. No consent to an assignment by Foothill shall release Borrower from its Obligations. Foothill may assign this Agreement and its rights and duties hereunder and no consent or approval by Borrower is required in connection with any such assignment. Foothill reserves the right to sell, assign, transfer, negotiate, or grant participations in all or any part of, or any interest in Foothill's rights and benefits hereunder. In connection with any such assignment or participation, Foothill may disclose all documents and information which Foothill now or hereafter may have relating to Borrower or Borrower's business. To the extent that Foothill assigns its rights and obligations hereunder to a third Person, Foothill thereafter shall be released from such assigned obligations to Borrower and such assignment shall effect a novation between Borrower and such third Person. 15.3 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each section applies equally to this entire Agreement. 15.4 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Foothill or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 15.5 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 15.6 Amendments in Writing. This Agreement can only be amended by a writing signed by both Foothill and Borrower. 15.7 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of a manually executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver a manually executed counterpart of this Agreement but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. 15.8 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by Borrower of the Obligations or the transfer by either or both of such parties to Foothill of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if Foothill is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that Foothill is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of Foothill related thereto, the liability of Borrower automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 15.9 Confidential Information. Foothill will hold all material information obtained by it from Borrower pursuant to this Agreement concerning the affairs and business of Borrower not otherwise generally available to the public (the "Confidential Information") in accordance with Foothill's reasonable and customary procedures for handling confidential information. It is understood and agreed by Borrower that Foothill may make disclosures (a) reasonably required by any bona fide potential or actual assignee, transferee, or participant in connection with any contemplated or actual assignment or transfer by Foothill of an interest herein or any participation interest in Foothill's rights hereunder, (b) of information that has become public as a result of disclosures made by Persons other than Foothill, its Affiliates, assignees, transferees, or participants, or (c) as required or requested by any court, governmental or administrative agency, pursuant to any subpoena or other legal process, or by any law, statute, regulation, or court order. Unless prohibited by applicable law, statute, regulation or court order, Foothill shall use reasonable efforts to notify Borrower of any request by any court, governmental or administrative agency, or pursuant to any subpoena or other legal process for disclosure of any Confidential Information concurrent with, or where practicable, prior to the disclosure thereof. 15.10 Foothill Purchase of Stock of Borrower. Foothill agrees, during the term of this Agreement, that Foothill will not directly or indirectly purchase or sell shares of Borrower's common stock without Borrower's consent. 15.11 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in Los Angeles, California. FOOTHILL CAPITAL CORPORATION, a California corporation By__________________________ Title:_______________________ Mednet, MPC Corporation, a Nevada corporation By M. B. Merryman Title: President Medi-Mail, Inc., a Nevada corporation By M. B. Merryman Title: Vice President Family Pharmaceuticals of America, Inc., a South Carolina corporation By M. B. Merryman Title: Vice President Medi-Claim, Inc., a Nevada corporation By M. B. Merryman Title: Vice President Medi-Phar, Inc., a Nevada corporation By M. B. Merryman Title: Vice President STATE OF CALIFORNIA ) ) ss. Los Angeles COUNTY OF LOS ANGELES) On December 26, 1995 before me, the undersigned officer, personally appeared M. B. Merryman, known to me (or satisfactorily proven) and acknowledged that he executed the within document as Vice President of Medi-Mail, Inc., Family Pharmaceuticals of America, Inc., Medi-Claim, Inc. and Medi-Phar, Inc. and as President of Mednet, MPC Corporation. IN WITNESS WHEREOF I hereunto set my hand. Notary Public SCHEDULE A-1 List of Approved Account Debtors and Approved Written Contracts For Medi-Claim, Inc. and Approved Form of Medi-Claim, Inc. Contracts No Eligible-Medi-Claim, Inc. Account Debtors exist at the Closing Date. No Eligible-Medi-Claim, Inc. Accounts exits at the Closing Date. No forms of Acceptable Medi-Claim, Inc. Eligible Contracts exist at the Closing Date. -> EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Mednet, MPC Corporation Las Vegas, Nevada We hereby consent to the use in this post effective amendment No. 2 of a Registration Statement covering 7,423,024 shares of common stock on Form S-1 of our report dated March 24, 1995, relating to the consolidated financial statements of Medi-Mail, Inc. and subsidiaries and our report dated July 29, 1994, relating to the financial statements of Family Pharmaceuticals of America, Inc., and to the reference to our Firm under the caption "Experts" in the Prospectus. /s/ McGladrey & Pullen, LLP Las Vegas, Nevada January 31, 1996 EX-23 4 CONSENT OF INDEPENDENT AUDITORS We consent to the inclusion of our report dated September 30, 1994, on the consolidated financial statements of Medical Service Agency, Inc. and subsidiary and the reference to our firm under the caption "Financial Statements" in the Post-Effective Amendment No. 2 to the S-1 Registration Statement for 7,423,024 shares of common stock of MedNet, MPC Corporation. /s/ McKonly & Asbury Harrisburg, Pennsylvania January 31, 1996 EX-23 5 CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Mednet, MPC Corporation Las Vegas, Nevada As independent public accountants, we hereby consent to the use of our report dated October 6, 1995 (and to all references to our Firm) included in or made a part of this (the attached) Form S-1 Registration Statement (No. 2). /s/ Arthur Andersen LLP Chicago, Illinois January 31, 1996 -----END PRIVACY-ENHANCED MESSAGE-----