UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 6, 1997
METROPOLITAN HEALTH NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Florida 000-28456 65-0635748
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) Identification No.)
5100 Town Center Circle, Boca Raton, Florida 33486
(Address of principal executive office) (Zip Code)
(561) 416-9484
(Registrant's telephone number, including area code)
<PAGE>
This Current Report on Form 8-K/A amends the Current Report on Form 8-K filed by
Metropolitan Health Networks, Inc. on August 21, 1997 to add the financial
statements of the busines acquired required by Item 7(a); the pro forma
financial information required by Item 7(b) and the terms of the Merger
Agreement reported by Item 2. This Current Report also serves as notification of
the restatement of the financial statements of Martin Harrison M.D., P.A. (D/B/A
General Medical Associates) for the years ended December 31, 1995 and 1994 and
for the six-month periods ended June 30, 1995 and 1996 (unaudited)which were
included in the original registration of Metropolitan Health Networks, Inc. on
Form SB-2, dated February 12, 1997, as amended.
<PAGE>
ITEM 2 AND ITEM 5 ACQUISITION OR DISPOSITION OF ASSETS; OTHER EVENTS
Subsequent to the Merger Agreement dated August 6, 1997 between Metropolitan
Health Networks, Inc., Metcare III, Inc. (a wholly owned subsidiary), General
Medical Associates, Inc. and Martin Harrison, Metropolitan Health Networks, Inc
received notification that the net accounts receivable of General Medical
Associates, Inc. were materially overstated at December 31, 1995 and June 30,
1996. The net accounts receivable as of December 31, 1995 and June 30, 1996
were adjusted from $2,710,732 to $1,467,315 and $2,891,993 to $1,538,221
respectively. Retained Earnings as of December 31, 1995 and 1994; June 30, 1996
and 1995; and January 1, 1994 were materially overstated and adjusted from
$2,710,955 to $1,467,538 ; $2,152,226 to $1,062,516; $2,886,072 to $1,532,300;
$2,589,670 to $1,463,166;and $2,110,442 to $885,204 respectively. The changes
and resulting amendment of the Financial Statements were due to a correction
of an error. The reissued auditors report, of Jesse Small, P.A. dated October
7, 1997, indicates that the correction was necessary as the result of new
information coming to their attention.
The effect on the Unaudited Pro Forma Financial Statements included in the
Company's Form SB-2 filing, dated February 12, 1997, as amended, would have been
to reduce net accounts receivable and increase goodwill by approximately
$1,300,000. Additionally, consolidated pro forma income is reduced for the year
ended June 30, 1996 and for the three month period ended September 30, 1996 by
approximately $45,000 and $11,000, respectively.
On October 18, 1997, Metropolitan Health Networks, Inc., Metcare III, Inc. (a
wholly owned subsidiary), General Medical Associates, Inc. and Martin Harrison
entered into a Post Effective Amendment to the Merger Agreement, whereby Martin
Harrison will return to Metropolitan Health Networks, Inc. 150,000 shares of
common stock, terminate the Security Agreement and defer payment on the note
payable to Martin Harrison. Metropolitan Health Networks, Inc. has agreed to
grant 150,000 options exercisable at the market rate at the time of the
agreement and 150,000 options exercisable at $1.00 over market price to Martin
Harrison. These options will be vested equally over five six month intervals,
are assignable and will terminite if Martin Harrison is in breach of his employ-
ment agreement with Metropolitan Health Networks, Inc.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
The following financial statements of the business acquired are
incorporated herein as part of this report.
Page No.
--------
(a) Financial Statements of Business Acquired
Financial Statements for Year ended December 31, 1996 and the
Six-month period ended June 30, 1997 (unaudited)
Independent Auditor Report F-1
Balance Sheet- December 31, 1996
and June 30, 1997 (unaudited) F-2
Statements of Income and Retained Earnings
for the Year ended December 31, 1996
and the Six-month period Ended
June 30, 1997 (unaudited) F-3
Statements of Cash Flows for the
Year ended December 31, 1996
and the Six-month period ended
June 30, 1997 (unaudited) F-4
Notes to Financial Statements F-5 to F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
________________________________________________________________________________
To the Board of Directors
Metropolitan Health Networks, Inc.
Boca Raton, Florida
We have audited the accompanying balance sheet of Martin W. Harrison, M.D., P.A.
d/b/a General Medical Associates (the Association) as of December 31, 1996, and
the related statements of income and retained earnings and cash flows for the
year then ended. These financial statements are the responsibility of the
Association'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 Martin W. Harrison, M.D., P.A.
d/b/a General Medical Associates as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Kaufman, Rossin & Co.
October 3, 1997 (except for the first paragraph of Note 4, as to which the date
is October 18, 1997) Miami, Florida
F-1
<PAGE>
MARTIN W. HARRISON, M.D., P.A.
D/B/A GENERAL MEDICAL ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
December 31, June 30, 1997
ASSETS 1996 (Unaudited)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ - $ 44,188
Accounts receivable, net of allowance for doubtful
accounts of $3,406,304 at December 31, 1996 and
at June 30, 1997 (unaudited) 1,580,126 1,590,413
Other assets 3,960 3,600
- -----------------------------------------------------------------------------------------
Total current assets 1,584,086 1,638,201
PROPERTY AND EQUIPMENT (NOTE 2) 29,354 28,903
OTHER ASSETS 321 321
- -----------------------------------------------------------------------------------------
$1,613,761 $1,667,425
=========================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
- -----------------------------------------------------------------------------------------
CURRENT LIABILITIES
Cash overdraft $ 5,467 $ -
Accounts payable and accrued expenses 30,968 45,594
- -----------------------------------------------------------------------------------------
Total current liabilities 36,435 45,594
- -----------------------------------------------------------------------------------------
LEASE COMMITMENT (NOTE 3)
STOCKHOLDER'S EQUITY (NOTE 4)
Common stock, $1.00 par value, 100 shares authorized,
Issued and outstanding 100 100
Retained earnings 1,577,226 1,621,731
- -----------------------------------------------------------------------------------------
Total stockholder's equity 1,577,326 1,621,831
- -----------------------------------------------------------------------------------------
$1,613,761 $1,667,425
=========================================================================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
MARTIN W. HARRISON, M.D., P.A.
D/B/A GENERAL MEDICAL ASSOCIATES
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Six-month period
ended
Year ended June 30, 1997
December 31, 1996 (Unaudited)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
GROSS PATIENT REVENUE $ 3,198,530 $ 1,506,446
UNCOLLECTIBLE AMOUNTS 1,259,833 600,780
- -----------------------------------------------------------------------------------------
NET PATIENT REVENUE 1,938,697 905,666
- -----------------------------------------------------------------------------------------
OPERATING EXPENSES
Professional fees 395,847 107,567
Payroll and payroll taxes 735,629 335,424
Other 289,215 134,624
- -----------------------------------------------------------------------------------------
Total operating expenses 1,420,691 577,615
- -----------------------------------------------------------------------------------------
NET INCOME 518,006 328,051
RETAINED EARNINGS - BEGINNING 1,467,539 1,577,226
DISTRIBUTIONS TO STOCKHOLDER ( 408,319) ( 283,546)
- -----------------------------------------------------------------------------------------
RETAINED EARNINGS - ENDING $ 1,577,226 $ 1,621,731
=========================================================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
MARTIN W. HARRISON, M.D., P.A.
D/B/A GENERAL MEDICAL ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Six-month period
ended
Year ended June 30, 1997
December 31, 1996 (Unaudited)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 518,006 $ 328,051
- -----------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash
Provided by operatingactivities:
Depreciation 8,400 5,601
Changes in operating assets and liabilities:
Accounts receivable ( 112,810) ( 10,287)
Other assets ( 185) 360
Accounts payable and accrued expenses 4,353 14,626
- -----------------------------------------------------------------------------------------
Total adjustments ( 100,242) 10,300
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 417,764 338,351
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ( 8,040) ( 5,150)
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft ( 1,405) ( 5,467)
Distributions to stockholder ( 408,319) ( 283,546)
- -----------------------------------------------------------------------------------------
Net cash used in financing activities ( 409,724) ( 289,013)
- -----------------------------------------------------------------------------------------
NET INCREASE IN CASH - 44,188
CASH - BEGINNING - -
- -----------------------------------------------------------------------------------------
CASH - ENDING $ - $ 44,188
=========================================================================================
Supplemental Disclosure of Cash Flow Information:
- -----------------------------------------------------------------------------------------
Interest paid $ - $ -
=========================================================================================
Income taxes paid $ - $ -
=========================================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
MARTIN W. HARRISON, M.D., P.A.
D/B/A GENERAL MEDICAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Business Activity
Martin W. Harrison, M.D., P.A. d/b/a General Medical Associates (the
"Association"), was incorporated on May 21, 1992 in the State of
Florida. The Association provides occupational and orthopedic
medical services to patients at its facility located in North Miami
Beach, Florida.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major
betterments and additions are charged to the asset account while
replacements, maintenance and repairs, which do not improve or
extend the lives of the respective assets, are charged to expense
currently.
Depreciation and Amortization
Depreciation of property and equipment is computed using accelerated
methods, at various rates based generally on the estimated useful
lives of the assets. The estimated useful lives are as follows:
Leasehold improvements 7 years
Machinery and equipment 7 years
Furniture and fixtures 7 years
Computers 5 years
Income Taxes
The Association has elected, with the consent of its stockholder, to
be taxed under the S Corporation provisions of the Internal Revenue
Code and, accordingly, no provision has been made for federal and
state income taxes. Under these provisions, the taxable income or
loss is reflected on the stockholder's personal income tax return.
Revenue Recognition
The Association recognizes revenue net of uncollectible amounts as
medical services are provided to patients. These revenues are
typically billed directly to patients, insurance companies, and
attorneys representing patients in personal injury matters. The
collection period for the Association's accounts receivable ranges
from thirty days to three years. A substantial portion of such
receivables are principally derived from patients involved in
personal injury matters, and as such, legal settlement and
collection may not occur until several years subsequent to the
rendering of services. The Association provides an allowance for
uncollectible receivables based on management's assessment of
overall collectibility.
F-5
<PAGE>
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- --------------------------------------------------------------------------------
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The allowance for doubtful accounts is an estimate which is
established through charges to earnings for estimated uncollectible
amounts. Management's judgment in determining the adequacy of the
allowance is based upon several factors which include, but are not
limited to, the nature and volume of the receivable portfolio,
review of problem or non-performing receivables and managements'
judgment with respect to current economic conditions and their
impact on the existing receivable portfolio. Given the nature of the
medical services industry, it is reasonably possible the
Association's estimate of the allowance could change in the future.
Interim Financial Data
In the opinion of the management, the accompanying unaudited
financial statements contain all adjustments (consisting of only
normal, recurring adjustments) necessary to present fairly the
financial position of the Association as of June 30, 1997, and the
results of its operations for the six-month period ended June 30,
1997. The results of operations and cash flows for the six month
period ended June 30, 1997 are not necessarily indicative of the
results of operations and cash flows which may be reported for the
remainder of 1997.
- --------------------------------------------------------------------------------
NOTE 2. PROPERTY AND EQUIPMENT
- --------------------------------------------------------------------------------
Property and equipment consisted of the following:
December 31, June 30, 1997
1996 (Unaudited)
----------------------------------------------------------------
Leasehold improvements $ 43,313 $ 46,756
Machinery and equipment 24,373 26,080
Furniture and fixtures 609 609
Computers 3,035 3,035
----------------------------------------------------------------
71,330 76,480
Less accumulated depreciation ( 41,976) ( 47,577)
----------------------------------------------------------------
$ 29,354 $ 28,903
================================================================
Depreciation expense was $8,400 for 1996.
F-6
<PAGE>
- --------------------------------------------------------------------------------
NOTE 3. LEASE COMMITMENT
- --------------------------------------------------------------------------------
In November 1995, the Association entered into a five year
non-cancellable lease for its medical office facility located in
North Miami Beach, Florida.
The approximate future minimum annual commitment on this lease is as
follows:
1997 $ 60,000
1998 60,000
1999 60,000
2000 50,000
--------------------------------------------------------------------
$ 230,000
====================================================================
Rent expense amounted to $68,711 in 1996.
- --------------------------------------------------------------------------------
NOTE 4. SUBSEQUENT EVENT
- --------------------------------------------------------------------------------
Under an agreement dated August 6, 1997, and amended on October 18,
1997, Metropolitan Health Networks, Inc. (MHNI) acquired 100% of the
Association from the stockholder. The terms of the agreement provide
for, among other things, the stockholder to receive from MHNI cash
consideration, a short-term note receivable, and common stock of
MHNI. Additionally, the stockholder entered into an employment
agreement providing for the continuation of services for five years.
Deferred income taxes are required to be provided for the estimated
tax effects of temporary differences between financial and income
tax reporting in accordance with FASB Statement No. 109. These
differences result principally from reporting on the cash basis of
accounting for income tax purposes. As a result of the acquisition
by MHNI, the Association will no longer be taxed under the S
corporation provisions of the Internal Revenue Code. Accordingly, on
the date of acquisition the Association will recognize a deferred
tax liability of approximately $600,000 relating to the income tax
effects of its accounts receivable.
F-7
<PAGE>
(b) Pro Forma Information
The required pro forma financial information is set forth below
Balance Sheet- June 30, 1997 (unaudited) PF-1
Notes to Unaudited Pro Forma Balance Sheet PF-2
Unaudited Pro Forma Statement of Income
for the Year ended December 31, 1996 PF-3
Notes to Unaudited Pro Forma Statement
of Income PF-4
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
General
Metropolitan Health Medical Pro Forma Consolidated
Networks, Inc. Associates Adjustments Pro Forma
(1) (2)
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents 1,667,887 44,188 (300,000)(3) 1,412,075
Trading securities 183,276 183,276
Securities 166,527 166,527
Accounts receivable 3,256,423 1,590,413 4,846,836
Other current assets 149,918 3,600 153,518
--------- --------- ----------- ---------
Total current assets 5,424,031 1,638,201 6,762,232
Property and Equipment 4,299,816 28,903 4,328,719
Goodwill 2,882,005 266,739 (3) 3,148,744
Intangible Assets 341,204 341,204
Deferred Acquisition Costs 136,506 136,506
Other Assets 146,966 321 147,287
---------- --------- ---------- ----------
13,230,528 1,667,425 ( 33,261) 14,864,692
========== ========= ========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable 159,287 45,594 204,881
Accrued expenses 783,838 783,838
Note payable 400,000 (3) 400,000
Line of credit facilities 628,501 628,501
Current maturities of capital
lease obligations 594,358 594,358
Current maturities of long-
term debt 365,633 365,633
Notes payable to redeemed
Partners 555,000 555,000
--------- ------- ---------- ---------
Total current liabilities 3,086,617 45,594 400,000 3,532,211
Capital Lease Obligations 3,099,072 3,099,072
Long-Term Debt 71,119 71,119
Commitments and Contingencies
Equity 6,973,720 1,621,831 (1,621,831)(3)
1,188,570 (3) 8,162,290
--------- ------- ---------- ---------
Total liabilities and equity 13,230,528 1,667,425 ( 33,261) 14,864,692
========== ========= ============ ==========
</TABLE>
PF-1
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET
NOTE 1.
The column includes the historical balance sheet of Metropolitan Health
Network s, Inc. as of June 30, 1997.
NOTE 2.
The column incudes the historical balance sheet of General Medical
Associates as of June 30, 1997.
NOTE 3.
Reflects the acquisition subsequent to June 30, 1997 of certain assets and
libilities in exchange for cash, a note payable and common stock, as
follows:
Cash to be paid for acquisition $ 300,000
Issuance of Notes for the acquisition 400,000
Issuance of common stock toformer owner of the acquired
Company 1,188,570
----------
Total consideration 1,888,570
Book value of tangible assets acquired (1,621,831)
----------
Excess fair value of net assets acquired over cost,
Intangibles $ 266,739
==========
PF-2
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Metropolitan Health General
Networks, Inc. Medical Pro Forma Consolidated
Historical Pro Forma Associates Adjustments Pro Forma
-----------------------------------------------------------------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Revenues 7,512,185 9,594,477 1,639,964 11,234,441
Expenses
Payroll, payroll taxes,
Benefits 4,259,916 4,794,656 710,774 100,000 (5) 5,605,430
Depreciation and
Amortization 718,436 933,635 26,674 (6) 960,309
Provision for bad debt 824,780 945,719 945,719
Interest 511,617 574,162 16,177 (7) 590,339
General and admin-
istrative 3,255,244 4,516,914 501,480 5,018,394
--------- ---------- --------- ------- ----------
Total expenses 9,569,993 11,765,086 1,212,254 142,851 13,120,191
Gain (Loss) From
Operations (2,057,808) (2,170,609) 427,710 (142,851) (1,885,750)
Interest and Other
Income 76,324 70,545 70,545
Gain (Loss)from
Operations Before
Income Tax Benefit (1,981,484) (2,100,064) 427,710 (142,851) (1,815,205)
Income Tax Benefit 362,000 362,000 362,000
Net Income (Loss) (1,619,484) (1,738,064) 427,710 (142,851) (1,453,205)
=========== ========== ======= ======== ==========
Weighted Average Shares
Outstanding 4,593,917
Loss Per Share (0.32)
=========
</TABLE>
PF-3
<PAGE>
NOTES TO UNAUDITIED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
NOTE 1.
The column includes the historical results of operations of Metropolitan
Health Networks, Inc. for the twelve months ended June 30, 1997.
NOTE 2.
The column includes the combined historical results of operations for the
three businesses acquired, Nuclear Magnetic Imaging, Inc., Datascan of Florida,
Inc. and Dr. Paul Wand, MD PA, as if the acquisitions occurred as of the
beginning of the fiscal year ended June 30, 1997, and after giving effect to
certain adjustments such as the elimination of intercompany transactions and
amortization of goodwill resulting from those acquisitions.
NOTE 3.
The column includes the historical results of operations of General
Medical Associates for the twelve months ended June 30, 1997.
NOTE 4.
The column includes adjustments to the historical results of operations of
General Medical Associates as if the acquisition had occurred as of the
beginning of the fiscal year ended June 30, 1997.
NOTE 5.
Payroll, payroll taxes and benefits have been adjusted to reflect the
effects of an employment agreement agreed upon in connection with the
acquisition agreement whereby the seller will become an employee, subject to the
direction and control of the Company as follows:
Historical Per Net Pro Forma
Compensation Contract Adjustment
------------ -------- ----------
Shareholder Salary & Bonus $250,000 $350,000 $100,000
NOTE 6.
Adjusts the amortization expense by $ 26,674 based on the allocation of
the purchase price for the excess of cost over the fair value of assets to be
acquired. Amortization is being computed over 10 years.
NOTE 7.
Adjusts interest expense by $ 16,177 for the interest on the note issued
as part of the acquisition agreement.
NOTE 8.
Weighted average common and equivalent shares for the period ended June
30, 1997 have been calculated using the treasury stock method assuming that
stock and warrants had been issued for the transactions as of July 1, 1996.
PF-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned herunto duly authorized.
METROPOLITAN HEALTH NETWORKS, INC.
By: /s/ Donald B. Cohen
-----------------------------------------
Donald B. Cohen
Executive Vice President and
Chief Financial Officer
Dated October 20, 1997
<PAGE>
(c) Exhibits
10.12 Post Effective Amendment No. 1 to Merger Agreement,
dated October , 1997, by and between Metropolitan Health
Networks, Inc.("Metropolitan"), Metcare III, Inc. ( a
wholly owned subsidiary of Metropolitan Health Networks,
Inc., "Acquisition Sub"), General Medical Associates,
Inc. ("GMA") and Martin Harrison ("Shareholder").
99.1 Restated Audited Financial Statements of General Medical
Associates, Inc. for the Years Ended December 31, 1995
and 1994
Post Effective
Amendment No. 1
To Merger Agreement
This Post effective amendment dated October 18, 1997 (the "Amendment")
to Merger Agreement dated August 6, 1997 by and between Metropolitan Health
Networks, Inc. ("Metropolitan") Metcare III, Inc, ("Acquisition Sub") General
Medical Associates, Inc. ("GMA") and Martin Harrison ("Shareholder")
WITNESSETH
Whereas on August 6, 1997 Acquisition Sub and GMA were merged and acquisition
sub was the surviving corporation;
Whereas the parties hereto was to amend certain terms and conditions of the
merger agreement;
Whereas the parties believe that such transactions are in the best interest of
all parties;
Now, therefore, in consideration of the mentioned terms and conditions the
parties agree as follows:
1. SECURITY AGREEMENT - The Security Agreement between Acquisition Sub,
Metropolitan and Shareholder dated August 6, 1997 is hereby in all respects
terminated and shareholder shall agree to execute UCC-3 termination
statement with respect to such termination. Shareholder acknowledges that
no additional security exists to secure payment of the promissory note and
the shareholder sale option (as defined in section 2.7(1) of the merger
agreement).
2. PROMISSORY NOTE - Shareholder agrees to a deferral of all payments due to
him under the promissory note issued pursuant to the terms of the merger
agreement.
3. SHARE EXCHANGE - Harrison shall deliver to Metropolitan, in form duly
presented for transfer, 150,000 shares of Metropolitan's common stock from
the 366,154 shares of Metropolitan's common stock issued under clause
27(c).
4. OPTIONS - Shareholder is hereby is granted options to purchase 300,000
shares of the Company's common stock. 150,000 shares are exercisable at
market price and $150,000 shares are exercisable at $1.00 above market
price. The options shall vest equally over five semi-annual periods (60,000
shares per 6 month period). The options are for a period of five years from
date of grant, are assignable and will terminate if shareholder is in
breach of his employment agreement with Metropolitan.
<PAGE>
5. REP LETTER - Shareholder shall execute such representation letters as are
requested by Metropolitan's auditors.
6. INDEMNITY - Metropolitan agrees to indemnity and hold harmless shareholder
to any damages that shareholders may suffer arising directly from any
actions Metropolitan or any third parties may take in relationship to the
valuation of collectibility of GMA's accounts receivable for the period
prior to July 1, 1996 provided that this provision shall not apply if
shareholder is found by a court of competent jurisdiction, including
appellate review, to have committed fraud, gross negligence or willful
misconduct with respect to the above. Metropolitan covenants not to sue
shareholder with respect to the valuation of the collectibility of such
receivables
7. FURTHER ITEMS - Each party agrees to take such further reasonable steps
that are necessary to effectuate the agreement.
BY: /s/Donald B. Cohen
--------------------------------
Donald B. Cohen
Metropolitan Health Networks, Inc.
/s/Martin Harrison
--------------------------------
Martin Harrison, MD
BY: /s/Martin Harrison
--------------------------------
Martin Harrison, MD
Metcare III, Inc. (F/K/A General Medical Associates, Inc.)
GENERAL MEDICAL ASSOCIATES, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1995 & 1994
Table of Contents
-----------------
Page
----
Independent Auditors Report 1
Balance Sheets 2-3
Income Statements 4-5
Statements of Retained Earnings 6
Statements of Cash Flows 7-8
Notes to Financial Statements 9-12
<PAGE>
JESSE SMALL, P.A.
CERTIFIED PUBLIC ACCOUNTANTS
409 WEST HALLANDALE BEACH BOULEVARD - SUITE #415
HALLANDALE, FLORIDA 33009
(954) 458-2343
FAX (954) 458-1056
To The Board of Directors
General Medical Associates, Inc.
1865 N.E. 163rd Street
North Miami Beach, FL 33162
Independent Auditor's Report
----------------------------
We have audited the accompanying balance sheet of General Medical Associates,
Inc. as of December 31, 1995, and the related statements of income, retained
earnings, and cash flows for each of the two years in the period ended December
31, 1995. 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of General Medical Associates,
Inc. as of December 31, 1995, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 8, the allowances for doubtful accounts based upon
subsequently obtained information were determined to be materially understated.
These understatements effected accounts receivable for the years ended 12/31/94
and 12/31/95. Accordingly, the financial statements have been restated and an
adjustment has been made to the retained earnings as of January 1, 1994 to
correct the estimates.
August 20, 1996, except for note 8 as to which the date is October 7, 1997.
JESSE SMALL, C.P.A.
-1-
<PAGE>
GENERAL MEDICAL ASSOCIATES, INC.
BALANCE SHEETS
DECEMBER 31, 1995 & JUNE 30, 1996 (UNAUDITED)
ASSETS
DECEMBER 31, JUNE 30, 1996
1995 (UNAUDITED)
As Adjusted As Adjusted
(Note 8) (Note 8)
------------ ------------
ASSETS
CURRENT ASSETS
Cash -- $ 19,804
Accounts Receivable, Net of
Allowance For Doubtful Accounts of
$3,040,347 in 1995 and $3,247,612
as of June 30, 1996 (Unaudited) $1,467,315 1,538,221
Employee Loans Receivable 3,775 5,925
---------- ----------
TOTAL CURRENT ASSETS 1,471,090 1,563,950
PROPERTY & EQUIPMENT, At Cost, Net of
Accumulated Depreciation (see Note 2) 29,714 27,686
OTHER ASSETS
Deposits 321 321
---------- ----------
TOTAL ASSETS $1,501,125 $1,591,957
========== ==========
The accompanying notes to financial statements are
an integral part of these financial statements.
-2-
<PAGE>
GENERAL MEDICAL ASSOCIATES, INC.
BALANCE SHEETS
DECEMBER 31, 1995 & JUNE 30, 1996 (UNAUDITED)
DECEMBER 31 JUNE 30, 1996
1995 (UNAUDITED)
As Adjusted As Adjusted
(Note 8) (Note 8)
------------ -------------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdraft $ 6,872 --
Accounts Payable 26,041 $ 59,557
Payroll Taxes Payable 574 --
---------- ----------
TOTAL CURRENT LIABILITIES 33,487 59,557
STOCKHOLDERS' EQUITY
Common Stock - $1 Par
Value; 100 Authorized shares;
100 shares Issued and Outstanding 100 100
Retained Earnings - Unappropriated 1,467,538 1,532,300
---------- ----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $1,501,125 $1,591,957
========== ==========
The accompanying notes to financial statements are
an integral part of these financial statements.
-3-
<PAGE>
GENERAL MEDICAL ASSOCIATES, INC.
INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 & 1994
DECEMBER 31, DECEMBER 31,
1995 1994
As Adjusted As Adjusted
(Note 8) (Note 8)
REVENUE ------------ ------------
Patient Fees $2,448,606 $1,912,499
EXPENSES
Advertising $ 894 $ 185
Auto 225 --
Bad Debts (see Note 4) 376,584 --
Bank Charges -- 162
Depreciation (see Note 2) 15,070 9,884
Donations 575 135
Dues & Subscriptions 3,549 4,676
Equipment Leasing (see Note 5) 11,573 9,324
Insurance 57,957 54,473
Interest Expense 1,621 29,581
Repairs & Maintenance 9,443 9,687
Professional Fees 340,617 266,177
Office 39,274 46,807
Postage & Delivery 10,127 11,439
Rent (see Note 7) 68,711 49,789
Salaries - Officer 244,800 254,400
Salaries - Office 400,642 383,460
Security 363 830
Seminars & Continuing Education 2,291 10,392
Medical Supplies & Lab Fees 29,548 43,115
Taxes & Licenses 2,081 16,618
Payroll Taxes 39,506 43,308
Telephone 17,501 18,595
Travel & Promotion 6,065 9,463
Uniforms 10,435 9,289
Utilities 12,957 11,048
Meals & Entertainment -- 9,978
---------- ----------
Total Expenses 1,702,409 1,302,815
---------- ----------
NET INCOME $ 746,197 $ 609,684
========== ==========
The accompanying notes to financial statements are
an integral part of these financial statements.
-4-
<PAGE>
GENERAL MEDICAL ASSOCIATES, INC.
INCOME STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 & 1995 (UNAUDITED)
Six Months Ended Six Months Ended
JUNE 30, 1996 JUNE 30, 1995
(UNAUDITED) (UNAUDITED)
As Adjusted As Adjusted
(Note 8) (Note 8)
REVENUE --------------- ---------------
Patient Fees $1,204,399 $1,268,235
EXPENSES
Advertising -- $ 125
Auto -- --
Bad Debts (see Note 4) $ 207,264 141,292
Bank Charges 91 --
Depreciation (see Note 2) 5,341 7,631
Donations -- 575
Dues & Subscriptions 1,730 735
Equipment Leasing (see Note 5) 8,004 5,125
Insurance 25,452 24,559
Interest Expense -- 1,621
Repairs & Maintenance 4,572 4,463
Professional Fees 186,439 165,882
Office 19,311 18,469
Postage & Delivery 5,228 4,893
Rent (see Note 7) 29,675 32,707
Salaries - Officer 124,800 120,000
Salaries - Office 213,345 187,062
Security 489 --
Seminars & Continuing Education 125 1,497
Medical Supplies & Lab Fees 14,530 15,635
Taxes & Licenses 5,125 769
Payroll Taxes 22,134 21,167
Telephone 9,212 8,395
Travel & Promotion 3,306 3,635
Uniforms 4,500 6,435
Utilities 5,734 5,296
---------- ----------
Total Expenses 896,407 777,968
---------- ----------
NET INCOME $ 307,992 $ 490,267
========== ==========
The accompanying notes to financial statements are
an integral part of these financial statements.
-5-
<PAGE>
GENERAL MEDICAL ASSOCIATES, INC.
STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995 & 1994 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 & 1995 (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
1995 1994 (UNAUDITED) (UNAUDITED)
As Adjusted As Adjusted As Adjusted As Adjusted
(Note 8) (Note 8) (Note 8) (Note 8)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Retained Earnings January 1 $ 1,062,516 $ 885,204 $ 1,467,538 $ 1,062,516
Add: Net Income for the Period 746,197 609,684 307,992 490,267
Deduct: Sub-S Distributions (341,175) (432,372) (243,230) (89,617)
---------- ---------- ---------- ----------
Retained Earnings December 31, 1995,
1994 and June 30, 1996, 1995. $ 1,467,538 $ 1,062,516 $ 1,532,300 $ 1,463,166
========== ========== ========== ==========
</TABLE>
The accompanying notes to financial statements are
an integral part of these financial statements.
-6-
<PAGE>
GENERAL MEDICAL ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 & 1994
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
As Adjusted As Adjusted
(Note 8) (Note 8)
------------------------- ------------------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 746,197 $699,684
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation 15,070 $ 9,884
Decrease (Increase) in Accounts Receivable
(Net of Allowance) (188,574) 33,359
Decrease (Increase) in Employee
Loans Receivable (1,728) 453
(Increase) Decrease in Payroll Tax
Refund Receivable 1,192 (1,192)
(Decrease) in Accounts Payable (2,517) (26,033)
Increase in Payroll Taxes Payable 574 --
Increase in Bank Overdraft 3,775 3,097
---------- ----------
Total Adjustments (172,208) 19,568
---------- ---------
Net Cash Provided by Operating Activities 573,989 629,252
Cash Flows From Investing Activities:
Sale of Fixed Assets 17,281 --
Purchase of Fixed Assets (6,466) (44,748)
---------- ----------
Net Cash Used in Investing Activities 10,815 (44,748)
Cash Flows From Financing Activities:
Principal Payments on Notes Payable (243,630) (153,870)
Payment of Sub-S Distributions (341,174) (432,372)
---------- ---------
Net Cash Provided by Financing Activities (584,804) (586,242)
---------- ---------
Net (Decrease) in Cash 0 (1,738)
Cash at Beginning of Year 0 1,738
---------- ---------
Cash at End of Year $ 0 $ 0
========== =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 1,621 $ 29,581
</TABLE>
The accompanying notes to financial statements are
an integral part of these financial statements.
- 7 -
<PAGE>
GENERAL MEDICAL ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 & 1995 (UNAUDITED)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
JUNE 30, 1996 JUNE 30, 1995
(UNAUDITED) (UNAUDITED)
As Adjusted As Adjusted
(Note 8) (Note 8)
------------------------ --------------------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 307,992 $ 490,267
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation $ 5,341 $ 7,631
(Decrease) in Bank Overdraft (6,872) (3,097)
(Increase) in Accounts Receivable (Net of Allowance) (70,906) (141,287)
(Increase) Decrease in Employee Loans Receivable (2,150) 1,116
Increase in Accounts Payable 33,516 33,019
(Decrease) Increase in Payroll Taxes Payable (574) 16
Decrease in Payroll Tax Refund Receivable -- 1,192
---------- ----------
Total Adjustments (41,645) (101,410)
---------- ---------
Net Cash Provided by Operating Activities 266,347 388,857
Cash Flows From Investing Activities:
Purchase of Fixed Assets (3,313) (3,682)
---------- ----------
Net Cash Used in Investing Activities (3,313) (3,682)
Cash Flows From Financing Activities:
Principal Payments on Notes Payable -- (243,630)
Payment of Sub-S Distributions (243,230) (89,617)
---------- ---------
Net Cash Provided by Financing Activities (243,230) (333,247)
--------- ---------
Net Increase in Cash 19,804 51,928
Cash at Beginning of Year 0 0
---------- ---------
Cash at June 30, 1996 & 1995 $ 19,804 $ 51,928
========== =========
Supplemental Disclosures Of Cash Flow Information:
Cash Paid During The Year For:
Interest $ 0 $ 1,621
</TABLE>
The accompanying notes to financial statements are
an integral part of these financial statements.
- 8 -
<PAGE>
GENERAL MEDICAL ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 & 1994
NOTE 1: BUSINESS DESCRIPTION
The Company's operations consist of performing medical services in the
Miami area.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements are prepared on the accrual basis. Property
and equipment are stated at cost and include expenditures which
increase the useful lives of existing property and equipment.
Maintenance and repairs are charged to operations as incurred. When
property and equipment is disposed of, the related cost and
accumulated depreciation is removed from the respective accounts and
any gain or loss is reflected in the results of operations.
Depreciation is being provided using the modified accelerated cost
recovery system over the estimated useful lives of the assets. The
following is a list of the depreciable assets:
METHOD & (UNAUDITED)
USEFUL LIFE 12/31/95 06/31/96
----------- -------- --------
Leasehold Improvements DDB, 7 YR. $ 35,273 $ 35,273
Machinery & Equipment DDB, 7 YR. 24,373 27,686
Furniture & Fixtures DDB, 7 YR. 609 609
Computers DDB, 5 YR. 3,035 3,035
-------- --------
Total $ 63,290 $ 66,603
Less: Accumulated
Depreciation 33,576 38,917
-------- --------
Net Fixed Assets $ 29,714 $ 27,686
======== ========
(CONTINUED)
-9-
<PAGE>
GENERAL MEDICAL ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 & 1994
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
As an S Corporation, the company is not required to pay federal income
taxes because the income flows through to the shareholders; therefore,
a provision for income taxes is not required and a deferred tax
liability is not required.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The balance sheet of the Company as of June 30, 1996 and related
statements of income, retained earnings and cash flows for the six
month periods ended June 30, 1996 and 1995 have not been audited.
However, in the opinion of management, the financial statements
reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of the
periods reflected. The results for the period reflected are not
necessarily indicative of the results for the full fiscal years.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
ACCOUNTS RECEIVABLE AND REVENUES
The Company recognizes revenues net of contractual adjustments and
uncollectible amounts as services are provided to patients. These
services are typically billed to patients, insurance companies,
Medicare, and attorneys representing patients in personal injury
matters. The Company provides an allowance for uncollectible
receivables and for contractual adjustments relating to the difference
between standard charges and rates paid by certain third party payers.
-10-
<PAGE>
GENERAL MEDICAL ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 3: NOTES PAYABLE
Notes Payable-Auto was a note against the automobile on the balance
sheet. Note Payable-Auto was paid-off in 1995 when the automobile was
sold. Notes Payable-Barnett Bank was a Note taken out to pay-off the
previous owner of General Medical Associates, Inc. for the purchase of
General Medical Associates, Inc. The loan was for $450,000 taken out
on 5/21/93 and was completely paid-off by 5/31/95.
NOTE 4: BAD DEBTS
Accounts Receivable on the Balance Sheet are reported at their net
realizable values.
NOTE 5: EQUIPMENT LEASING
All equipment leases during 1994, 1995 and the six months ended June
30, 1996 were operating leases.
NOTE 6: CASH
There were no claims against cash during 1994, 1995 and the six months
ended June 30, 1996.
NOTE 7: LEASE COMMITMENTS
The company is currently leasing its office space on a 5-year
renewable lease that ends on October 31, 2000. Total rental payments
are $4,758 per month. Total minimum lease payments per year amount to
$57,096.
NOTE 8: CORRECTIONS
Retained earnings as of January 1, 1994 has been adjusted from
$2,110,442 to $885,204 to reflect corrections made to the estimates of
the allowances for doubtful accounts. The new estimates of the
allowances for doubtful accounts were caused by the availability of
previously unattainable computer data specifically relating to
accounts receivable. In regards to the Balance Sheets, allowance for
doubtful accounts as of December 31, 1995 and June 30, 1996
(Unaudited) has been adjusted from $1,796,931 to $3,040,347 and
$1,893,839 to $3,247,612 respectively.
-11-
<PAGE>
GENERAL MEDICAL ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 8: CORRECTIONS- (Continued)
Retained earnings as of December 31, 1995 and June 30, 1996
(Unaudited) has been adjusted from $2,710,955 to $1,467,538 and
$2,886,072 to $1,532,300 respectively. Retained earnings as of
December 31, 1994 and June 30, 1995 (Unaudited) has been adjusted from
$2,152,226 to $1,062,516 and $2,589,670 to $1,463,166 respectively.
In regards to the Income Statement, the patient fees for the year
ended December 31, 1994 has been adjusted from $1,776,971 to
$1,912,499. Bad debts for the year ended December 31, 1995 has been
adjusted from $222,877 to $376,584. Bad debts for the six months ended
June 30, 1995 (Unaudited) and June 30, 1996 (Unaudited) has been
adjusted from $104,498 to $141,292 and $96,909 to $207,264
respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS The balance sheet of the
Company as of June 30, 1996 and related statements of income, retained
earnings and cash flows for the six month periods ended June 30, 1996
and 1995 have not been audited. However, in the opinion of management,
the financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
results of the periods reflected. The results for the period reflected
are not necessarily indicative of the results for the full fiscal
years.
-12-
