U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to ____________
Commission file number
0-28456
Metropolitan Health Networks, Inc.
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(Name of small business issuer in its charter)
Florida 65-0635748
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5100 Town Center Circle, Suite 560, Boca Raton, Florida 33486
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 416-9484
Securities registered under Section 12(b) of the Exchange Act: none
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
Common Stock, $.001 par value
Redeemable Common Stock Purchase Warrants
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
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contained, to the best of registrant's knowledge, in the definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
State issuer's revenues for its most recent fiscal year: $7,512,185
The aggregate market value of the Registrant's voting Common Stock held by
non-affiliates of the registrant was approximately $14,584,650 (computed using
the closing price of $6.25 per share of Common Stock on October 10, 1997, as
reported by NASDAQ, based on the assumption that directors and officers and more
than 5% stockholders are affiliates).
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
There were 5,210,825 shares of the registrant's Common Stock, par value $.001
per share, and 2,764,500 of the registrant's Redeemable Common Stock Purchase
Warrants outstanding on October 10, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (Check One): Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Metropolitan Health Networks, Inc. (the "Company") was incorporated in the
State of Florida in January 1996 for the purpose of developing a vertically and
horizontally integrated health care delivery network (the "Network"). The
Network will provide primary and subspecialty physician care as well as
diagnostic and therapeutic services.
The Company is seeking to develop its Network through the acquisition,
expansion and integration of (i) physician care practices (the "Physician
Practices") together with (ii) laboratories, pharmacies and diagnostic and
rehabilitation centers ("Ancillary Services").
The Company is organized, in principal part, as a multi-county vertically
and horizontally integrated medical group practice. As such, all of the
physicians to be employed by the Company will provide an aggregate minimum of
75% of their services through the group practice and all physician services are
to be billed under one common Medicare provider number. The Company believes it
will meet all government requirements of a "group practice" to avail itself of
benefits available to group practices under Florida and federal laws.
The Company's goal through its Network is to provide quality, cost
effective and outcome oriented health care in Dade, Broward and Palm Beach
Counties, Florida, a tri-county area with a population in excess of four
million.
INDUSTRY
GENERAL. The Health Care Financing Administration estimates that national
health care spending in the United States in 1994 was approximately $1 trillion,
with approximately $200 billion directly attributable to physician services and
another $612 billion under physician direction. Health care spending in the
tri-county Florida region was estimated to be $16 billion. Historically,
patients in need of medical care went directly to a specialist who typically
provided service on an inpatient basis. In the 1980's and early 1990's, managed
care entities began assuming a significant role by contracting with health care
providers on a capitated basis. At the same time, HMOs began to encourage the
use of alternate-site facilities (sites other than hospitals).
As a result of the trends toward increased HMO enrollment and physician
membership in group medical practices, health care providers have sought to
reorganize themselves into health care delivery systems that are better suited
to the managed care environment. The Company believes that physician groups are
joining with hospitals and other institutional providers in various ways to
create vertically and horizontally integrated delivery systems which provide
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medical and hospital services ranging from community based primary medical care
to specialized inpatient services through single coordinated delivery systems.
These health care delivery systems contract with HMOs to provide hospital and
medical services to enrollees under full risk contracts, under which providers
assume the obligation of providing both the professional and institutional
components of covered health care services to the enrollees for predetermined
fixed per capita payments.
In order to compete effectively in such an emerging environment,
physicians are concluding that they must have control over the delivery and
financial impact of a broader range of health care services. To this end, groups
of independent physicians and medium to large medical groups are taking steps to
assume responsibility and risk for health care services which they do not
provide. The Company believes that physicians are increasingly abandoning
traditional private practice in favor of affiliations with larger organizations
which offer skilled and innovative management, information systems and capital
resources. The Company believes that many payors and their intermediaries,
including governmental entities and HMOs are increasingly looking to outside
providers of physician services to develop and maintain quality outcomes,
management programs and patient care data. The Company believes that physicians
are increasingly turning to organizations such as the Company to provide the
resources necessary to function effectively in a managed care environment
STRATEGY
The Company's strategy is to develop and expand a locally prominent,
integrated health care delivery network in Dade, Broward and Palm Beach counties
Florida within a medical group practice structure, that provides a high quality
and cost-effective health care delivery system. The Company's principal strategy
for developing and expanding its network is through the acquisition of (through
purchases, merger or otherwise) or affiliation with physicians, medical groups,
and other health care providers in the South Florida market. The Company seeks
to acquire or otherwise affiliate with physician groups and other providers in
their local markets with reputations for providing quality cost effective
healthcare services. The Company also seeks to acquire Ancillary Services,
including laboratories, pharmacies and diagnostic and rehabilitation centers
within its group practice structure. The Company believes that by increasing
marketing activities, enhancing patient service and improving the accessibility
of care, it will increase the Company's market share. The Company also believes
strategic alliances with hospitals and health plans will improve the delivery of
managed health care. The Company also believes that by the consolidation of
management and administrative services that its costs should be reduced.
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OVERVIEW OF THE NETWORK
Medical Group Expansion
The Company is developing its Network mostly through the acquisition of a
broad range of multi-disciplinary physicians. These will range from primary care
through highly specialized sub-specialists. These physicians, once acquired,
will be merged directly into the medical group and form part of the group's
medical staff, where they will share all of the resources of the group and
increase the cross-referral of all physicians within the group.
In the South Florida region, the Company has primarily targeted
multi-specialty medical groups that are comprised of four to thirty physicians.
The Company will seek to purchase the medical groups or to enter into long term
management agreements with the affiliated physician groups (see below). The
Company believes the key to its growth will be its ability to greatly improve
and expand the health care services provided through its medical groups, to
enhance operating efficiency and profits of the medical group and to earn and
maintain the trust and confidence of the physicians associated with the Network.
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Practice Management Activities
In situations where the Company is unable to or does not desire to
purchase a medical group, it will seek to enter into contractual arrangements
with the medical group that will allow the Company to receive substantially all
of the benefits of ownership without the additional capital.
The Company believes that as the health care industry continues to become
more complex, the administrative needs of medical groups will best be served by
professional managers. Under these types of contractual arrangements the Company
would acquire from the medical group substantially all of the groups medically
related assets and the Company would function as a management services
organization (MSO). The medical group, independent of the Company's own medical
group, could then enter into a 20 to 40-year service agreement with the Company
to have the Company provide all or part of the front and back office functions
of the medical group. The Company will provide the physicians and groups with
the equipment and facilities used in its medical practices, manage practice
operations and employ substantially all the practices' non-physician personnel
exclusive of those required by law to be employed by the practices. The
physicians will continue to be responsible for all the decisions regarding
patient health care, including diagnosis, treatment, surgery and therapy. The
Company believes the fees retained by the Company would range from 30% to 70% of
the medical groups' net collections depending on the size and specialty of the
medical group.
Independent Practice Associations
The Company does not now own or manage any independent practice
associations ("IPAs"). However, the Company anticipates organizing, managing
and/or purchasing an IPA management company in the future to complete its
network. An IPA allows an individual practitioner to access patients in his/her
area through contracting with HMOs without having to join a group practice or
sign exclusive contracts, and also coordinates utilization review and quality
assurance programs for its affiliated physicians. In addition to providing
access to HMO contracts, an IPA offers other benefits to the physicians seeking
to remain independent, including enhanced risk sharing arrangements and access
to other strategic alliances within the Company's network. The Company believes
the IPAs will enable it to increase HMO market share with relative low risk
because of the low incremental investment required to recruit additional
physicians. The Company believes an IPA management company negotiates both
managed care contracts and discounted fees for service contracts and collects a
percentage of total revenues on the contract plus fees for providing billing and
collection functions. An IPA can also provide substantial savings to physicians
by pooling purchasing and insurance on behalf of physician members. Usually the
IPA Management Company collects a percentage of the savings generated for
physicians.
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Ancillary Service Groups
The Company currently provides certain ancillary services, mostly
diagnostic and rehabilitation services. The Company intends to expand these
services both by acquisition and internal growth to cover the entire targeted
area as well as expand into additional ancillary services. The Company expects
that these Ancillary Services will complement the services provided by the
Physician Practices and the other Ancillary Services owned or acquired by the
Company. The Company intends to acquire those Ancillary Services which will
permit the Network to expand and provide services needed by patients. Through an
association of administrative services, as well as facilities, the Company
believes that it can increase revenues and profitability. As of the date hereof,
the Company has acquired (i) Magnetic Resonance Imaging Center ("MRI"), a fixed
and mobile magnetic resonance imagery business which is engaged in performing
and reading magnetic resonance images for patients primarily located in South
Florida, and (ii) Datascan of Florida, Inc., a mobile diagnostic services
company which provides nerve conduction, vascular and ultrasound studies in
South Florida.
HMO Arrangements
The Company intends to have a portion of its revenues derived from
agreements with Health Management Organizations ("HMOs") that provide for the
receipt of capitated fees. Capitated fees are negotiated fees that stipulate a
specific dollar amount or a percentage of total premium collected by an insurer
or payor source to cover the partial or complete healthcare services deliveries
to a person. The fees are determined on a per capita basis paid monthly by
managed care organizations. HMO enrollees may come from the integration or
acquisition of healthcare providing entities, additional affiliated physicians
and acquire and increase enrollment in HMOs currently contracting with the
Company through its Physician Practices and Ancillary Services or from
agreements with new HMOs. The Company intends to enter into HMO agreements which
generally will be for one-year terms and subject to annual negotiation of rates,
covered benefits and other terms and conditions. HMO agreements are often
negotiated and executed in arrears. There can be no assurance that such
agreements will be entered into, renewed or, if entered into and/or renewed,
that they will contain these favorable reimbursement terms to the Company and
its affiliated providers. There can be no assurance that the Company will be
successful in identifying, acquiring and integrating HMO entities or in
increasing the number of HMO enrollees. Once acquired a decline in enrollees in
HMOs could also have a material adverse effect on the Company's profitability.
Under the HMO agreements, the Company, through its affiliated providers,
will generally be responsible for the provision of all covered hospital
benefits, as well as outpatient benefits, regardless of whether the affiliated
providers directly provide the healthcare services associated with the covered
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benefits. To the extent that enrollees require more care than is anticipated or
require supplemental healthcare which is not otherwise reimbursed by the HMO,
aggregate capitation rates may be insufficient to cover the costs associated
with the treatment of enrollees. If revenue is insufficient to cover costs, the
Company's operating results could be adversely affected. As a result, the
success of the Company will depend in large part on the effective management of
health care costs through various methods, including utilization management,
competitive pricing for purchased services and favorable agreements with payers.
Recently, many providers, including the Company, have experienced pricing
pressures with respect to negotiations with HMOs. In addition, the Company
believes that employer groups are becoming increasingly successful in
negotiating reductions in the growth of premiums paid for their employees'
health insurance, which tends to depress the reimbursement for health care
services. At the same time, employer groups are demanding higher accountability
from payers and providers of health care services with respect to measurable
accessibility, quality and service. If these trends continue, the cost of
providing healthcare services could increase while the level of reimbursement
could grow at a significant lower rate. There can be no assurance that these
pricing pressures will not have a material adverse effect on the operating
results of the Company. Changes in health care practices, inflation, new
technologies, major epidemics, natural disasters and numerous other factors
affecting the delivery and cost of health care are beyond the control of the
Company and may adversely affect its operating results.
The Company currently only has discounts for service arrangements with
managed care companies. These arrangements place no additional financial risk to
the Company. In all cases there are either negotiated flat, mutually agreed upon
rates for covered services, usually calling for a discount of 30% from usual and
customary charges, or a call for payment at a percentage of Medicare allowable
rates (ranging from 100% to 150%). The Company, however, intends to enter into
full risk managed care agreements within the next six (6) months and at such
time will be subject to additional financial risk. The Company believes that in
the next 12 months it may be receiving approximately 10% in revenues from
managed care agreements and 20%-25% in two years.
PHYSICIAN PRACTICES ACQUIRED
The Company, on March 12, 1997 acquired the clinical practice of Dr. Paul
Wand, M.D., P.A. ("Wand Practice"). Dr. Wand is a neurologist who began his
practice in South Florida in 1982, and who, in addition to his practice conducts
certain research in the field of head injuries. Dr. Wand is currently planning
clinical trials to obtain FDA approval in the treatment of traumatic brain
injuries with a drug that has been previously approved by the FDA for treatment
of patients with other diagnosis.
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Pursuant to the terms of the acquisition, the Company, through a
wholly-owned subsidiary, acquired by merger the Wand Practice for consideration
of 75,000 shares of Common Stock and $125,000 in cash. In addition, if the
earnings before interest, taxes, depreciation and amortization ("EBITDA") of the
Wand Practice for the twelve months ended June 30, 1997 and 1998 is determined
to have equaled or exceeded $75,500, the Company shall deliver up to 37,500
additional shares of Common Stock of the Company upon each such occurrence. No
additional consideration for the Wand practice is due for the 12 month period
ended June 30, 1997. In addition, and as part of the acquisition, the Company
entered into a five year employment contract with Dr. Wand with a base
compensation of $200,000 per year and a potential to receive a bonus in the
amount of 10% of the total practice revenues. Dr. Wand has agreed not to compete
or solicit patients or referring sources to the Company for a period of two
years following the termination of his employment agreement.
Effective July 1, 1997, the Company, through a wholly-owned subsidiary of
the Company, acquired General Medical Associates, Inc. ("GMA"). GMA was owned by
Martin Harrison, M.D. ("Harrison"). Pursuant to the merger agreement, the
Company paid (i) $300,000 in cash; (ii) a $400,000 8% promissory note with
interest and principal due monthly in an eleven month period commencing on
September 5, 1997; (iii) 523,077 shares of Common Stock of the Company, 156,923
shares of which can be earned by Harrison based upon the annual performance of
GMA. If the earnings before interest, taxes, depreciation and amortization
("EBITDA") of GMA for the years ended June 30, 1998 and 1999 equals or exceeds
80% of GMA's EBITDA, the twelve months ended June 30, 1997 (the "Targeted
Amount"), there shall be released from escrow 104,615 and 52,308, respectively,
additional shares of the Common Stock of the Company upon each occurrence. In
the event, however, that the EBITDA is less than the Targeted Amount, Harrison
is entitled to receive additional shares of the Company, as determined based
upon a sliding scale down to 60%.
The Company has warranted to Harrison that if the gross proceeds of the
sale by Harrison, of up to 200,000 shares (over a period of time beginning July
1, 1998 and ending February 13, 1999) of the Company's Common Stock received in
the Merger, is less than $6.50 per share, the Company shall make up such
deficiency in cash. In the event the Company's Common Stock trades over $7.50
per share during any fifteen (15) day period in a calendar month, the price
protection shall be eliminated in 25,000 share blocks. The Company has also
guaranteed Harrison price per share protection in the event that the Company's
Common Stock trades at an average of less than $6.50 per share for any twenty
(20) day period beginning on August 1, 1999 and ending October 1, 1999, Harrison
shall receive additional shares of Company Common Stock determined by dividing
$3,400,000 (less certain shares sold x $6.50) by the lowest closing bid price
over such 20 day period and deducting 523,077 (subject to adjustment). In
addition, Harrison has been granted a security interest in GMA's receivables, to
secure the Company's obligations under the promissory note and the price
protection guarantee.
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GMA is a multi-specialty group with components of neurology and physiatry,
in addition to chiropractic physicians, licensed massage therapists and
additional ancillary services. GMA uses both staff and subcontracting services
to provide the healthcare services and currently has three physicians, two
massage therapists, two medical assistants, one x-ray technician and two
electro-diagnostic technicians who perform nerve studies. GMA provides
full-service medical evaluations including x-rays, EKG, minor surgical
procedures as well as physical therapy and clerical and billing support persons.
GMA currently sees approximately 300 patients per week in its facilities and has
over 3,000 active charts.
Subsequent to the acquisition, information concerning the valuation of
certain assets has come to the attention of the Company. Presently, the Company
is unable to quantify such information and is consulting with its counsel to
determine the significance and effect of such information on the financial
statements of the Company, subsequent to consummation of the GMA acquisition.
On October 15, 1996 the Company acquired pursuant to an asset purchase
agreement ("International Agreement") certain medically related assets of
International Family Healthcare Centers, Inc. ("International") from Emergency
Care Services, Inc. ("ECSI"). The assets consist primarily of two medical
clinics one located in North Miami Beach and the second located in Aventura,
Florida. The Company had previously entered into a management agreement
effective April 23, 1996 to operate the facilities of International. Under the
International Agreement, the Company purchased the assets for 50,000 shares of
its Common Stock and the issuance of an 8% promissory note ("International
Note") in the amount of $150,000. The final payment of $11,503.63 was made on
September 24, 1997.
DIAGNOSTIC SERVICES
The Company, through its group practice, owns a full range of fixed-site
and mobile diagnostic services. These will include x-ray, MRIs, CT, neuro
diagnostic equipment, vascular studies, nuclear equipment, ultrasound,
echocardiograph, Holter monitors and others. As a group practice, the Company
may own and benefit from historically profitable ancillary services for patients
of the group as well as, under current interpretations of state and federal
laws, patients referred to the Company by other physicians and providers not
associated with the Company. This ability to own and refer patients for
ancillary services is significantly restricted for physicians not in group
practices by both state and federal health care laws, thus the Company believes
it will enjoy a competitive advantage over other health care providers and
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physicians. The Company believes many self-insured employers and third party
payors have determined that the delivery of services in an outpatient
environment is often less costly than the provision of the identical services on
an inpatient basis. Consequently, some payors insist that services be obtained
solely on an outpatient basis where medically appropriate and contract with
diagnostic imaging centers for the provision of these services.
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ACQUIRED ANCILLARY SERVICES
Effective September 1, 1996, the Company acquired 100% of the operating
assets of Nuclear Magnetic Imaging, Inc. ("NMI") and 97.5% of Magnetic Imaging
Systems I, Ltd. ("MIS"), which jointly operate as MRI Scan Center. The MRI Scan
Center, which began operations in 1984, performs approximately 9,000 procedures
per year. In May 1986, the MRI Scan Center began providing mobile MRI services
to outpatient facilities and to hospitals. The MRI Scan Center currently
operates at three locations, two in Fort Lauderdale and one in Coral Gables,
Florida. The MRI Scanner uses a highly technical process called magnetic
resonance imaging, which utilizes an extremely powerful magnetic field, radio
waves and computers to produce images of the body. While the patient is in the
magnetic field, radio waves stimulate the hydrogen molecules in the body to give
off their own signals. This information is fed through numerous computers, which
map the action and properties of the molecules. Images of the body are
constructed which display biochemistry of tissue as a picture. The MRI procedure
was approved by the Food and Drug Administration in the early 1980's. The MRI
Scanner differentiates between healthy tissue, tumors, fatty tissues and
muscles. This means that many uncomfortable tests, certain types of exploratory
surgeries, some biopsies, angiograms, mammographies and others, can be safely
replaced by MRIs. In most cases, a clear image is produced with no discomfort to
the patient or costly hospitalization.
Effective September 1, 1996, under two separate agreements with certain
limited partners of Magnetic Imaging Systems I, Ltd. (MIS), the Company acquired
each such partner's 4.75% interest in MIS in exchange for $30,000 in notes
payable and 7,500 shares of the Company's Common Stock, each.
Under a third agreement dated September 1, 1996 (MRI Agreement) between
Dr. Robert Kagan, who was a 28.5% limited partner in MIS and the sole
shareholder of Nuclear Magnetic Imaging, Inc. (NMI), the 59.5% general partner
in MIS (combined, MRI Group), the Company acquired 100% of NMI and the MRI
shareholders' 28.5% interest in MIS (resulting in a total interest in MIS of
97.5%), for consideration of 550,000 shares of Common Stock of the Company and
the issuance of a $400,000 note bearing interest for 6.5%, $200,000 was paid
during April 1997, and the remaining $200,000 plus accrued interest on or before
April 1, 1998. The MRI Agreement also provides for the issuance of up to an
additional 400,000 shares to the MRI Group as follows: if the EBITDA of the MRI
Group for the twelve months ended June 30, 1997 and 1998 is determined to have
exceeded $1.2 million and $1.5 million respectively, the Company shall deliver
200,000 additional shares of Common Stock of the Company upon each such
occurrence. The MRI Scan Center did not meet its EBITDA requirement for the 12
month period ended June 30, 1997. The Company agreed to extend the EBITDA
threshold for earning the bonus share, to be cumulative at the end of the second
year.
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On August 21, 1997, the Company offered to convert any, or a portion, of
the limited partnership units purchased by the MRI Scan Center in 1993 and 1994,
into the Company's common stock. The Company's offer was to allow the note
holders to convert any amount due into the appropriate amount of the Company's
Common Stock at a 25% discount to the market value of the Company's shares,
based on the closing price for the Company's Common Stock on the date they
notified the Company of acceptance of the conversion option. The Company's
shares were issued as legend shares and will not be eligible for sale in the
open market for 12 months from the date of issue under SEC Rule 144. The Company
warranted that at the time the restrictive legend is removed, the price of the
common stock will be no lower than the price on the conversion date, or the
Company will make up any shortfall in stock or cash. A total of $60,000 has been
converted to date at an average price of $4.39 per share.
The Company has warranted that the cumulative shares represented in the
MRI Agreement will be worth no less than 10 times the pre-tax earnings of the
combined consolidated companies following 12 and 24 months from the time of
acquisitions. If the average closing price of the Company's Common Stock for the
ten days prior to the years ended June 30, 1997 and 1998, multiplied by 550,000
plus the number of any contingent shares earned ("Trading Value") is less than
ten times the pretax earnings of the MRI Group for each respective twelve month
period, the Company must deliver additional shares such that the Trading Value
is equal to ten times, or pay the NMI and MRI shareholders the difference in
cash. Additionally, as part of the acquisition, Dr. Kagan received an employment
contract which calls for payment of $600,000 per year and a percentage of the
adjusted revenues of NMI jointly not to exceed 15% of all revenue generated by
NMI. The 5-year employment contract in addition, calls for numerous
non-solicitation and non-compete provisions that will prohibit Dr. Kagan from
competing with the Company for a period of no less than two (2) years following
termination.
On September 26, 1996, effective October 1, 1996, pursuant to a stock
purchase agreement ("Datascan Agreement") the Company acquired Datascan of
Florida, Inc. and Datascan Southeast, Inc., mobile and fixed site diagnostic
testing companies servicing Dade, Broward and Palm Beach Counties (collectively,
"Datascan"). Datascan was organized in May 1981 in Fort Lauderdale, Florida.
Datascan serves its patients from mobile facilities providing services directly
to the physicians' offices. Datascan has currently 32 employees and provides
ultrasound procedures including echocardiography, cardiac Doppler, colorflow
mapping, transesophogeal echocardiography and stress echocardiography and
carotid artery, abdominal, transrectal and transvaginal ultrasound, small parts
imaging and peripheral vascular ultrasound. It also provides Holter monitoring,
event monitoring, EKG and pacemaker checks, in addition to nuclear cardiac
imaging. The Company sees approximately 17,000 patients per year, with 32,000
procedure codes billed in 1995. The payor mix for the Company is approximately
40% Medicare, 20% private insurance and 40% managed care. Its referral source
includes over 400 local physicians and hospitals.
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Under the Datascan Agreement, the Company acquired all of the outstanding
stock and ownership interest in Datascan for consideration of 300,000 shares of
Common Stock of the Company. The Datascan Agreement also provides for the
issuance of up to an additional 200,000 shares to the Datascan shareholders as
follows: if the EBITDA of Datascan for the twelve months ended June 30, 1997 and
1998 is determined to have equaled or exceeded $288,000 and $313,894
respectively, and if certain Datascan shareholders continue employment (subject
to certain exceptions) the Company shall deliver 100,000 additional shares of
Common Stock of the Company to the Datascan shareholders upon each such
occurrence. Kenneth J. Hall, a director of the Company was an approximately 50%
shareholder of Datascan, with the other principal shareholder of Datascan,
Michael P. Goldstein, Group Vice President of the Company, a 29% stockholder of
Datascan and at the time of acquisition a Vice President of Datascan. In the
event, however, that EBITDA does not equal or exceed $288,000 in the twelve
months ended June 30, 1997, but it equals or exceeds $602,532 for the
twenty-four months ended June 30, 1998, the Company will deliver up to 200,000
additional shares. Datascan met its EBITDA requirement for the 12 month period
ended June 30, 1997. The Company, in addition, agreed to enter into employment
contracts with the principals of Datascan that in part calls for an employment
contract with a base salary of $200,000 per year, plus a bonus to be paid in
combination of cash and/or stock to be negotiated.
In addition, the Datascan Agreement provides that, if the Company merges,
consolidates or otherwise reorganizes and such transaction results in the
Company not being the surviving corporation, depending upon when such
transaction occurs, additional consideration may be due. Specifically, if during
the twelve month period ended June 30, 1997, the EBITDA of Datascan for the most
recent three months (at the point in time as such transaction occurs) is
determined to have equaled or exceeded $72,000, the Company will deliver an
additional 200,000 shares and further, if such transaction occurs subsequent to
June 30, 1997 but prior to June 30, 1998, and both the EBITDA for the twelve
months ended June 30, 1997 equaled or exceeded $288,000 and the average monthly
EBITDA for the prior months in the period equals or exceeds $26,157, the Company
shall deliver 100,000 additional shares of Common Stock to the Datascan
shareholders.
All the Acquisitions to date were accounted for under the "purchase"
method of accounting.
MANAGEMENT INFORMATION SYSTEMS
The Company has begun to install and maintain integrated information
systems to support its growth and acquisition plans. The Company believes that
effective and efficient access to key clinical patient data is crucial in
improving costs and quality outcomes. The Company will utilize its information
systems to improve productivity, manage complex reimbursement procedures,
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measure patient care satisfaction and outcomes of care, and integrate
information from multiple facilities throughout the care spectrum. The Company's
overall information systems will be designed to be modular and flexible. The
Company has selected a partner to provide the information systems that will, in
part, allow the Company to track physician utilization, outcomes management,
patient scheduling and tracking and most importantly, managed care plan
processing.
The Company, through its wholly owned subsidiary MetBilling Group, Inc.
has invested over $500,000 in setting up the information and billing systems for
the Company. The services of MetBilling have been and will continue to be
provided to all of the Company's acquisitions and the general medical community.
As of this date the Company is providing billing services to various non-Company
owned facilities and expansion of outside services is anticipated.
COMPETITION
The health care industry is highly competitive. The industry is also
subject to continuing changes in the provision of services and the selection and
compensation of providers. In addition, certain companies, including hospitals
and insurers, are expanding their presence in the physician management market.
The Company's operations will compete with national, regional and local
companies in providing its services. Many of the Company's competitors are
larger and better capitalized to provide a wider variety of services, may have
greater experience in providing health care management services and may have
longer established relationships with buyers of such services.
GOVERNMENT REGULATION
As a participant in the health care industry, the Company's operations and
relationships are subject to extensive and increasing regulation by a number of
governmental entities at the federal, state and local levels. The Company
intends to structure its operations to be in material compliance with applicable
laws. Nevertheless, because of the uniqueness of the structure of the
relationship of the Physician Practices and Ancillary Services owned or acquired
by the Company, many aspects of the Company's actual and proposed business
operations have not been the subject of state or federal regulatory
interpretation and there can be no assurance that a review of the Company's or
the affiliated physicians' business by courts or regulatory authorities will not
result in a determination that could adversely affect the operations of the
Company or the affiliated physicians or that the health care regulatory
environment will not change so as to restrict the Company's or the affiliated
physicians' existing operations or their expansion.
The federal Medicare program adopted a system of reimbursement of
physician services, known as the resource based relative value scale schedule
("RBRVS"), which took effect in 1992 and is expected to be fully implemented by
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December 31, 1996. The government revises the RBRVS Physician Fee Schedule
annually. The Company expects that the RBRVS fee schedule and other future
changes in Medicare reimbursement will result in some cases in a reduction and
in some cases in an increase from historical levels in the per patient Medicare
revenue received by physicians affiliated with the Company. However, the Company
does not believe such reductions will result in a material adverse change in the
Company's operating results, although there can be no assurance that this will
be the case.
The laws of many states prohibit business corporations such as the Company
from practicing medicine and employing physicians to practice medicine. In
Florida, non-licensed persons or entities, such as the Company, are prohibited
from engaging in the practice of medicine directly; however, Florida does not
prohibit such non-licensed persons or entities from employing or otherwise
retaining licensed physicians to practice medicine, so long as the Company does
not interfere with the physicians' exercise of independent medical judgment in
the treatment of patients. The Company believes it is not in violation of
applicable Florida law relating to the practice of medicine. The laws in most
states, including Florida, regarding the corporate practice of medicine have
been subjected to limited judicial and regulatory interpretation and, therefore,
no assurances can be given that the Company's activities will be found to be in
compliance, if challenged.
There are also state and federal civil and criminal statutes imposing
substantial penalties, including civil and criminal fines and imprisonment,
administrative sanctions and possible exclusion from Medicare and other
governmental programs on health care providers that fraudulently or wrongfully
bill governmental or other third-party payers for health care services. The
federal law prohibiting false billings allows a private person to bring a civil
action in the name of the United States government for violations of its
provisions. Moreover, technical Medicare and other reimbursement rules affect
the structure of physician and ancillary billing arrangements. The Company
believes it is in material compliance with such laws, but there is no assurance
that the Company's activities will not be challenged or scrutinized by courts or
governmental authorities. Noncompliance with such laws may adversely affect the
operation of the Company and subject it to penalties and additional costs.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute," prohibit the offer, payment, solicitation or receipt of
any form of remuneration in return for the referral of Medicare or state health
program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. The Anti-Kickback Statute is
broad in scope and has been broadly interpreted by courts in many jurisdictions.
Read literally, the statute places at risk many business arrangements,
potentially subjecting such arrangements to lengthy, expensive investigations
and prosecutions initiated by federal and state governmental officials.
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Violation of the Anti-Kickback Statute is a felony, punishable by significant
fines and/or imprisonment. In addition, the Department of Health and Human
Services may impose civil penalties excluding violators from participation in
Medicare or state health programs.
In July 1991 and November 1992, in part to address concerns regarding the
Anti-Kickback Statute, the federal government published regulations that provide
exceptions, or "safe harbors," for sections that will be deemed not to violate
the Anti-Kickback Statute. Although the Company believes that it is not in
violation of the Anti-Kickback Statute, its operations do not fit within any of
the existing or proposed safe harbors, and, accordingly, there can be no
assurance that the Company's practices, if scrutinized, would not be found to be
in violation of the statute, and any such finding could have a material adverse
effect on the Company. Transactions outside of a safe harbor are not per se
violations of the statute, but may be subject to government scrutiny on a case
by case basis. Among the safe harbors included in the regulations were
provisions relating to the sale of practitioner practices, management and
personal services agreements, and employee relationships. Additional safe
harbors were published in September 1993 offering new protections under the
statute to eight activities, including referrals within group practices
consisting of active investors. Proposed amendments to clarify these safe
harbors were published in July 1994 which, if adopted, would cause substantive
retroactive changes to the 1991 regulations.
The new federal Health Insurance Portability and Accountability Act of
1996, signed into law on August 21, 1996, expands the government's resources to
combat health care fraud, creates several new criminal health care offenses and
establishes a new advisory opinion mechanism under which the Office of Inspector
General is required to respond to requests for interpretation of the
Anti-Kickback Statute, in an effort to bring clarity and relief to the
uncertainty of the Anti-Kickback Statute. Due to the newness of the legislation,
it is impossible to predict the impact of the new law on the Company's
operations.
Florida has adopted state laws similar to the federal Anti-Kickback
Statute prohibiting payments intended to induce referrals of all patients,
regardless of payor source. The "Patient Brokering Law," effective October 1,
1996, makes it a crime for any person, including any health care provider or
health care facility, to offer, pay, solicit, or receive any commissions, bonus,
rebate, kickback, or bribe, directly or indirectly, overtly or covertly, in cash
or in kind, or to engage in any split-fee arrangement, in any form whatsoever,
to induce or in return for referring patients or patronage to or from a health
care provider or health care facility, or to aid, abet, advise, or participate
in any such act. There are exceptions to the Patient Brokering Law, including
exceptions for any payment practice, discount, or waiver of payment not
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prohibited by the federal Anti-Kickback Statute or the safe harbor regulations,
and certain payment, compensation, or financial arrangements within a group
practice. The Company believes its activities fit within exceptions to the
Patient Brokering Law, however, until the new law has been subjected to judicial
and/or regulatory interpretations, there can be no assurances given that the
Company's activities will be found to be in compliance, if challenged.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions,
commonly known as "Stark II," amended prior physician self-referral legislation
known as "Stark I" by dramatically enlarging the field of physician-owned or
physician-interested entities to which the referral prohibitions apply.
Effective January 1, 1995, Stark II prohibits, subject to certain exceptions,
including a group practice exception, a physician from referring Medicare or
Medicaid patients to an entity providing "designated health services" in which
the physician or immediate family member has an ownership or investment interest
or with which the physician has entered into a compensation arrangement. The
designated health services include clinical laboratory services, radiology and
other diagnostic services, radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
equipment and supplies, prosthetics, orthotics, outpatient prescription drugs,
home health services, and inpatient and outpatient hospital services. The
penalties for violating Stark II include a prohibition on payment by these
government programs and civil penalties of as much as $15,000 for each violative
referral and $100,000 for participation in a "circumvention scheme." The Stark
legislation is broad and ambiguous. Interpretive regulations clarifying the
provisions of Stark II have not been issued. Florida has also enacted similar
self-referral laws. The Florida Patient Self-Referral Act of 1992 severely
restricts patient referrals for certain services by physicians with ownership or
investment interests, requires disclosure of physician ownership in businesses
to which patients are referred and places other regulations on health care
providers. While the Company believes it is in compliance with the Florida and
Stark legislation, and their exceptions, future laws, regulations or
interpretations of current law could require the Company to modify the form of
its relationships with physicians and ancillary service providers. Moreover, the
violation of Stark I or II or the Florida Patient Self-Referral Law of 1992 by
the Company's Physician group could result in significant fines and loss of
reimbursement which would adversely affect the Company.
As a result of the continued escalation of health care costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been or may be introduced in the U.S. Congress and state legislatures
relating to health care reform. There can be no assurance as to the ultimate
content, timing or effect of any health care reform legislation, nor is it
possible at this time to estimate the impact of potential legislation, which may
be material on the Company.
EMPLOYEES
As of October 10, 1997 the Company had 103 full-time and five part-time
employees. Of the total, 17 were employed at the Company's corporate office. No
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employee of the Company is covered by a collective bargaining agreement or is
represented by a labor union. The Company considers its employee relations to be
good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's Executive offices are located at 5100 Town Center Circle,
Suite 560, Boca Raton, Florida 33486 where it occupies 3,800 square feet and a
monthly rental of approximately $8,836.00 pursuant to a sublease expiring April
15, 2000.
MetBilling Group, Inc. occupies approximately 2,490 square feet in Boca
Raton, Florida 33486, at a monthly rental of approximately $3,321.00, which
lease expires on April 15, 2000.
Magnetic Imaging Systems, I, Ltd. also leases approximately 4,656 square
feet for diagnostic facilities located in Fort Lauderdale, Florida at a monthly
rental rate of approximately $14,126 which lease expires April 30, 1999 and is
leased from Dr. Kagan, a Director of the Company.
The Company also leases approximately 5,740 square feet for diagnostic
facilities in Fort Lauderdale, Florida at a monthly rate of approximately $6,708
which lease expires January 31, 1999 and is leased from KFK Enterprises, Inc., a
corporation in which Dr. Kagan, a Director of the Company, is a principal
shareholder which was entered into on favorable terms for Dr. Kagan.
None of the Company's properties, except as otherwise indicated, are
leased from affiliates.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings and, to the
best of the Company's information, knowledge and belief, none is contemplated or
has been threatened, other than stated below.
Datascan and the Company have been named as defendants in a lawsuit
wherein a former Datascan employee is alleging employment discrimination. The
lawsuit seeks unspecified punitive and economic damages. The Company believes
that these claims are without merit, and intends to vigorously defend this
action. At this time, the Company is unable to estimate the possible loss or
range of loss that would occur if this action were judged unfavorably.
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On September 25, 1996, pursuant to a merger agreement ("FRSI Agreement"),
the Company, acquired Florida Rehabilitation Services, Inc. ("FRSI") and
Southeast Medical Staffing, Inc. ("SMSI" and collectively "FR Group") from the
sole shareholder of both companies. On December 31, 1996, the Company has
rescinded this transaction as a result of the Company's belief that a breach of
the agreement has occurred and requested the return of all consideration paid.
In connection therewith, the Company has cancelled the shares of common stock
issued as part of the purchase price and will take all action necessary for the
return of all cash and other expenses paid in connection with the transaction.
The merger transaction is not reflected in the financial statements and the
common stock is not considered to be outstanding at June 30, 1997
During the year ended June 30, 1997, the Company reserved approximately
$72,000 of advances incurred in connection with this transaction.
In January 1997, a medical billing group filed a complaint against the
company and FR Group claiming breach of a funding and security agreement, and
economic damages of approximately $150,000 plus treble damages of approximately
$208,000. Although the Company believes it has meritorious defenses against the
suit, the ultimate resolution of the matter could result in a material loss to
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1997.
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock and Warrants are currently traded on the NASDAQ
SmallCap Stock Market ("NASDAQ") under the symbols "MDPA" and "MDPAW." The
following table sets forth, since the Company's initial public offering on
February 14, 1997, the high and low closing values for the common stock and
warrants, as reported by NASDAQ:
HIGH LOW
($) ($)
COMMON STOCK
Quarter ended March 31, 1997 7.56 3.56
Quarter ended June 30, 1997 5.37 3.18
WARRANTS
Quarter ended March 31, 1997 2.75 1.00
Quarter ended June 30, 1997 1.28 0.50
The Company has not declared or paid any dividends on common stock. The
Company presently intends to invest its earnings, if any, in the development and
growth of its operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
As noted in Item I - "Description of Business -General", Metropolitan
Health Network, Inc. was formed in January 1996 for the purpose of developing a
vertically and horizontally integrated health care delivery network in the south
Florida area. The framework of the network was to be built through acquisition,
internal development, management of non-owned practices, and the network
affiliations. On February 13, 1997 the Company completed its initial public
offering.
From its inception through the offering, the Company's activities were
primarily limited to the start-up activities, including raising of capital,
recruiting key operating personnel, obtaining and implementing computerized
billing, collections and operational information systems, negotiating network
acquisitions, and setting up the infrastructure of the network.
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The Company took operational control of its first acquisitions in February
(MRI Scan Center and Datascan of Florida). These two companies perform
diagnostic services and are a central core to the network. The Company also
completed the acquisition of a physician practice and is developing two medical
clinics prior to the fiscal year end.
Another integral part of the framework of the network is the billing and
collection of patient visits. The Company has launched its own billing and
collection company (MetBilling Group), with the focus toward the most up-to-date
operational information and billing system to provide intra-network and external
services. Though the Company's health care provider network is in the south
Florida area, MetBilling Group has extended its service area by signing
contracts with hospital emergency rooms throughout the country.
Operating Revenues
As previously noted, Metropolitan Health Network, Inc.'s operations are
dependent upon the formation of its network. During fiscal 1997, $ 6,782,000 or
91% of the Company's total revenue of $ 7,512,185 was derived from its
diagnostic companies. The balance of revenues primarily were derived from its
physician practices. The ratio of diagnostic revenue to other operations was
higher than anticipated due in part (as previously stated) to the Company's
delay in acquiring physician practices that would have enhanced the revenues of
the network. The Company believes that the revenue composition will shift away
from diagnostics and will increase as the Company increases the number of
physicians it merges, manages and affiliates into its network. Diagnostic
revenues in the last part of the fiscal year decreased due to the loss of
certain direct diagnostic contracts and the aging equipment at one of the MRI
Scan Center facilities. The Company has recently entered into additional direct
contracts and has contracted to purchase a new Super Conductor Open MRI to be
operational by the end of December.
The Company has implemented a managed care/network development department
to broaden its existing managed care contracts throughout the network and
procure new managed care agreements with the inclusion of affiliated network
physicians. The Company believes this will enable the Company to have the
multi-specialty/modality, as well as geographical presence necessary to obtain
these managed care contracts. The Company has dedicated the resources necessary
to ensure the success of this plan by hiring a Director and full support staff.
In addition to patient revenues, approximately $43,000 can be attributed
to Metbilling's contractual arrangements from outside the medical group. This
represents 30 days of billings from an emergency room physician group with
annualized revenues expected to be approximately $300,000. Additionally, the
Company believes its billing company will expand in the next fiscal year by
providing services to hospital emergency rooms and other healthcare providers
outside the network.
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Subsequent to June 30, 1997, the medical groups' two primary care
facilities been restructured within the last 60 days, with the hiring of two
board certified physicians, structural improvements and an aggressive marketing
campaign under way. Both facilities will be structured and marketed as
multispecialty clinics with emphasis on patient education and early prevention.
The Company's ability to increase revenues and achieve profitability is
dependent in part upon its ability to expand its network, maintain reasonable
third party reimbursements, obtain favorable managed care contracts, and expand
billing and collection services for outside healthcare providers. There is no
assurance, if or when, the Company will achieve profitability. The Company's
prospects, therefore, must be evaluated in light of the risks and expenses
normally encountered by a new entrant into the health care industry.
OPERATING EXPENSES. Operating expenses totaling $9,520,128 for the year
ended June 30, 1997 consisted primarily of expenses incurred for payroll,
payroll taxes and benefits, depreciation and amortization, bad debt expense,
interest, rent and other general and administrative expenses.
Payroll related expenses totaling $4,259,916 represented 44.8% of the
total operating expenses for the year ended June 30, 1997. Payroll and related
expenses increased during the latter part of the fiscal year due to the
additional corporate staff hired during the fourth quarter as well as the merger
of Dr. Wand's practice into the medical group. In the future, revenue increases
will not require a proportional increase in staffing relating to the internal
growth of revenues.
Depreciation and amortization totaling $718,436 or 7.6% of the total
operating expenses for the year ended June 30, 1997. The increases in the fourth
quarter are due to the purchase of the medical information system utilized at
corporate for all billing and collections for the medical group.
Bad debt expense amounting to $824,780 represented 8.7% of the total
operating expenses for the year ended June 30, 1997. A significant portion of
the medical groups revenue is generated from personal injury type claims. Due to
the nature of this type of billing, collections can require up to two years and
is not tied to any reimbursement schedule. Consequently, exact reimbursements
cannot be defined at the time of service.
Interest expense totaling $511,617 represented 5.4% of the total operating
expenses for the year ended June 30, 1997. Approximately $304,000 of the total
is due to interest on capital leases.
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Rent expense amounted to $668,460 or 7.0% of the total operating expenses
for the year ended June 30, 1997. MRI has three fixed-site locations plus one
warehouse. Total rent expense related to these leases amounted to approximately
$257,000. All other entities are single site. The rent expense for the corporate
offices is approximately $120,000 for the year ended June 30, 1997. There is
sufficient capacity at these locations for future growth of existing operations.
Based upon the foregoing, the Company incurred a loss from operations of
$2,007,943 for the year ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has and continues to acquire healthcare
providers. In addition, the Company has allocated significant capital resources
to the development of its infrastructure through the purchase of a medical
information system and hiring of personnel. Prior to any acquisitions the
Company financed its initial operations, through the initial public offering, by
the sale of Common Stock through private placement of $334,127, and bridge
financing of $897,362.
The Company was delayed in its initial public offering by three months.
Significant funds were expended relating to the offering, with additional
expenses incurred during the subsequent delay. The Company received $3,394,408
in proceeds from the IPO, net of IPO-related expenses, and began investing the
funds in constructing the corporate infrastructure along with acquiring medical
practices. Management anticipates future asset based and working capital lines
of credit as requirements to continue its aggressive growth through acquisitions
of healthcare providers. Subsequent to June 30, 1997, the Company has entered
into an agreement for a private placement of preferred stock to raise
approximately $3 million of which, to date, $500,000 has been received.
Management believes that the above referenced financing, if and when received,
will provide the Company with sufficient working capital for the expansion of
its network; and supplement any operational cash requirements although there can
be no assurances that these funds will be sufficient that any necessary
financing will be available to the Company.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Except for historical information contained herein, the matters discussed
in this report are forward-looking statements made pursuant to the safe harbor
provisions of the Securities Litigation Reform Act of 1995. These
forward-looking statements are based largely on the Company's expectation and
are subject to a number of risks and uncertainties, including but not limited
to, economic, competitive and other factors affecting the Company's operations,
markets, expansion strategies, available financing, and other factors discussed
elsewhere in this report and the documents filed by the Company with the
Securities and Exchange Commission. Many of these factors are beyond the
Company's control. Actual results could differ materially from the
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forward-looking statements. In light of these risks and uncertainties, there can
be no assurance that the forward-looking information contained in this report
will, in fact, occur.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required to be filed hereunder are included under
Item 13 (a) (1) of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
As of October 13, 1997, the directors and executive officers of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Noel J. Guillama 37 Chairman, President, Chief Executive and Operating Officer
Donald B. Cohen 43 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
Luis J. Crucet, Jr. 43 Executive Vice President
President - MetBilling Group, Inc.
Roman G. Fisher 49 Executive Vice President
Chief Operating Officer - MRI Scan Center
Robert L. Kagan, M.D. 50 Medical Director - MRI Scan Center, Director
Kenneth J. Hall 59 President of Datascan, Director
_________________
</TABLE>
NOEL J. GUILLAMA has served as Chairman, President and Chief Executive and
Operating Officer of the Company since inception in January 1996. During 1995,
Mr. Guillama served as a health care consultant to public and private health
care providers. During 1995, he was Vice President of Development for
MedPartners, Inc., a Birmingham, Alabama-based physician practice management
public company. From 1991 to 1994, he served as Director and Vice President of
Operations of Quality Care Networks, Inc. From 1980 to 1990, Mr. Guillama served
as President and Chief Executive Officer of JMG Corporation, Inc., a diversified
company with interest in construction, real estate, mortgage financing, and
trucking in South Florida.
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DONALD B. COHEN has served as Chief Financial Officer and Director of the
Company since April 1996, Executive Vice President since April 1, 1997 and as
Secretary since October 1, 1997. Mr. Cohen was Vice President and CFO of
ProSports Video Response, Inc., from 1989 to 1992, Vice President and CFO of
BDS, Inc., from 1987 to 1989, and Director of Finance of Tel-Plus Communication
of Southern California from 1984 to 1986. Prior to his employment with the
Company, from 1993 to 1995, Mr. Cohen worked for Ocwen Financial Corporation
designing and implementing a loan accounting system. Mr. Cohen has extensive
experience in information systems and start-up ventures. Mr. Cohen received a
Bachelor of Science degree from California State University in Northridge. In
1981, Mr. Cohen was certified as a CPA in the State of California.
DR. ROBERT L. KAGAN has served as a Director of the Company since October
1996. Dr. Kagan owned and operated the MRI Center from 1984 until its sale to
the Company in September 1996. Prior thereto he served as Director of the
Department of Nuclear Medicine at Holy Cross Hospital in Fort Lauderdale. Dr.
Kagan has 20 years of experience in clinical pathology and nuclear medicine. His
numerous distinctions include diplomate of the American Board of Pathology in
clinical Pathology, Chairman of the American Society of Clinical Pathology's
Board of Registry in Nuclear Medicine, diplomate of the American Board of
Nuclear Medicine. Past President of the Florida Association of Nuclear
Physicians, and former Assistant Professor of Radiology at the University of
Miami. Dr. Kagan received his MD degree from Georgetown University School of
Medicine in Washington, DC, and his Bachelor of Arts degree from Bucknell
University in Lewisburg, Pennsylvania.
KENNETH J. HALL has served as a Director of the Company since October
1996. Mr. Hall founded Datascan of Florida, Inc., in 1981, and since then has
served as its President and Director. Datascan provides mobile diagnostic
services to individual physician practices and hospitals in Dade, Broward and
Palm Beach Counties. He is responsible for day-to-day administration, including
finance and budgeting, operations, development, logistics, management, sales and
marketing. Mr. Hall also has extensive experience in sales, marketing and
management with several international companies, such as Merck & Co.,
Hoffman-LaRoche and Metpath Laboratories Corning.
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LUIS J. CRUCET, JR. joined the Company in April 1996 as Executive Vice
President. Mr. Crucet is also President of MetBilling Group, Inc., a
wholly-owned subsidiary of the Company. MetBilling handles all billing for the
Company and for other unrelated third party customers. From 1991 to 1996, he
founded and served as President of MedBilling Group, Inc. MedBilling provided
billing and collection services to physicians and diagnostic facilities in the
south Florida area. From 1989 to 1992, Mr. Crucet served as Regional Director of
Information Services for Columbia Hospital Corporation in the tri-county area
before that from 1985 to 1989, as Director of Systems Development at Florida
Medical Center in Fort Lauderdale. Before entering the health care industry, Mr.
Crucet worked with American Express as a Project Leader, where he developed a
front-end-capture financial system.
ROMAN G. FISHER has served as Executive Vice President since September,
1996. Since 1985 Mr. Fisher has served as Chief Operating Officer and Director
of the MRI Scan Center. He specializes in administration, staff management,
information systems selection and implementation, accounting, payroll and
database management. Since 1985, Mr. Fisher has initiated and implemented key
administrative policies and procedures at the MRI Scan Center. Mr. Fisher
studied engineering and mathematics at George Washington University in
Washington, DC, received a Masters of Science degree from Nova University in
Fort Lauderdale, Florida, and earned a law degree from the University of Basel
in Switzerland.
BOARD OF DIRECTORS
Election of Officers
Each director is elected at the Company's annual meeting of shareholders
and holds office until the next annual meeting of stockholders, or until the
successors are elected and qualified. At present, the Company's bylaws provide
for not less than one (1) director. Currently, there are four (4) directors in
the Company; however, the Company will seek to elect a least two (2) additional
outside directors by the end of 1997. The bylaws permit the Board of Directors
to fill any vacancy and such director may serve until the next annual meeting of
shareholders or until his successor is elected and qualified. Officers are
elected by the Board of Directors and their terms of office are, except to the
extent governed by employment contracts, at the discretion of the Board. Other
than as indicated above, there are no family relations among any officers or
directors of the Company. The officers of the Company devote full time to the
business of the Company.
Mr. Guillama, Dr. Kagan and Ms. Hilderbrand, a fifteen (15%) percent
shareholder of the Company have entered into a cross-nominating agreement/proxy
that requires each to vote all of their respective shares of Common Stock for
the re-election of Mr. Guillama and Dr. Kagan to the Board of Directors. This
agreement is valid for the period of time Dr. Kagan is employed by the Company.
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Accordingly, Mr. Guillama, Dr. Kagan and Ms. Hilderbrand, collectively under
this agreement, are in a position to control the election of directors as well
as the other affairs of the Company.
Board Committees
The Company has three (3) committees, an Audit, Compensation and Option
Committee, as well as an Advisory Board. The Audit Committee consists of Mr.
Guillama and Mr. Hall. The Audit Committee makes recommendations to the Board of
Directors regarding the selection of independent auditors, reviews the results
and scope of the audit and other services provided by the Company's independent
auditors, and review and evaluates the Company's internal control functions.
The Compensation Committee consists of Messrs. Guillama and Kagan. The
Compensation Committee makes recommendations to the Board of Directors
concerning compensation for executive officers and consultants of the Company.
The Option Committee consists of Messrs. Guillama and Cohen. The Option
Committee administers the Company's Stock Option Plan.
ADVISORY BOARD
The Advisory Board ("Advisory Board") consists of Dr. Robert Kagan who
serves as Chairman, Kenneth J. Hall and a designee, who has not been identified
as of the date hereof, appointed by the Managing Underwriter.
The members of the Advisory Board advise and consult with the Company's
Board of Directors on an informal basis from time to time as requested on any
and all matters designated by the Board of Directors. Except for employee
members, the members are not expected to devote their efforts exclusively to the
business of the Company and will spend only such time on such business as needed
by the Company at the mutual convenience of the Company and such members. The
Advisory Board has no formal duties, authority or management obligations. There
is no written agreement between the Company and any member of the Advisory Board
providing for compensation for services rendered. However, the Company may
compensate each such member at competitive rates as and when such member
performs work for the Company.
COMPENSATION OF DIRECTORS
The Company reimburses all directors for their expenses in connection with
their activities as directors of the Company. The directors make themselves
available to consult with the Company's management. All of the directors of the
Company are also employees of the Company and do not receive additional
compensation for their services as directors.
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COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
(10%) percent of the outstanding Common Stock, to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership on Form 3 and
reports of changes in ownership of Common Stock on Forms 4 or 5. Such persons
are required by SEC regulation to furnish the Company with copies of all such
reports they file.
Based solely on its review of the copies of such reports furnished to the
Company or written representations that no other reports were required, the
Company believes that all Section 16(a) filing requirements applicable to its
officers, directors and greater than (10%) percent beneficial owners were
complied with during the year ended June 30th, 1997.
Page 30
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following tables present information concerning the cash compensation
and stock options provided to the Company's Chief Executive Officer and each
additional executive officer whose total annualized compensation exceeded
$100,000 for the period from inception (January 16, 1996) to June 30, 1996, and
for year ended June 30, 1997 ("fiscal 1997"). The notes to these tables provide
more specific information regarding compensation.
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
<TABLE>
<CAPTION>
Long-term
Compensation
Awards
Securities
Underlying
Other Annual Options/
Name and Fiscal Salary Bonus Compensation SARs All Other
Principal Position Year $ $ ($) (#)
Compensation
------------------ ---- - - --- --- ----------
- --
<S> <C> <C> <C> <C> <C> <C>
Noel J. Guillama 1996 32,000
Chairman of the Board, 1997 67,100 37,027 --
President,
Chief Executive Officer
Robert L. Kagan, MD 1997 500,000 151,017
Director, Medical
Director - MRI Scan
Center
Kenneth J. Hall 1997 150,000
Director, President -
Datascan of Florida, Inc.
Roman G. Fisher 1997 125,000 15,166
Executive Vice
President, Chief
Operating Officer - MRI
Scan Center
</TABLE>
Page 31
<PAGE>
Options Granted in the Year Ended June 30, 1997
-----------------------------------------------
<TABLE>
<CAPTION>
Number of
Securities % of Total
Underlying Options/
Options/ SARs
SARs Granted to Exercise or Base
Granted Employees in Price Expiration
(a)(#) Fiscal Year ($/Share) Date
------ ----------- --------- ----
<S> <C> <C> <C> <C>
Name
Noel J. Guillama 100,000 33.3% $10.00 9/5/2000
Roman Fisher 128,000 42.6% $1.00 to $18.00 9/4/2001 to 9/4/2004
</TABLE>
Total number of options granted during the year ended June 30, 1997 was 300,500.
Aggregated Fiscal Year-End Option Value Table
The following table sets forth certain information concerning unexercised
stock options as of June 30, 1997. Noel J. Guillama exercised 200,000 options
during the period ended June 30, 1997. No stock appreciation rights were granted
or are outstanding.
Value of Unexercised
Number of Unexercised Options In-The-Money
Held at June 30, 1997 Options at June 30, 1997
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
(#) (#) ($) ($)
Noel J. Guillama 270,000 625,677
Donald B. Cohen 92,000 28,000 124,186
Luis J. Crucet, Jr. 75,500 39,500 110,387
Roman Fisher 41,500 86,500 77,158
(i) The closing sale price of the Common Stock on June 30, 1997 as reported by
NASDAQ was $3.81 per share. Value is calculated by multiplying (a) the
difference between $3.81 and the option exercisable price by (b) the number of
shares of Common Stock underlying.
Page 32
<PAGE>
COMPENSATION OF DIRECTORS. For the fiscal period ending June 30, 1997, all
directors who received remuneration in excess of $100,000 are listed above.
EMPLOYMENT AGREEMENTS.
The Company has entered into a five (5) year Employment Agreement
("Agreement") with Noel J. Guillama, the President and Chief Executive and
Operating Officer of the Company effective on the effective date of this
Offering. The terms of the Agreement call for a salary of no less than $100,000
each year. Mr. Guillama is also eligible for a bonus equal to 5% of the
Company's earnings before income taxes in excess of $2,000,000 per year plus a
bonus equal to 1/2 of 1% of the gross revenues of the Company for each quarter.
Mr. Guillama will also receive healthcare benefits, life insurance, a retirement
plan and car allowance of $700 a month. Mr. Guillama will receive options to
purchase 100,000 shares of the Company's Common Stock at $10.00 per share, and
options to purchase an additional 50,000 shares at $10.00 per share for each
$20,000,000 increase in the Company's revenues until it reaches $100,000,000 in
revenues.
In the event Mr. Guillama is terminated for cause or voluntarily resigns,
he shall be subject to a non-competition clause for a period of two years. Mr.
Guillama's Agreement also provides that he shall be deemed to be constructively
terminated in the event of a change of control of the Company or the election of
a chairman. In such event, the Company would be required to pay Mr. Guillama the
balance of the Employment Agreement, register all of the shares held by Mr.
Guillama, his family and any stock owned by his affiliated entities.
The Company has entered into a five (5) year employment agreement with Dr.
Robert Kagan, the Medical Director for the MRI Scan Center. The employment
agreement specifies a yearly salary of $600,000, and a 10% bonus of total
collected revenues. Total compensation, salary and bonus, not to exceed 15% of
total collected revenues of NMI. In addition, Dr. Kagan is entitled to a monthly
automobile allowance of $700 and five weeks vacation. The agreement commenced
September 1, 1996 and expires August 31, 2001 and shall automatically renew for
successive five year (5) terms unless notice is given at least ninety days (90)
prior to the expiration date. As of this date, the Company is delinquent in the
payment of certain bonuses in the amount of approximately $50,000 to Dr. Kagan
which amount will be paid from cash flow.
On June 30, 1997, the Company and Dr. Robert Kagan modified the employment
contract between the Company and Dr. Robert Kagan. Dr. Robert Kagan agreed to,
effective July 1, 1997 and for the life of the contract, to have his bonus paid
only in months where the MRI Scan Center had positive cash flow and that all
accruals that went beyond 90 days due to lack of cash flow, would be lost. Dr.
Robert Kagan further agreed to read 1,293 scans per quarter.
Page 33
<PAGE>
The Company has entered into a five (5) year employment agreement with
Kenneth Hall, President of Datascan. The employment agreement specifies a yearly
salary of $200,000 and a bonus of 5% of pre-tax profits over $400,000. Mr. Hall
is entitled to receive a monthly automobile allowance of $600 and four weeks (4)
vacation. The agreement commenced September 30, 1996 and expires August 31, 2001
with annual renewals thereafter.
Nuclear Magnetic Imaging, Inc., (a subsidiary of the Company) has entered
into a five (5) year employment agreement with Roman Fisher whereby Mr. Fisher
functions as the Chief Operating Officer of the MRI Scan Center and also serves
as Executive Vice President of the Company. The employment agreement provides
for base compensation of $150,000 per year for serving as COO plus 5% of EBITDA
in excess of $800,000 per year plus a bonus of 0.0033% of the gross revenues of
the MRI Scan Center, a car allowance of $500 per month, and three weeks
vacation. The employment agreement additionally provides 125,000 options to
purchase the Company's stock exercisable from the date of the employment
agreement and for three (3) years thereafter if he remains employed, at a price
of from $1.00 to $18.00 per share. The employment agreement commenced September
1, 1996 and expires August 31, 2001, which may be renewed for up to two, three
year terms.
The Company expects to negotiate long term Employment Agreements with Mr.
Cohen and Mr. Crucet, but no assurance can be given that the Company will be
successful in such negotiations.
Page 34
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the Company's
Common Stock beneficially owned at October 10, 1997 (i) by each person who is
known by the Company to own beneficially 5% or more of the Company's common
stock; (ii) by each of the Company's directors; and (ii) by all executive
officers and directors as a group.
Percentage of
Name/Address of Beneficial Ownership Beneficial Ownership
Beneficial Owner Common Stock Common Stock
- ---------------- ------------ ------------
Noel J. Guillama(1)(9) 876,726 13.66%
Robert L. Kagan, M.D.(2)(9)(10) 775,000 12.08%
Kenneth J. Hall(3) 354,000 5.52%
Donald B. Cohen(4) 102,000 1.59%
Luis Crucet, Jr.(5) 115,500 1.80%
Roman G. Fisher(6) 93,900 1.46%
Bonnie Hilderbrand(7)(9)10 875,000 13.63%
Martin Harrison, M.D.(8) 516,154 8.04%
Directors and Executive
Officers as a group
(8 persons) 3,708,280 57.78%
_________________
(1) Includes (1) 100,000 shares held by Mr. Guillama's wife, (2) 265,000
shares held by Guillama Family Holdings, Inc., a corporation in which Mr.
Guillama is a shareholder, (3) 142,000 shares held by Mr. Guillama as
trustee for his minor son, (4) 15,000 shares owned by Beacon Equity Group,
a corporation in which Mr. Guillama is a director, (5) 84,000 shares owned
by Beacon Consulting Group, Inc., a corporation in which Mr. Guillama is a
director, (6) 135,000 shares issuable upon exercise of options at a price
of $.10 per share until September 5, 2001, (7) 100,000 shares issuable
upon exercise of options at a price of $10.00 per share until September 5,
2001, and (8) 35,000 shares issuable upon exercise of options at a price
of $.50 until April 15, 2001, pursuant to Mr. Guillama's Employment
Agreement. Does not include up to 250,000 shares issuable upon exercise of
options at a price of $10.00 per share pursuant to Mr. Guillama's
Employment Agreement. See "Management - Employment Agreements."
(2) Includes 175,000 shares issuable upon exercise of an option granted by Ms.
Hilderbrand, exercisable at a price of $.01 per share commencing on
February 13, 1997, and continuing for a period of 5 years thereafter. Does
not include 400,000 shares which may be issued pursuant to the Acquisition
Agreement and the achievement of certain earnings criteria for the
acquired practice.
Page 35
<PAGE>
(3) Does not include 51,000 shares which may be issued pursuant to the
Acquisition Agreement and the achievement of certain earnings criteria for
the acquired practice.
(4) Includes (1) 16,000 shares issuable upon exercise of options at a price of
$.50 per share until October 15, 2001, (2) 20,000 shares issuable upon
exercise of options at a price of $.50 per share until November 1, 2001,
and (3) 14,000 shares issuable upon exercise of options at a price of
$5.00 until January 15, 2002. Does not include (1) 14,000 shares issuable
upon exercise of options of a price of $6.00 per share at any time after
April 29, 1997 until April 29, 2002; (2) 14,000 shares issuable upon
exercise of options at a price of $8.00 per share at any time after April
29, 1997 until April 29, 2002; (3) 14,000 shares issuable upon exercise of
options at a price of $10.00 per share at any time after April 29, 1997
until April 29, 2002.
(5) Includes (1) 30,000 shares issuable upon exercise of options at a price of
$.50 per option until July 31, 2001, (2) 2,000 shares issuable upon
exercise of options at a price of $.50 per share until October 15, 2001,
(3) 13,500 issuable upon exercise of options at a price of $7.00 until
December 31, 2001, and (4) 3,000 shares issuable upon exercise of options
at a price of $5.00 until January 15, 2002. Does not include (1) 13,500
shares issuable upon exercise of options at a price of $9.00 per share at
any time after April 30, 1997 until April 30, 2002; (2) 13,500 shares
issuable upon exercise of options at a price of $11.00 per share at any
time after June 30, 1997 until June 30, 2002.
(6) Includes (1) 25,000 shares issuable upon exercise of options at a price of
$1.00 per share until September 5, 2001; (2) 3,000 shares issuable upon
exercise of options at a price of $10.00 per share until September 5,
2001. Does not include (1) 13,500 shares issuable upon exercise of options
at a price of $6.00 per share at any time after March 5, 1997 until March
5, 2002; (2) 13,500 shares issuable upon exercise of options at a price of
$8.00 per option at any time after July 5, 1997 until July 5, 2002; (3)
13,500 shares issuable upon exercise of options at a price of $10.00 per
share at any time after November 5, 1997 until November 5, 2002.
(7) Includes (1) 25,000 shares owned by each of Ms. Hilderbrand's three (3)
children; (2) 50,000 shares held by a corporation of which she is a
stockholder; and (3) 150,000 shares issuable upon the exercise of options
at a price of $.10 per share until September 5, 2001.
(8) Does not include 156,923 shares which may be issued pursuant to the
Acquisition Agreement and the achievement of certain earnings criteria for
the acquired practice.
(9) Mr. Guillama, Dr. Kagan and Ms. Hilderbrand have entered into a
cross-nominating agreement/proxy that requires each to vote all of their
respective shares of Common Stock for the reelection of Mr. Guillama and
Dr. Kagan to the Board of Directors. This agreement is valid for the
period of time Dr. Kagan is employed by the Company. Accordingly, Mr.
Guillama, Dr. Kagan and Ms. Hilderbrand, collectively under this
agreement, are in a position to control the election of directors as well
as the other affairs of the Company.
(10) With respect to the 175,000 shares (3% of the outstanding shares of Common
Stock) subject to the option granted by Ms. Hilderbrand to Dr. Kagan (see
above), Ms. Hilderbrand has agreed to vote such securities in the same
proportion as the vote of the other shareholders on all matters except for
the election of directors (see above). The Company has agreed to register
the shares underlying the options within two years of February 13, 1997.
Page 36
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has a month to month consulting agreement with Sternco, Inc.
that provides for weekly draws of $1,500 per week towards commissions to be
earned plus reimbursement of allowable expenses and a one time commission of 1/2
of 1% of the previous year's revenue of all transactions consummated by the
Company as a result of Sternco, Inc.'s involvement, through January 31, 1997 and
thereafter the commission will be increased to 1% of the revenue of all
transactions consummated as a result of Sternco, Inc.'s direct involvement. The
Company will pay the commissions in either cash or stock. Sternco, Inc. is a
shareholder of the Company and is owned or controlled by Bonnie Hilderbrand, the
Company's second largest shareholder.
The facility leases between Dr. Robert Kagan and the Company are for the
addresses 3122 East Commercial Boulevard and 3079 East Commercial Boulevard. The
property located at 3122 East Commercial Boulevard is owned by Dr. Kagan, a
director of the Company, and leased by Magnetic Imaging Systems I, Ltd. The
current rent is $14,126 per month net of expenses. The total square footage is
4,656 of office space plus an additional 2,000 square feet of garage. Magnetic
Imaging Systems, I, Ltd. built the garage in 1987. The total leasehold
improvements were approximately $285,289 at this location. Independent property
appraisals were performed and both valued the properties at a maximum of $22 a
square foot net of expenses. Magnetic Imaging Systems, I, Ltd. is currently
paying $36.40 a square foot net of expenses for the 4,656 square feet of office
space. The Company intends to renegotiate the lease between Dr. Kagan and
Magnetic Imaging Systems, I, Ltd., however, no assurance can be made that the
Company will be successful. This lease expires April 30, 1999, at which time the
Company may seek to move to a less expensive location.
The property located at 3079 East Commercial Boulevard, is owned by KFK
Enterprises, Inc., a Florida corporation and leased by Magnetic Imaging Systems,
I, Ltd. Dr. Kagan, a director of the Company owns approximately 50% of KFK
Enterprises. The rental payment is $6,708 per month and the property is 5,740
square feet. Thus, Magnetic Imaging Systems, I, Ltd. is paying $14 per square
foot net of expenses. The Company believes that this price is equal to current
market value. Magnetic Imaging Systems, I, Ltd. made leasehold improvements of
$139,289 at this location. This lease expires January 31, 1999.
All future transactions between the Company and any officer, director or
5% shareholder will be on terms no less favorable than could be obtained from
independent third parties and will be approved by a majority of the independent
Page 37
<PAGE>
disinterested directors of the Company. The Company believes that all prior
affiliated transactions except those identified above were made on terms no less
favorable to the Company than available from unaffiliated parties. Loans, if
any, made by the Company to any officer, director or 5% stockholder, will only
be made for bona fide business purposes.
Page 38
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
The financial statements listed on the index to financial statements on
page F-1 are filed as part of this Form 10KSB.
(a) (2) Exhibits
Exhibits marked with footnote one are filed herewith. The remainder of the
exhibits have heretofore been filed with the Commission and are incorporated
herein by reference. Each management contract or compensation plan or
arrangement filed as an exhibit hereto is identified by a dagger (+).
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation.
3.2 Articles of Amendment to the Articles of Incorporation.
3.3 By-laws.
4.1 Specimen Common Stock Certificate.
4.2 Specimen Common Stock Purchase Warrant.
4.4 Underwriter's Warrant Agreement.
4.5 Underwriter's Warrant.
4.6 Warrant Agreement.
4.7 Specimen of Private Placement Warrant
Page 39
<PAGE>
10.1 Stock Option Plan.
10. Executive Employment Agreement between the Company and Noel J.
Guillama.
10.3 Executive Employment Agreement between the Company and Robert L.
Kagan, M.D.
10.4 Sub-Lease Agreement with the Company and Safeskin dated August
1, 1996.
10.5 Purchase and Sales Agreement between the Company, Roman Fisher
and Ofra Fisher dated August 13, 1996.
10.6 Purchase and Sales Agreement between the Company and Edwin Kagan
dated August 13, 1996.
10.7 Agreement between the Company and Dr. Robert Kagan dated
September 1, 1996.
10.8 Merger Agreement between the Company, Florida Rehabilitation
Services, Inc., Southeast Medical Staffing, Inc. and Dr.
Frederick J. Kunen dated September 25, 1996.
10.9 Stock Purchase Agreement between the Company, Kenneth J. Hall,
Ira P. Hall, Lee M. Hall and Michael Goldstein dated September
26, 1996.
10.10 Assets Purchase Agreement between the Company, International
Family Healthcare Centers, Inc. and Emergency Care Services,
Inc. dated October 15, 1996.
10.11 Merger Agreement between the Company, Metcare II, Inc., Paul
Wand, M.D., P.A., and Paul Wand dated October 24, 1996.
10.12 Merger Agreement dated August 6, 1997 by and among the Company,
Metcare, GMA and Martin Harrison, M.D.
10.2 Promissory Note dated August 6, 1997.
Page 40
<PAGE>
10.13 Promissory Note dated December 23, 1993 by Datascan of Florida,
Inc. to First Union National Bank.
10.14 Promissory Note dated September 1, 1996 by the Company to Robert
L. Kagan.
10.15 Promissory Note dated September 1, 1996 by the Company to Robert
L. Kagan.
10.16 Promissory Note dated September 1, 1996 by the Company to Robert
L. Kagan.
10.17 Promissory Note dated September 25, 1996 by the Company to
Frederick J. Kunen.
10.18 Promissory Note dated October 15, 1996 by the Company to
International Family Healthcare Center, Inc.
10.19 Executive Employment Agreement between the Company and Kenneth
Hall.
10.20 Executive Employment Agreement between the Company and Roman
Fisher.
10.21 Agreement between Mr. Guillama, Mr. Kagan and Ms. Hilderbrand
10.22 Consulting Agreement between the Company and Euro-Atlantic
Securities, Inc.
10.23 Consulting Agreement between the Company and Sternco, Inc.
10.24 Letter of Intent between the Company and General Medical
Associates, Inc.
10.25 Lease Agreement between the Company and Champion Technologies of
Florida, Inc.
10.26 Consulting Agreement dated July 28, 1997, between the Company
and Lion Capital
Page 41
<PAGE>
10.27 Merger Agreement dated August 6, 1997, by and among the Company,
MetCare, GMA and Martin Harrison, MD
10.28 Promissory Note dated August 6, 1997, by the Company to Dr.
Harrison, MD
21 Subsidiaries of the Company.
23.1 Consent of Kaufman, Rossin and Company. (1)
23.2 Consent of Atlas, Pearlman, Trop & Borkson, counsel for the
Company (included in opinion filed in Exhibit 5.1).
23.3 Consent of Jesse Small, C.P.A.(1)
23.4 Consent of Barry I. Hechtman, P.A.
23.5 Consent of Goldstein Lewin & Co. (1)
27 Financial Data Schedule
___________________
(1) Filed herewith
Page 42
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
registrant has duly caused this Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized in the Boca Raton, State of Florida on
the 14th day of October, 1997.
METROPOLITAN HEALTH NETWORKS, INC.
By: /s/Noel J. Guillama
--------------------
NOEL J. GUILLAMA
President, Chief Executive and
Operating Officer and Chairman
Pursuant to the requirements of the Securities Act, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ NOEL J. GUILLAMA President, Chief Executive October 14, 1997
- --------------------------- and Operating Officer
Noel J. Guillama (Principal Executive
Operating Officer) and
Chairman of the Board
/s/ DONALD B. COHEN Vice President of Finance, October 14, 1997
- --------------------------- Chief Financial Officer,
Donald B. Cohen Treasurer, Secretary
and Director
/s/ ROBERT L. KAGAN, M.D. Director October 14, 1997
- ---------------------------
Robert L. Kagan, M.D.
/s/ KENNETH J. HALL Director October 14, 1997
- ---------------------------
Kenneth J. Hall
Page 43
<PAGE>
________________________________________________________________________________
METROPOLITAN HEALTH NETWORKS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
________________________________________________________________________________
C O N T E N T S
Page
________________________________________________________________________________
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet F-3
Statements of Operations F-4
Statements of Changes in Stockholders' Equity F-5
Statements of Cash Flows F-6 - F-7
Notes to Financial Statements F-8 - F-22
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
________________________________________________________________________________
To the Board of Directors and Stockholders
Metropolitan Health Networks, Inc. and Subsidiaries
Boca Raton, Florida
We have audited the accompanying consolidated balance sheet of Metropolitan
Health Networks, Inc. and Subsidiaries as of June 30, 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the period from inception (January 2, 1996) through June 30, 1996 and
for the year ended June 30, 1997. 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 Metropolitan Health
Networks, Inc. and Subsidiaries as of June 30, 1997, and the results of their
operations and their cash flows for the period from inception (January 2, 1996)
through June 30, 1996 and for the year ended June 30, 1997, in conformity with
generally accepted accounting principles.
September 26, 1997
Miami, Florida
F-2
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
________________________________________________________________________________
ASSETS
________________________________________________________________________________
CURRENT ASSETS
Cash and cash equivalents $ 1,667,887
Trading securities (Note 4) 183,276
Securities available for sale (Note 4) 166,527
Accounts receivable, net of allowances of $3,608,743 3,256,423
Other current assets 149,918
- --------------------------------------------------------------------------------
Total current assets 5,424,031
PROPERTY AND EQUIPMENT (Note 3) 4,299,816
GOODWILL, net of accumulated amortization of $71,610 (Note 2) 2,882,005
INTANGIBLE ASSETS, net of accumulated amortization of $38,481 341,204
DEFERRED ACQUISITION COSTS 136,506
OTHER ASSETS 146,966
- --------------------------------------------------------------------------------
$13,230,528
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
________________________________________________________________________________
CURRENT LIABILITIES
Accounts payable $ 159,287
Accrued expenses 783,838
Line of credit facilities (Note 6) 628,501
Current maturities of capital lease obligations (Note 5) 594,358
Current maturities of long-term debt (Note 7) 365,633
Notes payable to redeemed partners (Note 8) 555,000
- --------------------------------------------------------------------------------
Total current liabilities 3,086,617
CAPITAL LEASE OBLIGATIONS (NOTE 5) 3,099,072
LONG-TERM DEBT (NOTE 7) 71,119
COMMITMENTS AND CONTINGENCIES (NOTE 13)
EQUITY (NOTE 11) 6,973,720
- --------------------------------------------------------------------------------
$13,230,528
================================================================================
See accompanying notes.
F-3
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1997 AND FOR THE PERIOD FROM
INCEPTION (JANUARY 2, 1996) THROUGH JUNE 30, 1996
<TABLE>
<CAPTION>
__________________________________________________________________________________________
Year Ended Period Ended
June 30, 1997 June 30, 1996
__________________________________________________________________________________________
<S> <C> <C>
REVENUES:
Patient services $ 7,469,035 $ -
Billing services 43,150 -
Management fees - 120,000
- ------------------------------------------------------------------------------------------
Total revenues 7,512,185 120,000
- ------------------------------------------------------------------------------------------
EXPENSES:
Payroll, payroll taxes and benefits 4,259,916 65,083
Depreciation and amortization 718,436 920
Provision for bad debts 824,780 -
Interest 511,617 -
Rent (Note 9) 668,460 13,162
General and administrative 2,536,919 169,826
- ------------------------------------------------------------------------------------------
Total expenses 9,520,128 248,991
- ------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS ( 2,007,943) ( 128,991)
INTEREST AND OTHER INCOME 76,324 482
- ------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX
BENEFIT ( 1,931,619) ( 128,509)
INCOME TAX BENEFIT 362,000 -
- ------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS ( 1,569,619) ( 128,509)
DISCONTINUED OPERATIONS (NOTE 14)
Income from operation of pharmacy management business 41,826 -
Loss on disposal of pharmacy management business ( 91,691) -
- ------------------------------------------------------------------------------------------
NET LOSS $ 1,619,484 $ 128,509
==========================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 4,101,323 2,189,870
==========================================================================================
PER SHARE AMOUNTS
Loss from continuing operations ( $ 0.38) ( $ 0.06)
Income from discontinued operations 0.01 -
Loss on disposal of discontinued operations ( 0.02) -
- ------------------------------------------------------------------------------------------
NET LOSS ( $ 0.39) ( $ 0.06)
==========================================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1997 AND THE PERIOD FROM INCEPTION
(JANUARY 2, 1996) THROUGH JUNE 30, 1996
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________________________________
Unrealized Gain
Common Additional Retained On Securities
Stock Common Paid-in Earnings Available
Shares Stock Capital (Deficit) For Sale Total
____________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
BALANCES - JANUARY 2, 1996 (INCEPTION) - $ - $ - $ - $ - $ -
Issuance of common stock and warrants 2,290,175 2,290 590,372 - - 592,662
Net loss - period from inception (January 2,
1996) through June 30, 1996 - - - ( 128,509) - ( 128,509)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES - JUNE 30, 1996 2,290,175 2,290 590,372 ( 128,509) - 464,153
Issuance of common stock in connection with
acquisitions (Note 2) 1,110,000 1,110 3,256,890 - - 3,258,000
Issuance of common stock and warrants in connection
with equity financing (Note 11) 433,500 434 996,616 - - 997,050
Common stock and warrant equity financing
issue costs (Note 11) - - ( 99,688) - - ( 99,688)
Issuance of common stock and warrants in connection
with initial public offering (Note 11) 825,000 825 5,196,675 - - 5,197,500
Common stock and warrant public offering issue costs - - ( 1,802,267) - - (1,802,267)
Issuance of warrants - underwriters over-allotment - - 37,125 - - 37,125
Underwriters over allotment issue costs - - ( 3,712) - - ( 3,712)
Issuance of common stock and warrants - other 552,150 552 503,575 - - 504,127
Change in unrealized gain on securities available for
sale, net of tax effect of $24,000 - - - - 40,916 40,916
Net loss - year ended June 30, 1997 - - - ( 1,619,484) - (1,619,484)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES - JUNE 30, 1997 5,210,825 $ 5,211 $ 8,675,586 ($1,747,993) $ 40,916 $ 6,973,720
====================================================================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1997 AND THE PERIOD FROM INCEPTION
(JANUARY 2, 1996) THROUGH JUNE 30, 1996
<TABLE>
<CAPTION>
_____________________________________________________________________________________________________
Year Ended Period Ended
June 30, 1997 June 30, 1996
_____________________________________________________________________________________________________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ( $ 1,619,484) ( $ 128,509)
- -----------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 718,436 920
Gain on sales of securities ( 6,845) -
Provision for bad debts 824,780 -
Deferred costs charged to operations 84,203 -
Amortization of discount on note payable 47,775 -
Stock options issued in lieu of compensation 50,000 -
Income tax benefit ( 362,000) -
Changes in operating assets and liabilities:
Accounts receivable ( 1,116,646) ( 70,751)
Trading securities ( 176,431) -
Other current assets ( 87,798) ( 12,156)
Other assets 16,440 -
Accounts payable and accrued expenses ( 127,883) 41,983
- ------------------------------------------------------------------------------------------------------
Total adjustments ( 135,969) ( 40,004)
- ------------------------------------------------------------------------------------------------------
Net cash used in operating activities ( 1,755,453) ( 168,513)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred acquisition costs ( 136,506) ( 72,138)
Collections on note receivable - 24,345
Issuance of note receivable - ( 35,000)
Cash consideration paid for companies acquired ( 120,000) -
Cash balances of companies acquired 82,633 -
Purchases of securities available for sale ( 101,611) -
Capital expenditures ( 258,695) ( 15,239)
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities ( 534,179) ( 98,032)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit facilities 33,188 -
Repayments of notes payable ( 469,356) -
Repayments of capital lease obligations ( 400,513) -
Loan acquisition cost ( 164,750) -
Deferred offering costs - ( 27,302)
Net proceeds from issuances of common stock 4,660,135 592,662
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,658,704 565,360
- -----------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,369,072 298,815
CASH AND CASH EQUIVALENTS - BEGINNING 298,815 -
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - ENDING $ 1,667,887 $ 298,815
=====================================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEAR ENDED JUNE 30, 1997 AND THE PERIOD FROM INCEPTION
(JANUARY 2, 1996) THROUGH JUNE 30, 1996
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________
Year Ended Period Ended
June 30, 1997 June 30, 1996
___________________________________________________________________________________________________________
<S> <C> <C>
Supplemental Disclosures:
- -----------------------------------------------------------------------------------------------------------
Interest paid $ 500,000 $ -
- -----------------------------------------------------------------------------------------------------------
Income taxes paid - -
- -----------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Noncash Investing and
Financing Activities (Note 2)
-------------------------------------------------------------------------------------------------------
Common stock issued in connection with acquisitions $ 3,108,000 -
-------------------------------------------------------------------------------------------------------
Issuance of notes payable in connection with acquisitions $ 575,923 -
-------------------------------------------------------------------------------------------------------
Fair value of assets received in connection with acquisitions $ 6,709,509 -
-------------------------------------------------------------------------------------------------------
Fair value of liabilities assumed in connection with acquisitions $ 5,558,511 -
-------------------------------------------------------------------------------------------------------
Capital lease obligations incurred on purchases of equipment $ 1,176,090 -
-------------------------------------------------------------------------------------------------------
Common stock issued for purchase of equipment $ 120,000 -
-------------------------------------------------------------------------------------------------------
Common stock issued in exchange for certain assets of IFHC $ 150,000 -
-------------------------------------------------------------------------------------------------------
Issuance of note payable for certain assets of IFHC $ 150,000 -
-------------------------------------------------------------------------------------------------------
Unrealized gain on securities available for sale, net of tax effect
of $24,000 $ 40,916 -
-------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
________________________________________________________________________________
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
________________________________________________________________________________
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of
Metropolitan Health Networks, Inc. and all majority owned
subsidiaries, the most significant of which are Magnetic Imaging
Systems I, Ltd. and Nuclear Magnetic Imaging, Inc. (collectively,
MIS), Datascan of Florida, Inc. (Datascan), Dr. Paul Wand, MD P.A.
(Wand) and Metbilling Group, Inc. (Metbilling). The consolidated
group is referred to, collectively, as the Company. All significant
intercompany balances and transactions have been eliminated in
consolidation.
ORGANIZATION AND BUSINESS ACTIVITY
The Company was incorporated in January 1996, under the laws of the
State of Florida for the purpose of acquiring and operating health
care related businesses. The Company operates in South Florida, and
currently owns and operates a radiology practice, a magnetic
resonance imaging (MRI) outpatient center, a diagnostic testing
company and various general medical practice offices. Additionally,
the Company provides medical billing services to third party medical
related businesses however, as their services are not significant,
the company is deemed to be operating in one segment.
Effective July 1, 1996, the Company was no longer considered to be
in the development stage.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. From time
to time, the Company maintains cash balances with financial
institutions in excess of federally insured limits.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Expenditures for major
betterments and additions are charged to the asset accounts, while
replacements, maintenance and repairs which do not extend the lives
of the respective assets are charged to expense currently.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not
be recoverable. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of the asset, a loss is
recognized for the difference between the fair value and carrying
value of the asset.
F-8
<PAGE>
________________________________________________________________________________
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
________________________________________________________________________________
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment, including
property under capital leases, is computed using straight-line
methods over the estimated useful lives of the assets. The range of
useful lives is as follows:
Machinery and equipment 5-7 years
Computer and office equipment 5-7 years
Furniture and fixtures 5-7 years
Auto equipment 5 years
Leasehold improvements 5 years
USE OF ESTIMATES
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 disclosures of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses for the periods presented. Actual results
could differ from those estimates. Estimates are used when
accounting for certain items such as the allowances for doubtful
accounts, depreciation and amortization, fair value of consideration
paid in nonmonetary transactions, employee benefit plans, taxes,
contingencies, and fair value of financial instruments.
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 accounts receivable and
management's judgment with respect to current economic conditions
and their impact on the receivable balances. It is reasonably
possible the Company's estimate of the allowance for doubtful
accounts could change in the near term.
The Company has recorded a net deferred tax asset of $226,000, which
is offset by a valuation allowance in the same amount (see Note 10).
Realization of the deferred tax asset is dependent on generating
sufficient taxable income in the future. It is reasonably possible
that the amount of the deferred tax asset considered realizable
could change in the future.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" requires that the Company
disclose estimated fair values for its financial instruments. The
following methods and assumptions were used by the Company in
estimating the fair values of each class of financial instruments
disclosed herein:
F-9
<PAGE>
________________________________________________________________________________
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
________________________________________________________________________________
CASH AND EQUIVALENTS - The carrying amount approximates fair
value because of the short maturity of those instruments.
INVESTMENTS - The fair values of trading securities and
securities available for sale are estimated based on quoted
market prices for those or similar investments.
LINE OF CREDIT FACILITIES, CAPITAL LEASE OBLIGATIONS, LONG-TERM
DEBT AND NOTES PAYABLE TO REDEEMED PARTNERS - The fair value of
line of credit facilities, capital lease obligations, long-term
debt and notes payable to redeemed partners are estimated using
discounted cash flows analyses based on the Company's incremental
borrowing rates for similar types of borrowing arrangements. At
June 30, 1997, the fair values approximate the carrying values.
NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number
of common shares outstanding. Outstanding stock options (see Note
12) were not considered in the calculation of weighted average
number of common shares outstanding, as their effect would have been
antidilutive.
ACCOUNTS RECEIVABLE AND REVENUES
The Company recognizes revenues, net of contractual allowances, as
medical services are provided to patients. These services are
typically billed to patients, Medicare, Medicaid, health maintenance
organizations and insurance companies. The Company provides an
allowance for uncollectible amounts and for contractual adjustments
relating to the difference between standard charges and rates paid
by certain third party payors.
GOODWILL
In connection with its acquisition of physician and ancillary
practices, the Company has recorded goodwill of $2,953,615, which is
the excess of the purchase price over the fair value of the net
assets acquired. The goodwill is attributable to the general
reputation of the practices in the communities they serve, the
collective experience of the management and other employees of the
practices, contracts with health maintenance organizations,
relationships between the physicians and their patients, patient
lists and other similar intangible assets. The Company evaluates the
underlying facts and circumstances related to each acquisition in
establishing amortization periods for the related goodwill. The
goodwill related to current acquisitions is being amortized on a
straight-line basis over 30 years.
The Company continuously evaluates whether events have occurred or
circumstances exist which impact the recoverability of the carrying
value of goodwill, pursuant to Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."
F-10
<PAGE>
________________________________________________________________________________
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
________________________________________________________________________________
In connection with its evaluation of the periods of amortization at
June 30, 1997 events and circumstances exist that warrant revising
the remaining useful lives of goodwill to be 10 years from that
date. Accordingly, net goodwill at June 30, 1997 will be amortized
over 10 years from that date.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs consist of direct expenditures related to
pending business acquisitions. These costs are being deferred until
such time as the anticipated business acquisitions are consummated
or these acquisitions are deemed unsuccessful.
INTANGIBLE ASSETS
Intangible assets consist primarily of a trade name associated with
the purchase of certain assets of International Family Healthcare
Centers, Inc. (IFHC) and deferred loan costs. The trade name is
being amortized over 20 years, and the deferred loan costs are being
amortized over three years, the term of the line of credit facility
to which they apply (see Note 6).
TRADING SECURITIES
The Company considers all investments in marketable equity
securities acquired in its trading account as Trading Securities.
Accordingly, unrealized gains and losses are included as a component
of earnings. Realized gains or losses are computed based on specific
identification of the securities sold.
SECURITIES AVAILABLE FOR SALE
The Company considers its investment in marketable equity securities
acquired upon the conversion of a debt security as available for
sale. Accordingly, unrealized gains and losses and the related
deferred income tax effects are excluded from earnings and reported
in a separate component of stockholders' equity.
INCOME TAXES
The Company accounts for income taxes according to Statement of
Financial Accounting Standards No. 109, which requires a liability
approach to calculating deferred income taxes.
RECLASSIFICATION
Certain amounts in the 1996 financial statements have been
reclassified to conform with 1997 presentation.
F-11
<PAGE>
______________________________________________________________________________
NOTE 2. ACQUISITIONS
________________________________________________________________________________
PURCHASE OF MIS
Effective August 31, 1996, the Company acquired MIS for $2,436,984.
The purchase price consisted of 585,000 shares of the Company's
common stock (valued at $3 per share), $575,923 of notes payable,
and related acquisition costs of $106,061. The acquisition was
accounted for as a purchase, and accordingly, the purchase price was
allocated to the net assets acquired based on their estimated fair
market values and the results of operations beginning September 1,
1996 are included in the Company's statement of operations. As a
result of this acquisition, $2,513,627 was allocated to goodwill.
In addition to the purchase price the acquisition agreement provides
for contingent consideration of 200,000 shares of common stock if
MIS achieves earnings before interest, income taxes, depreciation
and amortization ("EBITDA") in excess of $1,200,000 for the year
ended June 30, 1997 or in excess of $1,500,000 for the year ended
June 30, 1998, a total maximum contingent consideration of 400,000
shares, plus additional shares issuable in connection a share price
guarantee based upon the Company's pretax earnings at the first and
second anniversary of the transaction. The Company is not liable for
contingent consideration for the year ended June 30, 1997.
PURCHASE OF DATASCAN
Effective September 30, 1996, the Company acquired Datascan for
$1,170,529. The purchase price consisted of 300,000 shares of the
Company's common stock (valued at $3 per share) and related
acquisition costs of $42,529. The acquisition was accounted for as a
purchase, and accordingly, the purchase price was allocated to the
net assets acquired based on their estimated fair market values and
the results of operations of Datascan beginning October 1, 1996 are
included in the Company's statement of operations. As a result of
this acquisition, $429,463 was allocated to goodwill.
Effective June 30, 1997, the purchase price includes 100,000 shares
of contingent consideration to be issued to the former owners of
Datascan (valued at $2.28 per share). This contingent consideration
is based on Datascan obtaining an EBITDA in excess of $288,000 for
the year ended June 30, 1997.
The Company is potentially liable for additional contingent
consideration of 100,000 shares of common stock if, among other
things, Datascan obtains an EBITDA in excess of $313,894 for the
year ended June 30, 1998.
PURCHASE OF WAND
Effective March 12, 1997, the Company acquired Wand for $363,015.
The purchase price consisted of a cash payment of $120,000, 75,000
shares of the Company's common stock (valued at $3 per share) and
related acquisition costs of $18,015. The acquisition was accounted
for as a purchase, and accordingly, the purchase price was allocated
to the net assets acquired based on their estimated fair market
values and the results of Wand's operations beginning March 12, 1997
are included in the Company's statement of operations. As a result
of this acquisition, $10,525 was allocated to goodwill.
F-12
<PAGE>
_______________________________________________________________________________
NOTE 2. ACQUISITIONS (Continued)
________________________________________________________________________________
In addition to the purchase price noted above, the Company is
potentially liable for contingent consideration. The acquisition
agreement provides for contingent consideration of 37,500 shares of
common stock if Wand obtains EBITDA in excess of $75,500 for the
year ended June 30, 1997 or 1998, a total maximum contingent
consideration of 75,000 shares. The Company is not contingently
liable for contingent consideration for the year ended June 30,
1997.
PURCHASE OF CERTAIN ASSETS OF IFHC
Pursuant to an asset purchase agreement effective October 15, 1996,
the Company acquired certain assets of IFHC. The purchase price
consisted of 50,000 shares of the Company's common stock (valued at
$3 per share) and the issuance of a 8% note payable in the amount of
$150,000. The note is due in October 1997.
PRO-FORMA
Unaudited pro-forma results of operations, assuming the acquisition
of MIS, Datascan and Wand occurred as of the beginning of the fiscal
years ended June 30, 1997 and 1996, after giving effect to certain
adjustments such as the elimination of intercompany transactions and
amortization of goodwill resulting from the acquisitions were as
follows: This proforma summary does not reflect the results of
operations as they would have been if the companies has constituted
a single entity during such periods.
June 30, 1997 June 30, 1996
-------------------------------------------------------------------
Revenues $9,594,000 $11,048,000
Net income (loss) ( $1,738,000) $ 34,000
Income (loss) per share ( $ 0.41) $ 0.01
________________________________________________________________________________
NOTE 3. PROPERTY AND EQUIPMENT
________________________________________________________________________________
At June 30, 1997, property and equipment consisted of the following:
Machinery and medical equipment $ 816,987
Furniture and fixtures 206,342
Leasehold improvements 506,409
Computer and office equipment 255,646
Auto equipment 156,432
-------------------------------------------------------------------
1,941,816
Less accumulated depreciation ( 285,212)
-------------------------------------------------------------------
1,656,604
-------------------------------------------------------------------
At June 30, 1997, property and equipment under capital leases
consisted of the following:
Machinery and equipment 2,649,816
Computer and office equipment 298,711
Leasehold improvements 18,738
-------------------------------------------------------------------
2,967,265
Less accumulated amortization ( 324,053)
-------------------------------------------------------------------
2,643,212
-------------------------------------------------------------------
$4,299,816
===================================================================
F-13
<PAGE>
________________________________________________________________________________
NOTE 4. INVESTMENTS
________________________________________________________________________________
Trading securities consisted of marketable equity securities which
are held for trading purposes. The change in unrealized loss on
trading securities for the periods ended June 30, 1997 and 1996 were
$10,431 and $0, respectively, and are included in other income in
the consolidated statements of operations.
Securities available for sale consisted of common stock acquired
through the conversion of convertible debenture securities. The cost
and market value of these securities at June 30, 1997 were as
follows:
Cost $ 101,611
Gross unrealized gains 64,916
-----------------------------------------------------------------
$ 166,527
=================================================================
Net realized gains on sales of trading securities for the periods
ended June 30, 1997 and 1996 were $7,982 and $0, respectively.
________________________________________________________________________________
NOTE 5. CAPITAL LEASE OBLIGATIONS
________________________________________________________________________________
The Company is obligated under capital leases for certain of its
property and equipment. Future minimum lease payments for capital
lease obligations as of June 30, 1997 were as follows:
June 30, 1998 $ 947,148
June 30, 1999 889,748
June 30, 2000 785,794
June 30, 2001 785,794
June 30, 2002 747,093
Thereafter 888,417
-------------------------------------------------------------------
5,043,994
Less amount representing interest ( 1,350,564)
-------------------------------------------------------------------
3,693,430
Less current maturities ( 594,358)
-------------------------------------------------------------------
$3,099,072
===================================================================
F-14
<PAGE>
________________________________________________________________________________
NOTE 6. LINE OF CREDIT FACILITIES
________________________________________________________________________________
In April 1996, MIS entered into a two year loan and security
agreement with a leasing/financing entity which provided the Company
with a line of credit providing maximum borrowings not to exceed
$1,300,000. Any outstanding amounts under this credit facility are
collateralized by certain eligible accounts receivable, and the
Company may borrow up to 80% against these receivables. The facility
bears interest at prime plus 3.5% (12% at June 30, 1997), and
repayments are made directly through a lock box arrangement. At June
30, 1997, $628,501 is outstanding under this facility.
In March 1997, the Company obtained a $3,500,000 fixed asset based
line of credit facility with an entity that originates funds and
sells mortgages. The credit facility, if used, bears interest at
11.5%, has a three-year term and provides for financing of up to
100% of the fair value of unencumbered fixed assets, which at June
30, 1997 were insignificant. In connection therewith, the Company
paid loan fees of $150,000, which are included in intangible assets
at June 30, 1997. At June 30, 1997, no amounts are outstanding under
this credit facility.
________________________________________________________________________________
NOTE 7. LONG-TERM DEBT
________________________________________________________________________________
Long-term debt consisted of the following:
Note payable to former owner of MIS; interest at
6.5%; principal and interest payment of $213,000
due April 1, 1998; unsecured $ 200,000
Installment notes payable to bank; interest
ranging from 7.75% to 9.5%; collateralized by
various automobiles; due August through December, 37,374
1997
Equipment note payable to bank; interest at 9.98%;
payable in monthly installments of $2,552;
collateralized by medical testing
equipment; due April, 1999 51,118
Note payable to former owners of IFHC; interest at
8%; payable in monthly installments of $11,429
plus interest; due October, 1997 34,284
Note payable to bank; interest at 11.75%; payable
in monthly installments of $1,265; collateralized
by substantially all assets of Wand; due August, 40,018
2000
Loan payable to former employee 73,958
-------------------------------------------------------------------
436,752
Less current maturities 365,633
-------------------------------------------------------------------
Long-term debt $ 71,119
===================================================================
F-15
<PAGE>
________________________________________________________________________________
NOTE 7. LONG-TERM DEBT (Continued)
________________________________________________________________________________
Aggregate maturities of long-term debt for the years subsequent to
June 30, 1997 are as follows:
June 30, 1998 $ 365,633
June 30, 1999 41,733
June 30, 2000 19,377
June 30, 2001 8,429
June 30, 2002 1,580
-------------------------------------------------------------------
$ 436,752
===================================================================
Loan payable to former employee consisted of the remaining principal
and interest due to a former employee under an oral agreement,
wherein $75,000 was loaned to Wand in 1993. This agreement requires
monthly payments of $1,450, including principal and interest at 6%,
however such terms have not been complied with since 1993.
Accordingly, the full amount of the acquired debt is reflected as
currently due.
________________________________________________________________________________
NOTE 8. NOTES PAYABLE TO REDEEMED PARTNERS
________________________________________________________________________________
In August 1993, MIS commenced a buy-back of certain outstanding
limited partnership units. The buy-back agreement required MIS (and
consequently, the Company) to purchase twenty-five partnership units
from certain limited partners for $1,375,000, as evidenced by
non-interest bearing notes payable. At June 30, 1997, $375,000
remained outstanding, of which $300,000 was repaid ($240,000 in cash
and $60,000 in stock subscribed to) in August 1997.
During 1997, the Company charged approximately $25,000 to interest
expense in connection with imputing interest on the above notes at
8%. At June 30, 1997 the imputed interest discount on the
non-interest bearing notes was fully amortized.
On July 29, 1996, a claim against MIS was settled pursuant to an
agreement providing for the buy-back of certain limited partnership
units from the plaintiffs. The initial settlement required payments
totaling $330,000. At June 30, 1997, the balance of this liability
was $180,000, which was paid in August 1997.
________________________________________________________________________________
NOTE 9. RELATED PARTY TRANSACTIONS
________________________________________________________________________________
OFFICE RENT
The Company rents one of its office facilities from an individual
who is the former majority owner of MIS and a director of the
Company, and another office facility from a company owned 50% by
this individual. Total rent expense related to these leases amounted
to approximately $188,000 for the year ended June 30, 1997.
F-16
<PAGE>
________________________________________________________________________________
NOTE 9. RELATED PARTY TRANSACTIONS (Continued)
________________________________________________________________________________
PURCHASE OF COMPUTER EQUIPMENT
In September 1996, the Company purchased computer hardware and
software from an individual who is an officer of the Company. In
exchange for this computer equipment, the Company issued this
individual 40,000 shares of its common stock (valued at $3 per
share) and assigned a value to the equipment of $120,000.
________________________________________________________________________________
NOTE 10. INCOME TAXES
________________________________________________________________________________
The components of the income tax benefit were as follows:
Year Ended Period Ended
June 30, 1997 June 30, 1996
-------------------------------------------------------------------
Current Benefit
Federal $ - $ -
State - -
Deferred Benefit
Federal 450,000 42,000
State 66,000 6,000
Increase in Valuation Allowance ( 154,000) ( 48,000)
-------------------------------------------------------------------
Income Tax Benefit $ 362,000 $ -
===================================================================
The net income tax benefit resulted from the utilization of current
year operating losses against acquired deferred tax liabilities.
The effective tax rate differed from the federal statutory rate due
to permanent differences of approximately $65,000, valuation
allowance of $178,000 and other differences of $76,000.
The Company has a net operating loss carryforward of approximately
$723,000, which expires beginning in 2011.
At June 30, 1997, approximate deferred tax assets and liabilities
were as follows:
Deferred tax assets:
--------------------
Allowances for doubtful accounts $ 313,000
Net operating loss carryforward 771,000
-------------------------------------------------------------------
Total deferred tax assets $1,084,000
Deferred tax liabilities:
Accounts receivable of cash basis subsidiaries $ 751,000
Excess tax over book deprecation 83,000
Unrealized gains on securities available for sale 24,000
-------------------------------------------------------------------
Total deferred tax liabilities $ 858,000
Net deferred tax asset $ 226,000
Less valuation allowance ( $ 226,000)
-------------------------------------------------------------------
-
===================================================================
F-17
<PAGE>
________________________________________________________________________________
NOTE 11. STOCKHOLDERS' EQUITY
________________________________________________________________________________
At June 30, 1997, the Company has authorized 40,000,000 shares of
par value $.001 common stock, with 5,210,825 shares issued and
outstanding. Additionally, the Company has authorized 10,000,000
shares of par value $.001 preferred stock. No preferred shares are
issued or outstanding at June 30, 1997.
In October 1996, the Company entered into an agreement with an
underwriter to obtain equity financing with net proceeds to the
Company of approximately $897,000. In connection therewith, the
Company offered 433,500 shares of common stock (at $2 per share) and
867,000 warrants at $0.15 per warrant. Each warrant entitled the
holder to purchase one share of common stock at $7.00 per share
during the four year period commencing thirty days after the
effective date of the offering.
The Company completed an initial public offering of its common stock
effective February 13, 1997, and issued 825,000 shares of common
stock at a price of $6.00 per share. As part of the offering, the
Company issued 1,650,000 redeemable common stock purchase warrants
at a purchase price of $0.15 per warrant. Each warrant entitled the
holder to purchase one share of common stock at $7.00 per share
during the four year period commencing thirty days after the
effective date of the offering. The initial public offering
generated net proceeds to the Company of $3,395,233.
At June 30, 1997, the Company has 3,207,500 warrants outstanding.
________________________________________________________________________________
NOTE 12. STOCK OPTIONS
________________________________________________________________________________
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") in 1997. The Company has
elected to continue using Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" in accounting for
employee stock options. Accordingly, compensation expense has been
recorded to the extent that the market value of the underlying stock
exceeded the exercise price at the date of grant. All stock options
granted expire 5 years after the date of the grant. For the years
ended June 30, 1997 and 1996, compensation costs related to stock
options amounted to $50,000 and $0, respectively.
Stock option activity for the year ended June 30, 1997 was as
follows:
Number of Weighted Average
Options Exercise Price
-------------------------------------------------------------------
Balance, June 30, 1996 1,207,000 $ 1.47
Granted during year 425,500 $ 9.43
Exercised during year ( 407,500) $ 0.01
---------------------------------------------------
Balance, end of year 1,225,000 $ 4.72
===================================================
Exercisable at end of year 1,011,500 $ 2.98
F-18
<PAGE>
________________________________________________________________________________
NOTE 12. STOCK OPTIONS (Continued)
________________________________________________________________________________
The exercise prices of stock options which were fully vested at June
30, 1997 were as follows:
Exercise Number of Options
Price
--------------------------------
$ 0.10 492,500
0.50 110,000
1.00 25,000
2.00 2,000
4.00 5,000
5.00 25,000
6.00 180,000
7.00 13,500
8.00 14,500
9.00 13,500
10.00 117,000
11.00 13,500
The weighted average fair value per option as of grant date was
$0.73 for stock options granted in 1997 and $0.19 for stock options
granted in 1996. The determination of the fair value of all stock
options granted was based on (i) risk-free interest rate of 6.38%,
(ii) expected option lives of 5 years, depending on the vesting
provisions of each option, (iii) expected volatility in the market
price of the Company's common stock of 20%, and (iv) no expected
dividends on the underlying stock.
The following table summarizes the pro forma consolidated results of
operations of the Company as though the fair value based accounting
method in SFAS 123 had been used in accounting for stock options.
Year ended Period ended
June 30, 1997 June 30, 1996
-------------------------------------------------------------------
Net loss ( $1,795,294) ( $ 355,720)
Net loss per share ( $ 0.44) ( $ 0.16)
During the year ended June 30, 1997, 407,500 options were exercised,
with net proceeds to the Company of $4,750.
F-19
<PAGE>
________________________________________________________________________________
NOTE 13. COMMITMENTS AND CONTINGENCIES
________________________________________________________________________________
LEASES
The Company leases office and medical facilities under various
non-cancelable operating leases. Future minimum payments under these
leases are as follows:
June 30, 1998 $ 606,000
June 30, 1999 545,000
June 30, 2000 177,000
June 30, 2001 128,000
June 30, 2002 104,000
Thereafter 128,000
-------------------------------------------------------------------
Total $ 1,688,000
===================================================================
EMPLOYMENT CONTRACTS
The Company has employment contracts with certain executives,
physicians and other clinical and administrative employees. Future
annual minimum payments under these employment agreements are as
follows:
June 30, 1998 $1,540,000
June 30, 1999 1,540,000
June 30, 2000 1,540,000
June 30, 2001 1,525,000
June 30, 2002 371,000
-------------------------------------------------------------------
$6,516,000
===================================================================
DATASCAN
Datascan and the Company have been named as defendants in a lawsuit
wherein a former Datascan employee is alleging employment
discrimination. The lawsuit seeks unspecified punitive and economic
damages. The Company believes that these claims are without merit,
and intends to vigorously defend this action. At this time, the
Company is unable to estimate the possible loss or range of loss
that would occur if this action were judged unfavorably.
FLORIDA REHABILITATION
On September 25, 1996, pursuant to a merger agreement ("FRSI
Agreement"), the Company, acquired Florida Rehabilitation Services,
Inc. ("FRSI") and Southeast Medical Staffing, Inc. ("SMSI" and
collectively "FR Group") from the sole shareholder of both
companies. On December 31, 1996, the Company has rescinded this
transaction as a result of the Company's belief that a breach of the
agreement has occurred and requested the return of all consideration
paid. In connection therewith, the Company has cancelled the shares
of common stock issued as part of the purchase price and will take
all action for the return of all cash and other expenses paid in
connection with the transaction. The merger transaction is not
reflected in the financial statements and the common stock is not
considered to be outstanding at June 30, 1997.
F-20
<PAGE>
________________________________________________________________________________
NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued)
________________________________________________________________________________
During the year ended June 30, 1997, the Company reserved
approximately $72,000 of advances incurred in connection with this
transaction.
In January 1997, a medical billing group filed a complaint against
the company and FR Group claiming breach of a funding and security
agreement, and economic damages of approximately $150,000 plus
treble damages of approximately $208,000. Although the Company
believes it has meritorious defenses against the suit, the ultimate
resolution of the matter could result in a material loss to the
Company.
________________________________________________________________________________
NOTE 14. DISCONTINUED OPERATIONS
________________________________________________________________________________
In October 1996, the Company disposed of the operations of Arthur's
Pharmacy and Surgical Supply, Inc. through the sale of its five year
management agreement to the majority shareholder of the second party
to the agreement for a $90,000 collateralized note receivable. The
note receivable was valued at $50,000, the approximate value of the
collateral (12,500 shares of the Company's common stock) at the time
of the transaction. In connection with the discontinuation of the
operations, the Company deemed accrued management fees and notes
receivable of $141,691 to be uncollectible.
The note receivable is included in other long term assets and
although it provides for interest at 10%, the Company is not
accruing interest due to its non-performing status.
________________________________________________________________________________
NOTE 15. SUBSEQUENT EVENTS
________________________________________________________________________________
GENERAL MEDICAL ASSOCIATES, INC.
Effective July 1, 1997, the Company purchased all of the outstanding
common stock of Dr. Martin W. Harrison, M.D., P.A., doing business
as General Medical Associates, Inc. (General), a multi-specialty
medical group with components of neurology and physiatry in addition
to chiropractic physicians, licensed massage therapists and
additional ancillary services. In exchange for the stock of General,
the Company paid $300,000 cash, 366,154 shares of the Company's
common stock and entered into a note payable of $400,000 with the
former shareholder of General. In addition to the purchase
consideration, the Company is potentially liable for contingent
consideration of up to 156,923 shares, plus additional shares
issuable in connection with a $6.50 price guarantee for the two
month period commencing the second anniversary of the transaction,
and the Company has guaranteed the former shareholder a minimum of
$6.50 per share selling price on 200,000 shares which become
available for sale during the period July 1, 1998 through February
12, 2000.
In connection with the acquisition the former shareholder of General
entered into a 5-year employment agreement with the Company whereby
he will be paid a minimum of $350,000 annually.
F-21
<PAGE>
________________________________________________________________________________
NOTE 15. SUBSEQUENT EVENTS (Continued)
________________________________________________________________________________
Subsequent to the consummation of the acquisition, information has
come to the attention of the Company indicating that certain of the
representations made during due diligence may be inaccurate. In
connection therewith, the Company has consulted with counsel and is
considering all options.
PREFERRED STOCK
Subsequent to year-end, the Company issued 5,000 shares of its
preferred stock via a private placement and received net proceeds of
$500,000.
F-22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF METROPOLITAN HEALTH NETWORKS, INC. FOR THE FISCAL YEAR
ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,667,887
<SECURITIES> 183,276
<RECEIVABLES> 6,865,166
<ALLOWANCES> 3,608,743
<INVENTORY> 0
<CURRENT-ASSETS> 5,257,504
<PP&E> 4,909,081
<DEPRECIATION> 609,265
<TOTAL-ASSETS> 13,230,528
<CURRENT-LIABILITIES> 3,086,617
<BONDS> 0
0
0
<COMMON> 5,211
<OTHER-SE> 6,968,509
<TOTAL-LIABILITY-AND-EQUITY> 13,230,528
<SALES> 7,512,185
<TOTAL-REVENUES> 7,512,185
<CGS> 0
<TOTAL-COSTS> 9,008,511
<OTHER-EXPENSES> (76,324)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 511,617
<INCOME-PRETAX> (1,931,619)
<INCOME-TAX> (362,000)
<INCOME-CONTINUING> (1,569,619)
<DISCONTINUED> 49,865
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,619,484)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
