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, 1998
[ ] 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.
(Name of small business issuer in its charter)
Florida 65-0635748
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5100 Town Center Circle, Suite 560, Boca Raton, Florida 33486
(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
Class A 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: $14,546,172
The aggregate market value of the Registrant's voting Common Stock held
by non-affiliates of the registrant was approximately $9,557,366 (computed using
the closing price of $2.56 per share of Common Stock on October 6, 1998, 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 6,482,497 shares of the registrant's Common Stock, par value $.001
per share, and 3,517,625 of the registrant's Class A Redeemable Common Stock
Purchase Warrants outstanding on October 6, 1998.
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 to develop a vertically and horizontally
integrated health care delivery network (the "Network"). The Network provides
primary and subspecialty physician care and diagnostic and therapeutic services.
The Company developed its Network to date through the acquisition,
expansion and integration of (i) physician care practices (the "Physician
Practices") together with (ii) diagnostic and rehabilitation centers ("Ancillary
Services").
The Company is organized as a multi-county vertically and horizontally
integrated medical group practice. As such, all of the physicians employed by
the Company provide a minimum of 75% of their medical services through the group
practice and all physician services are billed under one common Medicare
provider number. The Company believes it meets all government requirements of a
"group practice" and is eligible to receive the benefits available to group
practices under Florida and federal laws.
The Company's initial goal is to provide quality, cost effective and
outcome oriented health care in Dade, Broward and Palm Beach Counties, Florida
(Service Area). This tri-county area has a population in excess of four million.
The Company is currently exploring expanding its services beyond this initial
area to contiguous areas north of the current Service Area.
INDUSTRY
General
The Health Care Financing Administration projects spending for health care
in the United States will double over the next decade, reaching $2.1 trillion by
2007. Healthcare spending has been fairly stable in recent years, as consumers
have switched in large numbers to managed care plans, holding down costs. But
with 85 percent of working Americans now covered by managed care, additional
savings from employers moving to low-cost plans are going to be harder to find.
Managed care plans that have been competing on price are starting to increase
premiums to strengthen their profit margins. Meanwhile, costs are increasing
because of inflation and because new-and-improved medical technology simply
costs more, while the Balanced Budget Act is restraining federal health care
spending for Medicare and Medicaid, therefore making government payments to
doctors and hospitals tighter. Because of those trends, the study projects
insurance companies and consumers will see bigger jumps in health bills than
Medicare. The study projects: Healthcare spending, $1.035 trillion in 1996, will
rise to $2.133 trillion in 2007. In 1996, consumers paid $552 billion through
private insurance, out-of pocket payments and other private sources, while
Medicare, Medicaid and other government programs paid $483 billion of the cost.
By 2007, private sources will account for nearly $1.15 trillion and government
will pay $987 billion. Hospitals will get less, receiving 30 percent of health
expenditures by 2007, compared with 35 percent in 1996, because of the trend
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toward more outpatient care. Healthcare spending is expected to jump from $3,759
per person in 1996 to $7,100 in 2007. Americans are expected to spend $171
billion on prescription drugs in 2007, up from $62 billion in 1996. Of the
$1.035 trillion spent in healthcare in 1996 over $200 billion is directly
attributable to physician services and over $600 billion is under the physicians
direction. Healthcare spending in the tri-county Florida region was estimated to
be $16 billion in 1996.
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 healthcare 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
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 payers 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.
The Physician Practice Management Industry
The Company has been identified as a Physicians Practice Management (PPM)
company even though the Company is not a management company as such and is an
integrated group practice. PPMs have undergone tremendous changes in the last 12
months as a result of the continuing changes in payers and the lack of
demonstrating increases in efficiencies and any material increases in " same
store sales". Many PPM as well as the Company have experienced a reduction in
same store sales as a result of continued pressures by managed care companies.
Many PPM's are seeking to increase sales by managing the total care of the
patients in what is know as "Full Risk" managed care contracts where providers,
such as the Company can receive a percentage of the premiums paid by the managed
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care member or by Medicare. This strategy has a double edge in that if properly
managed the PPM has insulated itself from the continuing pressures asserted by
managed care, however it is exposed to the cost of providing healthcare which
may exceed income or current capacity.
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 quality,
cost-effective, outcome oriented health care delivery network. 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 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 as well
as same store sales. The Company also believes strategic alliances with
hospitals and health plans will improve the delivery of managed health care, and
that by the consolidation of management and administrative services its costs of
providing care should be reduced.
OVERVIEW OF THE NETWORK
Medical Group Expansion
The Company is attempting to develop 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, are 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 two to twenty physicians.
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 he Network.
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 expenditures.
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
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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. 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.
Ancillary Services
The Company currently provides certain ancillary services, mostly
diagnostic and rehabilitation services through the company's Metcare Diagnostic
Services (MDS) division . 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 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 a consolidation of administrative services, as well
as facilities, the Company believes that it can increase revenues and
profitability.
HMO Arrangements
The Company has 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 payer
source to cover the partial or complete healthcare services deliveries to an
individual. The fees are determined on a per capita basis, and paid monthly by
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managed care organizations. HMO enrollees may come from the integration or
acquisition of healthcare providing entities, the addition of affiliated
physicians and increases in enrollment in HMOs currently contracting with the
Company through its Physician Practices and Ancillary Services or from
agreements with new HMOs. The Company and its facilities have entered into HMO
agreements which generally are for a one-year term 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 or an increase in costs could also have a material adverse
effect on the Company's profitability.
Under the HMO agreements, the Company, through its affiliated providers, is
generally 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 benefits.
This type of agreement is called a "Full Risk" agreement. 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, 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.
In addition to the primary care capitation and the full risk capitation
arrangements previously discussed, the Company also has discount fee for service
arrangements. These discounted "fee for service" arrangements are either
negotiated flat, mutually agreed upon rates for covered services, (usually
calling for a discount of up to 70% from ordinary and customary charges,) or
call for a payment at a percentage of Medicare allowable rates.
The Company has entered into a full risk capitation arrangement with HUMANA
Inc., with the acquisition of two medical centers owned by Primedica Healthcare,
Inc., a wholly owned subsidiary of Sheridan Healthcorp, Inc., as of April 1,
1998. The revenue generated from this acquisition represents approximately 43%
of the Company's annualized revenue. The Company believes it has the ability and
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expertise to administer a full risk contract profitably.
PHYSICIAN PRACTICES
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; and (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. Subsequent to the acquisition and pursuant to the terms of
an amended agreement, the 523,077 shares originally issued were adjusted to be
373,077 shares. 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 for 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
$2,424,955 (less certain shares sold x $6.50) by the lowest closing bid price
over such 20 day period and deducting 373,070 (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.
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.
On November 30, 1997, the Company, Metcare, VI, Inc. ("Metcare"), a
wholly-owned subsidiary of the Company (Subsidiary) and Trident Medical
Concepts, Inc. ("Trident") entered into a definitive merger agreement which
Merger Agreement was amended on January 13, 1998 and February 22, 1998
(collectively the "Merger Agreement") pursuant to which Trident was merged into
Metcare. Pursuant to the Merger Agreement, each share of common and preferred
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stock of Trident issued and outstanding immediately preceding February 27, 1998,
the "Effective Date", were converted into the right to receive 1.15 shares of
the Common Stock of the Company for an aggregate amount of 7,539,869 shares. The
methodology followed in determining the amount of shares issued to the
shareholders of Trident include (i) the worth of the businesses, considering
their historical, present and future business operations, and (ii) the market
for the Company's shares, including the depth and trading activity in the
shares.
The Merger Agreement provided, among other things, that the Company shall
have the absolute right to cause the Merger to be unwound solely upon the
occurrence of the failure to obtain Trident's lender's consent ("Lender's
Consent") to the Merger Agreement, as amended, or to replace Lender by May 1,
1998. The Company was unable to obtain the Lender's Consent or to replace the
Lender in the time specified by the Merger Agreement and therefore on May 8,
1998, elected to unwind the merger. The Company has continued dicussions with
the principals and shareholders of Trident and may explore a partial purchase of
assets or a purchase of Trident in its' entirety at a future date.
On April 2, 1998, the Company, Metcare, VII, Inc. ("Metcare VII"), a
wholly-owned subsidiary of the Company (Subsidiary) Inc. and Primedica
Healthcare, Inc. (Primedica) entered into an asset purchase agreement pursuant
to which Metcare VII purchased substantially all of the assets and operations
related to two physician practices (the Practices) located in North Miami Beach,
Florida owned by Primedica. The aggregate purchase price was three million five
hundred thousand dollars ($3,500,000). The purchase price was allocated as
follows: (i) Accounts Receivable - $135,000; (ii) Furniture and Fixtures -
$465,000; and (iii) Goodwill - $2,900,000.
Payment of the purchase price was made by delivery to Primedica of an
unsecured promissory note ("Note") of three million five hundred thousand
dollars ($3,500,000). The Note, together with interest computed at the rate of
seven and one half percent (7.5%) per annum, requires fifty-nine (59) monthly
principal and interest payments of twenty-eight thousand one hundred ninety-six
dollars ($28,196) and a final payment due on April 2, 2003 of three million
sixty-nine thousand seven hundred fourty-eight dollars ($3,069,748).
The purchase provides both capitated and non-capitated medical services to
approximately 2,600 members of various managed care organizations. The capitated
services comprise approximately ninety percent (90%) of its revenues and one
managed care organization accounts for approximately eighty-five percent (85%)
of total revenues. The unaudited revenues for the Practices for the twelve
months ended December 31, 1997 equaled approximately $5,700,000 resulting in a
gross margin of approximately $230,000.
As part of the acquisition of Primedica pursuent to the Repurchase Election
Agreement, whereby Primedica may be required to repurchase the Practices at the
end of five years in exchange for extinguishing Metcare and Company's further
obligations under the Note, provided certain conditions are met, among the most
significant of which is the requirement that the Company be in compliance with
the terms of the Promissory Note. However, in the event that net revenues
derived from the assets for the year preceding the election date as determined
by GAAP, then Primedica may elect not to repurchase the Practice.
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Discontinued Operations
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.
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 or 1998. 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, 1998, the Company sold Wand Practice back to Dr. Wand. As
consideration for the sale of all of the assets and liabilities associated with
the practice and the termination of his employment contract, the Company
received (i) a three (3) year $75,000.00 note payable by Dr. Wand bearing
interest at 7% per annum with payments beginning November 1, 1998, and (ii) the
75,000 shares that were given to Dr. Wand when the Company originally purchased
the practice, and (iii) an indemnification from certain obligations.
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 an 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.
Effective June 1, 1998, the Company sold the Aventura facility, to Bernd
Wollschlaeger, M.D. In return for the sale of all the assets and liabilities
associated with the practice, the Company received a promissory note for
$38,000. Dr. Wollschlaeger will begin repaying the note once revenues of the
practice reach $10,000 with interest at the South Florida Prime Rate (8.25 % as
of October 10, 1998) per annum with a balloon payment in year five. Effective
June 1, 1998, the North Miami Beach facility discontinued operations with the
transfer for all patients and medical personnel to the Companies primary care
facility located at Skylake. Expenses of $439,000 were recognized in the
financial statements by the Company for the fiscal year June 30, 1998 in
association with the closing of these two practices.
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ANCILLARY SERVICES
Effective September 15, 1998 the Company consolidated all management and
operational functions of Datascan of Florida, Inc. and MRI Scan Center into one
operating division, creating Metcare Diagnostic Services ("M.D. Services").This
new division will provide a full range of fixed-site and mobile diagnostic
services to it's own medical group physicians as well as to physicians outside
the group in the tri-county area. Services offered currently include x-ray,
MRIs, neuro diagnostic equipment, vascular studies, 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's medical group 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, therefore the Company
believes it will enjoy a competitive advantage over other health care providers
and physicians. The Company believes many self-insured employers and third party
payers 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 payers 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. The company
believes that by consolidating into one operating division it will benefit from
numerous synergies, currently untapped. By operating under one management team,
and with no additional staff required, duplications have been eliminated; a
further consolidation is anticipated; a sales and marketing team created,
dedicated solely to the diagnostic division; and a logistics department has been
established to handle plant and / or facility repair, vehicle and equipment
maintenance, and transportation/courier services intended for the whole medical
group. The result is expected to be a more dynamic and efficiently run entity
that will be capable of taking the Company forward in a highly competitive
managed care environment. Through M.D. Services the Company will realize
significant and material savings by utilizing one radiologist for essentially
all it's X-rays, MRI and ultrasound interpretations. Additionally, further cost
savings can be realized by eliminating services provided by outside vendors
currently being utilized by other entities within the medical group.
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 other procedures, can be
safely replaced by MRIs. In most cases, a clear image is produced with no
discomfort to the patient or costly hospitalization.
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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%. During April 1997,
$200,000 was paid 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. The MRI Scan Center did not meet its EBITDA requirement for the fiscal
year ended June 30, 1998.
Dr. Kagan had agreed to extend the due date for the final payment of
$200,000 on the note, from April 1, 1998 to September 30, 1998. In exchange the
Company agreed to pay the default rate of 18% on the balance of the note, and
the Company would not object to the release of the underwriter's lock-up of 100,
000 of the Company's common shares owned by Dr. Kagan to be sold through June
30, 1998. It was further agreed, that if the $200,000 was not paid by September
30, 1998 the Company would request that an additional 100, 000 shares be
released for sale. The Company was successful in obtaining the release of the
restrictions on 150,000 shares, which has been were sold at $2.00 per share, as
reported in a Form 3 filing with the Commission. The Company had made payments
on the note through July of 1998, when Dr. Kagan filed suit in Broward County,
Florida for the payment of principal and interest. The Company has not filed its
response to the suit at this time, however, the Company's response will be filed
within the time allocated by the courts, which will describe mitigating
circumstances and may further allege breach of contract and/or breach of
fiduciary responsibility by Dr. Kagan.
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
warranted that at such time the shares are eligible for resale pursuant to Rule
144, 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 approximately $60,000 has been converted to date at an average price of
$3.845 per share.
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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 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. Currently Datascan has approximately 33 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 16,000 patients per year, with
approximately 34,800 procedure codes billed in 1998. The payer mix for the
Company is approximately 23% Medicare, 38% private insurance and 39% managed
care. Its referral source includes over 400 local physicians and hospitals.
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 former director of the Company was an
approximately 50% shareholder of Datascan, with the other principal shareholder
of Datascan, Michael P. Goldstein, Executive 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 exceed $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. Datascan did not met
its EBITDA requirement for 12 months ended June 30, 1998.
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Ken Hall, the former President of Datascan of Florida, Inc. who retired
effective September 4, 1998, has agreed to continue on as a consultant with
Datascan through September 30, 2001 at monthly payments of $16,667. He will
consult with the new President of Datascan on a regular basis, to share his long
years of experience.
All the Acquisitions to date were accounted for under the "purchase" method
of accounting.
MANAGEMENT INFORMATION SYSTEMS
The Company has installed an 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, measure patient care
satisfaction and outcomes of care, and integrate information from multiple
facilities throughout the care spectrum. The Company's overall information
systems is 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.
Impact of the "Year 2000" Computer Issue
The Company has completed the assessment phase of its Year 2000 project and
determined that it will be required to evaluate, test and modify (when needed)
approximately 50 internally and externally developed software programs and
approximately 100 pieces of equipment. The Company presently believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose material operational problems for its computer systems.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company. The Company has initiated formal communications with
its significant suppliers and large customers to determine the extent to which
the Company's interface systems are vulnerable to those third parties' failure
to remedy their own Year 2000 Issues. However, there can be no guarantee that
the systems of other companies on which the Company's systems rely will be
timely converted and would not have an adverse effect on the Company's systems.
The Company will utilize both internal and external resources to reprogram or
replace and test software and medical equipment for Year 2000 modifications. The
Company anticipates that the various components of the Year 2000 project
procedures will continue throughout calendar 1998 and 1999. The Year 2000
project is currently estimated to have a minimum total cost of $150,000 related
to the review and modification of the Company's computer and software systems
not including the scheduled replacement of equipment or updates in software
previously anticipated in the normal course of business.
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The Company is not able to reasonably estimate the costs to be incurred for
the review and modification of the medical equipment and infrastructure elements
at this time. The majority of the costs related to the Year 2000 project will be
expensed as incurred and are expected to be funded through operating cash flows.
The Company has incurred minimal cost related to the assessment of, and
preliminary efforts on its Year 2000 project. The costs of the project and
estimated completion dates for the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes and all medical equipment.
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. Excluding individual physicians and small
medical groups most 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 was implemented by 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.
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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.
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.
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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
payer 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
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.
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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.
Risks of Changes in Payment for Medical Services.
The United States Congress and many state legislatures routinely consider
proposals to reform or modify the health care system, including measures that
would control health care spending, convert all or a portion of government
reimbursement programs to managed care arrangements and reduce spending for
Medicare and state health programs. These measures can affect health care
company's cost of doing business and contractual relationships. For example,
recent developments that affect the Company's activities include: (i) federal
legislation requiring a health plan to continue coverage for individuals who are
no longer eligible for group health benefits and prohibiting the use of
"pre-existing condition" exclusions that limit the scope of coverage; (ii) a
Health Care Financing Administration policy prohibiting restrictions in Medicare
risk HMO plans on a physician's recommendation of other health plans and
treatment options to patients; and (iii) regulations imposing restrictions on
physician incentive provisions in physician provider agreements. There can be no
assurance that such legislation, programs and other regulatory changes will not
have a material adverse effect on the Company.
The profitability of the Company may be adversely affected by Medicare and
Medicaid regulations, cost containment decisions of third party payers and other
payment factors over which the Company has no control. Additionally, the Florida
Board of Medicine has interpreted the Florida fee-splitting law very broadly.
The Florida Board of Medicine decision has been stayed pending judicial
interpretation of the decision. There can be no assurance that review of the
Company's business by courts or health care, or other regulatory authorities
will not result in determinations that could adversely affect the financial
condition or results of operations of the Company. If for any reason the Company
were found to have violated the corporate practice of medicine or fee-splitting
statutes, possible consequences could include revocation or suspension of the
physicians' license resulting in lowered revenue to the Company.
Increased Government Scrutiny of Health Care Arrangements
There is increasing scrutiny by law enforcement authorities, the OIG, the
courts, and the United States Congress of arrangements between health care
providers and potential referral sources to ensure that the arrangements are not
designed as a mechanism to exchange remuneration for patient care referrals and
opportunities. Investigators have also demonstrated a willingness to look behind
the documents evidencing a business transaction to determine the underlying
purpose of payments between health care providers and potential referral
sources. Enforcement actions have increased. Although, to its knowledge the
Company is not currently the subject of any investigation, however, there can be
no assurance that they will not be the subject of investigations or inquiries in
the future. The HMO industry is highly regulated at the state level and is
highly competitive. Additionally, the HMO industry has been subject to numerous
legislative initiatives within the past several years, including initiatives
that would pose additional liabilities on HMOs for patient malpractice, thereby
increasing costs to HMOs, which would result in correspondingly lower revenue to
the Company. There can be no assurance that developments in any of these areas
will not have an adverse effect on the Company.
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EMPLOYEES
As of October 6, 1998 the Company had approximately 133 full-time and 5
part-time employees. Of the total, seventeen (17) were employed at the Company's
executive offices and eight (8) at the Company's billing and collection
operations. No 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 $9,564 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 $5,817, 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 $13,126 plus real estate taxes. This lease expires
December 31, 2003, and is leased from Dr. Kagan, a former Director of the
Company. Dr. Kagan is a Vice President of the Company and Medical Director of
the MRI Scan Center.
GMA occupies approximately 1,800 square feet in North Miami, Florida at a
monthly rental of approximately $5,140. The term of this lease is month to
month.
Datascan's offices are located at 2301 West Sample Road, Building 4 Suite
2A, Pompano Beach, Florida 33073 where it occupies approximately 5,000 square at
a monthly rental of approximately $2,900. This lease expires on July 13, 1999.
The Skylake Practice occupies approximately 4,800 square feet in North
Miami Beach, Florida at a monthly rental of $13,931. This lease expires on June
30, 2000.
The Company also leases approximately 5,740 square feet for diagnostic
facilities in Fort Lauderdale, Florida at a monthly rate of approximately $7,395
which lease expires December 31, 2003, and is leased from KFK Enterprises, Inc.,
a corporation in which Dr. Kagan, an employee, and former Director of the
Company, is a principal shareholder.
This lease was entered into on favorable terms for Dr. Kagan.
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None of the Company's properties, except as otherwise indicated, are leased
from affiliates.
ITEM 3. LEGAL PROCEEDINGS.
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 rescinded
this transaction as a result of the Company's belief that a breach of the
agreement had occurred and requested the return of all consideration paid. In
connection therewith, the Company has canceled 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, 1998
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 funding group filed a complaint against FR Group
and, as a result of the merger, the Company, alleging a breach of an August 1996
Security Agreement wherein Plaintiff claimed a perfected security interest in
accounts receivable. Economic damages have been claimed of approximately
$150,000 for breach of the contract and treble damages of approximately $208,000
for the value of certain "bad" checks allegedly issued by Kunen. Plaintiffs have
dismissed the Company from this action, without prejudice, and have substituted
Met Rehab Group Inc. (Met Rehab was merged into Metcare I, a wholly owned
subsidiary of the Company.) The Company cannot be held liable absent piercing
the corporate veil.
On July 24, 1997, the Company and Met Rehab Group Inc. (f/k/a) Metcare I
Inc. filed a separate action against Florida Rehabilitation Services and Kunen,
seeking damages in excess of $15,000 for fraud in the inducement and breach of a
Merger Agreement, for failure to disclose the Funding and Security Agreement
above mentioned.
Counterclaims have been filed.
In August 1998, the Company and Paul H. Wand, M.D. were named as defendants
in a lawsuit wherein a former employee of the Wand Practice is alleging that she
was wrongfully terminated and her employment contract breached. This event if
true occurred prior to the Company's acquisition of the Wand practice. The
Company never employed the defendant. The Company has terminated its
relationship with the Wand Practice effective July 1, 1998. The Company 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.
On May 1997, the Company was named as defendant in a lawsuit wherein a
former contract advertising agency claimed breach of letter of agreement. The
agency filed suit alleging that the agreement was improperly terminated, seeking
sums allegedly due and owing under the agreement in the amount of $123,086.08,
plus interest, costs and attorneys' fees. The Company has filed defenses and
entered a counterclaim alleging failure to perform as required. Mediation is
scheduled.
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Dr. Kagan a former Director of the Company and currently Vice President of
the Company and Medical Director of the Company's MRI Scan Center, filed suit in
Broward County, Florida for the payment of principal and interest on a $200,000
note with interest owed by the Company. The note was part of the acquisition of
the MRI Scan Center as described above. Dr. Kagan had agreed to extend the due
date for the final payment of $200,000 on the note, from April 1, 1998 to
September 30, 1998. In exchange the Company agreed to pay the default rate of
18% on the balance of the note, and the Company would not object to the release
of the underwriter's lock-up of 100, 000 of the Company's common shares owned by
Dr. Kagan to be sold through June 30, 1998. It was further agreed, that if the
$200,000 was not paid by September 30, 1998 the Company would not object to the
release of an additional 100, 000 shares The Company had made payments on the
note through July of 1998, when Dr. Kagan filed suit in Broward County, Florida
for the payment of principal and interest. The Company has not filed its'
response to the suit at this time, however, the Company's response will be filed
within the time allocated by the courts.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the fiscal year ended June 30,
1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock and Warrants are currently traded on the NASDAQ
SmallCap Stock Market ("NASDAQ") under the symbols "MDPA" and "MDPAW"
Respectively. The following table sets forth, since the Company's initial public
offering on February 14, 1997, the high and low closing bid prices for the
common stock and warrants, as reported by NASDAQ:
High Low
($) ($)
Common Stock
Quarter ended March 31, 1997 7.56 3.56
Quarter ended June 30, 1997 5.37 3.18
Quarter ended September 30, 1997 6.125 3.375
Quarter ended December 31, 1997 7.375 5.625
Quarter ended March 31, 1998 6.125 2.500
Quarter ended June 30, 1998 4.063 2.750
Warrants
Quarter ended March 31, 1997 2.75 1.00
Quarter ended June 30, 1997 1.28 0.50
Quarter ended September 30, 1997 0.97 0.44
Quarter ended December 31, 1997 1.06 0.53
Quarter ended March 31, 1998 0.66 0.25
Quarter ended June 30, 1998 0.59 0.31
The Company has not declared or paid any dividends on either the common
or preferred 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
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Company's losses from operations of approximately
$______________for the year, together with the costs associated with
restructuring, closing of operations, cost of severance and separation
agreements, the Company has experienced liquidity and cash flow problems. If the
Company is not able to raise additional capital in the immediate future, this
will pose a significant threat to current operations and further hamper the
Company's future development and growth.
22
<PAGE>
A primary source of the Company's liquidity is derived from its accounts
receivable, therefore it has selected, designed and implemented an information
system which links the Company's facilities to maximize billing, and optimally
reduce the number of days of sales in accounts receivable. To date the Company
has been able to reduce the cost of billings and collections, however, actual
reductions in accounts receivable days has not actually been achieved due to a
decrease in procedures performed and a reduction in reimbursements percentages.
This has caused a reduction in the Company's ability to borrow against the
Company's current lines of credit. The reduction in its current borrowing limits
have decrease approximately $600,000. The Company is in negotiations with one of
its current lenders to combine and restructure its accounts receivable secured
line of credit. Based on these negotiations, the Company anticipates to net
approximately $700,000 to $800,000 after payment of its existing borrowings by
the middle of the second quarter.
23
<PAGE>
OVERVIEW For purposes of managements discussion of the results of
operationsar presented on a pro forma basis, which includes all acquisitions
during the two year period being recorded as if the transactions occurred at
July 1, 1996. The pro forma results of operations are :
1998 1997
---- ----
Revenues 17,597,000 16,999,000
Salaries and Benefits 8,168,000 6,904,000
Depreciation and Amortization 1,880,000 1,509,000
Medical Expenses 3,470,000 1,454,000
General and Adminstative 9,224,000 8,292,000
Income from Continuing Operations (5,145,000) (1,160,000)
The Company had, on a pro forma basis, operating revenues of $17,597,000
for fiscal 1998, as compared to revenues of $16,999,000 for fiscal 1997. The
Company's Loss from Continuing Operations for fiscal 1998 and 1997 were
$5,145,000 and $1,160,000 respectively. In the third quarter of fiscal 1998, the
Company reviewed its expenses and instituted a cost reduction plan that reduced
the overall expenses by approximately $50,000 per month in the fourth quarter
and when fully implemented in the first quarter of fiscal 1999, will reduce
costs by an additional $40,000. In the fourth quarter of fiscal 1998, the
Company identified four physician practices that were not profitable and would
remain unprofitable in the near future. Therefore, the Company elected to close
or sell these practices. Of the expenses from continuing operations incurred
during fiscal 1998, approximately $1,000,000 relates to non-reoccurring charges.
The breakdown of these charges is as follows: (i) $330,000 relates to the
aforementioned physician practice disposals, (ii) $200,000 is associated with
the settlement of an agreement with an independent contractor, (iii) $360,000 is
incurred due to the revision of an employment agreement and acquisition
agreement with the Medical Director of the MRI Scan Center, $200,000 relating to
a settlement on a termination of an independent contractor contract and $100,000
relating to the early write-off of costs associated with a loan commitment that
will not the Company will not be able to utilize .
OPERATING REVENUES As previously noted, the Company's operations are
dependent upon the formation and expansion of its network. For fiscal 1998,
approximately $8,610,000 or 49 % of the Company's revenue was derived from its
diagnostic companies, compared to fiscal 1997 in which $8,559,000 or 51% of
total revenue was generated from diagnostics. Physician practices contributed
$8,573,000 or 49% in revenues for fiscal 1998 and $8,426,000 or 49% for 1997.
The Company anticipates that the composition of the revenues for physician
practices will increase in relation to the percentage of revenues produced by
diagnostics. The Company purchased two full risk centers from Primedica
Healthcare, Inc. This acquisition is the Company's first entrance into full risk
contracts. Though full risk contracts represent a greater exposure to the
Company, management believes that it currently has the personnel and procedures
in place to manage these types of contracts to maximize profits and maintain a
high level of patient care.
24
<PAGE>
Datascan of Florida, Inc., the Company's mobile ultrasound unit, had total
revenues of $3,351,700 for fiscal year 1998 and pro forma revenues of $2,987,200
for 1997, an increase of $364,500 or 12%. The increase was due in part to low
margin contracts entered into to broaden its network affiliations.
The MRI Scan Center had revenues of $5,258,800 for fiscal 1998, as compared
to pro forma revenues of $5,611,900 for fiscal 1997, a$353,000 or 6% decrease.
This decrease is due in part to a reduction in reimbursement per procedure and
the loss of direct diagnostic contracts.
In fiscal 1999 the Company has combined the operations of Datascan of
Florida and MRI Scan Center, under new division, Metcare Diagnostic Services.
This will enable the Company to offer all of its diagnostics within one
operation. This restructuring will eliminate duplications and unify and
strengthen the combined marketing efforts. During the first quarter of fiscal
1999, the Company hired an additional radiologist to assist with a new
aggressive marketing effort, develop and institute a quality assurance program
and interpret all x-rays, ultrasounds and MRI's.
The largest component of Physician Practices was Skylake which generated
revenues for fiscal 1998 of $5,467,000 as compared to $4,473,000 for fiscal
1997, an increase of $994,000 or 22%. The Company purchased the assets of two
full risk primary care medical facilities on April 1, 1998, from Primedica
Healthcare, Inc. The Company has initiated an aggressive cost reduction and
marketing plan that has begun to materialize. The Company has consolidated the
two practices along with the transfer of patients, medical personnel and
equipment into one facility at Skylake, Florida ("Skylake"). The facility
retained approximately 90% of the patient enrollment, and management expects an
increase in profits with the decrease in overhead. Effective October 1, 1998 the
Company hired an additional primary care physician that had been released from a
competing medical center located within close proximity to Skylake. The
physician, void of any restrictions, has a substantial and loyal following.
Management believes that this will have a material positive impact in the coming
months
GMA's revenues for fiscal 1998 were $2,426,100 as compared to 1997 pro
forma revenues of $2,690,600. This loss of revenue at GMA was offset by an
increase in revenues at MetBilling. MetBilling's revenues increased $443,000
over fiscal 1997's due to an outside contract that expired January 1998.
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. Though the
Company believes it has a superior operating mode, it currently lacks the
financial resources to execute it. 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 on a pro forma basis totaled
approximately $22,743,000 for the year ended June 30, 1998,as compared to
$18,159,000 for 1997. They consisted primarily of expenses incurred for payroll,
payroll taxes and benefits, depreciation and amortization, full risk insurance
contracts, interest, rent and other general and administrative expenses.
During the fourth quarter fiscal 1998, the Company decided to sell or shut
down certain of its individual medical clinics. These clinics were operating at
a loss and it was projected that the Company could not turn around these
operations in a reasonable period of time. The sale or closure of these two
facilities resulted in a one time write off of approximately $440,000. With the
combining of its diagnostic services under Metcare Diagnostic Services, the
Company anticipates to reduce its costs by $100,000-$150,000 annually.
25
<PAGE>
Payroll related expenses totaling approximately $8,168,000 represented 36%
of the total operating expenses for the year ended June 30, 1998 versus
$6,904,200 on a pro forma basis for fiscal year 1997. Payroll and related
expenses increased from the preceding fiscal year due primarily to the increase
in corporate staff in the fourth quarter 1997. During fiscal 1998, the Company
has had the effect of those salaries and benefits for an entire year, versus 3
months for fiscal 1997. In addition we added three physicians and their support
staff during the current fiscal year.
Pro forma depreciation and amortization totaled approximately $1,940,000 or
8% of the total operating expenses for the year ended June 30, 1998 and
$1,510,000 and 9% for 1997. The increase in depreciation and amortization is due
to the effect of a full year versus a partial year for depreciation and changing
from 30 years to 10 years for amortization of goodwill. This change in the
amortization increases operating expenses by approximately $200,000.
Full risk insurance contract expenses of approximately $3,470,000 or 15% of
operating expenses for fiscal 1998 increased $2,015,000 or 138% from fiscal
1997's expenses of $1,454,000. This variance in costs is a result of an increase
in direct medical expenses. The Company has initiated expense review procedures
to review costs and to ensure that all expenses are appropriate. The Company
believes that it can lower its costs per member per month with the installation
of these new procedures and quality control.
Interest expense totaling $813,000 represented 4% of the total operating
expenses for the year ended June 30, 1998 as compared to $850,000 for 1997.
Approximately $454,000 of the 1998 total is due to interest on capital leases.
Interest on the note issued to purchase the Skylake practice accounts for
approximately $240,000 of the interest expense amounts on a pro forma basis.
Rent expense amounted to $1,068,000 or 5% of the total operating expenses
for the year ended June 30, 1998 as compared to $990,000 for fiscal 1997. The
increase is due to the addition of two locations during the 1998 fiscal year.
MRI has three fixed-site locations plus one warehouse. Total rent related to
these leases amounted to approximately $320,000. All other entities are single
site. The rent expense for the corporate offices is approximately $120,000 for
the year ended June 30, 1998. There is sufficient capacity at these locations
for future growth.
Bad debt expense amounting to $1,683,000 represented 7% of the total
operating expenses for the year ended June 30, 1998 as compared to $2,139,000
for fiscal 1997. A significant portion of the medical group's 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.
Based upon the foregoing, the Company incurred a loss from operations of
$5,788,000 for the year ended June 30, 1998.
The Company auditors has issued a going concern opinion. See Note to the
audited financial statements.
26
<PAGE>
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,
ability of the Company to obtain competent medical personnel, the cost of
services provided versus payment received for capitated and full risk managed
care contracts, negative effects of prospective healthcare reforms, the
Company's ability to obtain medical malpractice coverage and the cost associated
with malpractice, the availability of appropriate acquisition candidates, the
Company's ability to close once a letter of intent or contract has been
executed, the Company's ability to raise capital to close on such acquisitions,
access to borrowed or equity capital on favorable terms, the fluctuation of the
Company's common stock price, and other factors discussed elsewhere in this
report and in other documents filed by the Company with the Securities and
Exchange Commission from time to time, including but not limited to the
Company's SB-2, S-3, S-8 and 8-K fillings. Many of these factors are beyond the
Company's control. Actual results could differ materially from the
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.
27
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
As of October 13, 1998, the directors, control person and executive
officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C>
Noel J. Guillama 38 Chairman, President and Chief Executive Officer
Donald B. Cohen 44 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
Michael P. Goldstein 44 Executive Vice President, Acting Chief Operating Officer,
and Director
President - Metcare Diagnostic Services Division
Roman G. Fisher 50 Executive Vice President of Strategic Planning
Acting Chief Information Officer
Chief Operating Officer - MRI Scan Center
Daniel L. Beckett 39 Senior Vice President, Chief Accounting Officer
Walter A. Fox, D.O. 71 Director
Mark K. Gerstenfeld 56 Director
Robert L. Kagan, M.D. 51 Vice President
Medical Director - MRI Scan Center
</TABLE>
- ---------------
NOEL J. GUILLAMA has served as Chairman, and President and Chief Executive
Officer since inception in January 1996. From the period of October 1996 till
May of 1998, he served as Chief Operating Officer. During 1995, Mr. Guillama
served as a health care consultant to public and private health care providers
and companies. 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.
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.
28
<PAGE>
MICHAEL P. GOLDSTEIN since May of 1998 has been serving as Executive Vice
President and acting Chief Operating Officer and further serves as President of
the Company's Diagnostic Services Division. In September 1998, he was elected to
the Board of Directors. He had served as Vice President of the Company from July
1997 through May of 1998. Mr. Goldstein co-founded Datascan of Florida, Inc., in
1981. He served as its Vice President from 1981 to September 1998, at which time
he became the President of Datascan. Datascan provides mobile diagnostic
services to individual physician practices and hospitals in Dade, Broward and
Palm Beach Counties. Mr. Goldstein is responsible for day-to-day administration,
including operations, development, management, sales and marketing. From 1977 to
1981, Mr. Goldstein was Director of Non-Invasive Diagnostics at Community
General Hospital, a 300 bed acute care facility in Sullivan County New York.
From 1975 to 1977, Mr. Goldstein was Director of CAT-ECG, Inc. an
electrophysiology company, servicing the New York City area.
ROMAN G. FISHER has served as Executive Vice President of the Company since
September, 1996 and Acting Chief Information Officer since September of 1998.
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. 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.
WALTER A. FOX, D. O., M.Sc., F.A.C.O.I., has served as Director of the
Company since October 9, 1998. Since leaving 1997, Dr. Fox has been in private
practice. From 1994 to 1997, Dr. Fox was practicing internal medicine for the
Lake Hospital System based in Gainesville, Ohio. From 1992 to 1994 Dr. Fox
served as Medical Director of Southern Community Medial Center in Ft.
Lauderdale, Florida. From 1987 to 1990 he served as Medical Director of LTV
Steel. From 1979 to 1986 he served as Chairman - Department of internal Medicine
at Richmond Heights General Hospital in Richmond Heights, Ohio. From 1971 to
1979 he served as Chairman of Internal Medicine at Las Olas General Hospital in
Ft. Lauderdale, Florida. Dr. Fox received a Bachelor or Science degree from
Albright College in Reading, Pennsylvania and a Doctorate of Osteopathic degree
from Philadelphia College of Osteopathic Medicine in Philadelphia, Pennsylvania.
Dr. Fox received a Fellowship from the American College of Osteopathic Internist
and a 30-Year Service Award from the College of Osteopathic Internist. He is a
member of the American Medical Association and the American Osteopathic
Association.
MARK K. GERSTENFELD has served as Director of the Company since October 9,
1998. Mr. Gerstenfeld has served from October of 1996 to present as an advisor
to the Company. Mr. Gerstenfeld has since 1986 served as Vice President of Sales
at Action West in New York, NY. Action West is an Apparel Products distributor
with approximately $ 60 million in annual sales. Prior to his position at Action
West Mr. Gerstenfeld has served at various executive positions in the garment
industry and was a Security Analyst following the garment industry. Mr.
Gerstenfeld received a Bachelor or Arts degree from Michigan State University in
East Lansing Michigan and a MBA in marketing and marketing research from City
College of New York, Baruch School of Business.
29
<PAGE>
DANIEL L. BECKETT has served as Senior Vice President and Chief Accounting
Officer of the Company since July, 1998. Prior to his employment with the
Company, Mr. Beckett held various financial positions with EquiMed, Inc, a
physician practice management company. His employment with EquiMed was from 1996
to June of 1998, and he was the CFO prior to joining the Company. From 1991 to
1996, Mr. Beckett served as Controller for Oncology Services Corporation, a
management company specializing in radiation oncology. From 1989 to 1991, Mr.
Beckett served as Accounting Manager for Oncology Services Inc., a management
company also specializing in radiation oncology. Mr. Beckett received his
Bachelor of Science degree from Grace College in Indiana.
ROBERT L. KAGAN M.D., has been Vice President of the Company since October
1996 and has served as a Director of the Company from October 1996 through
October 9, 1998. He is considered to be a control person of the Company and its
largest shareholder. He holds the title of Vice President and Medical Director
for the MRI Scan Center. 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 diplomat of the American
airman of the American Society of Clinical Pathology's Board of Registry in
Nuclear Medicine, diplomat 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.
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 five (5) directors in
the Company. 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 a third shareholder Ms. Hilderbrand who owns
approximately 4.5% of the Company's common stock 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. Accordingly, Mr. Guillama, Dr. Kagan and
this third shareholder, Ms. Hilderbrand, collectively under this agreement,
control approximately 24% of the Company and could be in a position to control
the election of directors as well as the other affairs of the Company.
30
<PAGE>
Board Committees
The Company has four (4) committees, an Executive, Audit, Compensation and
Option Committee, as well as an Advisory Board. The Audit Committee consists of
Mr. Guillama, Dr. Fox and Mr. Gerstenfeld. 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 Executive Committee was recently established and shall have and may exercise
the power of the Board of Directors in the management of the business and
affairs of the Corporation at any time when the Board of Directors is not in
session. The Executive Committee shall, however, be subject to the specific
directions of the Board of Directors. It is composed of Messrs Guillama, Cohen
and Gerstenfeld. All actions of the Executive Committee require a unanimous
vote. The Compensation Committee consists of Messrs. Guillama, Gerstenfeld and
Dr. Fox. 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 Cohen and Gerstenfeld.
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, Mr. Goldlstein, Dr. Walter Fox, 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.
31
<PAGE>
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. Three (3) of the five (5)
Directors of the Company are also employees of the Company and do not receive
additional compensation for their services as Directors. A formal compensation
and stock option plan is anticipated to be adopted for the Company's outside
Directors in the near future.
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 30, 1998.
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 year ended June 30, 1998 ("fiscal 1998"). The notes to these
tables provide more specific information regarding compensation.
32
<PAGE>
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 $ $ ($) (#) Compensation
------------------ ---- - - --- --- ------------
<S> <C> <C>
Noel J. Guillama 1996 32,000
Chairman of the Board, 1997 67,100 37,027
President, 1998 83,300
Chief Executive Officer
Robert L. Kagan, MD 1997 500,000 151,017
Vice President and 1998 918,100 77,500 7,700
Medical Director MRI
Scan Center
Michael P. Goldstein 1997 150,000
Director, Acting Chief 1998 148,400 6,000
Operating Officer and
President Metcare
Diagnostic Services
Roman G. Fisher 1997 125,000 15,166
Executive Vice President, 1998 120,000 5,000
Acting Chief Operating
Officer - MRI Scan Center
</TABLE>
33
<PAGE>
Options Granted in the Year Ended June 30, 1998
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/
Underlying SARs
Options/ Granted to Exercise or
SARs Employees in Base Price Expiration
Name Granted Fiscal Year ($/Share) Date
---- ------- ----------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Kagan 100,000 11.98% $6.94 to $7.94 4/18/2003 to 4/18/2005
Don Cohen 140,000 16.78% $3.00 10/16/2002 to 4/1/2003
Michael Goldstein 90,000 10.78% $2.55 to $3.50 7/17/2002 to 3/31/2003
Roman Fisher 30,000 3.59% $2.55 3/31/2003
</TABLE>
Total number of options granted during the year ended June 30, 1998 was 834,500.
Aggregated Fiscal Year-End Option Value Table
The following table sets forth certain information concerning unexercised
stock options as of June 30, 1998. Both Noel J. Guillama and Donald B Cohen
exercised options during the fiscal year ended June 30;, 1998. Mr. Guillama
exercised 170,000 options and Mr. Cohen exercised 36,000 options. No stock
appreciation rights were granted or are outstanding.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money
Held at June 30, 1998 Options at June 30, 1998 (i)
---------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
(#) (#) ($) ($)
--- --- --- ---
<S> <C> <C>
Robert Kagan 20,000 80,000
Donald B. Cohen 209,000
Michael P. Goldstein. 90,000 15,520
Roman Fisher 113,000 45,000 60,090
</TABLE>
(i) The closing sale price of the Common Stock on June 30, 1998 as reported by
NASDAQ was $2.938 per share. Value is calculated by multiplying (a) the
difference between $2.938 and the option exercisable price by (b) the number of
shares of Common Stock underlying.
34
<PAGE>
During fiscal 1998, the exercise price of certain options granted to key
employees and senior management were revised from as high as $18.00 down to
$3.00 a share.
Compensation of Directors. For the fiscal period ending June 30, 1998, 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 February 13,
1997. 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.
Mr. Guillama waived any rights to all his warrants not exercised by June 30,
1998. 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. Based on
various actions or lack of action by the Board of Directors, Mr. Guillama could
exercise the constructive termination clause in his contract. To date no such
notification has taken place.
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.
The Company has entered into a five (5) year employment agreement with
Michael Goldstein, 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. Goldstein is entitled to receive a monthly automobile allowance of $700 and
four weeks (4) vacation. The agreement commenced September 30, 1996 and expires
August 31, 2001 with annual renewals thereafter.
35
<PAGE>
The Company and Nuclear Magnetic Imaging, Inc., (a subsidiary of the
Company) On September 8, 1998 entered into a modification of 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
modification also provides for 35,000 shares of Rule 144 common stock to be
issued and 25,000 cashless options at $2.00 per option were granted, which will
expire September 7, 2003. In the event of termination of the employment
agreement as modified, Mr. Fisher will be paid approximately 150,000 shares of
restricted stock (or such lesser or greater amount) to fully pay the base salary
owed at that time. Mr. Fisher would receive reasonable registration rights, to
equal $12,000 per month, however, such rights will not exceed 8,000 shares per
month, and he would continue with the Company as a consultant through August 22,
2001.
The Company has entered into a three (3) year employment agreement with
Daniel L. Beckett, Senior Vice President and Chief Accounting Officer of the
Company. The employment agreement specifies a monthly salary of $7,000 from July
through September 1998, and $8,000 a month thereafter. Mr. Beckett is entitled
to receive a monthly car allowance of $500 and four (4) weeks vacation. The
agreement began July 1998 and expires June 2001.
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, 1998 (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.
<TABLE>
<CAPTION>
Percentage of
Name/Address of Beneficial Ownership Beneficial Ownership
Beneficial Owner Common Stock Common Stock
- ---------------- -------------------- --------------------
<S> <C> <C> <C>
Noel J. Guillama(1)(8) 569,725 8.17%
Robert L. Kagan, M.D.(2)(8) 790,000 11.33%
Kenneth J. Hall(3) 367,667 5.27%
Donald B. Cohen(4) 298,454 4.28%
Michael P. Goldstein.(5) 227,334 3.26%
Roman G. Fisher(6) 85,400 1.22%
Martin Harrison, M.D.(7) 516,488 7.41%
Walter A. Fox, D.O. 20,000 0.29%
Mark K. Gerstenfeld 6,000 0.09%
Directors and Executive
Officers as a group
(8 persons) 6,973,164 41.32%
</TABLE>
36
<PAGE>
- -------------
(1) Includes (1) 14,059 held by Mr. Guillama, (2) 80,000 shares held by Mr.
Guillama's wife, (3) 265,000 shares held by Guillama Family Holdings,
Inc., a corporation in which Mr. Guillama is an officer, (4) 142,000
shares held by Mr. Guillama as trustee for his minor son, and (5)
68,666 shares owned by Beacon Consulting Group, Inc., a corporation in
which Mr. Guillama is a director,
(2) Includes (1) 750,000 shares held by Dr. Kagan, (2) 10,000 shares
issuable upon exercise of options at a price of $6.938 per share until
April 18, 2003, (3) 10,000 shares issuable upon exercise of options at
a price of a price of $7.938 until April 18, 2003, (4) 10,000 shares
issuable up on exercise of options at a price of $6.938 per share until
October 18, 2003, and (5) 10,000 shares issuable upon exercise of
options at a price of $7.938 per share until October 18, 2003. Does not
include (1) 10,000 shares issuable upon exercise of options at a price
of $6.938 per share from April 18, 1999 to April 18, 2004, (2) 10,000
shares issuable upon exercise of options at a price of $7.938 per share
from April 18, 1999 to April 18, 2004, (3) 10,000 shares issuable upon
exercise of options at a price of $7.938 per share from October 18,
1999 to October 18, 2004, (4) 10,000 shares issuable upon exercise of
options at a price of $6.938 per share from April 18, 2000 to April 18,
2005, (5) 10,000 shares issuable upon exercise of options at a price of
$7.938 per share from April 18, 2000 to April 18, 2005. 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.
(3) Includes (1) 339,00 shares held by Mr. Hall, (2) 3,000 shares issuable
upon exercise of options at price of $6.938 per share until April 18,
2003, (3) 3,000 shares issuable upon exercise of options at a price of
$7.938 per share until April 18, 2003, (4) 3,000 shares issuable upon
exercise of options at a price of $6.938 per share until October 18,
2003, (5) 3,000 shares issuable upon exercise of options at a price of
$7.938 per share until October 18, 2003, and (6) 16,667 shares issuable
upon exercise of options at a price of $2.550 per share until March 31,
2003. Does not include (1) 3,000 shares issuable upon exercise of
options at a price of $6.938 per share from April 18, 1999 to April 18,
2004, (2) 3,000 shares issuable upon exercise of options at a price of
$7.938 per share from April 18, 1999 to April 18, 2004, (3) 3,000
shares issuable upon exercise of options at a price of $6.938 per share
from October 18, 1999 to October 18, 2004, (4) 3,000 shares issuable
upon exercise of options at a price of $7.938 per share from October
18, 1999 to October 18, 2004, (5) 3,000 shares issuable upon exercise
of options at a price of $6.938 per share from April 18, 2000 to April
18, 2005, and (6) 3,000 shares issuable upon exercise of optionss at a
price of $7.938 per share from April 18, 2000 to April 18, 2005.
(4) Includes (1) 89,454 shares held by Mr. Cohen, (2) 14,000 shares
issuable upon exercise of options at a price of $3.00 per share until
October 15, 2002, (3) 29,000 shares issuable upon exercise of options
at a price of $3.00 per share until April 27, 2002, (4) 28,000 shares
issuable upon exercise of options at a price of $3.00 until April 29,
2003, (5) 40,000 shares issuable upon exercise of options of a price of
$3.00 per share until October 16, 2002; (6) 50,000 shares issuable upon
exercise of options at a price of $3.00 per share until October 21,
2002; (7) 50,000 shares issuable upon exercise of options at a price of
$3.00 per share until April 1, 2003.
(5) Includes (1) 137,334 shares held by Mr. Goldstein, (2) 40,000 shares
issuable upon exercise of options at a price of $2.55 per share until
March 31, 2003, and (3) 50,000 shares issuable upon exercise of options
at a price of $3.50 per share until July 17, 2002.
(6) Includes (1) 42,500 shares held by Mr. Fisher, 2) 17,900 shares held by
Mr. Fisher and Ofra Fisher Ten Ent (3) 25,000 shares issuable upon
exercise of options at a price of $2.00 per share until September 7,
2003;
(7) 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. Inclues (1) 418,488 shares held by Dr.
Harrison, (2) 7,000 shares issuable upon exercise of options at a price
of $6.938 per share until April 18, 2003, (3) 7,000 shares issuable
upon exercise of options at a price of $7.938 per share until April 18,
2003, (4) 7,000 shares issuable upon exercise of options at a price of
$6.938 per share until October 18, 2003, (6) 7,000 shares issuable upon
exercise of options at a price of $7.938 per share until October 18,
2003, and (6) 70,000 shares issuable upon exercise of options at a
price of $2.550 per share until March 31, 2003. Does not include: (1)
7,000 shares issuable upon exercise of options at a price of $6.938 per
share from April 18, 1999 to April 18, 2004, (2) 7,000 shares issuable
upon exercise of options at a price of $7.938 per share from April 18,
1999 to April 18, 2004, (3) 7,000 shares issuable upon exercise of
options at a price of $6.938 per share from October 18, 1999 to October
18, 2004, (4) 7,000 shares issuable upon exercise of options at a price
of $7.938 per share from October 18, 1999 to October 18, 2004, or (5)
7,000 shares issuable upon exercise of options at a price of $6.938 per
share from April 18, 2000 to April 18, 2005, and (6) 7,000 shares
issuable upon exercise of options at a price of $7.938 per share from
April 18, 2000 to April 18, 2005.
37
<PAGE>
(8) 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has a one year consulting agreement with Sternco, Inc. that
provides for commissions to earned at the closing of any acquistion to which
Sternco is or was the introducing party or materially contributed to such
acquisition. This commission is earned on a sliding scale ranging as follows:
5% of the first million dollars of purchase price, 4% of the second
million dollars of purchase price, 3% of the third million dollars of
purchase price, and 2% of the balance of the purchase price.
The commissions will be limited to $500,000 on any single purchase. Furthermore,
the Company will pay Sternco 1% of principal of any debt financing secured by
the Company of which Sternco is or was the introducing party or materially
assists in such financing. 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 $13,126 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 $23.66 a square foot net of expenses for the 4,656 square feet of office
space. This lease expires December 31, 2003.
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 $7,395 per month and the property is 5,740
square feet. Thus, Magnetic Imaging Systems, I, Ltd. is paying $15.46 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 December 31, 2003.
38
<PAGE>
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
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.
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 (+).
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Articles of Incorporation.(1)
3.2 Articles of Amendment to the Articles of Incorporation.(1)
3.3 By-laws.(1)
3.4 Article of Amendment to the Articles of Incorporation designating the Series A Preferred Stock. (8)
3.5 Article of Amendment to the Articles of Incorporation designating the Series B Preferred Stock. (8)
3.6 Articles of Amendment to the Articles of Incorporation amending the designation of the Series B Preferred Stock. (8)
4.1 Specimen Common Stock Certificate.(1)
4.2 Specimen Common Stock Purchase Warrant (issued pursuant to the Company's initial public offering on February 13, 1997) (1)
4.3 Underwriter's Warrant.(1)
39
<PAGE>
4.4 Warrant Agreement.(1)
4.5 Specimen of Class A Warrant (issued pursuant to the Company's Private Placement in February 1996). (1)
4.6 Stock Purchase Warrant (issued pursuant to the Securities Purchase Agreement dated April 27, 1998). (8)
5.1 Opinion of Atlas, Pearlman, Trop & Borkson, P.A. concerning legality of shares being registered pursuant to this
Registration Statement. (8)
10.1 Stock Option Plan. (1)
10.2 Executive Employment Agreement between the Company and Noel J. Guillama. (1)
10.3 Executive Employment Agreement between the Company and Robert L. Kagan, M.D. (1)
10.4 Sub-Lease Agreement with the Company and Safeskin dated August 1, 1996. (1)
10.5 Purchase and Sales Agreement between the Company, Roman Fisher and Ofra Fisher dated August 13, 1996. (1)
10.6 Purchase and Sales Agreement between the Company and Edwin Kagan dated August 13, 1996. (1)
10.7 Agreement between the Company and Dr. Robert Kagan dated September 1, 1996.(1)
10.8 Merger Agreement between the Company, Florida Rehabilitation Services, Inc., Southeast Medical Staffing, Inc. and
Dr. Frederick J. Kunen dated September 25, 1996. (1)
10.9 Stock Purchase Agreement between the Company, Kenneth J. Hall, Ira P. Hall, Lee M. Hall and Michael Goldstein dated
September 26, 1996. (1)
10.10 Assets Purchase Agreement between the Company, International Family Healthcare Centers, Inc. and Emergency Care Services,
Inc. dated October 15, 1996. (1)
10.11 Merger Agreement between the Company, Metcare II, Inc., Paul Wand, M.D., P.A., and Paul Wand dated October 24, 1996. (1)
10.12 Promissory Note dated December 23, 1993 by Datascan of Florida, Inc. to First Union National Bank. (1)
10.13 Promissory Note dated September 1, 1996 by the Company to Robert L. Kagan. (1)
40
<PAGE>
10.14 Promissory Note dated September 1, 1996 by the Company to Robert L. Kagan. (1)
10.15 Promissory Note dated September 1, 1996 by the Company to Robert L. Kagan. (1)
10.16 Promissory Note dated September 25, 1996 by the Company to Frederick J. Kunen. (1)
10.17 Promissory Note dated October 15, 1996 by the Company to International Family Healthcare Center, Inc. (1)
10.18 Executive Employment Agreement between the Company and Kenneth Hall. (1)
10.19 Executive Employment Agreement between the Company and Roman Fisher. (1)
10.20 Agreement between Mr. Guillama, Mr. Kagan and Ms. Hilderbrand. (1)
10.21 Consulting Agreement between the Company and Euro-Atlantic Securities, Inc. (1)
10.22 Consulting Agreement between the Company and Sternco, Inc. (1)
10.23 Letter of Intent between the Company and General Medical Associates, Inc. (1)
10.24 Lease Agreement between the Company and Champion Technologies of Florida, Inc. (1)
10.25 Letter of Intent between Martin Harrison, M.D. and Metropolitan Health Networks, Inc. (1)
10.26 Option Agreement between Noel J. Guillama, Bonnie Hilderbrand and Dr. Martin Harrison. (1)
10.27 Option Agreement between Noel J. Guillama, Bonnie Hilderbrand and Dr. Robert L. Kagan.(1)
10.28 Option Agreement between Noel J. Guillama, Bonnie Hilderbrand and Kenneth J. Hall. (1)
10.29 Merger Agreement dated August 6, 1997 by and among the Company, Metcare, GMA and Martin Harrison, M.D. (2)
10.30 Promissory Note dated August 6, 1997. (2)
10.31 Consulting Agreement dated July 28, 1997, between the Company and Lion Capital. (3)
10.32 Promissory Note dated August 6, 1997, by the Company to Dr. Harrison, M.D. (3)
10.33 Post Effective Amendment No. 1 to Merger Agreement, dated October 1997, by and among Metropolitan Health Networks, Inc.
("Metropolitan"), Metcare III, Inc., General Medical Associates, Inc. and Martin Harrison. (4)
41
<PAGE>
10.34 Agreement and Plan of Merger dated November 30, 1997 by and among the Company, Metcare VI, Inc. and Trident Medical
Concepts, Inc. (5)
10.35 First Amendment to Merger Agreement dated January 13, 1998 by and among the Company, Metcare VI, Inc. and Trident Medical
Concepts, Inc. (5)
10.36 Second Amendment to Merger Agreement dated February 22, 1998 by and among Trident Medical Concepts, Inc. (5)
10.37 Asset Purchase Agreement dated April 2, 1997 by and among the Company, Metcare VII, Inc. and Primedica Healthcare, Inc. (6)
10.38 Repurchase Election Agreement dated April 2, 1998 by and among the Company, Metcare VII and Primedica Healthcare, Inc. (6)
10.39 Promissory Note dated April 2, 1998. (6)
10.40 Stock Purchase Agreement dated July 1997 between Neal Jay Tolar and the Company. (7)
10.41 Securities Purchase Agreement dated April 27, 1998 between Pangaea Fund Ltd. and the Company. (8)
10.42 Registration Rights Agreement dated April 27, 1998 between Pangaea Fund Ltd. and the Company. (8)
21 Subsidiaries of the Company. (8)
23.1 Consent of Kaufman, Rossin and Company. (7)
23.2 Consent of Atlas, Pearlman, Trop & Borkson, counsel for the Company (included in opinion filed in Exhibit
5.1). (8)
- ------------------
(1) Incorporated by reference to the exhibit of the same number filed with the Company's Registration Statement on Form SB-2
(No. 333-5884-A)
(2) Incorporated by reference to the Company's Current Report on Form 8-K dated August 6, 1997
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-KSB for the year ended June 30, 1997
(4) Incorporated by reference to the Company's Current Report on Form 8-K/A dated August 6, 1997
(5) Incorporated by reference to the Company's Current Report on Form 8-K dated February 22, 1998
(6) Incorporated by reference to the Company's Current Report on Form 8-K dated April 2, 1998
(7) Filed herewith
(8) Previously filed
</TABLE>
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 ___th day of October, 1998.
METROPOLITAN HEALTH NETWORKS, INC.
By: /s/Noel J. Guillama
-----------------------------
NOEL J. GUILLAMA
President, Chief Executive
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ NOEL J. GUILLAMA President, Chief Executive October ___, 1998
- -------------------------- (Principal Executive Officer
Noel J. Guillama and Chairman of the Board
/s/ DONALD B. COHEN Executive Vice President, October ___, 1998
- -------------------------- Chief Financial Officer,
Donald B. Cohen Treasurer, Secretary
and Director
/s/ MICHAEL P. GOLDSTEIN Executive Vice President, October ___, 1998
- -------------------------- Acting Chief Operating Officer
Michael P. Goldstein and Director
WALTER A. FOX, D.O. Director October ___, 1998
Walter A. Fox
MARK K. GERSTENFELD Director October ___, 1998
Mark K. Gerstenfeld
</TABLE>
43
<PAGE>
- --------------------------------------------------------------------------------
METROPOLITAN HEALTH
NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
- --------------------------------------------------------------------------------
<PAGE>
C O N T E N T S
Page
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet 2
Statements of Operations 3
Statements of Changes in Stockholders' Equity 4
Statements of Cash Flows 5 - 6
Notes to Financial Statements 7 - 25
<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, 1998, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the two years in the period ended June 30, 1998. 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, 1998, and the results of their
operations and their cash flows for each of the two years in the period then
ended , in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
has sustained substantial operating losses and negative cash flows from
operations since inception. In the absence of achieving profitable operations
and positive cash flows from operations or obtaining additional debt or equity
financing, the Company may have difficulty meeting current and long term
obligations. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company can not continue in existence.
KAUFMAN, ROSSIN & CO., P.A.
September 25, 1998, except for the MIS section contained within
Note 14 as to which the date is October 9, 1998
Miami, Florida
F-1
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 916,464
Trading securities (Note 5) 46,138
Accounts receivable, net of allowances of $6,304,557 5,850,870
Other current assets 242,214
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 7,055,686
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,612,536 (Note 4) 4,433,412
GOODWILL, net of accumulated amortization of $464,983 (Note 3) 4,334,559
INTANGIBLE ASSETS, net of accumulated amortization of $35,385 46,882
DEFERRED ACQUISITION COSTS 171,890
NOTES RECEIVABLE 170,000
OTHER ASSETS 133,329
- ----------------------------------------------------------------------------------------------------------------------------------
$ 16,345,758
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 728,284
Accrued expenses 1,344,897
Medical costs payable 845,537
Line of credit facilities (Note 7) 1,675,925
Current maturities of capital lease obligations (Note 6) 684,460
Current maturities of long-term debt (Note 8) 696,314
Notes payable to redeemed partners (Note 9) 30,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,005,417
CAPITAL LEASE OBLIGATIONS (NOTE 6) 2,526,473
LONG-TERM DEBT (NOTE 8) 2,581,427
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY (NOTE 12) 5,232,441
- ----------------------------------------------------------------------------------------------------------------------------------
$ 16,345,758
==================================================================================================================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Patient services $ 13,759,490 $ 7,469,035
Billing services 265,774 43,150
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues 14,025,264 7,512,185
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Payroll, payroll taxes and benefits 7,114,017 4,259,916
Depreciation and amortization 1,415,515 718,436
Bad debt expense 1,723,425 824,780
Rent and leases 1,159,356 668,460
Interest 658,048 511,617
General and administrative 6,889,093 2,536,919
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 18,959,454 9,520,128
- ---------------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS ( 4,934,190) ( 2,007,943)
OTHER INCOME (EXPENSE) ( 232,135) 76,324
- ---------------------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT ( 5,166,325) ( 1,931,619)
INCOME TAX BENEFIT (NOTE 11) - 362,000
- ---------------------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS ( 5,166,325) ( 1,569,619)
DISCONTINUED OPERATIONS (NOTE 16)
Income from operation of pharmacy management business - 41,826
Loss on disposal of pharmacy management business - ( 91,691)
- ---------------------------------------------------------------------------------------------------------------------------------
NET LOSS ( $ 5,166,325) ( $ 1,619,484)
=================================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 5,597,803 4,101,323
=================================================================================================================================
PER SHARE AMOUNTS
Loss from continuing operations ( $ 0.92) ( $ 0.38)
Income from discontinued operations - 0.01
Loss on disposal of discontinued operations - ( 0.02)
- ---------------------------------------------------------------------------------------------------------------------------------
NET LOSS ( $ 0.92) ( $ 0.39)
=================================================================================================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Common Common Preferred Preferred
Stock Stock Shares Stock
Shares
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES - JUNE 30, 1996 2,290,175 $ 2,290 - $ -
Issuance of common stock in connection with acquisitions 1,110,000 1,110 - -
(Note 3)
Issuance of common stock and warrants in connection with 433,500 434 - -
equity financing (Note 12)
Common stock and warrant equity financing issue costs (Note 12) - - - -
Issuance of common stock and warrants in connection with 825,000 825 - -
initial public offering (Note 12)
Common stock and warrant public offering issue costs - - - -
Issuance of warrants - underwriters over-allotment - - - -
Underwriters over allotment issue costs - - - -
Issuance of common stock and warrants - other 552,150 552 - -
Change in unrealized gain on securities available for sale, - - - -
net of tax effect of $24,000
Net loss - year ended June 30, 1997 - - - -
- ------------------------------------------------------------------------------------------------------------------------
BALANCES - JUNE 30, 1997 5,210,825 5,211 - -
Issuance of series A Preferred Stock (Note 12) - - 5,000 500,000
Issuance of series B Preferred Stock (Note 12) - - 1,200 1,200,000
Issuances of common stock 625,142 625 - -
Issuance of options in lieu of compensation - - - -
Exercise of options (Note 13) 470,602 471 - -
Conversion of securities available for sale to the trading - - - -
account (Note 5)
Dividends on preferred stock (Note 12) - - - -
Net loss - - - -
- ------------------------------------------------------------------------------------------------------------------------
BALANCES - JUNE 30, 1998 6,306,569 $ 6,307 6,200 $ 1,700,000
========================================================================================================================
(RESTUBBED TABLE CONTINUED)
-------------------------------------------------------------
Additional Unrealized Total
Paid-in Retained Gain On
Capital Earnings Securities
(Deficit) Available
For Sale
-------------------------------------------------------------
BALANCES - JUNE 30, 1996 $ 590,372 ( $ 128,509) $ - $ 464,153
Issuance of common stock in connection with acquisitions 3,256,890 - - 3,258,000
(Note 3)
Issuance of common stock and warrants in connection with 996,616 - - 997,050
equity financing (Note 12)
Common stock and warrant equity financing issue costs (Note 12) ( 99,688) ( 99,688)
Issuance of common stock and warrants in connection with 5,196,675 - - 5,197,500
initial public offering (Note 12)
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 503,575 - - 504,127
Change in unrealized gain on securities available for sale, - - 40,916 40,916
net of tax effect of $24,000
Net loss - year ended June 30, 1997 - ( 1,619,484) - ( 1,619,484)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES - JUNE 30, 1997 8,675,586 ( 1,747,993) 40,916 6,973,720
Issuance of series A Preferred Stock (Note 12) ( 40,000) - - 460,000
Issuance of series B Preferred Stock (Note 12) ( 84,946) - - 1,115,054
Issuances of common stock 1,768,853 - - 1,769,478
Issuance of options in lieu of compensation 127,000 - - 127,000
Exercise of options (Note 13) 3,959 - - 4,430
Conversion of securities available for sale to the trading - - ( 40,916) ( 40,916)
account (Note 5)
Dividends on preferred stock (Note 12) - ( 10,000) - ( 10,000)
Net loss - ( 5,166,325) - ( 5,166,325)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES - JUNE 30, 1998 $ 10,450,452 ( $6,924,318) $ - $ 5,232,441
====================================================================================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ( $ 5,166,325) ( $ 1,619,484)
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,415,515 718,436
Loss (gain) on sales of securities 22,677 ( 6,845)
Provision for bad debts 1,723,425 824,780
Deferred costs charged to operations 260,364 84,203
Amortization of discount on note payable 36,201 47,775
Stock options issued in lieu of compensation 127,000 50,000
Stock issued for professional services 350,632 -
Income tax benefit - ( 362,000)
Changes in operating assets and liabilities:
Accounts receivable ( 1,577,900) ( 1,116,646)
Trading securities 240,072 ( 176,431)
Other current assets ( 92,296) ( 87,798)
Other assets 20,461 16,440
Accounts payable and accrued expenses 1,060,358 ( 127,883)
Medical claims payable 466,990 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustments 4,053,499 ( 135,969)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities ( 1,112,826) ( 1,755,453)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred acquisition costs ( 110,016) ( 136,506)
Issuance of notes receivable ( 170,000) -
Cash consideration paid for companies acquired ( 346,500) ( 120,000)
Cash balances of companies acquired 46,626 82,633
Purchases of securities available for sale - ( 101,611)
Capital expenditures ( 371,815) ( 258,695)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ( 951,705) ( 534,179)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit facilities 1,023,399 33,188
Repayments of notes payable ( 717,547) ( 469,356)
Borrowings on note payable 177,413 -
Repayments of capital lease obligations ( 704,641) ( 400,513)
Loan acquisition cost ( 45,000) ( 164,750)
Issuance of stock options 4,430 -
Net proceeds from issuance of preferred stock 1,575,054 -
Net proceeds from issuances of common stock - 4,660,135
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,313,108 3,658,704
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 751,423) 1,369,072
CASH AND CASH EQUIVALENTS - BEGINNING 1,667,887 298,815
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - ENDING $ 916,464 $ 1,667,887
====================================================================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures:
- ------------------------------------------------------------------------------------------------------------------------------------
Interest paid $ 560,000 $ 500,000
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes paid $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Non-cash Investing and Financing Activities (Note 3)
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued in connection with acquisitions $ 1,291,846 $ 3,108,000
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of notes payable in connection with acquisitions $ 2,856,123 $ 575,923
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of assets received in connection with acquisitions $ 2,200,151 $ 6,709,509
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of liabilities assumed in connection with acquisitions $ 1,060,270 $ 5,558,511
- ------------------------------------------------------------------------------------------------------------------------------------
Capital lease obligations incurred on purchases of equipment $ 221,673 $ 1,176,090
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends accrued but not paid $ 10,000 $ -
- ------------------------------------------------------------------------------------------------------------------------------------
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-6
<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) Metbilling Group, Inc. (Metbilling),
General Medical Associates, Inc. (GMA), and two physician
practices acquired from Primedica Healthcare, Inc. (the
Practices). 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.
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-7
<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
$3,196,000, which is offset by a valuation allowance in the
same amount (see Note 11). 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-8
<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 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, 1998, the fair values approximate the carrying values.
Net loss per share
Net loss per share is computed in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, based on the
weighted average number of common shares outstanding.
Outstanding stock options (see Note 13) 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 acquisitions of physician and ancillary
practices, the Company has recorded goodwill of $4,334,559,
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 10 years.
The Company continuously evaluates whether events have
occurred or circumstances exist which impact the
recoverability of the carrying value of long-lived assets and
related 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-9
<PAGE>
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- --------------------------------------------------------------------------------
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.
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 considered its investment in marketable equity
securities acquired upon the conversion of a debt security as
available for sale as of June 30, 1997. Accordingly,
unrealized gains and losses and the related deferred income
tax effects were excluded from earnings and reported in a
separate component of stockholders' equity. At June 30, 1998
there were no securities available for sale.
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 1997 financial statements have been
reclassified to conform with 1998 presentation.
Impact of the "Year 2000" Computer Issue
The Company has completed the assessment phase of its Year
2000 project and determined that it will be required to
evaluate, test and modify (when needed) approximately 50
internally and externally developed software programs and
approximately 100 pieces of equipment. The Company presently
believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose
material operational problems for its computer systems.
However, if such modifications and conversions are not made,
or are not completed timely, the Year 2000 Issue could have a
material impact on the operations of the Company. The Company
has initiated formal communications with its significant
suppliers and large customers to determine the extent to which
the Company's interface systems are vulnerable to those third
parties' failure to remediate their own Year 2000 Issues.
However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the
Company's systems.
F-10
<PAGE>
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- --------------------------------------------------------------------------------
The Company will utilize both internal and external resources
to reprogram or replace and test software and medical
equipment for Year 2000 modifications. The Company anticipates
that the various components of the Year 2000 project
procedures will continue throughout calendar 1998 and 1999.
The Year 2000 project is currently estimated to have a minimum
total cost of $150,000 related to the review and modification
of the Company's computer and software systems not including
the replacement of scheduled equipment or updates in software
previously anticipated in the normal course of business.
Changes in Accounting Policies
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" (SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of
comprehensive income and its components in the financial
statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for
comparative purposes is required. The adoption of SFAS No. 130
will have no impact on the Company's consolidated results of
operations, financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No.
131"). SFAS No. 131 establishes standards for the way that
public business enterprises report selected information about
operating segments. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997.
Financial statement disclosures for prior periods are required
to be restated. The Company is in the process of evaluating
the disclosure requirements. The adoption of SFAS No. 131 will
have no impact on the Company's consolidated results of
operations, financial position or cash flows.
NOTE 2. GOING CONCERN
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles,
which contemplates continuation of the Company as a going
concern. However, the Company has sustained substantial
operating losses and negative cash flows from operations since
inception. In the absence of achieving profitable operations
and positive cash flows from operations or obtaining
additional debt or equity financing, the Company may have
difficulty meeting current and long term obligations.
To address these concerns, the Company is restructuring the
current accounts receivable line of credit facility, which is
expected to be completed by mid November 1998, netting
additional funds approximating $700,000 to $800,000.
Additionally, the Company continues to pursue the sale of its
convertible preferred stock through private placement
offerings. As part of its restructuring plans the Company
intends to continue to close or sell unprofitable facilities
and continues to reduce operating expenses.
F-11
<PAGE>
- --------------------------------------------------------------------------------
NOTE 2. GOING CONCERN (Continued)
- --------------------------------------------------------------------------------
In view of these matters, realization of a major portion of
the assets in the accompanying balance sheet is dependent upon
continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its financial
obligations. Management believes that actions presently being
taken, as described in the preceding paragraph, provide the
opportunity for the Company to continue as a going concern.
NOTE 3. ACQUISITIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Purchase of MIS
Effective August 31, 1996, the Company acquired MIS for
$2,426,984. 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 with a price guarantee based
upon the company's pre-tax earnings at the first and second
anniversary of the transaction. The Company was not liable for
contingent consideration for the year ended June 30, 1998 and
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 issued to the former owners
of Datascan (valued at $2.28 per share). This contingent
consideration was based on Datascan obtaining an EBITDA in
excess of $288,000 for the year ended June 30, 1997.
F-12
<PAGE>
- --------------------------------------------------------------------------------
NOTE 3. ACQUISITIONS (Continued)
- --------------------------------------------------------------------------------
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. Effective July
1, 1998, Wand was sold in exchange for a three year note
receivable of $75,000 secured by 100% of the common stock of
Wand and the return of the initial 75,000 shares of the
Company's common stock. Additionally, the purchaser assumed
certain liabilities of Wand. The Company anticipates a gain on
this sale of approximately $75,000.
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. During 1998 Management
discontinued the operations of IFHC. In connection therewith,
certain assets of IFHC were sold in exchange for a $35,000
note receivable. Total amounts charged to operations in
connection with closing these facilities totalled
approximately $330,000.
Purchase of the Practices
Effective April 1, 1998, the Company acquired two physician
practices (the Practices) from Primedica Healthcare, Inc. for
$2,431,123. The purchase price consisted of a 7.5% note
payable of $3,500,000, which is amortized over 20 years, with
a balloon payment due on April 1, 2003. Management has
discounted this note $1,068,877 utilizing a 16% imputed
interest rate (see Note 8). 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
April 1, 1998 are included in the Company's statement of
operations. As a result of this acquisition, $1,161,914 was
allocated to goodwill.
In addition, a Repurchase Election Agreement was signed,
whereby Primedica may be required to repurchase the Practices
at the end of five years in exchange for extinguishing the
Company's further obligations under the note payable, provided
certain conditions are met, among the most significant of
which is the requirement that the Company be in compliance
with the terms of the Promissory Note. Additionally, Primedica
may elect not to be liable to repurchase the Practices if the
net revenue derived from the purchased assets exceeds
$6,000,000.
F-13
<PAGE>
- --------------------------------------------------------------------------------
NOTE 3. ACQUISITIONS (Continued)
- --------------------------------------------------------------------------------
Purchase of GMA
Effective July 1, 1997, the Company purchased all of the
outstanding common stock of GMA for $1,720,306. In exchange
for the stock of GMA, the Company paid $300,000 cash, 216,154
shares of the Company's common stock (valued at $4.37) and
entered into a note payable of $400,000 with the former
shareholder of GMA. 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 July 1, 1997
are included in the Company's statement of operations. As a
result of this acquisition, $98,475 was allocated to goodwill.
In addition to the purchase consideration, the Company is
potentially liable for two types of contingent consideration:
1) If the EBITDA of GMA for the years ended June 30, 1998 and
1999 equals or exceeds 80% of GMA's EBITDA for the twelve
months ended June 30, 1997 (the "Targeted Amount"), there
shall be released from escrow 104,615 and 52,308 additional
shares, respectively, of the common stock of the Company. In
the event, however, that the EBITDA is less than the Targeted
Amount, the seller of GMA is entitled to receive additional
shares of the Company, as determined based upon a sliding
scale down to 60%. The Company was not liable for this
contingent consideration at June 30, 1998; 2) If the gross
proceeds from the sale of up to 200,000 shares of the
Company's common stock issued to the seller of GMA amounted to
less then $6.50 per share, the Company must make up the
deficiency in cash. The seller is entitled to sell 25,000
share blocks monthly, during the period July 1, 1998 through
February 12, 2000.
Pro forma
Unaudited pro forma results of operations, assuming the
acquisition of MIS, Datascan, GMA, the Practices and Wand
occurred as of the beginning of the fiscal years ended June
30, 1998 and 1997, after giving effect to certain adjustments
such as the elimination of intercompany transactions and
amortization of goodwill resulting from the acquisitions were
as follows. The pro forma summary does not necessarily reflect
the results of operations as they would have been if the
companies had constituted a single entity during such periods.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
June 30, 1998 June 30, 1997
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 17,597,426 $ 16,998,784
Net loss ($ 5,848,123) ($ 1,763,676)
Loss per share ($ 1.04) ($ 0.40)
F-14
<PAGE>
- --------------------------------------------------------------------------------
NOTE 4. PROPERTY AND EQUIPMENT
- --------------------------------------------------------------------------------
At June 30, 1998, property and equipment consisted of the
following:
Machinery and medical equipment $ 1,224,457
Furniture and fixtures 240,979
Leasehold improvements 555,282
Computer and office equipment 732,516
Auto equipment 221,164
----------------------------------------------------------------------------------------------------
2,974,398
Less accumulated depreciation ( 815,120)
----------------------------------------------------------------------------------------------------
$ 2,159,278
====================================================================================================
At June 30, 1998, property and equipment under capital
leases consisted of the following:
Machinery and equipment $ 2,691,734
Computer and office equipment 361,078
Leasehold improvements 18,738
----------------------------------------------------------------------------------------------------
3,071,550
Less accumulated amortization ( 797,416)
----------------------------------------------------------------------------------------------------
2,274,134
----------------------------------------------------------------------------------------------------
$ 4,433,412
====================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
NOTE 5. 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, 1998
and 1997 was $131,817 and $10,431, respectively, and is
included in other income in the consolidated statements of
operations.
Securities available for sale at June 30, 1997 consisted of
common stock acquired through the conversion of convertible
debenture securities. This security was transferred to the
trading account on July 1, 1998. There were no securities
available for the sale as of June 30, 1998.
Net realized loss and gain on sales of trading securities for
the periods ended June 30, 1998 and 1997 were $22,677 and
$6,845, respectively.
F-15
<PAGE>
- --------------------------------------------------------------------------------
NOTE 6. 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 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 $ 1,017,453
2000 882,788
2001 806,990
2002 696,456
2003 635,628
Thereafter 91,788
--------------------------------------------------------------------------------------------------------
4,131,103
Less amount representing interest ( 920,170)
--------------------------------------------------------------------------------------------------------
3,210,933
Less current maturities ( 684,460)
--------------------------------------------------------------------------------------------------------
$ 2,526,473
========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
NOTE 7. 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, 1998), and repayments are
made directly through a lock box arrangement. At June 30,
1998, $1,026,214 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. Subsequent to year end, management
determined that there was an insufficient asset base to
utilize this credit facility. In connection therewith,
approximately $100,000 of unamortized loan costs previously
capitalized were written off. At June 30, 1998, no amounts
were outstanding under this credit facility.
In September 1997, the Company entered into a one year
accounts receivable funding program (the Program) with a
financing company. The Program allows for advances to the
Company of up to 85% of the expected collections from third
party payers on eligible accounts receivable of GMA, as
defined. Any outstanding amounts under this credit facility
are collateralized by the eligible accounts receivable. The
Program bears interest at 12% and repayments are made directly
through a lock box arrangement. At June 30, 1998, $624,711 is
outstanding under this Program.
F-16
<PAGE>
- --------------------------------------------------------------------------------
NOTE 8. LONG-TERM DEBT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Long-term debt consisted of the following:
<S> <C>
Note payable to former owner of MIS; interest at 6.5%; principal and $ 200,000
interest payment of $213,000 due April 1, 1998; unsecured; during 1998 the
note payment was delayed and the interest was increased to 18% (see Note
14).
Note payable to former owner of GMA; interest at 8%; payable in monthly 329,194
installments of $37,834 commencing on August, 1998. Prior to August 1998
the note required only monthly interest payments.
Promissory note to former owner of Glickman, P.A.; interest at 8%; payable 25,000
in 2 installments of $15,000 and $10,000, due on November, 1998 and
December, 1998, respectively.
Promissory note to Primedica Healthcare, Inc. in connection with the 2,449,923
acquisition of assets on April, 1998; stated interest at 7.5%; payable in
59 monthly installments of $28,196 commencing in May, 1998, and a lump sum
payment of $3,069,748 in April, 2003; original note balance of $3,500,000
net of unamortized discount of $1,030,995 based on imputed interest rate
of 16%.
Installment notes payable; interest ranging from 9.7% to
10.5%; 73,865 collateralized by various automobiles; due
July, 2001 through August, 2002.
Equipment notes payable to bank; interest ranging from 9.5% to 10.48%; 90,759
collateralized by medical testing equipment; due August, 2000 through
November, 2002.
Note payable to bank; interest at 11.75%; payable in monthly installments of 35,140
$1,265; collateralized by substantially all assets of Wand; due August,
2000 (Note 3)
Loan payable to former employee 73,860
----------------------------------------------------------------------------------------------------
3,277,741
Less current maturities 696,314
----------------------------------------------------------------------------------------------------
Long-term debt $ 2,581,427
====================================================================================================
Aggregate maturities of long-term debt for the years
subsequent to June 30, 1999 are as follows:
June 30, 1999 $ 696,314
June 30, 2000 75,122
June 30, 2001 42,232
June 30, 2002 12,262
June 30, 2003 2,451,811
-----------------------------------------------------------------------------------------------------
$ 3,277,741
====================================================================================================
</TABLE>
F-17
<PAGE>
- --------------------------------------------------------------------------------
NOTE 8. LONG-TERM DEBT (Continued)
- --------------------------------------------------------------------------------
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. This loan was
transferred along with the related sale of Wand assets,
effective July 1, 1998 (Note 3).
- --------------------------------------------------------------------------------
NOTE 9. 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, 1998, $30,000 remained outstanding.
During 1997, the Company charged approximately $25,000 to
interest expense in connection with imputed 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, 1998, the
balance of this liability was $15,000 and is included in
accounts payable.
- --------------------------------------------------------------------------------
NOTE 10. 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
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 $235,000 and
$188,000 for the years ended June 30, 1998 and 1997.
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.
F-18
<PAGE>
- --------------------------------------------------------------------------------
NOTE 11. INCOME TAXES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The components of the income tax benefit were as follows:
Year Ended Year Ended
June 30, 1998 June 30, 1997
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Benefit
Federal $ - $ -
State - -
Deferred Benefit
Federal $ 1,787,000 450,000
State 183,000 66,000
Increase in Valuation Allowance ( 1,970,000) ( 154,000)
----------------------------------------------------------------------------------------------------
Income Tax Benefit $ - $ 362,000
====================================================================================================
</TABLE>
The 1997 net income tax benefit resulted from the reduction in
the valuation allowance for deferred tax assets as a result of
an assessment of realization by the combined enterprises.
The effective tax rate for 1998 differed from the federal
statutory rate due to state income tax benefits of
approximately $183,000, a net increase in the valuation
allowance of approximately $1,970,000, and permanent and other
differences of approximately $49,000.
The effective tax rate for 1997 differed from the federal
statutory rate due to permanent differences of approximately
$65,000, the valuation allowance and other differences of
$76,000.
The Company has net operating loss carryforwards totalling
approximately $8,800,000, expiring in various years through
2013.
<TABLE>
<CAPTION>
At June 30, 1998, approximate deferred tax assets and
liabilities were as follows:
<S> <C>
Deferred tax assets:
Allowances for doubtful accounts $ 1,212,000
Net operating loss carryforward 3,305,000
----------------------------------------------------------------------------------------------------
Total deferred tax assets $ 4,517,000
----------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Accounts receivable of cash basis subsidiaries $ 1,145,000
Excess tax over book deprecation 176,000
----------------------------------------------------------------------------------------------------
Total deferred tax liabilities $ 1,321,000
----------------------------------------------------------------------------------------------------
Net deferred tax asset $ 3,196,000
Less valuation allowance ( $ 3,196,000)
----------------------------------------------------------------------------------------------------
$ -
====================================================================================================
</TABLE>
F-19
<PAGE>
- --------------------------------------------------------------------------------
NOTE 12. STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
At June 30, 1998, the Company has authorized 40,000,000 shares
of par value $.001 common stock, with 6,306,569 shares issued
and outstanding. Additionally, the Company has authorized
10,000,000 shares of par value $.001 preferred stock.
In October 1996, the Company entered into an agreement with an
investment banker 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
plus 247,500 additional warrants under an over-allotment
agreement, also 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 initial public
offering generated net proceeds to the Company of $3,428,645.
At June 30, 1998, the Company has 3,447,500 warrants
outstanding.
During 1998, the Company completed two separate issues of
non-voting preferred stock. The Company has authorized 30,000
shares of Series A preferred stock, par value $.001, of which
5,000 were issued in 1998. Each share of Series A preferred
stock has a stated value of $100 and pays dividends equal to
10% of the stated value per annum. The aggregate and per share
amounts of arrearages in cumulative preferred dividends are
$41,667 and $8.33, respectively. Each share of Series A
preferred stock is convertible into shares of common stock at
the option of the holder at the lesser of 85% of the average
closing bid price of the common stock for the ten trading days
immediately preceding the conversion or $6.00. The Company has
the right to deny conversion of the Series A preferred stock,
at which time the holder shall be entitled to receive and the
Company shall pay additional cumulative dividends at 5% per
annum, together with the initial dividend rate to equal 15%
per annum. Gross proceeds from this issuance amounted to
$500,000, less commissions and costs of $40,000. In the event
of any liquidation, dissolution or winding up of the Company,
holder of the Series A preferred stock shall be entitled to
receive, a liquidating distribution before any distribution
may be made to holders of common stock of the Company.
The Company has also designated 7,000 shares of preferred
stock as Series B preferred stock, with a stated value of
$1,000 per share. During 1998, 1,200 shares of Series B
preferred stock were issued. Holders of the Series B preferred
stock are entitled to receive, whether declared or not,
cumulative dividends equal to 5% per annum. The aggregate and
per share amounts of arrearages in cumulative preferred
dividends are $10,000 and $8.33, respectively. Each share of
Series B preferred stock is convertible into such number of
fully paid and nonassessable shares of common stock as is
determined by dividing the stated value by the conversion
price. The conversion price shall be the lesser of the market
price, as defined and $4.00. Gross proceeds from the issuance
of series B preferred stock amounted to $1,200,000, less
commissions and costs of $84,946.
F-20
<PAGE>
- --------------------------------------------------------------------------------
NOTE 12. STOCKHOLDERS' EQUITY (Continued)
- --------------------------------------------------------------------------------
In the event of liquidation, as defined, holders of the Series
B preferred stock shall be entitled to receive liquidating
distribution, before any distribution may be made to holders
of any class of capital stock.
- --------------------------------------------------------------------------------
NOTE 13. 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. For the years ended
June 30, 1998 and 1997, compensation costs related to stock
options amounted to $127,000 and $50,000, respectively.
<TABLE>
<CAPTION>
Stock option activity for the year ended June 30, 1998 was as
follows:
Number of Weighted Average
Options Exercise Price
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, June 30, 1997 1,225,000 $ 4.72
Granted during year 984,200 $ 4.71
Exercised and returned during year ( 485,000) $ 0.01
Forfeited during year ( 265,950) $ 9.05
--------------------------------------------------------------------------
Balance, end of year 1,458,250 $ 5.02
==========================================================================
Exercisable at end of year 1,138,167 $ 4.43
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes information about stock options
outstanding at June 30, 1998:
Options Outstanding Options Exercisable
---------------------------------------- ------------------------------------
Exercise Price Number of Weighted Average Number of Options Weighted
Options Remaining Average
Contractual Life Remaining
Contractual
Life
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.10 78,500 3.8 78,500 3.8
0.50 39,000 5.3 39,000 5.3
1.00 25,000 5.0 25,000 5.0
2.00 32,950 5.5 2,000 5.0
2.50 200 6.5 - -
2.55 156,667 5.1 156,667 5.1
F-21
<PAGE>
- --------------------------------------------------------------------------------
NOTE 13. STOCK OPTIONS (Continued)
- --------------------------------------------------------------------------------
2.65 150,000 5.2 150,000 5.2
3.00 258,500 5.6 248,000 5.6
3.13 600 6.3 - -
3.50 50,000 5.0 50,000 5.0
4.00 8,450 5.1 8,250 5.1
5.00 19,000 6.4 11,000 5.6
5.63 20,000 6.3 - -
6.00 171,000 5.9 171,000 5.9
6.13 3,000 6.3 750 5.5
6.94 100,000 6.5 20,000 5.5
7.00 13,500 5.7 13,500 5.7
7.94 100,000 6.5 20,000 5.5
8.00 14,000 5.9 14,000 5.9
9.00 13,500 6.0 13,500 6.0
10.00 24,000 6.0 24,000 6.0
11.00 13,500 6.2 13,500 6.2
12.00 22,000 6.4 22,000 6.4
13.00 13,500 6.7 13,500 6.7
14.00 20,500 6.6 6,000 5.5
15.00 13,500 6.8 13,500 6.8
16.00 21,000 6.9 6,000 5.5
17.00 12,500 6.8 12,500 6.8
18.00 21,500 7.3 6,000 5.5
----------------------------------------------------------------------------------------------------
1,415,867 1,138,167
====================================================================================================
</TABLE>
In July 1998, 42,383 of previously granted unvested stock
options were forfeited and as such not included in the above
table.
The weighted average fair value per option as of grant date
was $0.48 for stock options granted during the fiscal year
ended June 30, 1998. The determination of the fair value of
all stock options granted during the fiscal year ended June
30, 1998 was based on (i) risk-free interest rate of 6.00%,
(ii) expected option lives ranging from 5 to 7 years,
depending on the vesting provisions of each option, (iii)
expected volatility in the market price of the Company's
common stock of 40%, 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.
<TABLE>
<CAPTION>
Year ended June 30, Year ended June 30,
1998 1997
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss ( $ 5,415,226) ( $ 1,795,294)
Net loss per share ( $ 0.97) ( $ 0.44)
</TABLE>
During the year ended June 30, 1998, 470,602 options were
exercised, with net proceeds to the Company of $4,430 plus the
return of 14,398 options. During 1997, 407,500 options were
exercised with net proceeds of $4,750 to the Company.
F-22
<PAGE>
- --------------------------------------------------------------------------------
NOTE 14. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
Leases
<TABLE>
<CAPTION>
The Company leases office and medical facilities under various
non-cancelable operating leases. Future minimum payments under
these leases are as follows:
<S> <C> <C>
1999 $ 900,747
2000 505,242
2001 240,384
2002 175,660
2003 136,236
Thereafter 155,484
----------------------------------------------------------------------------------------------------
Total $ 2,113,753
====================================================================================================
</TABLE>
Employment Contracts
<TABLE>
<CAPTION>
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:
<S> <C> <C>
1999 $ 2,770,000
2000 2,408,000
2001 2,250,000
2002 1,096,000
2003 109,000
----------------------------------------------------------------------------------------------------
$ 8,633,000
====================================================================================================
</TABLE>
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 rescinded
this transaction as a result of the Company's belief that a
breach of the agreement occurred and requested the return of
all consideration paid. In connection therewith, the Company
canceled 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, 1998.
During the year ended June 30, 1997, the Company reserved
approximately $72,000 of advances incurred in connection with
this transaction.
F-23
<PAGE>
- --------------------------------------------------------------------------------
NOTE 14. COMMITMENTS AND CONTINGENCIES (Continued)
- --------------------------------------------------------------------------------
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 and an
estimate of the amount of any potential loss cannot be
determined at this time.
MIS
In October 1998, a lawsuit was initiated against the Company
by an individual who is the medical director and former owner
of MIS, and is also an officer and director of the Company
(the Plaintiff). The lawsuit centers on a $200,000 note
payable to the Plaintiff which was due April 1, 1998, but was
not repaid by the Company. Subsequent to April 1, 1998, the
parties renegotiated certain terms of the note to include
interest at 18%. However, no payments have been made under
this revised note. In connection with the filing of this
lawsuit, the Plaintiff has resigned as a director of the
Company. The Company intends to vigorously defend itself in
this action and is in the process of filing a counterclaim
against the Plaintiff. The counterclaim will allege, among
other things, that the Plaintiff breached his employment
agreement with the Company. At this time, management is unable
to determine the likelihood of an unfavorable outcome and an
estimate of the amount of any potential loss, if any.
Other Litigation
During 1998 a marketing company (the Marketer) filed a
complaint against the Company seeking to enforce a written
letter agreement regarding marketing and other services. The
complaint seeks damages of approximately $125,000 plus
interest, costs and attorneys fees. The Company has filed
defenses and a counterclaim alleging that the Marketer did not
perform as required under the agreement, and is not entitled
to the amount claimed. Although the Company believes it has
meritorious defenses against this complaint, management is
unable to determine the likelihood of an unfavorable outcome
and an estimate of the amount of any potential loss, if any.
- --------------------------------------------------------------------------------
NOTE 15. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
- --------------------------------------------------------------------------------
During the fourth quarter the Company made certain
adjustments deemed to be material to the results of the
quarter, including the following:
The Company charged approximately $330,000 to operations
relating to the closing of certain medical facilities.
The Company made provisions to bad debt expense of
approximately $450,000 relating to certain customer
accounts estimated to be uncollectible.
F-24
<PAGE>
- --------------------------------------------------------------------------------
NOTE 15. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS (Continued)
- --------------------------------------------------------------------------------
The Company charged approximately $360,000 to operations
relating to the restructuring of a certain employment
agreement.
The Company charged approximately $100,000 to operations
relating to loan costs deemed not to be recoverable.
The effect of the above adjustments increased the net loss by
$1,240,000 in the fourth quarter.
- --------------------------------------------------------------------------------
NOTE 16. 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.
In 1998, the $50,000 note receivable was satisfied in exchange
for the return of the notes collateral, 12,500 shares of the
Company's common stock. In connection with this transaction,
the Company charged off the remaining $21,000 of this note.
F-25
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the incorporation by reference in the
Post-Effective Amendment No. 1 to Form SB-2 Registration Statement on
Form S-3 of our report, dated September 25, 1998, except for the MIS
Section contained within Note 14 which is dated October 9, 1998, which
appears on page F-2 of the annual report on Form 10-KSB of Metropolitan
Health Networks, Inc. and Subsidiaries for the year ended June 30,
1998.
KAUFMAN, ROSSIN & CO.
Miami, Florida
October 13, 1998
