As Filed with the Securities and Exchange Commission on July 2, 1998
Registration No. ____________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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Metropolitan Health Network, Inc.
(Exact name of registrant as specified in its charter)
Florida 65-0635748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5100 Town Center Circle, Suite 560
Boca Raton, Florida 33486
(561) 416-9484
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(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive offices)
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Noel J. Guillama
Chief Executive Officer
5100 Town Center Circle, Suite 560
Boca Raton, Florida 33486
(561) 416-9484
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(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
Roxanne K. Beilly, Esq.
Atlas, Pearlman, Trop & Borkson, P.A.
200 East Las Olas Boulevard, Suite 1900
Fort Lauderdale, Florida 33301
(954) 763-1200
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(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [X]
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Title of Amount Offering Aggregate Amount of
Shares to be to be Price Per Offering Registration
Registered Registered (1) Share (2) Price (2) Fee
- ------------- -------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value
per share reserved for issuance
upon conversion of Series A
Preferred Stock 427,100 $2.97 $1,268,487 $374.20
Common Stock, $.001 par value
per share reserved for issuance
upon conversion of Series B
Preferred Stock 915,200 $2.97 $2,718,144 $801.85
Common Stock reserved for
issuance upon exercise of Common
Stock Purchase Warrants 120,000 $4.00 $480,000 $141.60
Common Stock reserved for
issuance upon exercise of Common
Stock Purchase Warrants 120,000 $5.00 $600,000 $177.00
Total 1,582,300 $5,066,631 $1,494.65
</TABLE>
(1) Shares of Common Stock which may be offered pursuant to this
Registration Statement consist of 427,100 shares issuable upon conversion of
Series A Convertible Preferred Stock, 915,200 shares issuable upon conversion of
Series B Convertible Preferred Stock and 240,000 shares issuable upon exercise
of Warrants. For purposes of estimating the number of shares of Common Stock to
be included in this Registration Statement, the Company calculated 200% of the
number of shares of Common Stock issuable in connection with the conversion of
the Company's Series A Convertible Preferred Stock (based on a conversion price
of $2.54 which is 85% of the average closing bid price of the Common Stock
reported on the NASDAQ SmallCap Market for the ten (10) trading days ending June
26, 1998), the conversion of the Company's Series B Convertible Preferred Stock
(based on a conversion price of $2.65 which is 90% of the average of the two (2)
lowest closing bid prices of the Common Stock ^ for the twelve (12) consecutive
trading days immediately preceding the date of conversion. In addition to the
shares set forth in the table, the amount to be registered includes an
indeterminate number of shares issuable upon conversion of or in respect of the
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and
the Warrants, as such number may be adjusted as a result of stock splits, stock
dividends and antidilution provisions (including floating rate conversion
prices) in accordance with Rule 416.
(2) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457(c) under the Securities Act of
1933, as amended (the "Securities Act"), based on the average of the high and
low sale price for the Common Stock, $.001 par value per share (the "Common
Stock"), as reported on the Nasdaq SmallCap Market at June 29, 1998.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
Subject to Completion, dated July 2, 1998
PROSPECTUS
1,582,300 Shares
METROPOLITAN HEALTH NETWORKS, INC.
This Prospectus ("Prospectus") relates to the offer and sale of up to
1,582,300 shares of Common Stock, par value $.001 per share ("Common Stock" or
"Shares") of Metropolitan Health Networks, Inc. (the "Company") by certain
shareholders of the Company (the "Selling Security Holders"). Of the shares of
Common Stock offered hereby (i) 427,100 Shares are issuable upon conversion of
5,000 shares of the Company's Series A 10% Convertible Cumulative Preferred
Stock (the "Series A Preferred Stock") held by Selling Security Holders; (ii)
915,200 Shares upon conversion of the Company's Series B 5% Convertible
Preferred Stock ("Series B Preferred Stock") held by Selling Security Holders;
and (iii) 240,000 Shares upon exercise of Common Stock Purchase Warrants (the
"Warrants") issued to the holder of the Company's Series B Preferred Stock.
The shares of Common Stock will be issued upon conversion of the Series
A Preferred Stock and Series B Preferred Stock at prices below the current
market price of the Common Stock. The conversion price for the Series A
Preferred Stock is equal to the lower of (i) 85% of the average closing bid
price for the ten (10) consecutive trading days immediately preceding the date
of conversion; or (ii) $6.00. The conversion price for the Series B Preferred
Stock is equal to the lower of (i) 90% of the average of the two closing bid
prices for the twelve (12) consecutive trading days immediately preceding the
date of conversion; or (ii) $4.00. See "Selling Security Holders" and
"Description of Securities."
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
POTENTIAL PURCHASERS SHOULD NOT INVEST IN THESE SECURITIES UNLESS THEY CAN
AFFORD A LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" AT PAGES ____
THROUGH _____.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is______________, 1998.
<PAGE>
Accordingly, the actual number of shares of Common Stock issued to the
Selling Security Holders and sold hereby will depend upon the market price of
the Common Stock at the time of conversion of the Preferred Stock. Accordingly,
this Prospectus covers the resale in accordance with Rule 416 under the
Securities Act of 1933 (the "Act") of such presently indeterminate number of
additional shares as may be issuable upon conversion of the Preferred Stock
based on fluctuations in the conversion price of such securities.
The Company believes that the number of shares of Common Stock to which
this Prospectus relates should be the maximum number of shares of Common Stock
that are likely to be issued to the Selling Security Holders and sold hereby.
The Company has been advised by the Selling Security Holders that they
may sell all or a portion of the Shares offered hereby from time to time in the
over-the-counter market, in negotiated transactions, directly or through brokers
or otherwise, and that such shares will be sold at market prices prevailing at
the time of such sales or at negotiated prices. The Company will not receive any
of the proceeds from the sale of the Shares offered hereby except upon exercise
of the Warrants. Usual and customary or specifically negotiated brokerage fees
and commissions may be paid by the Selling Security Holders. In connection with
such sales, the Selling Security Holders and any brokers participating in such
sales may be deemed to be underwriters within the meaning of the Securities Act
of 1933. See "Use of Proceeds" and "Selling Security Holders."
The Common Stock and the Warrants are quoted on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") under
the symbols "MDPA" and "MDPAW". On June 29, 1998, the closing price on NASDAQ
for the Common Stock was $3.00 and the closing price for the Warrants was $0.31.
Expenses of this offering, other than fees and expenses of counsel to
the Selling Security Holders and selling commissions, will be borne by the
Company. The Company will pay all offering expenses for the offering, estimated
at approximately $12,500 including (i) legal fees and expenses ($6,500); (ii)
accounting fees and expenses ($1,000); (iii) printing expenses ($3,000); and
(iv) miscellaneous expenses ($2,000), but will not pay any discounts or
commissions incurred by selling stockholders in connection with the sale of
their shares of Common Stock.
The Company has informed the Selling Security Holders that the
anti-manipulative rules under the Securities Exchange Act of 1934, including
Regulation M, may apply to their sales in the market and has furnished each of
the Selling Security Holders with a copy of these rules. The Company has also
informed the Selling Security Holders of the need for delivery of copies of this
Prospectus in connection with any sale of securities registered hereunder.
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<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed with the Commission can be inspected and
copied at the public reference facilities of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of this material can also be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at http//www.sec.gov.
The Company has filed with the Commission a Registration Statement (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the resale of the securities described
herein. This Prospectus, which is part of the Registration Statement, omits
certain information contained in the Registration Statement. For further
information with respect to the Company and the securities offered by this
Prospectus, reference is made to the Registration Statement, including the
exhibits thereto. Statements in this Prospectus as to any document are not
necessarily complete, and where any such document is an exhibit to the
Registration Statement or is incorporated by reference herein, each such
statement is qualified in all respects by the provisions of such exhibit or
other document, to which reference is hereby made, for a full statement of the
provisions thereof. A copy of the Registration Statement, with exhibits, may be
obtained from the Commission's office in Washington, D.C. (at the above address)
upon payment of the fees prescribed by the rules and regulations of the
Commission, or examined there without charge.
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<PAGE>
TABLE OF CONTENTS
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Page
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AVAILABLE INFORMATION............................................ 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE................ 5
RISK FACTORS..................................................... 6
USE OF PROCEEDS.................................................. 19
BUSINESS......................................................... 20
SELLING SECURITY HOLDERS ........................................ 38
PLAN OF DISTRIBUTION............................................. 44
DESCRIPTION OF SECURITIES........................................ 45
LEGAL MATTERS.................................................... 55
EXPERTS.......................................................... 55
INDEMNIFICATION.................................................. 56
The Common Stock and Warrants are traded on the NASDAQ SmallCap Market
under the symbols "MDPA" and "MDPAW" respectively. The low and high prices of
the Common Stock as reported on the NASDAQ on June 29, 1998 were $2.94 and
$3.06, per share, respectively. The low and high prices of the Warrants as
reported on the NASDAQ on June 29, 1998 were $.31 and $.31 per Warrant,
respectively.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer contained in this Prospectus, and if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the selling stockholders.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE.
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The Company is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports and other information
with the Securities and Exchange Commission.
The Company has previously and in the future intends to furnish its
shareholders with annual reports containing audited financial statements and
distributes quarterly reports containing unaudited summary financial information
for each of the first three quarters of each fiscal year.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission are incorporated
herein by reference:
(a) Annual Report of the Company on Form 10-KSB for the fiscal
year ended June 30, 1997.
(b) Quarterly Reports of the Company on Form 10-QSB for the
quarters ended September 30, 1997, December 31, 1997 and March
31, 1998.
(c) The Company's current reports on Form 8-K, and amendments
thereto, filed March 26, 1997, May 27, 1997, August 21, 1997,
October 20, 1997, March 9, 1998, April 17, 1998, May 8, 1998
and June 16, 1998.
(d) All reports and documents filed by the Company pursuant to
Sections 13, 14 or 15(d) of the Exchange Act, prior to the
filing of a post-effective amendment which indicates that all
securities offered hereby have been sold or which deregisters
all securities then remaining unsold, shall be deemed to be
incorporated by reference herein and to be a part hereof from
the respective date of filing of such documents.
Any statement incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document, which also is or
is deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any statement modified or superseded shall not be deemed, except as
so modified or superseded, to constitute part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of the Prospectus has been
delivered, on the written or oral request of any such person, a copy of any or
all of the documents referred to above which have been or may be incorporated by
reference in this Prospectus, other than exhibits to such documents. Written
requests for such copies should be directed to Corporate Secretary, Metropolitan
Health Networks, Inc. at the
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Company's principal executive office, 5100 Town Center Circle, Suite 560 Boca
Raton, Florida 33486, Telephone (561) 416-9484, Facsimile (561) 416-9487.
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
ONLY THOSE PERSONS ABLE TO LOSE THEIR ENTIRE INVESTMENT SHOULD PURCHASE THESE
SECURITIES. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT DECISION,
SHOULD CAREFULLY READ THIS PROSPECTUS AND CONSIDER, ALONG WITH OTHER MATTERS
REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS: LIMITED OPERATING HISTORY; LOSS
FROM OPERATIONS
Risks Related to the Company's Acquisition Strategy
The Company's strategy is to increase its revenue and the markets it
serves through the acquisition of, and additional acquisition of, physician care
practices ("Physician Practices") and laboratories, pharmacies, and diagnostic
and rehabilitative centers ("Ancillary Services"). There can be no assurance
that the Company will be able to identify, acquire or profitably manage
additional companies or successfully integrate the operations of additional
companies into those of the Company without encountering substantial costs,
delays or other problems. In addition, there can be no assurance that companies
acquired in the future will achieve profitability that justify the Company's
investment in them or that acquired companies will not have unknown liabilities
that could materially adversely affect the Company's results of operations or
financial condition. The Company may compete for acquisition and expansion
opportunities with companies that have greater resources than the Company. There
can be no assurance that suitable acquisition candidates will continue to be
available, that financing for acquisitions will be obtainable on terms
acceptable to the Company, that acquisitions can be consummated or that acquired
businesses can be integrated successfully and profitably into the Company
operations. Further, the Company's results of operations in fiscal quarters
immediately following a material acquisition may be materially adversely
effected while the Company integrates the acquired business into its existing
operations. The Company may acquire certain businesses that have either been
unprofitable or that have had inconsistent profitability prior to their
acquisition. An inability of the Company to improve the profitability of these
acquired businesses could have a material adverse effect on the Company.
Finally, the Company's acquisition strategy places significant demands on the
Company's resources and there can be no assurance that the Company's management
and operational systems and structure can be expanded to effectively support the
Company's continued acquisition strategy. If the Company is unable to implement
successfully its acquisition strategy, this inability may have a
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material adverse effect on the Company's business, results of operations or
financial condition.
Dependence on Management to Integrate the Acquisitions and Ability to Manage
Growth
The business strategy of the Company involves growth through
acquisition, internal development and integration of the individual components
in order to form a provider network. The Company is subject to various risks
associated with its growth strategy, including the risk that it will be unable
to identify and recruit suitable acquisition candidates in the future or to
integrate and manage the acquired healthcare providers.
The Company has completed acquisitions and is still in the process of
integrating those acquired businesses. While the business plans of these
acquired companies are similar, their histories, geographical location, business
models and business cultures are different in many respects. The directors and
senior management of the Company face a significant challenge in their efforts
to integrate the businesses of the Company and the acquired companies or assets
and effectively manage the continued growth of the Company and historically
experienced by each of the acquired companies or assets separately. While
management of the Company believes that the diverse experience of the Company
and the acquired companies will strengthen the Company, there can be no
assurance that management's efforts to integrate the operations of the companies
will be successful, that management can manage the Company's growth or that the
anticipated benefits of the acquired companies or assets will be fully realized.
The dedication of management resources to such efforts may detract attention
from the day-to-day business of the Company. There can be no assurance that
there will not be substantial costs associated with such activities or the
success of integration efforts, which could have a material adverse effect on
the Company's operating results.
The profitability of the Company is largely dependent on its ability to
develop and integrate networks of healthcare providers to manage and control
costs in order to realize economies of scale. The Company's operating results
could be adversely affected in the event it incurs costs associated with
developing networks without generating sufficient revenues from such networks.
The Company's current and anticipated future expansion has placed, and
will continue to place, significant demands on the management, operational and
financial resources of the Company. The Company will need to continue to augment
its management and operational systems to support growth both within its
vertical as well as its horizontal components. There can be no assurance that
the Company will be able to manage its expanded operations effectively.
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Absence of Substantial Profitability; Accumulated Deficit; Prior Loss; Future
Operating Results
Although the Company has achieved increased levels of revenues for the
year ended June 30, 1997 and nine months ended March 31, 1998, the Company has
only achieved limited profitability. For the year ended June 30, 1997 and nine
months ended March 31, 1998, the Company incurred losses of $1,619,000 and
$2,434,000, respectively. The Company's operating expenses have increased and
can be expected to increase significantly in connection with the Company's
proposed expansion and, accordingly, the Company's future profitability may
depend on corresponding increases in revenues from operations. Future events,
including unanticipated expenses, increased competition or changes in government
regulation, could have an adverse affect on the Company's operating margins and
results of operations. As a result of the Company's losses from operations,
together with the costs associated with restructuring, the Company may
experience liquidity and cash flow problems if they are not able to raise
additional capital in the immediate future. There can be no assurance that the
Company's rate of revenue growth will continue in the future or that the
Company's future operations will be profitable.
Need for Additional Financing
The Company currently intends to effect future acquisitions with cash,
promissory notes and future issuances of debt or equity securities. There can be
no assurance that the Company will be able to obtain financing if and when it is
needed on terms the Company deems acceptable. The inability of the Company to
obtain financing would have a material adverse effect on the Company's ability
to implement its acquisition strategy, and as a result, could require the
Company to diminish or suspend its acquisition strategy.
Dependence on HMO Agreements; Capitated Nature of Revenues; Control of
Health Care Costs
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 payor
source to cover the partial or complete healthcare services deliveries to a
person. The fees are determined on a per capita basis paid monthly by managed
care organizations. HMO enrollees may come from the integration or acquisition
of healthcare providing entities, additional affiliated physicians and acquire
and increase enrollment in HMOs currently contracting with the Company through
its Physician Practices and Ancillary Services or from agreements with new HMOs.
The Company intends to enter into HMO agreements which generally will be for
one-year terms and subject to annual negotiation of rates, covered benefits and
other terms and conditions. HMO agreements are often negotiated and executed in
arrears.
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There can be no assurance that such agreements will be entered into, renewed or,
if entered into and/or renewed, that they will contain these favorable
reimbursement terms to the Company and its affiliated providers. There can be no
assurance that the Company will be successful in identifying, acquiring and
integrating HMO entities or in increasing the number of HMO enrollees. Once
acquired a decline in enrollees in HMOs could also have a material adverse
effect on the Company's profitability.
Under the HMO agreements, the Company, through its affiliated
providers, will generally be responsible for the provision of all covered
hospital benefits, as well as outpatient benefits, regardless of whether the
affiliated providers directly provide the healthcare services associated with
the covered benefits. To the extent that enrollees require more care than is
anticipated or require supplemental healthcare which is not otherwise reimbursed
by the HMO, aggregate capitation rates may be insufficient to cover the costs
associated with the treatment of enrollees. If revenue is insufficient to cover
costs, the Company's operating results could be adversely affected. As a result,
the success of the Company will depend in large part on the effective management
of health care costs through various methods, including utilization management,
competitive pricing for purchased services and favorable agreements with payers.
Recently, many providers, including the Company, have experienced pricing
pressures with respect to negotiations with HMOs. In addition, employer groups
are becoming increasingly successful in negotiating reductions in the growth of
premiums paid for their employees' health insurance, which tends to depress the
reimbursement for health care services. At the same time, employer groups are
demanding higher accountability from payers and providers of health care
services with respect to measurable accessibility, quality and service. If these
trends continue, the cost of providing healthcare services could increase while
the level of reimbursement could grow at a significant lower rate. There can be
no assurance that these pricing pressures will not have a material adverse
effect on the operating results of the Company. Changes in health care
practices, inflation, new technologies, major epidemics, natural disasters and
numerous other factors affecting the delivery and cost of health care are beyond
the control of the Company and may adversely affect its operating results.
The Company currently has discounted fees for service arrangements with
managed care companies. In all cases they are either negotiated flat, mutually
agreed upon rates for covered services, usually providing for a discount of 30%
from usual and customary charges, or provide for payment at a percentage of
Medicare allowable rates (ranging from 60% to 150%). The Company is receiving
approximately 30% in revenues from managed care agreements.
Under HMO agreements, the Company is frequently responsible for the
provision of all covered hospital benefits regardless of whether it is
responsible for provision of the hospital services associated with the covered
benefits. The Company is currently not
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providing any full hospital covered benefits under its managed care agreements.
However, the Company anticipates in the normal course of business to enter into
such arrangements in the future. In connection with hospital covered benefits,
the Company will enter into a per diem arrangement with a hospital or hospital
chain whereby the Company would pay the hospital service provider a flat per
diem fee, for which the hospital would provide all hospital directed services
for a single per diem fee. This can range by the type of service the patient
requires. These fees can range from $400 per day to $2,000 or more per day. In
some cases the Company would be required to pay usual and customary hospital
charges if a capitated patient is seen or admitted in a hospital not under
contract to the Company. The Company intends to contract with a number of
hospitals to provide covered services to HMO enrollees who have been assigned to
the physician practices affiliated with the Company. The Company expects to seek
additional hospital providers to provide covered services to HMO enrollees
assigned to its affiliated physicians. To the extent that enrollees require more
care than is anticipated or require supplemental care that is not otherwise
reimbursed by the HMOs, aggregate capitation rates may be insufficient to cover
the costs associated with the treatment of enrollees. If such revenue is
insufficient, the Company's operating results could be adversely affected.
The HMO agreements often contain shared-risk provisions under which
additional revenue can be earned or economic penalties can be incurred based
upon the utilization of hospital physicians and ancillary services by HMO
enrollees. These estimates are based upon resource consumption, utilization and
associated costs incurred by HMO enrollees compared to budgeted costs.
Differences between actual contract settlements and amounts estimated as
receivable or payable relating to HMO risk-sharing arrangements are generally
reconciled annually, which may cause fluctuations from amounts previously
accrued. See "Business".
Reductions in Third-Party Reimbursement
Healthcare providers that render services on a fee-for-service basis
(as opposed to a capitated plan), typically submit bills for healthcare services
provided to various third-party payers, such as governmental programs (e.g.,
Medicare and Medicaid), private insurance plans and managed care plans, for the
health care services provided to their patients. A significant portion of the
revenue of the Company is derived from payments made by these third-party
payers. These third-party payers increasingly are negotiating the prices charged
for healthcare services, with the goal of lowering reimbursement and utilization
rates. The success of the Company therefore depends in large part on the
effective management of health care costs, including controlling utilization of
specialty care physicians and other ancillary providers and purchasing services
from third-party providers at competitive prices. There can be no assurance that
payments under governmental programs or from other third-party payers will
remain at present levels. In addition, third-party payers can deny reimbursement
if they determine that treatment was not performed in accordance with the
cost-effective
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treatment methods established by such payers, was experimental or for other
reasons. Any loss of revenues by the affiliated physicians caused by this trend
in the health care industry toward cost containment and oversight could have a
material adverse effect on the Company's operating results. For the period of
September, 1997 through May, 1998, third party reimbursements accounted for
approximately 88% of total revenues, consisting of; private insurance 34%,
managed care (fee for service) 24%, Medicare 23%, Workers Compensation 6% and
Medicaid 1%.
Risks Associated with Development of Management Information Systems;
Dependence on Major Supplier for Management Information Systems
The Company's management information systems are important components
of the business and are becoming a more significant factor in the Company's
ability to remain competitive. The Company already possesses a physician billing
and collection system. In addition, in order to address the needs associated
with its expansion into the primary care capitated environment, the Company is
participating in the development of an integrated management information system.
This system is designed to provide centralized billing, permit the review of a
patient's electronic medical records and information on practice guidelines,
monitor utilization, and measure patient satisfaction and outcomes of care. The
development and implementation of such systems involve the risk of unanticipated
delay and expense, and there can be no assurance that the Company will be
successful in implementing the integrated management information system. Any
significant delay or increase in expense associated with the development of this
integrated management information system could have a material adverse effect on
the Company's business. The Company's primary supplier and developmental partner
for the management information system is Companion Technologies of Florida. The
Company has committed an aggregate of approximately $500,000 to the development,
installation and implementation of the main components of this management
system. See "Business--Management Information System." The Company further
expects to allocate an additional $500,000 over the next two (2) years to
complete the management information system which funds the Company anticipates
will be generated from cash flow or lease payments, however, no assurances can
be given that such funds will be available or that the Company will be
successful in the development of the system. The Company expects to continue
committing capital and resources towards its management system.
Exposure to Professional Liability; Liability Insurance
In recent years, physicians, hospitals and other providers in the
health care industry have become subject to an increasing number of lawsuits
alleging medical malpractice and related legal theories. Many of these lawsuits
involve large claims and substantial defense costs. The Company maintains
professional liability insurance coverage, on a claim basis, for entities and
individuals, owned or employed by the Company, in amounts that exceed the
requirements as mandated by the State of Florida
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but which may not be adequate to protect the Company's assets. The amount of
professional coverage liability coverage carried by the physicians and/or their
practices exceed the requirements as mandated by the State of Florida and
adequately cover the Company's exposure at present. The Company currently has a
Master Professional Liability Policy at limits of $5,000,000. No assurances can
be made, however, that such amounts are sufficient or that coverage will be
available in the future.
Concentration of Customers
The combined facilities owned and proposed to be purchased by the
Company have a cumulative dependency on federal Medicare payments. Federal
Medicare payments account for approximately 15% of the Company's combined
revenues. This translates individually from a minimum of 2% to a maximum of
approximately 50% per facility. The Company additionally received approximately
25% from private insurance, 28% from agreements with managed care (fee for
service), 13% from managed care capitated contracts, 5% direct patient payment,
2% from workers compensation, 15% from personal injury and 1% from Medicaid,
account for the Company's combined revenues. No other individual payor accounts
for more than 9.9% of the combined revenues of the Company.
Competition
The demand for physicians and other health care professionals presently
exceeds the supply of qualified personnel. As a result, the Company experiences
competitive pressures for the recruitment and retention of qualified physicians
and other health care professionals to deliver their services. The Company's
future success depends on its ability to continue to recruit and retain
qualified physicians and other health care professionals to serve as employees
or independent contractors of the Company and its affiliates. There can be no
assurance that the Company will be able to recruit or retain a sufficient number
of competent physicians and other health care professionals to continue to
expand its operations.
The Company expects and will receive substantial competition from
substantially larger companies that will seek to purchase or manage physician
practices, as well as competition from companies that specialize in Ancillary
Services, most of which are substantially larger with access to virtually
unlimited amounts of capital to make such acquisitions. The Company has and will
experience substantial additional competition from both not-for-profit and
for-profit hospitals in South Florida, both for the acquisition of physical
practices and for providing Ancillary Services.
Government Regulation
Federal and state laws regulate the relationships among providers of
health care services, physicians and other clinicians. These laws include the
fraud and abuse
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provisions of the Medicare and Medicaid statutes and the Florida Patient
Brokering Law of 1996, which prohibit the solicitation, payment, receipt or
offering of any direct or indirect remuneration for the referral of Medicare or
Medicaid patients or for recommendation, leasing, arranging, ordering or
purchasing of Medicare or Medicaid covered services, as well as laws that impose
significant penalties for false or improper billings for physician services.
These laws also impose restrictions on physicians' referrals for designated
health services to entities with which they have financial relationships.
Violations of these laws may result in substantial civil or criminal penalties
for individuals or entities, including large civil money penalties,
imprisonment, and exclusion from participation in the Medicare and Medicaid
programs. Such exclusion and penalties, if applied to the Company and its
affiliated physicians and ancillaries, could result in significant loss of
reimbursement and material adverse impact on the Company's business.
The Company believes its operations as currently conducted are in
material compliance with existing applicable laws, however, there can be no
assurance that the existing organization of the Company and its contractual
arrangements with affiliated physicians will not be successfully challenged or
that the enforceability of the provisions of such arrangements, including
non-competition agreements, will not be limited. There can be no assurance that
review of the business of the Company and its affiliates by courts or regulatory
authorities will not result in a determination that could adversely affect their
operations or that the health care regulatory environment will not change so as
to restrict existing operations or expansion of the Company and its affiliates.
In the event of action by any regulatory authority limiting or prohibiting the
Company or its affiliates from carrying on its business or from expanding the
operations of the Company to certain jurisdictions, the Company may be required
to make structural and organizational modifications of such organization or
arrangements. While the Company believes it will be able to restructure in
accordance with applicable laws and regulations, if required, the Company cannot
assure that such restructuring in all cases will be possible or would not have a
material adverse effect on the Company. See "Business."
Health Care Reform
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 to the Company, its operations and profitability.
Related Party Transactions and Potential Conflicts of Interest
The Company has entered into transactions and may do so in the future
with officers, directors and shareholders of the Company, as well as their
affiliated
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companies. The terms of these transactions were no less favorable to the Company
than those available from and to unaffiliated parties except with respect to the
acquisition transaction with Dr. Kagan (as identified below). To the extent that
the Company enters into transactions with these affiliated persons and entities
in the future, it will do so only on terms no less favorable to the Company than
those available from and to unaffiliated parties.
The facility leases between Dr. Robert Kagan, the largest shareholder
and director of the Company, 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 and leased by Magnetic
Imaging Systems I, Ltd. The current rent is $12,469 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 a garage in 1987.
The total leasehold improvements were approximately $285,289 at this location.
Magnetic Imaging Systems, I, Ltd. is currently paying $22.50 a square foot net
of expenses for the 4,656 square feet of office space and the 2,000 square foot
garage. The Company intends to re-negotiate the lease between Dr. Kagan and
Magnetic Imaging Systems, I, Ltd., however, no assurance can be made that the
Company will be successful. This lease expires April 30, 1999, at which time the
Company may seek to move to a less expensive location.
The property located at 3079 East Commercial Boulevard, is owned by KFK
Enterprises, Inc., a Florida corporation and leased by Magnetic Imaging Systems,
I, Ltd. Dr. Kagan, a director of the Company owns approximately 50% of KFK
Enterprises. The rental payment is $7,395 per month and the property is 5,740
square feet. Thus, Magnetic Imaging Systems, I, Ltd. is paying $18 per square
foot net of expenses. The Company believes that this price is equal to current
market value. Magnetic Imaging Systems, I, Ltd. made leasehold improvements of
$139,289 at this location. This lease expires January 31, 1999.
Control by Management and Present Shareholders of the Company
Noel J. Guillama and Robert L. Kagan, M.D. beneficially own
approximately 9.7% and 15.9%, respectively of the outstanding shares of Common
Stock. Mr. Guillama, Dr. Kagan and a third shareholder have also 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 and Dr. Kagan,
collectively under this agreement, are in a position to control the election of
directors as well as the other affairs of the Company.
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Dependence on Key Personnel
Implementation of the Company's acquisition strategy is largely
dependent on the efforts of a few senior officers. In particular, the Company's
operations are dependent to a great degree on the continued efforts of the
President, Chief Executive and Operation Officer Noel J. Guillama of the
Company. Furthermore, the Company will likely be dependent on the senior
management of companies that are acquired. Competition for highly qualified
personnel is intense, and the loss of any executive officer or other key
employee, or the failure to attract and retain other skilled employees, could
have a material adverse effect upon the Company's business, results of
operations or financial condition. The Company is a party to employment
agreements with Mr. Guillama, as well as with the Medical Director of the MRI
Scan Center, Robert L. Kagan, M.D., President of Datascan, Kenneth J. Hall, and
the Executive Vice President, Roman G. Fisher of the Company. Each of the
employment agreements with Messrs. Guillama, Kagan, Hall and Fisher terminate in
the year 2001, unless terminated earlier pursuant to the agreements, and each
contains confidentiality provisions and covenants not to compete. The Company
has designated itself the beneficiary, key man life insurance in the amount of
$2,000,000 on the life of Mr. Guillama and $1,000,000 on the life of Dr. Kagan,
each for a term of ten years. There can be no assurance, however, that the
Company can maintain the policy in effect or that the coverage will be
sufficient to compensate the Company for the loss of the services of Mr.
Guillama and/or Dr. Kagan.
Forward Looking Statements
Statements contained in this Prospectus which are not historical facts
may be considered forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to risks and uncertainties which could cause actual
results to differ materially from those projected.
The Prospectus further contains statements relating to completion of
pending Acquisitions, and other matters. Certain of these statements are
accompanied by important cautionary factors that could cause different results
than expected by the Company. In addition to those factors, other factors such
as shareholder, regulatory and third party consents with respect to
Acquisitions, among other events outside the Company's control could also cause
future results to differ from expectations.
Additional risks and uncertainties include the potential loss of
contractual relationships, fluctuations in the volume of procedures performed by
the Company's facilities and physicians, changes in the reimbursement rates for
those services as well as uncertainty about the ability to collect the
appropriate fees for services provided by the Company.
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Exercise of Warrants and Capital Needs May Have Dilutive Effect
As of June 26, 1998, 5,000 shares of the Company's Series A Convertible
Preferred Stock (the "Series A Preferred Stock") were issued and outstanding.
Each share of the Series A Preferred Stock is convertible into such number of
shares of Common Stock as is determined by dividing the stated value ($100) of
the share of Series A Preferred Stock by the then current Conversion Price
(which is equal to the lower of (i) 85% of the average closing bid price for the
ten (10) days immediately preceding the date of conversion; or (ii) $6.00. If
converted on June 29, 1998, the Series A Preferred Stock would have been
convertible into approximately 427,100 shares of Common Stock, but this number
of shares could prove to be significantly greater in the event of a decrease in
the trading price of the Common Stock. As of June 29, 1998, 1,200 shares of the
Company's Series B Preferred Stock were issued and outstanding. Each share of
the Series B Preferred Stock is convertible into such number of shares of Common
Stock as is determined by dividing the stated value ($1,000) of the share of
Series B Preferred Stock by the then current Conversion Price (which is 90% of
the average of the two (2) lowest closing bid prices of the Common Stock for the
last twelve (12) trading days). If converted on June 29, 1998, the Series B
Preferred Stock would have been convertible into approximately 915,200 shares of
Common Stock, but this number of shares could prove to be significantly greater
in the event of a decreased in the trading price of the Common Stock. Purchasers
of Common Stock could therefore experience substantial dilution of their
investment upon conversion of the Series A Preferred Stock and Series B
Preferred Stock. The shares of Series A Preferred Stock and Series B Preferred
Stock are not registered and may be sold only if registered under the Securities
Act or sold in accordance with an applicable exemption from registration, such
as Rule 144. The shares of Common Stock into which the Series A Preferred Stock
and Series B Preferred Stock may be converted are being registered pursuant to
this Registration Statement.
As of June 29, 1998, Warrants to purchase 240,000 shares of Common
Stock issued to the holders of the Series B Preferred Stock and exercisable over
the next five years at a price of $4.00 for 120,000 shares and $5.00 for 120,000
shares (as may be adjusted from time to time under certain antidilution
provisions) were outstanding. The shares of Common Stock issuable upon exercise
of these Warrants are being registered pursuant to this Registration Statement.
As of June 29, 1998, 4,688,875 shares of Common Stock were reserved for
issuance upon exercise of the Company's outstanding warrants and options
(excluding the Warrants) and an additional 427,100 shares of Common Stock were
reserved for issuance upon conversion of the Series A Preferred Stock, 915,200
shares of Common Stock were reserved for issuance upon conversion of the Series
B Preferred Stock and 240,000 were reserved for issuance upon exercise of the
Warrants. At June 29, 1998, there were 6,184,569 shares of Common Stock
outstanding. Of these outstanding
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shares, 1,741,911 were freely tradeable without restriction under the Securities
Act unless held by affiliates.
Possible Applicability of Rules Relating to Low-Priced Stocks; Penny Stock;
Possible Failure to Maintain Criteria for NASDAQ Securities
The Company's Common Stock is traded in the NASDAQ SmallCap Market
under the symbol "MDPA." If, for any reason, the Common Stock does not remain
accepted for inclusion on NASDAQ, then, in such case, the Company's Common Stock
would be expected to continue to be traded in the over-the-counter markets
through the "pink sheets" or the NASD's OTC Bulletin Board. In the event the
Common Stock was not included on NASDAQ, the Company's Common Stock would be
covered by a Securities and Exchange Commission rule that imposes additional
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by the rule, the broker-dealer must
make a special suitability determination for the purchaser and receive the
purchaser's written agreement to the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell the
Company's securities and also may affect the ability of purchasers in this
offering to sell their shares in the secondary market. The ability of the
Company to secure a symbol on NASDAQ does not imply that a meaningful trading
market in its Common Stock will ever develop.
Shares Eligible for Future Sale
As of June 29, 1998, there were 6,184,569 shares of the Company's
Common Stock outstanding, of which 4,442,658 were "restricted securities" as
that term is defined by Rule 144 under the Securities Act of 1933 (the
"Securities Act"). Such shares will be eligible for public sale only if
registered under the Securities Act or if sold in accordance with Rule 144.
Under Rule 144, a person who has held restricted securities for a period of one
year may sell a limited number of shares to the public in ordinary brokerage
transactions. Sales under Rule 144 may have a depressive effect on the market
price of the Company's Common Stock due to the potential increased number of
publicly held securities. The timing and amount of sales of Common Stock covered
by the Registration Statement of which this Prospectus is a part, as well as
sales pursuant to other filed registration statements, could also have a
depressive effect on the market price of the Company's Common Stock.
Anti-Takeover Provisions
Certain provisions of the Company's Articles of Incorporation and
Bylaws may be deemed to have anti-takeover effects and may delay, defer or
prevent a takeover attempt of the Company, which include when and by whom
special meetings of the
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Company may be called. In addition, certain provisions of the Florida Business
Corporation Act also may be deemed to have certain anti-takeover effects which
include that control of shares acquired in excess of certain specified
thresholds will not possess any voting rights unless these voting rights are
approved by a majority of a corporation's disinterested shareholders. In
addition, the Company's Articles of Incorporation authorize the issuance of up
to 10,000,000 shares of Preferred Stock with such rights and preferences as may
be determined from time to time by the Board of Directors. Accordingly, the
Board of Directors may, without shareholder approval, issue Preferred Stock with
dividends, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of the Company's Common
Stock. In addition, the issuance of large blocks of Preferred Stock could
possibly have a dilutive effect with respect to existing holders of Common Stock
of the Company. The Company, however, has agreed pursuant to the terms of the
Underwriting Agreement that without the consent of the Managing Underwriter it,
for a period of two (2) years will not issue any shares of Preferred Stock (i)
for purposes other than acquisitions from persons or entities not affiliated
with the Company; (ii) which have disproportionate voting power to the shares of
Common Stock; or (iii) that have rights to stock or cash dividends
disproportionate to the shares of Common Stock.
Additionally, the Company's Articles of Incorporation, Bylaws and
Florida law authorize the Company to indemnify its directors, officers,
employees and agents and limit the personal liability of corporate directors for
monetary damages, except in certain instances. See "Description of Securities --
Certain Florida Legislation; Anti-takeover Effects of Certain Provisions of the
Company's Articles of Incorporation and Bylaws."
Absence of Dividends
Holders of the Company's Common Stock are entitled to cash dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor. As a newly organized corporation, the Company has never paid
dividends. The Company does not anticipate the declaration or payments of any
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance the developments and expansion of its business. Future dividend
policy will be subject to the discretion of the Board of Directors and will be
contingent upon future earnings, if any, the Company's financial condition,
capital requirements, general business conditions and other factors. Future
dividends may also be subject to covenants contained in loan or other financing
documents. Therefore, there can be no assurance that cash dividends of any kind
will ever be paid.
Risks Relating to Capital Requirements
The Company's acquisition of physician practices requires substantial
capital investment. Capital is typically needed not only for the acquisition of
the physician practices, but also for the effective integration, operation and
expansion of the practices
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as well as the start-up of new contracts for specialist physician services. The
practices may require capital for renovation and expansion and for the addition
of medical equipment and technology. Therefore, the Company will need to raise
capital through the issuance of long-term or short-term indebtedness or the
issuance of its equity securities in private or public transactions in order to
complete further acquisitions and expansion. This could result in dilution of
existing equity positions and increased interest expense. There can be no
assurance that acceptable financing for future acquisitions or for the
integration and expansion of existing physician practices can be obtained on
suitable terms, if at all.
Volatility of Stock Price
Historically there has been and there may continue to be volatility in
the market price for the Company's Common Stock. Quarterly operating results of
the Company and their relationship to analysts' projections, changes in general
conditions in the economy, the financial markets or the healthcare industry, or
other developments affecting the Company or its competitors, could cause the
market price of the Common Stock to fluctuate substantially. In addition, in
recent years, the stock market and, in particular, the healthcare industry
segment, has experienced significant price and volume fluctuations. This
volatility has affected the market prices of securities issued by many companies
for reasons unrelated to their operating performance.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
offered hereby. In the event all of the Warrants were to be exercised, the
Company would receive net proceeds of approximately $1,067,500, after payment of
offering expenses estimated to be approximately $12,500. No proceeds will be
obtained by the Company from the Warrants except upon the exercise of the
Warrants. It is anticipated that the net proceeds, if any, will be used by the
Company for acquisitions, building of infrastructure and for working capital
associated with continuing operations. The actual allocation of proceeds
realized from the exercise of the Warrants will depend upon the amount and
timing of such exercises, the Company's operating revenues and cash position at
such time and its working capital requirements during the course of such
exercise period. There can be no assurances that any of the Warrants will be
exercised.
While the intended use of proceeds is consistent with the Company's
current business plan objectives, the Company reserves the right to change the
use of proceeds depending on working capital requirements and opportunities
afforded to the Company. Pending utilization of the proceeds as described above,
the net proceeds of the offering will be deposited in interest bearing accounts
or invested in money market instruments, government obligations, certificates of
deposits or similar short-term investment grade interest bearing investments.
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BUSINESS
Metropolitan Health Networks, Inc. (the "Company") was incorporated in
the State of Florida in January 1996 for the purpose of developing a vertically
and horizontally integrated health care delivery network (the "Network"). The
Network will provide primary and subspecialty physician care as well as
diagnostic and therapeutic services.
The Company developed its Network through the acquisition, expansion
and integration of (i) physician care practices (the "Physician Practices")
together with (ii) laboratories, pharmacies and diagnostic and rehabilitation
centers ("Ancillary Services").
The Company is organized, in principal part, as a multi-county
vertically and horizontally integrated medical group practice. As such, all of
the physicians to be employed by the Company will provide an aggregate minimum
of 75% of their services through the group practice and all physician services
are to be billed under one common Medicare provider number. The Company believes
it will meet all government requirements of a "group practice" to avail itself
of benefits available to group practices under Florida and federal laws.
The Company's goal through its Network is to provide quality, cost
effective and outcome oriented health care in Dade, Broward and Palm Beach
Counties, Florida, a tri-county area with a population in excess of four
million.
Industry
General
The Health Care Financing Administration estimates that national health
care spending in the United States in 1994 was approximately $1 trillion, with
approximately $200 billion directly attributable to physician services and
another $612 billion under physician direction. Health care spending in the
tri-county Florida region was estimated to be $16 billion. Historically,
patients in need of medical care went directly to a specialist who typically
provided service on an inpatient basis. In the 1980's and early 1990's, managed
care entities began assuming a significant role by contracting with health care
providers on a capitated basis. At the same time, HMOs began to encourage the
use of alternate-site facilities (sites other than hospitals).
As a result of the trends toward increased HMO enrollment and physician
membership in group medical practices, health care providers have sought to
reorganize themselves into health care delivery systems that are better suited
to the managed care environment. The Company believes that physician groups are
joining with hospitals and other institutional providers in various ways to
create vertically and horizontally integrated delivery systems which provide
medical and hospital services ranging from community
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based primary medical care to specialized inpatient services through single
coordinated delivery systems. These health care delivery systems contract with
HMOs to provide hospital and medical services to enrollees under full risk
contracts, under which providers assume the obligation of providing both the
professional and institutional components of covered health care services to the
enrollees for predetermined fixed per capita payments.
In order to compete effectively in such an emerging environment,
physicians are concluding that they must have control over the delivery and
financial impact of a broader range of health care services. To this end, groups
of independent physicians and medium to large medical groups are taking steps to
assume responsibility and risk for health care services which they do not
provide. The Company believes that physicians are increasingly abandoning
traditional private practice in favor of affiliations with larger organizations
which offer skilled and innovative management, information systems and capital
resources. The Company believes that many payors and their intermediaries,
including governmental entities and HMOs are increasingly looking to outside
providers of physician services to develop and maintain quality outcomes,
management programs and patient care data. The Company believes that physicians
are increasingly turning to organizations such as the Company to provide the
resources necessary to function effectively in a managed care environment.
Strategy
The Company's strategy is to develop and expand a locally prominent,
integrated health care delivery network in Dade, Broward and Palm Beach counties
Florida within a medical group practice structure, that provides a high quality
and cost-effective health care delivery system. The Company's principal strategy
for developing and expanding its network is through the acquisition of (through
purchases, merger or otherwise) or affiliation with physicians, medical groups,
and other health care providers in the South Florida market. The Company seeks
to acquire or otherwise affiliate with physician groups and other providers in
their local markets with reputations for providing quality cost effective
healthcare services. The Company also seeks to acquire Ancillary Services,
including laboratories, pharmacies and diagnostic and rehabilitation centers
within its group practice structure. The Company believes that by increasing
marketing activities, enhancing patient service and improving the accessibility
of care, it will increase the Company's market share. The Company also believes
strategic alliances with hospitals and health plans will improve the delivery of
managed health care. The Company also believes that by the consolidation of
management and administrative services that its costs should be reduced.
Overview of the Network
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Medical Group Expansion
The Company is developing its Network mostly through the acquisition of
a broad range of multi-disciplinary physicians. These will range from primary
care through highly specialized sub-specialists. These physicians, once
acquired, will be merged directly into the medical group and form part of the
group's medical staff, where they will share all of the resources of the group
and increase the cross-referral of all physicians within the group.
In the South Florida region, the Company has primarily targeted
multi-specialty medical groups that are comprised of four to thirty physicians.
The Company will seek to purchase the medical groups or to enter into long term
management agreements with the affiliated physician groups (see below). The
Company believes the key to its growth will be its ability to greatly improve
and expand the health care services provided through its medical groups, to
enhance operating efficiency and profits of the medical group and to earn and
maintain the trust and confidence of the physicians associated with the Network.
Practice Management Activities
In situations where the Company is unable to or does not desire to
purchase a medical group, it will seek to enter into contractual arrangements
with the medical group that will allow the Company to receive substantially all
of the benefits of ownership without the additional capital.
The Company believes that as the health care industry continues to
become more complex, the administrative needs of medical groups will best be
served by professional managers. Under these types of contractual arrangements
the Company would acquire from the medical group substantially all of the groups
medically related assets and the Company would function as a management services
organization (MSO). The medical group, independent of the Company's own medical
group, could then enter into a 20 to 40-year service agreement with the Company
to have the Company provide all or part of the front and back office functions
of the medical group. The Company will provide the physicians and groups with
the equipment and facilities used in its medical practices, manage practice
operations and employ substantially all the practices' non-physician personnel
exclusive of those required by law to be employed by the practices. The
physicians will continue to be responsible for all the decisions regarding
patient health care, including diagnosis, treatment, surgery and therapy. The
Company believes the fees retained by the Company would range from 30% to 70% of
the medical groups' net collections depending on the size and specialty of the
medical group.
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Independent Practice Associations
The Company does not now own or manage any independent practice
associations ("IPAs"). However, the Company anticipates organizing, managing
and/or purchasing an IPA management company in the future to complete its
network. An IPA allows an individual practitioner to access patients in his/her
area through contracting with HMOs without having to join a group practice or
sign exclusive contracts, and also coordinates utilization review and quality
assurance programs for its affiliated physicians. In addition to providing
access to HMO contracts, an IPA offers other benefits to the physicians seeking
to remain independent, including enhanced risk sharing arrangements and access
to other strategic alliances within the Company's network. The Company believes
the IPAs will enable it to increase HMO market share with relative low risk
because of the low incremental investment required to recruit additional
physicians. The Company believes an IPA management company negotiates both
managed care contracts and discounted fees for service contracts and collects a
percentage of total revenues on the contract plus fees for providing billing and
collection functions. An IPA can also provide substantial savings to physicians
by pooling purchasing and insurance on behalf of physician members. Usually the
IPA Management Company collects a percentage of the savings generated for
physicians.
Ancillary Service Groups
The Company currently provides certain ancillary services, mostly
diagnostic and rehabilitation services. The Company intends to expand these
services both by acquisition and internal growth to cover the entire targeted
area as well as expand into additional ancillary services. The Company expects
that these Ancillary Services will complement the services provided by the
Physician Practices and the other Ancillary Services owned or acquired by the
Company. The Company intends to acquire those Ancillary Services which will
permit the Network to expand and provide services needed by patients. Through an
association of administrative services, as well as facilities, the Company
believes that it can increase revenues and profitability. As of the date hereof,
the Company has acquired (i) Magnetic Resonance Imaging Center ("MRI"), a fixed
and mobile magnetic resonance imagery business which is engaged in performing
and reading magnetic resonance images for patients primarily located in South
Florida, and (ii) Datascan of Florida, Inc., a mobile diagnostic services
company which provides nerve conduction, vascular and ultrasound studies in
South Florida.
HMO Arrangements
The Company intends to have a portion of its revenues derived from
agreements with Health Management Organizations ("HMOs") that provide for the
receipt of capitated fees. Capitated fees are negotiated fees that stipulate a
specific dollar amount or a percentage of total premium collected by an insurer
or payor source to cover the partial or complete healthcare services deliveries
to a person. The fees are determined on a
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per capita basis paid monthly by managed care organizations. HMO enrollees may
come from the integration or acquisition of healthcare providing entities,
additional affiliated physicians and acquire and increase enrollment in HMOs
currently contracting with the Company through its Physician Practices and
Ancillary Services or from agreements with new HMOs. The Company intends to
enter into HMO agreements which generally will be for one-year terms and subject
to annual negotiation of rates, covered benefits and other terms and conditions.
HMO agreements are often negotiated and executed in arrears. There can be no
assurance that such agreements will be entered into, renewed or, if entered into
and/or renewed, that they will contain these favorable reimbursement terms to
the Company and its affiliated providers. There can be no assurance that the
Company will be successful in identifying, acquiring and integrating HMO
entities or in increasing the number of HMO enrollees. Once acquired a decline
in enrollees in HMOs could also have a material adverse effect on the Company's
profitability.
Under the HMO agreements, the Company, through its affiliated
providers, will generally be responsible for the provision of all covered
hospital benefits, as well as outpatient benefits, regardless of whether the
affiliated providers directly provide the healthcare services associated with
the covered benefits. To the extent that enrollees require more care than is
anticipated or require supplemental healthcare which is not otherwise reimbursed
by the HMO, aggregate capitation rates may be insufficient to cover the costs
associated with the treatment of enrollees. If revenue is insufficient to cover
costs, the Company's operating results could be adversely affected. As a result,
the success of the Company will depend in large part on the effective management
of health care costs through various methods, including utilization management,
competitive pricing for purchased services and favorable agreements with payers.
Recently, many providers, including the Company, have experienced pricing
pressures with respect to negotiations with HMOs. In addition, the Company
believes that employer groups are becoming increasingly successful in
negotiating reductions in the growth of premiums paid for their employees'
health insurance, which tends to depress the reimbursement for health care
services. At the same time, employer groups are demanding higher accountability
from payers and providers of health care services with respect to measurable
accessibility, quality and service. If these trends continue, the cost of
providing healthcare services could increase while the level of reimbursement
could grow at a significant lower rate. There can be no assurance that these
pricing pressures will not have a material adverse effect on the operating
results of the Company. Changes in health care practices, inflation, new
technologies, major epidemics, natural disasters and numerous other factors
affecting the delivery and cost of health care are beyond the control of the
Company and may adversely affect its operating results.
The Company currently has three types of arrangements with managed care
companies. These are discount fee for service arrangements. The other is a
primary care capitation and the last is a "full rise" capitation. These
arrangements place no additional financial risk to the Company. The discounted
fee for service arrangements
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are either negotiated flat, mutually agreed upon rates for covered services,
usually calling for a discount of 30% from usual and customary charges, or a
call for payment at a percentage of Medicare allowable rates (ranging from 100%
to 150%).
Physician Practices Acquired
The Company, on March 12, 1997 acquired the clinical practice of Paul
Wand, M.D., P.A. ("Wand Practice"). Dr. Wand is a neurologist who began his
practice in South Florida in 1982, and who, in addition to his practice conducts
certain research in the field of head injuries. Dr. Wand is currently planning
clinical trials to obtain FDA approval in the treatment of traumatic brain
injuries with a drug that has been previously approved by the FDA for treatment
of patients with other diagnosis.
Pursuant to the terms of the acquisition, the Company, through a
wholly-owned subsidiary, acquired by merger the Wand Practice for consideration
of 75,000 shares of Common Stock and $125,000 in cash. In addition, if the
earnings before interest, taxes, depreciation and amortization ("EBITDA") of the
Wand Practice for the twelve months ended June 30, 1997 and 1998 is determined
to have equaled or exceeded $75,500, the Company shall deliver up to 37,500
additional shares of Common Stock of the Company upon each such occurrence. No
additional consideration for the Wand practice is due for the 12 month period
ended June 30, 1997. In addition, and as part of the acquisition, the Company
entered into a five year employment contract with Dr. Wand with a base
compensation of $200,000 per year and a potential to receive a bonus in the
amount of 10% of the total practice revenues. Dr. Wand has agreed not to compete
or solicit patients or referring sources to the Company for a period of two
years following the termination of his employment agreement. The Company has
been in active negotiations to sell this practice and anticipates such sale in
the near future. When sold the Company anticipates taking a one-time charge
relating to its sale.
Effective July 1, 1997, the Company, through a wholly-owned subsidiary
of the Company, acquired General Medical Associates, Inc. ("GMA"). GMA was owned
by Martin Harrison, M.D. ("Harrison"). Pursuant to the merger agreement, the
Company paid (i) $300,000 in cash; (ii) a $400,000 8% promissory note with
interest and principal due monthly in an eleven month period commencing on
September 5, 1997; (iii) 523,077 shares of Common Stock of the Company, 156,923
shares of which can be earned by Harrison based upon the annual performance of
GMA. Subsequent to the acquisition and pursuant to the terms of an amended
agreement, the 523,077 originally issued were adjusted to be 373,077. If the
earnings before interest, taxes, depreciation and amortization ("EBITDA") of GMA
for the years ended June 30, 1998 and 1999 equals or exceeds 80% of GMA's
EBITDA, the twelve months ended June 30, 1997 (the "Targeted Amount"), there
shall be released from escrow 104,615 and 52,308, respectively, additional
shares of the Common Stock of the Company upon each occurrence. In the event,
however, that the EBITDA is less than the Targeted Amount, Harrison is entitled
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to receive additional shares of the Company, as determined based upon a sliding
scale down to 60%.
The Company has warranted to Harrison that if the gross proceeds of the
sale by Harrison, of up to 200,000 shares (over a period of time beginning July
1, 1998 and ending February 13, 1999) of the Company's Common Stock received in
the Merger, is less than $6.50 per share, the Company shall make up such
deficiency in cash. In the event the Company's Common Stock trades over $7.50
per share during any fifteen (15) day period in a calendar month, the price
protection shall be eliminated in 25,000 share blocks. The Company has also
guaranteed Harrison price per share protection in the event that the Company's
Common Stock trades at an average of less than $6.50 per share for any twenty
(20) day period beginning on August 1, 1999 and ending October 1, 1999, Harrison
shall receive additional shares of Company Common Stock determined by dividing
$3,400,000 (less certain shares sold x $6.50) by the lowest closing bid price
over such 20 day period and deducting 523,077 (subject to adjustment).
GMA is a multi-specialty group with components of neurology and
physiatry, in addition to chiropractic physicians, licensed massage therapists
and additional ancillary services. GMA uses both staff and subcontracting
services to provide the healthcare services and currently has three physicians,
two massage therapists, two medical assistants, one x-ray technician and two
electro-diagnostic technicians who perform nerve studies. GMA provides
full-service medical evaluations including x-rays, EKG, minor surgical
procedures as well as physical therapy and clerical and billing support persons.
GMA currently sees approximately 300 patients per week in its facilities and has
over 3,000 active charts.
Subsequent to the acquisition, information concerning the valuation of
certain assets has come to the attention of the Company. Presently, the Company
is unable to quantify such information and is consulting with its counsel to
determine the significance and effect of such information on the financial
statements of the Company, subsequent to consummation of the GMA acquisition.
On October 15, 1996 the Company acquired pursuant to an asset purchase
agreement ("International Agreement") certain medically related assets of
International Family Healthcare Centers, Inc. ("International") from Emergency
Care Services, Inc. ("ECSI"). The assets consist primarily of two medical
clinics one located in North Miami Beach and the second located in Aventura,
Florida. The Company had previously entered into a management agreement
effective April 23, 1996 to operate the facilities of International. Under the
International Agreement, the Company purchased the assets for 50,000 shares of
its Common Stock and the issuance of an 8% promissory note ("International
Note") in the amount of $150,000. The final payment of $11,503.63 was made on
September 24, 1997. Management intends to close down one of the acquired
facilities and merge with an existing center to reduce cost and consolidate
services and
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is negotiating to sell the second facility to the currently employed physician
running the second site.
On November 30, 1997, Metropolitan Health Networks, Inc. (the
"Registrant" or 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 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 principals followed in
determining the amount of shares issued to the shareholders of Trident include
the worth of the businesses considering their historical, present and future
business operations, and 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.
On April 2, 1998, Metropolitan Health Networks, Inc. (the "Registrant"
or the "Company"), Metcare, VII, Inc. ("Metcare"), a wholly-owned subsidiary of
the Company (Subsidiary) Inc. and Primedica Healthcare, Inc. (Primedica) entered
into an asset purchase agreement pursuant to which Metcare 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 purchased 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 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 Forty-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
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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.
An additional agreement was signed, 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 Registrant'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. Additionally, Primedica may elect not to be liable to
repurchase the Practices if the net revenue derived from the purchased assets
exceeds Six million dollars ($6,000,000). The Company believes that this
acquisition will remain part of Metropolitan Health Networks, Inc., however the
Company has been advised that Trident Medical Concepts, Inc. may express a claim
on the acquisition
Diagnostic Services
The Company, through its group practice, owns a full range of
fixed-site and mobile diagnostic services. These will include x-ray, MRIs, CT,
neuro diagnostic equipment, vascular studies, nuclear equipment, ultrasound,
echocardiograph, Holter monitors and others. As a group practice, the Company
may own and benefit from historically profitable ancillary services for patients
of the group as well as, under current interpretations of state and federal
laws, patients referred to the Company by other physicians and providers not
associated with the Company. This ability to own and refer patients for
ancillary services is significantly restricted for physicians not in group
practices by both state and federal health care laws, thus the Company believes
it will enjoy a competitive advantage over other health care providers and
physicians. The Company believes many self-insured employers and third party
payors have determined that the delivery of services in an outpatient
environment is often less costly than the provision of the identical services on
an inpatient basis. Consequently, some payors insist that services be obtained
solely on an outpatient basis where medically appropriate and contract with
diagnostic imaging centers for the provision of these services.
Acquired Ancillary Services
Effective September 1, 1996, the Company acquired 100% of the operating
assets of Nuclear Magnetic Imaging, Inc. ("NMI") and 97.5% of Magnetic Imaging
Systems I, Ltd. ("MIS"), which jointly operate as MRI Scan Center. The MRI Scan
Center, which began operations in 1984, performs approximately 9,000 procedures
per year. In May 1986, the MRI Scan Center began providing mobile MRI services
to outpatient facilities and to hospitals. The MRI Scan Center currently
operates at three locations, two in Fort Lauderdale and one in Coral Gables,
Florida. The MRI Scanner uses a highly technical
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process called magnetic resonance imaging, which utilizes an extremely powerful
magnetic field, radio waves and computers to produce images of the body. While
the patient is in the magnetic field, radio waves stimulate the hydrogen
molecules in the body to give off their own signals. This information is fed
through numerous computers, which map the action and properties of the
molecules. Images of the body are constructed which display biochemistry of
tissue as a picture. The MRI procedure was approved by the Food and Drug
Administration in the early 1980's. The MRI Scanner differentiates between
healthy tissue, tumors, fatty tissues and muscles. This means that many
uncomfortable tests, certain types of exploratory surgeries, some biopsies,
angiograms, mammographies and others, can be safely replaced by MRIs. In most
cases, a clear image is produced with no discomfort to the patient or costly
hospitalization.
Effective September 1, 1996, under two separate agreements with certain
limited partners of Magnetic Imaging Systems I, Ltd. (MIS), the Company acquired
each such partner's 4.75% interest in MIS in exchange for $30,000 in notes
payable and 7,500 shares of the Company's Common Stock, each.
Under a third agreement dated September 1, 1996 (MRI Agreement) between
Dr. Robert Kagan, who was a 28.5% limited partner in MIS and the sole
shareholder of Nuclear Magnetic Imaging, Inc. (NMI), the 59.5% general partner
in MIS (combined, MRI Group), the Company acquired 100% of NMI and the MRI
shareholders' 28.5% interest in MIS (resulting in a total interest in MIS of
97.5%), for consideration of 550,000 shares of Common Stock of the Company and
the issuance of a $400,000 note bearing interest at 6.5%, $200,000 was paid
during April 1997, and the remaining $200,000 plus accrued interest on or before
April 1, 1998. The MRI Agreement also provides for the issuance of up to an
additional 400,000 shares to the MRI Group as follows: if the EBITDA of the MRI
Group for the twelve months ended June 30, 1997 and 1998 is determined to have
exceeded $1.2 million and $1.5 million respectively, the Company shall deliver
200,000 additional shares of Common Stock of the Company upon each such
occurrence. The MRI Scan Center did not meet its EBITDA requirement for the 12
month period ended June 30, 1997. The Company agreed to extend the EBITDA
threshold for earning the bonus share, to be cumulative at the end of the second
year.
On August 21, 1997, the Company offered to convert any, or a portion,
of the limited partnership units purchased by the MRI Scan Center in 1993 and
1994, into the Company's common stock. The Company's offer was to allow the note
holders to convert any amount due into the appropriate amount of the Company's
Common Stock at a 25% discount to the market value of the Company's shares,
based on the closing price for the Company's Common Stock on the date they
notified the Company of acceptance of the conversion option. The Company's
shares were issued as legend shares and will not be eligible for sale in the
open market for 12 months from the date of issue under SEC Rule 144. The Company
warranted that at the time the restrictive legend is removed, the price of the
common stock will be no lower than the price on the
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conversion date, or the Company will make up any shortfall in stock or cash. A
total of $60,000 has been converted to date at an average price of $4.39 per
share.
The Company has warranted that the cumulative shares represented in the
MRI Agreement will be worth no less than 10 times the pre-tax earnings of the
combined consolidated companies following 12 and 24 months from the time of
acquisitions. If the average closing price of the Company's Common Stock for the
ten days prior to the years ended June 30, 1997 and 1998, multiplied by 550,000
plus the number of any contingent shares earned ("Trading Value") is less than
ten times the pretax earnings of the MRI Group for each respective twelve month
period, the Company must deliver additional shares such that the Trading Value
is equal to ten times, or pay the NMI and MRI shareholders the difference in
cash. Additionally, as part of the acquisition, Dr. Kagan received an employment
contract which calls for payment of $600,000 per year and a percentage of the
adjusted revenues of NMI jointly not to exceed 15% of all revenue generated by
NMI. The 5-year employment contract in addition, calls for numerous
non-solicitation and non-compete provisions that will prohibit Dr. Kagan from
competing with the Company for a period of no less than two (2) years following
termination.
On September 26, 1996, effective October 1, 1996, pursuant to a stock
purchase agreement ("Datascan Agreement") the Company acquired Datascan of
Florida, Inc. and Datascan Southeast, Inc., mobile and fixed site diagnostic
testing companies servicing Dade, Broward and Palm Beach Counties (collectively,
"Datascan"). Datascan was organized in May 1981 in Fort Lauderdale, Florida.
Datascan serves its patients from mobile facilities providing services directly
to the physicians' offices. Datascan has currently 32 employees and provides
ultrasound procedures including echocardiography, cardiac Doppler, colorflow
mapping, transesophogeal echocardiography and stress echocardiography and
carotid artery, abdominal, transrectal and transvaginal ultrasound, small parts
imaging and peripheral vascular ultrasound. It also provides Holter monitoring,
event monitoring, EKG and pacemaker checks, in addition to nuclear cardiac
imaging. The Company sees approximately 17,000 patients per year, with 32,000
procedure codes billed in 1995. The payor mix for the Company is approximately
40% Medicare, 20% private insurance and 40% managed care. Its referral source
includes over 400 local physicians and hospitals.
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. For the year ended June 30,
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1997, the foregoing requirements were met and according the Company issued the
Datascan shareholders an additional 100,000 shares of Common Stock. Kenneth J.
Hall, a director of the Company was an approximately 50% shareholder of
Datascan, with the other principal shareholder of Datascan, Michael P.
Goldstein, Group Vice President of the Company, a 29% stockholder of Datascan
and at the time of acquisition a Vice President of Datascan. In the event,
however, that EBITDA does not equal or exceed $288,000 in the twelve months
ended June 30, 1997, but it equals or exceeds $602,532 for the twenty-four
months ended June 30, 1998, the Company will deliver up to 200,000 additional
shares. Datascan met its EBITDA requirement for the 12 month period ended June
30, 1997. The Company, in addition, agreed to enter into employment contracts
with the principals of Datascan that in part calls for an employment contract
with a base salary of $200,000 per year, plus a bonus to be paid in combination
of cash and/or stock to be negotiated.
In addition, the Datascan Agreement provides that, if the Company
merges, consolidates or otherwise reorganizes and such transaction results in
the Company not being the surviving corporation, depending upon when such
transaction occurs, additional consideration may be due. Specifically, if during
the twelve month period ended June 30, 1997, the EBITDA of Datascan for the most
recent three months (at the point in time as such transaction occurs) is
determined to have equaled or exceeded $72,000, the Company will deliver an
additional 200,000 shares and further, if such transaction occurs subsequent to
June 30, 1997 but prior to June 30, 1998, and both the EBITDA for the twelve
months ended June 30, 1997 equaled or exceeded $288,000 and the average monthly
EBITDA for the prior months in the period equals or exceeds $26,157, the Company
shall deliver 100,000 additional shares of Common Stock to the Datascan
shareholders.
All the Acquisitions to date were accounted for under the "purchase"
method of accounting.
Management Information Systems
The Company has begun to install and maintain integrated information
systems to support its growth and acquisition plans. The Company believes that
effective and efficient access to key clinical patient data is crucial in
improving costs and quality outcomes. The Company will utilize its information
systems to improve productivity, manage complex reimbursement procedures,
measure patient care satisfaction and outcomes of care, and integrate
information from multiple facilities throughout the care spectrum. The Company's
overall information systems will be designed to be modular and flexible. The
Company has selected a partner to provide the information systems that will, in
part, allow the Company to track physician utilization, outcomes management,
patient scheduling and tracking and most importantly, managed care plan
processing.
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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.
Competition
The health care industry is highly competitive. The industry is also
subject to continuing changes in the provision of services and the selection and
compensation of providers. In addition, certain companies, including hospitals
and insurers, are expanding their presence in the physician management market.
The Company's operations will compete with national, regional and local
companies in providing its services. Many of the Company's competitors are
larger and better capitalized to provide a wider variety of services, may have
greater experience in providing health care management services and may have
longer established relationships with buyers of such services.
Government Regulation
As a participant in the health care industry, the Company's operations
and relationships are subject to extensive and increasing regulation by a number
of governmental entities at the federal, state and local levels. The Company
intends to structure its operations to be in material compliance with applicable
laws. Nevertheless, because of the uniqueness of the structure of the
relationship of the Physician Practices and Ancillary Services owned or acquired
by the Company, many aspects of the Company's actual and proposed business
operations have not been the subject of state or federal regulatory
interpretation and there can be no assurance that a review of the Company's or
the affiliated physicians' business by courts or regulatory authorities will not
result in a determination that could adversely affect the operations of the
Company or the affiliated physicians or that the health care regulatory
environment will not change so as to restrict the Company's or the affiliated
physicians' existing operations or their expansion.
The federal Medicare program adopted a system of reimbursement of
physician services, known as the resource based relative value scale schedule
("RBRVS"), which took effect in 1992 and was implemented in December 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
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harbors, and, accordingly, there can be no assurance that the Company's
practices, if scrutinized, would not be found to be in violation of the statute,
and any such finding could have a material adverse effect on the Company.
Transactions outside of a safe harbor are not per se violations of the statute,
but may be subject to government scrutiny on a case by case basis. Among the
safe harbors included in the regulations were provisions relating to the sale of
practitioner practices, management and personal services agreements, and
employee relationships. Additional safe harbors were published in September 1993
offering new protections under the statute to eight activities, including
referrals within group practices consisting of active investors. Proposed
amendments to clarify these safe harbors were published in July 1994 which, if
adopted, would cause substantive retroactive changes to the 1991 regulations.
The new federal Health Insurance Portability and Accountability Act of
1996, signed into law on August 21, 1996, expands the government's resources to
combat health care fraud, creates several new criminal health care offenses and
establishes a new advisory opinion mechanism under which the Office of Inspector
General is required to respond to requests for interpretation of the
Anti-Kickback Statute, in an effort to bring clarity and relief to the
uncertainty of the Anti-Kickback Statute. Due to the newness of the legislation,
it is impossible to predict the impact of the new law on the Company's
operations.
Florida has adopted state laws similar to the federal Anti-Kickback
Statute prohibiting payments intended to induce referrals of all patients,
regardless of payor source. The "Patient Brokering Law," effective October 1,
1996, makes it a crime for any person, including any health care provider or
health care facility, to offer, pay, solicit, or receive any commissions, bonus,
rebate, kickback, or bribe, directly or indirectly, overtly or covertly, in cash
or in kind, or to engage in any split-fee arrangement, in any form whatsoever,
to induce or in return for referring patients or patronage to or from a health
care provider or health care facility, or to aid, abet, advise, or participate
in any such act. There are exceptions to the Patient Brokering Law, including
exceptions for any payment practice, discount, or waiver of payment not
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
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which the physician or immediate family member has an ownership or investment
interest or with which the physician has entered into a compensation
arrangement. The designated health services include clinical laboratory
services, radiology and other diagnostic services, radiation therapy services,
physical and occupational therapy services, durable medical equipment,
parenteral and enteral nutrients, equipment and supplies, prosthetics,
orthotics, outpatient prescription drugs, home health services, and inpatient
and outpatient hospital services. The penalties for violating Stark II include a
prohibition on payment by these government programs and civil penalties of as
much as $15,000 for each violative referral and $100,000 for participation in a
"circumvention scheme." The Stark legislation is broad and ambiguous.
Interpretive regulations clarifying the provisions of Stark II have not been
issued. Florida has also enacted similar self-referral laws. The Florida Patient
Self-Referral Act of 1992 severely restricts patient referrals for certain
services by physicians with ownership or investment interests, requires
disclosure of physician ownership in businesses to which patients are referred
and places other regulations on health care providers. While the Company
believes it is in compliance with the Florida and Stark legislation, and their
exceptions, future laws, regulations or interpretations of current law could
require the Company to modify the form of its relationships with physicians and
ancillary service providers. Moreover, the violation of Stark I or II or the
Florida Patient Self-Referral Law of 1992 by the Company's Physician group could
result in significant fines and loss of reimbursement which would adversely
affect the Company.
As a result of the continued escalation of health care costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been or may be introduced in the U.S. Congress and state legislatures
relating to health care reform. There can be no assurance as to the ultimate
content, timing or effect of any health care reform legislation, nor is it
possible at this time to estimate the impact of potential legislation, which may
be material on the Company.
Employees
As of June 29, 1998, the Company had 130 full-time and 5 part-time
employees. Of the total, 13 were employed at the Company's corporate office and
8 at the Company's billing subsidiary MetBilling Group, Inc. 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.
Description of Property
The Company's Executive offices are located at 5100 Town Center Circle,
Suite 560, Boca Raton, Florida 33486 where it occupies 3,800 square feet and a
monthly rental of approximately $8,836 pursuant to a sublease expiring April 15,
2000.
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<PAGE>
MetBilling Group, Inc. occupies approximately 2,490 square feet in Boca
Raton, Florida 33486, at a monthly rental of approximately $3,321, which lease
expires on April 15, 2000.
Magnetic Imaging Systems, I, Ltd. also leases approximately 4,656
square feet for diagnostic facilities located in Fort Lauderdale, Florida at a
monthly rental rate of approximately $14,126 which lease expires April 30, 1999
and is leased from Dr. Kagan, a Director of the Company.
The Company also leases approximately 5,000 square feet for diagnostic
facilities in Fort Lauderdale, Florida at a monthly rate of approximately $7,395
which lease expires January 31, 1999 and is leased from KFK Enterprises, Inc., a
corporation in which Dr. Kagan is the largest shareholder and a director of the
Company.
None of the Company's properties, except as otherwise indicated, are
leased from affiliates.
Legal Proceedings
The Company is not a party to any material legal proceedings and, to
the best of the Company's information, knowledge and belief, none is
contemplated or has been threatened, other than stated below.
Datascan and the Company have been named as defendants in a lawsuit
wherein a former Datascan employee is alleging employment discrimination. The
lawsuit seeks unspecified punitive and economic damages. The Company believes
that these claims are without merit, and intends to vigorously defend this
action. At this time, the Company is unable to estimate the possible loss or
range of loss that would occur if this action were judged unfavorably.
On September 25, 1996, pursuant to a merger agreement ("FRSI
Agreement"), the Company, acquired Florida Rehabilitation Services, Inc.
("FRSI") and Southeast Medical Staffing, Inc. ("SMSI" and collectively "FR
Group") from the sole shareholder of both companies. On December 31, 1996, the
Company has rescinded this transaction as a result of the Company's belief that
a breach of the agreement has occurred and requested the return of all
consideration paid. In connection therewith, the Company has cancelled the
shares of common stock issued as part of the purchase price and will take all
action necessary for the return of all cash and other expenses paid in
connection with the transaction. The merger transaction is not reflected in the
financial statements and the common stock is not considered to be outstanding at
June 30, 1997. During the year ended June 30, 1997, the Company reserved
approximately $72,000 of advances incurred in connection with this transaction.
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<PAGE>
On or about June 24, 1997, the Company and Met Rehab Group, Inc.
(collectively the "Plaintiffs") instituted an action against FRSI, SMSI and
Frederick J. Kunen ("Kunen") (collectively the "Defendants") whereby the Company
is seeking damages against the Defendants in excess of $15,000 for fraud in the
inducement and for breach of the FRSI Agreement. The Company is also seeking a
rescission of the FRSI Agreement. The Plaintiffs have obtained a Default
Judgment against SMSI. On or about December 3, 1997, Kunen filed a Counterclaim
asserting causes of action against the Company for breach of promissory note,
fraud in the inducement, and securities fraud under Chapter 517 of the Florida
Statutes. The Company filed a Motion to Dismiss Kunen's Counterclaim on or about
May 18, 1998 which has not yet been heard. The Company intends to vigorously
litigate this action and to defend the claims brought against it by Kunen.
In January 1997, a medical billing group filed a complaint against the
company and FR Group claiming breach of a funding and security agreement, and
economic damages of approximately $150,000 plus treble damages of approximately
$208,000. Although the Company believes it has meritorious defenses against the
suit, the ultimate resolution of the matter could result in a material loss to
the Company.
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS SET
FORTH IN THIS PROSPECTUS ARE FORWARD LOOKING AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DESCRIBED FOR A VARIETY OF FACTORS. SUCH FACTORS COULD INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS" IN THE COMPANY'S FORM 10KSB ANNUAL REPORT FILED FOR THE FISCAL YEAR
ENDING JUNE 30, 1997, AS WELL AS THOSE DISCUSSED ELSEWHERE IN OTHER PUBLIC
FILINGS MADE BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. FORWARD
LOOKING STATEMENTS INCLUDE THE COMPANY'S STATEMENTS REGARDING LIQUIDITY,
ANTICIPATED CASH NEEDS AND AVAILABILITY, AND ANTICIPATED EXPENSE LEVELS IN
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." ALL FORWARD LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED
ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY
ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD LOOKING STATEMENTS. IT IS
IMPORTANT TO NOTE THAT THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE IN SUCH FORWARD LOOKING STATEMENTS.
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<PAGE>
SELLING SECURITY HOLDERS
Securities Purchase Agreements
The Series A Preferred Stock was acquired by the Selling Security
Holder pursuant to the terms of a Regulation D Stock Purchase Agreement dated
July 1997 ("Securities Purchase Agreement"). The Series A Preferred Stock bears
a 10% dividend. The Series A Preferred Stock is currently convertible into the
Company's Common Stock. The Preferred Stock carries no voting rights. The stated
value of the Preferred Stock is $100 per share.
The Series A Preferred Stock is convertible subject to adjustment, into
shares of Common Stock of the Company at the lower of (i) 85% the average of the
average closing bid price of the Company's Common Stock on the NASDAQ SmallCap
Market (or on the principal securities exchange on which the Company's Common
Stock is then traded) during the 10 trading days prior to the date of
conversion; or (ii) $6.00 per share.
The Company has retained the option 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 the rate per share (as a
percentage of the stated value) equal to 5% per annum, and together with the
initial dividend rate, to equal 15% per annum payable under the same terms as
the initial dividends, until conversion is permitted.
In addition, holders of the Series A Preferred Stock shall be entitled
to receive, when and as declared by the Board of Directors out of funds legally
available therefor, and the Company shall pay, cumulative dividends at the rate
per share, as a percentage of the Stated Value equal to five (5%) percent per
annum, payable, in cash or shares of Common Stock (subject to the terms and
conditions hereof) at the option of the Company quarterly in arrears, but in no
event later than conversion applicable to such share of Series A Preferred
Stock. Dividends on the Series A Preferred Stock shall be calculated on the
basis of a 360-day year, shall accrue daily commencing the date of issuance and
shall be deemed to accrue on such date whether or not earned or declared and
whether or not there are profits, surplus or other funds of the Company legally
available for the payment of dividends. The party that holds the Series A
Preferred Stock of record on an applicable record date for any dividend payment
will be entitled to receive such dividend payment and any other accrued and
unpaid dividends which accrued prior to such dividend payment date, without
regard to any sale or disposition of such Series A Preferred Stock subsequent to
the applicable record date but prior to the applicable dividend payment date.
Except as otherwise provided herein, if at any time the Company pays less than
the total amount of dividends then accrued on account of the Series A Preferred
Stock, such payment shall be distributed ratably among the holders of the Series
A Preferred Stock based upon the number of shares held by each holder.
Pursuant to the Stock Purchase Agreement, the Company agreed to file a
Registration Statement registering the resale by the Selling Security Holders of
the Shares underlying the Preferred Stock. The Registration Statement has been
filed by
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<PAGE>
the Company to fulfill these obligations to the Selling Security Holder under
the Stock Purchase Agreement. The Company is required to maintain the
effectiveness of the Registration Statement covering the resale of the Shares of
the Selling Security Holder until the earlier of (i) the date on which the
Selling Security Holder may sell all of their Shares without restriction
pursuant to Rule 144(k) promulgated under the Securities Act of 1933, or (ii)
the date on which the Selling Security Holder has sold all of their Shares
included in the Prospectus and none of the shares of the Preferred Stock.
The Company has agreed to indemnify the Selling Security Holder against
any liabilities under the Securities Act of 1933 or otherwise, arising out of or
based upon any untrue or alleged untrue statement of a material fact in the
Registration Statement or this Prospectus or by any omission of a material fact
required to be stated therein except to the extent that such liabilities arise
out of or are based upon any untrue or alleged untrue statement or omission in
any information furnished in writing to the Company by the Selling Security
Holders expressly for use in the Registration Statement. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
its Certificate of Incorporation and By-laws, the Company has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
Pursuant to the terms of the Stock Purchase Agreement, a Holder may not
convert Preferred Stock if, as a result of such conversion, the shares of Common
Stock beneficially owned by the Holder would exceed 4.9% (the "Percentage") of
the outstanding shares of Common Stock of the Company (the "4.9% Restriction").
Notwithstanding, the converting Holder or Holders may waive the applicability of
the 4.9% Restriction (the "Waiver") by providing notice to the Company of such
Holder or Holders intent to waive such restriction. In no event may the holders
convert Preferred Stock if the total number of shares of Common Stock issuable
upon conversion would exceed the maximum number of shares of Common Stock that
the Company could, without stockholder approval, issue pursuant to Nasdaq Rule
4460(i)(l)(d)(ii).
The Series B Preferred Stock and related Warrants were acquired by the
Selling Security Holder pursuant to the terms of a Regulation D Securities
Purchase Agreement dated April 27, 1998 ("Securities Purchase Agreement"). The
Series B Preferred Stock bears a 5% dividend. The Series B Preferred Stock is
immediately convertible into the Company's Common Stock. The Preferred Stock
carries no voting rights. The stated value of the Preferred Stock is $1,000 per
share.
The Preferred Stock is immediately convertible, subject to adjustment,
into shares of Common Stock of the Company at the lower of (i) 90% of the
average of the two (2) lowest closing bid prices of the Company's Common Stock
on the NASDAQ SmallCap Market (or on the principal securities exchange on which
the Company's Common Stock
39
<PAGE>
is then traded) during the twelve (12) trading days prior to the date of
conversion; or (ii) $4.00 per share ("Conversion Rate").
Provided that a registration statement is effective and the Company is
not subject to redeem the Series B Preferred Stock, any shares of Preferred
Stock which are outstanding on April 24, 2003 will be automatically converted at
the Conversion Rate.
Upon the happening of a Mandatory Redemption Event (as described in
"Description of Securities - Series B Preferred Stock"), at the option of the
holders of at least fifty (50%) percent of the then outstanding Series B
Preferred Stock, the Corporation will be required to redeem each of the holders
shares of Series B Preferred Stock for an amount equal to (1) 120% multiplied by
the sum of the Stated Value of the shares to be redeemed; or (2) the "parity
value" of the shares to be redeemed, where parity value means the product of (a)
the number of shares of Common Stock issuable upon conversion of such shares,
multiplied by (b) the Closing Price for the Common Stock on such "Conversion
Date."
Pursuant to the terms of the Securities Purchase Agreement, the Holder
also received Five Year Warrants (the "Warrants") to purchase 120,000 shares of
Common Stock of the Company at $4.00 and 120,000 shares of Common Stock of the
Company at $5.00.
The Warrants are exercisable at any time from April 27, 1998 to April
27, 2003. The Warrants also include a cashless exercise option ("Cashless
Exercise Option") applicable only if the Company fails to have an effective
registration statement. As a result of the Cashless Exercise Option, the Holders
thereof will be entitled to receive a number of shares of Common Stock
calculated by multiplying the number of shares of Common Stock for which the
Warrant is being exercised by a fraction, the numerator of which shall be the
difference between the then current Market Price per share of the Common Stock
and the Exercise Price, and the denominator of which shall be the then current
Market Price per share of Common Stock.
Pursuant to the terms of the Securities Purchase Agreement, a Holder
may not convert Preferred Stock if, as a result of such conversion, the shares
of Common Stock beneficially owned by the Holder would exceed 4.9% (the
"Percentage") of the outstanding shares of Common Stock of the Company (the
"4.9% Restriction"). Notwithstanding, the converting Holder or Holders may waive
the applicability of the 4.9% Restriction (the "Waiver") by providing notice to
the Company of such Holder or Holders intent to waive such restriction. In no
event may the holders convert Preferred Stock if the total number of shares of
Common Stock issuable upon conversion would exceed the maximum number of shares
of Common Stock that the Company could, without stockholder approval, issue
pursuant to Nasdaq Rule 4460(i)(l)(d)(ii).
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<PAGE>
The Company has also agreed not to issue any equity securities for cash
in private capital raising transactions at a discount to current market without
obtaining the prior written approval of Holders holding a majority of the
purchase price of the Series B Preferred Stock then outstanding. In addition,
the Company has agreed that through April 27, 1999, the Company will not,
without the prior written consent of each Holder, issue or sell, or agree to
issue or sell, any equity or debt securities of the Company or any of its
subsidiaries (or any security convertible into or exercisable or exchangeable,
directly or indirectly, for equity or debt securities of the Company or any of
its subsidiaries) unless the Company shall have first delivered to each Holder
at least 15 days prior to the closing of such future offerings a written notice
describing such future offering and providing each Holder and its affiliates an
option during the 10-day period following delivery of such notice to purchase up
to the full amount of the securities being offered in the future offering on
such terms as contemplated by such future offering. Such restrictions on capital
raising activities of the Company do not apply to any transaction involving
issuances of securities in connection with a merger, consolidation, acquisition
or sale of assets, in connection with any strategic partnership or joint
venture, the disposition or acquisition of a business, equity component of a
bona fide senior lending arrangement, product or license by the Company or
exercise of options by employees, consultants or directors of the Company. In
addition, these capital raising limitations will not apply to underwritten
public offerings, the exercise or conversion of existing options, warrants or
convertible securities, the grant of options or warrants under any stock option
or restricted stock plan for the benefit of the Company's employees, directors
and consultants.
In connection with distributions of the Shares, the Holders have agreed
that during the period from the date hereof to the date that all shares of
Preferred Stock owned by such Holder are either converted in full or redeemed by
the Company or otherwise disposed of by the Holder, the Holder shall not engage
in short sales or other hedging transactions with respect to the Common Stock.
However, a Holder may enter into such transactions involving a number of shares
of Common Stock not to exceed the number of Shares for which a Conversion Notice
has been submitted to the Company.
Pursuant to the Registration Rights Agreement with the holder of the
Series B Preferred Stock and Warrants, the Company agreed to file a Registration
Statement registering the resale by the Holder of the Shares underlying the
Series B Preferred Stock and the Warrants. The Registration Statement has been
filed by the Company to fulfill these obligations to the Holder under the
Registration Rights Agreement. The Company is required to maintain the
effectiveness of the Registration Statement covering the resale of the Shares of
the Holder until the earlier of (i) the date on which the Holder may sell all of
their Shares without restriction pursuant to Rule 144(k) promulgated under the
Securities Act of 1933, or (ii) the date on which the Holder has sold all of
their Shares included in the Prospectus and none of the shares of the Series B
Preferred Stock and the Warrants remain outstanding.
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<PAGE>
The Company has agreed to indemnify the Holder against any liabilities
under the Securities Act of 1933 or otherwise, arising out of or based upon any
untrue or alleged untrue statement of a material fact in the Registration
Statement or this Prospectus or by any omission of a material fact required to
be stated therein except to the extent that such liabilities arise out of or are
based upon any untrue or alleged untrue statement or omission in any information
furnished in writing to the Company by the Selling Security Holders expressly
for use in the Registration Statement. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the Company pursuant to its Certificate of
Incorporation and By-laws, the Company has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
The following table sets forth the name of the Selling Security
Holders, the amount of shares of Common Stock held directly or indirectly or
underlying the Series A Preferred Stock, Series B Preferred Stock and the
Warrants as of June 29, 1998 to be offered by the Selling Security Holders and
the amount to be owned by the Selling Security Holders following sale of such
shares of Common Stock. As of June 29, 1998, there were 6,184,569 outstanding
shares of Common Stock of the Company.
Shares to be
Name of Selling Number of Shares to Owned After
Security Holders Shares Owned(3) be Offered(3) Offering
- ---------------- --------------- ------------- ------------
Neal Jay Tolar, Ph.D.(1) 496,700 427,100 69,600
Pangaea Fund, Ltd.(2) 1,155,200 1,155,200 -0-
(1) Includes 427,100 shares of Common Stock issuable upon the conversion of
5,000 shares of Series A Preferred Stock. Address is 1818 South Highway 441,
Apopka, FL 32703.
(2) Includes 915,200 shares of Common Stock issuable upon the conversion of
1,200 shares of Series B Preferred Stock and 240,000 shares of Common Stock
issuable upon the exercise of the Warrants. Address is Windermere House, 404
East Bay Street, P.O. Box 55-6238, Nassau, Bahamas.
(3) The number of shares set forth in the table represents an estimate of the
number of shares of Common Stock to be offered by the Selling Security Holder.
The actual number of shares of Common Stock issuable upon conversion of Series A
Preferred Stock and Series B Preferred Stock is indeterminate, is subject to
adjustment and could be materially less or more than such estimated number
depending on factors which cannot be predicted by the Company at this time,
including, among other factors, the future market price of the Common Stock. The
actual number of shares of Common
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<PAGE>
Stock offered hereby, and included in the Registration Statement of which this
Prospectus is a part, includes such additional number of shares of Common Stock
as may be issued or issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock and exercise of the Warrants by reason of the floating
rate conversion price mechanism or other adjustment mechanisms described therein
or by reason of any stock split, stock dividend or similar transaction involving
the Common Stock, in order to prevent dilution, in accordance with Rule 416
under the Securities Act. Pursuant to the terms of the Series A Preferred Stock,
if the Series A Preferred Stock had been actually converted on June 29, 1998,
the conversion price would have been $2.54 (85% of the average closing bid price
of the Common Stock for the ten (10) trading days immediately preceding such
date) at which price the Series A Preferred Stock would have been converted into
approximately 213,550 shares of Common Stock. Pursuant to the terms of the
Series B Preferred Stock, if the Series B Preferred Stock had been actually
converted on June 26, 1998, the conversion price would have been $2.65 (90%
of the average of the two (2) daily low trading prices of the Common Stock for
the twelve (12) trading days immediately preceding such date) at which price the
Series B Preferred Stock would have been converted into approximately
457,600 shares of Common Stock.
The Warrants are exercisable into 240,000 shares of Common Stock at an
exercise price of $4.00 and 120,000 shares of Common Stock at an exercise price
of $5.00. Pursuant to the terms of the Series B Preferred Stock are convertible
and the Warrants are exercisable by any holder only to the extent that the
number of shares of Common Stock thereby issuable, together with the number of
shares of Common Stock owned by such holder and its affiliates (but not
including shares of Common Stock underlying unconverted shares of Series B
Preferred Stock or unexercised portions of the Warrants) would not exceed 4.9%
of the then outstanding Common Stock as determined in accordance with Section
13(d) of the Exchange Act. Accordingly, the number of shares of Common Stock set
forth in the table for this Selling Stockholder exceeds the number of shares of
Common Stock that this Selling Stockholder could own beneficially at any given
time through their ownership of the Series B Preferred Stock and the Warrants.
In that regard, beneficial ownership of this Selling Stockholder set forth in
the table is not determined in accordance with Rule 13d-3 under the Exchange
Act.
The Company has agreed to pay for all costs and expenses incident to
the issuance, offer, sale and delivery of the shares issuable upon conversion of
the Series A Preferred Stock, Series B Preferred Stock and upon exercise of the
Warrants including, but not limited to, all expenses and fees of preparing,
filing and printing the Registration Statement and Prospectus and related
exhibits, amendments and supplements thereto and mailing of such items. The
Company will not pay selling commissions and expenses associated with any such
sales by the Selling Security Holders. Sales of the shares of Common Stock may
be made from time to time by or for the account of the Selling Security Holders
in one or more transactions in the over-the-counter market, in negotiated
transactions or otherwise, at prices related to the prevailing market prices or
at negotiated prices.
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<PAGE>
PLAN OF DISTRIBUTION
The Shares being offered by the Selling Security Holders or their
respective pledgees, donees, transferees or other successors in interest, will
be sold in one or more transactions (which may involve block transactions) on
the NASDAQ SmallCap Market or on such other market on which the Common Stock may
from time to time be trading, in privately-negotiated transactions, through the
writing of options on the Shares, short sales or any combination thereof. The
sale price to the public may be the combination thereof. The sale price to the
public may be the market price prevailing at the time of sale, a price related
to such prevailing market price or such other price as the Selling Security
Holders determine from time to time. The Shares may also be sold pursuant to
Rule 144. The Selling Security Holders shall have the sole and absolute
discretion not to accept any purchase offer or make any sale of Shares if they
deem the purchase price to be unsatisfactory at any particular time.
The Selling Security Holders of their respective pledgees, donees,
transferees or other successors in interest, may also sell the Shares directly
to market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Brokers acting as agents for the Selling Security
Holders will receive usual and customary commissions for brokerage transactions,
and market makers and block purchasers purchasing the Shares will do so for
their own account and at their own risk. It is possible that a Selling Security
Holders will attempt to sell shares of Common Stock in block transactions to
market makers or other purchasers at a price per share which may be below the
then market price. There can be no assurance that all or any of the Shares
offered hereby will be issued to, or sold by, the Selling Security Holders. The
Selling Security Holders and any brokers, dealers or agents, upon effecting the
sale of any of the Shares offered hereby, may be deemed "underwriters" as that
term is defined under the Securities Act or the Exchange Act, or the rules and
regulations thereunder.
The Selling Security Holders, alternatively, may sell all or any part
of the Shares offered hereby through an underwriter. No Selling Security Holders
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into. If a Selling Security
Holders enters into such an agreement or agreements, the relevant details will
be set forth in a supplement or revisions to this Prospectus.
The Selling Security Holders and any other persons participating in the
sale or distribution of the Shares will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the Shares by the Selling
Security Holders or any other such person. The foregoing may affect the
marketability of the Shares.
The Company has agreed to indemnify the Selling Security Holders, or
their transferees or assignees, against certain liabilities, including
liabilities under the
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<PAGE>
Securities Act, or to contribute to payments the Selling Security Holders or
their respective pledgees, donees, transferees or other successors in interest,
may be required to make in respect thereof.
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with by the Company and the selling
stockholders.
The Company has agreed to pay all fees and expenses incident to the
registration of the securities registered hereby except selling commissions and
fees and expenses of counsel or any other professionals or other advisors, if
any, to the selling stockholders.
DESCRIPTION OF SECURITIES
The Company is currently authorized to issue up to 40,000,000 shares of
Common Stock, $.001 par value per share, of which 6,184,569 shares were
outstanding as of the date hereof. The Company is authorized to issue up to
10,000,000 shares of Preferred Stock, $.001 par value per share, of which 30,000
shares have been designated as Series A Preferred Stock, and 5,000 of which were
outstanding as of the date hereof, and 7,000 shares have been designated as
Series B Preferred Stock and 1,200 shares of which were outstanding as of the
date hereof.
Common Stock
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted for the election of
directors can elect all of the directors. The holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over the Common Stock. Holders of
shares of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock. All of the outstanding shares of Common Stock are, and the shares
of Common Stock offered hereby, will be duly authorized, validly issued, fully
paid and nonassessable.
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Market for Common Equity and Related Stockholder Matters
The Company's Common Stock and Warrants are currently traded on the
NASDAQ SmallCap Market ("NASDAQ") under the symbols "MDPA" and "MDPAW." The
following table sets forth, since the Company's initial public offering on
February 14, 1997, the high and low closing sales prices for the Common Stock
and Warrants, as reported by NASDAQ:
<TABLE>
<CAPTION>
Common Stock Warrants
------------ --------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1997
Third Quarter....................... $7.56 $3.56 $2.75 $1.00
(ended March 31, 1997)
Fourth Quarter...................... $5.37 $3.18 $1.28 $0.50
(ended June 30, 1997)
1998
First Quarter....................... $6.13 $3.38 $ .97 $ .44
(ended September 30, 1997)
Second Quarter...................... $7.38 $5.63 $1.06 $ .53
(ended December 31, 1997)
Third Quarter....................... $6.13 $2.50 $ .66 $ .25
(ended March 31, 1998)
Fourth Quarter...................... $4.06 $2.75 $ .59 $ .31
(ended June 29, 1998)
</TABLE>
The Company has not declared or paid any dividends on Common Stock. The
Company presently intends to invest its earnings, if any, in the development and
growth of its operations.
As of June 29, 1998, there were 1,040 record holders of the Company's
Common Stock.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of Preferred Stock
with such designation, rights and preferences as may be determined from time to
time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of the Common Stock. In the event of
issuance, the Preferred Stock could be
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<PAGE>
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company.
The Board of Directors has designated 30,000 shares of Preferred Stock
as Series A Convertible Preferred Stock of which 5,000 are currently
outstanding. The Board of Directors has also designated 7,000 shares of
Preferred Stock as Series B Convertible Preferred Stock of which 1,200 shares
are currently issued and outstanding.
Series A Preferred Stock.
Designation and Number of Shares. The Company has designated 30,000
shares of its Preferred Stock as "Series A Preferred Stock" of a par value of
$.001 per share of which 5,000 shares are issued and outstanding.
Dividend Rights. Holders of the Series A Preferred Stock shall be
entitled to receive, when and as declared by the Board of Directors out of funds
legally available therefor, and the Company shall pay, cumulative dividends at
the rate per share, as a percentage of the stated value of $100 per share
("Stated Value") equal to 10% percent per annum ("Initial Dividends"), payable,
in cash or shares of Common Stock (subject to the terms and conditions hereof)
at the option of the Company quarterly in arrears, but in no event later than
conversion applicable to such share of Series A Preferred Stock.
Conversion.
(a) Each share of Series A Preferred Stock shall be
convertible into shares of Common Stock at the Conversion Ratio (as defined
herein) at the option of the holder in whole or in part as at any time after the
expiration of the 360th day after the date of issuance. "Conversion Ratio"
means, at any time, a fraction, of which the numerator is Stated Value plus
accrued but unpaid dividends (including any accrued but unpaid interest thereon)
but only to the extent not paid in shares of Common Stock in accordance with the
terms hereof, and of which the denominator is the Conversion Price at such time.
The Company shall have 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 the rate per share (as a percentage
of the Stated Value) equal to 5% per annum, and together with the Initial
Dividend rate, to equal fifteen (15%) percent per annum payable under the same
terms as the Initial Dividends.
(b) The conversion price for each share of Series A Preferred
Stock (the "Conversion Price") in effect on any conversion date shall be the
lesser of (a) 85% of the average closing bid price of the Common Stock reported
by the principal exchange on which the Common Stock is traded, the NASDAQ Small
Cap Market or any other
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<PAGE>
exchange the Common Stock is then traded, for the ten (10) trading days
immediately preceding the Conversion Date, or (b) $6.00.
(c) The Conversion Price will be subject to adjustment in
certain events, including (i) the issuance of capital stock as a dividend or
distribution on Common Stock, (ii) subdivision, combinations, reverse stock
splits and reclassification of the Common Stock, (iii) the fixing of a record
date for the issuance to all holders of Common Stock of rights or warrants
entitling them (for a period expiring within 45 days of such record date) to
subscribe for Common Stock and (iv) the fixing of a record date for the
distribution to all holders of Common Stock of evidence of indebtedness or
assets (other than cash dividends) of the Company or subscription rights or
warrants (other than those referred to above).
Redemption. The Company shall have the right, exercisable at any time
upon ten (10) trading days notice to the holders of the Series A Preferred Stock
given at any time after the expiration of two years after the date of issuance
to redeem, from funds legally available therefor at the time of such redemption,
all or any portion of the shares of Series A Preferred Stock which have not
previously been converted or redeemed, at a price equal to 105% of the product
of (i) the number of shares of Preferred Stock then held by the holder, and (ii)
the Stated Value.
Voting Rights. Except as provided by law, the Series A Preferred Stock
shall not be entitled to vote on matters submitted to a vote of the shareholders
of the Company.
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Company, holders of the Series A Preferred Stock shall be
entitled to receive, after due payment or provision for payment for the debts
and other liabilities of the Company, a liquidating distribution before any
distribution may be made to holders of Common Stock of the Company. The holders
of the Series A Preferred Stock outstanding shall be entitled to receive an
amount equal to the Stated Value, plus declared dividends to the date of the
final distribution, whether or not such liquidation, dissolution or winding up
is voluntary or involuntary on the part of the Company.
Miscellaneous. The Series A Preferred Stock has no preemptive rights.
Series B Convertible Preferred Stock
Designation and Amount. The Company has designated 7,000 shares of
Preferred Stock as Series B Preferred Stock with the stated value as One
Thousand Dollars ($1,000) per share (the "Stated Value").
Rank. The Series B Preferred Stock shall rank (i) prior to the
Company's common stock, par value $.001 per share (the "Common Stock"); (ii)
prior to any class or series of capital stock of the Company hereafter created
(unless, with the consent of the
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holders of Series B Preferred Stock, such class or series of capital stock
specifically, by its terms, ranks senior to or pari passu with the Series B
Preferred Stock) (collectively, with the Common Stock, "Junior Securities");
(iii) pari passu with any class or series of capital stock of the Company
hereafter created (with the consent of the holders of Series B Preferred Stock)
specifically ranking, by its terms, on parity with the Series B Preferred Stock
("Pari Passu Securities"); and (iv) junior to any class or series of capital
stock of the Company hereafter created (with the consent of the holders of
Series B Preferred Stock obtained in accordance with Article IX hereof)
specifically ranking, by its terms, senior to the Series B Preferred Stock
("Senior Securities"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary.
Dividend Rights. Holders of the Series B Preferred Stock shall be
entitled to receive, whether or not declared by the Board of Directors out of
funds legally available therefor, and the Company shall pay, cumulative
dividends at the rate per share, as a percentage of the stated value of $1,000
per share ("Stated Value") equal to 5% percent per annum ("Initial Dividends"),
payable, in cash or shares of Common Stock (subject to the terms and conditions
hereof) at the option of the Company quarterly in arrears, but in no event later
than conversion applicable to such share of Series B Preferred Stock.
Liquidation Preference
(a) At the option of any holder of Series B Preferred Stock,
upon the sale, conveyance or disposition of all or substantially all of the
assets of the Company, the effectuation by the Company of a transaction or
series of related transactions in which more than 50% of the voting power of the
Company is disposed of, or the consolidation, merger or other business
combination of the Company with or into any other entity when the Company is not
the survivor shall either: (i) be deemed to be a liquidation, dissolution or
winding up of the Company pursuant to which the Company shall be required to
distribute upon consummation of such transaction an amount equal to 120% of the
Liquidation Preference with respect to each outstanding share of Series B
Preferred Stock or (ii) be treated pursuant to the provisions under "Conversion
at the Option of the Holder" described herein.
(b) For purposes hereof, the "Liquidation Preference" with
respect to a share of the Series B Preferred Stock shall mean an amount equal to
the sum of (i) the Stated Value thereof plus (ii) and amount equal to five
percent (5%) per annum of such Stated Value for the period beginning on the date
of issuance of the Series B Preferred Stock (the "Issue Date") and ending on the
date of final distribution to the holder thereof (prorated for any portion of
such period).
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Redemption
(a) If any of the following events (each, a "Mandatory
Redemption Event") shall occur:
(i) The Company fails to issue shares of Common Stock
to the holders of Series B Preferred Stock upon exercise by the holders of their
conversion rights fails to transfer or to cause its transfer agent to transfer
any certificate for shares of Common Stock issued to the holders upon conversion
of the Series B Preferred Stock as and when required, fails to remove any
restrictive legend (or to withdraw any stop transfer instructions in respect
thereof) on any certificate or any shares of Common Stock issued to the holders
of Series B Preferred Stock upon conversion of the Series B Preferred Stock, or
fails to fulfill its obligations pursuant to certain Sections of the Purchase
Agreement therefor and any such failure shall continue uncured for ten (10)
business days;
(ii) In connection with the Securities Purchase
Agreement dated April 24, 1998, the Company fails to obtain effectiveness with
the Securities and Exchange Commission (the "SEC") of a Registration Statement
registering the shares of Common Stock underlying the Series B Preferred Stock
prior to October 31, 1998 or such Registration Statement lapses in effect (or
sales otherwise cannot be made thereunder, whether by reason of the Company's
failure to amend or supplement the prospectus included therein for more than
thirty (30) consecutive days or sixty (60) days in any twelve (12) month period
after such Registration Statement becomes effective. In connection with shares
of Series B Preferred Stock issued pursuant to any other securities purchase
agreement the Corporation fails to obtain effectiveness with the Securities and
Exchange Commission (the "SEC") of the Registration Statement (as defined in the
Registration Rights Agreement) prior to the expiration of six (6) months from
the date of issuance of the Series B Preferred Stock or such Registration
Statement lapses in effect (or sales otherwise cannot be made thereunder,
whether by reason of the Company's failure to amend or supplement the prospectus
included therein in accordance with the Registration Rights Agreement or
otherwise) for more than thirty (30) consecutive days or sixty (60) days in any
twelve (12) month period after such Registration Statement becomes effective;
(iii) The Company shall make an assignment for the
benefit of creditors, or apply for or consent to the appointment of a receiver
or trustee for it or for all or substantially all of its property or business;
or such a receiver or trustee shall otherwise be appointed;
(iv) Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Company or any subsidiary of the Company;
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(v) The Company shall fail to maintain the listing of
the Common Stock on the Nasdaq National Market, the Nasdaq SmallCap Market
("Nasdaq SmallCap"), the New York Stock Exchange or the American Stock Exchange
and such failure shall remain uncured for at least ten (10) business days, then,
upon the occurrence and during the continuation of any Mandatory Redemption
Event, the Company shall purchase each holder's shares of Series B Preferred
Stock for an amount per share equal to the greater of (1) 120% multiplied by the
sum of (a) the Stated Value of the shares to be redeemed ^ (the "Mandatory
Redemption Date"), and (2) the "parity value" of the shares to be redeemed,
where parity value means the product of (a) the number of shares of Common Stock
issuable upon conversion of such shares multiplied by (b) the Closing Price for
the Common Stock on such "Conversion Date" (the greater of such amounts being
referred to as the "Mandatory Redemption Amount").
In the case of a Mandatory Redemption Event, if the Company
fails to pay the Mandatory Redemption Amount for each share within five (5)
business days of written notice that such amount is due and payable, then
(assuming there are sufficient authorized shares) in addition to all other
available remedies, each holder of Series B Preferred Stock shall have the right
at any time, so long as the Mandatory Redemption Event continues, to require the
Company, upon written notice, to immediately issue in lieu of the Mandatory
Redemption Amount, with respect to each outstanding share of Series B Preferred
Stock held by such holder, the number of shares of Common Stock of the Company
equal to the Mandatory Redemption Amount divided by the Conversion Price then in
effect.
(b) If the Series B Preferred Stock ceases to be convertible
as a result of the limitations described under "Conversion at the Option of the
Holder" described herein (a "19.99% Redemption Event"), and the Company has not
prior to, or within thirty (30) days of, the date that such 19.99% Redemption
Event arises, (i) obtained approval of the issuance of the additional shares of
Common Stock by the requisite vote of the holders of the then-outstanding Common
Stock (not including any shares of Common Stock held by present or former
holders of Series B Preferred Stock that were issued upon conversion of Series B
Preferred Stock); or (ii) received other permission pursuant to Nasdaq
Marketplace Rule 4460(i) allowing the Company to resume issuances of shares of
Common Stock upon conversion of Series B Preferred Stock, then the Company shall
be obligated to redeem immediately all of the then outstanding Series B
Preferred Stock, in accordance with this Article 5(b). An irrevocable Redemption
Notice shall be delivered promptly to the holders of Series B Preferred Stock at
their registered address appearing on the records of the Company and shall state
(1) that 19.99% of the Outstanding Common Amount (as defined herein) has been
issued upon exercise of the Series B Preferred Stock; (2) that the Company is
obligated to redeem all of the outstanding Series B Preferred Stock; and (3) the
Mandatory Redemption Date, which shall be a date within five (5) business days
of the date of the Redemption Notice. On the Mandatory Redemption Date, the
Company shall make payment of the Mandatory Redemption Amount (as defined in
Article 5(a) above) in
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cash. If the Company fails to redeem in accordance with the provisions hereof,
in addition to all other remedies available to the holders of the Series B
Preferred Stock, upon request of a majority-in-interest of the Series B
Preferred Stock, the Company shall terminate the listing of its Common Stock on
Nasdaq SmallCap (and any other exchange or quotation system with a rule
substantially similar to Rule 4460(i)) and cause its Common Stock to be eligible
for trading on the over-the-counter electronic bulletin board.
(c) So long as no Mandatory Redemption Event shall have
occurred and be continuing, the Company shall have the right, on the date which
is the third (3rd) anniversary of the date on which the Registration Statement
is declared effective by the SEC, exercisable on not less than twenty (20)
Trading Days prior written notice to the holders of Series B Preferred Stock, to
redeem all of the outstanding shares of Series B Preferred Stock in accordance
herewith. If the Company exercises its right to redeem the Series B Preferred
Stock, the Company shall make payment to the holders of an amount in cash (the
"Optional Redemption Amount") equal to 120% ^ of the Stated Value of the shares
of Series B Preferred Stock to be redeemed plus any unpaid dividends for each
share of Series B Preferred Stock then held.
Conversion at the Option of the Holder
(a) Each holder of shares of Series B Preferred Stock may,
convert any or all of the shares of Series B Preferred Stock into Common Stock
as follows (an "Optional Conversion"). Each share of Series B Preferred Stock
shall be convertible into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing (1) ^ the Stated Value thereof ^ by
(2) the then effective Conversion Price (as defined below). ^
(b) The "Conversion Price" shall be the lesser of the Market
Price (as defined herein) and the Fixed Conversion Price (as defined herein),
subject to certain adjustments as described herein. "Market Price" shall mean
the average of the two (2) lowest Closing Bid Prices during the twelve (12)
consecutive Trading Day period ending one (1) Trading Day prior to the date (the
"Conversion Date") the Conversion Notice is sent by a holder to the Company via
facsimile (the "Pricing Period"). The "Fixed Conversion Price" shall mean $4.00.
Notwithstanding anything contained in the foregoing the
Conversion Prices subject to certain adjustments including in the event of
merger, consolidation, stock dividends, stock splits as set forth in the
Company's Articles of Incorporation.
Automatic Conversion
So long as a Registration Statement cover the Common Stock underlying
the Series B Preferred Stock is effective and there is not then a continuing
Mandatory Redemption Event, each share of Series B Preferred Stock issued and
outstanding on
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April 24, 2003, subject to any adjustment (the "Automatic Conversion Date"),
automatically shall be converted into shares of Common Stock on such date at the
then effective Conversion Price in accordance with, and subject to, the
provisions of Article VI hereof (the "Automatic Conversion"). The Automatic
Conversion Date shall be delayed by one (1) Trading Day each for each Trading
Day occurring prior thereto and prior to the full conversion of the Series B
Preferred Stock that (i) sales cannot be made pursuant to the Registration
Statement (whether by reason of the Company's failure to properly supplement or
amend the prospectus included therein in accordance with the terms of the
Registration Rights Agreement or otherwise including any Allowed Delays; or (ii)
any Default Event exists, without regard to whether any cure periods shall have
run.
Voting Rights
The holders of the Series B Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Florida Company Law ("FCL").
Protective Provisions
So long as shares of Series B Preferred Stock are outstanding, the
Company shall not, without first obtaining the approval (by vote or written
consent, as provided by the FCL) of the holders of at least a majority of the
then outstanding shares of Series B Preferred Stock: (a) alter or change the
rights, preferences or privileges of the Series B Preferred Stock or any Senior
Securities so as to affect adversely the Series B Preferred Stock; (b) create
any new class or series of capital stock having a preference over the Series B
Preferred Stock as to distribution of assets upon liquidation, dissolution or
winding up of the Company; (c) create any new class or series of capital stock
ranking pari passu with the Series B Preferred Stock as to distribution of
assets upon liquidation, dissolution or winding up of the Company; (d) increase
the authorized number of shares of Series B Preferred Stock; or (e) do any act
or thing not authorized or contemplated by the terms of the Series B Preferred
Stock which would result in taxation of the holders of shares of the Series B
Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as
amended (or any comparable provision of the Internal Revenue Code as hereafter
from time to time amended).
Warrants
As of the date hereof, the Company has 2,834,625 warrants issued and
outstanding pursuant to the Company's initial public offering on February 14,
1998. The warrants were issued in registered form pursuant to an agreement (the
"Warrant Agreement") between the Company and Florida Atlantic Stock Transfer,
Inc., as Warrant Agent. Reference is made to said Warrant Agreement for a
complete description of the terms and conditions therein (the description herein
contained being qualified in its entirety by reference thereto). Each warrant
entitles the registered holder thereof to
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purchase one share of Common Stock, at a price of $7.00, subject to adjustment
in certain circumstances, at any time until March 3, 2001. After the expiration
date, the Warrantholders shall have no further rights. The warrants are
redeemable by the Company for $.05 per warrant, at any time upon thirty (30)
days' prior written notice, provided (i) the average closing bid price of the
Common Stock, as reported by the principal exchange on which the Common Stock is
traded, the Nasdaq SmallCap Market or the National Quotation Bureau,
Incorporated, as the case may be, equals or exceeds $12.00 per share for any ten
(10) consecutive trading days ending within ten (10) days prior to the date of
the notice of redemption, and (ii) the Company has at the time notice of
redemption is given an annualized run rate (as hereinafter defined) of revenues
of $20,000,000 for a minimum of one quarter as evidenced by the filing of a Form
8-K with the Securities and Exchange Commission containing historical pro forma
financial statements reflecting said revenues. Run Rate shall be defined as the
combined gross revenue on a pro forma basis of the Company's prior years gross
revenue.
As of June 26, 1998, Warrants to purchase 240,000 shares of Common
Stock issued to the purchasers of the Series B Preferred Stock and exercisable
over the next five years at a price of $4.00 for 120,000 shares and $5.00 for
120,000 shares (as may be adjusted from time to time under certain antidilution
provisions) were outstanding. The shares of Common Stock issuable upon exercise
of these Warrants are being registered pursuant to this Registration Statement.
The Company also has outstanding options and warrants to purchase up to
an aggregate of 1,411,250 shares of Common Stock at exercise prices ranging from
$.10 to $18.00, substantially all of which are presently exercisable until
expiration dates ranging from June 30, 1998 to June 30, 2003.
Dividend Policy
Holders of Common Stock are entitled to receive such dividends as may
be declared and paid from time to time by the Board of Directors out of funds
legally available therefor. The Company intends to retain any earnings for the
operation and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future. Any future determination as to the payment
of cash dividends will depend upon future earnings, results of operations,
capital requirements, the Company's financial condition and such other factors
as the Board of Directors may consider.
Anti-Takeover Law
Certain provisions of the Company's Articles of Incorporation and
Bylaws may be deemed to have anti-takeover effects and may delay, defer or
prevent a takeover attempt of the Company, which include when and by whom
special meetings of the Company may be called. In addition, certain provisions
of the Florida Business Corporation Act also may be deemed to have certain
anti-takeover effects which include
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that control of shares acquired in excess of certain specified thresholds will
not possess any voting rights unless these voting rights are approved by a
majority of a corporation's disinterested shareholders. In addition, the
Company's Articles of Incorporation authorize the issuance of up to 10,000,000
shares of Preferred Stock with such rights and preferences as may be determined
from time to time by the Board of Directors. Accordingly, the Board of Directors
may, without shareholder approval, issue Preferred Stock with dividends,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Common Stock. In
addition, the issuance of large blocks of Preferred Stock could possibly have a
dilutive effect with respect to existing holders of Common Stock of the Company.
The Company, however, has agreed pursuant to the terms of the Underwriting
Agreement that without the consent of the Managing Underwriter it, for a period
of two (2) years will not issue any shares of Preferred Stock (i) for purposes
other than acquisitions from persons or entities not affiliated with the
Company; (ii) which have disproportionate voting power to the shares of Common
Stock; or (iii) that have rights to stock or cash dividends disproportionate to
the shares of Common Stock.
Additionally, the Company's Articles of Incorporation, Bylaws and
Florida law authorize the Company to indemnify its directors, officers,
employees and agents and limit the personal liability of corporate directors for
monetary damages, except in certain instances. See "Description of Securities --
Certain Florida Legislation; Anti-takeover Effects of Certain Provisions of the
Company's Articles of Incorporation and Bylaws."
Over-The-Counter Market
The Company's Common Stock is traded on the NASDAQ SmallCap Market
System under the symbols "MDPA" and "MDPAW," respectively.
Transfer Agent
The Transfer Agent for the Company's shares of Common Stock is Florida
Atlantic Stock Transfer, Tamarac, Florida.
LEGAL MATTERS
Certain legal matters in connection with the securities being offered
hereby will be passed upon for the Company by Atlas, Pearlman, Trop & Borkson,
P.A., Counsel for the Company, Fort Lauderdale, Florida.
EXPERTS
The consolidated balance sheets as of June 30, 1997 and 1996, and the
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended, incorporated by reference in this prospectus, have been
incorporated herein
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in reliance on the reports of Kaufman, Rossin & Co., P.A. independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
INDEMNIFICATION
The Company has authority under Section 607.0850 of the Florida
Business Corporation Securities Act to indemnify its directors and officers to
the extent provided for in such statute. The Company's Articles of Incorporation
provide that the Company shall indemnify and may insure its officers and
directors to the fullest extent permitted by law.
The provisions of the Florida Business Corporation Securities Act that
authorize indemnification do not eliminate the duty of care of a director, and
in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Florida law. In
addition, each director will continue to be subject to liability for (i)
violations of criminal laws, unless the director had reasonable cause to believe
his conduct was lawful or had no reasonable cause to believe his conduct was
unlawful; (ii) deriving an improper personal benefit from a transaction; (iii)
voting for or assenting to an unlawful distribution; and (iv) willful misconduct
or conscious disregard for the best interests of the Company in a proceeding by
or in the right of the Company to procure a judgment in its favor or in a
proceeding by or in the right of a shareholder. The statute does not affect a
director's responsibilities under any other law, such as the Federal securities
laws.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
enforceable.
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<TABLE>
<CAPTION>
<S> <C>
No dealer, salesperson or any other person has been
authorized to give any information or to make any
representations not contained in this Prospectus in
connection with this offer made hereby. If given or
made, such information or representations must not
be relied upon as having been authorized by the Company
or any Underwriter. This Prospectus does not constitute
an offer to sell or a solicitation of any offer to buy
any of the securities offered hereby in any circumstance 1,582,000 Shares
in which such offer or solicitation would be unlawful.
Neither the delivery of this Prospectus nor any sale
made hereunder shall under any circumstances create an
implication that information herein is correct at any
time subsequent to the date of this Prospectus. METROPOLITAN
HEALTH NETWORKS,
-------------- INC.
TABLE OF CONTENTS
-----------------
Page
----
AVAILABLE INFORMATION....................... 3
INCORPORATION OF CERTAIN ----------
INFORMATION BY REFERENCE.................. 5
PROSPECTUS
RISK FACTORS................................ 6 ----------
USE OF PROCEEDS............................. 19
THE COMPANY................................. 20
SELLING SECURITY HOLDERS.................... 38
PLAN OF DISTRIBUTION........................ 44
DESCRIPTION OF SECURITIES................... 45
LEGAL MATTERS............................... 55
EXPERTS..................................... 55 ______________, 1998
INDEMNIFICATION............................. 56
</TABLE>
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
-------------------------------------------
The following table sets forth the estimated expenses, all of which are
being paid by the Company, in connection with this offering.
Legal fees and expenses............................ $6,500*
Accounting fees and expenses....................... 1,000*
Printing expenses.................................. 3,000*
Miscellaneous...................................... 2,000*
Total............................................ $12,500
- ----------------
*Estimated
Item 15. Indemnification of Directors and Officers.
The Company has authority under Section 607.0850 of the Florida
Business Corporation Securities Act to indemnify its directors and officers to
the extent provided for in such statute. The Company's Articles of Incorporation
provide that the Company shall indemnify and may insure its officers and
directors to the fullest extent permitted by law.
The provisions of the Florida Business Corporation Securities Act that
authorize indemnification do not eliminate the duty of care of a director, and
in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Florida law. In
addition, each director will continue to be subject to liability for (i)
violations of criminal laws, unless the director had reasonable cause to believe
his conduct was lawful or had no reasonable cause to believe his conduct was
unlawful; (ii) deriving an improper personal benefit from a transaction; (iii)
voting for or assenting to an unlawful distribution; and (iv) willful misconduct
or conscious disregard for the best interests of the Company in a proceeding by
or in the right of the Company to procure a judgment in its favor or in a
proceeding by or in the right of a shareholder. The statute does not affect a
director's responsibilities under any other law, such as the Federal securities
laws.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably
II-1
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believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
enforceable.
Item 16. Exhibits.
--------
Exhibit Description
- ------- -----------
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement.(1)
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. (7)
3.5 Article of Amendment to the Articles of Incorporation designating the Series B
Preferred Stock. (7)
3.6 Articles of Amendment to the Articles of Incorporation amending the designation
of the Series B Preferred Stock. (7)
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)
4.4 Warrant Agreement.(1)
4.5 Specimen of Class A Warrant (issued pursuant to the Company's Private
Placement in February 1996).(1)
II-2
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4.6 Stock Purchase Warrant (issued pursuant to the Securities Purchase
Agreement dated April 27, 1998).(7)
5.1 Opinion of Atlas, Pearlman, Trop & Borkson, P.A. concerning legality of
shares being registered pursuant to this Registration Statement.(7)
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)
10.14 Promissory Note dated September 1, 1996 by the Company to Robert L. Kagan.(1)
II-3
<PAGE>
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)
II-4
<PAGE>
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)
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. (7)
10.42 Registration Rights Agreement dated April 27, 1998 between Pangaea Fund Ltd.
and the Company. (7)
21 Subsidiaries of the Company.(1)
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).(7)
</TABLE>
- ------------------
(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
II-5
<PAGE>
(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
Item 17. Undertakings.
------------
(1) The undersigned Registrant hereby undertakes:
(a) to file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement to include
any additional or changed material information on the plan of distribution;
(b) that, for determining any liability under the Securities
Act, treat each such post-effective amendment as a new Registration Statement of
the securities offered at that time shall be deemed to be the initial bona fide
offering thereof; and
(c) to file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(2) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Director, officer of controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Fort Lauderdale and the State of Florida, on the
30th day of June, 1998
METROPOLITAN HEALTH NETWORKS, INC.
By: /s/Noel J. Guillama
-------------------------------------
Noel J. Guillama
Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
President, Chief Executive
and Operating Officer
(Principal Executive
/s/ Noel J. Guillama Operating Officer) and June 30, 1998
- --------------------------------- Chairman of the Board
Noel J. Guillama
Executive Vice President
/s/ Donald B. Cohen and Chief Financial Officer
Donald B. Cohen (Principal Financial and June 30, 1998
- --------------------------------- Accounting Officer) and
Director
- --------------------------------- Director June __, 1998
Dr. Robert L. Kagan
/s/ Kenneth J. Hall Director June 30, 1998
- ---------------------------------
Kenneth J. Hall
</TABLE>
II-7
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
METROPOLITAN HEALTH NETWORKS, INC.
Pursuant to Section 607.10025 of the Business Corporation Act of the
State of Florida, the undersigned President of METROPOLITAN HEALTH NETWORKS,
INC., a corporation organized and existing under and by virtue of the Business
Corporation Act of the State of Florida ("Corporation"), bearing document number
P96000004953, does hereby certify that the following is a true and correct copy
of resolutions duly adopted by the Board of Directors of the Company (the "Board
of Directors") by unanimous written consent dated July 28, 1997, which
constituted all requisite action on the part of the Company for adoption of such
resolutions.
WHEREAS, the Articles of Incorporation of the Corporation
authorizes 10,000,000 shares of preferred stock, par value $.001 per share, of
which no shares are issued and outstanding.
WHEREAS, the Board of Directors is authorized at any time and
from time to time, to provide for the issuance of shares of preferred stock in
one or more series, with such voting powers, full or limited, or without voting
powers, and with such designations, preferences and relations, participating,
optional or other special rights, qualifications, limitations or restrictions
thereof.
WHEREAS, the Board of Directors desires, pursuant to its
authority as aforesaid, to designate a new series of preferred stock, set the
number of shares constituting such series and fix the rights, preferences,
privileges and restrictions of such series.
Roxanne K. Beilly, Esq., FL Bar # 851450
Atlas, Pearlman, Trop & Borkson, P.A.
200 E Las Olas Blvd., Suite 1900
Ft. Lauderdale, FL 33301
(954) 763-1200
<PAGE>
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors
hereby designates a new series of preferred stock and, in accordance therewith,
Article III entitled, "Capital Stock" of the Articles of Incorporation of this
Corporation is revised to include the number of shares constituting such series
and the rights, preferences, privileges and restrictions relating to such series
as follows:
C. Series A Preferred Stock.
1. Designation and Number of Shares. The Preferred Stock shall
be designated "Series A Convertible Stock" of a par value of $.001 per
share, and the number of shares constituting the Series A Preferred
Stock shall be 30,000 shares.
2. Dividend Rights. Holders of the Series A Preferred Stock
shall be entitled to receive, when and as declared by the Board of
Directors out of funds legally available therefor, and the Company
shall pay, cumulative dividends at the rate per share, as a percentage
of the stated value of $100.00 per share ("Stated Value") equal to 10%
percent per annum ("Initial Dividends"), payable, in cash or shares of
Common Stock (subject to the terms and conditions hereof) at the option
of the Company quarterly in arrears, but in no event later than
conversion applicable to such share of Series A Preferred Stock.
Dividends on the Series A Preferred Stock shall be calculated on the
basis of a 360-day year, shall accrue daily commencing the date of
issuance and shall be deemed to accrue on such date whether or not
earned or declared and whether or not there are profits, surplus or
other funds of the Company legally available for the payment of
dividends.
2
<PAGE>
The party that holds the Series A Preferred Stock of record on an
applicable record date for any dividend payment will be entitled to
receive such dividend payment and any other accrued and unpaid
dividends which accrued prior to such dividend payment date, without
regard to any sale or disposition of such Series A Preferred Stock
subsequent to the applicable record date but prior to the applicable
dividend payment date. Except as otherwise provided herein, if at any
time the Company pays less than the total amount of dividends then
accrued on account of the Preferred Stock, such payment shall be
distributed ratably among the holders of the Preferred Stock based upon
the number of shares held by each holder.
3. Conversion.
(a) Each share of Series A Preferred Stock shall be
convertible into shares of Common Stock at the Conversion Ratio (as
defined herein) at the option of the holder in whole or in part as at
any time, commencing seven months after the date of issuance.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends (including
any accrued but unpaid interest thereon) but only to the extent not
paid in shares of Common Stock in accordance with the terms hereof, and
of which the denominator is the Conversion Price at such time. The
holder shall effect conversions by surrendering the certificate or
certificates representing the shares of Series A Preferred Stock to be
converted to the legal counsel for the Company, with a copy thereof to
the Company,
3
<PAGE>
together with the form of conversion notice attached hereto as Exhibit
A (the "Conversion Notice"), provided, however, that the holder shall
not convert more than 7,500 shares of Series A Preferred Stock in any
one quarter. Each Conversion Notice shall specify the number of shares
of Series A Preferred Stock to be converted and the date on which such
conversion is to be effected, which date may not be prior to the date
the holder delivers such Conversion Notice by facsimile (the
"Conversion Date"). If no Conversion Date is specified in a Conversion
Notice, the Conversion Date shall be the date that the Conversion
Notice is delivered. Each Conversion Notice, once given, shall be
irrevocable. If the holder is converting less than all shares of Series
A Preferred Stock represented by the certificate or certificates
tendered by the holder with the Conversion Notice, or if a conversion
hereunder cannot be effected in full for any reason, the Company shall
convert up to the number of shares of Series A Preferred Stock which
can be so converted and shall promptly deliver to such holder a
certificate for such number of shares as have not been converted.
Notwithstanding anything to the contrary contained herein, the Company
shall have 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 the rate per share
(as a percentage of the Stated Value) equal to 5% per annum, and
together with the Initial Dividend rate, to equal fifteen (15%) percent
per annum payable under the same terms as the Initial Dividends. No
fractional share or scrip representing a fractional share
4
<PAGE>
will be issued upon conversion of the Series A Preferred Stock. In the
event of any reclassification, merger, consolidation or change of
shares of the Series A Preferred Stock and/or the Common Stock of the
Corporation, the Corporation shall make adjustments to the conversion
ratio which shall be as nearly equivalent to that stated above as may
be practical.
(b) The conversion price for each share of Series A Preferred
Stock (the "Conversion Price") in effect on any Conversion Date shall
be the lesser of (a) 85% of the average closing bid price of the Common
Stock reported by the principal exchange on which the Common Stock is
traded, the NASDAQ Small Cap Market or any other exchange the Common
Stock is then traded, for the ten (10) trading days immediately
preceding the Conversion Date, or (b) $6.00.
(c) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued Common Stock
solely for the purpose of issuance upon conversion of Preferred Stock
and payment of dividends on Preferred Stock, each as herein provided,
free from preemptive rights or any other actual contingent purchase
rights of persons other than the holders of Preferred Stock, not less
than such number of shares of Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares
set forth in the Purchase Agreement) be issuable upon the conversion of
all outstanding shares of Preferred Stock and payment of dividends
hereunder. The Company covenants that all shares of Common Stock
5
<PAGE>
that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and freely tradeable.
(d) The Conversion Price will be subject to adjustment in
certain events, including (i) the issuance of capital stock as a
dividend or distribution on Common Stock, (ii) subdivision,
combinations, reverse stock splits and reclassification of the Common
Stock, (iii) the fixing of a record date for the issuance to all
holders of Common Stock of rights or warrants entitling them (for a
period expiring within 45 days of such record date) to subscribe for
Common Stock and (iv) the fixing of a record date for the distribution
to all holders of Common Stock of evidence of indebtedness or assets
(other than cash dividends) of the Corporation or subscription rights
or warrants (other than those referred to above).
(e) Shares of Series A Preferred Stock converted into Common
Stock shall be canceled and shall have the status of authorized but
unissued shares of undesignated preferred stock.
4. Redemption. The Company shall have the right, exercisable
at any time upon 10 trading days notice to the holders of the Series A
Preferred Stock given at any time after the expiration of two years
after the date of issuance to redeem, from funds legally available
therefor at the time of such redemption, all or any portion of the
shares of Series A Preferred Stock which have not previously been
converted or redeemed, at a price equal to 105% of the product of (i)
the number
6
<PAGE>
of shares of Preferred Stock then held by the holder, and (ii) the
Stated Value.
5. Voting Rights. Except as provided by law, the Series A
Preferred Stock shall not be entitled to vote on matters submitted to a
vote of the shareholders of the Corporation. Unless the vote or consent
of the holders of a greater number of shares is required by law, the
consent of the holders of at least a majority of all of the Series A
Preferred Stock at the time outstanding shall be necessary to change,
alter or revoke the rights and preferences conferred on the Series A
Preferred Stock by the Articles of Incorporation or to adopt any
amendment to the Articles of Incorporation materially adversely
affecting the rights of the holders of the Series A Preferred Stock.
6. Liquidation Rights. In the event of any liquidation,
dissolution or winding up of the Corporation, holders of the Series A
Preferred Stock shall be entitled to receive, after due payment or
provision for payment for the debts and other liabilities of the
Corporation, a liquidating distribution before any distribution may be
made to holders of Common Stock of the Corporation. The holders of the
Series A Preferred Stock outstanding shall be entitled to receive an
amount equal to the Stated Value, plus declared dividends to the date
of the final distribution, whether or not such liquidation, dissolution
or winding up is voluntary or involuntary on the part of the
Corporation.
7. Miscellaneous. The Series A Preferred Stock has no
preemptive rights. The Corporation reserves the right to issue up to an
additional
7
<PAGE>
9,970,000 shares of preferred stock, representing the balance of the
authorized preferred stock, with designations and preferences as the
Board of Directors shall determine. The Series A Preferred Stock and
the Common Stock into which such Series A Preferred Stock is
convertible, when issued will be legally issued, fully paid and
non-assessable.
IN WITNESS WHEREOF, the undersigned, being the President of
this Corporation, has executed these Articles of Amendment as of July
29, 1997.
METROPOLITAN HEALTH NETWORKS, INC.
By: /s/ Noel J. Guillama
----------------------------------------
Noel J. Guillama, Chairman and President
By: /s/ Donald Cohen
----------------------------------------
Donald Cohen, Secretary
8
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series A
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $.01 per share (the "Common Stock"), of Metropolitan Health Networks, Inc.
(the "Company") according to the conditions hereof, as of the date written
below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
___________________________________________________
Date to Effect Conversion
___________________________________________________
Number of shares of Preferred Stock to be Converted
___________________________________________________
Number of shares of Common Stock to be Issued
___________________________________________________
Applicable Conversion Price
___________________________________________________
Signature
___________________________________________________
Name
___________________________________________________
Address
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested hereby),
notify the converting holder by facsimile of the number of shares of Common
Stock outstanding on such date and the number of shares of Common Stock which
would be issuable to the holder if the conversion requested in this conversion
notice were effected in full, whereupon, if the Company determines that such
conversion would result in it owning in excess of 4.9% of the outstanding shares
of Common Stock on such date, the Company shall convert up to an amount equal to
4.9% of the outstanding shares of Common Stock and issue to the holder one or
more certificates representing shares of Preferred Stock which have not been
converted as a result of this provision.
9
ARTICLES OF AMENDMENT
to the
ARTICLES OF INCORPORATION
of
METROPOLITAN HEALTH NETWORKS, INC.
(Pursuant to Section 607.0602 of the
Florida Business Corporation Act)
Metropolitan Health Networks, Inc., a corporation organized and
existing under the Florida Business Corporation Act (the "Corporation") bearing
document no. P96000004953, hereby certifies that the following resolutions were
adopted by the Board of Directors of the Corporation on April 16, 1998 pursuant
to authority of the Board of Directors:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the "Board")
in accordance with the provisions of its Articles of Incorporation, the Board of
Directors hereby authorizes a series of the Corporation's previously authorized
Preferred Stock, par value $.001 per share (the "Preferred Stock"), and hereby
amends Article 3 of the Articles of Incorporation to include the following which
states the designation and number of shares, and fixes the relative rights,
preferences, privileges, powers and restrictions thereof as follows:
Series B Convertible Preferred Stock:
I. Designation and Amount
The designation of this series, which consists of 2,000 shares of
Preferred Stock, is Series B Convertible Preferred Stock (the "Series B
Preferred Stock") and the stated value shall be One Thousand Dollars ($1,000)
per share (the "Stated Value").
II. Rank
The Series B Preferred Stock shall rank (i) prior to the Corporation's
common stock, par value $.001 per share (the "Common Stock"); (ii) prior to any
class or series of capital stock of the Corporation hereafter created (unless,
with the consent of the holders of Series B Preferred Stock obtained in
accordance with Article IX hereof, such class or series of capital stock
specifically, by its terms, ranks senior to or pari passu with the Series B
Preferred Stock) (collectively, with the Common Stock, "Junior Securities");
(iii) pari passu with any class or series of capital stock of the Corporation
hereafter created (with the consent of the holders of Series B Preferred Stock
obtained in accordance with Article IX hereof) specifically ranking, by its
terms, on parity with the Series B Preferred Stock ("Pari Passu Securities");
and (iv) junior
This document prepared by:
ROXANNE K. BEILLY, ESQ., Florida Bar No. 851450
Atlas, Pearlman, Trop & Borkson, P.A.
200 E. Las Olas Blvd., Suite 1900
Ft. Lauderdale, FL 33301 Phone: (954) 763-1200
-1-
<PAGE>
to any class or series of capital stock of the Corporation hereafter created
(with the consent of the holders of Series B Preferred Stock obtained in
accordance with Article IX hereof) specifically ranking, by its terms, senior to
the Series B Preferred Stock ("Senior Securities"), in each case as to
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary.
III. Dividends
The Series B Preferred Stock shall not bear any dividends. In no event,
so long as any Series B Preferred Stock shall remain outstanding, shall any
dividend whatsoever be declared or paid upon, nor shall any distribution be made
upon, any Junior Securities, nor shall any shares of Junior Securities be
purchased or redeemed by the Corporation nor shall any moneys be paid to or made
available for a sinking fund for the purchase or redemption of any Junior
Securities (other than a distribution of Junior Securities), without, in each
such case, the written consent of the holders of a majority of the outstanding
shares of Series B Preferred Stock, voting together as a class.
IV. Liquidation Preference
A. If the Corporation shall commence a voluntary case under the Federal
bankruptcy laws or any other applicable Federal or State bankruptcy, insolvency
or similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the Federal bankruptcy laws or any other applicable
Federal or state bankruptcy, insolvency or similar law resulting in the
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up (each such event being considered a
"Liquidation Event"), no distribution shall be made to the holders of any shares
of capital stock of the Corporation (other than Senior Securities) upon
liquidation, dissolution or winding up unless prior thereto, the holders of
shares of Series B Preferred Stock, subject to Article VI, shall have received
the Liquidation Preference (as defined in Article IV.C) with respect to each
share. If upon the occurrence of a Liquidation Event, the assets and funds
available for distribution among the holders of the Series B Preferred Stock and
holders of Pari Passu Securities (including any dividends or distribution paid
on any Pari Passu Securities after the date of filing of this Certificate of
Designation) shall be insufficient to permit the payment to such holders of the
preferential amounts payable thereon, then the entire assets and funds of the
Corporation legally available for distribution to the Series B Preferred Stock
and the Pari Passu Securities shall be distributed ratably among such shares in
proportion to the ratio that the Liquidation Preference payable on each such
share bears to the aggregate
-2-
<PAGE>
liquidation preference payable on all such shares. Any prior dividends or
distribution made after the date of filing of this Certificate of Designation
shall offset, dollar for dollar, the amount payable to the class or series to
which such distribution was made.
B. At the option of any holder of Series B Preferred Stock, the sale,
conveyance or disposition of all or substantially all of the assets of the
Corporation, the effectuation by the Corporation of a transaction or series of
related transactions in which more than 50% of the voting power of the
Corporation is disposed of, or the consolidation, merger or other business
combination of the Corporation with or into any other Person (as defined below)
or Persons when the Corporation is not the survivor shall either: (i) be deemed
to be a liquidation, dissolution or winding up of the Corporation pursuant to
which the Corporation shall be required to distribute upon consummation of such
transaction an amount equal to 120% of the Liquidation Preference with respect
to each outstanding share of Series B Preferred Stock in accordance with and
subject to the terms of this Article IV or (ii) be treated pursuant to Article
VI.C(b) hereof. "Person" shall mean any individual, corporation, limited
liability company, partnership, association, trust or other entity or
organization.
C. For purposes hereof, the "Liquidation Preference" with respect to a
share of the Series B Preferred Stock shall mean an amount equal to the sum of
(i) the Stated Value thereof plus (ii) an amount equal to five percent (5%) per
annum of such Stated Value for the period beginning on the date of issuance of
the Series B Preferred Stock (the "Issue Date") and ending on the date of final
distribution to the holder thereof (prorated for any portion of such period).
The liquidation preference with respect to any Pari Passu Securities shall be as
set forth in the Certificate of Designation filed in respect thereof.
V. Redemption
A. If any of the following events (each, a "Mandatory Redemption
Event") shall occur:
(i) The Corporation fails to issue shares of Common Stock to
the holders of Series B Preferred Stock upon exercise by the holders of their
conversion rights in accordance with the terms of this Certificate of
Designation (for a period of at least sixty (60) days if such failure is solely
as a result of the circumstances governed by the second paragraph of Article
VI.F below and the Corporation is using all commercially reasonable efforts to
authorize a sufficient number of shares of Common Stock as soon as practicable),
fails to transfer or to cause its transfer agent to transfer (electronically or
in certificated form) any certificate for shares of Common Stock issued to the
holders upon conversion of the Series B Preferred Stock as and when required by
this Certificate of Designation or the Registration Rights Agreement, dated as
of April 24, 1998, by and among the Corporation and the other signatories
thereto (the "Registration Rights Agreement"), fails to remove any restrictive
legend (or to withdraw any stop transfer instructions in respect thereof) on any
certificate or any shares of Common Stock issued to the holders of Series B
Preferred Stock upon conversion of the Series B Preferred Stock as and when
required by this Certificate of Designation, the Securities Purchase Agreement
dated as of April 24, 1998, by and between the Corporation and the other
signatories thereto (the "Purchase Agreement") or the Registration Rights
Agreement, or fails to fulfill its obligations pursuant to Sections 4(c), 4(e),
4(h), 4(i), 4(j) or 5 of the Purchase Agreement (or
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makes any announcement, statement or threat that it does not intend to honor the
obligations described in this paragraph) and any such failure shall continue
uncured (or any announcement, statement or threat not to honor its obligations
shall not be rescinded in writing) for ten (10) business days;
(ii) The Corporation fails to obtain effectiveness with the
Securities and Exchange Commission (the "SEC") of the Registration Statement (as
defined in the Registration Rights Agreement) prior to October 31, 1998 or such
Registration Statement lapses in effect (or sales otherwise cannot be made
thereunder, whether by reason of the Company's failure to amend or supplement
the prospectus included therein in accordance with the Registration Rights
Agreement or otherwise) for more than thirty (30) consecutive days or sixty (60)
days in any twelve (12) month period after such Registration Statement becomes
effective;
(iii) The Corporation shall make an assignment for the benefit
of creditors, or apply for or consent to the appointment of a receiver or
trustee for it or for all or substantially all of its property or business; or
such a receiver or trustee shall otherwise be appointed;
(iv) Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Corporation or
any subsidiary of the Corporation;
(v) The Corporation shall fail to maintain the listing of the
Common Stock on the Nasdaq National Market, the Nasdaq SmallCap Market ("Nasdaq
SmallCap"), the New York Stock Exchange or the American Stock Exchange and such
failure shall remain uncured for at least ten (10) business days, then, upon the
occurrence and during the continuation of any Mandatory Redemption Event
specified in subparagraphs (i), (ii) or (v) at the option of the holders of at
least 50% of the then outstanding shares of Series B Preferred Stock by written
notice (the "Mandatory Redemption Notice") to the Corporation of such Mandatory
Redemption Event, or upon the occurrence of any Mandatory Redemption Event
specified in subparagraphs (iii) or (iv), the Corporation shall purchase each
holder's shares of Series B Preferred Stock for an amount per share equal to the
greater of (1) 120% multiplied by the sum of (a) the Stated Value of the shares
to be redeemed plus (b) an amount equal to five (5%) percent per annum of such
Stated Value for the period beginning on the Issue Date and ending on the date
of payment of the Mandatory Redemption Amount (the "Mandatory Redemption Date"),
and (2) the "parity value" of the shares to be redeemed, where parity value
means the product of (a) the number of shares of Common Stock issuable upon
conversion of such shares in accordance with Article VI below (without giving
any effect to any limitations or conversions of shares set forth in Article
VI.A(b) below, and treating the Trading Day (as defined in Article VI.B.)
immediately preceding the Mandatory Redemption Date as the "Conversion Date" (as
defined in Article VI.B(a)) unless the Mandatory Redemption Event arises as a
result of a breach in respect of a specific Conversion Date in which case such
Conversion Date shall be the Conversion Date), multiplied by (b) the Closing
Price (as defined in Article VI.A(b)) for the Common Stock on such "Conversion
Date" (the greater of such amounts being referred to as the "Mandatory
Redemption Amount").
In the case of a Mandatory Redemption Event, if the Corporation fails
to pay the Mandatory Redemption Amount for each share within five (5) business
days of written notice
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that such amount is due and payable, then (assuming there are sufficient
authorized shares) in addition to all other available remedies, each holder of
Series B Preferred Stock shall have the right at any time, so long as the
Mandatory Redemption Event continues, to require the Corporation, upon written
notice, to immediately issue (in accordance with and subject to the terms of
Article VI below), in lieu of the Mandatory Redemption Amount, with respect to
each outstanding share of Series B Preferred Stock held by such holder, the
number of shares of Common Stock of the Corporation equal to the Mandatory
Redemption Amount divided by the Conversion Price then in effect.
B. If the Series B Preferred Stock ceases to be convertible as a result
of the limitations described in the second paragraph of Article VI.A below (a
"19.99% Redemption Event"), and the Corporation has not prior to, or within
thirty (30) days of, the date that such 19.99% Redemption Event arises, (i)
obtained approval of the issuance of the additional shares of Common Stock by
the requisite vote of the holders of the then-outstanding Common Stock (not
including any shares of Common Stock held by present or former holders of Series
B Preferred Stock that were issued upon conversion of Series B Preferred Stock)
or (ii) received other permission pursuant to Nasdaq Marketplace Rule 4460(i)
allowing the Corporation to resume issuances of shares of Common Stock upon
conversion of Series B Preferred Stock, then the Corporation shall be obligated
to redeem immediately all of the then outstanding Series B Preferred Stock, in
accordance with this Article V.B. An irrevocable Redemption Notice shall be
delivered promptly to the holders of Series B Preferred Stock at their
registered address appearing on the records of the Corporation and shall state
(1) that 19.99% of the Outstanding Common Amount (as defined in Article VI.A)
has been issued upon exercise of the Series B Preferred Stock, (2) that the
Corporation is obligated to redeem all of the outstanding Series B Preferred
Stock and (3) the Mandatory Redemption Date, which shall be a date within five
(5) business days of the date of the Redemption Notice. On the Mandatory
Redemption Date, the Corporation shall make payment of the Mandatory Redemption
Amount (as defined in Article V.A. above) in cash. If the Corporation fails to
redeem in accordance with this Article V.B., then, in addition to all other
remedies available to the holders of the Series B Preferred Stock, upon request
of a majority-in-interest of the Series B Preferred Stock, the Corporation shall
terminate the listing of its Common Stock on Nasdaq SmallCap (and any other
exchange or quotation system with a rule substantially similar to Rule 4460(i))
and cause its Common Stock to be eligible for trading on the over-the-counter
electronic bulletin board.
C. Notwithstanding anything to the contrary contained in this Article
V, so long as no Mandatory Redemption Event shall have occurred and be
continuing, the Corporation shall have the right, on the date which is the third
(3rd) anniversary of the date on which the Registration Statement is declared
effective by the SEC, exercisable on not less than twenty (20) Trading Days
prior written notice to the holders of Series B Preferred Stock, to redeem all
of the outstanding shares of Series B Preferred Stock in accordance with this
Article V. Any notice of redemption hereunder (an "Optional Redemption") shall
be delivered to the holders of Series B Preferred Stock at their registered
addresses appearing on the books and records of the Corporation and shall state
(1) that the Corporation is exercising its right to redeem all of the
outstanding shares of Series B Preferred Stock issued on the Issue Date and (2)
the date of redemption (the "Optional Redemption Notice"). On the date fixed for
redemption (the "Optional Redemption Date"), the Corporation shall make payment
of the Optional Redemption Amount (as defined below) to or upon the order of the
holders as specified by the holders in
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writing to the Corporation at least one (1) business day prior to the Optional
Redemption Date. If the Corporation exercises its right to redeem the Series B
Preferred Stock, the Corporation shall make payment to the holders of an amount
in cash (the "Optional Redemption Amount") equal to 120% multiplied by the sum
of (i) the Stated Value of the shares of Series B Preferred Stock to be redeemed
and (ii) an amount equal to five percent (5%) per annum of such Stated Value for
the period beginning on the Issue Date and ending on the Optional Redemption
Date, for each share of Series B Preferred Stock then held. Notwithstanding
notice of an Optional Redemption, the holders shall at all times prior to the
Optional Redemption Date maintain the right to convert all or any shares of
Series B Preferred Stock in accordance with Article VI and any shares of Series
B Preferred Stock so converted after receipt of an Optional Redemption Notice
and prior to the Optional Redemption Date set forth in such notice and payment
of the aggregate Optional Redemption Amount shall be deducted from the shares of
Series B Preferred Stock which are otherwise subject to redemption pursuant to
such notice.
From time to time following the Issue Date, the holders may request
advance notice as to whether the Corporation intends to redeem the shares of
Series B Preferred Stock. Such request shall be made in writing and the
Corporation shall respond in writing as promptly as practicable but prior to
5:00 p.m. Eastern Standard Time one (1) business day after receipt of the
request. The Corporation will be bound by such response for a period of twenty
(20) Trading Days (the "Term") from the date of its response. A failure to
respond within one (1) business day shall be deemed to be an election not to
redeem the Series B Preferred Stock during the Term. The holders may not request
such notice in the event that the Corporation files a registration statement
where the use of proceeds set forth in such registration statement are
identified for purposes of redemption of the outstanding Series B Preferred
Stock.
VI. Conversion at the Option of the Holder
A. (a) Each holder of shares of Series B Preferred Stock may, at its
option at any time and from time to time, upon surrender of the certificates
therefor, convert any or all of its shares of Series B Preferred Stock into
Common Stock as follows (an "Optional Conversion"). Each share of Series B
Preferred Stock shall be convertible into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing (1) the sum of
(a) the Stated Value thereof plus (b) the Premium Amount (as defined below), by
(2) the then effective Conversion Price (as defined below); provided, however,
that, unless the holder delivers a waiver in accordance with the immediately
following sentence, in no event (other than pursuant to the Automatic Conversion
(as defined herein)) shall a holder of shares of Series B Preferred Stock be
entitled to convert any such shares in excess of that number of shares upon
conversion of which the sum of (x) the number of shares of Common Stock
beneficially owned by the holder and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the shares of Series B Preferred Stock) and (y) the
number of shares of Common Stock issuable upon the conversion of the shares of
Series B Preferred Stock with respect to which the determination of this proviso
is being made, would result in beneficial ownership by a holder and such
holder's affiliates of more than 4.9% of the outstanding shares of Common Stock.
For purposes of the proviso to the immediately preceding sentence, (i)
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder,
except as otherwise provided in clause (x) of such proviso and (ii) a holder may
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waive the limitations set forth therein by written notice to the Corporation
upon not less than sixty-one (61) days prior written notice (with such waiver
taking effect only upon the expiration of such sixty-one (61) day notice
period).
(b) The "Premium Amount" means the product of the Stated
Value, multiplied by .05, multiplied by (N/365), where "N" equals the number of
days elapsed from the Issue Date to and including the Conversion Date (as
defined in Article VI.B, below).
(c) So long as the Common Stock is listed for trading on
Nasdaq SmallCap or an exchange or quotation system with a rule substantially
similar to Rule 4460(i) then, notwithstanding anything to the contrary contained
herein if, at any time, the aggregate number of shares of Common Stock then
issued upon conversion of the Series B Preferred Stock (including any shares of
capital stock or rights to acquire shares of capital stock issued by the
Corporation which are aggregated or integrated with the Common Stock issued or
issuable upon conversion of the Series B Preferred Stock for purposes of such
rule) equals 19.99% of the "Outstanding Common Amount" (as hereinafter defined),
the Series B Preferred Stock shall, from that time forward, cease to be
convertible into Common Stock in accordance with the terms of this Article VI
and Article VII below, unless the Corporation (i) has obtained approval of the
issuance of the Common Stock upon conversion of the Series B Preferred Stock by
a majority of the total votes cast on such proposal, in person or by proxy, by
the holders of the then-outstanding Common Stock (not including any shares of
Common Stock held by present or former holders of Series B Preferred Stock that
were issued upon conversion of Series B Preferred Stock), or (ii) shall have
otherwise obtained permission to allow such issuances from Nasdaq SmallCap in
accordance with Nasdaq SmallCap Rule 4460(i). If the Corporation's Common Stock
is not then listed on Nasdaq SmallCap or an exchange or quotation system that
has a rule substantially similar to Rule 4460(i) limitations set forth herein
shall be inapplicable and of no force and effect. For purposes of this
paragraph, "Outstanding Common Amount" means (i) the number of shares of the
Common Stock outstanding on the date of issuance of the Series B Preferred Stock
pursuant to the Purchase Agreement plus (ii) any additional shares of Common
Stock issued thereafter in respect of such shares pursuant to a stock dividend,
stock split or similar event. The maximum number of shares of Common Stock
issuable as a result of the 19.99% limitation set forth herein is hereinafter
referred to as the "Maximum Share Amount." With respect to each holder of Series
B Preferred Stock, the Maximum Share Amount shall refer to such holder's pro
rata share thereof determined in accordance with Article X below. In the event
that Corporation obtains Stockholder Approval or the approval of Nasdaq
SmallCap, by reason of the inapplicability of the rules of Nasdaq SmallCap or
otherwise and concludes that it is able to increase the number of shares to be
issued above the Maximum Share Amount (such increased number being the "New
Maximum Share Amount"), the references to Maximum Share Amount, above, shall be
deemed to be, instead, references to the greater New Maximum Share Amount. In
the event that Stockholder Approval is not obtained, there are insufficient
reserved or authorized shares or a registration statement covering the
additional shares of Common Stock which constitute the New Maximum Share Amount
is not effective prior to the Maximum Share Amount being issued (if such
registration statement is necessary to allow for the public resale of such
securities), the Maximum Share Amount shall remain unchanged; provided, however,
that the Holder may grant an extension to obtain a sufficient reserved or
authorized amount of shares or of the effective date of such registration
statement. In the event that (a) the aggregate number of shares of Common Stock
issued pursuant to the
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outstanding Series B Preferred Stock represents at least twenty percent (20%) of
the Maximum Share Amount and (b) the sum of (x) the aggregate number of shares
of Common Stock issued upon conversion of Series B Preferred Stock plus (y) the
aggregate number of shares of Common Stock that remain issuable upon conversion
of Series B Preferred Stock, represents at least one hundred percent (100%) of
the Maximum Share Amount (the "Triggering Event"), the Corporation will use its
best efforts to seek and obtain Stockholder Approval (or obtain such other
relief as will allow conversions hereunder in excess of the Maximum Share
Amount) as soon as practicable following the Triggering Event and before the
Mandatory Redemption Date.
B. (a) Subject to subparagraph (b) below, the "Conversion Price" shall
be the lesser of the Market Price (as defined herein) and the Fixed Conversion
Price (as defined herein), subject to adjustments pursuant to the provisions of
Article VI.C below. "Market Price" shall mean the average of the three (3)
lowest Closing Bid Prices during the twelve (12) consecutive Trading Day period
ending one (1) Trading Day prior to the date (the "Conversion Date") the
Conversion Notice is sent by a holder to the Corporation via facsimile (the
"Pricing Period"). The "Fixed Conversion Price" shall mean $4.00. "Closing Bid
Price" means, for any security as of any date, the closing bid price on Nasdaq
SmallCap as reported by Bloomberg Financial Markets or an equivalent reliable
reporting service mutually acceptable to and hereafter designated by the holders
of a majority in interest of the shares of Series B Preferred Stock and the
Corporation ("Bloomberg") or, if Nasdaq SmallCap is not the principal trading
market for such security, the closing bid price of such security on the
principal securities exchange or trading market where such security is listed or
traded as reported by Bloomberg, or if the foregoing do not apply, the closing
bid price of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price of such security in the over-the-counter market on the electronic bulletin
board for such security or in any of the foregoing manners, the average of the
bid prices of any market makers for such security or as reported in the "pink
sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot
be calculated for such security on such date in the manner provided above, the
Closing Bid Price shall be the fair market value as mutually determined by the
Corporation and the holders of a majority in interest of shares of Series B
Preferred Stock being converted for which the calculation of the Closing Bid
Price is required in order to determine the Conversion Price of such Series B
Preferred Stock. "Trading Day" shall mean any day on which the Common Stock is
traded for any period on Nasdaq SmallCap, or on the principal securities
exchange or other securities market on which the Common Stock is then being
traded.
(b) Notwithstanding anything contained in subparagraph (a) of
this Paragraph B to the contrary, in the event the Corporation (i) makes a
public announcement that it intends to consolidate or merge with any other
corporation (other than a merger in which the Corporation is the surviving or
continuing corporation and its capital stock is unchanged) or sell or transfer
all or substantially all of the assets of the Corporation or (ii) any person,
group or entity (including the Corporation) publicly announces a tender offer to
purchase 50% or more of the Corporation's Common Stock or otherwise publicly
announces an intention to replace a majority of the corporation's Board of
Directors by waging a proxy battle or otherwise (the date of the announcement
referred to in clause (i) or (ii) is hereinafter referred to as the
"Announcement Date"), then the Conversion Price shall, effective upon the
Announcement Date and continuing through the Adjusted Conversion Price
Termination Date (as defined below), be equal to the lower of (x) the Conversion
Price which would have been applicable for an Optional
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Conversion occurring on the Announcement Date and (y) the Conversion Price that
would otherwise be in effect. From and after the Adjusted Conversion Price
Termination Date, the Conversion Price shall be determined as set forth in
subparagraph (a) of this Article VI.B. For purposes hereof, "Adjusted Conversion
Price Termination Date" shall mean, with respect to any proposed transaction,
tender offer or removal of the majority of the Board of Directors which a public
announcement as contemplated by this subparagraph (b) has been made, the date
upon which the Corporation (in the case of clause (i) above) or the person,
group or entity (in the case of clause (ii) above) publicly announces the
termination or abandonment of the proposed transaction or tender offer which
caused this subparagraph (b) to become operative.
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C. The Conversion Price shall be subject to adjustment from time to
time as follows:
(a) Adjustment to Conversion Price Due to Stock Split, Stock
Dividend, Etc. If at any time when Series B Preferred Stock is issued and
outstanding, the number of outstanding shares of Common Stock is increased or
decreased by a stock split, stock dividend, combination, reclassification,
rights offering below the Trading Price (as defined below) to all holders of
Common Stock or other similar event, which event shall have taken place during
the reference period for determination of the Conversion Price for any Optional
Conversion or Automatic Conversion of the Series B Preferred Stock, then the
Conversion Price shall be calculated giving appropriate effect to the stock
split, stock dividend, combination, reclassification or other similar event. In
such event, the Corporation shall notify the Transfer Agent of such change on or
before the effective date thereof.
(b) Adjustment Due to Merger, Consolidation, Etc. If, at any
time when Series B Preferred Stock is issued and outstanding and prior to the
conversion of all Series B Preferred Stock, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Corporation
shall be changed into the same or a different number of shares of another class
or classes of stock or securities of the Corporation or another entity, or in
case of any sale or conveyance of all or substantially all of the assets of the
Corporation other than in connection with a plan of complete liquidation of the
Corporation, then the holders of Series B Preferred Stock shall thereafter have
the right to receive upon conversion of the Series B Preferred Stock, upon the
bases and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore issuable upon conversion, such
stock, securities or assets which the holders of Series B Preferred Stock would
have been entitled to receive in such transaction had the Series B Preferred
Stock been converted in full (without regard to any limitations on conversion
contained herein) immediately prior to such transaction, and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the holders of Series B Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares of Common Stock issuable upon conversion of
the Series B Preferred Stock) shall thereafter be applicable, as nearly as may
be practicable in relation to any securities or assets thereafter deliverable
upon the conversion of Series B Preferred Stock. The Corporation shall not
effect any transaction described in this subsection (b) unless (a) it first
gives, to the extent practical, thirty (30) days' prior written notice (but in
any event at least fifteen (15) business days prior written notice) of such
merger, consolidation, exchange of shares, recapitalization, reorganization or
other similar event or sale of assets (during which time the holders of Series B
Preferred Stock shall be entitled to convert the Series B Preferred Stock) and
(b) the resulting successor or acquiring entity (if not the Corporation) assumes
by written instrument the obligations of this subsection (b). The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers or share exchanges.
(c) Other Securities Offerings. If, at any time after the
Issue Date, the Corporation sells Common Stock or securities convertible into,
or exchangeable for, Common Stock, other than a sale pursuant to a bona fide
firm commitment underwritten public offering of Common Stock by the Corporation
(not including a continuous offering pursuant to Rule 415 under the Securities
Act of 1933, as amended), (collectively, the "Other Common Stock"), then,
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if the effective or maximum sales price of the Common Stock with respect to such
transaction (including the effective or maximum conversion, or exchange price)
("Other Price") is less than the effective Conversion Price of the Series B
Preferred Stock at such time and such Other Common Stock is eligible for resale
prior to December 31, 1999, the Corporation shall adjust the Conversion Price
applicable to the Series B Preferred Stock not yet converted in form and
substance reasonably satisfactory to the holders of Series B Preferred Stock so
that the Conversion Price applicable to the Series B Preferred Stock shall not,
in any event, be greater, after giving effect to all other adjustments contained
herein, than the Other Price.
(d) Adjustment Due to Distribution. Subject to Article III, if
the Corporation shall declare or make any distribution of its assets (or rights
to acquire its assets) to holders of Common Stock as a dividend, stock
repurchase, by way of return of capital or otherwise (including any dividend or
distribution to the Corporation's shareholders in cash or shares (or rights to
acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a
"Distribution"), then the holders of Series B Preferred Stock shall be entitled,
upon any conversion of shares of Series B Preferred Stock after the date of
record for determining shareholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the holder with
respect to the shares of Common Stock issuable upon such conversion had such
holder been the holder of such shares of Common Stock on the record date for the
determination of shareholders entitled to such Distribution.
(e) Purchase Rights. Subject to Article III, if at any time
when any Series B Preferred Stock is issued and outstanding, the Corporation
issues any convertible securities or rights to purchase stock, warrants,
securities or other property (the "Purchase Rights") pro rata to the record
holders of any class of Common Stock, then the holders of Series B Preferred
Stock will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have acquired if
such holder had held the number of shares of Common Stock acquirable upon
complete conversion of the Series B Preferred Stock (without regard to any
limitations on conversion contained herein) immediately before the date on which
a record is taken for the grant, issuance or sale of such Purchase Rights, or,
if no such record is taken, the date as of which the record holders of Common
Stock are to be determined for the grant, issue or sale of such Purchase Rights.
(f) Adjustment for Restricted Periods. In the event that (1)
the Corporation fails to obtain effectiveness with the Securities and Exchange
Commission of the Registration Statement (as defined in the Registration Rights
Agreement) prior to one hundred twenty (120) days following the Issue Date, or
(2) such Registration Statement lapses in effect, or sales otherwise cannot be
made thereunder, whether by reason of the Corporation's failure or inability to
amend or supplement the prospectus (the "Prospectus") included therein in
accordance with the Registration Rights Agreement or otherwise, after such
Registration Statement becomes effective (including, without limitation, during
an Allowed Delay (as defined in Section 3(f) of the Registration Rights
Agreement), then the Pricing Period shall be comprised of, (i) in the case of an
event described in clause (1), the twenty (20) Trading Days preceding the 120th
day following the Issue Date plus all Trading Days through and including the
third Trading Day following the date of effectiveness of the Registration
Statement; and (ii) in the case of an event described in clause (2), the number
of Trading Days preceding the date on which the holder of the Series B Preferred
Stock is first notified that sales may not be made under the Prospectus
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that would otherwise then be included in the Pricing Period in accordance with
the definition thereof set forth in Article VI.B(a), plus all Trading Days
through and including the third Trading Day following the date on which the
Holder is first notified that such sales may again be made under the Prospectus.
If a holder of Series B Preferred Stock determines that sales may not be made
pursuant to the Prospectus (whether by reason of the Corporation's failure or
inability to amend or supplement the Prospectus) it shall so notify the
Corporation in writing and, unless the Corporation provides such holder with a
written opinion of the Corporation's counsel to the contrary, such determination
shall be binding for purposes of this paragraph.
(g) Notice of Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Article
VI.C, the Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to each holder of Series B Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
B Preferred Stock, furnish to such holder a like certificate setting forth (i)
such adjustment or readjustment, (ii) the Conversion Price at the time in effect
and (iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon conversion of a
share of Series B Preferred Stock.
D. For purposes of Article VI.C(a) above, "Trading Price," which shall
be measured as of the record date in respect of the rights offering means (i)
the average of the last reported sale prices for the shares of Common Stock on
Nasdaq SmallCap as reported by Bloomberg, as applicable, for the five (5)
Trading Days immediately preceding such date, or (ii) if Nasdaq SmallCap is not
the principal trading market for the shares of Common Stock, the average of the
last reported sale prices on the principal trading market for the Common Stock
during the same period as reported by Bloomberg, or (iii) if market value cannot
be calculated as of such date on any of the foregoing bases, the Trading Price
shall be the fair market value as reasonably determined in good faith by (a) the
Board of Directors of the Corporation or, (b) at the option of a
majority-in-interest of the holders of the outstanding Series B Preferred Stock
by an independent investment bank of nationally recognized standing in the
valuation of businesses similar to the business of the Corporation.
E. In order to convert Series B Preferred Stock into full shares of
Common Stock, a holder of Series B Preferred Stock shall: (i) submit a copy of
the fully executed notice of conversion in the form attached hereto as Exhibit A
("Notice of Conversion") to the Corporation by facsimile dispatched on the
Conversion Date (or by other means resulting in notice to the Corporation on the
Conversion Date) at the office of the Corporation or its designated Transfer
Agent for the Series B Preferred Stock that the holder elects to convert the
same, which notice shall specify the number of shares of Series B Preferred
Stock to be converted, the applicable Conversion Price and a calculation of the
number of shares of Common Stock issuable upon such conversion (together with a
copy of the first page of each certificate to be converted) prior to Midnight,
New York City time (the "Conversion Notice Deadline") on the date of conversion
specified on the Notice of Conversion; and (ii) surrender the original
certificates representing the Series B Preferred Stock being converted (the
"Preferred Stock Certificates"), duly endorsed, along with a copy of the Notice
of Conversion to the office of the Corporation or the Transfer Agent for the
Series B Preferred Stock as soon as practicable thereafter. The Corporation
shall
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not be obligated to issue certificates evidencing the shares of Common Stock
issuable upon such conversion, unless either the Preferred Stock Certificates
are delivered to the Company or its Transfer Agent as provided above, or the
holder notifies the Corporation or its Transfer Agent that such certificates
have been lost, stolen or destroyed (subject to the requirements of subparagraph
(a) below). In the case of a dispute as to the calculation of the Conversion
Price, the Corporation shall promptly issue such number of shares of Common
Stock that are not disputed in accordance with subparagraph (b) below. The
Corporation shall submit the disputed calculations to its outside accountant via
facsimile within two (2) business days of receipt of the Notice of Conversion.
The accountant shall audit the calculations and notify the Corporation and the
holder of the results no later than 48 hours from the time it receives the
disputed calculations. The accountant's calculation shall be deemed conclusive
absent manifest error.
(a) Lost or Stolen Certificates. Upon receipt by the
Corporation of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of Series B Preferred Stock,
and (in the case of loss, theft or destruction) of indemnity reasonably
satisfactory to the Corporation, and upon surrender and cancellation of the
Preferred Stock Certificate(s), if mutilated, the Corporation shall execute and
deliver new Preferred Stock Certificate(s) of like tenor and date.
(b) Delivery of Common Stock Upon Conversion. Upon the
surrender of certificates as described above together with a Notice of
Conversion, the Corporation shall issue and, within two (2) business days after
such surrender (or, in the case of lost, stolen or destroyed certificates, after
provision of agreement and indemnification pursuant to subparagraph (a) above)
(the "Delivery Period"), deliver (or cause its Transfer Agent to so issue and
deliver) to or upon the order of the holder (i) that number of shares of Common
Stock for the portion of the shares of Series B Preferred Stock converted as
shall be determined in accordance herewith and (ii) a certificate representing
the balance of the shares of Series B Preferred Stock not converted, if any. In
addition to any other remedies available to the holder, including actual damages
and/or equitable relief, the Corporation shall pay to a holder $2,000 per day in
cash for each day beyond a two (2) day grace period following the Delivery
Period that the Corporation fails to deliver Common Stock (a "Conversion
Default") issuable upon surrender of shares of Series B Preferred Stock with a
Notice of Conversion until such time as the Corporation has delivered all such
Common Stock (the "Conversion Default Payments"). Such cash amount shall be paid
to such holder by the fifth day of the month following the month in which it has
accrued or, at the option of the holder (by written notice to the Corporation by
the first day of the month following the month in which it has accrued), shall
be convertible into Common Stock in accordance with the terms of this Article
VI.
In lieu of delivering physical certificates representing the Common
Stock issuable upon conversion, provided the Corporation's Transfer Agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the holder and its compliance with
the provisions contained in Article VI.A. and in this Article VI.E., the
Corporation shall use its best efforts to cause its Transfer Agent to
electronically transmit the Common Stock issuable upon conversion to the holder
by crediting the account of holder's Prime Broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system. The time periods for delivery and
penalties described in the immediately preceding paragraph shall apply to the
electronic transmittals described herein.
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(c) No Fractional Shares. If any conversion of Series B
Preferred Stock would result in a fractional share of Common Stock or the right
to acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon Conversion of
the Series B Preferred Stock shall be the next higher number of shares.
(d) Conversion Date. The "Conversion Date" shall be the date
specified in the Notice of Conversion, provided that the Notice of Conversion is
submitted by facsimile (or by other means resulting in notice) to the
Corporation or its Transfer Agent before Midnight, New York City time, on the
Conversion Date. The person or persons entitled to receive the shares of Common
Stock issuable upon conversion shall be treated for all purposes as the record
holder or holders of such securities as of the Conversion Date and all rights
with respect to the shares of Series B Preferred Stock surrendered shall
forthwith terminate except the right to receive the shares of Common Stock or
other securities or property issuable on such conversion and except that the
holders preferential rights as a holder of Series B Preferred Stock shall
survive to the extent the corporation fails to deliver such securities.
F. A number of shares of the authorized but unissued Common Stock
sufficient to provide for the conversion of the Series B Preferred Stock
outstanding at the then current Conversion Price shall at all times be reserved
by the Corporation, free from preemptive rights, for such conversion or
exercise. As of the date of issuance of the Series B Preferred Stock, 750,000
authorized and unissued shares of Common Stock have been duly reserved for
issuance upon conversion of the Series B Preferred Stock (the "Reserved
Amount"). The Reserved Amount shall be increased from time to time in accordance
with the Company's obligations pursuant to Section 4(h) of the Purchase
Agreement. In addition, if the Corporation shall issue any securities or make
any change in its capital structure which would change the number of shares of
Common Stock into which each share of the Series B Preferred Stock shall be
convertible at the then current Conversion Price, the Corporation shall at the
same time also make proper provision so that thereafter there shall be a
sufficient number of shares of Common Stock authorized and reserved, free from
preemptive rights, for conversion of the outstanding Series B Preferred Stock.
If at any time a holder of shares of Series B Preferred Stock submits a
Notice of Conversion, and the Corporation does not have sufficient authorized
but unissued shares of Common Stock available to effect such conversion in
accordance with the provisions of this Article VI (a "Conversion Default"), the
Corporation shall issue to the holder (or holders, if more than one holder
submits a Notice of Conversion in respect of the same Conversion Date, pro rata
based on the ratio that the number of shares of Series B Preferred Stock then
held by each such holder bears to the aggregate number of such shares held by
such holders) all of the shares of Common Stock which are available to effect
such conversion. The number of shares of Series B Preferred Stock included in
the Notice of Conversion which exceeds the amount which is then convertible into
available shares of Common Stock (the "Excess Amount") shall, notwithstanding
anything to the contrary contained herein, not be convertible into Common Stock
in accordance with the terms hereof until (and at the holder's option at any
time after) the date additional shares of Common Stock are authorized by the
Corporation to permit such conversion, at which time the Conversion Price in
respect thereof shall be the lesser of (i) the Conversion Price on the
Conversion Default Date (as defined below) and (ii) the Conversion Price on the
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Conversion Date elected by the holder in respect thereof. The Corporation shall
use its best efforts to effect an increase in the authorized number of shares of
Common Stock as soon as possible following a Conversion Default. In addition,
the Corporation shall pay to the holder payments ("Conversion Default Payments")
for a Conversion Default in the amount of (a) (N/365), multiplied by (b) the sum
of the Stated Value plus the Premium Amount per share of Series B Preferred
Stock through the Authorization Date (as defined below), multiplied by (c) the
Excess Amount on the day the holder submits a Notice of Conversion giving rise
to a Conversion Default (the "Conversion Default Date"), multiplied by (d) .24,
where (i) N = the number of days from the Conversion Default Date to the date
(the "Authorization Date") that the Corporation authorizes a sufficient number
of shares of Common Stock to effect conversion of the full number of shares of
Series B Preferred Stock. The Corporation shall send notice to the holder of the
authorization of additional shares of Common Stock, the Authorization Date and
the amount of holder's accrued Conversion Default Payments. The accrued
Conversion Default Payment for each calendar month shall be paid in cash or
shall be convertible into Common Stock at the Conversion Price, at the holder's
option, as follows:
(a) In the event the holder elects to take such payment in
cash, cash payment shall be made to holder by the fifth day of the month
following the month in which it has accrued; and
(b) In the event the holder elects to take such payment in
Common Stock, the holder may convert such payment amount into Common Stock at
the Conversion Price (as in effect at the time of Conversion) at any time after
the fifth day of the month following the month in which it has accrued in
accordance with the terms of this Article VI (so long as there is then a
sufficient number of authorized shares).
Nothing herein shall limit the holder's right to pursue actual damages
for the Corporation's failure to maintain a sufficient number of authorized
shares of Common Stock, and each holder shall have the right to pursue all
remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
G. Upon the occurrence of each adjustment or readjustment of the
Conversion Price pursuant to this Article VI, the Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series B Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
B Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustment or readjustment, (ii) the
Conversion Price at the time in effect and (iii) the number of shares of Common
Stock and the amount, if any, of other securities or property which at the time
would be received upon conversion of a share of Series B Preferred Stock.
H. Upon submission of a Notice of Conversion by a holder of Series B
Preferred
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<PAGE>
Stock, (i) the shares covered thereby (other than the shares, if any, which
cannot be issued because their issuance would exceed such holder's allocated
portion of the Reserved Amount) shall be deemed converted into shares of Common
Stock and (ii) the holder's rights as a holder of such converted shares of
Series B Preferred Stock shall cease and terminate, excepting only the right to
receive certificates for such shares of Common Stock and to any remedies
provided herein or otherwise available at law or in equity to such holder
because of a failure by the Corporation to comply with the terms of this
Certificate of Designation. Notwithstanding the foregoing, if a holder has not
received certificates for all shares of Common Stock prior to the tenth (10th)
business day after the expiration of the Delivery Period with respect to a
conversion of shares of Series B Preferred Stock for any reason, then (unless
the holder otherwise elects to retain its status as a holder of Common Stock by
so notifying the Corporation) the holder shall regain the rights of a holder of
such shares of Series B Preferred Stock with respect to such unconverted shares
of Series B Preferred Stock and the Corporation shall, as soon as practicable,
return such unconverted shares of Series B Preferred Stock to the holder or, if
such shares of Series B Preferred Stock have not been surrendered, adjust its
records to reflect that such shares of Series B Preferred Stock have not been
converted. In all cases, the holder shall retain all of its rights and remedies
(including, without limitation, the right to receive Conversion Default Payments
pursuant to Article IV.E. to the extent required thereby for such Conversion
Default and any subsequent Conversion Default).
VII. Automatic Conversion
So long as the Registration Statement is effective and there is not
then a continuing Mandatory Redemption Event, each share of Series B Preferred
Stock issued and outstanding on April 24, 2003, subject to any adjustment
pursuant to Article V.A.(ii) (the "Automatic Conversion Date"), automatically
shall be converted into shares of Common Stock on such date at the then
effective Conversion Price in accordance with, and subject to, the provisions of
Article VI hereof (the "Automatic Conversion"). The Automatic Conversion Date
shall be delayed by one (1) Trading Day each for each Trading Day occurring
prior thereto and prior to the full conversion of the Series B Preferred Stock
that (i) sales cannot be made pursuant to the Registration Statement (whether by
reason of the Company's failure to properly supplement or amend the prospectus
included therein in accordance with the terms of the Registration Rights
Agreement or otherwise including any Allowed Delays (as defined in Section 3(f)
of the Registration Rights Agreement) or (ii) any Default Event (as defined in
Article V.A.) exists, without regard to whether any cure periods shall have run.
The Automatic Conversion Date shall be the Conversion Date for purposes of
determining the Conversion Price and the time within which certificates
representing the Common Stock must be delivered to the holder.
VIII. Voting Rights
The holders of the Series B Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Florida Corporation Law ("FCL"),
in this Article VIII, and in Article IX below.
Notwithstanding the above, the Corporation shall provide each holder of
Series B Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the
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<PAGE>
Corporation of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation or recapitalization) any share of any
class or any other securities or property, or to receive any other right, or for
the purpose of determining shareholders who are entitled to vote in connection
with any proposed sale, lease or conveyance of all or substantially all of the
assets of the Corporation, or any proposed liquidation, dissolution or winding
up of the Corporation, the Corporation shall mail a notice to each holder, at
least ten (10) days prior to the record date specified therein (or thirty (30)
days prior to the consummation of the transaction or event, whichever is
earlier), of the date on which any such record is to be taken for the purpose of
such dividend, distribution, right or other event, and a brief statement
regarding the amount and character of such dividend, distribution, right or
other event to the extent known at such time.
To the extent that under the FCL the vote of the holders of the Series
B Preferred Stock, voting separately as a class or series as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the holders of at least a majority of the shares of the Series B
Preferred Stock represented at a duly held meeting at which a quorum is present
or by written consent of a majority of the shares of Series B Preferred Stock
(except as otherwise may be required under the FCL) shall constitute the
approval of such action by the class. To the extent that under the FCL holders
of the Series B Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of Series B Preferred
Stock shall be entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible using the record date for the
taking of such vote of shareholders as the date as of which the Conversion Price
is calculated. Holders of the Series B Preferred Stock shall be entitled to
notice of all shareholder meetings or written consents (and copies of proxy
materials and other information sent to shareholders) with respect to which they
would be entitled to vote, which notice would be provided pursuant to the
Corporation's bylaws and the FCL.
IX. Protective Provisions
So long as shares of Series B Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the FCL) of the holders of at least a majority of the
then outstanding shares of Series B Preferred Stock:
(a) alter or change the rights, preferences or privileges of
the Series B Preferred Stock or any Senior Securities so as to affect adversely
the Series B Preferred Stock;
(b) create any new class or series of capital stock having a
preference over the Series B Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article II hereof, "Senior Securities");
(c) create any new class or series of capital stock ranking
pari passu with the Series B Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article II hereof, "Pari Passu Securities");
(d) increase the authorized number of shares of Series B
Preferred Stock; or
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<PAGE>
(e) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the holders of
shares of the Series B Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended).
In the event holders of at least a majority of the then outstanding
shares of Series B Preferred Stock agree to allow the Corporation to alter or
change the rights, preferences or privileges of the shares of Series B Preferred
Stock, pursuant to subsection (a) above, so as to affect the Series B Preferred
Stock, then the Corporation will deliver notice of such approved change to the
holders of the Series B Preferred Stock that did not agree to such alteration or
change (the "Dissenting Holders") and Dissenting Holders shall have the right
for a period of thirty (30) days to convert pursuant to the terms of this
Certificate of Designation as they exist prior to such alteration or change or
continue to hold their shares of Series B Preferred Stock.
X. Pro Rata Allocations
The Maximum Share Amount and the Reserved Amount (including any
increases thereto) shall be allocated by the Corporation pro rata among the
holders of Series B Preferred Stock based on the number of shares of Series B
Preferred Stock then held by each holder relative to the total aggregate number
of shares of Series B Preferred Stock then outstanding.
(THIS PAGE INTENTIONALLY LEFT BLANK)
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<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is
executed on behalf of the Corporation this 24th day of April, 1998.
METROPOLITAN HEALTH NETWORKS, INC.
By: /s/ Anthony J. Gigliotti
---------------------------------
Name: Anthony J. Gigliotti
Title: Chairman
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ARTICLES OF AMENDMENT
to the
ARTICLES OF INCORPORATION
of
METROPOLITAN HEALTH NETWORKS, INC.
(Pursuant to Section 607.0602 of the
Florida Business Corporation Act)
Metropolitan Health Networks, Inc., a corporation organized and
existing under the Florida Business Corporation Act (the "Corporation") bearing
document no. P96000004953, hereby certifies that the following resolutions were
adopted by the Board of Directors of the Corporation on June 30, 1998 pursuant
to authority of the Board of Directors:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the "Board")
in accordance with the provisions of its Articles of Incorporation on April 16,
1998, the Board of Directors authorized a series of the Corporation's previously
authorized Preferred Stock, par value $.001 per share, as Series B Preferred
Stock, in the aggregate amount of 2,000 shares; and
RESOLVED, that pursuant to the unanimous Written Consent of the Board
of Directors and sole Series B Preferred Stockholder, the Corporation increased
the authorized amount of Series B Preferred Stock from 2,000 shares to 7,000
shares and hereby amends Article 3 of the Articles of Amendment to replace the
description of the Series B Preferred Stock with the following which states the
designation and number of shares, and fixes the relative rights, preferences,
privileges, powers and restrictions of the Series B Preferred Stock thereof as
follows:
Series B Convertible Preferred Stock:
I. Designation and Amount
----------------------
The designation of this series, which consists of 7,000 shares of
Preferred Stock, is Series B Convertible Preferred Stock (the "Series B
Preferred Stock") and the stated value shall be One Thousand Dollars ($1,000)
per share (the "Stated Value").
This document prepared by:
ROXANNE K. BEILLY, ESQ., Florida Bar No. 851450
Atlas, Pearlman, Trop & Borkson, P.A.
200 E. Las Olas Blvd., Suite 1900
Ft. Lauderdale, FL 33301 Phone: (954) 763-1200
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<PAGE>
II. Rank
----
The Series B Preferred Stock shall rank (i) prior to the Corporation's
common stock, par value $.001 per share (the "Common Stock"); (ii) prior to any
class or series of capital stock of the Corporation hereafter created (unless,
with the consent of the holders of Series B Preferred Stock obtained in
accordance with Article IX hereof, such class or series of capital stock
specifically, by its terms, ranks senior to or pari passu with the Series B
Preferred Stock) (collectively, with the Common Stock, "Junior Securities");
(iii) pari passu with any class or series of capital stock of the Corporation
hereafter created (with the consent of the holders of Series B Preferred Stock
obtained in accordance with Article IX hereof) specifically ranking, by its
terms, on parity with the Series B Preferred Stock ("Pari Passu Securities");
and (iv) junior to any class or series of capital stock of the Corporation
hereafter created (with the consent of the holders of Series B Preferred Stock
obtained in accordance with Article IX hereof) specifically ranking, by its
terms, senior to the Series B Preferred Stock ("Senior Securities"), in each
case as to distribution of assets upon liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary.
III. Dividends
---------
Holders of the Series B Preferred Stock shall be entitled to receive,
whether or not declared by the Board of Directors out of funds legally available
therefor, and the Company shall pay, cumulative dividends at the rate per share,
as a percentage of the Stated Value equal to 5% percent per annum, payable, in
cash or shares of Common Stock (subject to the terms and conditions hereof) at
the option of the Company quarterly in arrears, but in no event later than
conversion applicable to such share of Series B Preferred Stock. Dividends on
the Series B Preferred Stock shall be calculated on the basis of a 360-day year,
shall accrue daily commencing the date of issuance and shall be deemed to accrue
on such date whether or not earned or declared and whether or not there are
profits, surplus or other funds of the Company legally available for the payment
of dividends. The party that holds the Series B Preferred Stock of record on an
applicable record date for any dividend payment will be entitled to receive such
dividend payment and any other accrued and unpaid dividends which accrued prior
to such dividend payment date, without regard to any sale or disposition of such
Series B Preferred Stock subsequent to the applicable record date but prior to
the applicable dividend payment date. Except as otherwise provided herein, if at
any time the Company pays less than the total amount of dividends then accrued
on account of the Series B Preferred Stock, such payment shall be distributed
ratably among the holders of the Series B Preferred Stock based upon the number
of shares held by each holder.
In no event, so long as any Series B Preferred Stock shall remain
outstanding, shall any dividend whatsoever be declared or paid upon, nor shall
any distribution be made upon, any Junior Securities, nor shall any shares of
Junior Securities be purchased or redeemed by the Corporation nor shall any
moneys be paid to or made available for a sinking fund for the purchase or
redemption of any Junior Securities (other than a distribution of Junior
Securities), without, in each such case, the written consent of the holders of a
majority of the outstanding shares of Series B Preferred Stock, voting together
as a class.
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<PAGE>
IV. Liquidation Preference
----------------------
A. If the Corporation shall commence a voluntary case under the Federal
bankruptcy laws or any other applicable Federal or State bankruptcy, insolvency
or similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the Federal bankruptcy laws or any other applicable
Federal or state bankruptcy, insolvency or similar law resulting in the
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up (each such event being considered a
"Liquidation Event"), no distribution shall be made to the holders of any shares
of capital stock of the Corporation (other than Senior Securities) upon
liquidation, dissolution or winding up unless prior thereto, the holders of
shares of Series B Preferred Stock, subject to Article VI, shall have received
the Liquidation Preference (as defined in Article IV.C) with respect to each
share. If upon the occurrence of a Liquidation Event, the assets and funds
available for distribution among the holders of the Series B Preferred Stock and
holders of Pari Passu Securities (including any dividends or distribution paid
on any Pari Passu Securities after the date of filing of this Articles of
Amendment) shall be insufficient to permit the payment to such holders of the
preferential amounts payable thereon, then the entire assets and funds of the
Corporation legally available for distribution to the Series B Preferred Stock
and the Pari Passu Securities shall be distributed ratably among such shares in
proportion to the ratio that the Liquidation Preference payable on each such
share bears to the aggregate liquidation preference payable on all such shares.
Any prior dividends or distribution made after the date of filing of this
Articles of Amendment shall offset, dollar for dollar, the amount payable to the
class or series to which such distribution was made.
B. At the option of any holder of Series B Preferred Stock, the sale,
conveyance or disposition of all or substantially all of the assets of the
Corporation, the effectuation by the Corporation of a transaction or series of
related transactions in which more than 50% of the voting power of the
Corporation is disposed of, or the consolidation, merger or other business
combination of the Corporation with or into any other Person (as defined below)
or Persons when the Corporation is not the survivor shall either: (i) be deemed
to be a liquidation, dissolution or winding up of the Corporation pursuant to
which the Corporation shall be required to distribute upon consummation of such
transaction an amount equal to 120% of the Liquidation Preference with respect
to each outstanding share of Series B Preferred Stock in accordance with and
subject to the terms of this Article IV or (ii) be treated pursuant to Article
VI.C(b) hereof. "Person" shall mean any individual, corporation, limited
liability company, partnership, association, trust or other entity or
organization.
C. For purposes hereof, the "Liquidation Preference" with respect to a
share of the Series B Preferred Stock shall mean an amount equal to the sum of
(i) the Stated Value thereof
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<PAGE>
plus (ii) and amount equal to five percent (5%) per annum of such Stated Value
for the period beginning on the date of issuance of the Series B Preferred Stock
(the "Issue Date") and ending on the date of final distribution to the holder
thereof (prorated for any portion of such period). The liquidation preference
with respect to any Pari Passu Securities shall be as set forth in the Articles
of Incorporation filed in respect thereof.
V. Redemption
----------
A. If any of the following events (each, a "Mandatory Redemption
Event") shall occur:
(i) The Corporation fails to issue shares of Common Stock to
the holders of Series B Preferred Stock upon exercise by the holders of their
conversion rights in accordance with the terms of this Articles of Amendment
(for a period of at least sixty (60) days if such failure is solely as a result
of the circumstances governed by the second paragraph of Article VI.F below and
the Corporation is using all commercially reasonable efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable), fails to
transfer or to cause its transfer agent to transfer (electronically or in
certificated form) any certificate for shares of Common Stock issued to the
holders upon conversion of the Series B Preferred Stock as and when required by
this Articles of Amendment or the Registration Rights Agreement, dated as of
April 24, 1998, by and among the Corporation and the other signatories thereto
(the "Registration Rights Agreement"), fails to remove any restrictive legend
(or to withdraw any stop transfer instructions in respect thereof) on any
certificate or any shares of Common Stock issued to the holders of Series B
Preferred Stock upon conversion of the Series B Preferred Stock as and when
required by this Articles of Amendment, the Securities Purchase Agreement dated
as of April 24, 1998, by and between the Corporation and the other signatories
thereto (the "Purchase Agreement") or the Registration Rights Agreement, or
fails to fulfill its obligations pursuant to Sections 4(c), 4(e), 4(h), 4(i),
4(j) or 5 of the Purchase Agreement (or makes any announcement, statement or
threat that it does not intend to honor the obligations described in this
paragraph) and any such failure shall continue uncured (or any announcement,
statement or threat not to honor its obligations shall not be rescinded in
writing) for ten (10) business days;
(ii) In connection with the Securities Purchase Agreement
dated April 24, 1998, the Corporation fails to obtain effectiveness with the
Securities and Exchange Commission (the "SEC") of the Registration Statement (as
defined in the Registration Rights Agreement) prior to November 7, 1998 or such
Registration Statement lapses in effect (or sales otherwise cannot be made
thereunder, whether by reason of the Company's failure to amend or supplement
the prospectus included therein in accordance with the Registration Rights
Agreement or otherwise) for more than thirty (30) consecutive days or sixty (60)
days in any twelve (12) month period after such Registration Statement becomes
effective. In connection with shares of Series B Preferred Stock issued pursuant
to any other securities purchase agreement, the Corporation fails to obtain
effectiveness with the Securities and Exchange Commission (the "SEC") of the
Registration Statement (as defined in the Registration Rights Agreement) prior
to the expiration of six (6) months from the date of issuance of the Series B
Preferred Stock or such Registration Statement lapses in effect (or sales
otherwise cannot be made thereunder, whether by reason of the Company's failure
to amend or supplement the prospectus included therein in accordance with the
Registration Rights Agreement or otherwise) for more than
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<PAGE>
thirty (30) consecutive days or sixty (60) days in any twelve (12) month period
after such Registration Statement becomes effective;
(iii) The Corporation shall make an assignment for the benefit
of creditors, or apply for or consent to the appointment of a receiver or
trustee for it or for all or substantially all of its property or business; or
such a receiver or trustee shall otherwise be appointed;
(iv) Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Corporation or
any subsidiary of the Corporation;
(v) The Corporation shall fail to maintain the listing of the
Common Stock on the Nasdaq National Market, the Nasdaq SmallCap Market ("Nasdaq
SmallCap"), the New York Stock Exchange or the American Stock Exchange and such
failure shall remain uncured for at least ten (10) business days, then, upon the
occurrence and during the continuation of any Mandatory Redemption Event
specified in subparagraphs (i), (ii) or (v) at the option of the holders of at
least 50% of the then outstanding shares of Series B Preferred Stock by written
notice (the "Mandatory Redemption Notice") to the Corporation of such Mandatory
Redemption Event, or upon the occurrence of any Mandatory Redemption Event
specified in subparagraphs (iii) or (iv), the Corporation shall purchase each
holder's shares of Series B Preferred Stock for an amount per share equal to the
greater of (1) 120% multiplied by the sum of (a) the Stated Value of the shares
to be redeemed (the "Mandatory Redemption Date"), and (2) the "parity value" of
the shares to be redeemed, where parity value means the product of (a) the
number of shares of Common Stock issuable upon conversion of such shares in
accordance with Article VI below (without giving any effect to any limitations
or conversions of shares set forth in Article VI.A(b) below, and treating the
Trading Day (as defined in Article VI.B.) immediately preceding the date of
payment of the Mandatory Redemption Amount ("Mandatory Redemption Date") as the
"Conversion Date" (as defined in Article VI.B(a)) unless the Mandatory
Redemption Event arises as a result of a breach in respect of a specific
Conversion Date in which case such Conversion Date shall be the Conversion
Date), multiplied by (b) the Closing Price (as defined in Article VI.A(b)) for
the Common Stock on such "Conversion Date" (the greater of such amounts being
referred to as the "Mandatory Redemption Amount").
In the case of a Mandatory Redemption Event, if the Corporation fails
to pay the Mandatory Redemption Amount for each share within five (5) business
days of written notice that such amount is due and payable, then (assuming there
are sufficient authorized shares) in addition to all other available remedies,
each holder of Series B Preferred Stock shall have the right at any time, so
long as the Mandatory Redemption Event continues, to require the Corporation,
upon written notice, to immediately issue (in accordance with and subject to the
terms of Article VI below), in lieu of the Mandatory Redemption Amount, with
respect to each outstanding share of Series B Preferred Stock held by such
holder, the number of shares of Common Stock of the Corporation equal to the
Mandatory Redemption Amount divided by the Conversion Price then in effect.
B. If the Series B Preferred Stock ceases to be convertible as a result
of the limitations described in the second paragraph of Article VI.A below (a
"19.99% Redemption Event"), and the Corporation has not prior to, or within
thirty (30) days of, the date that such
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19.99% Redemption Event arises, (i) obtained approval of the issuance of the
additional shares of Common Stock by the requisite vote of the holders of the
then-outstanding Common Stock (not including any shares of Common Stock held by
present or former holders of Series B Preferred Stock that were issued upon
conversion of Series B Preferred Stock) or (ii) received other permission
pursuant to Nasdaq Marketplace Rule 4460(i) allowing the Corporation to resume
issuances of shares of Common Stock upon conversion of Series B Preferred Stock,
then the Corporation shall be obligated to redeem immediately all of the then
outstanding Series B Preferred Stock, in accordance with this Article V.B. An
irrevocable Redemption Notice shall be delivered promptly to the holders of
Series B Preferred Stock at their registered address appearing on the records of
the Corporation and shall state (1) that 19.99% of the Outstanding Common Amount
(as defined in Article VI.A) has been issued upon exercise of the Series B
Preferred Stock, (2) that the Corporation is obligated to redeem all of the
outstanding Series B Preferred Stock and (3) the Mandatory Redemption Date,
which shall be a date within five (5) business days of the date of the
Redemption Notice. On the Mandatory Redemption Date, the Corporation shall make
payment of the Mandatory Redemption Amount (as defined in Article V.A. above) in
cash. If the Corporation fails to redeem in accordance with this Article V.B.,
then, in addition to all other remedies available to the holders of the Series B
Preferred Stock, upon request of a majority-in-interest of the Series B
Preferred Stock, the Corporation shall terminate the listing of its Common Stock
on Nasdaq SmallCap (and any other exchange or quotation system with a rule
substantially similar to Rule 4460(i)) and cause its Common Stock to be eligible
for trading on the over-the-counter electronic bulletin board.
C. Notwithstanding anything to the contrary contained in this Article
V, so long as no Mandatory Redemption Event shall have occurred and be
continuing, the Corporation shall have the right, on the date which is the third
(3rd) anniversary of the date on which the Registration Statement is declared
effective by the SEC, exercisable on not less than twenty (20) Trading Days
prior written notice to the holders of Series B Preferred Stock, to redeem all
of the outstanding shares of Series B Preferred Stock in accordance with this
Article V. Any notice of redemption hereunder (an "Optional Redemption") shall
be delivered to the holders of Series B Preferred Stock at their registered
addresses appearing on the books and records of the Corporation and shall state
(1) that the Corporation is exercising its right to redeem all of the
outstanding shares of Series B Preferred Stock issued on the Issue Date and (2)
the date of redemption (the "Optional Redemption Notice"). On the date fixed for
redemption (the "Optional Redemption Date"), the Corporation shall make payment
of the Optional Redemption Amount (as defined below) to or upon the order of the
holders as specified by the holders in writing to the Corporation at least one
(1) business day prior to the Optional Redemption Date. If the Corporation
exercises its right to redeem the Series B Preferred Stock, the Corporation
shall make payment to the holders of an amount in cash (the "Optional Redemption
Amount") equal to 120% of the Stated Value of the shares of Series B Preferred
Stock to be redeemed plus any unpaid dividend for each share of Series B
Preferred Stock then held. Notwithstanding notice of an Optional Redemption, the
holders shall at all times prior to the Optional Redemption Date maintain the
right to convert all or any shares of Series B Preferred Stock in accordance
with Article VI and any shares of Series B Preferred Stock so converted after
receipt of an Optional Redemption Notice and prior to the Optional Redemption
Date set forth in such notice and payment of the aggregate Optional Redemption
Amount shall be deducted from the shares of Series B Preferred Stock which are
otherwise subject to redemption pursuant to such notice.
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From time to time following the Issue Date, the holders may request
advance notice as to whether the Corporation intends to redeem the shares of
Series B Preferred Stock. Such request shall be made in writing and the
Corporation shall respond in writing as promptly as practicable but prior to
5:00 p.m. Eastern Standard Time one (1) business day after receipt of the
request. The Corporation will be bound by such response for a period of twenty
(20) Trading Days (the "Term") from the date of its response. A failure to
respond within one (1) business day shall be deemed to be an election not to
redeem the Series B Preferred Stock during the Term. The holders may not request
such notice in the event that the Corporation files a registration statement
where the use of proceeds set forth in such registration statement are
identified for purposes of redemption of the outstanding Series B Preferred
Stock.
VI. Conversion at the Option of the Holder
--------------------------------------
A. (a) Each holder of shares of Series B Preferred Stock may, at its
option at any time and from time to time, upon surrender of the certificates
therefor, convert any or all of its shares of Series B Preferred Stock into
Common Stock as follows (an "Optional Conversion"). Each share of Series B
Preferred Stock shall be convertible into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing (1) the Stated
Value thereof by (2) the then effective Conversion Price (as defined below);
provided, however, that, unless the holder delivers a waiver in accordance with
the immediately following sentence, in no event (other than pursuant to the
Automatic Conversion (as defined herein)) shall a holder of shares of Series B
Preferred Stock be entitled to convert any such shares in excess of that number
of shares upon conversion of which the sum of (x) the number of shares of Common
Stock beneficially owned by the holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the shares of Series B Preferred Stock) and (y) the
number of shares of Common Stock issuable upon the conversion of the shares of
Series B Preferred Stock with respect to which the determination of this proviso
is being made, would result in beneficial ownership by a holder and such
holder's affiliates of more than 4.9% of the outstanding shares of Common Stock.
For purposes of the proviso to the immediately preceding sentence, (i)
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder,
except as otherwise provided in clause (x) of such proviso and (ii) a holder may
waive the limitations set forth therein by written notice to the Corporation
upon not less than sixty-one (61) days prior written notice (with such waiver
taking effect only upon the expiration of such sixty-one (61) day notice
period).
(b) So long as the Common Stock is listed for trading on
Nasdaq SmallCap or an exchange or quotation system with a rule substantially
similar to Rule 4460(i) then, notwithstanding anything to the contrary contained
herein if, at any time, the aggregate number of shares of Common Stock then
issued upon conversion of the Series B Preferred Stock (including any shares of
capital stock or rights to acquire shares of capital stock issued by the
Corporation which are aggregated or integrated with the Common Stock issued or
issuable upon conversion of the Series B Preferred Stock for purposes of such
rule) equals 19.99% of the "Outstanding Common Amount" (as hereinafter defined),
the Series B Preferred Stock shall, from that time forward, cease to be
convertible into Common Stock in accordance with the terms of this Article VI
and Article VII below, unless the Corporation (i) has obtained approval of the
issuance of the Common Stock upon conversion of the Series B Preferred Stock by
a majority
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of the total votes cast on such proposal, in person or by proxy, by the holders
of the then-outstanding Common Stock (not including any shares of Common Stock
held by present or former holders of Series B Preferred Stock that were issued
upon conversion of Series B Preferred Stock), or (ii) shall have otherwise
obtained permission to allow such issuances from Nasdaq SmallCap in accordance
with Nasdaq SmallCap Rule 4460(i). If the Corporation's Common Stock is not then
listed on Nasdaq SmallCap or an exchange or quotation system that has a rule
substantially similar to Rule 4460(i) limitations set forth herein shall be
inapplicable and of no force and effect. For purposes of this paragraph,
"Outstanding Common Amount" means (i) the number of shares of the Common Stock
outstanding on the date of issuance of the Series B Preferred Stock pursuant to
the Purchase Agreement plus (ii) any additional shares of Common Stock issued
thereafter in respect of such shares pursuant to a stock dividend, stock split
or similar event. The maximum number of shares of Common Stock issuable as a
result of the 19.99% limitation set forth herein is hereinafter referred to as
the "Maximum Share Amount." With respect to each holder of Series B Preferred
Stock, the Maximum Share Amount shall refer to such holder's pro rata share
thereof determined in accordance with Article X below. In the event that
Corporation obtains Stockholder Approval or the approval of Nasdaq SmallCap, by
reason of the inapplicability of the rules of Nasdaq SmallCap or otherwise and
concludes that it is able to increase the number of shares to be issued above
the Maximum Share Amount (such increased number being the "New Maximum Share
Amount"), the references to Maximum Share Amount, above, shall be deemed to be,
instead, references to the greater New Maximum Share Amount. In the event that
Stockholder Approval is not obtained, there are insufficient reserved or
authorized shares or a registration statement covering the additional shares of
Common Stock which constitute the New Maximum Share Amount is not effective
prior to the Maximum Share Amount being issued (if such registration statement
is necessary to allow for the public resale of such securities), the Maximum
Share Amount shall remain unchanged; provided, however, that the Holder may
grant an extension to obtain a sufficient reserved or authorized amount of
shares or of the effective date of such registration statement. In the event
that (a) the aggregate number of shares of Common Stock issued pursuant to the
outstanding Series B Preferred Stock represents at least twenty percent (20%) of
the Maximum Share Amount and (b) the sum of (x) the aggregate number of shares
of Common Stock issued upon conversion of Series B Preferred Stock plus (y) the
aggregate number of shares of Common Stock that remain issuable upon conversion
of Series B Preferred Stock, represents at least one hundred percent (100%) of
the Maximum Share Amount (the "Triggering Event"), the Corporation will use its
best efforts to seek and obtain Stockholder Approval (or obtain such other
relief as will allow conversions hereunder in excess of the Maximum Share
Amount) as soon as practicable following the Triggering Event and before the
Mandatory Redemption Date.
B. (a) Subject to subparagraph (b) below, the "Conversion Price" shall
be the lesser of the Market Price (as defined herein) and the Fixed Conversion
Price (as defined herein), subject to adjustments pursuant to the provisions of
Article VI.C below. "Market Price" shall mean 90% of the average of the two (2)
lowest Closing Bid Prices during the twelve (12) consecutive Trading Day period
ending one (1) Trading Day prior to the date (the "Conversion Date") the
Conversion Notice is sent by a holder to the Corporation via facsimile (the
"Pricing Period"). The "Fixed Conversion Price" shall mean $4.00. "Closing Bid
Price" means, for any security as of any date, the closing bid price on Nasdaq
SmallCap as reported by Bloomberg Financial Markets or an equivalent reliable
reporting service mutually acceptable to and hereafter designated by the holders
of a majority in interest of the shares of Series B Preferred Stock and
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the Corporation ("Bloomberg") or, if Nasdaq SmallCap is not the principal
trading market for such security, the closing bid price of such security on the
principal securities exchange or trading market where such security is listed or
traded as reported by Bloomberg, or if the foregoing do not apply, the closing
bid price of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price of such security in the over-the-counter market on the electronic bulletin
board for such security or in any of the foregoing manners, the average of the
bid prices of any market makers for such security or as reported in the "pink
sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot
be calculated for such security on such date in the manner provided above, the
Closing Bid Price shall be the fair market value as mutually determined by the
Corporation and the holders of a majority in interest of shares of Series B
Preferred Stock being converted for which the calculation of the Closing Bid
Price is required in order to determine the Conversion Price of such Series B
Preferred Stock. "Trading Day" shall mean any day on which the Common Stock is
traded for any period on Nasdaq SmallCap, or on the principal securities
exchange or other securities market on which the Common Stock is then being
traded.
(b) Notwithstanding anything contained in subparagraph (a) of
this Paragraph B to the contrary, in the event the Corporation (i) makes a
public announcement that it intends to consolidate or merge with any other
corporation (other than a merger in which the Corporation is the surviving or
continuing corporation and its capital stock is unchanged) or sell or transfer
all or substantially all of the assets of the Corporation or (ii) any person,
group or entity (including the Corporation) publicly announces a tender offer to
purchase 50% or more of the Corporation's Common Stock or otherwise publicly
announces an intention to replace a majority of the corporation's Board of
Directors by waging a proxy battle or otherwise (the date of the announcement
referred to in clause (i) or (ii) is hereinafter referred to as the
"Announcement Date"), then the Conversion Price shall, effective upon the
Announcement Date and continuing through the Adjusted Conversion Price
Termination Date (as defined below), be equal to the lower of (x) the Conversion
Price which would have been applicable for an Optional Conversion occurring on
the Announcement Date and (y) the Conversion Price that would otherwise be in
effect. From and after the Adjusted Conversion Price Termination Date, the
Conversion Price shall be determined as set forth in subparagraph (a) of this
Article VI.B. For purposes hereof, "Adjusted Conversion Price Termination Date"
shall mean, with respect to any proposed transaction, tender offer or removal of
the majority of the Board of Directors which a public announcement as
contemplated by this subparagraph (b) has been made, the date upon which the
Corporation (in the case of clause (i) above) or the person, group or entity (in
the case of clause (ii) above) publicly announces the termination or abandonment
of the proposed transaction or tender offer which caused this subparagraph (b)
to become operative.
C. The Conversion Price shall be subject to adjustment from time to
time as follows:
(a) Adjustment to Conversion Price Due to Stock Split, Stock
Dividend, Etc. If at any time when Series B Preferred Stock is issued and
outstanding, the number of outstanding shares of Common Stock is increased or
decreased by a stock split, stock dividend, combination, reclassification,
rights offering below the Trading Price (as defined below) to all holders of
Common Stock or other similar event, which event shall have taken place during
the reference period for determination of the Conversion Price for any Optional
Conversion or Automatic Conversion of the Series B Preferred Stock, then the
Conversion Price shall be
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calculated giving appropriate effect to the stock split, stock dividend,
combination, reclassification or other similar event. In such event, the
Corporation shall notify the Transfer Agent of such change on or before the
effective date thereof.
(b) Adjustment Due to Merger, Consolidation, Etc. If, at any
time when Series B Preferred Stock is issued and outstanding and prior to the
conversion of all Series B Preferred Stock, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Corporation
shall be changed into the same or a different number of shares of another class
or classes of stock or securities of the Corporation or another entity, or in
case of any sale or conveyance of all or substantially all of the assets of the
Corporation other than in connection with a plan of complete liquidation of the
Corporation, then the holders of Series B Preferred Stock shall thereafter have
the right to receive upon conversion of the Series B Preferred Stock, upon the
bases and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore issuable upon conversion, such
stock, securities or assets which the holders of Series B Preferred Stock would
have been entitled to receive in such transaction had the Series B Preferred
Stock been converted in full (without regard to any limitations on conversion
contained herein) immediately prior to such transaction, and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the holders of Series B Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares of Common Stock issuable upon conversion of
the Series B Preferred Stock) shall thereafter be applicable, as nearly as may
be practicable in relation to any securities or assets thereafter deliverable
upon the conversion of Series B Preferred Stock. The Corporation shall not
effect any transaction described in this subsection (b) unless (a) it first
gives, to the extent practical, thirty (30) days' prior written notice (but in
any event at least fifteen (15) business days prior written notice) of such
merger, consolidation, exchange of shares, recapitalization, reorganization or
other similar event or sale of assets (during which time the holders of Series B
Preferred Stock shall be entitled to convert the Series B Preferred Stock) and
(b) the resulting successor or acquiring entity (if not the Corporation) assumes
by written instrument the obligations of this subsection (b). The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers or share exchanges.
(c) Other Securities Offerings. If, at any time after the
Issue Date, the Corporation sells Common Stock or securities convertible into,
or exchangeable for, Common Stock, other than a sale pursuant to a bona fide
firm commitment underwritten public offering of Common Stock by the Corporation
(not including a continuous offering pursuant to Rule 415 under the Securities
Act of 1933, as amended), (collectively, the "Other Common Stock"), then, if the
effective or maximum sales price of the Common Stock with respect to such
transaction (including the effective or maximum conversion, or exchange price)
("Other Price") is less than the effective Conversion Price of the Series B
Preferred Stock at such time and such Other Common Stock is eligible for resale
prior to December 31, 1999, the Corporation shall adjust the Conversion Price
applicable to the Series B Preferred Stock not yet converted in form and
substance reasonably satisfactory to the holders of Series B Preferred Stock so
that the Conversion Price applicable to the Series B Preferred Stock shall not,
in any event, be greater, after giving effect to all other adjustments contained
herein, than the Other Price.
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(d) Adjustment Due to Distribution. Subject to Article III, if
the Corporation shall declare or make any distribution of its assets (or rights
to acquire its assets) to holders of Common Stock as a dividend, stock
repurchase, by way of return of capital or otherwise (including any dividend or
distribution to the Corporation's shareholders in cash or shares (or rights to
acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a
"Distribution"), then the holders of Series B Preferred Stock shall be entitled,
upon any conversion of shares of Series B Preferred Stock after the date of
record for determining shareholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the holder with
respect to the shares of Common Stock issuable upon such conversion had such
holder been the holder of such shares of Common Stock on the record date for the
determination of shareholders entitled to such Distribution.
(e) Purchase Rights. Subject to Article III, if at any time
when any Series B Preferred Stock is issued and outstanding, the Corporation
issues any convertible securities or rights to purchase stock, warrants,
securities or other property (the "Purchase Rights") pro rata to the record
holders of any class of Common Stock, then the holders of Series B Preferred
Stock will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have acquired if
such holder had held the number of shares of Common Stock acquirable upon
complete conversion of the Series B Preferred Stock (without regard to any
limitations on conversion contained herein) immediately before the date on which
a record is taken for the grant, issuance or sale of such Purchase Rights, or,
if no such record is taken, the date as of which the record holders of Common
Stock are to be determined for the grant, issue or sale of such Purchase Rights.
(f) Adjustment for Restricted Periods. In the event that (1)
the Corporation fails to obtain effectiveness with the Securities and Exchange
Commission of the Registration Statement (as defined in the Registration Rights
Agreement) prior to one hundred twenty (127) days following the Issue Date, or
(2) such Registration Statement lapses in effect, or sales otherwise cannot be
made thereunder, whether by reason of the Corporation's failure or inability to
amend or supplement the prospectus (the "Prospectus") included therein in
accordance with the Registration Rights Agreement or otherwise, after such
Registration Statement becomes effective (including, without limitation, during
an Allowed Delay (as defined in Section 3(f) of the Registration Rights
Agreement), then the Pricing Period shall be comprised of, (i) in the case of an
event described in clause (1), the twenty (20) Trading Days preceding the 127th
day following the Issue Date plus all Trading Days through and including the
third Trading Day following the date of effectiveness of the Registration
Statement; and (ii) in the case of an event described in clause (2), the number
of Trading Days preceding the date on which the holder of the Series B Preferred
Stock is first notified that sales may not be made under the Prospectus that
would otherwise then be included in the Pricing Period in accordance with the
definition thereof set forth in Article VI.B(a), plus all Trading Days through
and including the third Trading Day following the date on which the Holder is
first notified that such sales may again be made under the Prospectus. If a
holder of Series B Preferred Stock determines that sales may not be made
pursuant to the Prospectus (whether by reason of the Corporation's failure or
inability to amend or supplement the Prospectus) it shall so notify the
Corporation in writing and, unless the Corporation provides such holder with a
written opinion of the Corporation's counsel to the contrary, such determination
shall be binding for purposes of this paragraph.
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(g) Notice of Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Article
VI.C, the Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to each holder of Series B Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
B Preferred Stock, furnish to such holder a like certificate setting forth (i)
such adjustment or readjustment, (ii) the Conversion Price at the time in effect
and (iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon conversion of a
share of Series B Preferred Stock.
D. For purposes of Article VI.C(a) above, "Trading Price," which shall
be measured as of the record date in respect of the rights offering means (i)
the average of the last reported sale prices for the shares of Common Stock on
Nasdaq SmallCap as reported by Bloomberg, as applicable, for the five (5)
Trading Days immediately preceding such date, or (ii) if Nasdaq SmallCap is not
the principal trading market for the shares of Common Stock, the average of the
last reported sale prices on the principal trading market for the Common Stock
during the same period as reported by Bloomberg, or (iii) if market value cannot
be calculated as of such date on any of the foregoing bases, the Trading Price
shall be the fair market value as reasonably determined in good faith by (a) the
Board of Directors of the Corporation or, (b) at the option of a
majority-in-interest of the holders of the outstanding Series B Preferred Stock
by an independent investment bank of nationally recognized standing in the
valuation of businesses similar to the business of the Corporation.
E. In order to convert Series B Preferred Stock into full shares of
Common Stock, a holder of Series B Preferred Stock shall: (i) submit a copy of
the fully executed notice of conversion in the form attached hereto as Exhibit A
("Notice of Conversion") to the Corporation by facsimile dispatched on the
Conversion Date (or by other means resulting in notice to the Corporation on the
Conversion Date) at the office of the Corporation or its designated Transfer
Agent for the Series B Preferred Stock that the holder elects to convert the
same, which notice shall specify the number of shares of Series B Preferred
Stock to be converted, the applicable Conversion Price and a calculation of the
number of shares of Common Stock issuable upon such conversion (together with a
copy of the first page of each certificate to be converted) prior to Midnight,
New York City time (the "Conversion Notice Deadline") on the date of conversion
specified on the Notice of Conversion; and (ii) surrender the original
certificates representing the Series B Preferred Stock being converted (the
"Preferred Stock Certificates"), duly endorsed, along with a copy of the Notice
of Conversion to the office of the Corporation or the Transfer Agent for the
Series B Preferred Stock as soon as practicable thereafter. The Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such conversion, unless either the Preferred Stock
Certificates are delivered to the Company or its Transfer Agent as provided
above, or the holder notifies the Corporation or its Transfer Agent that such
certificates have been lost, stolen or destroyed (subject to the requirements of
subparagraph (a) below). In the case of a dispute as to the calculation of the
Conversion Price, the Corporation shall promptly issue such number of shares of
Common Stock that are not disputed in accordance with subparagraph (b) below.
The Corporation shall submit the disputed calculations to its outside accountant
via facsimile within two (2) business days of receipt of the Notice of
Conversion. The accountant shall audit the calculations and notify the
Corporation
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and the holder of the results no later than 48 hours from the time it receives
the disputed calculations. The accountant's calculation shall be deemed
conclusive absent manifest error.
(a) Lost or Stolen Certificates. Upon receipt by the
Corporation of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of Series B Preferred Stock,
and (in the case of loss, theft or destruction) of indemnity reasonably
satisfactory to the Corporation, and upon surrender and cancellation of the
Preferred Stock Certificate(s), if mutilated, the Corporation shall execute and
deliver new Preferred Stock Certificate(s) of like tenor and date.
(b) Delivery of Common Stock Upon Conversion. Upon the
surrender of certificates as described above together with a Notice of
Conversion, the Corporation shall issue and, within two (2) business days after
such surrender (or, in the case of lost, stolen or destroyed certificates, after
provision of agreement and indemnification pursuant to subparagraph (a) above)
(the "Delivery Period"), deliver (or cause its Transfer Agent to so issue and
deliver) to or upon the order of the holder (i) that number of shares of Common
Stock for the portion of the shares of Series B Preferred Stock converted as
shall be determined in accordance herewith and (ii) a certificate representing
the balance of the shares of Series B Preferred Stock not converted, if any. In
addition to any other remedies available to the holder, including actual damages
and/or equitable relief, the Corporation shall pay to a holder $2,000 per day in
cash for each day beyond a two (2) day grace period following the Delivery
Period that the Corporation fails to deliver Common Stock (a "Conversion
Default") issuable upon surrender of shares of Series B Preferred Stock with a
Notice of Conversion until such time as the Corporation has delivered all such
Common Stock (the "Conversion Default Payments"). Such cash amount shall be paid
to such holder by the fifth day of the month following the month in which it has
accrued or, at the option of the holder (by written notice to the Corporation by
the first day of the month following the month in which it has accrued), shall
be convertible into Common Stock in accordance with the terms of this Article
VI.
In lieu of delivering physical certificates representing the Common
Stock issuable upon conversion, provided the Corporation's Transfer Agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the holder and its compliance with
the provisions contained in Article VI.A. and in this Article VI.E., the
Corporation shall use its best efforts to cause its Transfer Agent to
electronically transmit the Common Stock issuable upon conversion to the holder
by crediting the account of holder's Prime Broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system. The time periods for delivery and
penalties described in the immediately preceding paragraph shall apply to the
electronic transmittals described herein.
(c) No Fractional Shares. If any conversion of Series B
Preferred Stock would result in a fractional share of Common Stock or the right
to acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon Conversion of
the Series B Preferred Stock shall be the next higher number of shares.
(d) Conversion Date. The "Conversion Date" shall be the date
specified in the Notice of Conversion, provided that the Notice of Conversion is
submitted by facsimile (or
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by other means resulting in notice) to the Corporation or its Transfer Agent
before Midnight, New York City time, on the Conversion Date. The person or
persons entitled to receive the shares of Common Stock issuable upon conversion
shall be treated for all purposes as the record holder or holders of such
securities as of the Conversion Date and all rights with respect to the shares
of Series B Preferred Stock surrendered shall forthwith terminate except the
right to receive the shares of Common Stock or other securities or property
issuable on such conversion and except that the holders preferential rights as a
holder of Series B Preferred Stock shall survive to the extent the corporation
fails to deliver such securities.
F. A number of shares of the authorized but unissued Common Stock
sufficient to provide for the conversion of the Series B Preferred Stock
outstanding at the then current Conversion Price shall at all times be reserved
by the Corporation, free from preemptive rights, for such conversion or
exercise. As of the date of issuance of the Series B Preferred Stock, 750,000
authorized and unissued shares of Common Stock have been duly reserved for
issuance upon conversion of the Series B Preferred Stock (the "Reserved
Amount"). The Reserved Amount shall be increased from time to time in accordance
with the Company's obligations pursuant to Section 4(h) of the Purchase
Agreement. In addition, if the Corporation shall issue any securities or make
any change in its capital structure which would change the number of shares of
Common Stock into which each share of the Series B Preferred Stock shall be
convertible at the then current Conversion Price, the Corporation shall at the
same time also make proper provision so that thereafter there shall be a
sufficient number of shares of Common Stock authorized and reserved, free from
preemptive rights, for conversion of the outstanding Series B Preferred Stock.
If at any time a holder of shares of Series B Preferred Stock submits a
Notice of Conversion, and the Corporation does not have sufficient authorized
but unissued shares of Common Stock available to effect such conversion in
accordance with the provisions of this Article VI (a "Conversion Default"), the
Corporation shall issue to the holder (or holders, if more than one holder
submits a Notice of Conversion in respect of the same Conversion Date, pro rata
based on the ratio that the number of shares of Series B Preferred Stock then
held by each such holder bears to the aggregate number of such shares held by
such holders) all of the shares of Common Stock which are available to effect
such conversion. The number of shares of Series B Preferred Stock included in
the Notice of Conversion which exceeds the amount which is then convertible into
available shares of Common Stock (the "Excess Amount") shall, notwithstanding
anything to the contrary contained herein, not be convertible into Common Stock
in accordance with the terms hereof until (and at the holder's option at any
time after) the date additional shares of Common Stock are authorized by the
Corporation to permit such conversion, at which time the Conversion Price in
respect thereof shall be the lesser of (i) the Conversion Price on the
Conversion Default Date (as defined below) and (ii) the Conversion Price on the
Conversion Date elected by the holder in respect thereof. The Corporation shall
use its best efforts to effect an increase in the authorized number of shares of
Common Stock as soon as possible following a Conversion Default. In addition,
the Corporation shall pay to the holder payments ("Conversion Default Payments")
for a Conversion Default in the amount of (a) (N/365), multiplied by (b) the sum
of the Stated Value plus the Premium Amount per share of Series B Preferred
Stock through the Authorization Date (as defined below), multiplied by (c) the
Excess Amount on the day the holder submits a Notice of Conversion giving rise
to a Conversion Default (the "Conversion Default Date"), multiplied by (d) .24,
where (i) N = the
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<PAGE>
number of days from the Conversion Default Date to the date (the "Authorization
Date") that the Corporation authorizes a sufficient number of shares of Common
Stock to effect conversion of the full number of shares of Series B Preferred
Stock. The Corporation shall send notice to the holder of the authorization of
additional shares of Common Stock, the Authorization Date and the amount of
holder's accrued Conversion Default Payments. The accrued Conversion Default
Payment for each calendar month shall be paid in cash or shall be convertible
into Common Stock at the Conversion Price, at the holder's option, as follows:
(a) In the event the holder elects to take such payment in
cash, cash payment shall be made to holder by the fifth day of the month
following the month in which it has accrued; and
(b) In the event the holder elects to take such payment in
Common Stock, the holder may convert such payment amount into Common Stock at
the Conversion Price (as in effect at the time of Conversion) at any time after
the fifth day of the month following the month in which it has accrued in
accordance with the terms of this Article VI (so long as there is then a
sufficient number of authorized shares).
Nothing herein shall limit the holder's right to pursue actual damages
for the Corporation's failure to maintain a sufficient number of authorized
shares of Common Stock, and each holder shall have the right to pursue all
remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
G. Upon the occurrence of each adjustment or readjustment of the
Conversion Price pursuant to this Article VI, the Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series B Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
B Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustment or readjustment, (ii) the
Conversion Price at the time in effect and (iii) the number of shares of Common
Stock and the amount, if any, of other securities or property which at the time
would be received upon conversion of a share of Series B Preferred Stock.
H. Upon submission of a Notice of Conversion by a holder of Series B
Preferred Stock, (i) the shares covered thereby (other than the shares, if any,
which cannot be issued because their issuance would exceed such holder's
allocated portion of the Reserved Amount) shall be deemed converted into shares
of Common Stock and (ii) the holder's rights as a holder of such converted
shares of Series B Preferred Stock shall cease and terminate, excepting only the
right to receive certificates for such shares of Common Stock and to any
remedies provided herein or otherwise available at law or in equity to such
holder because of a failure by the Corporation to comply with the terms of this
Articles of Amendment. Notwithstanding the foregoing, if a holder has not
received certificates for all shares of Common Stock prior to the tenth (10th)
business day after the expiration of the Delivery Period with respect to a
conversion of shares of Series B Preferred Stock for any reason, then (unless
the holder otherwise elects to retain its status as a holder of Common Stock by
so notifying the Corporation) the holder shall regain the rights of a holder of
such shares of Series B Preferred Stock with respect to such
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<PAGE>
unconverted shares of Series B Preferred Stock and the Corporation shall, as
soon as practicable, return such unconverted shares of Series B Preferred Stock
to the holder or, if such shares of Series B Preferred Stock have not been
surrendered, adjust its records to reflect that such shares of Series B
Preferred Stock have not been converted. In all cases, the holder shall retain
all of its rights and remedies (including, without limitation, the right to
receive Conversion Default Payments pursuant to Article IV.E. to the extent
required thereby for such Conversion Default and any subsequent Conversion
Default).
VII. Automatic Conversion
--------------------
So long as the Registration Statement is effective and there is not
then a continuing Mandatory Redemption Event, each share of Series B Preferred
Stock issued and outstanding on April 24, 2003, subject to any adjustment
pursuant to Article V.A.(ii) (the "Automatic Conversion Date"), automatically
shall be converted into shares of Common Stock on such date at the then
effective Conversion Price in accordance with, and subject to, the provisions of
Article VI hereof (the "Automatic Conversion"). The Automatic Conversion Date
shall be delayed by one (1) Trading Day each for each Trading Day occurring
prior thereto and prior to the full conversion of the Series B Preferred Stock
that (i) sales cannot be made pursuant to the Registration Statement (whether by
reason of the Company's failure to properly supplement or amend the prospectus
included therein in accordance with the terms of the Registration Rights
Agreement or otherwise including any Allowed Delays (as defined in Section 3(f)
of the Registration Rights Agreement) or (ii) any Default Event (as defined in
Article V.A.) exists, without regard to whether any cure periods shall have run.
The Automatic Conversion Date shall be the Conversion Date for purposes of
determining the Conversion Price and the time within which certificates
representing the Common Stock must be delivered to the holder.
VIII. Voting Rights
-------------
The holders of the Series B Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Florida Corporation Law ("FCL"),
in this Article VIII, and in Article IX below.
Notwithstanding the above, the Corporation shall provide each holder of
Series B Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Corporation, or any proposed
liquidation, dissolution or winding up of the Corporation, the Corporation shall
mail a notice to each holder, at least ten (10) days prior to the record date
specified therein (or thirty (30) days prior to the consummation of the
transaction or event, whichever is earlier), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
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<PAGE>
To the extent that under the FCL the vote of the holders of the Series
B Preferred Stock, voting separately as a class or series as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the holders of at least a majority of the shares of the Series B
Preferred Stock represented at a duly held meeting at which a quorum is present
or by written consent of a majority of the shares of Series B Preferred Stock
(except as otherwise may be required under the FCL) shall constitute the
approval of such action by the class. To the extent that under the FCL holders
of the Series B Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of Series B Preferred
Stock shall be entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible using the record date for the
taking of such vote of shareholders as the date as of which the Conversion Price
is calculated. Holders of the Series B Preferred Stock shall be entitled to
notice of all shareholder meetings or written consents (and copies of proxy
materials and other information sent to shareholders) with respect to which they
would be entitled to vote, which notice would be provided pursuant to the
Corporation's bylaws and the FCL.
IX. Protective Provisions
---------------------
So long as shares of Series B Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the FCL) of the holders of at least a majority of the
then outstanding shares of Series B Preferred Stock:
(a) alter or change the rights, preferences or privileges of
the Series B Preferred Stock or any Senior Securities so as to affect adversely
the Series B Preferred Stock;
(b) create any new class or series of capital stock having a
preference over the Series B Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article II hereof, "Senior Securities");
(c) create any new class or series of capital stock ranking
pari passu with the Series B Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article II hereof, "Pari Passu Securities");
(d) increase the authorized number of shares of Series B
Preferred Stock; or
(e) do any act or thing not authorized or contemplated by this
Articles of Amendment which would result in taxation of the holders of shares of
the Series B Preferred Stock under Section 305 of the Internal Revenue Code of
1986, as amended (or any comparable provision of the Internal Revenue Code as
hereafter from time to time amended).
In the event holders of at least a majority of the then outstanding
shares of Series B Preferred Stock agree to allow the Corporation to alter or
change the rights, preferences or privileges of the shares of Series B Preferred
Stock, pursuant to subsection (a) above, so as to affect the Series B Preferred
Stock, then the Corporation will deliver notice of such approved change to the
holders of the Series B Preferred Stock that did not agree to such alteration or
change (the "Dissenting Holders") and Dissenting Holders shall have the right
for a period of
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<PAGE>
thirty (30) days to convert pursuant to the terms of this Articles of Amendment
as they exist prior to such alteration or change or continue to hold their
shares of Series B Preferred Stock.
X. Pro Rata Allocations
--------------------
The Maximum Share Amount and the Reserved Amount (including any
increases thereto) shall be allocated by the Corporation pro rata among the
holders of Series B Preferred Stock based on the number of shares of Series B
Preferred Stock then held by each holder relative to the total aggregate number
of shares of Series B Preferred Stock then outstanding.
(THIS PAGE INTENTIONALLY LEFT BLANK)
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<PAGE>
IN WITNESS WHEREOF, this Articles of Amendment is executed on
behalf of the Corporation this 1st day of July, 1998.
METROPOLITAN HEALTH NETWORKS, INC.
By:
-------------------------
Name: Noel J. Guillama
Title: President
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THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
EXCEPT AS OTHERWISE SET FORTH HEREIN OR IN A SECURITIES PURCHASE
AGREEMENT DATED AS OF APRIL 27, 1998, NEITHER THIS WARRANT NOR ANY OF
SUCH SHARES MAY BE SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED, OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER SUCH ACT OR
AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT
OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT. ANY SUCH SALE,
ASSIGNMENT OR TRANSFER MUST ALSO COMPLY WITH APPLICABLE STATE
SECURITIES LAWS.
Right to Purchase
120,000 Shares of
Common Stock, par
value $.001 per share
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, Pangaea Fund Ltd. or its
registered assigns, is entitled to purchase from Metropolitan Health Networks,
Inc., a Florida corporation (the "Company"), at any time or from time to time
during the period specified in Paragraph 2 hereof, One hundred Twenty Thousand
(120,000) fully paid and nonassessable shares of the Company's Common Stock, par
value $.001 per share (the "Common Stock"), at an exercise price of $5.00 per
share (the "Exercise Price"). The term "Warrant Shares," as used herein, refers
to the shares of Common Stock purchasable hereunder. The Warrant Shares and the
Exercise Price are subject to adjustment as provided in Paragraph 4 hereof. The
term Warrants means this Warrant and other warrants issued pursuant to that
certain Securities Purchase Agreement, dated April 27, 1998, by and among the
Company and the Buyers listed on the execution page thereof (the "Securities
Purchase Agreement").
This Warrant is subject to the following terms, provisions, and
conditions:
1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "Exercise
Agreement"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the resale of the Warrant
Shares by the holder is not then registered pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), delivery to the Company of a written notice of an election to
effect a "Cashless Exercise" (as defined in Section 11(c) below) for the Warrant
Shares specified in the Exercise Agreement. The Warrant Shares so purchased
shall be deemed to be issued to the holder hereof or such holder's designee, as
the record owner of such shares, as of the close of business on the date on
which this Warrant shall have been surrendered, the completed Exercise Agreement
shall
<PAGE>
have been delivered, and payment shall have been made for such shares as set
forth above. Certificates for the Warrant Shares so purchased, representing the
aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the holder hereof within a reasonable time, not exceeding three (3)
business days, after this Warrant shall have been so exercised. The certificates
so delivered shall be in such denominations as may be requested by the holder
hereof and shall be registered in the name of such holder or such other name as
shall be designated by such holder. If this Warrant shall have been exercised
only in part, then, unless this Warrant has expired, the Company shall, at its
expense, at the time of delivery of such certificates, deliver to the holder a
new Warrant representing the number of shares with respect to which this Warrant
shall not then have been exercised.
Notwithstanding anything in this Warrant to the contrary, in
no event shall the Holder of this Warrant be entitled to exercise a number of
Warrants (or portions thereof) in excess of the number of Warrants (or portions
thereof) upon exercise of which the sum of (i) the number of shares of Common
Stock beneficially owned by the Holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unexercised Warrants and unconverted shares of Series B Preferred Stock (as
defined in the Securities Purchase Agreement) and (ii) the number of shares of
Common Stock issuable upon exercise of the Warrants (or portions thereof) with
respect to which the determination described herein is being made, would result
in beneficial ownership by the Holder and its affiliates of more than 4.9% of
the outstanding shares of Common Stock. For purposes of the immediately
preceding sentence, (a) beneficial ownership shall be determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended, and
Regulation 13D-G thereunder, except as otherwise provided in clause (i) hereof
and (b) the holder of this Warrant may waive the limitations set forth therein
by written notice to the Company upon not less than sixty-one (61) days prior
notice (with such waiver taking effect only upon the expiration of such 61-day
notice period).
2. Period of Exercise. This Warrant is exercisable at any time or from
time to time on or after the date on which this Warrant is issued and delivered
pursuant to the terms of the Securities Purchase Agreement and before 5:00 p.m.,
New York City time on the fifth (5th) anniversary of the date of issuance (the
"Exercise Period").
3. Certain Agreements of the Company. The Company hereby covenants and
agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon
issuance in accordance with the terms of this Warrant, be validly issued, fully
paid, and nonassessable and free from all taxes, liens, and charges with respect
to the issue thereof.
(b) Reservation of Shares. During the Exercise Period, the
Company shall at all times have authorized, and reserved for the purpose of
issuance upon exercise of this Warrant, a sufficient number of shares of Common
Stock to provide for the exercise of this Warrant.
(c) Listing. The Company shall promptly secure the listing of
the shares of Common Stock issuable upon exercise of the Warrant upon each
national securities exchange or
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<PAGE>
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance upon exercise of this Warrant)
and shall maintain, so long as any other shares of Common Stock shall be so
listed, such listing of all shares of Common Stock from time to time issuable
upon the exercise of this Warrant; and the Company shall so list on each
national securities exchange or automated quotation system, as the case may be,
and shall maintain such listing of, any other shares of capital stock of the
Company issuable upon the exercise of this Warrant if and so long as any shares
of the same class shall be listed on such national securities exchange or
automated quotation system.
(d) Certain Actions Prohibited. The Company will not, by
amendment of its charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed by it hereunder, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of all such action as may reasonably be requested by the holder of
this Warrant in order to protect the exercise privilege of the holder of this
Warrant against dilution or other impairment, consistent with the tenor and
purpose of this Warrant. Without limiting the generality of the foregoing, the
Company (i) will not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect, and (ii) will take all such actions as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant.
(e) Successors and Assigns. This Warrant will be binding upon
any entity succeeding to the Company by merger, consolidation, or acquisition of
all or substantially all the Company's assets.
4. Antidilution Provisions. During the Exercise Period, the Exercise
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Paragraph 4.
In the event that any adjustment of the Exercise Price as required
herein results in a fraction of a cent, such Exercise Price shall be rounded up
to the nearest cent.
(a) Adjustment of Exercise Price and Number of Shares upon
Issuance of Common Stock. Except as otherwise provided in Paragraphs 4(c) and
4(e) hereof, if and whenever on or after the date of issuance of this Warrant,
the Company issues or sells, or in accordance with Paragraph 4(b) hereof is
deemed to have issued or sold, any shares of Common Stock for no consideration
or for a consideration per share (before deduction of reasonable expenses or
commissions or underwriting discounts or allowances in connection therewith)
less than the Market Price (as hereinafter defined) on the date of issuance (a
"Dilutive Issuance"), then immediately upon the Dilutive Issuance, the Exercise
Price will be reduced to a price determined by multiplying the Exercise Price in
effect immediately prior to the Dilutive Issuance by a fraction, (i) the
numerator of which is an amount equal to the sum of (x) the number of shares of
Common Stock actually outstanding immediately prior to the Dilutive Issuance,
plus (y) the quotient of the aggregate consideration, calculated as set forth in
Paragraph 4(b) hereof, received by the Company upon such Dilutive Issuance
divided by the Market Price in effect
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<PAGE>
immediately prior to the Dilutive Issuance, and (ii) the denominator of which is
the total number of shares of Common Stock Deemed Outstanding (as defined below)
immediately after the Dilutive Issuance.
(b) Effect on Exercise Price of Certain Events. For purposes
of determining the adjusted Exercise Price under Paragraph 4(a) hereof, the
following will be applicable:
(i) Issuance of Rights or Options. If the Company in
any manner issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common Stock or other
securities convertible into or exchangeable for Common Stock, other than options
or warrants granted or issued pursuant to any Company stock option or restricted
stock plan approved by a majority of the Company's disinterested directors or
pursuant to a bona fide senior lending arrangement with a financial institution
("Convertible Securities") (such warrants, rights and options to purchase Common
Stock or Convertible Securities are hereinafter referred to as "Options") and
the price per share for which Common Stock is issuable upon the exercise of such
Options is less than the Market Price on the date of issuance or grant of such
Options, then the maximum total number of shares of Common Stock issuable upon
the exercise of all such Options will, as of the date of the issuance or grant
of such Options, be deemed to be outstanding and to have been issued and sold by
the Company for such price per share. For purposes of the preceding sentence,
the "price per share for which Common Stock is issuable upon the exercise of
such Options" is determined by dividing (i) the total amount, if any, received
or receivable by the Company as consideration for the issuance or granting of
all such Options, plus the minimum aggregate amount of additional consideration,
if any, payable to the Company upon the exercise of all such Options, plus, in
the case of Convertible Securities issuable upon the exercise of such Options,
the minimum aggregate amount of additional consideration payable upon the
conversion or exchange thereof at the time such Convertible Securities first
become convertible or exchangeable, by (ii) the maximum total number of shares
of Common Stock issuable upon the exercise of all such Options (assuming full
conversion of Convertible Securities, if applicable). No further adjustment to
the Exercise Price will be made upon the actual issuance of such Common Stock
upon the exercise of such Options or upon the conversion or exchange of
Convertible Securities issuable upon exercise of such Options.
(ii) Issuance of Convertible Securities. If the
Company in any manner issues or sells any Convertible Securities, whether or not
immediately convertible (other than where the same are issuable upon the
exercise of Options) and the price per share for which Common Stock is issuable
upon such conversion or exchange is less than the Market Price on the date of
issuance, then the maximum total number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities will, as of the
date of the issuance of such Convertible Securities, be deemed to be outstanding
and to have been issued and sold by the Company for such price per share. For
the purposes of the preceding sentence, the "price per share for which Common
Stock is issuable upon such conversion or exchange" is determined by dividing
(i) the total amount, if any, received or receivable by the Company as
consideration for the issuance or sale of all such Convertible Securities, plus
the minimum aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof at the time such Convertible
Securities first become convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities. No further adjustment to the
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<PAGE>
Exercise Price will be made upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities.
(iii) Change in Option Price or Conversion Rate. If
there is a change at any time in (i) the amount of additional consideration
payable to the Company upon the exercise of any Options; (ii) the amount of
additional consideration, if any, payable to the Company upon the conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock
(other than under or by reason of provisions designed to protect against
dilution), the Exercise Price in effect at the time of such change will be
readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(iv) Treatment of Expired Options and Unexercised
Convertible Securities. If, in any case, the total number of shares of Common
Stock issuable upon exercise of any Option or upon conversion or exchange of any
Convertible Securities is not, in fact, issued and the rights to exercise such
Option or to convert or exchange such Convertible Securities shall have expired
or terminated, the Exercise Price then in effect will be readjusted to the
Exercise Price which would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination (other than in respect of
the actual number of shares of Common Stock issued upon exercise or conversion
thereof), never been issued.
(v) Calculation of Consideration Received. If any
Common Stock, Options or Convertible Securities are issued, granted or sold for
cash, the consideration received therefor for purposes of this Warrant will be
the amount received by the Company therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Company in connection with such issuance, grant or sale.
In case any Common Stock, Options or Convertible Securities are issued or sold
for a consideration part or all of which shall be other than cash, the amount of
the consideration other than cash received by the Company will be the fair value
of such consideration, except where such consideration consists of securities,
in which case the amount of consideration received by the Company will be the
Market Price thereof as of the date of receipt. In case any Common Stock,
Options or Convertible Securities are issued in connection with any acquisition,
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving corporation as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair value of any consideration other than cash or securities
will be determined in good faith by the Board of Directors of the Company.
(vi) Exceptions to Adjustment of Exercise Price. No
adjustment to the Exercise Price will be made (i) upon the exercise of any
warrants, options or convertible securities granted, issued and outstanding on
the date of issuance of this Warrant; (ii) upon the grant or exercise of any
stock or options which may hereafter be granted or exercised under any employee
benefit plan of the Company now existing or to be implemented in the future, so
long as the issuance of such stock or options is approved by a majority of the
independent members
-5-
<PAGE>
of the Board of Directors of the Company or a majority of the members of a
committee of independent directors established for such purpose; or (iii) upon
the exercise of the Warrants.
(c) Subdivision or Combination of Common Stock. If the Company
at any time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company at any
time combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) the shares of Common Stock acquirable hereunder
into a smaller number of shares, then, after the date of record for effecting
such combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased.
(d) Adjustment in Number of Shares. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Paragraph 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(e) Consolidation, Merger or Sale. In case of any
consolidation of the Company with, or merger of the Company into any other
corporation, or in case of any sale or conveyance of all or substantially all of
the assets of the Company other than in connection with a plan of complete
liquidation of the Company, then as a condition of such consolidation, merger or
sale or conveyance, adequate provision will be made whereby the holder of this
Warrant will have the right to acquire and receive upon exercise of this Warrant
in lieu of the shares of Common Stock immediately theretofore acquirable upon
the exercise of this Warrant, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore acquirable and receivable upon exercise of
this Warrant had such consolidation, merger or sale or conveyance not taken
place. In any such case, the Company will make appropriate provision to insure
that the provisions of this Paragraph 4 hereof will thereafter be applicable as
nearly as may be in relation to any shares of stock or securities thereafter
deliverable upon the exercise of this Warrant. The Company will not effect any
consolidation, merger or sale or conveyance unless prior to the consummation
thereof, the successor corporation (if other than the Company) assumes by
written instrument the obligations under this Paragraph 4 and the obligations to
deliver to the holder of this Warrant such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the holder may be entitled to
acquire.
(f) Distribution of Assets. In case the Company shall declare
or make any distribution of its assets (including cash) to holders of Common
Stock as a partial liquidating dividend, by way of return of capital or
otherwise, then, after the date of record for determining stockholders entitled
to such distribution, but prior to the date of distribution, the holder of this
Warrant shall be entitled upon exercise of this Warrant for the purchase of any
or all of the shares of Common Stock subject hereto, to receive the amount of
such assets which would have been payable to the holder had such holder been the
holder of such shares of Common Stock on the record date for the determination
of stockholders entitled to such distribution.
-6-
<PAGE>
(g) Notice of Adjustment. Upon the occurrence of any event
which requires any adjustment of the Exercise Price, then, and in each such
case, the Company shall give notice thereof to the holder of this Warrant, which
notice shall state the Exercise Price resulting from such adjustment and the
increase or decrease in the number of Warrant Shares purchasable at such price
upon exercise, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based. Such calculation shall be
certified by the chief financial officer of the Company.
(h) Minimum Adjustment of Exercise Price. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) No Fractional Shares. No fractional shares of Common Stock
are to be issued upon the exercise of this Warrant, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Market Price of a share
of Common Stock on the date of such exercise.
(j) Other Notices. In case at any time:
(i) the Company shall declare any dividend upon the
Common Stock payable in shares of stock of any class or make any other
distribution (including dividends or distributions payable in cash out of
retained earnings) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro
rata to the holders of the Common Stock any additional shares of stock of any
class or other rights;
(iii) there shall be any capital reorganization of
the Company, or reclassification of the Common Stock, or consolidation or merger
of the Company with or into, or sale of all or substantially all its assets to,
another corporation or entity; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the date
on which the holders of Common Stock shall be entitled to receive such dividend,
distribution, or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon such reorganization,
reclassification, consolidation,
-7-
<PAGE>
merger, sale, dissolution, liquidation, or winding-up, as the case may be. Such
notice shall be given at least 30 days prior to the record date or the date on
which the Company's books are closed in respect thereto. Failure to give any
such notice or any defect therein shall not affect the validity of the
proceedings referred to in clauses (i), (ii), (iii) and (iv) above.
(k) Certain Events. If any event occurs of the type
contemplated by the adjustment provisions of this Paragraph 4 but not expressly
provided for by such provisions, the Company will give notice of such event as
provided in Paragraph 4(g) hereof, and the Company's Board of Directors will
make an appropriate adjustment in the Exercise Price and the number of shares of
Common Stock acquirable upon exercise of this Warrant so that the rights of the
Holder shall be neither enhanced nor diminished by such event.
(l) Certain Definitions.
(i) "Common Stock Deemed Outstanding" shall mean the
number of shares of Common Stock actually outstanding (not including shares of
Common Stock held in the treasury of the Company), plus (x) pursuant to
Paragraph 4(b)(i) hereof, the maximum total number of shares of Common Stock
issuable upon the exercise of Options, as of the date of such issuance or grant
of such Options, if any, and (y) pursuant to Paragraph 4(b)(ii) hereof, the
maximum total number of shares of Common Stock issuable upon conversion or
exchange of Convertible Securities, as of the date of issuance of such
Convertible Securities, if any.
(ii) "Market Price," as of any date, (i) means the
average of the last reported sale prices for the shares of Common Stock on the
Nasdaq SmallCap Market ("Nasdaq") for the five (5) trading days immediately
preceding such date as reported by Bloomberg, L.P. ("Bloomberg"), or (ii) if
Nasdaq is not the principal trading market for the shares of Common Stock, the
average of the last reported sale prices on the principal trading market for the
Common Stock during the same period as reported by Bloomberg, or (iii) if market
value cannot be calculated as of such date on any of the foregoing bases, the
Market Price shall be the fair market value as reasonably determined in good
faith by (a) the Board of Directors of the Corporation or, at the option of a
majority-in-interest of the holders of the outstanding Warrants by (b) an
independent investment bank of nationally recognized standing in the valuation
of businesses similar to the business of the corporation. The manner of
determining the Market Price of the Common Stock set forth in the foregoing
definition shall apply with respect to any other security in respect of which a
determination as to market value must be made hereunder.
(iii) "Common Stock," for purposes of this Paragraph
4, includes the Common Stock, par value $.001 per share, and any additional
class of stock of the Company having no preference as to dividends or
distributions on liquidation, provided that the shares purchasable pursuant to
this Warrant shall include only shares of Common Stock, par value $.001 per
share, in respect of which this Warrant is exercisable, or shares resulting from
any subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Paragraph 4(e) hereof, the stock or other securities or
property provided for in such Paragraph.
-8-
<PAGE>
5. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
6. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. Transfer, Exchange, and Replacement of Warrant.
(a) Restriction on Transfer. This Warrant and the rights
granted to the holder hereof are transferable, in whole or in part, upon
surrender of this Warrant, together with a properly executed assignment in the
form attached hereto, at the office or agency of the Company referred to in
Paragraph 7(e) below, provided, however, that any transfer or assignment shall
be subject to the conditions set forth in Paragraph 7(f) hereof and to the
applicable provisions of the Securities Purchase Agreement. Until due
presentment for registration of transfer on the books of the Company, the
Company may treat the registered holder hereof as the owner and holder hereof
for all purposes, and the Company shall not be affected by any notice to the
contrary. Notwithstanding anything to the contrary contained herein, the
registration rights described in Paragraph 8 are assignable only in accordance
with the provisions of that certain Registration Rights Agreement, dated as of
April 27, 1998, by and among the Company and the other signatories thereto (the
"Registration Rights Agreement").
(b) Warrant Exchangeable for Different Denominations. This
Warrant is exchangeable, upon the surrender hereof by the holder hereof at the
office or agency of the Company referred to in Paragraph 7(e) below, for new
Warrants of like tenor representing in the aggregate the right to purchase the
number of shares of Common Stock which may be purchased hereunder, each of such
new Warrants to represent the right to purchase such number of shares as shall
be designated by the holder hereof at the time of such surrender.
(c) Replacement of Warrant. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Warrant and, in the case of any such loss, theft, or
destruction, upon delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of this Warrant, the Company, at its expense, will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
(d) Cancellation; Payment of Expenses. Upon the surrender of
this Warrant in connection with any transfer, exchange, or replacement as
provided in this Paragraph 7, this Warrant shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities transfer taxes)
and all other expenses (other than legal expenses, if any, incurred
-9-
<PAGE>
by the Holder or transferees) and charges payable in connection with the
preparation, execution, and delivery of Warrants pursuant to this Paragraph 7.
(e) Register. The Company shall maintain, at its principal
executive offices (or such other office or agency of the Company as it may
designate by notice to the holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(f) Exercise or Transfer Without Registration. If, at the time
of the surrender of this Warrant in connection with any exercise, transfer, or
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act of 1933, as amended (the "Securities Act") and under applicable state
securities or blue sky laws, the Company may require, as a condition of allowing
such exercise, transfer, or exchange, (i) that the holder or transferee of this
Warrant, as the case may be, furnish to the Company a written opinion of
counsel, which opinion and counsel are acceptable to the Company, to the effect
that such exercise, transfer, or exchange may be made without registration under
said Act and under applicable state securities or blue sky laws, (ii) that the
holder or transferee execute and deliver to the Company an investment letter in
form and substance acceptable to the Company and (iii) that the transferee be an
"accredited investor" as defined in Rule 501(a) promulgated under the Securities
Act; provided that no such opinion, letter or status as an "accredited investor"
shall be required in connection with a transfer pursuant to Rule 144 under the
Securities Act. The first holder of this Warrant, by taking and holding the
same, represents to the Company that such holder is acquiring this Warrant for
investment and not with a view to the distribution thereof.
8. Registration Rights. The initial holder of this Warrant (and certain
assignees thereof) is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in Section 2 of the Registration
Rights Agreement.
9. Notices. All notices, requests, and other communications required or
permitted to be given or delivered hereunder to the holder of this Warrant shall
be in writing, and shall be personally delivered, or shall be sent by certified
or registered mail or by recognized overnight mail courier, postage prepaid and
addressed, to such holder at the address shown for such holder on the books of
the Company, or at such other address as shall have been furnished to the
Company by notice from such holder. All notices, requests, and other
communications required or permitted to be given or delivered hereunder to the
Company shall be in writing, and shall be personally delivered, or shall be sent
by certified or registered mail or by recognized overnight mail courier, postage
prepaid and addressed, to the office of the Company at 5100 Town Center Circle,
Suite 560, Boca Raton, Florida 33486 Attention: Chief Executive Officer, or at
such other address as shall have been furnished to the holder of this Warrant by
notice from the Company. Any such notice, request, or other communication may be
sent by facsimile, but shall in such case be subsequently confirmed by a writing
personally delivered or sent by certified or registered mail or by recognized
overnight mail courier as provided above. All notices, requests, and other
communications shall be deemed to have been given either at the time of the
receipt thereof by the person entitled to receive such notice at the address of
such person for purposes of this Paragraph 9, or, if mailed by registered or
certified mail or with a
-10-
<PAGE>
recognized overnight mail courier upon deposit with the United States Post
Office or such overnight mail courier, if postage is prepaid and the mailing is
properly addressed, as the case may be.
10. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO THE BODY OF LAW CONTROLLING CONFLICTS OF LAW.
11. Miscellaneous.
(a) Amendments. This Warrant and any provision hereof may only
be amended by an instrument in writing signed by the Company and the holder
hereof.
(b) Descriptive Headings. The descriptive headings of the
several paragraphs of this Warrant are inserted for purposes of reference only,
and shall not affect the meaning or construction of any of the provisions
hereof.
(c) Cashless Exercise. Notwithstanding anything to the
contrary contained in this Warrant, if the resale of the Warrant Shares by the
holder is not then registered pursuant to an effective registration statement
under the Securities Act, this Warrant may be exercised by presentation and
surrender of this Warrant to the Company at its principal executive offices with
a written notice of the holder's intention to effect a cashless exercise,
including a calculation of the number of shares of Common Stock to be issued
upon such exercise in accordance with the terms hereof (a "Cashless Exercise").
In the event of a Cashless Exercise, in lieu of paying the Exercise Price in
cash, the holder shall surrender this Warrant for that number of shares of
Common Stock determined by multiplying the number of Warrant Shares to which it
would otherwise be entitled by a fraction, the numerator of which shall be the
difference between the then current Market Price per share of the Common Stock
and the Exercise Price, and the denominator of which shall be the then current
Market Price per share of Common Stock.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-11-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
METROPOLITAN HEALTH NETWORKS, INC.
By: _____________________________________
Name: Anthony J. Gigiliotti
Title: Chairman
Dated as of April 27, 1998
-12-
<PAGE>
FORM OF EXERCISE AGREEMENT
Dated: ________, ____.
To: Metropolitan Health Networks, Inc.
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase ________ shares of Common Stock covered by
such Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant in cash or by certified or official bank check in the
amount of, or, if the resale of such Common Stock by the undersigned is not
currently registered pursuant to an effective registration statement under the
Securities Act of 1933, as amended, by surrender of securities issued by the
Company (including a portion of the Warrant) having a market value (in the case
of a portion of this Warrant, determined in accordance with Section 11(c) of the
Warrant) equal to $_________. Please issue a certificate or certificates for
such shares of Common Stock in the name of and pay any cash for any fractional
share to:
Name: ___________________________________
Signature: ___________________________________
Address: ___________________________________
___________________________________
Note: The above signature should
correspond exactly with the name on
the face of the within Warrant.
and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers all the rights of the undersigned under the within Warrant, with
respect to the number of shares of Common Stock covered thereby set forth
hereinbelow, to:
Name of Assignee Address No of Shares
- ---------------- ------- ------------
, and hereby irrevocably constitutes and appoints ______________________________
________________________ as agent and attorney-in-fact to transfer said Warrant
on the books of the within-named corporation, with full power of substitution in
the premises.
Dated: _____________________, ____,
In the presence of
______________________
Name: ___________________________________
Signature: ___________________________________
Title of Signing Officer or Agent (if any):
___________________________________
Address: ___________________________________
___________________________________
Note: The above signature should correspond
exactly with the name on the face of
the within Warrant.
ATLAS, PEARLMAN, TROP & BORKSON, P.A.
ATTORNEYS AT LAW
200 East Las Olas Boulevard, Suite 1900
Ft. Lauderdale, Florida 33301
Telephone (954) 763-1200 Facsimile (954) 766-7800
Metropolitan Health Networks, Inc. June 29, 1998
5100 Town Center Circle, Suite 560
Boca Raton, FL 33486-1008
Re: Registration Statement on Form S-3; Metropolitan Health
Networks, Inc. (the "Company"),
1,582,300 Shares of Common Stock
Gentlemen:
This opinion is submitted pursuant to the applicable rules of the
Securities and Exchange Commission with respect to the registration by the
Company of 1,582,300 shares of Common Stock, par value $.01 per share (the
"Common Stock"), to be sold by the Selling Security Holders designated in the
Registration Statement. The shares of Common Stock to be sold consist of up to
427,100 shares of Common Stock issuable on conversion of the Company's Series A
Preferred Stock and Services B Preferred Stock and up to 915,200 shares of
Common Stock issuable upon exercise of Warrants issued to the holder of the
Series B Preferred Stock.
In our capacity as counsel to the Company, we have examined the
original, certified, conformed, photostat or other copies of the Company's
Certificate of Incorporation (as Amended), By-Laws, instruments pertaining to
the Preferred Stock and related subscription agreements, exhibits and corporate
minutes provided to us by the Company. In all such examinations, we have assumed
the genuineness of all signatures on original documents, and the conformity to
originals or certified documents of all copies submitted to us as conformed,
photostat or other copies. In passing upon certain corporate records and
documents of the Company, we have necessarily assumed the correctness and
completeness of the statements made or included therein by the Company, and we
express no opinion thereon.
Based upon and in reliance of the foregoing, we are of the opinion that
the Common Stock to be issued upon conversion or exercise of or in connection
with the Preferred Stock and Warrants (assuming payment of the respective
exercise prices therefor), when issued in accordance with the terms of the
Preferred Stock, Warrants and Placement Agent Warrants, will be validly issued,
fully paid and non-assessable.
<PAGE>
We hereby consent to the use of this opinion in the Registration
Statement on Form S-3 to be filed with the Commission.
Very truly yours,
ATLAS, PEARLMAN, TROP & BORKSON, P.A.
/s/ATLAS, PEARLMAN, TROP & BORKSON, P.A
---------------------------------------
RKB/sm
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made this _____ day
of July, 1997 (the "Closing Date") between Metropolitan Health Networks, Inc.
(the "Seller"), whose mailing address is 5100 Town Center Circle, Suite 560,
Boca Raton, Florida 33486-1008 and Neil Jay Tolar (the "Purchaser"), whose
mailing address is 2070 Naamans Road, Wilmington, DE 19810.
W I T N E S S E T H :
WHEREAS, the Purchaser desires to purchase an aggregate of Five
Thousand (5,000) shares of the Series A 10% Convertible Preferred Stock, par
value of $.001 per share, of the Company (the "Shares") from the Company on the
terms and conditions set forth in this Agreement; and the Company desires to
sell the Shares to the Purchaser on the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, and other good and valuable consideration, the receipt of
which is hereby acknowledged, the Company and the Purchaser hereby agree as
follows:
1. Incorporation by reference. The above recitals are herein
incorporated by reference.
2. Purchase and Sale. The Purchaser shall purchase from the Company,
and the Company shall sell to the Purchaser, the Shares on the terms and
conditions of this Agreement. The Shares shall have the rights, preferences and
limitations as set forth in the Articles of Amendment designating the Series A
Preferred Stock, a copy of which is attached hereto as Exhibit A.
3. Consideration/Purchase Price. In consideration of the purchase of
the Shares by the Purchaser, the Purchaser shall pay to the Company a purchase
price (the "Purchase Price"), in the amount of $500,000, in cash, or by
cashier's or certified check payable to the order of the Company or by other
mutual acceptable manner, payable in full on the Closing Date, as defined
herein.
4. Obligations of Seller.
(a) At the Closing, as defined herein, the Company shall
deliver to the Purchaser 5,000 Shares in the name of the Purchaser.
(b) A receipt for the payment delivered to the Company by the
Purchaser pursuant to Section 3 of this Agreement.
5. Obligations of the Purchaser. At the Closing, the Purchaser shall
deliver to the Company the Purchase Price pursuant to the terms of Section 3 of
this Agreement.
6. Closing and Condition to Closing.
6.1 Closing. The Closing of the transactions contemplated
by this
<PAGE>
Agreement (the "Closing") shall take place on or before ____________, 1997
("Closing Date") at the offices of counsel for the Company or at such other
place mutually agreed upon between Purchaser and the Company, to be effective as
of the Closing Date.
6.2 Condition to Closing. The Closing shall be subject to
satisfaction of the condition that (i) the representations and warranties of (a)
the Company contained in Section 7 hereof; (b) the Purchaser contained in
Section 8 hereof, are true and correct and shall be true and correct as of the
Closing Date; the Company shall have delivered to the Purchaser the items
required by Section 4 hereof; (c) the Purchaser shall have delivered to the
Company the items required by Section 5 hereof; and (d) the Purchaser and the
Company shall have performed and complied with all agreements and conditions
required by this Agreement to be performed and complied with by such party prior
to or as of the Closing Date.
7. Representations and Warranties of the Purchaser.
The Purchaser hereby represents and warrants to, and covenants with,
the Company as follows:
(a) The Purchaser has received and reviewed the Company's
Registration Statement on Form SB-2 File No. 333-5884-A, including all
exhibits thereto, and the Form 10-QSB for the quarter ended March 31,
1997 (collectively the "Disclosure Documents");
(b) The Purchaser has had a reasonable opportunity to ask
questions of and receive answers from the Company concerning the
Company and the Shares, and all such questions, if any, have been
answered to the full satisfaction of the Purchaser;
(c) The Purchaser has such knowledge and expertise in
financial and business matters that the Purchaser is capable of
evaluating the merits and risks involved in an investment in the
Company;
(d) Except as set forth herein and in the Disclosure
Documents, no representations or warranties have been made to the
Purchaser by or on behalf of the Company or any agent, employee or
affiliate of the Company and in entering into this transaction the
Purchaser is not relying upon any information, other than that
contained in the Disclosure Documents and the results of independent
investigation by the Purchaser;
(e) The Purchaser understands that (A) the Shares have not
been regis-tered under the Act or the securities laws of any state,
based upon an exemption from such registration requirements for
non-public offerings pursuant to an exemption under the Act; (B) the
Shares are and will be "restricted securities", as said term is defined
in Rule 144 of the Rules and Regulations promulgated under the Act; (C)
the Shares may not be sold or otherwise transferred unless they have
been first registered under the Act and all
2
<PAGE>
applicable state securities laws, or unless exemptions from such
registration provisions are available with respect to said resale or
transfer; (D) other than as set forth in the Disclosure Documents and
this Agreement, the Company is under no obligation to register the
Shares under the Act or any state securities laws, or to take any
action to make any exemption from any such registration provisions
available; (E) the certificates for the Shares will bear a legend to
the effect that the transfer of the securities represented thereby is
subject to the provisions hereof; and (F) stop transfer instructions
will be placed with the transfer agent for the Shares;
(f) The Purchaser is acquiring the Shares solely for the
account of the Purchaser, for investment purposes only, and not with a
view towards the resale or distribution thereof;
(g) The Purchaser will not sell or otherwise transfer any of
the Shares, or any interest therein, unless and until (i) said Shares
shall have first been registered under the Act and all applicable state
securities laws; or (ii) the Purchaser shall have first delivered to
the Company a written opinion of counsel (which counsel and opinion (in
form and substance) shall be reasonably satisfactory to the Company),
to the effect that the proposed sale or transfer is exempt from the
registration provisions of the Act and all applicable state securities
laws;
(h) The Purchaser is a corporation duly organized under the
laws of the State of ___________; has full power and authority to
execute and deliver this Agreement and to perform the obligations of
the Purchaser hereunder; and this Agreement is a legally binding
obligation of the Purchaser in accordance with its terms;
(i) The Purchaser is an "accredited investor," as such term is
defined in Regulation D of the Rules and Regulations promulgated under
the Act and the Purchaser understands that the Company has determined
that the exemption from the registration provisions of the Securities
Act of 1933, as amended (the "Act"), which is based upon non-public
offerings are applicable to the offer and sale of the Shares, based, in
part, upon the representations, warranties and agreements made by the
Purchaser herein and in the this Agreement.
8. Representations and Warranties of the Company.
The Company hereby represents and warrants to, and covenants with the
Purchaser, as follows:
(a) The Company is a corporation duly organized under the laws
of Florida; has full power and authority to execute and deliver this
Agreement and perform its obligations hereunder, and this Agreement is
a legally binding obligation of the Company in accordance with its
terms.
(b) The Shares, and the underlying shares of Common Stock,
when issued and paid for in accordance with the terms of this Agreement
will be validly issued and fully paid and non-assessable; the holders
thereof will not be subject to any personal liability as such holders;
all corporate action required to be taken for the authorization,
issuance sale of the Shares, and underlying shares of Common Stock, has
been duly and validly taken.
3
<PAGE>
(c) The execution and delivery of the Agreement does not (i)
conflict with or will conflict with, result in a material breach of, or
constitute a default under (x) the articles or bylaws of the Company;
(y) any material contract, indenture mortgage, deed of trust or other
material agreement or instrument to which the Company is a party or by
which any of the properties or assets of the Company may be bound.
(d) The Company has filed with the Securities and Exchange
Commission ("SEC") Disclosure Documents which reports do not contain
any material misstatements of facts or omit to state any material
facts. Since the date of filing of the last such report there has been
no material adverse change in the business or financial condition of
the Company. Except as disclosed in the Disclosure Documents, there are
no pending or threatened litigations or other proceedings which could
have a material adverse effect on the business or financial condition
of the Company.
9. Registration.
(a) In the event that the Company proposes, at any time prior
to two years after the issuance of the Series A Preferred Stock, to
file a registration statement on a general form of registration under
the Act (other than a form S- 8, S-4 or other inappropriate form)
relating to securities issued or to be issued by it, then it shall give
written notice of such proposal to the record owner(s) of the Series A
Preferred Stock and any shares of Common Stock issued upon the exercise
thereof. If, within 15 days after the giving of such notice, the record
owners of any of the Series A Preferred Stock or shares of Common Stock
issued or issuable upon their exercise shall request in writing that
all of the shares of Common Stock issued or issuable upon exercise of
the Series A Preferred Stock be included in such proposed registration,
the Company shall, at its own expense (except as set forth below), also
register such securities as shall have been so requested in writing;
provided, however, that
(i) the Company shall not be required to include any
of such securities if, by reason of such inclusion, the
Company shall be required to prepare and file a registration
statement on a form promulgated by the Securities and Exchange
Commission different from that which the Company otherwise
would use;
(ii) such owners shall cooperate with the Company in
the preparation of such registration statement to the extent
required to furnish information concerning such owners
therein; and
(iii) if any underwriter or managing agent is
purchasing or arranging for the sale of the securities then
being offered by the Company under such registration
statement, then such owners (A) shall agree to have the
securities being so registered sold to or by such underwriter
or managing agent on terms substantially equivalent to the
terms upon which the Company is selling the securities so
registered, or (B) shall delay the sale of such securities for
the 90 day period commencing with the effective date of the
registration statement;
4
<PAGE>
further, if the number of shares as to which such owner, and
all other owners of securities of the Company holding
registration rights, has requested registration is in the
aggregate sufficient that such underwriter reasonably believes
in good faith that the inclusion of such securities in the
registration statement may jeopardize the success of the
offering, then such underwriter may require that each such
owner of securities reduce the number of shares of Common
Stock to be registered, with such reduction to be in
proportion to the number of shares as to which each respective
owner has requested registration which may be the entire
number of securities thereof.
(b) In the event that the record owners of a "Sufficient
Number," as defined below, of the Series A Preferred Stock should give
written notice to the Company of their intention to exercise the rights
set forth in this Section 9(b), then the Company shall file a
registration statement in accordance with this Section 9(b). Such
notice(s) by the record owners must, to be effective, (i) be received
by the Company within a 30-day period of each other, and (ii) be given
with respect to securities (the Common Stock issued upon exercise
thereof) that the record owner is not otherwise entitled to sell
publicly in the United States without registration. A record owner may
give such notice repeatedly, but notice by a record owner shall be
ineffective if given with respect to securities which may then be sold
pursuant to a registration statement already filed, and the Company
shall be obliged no more than once to file a registration statement in
accordance with this Section 9(b). The rights provided record owners by
this Section 9(b) are in addition to those provided by Section 9(a).
For the purposes hereof, a Sufficient Number of the Series A Preferred
Stock means in excess of 51% of the Common Stock issued or issuable,
upon exercises of the Series A Preferred Stock issued pursuant to this
agreement, with all outstanding Series A Preferred Stock issued
pursuant to this agreement deemed exercised. Unless the record owner's
notice specifically states otherwise, it shall be deemed to be a notice
with respect to the Common Stock issuable upon exercise thereof. After
receipt of such notice from a Sufficient Number, if received at any
time (i) after the expiration of 365 days from the date hereof and
prior to two years after the issuance of the Series A Preferred Stock,
or (ii) if the Company has a annual run rate of revenue less than
$30,000,00 as of the date hereof, after the expiration of seven (7)
months from the date hereof and prior to two years after the issuance
of the Series A Preferred Stock, the Company shall then, at its own
expense (except as set forth below), register such securities as were
the subject of the notice by record owners of a Sufficient Number;
provided, however, that
(i) such owners shall cooperate with the Company in
the preparation of such registration statement to the extent
required to furnish information concerning such owners
therein; and
(ii) if any underwriter or managing agent is
purchasing or arranging for the sale of the securities then
being offered by the Company under another registration
statement previously filed or filed
5
<PAGE>
within 30 days after the notice by the record owners of a
Sufficient Number, then such owners (A) shall agree to have
the securities being otherwise registered sold to or by such
underwriter or managing agent on terms substantially
equivalent to the terms upon which the Company is selling the
securities otherwise registered, or (B) shall delay the sale
of such securities for the 90 day period commencing with the
effective date of the other registration statement.
(c) In connection with the filing of a registration statement
pursuant to Section 9(a) or 9(b), the Company shall:
(i) notify such owners as to the filing thereof and
of all amendments thereto filed prior to the effective date of
said registration statement;
(ii) notify such owners, promptly after it shall have
received notice thereof, of the time when the registration
statement becomes effective or any supplement to any
prospectus forming a part of the registration statement has
been filed;
(iii) prepare and file without expense to such owners
any necessary amendment or supplement to such registration
statement or prospectus as may be necessary to comply with
Section 10(a)(3) of the Act or advisable in connection with
the proposed distribution of the securities by such owners;
(iv) take all reasonable steps to qualify the shares
of Common Stock being so registered for sale under the
securities or blue sky laws in such states, but only in such
states, as the Company would qualify the sales of its
securities absent any registration of the shares of Common
Stock issued or issuable hereunder, in the case of a
registration pursuant to Section 9(a); or in such states as
the record owners may reasonably request, in the case of a
registration pursuant to Section 9(b);
(v) notify such registered owners of any stop order
suspending the effectiveness of the registration statement and
use its reasonable best efforts to remove such stop order; and
(vi) undertake to keep said registration statement
and prospectus effective until the earlier of (A) one year
from the effective date thereof (provided, that if the Holders
are required to delay the sale of the securities pursuant to
Section 9(a)(iii)(B) or 9(b)(ii)(B) hereof, then such period
shall be extended by the amount of such delay), or (B) the
date the Series A Preferred Stock or shares of Common Stock
are sold or become available for public sale without
restriction under the Act; provided, however, that such
undertaking shall apply only to the extent that the Company is
permitted to register such securities for continuous sale
under Rule 415 of the General Rules promulgated under the
Securities Act of 1933, under any successor provision, or
under authoritative interpretations of applicable law.
6
<PAGE>
(d) The record owners of the shares of Common Stock being
registered under this Section 9 agree to pay all of the underwriting
discounts and commissions, registration fees and their own counsel fees
with respect to the securities owned by them and being registered. The
Company agrees that the costs and expenses which it is obligated to pay
in connection with a registration statement to be filed pursuant to
Section 9(a) or 9(b) hereof include, but are not limited to, the fees
and expenses of counsel for the Company, the fees and expenses of its
accountants and all other costs and expenses incident to the
preparation, printing and filing under the Act of any such registration
statement, each prospectus and all amendments and supplements thereto,
the costs incurred in connection with the qualification of such
securities for sale in a reasonable number of states, including fees
and disbursements of counsel for the Company, and the costs of
supplying a reasonable number of copies of the registration statement,
each preliminary prospectus, final prospectus and any supplements or
amendments thereto to such registered owners.
10. In connection with the obligation of the Company to register shares
of Common Stock pursuant to the provisions of Section 9 hereof, the Company and
each Holder agree as follows:
(a) The Company hereby agrees to indemnify and hold harmless
each Holder and each person who controls each Holder within the meaning
of Section 15 of the Act or Section 20 of the Securities Exchange Act
of 1934 (the "Exchange Act") from and against any and all losses,
claims, damages, liabilities or actions to which each Holder or they or
any of them may become subject under the Act, the Exchange Act or
otherwise and to reimburse the persons indemnified above for any legal
or other expenses (including the cost of any investigation and
preparation) reasonably incurred by them in connection with any
litigation or proceeding or threatened litigation or proceeding,
whether or not resulting in any liabilities, but only insofar as such
losses, claims, damages, liabilities or actions arise out of, or are
based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in the registration statement with respect to
the shares of the Common Stock (or incorporated therein by reference)
or any amendment or supplement thereto (such registration statement,
together with any such amendments or supplements, is referred to herein
as the "Registration Statement"), or the omission or alleged omission
to state in the Registration Statement a material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, or (ii)
the employment of the Company of any device, scheme or artifice to
defraud, or the engaging by the Company in any act, practice or course
of business which operates or would operate as a fraud or deceit, or
any conspiracy with respect thereto, in which the Company shall
participate, in connection with the sale pursuant to the Registration
Statement of any of the securities registered thereby; provided,
however, that the indemnity agreement contained in this paragraph (a)
shall not extend to any indemnified person in respect of any such
losses, claims, damages, liabilities or actions arising out of, or
based upon, any such untrue statement or alleged untrue statement or
any such omission or alleged omission, if such statement or omission
was made in reliance upon information furnished in writing to the
Company by such person
7
<PAGE>
specifically for use in connection with the preparation of the
Registration Statement. The Company agrees to pay any legal and other
expenses for which it is liable under this paragraph (a) from time to
time (but not more frequently than monthly) within 30 days after its
receipt of a bill therefor.
(b) Each Holder agrees to indemnify and hold harmless the
Company, its directors, its officers who shall have signed the
registration statement, each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the
Company to each Holder but in each case to the extent, and only to the
extent, that any statement in or omission from or alleged omission from
the registration statement, any preliminary prospectus, the prospectus
or any amendment or supplement thereto was made in reliance upon
information furnished in writing to the Company by such Holder
specifically for use in connection with the preparation of the
registration statement, any preliminary prospectus or the prospectus or
any such amendment or supplement thereto. Each Holder agrees to pay any
legal and other expenses for which it is liable under this paragraph
(b) from time to time (but not more frequently than monthly) within 30
days after its receipt of a bill therefor.
(c) If any action is brought against a person entitled to
indemnification pursuant to the foregoing paragraphs (a) or (b) (an
"Indemnified Party") in respect of which indemnity may be sought
against a person granting indemnification (an "Indemnifying Party")
pursuant to such subsections, such Indemnified Party shall promptly
notify such Indemnifying Party in writing of the commencement thereof;
but the omission so to notify the Indemnifying Party of any such action
shall not release the Indemnifying Party from any liability it may have
to such Indemnified Party otherwise than on account of the indemnity
agreement contained in paragraphs (a) or (b). In case any such action
is brought against an Indemnified Party and it notifies an Indemnifying
Party of the commencement thereof, the Indemnifying Party against which
a claim is to be made will be entitled to participate therein, and, to
the extent that it may wish, to assume the defense thereof, with
counsel reasonably satisfactory to such Indemnified Party, provided,
however, that if the defendants in any such action include both the
Indemnified Party and the Indemnifying Party and the Indemnified Party
shall have reasonably concluded based upon advice of counsel that there
may be legal defenses available to it and/or other Indemnified Parties
which conflict with those available to the Indemnifying Party, the
Indemnified Party shall have the right to select separate counsel to
assume such legal defenses and otherwise to participate in the defense
of such action on behalf of such Indemnified Party or Parties. Upon
receipt of notice from the Indemnifying Party to such Indemnified Party
of its election so to assume the defense of such action and approval by
the Indemnified Party of counsel, the Indemnifying Party will not be
liable to such Indemnified Party under this agreement for any legal or
other expenses subsequently incurred by such Indemnified Party in
connection with the defense thereof unless (i) the Indemnified Party
shall have employed such counsel in connection with the assumption of
legal defenses in accordance with the proviso to the next preceding
sentence (it being understood, however, that the Indemnifying Party
shall not be liable for the expenses of more than one separate
counsel), (ii) the Indemnifying Party shall not have employed counsel
8
<PAGE>
reasonably satisfactory to the Indemnified Party to represent the
Indemnified Party within a reasonable time after notice of commencement
of the action or (iii) the Indemnifying Party has authorized the
employment of such counsel for the Indemnified Party at the expense of
the Indemnifying Party. An Indemnifying Party shall not be liable for
any settlement of any action or proceeding effected without its written
consent.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in
paragraph (a) is unavailable to a Holder in accordance with its terms.
The Company and each Holder shall contribute to the aggregate losses,
claims, damages and liabilities of the nature contemplated by said
indemnity agreement incurred by each Holder based on the relative fault
of the Company on the one hand, and each Holder on the other hand, in
connection with the statements or omissions which resulted in such
losses, claims, damages and liabilities. The relative fault shall be
determined by reference to, among other things, whether in the case of
an untrue statement or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact, such
statement or omission relates to information supplied by the Company or
such Holder and the party's relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement
or omission. The amount paid or payable by the Indemnified Party as a
result of the losses, claims, damages, or liabilities referred to above
in this paragraph shall be deemed to include any legal or other
expenses reasonably incurred by such Indemnified Party in connection
with investigating or defending against or appearing as a third party
witness in any such action or claim. Notwithstanding the provisions of
this paragraph, if a Holder is found to be guilty or fraudulent
misrepresentation within the meaning of Section 11(f) of the Act, it
shall not be entitled to contribution from the Company unless the
Company is also found to be guilty of such fraudulent
misrepresentation.
11. Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be deemed to have been duly given if
physically delivered; delivered by overnight delivery, confirmed telecopy,
telegram or courier; or three days after having been deposited in the United
States Mail, as certified mail with return receipt requested and with postage
prepaid, addressed to the recipient at the address listed at the top of the
first page of this Agreement. Any of the foregoing addresses may be changed by
giving notice of such change in the foregoing manner, except that notices for
changes of address will be effective only upon receipt.
12. Miscellaneous.
(a) Assignment. This Agreement and the rights granted
hereunder may not be assigned in whole or in part by any of the parties
without the prior written consent of the other parties.
(b) Further Assurances. All parties hereto shall execute and
deliver such other instruments and do such other acts as may be
necessary to carry out the intent and purposes of this Agreement.
9
<PAGE>
(c) Gender. Whenever the context may require, any pronouns
used herein shall include the corresponding masculine, feminine or
neuter forms and the singular form of nouns and pronouns shall include
the plural and vice versa.
(d) Captions. The captions contained in this Agreement are
inserted only as a matter of convenience and in no way define, limit,
extend or prescribe the scope of this Agreement or the intent of any of
the provisions hereof.
(e) Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter
hereof. It supersedes all prior negotiations, letters and
understandings relating to the subject matter hereof.
(f) Amendment. This Agreement may not be amended, supplemented
or modified in whole or in part except by an instrument in writing
signed by the party or parties against whom enforcement of any such
amendment, supplement or modification is sought.
(g) Choice of Law. This Agreement will be interpreted,
construed and enforced in accordance with the laws of the State of
Florida.
(h) Effect of Waiver. The failure of any party at any time or
times to require performance of any provision of this Agreement will in
no manner affect the right to enforce the same. The waiver by any party
of any breach of any provision of this Agreement will not be construed
to be a waiver by any such party of any succeeding breach of that
provision or a waiver by such party of any breach of any other
provision.
(i) Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement is
held to be invalid, illegal or unenforceable in any respect under any
applicable law or rule in any jurisdiction, such invalidity, illegality
or unenforceability will not affect any other provision or any other
jurisdiction, but this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
(j) Enforcement. Should it become necessary for any party to
institute legal action to enforce the terms and conditions of this
Agreement, the successful party will be awarded reasonable attorneys'
fees at all trial and appellate levels, expenses and costs. Venue for
any such action, in addition to any other venue permitted by statute,
will be Broward County, Florida.
(k) Binding Nature. This Agreement will be binding upon and
will inure to the benefit of any successor or successors of the parties
to this Agreement.
(l) Counterparts. This Agreement may be executed in one or
more counterparts, each of which will be deemed an original and all of
which together will constitute one and the same instrument.
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<PAGE>
(m) Construction. This Agreement shall be construed within the
fair meaning of each of its terms and not against the party drafting
the document.
The parties, as evidenced by their signatures below, acknowledge that
this Agreement has been presented to their attorneys and that their attorneys
have had the opportunity to review and explain to them the terms and provisions
of the Agreement, and that they fully understand those terms and provisions.
IN WITNESS WHEREOF, the parties have respectively caused this Agreement
to be executed on the date first above written.
Seller:
The Company
Metropolitan Health Networks, Inc., a Florida
corporation
By: /s/ Noel J. Guillama
-------------------------------------
Noel J. Guillama, President
Purchaser:
/s/ Neal Jay Tolar
-------------------------------------
Neal Jay Tolar
11
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of April 27,
1998, by and among Metropolitan Health Networks, Inc., a Florida corporation,
with headquarters located at 5100 Town Center Circle, Suite 560, Boca Raton,
Florida 33486 ("Company"), and each of the purchasers set forth on the signature
pages hereto (the "Buyers").
WHEREAS:
A. The Company and the Buyers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 under Regulation D ("Regulation D") as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 Act");
B. The Company has authorized a new series of preferred stock,
designated as Series B Convertible Preferred Stock (the "Preferred Stock"),
having the rights, preferences and privileges set forth in the Certificate of
Designations, Rights and Preferences attached hereto as Exhibit "A" (the
"Certificate of Designation");
C. The Preferred Stock is convertible into shares of common stock,
$.001 par value per share, of the Company (the "Common Stock"), upon the terms
and subject to the limitations and conditions set forth in the Certificate of
Designation;
D. The Company has authorized the issuance to the Buyers of warrants,
in the form attached hereto as Exhibit "B", to purchase an aggregate of Two
Hundred Forty Thousand (240,000) shares of Common Stock (the "Warrants");
E. The Buyers desire to purchase and the Company desires to issue and
sell, upon the terms and conditions set forth in this Agreement, (i) an
aggregate of One Thousand Two Hundred (1,200) shares of Preferred Stock, and
(ii) Warrants to purchase Two Hundred Forty Thousand (240,000) shares of Common
Stock, for an aggregate purchase price of One Million Two Hundred Thousand
Dollars ($1,200,000).
F. Each Buyer wishes to purchase, upon the terms and conditions stated
in this Agreement, the number of shares of Preferred Stock and number of
Warrants as is set forth immediately below its name on the signature pages
hereto;
G. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as Exhibit "C" (the "Registration Rights
Agreement"), pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws; and
NOW THEREFORE, the Company and each of the Buyers (severally and not
jointly) hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED SHARES AND WARRANTS.
<PAGE>
a. Purchase of Preferred Shares and Warrants. The
Company shall issue and sell to each Buyer and each Buyer severally agrees to
purchase from the Company such number of shares of Series B Preferred Stock
(collectively, together with any Preferred Stock issued in replacement thereof
or as a dividend thereon or otherwise with respect thereto in accordance with
the terms thereof, the "Preferred Shares") and number of Warrants for the
aggregate purchase price (the "Purchase Price") as is set forth immediately
below such Buyer's name on the signature pages hereto. The aggregate number of
Preferred Shares to be issued at the Closing (as defined below) is One Thousand
Two Hundred (1,200) and the aggregate number of Warrants to be issued at the
Closing is Two Hundred Forty Thousand (240,000), for an aggregate purchase price
of One Million Two Hundred Thousand Dollars ($1,200,000).
b. Form of Payment. On the Closing Date (as defined
below), (i) each Buyer shall pay the Purchase Price for the Preferred Shares and
the Warrants to be issued and sold to it at the Closing (as defined below) by
wire transfer of immediately available funds to the Company, in accordance with
the Company's written wiring instructions, against delivery of duly executed
certificates representing such number of Preferred Shares and Warrants which
such Buyer is purchasing and (ii) the Company shall deliver such certificates
and Warrants duly executed on behalf of the Company, to the Buyer, against
delivery of such Purchase Price.
c. Closing Date. Subject to the satisfaction (or
waiver) of the conditions thereto set forth in Section 6 and Section 7 below,
the date and time of the issuance and sale of the Preferred Shares and the
Warrants pursuant to this Agreement (the "Closing Date") shall be 12:00 noon
Eastern Standard Time on April 27, 1998 or such other mutually agreed upon time.
The closing of the transactions contemplated by this Agreement (the "Closing")
shall occur on the Closing Date at the offices of the Company, or at such other
location as may be agreed to be the parties.
2. BUYERS' REPRESENTATIONS AND WARRANTIES. Each Buyer
severally (and not jointly) represents and warrants to the Company solely as to
such Buyer that:
a. Organization and Standing of the Buyers. If the
Buyer is an entity, such Buyer is a corporation or partnership duly incorporated
or organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization.
b. Authorization and Power. The Buyer has the
requisite power and authority to enter into and perform this Agreement and to
purchase the Preferred Shares and Warrants being sold to it hereunder. The
execution, delivery and performance of this
2
<PAGE>
Agreement and the Registration Rights Agreement by such Buyer and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate or partnership action (if the Buyer
is an entity), and no further consent or authorization of such Buyer or its
Board of Directors, stockholders, or partners, as the case may be, is required.
Each of this Agreement and the Registration Rights Agreement has been duly
authorized, executed and delivered by such Buyer.
c. No Conflicts. The execution, delivery and
performance of this Agreement and the Registration Rights Agreement and the
consummation by such Buyer of the transactions contemplated hereby and thereby
or relating hereto do not and will not (i) result in a violation of such Buyer's
charter documents or bylaws or (ii) conflict with, or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of any agreement, indenture or instrument to which such Buyer is a
party, or result in a violation of any law, rule, or regulation, or any order,
judgment or decree of any court or governmental agency applicable to such Buyer
or its properties (except for such conflicts, defaults and violations as would
not, individually or in the aggregate, have a Material Adverse Effect on such
Buyer). Such Buyer is not required to obtain any consent, authorization or order
of, or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or the Registration Rights Agreement or to purchase the Preferred
Shares and Warrants in accordance with the terms hereof, provided that for
purposes of the representation made in this sentence, such Buyer is assuming and
relying upon the accuracy of the relevant representations and agreements of the
Company herein.
d. Investment Purpose. As of the date hereof, the
Buyer is purchasing the Preferred Shares and the shares of Common Stock issuable
upon conversion thereof (the "Conversion Shares") and the Warrants and the
shares of Common Stock issuable upon exercise thereof (the "Warrant Shares" and,
collectively with the Preferred Shares, Warrants and Conversion Shares the
"Securities") for its own account for investment only and not with a present
view towards the public sale or distribution thereof, except pursuant to sales
registered or exempted from registration under the 1933 Act.
e. Accredited Investor Status. The Buyer is an
"accredited investor" as that term is defined in Rule 501(a) of Regulation D.
f. Reliance on Exemptions. The Buyer understands that
the Securities are being offered and sold to it in reliance upon specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in
3
<PAGE>
order to determine the availability of such exemptions and the eligibility of
the Buyer to acquire the Securities.
g. Information. The Buyer and its advisors, if any,
have been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Securities which have been requested by the Buyer or its advisors. The Buyer and
its advisors, if any, have been afforded the opportunity to ask questions of the
Company and have received what the Buyer believes to be satisfactory answers to
any such inquiries. Neither such inquiries nor any other due diligence
investigation conducted by Buyer or any of its advisors or representatives shall
modify, amend or affect Buyer's right to rely on the Company's representations
and warranties contained in Section 3 below. The Buyer understands that its
investment in the Securities involves a significant degree of risk.
h. Governmental Review. The Buyer understands that no
United States federal or state agency or any other government or governmental
agency has passed upon or made any recommendation or endorsement of the
Securities.
i. Transfer or Resale. The Buyer understands that (i)
except as provided in the Registration Rights Agreement, the Securities have not
been and are not being registered under the 1933 Act or any applicable state
securities laws, and may not be transferred unless (a) subsequently included in
an effective registration statement thereunder, (b) the Buyer shall have
delivered to the Company an opinion of counsel (which opinion shall be
reasonably acceptable to the Company) to the effect that the Securities to be
sold or transferred may be sold or transferred pursuant to an exemption from
such registration, (c) sold or transferred to on "affiliate" (as defined in Rule
144 promulgated under the 1933 Act (or a successor rule) ("Rule 144")) or (d)
sold pursuant to Rule 144; (ii) any sale of such Securities made in reliance on
Rule 144 may be made only in accordance with the terms of said Rule and further,
if said Rule is not applicable, any resale of such Securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such Securities under the 1933 Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder (in each case, other than pursuant to the Registration
Rights Agreement). Notwithstanding the foregoing or anything else contained
herein to the contrary, the Securities may be pledged as collateral in
connection with a bona fide margin account or other lending arrangement.
j. Legends. The Buyer understands that the Preferred
Shares and the Warrants and, until such time as the Conversion Shares and
Warrant Shares have been registered under the 1933 Act as contemplated by the
Registration Rights Agreement, the Conversion Shares and Warrant Shares, may
bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the certificates for such
Securities):
4
<PAGE>
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be
sold, transferred or assigned in the absence of an effective
registration statement for the securities under said Act, or
an opinion of counsel, in form, substance and scope reasonably
acceptable to the Company, that registration is not required
under said Act or unless sold pursuant to Rule 144 under said
Act."
The legend set forth above shall be removed and the Company
shall issue a certificate without such legend to the holder of any Security upon
which it is stamped, if, unless otherwise required by applicable state
securities laws, (a) such Security is registered for sale under an effective
registration statement filed under the 1933 Act, or (b) such holder provides the
Company with an opinion of counsel, in form, substance and scope reasonably
acceptable to the Company, to the effect that a public sale or transfer of such
Security may be made without registration under the 1933 Act and such sale or
transfer is effected or (c) such holder provides the Company with reasonable
assurances that such Security can be sold pursuant to Rule 144 under the 1933
Act (or a successor rule thereto) without any restriction as to the number of
Securities acquired as of a particular date that can then be immediately sold.
The Buyer agrees to sell all Securities, including those represented by a
certificate(s) from which the legend has been removed, in compliance with
applicable prospectus delivery requirements, if any.
k. Enforcement. This Agreement and the Registration
Rights Agreement have been duly and validly authorized, executed and delivered
on behalf of the Buyer and are valid and binding agreements of the Buyer
enforceable in accordance with their terms.
l. Residency. The Buyer is a resident of the
jurisdiction set forth immediately below such Buyer's name on the signature
pages hereto.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Buyer that:
a. Organization and Qualification. The Company and
each of its Subsidiaries (as defined below), if any, is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated, with full power and authority
(corporate and other) to own, lease, use and operate its properties and to carry
on its business as and where now owned, leased, used, operated and conducted.
Exhibit 21 to the Company's most recent Annual Report on Form 10-KSB sets forth
or incorporates by reference a list of all of the Subsidiaries of the Company
and the jurisdiction in which each is incorporated. The Company and each of its
Subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which the nature of the business
conducted by it makes such qualification necessary except where the failure to
be
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so qualified or in good standing would not have a Material Adverse Effect.
"Material Adverse Effect" means any material adverse effect on the business,
operations, assets, financial condition or prospects of the Company or its
Subsidiaries, if any, taken as a whole, or on the transactions contemplated
hereby or by the agreements or instruments to be entered into in connection
herewith. "Subsidiaries" means any corporation or other organization, whether
incorporated or unincorporated, in which the Company owns, directly or
indirectly, any equity or other ownership interest.
b. Authorization; Enforcement. (i) The Company has
all requisite corporate power and authority to file and perform its obligations
under the Certificate of Designation and to enter into and perform this
Agreement, the Registration Rights Agreement and the Warrants and to consummate
the transactions contemplated hereby and thereby and to issue the Securities, in
accordance with the terms hereof and thereof, (ii) the execution and delivery of
this Agreement, the Registration Rights Agreement and the Warrants by the
Company and the consummation by it of the transactions contemplated hereby and
thereby (including without limitation, the issuance of the Preferred Shares and
the Warrants and the issuance and reservation for issuance of the Conversion
Shares and Warrant Shares issuable upon conversion or exercise thereof) have
been duly authorized by the Company's Board of Directors and no further consent
or authorization of the Company, its Board of Directors, or its shareholders is
required, (iii) this Agreement has been duly executed and delivered and the
Certificate of Designation has been duly filed by the Company, and (iv) each of
this Agreement and the Certificate of Designation constitutes, and upon
execution and delivery by the Company of the Registration Rights Agreement and
the Warrants, each of such instruments will constitute, a legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms.
c. Capitalization. As of the date hereof, the
authorized capital stock of the Company consists of (i) 40,000,000 shares of
Common Stock of which 13,682,064 shares are issued and outstanding, 500,000
shares are reserved for issuance pursuant to the Company's stock option plans,
7,065,652 shares are reserved for issuance pursuant to securities (other than
the Preferred Shares and the Warrants) exercisable for, or convertible into or
exchangeable for shares of Common Stock and 750,000 (2x currently required)
shares are reserved for issuance upon conversion of the Preferred Shares and
exercise of the Warrants (subject to adjustment pursuant to the Company's
covenant set forth in Section 4(h) below); and (ii) 10,000,000 shares of
preferred stock, 5,000 of which shares are issued and outstanding. All of such
outstanding shares of capital stock are, or upon issuance will be, duly
authorized, validly issued, fully paid and nonassessable. No shares of capital
stock of the Company are subject to preemptive rights or any other similar
rights of the stockholders of the Company or any liens or encumbrances imposed
through the actions or failure to act of the Company. Except as disclosed in
Schedule 3(c), as of the effective date of this Agreement, (i) there are no
outstanding options, warrants, scrip, rights to subscribe for, puts, calls,
rights of first refusal, agreements, understandings, claims or other commitments
or rights of any character whatsoever relating to, or securities or
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rights convertible into or exchangeable for any shares of capital stock of the
Company or any of its Subsidiaries, or arrangements by which the Company or any
of its Subsidiaries is or may become bound to issue additional shares of capital
stock of the Company or any of its Subsidiaries, and (ii) there are no
agreements or arrangements under which the Company or any of its Subsidiaries is
obligated to register the sale of any of its or their securities under the 1933
Act (except the Registration Rights Agreement) and (iii) there are no
anti-dilution or price adjustment provisions contained in any security issued by
the Company (or in any agreement providing rights to security holders) that will
be triggered by the issuance of the Preferred Shares, the Warrants, the
Conversion Shares or Warrant Shares. The Company has furnished to the Buyer true
and correct copies of the Company's Certificate of Incorporation as in effect on
the date hereof ("Certificate of Incorporation"), the Company's By-laws, as in
effect on the date hereof (the "By-laws"), and the terms of all securities
convertible into or exercisable for Common Stock of the Company and the material
rights of the holders thereof in respect thereto. The Company shall provide the
Buyer with a written update of this representation signed by the Company's Chief
Executive or Chief Financial Officer on behalf of the Company as of the Closing
Date.
d. Issuance of Shares. The Preferred Shares,
Conversion Shares and Warrant Shares are duly authorized and, upon issuance in
accordance with the terms of this Agreement (including the issuance of the
Conversion Shares upon conversion of the Preferred Shares in accordance with the
Certificate of Designation and the Warrant Shares upon exercise of the Warrants
in accordance with the terms thereof) will be validly issued, fully paid and
non-assessable, and free from all taxes, liens and charges with respect to the
issue thereof and shall not be subject to preemptive rights or other similar
rights of stockholders of the Company. The term Conversion Shares and Warrant
Shares includes the shares of Common Stock issuable upon conversion of the
Preferred Shares or exercise of the Warrants, including without limitation, such
additional shares, if any, as are issuable as a result of the events described
in Article VI.E(b) or Article VI.F of the Certificate of Designation and Section
2(c) of the Registration Rights Agreement. The Company understands and
acknowledges the potentially dilutive effect to the Common Stock upon the
issuance of the Conversion Shares and Warrant Shares upon conversion or exercise
of the Preferred Shares or Warrants. The Company further acknowledges that its
obligation to issue Conversion Shares and Warrant Shares upon conversion of the
Preferred Shares or exercise of the Warrants in accordance with this Agreement,
the Certificate of Designation and the Warrants is absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.
e. No Conflicts. Except as set forth on Schedule
3(e), The execution, delivery and performance of this Agreement, the
Registration Rights Agreement and the Warrants by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the filing of the Certificate of Designation and
the issuance and reservation for issuance of the Conversion Shares and Warrant
Shares) will not (i) conflict with or result in a violation of any provision of
the Certificate of
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Incorporation or By-laws or (ii) violate or conflict with, or result in a breach
of any provision of, or constitute a default (or an event which with notice or
lapse of time or both could become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party, or result in a violation of any law, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations) applicable to the Company or any of its Subsidiaries or by which
any property or asset of the Company or any of its Subsidiaries is bound or
affected (except for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect). Neither the Company nor any of its
Subsidiaries is in violation of its Certificate of Incorporation, By-laws or
other organizational documents and neither the Company nor any of its
Subsidiaries is in default (and no event has occurred which with notice or lapse
of time or both could put the Company or any of its Subsidiaries in default)
under, and neither the Company nor any of its Subsidiaries has taken any action
or failed to take any action that would give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its Subsidiaries is a
party or by which any property or assets of the Company or any of its
Subsidiaries is bound or affected, except for possible defaults as would not,
individually or in the aggregate, have a Material Adverse Effect. The businesses
of the Company and its Subsidiaries, if any, are not being conducted, and shall
not be conducted so long as a Buyer owns any of the Securities, in violation of
any law, ordinance or regulation of any governmental entity. Except as
specifically contemplated by this Agreement and as required under the 1933 Act
and any applicable state securities laws, the Company is not required to obtain
any consent, authorization or order of, or make any filing or registration with,
any court or governmental agency or any regulatory or self regulatory agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement, the Registration Rights Agreement or the Warrants in accordance with
the terms hereof or thereof. Except as disclosed in Schedule 3(e), all consents,
authorizations, orders, filings and registrations which the Company is required
to obtain pursuant to the preceding sentence have been obtained or effected on
or prior to the date hereof. The Company is not in violation of the listing
requirements of the Nasdaq SmallCap Market ("Nasdaq SmallCap") and does not
reasonably anticipate that the Common Stock will be delisted by the Nasdaq
SmallCap in the foreseeable future. The Company and its Subsidiaries are unaware
of any facts or circumstances which might give rise to any of the foregoing.
f. SEC Documents, Financial Statements. Since June
30, 1996, the Company has timely filed all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the Exchange Act of 1934, as amended (the "1934 Act")
(all of the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements and schedules thereto and documents (other than
exhibits) incorporated by reference therein. The Buyers and their advisors, if
any, have received true and complete copies of the Company's Form 10-KSB for the
fiscal year ended June 30, 1997, the Company's Forms 10-QSB for the fiscal
quarters ended September 30, 1997 and
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December 31, 1997 and the Company's Current Report on Form 8-K dated February
22, 1998 (collectively, the "SEC Documents"). As of their respective dates, the
SEC Documents complied in all material respects with the requirements of the
1934 Act and the rules and regulations of the SEC promulgated thereunder
applicable to the SEC Documents, and none of the SEC Documents, at the time they
were filed with the SEC, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. As of their respective dates, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto. Such financial statements
have been prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except as
set forth in the financial statements of the Company included in the SEC
Documents, the Company has no liabilities, contingent or otherwise, other than
(i) liabilities incurred in the ordinary course of business subsequent to June
30, 1997 and (ii) obligations under contracts and commitments incurred in the
ordinary course of business and not required under generally accepted accounting
principles to be reflected in such financial statements, which, individually or
in the aggregate, are not material to the financial condition or operating
results of the Company.
g. Absence of Certain Changes. Since June 30, 1997,
except as disclosed in the SEC Documents, there has been no material adverse
change and no material adverse development in the assets, liabilities, business,
properties, operations, financial condition, results of operations or prospects
of the Company or any of its Subsidiaries.
h. Absence of Litigation. There is no action, suit,
claim, proceeding, inquiry or investigation before or by any court, public
board, government agency, self-regulatory organization or body pending or, to
the knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company or any of its Subsidiaries that could have a Material
Adverse Effect. Schedule 3(h) contains a complete list and summary description
of any pending or threatened proceeding against or affecting the Company or any
of its Subsidiaries, without regard to whether it would have a Material Adverse
Effect that are not disclosed in the SEC Documents. The Company and its
Subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing.
i. Patents, Copyrights, etc. The Company and each of
its Subsidiaries owns or possesses the requisite licenses or rights to use all
patents, patent rights, inventions,
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know-how, trade secrets, trademarks, service marks, service names, trade names
and copyrights ("Intellectual Property") necessary to enable it to conduct its
business as now operated (and, except as set forth in Schedule 3(i) hereof, to
the best of the Company's knowledge, as presently contemplated to be operated in
the future); there is no claim or action by any person pertaining to, or
proceeding pending, or to the Company's knowledge threatened which challenges
the right of the Company or of a Subsidiary with respect to any Intellectual
Property necessary to enable it to conduct its business as now operated (and,
except as set forth in Schedule 3(i) hereof or in the SEC Documents, to the best
of the Company's knowledge, as presently contemplated to be operated in the
future); to the best of the Company's knowledge, the Company's or its
Subsidiaries, current and intended products, services and processes do not
infringe on any Intellectual Property or other rights held by any person; and
the Company is unaware of any facts or circumstances which might give rise to
any of the foregoing. The Company and each of its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of their Intellectual Property.
j. No Materially Adverse Contracts, Etc. Neither the
Company nor any of its Subsidiaries is subject to any charter, corporate or
other legal restriction, or any judgment, decree, order, rule or regulation
which in the judgment of the Company's officers has or is expected in the future
to have a Material Adverse Effect. Neither the Company nor any of its
Subsidiaries is a party to any contract or agreement which in the judgment of
the Company's officers has or is expected to have a Material Adverse Effect.
k. Tax Status. Except as set forth on Schedule 3(k)
or in the SEC Documents, the Company and each of its Subsidiaries has made or
filed all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject (unless and
only to the extent that the Company and each of its Subsidiaries has set aside
on its books provisions reasonably adequate for the payment of all unpaid and
unreported taxes) and has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provisions reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.
l. Certain Transactions. Except as set forth on
Schedule 3(l) or in the SEC Documents and except for arm's length transactions
pursuant to which the Company or any of its Subsidiaries makes payments in the
ordinary course of business upon terms no less favorable than the Company or any
of its Subsidiaries could obtain from third parties and other than the grant of
stock options disclosed on Schedule 3(c), none of the officers, directors, or
employees of the Company is presently a party to any transaction with the
Company or any of its Subsidiaries (other than for services as employees,
officers and directors), including any
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contract, agreement or other arrangement providing for the furnishing of
services to or by, providing for rental of real or personal property to or from,
or otherwise requiring payments to or from any officer, director or such
employee or, to the knowledge of the Company, any corporation, partnership,
trust or other entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or partner.
m. Disclosure. All information relating to or
concerning the Company or any of its Subsidiaries set forth in this Agreement
and provided to the Buyers pursuant to Section 2(d) hereof and otherwise in
connection with the transactions contemplated hereby is true and correct in all
material respects and the Company has not omitted to state any material fact
necessary in order to make the statements made herein or therein, in light of
the circumstances under which they were made, not misleading. No event or
circumstance has occurred or exists with respect to the Company or any of its
Subsidiaries or its or their business, properties, prospects, operations or
financial conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed (assuming for this purposes that the Company's
reports filed under the 1934 Act are being incorporated into an effective
registration statement filed by the Company under the 1933 Act).
n. Acknowledgment Regarding Buyers' Purchase of
Securities. The Company acknowledges and agrees that the Buyers are acting
solely in the capacity of arm's length purchasers with respect to this Agreement
and the transactions contemplated hereby. The Company further acknowledges that
no Buyer is acting as a financial advisor or fiduciary of the Company (or in any
similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by any Buyer or any of their respective
representatives or agents in connection with this Agreement and the transactions
contemplated hereby is merely incidental to the Buyers' purchase of the
Securities. The Company further represents to each Buyer that the Company's
decision to enter into this Agreement has been based solely on the independent
evaluation of the Company and its representatives.
o. No Integrated Offering. Neither the Company, nor
any of its affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales in any security or solicited any
offers to buy any security under circumstances that would require registration
under the 1933 Act of the issuance of the Securities to the Buyers. The issuance
of the Securities to the Buyers will not be integrated with any other issuance
of the Company's securities (past, current or future) which requires stockholder
approval under the rules of The Nasdaq Stock Market.
p. No Brokers. The Company has taken no action which
would give rise to any claim by any person for brokerage commissions, finder's
fees or similar payments relating to this Agreement or the transactions
contemplated hereby, except for dealings with
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Tanner Unman Securities Incorporated ("Tanner Unman") whose commissions and fees
will be paid for by the Company.
q. Permits; Compliance. The Company and each of its
Subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and to
carry on its business as it is now being conducted (collectively, the "Company
Permits"), and there is no action pending or, to the knowledge of the Company,
threatened regarding suspension or cancellation of any of the Company Permits.
Neither the Company nor any of its Subsidiaries is in conflict with, or in
default or violation of, any of the Company Permits, except for any such
conflicts, defaults or violations which, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect. Since June 30,
1997, neither the Company nor any of its Subsidiaries has received any
notification with respect to possible conflicts, defaults or violations of
applicable laws, except for notices relating to possible conflicts, defaults or
violations, which conflicts, defaults or violations would not have a Material
Adverse Effect.
r. Environmental Matters.
(i) Except as set forth in Schedule 3(r) or
in the SEC Documents, there are, to the Company's knowledge, with respect to the
Company or any of its Subsidiaries or any predecessor of the Company, no past or
present violations of Environmental Laws (as defined below), releases of any
material into the environment, actions, activities, circumstances, conditions,
events, incidents, or contractual obligations which may give rise to any common
law environmental liability or any liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 or similar
federal, state, local or foreign laws and neither the Company nor any of its
Subsidiaries has received any notice with respect to any of the foregoing, nor
is any action pending or, to the Company's knowledge, threatened in connection
with any of the foregoing. The term "Environmental Laws" means all federal,
state, local or foreign laws relating to pollution or protection of human health
or the environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants contaminants, or toxic or hazardous substances or wastes
(collectively, "Hazardous Materials") into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.
(ii) Other than those that are or were
stored, used or disposed of in compliance with applicable law, no Hazardous
Materials are contained on or about any real property currently owned, leased or
used by the Company or any of its Subsidiaries, and no
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Hazardous Materials were released on or about any real property previously
owned, leased or used by the Company or any of its Subsidiaries during the
period the property was owned, leased or used by the Company or any of its
Subsidiaries, except in the normal course of the Company's or any of its
Subsidiaries' business.
(iii) Except as set forth in Schedule 3(r)
or in the SEC Documents, there are no underground storage tanks on or under any
real property owned, leased or used by the Company or any of its Subsidiaries
that are not in compliance with applicable law.
s. Title to Property. Except as set forth in Schedule
3(s) or in the SEC Documents, the Company and its Subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in Schedule 3(s) or such
as would not have a Material Adverse Effect. Any real property and facilities
held under lease by the Company and its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as would not have
a Material Adverse Effect.
t. Insurance. The Company and each of its
Subsidiaries are insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as management of the Company
believes to be prudent and customary in the businesses in which the Company and
its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a Material Adverse Effect.
u. Internal Accounting Controls. The Company and each
of its Subsidiaries maintain a system of internal accounting controls
sufficient, in the judgment of the Company's board of directors, to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management's general
or specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
v. Foreign Corrupt Practices. Neither the Company,
nor any of its Subsidiaries, nor any director, officer, agent, employee or other
person acting on behalf of the Company or any Subsidiary has, in the course of
his actions for, or on behalf of, the Company, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful
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expenses relating to political activity; made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from
corporate funds; violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.
4. COVENANTS.
a. Best Efforts. The parties shall use their best
efforts to satisfy timely each of the conditions described in Section 6 and 7 of
this Agreement.
b. Form D; Blue Sky Laws. The Company agrees to file
a Form D with respect to the Securities as required under Regulation D and to
provide a copy thereof to each Buyer promptly after such filing. The Company
shall, on or before the Closing Date, take such action as the Company shall
reasonably determine is necessary to qualify the Securities for sale to the
Buyers at the applicable closing pursuant to this Agreement under applicable
securities or "blue sky" laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to each Buyer on or prior to the Closing Date.
c. Reporting Status; Eligibility to Use Form S-3. The
Company's Common Stock is registered under Section 12(g) of the 1934 Act. So
long as any Buyer beneficially owns any of the Securities, the Company shall
timely file all reports required to be filed with the SEC pursuant to the 1934
Act, and the Company shall not terminate its status as an issuer required to
file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would permit such termination. The Company currently
meets, and will take all necessary action to continue to meet, the "registrant
eligibility" requirements set forth in the general instructions to Form S-3.
d. Use of Proceeds. The Company shall use the
proceeds from the sale of the Preferred Shares and the Warrants in the manner
set forth in Schedule 4(d) attached hereto and made a part hereof and shall not,
directly or indirectly, use such proceeds for any loan to or investment in any
other corporation, partnership, enterprise or other person (except in connection
with its currently existing direct or indirect Subsidiaries).
e. Additional Equity Capital; Right of First Refusal.
Subject to the exceptions described below, the Company will not, without the
prior written consent of a majority-in-interest of the Buyers, negotiate or
contract with any party to obtain additional equity financing (including debt
financing with an equity component) that involves (A) the issuance of Common
Stock at a discount to the market price of the Common Stock on the date of
issuance, (B) the issuance of convertible securities that are convertible into
an indeterminate number of shares of Common Stock or (C) the issuance of
warrants during the period (the "Lock-up
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Period") beginning on the Closing Date and ending on the later of (i) one
hundred eighty (180) days from the Closing Date and (ii) ninety (90) days from
the date the Registration Statement (as defined in the Registration Rights
Agreement) is declared effective (plus any days in which sales cannot be made
thereunder). In addition, subject to the exceptions described below, the Company
will not conduct any equity financing (including debt with an equity component)
("Future Offerings") during the period beginning on the Closing Date and ending
one (1) year after the end of the Lock-up Period, unless it shall have first
delivered to each Buyer, at least fifteen (15) business days prior to the
closing of such Future Offering, written notice describing the proposed Future
Offering, including the terms and conditions thereof and proposed definitive
documentation to be entered into in connection therewith, and providing each
Buyer an option during the ten (10) day period following delivery of such notice
to purchase its pro rata share (based on the ratio that the number of Preferred
Shares purchased by it hereunder bears to the aggregate number of Preferred
Shares purchased hereunder) of the securities being offered in the Future
Offering on the same terms as contemplated by such Future Offering (the
limitations referred to in this sentence are collectively referred to as the
"Capital Raising Limitations"). In the event the terms and conditions of a
proposed Future Offering are amended in any respect after delivery of the notice
to the Buyers concerning the proposed Future Offering, the Company shall deliver
a new notice to each Buyer describing the amended terms and conditions of the
proposed Future Offering and each Buyer thereafter shall have an option during
the ten (10) day period following delivery of such new notice to purchase its
pro rata share of the securities being offered on the same terms as contemplated
by such proposed Future Offering, as amended. The foregoing sentence shall apply
to successive amendments to the terms and conditions of any proposed Future
Offering. The Capital Raising Limitations shall not apply to any transaction
involving (i) issuances of securities in a firm commitment underwritten public
offering (excluding a continuous offering pursuant to Rule 415 under the 1933
Act), (ii) issuances of securities as consideration for a merger, consolidation
or sale of assets, or in connection with any strategic partnership or joint
venture (the primary purpose of which is not to raise equity capital), or in
connection with the disposition or acquisition of a business, product or license
by the Company, (iii) warrants to a financial institution in connection with a
bona fide senior lending arrangement or (iv) securities offered in the presently
contemplated private placement which is expected to be consummated within
forty-five (45) days following the Closing Date and for which Tanner Unman will
act as broker. The Capital Raising Limitations also shall not apply to the
issuance of securities upon exercise or conversion of the Company's options,
warrants or other convertible securities outstanding as of the date hereof or to
the grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option or restricted stock plan approved by
a majority of the Company's disinterested directors.
f. Expenses. The Company shall reimburse Tanner Unman
for all reasonable expenses incurred by it in connection with the negotiation,
preparation, execution, delivery and performance of this Agreement and the other
agreements to be executed in connection herewith, including, without limitation,
attorneys' and consultants' fees and expenses, as set forth on Schedule 4(f)
hereto.
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g. Financial Information. The Company agrees to send
the following reports to each Buyer until such Buyer transfers, assigns, or
sells all of the Securities: (i) within ten (10) days after the filing with the
SEC, a copy of its Annual Report on Form 10-K, its Quarterly Reports on Form
10-Q and any Current Reports on Form 8-K; (ii) within one (1) day after release,
copies of all press releases issued by the Company or any of its Subsidiaries;
and (iii) contemporaneously with the making available or giving to the
stockholders of the Company, copies of any notices or other information the
Company makes available or gives to such stockholders.
h. Reservation of Shares. The Company shall at all
times have authorized, and reserved for the purpose of issuance, a sufficient
number of shares of Common Stock to provide for the full conversion or exercise
of the outstanding Preferred Shares and Warrants and issuance of the Conversion
Shares and Warrant Shares in connection therewith (based on the Conversion Price
of the Preferred Shares or Exercise Price of the Warrants in effect from time to
time). The Company shall not reduce the number of shares of Common Stock
reserved for issuance upon conversion of Preferred Shares and exercise of the
Warrants without the consent of each Buyer. The Company shall use its best
efforts at all times to maintain the number of shares of Common Stock so
reserved for issuance at no less than two (2) times the number that is then
actually issuable upon full conversion of the Preferred Shares and exercise of
the Warrants (based on the Conversion Price of the Preferred Shares or Exercise
Price of the Warrants in effect from time to time). If at any time the number of
shares of Common Stock authorized and reserved for issuance is below the number
of Conversion Shares and Warrant Shares issued and issuable upon conversion of
the Preferred Shares and exercise of the Warrants (based on the Conversion Price
of the Preferred Shares or Exercise price of the Warrants then in effect), the
Company will promptly take all corporate action necessary to authorize and
reserve a sufficient number of shares, including, without limitation, calling a
special meeting of shareholders to authorize additional shares to meet the
Company's obligations under this Section 4(h), in the case of an insufficient
number of authorized shares, and using its best efforts to obtain shareholder
approval of an increase in such authorized number of shares.
i. Listing. The Company shall promptly secure the
listing of the Conversion Shares and Warrant Shares upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed (subject to official notice of issuance) and shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all Conversion Shares and Warrant Shares from time to time issuable
upon conversion of the Preferred Shares or exercise of the Warrants. The Company
will obtain and maintain the listing and trading of its Common Stock on the
Nasdaq SmallCap, the Nasdaq National Market ("Nasdaq"), the New York Stock
Exchange ("NYSE"), or the American Stock Exchange ("AMEX") and will comply in
all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the National Association of Securities Dealers ("NASD")
and such exchanges, as applicable. The Company shall promptly provide to each
16
<PAGE>
Buyer copies of any notices it receives from the Nasdaq SmallCap and any other
exchanges or quotation systems on which the Common Stock is then listed
regarding the continued eligibility of the Common Stock for listing on such
exchanges and quotation systems.
j. Corporate Existence. So long as a Buyer
beneficially owns any Preferred Shares or Warrants, the Company shall maintain
its corporate existence and shall not sell all or substantially all of the
Company's assets, except in the event of a merger or consolidation or sale of
all or substantially all of the Company's assets, where the surviving or
successor entity in such transaction (i) assumes the Company's obligations
hereunder and under the agreements and instruments entered into in connection
herewith and (ii) is a publicly traded corporation whose Common Stock is listed
for trading on Nasdaq, Nasdaq SmallCap, NYSE or AMEX.
k. No Integration. The Company will not conduct any
future offering that will be integrated with the issuance of the Securities
solely for purposes of Rule 4460(i) of the Nasdaq Stock Market.
l. Solvency. The Company (both before and after
giving effect to the transactions contemplated by this Agreement) is solvent
(i.e., its assets have a fair market value in excess of the amount required to
pay its probable liabilities on its existing debts as they become absolute and
matured) and currently the Company has no information that would lead it to
reasonably conclude that the Company would not have, nor does it intend to take
any action that would impair, its ability to pay its debts from time to time
incurred in connection therewith as such debts mature. The Company did not
receive a qualified opinion from its auditors with respect to its most recent
fiscal year end and does not anticipate or know of any basis upon which its
auditors might issue a qualified opinion in respect of its current fiscal year.
m. Trading Restrictions. Each Buyer agrees that it
will not (nor will any of its affiliates or designees) sell short the Common
Stock of the Company until such time as a conversion has been effected by such
Buyer.
n. Other Equity Offerings. In the event that the
Company offers shares of Common Stock (or securities convertible into Common
Stock), which Common Stock is eligible for public resale within six (6) months
of the Closing Date, with any terms more favorable than the terms applicable to
the Preferred Shares (including but not limited to the conversion terms
thereof), then the Buyers will have the right to have modified the applicable
terms of the Preferred Shares to reflect such more favorable terms. Further, in
the event that such offering by the Company referred to in the preceding
sentence also involves the issuance of warrants to purchase Common Stock, the
Buyers will be entitled to receive additional warrants to the same extent as
they would have received if such Buyers had participated in such offering.
17
<PAGE>
5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue
irrevocable instructions to its transfer agent to issue certificates, registered
in the name of each Buyer or its nominee, for the Conversion Shares and Warrant
Shares in such amounts as specified from time to time by each Buyer to the
Company upon conversion of the Preferred Shares or exercise of the Warrants in
accordance with the terms thereof (the "Irrevocable Transfer Agent
Instructions"). Prior to registration of the Conversion Shares and Warrant
Shares under the 1933 Act, all such certificates shall bear the restrictive
legend specified in Section 2(g) of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 5, and stop transfer instructions to give effect to Section 2(f)
hereof (in the case of the Conversion Shares and Warrant Shares, prior to
registration of the Conversion Shares and Warrant Shares under the 1933 Act),
will be given by the Company to its transfer agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way the Buyer's obligations and
agreement set forth in Section 2(g) hereof to comply with all applicable
prospectus delivery requirements, if any, upon resale of the Securities. If a
Buyer provides the Company with an opinion of counsel, reasonably satisfactory
to the Company in form, substance and scope, that registration of a resale by
such Buyer of any of the Securities is not required under the 1933 Act, the
Company shall permit the transfer, and, in the case of the Conversion Shares and
Warrant Shares, promptly instruct its transfer agent to issue one or more
certificates in such name and in such denominations as specified by such Buyer.
The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Buyers, by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section, that the Buyers shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach and requiring immediate transfer, without the necessity of showing
economic loss and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The
obligation of the Company hereunder to issue and sell the Preferred Shares and
Warrants to a Buyer at the Closing is subject to the satisfaction, at or before
the Closing Date of each of the following conditions thereto, provided that
these conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion:
a. The applicable Buyer shall have executed this
Agreement and the Registration Rights Agreement, and delivered the same to the
Company.
b. The applicable Buyer shall have delivered the
Purchase Price in accordance with Section 1(b) above.
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<PAGE>
c. The Certificate of Designation shall have been
accepted for filing with the Secretary of State of the State of Florida.
d. The representations and warranties of the
applicable Buyer shall be true and correct in all material respects as of the
date when made and as of the Closing Date as though made at that time (except
for representations and warranties that speak as of a specific date), and the
applicable Buyer shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the applicable Buyer at
or prior to the Closing Date.
e. No litigation, statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by or in any court or governmental authority of
competent jurisdiction or any self-regulatory organization having authority over
the matters contemplated hereby which prohibits the consummation of any of the
transactions contemplated by this Agreement.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE. The
obligation of each Buyer hereunder to purchase the Preferred Shares and Warrants
at the Closing is subject to the satisfaction, at or before the Closing Date of
each of the following conditions, provided that these conditions are for such
Buyer's sole benefit and may be waived by such Buyer at any time in its sole
discretion:
a. The Company shall have executed this Agreement and
the Registration Rights Agreement, and delivered the same to the Buyer.
b. The Company shall have delivered to such Buyer
duly executed certificates (in such denominations as the Buyer shall request)
representing the Preferred Shares and Warrants in accordance with Section 1(b)
above.
c. The Certificate of Designation shall have been
accepted for filing with the Secretary of Sate of the State of Florida, and a
copy thereof certified by such Secretary of State shall have been delivered to
such Buyer.
d. The Irrevocable Transfer Agent Instructions, in
form and substance satisfactory to a majority-in-interest of the Buyers, shall
have been delivered to and acknowledged in writing by the Company's Transfer
Agent.
e. The representations and warranties of the Company
shall be true and correct in all material respects as of the date when made and
as of the Closing Date as though made at such time (except for representations
and warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
19
<PAGE>
or complied with by the Company at or prior to the Closing Date. The Buyer shall
have received a certificate or certificates, executed by the chief executive
officer of the Company, dated as of the Closing Date, to the foregoing effect
and as to such other matters as may be reasonably requested by such Buyer
including, but not limited to certificates with respect to the Company's
Certificate of Incorporation, By-laws and Board of Directors' resolutions
relating to the transactions contemplated hereby.
f. No litigation, statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by or in any court or governmental authority of
competent jurisdiction or any self-regulatory organization having authority over
the matters contemplated hereby which prohibits the consummation of any of the
transactions contemplated by this Agreement.
g. The Conversion Shares and the Warrant Shares shall
have been authorized for quotation on the Nasdaq SmallCap and trading in the
Common Stock on the Nasdaq SmallCap shall not have been suspended by the SEC or
the Nasdaq SmallCap.
h. The Buyer shall have received an opinion of the
Company's counsel, dated as of the Closing Date, in form, scope and substance
reasonably satisfactory to the Buyer and in substantially the same form as
Exhibit "D" attached hereto.
i. The Buyer shall have received an officer's
certificate described in Section 3(c) above, dated as of the Closing Date.
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. This Agreement shall be governed by
and interpreted in accordance with the laws of the State of New York without
regard to the principles of conflict of laws. The parties hereto hereby submit
to the exclusive jurisdiction of the United States Federal Courts located in New
York with respect to any dispute arising under this Agreement, the agreements
entered into in connection herewith or the transactions contemplated hereby or
thereby.
b. Counterparts; Signatures by Facsimile. This
Agreement may be executed in two or more counterparts, all of which shall be
considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party.
This Agreement, once executed by a party, may be delivered to the other party
hereto by facsimile transmission of a copy of this Agreement bearing the
signature of the party so delivering this Agreement.
c. Headings. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
20
<PAGE>
d. Severability. If any provision of this Agreement
shall be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement and
the instruments referenced herein contain the entire understanding of the
parties with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor the Buyer
makes any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be waived or amended other than by
an instrument in writing signed by the party to be charged with enforcement.
f. Notices. Any notices required or permitted to be
given under the terms of this Agreement shall be sent by certified or registered
mail (return receipt requested) or delivered personally or by courier (including
a recognized overnight delivery service) or by facsimile and shall be effective
five days after being placed in the mail, if mailed by regular U.S. mail, or
upon receipt, if delivered personally or by courier (including a recognized
overnight delivery service) or by facsimile, in each case addressed to a party.
The addresses for such communications shall be:
If to the Company:
Metropolitan Health Networks, Inc.
5100 Town Center Circle
Suite 560
Boca Raton, Florida 33486
Attention: Chief Executive Officer
Facsimile: (954) 425-0858
With copies to:
Metropolitan Health Networks, Inc.
5100 Town Center Circle
Suite 560
Boca Raton, Florida 33486
Attention: Roberto L. Palenzuela, Esq.
Facsimile: (954) 425-0858
21
<PAGE>
Tanner Unman Securities
900 Third Avenue
2nd Floor
New York, New York 10022
Attention: Lucas Tanner
Facsimile: 212-750-1913
Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street
51st Floor
Philadelphia, Pennsylvania 19103
Attention: Gerald J. Guarcini, Esq.
Facsimile: 215-864-8999
If to a Buyer: To the address set forth immediately below such
Buyer's name on the signature pages hereto.
Each party shall provide notice to the other party of any
change in address.
g. Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties and their successors and
assigns. Neither the Company nor any Buyer shall assign this Agreement or any
rights or obligations hereunder without the prior written consent of the other.
Notwithstanding the foregoing, subject to Section 2(f), any Buyer may assign its
rights hereunder to any person that purchases Securities in a private
transaction from a Buyer or to any of its "affiliates," as that term is defined
under the 1934 Act, without the consent of the Company.
h. Third Party Beneficiaries. This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns, and is not for the benefit of, nor may any provision
hereof be enforced by, any other person.
i. Survival. The representations and warranties of
the Company and the agreements and covenants set forth in Sections 3, 4, 5 and 8
shall survive the closing hereunder notwithstanding any due diligence
investigation conducted by or on behalf of the Buyers. The Company agrees to
indemnify and hold harmless each of the Buyers and all their officers,
directors, employees and agents for loss or damage arising as a result of or
related to any breach or alleged breach by the Company of any of its
representations, warranties and covenants set forth in Sections 3 and 4 hereof
or any of its covenants and obligations under this Agreement or the Registration
Rights Agreement, including advancement of expenses as they are incurred.
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<PAGE>
j. Publicity. The Company and each of the Buyers
shall have the right to review a reasonable period of time before issuance of
any press releases, SEC, Nasdaq or NASD filings, or any other public statements
with respect to the transactions contemplated hereby; provided, however, that
the Company shall be entitled, without the prior approval of each of the Buyers,
to make any press release or SEC, Nasdaq or NASD filings with respect to such
transactions as is required by applicable law and regulations (although each of
the Buyers shall be consulted by the Company in connection with any such press
release prior to its release and shall be provided with a copy thereof and be
given an opportunity to comment thereon).
k. Further Assurances. Each party shall do and
perform, or cause to be done and performed, all such further acts and things,
and shall execute and deliver all such other agreements, certificates,
instruments and documents, as the other party may reasonably request in order to
carry out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby.
l. No Strict Construction. The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied against
any party.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the undersigned Buyers and the Company
have caused this Agreement to be duly executed as of the date first above
written.
METROPOLITAN HEALTH NETWORKS, INC.
By:_____________________________
Name: Anthony J. Gigliotti
Title: Chairman
PANGAEA FUND LTD.
By:_____________________________
Name:
Title:
RESIDENCE: Bahamas
ADDRESS:
Windermere House
404 East Bay Street
P.O. Box SS-6238
Nassau, Bahamas
Facsimile: (242) 394-3284
Telephone: (242) 393-8777
AGGREGATE SUBSCRIPTION AMOUNT:
Number of Shares of Preferred Stock: 1,200
Number of Warrants ($4.00 Exercise Price): 120,000
Number of Warrants ($5.00 Exercise Price): 120,000
Aggregate Purchase Price: $1,200,000
24
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of April 27,
1998, by and among Metropolitan Health Networks, Inc., a Florida corporation,
with its headquarters located at 5100 Town Center Circle, Suite 560, Boca Raton,
Florida 33486 (the "Company"), and the undersigned (together with the
undersigned's respective affiliates and any assignee or transferee of all of the
undersigned's respective rights hereunder, the "Investor").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among
the parties hereto of even date herewith (the "Securities Purchase Agreement"),
the Company has agreed, upon the terms and subject to the conditions contained
therein, to issue and sell to the Investor (i) shares of its Series B
Convertible Preferred Stock (the "Preferred Stock") that are convertible into
shares (the "Conversion Shares") of the Company's common stock, par value $.001
per share (the "Common Stock"), upon the terms and subject to the limitations
and conditions set forth in the Certificate of Designations, Rights,
Preferences, Privileges and Restrictions with respect to the Preferred Stock
(the "Certificate of Designation") and (ii) warrants (the "Warrants") to acquire
certain shares of Common Stock (the "Warrant Shares"), upon the terms and
conditions and subject to the limitations and conditions set forth in the
Warrants; and
B. To induce the Investor to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"1933 Act"), and applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and each
of the Investor hereby agree as follows:
1. DEFINITIONS.
a. As used in this Agreement, the following terms shall have
the following meanings:
<PAGE>
(i) "Investor" means the Investor and any transferee
or assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "register," "registered," and "registration"
refer to a registration effected by preparing and filing a Registration
Statement or Statements in compliance with the 1933 Act and pursuant to Rule 415
under the 1933 Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iii) "Registrable Securities" means the Conversion
Shares (including any shares issued pursuant to Articles VI.E(b) and VI.F of the
Certificate of Designation) and Warrant Shares issued or issuable and any shares
of capital stock issued or issuable as a dividend on or in exchange for or
otherwise with respect to any of the foregoing.
(iv) "Registration Statement" means a registration
statement of the Company under the 1933 Act.
b. Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings set forth in the Securities Purchase
Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare and, on
or prior to the date which is sixty (60) days after the date of the Closing
under the Securities Purchase Agreement (the "Closing Date"), file with the SEC
a Registration Statement on Form S-3 (or, if Form S-3 is not then available, on
such form of Registration Statement as is then available to effect a
registration of the Registrable Securities, subject to the consent of the
Investor, which consent will not be unreasonably withheld) covering the resale
of the Registrable Securities underlying the Preferred Stock and Warrants issued
or issuable pursuant to the Securities Purchase Agreement, which Registration
Statement, to the extent allowable under the 1933 Act and the Rules promulgated
thereunder (including Rule 416), shall state that such Registration Statement
also covers such indeterminate number of additional shares of Common Stock as
may become issuable upon conversion of the Preferred Stock and exercise of the
Warrants (i) to prevent dilution resulting from stock splits, stock dividends or
similar transactions or (ii) by reason of changes in the Conversion Price of the
Preferred Stock in accordance with the terms thereof or the exercise price of
the Warrants in accordance with the terms thereof. The number of shares of
Common Stock initially included in such Registration Statement shall be no less
than two (2) times the sum of the number of Conversion Shares and Warrant Shares
that are then issuable upon conversion of the Preferred Stock and the exercise
of the Warrants, without regard to any limitation on the Investor's ability to
convert the Preferred Stock or exercise the Warrants. The Company acknowledges
that the number of shares initially included in the
2
<PAGE>
Registration Statement represents a good faith estimate of the maximum number of
shares issuable upon conversion of the Preferred Stock and exercise of the
Warrants.
b. Underwritten Offering. If any offering pursuant to a
Registration Statement pursuant to Section 2(a) hereof involves an underwritten
offering, the Investor who holds a majority in interest of the Registrable
Securities subject to such underwritten offering, with the consent of a
majority-in-interest of the Investor, shall have the right to select one legal
counsel and an investment banker or bankers and manager or managers to
administer the offering, which investment banker or bankers or manager or
managers shall be reasonably satisfactory to the Company.
c. Payments by the Company. The Company shall use its best
efforts to file and obtain effectiveness of the Registration Statement as soon
as practicable. If (i) the Registration Statement(s) covering the Registrable
Securities required to be filed by the Company pursuant to Section 2(a) hereof
is not filed within sixty (60) days after the Closing Date or is not declared
effective by the SEC within one hundred twenty (120) days after the Closing Date
or if, after the Registration Statement has been declared effective by the SEC,
sales cannot be made pursuant to the Registration Statement, or (ii) the Common
Stock is not listed or included for quotation on the Nasdaq National Market
("Nasdaq"), the Nasdaq SmallCap Market ("Nasdaq SmallCap"), the New York Stock
Exchange (the "NYSE") or the American Stock Exchange (the "AMEX") after being so
listed or included for quotation, then the Company will make payments to the
Investor in such amounts and at such times as shall be determined pursuant to
this Section 2(c) as partial relief for the damages to the Investor by reason of
any such delay in or reduction of their ability to sell the Registrable
Securities (which remedy shall not be exclusive of any other remedies available
at law or in equity). The Company shall pay to each holder of the Preferred
Stock or Registerable Securities an amount equal to the then outstanding
principal amount of the Preferred Stock (and, in the case of holders of
Registerable Securities, the principal amount of Preferred Stock from which such
Registerable Securities were converted) ("Aggregate Share Price") multiplied by
the Applicable Percentage (as defined below) times the sum of: (i) the number of
months (prorated for partial months) after the end of such 60-day or 120-day
period, as the case may be, and prior to the date the Registration Statement is
declared effective by the SEC, provided, however, that there shall be excluded
from such period any delays which are solely attributable to changes required by
the Investor in the Registration Statement with respect to information relating
to the Investor, including, without limitation, changes to the plan of
distribution, or to the failure of the Investor to conduct their review of the
Registration Statement pursuant to Section 3(h) below in a reasonably prompt
manner; (ii) the number of months (prorated for partial months) that sales
cannot be made pursuant to the Registration Statement after the Registration
Statement has been declared effective (including, without limitation, when sales
cannot be made by reason of the Company's failure to properly supplement or
amend the prospectus included therein in accordance with the terms of this
Agreement, but excluding Allowed Days (as defined in Section 3(f)); and (iii)
the number of months (prorated for partial months) that the Common Stock is not
listed or included for quotation on the Nasdaq, Nasdaq SmallCap, NYSE or AMEX or
that trading thereon is halted after the Registration Statement has been
declared effective. The term "Applicable Percentage"
3
<PAGE>
means fifteen hundredths (.015) with respect to the first thirty (30) days of
any calculation under clause (i) of the sentence in which the term is used and
two-hundredths (.020) for any other purpose. (For example, if the Registration
Statement is filed or becomes effective one (1) month after the required date
for such event, the Company would pay $15,000 for each $1,000,000 of Aggregate
Share Price. If thereafter, sales could not be made pursuant to the Registration
Statement for an additional period of one (1) month, the Company would pay an
additional $20,000 for each $1,000,000 of Aggregate Share Price.) Such amounts
shall be paid in cash or, at each Investor's option, may be added to the
principal amount of the Preferred Stock and thereafter be convertible into
Common Stock at the "Conversion Price" (as defined in the Certificate of
Designation) in accordance with the terms of the Preferred Stock. Any shares of
Common Stock issued upon conversion of such amounts shall be Registrable
Securities. If the Investor desires to convert the amounts due hereunder into
Registrable Securities, it shall so notify the Company in writing within two (2)
business days of the date on which such amounts are first payable in cash and
such amounts shall be so convertible (pursuant to the mechanics set forth in the
Certificate of Designation), beginning on the last day upon which the cash
amount would otherwise be due in accordance with the following sentence.
Payments of cash pursuant hereto shall be made within five (5) days after the
end of each period that gives rise to such obligation, provided that, if any
such period extends for more than thirty (30) days, interim payments shall be
made for each such thirty (30) day period.
d. Piggy-Back Registrations. Subject to the last sentence of
this Section 2(d), if at any time prior to the expiration of the Registration
Period (as hereinafter defined) the Company shall file with the SEC a
Registration Statement relating to an offering for its own account or the
account of others under the 1933 Act of any of its equity securities (other than
on Form S-4 or Form S-8 or their then equivalents relating to equity securities
to be issued solely in connection with any acquisition of any entity or business
or equity securities issuable in connection with stock option or other employee
benefit plans), the Company shall send to each Investor who is entitled to
registration rights under this Section 2(d) written notice of such determination
and, if within fifteen (15) days after the effective date of such notice, such
Investor shall so request in writing, the Company shall include in such
Registration Statement all or any part of the Registrable Securities such
Investor requests to be registered, except that if, in connection with any
underwritten public offering for the account of the Company the managing
underwriter(s) thereof shall impose a limitation on the number of shares of
Common Stock which may be included in the Registration Statement because, in
such underwriter(s)' judgment, marketing or other factors dictate such
limitation is necessary to facilitate public distribution, then the Company
shall be obligated to include in such Registration Statement only such limited
portion of the Registrable Securities with respect to which such Investor has
requested inclusion hereunder as the underwriter shall permit. Any exclusion of
Registrable Securities shall be made pro rata among the Investor seeking to
include Registrable Securities in proportion to the number of Registrable
Securities sought to be included by such Investor; provided, however, that the
Company shall not exclude any Registrable Securities unless the Company has
first excluded all outstanding securities, the holders of which are not entitled
to inclusion of such securities in such Registration Statement or are not
entitled to pro rata inclusion with the Registrable Securities; and provided,
further, however, that, after giving effect to the
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immediately preceding proviso, any exclusion of Registrable Securities shall be
made pro rata with holders of other securities having the right to include such
securities in the Registration Statement other than holders of securities
entitled to inclusion of their securities in such Registration Statement by
reason of demand registration rights. No right to registration of Registrable
Securities under this Section 2(d) shall be construed to limit any registration
required under Section 2(a) hereof. If an offering in connection with which an
Investor is entitled to registration under this Section 2(d) is an underwritten
offering, then each Investor whose Registrable Securities are included in such
Registration Statement shall, unless otherwise agreed by the Company, offer and
sell such Registrable Securities in an underwritten offering using the same
underwriter or underwriters and, subject to the provisions of this Agreement, on
the same terms and conditions as other shares of Common Stock included in such
underwritten offering. Notwithstanding anything to the contrary set forth
herein, the registration rights of the Investor pursuant to this Section 2(d)
shall only be available in the event the Company fails to timely file, obtain
effectiveness or maintain effectiveness of the Registration Statement to be
filed pursuant to Section 2(a) in accordance with the terms of this Agreement.
e. Eligibility for Form S-3. The Company represents and
warrants that it meets the registrant eligibility and transaction requirements
for the use of Form S-3 for registration of the sale by the Investor and any
other investor of the Registrable Securities and the Company shall file all
reports required to be filed by the Company with the SEC in a timely manner so
as to maintain such eligibility for the use of Form S-3.
3. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
a. The Company shall prepare promptly, and file with the SEC
not later than sixty (60) days after the Closing Date, a Registration Statement
with respect to the number of Registrable Securities provided in Section 2(a),
and thereafter use its best efforts to cause such Registration Statement
relating to Registrable Securities to become effective as soon as possible after
such filing, and keep the Registration Statement effective pursuant to Rule 415
at all times until such date as is the earlier of (i) the date on which all of
the Registrable Securities have been sold and (ii) the date on which the
Registrable Securities (in the opinion of counsel to the Investor) may be
immediately sold without restriction (including without limitation as to volume
by each holder thereof) without registration under the 1933 Act (the
"Registration Period"), which Registration Statement (including any amendments
or supplements thereto and prospectuses contained therein) shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein, or necessary to make the statements therein not misleading.
b. The Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to the
Registration Statement and the prospectus used in connection with the
Registration Statement as may be necessary to keep the
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Registration Statement effective at all times during the Registration Period,
and, during such period, comply with the provisions of the 1933 Act with respect
to the disposition of all Registrable Securities of the Company covered by the
Registration Statement until such time as all of such Registrable Securities
have been disposed of in accordance with the intended methods of disposition by
the seller or sellers thereof as set forth in the Registration Statement. In the
event the number of shares available under a Registration Statement filed
pursuant to this Agreement is insufficient to cover all of the Registrable
Securities issued or issuable upon conversion of the Preferred Stock and
exercise of the Warrants, the Company shall amend the Registration Statement, or
file a new Registration Statement (on the short form available therefore, if
applicable), or both, so as to cover all of the Registrable Securities, in each
case, as soon as practicable, but in any event within thirty (30) days after the
necessity therefor arises (based on the market price of the Common Stock and
other relevant factors on which the Company reasonably elects to rely). The
Company shall use its best efforts to cause such amendment and/or new
Registration Statement to become effective as soon as practicable following the
filing thereof. The provisions of Section 2(c) above shall be applicable with
respect to such obligation, with the one hundred twenty (120) days running from
the day after the date on which the Company reasonably first determines (or
reasonably should have determined) the need therefor.
c. The Company shall furnish to each Investor whose
Registrable Securities are included in the Registration Statement and its legal
counsel (i) promptly after the same is prepared and publicly distributed, filed
with the SEC, or received by the Company, one copy of the Registration Statement
and any amendment thereto, each preliminary prospectus and prospectus and each
amendment or supplement thereto, and, in the case of the Registration Statement
referred to in Section 2(a), each letter written by or on behalf of the Company
to the SEC or the staff of the SEC, and each item of correspondence from the SEC
or the staff of the SEC, in each case relating to such Registration Statement
(other than any portion of any thereof which contains information for which the
Company has sought confidential treatment), and (ii) such number of copies of a
prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor. The Company will immediately notify each Investor by
facsimile of the effectiveness of the Registration Statement or any
post-effective amendment. The Company will promptly respond to any and all
comments received from the SEC, with a view towards causing any Registration
Statement or any amendment thereto to be declared effective by the SEC as soon
as practicable and shall promptly file an acceleration request as soon as
practicable following the resolution or clearance of all SEC comments or, if
applicable, following notification by the SEC that the Registration Statement or
any amendment thereto will not be subject to review.
d. The Company shall use reasonable efforts to (i) register
and qualify the Registrable Securities covered by the Registration Statement
under such other securities or "blue sky" laws of such jurisdictions in the
United States as the Investor who hold a majority in interest of the Registrable
Securities being offered reasonably request, (ii) prepare and file in those
jurisdictions such amendments (including post-effective amendments) and
supplements to
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such registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (a) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(d), (b) subject itself to general taxation in any such
jurisdiction, (c) file a general consent to service of process in any such
jurisdiction, (d) provide any undertakings that cause the Company undue expense
or burden, or (e) make any change in its charter or bylaws, which in each case
the Board of Directors of the Company determines to be contrary to the best
interests of the Company and its stockholders.
e. In the event Investor who hold a majority-in-interest of
the Registrable Securities being offered in the offering (with the approval of a
majority-in-interest of the Investor) select underwriters for the offering, the
Company shall enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the underwriters of such
offering.
f. As promptly as practicable after becoming aware of such
event, the Company shall notify each Investor of the happening of any event, of
which the Company has knowledge, as a result of which the prospectus included in
the Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request; provided that, for not more than thirty (30) consecutive
trading days (or a total of not more than sixty (60) trading days in any twelve
(12) month period), the Company may delay the disclosure of material non-public
information concerning the Company (as well as prospectus or Registration
Statement updating) the disclosure of which at the time is not, in the good
faith opinion of the Company, the best interests of the Company (an "Allowed
Delay"); provided, further, that the Company shall promptly (i) notify the
Investor in writing of the existence of (but in no event, without the prior
written consent of an Investor, shall the Company disclose to such investor any
of the facts or circumstances regarding) material non-public information giving
rise to an Allowed Delay and (ii) advise the Investor in writing to cease all
sales under the Registration Statement until the end of the Allowed Delay. Upon
expiration of the Allowed Delay, the Company shall again be bound by the first
sentence of this Section 3(f) with respect to the information giving rise
thereto.
g. The Company shall use its best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement, and, if such an order is issued, to obtain the
withdrawal of such order at the earliest possible moment and to notify each
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Investor who holds Registrable Securities being sold (or, in the event of an
underwritten offering, the managing underwriters) of the issuance of such order
and the resolution thereof.
h. The Company shall permit a single firm of counsel
designated by a majority-in-interest of the holders of the Preferred Stock to
review the Registration Statement and all amendments and supplements thereto (as
well as all requests for acceleration or effectiveness thereof) a reasonable
period of time prior to their filing with the SEC, and not file any document in
a form to which such counsel reasonably objects and will not request
acceleration of the Registration Statement without prior notice to such counsel.
The sections of the Registration Statement covering information with respect to
the Investor, the Investor's beneficial ownership of securities of the Company
or the Investor intended method of disposition of Registrable Securities shall
conform to the information provided to the Company by the Investor.
i. The Company shall make generally available to its security
holders as soon as practical, but not later than ninety (90) days after the
close of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 under the 1933 Act) covering a twelve-month
period beginning not later than the first day of the Company's fiscal quarter
next following the effective date of the Registration Statement.
j. At the request of any Investor, the Company shall furnish,
on the date that Registrable Securities are delivered to an underwriter, if any,
for sale in connection with the Registration Statement or, if such securities
are not being sold by an underwriter, on the date of effectiveness thereof (i)
an opinion, dated as of such date, from counsel representing the Company for
purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the
underwriters, if any, and the Investor and (ii) a letter, dated such date, from
the Company's independent certified public accountants in form and substance as
is customarily given by independent certified public accountants to underwriters
in an underwritten public offering, addressed to the underwriters, if any, and
the Investor.
k. The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant to the
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Investor, (iv) one firm of attorneys and one
firm of accountants or other agents retained by all other investors, and (v) one
firm of attorneys retained by all such underwriters (collectively, the
"Inspectors") all pertinent financial and other records, and pertinent corporate
documents and properties of the Company (collectively, the "Records"), as shall
be reasonably deemed necessary by each Inspector to enable each Inspector to
exercise its due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; provided, however, that
each Inspector shall hold in confidence and shall not make any disclosure
(except to an Investor) of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (a) the disclosure of such Records is
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<PAGE>
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (b) the release of such Records is ordered pursuant to a subpoena or
other order from a court or government body of competent jurisdiction, or (c)
the information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement. The
Company shall not be required to disclose any confidential information in such
Records to any Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and substance satisfactory to the Company)
with the Company with respect thereto, substantially in the form of this Section
3(k). Each Investor agrees that it shall, upon learning that disclosure of such
Records is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to the Company and allow
the Company, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, the Records deemed
confidential. Nothing herein (or in any other confidentiality agreement between
the Company and any Investor) shall be deemed to limit the Investor's ability to
sell Registrable Securities in a manner which is otherwise consistent with
applicable laws and regulations.
l. The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, or (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor prior
to making such disclosure, and allow the Investor, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
m. The Company shall (i) cause all the Registrable Securities
covered by the Registration Statement to be listed on each national securities
exchange on which securities of the same class or series issued by the Company
are then listed, if any, if the listing of such Registrable Securities is then
permitted under the rules of such exchange, or (ii) secure the designation and
quotation, of all the Registrable Securities covered by the Registration
Statement on the Nasdaq or, if not eligible for the Nasdaq on the Nasdaq
SmallCap and, without limiting the generality of the foregoing, to arrange for
at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities.
n. The Company shall provide a transfer agent and registrar,
which may be a single entity, for the Registrable Securities not later than the
effective date of the Registration Statement.
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o. The Company shall cooperate with the Investor who hold
Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Securities to be offered pursuant to the Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
managing underwriter or underwriters, if any, or the Investor may reasonably
request and registered in such names as the managing underwriter or
underwriters, if any, or the Investor may request, and, within three (3)
business days after a Registration Statement which includes Registrable
Securities is ordered effective by the SEC, the Company shall deliver, and shall
cause legal counsel selected by the Company to deliver, to the transfer agent
for the Registrable Securities (with copies to the Investor whose Registrable
Securities are included in such Registration Statement) an instruction in the
form attached hereto as Exhibit 1 and an opinion of such counsel in the form
attached hereto as Exhibit 2.
p. At the request of the holders of a majority-in-interest of
the Registrable Securities, the Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to a
Registration Statement and the prospectus used in connection with the
Registration Statement as may be necessary in order to change the plan of
distribution set forth in such Registration Statement.
q. From and after the date of this Agreement, the Company
shall not, and shall not agree to, allow the holders of any securities of the
Company to include any of their securities in any Registration Statement under
Section 2(a) hereof or any amendment or supplement thereto under Section 3(b)
hereof without the consent of the holders of a majority-in-interest of the
Registrable Securities.
r. The Company shall take all other reasonable actions
necessary to expedite and facilitate disposition by the Investor of Registrable
Securities pursuant to the Registration Statement.
4. OBLIGATIONS OF THE INVESTOR.
In connection with the registration of the Registrable Securities, the
Investor shall have the following obligations:
a. It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least three (3)
business days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify each Investor of the information the Company
requires from each such Investor.
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b. Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement.
c. In the event Investor holding a majority-in-interest of the
Registrable Securities being registered (with the approval of the Investor)
determine to engage the services of an underwriter, each Investor agrees to
enter into and perform such Investor's obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering and take such other actions as are reasonably required in order to
expedite or facilitate the disposition of the Registrable Securities, unless
such Investor has notified the Company in writing of such Investor's election to
exclude all of such Investor's Registrable Securities from the Registration
Statement.
d. Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(f)
or 3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
e. No Investor may participate in any underwritten
registration hereunder unless such Investor (i) agrees to sell such Investor's
Registrable Securities on the basis provided in any underwriting arrangements in
usual and customary form entered into by the Company, (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements, and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and any expenses in excess of those
payable by the Company pursuant to Section 5 below.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualification fees, printers and accounting fees, the
fees and disbursements of counsel for the Company, and the reasonable fees and
disbursements of one counsel selected by the Investor pursuant to Sections 2(b)
and 3(h) hereof shall be borne by the Company.
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6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify,
hold harmless and defend (i) each Investor who holds such Registrable
Securities, (ii) the directors, officers, partners, employees, agents and each
person who controls any Investor within the meaning of the 1933 Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act"), if any, (iii) any
underwriter (as defined in the 1933 Act) for the Investors, and (iv) the
directors, officers, partners, employees and each person who controls any such
underwriter within the meaning of the 1933 Act or the 1934 Act, if any (each, an
"Indemnified Person"), against any joint or several losses, claims, damages,
liabilities or expenses (collectively, together with actions, proceedings or
inquiries by any regulatory or self-regulatory organization, whether commenced
or threatened, in respect thereof, "Claims") to which any of them may become
subject insofar as such Claims arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or the omission or alleged omission to state therein a material fact
required to be stated or necessary to make the statements therein not
misleading; (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading; or
(iii) any violation or alleged violation by the Company of the 1933 Act, the
1934 Act, any other law, including, without limitation, any state securities
law, or any rule or regulation thereunder relating to the offer or sale of the
Registrable Securities (the matters in the foregoing clauses (i) through (iii)
being, collectively, "Violations"). Subject to the restrictions set forth in
Section 6(c) with respect to the number of legal counsel, the Company shall
reimburse the Indemnified Person, promptly as such expenses are incurred and are
due and payable, for any reasonable legal fees or other reasonable expenses
incurred by them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (i) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; (ii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld; and
(iii) with respect to any preliminary prospectus, shall not inure to the benefit
of any Indemnified Person if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented, such corrected prospectus was
timely made available by the Company pursuant to Section 3(c) hereof, and the
Indemnified
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Person was promptly advised in writing not to use the incorrect prospectus prior
to the use giving rise to a Violation and such Indemnified Person,
notwithstanding such advice, used it. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Investor pursuant to Section 9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees severally and not jointly
to indemnify, hold harmless and defend, to the same extent and in the same
manner set forth in Section 6(a), the Company, each of its directors, each of
its officers who signs the Registration Statement, each person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act, any
underwriter and any other stockholder selling securities pursuant to the
Registration Statement or any of its directors or officers or any person who
controls such stockholder or underwriter within the meaning of the 1933 Act or
the 1934 Act (collectively and together with an Indemnified Person, an
"Indemnified Party"), against any Claim to which any of them may become subject,
under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim arises out
of or is based upon any Violation by such Investor, in each case to the extent
(and only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement; and subject to
Section 6(c) such Investor will reimburse any legal or other expenses (promptly
as such expenses are incurred and are due and payable) reasonably incurred by
them in connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 6(b) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
liable under this Agreement (including this Section 6(b) and Section 7) for only
that amount as does not exceed the net proceeds to such Investor as a result of
the sale of Registrable Securities pursuant to such Registration Statement. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such Indemnified Party and shall survive the transfer of
the Registrable Securities by the Investor pursuant to Section 9.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(b) with respect to any preliminary
prospectus shall not inure to the benefit of any Indemnified Party if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected on a timely basis in the prospectus, as then amended or
supplemented.
c. Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified
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Party, as the case may be; provided, however, that an Indemnified Person or
Indemnified Party shall have the right to retain its own counsel with the fees
and expenses to be paid by the indemnifying party, if, in the reasonable opinion
of counsel retained by the indemnifying party, the representation by such
counsel of the Indemnified Person or Indemnified Party and the indemnifying
party would be inappropriate due to actual or potential differing interests
between such Indemnified Person or Indemnified Party and any other party
represented by such counsel in such proceeding. The indemnifying party shall pay
for only one separate legal counsel for the Indemnified Persons or the
Indemnified Parties, as applicable, and such legal counsel shall be selected by
Investor holding a majority-in-interest of the Registrable Securities included
in the Registration Statement to which the Claim relates (with the approval of a
majority-in-interest of the Investor), if the Investor is entitled to
indemnification hereunder, or the Company, if the Company is entitled to
indemnification hereunder, as applicable. The failure to deliver written notice
to the indemnifying party within a reasonable time of the commencement of any
such action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any seller of Registrable Securities who was not
guilty of such fraudulent misrepresentation, and (iii) contribution (together
with any indemnification or other obligations under this Agreement) by any
seller of Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investor the benefits of Rule
144 promulgated under the 1933 Act or any other similar rule or regulation of
the SEC that may at any time permit the Investor to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
a. make and keep public information available, as those terms
are understood and defined in Rule 144;
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b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to the Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested to
permit the Investor to sell such securities pursuant to Rule 144 without
registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by
the Investor to any transferee of all or any portion of Registrable Securities
if: (i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned,
(iii) following such transfer or assignment, the further disposition of such
securities by the transferee or assignee is restricted under the 1933 Act and
applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein, (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement, and (vi) such transferee shall be an "accredited investor" as that
term defined in Rule 501 of Regulation D promulgated under the 1933 Act.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with written consent of the Company, the
Investor (to the extent such Initial Investor still owns Registrable Securities)
and the holders of a majority interest of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company.
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11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices required or permitted to be given under the
terms hereof shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier (including a recognized
overnight delivery service) or by facsimile and shall be effective five days
after being placed in the mail, if mailed by regular U.S. mail, or upon receipt,
if delivered personally or by courier (including a recognized overnight delivery
service) or by facsimile, in each case addressed to a party. The addresses for
such communications shall be:
If to the Company:
Metropolitan Health Networks, Inc.
5100 Town Center Circle
Suite 560
Boca Raton, Florida 33486
Attention: Chief Executive Officer
Facsimile: (954) 425-0858
With copy to:
Atlas, Pearlman, Trop & Borkson, P.A.
200 East Las Olas Boulevard
Suite 1900
Fort Lauderdale, Florida 33301
Attention: Roxanne K. Beilly, Esq.
Facsimile: (954) 763-1200
If to an Investor: to the address set forth immediately below such Investor's
name on the signature pages to the Securities Purchase Agreement.
c. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
d. This Agreement shall be enforced, governed by and construed
in accordance with the laws of the State of Florida applicable to agreements
made and to be performed entirely within such State. In the event that any
provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall
16
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be deemed inoperative to the extent that it may conflict therewith and shall be
deemed modified to conform with such statute or rule of law. Any provision
hereof which may prove invalid or unenforceable under any law shall not affect
the validity or enforceability of any other provision hereof. The parties hereto
hereby submit to the exclusive jurisdiction of the United States Federal Courts
located in Florida with respect to any dispute arising under this Agreement or
the transactions contemplated hereby.
e. This Agreement and the Securities Purchase Agreement
(including all schedules and exhibits thereto) constitute the entire agreement
among the parties hereto with respect to the subject matter hereof and thereof.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein and therein. This Agreement and the
Securities Purchase Agreement supersede all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
g. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. Except as otherwise provided herein, all consents and other
determinations to be made by the investors pursuant to this Agreement shall be
made by Investor holding a majority of the Registrable Securities, determined as
if the all of the shares of Preferred Stock then outstanding have been converted
into for Registrable Securities.
k. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent, and no rules
of strict construction will be applied against any party.
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IN WITNESS WHEREOF, the Company and the undersigned Investor
have caused this Agreement to be duly executed as of the date first above
written.
METROPOLITAN HEALTH NETWORKS, INC.
By: /s/ Anthony J. Gigliotti
-------------------------------------
Name: Anthony J. Gigliotti
Title: Chairman
PANGAEA FUND LTD.
By: _____________________________________
(Print Name)
Title:
Date:
18
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of our report, dated September 26, 1997, 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, 1997, and to the reference to
our Firm under the caption "Experts" in the Prospectus.
KAUFMAN, ROSSIN & CO.
Miami, Florida
June 30, 1998
