PROSPECTUS
1,574,000 Shares
METROPOLITAN HEALTH NETWORKS, INC.
This Prospectus ("Prospectus") relates to the offer and sale of up to
1,574,000 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) 25,000 Shares were issued in satisfaction of
outstanding legal fees; (ii) 404,000 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; (iii)
905,000 Shares are issuable upon conversion of the Company's Series B 5%
Convertible Preferred Stock ("Series B Preferred Stock") held by Selling
Security Holders; and (iv) 240,000 Shares are issuable 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 (2) 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 6 THROUGH
20.
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 September 15, 1998.
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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.
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 September 4, 1998, the closing price on
NASDAQ for the Common Stock was $3.13 and the closing price for the Warrants was
$0.34.
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.
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
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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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TABLE OF CONTENTS
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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
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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 September 4, 1998 were $2.9375 and
$3.125, per share, respectively. The low and high prices of the Warrants as
reported on the NASDAQ on September 4, 1998 were $.34 and $ .34 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,
June 16, 1998 and September 10, 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
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should be directed to Corporate Secretary, Metropolitan Health Networks, Inc. at
the 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
Forward Looking Statements
The discussion in this Prospectus regarding the Company and its
business and operations includes "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1996. Such statements consist
of any statement other than a recitation of historical fact and can be
identified by the use of forward- looking terminology such as "may," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The reader is cautioned that all
forward-looking statements are necessarily speculative, and there are certain
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in such forward-looking statements. The
disclosure contained herein highlights some of the more important risks
regarding the Company. The risks highlighted below should not be assumed to be
the only things that could affect future performance. The Company does not have
a policy of updating or revising forward-looking statements, and thus, it should
not be assumed that silence by management of the Company over time means that
actual events are bearing out as estimated in such forward-looking statements.
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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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 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
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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.
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.
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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. 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
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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 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
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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 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
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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 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.
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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 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
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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 companies. The terms of these transactions were no less favorable to
the Company than those from and to unaffiliated parties. 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.
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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.
Control by Management and Present Shareholders of the Company
Noel J. Guillama and Robert L. Kagan, M.D. beneficially own
approximately 8.99% and 12.15%, 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.
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., and the Executive Vice President of the
Company, Roman G. Fisher. Each of the employment agreements with Messrs.
Guillama, Kagan 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.
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Exercise of Warrants and Capital Needs May Have Dilutive Effect
As of September 4, 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 September 4, 1998, the Series A Preferred Stock would
have been convertible into approximately 202,000 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 September 4, 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
September 4, 1998, the Series B Preferred Stock would have been convertible into
approximately 452,500 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 September 4, 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 September 4, 1998, 5,297,325 shares of Common Stock were reserved
for issuance upon exercise of the Company's outstanding warrants and options
(excluding the Warrants) and an additional 404,000 shares of Common Stock were
reserved for issuance upon conversion of the Series A Preferred Stock, 905,000
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 September 4, 1998, there were 6,463,437 shares of Common Stock
outstanding. Of these outstanding
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shares, 2,283,658 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 September 4, 1998, there were 6,463,437 shares of the Company's
Common Stock outstanding, of which 4,179,779 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.
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Overview of the Network
Medical Group Expansion
The Company is developing its Network mostly through the acquisition of
a broad range of multi-disciplinary physicians. These will range from primary
care through highly specialized sub-specialists. These physicians, once
acquired, will be merged directly into the medical group and form part of the
group's medical staff, where they will share all of the resources of the group
and increase the cross-referral of all physicians within the group.
In the South Florida region, the Company has primarily targeted
multi-specialty medical groups that are comprised of four to thirty physicians.
The Company will seek to purchase the medical groups or to enter into long term
management agreements with the affiliated physician groups (see below). The
Company believes the key to its growth will be its ability to greatly improve
and expand the health care services provided through its medical groups, to
enhance operating efficiency and profits of the medical group and to earn and
maintain the trust and confidence of the physicians associated with the Network.
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
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.
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 discontinued operations of the Collins Avenue
location and merged it with an existing center to reduce cost and consolidate
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services. Effective June 1, 1998, the Company has sold the Aventura location to
the ex-employed physician running this 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 has been notified by
Primedica that certain conditions of the acquisition have not yet been completed
by the Company.
The Company, on March 12, 1997 acquired the clinical practice of Paul
Wand, M.D., P.A. ("Wand Practice").
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. On July 22, 1998, the
Company entered into a Stock Purchase Agreement with Dr. Wand which provided for
the sale of the Wand Practice back to Dr. Wand, in consideration for the return
of the 75,000 shares of Metropolitan Health Network, Inc.'s Common Stock and a
$75,000 promissory note. The promissory note bears interest at 7.00% per annum
and is due and payable in thirty-six (36) equal monthly payments of Two Thousand
Three Hundred Fifteen Dollars 78/00 ($2,315.78) beginning November 1, 1998. In
the event a default occurs, interest shall accrue on the unpaid principal
balance at the rate of 18% per annum.
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
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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 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
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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. On June 30, 1997, the parties entered into an
Amended Employment Agreement with Dr. Kagan which provided for a decrease in Mr.
Kagan's bonus compensation, and the Company issued the first year's EBITDA
shares of 200,000 shares of Common Stock to Dr. Kagan. The amount of reduction
in fiscal 1998 was approximately $120,000.
On August 21, 1997, the Company offered to convert any, or a portion,
of the limited partnership units purchased by the MRI Scan Center in 1993 and
1994, into the Company's common stock. The Company's offer was to allow the note
holders to convert any amount due into the appropriate amount of the Company's
Common Stock at a 25% discount to the market value of the Company's shares,
based on the closing price for the Company's Common Stock on the date they
notified the Company of acceptance of the conversion option. The Company's
shares were issued as legend shares and will not be eligible for sale in the
open market for 12 months from the date of issue under SEC Rule 144. The Company
warranted that at the time the restrictive legend is removed, the price of the
common stock will be no lower than the price on the conversion date, or the
Company will make up any shortfall in stock or cash. A total of $60,000 has been
converted to date at an average price of $4.39 per share.
The Company has warranted that the cumulative shares represented in the
MRI Agreement will be worth no less than 10 times the pre-tax earnings of the
combined consolidated companies following 12 and 24 months from the time of
acquisitions. If the average closing price of the Company's Common Stock for the
ten days prior to the years ended June 30, 1997 and 1998, multiplied by 550,000
plus the number of any contingent shares earned ("Trading Value") is less than
ten times the pretax earnings of the MRI Group for each respective twelve month
period, the Company must deliver additional shares such that the Trading Value
is equal to ten times, or pay the NMI and MRI shareholders the difference in
cash. Additionally, as part of the acquisition, Dr. Kagan received an employment
contract which calls for payment of $600,000 per year and a percentage of the
adjusted revenues of NMI jointly not to exceed 15% of all revenue generated by
NMI. The 5-year employment contract in addition, calls for numerous
non-solicitation and non-compete provisions that will prohibit Dr. Kagan from
competing with the Company for a period of no less than two (2) years following
termination.
On September 26, 1996, effective October 1, 1996, pursuant to a stock
purchase agreement ("Datascan Agreement") the Company acquired Datascan of
Florida, Inc. and Datascan Southeast, Inc., mobile and fixed site diagnostic
testing companies servicing Dade, Broward and Palm Beach Counties (collectively,
"Datascan"). Datascan was organized in May 1981 in Fort Lauderdale, Florida.
Datascan serves its patients from
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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, 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, was an approximately
50% shareholder of Datascan, with the other principal shareholder of Datascan,
Michael P. Goldstein, director and 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
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$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.
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
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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.
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.
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Noncompliance with such laws may adversely affect the operation of the Company
and subject it to penalties and additional costs.
Certain provisions of the Social Security Act, commonly referred to as
the "Anti-Kickback Statute," prohibit the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare or
state health program patients or patient care opportunities, or in return for
the recommendation, arrangement, purchase, lease or order of items or services
that are covered by Medicare or state health programs. The Anti-Kickback Statute
is broad in scope and has been broadly interpreted by courts in many
jurisdictions. Read literally, the statute places at risk many business
arrangements, potentially subjecting such arrangements to lengthy, expensive
investigations and prosecutions initiated by federal and state governmental
officials. Violation of the Anti-Kickback Statute is a felony, punishable by
significant fines and/or imprisonment. In addition, the Department of Health and
Human Services may impose civil penalties excluding violators from participation
in Medicare or state health programs.
In July 1991 and November 1992, in part to address concerns regarding
the Anti-Kickback Statute, the federal government published regulations that
provide exceptions, or "safe harbors," for sections that will be deemed not to
violate the Anti-Kickback Statute. Although the Company believes that it is not
in violation of the Anti-Kickback Statute, its operations do not fit within any
of the existing or proposed safe harbors, and, accordingly, there can be no
assurance that the Company's practices, if scrutinized, would not be found to be
in violation of the statute, and any such finding could have a material adverse
effect on the Company. Transactions outside of a safe harbor are not per se
violations of the statute, but may be subject to government scrutiny on a case
by case basis. Among the safe harbors included in the regulations were
provisions relating to the sale of practitioner practices, management and
personal services agreements, and employee relationships. Additional safe
harbors were published in September 1993 offering new protections under the
statute to eight activities, including referrals within group practices
consisting of active investors. Proposed amendments to clarify these safe
harbors were published in July 1994 which, if adopted, would cause substantive
retroactive changes to the 1991 regulations.
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
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source. The "Patient Brokering Law," effective October 1, 1996, makes it a crime
for any person, including any health care provider or health care facility, to
offer, pay, solicit, or receive any commissions, bonus, rebate, kickback, or
bribe, directly or indirectly, overtly or covertly, in cash or in kind, or to
engage in any split-fee arrangement, in any form whatsoever, to induce or in
return for referring patients or patronage to or from a health care provider or
health care facility, or to aid, abet, advise, or participate in any such act.
There are exceptions to the Patient Brokering Law, including exceptions for any
payment practice, discount, or waiver of payment not prohibited by the federal
Anti-Kickback Statute or the safe harbor regulations, and certain payment,
compensation, or financial arrangements within a group practice. The Company
believes its activities fit within exceptions to the Patient Brokering Law,
however, until the new law has been subjected to judicial and/or regulatory
interpretations, there can be no assurances given that the Company's activities
will be found to be in compliance, if challenged.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions,
commonly known as "Stark II," amended prior physician self-referral legislation
known as "Stark I" by dramatically enlarging the field of physician-owned or
physician-interested entities to which the referral prohibitions apply.
Effective January 1, 1995, Stark II prohibits, subject to certain exceptions,
including a group practice exception, a physician from referring Medicare or
Medicaid patients to an entity providing "designated health services" in which
the physician or immediate family member has an ownership or investment interest
or with which the physician has entered into a compensation arrangement. The
designated health services include clinical laboratory services, radiology and
other diagnostic services, radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
equipment and supplies, prosthetics, orthotics, outpatient prescription drugs,
home health services, and inpatient and outpatient hospital services. The
penalties for violating Stark II include a prohibition on payment by these
government programs and civil penalties of as much as $15,000 for each violative
referral and $100,000 for participation in a "circumvention scheme." The Stark
legislation is broad and ambiguous. Interpretive regulations clarifying the
provisions of Stark II have not been issued. Florida has also enacted similar
self-referral laws. The Florida Patient Self-Referral Act of 1992 severely
restricts patient referrals for certain services by physicians with ownership or
investment interests, requires disclosure of physician ownership in businesses
to which patients are referred and places other regulations on health care
providers. While the Company believes it is in compliance with the Florida and
Stark legislation, and their exceptions, future laws, regulations or
interpretations of current law could require the Company to modify the form of
its relationships with physicians and ancillary service providers. Moreover, the
violation of Stark I or II or the Florida Patient Self-Referral Law of 1992 by
the Company's Physician group could result in significant fines and loss of
reimbursement which would adversely affect the Company.
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As a result of the continued escalation of health care costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been or may be introduced in the U.S. Congress and state legislatures
relating to health care reform. There can be no assurance as to the ultimate
content, timing or effect of any health care reform legislation, nor is it
possible at this time to estimate the impact of potential legislation, which may
be material on the Company.
Employees
As of September 4, 1998, the Company had approximately 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.
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. The lease was entered into on favorable terms for Dr. Kagan.
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.
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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.
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,
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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.
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
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<PAGE>
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 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").
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<PAGE>
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 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
40
<PAGE>
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).
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
41
<PAGE>
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.
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 September 4, 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 September 4, 1998, there were 6,465,437
outstanding shares of Common Stock of the Company.
<TABLE>
<CAPTION>
Shares to be
Name of Selling Number of Shares to Owned After
Security Holders Shares Owned be Offered Offering
- ---------------- ------------ ---------- ------------
<S> <C> <C> <C>
Neal Jay Tolar, Ph.D.(1)(4) 473,600 404,000 69,600
Pangaea Fund, Ltd.(2)(4) 1,145,000 1,145,000 -0-
Atlas, Pearlman, Trop & Borkson, P.A.(3) 25,000 25,000 -0-
</TABLE>
42
<PAGE>
(1) Includes 404,000 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 905,000 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) Includes 25,000 shares of Common Stock issued in satisfaction of outstanding
legal fees.
(4) 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 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 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 September 4, 1998,
the conversion price would have been $2.74 (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 202,000 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 September 4, 1998, the conversion price would have been $2.70 (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 452,500
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
43
<PAGE>
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.
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
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<PAGE>
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 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 6,463,437 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.
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<PAGE>
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.
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 30, 1998)
</TABLE>
46
<PAGE>
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 September 4, 1998, there were approximately 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 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
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<PAGE>
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 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
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<PAGE>
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 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
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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).
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
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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;
(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
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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 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)
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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 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
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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 1,967,625 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 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 September 4, 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 3,029,700 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.
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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 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.
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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 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
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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.
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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 1,574,000 Shares
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 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 METROPOLITAN
time subsequent to the date of this Prospectus. HEALTH NETWORKS,
INC.
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TABLE OF CONTENTS
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Page
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AVAILABLE INFORMATION....................... 3
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INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE.................. 5 PROSPECTUS
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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
September 15, 1998
EXPERTS..................................... 55
INDEMNIFICATION............................. 56
</TABLE>
