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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
/ / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the six month period ended December 31, 1999
/X/ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from July 1, 1999 to December 31, 1999
Commission file number
0-28456
Metropolitan Health Networks, Inc.
(Name of small business issuer in its charter)
Florida 65-0635748
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
500 Australian Avenue
West Palm Beach, Fl. 33401
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 805-8500
Securities registered under Section 12(b) of the Exchange Act: none
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
Common Stock, $.001 par value
Class A Redeemable Common Stock Purchase Warrants
Series A Convertible Preferred Stock, $.001 par value
Series B Convertible Preferred Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes / / No /X/
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in the definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year: $18,501,497
The aggregate market value of the Registrant's voting Common Stock held by
non-affiliates of the registrant was approximately $34,768,921 (computed using
the closing price of $1.875 per share of Common Stock on August 31, 2000, as
reported by NASDAQ, based on the assumption that directors and officers and more
than 5% stockholders are affiliates).
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
There were 18,543,425 shares of the registrant's Common Stock, par value $.001
per share, and 3,277,625 of the registrant's Class A Redeemable Common Stock
Purchase Warrants outstanding on August 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (Check One): Yes No /X/
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Metropolitan Health Networks, Inc. (the "Company" or "Metcare") was
incorporated in the State of Florida in January 1996 to develop a vertically and
horizontally integrated health care delivery network (the "Network"). The
Network initially was intended to provide primary and subspecialty physician
care and diagnostic and therapeutic services. Metcare pursued this business plan
into 1999 through the acquisition, expansion and integration of physician care
practices (the "Physician Practices") and diagnostic and rehabilitation centers
("Ancillary Services") in Dade, Broward and Palm Beach County, Florida.
Responding to changes in the health care industry in mid-1999 the
Company modified its business strategy and determined to become a Management
Services Organization ("MSO") in which, instead of owning and managing Physician
Practices and Ancillary Services, it would manage the total care of patients
through "Global Risk" managed care contracts. As a result, the Company undertook
to divest of or unwind several of its acquisitions.
The Company has changed its financial reporting year to December 31
from the fiscal year of June 30. The audited financial information reported
herein is for the six months ended December 31, 1999. Management felt the change
of the financial reporting year was consistent with the changes in direction of
the Company and the restructuring of the Company, and provides its shareholders
with reporting that will more appropriately reflect Metcare's strategies, goals
and objectives.
Several senior management and staff changes occurred in connection with
the redirection of the Company. Fred Sternberg, Metcare's CEO, was recruited in
January 2000, joining the Company's new CFO, David Gartner and Debbie Finnel,
the Company's COO, both hired in 1999. Total employee count was reduced by 98,
or 58% during this time, the result of a restructuring implemented by the
Company's new management.
The change in business strategy and related dispositions and
restructuring were substantially completed by the end of 1999.
RECENT DEVELOPMENTS
During the six months ended June 30, 1999, the Company secured a new
HMO contract, acquired and sold certain Physician Practices and Ancillary
Services, and entered into various strategic alliances to facilitate its
business plan. In August 2000, Metcare secured an additional HMO contract. The
new HMO contract and the Physician Practices and Ancillary Services transactions
are discussed in the appropriately captioned sections of the BUSINESS section.
Metcare has entered into a number of strategic alliances with
businesses aimed at bringing Internet-based technologies and solutions to
healthcare. The Company believes that implementing these advanced concepts,
products and services is bringing dramatic improvements and efficiencies to all
aspects of the patient, provider and payer relationship, and is a key to
Metcare's and its Network's success in the future. In addition, these new
technologies and businesses are expected to generate significant cost savings
and incremental revenues for the Network and the Company.
Adjudication & Payment of Claims. The Company entered into a strategic
alliance with Triad2000/MD2000, to create a paperless software system for
healthcare practitioners. The software will manage real-time referrals,
appointment scheduling, claims review, pharmacy management and utilization
management. The Company expects to implement the paperless software system in
its Daytona Beach market, Volusia and Flagler counties for 32,000 patients
beginning in the fourth quarter of 2000.
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On-Line Pharmacy. The Company has entered into an arrangement with a
pharmacy company that will provide mail order pharmacy and pharmacy management
to its Network and patients. The Company believes that it will begin
implementation before the end of 2000.
Internet Practice Management, Billing & Collections. The Company has
entered into a contract with eMedSoft.com to develop, implement and provide for
Metcare's electronic healthcare needs including software, portal, Internet and
network products and services. These solutions will allow Metcare's physicians
to manage their medical practices more efficiently in such areas as patient
scheduling, claims processing, provider directory management, ordering of
diagnostic imaging and laboratory tests, and will facilitate patient interaction
in a secure Internet environment. Implementation of these technologies will
begin in late 2000.
Telemedicine. The Company has entered into the telemedicine field with
CYBeR-CARE, Inc. to utilize CYBeR-CARE's telemedicine units. The system is a
patented Internet-based technology system that provides remote monitoring of
individuals for healthcare purposes such as blood pressure, pulse, heart rate
and other vital signs. Implementation of these systems began in July 2000.
Management believes that these systems will provide more efficient interaction
with patients, while reducing hospital and emergency room visits, resulting in
significant savings to the Company.
Purchasing E-Commerce Provider. The Company entered into an alliance to
provide its physicians the online capability to purchase medical supplies and
equipment. MetCare now offers its Network a more complete and efficient
purchasing solution to streamline their office management processes.
INDUSTRY
General
-------
A Health Care Financing Administration ("HCFA") study projects spending
for health care in the United States will increase from $1.035 trillion in 1996,
or to $2.1 trillion by 2007. Health care costs per person are expected to jump
from $3,759 to $7,100. Americans are expected to spend $171 billion on
prescription drugs in 2007, up from $62 billion a decade earlier. A number of
factors are at work, which are affecting the patient, healthcare provider and
payer relationship. Healthcare spending has been fairly stable in recent years,
as consumers and employers have switched to managed care plans, holding down
costs. Today, with 85% of working Americans now covered by managed care, the
opportunity for additional savings is becoming harder to find. Managed care
plans that have traditionally competed on price are starting to increase
premiums to improve their profit margins. Medical costs are increasing due to
inflation and the relative high cost of new medical technologies. The Balanced
Budget Act is constraining health care spending for Medicare and Medicaid,
putting greater pressure on payments to doctors and hospitals. Due to those
trends, the study projects that insurance companies and consumers will see
bigger increases in health bills than Medicare. Private sources are expected to
pay nearly 55% of healthcare costs in 2007 compared to 53% in 1996. Hospitals
will receive less, receiving 30 percent of healthcare expenditures by 2007,
compared with 35% in 1996, due to the trend toward more outpatient care. Of the
$1.035 trillion spent in healthcare in 1996 over 19% was directly attributable
to physician services while nearly 58% was under physicians' direction.
Changes in Industry
-------------------
As a result of increased HMO enrollment, health care providers have
sought to reorganize themselves into health care delivery systems that are
better suited to negotiate with managed care organizations. The Company believes
that physician groups are joining with hospitals and other institutional
providers in creative ways that provide medical and hospital services ranging
from community based primary medical care to specialized inpatient services
through single coordinated delivery systems. These health care delivery systems
contract with HMOs to provide hospital and medical services to enrollees under
full risk contracts, under which providers assume the obligation of providing
both the professional and institutional components of covered health care
services to the enrollees for predetermined fixed per capita payments.
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In particular, 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 that they do not provide. Physicians are increasingly abandoning
traditional private practice in favor of affiliations with larger organizations
that offer skilled and innovative management, information systems and capital
resources. Many payers and their intermediaries, including governmental entities
and HMOs are increasingly looking to outside providers of physician services to
develop and maintain quality outcomes, management programs and patient care
data. One of the vehicles being used by physicians to better compete and manage
within the health care industry are Managed Service Organizations or MSOs, which
provide the resources necessary to function effectively in a managed care
environment. MSO providers, such as the Company, manage the total care of the
patients through managed care contracts, and receive a percentage of the
premiums paid by the managed care member or by Medicare.
BUSINESS
Metropolitan Health Networks, Inc. is an MSO currently operating in
South and Central Florida. The Company had a contract with an HMO as of June 30,
1999 and was responsible for approximately 10,000 patient lives. As of June 30,
2000 several HMO agreements were in place and Metcare was responsible for
approximately 44,000 patient lives. At September 30, 2000 Metcare is responsible
for approximately 50,000 patient lives. Metcare provides its services through
its Network of primary care physicians, specialists, hospitals, ancillary and
diagnostic facilities. These providers have contracted to provide services to
the Company's patients agreeing to certain fee schedules and care requirements.
HMO Agreements
--------------
Under HMO agreements, the Company, through its affiliated providers, is
generally responsible for the provision of all outpatient benefits, as well as
all covered hospital benefits, regardless of whether the affiliated providers
directly provide the healthcare services associated with the covered benefits.
This type of agreement is called a "Full Risk" agreement. To the extent that
enrollees require supplemental healthcare that is not otherwise reimbursed by
the HMO, the aggregate monies received 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. The
Company's contracts have a provision for a stop-loss coverage, which caps the
Company's cost for Medicare at $40,000 per patient, and for commercial insurance
at $15,000-$20,000 per patient. As a result, the success of the Company depends
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 more favorable pricing with respect to
negotiations with HMOs. In addition, employer groups are becoming increasingly
successful in negotiating reductions in the growth of premiums paid for their
employees' health insurance, which tends to continue the growth in membership by
HMOs. 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. Changes in health care practices, inflation,
new technologies, major epidemics, natural disasters and numerous other factors
affecting the delivery and cost of health care are beyond the control of the
Company and may adversely affect its operating results.
In addition to the full-risk capitation arrangements previously
discussed, the Company also has discount "fee for service" arrangements with
physicians. These arrangements are either negotiated rates for covered services,
usually calling for a discount of up to 70% from ordinary and customary charges,
or call for a payment at a percentage of Medicare allowable rates.
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Effective December 1, 1998, the Company entered into a percent of
premium Global Risk Agreement for a renewable one year term with Humana Medical
Plan, Inc., PCA Health Plans of Florida, Inc. and PCA Family Health Plan, Inc.,
Humana Health Insurance Company, Employers Health Insurance Company and PCA Life
Insurance Company ("Humana") to provide covered health care services to members
in certain healthcare networks established or managed by Humana and PPM
Physicians' services to members. The original contract provided for coverage in
Dade, Broward and Palm Beach Counties. A new contract was entered into for
Volusia (Daytona) and Flagler counties, which was implemented on January 1,
2000. Under the terms of the contract the Company is paid a percentage of
premium of basic established fees by HCFA based upon the Medicare+ Choice
program. The Company's proven ability to negotiate contracts with these
providers is an important element in the Company's strategic growth model.
At December 31, 1999, approximately 68% of the Company's revenues were
from managed care contracts with HMO's, compared to 47.9% at June 30, 1999. At
June 30, 2000, managed care contract revenues accounted for approximately 95% of
total revenues. All of the Company's active HMO contracts are with Humana. The
Company has recently negotiated a contract with another HMO to provide services
through our Network of providers in the Treasure Coast (Martin, St. Lucie &
Okeechobee counties), which is subject to final governmental approvals.
Management anticipates implementation of this contract in the first quarter
of 2001.
Physician Practices
-------------------
While the Company was initially organized as a PPM, the Company's
management subsequently determined that it should primarily operate as an MSO.
As such, with the exception of practices described below, it undertook a program
to dispose of its Physician Practices. These remaining practices complement the
Company's strategy and are expected to remain a part of Metcare.
GMA
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GMA is a multi-specialty group with components of neurology, orthopedic
surgery and occupational medicine, in addition to chiropractic physicians,
licensed massage therapists and additional ancillary services. GMA uses both
staff and subcontracted services to provide 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,
electro-diagnostics, minor surgical procedures as well as physical therapy. GMA
currently sees approximately 200 patients per week in its facilities and has
over 3,000 active charts. The GMA facility has been combined with our Skylake
facility to enhance the services provided while reducing overhead costs.
Skylake Medical Center
----------------------
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 in April 1998. The aggregate purchase price
was $3,500,000. Skylake Medical Center provides primary care services to
approximately 4,000 patients including more than 900 Humana members.
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Advanced Health Care
--------------------
Advanced Health Care is comprised of two primary care centers, which
currently provide medical care on a fee-for-service basis to patients in St.
Lucie and Martin counties. These centers will be integrated into the Network
with the implementation of the new HMO contract. On March 17, 1999 the Company
purchased the assets and certain liabilities of Advanced Health Care for
$512,000. The purchase price consisted of assumed liabilities of approximately
$387,000 and payments of approximately $90,000 in cash and 70,000 shares of
common stock of the Company. As of June 30, 1999 the shares were held in escrow.
Subsequently, the note was paid through cash payments and by tendering the
70,000 shares for the any balance owed on the Promissory Note. The acquisition
was accounted for as a purchase, and accordingly, the purchase price was
allocated to the net assets acquired based on their estimated fair market
values. The results of operations beginning March 17, 1999 are included in the
Company's statement of operations for the period ended June 30, 1999. As a
result of this acquisition, $125,000 was recorded as goodwill.
Dr. Federgreen
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This is a primary care practice, which has been merged into the
Advanced Health Care facilities. Effective December 30, 1999, the Company
acquired certain assets and liabilities of Dr. Federgreen's practice for a
purchase price of $120,000 that consisted entirely of a note payable. The
acquisition was accounted for as a purchase, and accordingly, the purchase price
was allocated to the net assets acquired based on their estimated fair market
values. In addition to the purchase price, Dr. Federgreen is entitled to a bonus
based upon adjusted pre-tax earnings on a scalable basis up to $60,000, if
earnings are $225,000 or above.
Purchase of Dr. Sreekumar
-------------------------
This primary care practice that services Humana and other
fee-for-service patients is located in Palm Beach County and is part of our
Network. Effective August 12, 1999, the Company acquired the medical practice of
Dr. P. Sreekumar. The purchase price consisted of assumed liabilities of
approximately $300,000, cash of $200,000 and the issuance of a note payable in
the amount of $300,000. The acquisition was accounted for as a purchase and
accordingly, the purchase price was allocated to the net assets acquired based
on their estimated fair market values. The results of operations beginning
August 13, 1999, have been be included in the Company's statement of operations
for the six months ended December 31, 1999. As a result of this acquisition,
approximately $700,000 was recorded as goodwill.
DISPOSITION OF PHYSICIAN PRACTICES AND ANCILLARY SERVICES
The Company identified certain Ancillary Services that were not
performing or made the determination that services could be provided on a more
economical and efficient basis by adopting its new model for providing
healthcare services. The Company negotiated arrangements to dispose of its
Ancillary Services as described below.
Sale of Magnetic Imaging Systems (MIS)
--------------------------------------
Effective December 18, 1999, MIS was sold to its former owner in
exchange for the settlement of all outstanding obligations, the discharge of a
note payable of approximately $185,000 and other amounts due the former owner
and the assumption by the former owner of certain liabilities of MIS. In
connection with this disposal, the Company recognized a loss of approximately
$968,000 during the six months ended December 31, 1999. (See Legal Proceedings:
MRI Scan Center, Inc. and Dr. Kagan).
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Sale of Datascan
----------------
Effective December 31, 1999, Datascan was sold to its former owner. The
Agreement called for the settlement of all outstanding litigation and the
termination of Executive Employment Agreements and stock options held by the
former owner. The Buyer also assumed certain third party obligations of
Metropolitan. Also, as part of the agreement the former owner assumed all the
employment obligations of a former employee, who was also an officer and
director. Furthermore, Michael Goldstein, the former owner, had previously been
an officer and director of the Company. In connection with this disposal, the
Company recognized a loss of approximately $1,163,000 during the six months
ended December 31, 1999.
AGREEMENTS
Billing Agreement
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In November 1999 Metropolitan entered into an agreement to assign all
of its current billing contracts to an unaffiliated third party. Under the
agreement the third party paid the Company $250,000. As of September 30, 2000
the Company is reviewing this arrangement with the third party.
Alpha Clinical Laboratory, Inc.
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In October 1999, the Company entered into a management agreement with
Alpha Clinical Laboratory, Inc. ("Alpha") that provides for a fee based on 10%
of revenues. In addition, the Company acquired an irrevocable option to purchase
Alpha any time prior to October 31, 2000. Alpha is a full service clinical
laboratory. It is management's intention to exercise its purchase option and
close the transaction during this quarter. The designated purchase price will be
three (3) times the pre-tax profit for the twelve (12) month period preceding
the measurement date. Subsequent to October 1999 and through August 31, 2000 the
Company has advanced approximately $812,000 that has been converted to a
promissory note. The note is payable on demand and bears interest at 18% per
annum and is collateralized by Alpha's accounts receivable and substantially all
of the other assets of Alpha.
IMPACT OF THE Y2K COMPUTER ISSUE
The Company did not experience any impact from the date change
occurring between December 31, 1999 and January 1, 2000 with regard to its data
processing systems, and does not expect to experience any significant problems
in the future.
COMPETITION
The healthcare industry is highly competitive and is subject to
continuing changes in the provision of services and the selection and
compensation of providers. In addition, certain businesses, including hospitals
and insurers, are expanding their presence in the physician management market.
The Company's operations compete with national, regional and local companies in
providing its services. Excluding individual physicians and small medical
groups, many of the Company's competitors are larger and better capitalized,
provide a wider variety of services, have greater experience in providing health
care management services and may have longer established relationships with
buyers of such services.
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RISKS OF CHANGES IN PAYMENT FOR MEDICAL SERVICES
The United States Congress and many state legislatures routinely
consider proposals to reform or modify the health care system, including
measures that would control healthcare spending, convert all or a portion of
government reimbursement programs to managed care arrangements and reduce
spending for Medicare, Medicaid and state health programs. These measures can
affect a healthcare company's cost of doing business and contractual
relationships. There can be no assurance that such legislation, programs and
other regulatory changes will not have a material adverse effect on the Company.
The profitability of the Company may also be adversely affected by cost
containment decisions of third party payors and other payment factors over which
the Company has no control.
EMPLOYEES
As of December 31, 2000, the Company had approximately 70 full-time
employees down from 168 on June 30, 1999. Of the total, seventeen (17) were
employed at the Company's executive offices. No employee of the Company is
covered by a collective bargaining agreement or is represented by a labor union.
The Company considers its employee relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY
As of December 31, 1999 the Company was located at 5100 Town Center,
Boca Raton, Florida. However, as of the date of filing, the Company's Executive
offices are presently located at 500 Australian Avenue South, Suite 1000, West
Palm Beach, Florida where it occupies 10,936 square feet at a current monthly
rental of approximately $12,000 pursuant to a sublease expiring December 31,
2002. The Company relocated its corporate offices April 15, 2000.
Magnetic Imaging Systems, I, Ltd. leased approximately 4,656 square
feet for diagnostic facilities located in Fort Lauderdale, Florida at a monthly
rental rate of approximately $13,126 plus real estate taxes. The lease expires
December 31, 2003, and was leased from Dr. Kagan, a former Director and Vice
President of the Company and Medical Director of the MRI Scan Center. The lease
was assigned to Dr. Kagan as part of the Global Settlement Agreement and First
Amendment Agreement as of December 15, 1999. (See LEGAL PROCEEDINGS: MRI Scan
Center, Inc. and Dr. Kagan).
GMA occupied approximately 1,800 square feet in North Miami, Florida at
a monthly rental of approximately $5,140. The term of this lease was month to
month. This lease was terminated as of June 30, 2000 and the premises were
vacated in conjunction with its consolidation with the Skylake practice.
Datascan's offices were located at 2301 West Sample Road, Building 4,
Suite 2A, Pompano Beach, Florida 33073 where it occupied approximately 5,000
square feet at a monthly rental of approximately $2,900. This lease expired on
July 13, 1999.
The Skylake Practice occupies approximately 4,800 square feet in North
Miami Beach, Florida at a monthly rental of $13,931. This lease expired on June
30, 2000. As of July 1, 2000 a new lease was signed for five years with an
approximate monthly base rental of $4,400.
The Company leased approximately 5,740 square feet for diagnostic
facilities in Fort Lauderdale, Florida at a monthly rate of approximately
$7,395. This agreement expires December 31, 2003, and is leased from KFK
Enterprises, Inc., a corporation in which Dr. Kagan, an employee and former
Director of the Company, is a principal shareholder. The lease was assigned to
the former owner as part of a settlement agreement dated December 15, 1999 (see
LEGAL PROCEEDINGS: MRI Scan Center, Inc. and Dr. Kagan).
None of the Company's properties, except as otherwise indicated, are
leased from affiliates.
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ITEM 3. LEGAL PROCEEDINGS
MRI SCAN CENTER, INC. AND DR. KAGAN
As of December 15, 1999 the Company entered into a Global Settlement
Agreement and First Amendment Addendum to the Global Settlement Agreement
(Agreements) dated January 17, 2000 with Dr. Kagan and other parties. The
Agreements provide for a negotiated settlement of any and all disputes and
differences, cancellation of any and all existing agreements, promissory notes,
employment agreements, leases and contracts, including but not limited to the
Acquisition Documents of August 20, 1996. As part of the agreement, all parties
have exchanged general releases in favor of each other.
Also, as a condition of the settlement, the Company agreed to retain
Dr. Kagan to undertake and interpret not less than ten (10) scans per month for
forty-eight (48) months commencing January 1, 2000 and pay Kagan $5,000 per
month.
PRIMEDICA HEALTHCARE, INC.
The Company entered into litigation with regard to the Primedica
acquisition agreement. This litigation was subsequently settled whereby the
parties entered into a settlement agreement that reduced the total outstanding
debt to $1,512,235 from $4,745,364. The settlement agreement provided for
payments of $25,000 per week. A change in anticipated payments under a full risk
contract caused the Company to default on the agreement. As a result of this
change, the Company and Primedica then entered into a forbearance agreement,
which increased the amount of the debt to $2,000,000 while maintaining the
weekly payments of $25,000. At June 30, 1999 the Company was in default of the
Forbearance Agreement and, accordingly, the amount owed to Primedica was
adjusted to $4,745,364. As of August 4, 2000 the Company entered into a new
agreement in which Primedica acknowledged payments of $700,000 and provided for
continued weekly payments of $25,000 for 32 weeks, with a balloon payment of
$500,000 in March 2001, which would result in total payments of $2,000,000. In
the event the Company is not able to meet this obligation, the Company may
continue payments through December 2001 with a balloon payment, bringing the
total to $2,500,000. In the event of a default by the Company in the required
payments to Primedica, the Company shall be obligated to pay the full amount of
$4,745,364. The recorded liability at December 31, 1999 was $4,524,462. This
liability was settled in full in September 2000 through a negotiation and
subsequent payment of $350,000. A gain of approximately $3,500,000 will be
recognized in the quarter ended September 30, 2000 in connection with this
settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the six months ended December 31,
1999.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Warrants are currently traded on the
NASDAQ SmallCap Stock Market ("NASDAQ") OTC Bulletin Board under the symbols
"MDPA" and "MDPAW", respectively. The following table sets forth the high and
low closing bid prices for the common stock and warrants, as reported by NASDAQ:
High Low
($) ($)
Common Stock
Quarter ended September 30, 1997 6.125 3.375
Quarter ended December 31, 1997 7.375 5.625
Quarter ended March 31, 1998 6.125 2.500
Quarter ended June 30, 1998 4.063 2.750
Quarter ended September 30, 1998 3.813 2.500
Quarter ended December 31, 1998 2.875 1.188
Quarter ended March 31, 1999 1.870 0.065
Quarter ended June 30, 1999 1.938 0.344
Quarter ended September 30,1999 0.563 0.203
Quarter ended December 31, 1999 0.422 0.188
Warrants
Quarter ended September 30, 1997 0.97 0.44
Quarter ended December 31, 1997 1.06 0.53
Quarter ended March 31, 1998 0.66 0.25
Quarter ended June 30, 1998 0.59 0.31
Quarter ended September 30, 1998 0.47 0.25
Quarter ended December 31, 1998 0.28 0.09
Quarter ended March 31, 1999 0.13 0.03
Quarter ended June 30, 1999 0.13 0.01
Quarter ended September 30, 1999 0.10 0.02
Quarter ended December 31, 1999 0.10 0.01
The Company has not declared or paid any dividends on its common stock.
The Company presently intends to invest its earnings, if any, in the development
and growth of its operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS-SIX MONTHS ENDED DECEMBER 31, 1999
RESULTS OF OPERATIONS
OVERVIEW: The Company had revenues of $10,020,795 for the six month period ended
December 31, 1999 compared to $8,377,103 for the same period in 1998, an
increase of 19.6%. Operating expenses for those same periods were $13,829,744
and $11,008,810 respectively, a 25.6% increase of $2,820,934 in 1999. The loss
from operations for the six months ended December 31,1999 amounted to $3,808,949
compared to $2,631,707 in 1998. The Company recognized a net loss of $5,994,486
and $2,720,512 for the six-month period ended December 31, 1999 and 1998,
respectively. The current period results included a $2,185,537 loss on disposal
of assets related to the Company's restructuring.
REVENUES: As previously noted, revenues for the six-month period ended December
31, 1999 increased $1,643,692 (19.6%) over the same period in 1998, from
$8,377,103 to $10,020,795. MSO revenues for the two periods were $6,838,390 and
$3,445,053, respectively, a $3,393,337 (98.5%) increase from 1998 to 1999. This
was offset in part by a $1,749,645 (35.5%) decrease in diagnostic and physician
billings. MSO revenues for the six months ended December 31, 1999 represented
68.2% of total revenues compared to 41.1% in the prior year's period, reflecting
the Company's shift to the MSO business model.
<PAGE>
Management believes that future growth in revenues will result from increases in
its present HMO contracts, new HMO contracts, and from revenues relating to its
strategic alliances to provide products and services including mail order
pharmacy, physician purchasing of supplies and equipment, and telemedicine.
OPERATING EXPENSES: Total operating expenses increased 25.6% for the six-month
period ended December 31, 1999 compared to the prior year, rising from
$11,008,810 to $13,829,744. Direct medical costs, expenses directly related to
MSO revenue, increased from $2,506,228 for the six months ended December 31,
1998 to $6,455,678 for the same period in 1999. Medical expenses include all
costs associated with providing services of the MSO operation including direct
medical payments to physician providers, hospitals and ancillary services on a
capitated and fee for service basis.
Payroll, payroll taxes and benefits decreased 6.3% from 1998 to 1999, from
$3,503,208 for the six-month ended December 31 to $3,280,791. Payroll and
related expenses amounted to 41.8% of revenue in 1998 compared to 32.7% of
revenue in 1999. This improvement reflects both the Company's efforts to
streamline operations and the less labor-intensive nature of MSO business.
Rent and lease expenses totaled $1,225,910 for the six months ended December 31,
1999 and $672,061 for 1998. This increase of $553,849 was due to the acquisition
of new practices and the addition of new locations in early 1999. The Company
divested certain physician offices and its diagnostic operations in late 1999
that included certain rent and lease expenses. The Company moved its corporate
offices to its new location in West Palm Beach in April 2000. There is
sufficient capacity at the Company's current locations for future growth.
Bad debt expense totaled $54,418 or 0.5% of the total revenue for the six months
ended December 31, 1999 compared to $630,184 or 7.5% for the 1998 six month
period. The decrease was due to a decline in the MRI and Datascan revenues and
improved collection procedures.
Consulting expense increased $147,095 to $304,283 for the six months ended
December 31, 1999 compared to $157,188 in 1998. The Company contracted with
consultants to provide services relating to the expansion of medical offices and
to review its business plan to make recommendations regarding new strategic
initiatives.
General and administrative expenses decreased by $920,697 or 41.6% to $1,290,497
for the six months ended December 31, 1999. General and administrative expenses
were 12.9% of total revenue for the six months ended December 31, 1999 compared
to 26.4% of revenue the for prior year period. This improvement was primarily
due to decreases in legal and professional fees related to litigation and
reduction in costs associated with the disposition of physician offices and
diagnostic operations. The Company effectively settled all material litigation
as of December 31, 1999.
Depreciation and amortization totaled $918,145 or 9.2% of revenue for the six
months ended December 31, 1999, and $911,394 or 10.9% of revenue for the 1998
period. This increase is due to the combination of having a full year's
depreciation and amortization on previously acquired assets, and the acquisition
of assets during 1999.
Interest expense was $300,022 for the six months ended December 31, 1999
compared to $416,813 in 1998. This decrease is due to the disposition of assets
and leases relating to diagnostic operations.
The 1999 loss on disposal of assets in the amount of $2,185,537 mainly relates
to the disposal of the Company's MRI and Datascan businesses as part of its
restructuring.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced liquidity and cash flow problems, the
result of the Company's operating losses and costs associated with
restructuring, closing of operations, severance and separation agreements.
Current operations and the Company's future development and growth may be
hampered if the Company is not able to raise additional capital. There can be no
assurance that the Company will be able to raise sufficient capital.
While the Company's net loss was nearly $6 million for the six months
ended December 31, 1999, approximately $3,278,347 was attributable to non-cash
items, including stock and stock options issued for services and compensation,
loss on disposal of assets, and depreciation and amortization. The Company's
cash needs in fiscal 1999 were met in part by an advance from an HMO of
approximately $107,000 and certain private borrowings totaling approximately
$850,000.
The primary source of the Company's liquidity is derived from its
payments from its full-risk contracts with HMOs. In addition the Company has
other revenues and accounts receivable, which are financed under a line of
credit. Such borrowings are available on a formula basis taking into account the
amount and age of eligible receivables. Borrowings amounted to $1,520,668 at
December 31, 1999, with $924,545 remaining at September 30, 2000. Metcare is
negotiating with its current lender to restructure its line of credit. The
Company currently has no additional availability under the current line.
Subsequent to December 31, 1999 the Company has raised in excess of
$3,000,000 in debt and equity to fund its Current Operations.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Except for historical information contained herein, the matters
discussed in this report are forward-looking statements made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995. These
forward-looking statements are based largely on the Company's expectation and
are subject to a number of risks and uncertainties, including but not limited to
economic, competitive and other factors affecting the Company's operations,
ability of the Company to obtain competent medical personnel, the cost of
services provided versus payment received for capitated and full risk managed
care contracts, negative effects of prospective healthcare reforms, the
Company's ability to obtain medical malpractice coverage and the cost associated
with malpractice, access to borrowed or equity capital on favorable terms, the
fluctuation of the Company's common stock price, and other factors discussed
elsewhere in this report and in other documents filed by the Company with the
Securities and Exchange Commission from time to time. Many of these factors are
beyond the Company's control. Actual results could differ materially from the
forward-looking statements. In light of these risks and uncertainties, there can
be no assurance that the forward-looking information contained in this report
will, in fact, occur.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required to be filed hereunder are included
under Item 13 (a) (1) of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
As of December 31, 1999, the directors, control persons and executive
officers of the Company were as follows:
NAME AGE TITLE
Noel J. Guillama 39 Chairman, President, Chief Executive
Officer and Director
Debra A. Finnel 37 Chief Operating Officer-MSO Division
David S. Gartner, CPA 40 Chief Financial Officer
Walter A. Fox, D.O. 71 Director
Mark K. Gerstenfeld 56 Director
Paul Preste 47 Director
Karl Sachs 63 Director
--------------
As of August 31, 2000, the directors, control persons and executive officers of
the Company are as follows:
NAME AGE TITLE
Fred Sternberg 60 Chairman, President, Chief Executive
Officer and Director
Debra A. Finnel 38 Vice-President and Chief Operating
Officer
David S. Gartner, CPA 42 Chief Financial Officer and
Secretary
Michael Cahr 60 Director
Marvin Heiman 54 Director
Mark K. Gerstenfeld 56 Director
Paul Preste 47 Director
Karl Sachs 63 Director
Michael Earley 45 Director
MARK K. GERSTENFELD has served as Director of the Company since
October 9, 1998. In addition, Mr. Gerstenfeld has served from October of 1996 to
present as an advisor to the Company. Mr. Gerstenfeld has since 1986 served as
Vice President of Sales at Action West in New York, NY. Mr. Gerstenfeld received
a Bachelor or Arts degree from Michigan State University in East Lansing
Michigan and a MBA in marketing and marketing research from City College of New
York, Baruch School of Business.
KARL M. SACHS, CPA has served as a Director of the Company since
March 15, 1999. He is a founding partner of the Miami-based public accounting
firm of Sachs & Focaracci, P.A. A certified public accountant for more than 21
years, Mr. Sachs is a member of the American Institute of Certified Public
Accountants, Personal Financial Planning and Tax Sections; Florida Institute of
Certified Public Accountants; and the National Association of Certified
Valuation Analysts. The firm of Sachs & Focaracci, P.A. serves the financial and
tax needs of its diverse clients in addition to providing litigation support
services. Mr. Sachs is a qualified litigation expert for the U.S. Federal
District Court, U.S. District Court, U.S. Bankruptcy Court and Circuit Courts of
Dade and Broward Counties. He is a graduate of the University of Miami where he
received his BS in Business Administration. He also holds a Series 65 Securities
License and a Life Insurance and Annuity License.
<PAGE>
PAUL PRESTE, M.D. has served as a member of the Board of Directors
since March 15, 1999. He owned and operated a private medical practice from 1981
through 1992. From 1993 to 1994, he was associated with Intermed and returned to
his private practice in 1995. Dr. Preste was owner of a 30-bed retirement
facility from 1983 to 1987 and a 100-bed retirement home from 1987 to 1991. He
is affiliated with Holy Cross Hospital, AMI - North Ridge Medical Center and HTI
- Cleveland Clinic Hospital (Ft. Lauderdale, Florida). Dr. Preste received his
Bachelor of Science degree, summa cum laude, from the University of Florida in
1974, his Doctor of Medicine degree from the University of South Florida in 1978
and completed his residency in Internal Medicine at the University of South
Carolina in 1981.
FRED STERNBERG, President - Mr. Sternberg has been a director and
President of the Company since January 2000. For more than five years prior
thereto, Mr. Sternberg, through Sternco, Inc., has been involved in the
healthcare industry, providing consulting services relating to
billings/collections, accounts receivables (AR) financing and mobile diagnostics
companies. Mr. Sternberg has also provided consulting services to assisted care
living facilities and skilled nursing homes as well as a dental management
company.
DEBRA A. FINNEL, Vice President and Chief Operating Officer has been
associated with the Company since January 1999. For the five years prior to
joining the Company Ms. Finnel was President of Advanced HealthCare Consultants,
Inc., which managed and owned physician practices in multiple states and
provided turnaround consulting to managed care providers, MSOs, IPAs and
hospitals.
DAVID S. GARTNER, CPA joined the Company in November 1999 as its Chief
Financial Officer. He has 19 years experience in accounting and finance,
including nine years of specialization in the healthcare industry. Most
recently, Mr. Gartner served for two years as Chief Financial Officer of Medical
Specialists of the Palm Beaches, Inc., a large Palm Beach County multi-practice,
multi-specialty group of 40 physicians. Prior to Medical Specialists, he held
the position of Chief Financial Officer at National Consulting Group, Inc., a
treatment center licensed for 140 inpatient beds in New York and Florida, from
1991 to 1998.
MICHAEL CAHR has served as a director of the Company since February
2000. He is currently the Chief Executive Officer of IKEDEGA a video server
technology company. Prior he was the Chairman of Allscripts, Inc. a publicly
traded prescription management company from September 1997 through March 1999.
At Allscripts he successfully refocused the company to an Internet-based
technology company and raised $20 million leading to a successful IPO in 1999.
Prior to Allscripts, Mr. Cahr was the Venture Group Manager for Allstate Venture
Capital where he oversaw investments of over $100 million in technology,
healthcare services, biotech pharmaceuticals and medical services. Mr. Cahr
received his Bachelor of Arts degree in Economics from Colgate University and
Masters of Business Administration from Farleigh Dickinson University.
MARVIN HEIMAN has served as a director of the Company since March 2000.
He is President and Chairman of the Board of Sussex Financial Group, Inc. and
Sussex Insurance Group, an asset money manager for hundreds of physicians in the
Chicago area. He also manages group health plans for many physician practices.
From 1970 to 1981 he was President of Curtom Record Company and Division
Vice-President of Curtom/Warner Bros. Record Company from 1975-1978. Mr. Heiman
is a licensed Broker/Dealer with NASD and licensed with the SEC. He is also a
member of the International Association for Financial Planners, Real Estate
Securities Syndication Association, a recognize Platinum member of the
International Association for Financial Planners, AIPAC and a member of the
International Platform Association. Mr. Heiman's biography appears in Who's Who
in America, Who's Who in Finance, Who's Who in Emerging Leaders in America, and
Men of Achievement 1990/91 Cambridge, England. He has also been the recipient of
the American Jewish Committee "Humanitarian" award in 1978. Mr. Heiman is also a
partner in the Chicago White Sox baseball team.
MICHAEL EARLEY has served as a Director of the Company since June 2000.
He is currently President of Collins Associates, an institutional money
management firm. He was previously a principal and owner of Triton Group
Management, Inc., which provided financial and management consulting services to
a variety of clients. From 1986 to 1997, he served in a number of senior
management roles including CEO and CFO of Intermark, Inc. and Triton Group Ltd.;
both publicly traded diversified holding companies. Mr. Earley received
undergraduate degrees in Accounting and Business Administration from the
University of San Diego. From 1978 to 1983, he was an audit and tax staff member
of Ernst & Whinney.
<PAGE>
NOEL J. GUILLAMA served as Chairman, President and Chief Executive
Officer since inception in January 1996 until February 2000. During 1995, Mr.
Guillama served as a health care consultant to public and private health care
providers and companies. During 1995, he was Vice President of Development for
MedPartners, Inc., a Birmingham, Alabama-based physician practice management
public company. From 1991 to 1994, he served as Director and Vice President of
Operations of Quality Care Networks, Inc.
WALTER A. FOX, D. O., M.Sc., F.A.C.O.I., served as Director of the
Company since October 9, 1998 until February 4, 2000. From 1994 to 1997, Dr. Fox
was practicing internal medicine for the Lake Hospital System based in
Gainesville, Ohio. From 1992 to 1994, Dr. Fox served as Medical Director of
Southern Community Medial Center in Ft. Lauderdale, Florida. Dr. Fox received a
Bachelor or Science degree from Albright College in Reading, Pennsylvania and a
Doctorate of Osteopathic degree from Philadelphia College of Osteopathic
Medicine in Philadelphia, Pennsylvania. Dr. Fox received a Fellowship from the
American College of Osteopathic Internist and a 30-Year Service Award from the
College of Osteopathic Internist. He is a member of the American Medical
Association and the American Osteopathic Association.
BOARD OF DIRECTORS
Election of Officers
--------------------
Each director is elected at the Company's annual meeting of
shareholders and holds office until the next annual meeting of stockholders, or
until the successors are elected and qualified. At present, the Company's bylaws
provide for not less than one director. Currently, there are seven directors in
the Company. The bylaws permit the Board of Directors to fill any vacancy and
such director may serve until the next annual meeting of shareholders or until
his successor is elected and qualified. Officers are elected by the Board of
Directors and their terms of office are, except to the extent governed by
employment contracts, at the discretion of the Board. There are no family
relations among any officers or directors of the Company. The officers of the
Company devote full time to the business of the Company.
Board Committees
----------------
The Company has three committees, an Audit and Compensation Committee,
Executive Committee and Regulatory Compliance Committee. The Audit and
Compensation Committee consists of Messrs. Sachs, Cahr and Heiman. The Audit and
Compensation Committee makes recommendations to the Board of Directors regarding
the compensation for executive officers and consultants of the Company,
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors, reviews and
evaluates the Company's internal control functions. During fiscal 1999, the
Audit and Compensation Committee members were Messrs. Guillama, Fox and
Gerstenfeld.
The Executive Committee was established as of June 30, 1999 and has and
may exercise the power of the Board of Directors in the management of the
business and affairs of the Corporation at any time when the Board of Directors
is not in session. The Executive Committee shall, however, be subject to the
specific directions of the Board of Directors. It is composed of Messrs. Cahr,
Gerstenfeld, and Heiman. All actions of the Executive Committee require a
unanimous vote. During fiscal 1999, the Executive Committee consisted of Messrs.
Guillama and Gerstenfeld.
The Regulatory Compliance Committee consists of Messrs. Sachs, Preste
and Cahr.
<PAGE>
Compensation of Directors
-------------------------
The Company reimburses all Directors for their expenses in connection
with their activities as Directors of the Company. The Directors make themselves
available to consult with the Company's management. One of the seven Directors
of the Company is also an employee of the Company and did not receive additional
compensation for his services as Director. A formal compensation and stock
option plan has been adopted for the Company's outside Directors in the amount
of $12,000 per year. The Directors have elected to receive this compensation for
the present time in stock. All outside directors have received 40,000 options
upon joining the Board, of which 20,000 vest immediately and the other 20,000
after one year.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
--------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
(10%) percent of the outstanding Common Stock, to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership on Form 3 and
reports of changes in ownership of Common Stock on Forms 4 or 5. Such persons
are required by SEC regulation to furnish the Company with copies of all such
reports they file.
Based solely on its review of the copies of such reports furnished to
the Company or written representations that no other reports were required, the
Company believes that all Section 16(a) filing requirements applicable to its
officers, directors and greater than (10%) percent beneficial owners were
complied with during the six months ended December 31, 1999.
ITEM 10. EXECUTIVE COMPENSATION.
The following tables present information concerning the cash
compensation and stock options provided to the Company's Chief Executive Officer
and each additional executive officer whose total annualized compensation
exceeded $100,000 for the year ended December 31, 1999 ("fiscal 1999").
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
<TABLE>
<CAPTION>
Long-term
Compensation
Awards
Securities
Other Annual Underlying
Name and Fiscal Salary Bonus Compensation /Options SARs All Other
Principal Position Year $ $ ($) (#) Compensation
------------------ ------ ------ ----- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Noel J. Guillama
Chairman of the Board, 1998 41,466 11,592
President,
Chief Executive Officer 1999 64,200 197,989
Robert L. Kagan, MD
Vice President and Medical 1998 348,818 77,500 7,700
Director MRI Scan Center
Michael P. Goldstein
Director, Acting Chief 1998 81,976 8,400
Operating Officer and
President Metcare
Diagnostic Services
</TABLE>
<PAGE>
Options Granted in the Year Ended December 31, 1999 to Executives
Number of % of Total
Securities Options/
Underlying SARs
Options/ Granted to Exercise or
SARs Employees in Base Price Expiration
Granted Fiscal Year ($/Share) Date
---------- ------------ ----------- ----------
Name
NONE
Total number of options granted to non-executives for the six months
ended December 31, 1999 was 807,000 and for the twelve months ended December 31,
1999 was 1,778,000.
Aggregated Fiscal Year-End Option Value Table
The following table sets forth certain information concerning
unexercised stock options as of December 31, 1999. No stock appreciation rights
were granted or are outstanding.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money
Held at December 31, 1999 Options at December 31, 1999 (1)
----------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
(#) (#) ($) ($)
--- --- --- ---
<S> <C> <C> <C> <C>
Robert Kagan 80,000 20,000
Donald B. Cohen 306,000
</TABLE>
(1) The closing sale price of the Common Stock on December 31, 1999 as
reported by NASDAQ was $0.2344 per share. Value is calculated by multiplying (a)
the difference between $0.2344 and the option exercisable price by (b) the
number of shares of Common Stock underlying.
Compensation of Directors. For the six-month period ending December 31,
1999, all directors who received remuneration in excess of $100,000 are listed
above.
Employment Agreements. Effective February 29, 2000 Mr. Guillama
resigned as President, CEO and as a Director of the Company. Mr. Guillama has
entered a consulting agreement for one year. As part of his termination
agreement he is to receive 200,000 options at an average per share price of
approximately $1.00, which shall expire within thirty (30) months from February
29, 2000.
In connection with their employment with the Company, Fred Sternberg
and Debra Finnel have entered into written contracts with the Company providing
for base compensation of $150,000 and $125,000, respectively, together with
additional bonus provisions based on performance.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. (I am
not reviewing this section)
The following table sets forth certain information regarding the
Company's Common Stock beneficially owned at August 31, 2000 (i) by each person
who is known by the Company to own beneficially 5% or more of the Company's
common stock; (ii) by each of the Company's directors; and (ii) by all executive
officers and directors as a group.
Percentage of
Name/Address of Beneficial Ownership Beneficial Ownership
Beneficial Owner Common Stock Common Stock
---------------- ------------ ------------
Noel J. Guillama (1) 1,490,666 8.04%
Martin Harrison, M.D. (2) 5,291,372 28.54%
Fred Sternberg (3) 923,850 4.98%
Paul Preste, M.D. (4) 57,500 0.31%
Karl Sachs (5) 240,000 1.21%
Mark Gerstenfeld (6) 255,666 1.24%
Michael Cahr (7) 303,615 1.64%
Marvin Heiman (8) 131,100 0.71%
Michael Earley (9) 20,000 0.11%
David Gartner (10) 50,000 .0.27%
Debbie Finnel (11) 200,000 1. 08%
Directors and Executive
Officers as a group
(9 persons) 2,456,731 11.63%
--------------------
(1) Includes (1) 1,021,000 held by Mr. Guillama, (32) 265,000 shares held
by Guillama Family Holdings, Inc., a corporation in which Mr. Guillama is an
officer, (3) 142,000 shares held by Mr. Guillama as trustee for his minor son,
and (4) 68,666 shares owned by Beacon Consulting Group, Inc., a corporation in
which Mr. Guillama is a director. Does not include (1) 1,500,000 shares
currently held as collateral for an existing loan, (2) 50,000 shares issuable
upon exercise of options at a price of $0.50 until July 23, 2005, (3) 50,000
shares issuable upon exercise of options at a price of $0.75 from January 28,
2001 to January 28, 2006, (4) 50,000 shares issuable upon exercise of options at
a price of $1.00 from July 28, 2001 to July 28, 2006 and (5) 50,000 shares
issuable upon exercise of options at a price of $1.25 from January 28, 2002 to
January 28, 2007.
(2) Includes (1) 4,391,372 shares held by Dr. Harrison and (2) 900,000
shares held by H3O, Inc., a corporation which Dr. Harrison is a Director. Does
not include: (1) 7,000 shares issuable upon exercise of options at a price of
$6.938 per share until April 18, 2003, (2) 7,000 shares issuable upon exercise
of options at a price of $7.938 per share until April 18, 2003, (3) 7,000 shares
issuable upon exercise of options at a price of $6.938 per share until
October 18, 2003, (4) 7,000 shares issuable upon exercise of options at a price
of $7.938 per share until October 18, 2003, (5) 7,000 shares issuable upon
exercise of options at a price of $6.938 per share until April 18, 2004, (6)
7,000 shares issuable upon exercise of options at a price of $7.938 per share
until April 18, 2004, (7) 7,000 shares issuable upon exercise of options at a
price of $6.938 per share until October 18, 2004, (8) 7,000 shares issuable upon
exercise of options at a price of $7.938 per share until October 18, 2004, (9)
7,000 shares issuable upon exercise of options at a price of $6.938 per share
until April 18, 2005, or (10) 7,000 shares issuable upon exercise of options at
a price of $7.938 per share until April 18, 2005.
(3) Includes (1) 405,850 shares held by Sternco, Inc., a corporation which
Mr. Sternberg is a President, (2) 18,000 shares held by Mr. Sternberg's wife,
(3) 300,000 shares issuable upon the exercise of options at a price of $0.30 per
share until March 15, 2005, (4) 100,000 shares issuable upon the exercise of
options by Sternco, Inc. at a price of $0.75 per share until May 7, 2004, and
(5) 100,000 shares issuable
<PAGE>
upon the exercise of options by Sternco, Inc. at a price of $1.00 per share
until May 7, 2004. Does not include (1) 100,000 shares issuable upon the
exercise of options by Sternco, Inc. at a price of $2.00 per share with vesting
based upon certain earnings criteria of the Company or (2) 1,000,000 shares that
may be issued upon the exercise of options at a price of $0.50 per share with
vesting based upon certain earnings criteria of the Company.
(4) Includes (1) 17,500 shares held by Dr. Preste, (2) 20,000 shares
issuable upon exercise of options at a price of $0.30 until May 7, 2004 and (3)
20,000 shares issuable upon exercise of options at a price of $0.30 per share
until April 23, 2005.
(5) Includes (1) 200,000 shares held by Mr. Sachs, (2) 20,000 shares
issuable upon exercise of options at a price of $0.30 per share until March 15,
2004, and (3) 20,000 shares issuable upon exercise of options at a price of
$0.30 per share until March 15, 2004. Does not include 25,000 shares issuable
upon exercise of options at a price of $0.30 per share from February 4, 2001
through February 4, 2002.
(6) Includes (1) 85,666 shares held by Mr. Gerstenfeld, (2) 20,000 shares
issuable upon exercise of options at a price of $0.30 per share until October 8,
2003, (3) 20,000 shares issuable upon exercise of options at a price of $0.30
per share until April 8, 2004, (4) 80,000 shares issuable upon exercise of
options at a price of $0.625 per share until March 15, 2004, (5) 25,000 shares
issuable upon exercise of options at a price of $0.75 per share until November
7, 2004 and (6) 25,000 shares issuable upon exercise of options at a price of
$0.75 per share until May 7, 2005. Does not include (1) 25,000 shares issuable
upon exercise of options at a price of $0.75 per share from November 7, 2000
through November 7, 2005, (2) 25,000 shares issuable upon the exercise of
options at a price of $0.75 per share from May 7, 2001 through May 7, 2006 or
(3) 25,000 shares issuable upon the exercise of options at a price of $0.75 per
share from November 7, 2001 through November 7, 2006.
(7) Includes (1) 229,615 shares held by Michael Cahr, (2) 4,000 shares held
by Michael Cahr as custodian for his son, (3) 20,000 shares issuable upon the
exercise of options at the price of $0.75 per share until February 4, 2005 and
(4) 50,000 shares issuable upon the exercise of options at the price of $0.50
per share until April 4, 2001. Does not include 20,000 shares issuable upon the
exercise of options at the price of $0.75 per share from February 4, 2001
through February 4, 2005.
(8) Includes (1) 1111,100 shares held by Marvin Heiman and (2) 20,000
shares issuable upon the exercise of options at the price of $0.75 per share
until February 17, 2005. Does not include 20,000 shares issuable upon the
exercise of options at a price of $0.75 per share from February 17, 2001 through
February 17, 2005.
(9) Includes 20,000 shares issuable upon the exercise of options at a price
of $0.75 per share until June 9, 2005. Does not include 20,000 shares issuable
upon the exercise of options at a price of $0.75 per share from June 9, 2001
through June 9, 2005.
(10) Includes 50,000 shares issuable upon the exercise of options at a price
of $0.30 per share until February 4, 2001. Does not include 50,000 shares
issuable upon the exercise of options at a price of $0.30 per share from
November 1, 2000 to November 1, 2001 or 50,000 options issuable upon the
exercise of options at a price of $0.30 per share from November 1, 2001 to
November 1, 2002.
(11) Includes 150,000 shares issuable upon the exercise of options at a
price of $0.30 per share until March 16, 2001 and 50,000 shares issuable upon
the exercise of options at a price of $0.50 per share until October 8, 2005.
Does not include 50,000 shares issuable upon the exercise of options at a price
of $0.50 per shares from October 8, 2001 through October 8, 2006 or 50,000
shares issuable upon the exercise of options at a price of $0.50 per shares from
October 8, 2002 through October 8, 2007.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company had a consulting agreement with Sternco, Inc., an affiliate
of Fred Sternberg that provided for commissions on any acquisition for which
Sternco is or was the introducing party or materially contributed to such
acquisition. Prior to becoming an officer and director of the Company any and
all obligations under this agreement were satisfied with the payment of $24,000
cash and 160,000 shares of common stock.
<PAGE>
The facility leases between Dr. Robert Kagan and the Company are for
the addresses 3122 East Commercial Boulevard and 3079 East Commercial Boulevard.
The property located at 3122 East Commercial Boulevard is owned by Dr. Kagan, a
former director of the Company, and leased by Magnetic Imaging Systems I, Ltd.
The current rent is $13,126 per month net of expenses. The total square footage
is 4,656 of office space plus an additional 2,000 square feet of garage.
Magnetic Imaging Systems, I, Ltd. built the garage in 1987. The total leasehold
improvements were approximately $285,289 at this location. Independent property
appraisals were performed and both valued the properties at a maximum of $22 a
square foot net of expenses. Magnetic Imaging Systems, I, Ltd. is currently
paying $23.66 a square foot net of expenses for the 4,656 square feet of office
space. This lease expires December 31, 2003. This lease was assigned to Dr.
Robert Kagan as part of the Global Settlement Agreement, whereby METCARE has
been released of any and all responsibility and obligations.
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 former 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. The Company believes that this price is equal to current
market value. Magnetic Imaging Systems, I, Ltd. made leasehold improvements of
$139,289 at this location. This lease expires December 31, 2003. This lease has
been assigned to Dr. Robert Kagan as part of the Global Settlement Agreement,
whereby METCARE has been release of any and all responsibility and obligations.
All future transactions between the Company and any officer, director
or 5% shareholder will be on terms no less favorable than could be obtained from
independent third parties and will be approved by a majority of the independent
disinterested directors of the Company. The Company believes that all prior
affiliated transactions except those identified above were made on terms no less
favorable to the Company than available from unaffiliated parties. Loans, if
any, made by the Company to any officer, director or 5% stockholder, will only
be made for bona fide business purposes.
ITEM 13.EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
<PAGE>
--------------------------------------------------------------------------------
METROPOLITAN HEALTH
NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
--------------------------------------------------------------------------------
<PAGE>
C O N T E N T S
Page
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Operations 3 - 4
Statements of Changes in Stockholders' Equity (Deficiency
In Assets) 5 - 6
Statements of Cash Flows 7 - 10
Notes to Financial Statements 11 - 34
<PAGE>
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
To the Board of Directors and Stockholders
Metropolitan Health Networks, Inc. and Subsidiaries
West Palm Beach, Florida
We have audited the accompanying consolidated balance sheets of Metropolitan
Health Networks, Inc. and Subsidiaries as of December 31, 1999 and June 30,
1999, and the related consolidated statements of operations, changes in
stockholders' equity (deficiency in assets), and cash flows for the six month
period ended December 31, 1999 and each of the two years in the period ended
June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Metropolitan Health
Networks, Inc. and Subsidiaries as of December 31, 1999 and June 30, 1999, and
the results of their operations and their cash flows for the six month period
ended December 31, 1999 and each of the two years in the period ended June 30,
1999, in conformity with generally accepted accounting principles. We have not
audited the consolidated statements of operations and cash flows for the six
months ended December 31, 1998. Accordingly, we do not express an opinion or any
other form of assurance on them.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
has sustained substantial operating losses and negative cash flows from
operations since inception. In the absence of achieving profitable operations
and positive cash flows from operations or obtaining additional debt or equity
financing, the Company may have difficulty meeting current and long-term
obligations. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence.
KAUFMAN, ROSSIN & CO., P.A.
June 16, 2000, except for the fourth paragraph of Practices of Note 3, which is
August 2, 2000
Miami, Florida
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 1999
================================================================================
<TABLE>
<CAPTION>
ASSETS December 31, 1999 June 30, 1999
====================================================================================================
<S> <C> <C>
CURRENT ASSETS
Accounts receivable, net of allowances of $4,829,137 and
$5,042,376, respectively $ 3,001,661 $ 3,459,245
Other current assets (Note 6) 257,699 96,349
----------------------------------------------------------------------------------------------------
Total current assets 3,259,360 3,555,594
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$815,516 and $2,673,841, respectively (Note 4) 1,228,416 4,316,128
GOODWILL, net of accumulated amortization of $249,555 and
$958,722, respectively (Note 1) 2,394,891 3,842,840
INTANGIBLE ASSETS, net of accumulated amortization of $91,145
and $36,458, respectively 127,605 182,292
OTHER ASSETS 23,308 47,893
----------------------------------------------------------------------------------------------------
$ 7,033,580 $ 11,944,747
====================================================================================================
LIABILITIES AND DEFICIENCY IN ASSETS
====================================================================================================
CURRENT LIABILITIES
Accounts payable $ 2,608,950 $ 2,529,884
Advances from HMO 1,596,000 1,089,000
Due to related parties (Note 10) 95,705 300,144
Accrued expenses 2,793,466 1,665,399
Medical costs payable 98,907 357,940
Line of credit (Note 8) 1,520,668 132,231
Unearned revenue 125,000 --
Current maturities of capital lease obligations (Note 7) 378,094 848,120
Current maturities of long-term debt (Note 9) 6,366,181 5,764,221
----------------------------------------------------------------------------------------------------
Total current liabilities 15,582,971 12,686,939
CAPITAL LEASE OBLIGATIONS (NOTE 7) 449,515 2,280,705
LONG-TERM DEBT (NOTE 9) 293,700 477,902
COMMITMENTS AND CONTINGENCIES (NOTE 14)
DEFICIENCY IN ASSETS (NOTE 12) (9,292,606) (3,500,799)
----------------------------------------------------------------------------------------------------
$ 7,033,580 $ 11,944,747
====================================================================================================
</TABLE>
See accompanying notes.
2
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
<TABLE>
<CAPTION>
Unaudited
1999 1998
=========================================================================================
<S> <C> <C>
REVENUES $ 10,020,795 $ 8,377,103
-----------------------------------------------------------------------------------------
EXPENSES
Direct medical costs 6,455,678 2,506,228
Payroll, payroll taxes and benefits 3,280,791 3,503,208
Depreciation and amortization 918,145 911,934
Bad debt expense 54,418 630,184
Rent and leases 1,225,910 672,061
Consulting expense 304,283 157,188
Interest 300,022 416,813
General and administrative 1,290,497 2,211,194
-----------------------------------------------------------------------------------------
Total expenses 13,829,744 11,008,810
-----------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (3,808,949) (2,631,707)
-----------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Loss on disposal of assets (Note 3) (2,185,537) (9,158)
Other -- (79,647)
-----------------------------------------------------------------------------------------
Total other income (expense) (2,185,537) (88,805)
-----------------------------------------------------------------------------------------
NET LOSS $ (5,994,486) $ (2,720,512)
=========================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,738,757 6,501,185
=========================================================================================
NET LOSS PER SHARE, basic and diluted $ (0.55) $ (0.42)
=========================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
================================================================================
<TABLE>
<CAPTION>
1999 1998
=========================================================================================
<S> <C> <C>
REVENUES $ 18,501,497 $ 14,025,264
-----------------------------------------------------------------------------------------
EXPENSES
Direct medical costs 7,346,978 1,294,347
Payroll, payroll taxes and benefits 7,046,342 7,114,017
Depreciation and amortization 1,870,774 1,415,515
Bad debt expense 1,060,856 1,723,425
Rent and leases 1,955,352 1,159,356
Consulting expense 1,000,608 202,000
Interest 683,203 658,048
General and administrative 5,379,189 5,062,746
-----------------------------------------------------------------------------------------
Total expenses 26,343,302 18,629,454
-----------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (7,841,805) (4,604,190)
-----------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Loss on Primedica (Note 3) (2,206,448) --
Loss on disposal of assets (Note 3) (362,003) (330,000)
Other 90,440 (232,135)
-----------------------------------------------------------------------------------------
Total other income (expense) (2,478,011) (562,135)
-----------------------------------------------------------------------------------------
NET LOSS $(10,319,816) $ (5,166,325)
=========================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 7,185,142 5,597,803
=========================================================================================
NET LOSS PER SHARE, basic and diluted $ (1.44) $ (0.92)
=========================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN
ASSETS)
SIX MONTH PERIOD ENDED DECEMBER 31, 1999
================================================================================
<TABLE>
<CAPTION>
Common
Preferred Preferred Stock Common
Shares Stock Shares Stock
================================================================================================================================
<S> <C> <C> <C> <C>
BALANCES - JUNE 30, 1999 5,500 $ 1,000,000 9,351,765 $ 9,352
Conversion of preferred shares into common shares (Note 12) (500) (500,000) 2,300,000 2,300
Shares issued in lieu of compensation -- -- 62,700 63
Shares issued for consulting services -- -- 29,000 29
Shares issued for loans -- -- 70,000 70
Shares issued for director's fees -- -- 11,500 11
Shares issued for interest expense and late fees -- -- 130,000 130
Contingent shares issued in connection with acquisition -- -- 156,923 157
Dividends on preferred stock (Note 12) -- -- -- --
Issuance of options in lieu of compensation (Note 13) -- -- -- --
Net loss -- -- -- --
--------------------------------------------------------------------------------------------------------------------------------
BALANCES - DECEMBER 31, 1999 5,000 $ 500,000 12,111,888 $ 12,112
================================================================================================================================
<CAPTION>
Additional
Paid-in
Capital Deficit Total
=====================================================================================================================
<S> <C> <C> <C>
BALANCES - JUNE 30, 1999 $ 12,781,486 $(17,291,637) $ (3,500,799)
Conversion of preferred shares into common shares (Note 12) 497,700 -- --
Shares issued in lieu of compensation 19,770 -- 19,833
Shares issued for consulting services 5,686 -- 5,715
Shares issued for loans 34,930 -- 35,000
Shares issued for director's fees 5,681 -- 5,692
Shares issued for interest expense and late fees 46,090 -- 46,220
Contingent shares issued in connection with acquisition (157) -- --
Dividends on preferred stock (Note 12) -- (6,986) (6,986)
Issuance of options in lieu of compensation (Note 13) 97,205 -- 97,205
Net loss -- (5,994,486) (5,994,486)
---------------------------------------------------------------------------------------------------------------------
BALANCES - DECEMBER 31, 1999 $ 13,488,391 $(23,293,109) $ (9,292,606)
=====================================================================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN
ASSETS)
YEARS ENDED JUNE 30, 1999 AND 1998
================================================================================
<TABLE>
<CAPTION>
Common
Preferred Preferred Stock Common
Shares Stock Shares Stock
===================================================================================================================================
<S> <C> <C> <C> <C>
BALANCES - JUNE 30, 1997 -- $ -- 5,210,825 $ 5,211
Issuance of series A Preferred Stock (Note 12) 5,000 500,000 -- --
Issuance of series B Preferred Stock (Note 12) 1,200 1,200,000 -- --
Issuances of common stock -- -- 625,142 625
Issuance of options in lieu of compensation -- -- -- --
Exercise of options (Note 13) -- -- 470,602 471
Conversion of securities available for sale to the trading
account -- -- -- --
Dividends on preferred stock (Note 12) -- -- -- --
Net loss -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
BALANCES - JUNE 30, 1998 6,200 1,700,000 6,306,569 6,307
Conversion of preferred shares into common shares (Note 12) (700) (700,000) 1,297,305 1,297
Returned or retired shares (Note 3) -- -- (114,354) (114)
Shares issued in lieu of compensation -- -- 426,427 426
Shares issued for consulting services -- -- 540,500 541
Shares issued for marketing services -- -- 250,000 250
Shares issued for legal services -- -- 25,000 25
Shares issued for director's fees -- -- 18,000 18
Shares issued for non-compete agreement -- -- 125,000 125
Contingent shares issued in connection with acquisition -- -- 225,000 225
Exercise of options (Note 13) -- -- 252,318 252
Dividends on preferred stock (Note 12) -- -- -- --
Options granted for services rendered (Note 13) -- -- -- --
Issuance of options in lieu of compensation (Note 13) -- -- -- --
Net loss -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
BALANCES - JUNE 30, 1999 5,500 $ 1,000,000 9,351,765 $ 9,352
===================================================================================================================================
<CAPTION>
Additional Unrealized Gain On
Paid-in Securities
Capital Deficit Available For Sale Total
====================================================================================================================================
<S> <C> <C> <C> <C>
BALANCES - JUNE 30, 1997 $ 8,675,586 $ (1,747,993) $ 40,916 $ 6,973,720
Issuance of series A Preferred Stock (Note 12) (40,000) -- -- 460,000
Issuance of series B Preferred Stock (Note 12) (84,946) -- -- 1,115,054
Issuances of common stock 1,768,853 -- -- 1,769,478
Issuance of options in lieu of compensation 127,000 -- -- 127,000
Exercise of options (Note 13) 3,959 -- -- 4,430
Conversion of securities available for sale to the trading
account -- -- (40,916) (40,916)
Dividends on preferred stock (Note 12) -- (10,000) -- (10,000)
Net loss -- (5,166,325) -- (5,166,325)
------------------------------------------------------------------------------------------------------------------------------------
BALANCES - JUNE 30, 1998 10,450,452 (6,924,318) -- 5,232,441
Conversion of preferred shares into common shares (Note 12) 698,703 -- -- --
Returned or retired shares (Note 3) (276,594) -- -- (276,708)
Shares issued in lieu of compensation 428,159 -- -- 428,585
Shares issued for consulting services 228,509 -- -- 229,050
Shares issued for marketing services 127,000 -- -- 127,250
Shares issued for legal services 81,225 -- -- 81,250
Shares issued for director's fees 6,282 -- -- 6,300
Shares issued for non-compete agreement 218,625 -- -- 218,750
Contingent shares issued in connection with acquisition (225) -- -- --
Exercise of options (Note 13) 89,748 -- -- 90,000
Dividends on preferred stock (Note 12) -- (47,503) -- (47,503)
Options granted for services rendered (Note 13) 576,310 -- -- 576,310
Issuance of options in lieu of compensation (Note 13) 153,292 -- -- 153,292
Net loss -- (10,319,816) -- (10,319,816)
------------------------------------------------------------------------------------------------------------------------------------
BALANCES - JUNE 30, 1999 $ 12,781,486 $(17,291,637) $ -- $ (3,500,799)
====================================================================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS PERIODS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
<TABLE>
<CAPTION>
Unaudited
1999 1998
=================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,994,486) $(2,720,512)
-----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 918,145 911,934
Loss on disposal of assets 2,185,537 --
Provision for bad debts 54,418 630,184
Stock options granted in lieu of compensation 97,205 --
Stock issued for professional services and compensation 31,240 --
Stock issued for loans, interest and late fees 46,220 --
Changes in operating assets and liabilities:
Accounts receivable 403,166 1,079,356
Trading securities -- (204)
Other current assets (209,951) (272,261)
Other assets 24,585 (72,092)
Accounts payable and accrued expenses 1,130,062 1,331,322
Unearned revenue 125,000 --
Medical claims payable -- 13,626
-----------------------------------------------------------------------------------------------------------------
Total adjustments 4,805,627 3,621,865
-----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,188,859) 901,353
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash consideration paid for companies acquired (200,000) --
Capital expenditures (109,181) (360,542)
-----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (309,181) (360,542)
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit facilities 1,388,437 (980,685)
Repayments of notes payable (484,267) --
Borrowings on note payable 847,025 --
Net repayments of capital lease obligations (360,155) (285,855)
Net proceeds from issuance of common stock -- (158,719)
Advances from HMO 107,000 --
-----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,498,040 (1,425,259)
-----------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS -- (884,448)
CASH AND CASH EQUIVALENTS - BEGINNING -- 916,464
-----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - ENDING $ -- $ 32,016
=================================================================================================================
</TABLE>
See accompanying notes.
7
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE SIX MONTHS PERIODS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
<TABLE>
<CAPTION>
Unaudited
1999 1998
===============================================================================================================
<S> <C> <C>
Supplemental Disclosures:
---------------------------------------------------------------------------------------------------------------
Interest paid $ 221,000 $ 384,000
---------------------------------------------------------------------------------------------------------------
Income taxes paid $ -- $ --
---------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Non-cash Investing and Financing Activities (Note 3)
---------------------------------------------------------------------------------------------------------------
Purchase price in excess of net assets acquired $ 820,000 $ --
---------------------------------------------------------------------------------------------------------------
Conversion of preferred shares into common stock $ 500,000 $ --
---------------------------------------------------------------------------------------------------------------
Fair value of assets disposed of in connection with sales $4,694,944 $ --
---------------------------------------------------------------------------------------------------------------
Fair value of liabilities disposed of in connection with sales $2,509,407 $ --
---------------------------------------------------------------------------------------------------------------
Common stock issued for non-compete agreement $ -- $ 218,750
---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
8
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
================================================================================
<TABLE>
<CAPTION>
1999 1998
===================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,319,816) $ (5,166,325)
-------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,702,034 1,415,515
Loss on Primedica 2,206,448 --
Realized loss on sales of securities 131,452 22,677
Change in unrealized gain on trading securities (85,314) --
Loss on sale of property and equipment 14,339 --
Loss on disposal of assets 362,003 --
Provision for bad debts 1,060,856 1,723,425
Deferred costs charged to operations -- 260,364
Amortization of discount on note payable 168,740 36,201
Stock options granted in lieu of compensation 153,292 127,000
Stock options granted for professional services 576,310 --
Stock issued in lieu of compensation 428,585 --
Stock issued for professional services 443,850 350,632
Changes in operating assets and liabilities:
Accounts receivable 1,330,769 (1,577,900)
Trading securities -- 240,072
Other current assets 145,865 (92,296)
Other assets 85,436 20,461
Accounts payable and accrued expenses 2,044,599 1,060,358
Due to related parties 300,144 --
Medical claims payable (487,597) 466,990
-------------------------------------------------------------------------------------------------------------------
Total adjustments 10,581,811 4,053,499
-------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 261,995 (1,112,826)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred acquisition costs 171,890 (110,016)
Repayment (issuance) of notes receivable 170,000 (170,000)
Cash consideration paid for companies acquired -- (346,500)
Cash balances of companies acquired -- 46,626
Capital expenditures (908,712) (371,815)
-------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (566,822) (951,705)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit facilities (1,543,694) 1,023,399
Repayments of notes payable (82,044) (717,547)
Borrowings on note payable 420,017 177,413
Repayments of capital lease obligations (584,916) (704,641)
Loan acquisition cost -- (45,000)
Proceeds from exercise of stock options 90,000 4,430
Net proceeds from issuance of preferred stock -- 1,575,054
Advances from HMO 1,089,000 --
-------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (611,637) 1,313,108
-------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (916,464) (751,423)
CASH AND CASH EQUIVALENTS - BEGINNING 916,464 1,667,887
-------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - ENDING $ -- $ 916,464
===================================================================================================================
</TABLE>
See accompanying notes.
9
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED JUNE 30, 1999 AND 1998
================================================================================
<TABLE>
<CAPTION>
1999 1998
===============================================================================================================
<S> <C> <C>
Supplemental Disclosures:
Interest paid $ 633,000 $ 560,000
---------------------------------------------------------------------------------------------------------------
Income taxes paid $ -- $ --
---------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Non-cash Investing and Financing Activities (Note 3)
---------------------------------------------------------------------------------------------------------------
Common stock issued in connection with acquisitions $ -- $1,291,846
---------------------------------------------------------------------------------------------------------------
Issuance of notes payable in connection with acquisitions $ 37,801 $2,856,123
---------------------------------------------------------------------------------------------------------------
Fair value of assets received in connection with acquisitions $ 581,810 $2,200,151
---------------------------------------------------------------------------------------------------------------
Fair value of liabilities assumed in connection with acquisitions $ 454,054 $1,060,270
---------------------------------------------------------------------------------------------------------------
Capital lease obligations incurred on purchases of equipment $ 502,808 $ 221,673
---------------------------------------------------------------------------------------------------------------
Dividends accrued but not paid $ 47,503 $ 10,000
---------------------------------------------------------------------------------------------------------------
Common stock issued for non-compete agreement $ 218,750 $ --
---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
10
<PAGE>
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of
Metropolitan Health Networks, Inc. and all majority owned subsidiaries,
the most significant of which are Magnetic Imaging Systems I, Ltd. and
Nuclear Magnetic Imaging, Inc. (collectively MIS), Datascan of Florida,
Inc. (Datascan), Advanced Healthcare Consultants, Inc. (Advanced),
Family Medical Plaza, Inc. and several physician practices. The
consolidated group is referred to, collectively, as the Company. All
significant intercompany balances and transactions have been eliminated
in consolidation.
Organization and Business Activity
The Company was incorporated in January 1996, under the laws of the
State of Florida for the purpose of acquiring and operating health care
related businesses. The Company operates in South Florida, and during
the periods ended December 31, 1999 and June 1999 and 1998, owned and
operated a radiology practice, a magnetic resonance imaging (MRI)
outpatient center, a diagnostic testing company and various general
medical practice offices. During the six months ended December 31, 1999
the Company sold the radiology practice and magnetic resonance imaging
(MRI) outpatient center (see Note 3). The Company and certain of the
general medical practices operate under capitation agreements with a
national health maintenance organization (HMO). Commencing in 1999, the
Company entered into additional capitation agreements with the HMO in
locations where it did not have owned medical practices and in
connection therewith, began providing medical care to certain patients
through non-owned medical practices. (See accounts receivable and
revenue recognition.) The Company also provided medical billing
services to third party medical related businesses, however, as these
services were not significant, the Company is deemed to be operating in
one segment.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. From time to
time, the Company maintains cash balances with financial institutions
in excess of federally insured limits.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major
betterments and additions are charged to the asset accounts, while
replacements, maintenance and repairs which do not extend the lives of
the respective assets are charged to expense currently.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows
is less than the carrying amount of the asset, a loss is recognized for
the difference between the fair value and carrying value of the asset.
11
<PAGE>
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
================================================================================
Depreciation and Amortization
Depreciation and amortization of property and equipment, including
property under capital leases, is computed using straight-line methods
over the estimated useful lives of the assets. The range of useful
lives is as follows:
Machinery and equipment 5 - 7 years
Computer and office equipment 5 - 7 years
Furniture and fixtures 5 - 7 years
Auto equipment 5 years
Leasehold improvements 5 years
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses for the periods presented. Actual results could differ
from those estimates.
The allowance for doubtful accounts is an estimate which is established
through charges to earnings for estimated uncollectible amounts.
Management's judgment in determining the adequacy of the allowance is
based upon several factors which include, but are not limited to, the
nature and volume of the accounts receivable and management's judgment
with respect to current economic conditions and their impact on the
receivable balances. It is reasonably possible the Company's estimate
of the allowance for doubtful accounts could change in the near term.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires that the Company disclose
estimated fair values for its financial instruments. The following
methods and assumptions were used by the Company in estimating the fair
values of each class of financial instruments disclosed herein:
Cash and cash equivalents - The carrying amount approximates
fair value because of the short maturity of those instruments.
Line of credit facilities, capital lease obligations,
long-term debt - The fair value of line of credit facilities,
capital lease obligations, long-term debt and notes payable to
redeemed partners are estimated using discounted cash flows
analyses based on the Company's incremental borrowing rates
for similar types of borrowing arrangements. At December 31,
1999 and June 30, 1999, the fair values approximate the
carrying values.
12
<PAGE>
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
================================================================================
Net Loss Per Share
Net loss per share is computed in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, based on the weighted
average number of common shares outstanding. Outstanding stock options
(see Note 13) were not considered in the calculation of weighted
average number of common shares outstanding, as their effect would have
been antidilutive.
Accounts Receivable and Revenue Recognition
The Company recognizes revenues, net of contractual allowances, as
medical services are provided to patients. These services are typically
billed to patients, Medicare, Medicaid, health maintenance
organizations and insurance companies. The Company provides an
allowance for uncollectible amounts and for contractual adjustments
relating to the difference between standard charges and agreed upon
rates paid by certain third party payors.
The Company is a party to certain managed care contracts and provides
medical care to its patients through owned and non-owned medical
practices. Accordingly, revenues under these contracts are reported as
Management Service Organization (MSO) revenues, and the cost of
provider services under these contracts are not included as a deduction
to net revenues of the Company but are reported as an operating
expense. In connection with MSO operations, the Company is exposed to
losses to the extent of its share (100% for Medicare Part B and 50% for
Medicare Part A) of deficits, if any on its owned and non-owned managed
medical practices.
Revenues for the six month period ended December 31, 1999 and years
ended June 30, were as follows:
<TABLE>
<CAPTION>
Years Ended June 30
Six Months Ended ----------------------------
December 31, 1999 1999 1998
================================================================================
<S> <C> <C> <C>
Patient revenues, net $ 3,170,405 $ 9,606,854 $12,116,028
MSO revenues, net 6,838,390 8,862,826 1,643,462
Billing service revenues, net 12,000 31,817 265,774
--------------------------------------------------------------------------------
$10,020,795 $18,501,497 $14,025,264
================================================================================
</TABLE>
Advances from HMO
Advances represent amounts advanced from the HMO to the Company. These
advances are due on demand and are being repaid via offsets to future
revenues earned from the HMO.
13
<PAGE>
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
================================================================================
Goodwill
In connection with its acquisitions of physician and ancillary
practices, the Company has recorded goodwill of $2,644,446 and
$4,801,562 as of December 31 and June 30, 1999, respectively, which is
the excess of the purchase price over the fair value of the net assets
acquired. The goodwill is attributable to the general reputation of
these businesses in the communities they serve, the collective
experience of the management and other employees, contracts with health
maintenance organizations, relationships between the physicians and
their patients, patient lists and other similar intangible assets. The
Company evaluates the underlying facts and circumstances related to
each acquisition in establishing amortization periods for the related
goodwill. The goodwill related to current and prior year's acquisitions
is being amortized on a straight-line basis over 10 years.
The Company continuously evaluates whether events have occurred or
circumstances exist which impact the recoverability of the carrying
value of long-lived assets and related goodwill, pursuant to Statement
of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of."
Trading Securities
The Company considers all investments in marketable equity securities
acquired in its trading account as Trading Securities. Accordingly,
unrealized gains and losses are included as a component of earnings.
Realized gains or losses are computed based on specific identification
of the securities sold.
Income Taxes
The Company accounts for income taxes according to Statement of
Financial Accounting Standards No. 109, which requires a liability
approach to calculating deferred income taxes. Under this method, the
Company records deferred taxes based on temporary taxable and
deductible differences between the tax bases of the Company's assets
and liabilities and their financial reporting bases. A valuation
allowance is established when it is more likely than not that some or
all of the deferred tax assets will not be realized.
Reclassification
Certain amounts in the unaudited financial statements for the six month
period ended December 31, 1998 have been reclassified to conform with
the December 31, 1999 financial statement presentation.
14
<PAGE>
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
================================================================================
New Accounting Pronouncements
During 1998, the Company adopted Financial Accounting Standards Board
("FASB") statement No. 131, "Disclosure about Segments of an Enterprise
and Related Information." The Company has considered its operations and
has determined that it operates in a single operating segment for
purposes of presenting financial information and evaluating
performance. As such, the accompanying financial statements present
information in a format that is consistent with the financial
information used by management for internal use.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities.
Among other provisions, SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging
activities. It also requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position
and measure those instruments at fair value. SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
Management believes the adoption of SFAS No. 133 will not have a
material effect on the Company's consolidated financial statements.
NOTE 2. GOING CONCERN
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. The Company has
sustained substantial operating losses and negative cash flows from
operations since inception. In addition, the Company has had difficulty
in meeting its current and long-term obligations.
The Company's ability to continue as a going concern is dependent upon
achieving profitable operations and positive cash flows from operations
or obtaining additional debt or equity financing. These conditions
raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
In addition, the Company is not in compliance with Securities and
Exchange Commission and NASD reporting requirements with respect to
annual, quarterly and certain disclosure related filing requirements.
In this regard, should the Company remain deficient in its filing
requirements, it may lose its eligibility for quotation and be subject
to removal from the OTCBB.
15
<PAGE>
NOTE 3. ACQUISITIONS AND DISPOSALS
MIS
Effective August 31, 1996, the Company acquired MIS for $2,426,984. The
purchase price consisted of 585,000 shares of the Company's common
stock (valued at $3 per share), $575,923 of notes payable, and related
acquisition costs of $106,061. The acquisition was accounted for as a
purchase, and accordingly, the purchase price was allocated to the net
assets acquired based on their estimated fair market values. As a
result of this acquisition, $2,513,627 was allocated to goodwill.
In addition to the purchase price the acquisition agreement provided
for contingent consideration of 200,000 shares of common stock if MIS
achieved earnings before interest, income taxes, depreciation and
amortization ("EBITDA") in excess of $1,200,000 for the year ended June
30, 1997 or in excess of $1,500,000 for the year ended June 30, 1998, a
total maximum contingent consideration of 400,000 shares, plus
additional shares issuable in connection with a price guarantee based
upon the company's pre-tax earnings at the first and second anniversary
of the transaction. The Company was not liable for any contingent
consideration associated with its acquisition of MIS. Effective
December 18, 1999, MIS was sold to its former owner in exchange for the
settlement of all outstanding litigation with its former owner, the
discharge of a note payable of approximately $185,000 and other amounts
due to the former owner. Also, the former owner agreed to assume
certain liabilities of MIS. In connection with this disposal, the
Company recognized a loss of approximately $968,000 during the six
months ended December 31, 1999.
Datascan
Effective September 30, 1996, the Company acquired Datascan for
$1,170,529. The purchase price consisted of 300,000 shares of the
Company's common stock (valued at $3 per share), related acquisition
costs of $42,529 and contingent consideration of 100,000 shares of the
Company's common stock (valued at $2.28) issued on June 30, 1997. The
acquisition was accounted for as a purchase, and accordingly, the
purchase price was allocated to the net assets acquired based on their
estimated fair market value. As a result of this acquisition, $429,463
was allocated to goodwill. Effective December 31, 1999, Datascan was
sold to its former owner in exchange for the settlement of all
outstanding litigation and termination of all Executive Employment
Agreements and all stock options held by the former owner. The Buyer
also assumed certain third party obligations of the Company. In
connection with this disposal, the Company recognized a loss of
approximately $1,163,000 during the six months ended December 31, 1999.
16
<PAGE>
================================================================================
NOTE 3. ACQUISITIONS AND DISPOSALS (Continued)
================================================================================
Wand
Effective March 12, 1997, the Company acquired a medical practice
(Wand) for $363,015. The purchase price consisted of a cash payment of
$120,000, 75,000 shares of the Company's common stock (valued at $3 per
share) and related acquisition costs of $18,015. The acquisition was
accounted for as a purchase, and accordingly, the purchase price was
allocated to the net assets acquired based on their estimated fair
market value. As a result of this acquisition, $10,525 was allocated to
goodwill. Effective July 1, 1998, Wand was sold to its former owner in
exchange for the return of the initial 75,000 shares of the Company's
common stock. Additionally, the buyer assumed certain liabilities of
Wand. In connection with this sale, the Company recognized a loss of
approximately $200,000, which is included in loss on disposals of
assets in the accompanying statement of operations for the year ended
June 30, 1999.
Certain Assets of IFHC
Effective October 15, 1996, the Company acquired certain assets of
IFHC. The purchase price consisted of 50,000 shares of the Company's
common stock (valued at $3 per share) and the issuance of a 8% note
payable in the amount of $150,000. During 1998 the Company discontinued
the operations of IFHC. In connection therewith, certain assets of IFHC
were sold in exchange for a $35,000 note receivable. Total amounts
charged to operations in connection with closing these facilities
totalled approximately $330,000 for the year ended June 30, 1998.
GMA
Effective July 1, 1997, the Company purchased all of the outstanding
common stock of GMA for $1,720,306. In exchange for the stock of GMA,
the Company paid $300,000 cash, 216,154 shares of the Company's common
stock (valued at $4.37), entered into a note payable of $400,000 with
the former shareholder of GMA, and incurred related acquisition costs
of $75,713. The acquisition was accounted for as a purchase, and
accordingly, the purchase price was allocated to the net assets
acquired based on their estimated fair market value. The results of
operations beginning July 1, 1997 are included in the Company's
statement of operations. As a result of this acquisition, $98,475 was
allocated to goodwill.
17
<PAGE>
================================================================================
NOTE 3. ACQUISITIONS AND DISPOSALS (Continued)
================================================================================
In addition to the purchase consideration, the acquisition agreement provides
for two types of contingent consideration: 1) If the EBITDA of GMA for the years
ended June 30, 1998 and 1999 equals or exceeds 80% of GMA's EBITDA for the
twelve months ended June 30, 1997 (the "Targeted Amount"), there shall be
released from escrow 104,615 and 52,308 additional shares, respectively, of the
common stock of the Company. In the event, however, that the EBITDA is less than
the Targeted Amount, the seller of GMA is entitled to receive additional shares
of the Company, as determined based upon a sliding scale down to 60%. The
Company was not liable for contingent consideration under this provision at June
30, 1998 or 1999; 2) If the gross proceeds from the sale of up to 200,000 shares
of the Company's common stock issued to the former owner of GMA (the Seller)
amounted to less then $6.50 per share, the Company must make up the deficiency
in cash. In June 1999, the Company issued 225,000 shares of its common stock
(valued at $1.65 per share) to the Seller in full satisfaction of this
contingent consideration provision. The Seller was entitled to sell 25,000 share
blocks monthly, during the period July 1, 1999 through February 12, 2000.
The Practices
Effective April 1, 1998, the Company acquired two physician practices
(the Practices) from Primedica Healthcare, Inc. (Primedica) for
$2,431,123. The purchase price consisted of a 7.5% note payable of
$3,500,000, which is amortized over 20 years, with a balloon payment
due on April 1, 2003 (the Promissory Note). The Company discounted this
Promissory Note $1,068,877 based upon the Company's incremental
borrowing rate at April 1, 1998 (16%) (see Note 9). The acquisition was
accounted for as a purchase, and accordingly, the purchase price was
allocated to the net assets acquired based on their estimated fair
market values. The results of operations beginning April 1, 1998 are
included in the Company's statement of operations. As a result of this
acquisition, $1,588,349 was allocated to goodwill.
In connection with this acquisition, a Repurchase Election Agreement
was signed, whereby Primedica may be required to repurchase the
Practices at the end of five years in exchange for extinguishing the
Company's further obligations under the note payable, provided certain
conditions are met, among the most significant of which is the
requirement that the Company be in compliance with the terms of the
Promissory Note. Additionally, Primedica may elect not to be liable to
repurchase the Practices if the net revenue derived from the purchased
assets exceeds $6,000,000.
During 1999, the Company defaulted on the Promissory Note and a
judgement was entered against the Company for $4,745,370. Accordingly,
the Promissory Note was increased to $4,745,370, and a loss of
$2,206,448 was recorded in the result of operations for the year ended
June 30, 1999.
18
<PAGE>
================================================================================
NOTE 3. ACQUISITIONS AND DISPOSALS (Continued)
================================================================================
Subsequent to June 30, 1999, the Company and Primedica reached a
settlement whereby the Company agreed to pay Primedica $1,513,235,
subject to a provision stating that if timely payments were not
received by Primedica, the Company would be liable for $4,745,364. On
October 26, 1999, the Company was notified by Primedica that it was in
default of this settlement agreement. Effective August 2, 2000 the
parties entered into a second stipulation for forbearance providing for
a discount on amounts owed of $2,000,000 to $2,500,000 contingent upon
timely weekly payments of $25,000 to Primedica. In the event of a
default by the Company in connection with the timely required payments,
the Company shall be obligated to pay the full amount of the
$4,745,364. At December 31, 1999 the Company owed Primedica $4,524,462,
which is included in current maturities of long-term debt.
Disposal of Dr. Glickman's Practice
Effective January 31, 1999, one of the Company's physician practices
was sold to its former owner for $20,000 cash, the cancellation of a
note payable to the former owner of $25,000 and the return of the
initial 19,677 shares of the Company's common stock and 19,677
additional shares held in escrow. In connection with the disposal, the
Company incurred a loss of approximately $142,000, which is included in
loss on disposal of assets in the accompanying consolidated statement
of operations for the year ended June 30, 1999.
Family Medical Plaza, Inc.
Pursuant to an asset purchase agreement effective December 1, 1998, the
Company acquired certain assets and liabilities of Family Medical Plaza
Inc. The purchase price consisted of assumed liabilities of
approximately $67,000 and the issuance of an 8% promissory note for
approximately $38,000. The acquisition was accounted for as a purchase,
and accordingly, the purchase price was allocated to the net assets
acquired based on their estimated fair market values. The results of
operations beginning December 1, 1998 are included in the Company's
statement of operations. As a result of this acquisition $12,622 was
recorded as goodwill.
Advanced Healthcare, Inc.
Pursuant to an asset purchase agreement effective March 17, 1999, the
Company acquired all operating assets and certain liabilities of
Advanced Healthcare, Inc. for $512,000. The purchase price consisted of
assumed liabilities of approximately $387,000 and payments of
approximately $90,000 in cash and 70,000 shares of the Company's common
stock (valued at $0.50 per share). At June 30, 1999, the shares were
held in escrow and subsequently were released from escrow and issued.
The acquisition was accounted for as a purchase, and accordingly, the
purchase price was allocated to the net assets acquired based on their
estimated fair market values. The results of operations beginning March
17, 1999 are included in the Company's statement of operations. As a
result of this acquisition $125,000 was recorded as goodwill.
19
<PAGE>
================================================================================
NOTE 3. ACQUISITIONS AND DISPOSALS (Continued)
================================================================================
Pro Forma - Unaudited
Unaudited pro forma results of operations, assuming the acquisition of
Family Medical Plaza, Inc. and Advanced occurred as of the beginning of
the fiscal year ended June 30, 1999 and June 30, 1998, after giving
effect to certain adjustments such as the elimination of intercompany
transactions resulting from the acquisitions were as follows:
(Unaudited) (Unaudited)
June 30, 1999 June 30, 1998
-----------------------------------------------------------------------
Revenues $ 19,749,497 $ 14,025,264
Net loss $(10,947,319) $ (4,950,325)
Loss per share $ (1.52) $ (0.88)
The pro forma summary does not necessarily reflect the results of
operations as they would have been if the companies had constituted a
single entity during such periods.
Purchase of Dr. P. Sreekumar
Effective August 12, 1999, the Company acquired the medical practice of
Dr. P. Sreekumar. The purchase price consisted of assumed liabilities
of approximately $300,000, cash of $200,000 and the issuance of a note
payable in the amount of $300,000. The acquisition was accounted for as
a purchase, and accordingly, the purchase price was allocated to the
net assets acquired based on their estimated fair market values. The
results of operations beginning August 13, 1999 are included in the
Company's statement of operations for the six month period ended
December 31, 1999. As a result of this acquisition approximately
$700,000 was recorded as goodwill.
Purchase of Dr. Federgreen
Pursuant to an asset purchase agreement effective December 30, 1999,
the Company acquired certain assets of the Medical practice of Dr.
Federgreen. The purchase price consisted of a $120,000 note payable.
The acquisition was accounted for as a purchase and accordingly, the
purchase price was allocated to the net assets acquired based on their
estimated fair market values. The results of operations beginning
January 1, 2000 will be included in the Company's statement of
operations. As a result of this acquisition approximately $120,000 was
recorded as goodwill.
In addition to the purchase consideration, the Company is potentially
liable for additional consideration based on the amount of adjusted
pre-tax earnings for the first year of operations, on a scalable basis
up to $60,000 if earnings are $225,000 or above.
20
<PAGE>
================================================================================
NOTE 3. ACQUISITIONS AND DISPOSALS (Continued)
================================================================================
Pro Forma - Unaudited
Unaudited pro forma results of operations, assuming the acquisition of
the Sreekumar and Federgreen practices occurred as of the beginning of
the six months periods ended December 31, 1999 and 1998, after giving
effect to certain adjustments such as the elimination of intercompany
transactions resulting from the acquisitions were as follows:
(Unaudited) (Unaudited)
December 31, 1999 December 31, 1998
=======================================================================
Revenues $ 10,560,795 $ 8,917,103
Net loss $ (5,874,486) $ (2,600,512)
Loss per share $ (0.55) $ (0.40)
The pro forma summary does not necessarily reflect the results of
operations as they would have been if the companies had constituted a
single entity during such periods.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31, 1999 June 30, 1999
=======================================================================
Machinery and medical equipment $ 222,805 $ 1,694,841
Furniture and fixtures 531,721 254,154
Leasehold improvements 365,931 813,941
Computer and office equipment 425,259 492,589
Automobile equipment 61,380 160,086
-----------------------------------------------------------------------
1,607,096 3,415,611
Less accumulated depreciation (569,835) (1,346,948)
-----------------------------------------------------------------------
$ 1,037,261 $ 2,068,663
=======================================================================
21
<PAGE>
================================================================================
NOTE 4. PROPERTY AND EQUIPMENT (Continued)
================================================================================
Property and equipment under capital leases consisted of the following:
December 31, 1999 June 30, 1999
=======================================================================
Machinery and equipment $ -- $ 3,137,399
Computer and office equipment 436,836 436,959
-----------------------------------------------------------------------
436,836 3,574,358
Less accumulated amortization (245,681) (1,326,893)
-----------------------------------------------------------------------
191,155 2,247,465
-----------------------------------------------------------------------
$ 1,228,416 $ 4,316,128
=======================================================================
NOTE 5. INVESTMENTS
During the year ended June 30, 1999, the Company disposed of all
investments in trading securities. The change in unrealized gain (loss)
on trading securities for the years ended June 30, 1999 and 1998 was
$85,314 and $(131,817), respectively, and these changes are included in
other income (expense) in the consolidated statements of operations.
Net realized losses on sales of trading securities for the periods
ended June 30, 1999 and 1998 were $131,452 and $22,677, respectively,
and are included in other income (expense) in the consolidated
statements of operations.
NOTE 6. OTHER CURRENT ASSETS
Alpha Clinical Laboratory Agreement
During October 1999, the Company entered into a management agreement
with Alpha Clinical Laboratory (Alpha) to act as Alpha's management
company for a fee of 10% of Alpha's collections. Concurrently, the
Company entered into an unconditional and irrevocable option to
purchase or designate a third party to purchase at any time prior to
October 31, 2000 all of the outstanding common stock of Alpha. The
designated purchase price shall be three times the pre-tax profit for
the twelve-month period preceding the measurement date, and shall be
payable with the Company's common stock. Subsequent to October 1999,
the Company began advancing Alpha funds to support its operations. At
December 31, 1999 the Company had advanced approximately $210,000 to
Alpha which is included in other current assets in the accompanying
balance sheet. On May 12, 2000 these advances, plus additional advances
in 2000 were converted into a promissory note in the amount of
$512,000. The promissory note is payable upon demand, bears interest at
18% per annum, and is collateralized by substantially all of the assets
of Alpha.
22
<PAGE>
NOTE 7. CAPITAL LEASE OBLIGATIONS
The Company is obligated under capital leases relating to certain of
its property and equipment. Future minimum lease payments for capital
lease obligations as of December 31 were as follows:
2000 $ 466,539
2001 226,768
2002 141,394
2003 109,041
2004 75,461
-----------------------------------------------------------------------
1,019,203
Less amount representing interest 191,594
-----------------------------------------------------------------------
827,609
Less current maturities 378,094
-----------------------------------------------------------------------
$ 449,515
=======================================================================
NOTE 8. LINE OF CREDIT FACILITIES
In September 1997, the Company entered into an accounts receivable
funding program (the Program) with a financing company. The Program
allowed for advances to the Company of up to 85% of the expected
collections from third party payers on eligible accounts receivable of
GMA, as defined. Outstanding amounts under this credit facility are
collateralized by the eligible accounts receivable. The Program bears
interest at 12% and repayments are made directly through a lock box
arrangement. At June 30, 1999, $132,231 was outstanding under this
Program, which was repaid in July 1999 and the Program was canceled.
During June 1999, the Company entered into a three year line of credit
agreement providing for maximum borrowings not to exceed $2,000,000.
Any outstanding amounts under this credit facility are collateralized
by substantially all assets of the Company and the Company can borrow
up to 85% of eligible accounts receivable, as defined. This facility
bears interest at prime plus 4% (12.50% and 11.75% at December 31 and
June 30, 1999, respectively) and repayments are made directly through a
lock box arrangement. At December 31, 1999 $1,520,668 was outstanding
on this credit facility. At June 30, 1999 no amounts were outstanding
on this credit facility.
23
<PAGE>
NOTE 9. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
=================================================================================================
<S> <C> <C>
Promissory note to Primedica in connection with the
acquisition of assets on April, 1998; stated interest at
7.5%; original note balance of $3,500,000; note is in
default and carried at the default amount (See Note 3); due
on demand. $4,524,462 $4,745,370
Note payable to former owner of MIS; interest at 6.5%;
principal and interest payment of $213,000 was due April
1, 1998; unsecured; during 1998 and 1999 the note was in
default; interest was increased to 18%. Effective
December 18, 1999, the note was discharged as part of
the sale of MIS. (see Note 3). -- 185,000
Note payable to former owner of GMA and shareholder of the
Company; interest at 8%; payable in monthly installments
of $37,834 commencing in August, 1998; collateralized by
substantially all assets of GMA; prior to August 1998
the note required only monthly interest payments; at
December 31, 1999 and June 30, 1999 in default and; due
on demand. (Notes 10 and 16). 712,615 329,194
Note payable to former owner of Advanced; non-interest
bearing; due and payable on April 30, 1999; at June 30,
1999 in default and; due on demand. Repaid during the
six months ended December 31, 1999 for $40,000 and the
release of 70,000 shares held in escrow. -- 75,000
Note payable to HMO in connection with the Advanced
acquisition (see Note 3); interest at 6%, increased to
14% if note defaults; payable in 60 monthly installments
of $7,489 commencing May 1, 1999; collateralized by
accounts receivable and property and equipment. 371,620 377,223
Promissory note to former owner of Family Medical Plaza;
interest at 8%, due and payable on March 14, 1999; at
June 30, 1999 in default and due on demand
Subsequently, a settlement was reached, revised terms
reduce installments of $2,500 commencing on August 15,
2000. 45,000 37,756
</TABLE>
24
<PAGE>
================================================================================
NOTE 9. LONG-TERM DEBT (Continued)
================================================================================
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
=================================================================================================
<S> <C> <C>
Note payable to an individual; unsecured; stock-based
interest of 23%; due on demand. Repaid on July 1, 1999
in full with 45,500 shares of the Company's common stock
issued in lieu of interest. -- 200,000
Note payable to former officer of MIS in connection with
severance agreement; due on March 1, 1999; non-interest
bearing unless defaults occurs, then interest shall be
5% above the prime rate; at December 31, 1999 and June
30, 1999 in default and; due on demand. 170,000 195,000
Note payable to former owner of Federgreen practice;
non-interest bearing; payable in installments of $10,000
commencing January 2000. 120,000 --
Note payable to former owner of Sreekumar practice;
non-interest bearing; collateralized by the assets of the
practice; due and payable on August 12, 2000 in cash or
common stock. 300,000 --
Various installment notes payable; interest ranging from
9.7% to 10.13%; collateralized by various automobiles;
due September 2001 through August 2002. 44,545 44,545
Equipment notes payable to bank; interest ranging from 9.5%
to 10.48%; collateralized by medical testing equipment;
due August, 2000 through November, 2000. 53,035 53,035
Notes payable with interest at 17.5%, due in six monthly
installments beginning July 2000. The holders of these
notes have the right to convert the outstanding
obligations to common stock at $0.50 per share at any time. 125,000 --
Notes payable with interest at 11.5% payable in three
monthly installments of $10,000 beginning January 2000
and thereafter nine monthly installments of $19,688 and
collateralized by substantially all assets of the Company. 193,604 --
-------------------------------------------------------------------------------------------------
6,659,881 6,242,123
Less current maturities 6,366,181 5,764,221
-------------------------------------------------------------------------------------------------
Long-term debt $ 293,700 $ 477,902
=================================================================================================
</TABLE>
25
<PAGE>
================================================================================
NOTE 9. LONG-TERM DEBT (Continued)
================================================================================
Aggregate maturities of long-term debt for subsequent years as of
December 31, are as follows:
2000 $ 6,366,181
2001 90,615
2002 87,815
2003 85,344
2004 29,926
-----------------------------------------------------------------------
$ 6,659,881
=======================================================================
NOTE 10. RELATED PARTY TRANSACTIONS
Office Rent
The Company rented one of its office facilities from an individual who
is the former majority owner of MIS and director of the Company, and
another office facility from a company owned 50% by this individual.
Total rent expense related to these leases amounted to approximately
$105,000 for the six month period ended December 31, 1999 and $269,000
and $235,000 for the years ended June 30, 1999 and 1998. These leases
were canceled in December 1999 (See Note 3).
Due to Related Parties
During 1998, the Company entered into an agreement with an entity
controlled by the current President of the Company (Related
Consultant). Under the agreement, the Related Consultant provides
consulting services to the Company. Fees and expenses paid to the
Related Consultant for services amounted to approximately $60,000 for
the six month period ended December 31, 1999 and $142,000 for the year
ended June 30, 1999. As of December 31, 1999, approximately $85,000 was
owed to the Related Consultant.
For the six month period ended December 31, 1999 and the year ended
June 30, 1999, approximately $26,000 and $220,000, respectively of
Company expenses were paid by the former owner of GMA, who is presently
a shareholder of the Company. At December 31, 1999, $220,000 of these
amounts were included in long-term debt in the accompanying balance
sheet. At December 31, 1999 and June 30, 1999, approximately $26,000
and $220,000 of these amounts were included in due to related parties
in the accompanying balance sheet.
26
<PAGE>
NOTE 11. INCOME TAXES
The components of income taxes were as follows:
<TABLE>
<CAPTION>
Six months ended Year Ended Year Ended
December 31, 1999 June 30, 1999 June 30, 1998
=================================================================================================
<S> <C> <C> <C>
Current Benefit
Federal $ -- $ -- $ --
State -- -- --
Deferred Benefit
Federal 1,669,000 3,353,000 1,787,000
State 288,000 381,000 183,000
Increase in Valuation Allowance (1,957,000) (3,734,000) (1,970,000)
-------------------------------------------------------------------------------------------------
Income Tax Benefit $ -- $ -- $ --
=================================================================================================
</TABLE>
The effective tax rate for the year ended December 31, 1999, differed
from the federal statutory rate due to state income tax benefits of
approximately $288,000, an increase in the valuation allowance of
approximately $1,957,000 and permanent and other differences of
approximately $369,000.
The effective tax rate for the year ended June 30, 1999 differed from
the federal statutory rate due to state income tax benefits of
approximately $381,000, an increase in the valuation allowance of
approximately $3,734,000 and permanent and other differences of
approximately $156,000.
The effective tax rate for 1998 differed from the federal statutory
rate due to state income tax benefits of approximately $183,000, a net
increase in the valuation allowance of approximately $1,970,000, and
permanent and other differences of approximately $49,000.
The Company has net operating loss carryforwards totalling
approximately $23,200,000, expiring in various years through 2019.
27
<PAGE>
================================================================================
NOTE 11. INCOME TAXES (Continued)
================================================================================
At December 31, and June 30, 1999, approximate deferred tax assets and
liabilities were as follows:
December 31, 1999 June 30, 1999
=======================================================================
Deferred tax assets:
--------------------
Allowances for doubtful accounts $ 868,000 $ 1,560,000
Amortization -- 101,000
Net operating loss carryforward 8,707,000 6,619,000
-----------------------------------------------------------------------
Total deferred tax assets 9,575,000 8,280,000
-----------------------------------------------------------------------
Deferred tax liabilities:
-------------------------
Cash basis subsidiaries 674,000 914,000
Depreciation 14,000 436,000
-----------------------------------------------------------------------
Total deferred tax liabilities 688,000 1,350,000
-----------------------------------------------------------------------
Net deferred tax asset 8,887,000 6,930,000
Less valuation allowance (8,887,000) (6,930,000)
-----------------------------------------------------------------------
$ -- $ --
=======================================================================
NOTE 12. DEFICIENCY IN ASSETS
At December 31, 1999 and June 30, 1999, the Company has authorized 40,000,000
shares of par value $.001 common stock, with 12,111,888 and 9,351,765 shares
issued and outstanding, respectively. Additionally, the Company has authorized
10,000,000 shares of preferred stock.
The Company completed an initial public offering of its common stock
effective February 13, 1997, and issued 825,000 shares of common stock
at a price of $6.00 per share. As part of the offering, the Company
issued 1,650,000 redeemable common stock purchase warrants at a
purchase price of $0.15 per warrant plus 247,500 additional warrants
under an over-allotment agreement, also at $0.15 per warrant. Each
warrant entitled the holder to purchase one share of common stock at
$7.00 per share during the four year period commencing thirty days
after the effective date of the offering. The initial public offering
generated net proceeds to the Company of $3,428,645.
At December 31, 1999 and June 30, 1999, the Company has 3,517,625
warrants outstanding.
28
<PAGE>
================================================================================
NOTE 12 DEFICIENCY IN ASSETS (Continued)
================================================================================
During 1998, the Company completed two separate placements of
non-voting preferred stock. The Company has authorized 30,000 shares of
Series A preferred stock, par value $.001, of which 5,000 were issued
during the year ended June 30, 1998. Each share of Series A preferred
stock has a stated value of $100 and pays dividends equal to 10% of the
stated value per annum. At December 31, 1999 and June 30, 1999, the
aggregate and per share amounts of cumulative dividend arrearages were
approximately $150,000 and $30 and $92,000 and $18.40, respectively.
Each share of Series A preferred stock is convertible into shares of
common stock at the option of the holder at the lesser of 85% of the
average closing bid price of the common stock for the ten trading days
immediately preceding the conversion or $6.00. The Company has the
right to deny conversion of the Series A preferred stock, at which time
the holder shall be entitled to receive and the Company shall pay
additional cumulative dividends at 5% per annum, together with the
initial dividend rate to equal 15% per annum. For the year ended June
30, 1998, gross proceeds from this issuance amounted to $500,000, less
commissions and costs of $40,000. At December 31, 1999 and June 30,
1999 there were 5,000 series A preferred shares issued and outstanding.
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 a liquidating distribution before any distribution may be made
to holders of common stock of the Company.
The Company has also designated 7,000 shares of preferred stock as
Series B preferred stock, with a stated value of $1,000 per share.
During 1998, 1,200 shares of Series B preferred stock were issued.
Holders of the Series B preferred stock are entitled to receive,
whether declared or not, cumulative dividends equal to 5% per annum. At
December 31, 1999, the aggregate and per share amounts of cumulative
dividend arrearages was $57,503 and $114.81, respectively. Each share
of Series B preferred stock is convertible into such number of fully
paid and nonassessable shares of common stock as is determined by
dividing the stated value by the conversion price. The conversion price
shall be the lesser of the market price, as defined or $4.00. For the
year ended June 30, 1998, gross proceeds from the issuance of series B
preferred stock amounted to $1,200,000, less commissions and costs of
$84,946. From September 1998 to May 1999, 700 shares of series B
preferred stock were converted into 1,297,305 shares of the Company's
common stock at various prices. At June 30, 1999, there were 500 shares
of series B preferred stock issued and outstanding. During October
1999, the remaining 500 shares of series B preferred stock were
converted into 2,300,000 shares of the Company's common stock. There
were no series B preferred shares outstanding at December 31, 1999.
29
<PAGE>
NOTE 13. STOCK OPTIONS
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") in 1997. The Company has elected to
continue using Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" in accounting for employee stock
options. Accordingly, compensation expense has been recorded to the
extent that the market value of the underlying stock exceeded the
exercise price at the date of grant. For the six month period ended
December 31, 1999 compensation costs related to stock options amounted
to approximately $97,200. For the years ended June 30, 1999 and 1998,
compensation costs related to stock options amounted to approximately
$729,600 and $127,000, respectively.
Stock option activity for the six month period ended December 31, 1999
was as follows:
Number of Weighted Average
Options Exercise Price
-----------------------------------------------------------------------
Balance, June 30, 1999 2,383,842 $ 4.27
Granted during period 507,000 $ 0.37
Exercised and returned during period -- $ --
Forfeited during period (247,150) $ 4.29
-----------------------------------------------------
Balance, end of period 2,643,692 $ 3.70
=====================================================
Exercisable at end of period 1,907,554 $ 3.54
=====================================================
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- ----------------------------------
Weighted Weighted
Average Average
Remaining Remaining
Number of Contractual Number of Contractual
Exercise Price Options Life Options Life
------------------------------------------------------ ----------------------------------
<S> <C> <C> <C> <C>
$0.100 - $1.000 1,333,125 4.1 634,004 4.3
$1.250 - $2.000 217,000 4.2 227,333 4.2
$2.500 - $3.000 491,017 3.2 471,317 3.0
$3.125 - $5.000 147,050 3.3 139,400 3.1
$5.250 - $8.000 280,000 2.9 260,000 2.7
$9.000 - $18.000 175,500 3.2 175,500 3.2
--------- ---------
2,643,692 1,907,554
========= =========
</TABLE>
30
<PAGE>
================================================================================
NOTE 13. STOCK OPTIONS (Continued)
================================================================================
The weighted average fair value per option as of grant date was $0.12
for stock options granted during the six months period ended December
31, 1999. The determination of the fair value of all stock options
granted during the six month period ended December 31, 1999 was based
on (i) risk-free interest rate of 6.1%, (ii) expected option lives
ranging from 5 to 7 years, depending on the vesting provisions of each
option, (iii) expected volatility in the market price of the Company's
common stock of 100%, and (iv) no expected dividends on the underlying
stock.
The following table summarizes the pro forma consolidated results of
operations of the Company as though the fair value based accounting
method in SFAS 123 had been used in accounting for stock options.
Period ended
December 31, 1999
-----------------------------------------------------------------------
Net loss $ (6,052,057)
Net loss per share $ (0.56)
Stock option activity for the year ended June 30, 1999 was as follows:
Number of Weighted Average
Options Exercise Price
-----------------------------------------------------------------------
Balance, June 30, 1998 1,458,250 $ 5.02
Granted during year 1,331,975 $ 1.20
Exercised and returned during year (260,500) $ 0.44
Forfeited during year (145,883) $ 8.62
-----------------------------------------------------
Balance, end of year 2,383,842 $ 4.27
=====================================================
Exercisable at end of year 1,928,792 $ 4.00
=====================================================
The following table summarizes information about stock
options outstanding at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- ----------------------------------
Weighted Weighted
Average Average
Remaining Remaining
Number of Contractual Number of Contractual
Exercise Price Options Life Options Life
------------------------------------------------------ ----------------------------------
<S> <C> <C> <C> <C>
$0.100 - $1.000 814,925 5.0 537,542 4.8
$1.250 - $2.000 237,250 4.7 214,083 4.6
$2.500 - $3.000 629,117 3.7 582,517 3.5
$3.125 - $5.000 147,050 3.8 135,400 3.6
$5.250 - $8.000 380,000 3.7 299,250 3.3
$9.000 - $18.000 175,500 3.7 160,000 3.6
--------- ---------
2,383,842 1,928,792
========= =========
</TABLE>
31
<PAGE>
================================================================================
NOTE 13. STOCK OPTIONS (Continued)
================================================================================
The weighted average fair value per option as of grant date was $0.80
for stock options granted during the fiscal year ended June 30, 1999.
The determination of the fair value of all stock options granted during
the fiscal year ended June 30, 1999 was based on (i) risk-free interest
rate of 6.1%, (ii) expected option lives ranging from 5 to 7 years,
depending on the vesting provisions of each option, (iii) expected
volatility in the market price of the Company's common stock of 100%,
and (iv) no expected dividends on the underlying stock.
The following table summarizes the pro forma consolidated results of
operations of the Company as though the fair value based accounting
method in SFAS 123 had been used in accounting for stock options.
Year ended Year ended
June 30, 1999 June 30, 1998
-----------------------------------------------------------------------
Net loss $ (10,588,216) $ (5,415,226)
Net loss per share $ (1.47) $ (0.97)
During the year ended June 30, 1999, 252,318 options were exercised,
with net proceeds to the Company of $90,000, plus the return of 8,182
options. During the year ended June 30, 1998, 470,602 options were
exercised with net proceeds of $4,430 to the Company, plus the return
of 14,398 options.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office and medical facilities under various non-cancelable
operating leases. Approximate future minimum payments under these leases for the
years ended December 31, are as follows:
2000 $ 400,000
2001 248,000
2002 244,000
2003 173,000
2004 139,000
Thereafter 245,000
-----------------------------------------------------------------------
Total $ 1,449,000
=======================================================================
32
<PAGE>
================================================================================
NOTE 14. COMMITMENTS AND CONTINGENCIES (Continued)
================================================================================
Employment Contracts
The Company has employment contracts with certain executives, physicians and
other clinical and administrative employees. Future annual minimum payments
under these employment agreements for the years ended December 31, are as
follows:
2000 $ 471,000
2001 154,000
2002 121,000
2003 96,000
2004 4,000
-----------------------------------------------------------------------
$ 846,000
=======================================================================
Other Litigation
During 1998 a marketing company (the Marketer) filed a complaint
against the Company seeking to enforce a written letter agreement
regarding marketing and other services. The complaint seeks damages of
approximately $125,000 plus interest, costs and attorneys fees. The
Company has filed defenses and a counterclaim alleging that the
Marketer did not perform as required under the agreement, and is not
entitled to the amount claimed. Although the Company believes it has
meritorious defenses against this complaint, management is unable to
determine the likelihood of an unfavorable outcome and an estimate of
the amount of any potential loss, if any.
Other Contingencies
At December 31, 1999 and June 30 1999, the Company had recorded accrued
payroll taxes of approximately $1,290,000 and $598,000, respectively,
which is included in accrued expenses in the accompanying balance
sheet. The Company has requested an IRS agent be assigned to this
matter and intends to negotiate a payment plan to repay this amount.
NOTE 15. CONCENTRATIONS
Revenue Concentration
During the year ended June 30, 1999 and 1998 one HMO accounted for
approximately 48% and 12% of revenue, respectively. Revenue from this
HMO, for the six months ended December 31, 1999 were approximately 68%
of total sales. The loss of this HMO could affect the operating results
of the Company.
33
<PAGE>
NOTE 16. SUBSEQUENT EVENTS
Effective January 1, 2000, the Company issued 3,500,000 shares of
common stock to the former owner of GMA, who is a shareholder of the
Company in satisfaction of all outstanding obligations to this
individual, approximating $713,000.
Subsequent to December 31, 1999, the Company granted 2,765,000 options
under consulting, employee compensation agreements and settlements with
exercise prices from $0.30 to $4.50 which expire from August 2000
through January 2007.
34
<PAGE>
The financial statements listed on the index to financial statements on page F-1
are filed as part of this Form 10-KSB.
(a) (2) Exhibits
Exhibits marked with footnote one are filed herewith. The remainders of
the exhibits have heretofore been filed with the Commission and are incorporated
herein by reference. Each management contract or compensation plan or
arrangement filed as an exhibit hereto is identified by a dagger (+).
Exhibit Description
Number
------
3.1 Articles of Incorporation.(1)
3.2 Articles of Amendment to the Articles of Incorporation.(1)
3.3 By-laws. (1)
3.4 Article of Amendment to the Articles of Incorporation designating the
Series A Preferred Stock. (8)
3.5 Article of Amendment to the Articles of Incorporation designating the
Series B Preferred Stock. (8)
3.6 Articles of Amendment to the Articles of Incorporation amending the
designation of the Series B Preferred Stock. (8)
4.1 Specimen Common Stock Certificate. (1)
4.2 Specimen Common Stock Purchase Warrant (issued pursuant to the
Company's initial public offering on February 13, 1997) (1)
4.3 Underwriter's Warrant. (1)
4.4 Warrant Agreement. (1)
4.5 Specimen of Class A Warrant (issued pursuant to the Company's Private
Placement in February 1996). (1)
4.6 Stock Purchase Warrant (issued pursuant to the Securities Purchase
Agreement dated April 27, 1998). (8)
5.1 Opinion of Atlas, Pearlman, Trop & Borkson, P.A. concerning legality of
shares being registered pursuant to this Registration Statement. (8)
10.1 Stock Option Plan. (1)
10.2 Executive Employment Agreement between the Company and Noel J.
Guillama. (1)
10.3 Executive Employment Agreement between the Company and Robert L. Kagan,
M.D. (1)
10.4 Sub-Lease Agreement with the Company and Safeskin dated August 1,
1996. (1)
10.5 Purchase and Sales Agreement between the Company, Roman Fisher and Ofra
Fisher dated August 13, 1996. (1)
35
<PAGE>
Exhibit Description
Number
------
10.6 Purchase and Sales Agreement between the Company and Edwin Kagan dated
August 13, 1996. (1)
10.7 Agreement between the Company and Dr. Robert Kagan dated September 1,
1996. (1)
10.8 Merger Agreement between the Company, Florida Rehabilitation Services,
Inc., Southeast Medical Staffing, Inc. and Dr. Frederick J. Kunen dated
September 25, 1996. (1)
10.9 Stock Purchase Agreement between the Company, Kenneth J. Hall, Ira P.
Hall, Lee M. Hall and Michael Goldstein dated September 26, 1996. (1)
10.10 Assets Purchase Agreement between the Company, International Family
Healthcare Centers, Inc. and Emergency Care Services, Inc. dated
October 15, 1996. (1)
10.11 Merger Agreement between the Company, Metcare II, Inc., Paul Wand,
M.D., P.A., and Paul Wand dated October 24, 1996. (1)
10.12 Promissory Note dated December 23, 1993 by Datascan of Florida, Inc. to
First Union National Bank. (1)
10.13 Promissory Note dated September 1, 1996 by the Company to Robert L.
Kagan. (1)
10.14 Promissory Note dated September 1, 1996 by the Company to Robert L.
Kagan. (1)
10.15 Promissory Note dated September 1, 1996 by the Company to Robert L.
Kagan. (1)
10.16 Promissory Note dated September 25, 1996 by the Company to Frederick J.
Kunen. (1)
10.17 Promissory Note dated October 15, 1996 by the Company to International
Family Healthcare Center, Inc. (1)
10.18 Executive Employment Agreement between the Company and Kenneth
Hall. (1)
10.19 Executive Employment Agreement between the Company and Roman
Fisher. (1)
10.20 Agreement between Mr. Guillama, Mr. Kagan and Ms. Hilderbrand. (1)
10.21 Consulting Agreement between the Company and Euro-Atlantic Securities,
Inc. (1)
10.22 Consulting Agreement between the Company and Sternco, Inc. (1)
10.23 Letter of Intent between the Company and General Medical Associates,
Inc. (1)
10.24 Lease Agreement between the Company and Champion Technologies of
Florida, Inc. (1)
10.25 Letter of Intent between Martin Harrison, M.D. and Metropolitan Health
Networks, Inc. (1)
10.26 Option Agreement between Noel J. Guillama, Bonnie Hilderbrand and Dr.
Martin Harrison. (1)
10.27 Option Agreement between Noel J. Guillama, Bonnie Hilderbrand and Dr.
Robert L. Kagan. (1)
10.28 Option Agreement between Noel J. Guillama, Bonnie Hilderbrand and
Kenneth J. Hall. (1)
36
<PAGE>
Exhibit Description
Number
------
10.29 Merger Agreement dated August 6, 1997 by and among the Company,
Metcare, GMA and Martin Harrison, M.D. (2)
10.30 Promissory Note dated August 6, 1997. (2)
10.31 Consulting Agreement dated July 28, 1997, between the Company and Lion
Capital. (3)
10.32 Promissory Note dated August 6, 1997, by the Company to Dr. Harrison,
M.D. (3)
10.33 Post-Effective Amendment No. 1 to Merger Agreement dated October 1997,
by and among Metropolitan Health Networks, Inc. ("Metropolitan"),
Metcare III, Inc., General Medical Associates, Inc. and Martin
Harrison. (4)
10.34 Agreement and Plan of Merger dated November 30, 1997 by and among the
Company, Metcare VI, Inc. and Trident Medical Concepts, Inc. (5)
10.35 First Amendment to Merger Agreement dated January 13, 1998 by and among
the Company, Metcare VI, Inc. and Trident Medical Concepts, Inc. (5)
10.36 Second Amendment to Merger Agreement dated February 22, 1998 by and
among Trident Medical Concepts, Inc. (5)
10.37 Asset Purchase Agreement dated April 2, 1997 by and among the Company,
Metcare VII, Inc. and Primedica Healthcare, Inc. (6)
10.38 Repurchase Election Agreement dated April 2, 1998 by and among the
Company, Metcare VII and Primedica Healthcare, Inc. (6)
10.39 Promissory Note dated April 2, 1998. (6)
10.40 Stock Purchase Agreement dated July 1997 between Neal Jay Tolar and the
Company. (7)
10.41 Securities Purchase Agreement dated April 27, 1998 between Pangea Fund
Ltd. and the Company. (8)
10.42 Registration Rights Agreement dated April 27, 1998 between Pangea Fund
Ltd. and the Company. (8)
21 Subsidiaries of the Company. (8)
23.1 Consent of Kaufman, Rossin and Company. (7)
23.2 Consent of Atlas, Pearlman, Trop & Borkson, counsel for the Company
(included in opinion filed in Exhibit 5.1). (8)
------------------
(1) Incorporated by reference to the exhibit of the same number filed with
the Company's Registration Statement on Form SB-2 (No. 333-5884-A)
(2) Incorporated by reference to the Company's Current Report on Form 8-K
dated August 6, 1997
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-KSB for the year ended June 30, 1997
(4) Incorporated by reference to the Company's Current Report on Form 8-K/A
dated August 6, 1997
(5) Incorporated by reference to the Company's Current Report on Form 8-K
dated February 22, 1998
(6) Incorporated by reference to the Company's Current Report on Form 8-K
dated April 2, 1998
(7) Filed herewith
(8) Previously filed
37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
registrant has duly caused this Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized in the Boca Raton, State of Florida on
the 10th of August 2000.
METROPOLITAN HEALTH NETWORKS, INC.
By: /s/ Fred Sternberg
------------------------------------------
Fred Sternberg, President, Chief Executive
Officer and Chairman
Pursuant to the requirements of the Securities Act, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Fred Sternberg President, Chief Executive August 10, 2000
---------------------- Officer and Chairman of the Board
Fred Sternberg
/s/ David S. Gartner Chief Financial Officer August 10, 2000
---------------------- and Secretary
David S. Gartner
Director August 10, 2000
----------------------
Karl Sachs
Director August 10, 2000
----------------------
Michael Cahr
Director August 10, 2000
----------------------
Marvin Heiman
Director August 10, 2000
----------------------
Mark Gerstenfeld
Director August 10, 2000
----------------------
Michael Earley
Director August 10, 2000
----------------------
Paul Preste
38
