SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
January 19, 1997
------------------------------------------------
Date of Report (Date of earliest event reported)
MEDNET, MPC CORPORATION
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(Exact name of Registrant as specified in its charter)
Nevada 0-17120 88-0215949
- --------------- ---------------- --------------
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification
Incorporation) Number)
871-C Grier Drive
Las Vegas, Nevada 89119
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(Address of principal executive offices)
702-361-3119
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(Registrant's telephone number, including area code)
<PAGE>
Item 5. Other Events.
On or about January 19, 1997, James Argyropoulos and Norton Herrick,
Series A Convertible Exchangeable Preferred Stock shareholders of the Registrant
served the Registrant with a complaint filed on November 5, 1996 in the United
States District Court for the Central District of California against the
Registrant and certain members of its board of directors. The complaint alleges
that the Company and its officers and directors misrepresented material facts to
plaintiffs in order to induce plaintiffs to provide a cash infusion to the
Company and alleges violation of registration provisions in violation of Section
12(2) of the Securities Act of 1933 and Sections 10(b) and 20 of the Securities
Exchange Act of 1934. In addition, breaches of contract and violation of state
statutory provisions and common law claims are alleged. The complaint seeks
compensatory and punitive damages in an unspecified amount and costs and
expenses relating to the complaint, including attorneys' fees.
Item 7. Financial Statements and Exhibits.
The following exhibit is filed herewith:
(c) Complaint, James Argyropoulos and Norton Herrick v. Mednet, MPC
Corporation, et al., Civil No. 96-7740, filed November 5, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MEDNET, MPC CORPORATION
Date: March 5, 1997 By: /s/ Robert A. Bagdasarian
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Name: Robert A. Bagdasarian
Title: Chief Executive Officer
<PAGE>
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
JAMES ARGYROPOULOS and NORTON HERRICK CASE NUMBER
PLAINTIFF(S)
CV-96-7740 LGB (AJWx)
vs.
MEDNET, MPC CORPORATION M.B. MERRYMAN, S U M M ON S
DR. SOL LIZERBRAM, LEO T. MCCARTHY,
DONALD KIRSCH, BYRON GEORGIOU, EDWARD
HEIL, EDWARD HANLEY, ROBERT QUICK,
MATTHEW STRAUSS, and LINCOLN WARD
DEFENDANT(S)
TO THE ABOVE-NAMED DEFENDANT(S), You are hereby summoned and required to file
with this court and serve upon
Plaintiff's attorney, whose address is:
Robert A. Sacks
SULLIVAN & CROMWELL
444 South Flower Street, 12th Floor
Los Angeles, CA 90071
an answer to the complaint which is herewith served upon you within 20 days
after service of this summons upon you, exclusive of the day of service. If you
fail to do so, judgment by default will be taken against you for the relief
demanded in the complaint.
DATE: November 5, 1996
CLERK, U.S. DISTRICT COURT
By: /s/
----------------------------
Deputy Clerk
(SEAL OF THE COURT)
________________________________________________________________________________
S U M M O N S
________________________________________________________________________________
<PAGE>
Robert A. Sacks (CSB 150146)
SULLIVAN & CROMWELL
444 South Flower Street
Los Angeles, California 90071
(213) 955-8000
Attorneys for Plaintiffs
James Agyropoulos and
Norton Herrick
UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF CALIFORNIA
JAMES ARGYROPOULOS and )
NORTON HERRICK, ) Civil Action No. 96-7740 LGB (AJWx)
)
Plaintiffs, )
)
vs. )
) COMPLAINT AND
MEDNET, MPC CORPORATION ) DEMAND FOR JURY TRIAL
M.B. MERRYMAN, DR. SOL )
LIZERBRAM, LEO T. MCCARTHY, )
DONALD KIRSCH, BYRON GEORGIOU, )
EDWARD HEIL, EDWARD HANLEY, )
ROBERT QUICK, MATTHEW STRAUSS, )
and LINCOLN WARD, )
)
Defendants. )
___________________________________)
Plaintiffs James Argyropoulos ("Argyropoulos") and Norton Herrick
("Herrick") (collectively "Plaintiffs") for their complaint against Mednet, MPC
Corporation ("Mednet"), M.B. Merryman ("Merryman"), Dr. Sol Lizerbram
("Lizerbram"), Leo T. McCarthy ("McCarthy"), Donald Kirsch ("Kirsch"), Bryon
Georgiou ("Georgiou"), Edward Heil ("Heil"), Edward Hanley ("Hanley"), Robert
Quick ("Quick"), Matthew Strauss ("Strauss"), and Lincoln Ward ("Ward")
(collectively "Defendants"), allege upon knowledge as to themselves and their
conduct and upon information and belief as to all other matters, as follows:
INTRODUCTION
1. This action arises out of a pattern of fraudulent, deceptive and
wrongful conduct which began when Defendants Mednet and Merryman misrepresented
to Plaintiffs material facts concerning the historical performance of and future
financial and business prospects for defendant Mednet in order to induce
Plaintiffs to provide Mednet with a multi-million dollar cash infusion. At the
time Mednet and Merryman made these misrepresentations, Mednet was in the midst
of raising funds to complete a severely undercapitalized acquisition and was
urgently in need of the funds provided by Plaintiff's investment.
2. Defendants' misconduct did not stop at their fraud in inducing
Plaintiffs to provide Mednet with much-needed cash. In connection with the
Plaintiffs' investment, Mednet violated Section 5 of the Securities Act of 1933
by issuing Mednet convertible preferred stock to Plaintiffs that was not
registered with the Securities & Exchange Commission ("SEC") and did not fall
within any exemption from registration. In addition, in the year since
Plaintiffs' investment was made, Mednet, under Merryman's direction, has
repeatedly violated its contractual obligations to Plaintiffs, including, among
other things, by failing to register Plaintiffs' common stock in a timely manner
and by refusing to issue to Plaintiffs certain notes they were entitled to
receive upon exchange of their Mednet preferred stock. Mednet's failure to exert
best efforts to register Plaintiffs' common stock with the SEC has been
especially harmful to Plaintiffs, in the market price of Mednet's common stock
plummeted during the period of Mednet's delay, causing Plaintiffs millions of
dollars of damage due to their inability to sell any Mednet shares. During this
delay, however, Merryman and other Mednet officers made substantial sales of
their own Mednet stock, thereby breaching their fiduciary duties to Plaintiffs,
earning profits for themselves, and contributing to the decline in Mednet's
stock price.
<PAGE>
3. Recently, Defendants' misconduct has extended even further, as
Mednet has sought blatantly to disregard Plaintiffs' rights as holders of Mednet
securities. Thus, on October 24, 1996, Mednet violated its own corporate charter
documents as well as Plaintiffs' contractual rights by refusing to perform the
ministerial act of issuing Mednet notes to Plaintiffs upon exchange of their
Mednet convertible exchangeable preferred stock. This was a conscious and
malicious breach of Mednet's express obligation to do so under the terms of the
Certificate of Designations of the 10% Series A Convertible Exchangeable
Preferred Stock (the "Preferred Stock") then owned by Plaintiffs. By refusing to
issue these notes, Defendants apparently seek to harm Messrs. Argyropoulos and
Herrick by depriving them of the increased priority and other rights attendant
to being Mednet noteholders rather than preferred stockholders, including their
rights as noteholders to determine whether to veto the issuance by Mednet of
additional preferred stock or indebtedness. Indeed, Plaintiffs learned only on
October 28, 1996, that this last right was of particular concern to Defendants,
who publicly announced Mednet's intention to issue preferred stock and senior
debt to another third party, Bergen Brunswig ("Bergen"), without seeking or
obtaining the requisite consent of Plaintiffs to do so. Unless enjoined,
Mednet's intention to issue preferred stock and indebtedness to Bergen threatens
Plaintiffs with irreparable harm.
THE PARTIES
4. Plaintiff James Argyropoulos is a citizen of the State of
California, resident in this District. Plaintiff Norton Herrick is a citizen of
the State of Florida.
5. Defendant Mednet is a Nevada corporation with a principal place of
business located at 871-C Grier Drive, Las Vegas, Nevada. Mednet is engaged in
the managed prescription care industry, and develops and administers
prescription drug programs. Mednet's stock is publicly traded, and Mednet has
operations in this State. In connection with the events giving rise to this
action, officers and directors of Mednet traveled to this district, actively
solicited investment in this district and have engaged in continuous
communications with persons in this district. Numerous of the misrepresentations
that give rise to the claims in this action occurred in this district.
6. Defendant Merryman is the President, Chief Executive Officer and a
member of the Board of Directors of Mednet, and a resident of the State of
Nevada. In connection with the events giving rise to this action, Merryman
traveled to this district, actively solicited investment in this district and
has engaged in repeated communications with persons in this district. Merryman
also made or authorized some of the misrepresentations that give rise to the
claims against defendants in this district. All of Mednet's conduct in
connection with the matters alleged in this complaint has been carried out at
Merryman's direction and subject to his control. At all times relevant to this
action, Merryman has controlled Mednet and is a controlling person within the
meaning of Section 15 of the Securities Act of 1933 (the "Securities Act") and
Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act").
7. Defendants Lizerbram, McCarthy, Kirsch, Georgiou, Hanley, Heil,
Quick, Strauss, and Ward are directors of Mednet and were directors at the time
of the events giving rise to this action. At the time of the solicitation and
consummation of Plaintiffs' investment, these defendants controlled Mednet and
are controlling persons within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act.
JURISDICTION AND VENUE
8. This Court has jurisdiction over this action pursuant to Section 22
of the Securities Act, Section 27 of the Exchange Act, and 28 U.S.C. Section
1331, 1367 and 2201. Venue is proper in this District pursuant to Section 22 of
the Securities Act, Section 27 of the Exchange Act, and 28 U.S.C. Section
1391(b). Defendants offered and sold securities in this district and a
substantial part of the events giving rise to this dispute occurred in this
District.
FACTUAL ALLEGATIONS
9. In or about June 1995, Aries Capital Group, Inc. ("Aries") was
contacted by Mednet's financial advisor, McFarland Dewey Securities Co.
("McFarland Dewey"), about the possibility of making a substantial equity
investment in Mednet. Mednet was portrayed to Aries by McFarland Dewey as a
company that had grown rapidly and had significant potential for future growth
and profitability. Aries was informed by McFarland Dewey that Mednet was seeking
an equity investment to fund a pending acquisition and to provide needed
operating capital.
<PAGE>
10. In connection with its consideration of an investment in Mednet,
Aries was provided by McFarland Dewey with a confidential memorandum (the
"Offering Memorandum") that contained significant descriptive and financial
information, including projections, concerning Mednet, its strategies and
prospects, and its management. The material information in the Offering
Memorandum had been reviewed and/or prepared by Mednet and was provided to Aries
by McFarland Dewey on Mednet's behalf. Over the course of the next three months,
Aries representatives also had extensive contact with McFarland Dewey and Mednet
representatives, including Merryman, in which it was provided with significant
additional information about Mednet. These contacts included meetings in Los
Angeles as well as at Mednet's headquarters in Las Vegas, and involved among
other things discussion of Mednet's short and long term financial prospects. As
explained more fully below, the information contained in the Offering Memorandum
and additional information that was provided to Aries during due diligence was
materially inaccurate in numerous respects, and significantly overstated
Mednet's financial condition and prospects.
11. On or about September 15, 1995, Mednet and Aries entered into three
agreements: (i) a Strategic Financial Consulting and Investment Agreement (the
"Investment Agreement"), (ii) a Registration Rights Agreement ("Registration
Rights Agreement"), and (iii) a letter agreement relating to the appointment of
Steven Mayer ("Mayer") of Aries to the Mednet Board of Directors. These
agreements collectively set forth the terms and conditions pursuant to which
Aries agreed to make a $3 million investment in Mednet.
12. Under the terms of the Investment Agreement, in return for the
payment of $3 million, Mednet agreed to issue the following securities: (a)
150,000 shares of Preferred Stock, which were to be convertible into Mednet
common stock at the holder's option and would also be exchangeable, again at the
holder's option in the event certain conditions occurred, into Mednet
Convertible Notes; (b) a warrant initially exercisable for 363,636 shares of
Mednet common stock at $.01 per share, subject to adjustment; and c) a warrent
initially exercisable for 493,647 shares of Mednet common stock at $2.20 per
share, subject to adjustment (the $.01 per share and $2.20 per share warrants
shall be referred to collectively as the "Warrants"). Mednet also agreed to pay
Aries a fee of $250,000, and to pay certain of Aries' costs and attorneys' fees.
13. Under the terms of the Registration Rights Agreement, Mednet agreed
that, upon notice, it would register with the SEC the common stock into which
the securities issued pursuant to the Investment Agreement were convertible or
exercisable, as the case may be. The purpose of such registration was to provide
Aries or its assignees with marketable securities, which could be readily sold
to third parties. Mednet undertook in the Registration Rights Agreement to "use
its best efforts" to file a registration statement with the SEC within 30 days
from the appropriate notice requesting such registration, and to have the
registration statement declared effective within 90 days thereafter. Because
Mednet's common stock was already registered with the SEC, the process of
registering these additional shares is far less complex than were Mednet to be
filing an initial registration statement, and consequently the time periods
afforded by these deadlines were more than ample.
14. On September 15, 1995, Aries assigned all of its Rights under the
Investment Agreement and the Registration Rights Agreement to Messrs. Herrick,
Argyropoulos and Mayer pursuant to a written assignment, a copy of which was
provided to Mednet. Thereafter, in return for the payment of $2,250,000, Herrick
purchased 112,500 shares of Preferred Stock having a liquidation preference
equal to $2,250,000, and was issued a warrant to purchase 272,727 shares of
Mednet common stock at $.01 per share and a warrant to purchase 277,676 shares
of Mednet common stock at $2.20 per share. In return for the payment of
$750,000, Argyropoulos purchased 37,500 shares of Preferred Stock having a
liquidation preference equal to $750,000, and was issued a warrant to purchase
90,909 shares of Mednet common stock at $.01 per share and a warrant to purchase
92,559 shares of Mednet common stock at $2.20 per share. Mayer was issued a
warrant to purchase 123,412 shares of Mednet common stock at $2.20 per share.
15. Subsequently, Herrick exercised his warrant to purchase 272,727
shares of Mednet common stock at $.01 per share and thereby became the
stockholder of record of 272,727 shares of Mednet common stock. Argyropoulos has
also instructed the depository holding his warrant to purchase 90,909 shares of
Mednet common stock at $.01 per share to exercise it in order to become the
stockholder of record of 90,909 shares of Mednet common stock.
<PAGE>
16. On September 28, 1995, Herrick, Argyropoulos and Mayer delivered to
Mednet a written demand notice pursuant to Section 2(a) of the Registration
Rights Agreement that Mednet prepare and file a registration statement with the
SEC covering all of the registerable securities, including without limitation
all of the Mednet common stock issued or issuable upon conversion of the
Preferred Stock or exercise of the Warrants. Under the terms of the Registration
Rights Agreement, Mednet was therefore required to use its best efforts to file
a registration statement on or before October 28, 1995, and to have the
registration statement declared effective on or before January 26, 1996.
Notwithstanding the foregoing obligation, Mednet did not file a registration
statement with the SEC until January 31, 1996, and the registration statement
did not become effective until July 17, 1996 -- nearly 180 days after the date
contemplated by the Registration Rights Agreement.
17. During the period the registration statement should have been filed
and effective -- and would have been filed and effective had Mednet exercised
its best efforts to cause it to become so -- Mednet's per share common stock
price as quoted on NASDAQ declined from a high of $3-11/16 on March 22, 1996 to
$2 on July 17, 1996 when the registration statement finally became effective,
and has declined further to $15/16 as of yesterday's close. During this period,
Plaintiffs were precluded from publicly offering or selling any of the Mednet
common stock they owned or over which they had rights; however, defendant
Merryman was himself busy taking advantage of market conditions to sell his own
Mednet common stock for enormous gain, selling 75,00 shares during May 1996.
Another senior Mednet executive, Executive Vice President David Dalton, was even
more active, selling 400,000 shares during February and March 1996. In addition
to being a breach of their fiduciary duties to Plaintiffs, the effect of these
substantial insider sale transactions was to depress the value of Mednet's
stock, thereby harming Plaintiffs, during the period that Mednet's breach of
contract deprived Plaintiffs of the ability to sell their securities.
18. On or about April 26, 1996, Herrick, through his attorneys,
delivered a notice to Mednet that it was in breach of the Registration Rights
Agreement because of its failure to exercise its best efforts to file a
registration statement and cause it to become effective, and further notifying
Mednet that he intended to hold it responsible for all damages caused by his
inability to sell shares of Mednet common stock. In that same notice, Herrick
also informed Mednet, for the third time, that it was in breach of the
Investment Agreement for failing to pay his attorney's bill of $9,049.93 for
services connected with the initial investment.
19. On or about July 15, 1996, Herrick sent Mednet another notice
pursuant to the Investment Agreement and the Registration Rights Agreement
relating to Mednet's continuing failure to register the shares to the improper
sales, in the interim, of common stock by Mednet officers. On July 25, 1996,
Argyropoulos, through his attorneys, sent Mednet a notice that it was in breach
of numerous representations, warranties, and obligations under both the
Investment Agreement and the Registration Rights Agreement. In addition to these
notices, on numerous occassions Plaintiffs or their representatives contacted
Defendants or their representatives and requested them, to no avail, to comply
with their obligations under the Registration Rights Agreement.
20. The Preferred Stock purchased by Argyropoulos and Herrick was
"convertible exchangeable preferred stock". By its terms, the Preferred Stock
became exchangeable, "at the option of the holder" into Mednet Convertible
Notes if the following conditions occurred:
If a working capital facility is not obtained, or $10,000,000 principal
amount is not available thereunder, by November 15, 1995, then the
Series A Preferred Stock is thereafter exchangeable at the option of
the Holder in whole, or in part, at the rate of $1.00 principal amount
of Convertible Notes for each $1.00 Face Amount of Series A Preferred
Stock held by them at the time of exchange.
Mednet failed to obtain any working capital facility by November 15, 1995, much
less a working capital facility with $10,000,000 availability, and as a result
the Preferred Stock owned by Argyropoulos and Herrick became "thereafter"
exchangeable into Convertible Notes.
<PAGE>
21. On October 24, 1996, Argyropoulos and Herrick exercised their
rights to exchange their Preferred Stock into Convertible Notes. In accordance
with the terms of the Preferred Stock, they surrendered to Mednet their
certificates together with powers of attorney to transfer the Preferred Stock
and irrevocable notices of their election to exchange. Under the terms of the
Preferred Stock, the exchange of Argyropoulos' and Herrick's Preferred Stock for
Convertible Notes.
shall be deemed to have been made as of the date of such surrender of
the shares of Series A Preferred Stock to be exchanged, and the person
or persons entitled to receive the Convertible Notes deliverable upon
exchange of such Series A Preferred Stock shall be treated for all
purposes as a beneficiary of such Convertible Notes on such date...
Accordingly, as of October 24, 1996, Argyropoulos became the holder of $750,000
principal amount of Mednet Convertible Notes, and Herrick became the holder of
$2,250,000 principal amount of Mednet Convertible Notes.
22. Mednet covenanted that upon compliance by a Preferred Stockholder
with these exchange procedures, it would "as soon as practicable" deliver the
Convertible Notes "together with an amount in cash equal to all dividends on the
Series A Preferred Stock accrued and unpaid thereon, whether or not declared,
to the date of exchange." The amount of such dividends was $14,375 in the case
of Herrick and $4,791.66 in the case of Argyropoulos.
23. Mednet has conceded that it did not have the requisite working
capital facility in place on November 15, 1995 as required but, notwithstanding
that fact, it was wrongly stated that it has no obligation to deliver to
Argyropoulos and Herrick their Convertible Notes and cash and that it will not
do so. Mednet has also stated wrongly that Argyropoulos and Herrick had no legal
right to convert their Preferred Stock to Convertible Notes and that Mednet will
not recognize them as holders of Convertible Notes or permit them to exercise
any of the rights or obtain any of the benefits attendant to being noteholders.
Plaintiffs have duly informed Mednet that its conduct constitutes a breach of
the Investment Agreement and could constitute an event of default under the
Convertible Notes.
24. Under the terms of the Convertible Notes Mednet is obligated to
issue to Argyropoulos and Herrick, Mednet has covenanted not to do certain
things unless they are first approved by holders of 55% of the Convertible
Notes. Among the corporate matters that must be so approved is "[t]he
authorization, creation or issuance of any Preferred Stock or Indebtedness" by
Mednet. As holders of all of the outstanding Convertible Notes, therefore,
Argyropoulos and Herrick must approve any issuance of preferred stock or debt
before Mednet may legally issue any.
25. On October 28, 1996, four days after Argyropoulos and Herrick
became holders of Convertible Notes, Mednet announced publicly that it had
entered into an agreement in principle to settle a dispute with Bergen, pursuant
to the terms of which it had agreed to issue to Bergen preferred stock and debt.
Mednet did not solicit or receive the consent of Herrick and Argyropoulos to
such an arrangement as it was legally required to do, and it has further stated
that it does not intend to seek or obtain their consent prior to issuing such
Preferred Stock and debt. Plaintiffs have informed Mednet that any issuance of
preferred stock or indebtedness without their consent is a breach of the
Investment Agreement and an event of default under the Convertible Notes, and is
invalid.
FIRST CAUSE OF ACTION
(Declaratory Relief Against Mednet)
26. Plaintiffs repeat and reallege paragraphs 1 through 25 as if fully
set forth herein.
27. There exists a justiciable controversy between Plaintiffs
Argyropoulos and Herrick on the one hand, and defendant Mednet on the other, as
to whether Plaintiffs had the right to exchange their Preferred Stock for
Convertible Notes and whether Plaintiffs are now holders of the Convertible
Notes.
<PAGE>
28. In refusing to issue and deliver Convertible Notes to Plaintiffs,
Mednet has breached the Investment Agreement and has failed to comply with its
obligations under the terms of the Preferred Stock.
29. In failing to pay Herrick and Argyropoulos accrued and unpaid
dividends of, respectively, $14,375 and $4,791.66, Mednet had breached the
Investment Agreement and has failed to comply with its obligations under the
terms of the Preferred Stock. Plaintiffs have been damaged by Mednet's failure
to pay those sums, which are due and owing.
30. Plaintiffs seek a declaration that (a) they had the right to
exchange, and duly exchanged, their Preferred Stock for Convertible Notes, (b)
they became holders of Mednet Convertible Notes on October 24, 1996, (c) Mednet
has breached the Investment Agreement and its obligations under the Preferred
Stock by failing to deliver to Plaintiffs the Convertible Notes to which they
are entitled and by failing to pay them an amount equal to accrued and unpaid
dividends on their Preferred Stock prior to exchange, (d) one or more Events of
Default have occurred under the terms of the Convertible Notes, and (e) the
Convertible Notes are immediately due and payable.
SECOND CAUSE OF ACTION
(Injunction Relief Against Mednet)
31. Plaintiffs repeat and reallege paragraphs 1 through 30 as if fully
set forth herein.
32. Mednet is in a tenuous financial condition and there are serious
questions about its continued viability.
33. Absent delivery of the Convertible Notes, Plaintiffs are not able
to sell them or to exercise their rights as noteholders. Absent the ability to
exercise their rights as noteholders, Plaintiffs have no ability to protect
themselves from the wrongful issuance by Mednet of other indebtedness that
adversely effects their security and other rights.
34. Plaintiffs have no adequate remedy at law for Mednet's failure to
deliver their Convertible Notes.
35. Plaintiffs seek an order directing Mednet to deliver their
Convertible Notes.
THIRD CAUSE OF ACTION
(Injunctive Relief Against Mednet)
36. Plaintiffs repeat and reallege paragraphs 1 through 35 as if fully
set forth herein.
37. Mednet's proposed agreement to issue preferred stock and debt to
Bergen threatens an imminent violation of Plaintiffs' rights as holders of
Convertible Notes and is also a breach by Mednet of its obligations under the
Investment Agreement.
38. By attempting to deprive Plaintiffs of their rights as noteholders
to determine what additional preferred stock and debt, if any, may be issued by
Mednet, Mednet threatens Plaintiffs with imminent irreparable harm for which
they have no adequate remedy at law. Plaintiffs have no adequate remedy for the
issuance by Mednet of debt to third parties that impairs Plaintiffs' security
and other interests.
39. Plaintiffs seek an order enjoining Mednet from issuing any
preferred stock or indebtedness to Bergen or anyone else absent compliance with
the terms of the Convertible Notes.
FOURTH CAUSE OF ACTION
(Breach of Investment Agreement Against Mednet)
40. Plaintiffs repeat and reallege paragraphs 1 through 39 as if fully
set forth herein.
41. In order to induce Aries to enter into the Investment Agreement and
Registration Rights Agreement and Plaintiffs to invest $3 million in Mednet by
purchasing the securities described above, Defendants Mednet and Merryman made
numerous material misrepresenations and omissions. Among those
misrepresentations and omissions were the following:
<PAGE>
a. The Private Placement Memorandum contained overstated forecasts of
income and revenue that were not based upon any good faith judgment
about the future of Mednet's business. These projections were
represented and warranted to have been prepared in good faith and,
as of September 15, 1995, to be reasonable. They were neither. By
way of example, and not limitation, as of September 15, 1995, just
two weeks from the end of its fiscal third quarter, Mednet
continued to provide Plaintiffs with a forecast of 1995 revenues as
being $172 million, which was a 50% overstatement of actual
revenues of just $114 million. The estimate provided to Plaintiffs
at the time of their multi-million dollar investment is to be
contrasted with Mednet's more realistic estimate of 1995 gross
revenues of $110 to $115 million, which was publicly disclosed by
Merryman on November 17, 1995, just eight weeks later. Mednet
provided similarly inflated estimates of gross profit, operating
income and net income for the year, which turned out to be enormous
losses. Projected balance sheet and cash flow items were also
materially misstated, as were revenues and other income statement
items for future years.
b. The proforma financials provided by Defendants materially
overstated the revenues reasonably expected to be added by the Home
Pharmacy acquisition and other matters. By way of example and not
limitation, although the proforma financials reflected the full
amount of the approximately $45 million in revenues arising out of
Home Pharmacy's existing contracts, Mednet knew that a number of
Home Pharmacy's contracts were likely to be terminated upon or
shortly following closing of the acquisition. In fact, in
attempting to justify the termination by the City of Chicago of a
contract with Home Pharmacy representing an estimated $8 million in
annual revenues, Merryman admitted after the closing that he had
expected the contract to be terminated all along but was not
concerned because it was not a profitable contract; however, prior
to closing Merryman had represented to Mayer that all Home Pharmacy
contracts were profitable. In all, Mednet lost contracts
representing more than 50% of Home Pharmacy's 1995 sales within
just months of Plaintiffs' investment. After the fact, Defendant
Heil also acknowledged to Mayer that he had been aware that
numerous contracts would be lost. The Offering Memorandum further
reflects that there would be an increase in Mednet's earnings
before interest, taxes, depreciation and amortization of $5 million
as a result of the Home Pharmacy acquisition, and Merryman further
orally represented that, on a proforma basis, Home Pharmacy would
have contributed $5.4 million to Mednet's operating income. In fact
Home Pharmacy contributed negligible income or losses.
c. The projections provided by Defendants materially overstated the
revenues reasonably expected to be obtained through Mednet's
contract with Trustmark. In the Offering Memorandum and in private
conversations, Mednet touted the Trustmark contract as likely to
generate more than $19 million in revenues over the then-coming
year and to have the potential for annual revenues many times that
amount. Indeed, Plaintiffs were orally assured by Merryman that a
$19 million revenue estimate was conservative. Mednet also promoted
the Trustmark contract as one that would have significant
additional benefits to Mednet's reputation and demonstrate its
capacity to handle such a large contract. In fact, there were no
reasonable basis for such expectations, and Trustmark revenues have
to date been less than 20% of what was represented to be expected.
d. The financial information provided by Mednet materially understated
Mednet's liabilities by, among other things, understating its
payables and tax liabilities.
e. The financial information overstated Mednet's receivables by, among
other things, including receivables derived from a program
involving heart patients from whom Mednet did not have a reasonable
likelihood of collecting.
f. Information provided by Mednet identifying clients and projected
revenues that Mednet had a "high profitability" of obtaining had no
reasonable basis and was grossly over-optimistic.
<PAGE>
g. The Private Placement Memo and other financial information provided
by Mednet contained material omissions by, among other things,
failing to disclose and discuss the liquidity crisis facing the
company, failing to disclose fully the transition problems Mednet
had a reasonable likelihood of encountering in connection with the
Home Pharmacy acquisition, and omitting to discuss the risk of loss
of numerous significant contracts. The purpose and effect of all of
these misrepresentations was substantially to overstate Mednet's
reasonably expected revenues, income and cash flow, and to
fraudulently induce Plaintiffs to invest in Mednet.
42. In addition to all other written and oral information provided,
Defendant Merryman and others provided personal, oral assurances that the
financial projections and other prospective information that had been provided
to Plaintiffs were conservative and, if anything, understated the future
potential and short and long term prospects for Mednet.
43. The Investment Agreement contains numerous representations and
warranties by Mednet intended for the protection of the investors. Mednet has
breached numerous of those representations and warranties, including those
contained in Sections 4.1(f), (m), (n), (q), (w), (y), (z), and (aa).
44. Mednet failed to comply with the federal securities laws and rules
by the SEC by failing to register the Preferred Stock as required by Section 5
of the Securities Act. This is also a breach of its representations and
warranties under the Investment Agreement.
45. Mednet has further breached the Investment Agreement by failing to
pay Herrick's legal expenses.
46. Mednet has further breached the Investment Agreement by refusing to
honor its covenants under the Preferred Stock and Convertible Notes issued by it
pursuant to the Investment Agreement.
47. Under Section 6.2 of the Investment Agreement, Mednet agreed
broadly to indemnify Plaintiffs and hold them harmless against
any and all direct and indirect costs...damages, losses, liabilities
and expenses (including attorneys' fees and disbursements), together
with any such costs or expenses to investigate the same or enforce the
provisions hereof...resulting to, imposed upon or incurred by any of
them, directly or indirectly, arising out of, based upon, or resulting
from the breach or inaccuracy of any representation or warranty made by
the Company, or the breach of, or failure to comply with, any covenant
or agreement of the Company, in this Agreement.
48. Under the terms of the Investment Agreement, Plaintiffs are
entitled to recover their legal fees, in addition to any other relief that may
be appropriate.
49. Because of Mednet's breaches of the Investment Agreement, an event
of default has occurred under the Convertible Notes on account of which
Plaintiffs may declare the Notes owned by them to be immediately due and
payable.
50. By virtue of Mednet's breaches of the Investment Agreement,
Plaintiffs have been damaged in an amount to be proven at trial in excess of $14
million.
FIFTH CAUSE OF ACTION
(Breach of Registration Rights Agreement Against Defendant Mednet)
51. Plaintiffs repeat and reallege paragraphs 1 through 50 as if fully
set forth herein.
52. By virtue of the foregoing conduct, Mednet has breached its
obligations under the Registration Rights Agreement by, among other things,
failing to exercise it best efforts to file a registration statement and have it
declared effective. During the period when Plaintiffs should have been, but as a
result of the delay caused by Mednet's breach were not, in a position to sell
Mednet common stock for which they held warrants and rights of conversion, the
price of Mednet's common stock declined substantially. As a result, Plaintiffs
have incurred significant damages to be proven at trial in excess of $3 million.
<PAGE>
53. Under Section 8 of the Registration Rights Agreement, Mednet agreed
to indemnify Plaintiffs and hold them harmless
from and against all losses, claims, damages, liabilities and
expenses...to which the Investor or any Holder...may become
subject...insofar as such Damages (or proceedings in respect thereof)
arise out of or are based upon...(ii) the breach of inaccuracy of any
representation or warranty made by [Mednet], or the breach of, or
failure to comply with, any covenant or agreement of [Mednet] in this
Agreement...
54. Under the terms of the Registration Rights Agreement, Plaintiffs
are entitled to recover their attorneys' fees in addition to any damages or
other relief to which they may be entitled.
SIXTH CAUSE OF ACTION
(Section 12(a)(2) and Section 15 of the Securities
Act Against All Defendants)
55. Plaintiffs repeat and reallege paragraphs 1 through 54 as if fully
set forth herein.
56. By virtue of the foregoing, Defendants Mednet and Merryman have
violated Section 12(a)(2) of the Securities Act, entitling Plaintiffs to
recision of their Preferred Stock purchases or rescissory damages, together with
interest.
57. Plaintiffs have commenced this action within one year of learning
of the material misstatements and omissions on which this claim is based.
58. Defendant Merryman is directly liable and is also liable for
Mednet's violation of Section 12(a)(2) under Section 15 of the Securities Act.
59. Defendants Lizerbram, McCarthy, Kirsch, Heil, Georgiou, Hanley,
Quick, Strauss, and Ward are secondarily liable under Section 15 of the
Securities Act.
SEVENTH CAUSE OF ACTION
(Section 10(b) and Section 20 of the Exchange Act and SEC
Rule 10b-5 Against All Defendants)
60. Plaintiffs repeat and reallege paragraphs 1 through 59 as if fully
set forth herein.
61. The material misstatements identified above were made by Defendants
Mednet and Merryman with knowledge or in reckless disregard of their falsity.
62. Plaintiffs reasonably relied upon the material misrepresentations
of Defendants Mednet and Merryman in electing to invest $3 million in Mednet by
purchasing Mednet securities.
63. By engaging in the foregoing conduct, Defendants Mednet and
Merryman have violated Section 10(b) of the Exchange Act and SEC Rule 10b-5
thereunder, as a result of which Plaintiffs have been damaged in an amount to be
proven at trial in excess of $14 million.
64. Merryman is independently liable and is also liable for Mednet's
violation of Section 10(b) and Rule 10b-5 under Section 20 of the Exchange Act.
65. Defendants Lizerbram, McCarthy, Kirsch, Heil, Georgiou, Hanley,
Quick, Strauss, and Ward are secondarily liable under Section 20 of the Exchange
Act.
EIGHTH CAUSE OF ACTION
(Fraud Against Defendants Mednet and Merryman)
66. Plaintiffs repeat and reallege paragraphs 1 through 65 as if fully
set forth herein.
<PAGE>
67. Defendants Mednet and Merryman knowingly made the foregoing
misstatements to Plaintiffs to induce them to invest in Mednet.
68. Plaintiffs reasonably relied upon Defendants' fraudulent conduct to
their detriment.
69. By virtue of the foregoing conduct, Defendants Mednet and Merryman
have defrauded Plaintiffs and have caused them substantial damages in excess of
$14 million. Defendant Merryman also has profited by his own sales of Mednet
stock during a period when he knew Plaintiffs were unable to sell their stock.
70. Mednet's and Merryman's conduct was oppressive and was undertaken
with malice and the intent to defraud Plaintiffs, entitling Plaintiffs to an
award of substantial punitive damages.
NINTH CAUSE OF ACTION
(Negligent Misrepresentation Against Defendants Mednet and Merryman)
71. Plaintiffs repeat and reallege paragraphs 1 through 70 as if fully
set forth herein.
72. The misstatements and omissions of Defendants Mednet and Merryman
were made under circumstances where Defendants knew or should have known that
their representations were untrue.
73. As a result of the negligent conduct of Defendants Mednet and
Merryman, Plaintiffs have suffered substantial damages in excess of $14 million.
TENTH CAUSE OF ACTION
(Breach of Fiduciary Duty Against Defendant Merryman)
74. Plaintiffs repeat and reallege paragraphs 1 through 73 as if fully
set forth herein.
75. As an officer and director of Mednet, Merryman owed to Plaintiffs
various fiduciary duties.
76. By virtue of the foregoing conduct, Merryman has breached his
fiduciary duties to Plaintiffs, as a result of which Plaintiffs have been
damaged in a substantial amount to be proven at trial.
ELEVENTH CAUSE OF ACTION
(Violation of California Corporations Code Against All Defendants)
77. Plaintiffs repeat and reallege paragraphs 1 through 76 as if fully
set forth herein.
78. By virtue of the foregoing, Defendants Mednet and Merryman have
violated California Civil Code Section 25401.
79. Plaintiffs are entitled to recision or damages, as provided for by
California Corporations Code Section 25501.
80. As directors of Mednet at the time it sold Preferred Stock to
Plaintiffs, Defendants Merryman, Lizerbram, McCarthy, Kirsch, Heil, Georgiou,
Hanley, Quick, Strauss, and Ward are jointly and severally liable for Mednet's
liability pursuant to California Corporations Code Section 25504.
<PAGE>
TWELFTH CAUSE OF ACTION
(Violation of Nevada Securities Act Against All Defendants)
81. Plaintiffs repeat and reallege paragraphs 1 through 80 as if fully
set forth herein.
82. By virtue of the foregoing, Defendants Mednet and Merryman have
violated Nevada Revised Statutes 90.570.
83. Plaintiffs are entitled to recision or damages, as provided for by
Nevada Revised Statutes 90.660.
84. As directors of Mednet at the time it sold Preferred Stock to
Plaintiffs, Defendants Merryman, Lizerbram, McCarthy, Kirsch, Heil, Georgiou,
Hanley, Quick, Strauss, and Ward are jointly and severally liable for Mednet's
liability pursuant to Nevada Revised Statutes 90.660.
THIRTEENTH CAUSE OF ACTION
(Violation of Florida Securities and Investor
Protection Act Against All Defendants)
85. Plaintiffs repeat and reallege paragraphs 1 through 84 as if fully
set forth herein.
86. By virtue of the foregoing, Defendants Mednet and Merryman have
violated Florida Statutes, Chapter 517, Section 517.301.
87. Plaintiffs are entitled to recision or damages, as provided for by
Florida Statutes, Chapter 517, Section 517.211.
88. As directors of Mednet at the time it sold Preferred Stock to
Plaintiffs, Defendants Merryman, Lizerbram, McCarthy, Kirsch, Heil, Georgiou,
Hanley, Quick, Strauss, and Ward are jointly and severally liable for Mednet's
liability pursuant to Florida Statutes, Chapter 517, Section 517.211.
<PAGE>
PRAYER FOR RELIEF
WHEREAS, Plaintiffs demand judgment as follows:
A. On its First Cause of Action, entry of an order declaring Plaintiffs'
rights as specified above.
B. On its Second Cause of Action, entry of an order directing Mednet to
deliver Convertible Notes to Plaintiffs.
C. On its Third Cause of Action, entry of an order preliminarily and
permanently enjoining Mednet from issuing preferred stock or debt without
compliance with the terms of the Convertible Notes, or otherwise violating
the terms of those Notes.
D. On its Fourth, Fifth, Seventh, Eighth, Ninth, and Tenth Causes of Action,
an award of damages in an amount to be proven at trial.
E. On its Sixth, Eleventh, Twelfth and Thirteenth Causes of Action, recision
or an award of rescissory damages, as appropriate.
F. An award of punitive damages.
G. Plaintiff's costs of suit, including their reasonable attorneys' fees to
the extent allowable by contract and law.
H. Such other and further relief as the court may deem just and proper.
DATED: November 5, 1996
/s/ Robert A. Sacks
----------------------------------------
Robert A. Sacks
SULLIVAN & CROMWELL
444 South Flower Street
Los Angeles, California 90071
Attorneys for Plaintiffs James
Argyropoulos and Norton Herrick
<PAGE>
DEMAND FOR TRIAL BY JURY
Plaintiffs demand a trial by jury on all issues so triable.
/s/ Robert A. Sacks
----------------------------------------
Robert A. Sacks
SULLIVAN & CROMWELL
444 South Flower Street
Los Angeles, California 90071
Attorneys for Plaintiffs James
Argyropoulos and Norton Herrick
