AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 2002
REGISTRATION NO. 333-61566
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
POST EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
---------------------
METROPOLITAN HEALTH NETWORKS, INC.
(Name of Small Business Issuer in Its Charter)
<Table>
FLORIDA 8011 65-0635748
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
</Table>
500 AUSTRALIAN AVENUE SOUTH, SUITE 1000
WEST PALM BEACH, FL 33401
(561) 805-8500
(Address and Telephone Number of Principal Executive Offices)
---------------------
FRED STERNBERG, CHAIRMAN, PRESIDENT AND CEO
500 AUSTRALIAN AVENUE SOUTH, SUITE 1000
WEST PALM BEACH, FL 33401
(561) 805-8500
(Name, Address and Telephone Number of Agent For Service)
---------------------
COPIES OF ALL COMMUNICATIONS TO:
JOEL D. MAYERSOHN, ESQ.
ATLAS PEARLMAN, P.A.
350 EAST LAS OLAS BOULEVARD, SUITE 1700
FORT LAUDERDALE, FL 33301
TELEPHONE: (954) 763-1200
FACSIMILE NO. (954) 766-7800
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this Registration Statement.
We hereby amend this Registration Statement on such date or dates as may be
necessary to delay its effective date until we file a further amendment which
specifically states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933, as
amended, or until the Registration Statement shall become effective on such date
as the Securities and Exchange Commission, acting under Section 8(a), may
determine.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
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PROSPECTUS
METROPOLITAN HEALTH NETWORKS, INC.
8,547,498 SHARES OF COMMON STOCK
This prospectus covers the 8,547,498 shares of common stock of Metropolitan
Health Networks, Inc. being offered for resale by certain selling security
holders.
Our common stock is traded on the OTCBB under the trading symbol "MDPA". On
May 3, 2002, the closing price for our common stock was $0.60.
---------------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES
ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS"
BEGINNING ON PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
May 7, 2002
PROSPECTUS SUMMARY
This summary contains what we believe is the most important information
about us and the offering. You should read the entire document for a complete
understanding of our business and the transactions we are involved in. The
purchase of the securities offered by this prospectus involves a high degree of
risk. Risk factors include the lack of revenues and history of loss, and the
need for additional capital. See the "Risk Factors" section of this prospectus
for additional risk factors.
THE COMPANY
BUSINESS DESCRIPTION
We have agreements with HMOs to manage the financial risk for managed care
organizations in South and Central Florida and are responsible for providing
healthcare services to approximately 48,000 patients. We provide our services
through a network of primary care physicians, specialists, hospitals and
ancillary facilities. These providers have contracted to provide services to our
patients agreeing to certain fee schedules and care requirements.
We have developed management expertise in the fields of:
- Quality management -- a review of overall patient care by physicians by
reviewing referrals measured against standard industry guidelines, which
provide the basis to determine that patient care meets the highest
standards of medical care.
- Utilization management -- a daily review of the physicians care and
services through statistical data created by patient visits, referrals,
hospital admissions and nursing home information that enables us to
monitor effective medical care. The methods used also provide disease
management for the benefit of the high-risk patients.
- Claims adjudication and payment to physicians and hospitals.
Under our model, the physicians maintain their independence but are aligned
with a professional staff to assist in providing cost effective medicine. Each
primary care physician provides direct patient services as a primary care doctor
including referrals to specialists, hospital admissions and referrals to
diagnostic services.
We believe our expertise allows us to provide a service and manage the risk
that health insurance companies cannot provide on an efficient and economic
level. Health insurance companies are typically structured as marketing entities
to sell their products on a broad scale. Due to mounting pressures from the
industry, managed care organizations have altered their strategy, returning to
the traditional model of selling insurance and transferring the risk to a
provider service network. Under such arrangements, managed care organizations
receive premiums from the government Healthcare Financing Administration (HCFA)
and commercial groups and pass a significant percentage of the premium on to a
third party such as us, to provide covered benefits to patients, including
pharmacy and other enhanced services. After all medical expenses are paid, any
surplus or deficit remains with the provider service network. When managed
properly, accepting this risk can create significant surpluses.
We also use the Internet to help process referral claims between network
primary care physicians and specialists. This process helps reduce the paperwork
in the physician's office as well as provide a more efficient method for the
patient in our network. Our utilization management team communicates with the
physicians on a daily basis to provide overall management of the patient.
Our executive offices are located at 500 Australian Avenue South, Suite
1000, West Palm Beach, Florida 33401, and our telephone number is (561)
805-8500.
References throughout this prospectus to "we", "us" and "our" are to
Metropolitan Health Networks, Inc. and its subsidiaries.
1
THE OFFERING
SELLING SHAREHOLDERS
On March 30, 2001, we entered into a common stock purchase agreement with
Copira Investments Inc., a British Virgin Islands corporation.
We are registering 470,000 shares of common stock underlying the warrants
that we granted to Copira and 470,000 shares of common stock underlying the
warrants that we granted GKN Securities Corp. in connection with the common
stock purchase agreement. Warrants to purchase 188,000 shares were assigned to
five employees of GKN Securities. We are also registering for resale 1,915,945
shares to be issued upon exercise of various warrants, options and convertible
notes. We are registering an additional 5,691,553 outstanding shares held by
various shareholders. These shares may be offered for sale from time to time by
means of this prospectus by or for the accounts of Copira, GKN Securities, the
other warrant holders, note holders, option holders and shareholders.
On May 3, 2002, the closing price for our common stock on the OTCBB was
$0.60.
This prospectus covers up to 8,547,498 shares of our common stock which may
be sold by the selling stockholders identified in this prospectus. The number of
shares subject to this prospectus represents 26.64% of our issued and
outstanding common stock as of December 31, 2001.
SUMMARY FINANCIAL DATA
The following summary of our financial information has been derived from
our audited financial statements that are included in this prospectus.
RESULTS OF OPERATION
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Revenues............................................. $131,530,583 $119,129,854
Operating Expenses................................... 129,264,993 117,461,591
------------ ------------
Net Income........................................... 1,008,754 4,928,569
Net earnings Per Share
(basic)............................................ 0.04 0.28
(diluted).......................................... 0.04 0.24
------------ ------------
</Table>
BALANCE SHEET DATA
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2001 2000
------------ -----------------
Working Capital (Deficit)................................ $ 5,109,340 $ (528,364)
Total Assets............................................. 19,362,675 11,765,252
Total Liabilities........................................ 10,683,441 10,924,619
Shareholder's Equity..................................... 8,679,234 840,633
</Table>
2
RISK FACTORS
Prospective investors should carefully consider, along with other matters
referred to herein, the following risk factors.
FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD HARM OUR BUSINESS AND RESULTS OF
OPERATION.
We have experienced rapid growth in our business. This growth may impair
our ability to provide our services efficiently and to manage our employees
adequately. Our strategy is to focus on growth within geographic parameters,
identifying regions throughout Florida. We are taking steps to manage our growth
and to date have not experienced any persistent difficulties in managing our
growth. Future results of operations could be materially adversely affected if
we are unable to manage our growth effectively.
WE HAVE ONLY RECENTLY ACHIEVED PROFITABILITY AND WE MAY NOT BE ABLE TO SUSTAIN
PROFITABILITY.
We have achieved increased levels of revenues for the year ended December
31, 2001, and though this was our second profitable year, up to this date we
have operated with negative cash flows. For the year ended December 31, 2001, we
incurred a profit of $1,008,754. For the year ended December 31, 2000, we
incurred a profit of $4,928,569 of which $3,448,258 was a non-recurring gain.
Our operating expenses have increased and can be expected to increase in
connection with our operational growth and, accordingly, our future
profitability may depend on corresponding increases in revenues from operations.
Future events, including unanticipated expenses, increased competition or
changes in government regulation, could have an adverse affect on our operating
margins and results of operations. As a result, we may experience liquidity and
cash flow problems in the future, and may require additional financing. There
can be no assurance that our rate of revenue growth will continue in the future,
that our future operations will be profitable, or that we will be able to obtain
additional financing, if an when necessary, on terms acceptable to us.
OUR QUARTERLY RESULTS WILL LIKELY FLUCTUATE, WHICH COULD CAUSE THE VALUE OF OUR
COMMON STOCK TO DECLINE.
We are subject to quarterly variations in our medical expenses due to
fluctuations in patient utilization. We have significant fixed operating costs
and, as a result, are highly dependent on patient utilization to sustain
profitability. Our results of operations for any quarter are not necessarily
indicative of results of operations for any future period or full year. We
experience increased patient population and greater use of medical services in
the winter months. As a result, our results of operations may fluctuate
significantly from period to period. In addition, there recently has been
significant volatility in the market price of securities of health care
companies that in many cases we believe has been unrelated to the operating
performance of these companies. We believe that certain factors, such as
legislative and regulatory developments, quarterly fluctuations in our actual or
anticipated results of operations, lower revenues or earnings than those
anticipated by securities analysts, and general economic and financial market
conditions, could cause the price of our common stock to fluctuate
substantially.
THE LOSS OF CERTAIN AGREEMENTS AND THE CAPITATED NATURE OF OUR REVENUES COULD
MATERIALLY EFFECT OUR OPERATIONS.
The majority of our revenues come from agreements with managed care
organizations that provide for the receipt of capitated fees. The principal
organization that we contract with is Humana. Capitated fees are negotiated fees
that stipulate a specific dollar amount or a percentage of total premium
collected by an insurer or payor source to cover the partial or complete
healthcare services deliveries to a person. We generally enter into agreements
which are for one-year terms and subject to annual negotiation of rates, covered
benefits and other terms and conditions. These agreements may be terminated on
short notice or not renewed on terms favorable to us and our affiliated
providers. We may not be successful in obtaining additional HMO agreements or in
increasing the number of HMO enrollees. A decline in enrollees in HMOs could
also have a material adverse effect on our profitability.
Under the HMO agreements we, through our affiliated providers, generally
are responsible for the provision of all covered hospital benefits, as well as
outpatient benefits, regardless of whether the affiliated
3
providers directly provide the healthcare services associated with the covered
benefits. To the extent that enrollees require more care than is anticipated,
aggregate capitation rates may be insufficient to cover the costs associated
with the treatment of enrollees. If revenue is insufficient to cover costs, our
operating results could be adversely affected. As a result, our success will
depend in large part on the effective management of health care costs. Pricing
pressures may have a material adverse effect on our operating results. Changes
in health care practices, inflation, new technologies, and numerous other
factors affecting the delivery and cost of health care are beyond our control
and may adversely affect our operating results.
THE DEVELOPMENT OF MANAGEMENT INFORMATION SYSTEMS MAY INVOLVE SIGNIFICANT TIME
AND EXPENSE.
Our management information systems are important components of the business
and are becoming a more significant factor in our ability to remain competitive.
We already possess a physician billing and collection system. We are
participating in the development of an integrated management information system.
To date, we have not experienced any systematic glitch or significant setback
related to the functioning of our present management information system or to
the development of our new system. The development and implementation of such
systems involve the risk of unanticipated delay and expense, which could have an
adverse impact on our operations.
EXPOSURE TO PROFESSIONAL LIABILITY AND THE HIGH COST OF LIABILITY INSURANCE
COULD ADVERSELY EFFECT OUR FINANCIAL OPERATION.
In recent years, physicians, hospitals and other providers in the health
care industry have become subject to an increasing number of lawsuits alleging
medical malpractice and related legal theories. Many of these lawsuits involve
large claims and substantial defense costs. We maintain professional liability
insurance coverage, on a claims basis, in an amount of $1.0 million per claim
and $3.0 million in the aggregate for each physician and errors and omissions
coverage of $1.0 million per claim and $3.0 million in the aggregate. Those
amounts exceed the requirements as mandated by the state of Florida but which
may not be adequate to protect our assets.
THE LOSS OF A SIGNIFICANT CONTRACT WITH HUMANA WOULD MATERIALLY EFFECT OUR
OPERATIONS.
We have one year renewable agreements with Humana to provide healthcare
services to members in certain healthcare networks established or managed by
Humana. For the twelve months ended December 31, 2001, approximately 96% of our
revenue was obtained from these agreements. These agreements may be terminated
in the event we participate in activities Humana reasonably believes may
adversely effect the health or welfare of any member or other material breach.
Failure to maintain these agreements, or successfully develop additional sources
of revenue could adversely effect our financial condition.
OUR INDUSTRY IS ALREADY VERY COMPETITIVE; INCREASED COMPETITION COULD ADVERSELY
AFFECT OUR REVENUES.
The health care industry is highly competitive and subject to continual
changes in the method in which services are provided and the manner in which
health care providers are selected and compensated. Companies in other health
care industry segments, some of which have financial and other resources greater
than we do, may become competitors in providing similar services. Our principal
competitors include Continucare, Florida Health Choice and Primary Care
Specialists. Our strength in comparison with our competitors is our knowledge,
understanding and experience in managed care risks, particularly with Medicare.
We may not be able to continue to compete effectively in this industry.
Additional competitors may enter our markets and this competition may have an
adverse effect on our revenues.
WE ARE DEPENDENT UPON OUR KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS.
Our success depends to a significant extent on the continued contributions
of our key management, including our chairman, president and chief executive
officer, Fred Sternberg, and Debra Finnel, our chief operating officer and vice
president. We have no insurance policies for our executive officers. The loss of
Mr. Sternberg or Ms. Finnel or other key personnel could have a material adverse
effect on our financial
4
condition, results of operations and plans for future development. While we have
employment contracts with Mr. Sternberg and Ms. Finnel, we compete with other
companies for executive talent and there can be no assurance that highly
qualified executives would be readily available.
THE HEALTH CARE INDUSTRY IS HIGHLY REGULATED AND OUR FAILURE TO COMPLY WITH LAWS
OR REGULATIONS, OR A DETERMINATION THAT IN THE PAST WE HAVE FAILED TO COMPLY
WITH LAWS OR REGULATIONS, COULD HAVE AN ADVERSE EFFECT ON OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The health care services that we and our affiliated professionals provide
are subject to extensive federal, state and local laws and regulations governing
various matters such as the licensing and certification of our facilities and
personnel, the conduct of our operations, our billing and coding policies and
practices, our policies and practices with regard to patient privacy and
confidentiality, and prohibitions on payments for the referral of business and
self-referrals. If we fail to comply with these laws, or a determination is made
that in the past we have failed to comply with these laws, our financial
condition and results of operations could be adversely affected. Changes to
health care laws or regulations may restrict our existing operations, limit the
expansion of our business or impose additional compliance requirements. These
changes, if effected, could have the effect of reducing our opportunities or
continued growth and imposing additional compliance costs on us that may not be
recoverable through price increases.
Federal anti-kickback laws and regulations prohibit certain offers,
payments or receipts of remuneration in return for referring Medicaid or other
government-sponsored health care program patients or patient care opportunities
or purchasing, leasing, ordering, arranging for or recommending any service or
item for which payment may be made by a government-sponsored health care
program. In addition, federal physician self-referral legislation, known as the
Stark law, prohibits Medicare or Medicaid payments for certain services
furnished by a physician who has a financial relationship with various
physician-owned or physician-interested entities. These laws are broadly worded
and, in the case of the anti-kickback law, have been broadly interpreted by
federal courts, and potentially subject many business arrangements to government
investigation and prosecution, which can be costly and time consuming.
Violations of these laws are punishable by monetary fines, civil and criminal
penalties, exclusion from participation in government-sponsored health care
programs and forfeiture of amounts collected in violation of such laws, which
could have an adverse effect on our business and results of operations. Florida
also has anti-kickback and self-referral laws, imposing substantial penalties
for violations.
LIMITATIONS OF OR REDUCTION IN REIMBURSEMENT AMOUNTS OR RATES BY
GOVERNMENT-SPONSORED HEALTHCARE PROGRAMS COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
As of December 31, 2001 approximately 95% of our revenues were derived from
reimbursements by various government-sponsored health care programs. These
government programs, as well as private insurers, have taken and may continue to
take steps to control the cost, use and delivery of health care services. The
following events could result in an adverse effect on our financial condition
and results of operations:
- reductions in or limitations of reimbursement amounts or rates under
programs,
- reductions in funding of programs,
- elimination of coverage for certain individuals or treatments under
programs, which may be implemented as a result of increasing budgetary
and cost containment pressures on the health care industry, or
- new federal or state legislation reducing funding and reimbursements.
WE HAVE ANTI-TAKEOVER PROVISIONS WHICH MAY MAKE IT DIFFICULT TO REPLACE OR
REMOVE OUR CURRENT MANAGEMENT.
Our Articles of Incorporation authorize the issuance of up to 10,000,000
shares of preferred stock with such rights and preferences as may be determined
from time to time by the Board of Directors. Our Board of Directors may, without
shareholder approval, issue preferred stock with dividends, liquidation,
conversion,
5
voting or other rights which could adversely affect the voting power or other
rights of the holders of our common stock. The ability of our board to issue
preferred stock may prevent or frustrate shareholder attempts to replace or
remove current management.
DUE TO THE SUBSTANTIAL NUMBER OF OUR SHARES THAT WILL BE ELIGIBLE FOR SALE IN
THE NEAR FUTURE, THE MARKET PRICE OF OUR COMMON STOCK COULD FALL AS A RESULT OF
SALES OF A LARGE NUMBER OF SHARES OF COMMON STOCK IN THE MARKET, OR THE PRICE
COULD REMAIN LOWER BECAUSE OF THE PERCEPTION THAT SUCH SALES MAY OCCUR.
These factors could also make it more difficult for us to raise funds
through future offerings of our common stock. As of May 2, 2002, there were
32,084,649 shares of our common stock outstanding. All of which will be freely
tradable without restriction with the exception that approximately 5,500,000
shares, which are owned by certain of our officers, directors, affiliates and
third parties, may be sold publicly at any time subject to the volume and other
restrictions under Rule 144 of the Securities Act of 1933;
In addition, as of December 31, 2001, approximately 7,380,400 shares of our
common stock were reserved for issuance upon the exercise of warrants and
options which have been previously granted.
OUR COMMON STOCK HAS EXPERIENCED IN THE PAST, AND IS EXPECTED TO EXPERIENCE IN
THE FUTURE, SIGNIFICANT PRICE AND VOLUME VOLATILITY, WHICH SUBSTANTIALLY
INCREASES THE RISK OF LOSS TO PERSONS OWNING COMMON STOCK.
Because of the limited trading market for our common stock, and because of
the possible price volatility, you may not be able to sell your shares of common
stock when you desire to do so. The inability to sell your shares in a rapidly
declining market may substantially increase your risk of loss because of such
illiquidity and because the price for our common stock may suffer greater
declines because of its price volatility.
OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING THAT WE WILL CONTINUE AS A
GOING CONCERN.
The auditors' reports on our 2001 and 2000 financial statements state that
certain matters "raise substantial doubt about the company's ability to continue
as a going concern." We continue to explore the possibility of raising funds
through available sources which include equity and debt markets. In the event we
are unable to generate sufficient revenues to maintain operations we cannot be
certain that the company will be successful at raising the additional funds
needed.
FORWARD LOOKING STATEMENTS
The discussion in this Prospectus regarding our business and operations
includes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1996. Such statements consist of any
statement other than a recitation of historical fact and can be identified by
the use of forward-looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. The reader is cautioned that all forward-looking
statements are speculative, and there are certain risks and uncertainties that
could cause actual events or results to differ from those referred to in such
forward-looking statements. This disclosure highlights some of the important
risks regarding our business. The risks included should not be assumed to be the
only things that could affect future performance. Additional risks and
uncertainties include the potential loss of contractual relationships,
fluctuations in the volume of procedures performed by our facilities and
physicians, changes in the reimbursement rates for those services as well as
uncertainty about the ability to collect the appropriate fees for services
provided by us.
6
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2001
on an audited basis. The table should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
prospectus.
<Table>
<Caption>
DECEMBER 31, 2001
-----------------
Current maturities of long-term debt........................ $ 828,788
Long-term debt.............................................. 689,812
Shareholders' equity:
Common Stock, $.001 par value, 80,000,000 shares authorized,
27,479,087 shares issued and outstanding.................. 27,479
Preferred Stock, $.001 par value, 10,000,000 shares
authorized, 5,000 shares issued or outstanding............ 500,000
Additional paid-in capital.................................. 26,044,905
Accumulated deficit......................................... (17,575,786)
Other....................................................... (317,364)
------------
Total shareholders' equity........................ $ 8,679,234
============
</Table>
7
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our shares of common stock are traded on the OTCBB under the symbol "MDPA".
Our warrants traded under the symbol "MDPAW" until March 15, 2001, when they
expired. The following tables set forth the high and low closing bid prices for
the common stock as reported by OTCBB:
COMMON STOCK
<Table>
<Caption>
PERIOD HIGH LOW
- ------ ------ ------
April 1, 2000 - June 30, 2000............................... 2.750 1.031
July 1, 2000 - September 30, 2000........................... 3.313 1.531
October 1, 2000 - December 31, 2000......................... 2.000 0.750
January 1, 2001 - March 31, 2001............................ 1.844 0.875
April 1, 2001 - June 30, 2001............................... 3.340 1.930
July 1, 2001 - September 30, 2001........................... 2.900 1.750
October 1, 2001 - December 31, 2001......................... 2.080 1.030
January 1, 2002 - March 31, 2002............................ 1.400 0.670
April 1, 2002 - May 1, 2002................................. 0.830 0.480
</Table>
Holders of our common stock are entitled to cash dividends when, as may be
declared by the board of directors. We do not intend to pay any dividends in the
foreseeable future and investors should not rely on an investment in us if they
require dividend income. We intend to retain earnings, if any, to finance the
development and expansion of our business. Future dividend policy will be
subject to the discretion of our board of directors and will be based upon
future earnings, if any, our financial condition, capital requirements, general
business conditions and other factors. There can be no assurance that cash
dividends of any kind will ever be paid.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by Copira, GKN
Securities, the other warrant holders, option holders, note holders or
shareholders. However, we will receive proceeds from any sale of common stock to
Copira under the equity line of credit agreement described in this prospectus
and upon the exercise of the warrants and options by the warrant and option
holders when, and if, they exercise the warrants or options for cash.
If we exercise any draw downs under the equity line of credit agreement or
receive any proceeds from the exercise of other options or warrants, we expect
to use substantially all the net proceeds for working capital requirements and
acquisitions although we are not obligated to use the proceeds for any specific
purpose. As of the date of this prospectus, we have not identified any specific
acquisition. We are not obligated to, and may decide not to, exercise any draw
downs under the equity line of credit agreement. If we decide not to exercise
any draw downs we will not receive any proceeds under the equity line of credit
agreement.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
INTRODUCTION
We had revenues of $131.5 million for the year ended December 31, 2001,
compared to $119.1 million in the prior year. Operating expenses for those same
periods were $129.3 million and $117.5 million, respectively. We had net income
of $1.0 million for the year ended December 31, 2001 compared to net income of
$4.9 million for the year ended December 31, 2000. Excluding nonrecurring gains
and losses, net income for the year ended December 31, 2001 was $1.6 million,
compared to $908,000 in the prior year, an improvement of 76.9%. In 2001,
nonrecurring gains and losses consisted of a write-down of accounts receivable
from a closed medical practice of $775,000 and a gain on settlement of
litigation of $177,000, and in 2000 consisted of gains on settlement of
litigation of $4.0 million.
During 2001, in an effort to diversify our revenue base and ultimately
increase shareholder value, we implemented our pharmacy division (MetcareRx),
began the process of filing for our own HMO license and continued the
development of our clinical laboratory. In pursuing this expansion and
diversification, we incurred losses related to these operations of approximately
$2.7 million, including an allocation of corporate overhead. It is expected that
these operations, in total, will achieve profitability by the third quarter of
2002.
Earnings before interest, taxes, depreciation and amortization (EBITDA),
exclusive of nonrecurring items, were $3.2 million and $2.3 million for the
years ended December 31, 2001 and 2000, respectively an improvement of 39.1%. In
addition, we increased our net worth by $7.8 million in 2001 to $8.7 million at
December 31, 2001 and increased our working capital by $5.6 million in 2001 to
$5.1 million at December 31, 2001.
REVENUES
Revenues for the year ended December 31, 2001 increased $12.4 million
(10.4%) over the prior year from $119.1 million to $131.5 million. PSN revenues,
the core of our business, also increased 10.4%, from $114.9 million to $126.9
million, due primarily to the following factors; funding increases from
revisions to the Balanced Budget Act of approximating $5.0 million, opening new
medical offices in Belle Glade and Boca Raton totaling $5.4 million and
increased membership in our Daytona market.
Revenues for 2001 included approximately $3.1 million from Metcare Rx,
which began operations in the Daytona market in June 2001, New York in July
2001, and Maryland in October 2001. Management believes that with the proper
capitalization, MetcareRx will eventually account for a significant percentage
of our overall revenues as it continues to expand in its existing market and
enter other markets. Pharmacy sales to the PSN of approximately $296,000 have
been eliminated in consolidation. In addition, revenues for 2001 included
$563,000 from its clinical laboratory (Metlabs), as compared to revenues of only
$82,000 in the prior year.
The overall increase in revenues was partially offset by a decrease from
the closure of a medical practice, which reported revenues of $1.3 million in
2000, compared to only $345,000 in 2001. Revenues also decreased approximately
$970,000 in 2001, due to a reduction in one-time revenue and revenue from
discontinued and other non-PSN operations from 2000 to 2001.
EXPENSES
Operating expenses for the year ended December 31, 2001 increased 10.0%
over the prior year, in line with the 10.4% increase in revenue. Direct medical
costs, the largest component of expense, represent certain costs associated with
providing services of the PSN operation including direct medical payments to
physician providers, hospitals and ancillaries on a capitated or fee for service
basis. For the year ended December 31, 2001, these costs represented 89.0% of
PSN revenue, which is referred to as the Medical Loss Ratio ("MLR"), a
significant improvement over the prior year MLR of 95.1%. Overall, despite a
10.4% increase in PSN revenues, direct medical costs in 2001 increased only
3.4%, from $109.2 million to $112.9 million. This
9
improvement is due to our improved utilization efforts and initiatives including
our newly implemented hospitalist program, the June start-up of our pharmacy
division in the Daytona market and improved terms in our specialty contracts. We
expect to continue this trend with the recently announced Oncology and Partners
In Quality (PIQ) programs, which are designed to reduce costs while improving
patient care.
Cost of sales for the year ended December 31, 2001 totaled $2.3 million and
represents the cost of the pharmaceuticals sold by MetcareRx. The pharmacy
division had a gross profit percentage for 2001 of 26%.
Salaries and benefits for the year increased 82.8% over 2000, from $4.1
million to $7.4 million. A number of new operations were opened in late 2000 and
2001 as we continued to implement our business plan. These new operations
accounted for $2.7 million of the $3.3 million increase in payroll related
costs. Three of these new operations (Port Orange, Ormond Beach and Everglades),
totaling $1.2 million in payroll costs were opened February 2001 and operated as
medical centers for our PSN operations. In July 2001, a fourth new medical
center was opened in Boca Raton, incurring $172,000 in payroll costs for the
year. Metlabs, acquired October 2000, accounted for $320,000 of the increase in
payroll expenses while MetcareRx accounted for $959,000 of incremental payroll
costs in its Florida, New York and Maryland facilities. We believe we have the
necessary management in place in both MetcareRx and Metlabs to support the
revenue growth we anticipate in 2002 and beyond. In addition, in late 2000 and
early 2001, we recognized the need to reinforce our management team, hiring
three new senior managers that represented approximately $432,000 in incremental
payroll costs for 2001. Salary increases, increases in medical insurance
premiums and a bolstering of our staffing throughout the Company accounted for
the balance of the increase, which was partially offset by an $89,000
incremental decrease resulting from the closure of a medical practice.
Depreciation and amortization for the year ended December 31, 2001 totaled
$870,000, an increase of $204,000 over the prior year. Amortization of goodwill
accounted for $101,000 of the increase, due to the acquisition of Metlabs and
Medical Practices. Depreciation on fixed assets acquired in 2001 accounted for
the balance of the increase.
Bad debt expense decreased $335,000 in 2001 as compared with the prior
year. The decrease resulted from the decline in revenues on the closed medical
practice as the corresponding bad debt expense for this practice decreased
$527,000 from 2000 to 2001. Additional reserves on accounts receivable from
discontinued operations account for the net balance.
Rent and leases for the year ended December 31, 2001 totaled $962,000, a
$307,000 (47.0%) increase over the prior year. The aforementioned new operations
accounted for a majority ($268,000) of the increase, with the balance resulting
from annual increases in rent in our corporate and medical offices.
Consulting expenses increased $952,000 in 2001, from $323,000 in 2000 to
nearly $1.3 million in 2001. Of the increase, $321,000 was incurred in
connection with investment banking and advisory services and $111,000 was spent
in the development of our HMO, part of our long-term goal to diversify our
revenue base. An additional $86,000 was incurred in our Hospitalist and
Utilization/Quality Assurance/Management programs, which are designed to lower
direct medical costs while improving patient care. Also, as mentioned above,
during 2001 we implemented our pharmacy division, opened four new medical
practices and expanded our clinical laboratory, which accounted for an
additional $213,000 in incremental consulting expenses. Lastly, in conjunction
with the cancellation of the Pharmacy Management and Preferred Provider
Agreements with a pharmacy consultant, we entered into a one-year software
agreement with the consultant, accounting for $175,000 in expense during 2001.
General and administrative expenses increased from $1.9 million in 2000 to
$3.2 million in 2001, an increase of $1.3 million or 71.6%. New locations
accounted for approximately $1.5 million in incremental general and
administrative expenses, which was partially offset by the savings of $275,000,
resulting from the closure of a medical practice and a $171,000 decrease in
billing and collection fees from 2000 to 2001 resulting from the renegotiation
and eventual cancellation of our contract with an outside billing company. In
addition, legal, accounting and other related costs incurred as a result of
regulatory filings accounted for $163,000 of the increase while insurance costs
increased $89,000 due to an overall increase in premiums and the addition of new
medical offices.
10
Other income and expenses for the year ended December 31, 2001 included a
write down of accounts receivable from a closed medical practice of $775,000 and
a gain on settlement of litigation of $177,000 as compared to gains on
settlement of litigation recorded in 2000 of approximately $4.0 million.
Interest and penalty expense decreased by approximately $121,000 for the year,
from $768,000 to $647,000 due to the decrease in the average amount of
interest-bearing debt carried by us in 2001 as compared to 2000.
LIQUIDITY AND CAPITAL RESOURCES
In the year ended December 31, 2001, we had EBITDA of $2.7 million, which
was used to fund current operations. In addition, we raised approximately $6.0
million in debt and equity and were able to settle prior obligations at terms
favorable to us. As a result, working capital increased by $5.6 million from
December 31, 2000 to December 31, 2001 and shareholders' equity improved by $7.8
million. However, we have sustained substantial negative cash flows from
operations in 2001 primarily as a result of our diversification of our revenue
base, including the pharmacy and clinical laboratory operations. Although we
believe we will become cash flow positive from operations in 2002, there can be
no assurance that this will occur. In the absence of achieving positive cash
flows from operations or obtaining additional debt or equity financing, we may
have difficulty meeting current and long-term obligations. The auditor's report
on our financial statement states that certain matters raise substantial doubt
about our ability to continue as a going concern. To address these concerns, we
continue to pursue debt and/or equity financing.
Subsequent to year-end, we issued 500,000 shares to accredited investors,
in connection with private placements, resulting in proceeds of $500,000 that
were used for working capital. Additionally, we borrowed $1,700,000 on
short-term notes payable of which $1,200,000 is due June 6, 2002 and $500,000 is
due June 21, 2002 and $625,000 in long-term notes payable, with varying interest
rates ranging from 5% to 24% and beneficial conversion features. Certain notes
also provide for issuance of 65,000 warrants in the aggregate and are
collateralized by all our assets. The proceeds from these transactions were used
for working capital. Such offerings were to accredited investors pursuant to
Section 4(2) of the Securities and Exchange Act of 1934.
In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon our continued operations which
in turn is dependent upon our ability to meet our financial obligations.
Management believes that actions presently being taken, as described in the
preceding paragraph, provide the opportunity for us to continue as a going
concern.
The primary source of our liquidity is derived from payments from our
full-risk contracts with an HMO. In March 2002, two investors, on our behalf,
funded $1,000,000 as collateral for a letter of credit in favor of the HMO. The
letter of credit was required by our contract with the HMO and enabled us to
favorably renegotiate certain terms of the contract. We agreed to purchase the
collateral over ten months at an effective rate of 24% per annum.
At December 31, 2001 we had a recorded liability for unpaid payroll taxes
and related interest and penalties of approximately $2.1 million. Effective,
April 2001, we negotiated an installment plan with the Internal Revenue Service
(IRS) whereby we will make monthly installments ranging from $50,000 to $100,000
until the liability is retired (see Audited Financials).
11
BUSINESS
DESCRIPTION OF BUSINESS
INTRODUCTION
Metropolitan Health Networks, Inc. (the "Company," "Metcare," "we," or
"us") was incorporated in the State of Florida in January 1996. In 2000, we
implemented our new strategic plan, operating as a Provider Service Network
(PSN), specializing in managed care risk contracting. Our ability to control our
Network has produced favorable medical loss ratios, allowing us to successfully
tap into the trillion dollar healthcare market. Through its Network, we provide
care to over 25,000 Medicare+Choice patients, 7,000 commercial HMO patients and
approximately 13,000 fee-for-service patients aligned with various health plans.
The primary focus of the PSN division in 2001 was establishing the network
and infrastructure along with creating the application necessary to become a
Health Maintenance Organization. Many opportunities have been augmented by
current legislation and a political environment that has demonstrated support
for the Medicare+Choice program. An example of this support is the current
additional funding that has been proposed to begin in 2003, along with bonuses
for health plans that are willing to establish a presence in underserved
markets. Metcare's business plan is modeled to take full advantage of the new
direction of the Medicare+Choice program with the initial underserved market of
the Treasure Coast of Florida (Martin, St. Lucie and Okeechobee Counties).
Responding to rapid increases in pharmacy spending, in June of 2001 we
formed Metcare Rx, Inc., a wholly owned subsidiary, to control costs and to
reduce prescription drug expenditures that are forecasted to increase by over
100% in the next decade. An increasing number of health plans with low-cost
co-pays for drug coverage, direct-to-consumer advertising, and newer, better
therapies requiring high-cost branded products all drive up the cost of pharmacy
benefits. In an effort to reduce these costs, we have negotiated agreements
allowing us to directly negotiate contracts for the purchase, filling and
delivery of prescriptions. Assuming that we can successfully implement this
agreement throughout our Network, we believe we can achieve better management
and control to provide significant cost savings and incremental revenues. With
the use of the software technology included in this system, the physician is
provided with a preferred formulary resulting in reduced costs to both the
patient and us.
For the year ended December 31, 2001, revenues increased 10.4% to $131.5
million from $119.1 million with net income, excluding nonrecurring gains and
losses, of $1.6 million for the year ended December 31, 2001 compared to
$908,000 for the prior year, an increase of 76.9% for the year. We improved
shareholder value by increasing our net worth $7.8 million in 2001 to $8.7
million at December 31, 2001, and by increasing our working capital $5.6 million
in 2001 from a negative $528,000 as of December 31, 2000. Operationally,
exclusive of nonrecurring gains and losses, our EBITDA was $3.2 million in 2001
as compared to $2.3 million in 2000, an increase of 39%.
INDUSTRY
A recent study from the Center for Medicare and Medicaid Services (CMS)
projects spending for healthcare in the United States will increase from $1.2
trillion in 1999 to over $2 trillion by 2006, or 15.9% of the Gross Domestic
Product. Healthcare costs per person are expected to rise from $3,759 to $7,100
in 2006. Pharmacy expenditures were approximately $126 billion in 2000, over
$150 billion in 2001 and are expected to double over the next decade. A number
of factors are at work affecting the patient, healthcare provider and payor
relationship. Managed care plans that have traditionally competed on price are
beginning to increase premiums to be more in line with their costs. Medical
costs traditionally increased due to inflation and the relative high cost of new
medical technologies. The Balanced Budget Act of 1997 constrained healthcare
spending in both Medicare and Medicaid reducing payments to hospitals,
physicians and managed care organizations. In December 2000, portions of the
Balanced Budget Act of 1997 were revised in response to major surpluses created
by previous cuts. New minimum payment criteria were established for the
Medicare+Choice program enhancing payments to Managed Care Organizations (MCO)
more than $5 billion over the next several years. In 2001, we received
approximately $5 million in incremental revenues
12
based upon the new minimum payment criteria and expects to receive an additional
increase in revenues of over $5 million due to increases in Medicare
reimbursements for managed care patients. In addition current legislation has
demonstrated support for the Medicare+Choice program for additional funding
starting in 2003, along with bonuses for health plans that are willing to
establish a presence in underserved markets. Our business plan is modeled to
take full advantage of the new direction of the Medicare+Choice Program with
initial markets located in underserved areas.
The United States Congress and many state legislatures routinely consider
proposals to reform or modify the healthcare 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. While
we do not foresee nor do we know of any pending legislation, there can be no
assurance that such legislation, programs or other regulatory changes will not
have a material adverse effect on us. Our profitability may also be adversely
affected by cost containment decisions of third party payors and other payment
factors over which we have no control.
BUSINESS STRATEGY OVERVIEW
We are a healthcare company that provides turnkey services to managed care
companies on a full risk basis and pharmacy management on behalf of physicians.
We are moving rapidly to expand our revenue base through additional managed care
contracts, establishing an HMO in Florida, and expanding Metcare Rx.
We have developed an infrastructure of management expertise in the fields
of:
- Disease Management -- a method to manage the costs and care of high-risk
patients and produce better patient care.
- Partners In Quality -- a review of overall patient care measured against
best medical practice patterns.
- Utilization Management -- a daily review of statistical data created by
encounters, referrals, hospital admissions and nursing home information.
- Hospitalist Program -- a method to improve quality of patient care by
providing a team approach of creating trust between the physician and the
PSN and eliminating the need to evaluate referrals and prior
authorizations.
This expertise allows us to provide a service and manage the risk that
health insurance companies cannot provide on an efficient and economic level.
Health insurance companies are typically structured as marketing entities to
sell their products on a broad scale. Due to mounting pressures from the
industry, MCO's have altered their strategy, returning to the traditional model
of selling insurance and transferring the risk to the PSN's. Under such
arrangements, MCO's receive premiums from the CMS and commercial groups and pass
a significant percentage of the premium on to a third party such as us, to
provide covered benefits to patients, including pharmacy and other enhanced
services. After all medical expenses are paid; any surplus or deficit remains
with the PSN. When managed properly, accepting this risk can create significant
surpluses. Under our model, the physicians maintain their independence but are
aligned with a professional staff to assist in providing cost effective health
care, which in turn helps maximize profits for us and the physicians.
Furthermore, to limit our exposure, we have secured reinsurance (stop-loss
coverage). Our PSN business model is based on educating, motivating and
assembling physicians in groups that are prepared to assume managed care risk.
We envision expanding our network of physicians to provide our members
healthcare services on an efficient and cost effective basis through strategic
alliances with insurance companies and other healthcare providers on a statewide
basis. We also have as our objective to develop an HMO division to operate in
targeted Medicare markets including underserved areas. We believe that managing
the risk and not the Physician is the right prescription for the new Millennium.
13
We have established three segments to manage our anticipated growth:
- Managed Care (PSN and HMO)
- Pharmacy (Metcare Rx)
- Clinical Laboratory (Metlabs)
Currently the largest, the Managed Care division, includes the PSN and,
once established, the HMO. The Managed Care division will continue to be our
focal point. The HMO will be established after an application is filed with the
State of Florida in the first half of 2002. MetcareRx, Inc. should expand in
2002 as we continue to open our clinic-based pharmacies.
MANAGED CARE
The original Full Risk Agreement was signed in 1998 with Humana Medical
Plan, Inc., (HMO) an insurance company, to provide network management services.
We provide services to patients through a network of primary care physicians,
specialists, hospitals and ancillary facilities. These providers have contracted
to provide services to our patients by agreeing to certain fee schedules and
care requirements. The original South Florida contract was renewed in exchange
for providing additional coverage in Dade, Broward and Palm Beach Counties. For
providing these services, Humana pays us a majority of the Medicare+Choice
premiums they derive from these managed care patients.
A new Full Risk contract for Volusia and Flagler counties (Daytona Market)
was implemented on January 1, 2000. This agreement has been amended as of March
1, 2002 and we expect this amendment to have a positive impact on our future
profitability and cash flow.
Our agreements with Humana are for three years and renew automatically for
additional one-year terms unless terminated for cause or on 180-days prior
notice. Under these agreements, we are responsible for the provision of all
covered benefits for the patient covered under the contracted Humana plan. Under
the Agreement, Humana is obligated to pay us for covered services according to
an agreed upon payment schedule, based on the amount Humana receives from its
payor source. If revenue is insufficient to cover cost, our operating results
could be adversely affected.
Under these HMO agreements, we, through our affiliated providers, are
responsible for the provision of all covered benefits. While responsible for all
medical expenses for each covered life, we have limited our exposure by
obtaining reinsurance/stop-loss coverage. Additionally, we have capitated high
volume specialties, fixing our cost on a per member per month (PMPM) basis. Low
volume providers remain at a discounted fee-for-service basis. A change in
healthcare legislation, inflation, major epidemics, natural disasters and other
factors affecting the delivery and cost of healthcare are beyond our control and
may adversely affect our operating results.
For the two years ended December 31, 2001, approximately 96% of our
revenues were from risk contracts with MCO's. In conjunction with our new
business strategy, we are pursuing opportunities to add additional payor sources
while continuing to expand our existing business relationships to provide
additional services through the Network.
Under our model, the physicians maintain their independence but are aligned
with a professional staff to assist in providing cost effective quality
medicine. Each primary care physician provides direct patient services as a
primary care doctor including referrals to specialists, hospital admissions and
referrals to diagnostic services and rehab. As part of our Network, we own
several practices that have been fully integrated into our PSN model.
We enhance administrative operations of our physician practices by
providing management functions, such as payor contract negotiations,
credentialing assistance, financial reporting, risk management services and the
operation of integrated billing and collection systems. We believe that we offer
the physicians increased negotiating power associated with managing their
practice and fewer administrative burdens, which allows the physician to focus
on providing care to patients.
14
We also assist the physicians in obtaining managed care contracts. We
believe that our experience in negotiating and managing risk contracts enhances
our ability to market the services of our network physicians to managed care
payors and to negotiate favorable terms from such payors. Our staff also
performs quality assurance and utilization management by providing detailed
reports under each contract on behalf of our affiliated physicians.
We also use the Internet to help process referral claims between Network
primary care physicians and specialists. This process helps reduce paperwork in
the physician's office as well as provide a more efficient method for the
patient in our Network. Our utilization management team communicates with the
physicians on a daily basis to provide overall management of the patient.
HMO
Our strategy is to increase enrollment by adding new payor relationships
and new providers to the existing network and by expanding the network into new
geographic areas where the penetration of managed healthcare is low. We believe
that we will be able to develop new payor and provider relationships due to our
ability to manage the cost of health care without sacrificing quality.
While not competing with our growing and improving relationship with Humana
under our current contracts, we must acknowledge the changes within the managed
care industry and position ourself ahead of the curve. The managed care industry
continues to consolidate and redefine itself, and while many find the current
environment volatile, we have found it resplendent with opportunities.
PHARMACY
We have recruited a group of veteran pharmacy executives to manage the
pharmacy division. These executives have owned and operated multiple pharmacy
companies reflective of the wide range of managed care pharmaceutical services
that Metcare Rx offers.
Metcare Rx is strategically focused on servicing healthcare companies with
"pharmacy risk" with a goal of offering cost containment and quality service.
Our clients include various health care providers that are at-risk for pharmacy
costs. Our current operations serve a variety of at risk MCO's including medical
groups and clinics, managed care health plans, (HMO's, PPO's etc.), HIV clinics
and long-term care facilities. Metcare Rx offers all of these MCO's a one-stop
solution that is customized to each client to meet their need to control drug
costs while preserving quality. We provide an unparalleled continuum of pharmacy
care including effective specialty pharmacy services, strategically located
ambulatory pharmacies, convenient home delivery, meaningful drug utilization
evaluations and complex pharmaceutical managed care.
The marketing plan stresses our flexibility and broad range of abilities.
We can tailor our services to meet the specific needs of our clients. We have
determined that "specialty pharmacy" offers an opportunity for extensive growth.
For example, the specialty pharmacy service can be offered on a stand-alone
basis or be bundled with our total pharmacy management solution to provide a
one-stop, comprehensive approach to managed care pharmacy. Management has the
expertise necessary to offer an extensive range of services, which
differentiates their offering from the competition that typically offers more
rigid, narrowly defined service with little or no risk sharing characteristics.
The first of these specialty drug areas will be HIV patients. We, with our
experience in this field, have developed a program that will enhance clinical
and financial outcomes.
Our management's influence over the prescription writing process enables us
to increase our market share, which in turn creates significant buying power
with our drug suppliers. This purchasing leverage stems from various Company
strategies, including:
- Collaborative design of effective drug formulary in consultation with the
client MCO's key physicians, Medical Director and Pharmacy and
Therapeutic Committee;
- Active education of member physicians about the client's drug formulary
decisions and rationale;
- Focus on serving healthcare organizations that are at risk for pharmacy
costs;
15
- Effective Drug Utilization Evaluations ("DUE's");
- Increased patient convenience and compliance through physician office
dispensing, ambulatory pharmacies and home delivery of medications and;
- Automation through software and use of the Internet;
- Expertise in specialty drug areas such as "HIV."
These strategies help us influence the prescription process and create an
ability to shift the market share of our preferred drugs at an unprecedented
level.
PHARMACY COST INFLATION
Our management sees five key factors that will cause pharmacy costs to keep
increasing in the coming years:
- An annual expenditure increase of over 14%
- A doubling of the rate of new drugs introduced
- An aging population
- Aggressive drug company marketing
- Educated patient requests for drugs
Prescription drug expenditure growth now outpaces other categories of
health care spending. In fact, prescription drug expenditures are projected to
climb to over 12% of all personal health expenditures. In terms of dollar
volume, the last five years have shown double-digit growth with cost increases
of over 14% in 1999 and 2000. Higher drug prices will likely account for only
one-fifth of this growth. According to IMS Health 59% of the rise in drug costs
in 2000 was due to increased use of existing products, 27% to new products and
only 14% to higher prices.
New drugs are entering the market at an accelerating pace, primarily due to
a robust new drug pipeline and developments in the FDA approval process. In
1998, 56 new drugs were approved for the use in the U.S. compared to an average
of 23 new drugs per year in the preceding decade. Not only are more drugs
entering the market, but also they are being introduced at higher prices. New
drugs released after 1992 accounted for only 17% of total utilization, but
accounted for over 30% of total costs.
One of the most prominent drivers of pharmacy cost is the aging population.
Long-term care and other health care services for older adults represent a
substantial share of total health care spending. Nursing home and home health
care accounted for over 10% of personal health expenditures. In terms of the
pharmaceutical market, prescription utilization for persons aged over 75 far
outpaces utilization for any other group.
Another factor causing pharmacy cost inflation is increased use of
preventative drugs. With the advent of managed care and closer attention to
medical cost, preventative medicine has become increasingly popular as a means
of cost containment. Pharmaceutical drugs are no exception, and are used as
preventative measure in medicine. With increases in prescriptions written, the
market should exhibit overall cost inflation.
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. We compete with national, regional and local companies in providing
our services. Excluding individual physicians and small medical groups, many of
our competitors are larger and better capitalized and may have greater
experience in providing healthcare management services and may have longer
established relationships with buyers of such services.
16
EMPLOYEES
As of December 31, 2001, we had approximately 223 full-time employees. Of
the total, 42 were employed at our executive offices. None of our employees are
covered by a collective bargaining agreement or are represented by a labor
union. We consider our employee relations to be good.
DESCRIPTION OF PROPERTY
Our Executive offices have been located at 500 Australian Avenue South,
Suite 1000, West Palm Beach, Florida where we occupy 10,936 square feet at a
current monthly rental of approximately $12,000, pursuant to a sublease expiring
December 31, 2002.
We have a satellite office in Daytona Beach of 2,980 square feet with a
monthly rental of $2,000. The lease expires August 31, 2003.
The managed care division leases 6 offices in Florida with an aggregate
monthly rental of $27,000 with various expiration dates from 1 to 5 years.
The pharmacy division leases three offices in Florida, three offices in New
York and one office in Hanover, Maryland with an aggregate monthly rental of
$8,000 with various expiration dates from 1 to 5 years.
We lease an office for our laboratory operations in West Palm Beach for
3,400 square feet with a monthly rental of $5,200. The lease expires October 4,
2005.
None of our properties are leased from affiliates.
LEGAL PROCEEDINGS
We are a party to other various claims arising in the ordinary course of
business. Management believes that the outcome of these matters will not have a
materially adverse effect on the financial position or the results our
operations.
17
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
As of March 31, 2002, the directors, control persons and executive officers
of the Company were as follows:
<Table>
<Caption>
NAME AGE TITLE
- ---- --- -----
Fred Sternberg........................ 61 Chairman, President and Chief
Executive Officer
Debra A. Finnel....................... 40 Vice President and Chief Operating
Officer
David S. Gartner, CPA................. 43 Secretary and Chief Financial Officer
Michael Cahr.......................... 61 Director
Marvin Heiman......................... 56 Director
Martin Harrison, MD................... 48 Director
J. Robert Buchanan.................... 74 Director
William Bulger........................ 68 Director
</Table>
Fred Sternberg, President & Chairman of the Board -- Mr. Sternberg has been
Chairman, President and CEO of the Company since February 2000. From 1990 to
December 1999, he was President of Sternco, Inc., providing consulting services
to various healthcare companies in the managed care and related industries.
Between 1986 and 1990, Mr. Sternberg was involved in various investments,
including real estate development and rental properties and from 1980 to 1986 he
operated several plastic injection molding facilities in both the toy and
healthcare industries. From 1968 to 1972, Mr. Sternberg served as President of
The J. Bird Moyer Co., Inc., whose name was later changed to Moyco Technologies,
Inc., a publicly-traded dental manufacturing company. Mr. Sternberg has also
provided consulting services to assisted care living facilities and skilled
nursing homes.
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 20 years experience in accounting and finance,
including ten 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. Mr. Gartner is a member of the American Institute of Certified
Public Accountants.
Michael Cahr has served as a director since February 2000. He is currently
the Chief Executive Officer of IKEDEGA, a video server technology company. Prior
to joining IKEDEGA, 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.
Since 1986, he has been President and Chairman of the Board of Sussex Financial
Group, Inc. and Sussex Insurance Group, an asset money manager for physicians in
the Chicago area. He also manages group health plans for physician practices.
From 1970 to 1981 he was President of Curtom Record Company and Division
Vice-President of
18
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, and a recognized 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.
Dr. Martin Harrison was appointed as a Director of the Company in November
2000. He served as an advisor to the Board for the past year. He has been
practicing medicine in South Florida for the past 19 years and specializes in
preventive and occupational medicine. Dr. Harrison completed his undergraduate
training at the University of Illinois and postgraduate and residency training
at Johns Hopkins University, as well as his Masters in Public Health. Dr.
Harrison has also been on the Faculty of both the University and Medical School.
He is currently the owner of H30, Inc. a privately held Research & Biomedical
Company.
J. Robert Buchanan has been a director of since October 2001. He received
his BA from Amherst College cum laude and his MD from Cornell University Medical
College. Following residency and specialty fellowship training at New York
Hospital, Dr. Buchanan served in the US Army (1958-60) in Korea. Thereafter, he
served as Dean, Cornell University Medical College (1967-77), President, Michael
Reese Hospital, Chicago (1977-82) and General Director (CEO), Massachusetts
General Hospital, Boston (1982-94). Dr. Buchanan is a past Chair of the Illinois
and Massachusetts Hospital Associations, the Association of American Medical
Colleges, the Liaison Committee on Medical Education, the Educational Commission
for Foreign Medical Graduates and the China Medical Board of New York. He has
served or is serving as a director of Charles River Laboratories, AMI, Matritech
and i-STAT. Dr. Buchanan is a senior member of the Institute of Medicine of the
National Academy of Sciences.
William M. Bulger was appointed as a director in December 2001. Mr. Bulger
serves as the President of the University of Massachusetts, a position he was
appointed to in January 1996. President Bulger's appointment by the University
of Massachusetts Board of Trustees followed his 35-year career as a leading
state lawmaker. From 1978 to 1996, he served as President of the Massachusetts
Senate. President Bulger received his undergraduate degree in English from
Boston College and his Doctor of Jurisprudence degree from Boston College Law
School.
BOARD OF DIRECTORS
Each director is elected at our annual meeting of shareholders and holds
office until the next annual meeting of stockholders, or until the successors
are elected and qualified. At present, our bylaws provide for not less than one
director. Currently, we have six directors. 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 of our officers or directors. Our
officers devote full time to the business of the Company. The Board of Directors
held fifteen meetings and voted fourteen times by Unanimous Written Consent.
BOARD COMMITTEES
We had four active committees in 2001, the Audit and Compensation,
Executive, Compensation and Regulatory Compliance. All actions by these
committees shall be subject to the specific Directions of the Board of
Directors.
The Audit Committee consists of Messrs. Dr. Buchanan, Cahr and Heiman. The
Audit Committee selects the independent auditors; reviews the results and scope
of the audit and other services provided by our independent auditors and reviews
and evaluates our internal control functions.
19
The Executive Committee may exercise the power of the Board of Directors in
the management of our business and affairs 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, Bulger and Harrison. All actions of the Executive Committee require a
unanimous vote.
The Compensation Committee consists of Messrs. Bulger, Cahr and Heiman. The
Compensation Committee makes recommendations to the Board of Directors regarding
the compensation for our executive officers and consultants.
The Regulatory Compliance Committee consists of Messrs. Heiman, Dr.
Buchanan, Dr. Bernstein (a non-board member) and Debbie Finnel, our Chief
Operating Officer. The Regulatory Compliance Committee reviews the policy and
procedures, current compliance rules and regulations and our compliance methods.
COMPENSATION OF DIRECTORS
We reimburse all Directors for their expenses in connection with their
activities as Directors. The Directors make themselves available to consult with
our management. One of our six Directors is also an employee and did not receive
additional compensation for his services as Director. A compensation and stock
option agreement has been adopted for our outside Directors in the amount of
$18,000 per year, paid quarterly in our common stock valued at the average
closing price for the five last days of the quarter. 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 remaining 20,000 vests after one year. These options
are valued at the market value of the effective date of board membership.
ITEM 10. EXECUTIVE COMPENSATION
The following tables present information concerning the cash compensation
and stock options provided to our Chief Executive Officer and each additional
executive officer whose total annualized compensation exceeded $100,000 for the
year ended December 31, 2001.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<Table>
<Caption>
LONG-TERM
COMPENSATION
AWARDS
OTHER ANNUAL SECURITIES
NAME AND FISCAL COMPENSATION UNDERLYING/OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) SARs(#) COMPENSATION
- ------------------ ------ --------- -------- --------------- ------------------ ------------
Fred Sternberg.......... 2001 224,905 9,600
Chairman of the Board, 2000 150,000 0 9,600
President, CEO
Debra Finnel............ 2001 227,884 0 18,000
Vice President and 2000 132,000 0 --
Chief Operating
Officer
David S. Gartner,
CPA................... 2001 119,423 0 6,000
Secretary and Chief 2000 96,557 0 6,000
Financial Officer
</Table>
20
OPTIONS GRANTED IN THE YEAR ENDED DECEMBER 31, 2001 TO EXECUTIVES
<Table>
<Caption>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARs
OPTIONS/ GRANTED TO EXERCISE OR
SARs EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE
- ---- ---------- ------------ ----------- ----------
Debra Finnel............................ 100,000 20.35 $1.00 01/01/07
Debra Finnel............................ 100,000 $1.00 01/01/08
Debra Finnel............................ 100,000 $1.00 01/01/09
</Table>
Total number of options granted to non-executives for the year ended
December 31, 2001 was 300,000 and for the year ended December 31, 2000 were
1,543,000.
AGGREGATED FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning unexercised
stock options as of December 31, 2001. No stock appreciation rights were granted
or are outstanding.
<Table>
<Caption>
NUMBER OF
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
HELD AT 12/31/01 IN-THE-MONEY
------------------- OPTIONS AT 12/31/01(1)
SHARES ACQUIRED ---------------------------------
NAME EXERCISABLE(#) ON EXERCISE UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
- ---- -------------- ------------------- ---------------- -------------- ----------------
Fred Sternberg....... 1,160,000 1,160,000 525,000 762,900 343,500
Debbie Finnel........ 200,000 200,000 250,000 138,000 135,000
David Gartner........ 50,000 50,000 0 57,000 0
</Table>
- ---------------
(1) The closing sale price of the Common Stock on December 29, 2001 as reported
by OTCBB was $1.44 per share. Value is calculated by multiplying (a) the
difference between $1.44 and the option exercisable price by (b) the number
of shares of Common Stock underlying.
EMPLOYMENT AGREEMENTS
FRED STERNBERG
In January 2000 we entered into an employment agreement, subsequently
amended, with Fred Sternberg, our President, Chief Executive Officer and a
director. The term of the agreement is for five years from the effective date.
The annual salary under the Agreement is $150,000. Effective April 1, 2001 the
salary was increased to $250,000 per year. Mr. Sternberg agreed to waive the
bonus provisions and is eligible to receive a discretionary bonus. Additionally,
Mr. Sternberg was granted options to purchase 300,000 shares of Common Stock at
$0.30 per share and options to purchase 360,000 shares of Common stock at $0.50
per share upon the signing of the Agreement. Additional longevity options were
granted at the rate of 25,000 options per year of employment at a price of $1.00
per share. The Agreement also provides for an additional 700,000 options at
$0.75 per share vesting on various dates over the life of the Contract.
The Agreement also provides, among other things, for (i) participation in
any profit-sharing or retirement plan and in other employee benefits applicable
to our employees and executives; (ii) an automobile allowance of $800 per month
and fringe benefits commensurate with the duties and responsibilities of Mr.
Sternberg and (iii) benefits in the event of death or disability. The Agreement
also contains certain non-disclosure and non-competition provisions.
Under the terms of the Agreement, we may terminate the employment of Mr.
Sternberg either with or without cause. If we without good cause terminate the
Agreement, we would be obligated to continue to pay Mr. Sternberg's salary and
any current and future bonuses that would have been earned under the agreement.
Mr. Sternberg would also be entitled to all stock options earned or not yet
earned through the full term of the Agreement.
21
DEBRA FINNEL
In January 2001 we entered into an employment agreement with Debra Finnel,
Chief Operating Officer. The term of the agreement is three years and calls for
an annual salary of $225,000, increasing to $250,000 on July 1, 2001. Ms. Finnel
is also eligible to receive a discretionary bonus and has been granted options
to purchase 300,000 shares of Common Stock at $1.00 per share with vesting over
five years. The Agreement also calls for an automobile allowance of $1,500 per
month and fringe benefits commensurate with Ms. Finnel's responsibilities as
well as certain non-compete provisions.
CONSULTING AGREEMENTS
Effective February 29, 2000 Mr. Guillama resigned as President, CEO and as
a Director of the Company. Mr. Guillama had entered a consulting agreement for
one year. As part of his termination agreement he received 200,000 options at an
average per share price of approximately $1.00, which shall expire within thirty
(30) months from February 29, 2000.
INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
The Board had previously adopted an Employee Stock Option Plan in 1996.
However, no options were granted under this plan and accordingly, we decided to
replace this plan with the 2001 Stock Option Plan.
THE STOCK OPTION PLAN GENERALLY
The Board originally adopted the Plan on March 12, 2001. The Plan will
terminate on June 1, 2011. Under the Plan, the Board or the Compensation
Committee may grant stock incentives to key individuals performing services for
our company, including employees, officers, eligible directors, consultants and
agents. Awards under the Plan may be in the form of incentive stock options and
nonqualified stock options.
SHARES AVAILABLE FOR THE PLAN
We presently have 2,000,000 shares of common stock reserved for issuance
under the Plan. The number of shares underlying awards made to any one
participant in a fiscal year may not exceed 100,000 shares. The number of shares
that can be issued and the number of shares subject to outstanding options may
be adjusted in the event of a stock split, stock dividends, recapitalization or
other similar event affecting the number of shares of our outstanding common
stock.
PLAN ADMINISTRATION
The Board or the Compensation Committee will administer the Plan. Subject
to the specific provisions of the Plan, the Committee determines award
eligibility, timing and the type, amount and terms of the awards. The Committee
also interprets the Plan, establishes rules and regulations under the Plan and
makes all other determinations necessary or advisable for the Plan's
administration.
Options under the Plan may be either incentive stock options, as defined
under the tax laws, or nonqualified stock options. The per share exercise price
may not be less than the fair market value of our common stock on the date the
option is granted. The Compensation Committee may specify any period of time
following the date of grant during which options are exercisable, so long as the
exercise period is not more than 10 years. Incentive stock options are subject
to additional limitations relating to such things as employment status, minimum
exercise price, length of exercise period, maximum value of the stock underlying
the options and a required holding period for stock received upon exercise of
the option. Only nonqualified options may be granted to individuals who are not
our employees.
Upon exercise, the option holder may pay the exercise price in several
ways. He or she can pay: (1) in cash; (2) by delivering previously owned
Metropolitan common stock with a fair market value equal to the exercise price;
(3) by directing us to withhold shares of common stock with a fair market value
equal to the exercise price; or (4) by a combination of these methods.
22
EXPIRATION OF OPTIONS
Generally, options granted under the Plan expire on the date determined by
the Committee at the time of the grant, subject to earlier expiration as
specified in the award agreement if the holder terminates employment prior to
that date. IRS rules require that incentive stock options expire no later than
three months after the termination of employment for any reason other than death
or disability, or one year after termination of employment by reason of death or
disability, in either case subject to the normal expiration date of the option.
In no event may an option be exercised after its expiration date. Any unvested
portion of an option will expire immediately upon termination of employment.
OUTSTANDING OPTIONS
We cannot determine the number of shares that may be acquired under stock
options that may be awarded under the Plan to participants. There are no stock
appreciation rights under the Plan.
TRANSFERABILITY
Generally, an option may not be sold, assigned or otherwise transferred
during its holder's lifetime, except by will or the laws of descent and
distribution.
TAX CONSEQUENCES
The following is a summary, based on current law, of some significant
federal income tax consequences of awards under the Plan. Participants are
advised to consult with their own tax advisor regarding the federal, state and
local tax consequences of the grant and exercise of an option.
Participants in the Plan do not recognize taxable income by reason of the
grant or vesting of an option, and we do not receive a tax deduction by reason
of either event. At exercise, the federal tax consequences vary depending on
whether the award is an incentive stock option or nonqualified stock option.
INCENTIVE STOCK OPTIONS
Upon exercise of an incentive stock option, its holder does not recognize
taxable income, and we do not receive a tax deduction. However, the excess of
the fair market value of our common stock on the date of exercise over the
exercise price is an adjustment that increases alternative minimum taxable
income, the base upon which alternative minimum tax is computed.
If the shares purchased upon the exercise of an incentive stock option are
sold at a gain within two years from the date of grant, or within one year after
the option is exercised, then the difference, with certain adjustments, between
the fair market value of the stock at the date of exercise and the exercise
price will be considered ordinary income. Any additional gain will be treated as
a capital gain. If the shares are sold at a gain after they have been held at
least one year and more than two years after the grant date, any gain will be
treated as a long-term capital gain. Any loss recognized upon a taxable
disposition of the shares generally would be characterized as a capital loss.
NONQUALIFIED STOCK OPTIONS
Upon exercise of a nonqualified stock option, its holder recognizes
ordinary income in an amount equal to the difference between the fair market
value of Metropolitan common stock at the time of exercise and the exercise
price. Generally, Metropolitan is entitled to a corresponding tax deduction for
compensation income recognized by the holder. Upon the subsequent sale of the
shares acquired in the exercise, the holder will recognize a short-term or
long-term capital gain or loss, depending on the length of time he or she has
held the shares.
23
PLAN AMENDMENT AND TERMINATION
The Plan will terminate on June 1, 2011. The Board may amend or terminate
the Plan at any time. An amendment is subject to shareholder approval if it
increases the number of shares available for issuance under the Plan, permits
the grant of an incentive stock option at an exercise price less than that set
forth in the Plan, changes the class of individuals eligible for participation
in the Plan, or permits the grant of awards after the Plan termination date.
CERTAIN TRANSACTIONS
In July 1998, we executed a consulting agreement with Sternco, Inc., an
affiliate of Fred Sternberg, that provided for commissions on any acquisition
for which Sternco was the introducing party or materially contributed to such
acquisition and monthly consulting fees of $10,000 per month. We also agreed to
reimburse Sternco for mobile phone and pager expenses. The consulting agreement
was terminated on January 1, 2000 upon the execution of Mr. Sternberg's
employment agreement.
In November 2000, we loaned Debra Finnel $30,000. The loan has been
recorded as an employee advance and will be repaid in 2001 from time to time
from payroll deductions. There is no formal schedule of payments.
Atlas Pearlman, P.A., our counsel, has been issued options to purchase
100,000 shares of our common stock exercisable at $1.00 per share, and 336,000
shares of our common stock for services rendered since December 2001.
24
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding our Common
Stock beneficially owned at December 31, 2001 (i) by each person who is known by
us to own beneficially 5% or more of our common stock; (ii) by each of our
directors; and (ii) by all executive officers and directors as a group.
<Table>
<Caption>
AMOUNT OF PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ------------------------ -------------------- ----------
Martin Harrison, M.D.(1)................................. 5,357,047 19.49%
Fred Sternberg(2)........................................ 1,612,550 5.93
Fundamental Management Corp. ............................ 1,400,000 5.09
Michael Cahr(3).......................................... 368,308 1.34
Marvin Heiman............................................ 179,739 0.65
William Bulger(4)........................................ 20,635 0.08
J. Robert Buchanan(5).................................... 22,452 0.08
Debra Finnel(6).......................................... 150,000 0.55
David Gartner............................................ 150,000 0.55
Directors and Executive Officers as a Group (8
persons)............................................... 7,860,731 28.61
</Table>
- ---------------
(1) Includes (1) 411,332 shares held by Dr. Harrison, (2) 900,000 shares held by
H30, Inc., a corporation which Dr. Harrison is a Director, and (3) 20,000
shares issuable upon exercise of options at a price of $0.91 until November
2, 2005. Does not include 70,000 shares issuable upon exercise of options at
prices ranging from $6.938 to $7.938 per share with expirations from April
2003 to until April 18, 2003 or 20,000 shares issuable upon exercise of
options at a price of $0.91 per share that are not yet vested.
(2) Includes (1) 3,700 shares held by Mr. Sternberg (2) 505,850 shares held by
Sternco, Inc., a corporation which Mr. Sternberg is President, (3) 18,000
shares held by Mr. Sternberg's wife, and (4) 1,085,000 shares issuable upon
the exercise of options at a prices ranging from $0.30 to $2.00 which
expirations from May 2004 to December 2005. Does not include 800,000 shares
issuable upon the exercise of options at prices ranging from $0.l75 to $1.00
that have not yet vested.
(3) Includes 364,308 shares held by Michael Cahr and 4,000 shares held by
Michael Cahr as custodian for his son.
(4) Includes 635 shares held by William Bulger and 20,000 shares issuable upon
the exercise of options at $1.10
(5) Includes 2,452 shares held by J. Robert Buchanan and 20,000 shares issuable
upon the exercise of options at $1.42 that, expiring on October 30, 2006.
Does not include 20,000 shares issuable upon the exercise of options at
$1.42 that have not yet vested.
(6) Includes 50,000 shares held by Debra Finnel and 100,000 shares issuable upon
the exercise of options at $0.50 per share, expiring on 10/08/05. Does not
include 50,000 shares issuable upon the exercise of options at a price of
$0.50 per share and 300,000 shares issuable upon the exercise of options at
a price of $1.00 that have not yet vested.
25
DESCRIPTION OF SECURITIES
At May 2, 2002, we have authorized 80,000,000 shares of par value $0.001
common stock, with 32,084,649 shares issued and outstanding. Additionally, we
have authorized 10,000,000 shares of preferred stock, with 5,000 shares issued
and outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voted for the election of directors can
elect all of the directors. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of our liquidation, dissolution or
winding up, the holders of Common Stock are entitled to share ratably in all
assets remaining available for distribution to them after payment of liabilities
and after provision has been made for each class of stock, if any, having
preference over the Common Stock. Holders of shares of Common Stock, as such,
have no conversion, preemptive or other subscription rights, and there are no
redemption provisions applicable to Common Stock. All of the outstanding shares
of Common Stock are, and the shares of Common Stock offered hereby, will be duly
authorized, validly issued, fully paid and nonassessable.
PREFERRED STOCK
We are authorized to issue 10,000,000 shares of Preferred Stock with such
designation, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of the Common Stock. In the event of
issuance, the Preferred Stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control.
We have designated a Series A class of preferred stock and a Series B class
of preferred stock. A summary of their material terms, rights and preferences
are the following:
SERIES A
We have designated 30,000 shares of our preferred stock as Series A
preferred stock, par value $.001. There are currently 5,000 Series A preferred
shares issued and outstanding. 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, 2000, the aggregate and per share amounts of cumulative
dividend arrearages were approximately $166,667 and $33.40.
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 (1) the average
closing bid price of the common stock for the ten trading days immediately
preceding the conversion or (2) $6.00. We have the right to deny conversion of
the Series A preferred stock, at which time the holder shall be entitled to
receive additional cumulative dividends at 5% per annum in addition to the
initial dividend rate of 10% per annum.
In addition, we have the right, exercisable at any time upon 10 trading
days notice to the holders of the Series A preferred stock given at any time
after the expiration of two years after the date of issuance to redeem all or
any portion of the shares of Series A preferred stock which have not previously
been converted or redeemed, at a price equal to 105% of the product of (1) the
number of shares of preferred stock then held by the holder, and (2) the stated
value.
In the event of any liquidation, dissolution or winding up of our company,
holders of the Series A preferred stock are entitled to receive a liquidating
distribution before any distribution may be made to holders of our common stock
and other Series of our preferred stock.
The Series A preferred share holders have no voting rights, except as
provided under Florida law.
26
SERIES B
We have designated 7,000 shares of our preferred stock as Series B
preferred stock, with a stated value of $1,000 per share. During the year ended
June 30, 1998, 1,200 shares of Series B preferred stock were issued, however
there are currently no Series B shares outstanding. Holders of the Series B
preferred stock are entitled to receive, whether declared or not, cumulative
dividends equal to 5% per annum. 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.
From September 1998 to October 1999, all of our outstanding Series B preferred
shares were converted into 3,597,305 shares of our common stock at various
prices. The Series B preferred shares do not contain voting rights, except as
provided under Florida law.
TRANSFER AGENT
The Transfer Agent for our shares of Common Stock is Florida Atlantic Stock
Transfer, Tamarac, Florida.
SELLING SECURITY HOLDERS
This prospectus relates to sales of our common stock by Copira Investments
Inc., GKN Securities Corp. and various other shareholders, option holders, note
holders and warrant holders listed below. Common shares registered for resale
under this prospectus constitute 26.64% of our issued and outstanding common
shares as of December 31, 2001.
We will not receive any proceeds from the sale of the shares by the selling
shareholders. The selling shareholders may resell the shares they acquire by
means of this prospectus from time to time in the public market. The costs of
registering the shares offered by the selling shareholders are being paid by us.
The selling shareholders will pay all other costs of the sale of the shares
offered by them.
COPIRA
Copira is a newly formed British Virgin Islands corporation engaged in the
business of investing in publicly traded equity securities for its own account.
Copira's principal offices are located at Harbour House, 2nd Floor, Road Town,
Tortolla, British Virgin Islands. Investment decisions for Copira are made by
its board of directors. The directors are David Sims and Lamberto Banchetti.
Copira currently holds warrants to purchase 470,000 shares of common stock,
which warrants were issued to Copira in connection with the execution of a
common stock purchase agreement on March 31, 2001. There are no business
relationships between Copira and us. Copira does not have any relationship with
our promoters.
GKN SECURITIES
GKN Securities has acted as GKN Securities in connection with the common
stock purchase agreement. GKN Securities introduced us to Copira and assisted us
with structuring the common stock purchase agreement with Copira. GKN
Securities's duties as placement agent were undertaken on a reasonable best
efforts basis only. It made no commitment to purchase shares from us and did not
ensure us of the successful placement of any securities.
Other than the warrants to purchase 470,000 shares of common stock granted
to GKN Securities as a placement fee, GKN Securities does not currently own any
of our securities. Five affiliates of GKN Securities, as listed on the selling
shareholder table and described in the footnotes to the table, have the sole
authority to exercise any warrants granted to GKN Securities and to sell and
vote the shares of common stock issued under the warrants.
Copira and GKN Securities have not held any positions or offices or had
material relationships with us or any of our affiliates within the past three
years other than as a result of the ownership of our common stock. If,
27
in the future, Copira's or GKN Securities's relationship with us changes, we
will amend or supplement this prospectus to update this disclosure.
Copira, GKN Securities and the various other shareholders, option holders,
note holders and warrant holders are sometimes referred to in this prospectus as
the selling shareholders.
The following table shows the shares which are registered and may be sold
for sale by the selling shareholders.
<Table>
<Caption>
NUMBER OF
NUMBER OF SHARES TO BE
NUMBER OF SHARES TO BE OWNED AFTER
SELLING SECURITY HOLDERS SHARES OWNED OFFERED THE OFFERING
- ------------------------ ------------ ------------ ------------
Haskins & Associates........................... 58,225(1) 58,225 0
Compubill Systems Corporation, Inc............. 58,333(2) 58,333 0
PCS Netcare, Inc............................... 308,425(3) 308,425 0
Warren R. Federgreen........................... 14,000(4) 14,000 0
New Master Investments Limited................. 525,000(5) 525,000 0
Anthony Tang................................... 746,995(6) 746,995 0
Dedales Investments Holdings................... 1,102,768(7) 1,102,768 0
Barry Lewis.................................... 25,000(8) 25,000 0
Roland Wheeler................................. 325,000(9) 325,000 0
Peter Rettman.................................. 300,000(10) 300,000 0
Larry and Elizabeth Huch (JT).................. 50,000(11) 50,000 0
Jeff Shield.................................... 15,000(12) 15,000 0
Brian Pettersen................................ 143,000(13) 143,000 0
Robert Katz.................................... 10,000(14) 10,000 0
Stanford and Ethel Gaffe....................... 100,000(15) 100,000 0
Diane Rosencrantz.............................. 100,000(16) 100,000 0
National Securities Corp....................... 200,000(17) 200,000 0
Atlantic International Capital, Inc............ 50,000(18) 50,000 0
Hornblower & Weeks, Inc........................ 43,750(19) 43,750 0
Brener International, LLC...................... 70,967(20) 70,967 0
Martin Hodas................................... 105,000(21) 105,000 0
Charlee Wheeler................................ 5,000(22) 5,000 0
Roland Wheeler, custodian for Kelsee Wheeler... 5,000(23) 5,000 0
Roland Wheeler, custodian for Trayce Wheeler... 5,000(24) 5,000 0
Shand Wheeler.................................. 5,000(25) 5,000 0
Aimee Wheeler.................................. 5,000(26) 5,000 0
Crosby Enterprises, Inc........................ 50,000(27) 50,000 0
Brian Pettersen, as custodian for Angela
Pettersen.................................... 2,000(28) 2,000 0
Perilakalathil Sreekumar....................... 100,000(29) 100,000 0
Taylor Stuart Financial........................ 204,258(30) 204,258 0
Pequot Navigator Offshore Fund, Inc............ 150,000(31) 250,000 0
Pequot Scout Fund, L.P. ....................... 350,000(31) 250,000 0
Active Investors II, Ltd. ..................... 700,000(32) 700,000 0
Active Investors III, Ltd. .................... 700,000(33) 700,000 0
Ronald Shapss.................................. 50,000(34) 50,000 0
</Table>
28
<Table>
<Caption>
NUMBER OF
NUMBER OF SHARES TO BE
NUMBER OF SHARES TO BE OWNED AFTER
SELLING SECURITY HOLDERS SHARES OWNED OFFERED THE OFFERING
- ------------------------ ------------ ------------ ------------
Ronald Shapss, TTEE R. Shapss MPP\PS........... 100,000(35) 100,000 0
Fred Shapss.................................... 25,000(36) 25,000 0
Clique Holdings, LLC........................... 277,778(37) 277,778 0
Brian Mikes.................................... 50,000(38) 50,000 0
Michael Jacks.................................. 50,000(38) 50,000 0
Gary Shemano................................... 100,000(38) 100,000 0
Debra Finnel................................... 50,000(39) 50,000 0
Cameron Associates............................. 50,333(40) 50,333 0
Thomas Trapasso................................ 100,000(41) 100,000 0
Atlas Pearlman, P.A. .......................... 100,000(42) 100,000 0
Copira Investments, Inc. ...................... 470,000(43) 470,000 0
GKN Securities Corp. .......................... 282,000(44) 282,000 0
Brandon Ross................................... 78,000(44) 78,000 0
David Nussbaum................................. 94,000(44) 94,000 0
Lisa McInnis................................... 4,000(44) 4,000 0
Barry King..................................... 4,000(44) 4,000 0
Jorge Taubas................................... 8,000(44) 8,000 0
Talisman Group................................. 15,000(45) 15,000 0
Telluride Holdings............................. 6,666(46) 6,666 0
Total No. of Shares to be
Registered:........................ 8,547,498
</Table>
- ---------------
(1) Includes 58,225 shares of common stock underlying warrants exercisable at
$.687 per share. Warrants are exercisable until June 8, 2004. Warrants were
issued in June 1998 as commission for debt financing we received in which
Haskins & Associates served as our placement agent.
(2) The 58,333 shares of common stock were issued pursuant to a settlement
reached in connection with a disputed billing agreement.
(3) The 308,425 shares of common stock were received upon conversion of the
balance of a promissory note in the amount of $500,000 in favor of PCS
Netcare.
(4) The 14,000 shares of common stock were issued under a settlement agreement
with Dr. Warran R. Federgreen.
(5) Includes 250,000 shares of common stock issued under a private placement
dated August 31, 2000 of our common stock at $1.30 per share. Also includes
50,000 shares of common stock underlying warrants exercisable at $3.00 per
share. Includes 50,000 shares of common stock underlying warrants
exercisable at $4.00 per share. Includes 50,000 shares of common stock
underlying warrants exercisable at $5.00 per share. Includes 50,000 shares
of common stock underlying warrants exercisable at $6.00 per share. These
warrants were issued under the private placement described in this
footnote. In addition, amount includes 50,000 shares of common stock we
will issue upon the conversion of a $50,000 promissory note held by New
Master Investment and 25,000 shares of common stock underlying warrants
exercisable at $1.50 per share which were issued to New Master Investment
under the $50,000 promissory note. The promissory note is payable in full
on May 22, 2001.
(6) Includes an aggregate of 221,995 shares of common stock to be received upon
conversion of $150,000 non-negotiable promissory note due June 11, 2001.
Also includes 75,000 shares of common stock underlying warrants exercisable
at $1.00 per share issued in connection with the $150,000 non-negotiable
promissory note. Includes 50,000 shares of common stock to be received upon
conversion of $50,000 non-negotiable promissory note due May 22, 2001. Also
includes 25,000 shares of common
29
stock underlying warrants exercisable at $1.50 per share issued in
connection with the $50,000 non-negotiable promissory note. Includes
250,000 shares of common stock to be received upon conversion of $250,000
non-negotiable promissory note due May 13, 2001. Also includes 125,000
shares of common stock underlying warrants exercisable at $1.50 per share
issued in connection with the $250,000 non-negotiable promissory note.
(7) Represents 1,102,768 shares of common stock received for the conversion of
promissory notes in the aggregate amount of $1,646,501.
(8) Represents 25,000 shares of common stock that were purchased from Dedales
Investments Holdings in a private transaction. We were not a party to this
transaction.
(9) Includes 100,000 shares of common stock that were purchased from Dedales
Investments Holdings in a private transaction. We were not a party to this
transaction. Includes 200,000 shares of common stock purchased at $1.00 per
share under a stock purchase agreement with our company in January 2001.
Includes 25,000 shares received after conversion of a promissory note.
(10) Includes 100,000 shares of common stock that were purchased from Dedales
Investments Holdings in a private transaction. We were not a party to this
transaction. Also includes 200,000 shares of common stock purchased at
$1.00 per share under a stock purchase agreement with our company in
January 2001.
(11) The 50,000 shares of common stock were purchased at $1.00 per share under a
stock purchase agreement with our company in January 2001.
(12) The 15,000 shares of common stock were purchased at $1.00 per share under a
stock purchase agreement with our company in January 2001.
(13) Includes 45,000 shares of common stock which were purchased at $1.00 per
share under a stock purchase agreement with our company in January 2001.
Also includes 98,000 shares of common stock to be received upon conversion
of $75,000 non-negotiable promissory note due March 6, 2004.
(14) The 10,000 shares of common stock were purchased at $1.00 per share under a
stock purchase agreement with our company in January 2001.
(15) The 100,000 shares of common stock were purchased at $1.00 per share under
a stock purchase agreement with our company in January 2001.
(16) The 100,000 shares of common stock were purchased at $1.00 per share under
a stock purchase agreement with our company in January 2001.
(17) Includes 200,000 shares of common stock underlying warrants issued to
National Securities Corporation in consideration of financial advisory and
consulting services provided to our company. Warrants to purchase 100,000
shares of our common stock are exercisable at $1.10 per share and the
remaining warrants to purchase 100,000 shares of our common stock are
exercisable at $1.50. Of the warrants exercisable at $1.50, half vest on
June 27, 2001 and the remaining warrants vest September 28, 2001. All
warrants expire on March 27, 2004.
(18) Includes 25,000 shares of common stock issued and 25,000 shares to be
issued to Atlantic International Capital, Inc. in consideration for acting
as a financial advisor. The balance of 25,000 shares will be issued based
upon performance criteria.
(19) The 43,750 were issued pursuant to a consulting agreement.
(20) Includes 27,500 shares of common stock purchased at $1.20 under a stock
purchase agreement with our company in March 2001. Also includes 26,800
shares of common stock to be received upon conversion of $67,000
non-negotiable promissory note due March 30, 2004 and 16,667 shares of
common stock underlying warrants issued under the promissory note. The
warrants are exercisable at prices ranging from $2.50 to $4.00 per share
and expire March 30, 2004.
(21) The 105,000 shares of common stock were purchased at $1.19 per share under
a stock purchase agreement with our company in March 2001.
(22) Includes 5,000 shares of common stock issued upon conversion of the
non-negotiable promissory note reflected in note 9.
30
(23) Includes 5,000 shares of common stock issued upon conversion of the
non-negotiable promissory note reflected in note 9.
(24) Includes 5,000 shares of common stock issued upon conversion of the
non-negotiable promissory note reflected in note 9.
(25) Includes 5,000 shares of common stock issued upon conversion of the
non-negotiable promissory note reflected in note 9.
(26) Includes 5,000 shares of common stock issued upon conversion of the
non-negotiable promissory note reflected in note 9.
(27) The 50,000 shares of common stock will be issued upon conversion of a
$37,500 non-negotiable promissory note due March 6, 2004.
(28) The 2,000 shares of common stock were issued upon conversion of the
non-negotiable promissory note reflected in note 13.
(29) The 100,000 shares of common stock were received under a settlement and
mutual release agreement entered into on March 19, 2001 between
Perilakalathil Sreekumar and our company.
(30) Includes 200,000 shares of common stock underlying warrants issued under a
financial advisory and consulting agreement entered into on March 1, 2001.
The warrants are exercisable until March 1, 2004 and are exercisable at
$1.00 per share. Also includes 4,258 shares of common stock underlying
warrants issued to Taylor Stuart Financial in connection with a financing
agreement. These warrants are exercisable at $1.20 per share.
(31) Includes 250,000 shares of common stock which were purchased under a stock
purchase agreement dated April 2000, for an aggregate of 500,000 shares at
$1.85 per share.
(32) The 700,000 shares of common stock were purchased at $1.80 per share under
a stock purchase agreement with our company in April 2001.
(33) The 700,000 shares of common stock were purchased at $1.80 per share under
a stock purchase agreement with our company in April 2001.
(34) The 50,000 shares of common stock were purchased at $1.60 per share under a
stock purchase agreement with our company in April 2001.
(35) The 100,000 shares of common stock were purchased at $1.60 per share under
a stock purchase agreement with our company in April 2001.
(36) The 25,000 shares of common stock were purchased at $1.60 per share under a
stock purchase agreement with our company in April 2001.
(37) The 277,778 shares of common stock were purchased at $1.80 per share under
a stock purchase agreement with our company in April 2001.
(38) Includes warrants to purchase shares of common stock which were issued
under a consulting agreement to purchase an aggregate of 200,000 shares of
common stock entered into in April 11, 2001. The warrants are exercisable
at $4.00 per share.
(39) Includes 50,000 shares of common stock underlying options received and
exercised.
(40) The 50,333 shares of common stock were received as compensation for
advisory services in connection with our private placement in early 2001.
(41) Includes 100,000 shares of common stock underlying options that have been
exercised.
(42) Includes 100,000 shares of common stock underlying options received for
services provided that are exercisable at $1.00 per share.
(43) Includes 470,000 shares issuable upon exercise of warrants at $1.88 per
share of common stock.
(44) Includes shares issuable upon exercise of warrants at $1.88 per share.
(45) Includes 15,000 shares issuable upon exercise of warrants at $1.85 per
share.
(46) The 6,666 shares of common stock were for payment of professional services.
31
The following persons have investment and voting control over the
securities for which they are the selling security holders:
<Table>
Haskins & Associates Lee Haskins
Compubill Systems Corporation, Inc. Daniel Baldor; Lidia Baldor; Hillel Bronstein
PCS Netcare Dana Pusateri
New Master Investments Limited Loretta Cheung
Dedales Investments Holdings Charles Tapp
National Securities Corp. Stephen A. Rothestein
Atlantic International Capital Richare Iamunno
Hornblower & Weeks John Rooney
Brener International Capital Gabriel Brener
Crosby Enterprises Howard Crosby; Janice Crosby
Taylor Stewart Financial Eddie Gibstein; Irving Minnaker
Pequot Navigator Offshore, Inc. Art Samberg; Mark Broach
Pequot Scout Fund, L.P. Art Samberg; Mark Broach
Active Investors II Carl N. Singer
Active Investors III Carl N. Singer
Clique Holdings John Larson
Cameron Associates C. Rodney O'Conner
Atlas Pearlman Jan Atlas; Charles Pearlman; Michael Trop
Copira Investments Neil Galloway
GKN Securities Corp. Robert H. Gladstone
Talisman Group Larry Talisman
Telluride Holdings Jim Cassel; Scott Salpeter; Barry Steiner
</Table>
MANNER OF SALE
The shares of common stock owned, or which may be acquired, by the selling
shareholders may be offered and sold by means of this prospectus from time to
time as market conditions permit in the over-the-counter market, or otherwise,
at prices and terms then prevailing or at prices related to the then-current
market price, or in negotiated transactions. These shares may be sold by one or
more of the following methods, without limitation:
- a block trade in which a broker or dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
- face-to-face transactions between sellers and purchasers without a
broker/dealer.
In effecting sales, brokers or dealers engaged by the selling shareholders
may arrange for other brokers or dealers to participate. Such brokers or dealers
may receive commissions or discounts from selling shareholders in amounts to be
negotiated.
The selling shareholders and any broker/dealers who act in connection with
the sale of the shares hereunder may be deemed to be "underwriters" within the
meaning of section 2(11) of the Securities Acts of 1933, and any commissions
received by them and profit on any resale of the shares as principal might be
deemed to be underwriting discounts and commissions under the Securities Act. We
have agreed to indemnify the selling shareholders and any securities
broker/dealers who may be deemed to be underwriters against certain liabilities,
including liabilities under the Securities Act as underwriters or otherwise.
We have advised the selling shareholders that they and any securities
broker/dealers or others who may be deemed to be statutory underwriters will be
subject to the prospectus delivery requirements under the Securities Act. We
have also advised each selling shareholder that in the event of a "distribution"
of the shares owned by the selling shareholder, such selling shareholder, and
any broker/dealer or other person who
32
participates in such distribution, may be subject to Rule 102 under the
Securities Exchange Act of 1934 until their participation in that distribution
is completed. Rule 102 makes it unlawful for any person who is participating in
a distribution to bid for or purchase stock of the same class as is the subject
of the distribution. A "distribution" is defined in Rule 102 as an offering of
securities "that is distinguished from ordinary trading transactions by the
magnitude of the offering and the presence of special selling efforts and
selling methods". We have also advised the selling shareholders that Rule 101
under the 1934 Act prohibits any "stabilizing bid" or "stabilizing purchase" for
the purpose of pegging, fixing or stabilizing the price of the common stock in
connection with this offering.
We do not intend to distribute or deliver the prospectus by means other
than by hand or mail.
SHARES ELIGIBLE FOR FUTURE SALE
As of May 2, 2002, we have 32,084,649 shares of common stock issued and
outstanding. This does not include shares that may be issued upon exercise of
options or warrants.
We cannot predict the effect, if any, that market sales of common stock or
the availability of these shares for sale will have on the market price of our
shares from time to time. Nevertheless, the possibility that substantial amounts
of common stock may be sold in the public market could negatively damage and
affect market prices for our common stock and could damage our ability to raise
capital through the sale of our equity securities.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be passed
upon for us by Atlas Pearlman, P.A., 350 East Las Olas Boulevard, Suite 1700,
Fort Lauderdale, FL 33301, Florida. Atlas Pearlman, P.A. owns options to
purchase 100,000 shares of common stock.
EXPERTS
The consolidated balance sheet as of December 31, 2001 and the consolidated
statements of operations, stockholders' equity (accumulated deficit), and cash
flows or the years ended December 31, 2001 and December 31, 2000 are included
herein in reliance on the reports of Kaufman, Rosin & Co., P.A., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement on Form SB-2 under
the Securities Act for the common stock offered by this prospectus. This
prospectus, which is a part of the registration statement, does not contain all
of the information in the registration statement and the exhibits filed with it,
portions of which have been omitted as permitted by SEC rules and regulations.
For further information concerning us and the securities offered by this
prospectus, we refer to the registration statement and to the exhibits filed
with it. Statements contained in this prospectus as to the content of any
contract or other document referred to are not necessarily complete. In each
instance, we refer you to the copy of the contracts and/or other documents filed
as exhibits to the registration statement, and these statements are qualified in
their entirety by reference to the contract or document.
The registration statement, including all exhibits, may be inspected
without charge at the SEC's Public Reference Room at 450 Fifth Street, N.W.
Washington, D.C. 20549, and at the SEC's regional offices located at the
Woolworth Building, 233 Broadway, New York, New York 10279 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these
materials may also be obtained from the SEC's Public Reference at 450 Fifth
Street, N.W., Room 1024, Washington D.C. 20549, upon the payment of prescribed
fees. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330.
The registration statement, including all exhibits and schedules and
amendments, has been filed with the SEC through the Electronic Data Gathering,
Analysis and Retrieval system, and are publicly available through the SEC's Web
site located at http://www.sec.gov.
33
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
METROPOLITAN HEALTH
NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
CONTENTS
<Table>
<Caption>
PAGE
----
INDEPENDENT AUDITORS' REPORT................................ F-3
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet............................................. F-4
Statements of Operations.................................. F-5
Statements of Changes in Stockholders' Equity (Deficiency
in Assets)............................................. F-6
Statements of Cash Flows.................................. F-7
Notes to Financial Statements............................. F-9
</Table>
F-2
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 sheet of Metropolitan
Health Networks, Inc. and Subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, changes in stockholders' equity
(deficiency in assets), and cash flows for each of the two years in the period
ended December 31, 2001. 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 auditing standards generally
accepted in the United States of America. 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, 2001, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
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 incurred substantial negative cash flows from operations since inception. In
the absence of maintaining profitable operations and achieving 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. Management's plans are also discussed in Note 2. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company can not continue in
existence.
KAUFMAN, ROSSIN & CO., P.A.
Miami, Florida
March 15, 2002
F-3
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
<Table>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 393,968
Accounts receivable, net of allowances of $4,748,900...... 13,362,782
Inventory................................................. 697,489
Other current assets (including $104,000 due from
officers).............................................. 451,627
------------
Total current assets.............................. 14,905,866
Property and Equipment, net of accumulated depreciation and
amortization of $1,626,517................................ 1,336,168
Goodwill, net of accumulated amortization of $890,097....... 2,977,874
Other Assets................................................ 142,767
------------
Total Assets...................................... $ 19,362,675
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 4,076,628
Advances from HMO......................................... 1,152,953
Payroll taxes payable..................................... 2,631,179
Accrued expenses.......................................... 1,000,976
Current maturities of capital lease obligations........... 106,002
Current maturities of long-term debt...................... 828,788
------------
Total current liabilities......................... 9,796,526
Capital Lease Obligations................................... 197,103
Long-term Debt.............................................. 689,812
------------
Total Liabilities................................. 10,683,441
------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, par value $.001 per share; stated value
$100 per share; 10,000,000 shares authorized; 5,000
issued and outstanding................................. 500,000
Common stock, par value $.001 per share; 80,000,000 shares
authorized; 27,479,087 issued and outstanding.......... 27,479
Additional paid-in capital................................ 26,044,905
Accumulated deficit....................................... (17,575,786)
Common stock issued for services to be rendered........... (317,364)
------------
Total stockholders' equity........................ 8,679,234
============
Total Liabilities and Stockholders' Equity........ $ 19,362,675
============
</Table>
See accompanying notes.
F-4
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Revenues.................................................... $131,530,583 $119,129,854
Expenses
Direct medical costs...................................... 112,921,307 109,230,078
Cost of sales............................................. 2,269,308 --
Payroll, payroll taxes and benefits....................... 7,445,882 4,072,887
Depreciation and amortization............................. 870,284 666,330
Bad debt expense.......................................... 308,490 643,734
Rent and leases........................................... 961,776 654,408
Consulting expense........................................ 1,275,226 323,304
General and administrative................................ 3,212,720 1,870,850
------------ ------------
Total expenses.................................... 129,264,993 117,461,591
------------ ------------
Income Before Other Income (Expense)........................ 2,265,590 1,668,263
------------ ------------
Other Income (Expense)
Gain on settlements of litigation......................... 177,000 3,448,288
Write down of accounts receivable from closed medical
practice (GMA)......................................... (775,000) --
Gain on settlement of capital lease obligations........... -- 572,000
Interest and penalty expense.............................. (647,458) (768,208)
Other..................................................... 52,449 8,226
------------ ------------
Total other income (expense)...................... (1,193,009) 3,260,306
------------ ------------
Income Before Income Taxes.................................. 1,072,581 4,928,569
Income Tax Expense.......................................... 63,827 --
------------ ------------
Net Income.................................................. $ 1,008,754 $ 4,928,569
============ ============
Weighted Average Number of Common Shares Outstanding........ 25,859,411 16,887,402
============ ============
Net Earnings Per Share, basic............................... $ 0.04 $ 0.28
============ ============
Net Earnings Per Share, diluted............................. $ 0.04 $ 0.24
============ ============
</Table>
See accompanying notes.
F-5
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
YEARS ENDED DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
COMMON ADDITIONAL
PREFERRED PREFERRED STOCK COMMON PAID-IN PREPAID ACCUMULATED
SHARES STOCK SHARES STOCK CAPITAL EXPENSES DEFICIT TOTAL
--------- --------- ---------- ------- ----------- --------- ------------ -----------
BALANCES -- DECEMBER 31,
1999...................... 5,000 $500,000 12,111,888 $12,112 $13,488,391 $ -- $(23,513,109) $(9,512,606)
Shares issued in lieu of
compensation.............. -- -- 55,019 55 48,196 -- -- 48,251
Shares issued for consulting
services.................. -- -- 461,103 461 214,461 (33,258) -- 181,664
Shares issued in connection
with private placements... -- -- 874,176 874 1,061,968 -- -- 1,062,842
Shares issued for loans..... -- -- 2,773,001 2,773 2,385,961 -- -- 2,388,734
Shares issued for directors'
fees...................... -- -- 97,666 98 28,551 -- -- 28,649
Shares issued for interest
expense and late fees..... -- -- 890,951 891 134,193 -- -- 135,084
Shares issued in connection
with acquisition.......... -- -- 64,000 64 93,703 -- -- 93,767
Shares issued in
settlement................ -- -- 3,660,333 3,660 1,188,822 -- -- 1,192,482
Exercise of options and
warrants.................. -- -- 729,096 729 160,362 -- -- 161,091
Issuance of options for
services.................. -- -- -- -- 132,106 -- -- 132,106
Net income.................. -- -- -- -- -- -- 4,928,569 4,928,569
----- -------- ---------- ------- ----------- --------- ------------ -----------
BALANCES -- DECEMBER 31,
2000...................... 5,000 500,000 21,717,233 21,717 18,936,714 (33,258) (18,584,540) 840,633
Shares issued in connection
with private placements,
net....................... -- -- 3,312,788 3,313 5,027,986 -- -- 5,031,299
Shares issued upon
conversion of convertible
debt...................... -- -- 826,298 826 799,175 -- -- 800,001
Shares issued for consulting
services and
compensation.............. -- -- 25,000 25 15,863 -- -- 15,888
Shares issued for prepaid
consulting agreement,
net....................... -- -- 462,500 463 290,252 (162,679) -- 128,036
Exercise of options and
warrants.................. -- -- 685,516 686 452,202 -- -- 452,888
Shares issued for directors'
fees...................... -- -- 63,376 63 81,436 -- -- 81,499
Shares issued for interest
expense and late fees..... -- -- 139,443 139 61,552 -- -- 61,691
Shares issued in connection
with line of credit....... -- -- 57,767 58 73,919 -- -- 73,977
Shares issued in
settlement................ -- -- 189,166 189 102,579 -- -- 102,768
Issuance of options for
services, net............. -- -- -- -- 203,227 (121,427) -- 81,800
Net income.................. -- -- -- -- -- -- 1,008,754 1,008,754
----- -------- ---------- ------- ----------- --------- ------------ -----------
BALANCES -- DECEMBER 31,
2001...................... 5,000 $500,000 27,479,087 $27,479 $26,044,905 $(317,364) $(17,575,786) $ 8,679,234
===== ======== ========== ======= =========== ========= ============ ===========
</Table>
See accompanying notes.
F-6
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $1,008,754 $4,928,569
---------- ----------
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................... 870,284 666,330
Gain on settlements of litigation....................... (177,000) (3,448,288)
Provision for bad debts................................. 308,490 643,734
Write-down of accounts receivable from closed
practice.............................................. 775,000 --
Write-off of goodwill from closed practice.............. 54,161 --
Gain on settlement of capital lease obligations......... -- (572,000)
Amortization of discount on note payable................ 36,206 36,206
Stock options granted in lieu of compensation........... 81,800 --
Stock options granted for professional services......... -- 132,106
Stock issued in lieu of compensation.................... 97,362 76,900
Stock issued for professional services.................. 128,036 126,235
Stock issued for interest and late fees................. 61,691 135,084
Stock issued in connection with settlements............. 102,768 179,868
Changes in operating assets and liabilities:
Accounts receivable................................... (7,030,839) (4,704,246)
Inventory............................................. (334,377) --
Other current assets.................................. (307,139) 168,641
Other assets.......................................... (79,111) (249,323)
Due to related parties................................ (105,800) 10,095
Accounts payable and accrued expenses................. 1,978,207 (897,254)
Unearned revenue...................................... (906,944) 781,944
Medical claims payable................................ -- (98,907)
---------- ----------
Total adjustments.................................. (4,447,205) (7,012,875)
---------- ----------
Net cash used in operating activities.............. (3,438,451) (2,084,306)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash consideration paid for companies acquired............ (23,900) (758,486)
Capital expenditures...................................... (349,692) (265,858)
---------- ----------
Net cash used in investing activities.............. (373,592) (1,024,344)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants...... 452,888 161,091
Net repayments under line of credit facilities............ -- (709,568)
Repayments of notes payable............................... (434,113) (1,686,805)
Borrowings on notes payable............................... 733,587 3,554,867
Net borrowings (repayments) of capital lease
obligations............................................. (52,049) (185,984)
Net proceeds from issuance of common stock................ 5,105,905 1,062,842
Advances from (repayments to) HMO......................... (1,644,931) 956,931
---------- ----------
Net cash provided by financing activities.......... 4,161,287 3,153,374
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 349,244 44,724
CASH AND CASH EQUIVALENTS -- BEGINNING...................... 44,724 --
---------- ----------
CASH AND CASH EQUIVALENTS -- ENDING......................... $ 393,968 $ 44,724
========== ==========
</Table>
See accompanying notes.
F-7
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Supplemental Disclosures:
Interest paid............................................. $471,130 $ 599,000
-------- ----------
Income taxes paid......................................... $ 63,827 $ --
-------- ----------
Supplemental Disclosure of Non-cash Investing and Financing
Activities (Note 3)
Common stock issued in connection with acquisitions....... $ -- $ 66,767
-------- ----------
Issuance of notes payable in connection with
acquisitions........................................... $150,000 $ --
-------- ----------
Fair value of assets received in connection with
acquisitions........................................... $ 78,608 $ 134,550
-------- ----------
Fair value of liabilities assumed in connection with
acquisitions........................................... $507,462 $ 198,769
-------- ----------
Capital lease obligations incurred on purchases of
equipment.............................................. $277,074 $ --
-------- ----------
Purchase price in excess of net assets acquired........... $158,853 $ 340,760
-------- ----------
Conversion of debt into common stock...................... $800,001 $2,388,734
-------- ----------
Common stock issued as contingent consideration in
connection with acquisition............................ $ -- $ 27,000
-------- ----------
Common stock issued in connection with settlements........ $ -- $1,012,614
-------- ----------
</Table>
See accompanying notes.
F-8
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 subsidiaries. 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 principally in South and Central Florida. The
Company and certain of the wholly owned general medical practices operate under
agreements with a national health maintenance organization (HMO). Commencing in
1999, the Company entered into additional agreements with the HMO in locations
where it did not have owned medical practices and in connection therewith, began
contracting with physicians to provide medical care to certain patients through
non-owned medical practices (see accounts receivable and revenue recognition).
In October 2000, the Company acquired a clinical laboratory, which operates
in South Florida. In June 2001 the Company opened a pharmacy to service its
patient base in Central Florida. Commencing in the third quarter of 2001, the
Company expanded its pharmacy division into New York and Maryland.
SEGMENT REPORTING
The Company applies Financial Accounting Standards Boards ("FASB")
statement No. 131, "Disclosure about Segments of an Enterprise and Related
Information". The Company has considered its operations and has determined that
in 2000 it operated in one segment and in 2001 it operated in three operating
segments 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.
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.
INVENTORY
Inventories consist principally of prescription drugs that are stated at
the lower of cost or market determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Expenditures for major
betterments and additions are charged to the asset accounts, while replacements,
maintenance and repairs which do not extend the lives of the respective assets
are charged to expense currently.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
F-9
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets. Amortization of leasehold
improvements and property under capital leases is computed on a straight-line
basis over the shorter of the estimated useful lives of the assets or the term
of the lease. The range of useful lives is as follows:
<Table>
Machinery and equipment..................................... 5 - 7 years
Computer and office equipment, including items under capital 5 - 7 years
lease.....................................................
Furniture and fixtures...................................... 5 - 7 years
Auto equipment.............................................. 5 years
Leasehold improvements...................................... 5 years
</Table>
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
In the health care environment, it is almost always at least reasonably
possible that estimates could change in the near term as a result of one or more
future confirming events. With regard to revenues, expenses and receivables
arising from agreements with the HMO, the Company estimates amounts it believes
will ultimately be realizable through the use of judgments and assumptions about
future decisions. It is reasonably possible that some or all of these estimates
could change in the near term by an amount that could be material to the
financial statements.
Revenues from the HMO accounted for approximately 96% of the Company's
total revenues for 2001 and 2000. Programs with the HMO are sometimes complex
and at times subject to different interpretation by the Company and the HMO. The
2001 gross profit under agreements with the HMO was increased by approximately
$1.9 million due to the favorable settlement during 2001 with the HMO relating
to certain costs estimated as of December 31, 2000.
Direct medical expenses are based in part upon estimates of claims incurred
but not reported (IBNR) and estimates of retroactive adjustments to be applied
by the HMO. The IBNR estimates are made by the HMO utilizing actuarial methods
and are continually evaluated by management of the Company based upon its
specific claims experience. The estimates of retroactive adjustments to be
applied by the HMO are based upon current agreements with the HMO to modify
certain amounts previously charged to the Company. Management believes its
estimates of IBNR claims and estimates of retroactive adjustments are
reasonable, however, it is reasonably possible the Company's estimate of these
costs could change in the near term, and those changes may be material.
From time to time, the Company is charged for certain medical expenses for
which, under its contract with the HMO, the Company believes it is not liable.
In connection therewith, the Company is contesting certain costs aggregating
approximately $11 million. Management's estimate of recovery on these
contestations is determined based upon its judgment and its consideration of
several factors including the nature of the contestations, historical recovery
rates and other qualitative factors. Accordingly, net amount due from the HMO
has been increased by approximately $2 million, which represents an estimated
recovery of 20% of 2000
F-10
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and 2001 contestations outstanding at December 31, 2001. It is reasonably
possible the Company's estimate of these recoveries could change in the near
term, and those changes may be material.
Non-HMO accounts receivable, aggregating approximately $7,568,000 at
December 31, 2001 relate principally to medical services provided on a fee for
service basis, and are reduced by amounts estimated to be uncollectible
(approximately $4,748,000). Management's estimate of uncollectible amounts is
based upon its analysis of historical collections and other qualitative factors,
however it is reasonable possible the company's estimate of uncollectible
amounts could change in the near term, and those changes may be material.
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 and long-term debt are estimated using discounted cash flows
analyses based on the Company's incremental borrowing rates for similar
types of borrowing arrangements. At December 31, 2001, the fair values
approximate the carrying values.
NET INCOME PER SHARE
The following table sets forth the computations of basic earnings per share
and diluted earnings per share:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Net income.......................................... $ 1,008,754 $ 4,928,569
Less: preferred stock dividends..................... 50,000 166,667
----------- -----------
Income available to common shareholders............. 958,754 4,761,902
Denominator:
Weighted average common shares outstanding.......... 25,859,411 16,887,402
----------- -----------
Basic earnings per common share..................... $ 0.04 $ 0.28
=========== ===========
Net income.......................................... $ 1,008,754 $ 4,928,569
Interest on convertible securities.................. 43,870 8,743
----------- -----------
1,052,624 4,937,312
----------- -----------
</Table>
F-11
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Denominator:
Weighted average common shares outstanding.......... 25,859,411 16,887,402
Common shares equivalents of outstanding stock:
Stock options..................................... 2,094,366 2,576,405
Warrants.......................................... 157,035 187,979
Convertible preferred stock....................... 743,508 820,210
Convertible debt.................................. 286,413 462,500
----------- -----------
29,140,733 20,934,496
----------- -----------
Diluted earnings per common share................... $ 0.04 $ 0.24
=========== ===========
</Table>
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 Provider Service
Network (PSN) 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 its PSN 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.
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.
GOODWILL
In connection with its acquisitions of physician and ancillary practices,
the Company has recorded goodwill of $3,867,971 and $3,783,692 as of December
31, 2001 and 2000, 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, relationships
between the physicians and their patients, 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."
F-12
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITAL LEASE SETTLEMENT
During the year ended December 31, 2000, a vendor/lessee to a former
subsidiary disposed of during 1999 repossessed equipment from the former
subsidiary in partial satisfaction of certain company obligations. In connection
with this satisfaction, the Company recorded other income of approximately
$572,000.
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 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued two
new pronouncements: Statement of Financial Accounting Standards ("SFAS") No 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 is effective as follows: a) use of the pooling-
of-interest method is prohibited for business combinations initiated after June
30, 2001; and b) the provisions of SFAS 141 apply to all business combinations
accounted for by the purchase method that are completed after June 30, 2001
(that is, the date of the acquisition is July 2001 or later). There are also
transition provisions that apply to business combinations completed before July
1, 2001, that were accounted for by the purchase method. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001 for all goodwill
and other intangible assets recognized in an entity's statement of financial
position at that date, regardless of when those assets were initially
recognized. SFAS No. 142 specifies that goodwill and some intangible assets will
no longer be amortized but instead will be subject to periodic impairment
testing. The Company is currently assessing the impact of SFAS Nos. 141 and 142
which is not expected to have a material impact on the Company's financial
statements, however, future amortization of goodwill that relate to future
acquisitions will be affected by these statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." In August 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred and a corresponding
increase in the carrying amount of the related long-lived asset. Subsequently,
the asset retirement cost should be allocated to expense using a systematic and
rational method over its useful life. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. SFAS No. 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. It supersedes, with exceptions, SFAS No 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and
is effective for fiscal years beginning after December 15, 2001. The Company is
currently assessing the impact of SFAS No. 143 and No. 144 which are not
expected to have a material impact on the Company's financial statements.
RECLASSIFICATIONS
Certain amounts in the 2000 financial statements have been reclassified to
conform with 2001 presentation.
F-13
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States, which
contemplates continuation of the Company as a going concern. However, the
Company has incurred substantial negative cash flows from operations in 2001
partly as a result of the Company's diversification of its revenue base,
including the pharmacy and clinical laboratory operations. Although the Company
believes it will become cash flow positive from operations in 2002, there can be
no assurance that this will occur. In the absence of achieving positive cash
flows from operations or obtaining additional debt or equity financing, the
Company may have difficulty meeting current and long-term obligations, and may
be forced to discontinue a business segment or overall operations.
To address these concerns, the Company continues to pursue the sale of its
common stock through private placement offerings. In the first quarter of 2002,
the Company issued 500,000 shares of common stock in connection with private
placement offerings, resulting in net proceeds of $500,000. Additionally, the
Company borrowed $1,700,000 on short-term notes payable and $625,000 in
long-term notes payable, with varying interest rates and maturities. The
proceeds from these transactions were used for working capital.
In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financial obligations. Management believes that actions presently being taken,
as described in the preceding paragraph, provide the opportunity for the Company
to continue as a going concern, however, there is no assurance this will occur.
NOTE 3. ACQUISITIONS AND DISPOSALS
ALPHA CLINICAL PURCHASE
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. 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. On May 12, 2000 these advances, plus additional
advances in 2000 were converted into a promissory note in the amount of
$512,000.
Effective October 1, 2000, the Company acquired Alpha for approximately
$1,035,000. The acquisition was accounted for as a purchase. Accordingly, the
purchase price was allocated to the net assets acquired based upon their fair
market values. In connection with this acquisition, approximately $1,099,000 was
allocated to goodwill as follows:
<Table>
50,000 shares of the Company's common stock................. $ 66,767
Forgiveness of promissory note and other advances........... 968,000
Total consideration......................................... 1,034,767
Fair value of assets acquired............................... (134,775)
Fair value of liabilities assumed........................... 198,769
----------
$1,098,761
==========
</Table>
The results of the operations beginning October 1, 2000 are included in the
Company's consolidated statements of operations.
F-14
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. ACQUISITIONS AND DISPOSALS (CONTINUED)
Unaudited pro forma results of operations, assuming the business
combination had occurred at the beginning of 2000, after giving effect to
certain adjustments resulting from the acquisition, were as follows:
<Table>
<Caption>
FOR THE YEAR
ENDED
DECEMBER 31, 2000
-----------------
Revenue..................................................... $119,372,854
Net income.................................................. 4,640,569
Net income per share........................................ 0.26
</Table>
The pro forma data is provided for information purposes only and does not
purport to be indicative of results which actually would have been obtained if
the combination had been effected at the beginning of each period presented, or
of those results which may be obtained in the future.
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 was to be
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%). 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, $1,588,349 was allocated to goodwill.
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
consolidated statement of operations for the year ended June 30, 1999.
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.
In August 2000, the Company and Primedica reached a final settlement
agreement providing for full settlement of all Primedica judgments upon a
payment of $350,000. In connection therewith, the Company recorded "other
income" of approximately $3,400,000 for the year ended December 31, 2000.
F-15
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<Table>
<Caption>
DECEMBER 31, 2001
-----------------
Equipment under capital lease............................... $ 713,909
Machinery and medical equipment............................. 315,630
Furniture and fixtures...................................... 352,168
Leasehold improvements...................................... 520,928
Computer and office equipment............................... 998,670
Automobile equipment........................................ 61,380
-----------
2,962,685
Less accumulated depreciation and amortization.............. (1,626,517)
-----------
$ 1,336,168
===========
</Table>
Accumulated amortization of computer equipment and office equipment under
capital leases was $430,794 at December 31, 2001.
Depreciation and amortization expense totaled approximately $512,000 and
$287,000 for the years ended December 31, 2001 and 2000.
NOTE 5. EQUITY LINE OF CREDIT FACILITY
On March 30, 2001 the Company entered into an equity line of credit
agreement with a British Virgin Islands corporation (Purchaser), in order to
establish a possible source of funding for the Company's planned operations. The
equity line of credit agreement establishes what is sometimes also referred to
as an equity drawdown facility (Equity Facility).
Under the Equity Facility, the Purchaser agreed to provide the Company with
up to $12,000,000 of funding during the twenty-four (24) month period following
the date of an effective registration statement. During this twenty-four (24)
month period, the Company may request a drawdown under the Equity Facility by
selling shares of its common stock to the Purchaser, and the Purchaser would be
obligated to purchase the shares. The Company may request a drawdown once every
27 trading days, although the Company was under no obligation to request any
drawdowns under the Equity Facility.
As consideration for extending the equity line of credit, the Company
granted Purchaser warrants to purchase up to the number of shares equaling
$720,000 based upon the average closing price of the Company's common stock for
the 15 trading days prior to the closing of this agreement (Base Price). The
warrant entitles the Purchaser to purchase such shares for 120% of the Base
Price at any time prior to March 30, 2004. As partial consideration for
placement agent's services in connection with this offering, the Company granted
the placement agent warrants to purchase up to the number of shares equaling
$840,000 based upon the Base Price, for 120% of the Base Price, any time prior
to March 30, 2004.
During 2001, the Company received approximately $74,000 under the Equity
Facility and on March 5, 2002, the Company terminated the Equity Facility.
NOTE 6. UNEARNED REVENUE
On August 22, 2000, the Company entered into a Pharmacy Services Agreement
(Pharmacy Agreement) with a medical management and software company (Pharmacy
Consultant), to provide consulting, technology, and software services for the
Company's start-up pharmacy operation, for an initial term of three
F-16
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. UNEARNED REVENUE (CONTINUED)
years. In connection with this agreement, the Pharmacy Consultant paid the
Company $500,000, subject to return if the Company elects to cancel the Pharmacy
Agreement under certain provisions. On October 6, 2000, the Company received an
additional $500,000 in funding from the Pharmacy Consultant in connection with a
10-year exclusive preferred provider agreement. This amount was required to be
repaid, together with interest at prime plus 2%, should the Company default or
elect to cancel the Agreement. Of these amounts, approximately $132,000 and
$94,000 were recognized as revenue during the years ended December 31, 2001 and
2000, respectively.
On June 1, 2001, the Company terminated these agreements. Under the terms
of the termination, the Company purchased assets totaling $99,000 and assumed
certain liabilities totaling $78,000 of a Daytona pharmacy servicing the
Company's patients. In addition, the Company agreed to retain the Pharmacy
Consultant for a period of one year for a prepaid amount of $300,000. Of this
amount, $125,000 is included in prepaid expenses at December 31, 2001. Total
consideration paid for the net assets and the unamortized balances on the
agreements was $1,028,000, on which the Company recognized a gain in the amount
of $68,000.
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:
<Table>
2002........................................................ $ 155,792
2003........................................................ 142,521
2004........................................................ 88,849
---------
387,162
Less amount representing interest........................... (84,057)
---------
303,105
Less current maturities..................................... (106,002)
---------
$ 197,103
=========
</Table>
NOTE 8. LONG-TERM DEBT
Long-term debt consisted of the following:
<Table>
Note payable to HMO; interest at 5%, 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. $ 208,583
Notes payable with interest prepaid in the form of one share
of the Company's common stock for each dollar loaned, plus
additional interest upon default; principal payable in 6
equal installments. The holders of these notes have the
right to convert the outstanding obligation to common
stock at $1 per share at any time. 202,991
Note payable with interest at prime plus 5% (9.75% at
December 31, 2001), payable in installments of $25,000 per
week beginning March 1, 2002 for six weeks, then five
monthly payments of $50,000 and one monthly payment of
$100,000; collateralized by accounts receivable and
property and equipment. Should the Company not comply with
the terms of the arrangement, additional amounts of
approximately $180,000 will become due and owning, and the
interest rate will be increased by 5%. 500,187
</Table>
F-17
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. LONG-TERM DEBT (CONTINUED)
<Table>
Promissory notes; unsecured, with interest at 10%, increased
to 15% upon default, due and payable at various dates from
April to June 2003. The holders have the right to convert
the entire amount outstanding into shares of common stock
at varying prices from $0.74 to $1.00 per share, at any
time. 504,191
Promissory note to shareholder of the Company, interest at
8% due and payable on March 30, 2004, or as otherwise
agreed to by the parties. The payee at his discretion may
convert amount outstanding on the note into shares of the
common stock of the Company at $2.50 per share. The note
has 16,667 attached warrants at prices ranging from $2.50
to $4.00, also expiring March 30, 2004. 67,000
Promissory note, interest at 10%, due on demand;
collateralized by certain assets of the Company. 35,648
----------
1,518,600
Less current maturities 828,788
----------
Long-term debt $ 689,812
==========
</Table>
Aggregate maturities of long-term debt for years subsequent to December 31,
2001, are as follows:
<Table>
2002........................................................ $ 828,788
2003........................................................ 622,812
2004........................................................ 67,000
----------
$1,518,600
==========
</Table>
NOTE 9. RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
For the year ended December 31, 2000, approximately $238,000 of Company
expenses were paid by the former owner of GMA, who is presently a shareholder
and director of the Company. During 2001 these amounts were repaid. At December
31, 2001, amounts owed to the Company by officers totaled approximately
$104,000.
NOTE 10. INCOME TAXES
The components of income taxes were as follows:
<Table>
<Caption>
2001 2000
--------- -----------
Provision (Benefit) For Income Taxes
Current
Federal................................................ $ 63,827 $ --
State.................................................. -- --
Deferred
Federal................................................ 831,000 1,616,000
State.................................................. 143,000 278,000
--------- -----------
Change in Valuation Allowance............................... (974,000) (1,894,000)
--------- -----------
Income Tax Expense.......................................... $ 63,827 $ --
========= ===========
</Table>
F-18
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. INCOME TAXES (CONTINUED)
The effective tax rate for the year ended December 31, 2001, differed from
the federal statutory rate due principally to a decrease in the deferred tax
asset valuation allowance offset partially by alternative minimum taxes.
The effective tax rate for the year ended December 31, 2000, differed from
the federal statutory rate due to state income tax benefits of approximately
$278,000, a decrease in the valuation allowance of approximately $1,894,000 and
permanent and other differences of approximately $193,000.
The Company has net operating loss carryforwards of approximately
$14,498,000, expiring in various years through 2019.
At December 31, 2001, approximate deferred tax assets and liabilities were
as follows:
DEFERRED TAX ASSETS:
<Table>
Allowances for doubtful accounts............................ $1,787,000
Net operating loss carryforward............................. 4,525,000
----------
Total deferred tax assets................................. 6,312,000
----------
</Table>
DEFERRED TAX LIABILITIES:
<Table>
Cash basis subsidiaries..................................... 247,000
Amortization................................................ 15,000
Depreciation................................................ 30,000
-----------
Total deferred tax liabilities............................ 292,000
-----------
Net deferred tax asset...................................... 6,020,000
Less valuation allowance.................................... (6,020,000)
===========
$ --
===========
</Table>
NOTE 11. STOCKHOLDERS' EQUITY
As of December 31, 2001, the Company has designated 30,000 preferred shares
as Series A preferred stock, par value $.001, of which 5,000 were issued and
outstanding. 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,
2001, the aggregate and per share amounts of cumulative dividend arrearages were
approximately $216,667 and $43.40. 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. 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. At December 31, 2001,
there were no shares of series B preferred stock issued and outstanding.
At December 31, 2001, the Company had 1,844,150 warrants outstanding.
F-19
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. 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 years ended
December 31, 2001 and 2000 compensation costs and professional services related
to stock options amounted to approximately $81,800 and $132,106, respectively.
Stock option activity for the two years ended December 31, 2001 were as
follows:
<Table>
<Caption>
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
Balance, December 31, 1999............................... 2,643,692 $3.70
Granted during the year.................................. 3,868,000 1.21
Exercised and returned during the year................... (357,028) 0.53
Forfeited during the year................................ (1,103,217) 1.42
----------
Balance, December 31, 2000............................... 5,051,447 1.88
Granted during the year.................................. 1,474,000 1.48
Exercised and returned during the year................... (514,000) 0.59
Forfeited during the year................................ (275,197) 4.26
----------
Balance, December 31, 2001............................... 5,736,250 1.81
----------
Exercisable, December 31, 2000........................... 3,317,975 2.06
==========
Exercisable, December 31, 2001........................... 3,939,974 1.85
----------
</Table>
The following table summarizes information about stock options outstanding
at December 31, 2001:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
REMAINING REMAINING
NUMBER OF CONTRACTUAL LIFE NUMBER OF CONTRACTUAL LIFE
EXERCISE PRICE OPTIONS (YEARS) OPTIONS (YEARS)
- -------------- --------- ---------------- --------- ----------------
$0.100 -- $ 1.000............... 3,445,725 3.90 2,384,449 3.54
1.140 -- 2.000............... 797,450 3.61 607,450 3.41
2.020 -- 3.000............... 930,700 2.68 535,700 1.76
3.125 -- 5.000............... 144,100 3.89 144,100 3.89
5.500 -- 8.000............... 247,000 3.97 97,000 1.83
8.400 -- 18.000............... 171,275 0.56 171,275 0.56
========= ---------
5,736,250 3,939,974
--------- ---------
</Table>
The weighted average fair value per option as of grant date was $0.58 for
stock options granted during the year ended December 31, 2001. The determination
of the fair value of all stock options granted during the year ended December
31, 2001 was based on (i) risk-free interest rate of 3.51%, (ii) expected option
lives ranging from 1 to 4 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 weighted average fair value per option as of grant date was $0.21 for
stock options granted during the year ended December 31, 2000. The determination
of the fair value of all stock options granted during the year
F-20
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. STOCK OPTIONS (CONTINUED)
ended December 31, 2000 was based on (i) risk-free interest rate of 5.3%, (ii)
expected option lives ranging from 1 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.
<Table>
<Caption>
2001 2000
-------- ----------
Net income.................................................. $239,210 $4,219,555
Net income per share, basic................................. 0.01 0.24
Net income per share, diluted............................... 0.01 0.20
</Table>
NOTE 13. 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:
<Table>
2002........................................................ $ 902,000
2003........................................................ 624,000
2004........................................................ 489,000
2005........................................................ 449,000
2006........................................................ 249,000
Thereafter.................................................. 141,000
----------
Total....................................................... $2,854,000
==========
</Table>
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:
<Table>
2002........................................................ $2,556,000
2003........................................................ 1,023,000
2004........................................................ 908,000
2005........................................................ 616,000
----------
$5,103,000
==========
</Table>
Under the terms of the employment agreement with the Company's Chief
Executive Officer (CEO), if the Company terminates the CEO without good cause,
the Company would be obligated to continue to pay all salary and any current and
future bonuses that would have been earned under the agreement. In addition, the
CEO would also be entitled to all stock options earned or not yet earned through
the full term of the Agreement, and the Company would be required to register
all shares owned, directly or indirectly by the CEO.
F-21
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
The Company is a party to various claims arising in the ordinary course of
business. Management believes that the outcome of these matters will not have a
materially adverse effect on the financial position or the results of operations
of the Company.
PAYROLL TAXES PAYABLE
In 2000, the Company negotiated an installment plan with the Internal
Revenue Service (IRS) related to unpaid payroll tax liabilities including
interest and penalties totaling approximately $2,125,000 at December 31, 2001,
whereby the Company will make monthly installments ranging from $50,000 to
$100,000 a month until the amount is retired. This amount plus approximately
$506,000 related to fourth quarter payroll taxes are included as payroll taxes
payable at December 31, 2001.
NOTE 14. CONCENTRATIONS
REVENUE CONCENTRATION AND ECONOMIC DEPENDENCY
For each of the years ended December 31, 2001 and 2000, the HMO accounted
for approximately 96% of revenue and at December 31, 2001 the HMO represented
approximately 78% of the total accounts receivable balance. The loss of the
contracts with the HMO could significantly impact the operating results of the
Company.
NOTE 15. SEGMENTS
The Company has considered its operations and has determined that it
operates in three operating segments for purposes of presenting financial
information and evaluating performance, PSN (managed care and direct medical
services), pharmacy and clinical laboratory. The PSN segment also includes all
costs incurred in the development of the Company's HMO.
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2001 PSN PHARMACY LABORATORY TOTAL
- ----------------- ------------ ---------- ---------- ------------
Revenues from external customers......... $128,187,000 $2,781,000 $ 563,000 $131,531,000
Interest revenue......................... 11,000 -- -- 11,000
Interest expense and penalties........... 647,000 -- -- 647,000
Depreciation and amortization............ 918,000 15,000 10,000 943,000
Segment gain (loss)...................... 3,609,000 (1,604,000) (996,000) 1,009,000
Allocated corporate overhead included in
gain (loss)............................ 3,911,000 860,000 437,000 5,208,000
Segment assets........................... 15,139,000 2,435,000 1,544,000 19,118,000
Expenditures for segment assets.......... 359,000 271,000 78,000 708,000
</Table>
NOTE 16. SUBSEQUENT EVENTS
Subsequent to year-end, the Company issued 500,000 shares of common stock
in connection with private placements, resulting in proceeds of $500,000 that
were used for working capital Additionally, the Company borrowed $1,700,000 on
short-term notes payable and $625,000 on long-term notes payable, with interest
rates ranging from 5% to 24% and beneficial conversion features. Certain notes
also provide for issuance of 65,000 warrants in the aggregate and are
collateralized by all the Company's assets. The proceeds from these transactions
were used for working capital.
F-22
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. SUBSEQUENT EVENTS (CONTINUED)
In March 2002, two investors, on behalf of the Company, provided funding
for certificates of deposit aggregating $1,000,000 that are used as collateral
for a letter of credit in favor of the HMO. The letter of credit was required by
the Company's contract with the HMO and enabled the Company to favorably
renegotiate certain terms of the contract. The Company has agreed to purchase
the underlying certificates of deposit from the investors over ten months at
amounts that would result in an effective interest rate of 24% per annum.
NOTE 17. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter the Company made one adjustment deemed to be
material to the results of the quarter. The Company charged-off $775,000 of
accounts receivables relating to a medical practice that was closed during the
year.
F-23
- ------------------------------------------------------
- ------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT
WE HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF
ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Prospectus Summary.................... 1
Risk Factors.......................... 3
Forward-Looking Statements............ 6
Capitalization........................ 7
Price Range of Common Stock and
Dividend Policy..................... 8
Use of Proceeds....................... 8
Management's Discussion and Analysis
of Financial Conditions and Results
of Operations....................... 9
Business.............................. 12
Management............................ 18
Certain Transactions.................. 24
Principal Shareholders................ 25
Description of Securities............. 26
Selling Security Holders.............. 27
Shares Eligible for Future Sale....... 33
Legal Matters......................... 33
Experts............................... 33
Additional Information................ 33
Financial Statements.................. F-1
</Table>
8,547,498 SHARES
METROPOLITAN HEALTH
NETWORKS, INC.
--------------------
PROSPECTUS
--------------------
MAY 7, 2002
- ------------------------------------------------------
- ------------------------------------------------------
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act (the "Corporation Act") permits the
indemnification of directors, employees, officers and agents of Florida
corporations. Our Articles of Incorporation (the "Articles") and Bylaws provide
that we shall indemnify its directors and officers to the fullest extent
permitted by the Corporation Act.
The provisions of the Corporation Act that authorize indemnification do not
eliminate the duty of care of a director, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Florida law. In addition, each director will continue to
be subject to liability for (a) violations of criminal laws, unless the director
had reasonable cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful, (b) deriving an improper personal
benefit from a transaction, (c) voting for or assenting to an unlawful
distribution and (d) willful misconduct or conscious disregard for our best
interests in a proceeding by or in the right of a shareholder. The statute does
not affect a director's responsibilities under any other law, such as the
Federal securities laws.
The effect of the foregoing is to require us to indemnify our officers and
directors for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers or persons in control
pursuant to the foregoing provisions, we have been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by us in connection with the distribution of
the securities being registered are as follows:
<Table>
SEC Registration and Filing Fee............................. $ 7000
Legal Fees and Expenses*.................................... 25,000
Accounting Fees and Expenses*............................... 2,500
Financial Printing*......................................... 2,500
Transfer Agent Fees*........................................ 1,000
Blue Sky Fees and Expenses*................................. --
Miscellaneous*.............................................. 1,000
-------
Total............................................. $39,000
=======
</Table>
- ---------------
* Estimated
None of the foregoing expenses are being paid by the selling security
holders.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
On June 8, 1999 we issued warrants to purchase 58,225 shares of our common
stock exercisable at $.687 per share to an a financial advisor as compensation
for services provided in connection with debt financing we received in 1998. The
warrants are exercisable until June 8, 2004. The issuance of these warrants was
exempt
II-1
from registration under Section 4(2) of the Securities Act. The principals of
the advisor received information and had the opportunity to ask questions
regarding our company. The warrants contained the appropriate restrictive
legends and the entity purchased for investment purposes.
In December 1999 we issued convertible debentures in the aggregate amount
of $98,000 to 6 accredited investors. We received $98,000 in proceeds from the
sale of these convertible debentures. There were no underwriting discounts nor
commissions relating to the sales. The investors received an aggregate of 98,000
shares of our common stock in connection with the issuance of the convertible
debentures. These convertible debentures were subsequently converted into shares
of our common stock at $.50 per share or a total of 196,000 shares of common
stock. These convertible debentures and shares of common stock were issued under
the exemption from registration provided by Section 4(2) of the Securities Act.
Each investor received current information about our company and had the
opportunity to ask questions about our company. These investors purchased the
shares for investment purposes and the shares they received were marked with the
appropriate restrictive legend.
In January 2000 we issued convertible debentures in the aggregate amount of
$692,951 to 39 accredited investors. Of these investors, two were affiliates of
our company. We received $692,951 in proceeds from the sale of these convertible
debentures. There were no underwriting discounts nor commissions relating to the
sales. The investors received an aggregate of 692,951 shares of our common stock
in connection with the issuance of the convertible debentures. To date, 24 of
these investors have converted their convertible debentures into shares of our
common stock at $1.00 per share for an aggregate of 344,232 shares of our common
stock. The remaining convertible debentures were due December 15, 2000. The
convertible debentures and shares of common stock were issued under the
exemption from registration provided by Section 4(2) of the Securities Act. Each
investor received current information about our company and had the opportunity
to ask questions about our company. These investors purchased the shares and
debentures for investment purposes and the shares and debentures they received
were marked with the appropriate restrictive legend.
In March 2000 we entered into equity purchase agreements with 30 accredited
investors, four of which were affiliates of our company. These investors
received an aggregate of 601,000 shares of our common stock at a purchase price
of $1.25 per share. We received approximately $751,250 in proceeds from the sale
of these shares. There were no underwriting discounts nor commissions relating
to the sales. The shares of common stock were issued under the exemption from
registration provided by Section 4(2) of the Securities Act. Each investor
received current information about our company and had the opportunity to ask
questions about our company. These investors purchased the shares for investment
purposes and the shares they received were marked with the appropriate
restrictive legend.
On September 8, 2000 we sold 250,000 shares of common stock to an
individual non U.S. accredited investor at a purchase price of $375,000 or $1.50
per share. In addition, this investor received warrants to purchase an aggregate
of 200,000 shares of our common stock, 50,000 are exercisable at $3.00 per
share; 50,000 are exercisable at $4.00 per share; 50,000 are exercisable at
$5.00 per share; and 50,000 are exercisable at $6.00 per share. There were no
underwriting discounts nor commissions relating to the sales. We received
proceeds of $375,000 from the sale of these securities. The shares and warrants
were issued under the exemption from registration provided by Regulation S under
the Securities Act. The investor received current information regarding our
company and had the opportunity to ask questions about our company.
In September 2000 we converted outstanding promissory notes in the
aggregate amount of $1,646,501 held by an accredited investor into 1,832,768
shares of our common stock. These promissory notes were originally issued in
lieu of loans made to our company. The shares issued as payment on these
promissory notes were valued at approximately $.90 per share. These shares were
issued under the exemption from registration provided by Section 4(2) of the
Securities Act. These individuals had access to current information and the
ability to ask questions. The shares were marked with the appropriate
restrictive legend.
On October 24, 2000 we issued 58,333 shares of our common stock to a
company that provided billing services to our company. The shares were issued as
consideration for services provided under a settlement agreement we entered into
with the company. The issuance of these shares was exempt from registration
II-2
under Section 4(2) of the Securities Act. The shares received by the company
contained the appropriate restrictive legends.
In November 2000 we issued a $450,000, 12% convertible debenture to an
individual accredited investor and shareholder of our company. This investor
also received warrants to purchase 75,000 shares of our common stock exercisable
at $1.00 per share and warrants to purchase 150,000 shares of our common stock
exercisable at $1.50 per share. We received proceeds of $450,000 from the
issuance of this convertible debenture. There were no underwriting discounts nor
commissions. The convertible debenture was subsequently converted into 519,776
shares of our common stock. The convertible debentures and shares of common
stock were issued under the exemption from registration provided by Section 4(2)
of the Securities Act. The investor received current information about our
company and had the opportunity to ask questions about our company. He purchased
the shares and debentures for investment purposes and the shares and debentures
he received were marked with the appropriate restrictive legend.
In November 2000 we sold warrants to purchase 100,000 shares of our common
stock to an individual accredited investor. These warrants were subsequently
exercised in March 2001. The issuance of these warrants and underlying common
stock was exempt from registration under Section 4(2) of the Securities Act. The
investor had the opportunity to ask questions regarding our company and had
access to relevant information regarding our company. The warrants and
underlying shares of common stock we issued were marked with the appropriate
restrictive legends.
In December 2000 we issued 14,000 shares of our common stock to a medical
doctor under a contract settlement agreement. The settlement agreement arose
from additional consideration for the purchase of his medical practice. This
individual had access to current information regarding our company and had the
opportunity to ask questions regarding our company. The issuance of these shares
was exempt from registration under Section 4(2) of the Securities Act. The
individual received shares containing the appropriate restrictive legends.
In December 2000 we issued a $50,000, 12% convertible debenture to an
individual non U.S. accredited investor and shareholder of our company. This
investor also received warrants to purchase 25,000 shares of our common stock
exercisable at $1.50 per share. We received proceeds of $50,000 from the
issuance of this convertible debenture. There were no underwriting discounts nor
commissions. The convertible debenture was subsequently converted into 52,219
shares of our common stock. The shares, debentures and warrants were issued
under the exemption from registration provided by Regulation S under the
Securities Act. The investor received current information regarding our company
and had the opportunity to ask questions about our company.
In January 2001 we entered into equity purchase agreements with 8
accredited investors. These investors received an aggregate of 720,000 shares of
our common stock at a purchase price of $1.00 per share. We received $720,000 in
proceeds from the sale of these shares. There were no underwriting discounts nor
commissions relating to the purchase agreements. The shares of common stock were
issued under the exemption from registration provided by Section 4(2) of the
Securities Act. Each investor received current information about our company and
had the opportunity to ask questions about our company. These investors
purchased the shares for investment purposes and the shares they received were
marked with the appropriate restrictive legend.
Under an agreement dated February 1, 2001 we issued 25,000 shares to an
advisor in consideration for acting as a non-exclusive corporate financial
advisor for a period of 24 months. The advisor may also earn an additional
25,000 shares under certain performance criteria objectives. The issuance of
these shares was exempt from registration under Section 4(2) of the Securities
Act. The financial advisor had the opportunity to ask questions regarding our
company and had access to relevant information regarding our company. The shares
received by the advisor contained the appropriate restrictive legends.
Under an agreement dated March 1, 2001 we issued warrants to purchase
200,000 shares of our common stock to a consultant in consideration for
providing our company with financial advisory services for a period of 12
months. The warrants are exercisable at $2.25 per share of common stock. The
issuance of these warrants
II-3
was exempt from registration under Section 4(2) of the Securities Act. The
consultant had the opportunity to ask questions regarding our company and had
access to relevant information regarding our company. The warrants received by
the consulting company contained the appropriate restrictive legends.
Under an investment banking agreement dated March 1, 2001 we issued 43,750
shares of our common stock to a consultant in consideration for providing our
company with business consulting services. The issuance of these shares was
exempt from registration under Section 4(2) of the Securities Act. The
consultant had the opportunity to ask questions regarding our company and had
access to relevant information regarding our company. The shares received by the
consultant contained the appropriate restrictive legends.
On March 10, 2001, we issued 50,000 shares of our common stock to an
officer and director of our company. These shares were issued under a
compensation agreement. The options were issued under Section 4(2) of the
Securities Act and are marked with the appropriate restrictive legends.
Under a settlement agreement and mutual general release dated March 19,
2001 we issued 100,000 shares of our common stock to an individual physician.
The shares were issued as compensation for the physician entering into the
settlement agreement and mutual release with our company. The issuance of these
shares was exempt from registration under Section 4(2) of the Securities Act.
The physician had the opportunity to ask questions regarding our company and had
access to relevant information regarding our company. The shares received by the
physician contained the appropriate restrictive legends.
Under a financial advisory and consulting agreement dated March 27, 2001 we
issued warrants to purchase 200,000 shares of our common stock in consideration
for providing consulting advice relating to financial and other similar matters.
The warrants are exercisable until March 27, 2004 at prices ranging from $1.10
per share to $1.50 per share. The issuance of these warrants was exempt from
registration under Section 4(2) of the Securities Act. The consultant had the
opportunity to ask questions regarding our company and had access to relevant
information regarding our company. The warrants received by the consulting
company contained the appropriate restrictive legends.
On March 30, 2001, we issued warrants to purchase an aggregate of 940,000
shares of our common stock to Copira Investments Inc. and GKN Securities as
consideration for an equity line of credit. The warrants are exercisable at
$1.88 per share. Copira and GKN are accredited investors. The shares were issued
under the exemption provided by Section 4(2) of the Securities Act.
On March 30, 2001 we sold 27,500 shares of our common stock and warrants to
purchase an aggregate 16,667 shares of our common stock to an accredited
investor. The warrants are exercisable at prices ranging from $2.50 to $4.00. We
also issued the investor a $67,000, 8% convertible debenture. The convertible
debenture is convertible at $2.50 per share and is due March 30, 2004. We
received approximately $100,000 in gross proceeds from the sale of our shares,
warrants and convertible debenture. We paid a 7% cash commission to a placement
agent. The placement agent also received warrants to purchase 4,258 shares of
our common stock exercisable at $1.20 per share. The shares of common stock,
warrants and debenture were issued under the exemption from registration
provided by Section 4(2) of the Securities Act. The investor received current
information about our company and had the opportunity to ask questions about our
company. The investor purchased the securities for investment purposes and the
securities he received were marked with the appropriate restrictive legend.
In April 2001 we issued options to purchase 100,000 share of our common
stock to our legal counsel as consideration for services provided. The options
are exercisable at $1.00 per share. The issuance of these options was exempt
from registration under Section 4(2) of the Securities Act. The firm had the
opportunity to ask questions regarding our company and had access to relevant
information regarding our company. The options received by the firm contained
the appropriate restrictive legends.
In April, 2001 we sold an aggregate of 1,677,778 shares of our common stock
to 3 accredited investors. The shares were sold for $1.80 per share. We received
$3,020,000 in gross proceeds from the sale of these shares. We paid a placement
agent a commission of 50,333 shares of our common stock in connection with this
offering. This commission equaled approximately 3% of the total offering. The
shares of common stock were issued under the exemption from registration
provided by Section 4(2) of the Securities Act. The
II-4
investors received current information about our company and had the opportunity
to ask questions about our company. The investors purchased the shares for
investment purposes and the shares they received were marked with the
appropriate restrictive legend.
In April, 2001 we also sold an aggregate of 175,000 shares of our common
stock to 2 accredited investors. The shares were sold for $1.60 per share. We
received $280,000 in proceeds from the sale of these shares. There were no
underwriting discounts nor commissions relating to the sales. The shares of
common stock were issued under the exemption from registration provided by
Section 4(2) of the Securities Act. The investors received current information
about our company and had the opportunity to ask questions about our company.
The investors purchased the shares for investment purposes and the shares they
received were marked with the appropriate restrictive legend.
On April 2, 2001 we sold 105,000 shares of our common stock to an
individual accredited investor. The shares were sold at a purchase price of
$125,000 or approximately $1.19 per share. We received $125,000 in proceeds from
the sale of these shares. There were no underwriting discounts nor commissions
relating to the sale. The shares of common stock were issued under the exemption
from registration provided by Section 4(2) of the Securities Act. The investor
received current information about our company and had the opportunity to ask
questions about our company. The investor purchased the shares for investment
purposes and the shares he received were marked with the appropriate restrictive
legend.
In May 2001 we sold 350,000 shares of our common stock to an accredited
investor for a total purchase price of $647,500 per share or $1.85 per share.
The issuance of these shares was exempt from registration under Section 4(2) of
the Securities Act. The investor had access to information concerning our
company had the ability to ask questions regarding our company. The investor
represented that he was purchasing the shares for investment purposes. The
shares were marked with the appropriate restrictive legends.
On May 4, 2001 we issued warrants to purchase 15,000 shares of our common
stock to a financial consultant as consideration for providing financial and
other advisory consulting services. The warrants are exercisable at $1.85 per
share. The warrants expire on May 4, 2006. The issuance of these warrants was
exempt from registration under Section 4(2) of the Securities Act. The
consultant had the opportunity to ask questions regarding our company and had
access to relevant information regarding our company. The warrants received by
the consulting company contained the appropriate restrictive legends.
From October 26, 2001, through January 22, 2002, we raised $1,129,548
through the issuance of a series of notes to a non-affiliated third party. The
notes were convertible into shares of our common stock at conversion rates
ranging from $.82 per share to $1.35 per share. All of the notes have been
converted into a total of 1,157,778 shares of common stock. The shares were
issued under the exemption provided by Section 4(2) of the Securities Act.
On December 12, 2001, we reached an agreement with a non-affiliated third
party where we agreed to pay the non-affiliated third party a fee payable in our
common stock in the amount of 7% of any capital received by us as a result of an
introduction by the non- affiliated third party. We have issued the
non-affiliated third party a total of 15,500 shares of our common stock under
the agreement. The shares were issued under the exemption provided by Section
4(2) of the Securities Act.
On December 29, 2001 and February 18, 2002, we received a total of $800,000
for the issuance of a total of 800,000 shares of our common stock to a
non-affiliated third party pursuant to the terms of Common Stock Purchase
Agreements. The Common Stock Purchase Agreements provide for (i) piggy-back
registration rights in the event the Company files a registration statement
relating to an offering for its own account or the account of others under the
Securities Act of any of its equity securities (other than on Form S-4 or Form
S-8), and (ii) mandatory registration within 180 days of the date of purchase.
In the event the mandatory registration provision is not complied with, the
Common Stock Purchase Agreements provide that the investor shall receive an
additional shares of our common stock for each month until the shares are
registered pursuant to the terms of the Agreement. The shares were issued under
the exemption provided by Section 4(2) of the Securities Act.
II-5
In January 2002, we reached an agreement with a non-affiliated third party
where we agreed to pay the non-affiliated third party a fee payable in our
common stock in the amount of 10% of any capital received by us as a result of
an introduction by the non- affiliated third party. On February 11, 2002, we
issued the non-affiliated third party 30,000 shares of our common stock. The
shares were issued under the exemption provided by Section 4(2) of the
Securities Act.
In January 2002, we issued an aggregate of 66,165 shares of our common
stock to our directors under our director compensation agreements as
compensation for their services rendered during 2001. The shares were issued
under the exemption provided by Section 4(2) of the Securities Act.
On January 2, 2002, we issued 45,894 shares of our common stock to a non-
affiliated individual pursuant to a Settlement Agreement and Mutual General
Release dated March 19, 2001. The Settlement Agreement provided for the issuance
of 100,000 shares of our common stock having a value of no less than $300,000.
The Settlement Agreement further provided that in the event the value of the
issued shares of common stock was below $300,000 on the date of the filing of a
registration statement covering those shares, we would then become obligated to
issue to the non-affiliated individual additional shares of our common stock to
bring the total value of all shares issued to no less than $300,000. The
issuance of 45,894 shares of our common stock on January 2, 2002, satisfied the
foregoing condition of the Settlement Agreement. The Settlement Agreement
provided piggy-back registration rights with respect to the additional shares
issued on January 2, 2002. The shares were issued under the exemption provided
by Section 4(2) of the Securities Act.
On January 9, 2002, we issued 150 shares of our common stock to an
individual at $1.00 per share. The shares were issued under the exemption
provided by Section 4(2) of the Securities Act.
On February 7, 2002, we issued 113,073 shares of our common stock to an
individual in consideration for services rendered pursuant to a Services
Agreement dated December 31, 2001. The shares were issued under the exemption
provided by Section 4(2) of the Securities Act.
On February 11, 2002, we issued 1,241,778 shares of our common stock to an
entity upon the conversion of principal and interest under a convertible
promissory note. The shares were issued under the exemption provided by Section
4(2) of the Securities Act.
On February 12, 2002, we issued 10,500 shares of our common stock to an
entity as a commission with respect to a private placement of equity securities.
The shares were issued under the exemption provided by Section 4(2) of the
Securities Act.
On February 12, 2002, we issued 67 shares of our common stock to an
individual upon his exercise of common stock purchase options. The shares were
issued under the exemption provided by Section 4(2) of the Securities Act.
On February 12, 2002, we sold 300,000 shares of our common stock to a
non-affiliated third party at $1.00 per share. The shares were issued under the
exemption provided by Section 4(2) of the Securities Act.
On February 21, 2002, we issued 35,000 shares of our common stock to a
non-affiliated third party in connection with a financing through which we
raised $500,000 through the issuance of a secured promissory note. The shares
were issued under the exemption provided by Section 4(2) of the Securities Act.
On February 22, 2002, we issued 50,000 shares of our common stock to an
individual at $1.00 per share. The shares were issued under the exemption
provided by Section 4(2) of the Securities Act.
On March 1, 2002, we issued 38,475 shares of our common stock to an entity
pursuant to a draw down on an equity line agreement. The shares were issued
under the exemption provided by Section 4(2) of the Securities Act.
We issued 170,720 shares of our common stock to a non-affiliated third
party in consideration for services rendered. The shares were issued under the
exemption provided by Section 4(2) of the Securities Act.
We issued 336,000 shares of our common stock to a non-affiliated third
party in consideration of services rendered. The shares were issued under the
exemption provided by Section 4(2) of the Securities Act.
II-6
EACH OF THE SECURITY HOLDERS (A) HAD ACCESS TO BUSINESS AND FINANCIAL
INFORMATION CONCERNING THE COMPANY, (B) REPRESENTED THAT IT WAS ACQUIRING THE
SECURITIES FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TOWARDS DISTRIBUTION
OR RESALE EXCEPT IN COMPLIANCE WITH APPLICABLE SECURITIES LAWS AND (C) HAD SUCH
KNOWLEDGE AND EXPERIENCE IN BUSINESS AND FINANCIAL MATTERS THAT HE, SHE OR ITS
WAS ABLE TO EVALUATE THE RISKS AND MERITS OF AN INVESTMENT IN THE COMPANY.
THEREFORE, EACH INVESTOR WAS ALSO SOPHISTICATED WITHIN THE MEANING OF FEDERAL
SECURITIES LAWS. IN ADDITION, THE CERTIFICATES EVIDENCING THE SECURITIES THAT
WERE ISSUED CONTAINED A LEGEND RESTRICTING THEIR TRANSFERABILITY ABSENT
REGISTRATION UNDER THE SECURITIES ACT OR THE AVAILABILITY OF AN APPLICABLE
EXEMPTION THEREFROM.
II-7
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
3.1 -- Articles of Incorporation.(1)
3.2 -- Articles of Amendment to the Articles of Incorporation.(1)
3.3 -- By-laws.(1)
3.4 -- Articles of Amendment to the Articles of Incorporation
designating the Series A Preferred Stock.(2)
3.5 -- Articles of Amendment to the Articles of Incorporation
designating the Series B Preferred Stock.(2)
3.6 -- Articles of Amendment to the Articles of Incorporation.(2)
4.1 -- Specimen Common Stock Certificate.(1)
5.1 -- Opinion of Atlas Pearlman, P.A.(2)
10.1 -- Stock Option Plan.(2)
10.2 -- Metropolitan Purchase Option of Alpha Clinical Laboratory,
Inc.(2)
10.5 -- Common Stock Purchase Agreement between the Company and
Copira Investments Inc. dated March 30, 2001.(2)
10.6 -- Registration Rights Agreement between the Company and Copira
Investments Inc. dated March 30, 2001.(2)
10.7 -- Form of Copira Investments Inc. and GKN Securities Corp.
Stock Purchase Warrant dated March 30, 2001.(2)
10.8 -- Common Stock Purchase Agreement by and between the Company
and Pequot Scout Fund L.P. and Pequot Navigator Offshore,
Inc. dated March 1, 2001.(2)
10.9 -- Financial Advisory and Consulting Agreement with National
Securities Corporation dated March 1, 2001.(2)
10.10 -- Financial Advisory and Consulting Agreement with Taylor
Stuart Financial dated March 1, 2001.(2)
10.11 -- Consulting Agreement with Atlantic International Capital,
Inc. dated February 2001.(2)
10.12 -- Consulting Agreement with The Shemano Group, Inc. dated
March 1, 2001.(2)
10.13 -- Investment Banking Agreement with Hornblower & Weeks
Financial Corporation dated March 1, 2001.(2)
10.14 -- Financial Consulting Agreement with Talisman Group dated
March 4, 2001.(2)
10.15 -- Haskin & Associate, Inc. Warrant to Purchase Common Stock in
Connection with Debt Financing dated June 8, 1999.(2)
10.16 -- Settlement Agreement and Mutual General Release with
Perilakalathil Sreekumar dated March 19, 2001.(2)
10.17 -- Settlement Agreement dated December 2000 between the Company
and Dr. Warren R. Federgreen including the issuance of
14,000 Shares of Common Stock.(2)
10.18 -- Settlement Agreement with Compubill Systems Corporation
dated June 23, 2000 including the issuance of 58,333 Shares
of Common Stock.(2)
10.19 -- Form of Subscription Agreement.(2)
10.20 -- Form of Warrant Agreement.(2)
10.21 -- Form of Promissory Note.(2)
10.22 -- Physician Practice Management Participation Agreement
between Metcare of Florida, Inc. and Humana, Inc.(2)
(Certain portions of this exhibit have been redacted
pursuant to a Confidentiality Request submitted to the
Securities and Exchange Commission.)
10.23 -- Network Services Agreement with CyberCare Technologies, Inc.
and Metropolitan Health Networks dated July 13, 2000.(2)
</Table>
II-8
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
10.24 -- Employment Agreement between Metropolitan Health Networks
and Fred Sternberg, dated January 1, 2000.(2)
10.25 -- Employment Agreement between Metropolitan Health Networks
and Debra Finnel, dated January 1, 2000.(2)
21 -- Subsidiaries of the Company.(2)
23.1 -- Consent of Kaufman, Rossin and Company.(3)
23.2 -- Consent of Atlas Pearlman, P.A. (contained in Exhibit
5.1)(2)
</Table>
- ---------------
(1) Incorporated by reference to the exhibit of the same number filed with the
Company's Registration Statement on Form SB-2 (No. 333-5884-A)
(2) Previously filed
(3) Filed herewith
ITEM 28. UNDERTAKINGS
The undersigned Registrant undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission (the "Commission") such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or preceding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on this Post Effective Amendment No. 1 to Form
SB-2 and authorized this amended registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in West Palm Beach,
Florida on May 7, 2002.
METROPOLITAN HEALTH NETWORKS, INC.
By: /s/ FRED STERNBERG
------------------------------------
Fred Sternberg
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post
Effective Amendment No. 1 to Form SB-2 registration statement has been signed by
the following persons in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ FRED STERNBERG Chairman and Chief Executive May 7, 2002
- ------------------------------------------------ Officer
Fred Sternberg
/s/ DEBRA A. FINNEL Vice President and Chief May 7, 2002
- ------------------------------------------------ Operating Officer
Debra A. Finnel
/s/ DAVID S. GARTNER Secretary and Chief Financial May 7, 2002
- ------------------------------------------------ Officer
David S. Gartner
/s/ MICHAEL CAHR Director May 7, 2002
- ------------------------------------------------
Michael Cahr
/s/ MARVIN HEIMAN Director May 7, 2002
- ------------------------------------------------
Marvin Heiman
/s/ WILLIAM BULGER Director May 7, 2002
- ------------------------------------------------
William Bulger
/s/ ROBERT BUCHANAN Director May 7, 2002
- ------------------------------------------------
Robert Buchanan
/s/ MARTIN HARRISON Director May 7, 2002
- ------------------------------------------------
Martin Harrison
</Table>
II-10