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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Twelve Month Period Ended December 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
Commission File Number
0-28456
Metropolitan Health Networks, Inc.
(Name of small business issuer in its charter)
Florida 65-0635748
(State or other jurisdiction of (I.R.S. Employer Identification No)
Incorporation or organization)
500 Australian Avenue/Suite 1000
West Palm Beach, Fl. 33401
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 805-8500
Securities registered under Section 12(b) of the Exchange Act: none
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
Revenues for the most recent fiscal year: $131,530,583
The aggregate market value of the Registrant's voting Common Stock held by
non-affiliates of the registrant was approximately $26,849,278 (computed using
the closing price of $1.44 per share of Common Stock on December 31, 2001 as
reported by OTCBB, based on the assumption that directors and officers and more
than 5% stockholders are affiliates).
There were 27,864,786 shares of the registrant's Common Stock, par
value $.001 per share, outstanding on February 28, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (Check One): Yes No [X]
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Metropolitan Health Networks, Inc. (the "Company" or "Metcare ") was
incorporated in the State of Florida in January 1996. In 2000, the Company
implemented its new strategic plan, operating as a Provider Service Network
(PSN), specializing in managed care risk contracting. The Company's ability to
control its Network has produced favorable medical loss ratios, allowing the
Company to successfully tap into the trillion dollar healthcare market. Through
its Network, the Company provides 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 the
Company 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, the Company has negotiated
agreements allowing the Company to directly negotiate contracts for the
purchase, filling and delivery of prescriptions. Assuming that the Company can
successfully implement this agreement throughout its Network, Metcare believes
it 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 Company.
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. The Company
improved shareholder value by increasing its net worth $7.8 million in 2001 to
$8.7 million at December 31, 2001, and by increasing its working capital $5.6
million in 2001 from a negative $528,000 as of December 31, 2000. Operationally,
exclusive of nonrecurring gains and losses, the company's EBITDA was $3.2
million in 2001 as compared to $2.3 million in 2000, an increase of 39%.
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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, Metcare received
approximately $5 million in incremental revenues 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. Metcare's 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
the Company does not foresee nor does it 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 the Company. The profitability of the
Company may also be adversely affected by cost containment decisions of third
party payors and other payment factors over which the Company has no control.
BUSINESS STRATEGY OVERVIEW
Metcare is a healthcare company that provides turnkey services to
managed care companies on a full risk basis and pharmacy management on behalf of
physicians. The Company is moving rapidly to expand its revenue base through
additional managed care contracts, establishing an HMO in Florida, and expanding
Metcare Rx.
Metcare has developed an infrastructure of management expertise in the
fields of:
o Disease Management - a method to manage the costs and care of
high-risk patients and produce better patient care.
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o Partners In Quality - a review of overall patient care
measured against best medical practice patterns.
o Utilization Management - a daily review of statistical data
created by encounters, referrals, hospital admissions and
nursing home information.
o 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 the Company 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 Metcare, 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 Metcare's 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 the Company and the
physicians. Furthermore, to limit its exposure, the Company has secured
reinsurance (stop-loss coverage). Metcare's PSN business model is based on
educating, motivating and assembling physicians in groups that are prepared to
assume managed care risk. The Company envisions expanding its network of
physicians to provide its members healthcare services on an efficient and cost
effective basis through strategic alliances with insurance companies and other
healthcare providers on a statewide basis. The Company also has as its objective
to develop an HMO division to operate in targeted Medicare markets including
underserved areas. Metcare believes that managing the risk and not the Physician
is the right prescription for the new Millennium.
The Company has established three segments to manage the anticipated
growth of the Company:
o Managed Care (PSN and HMO)
o Pharmacy (Metcare Rx)
o 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 the
focal point of the Company. 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 the Company continues to open its 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.
Metcare provides services to patients through a network of primary care
physicians, specialists, hospitals and ancillary facilities. These providers
have contracted to provide services to the Company's patients by agreeing to
certain fee schedules and care requirements. The
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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 Metcare 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, the Company, through its affiliated
providers, is responsible for the provision of all covered benefits. While
responsible for all medical expenses for each covered life, Metcare has limited
its exposure by obtaining reinsurance/stop-loss coverage. Additionally, Metcare
has 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 the control of the Company and may adversely affect its operating
results.
For the two years ended December 31, 2001, approximately 96% of the
Company's revenues were from risk contracts with MCO's. In conjunction with its
new business strategy, the Company is pursuing opportunities to add additional
payor sources while continuing to expand its existing business relationships to
provide additional services through the Network.
Under Metcare's 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 its Network, the
Company owns several practices that have been fully integrated into its PSN
model.
Metcare enhances administrative operations of its 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 the
Company offers 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.
Metcare also assists 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.
Metcare's staff also performs quality assurance and
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utilization management by providing detailed reports under each contract on
behalf of its 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
The Company's 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. Metcare believes that it will be able to develop new payor and provider
relationships due to the Company's 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, Metcare must acknowledge the changes within
the managed care industry and position itself 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
The Company has 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. The Company's clients include various health care providers that are
at-risk for pharmacy costs. The Company's 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. The Company
provides 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 the Company's flexibility and broad range
of abilities that management believes its services are unique. The Company can
tailor its services to meet the specific needs of its clients. The Company has
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 the Company's 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
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more rigid, narrowly defined service with little or no risk sharing
characteristics. The first of these specialty drug areas will be HIV patients.
The Company, with its experience in this field, has developed a program that
will enhance clinical and financial outcomes
Management's influence over the prescription writing process enables
the Company to increase its market share, which in turn creates significant
buying power with its drug suppliers. This purchasing leverage stems from
various Company strategies, including:
o Collaborative design of effective drug formulary in
consultation with the client MCO's key physicians, Medical
Director and Pharmacy and Therapeutic Committee;
o Active education of member physicians about the client's drug
formulary decisions and rationale;
o Focus on serving healthcare organizations that are at risk for
pharmacy costs;
o Effective Drug Utilization Evaluations ("DUE's");
o Increased patient convenience and compliance through physician
office dispensing, ambulatory pharmacies and home delivery of
medications and;
o Automation through software and use of the Internet;
o Expertise in specialty drug areas such as "HIV."
These strategies help the Company influence the prescription process
and create an ability to shift the market share of its preferred drugs at an
unprecedented level.
PHARMACY COST INFLATION
Management sees five key factors that will cause pharmacy costs to keep
increasing in the coming years:
o An annual expenditure increase of over 14%
o A doubling of the rate of new drugs introduced
o An aging population
o Aggressive drug company marketing
o 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
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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. The Company competes with national, regional and
local companies in providing its services. Excluding individual physicians and
small medical groups, many of the Company's competitors are larger and better
capitalized and may have greater experience in providing healthcare management
services and may have longer established relationships with buyers of such
services.
EMPLOYEES
As of December 31, 2001, the Company had approximately 223 full-time
employees. Of the total, 42 were employed at the Company's executive offices. No
employee of the Company is covered by a collective bargaining agreement or is
represented by a labor union. The Company considers its employee relations to be
good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's Executive offices have been located at 500 Australian
Avenue South, Suite 1000, West Palm Beach, Florida where it occupies 10,936
square feet at a current monthly rental of approximately $12,000, pursuant to a
sublease expiring December 31, 2002.
The Company has 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.
The Company leases an office for its laboratory operations in West Palm
Beach for 3,400 square feet with a monthly rental of $5,200. The lease expires
October 4, 2005.
None of the Company's properties are leased from affiliates.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to other various claims arising in the ordinary
course of business. Management believes that the outcome of these matters will
not have a materially adverse effect on the financial position or the results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the twelve months ended December
31, 2001.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the OTCBB under the
symbol "MDPA". The Company's Warrants traded under the symbol "MDPAW" until
March 15, 2001 when they expired. The following table sets forth the high and
low closing bid prices for the common stock and warrants, as reported by OTCBB:
High Low
($) ($)
---- ----
COMMON STOCK
Quarter ended March 31, 2000 3.81 0.23
Quarter ended June 30, 2000 2.75 1.03
Quarter ended September 30, 2000 3.13 1.53
Quarter ended December 31, 2000 2.00 0.75
Quarter ended March 31, 2001 1.84 0.88
Quarter ended June 30, 2001 3.34 1.93
Quarter ended September 30, 2001 2.90 1.75
Quarter ended December 31, 2001 2.08 1.03
WARRANTS
Quarter ended March 31, 2000 0.250 0.005
Quarter ended June 30, 2000 0.375 0.070
Quarter ended September 30, 2000 0.220 0.072
Quarter ended December 31, 2000 0.080 0.015
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The Company has not declared or paid any dividends on its common stock.
The Company presently intends to invest its earnings, if any, in the development
and growth of its operations.
PREFERRED STOCK
SERIES A
We have designated 30,000 shares of Series A class of 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,
2001, the aggregate and per share amounts of cumulative dividend arrearages were
approximately $216,667.
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.
The series A preferred shareholders have no voting rights, except as
provided under Florida law.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001
INTRODUCTION
The Company 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. The
Company 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 its revenue base and ultimately
increase shareholder value, the Company implemented its pharmacy division
(MetcareRx), began the process of filing for its own HMO license and continued
the development of its clinical laboratory. In pursuing this expansion and
diversification, the Company 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, the Company increased its net worth by $7.8 million in 2001
to $8.7 million at December 31, 2001 and increased its 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 the Company's 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 overall revenues of the Company 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.
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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 improvement is due to the
Company's improved utilization efforts and initiatives including its newly
implemented hospitalist program, the June start-up of its pharmacy division in
the Daytona market and improved terms in its specialty contracts. The Company
expects 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 the Company continued to implement its 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. The
Company believes it has the necessary management in place in both MetcareRx and
Metlabs to support the revenue growth the Company anticipates in 2002 and
beyond. In addition, in late 2000 and early 2001, the Company recognized the
need to reinforce its 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 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.
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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 the Company's HMO, part of its long-term goal to diversify
its revenue base. An additional $86,000 was incurred in the Company's
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 the Company implemented its pharmacy division,
opened four new medical practices and expanded its 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, the Company 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 the Company's 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.
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 the Company in 2001 as compared to 2000.
LIQUIDITY AND CAPITAL RESOURCES
In the year ended December 31, 2001, the Company had EBITDA of $2.7
million, which was used to fund current operations. In addition, the Company
raised approximately $6.0 million in debt and equity and was able to settle
prior obligations at terms favorable to
15
the Company. 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, the Company has sustained substantial negative cash flows from
operations in 2001 primarily 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. The auditor's report on the Company's financial statement states
that certain matters raise substantial doubt about the Company's ability to
continue as a going concern. To address these concerns, the Company continues to
pursue debt and/or equity financing.
Subsequent to year-end, the Company 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, the Company 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 the Company's 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 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.
The primary source of the Company's liquidity is derived from payments
from its full-risk contracts with an HMO. In March 2002, two investors, on
behalf of the Company, funded $1,000,000 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 collateral over ten months
at an effective rate of 24% per annum.
At December 31, 2001 the Company had a recorded liability for unpaid
payroll taxes and related interest and penalties of approximately $2.1 million.
Effective, April 2001, the Company negotiated an installment plan with the
Internal Revenue Service (IRS) whereby it will make monthly installments ranging
from $50,000 to $100,000 until the liability is retired (see Audited
Financials).
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Except for historical information contained herein, the matters
discussed in this report are forward-looking statements made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995. These
forward-looking statements are based largely on the Company's expectation and
are subject to a number of risks and
16
uncertainties, including but not limited to economic, competitive and other
factors affecting the Company's operations, ability of the Company to obtain
competent medical personnel, the cost of services provided versus payment
received for capitated and full risk managed care contracts, negative effects of
prospective healthcare reforms, the Company's ability to obtain medical
malpractice coverage and the cost associated with malpractice, access to
borrowed or equity capital on favorable terms, the fluctuation of the Company's
common stock price, and other factors discussed elsewhere in this report and in
other documents filed by the Company with the Securities and Exchange Commission
from time to time. Many of these factors are beyond the Company's control.
Actual results could differ materially from the forward-looking statements. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this report will, in fact, occur.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required to be filed hereunder are included
under Item 13 (a) (1) of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
As of March 31, 2002, the directors, control persons and executive
officers of the Company were as follows:
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
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
18
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 form 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 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
19
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 the Company's annual meeting of
shareholders and holds office until the next annual meeting of stockholders, or
until the successors are elected and qualified. At present, the Company's bylaws
provide for not less than one director. Currently, there are six directors in
the Company. The bylaws permit the Board of Directors to fill any vacancy and
such director may serve until the next annual meeting of shareholders or until
his successor is elected and qualified. Officers are elected by the Board of
Directors and their terms of office are, except to the extent governed by
employment contracts, at the discretion of the Board. There are no family
relations among any officers or directors of the Company. The officers of the
Company devote full time to the business of the Company. The Board of Directors
held fifteen meetings and voted fourteen times by Unanimous Written Consent.
BOARD COMMITTEES
The Company 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 the Company's independent
auditors and reviews and evaluates the Company's internal control functions.
The Executive Committee may exercise the power of the Board of
Directors in the management of the business and affairs of the Corporation at
any time when the Board of Directors is not in session. The Executive Committee
shall, however, be subject to the specific directions of the Board of Directors.
It is composed of Messrs. Cahr, 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 executive officers and consultants to the
Company.
The Regulatory Compliance Committee consists of Messrs. Heiman, Dr.
Buchanan, Dr. Bernstein (a non-board member) and Debbie Finnel, the Company's
Chief Operating Officer. The Regulatory Compliance Committee reviews the policy
and procedures, current compliance rules and regulations and the Company's
compliance methods.
COMPENSATION OF DIRECTORS
The Company reimburses all Directors for their expenses in connection
with their activities as Directors of the Company. The Directors make themselves
available to consult with the Company's management. One of the six Directors of
the Company is also an employee of the Company and did not receive additional
compensation for his services as Director. A compensation and stock option
agreement has been adopted for the
20
Company's outside Directors in the amount of $18,000 per year, paid quarterly
in the Company's 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 menbership.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
(10%) percent of the outstanding Common Stock, to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership on Form 3 and
reports of changes in ownership of Common Stock on Forms 4 or 5. Such persons
are required by SEC regulation to furnish the Company with copies of all such
reports they file.
Based solely on its review of the copies of such reports furnished to
the Company or written representations that no other reports were required, the
Company believes that all Section 16(a) filing requirements applicable to its
officers, directors and greater than (10%) percent beneficial owners were
complied with during the year ended December 31, 2001.
21
ITEM 10. EXECUTIVE COMPENSATION.
The following tables present information concerning the cash
compensation and stock options provided to the Company's Chief Executive Officer
and each additional executive officer whose total annualized compensation
exceeded $100,000 for the year ended December 31, 2001.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Long-term
Compensation
Awards
Other Annual Securities
Name and Fiscal Compensation Underlying/Options All Other
Principal Position Year Salary($) 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 Chief 2000 132,000 0 --
Operating Officer
David S. Gartner, CPA 2001 119,423 0 6,000
Secretary and Chief 2000 96,557 0 6,000
Financial Officer
Options Granted in the Year Ended December 31, 2001 to Executives
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 $1.00 01/01/09
22
Total number of options granted to non-executives for the year ended
December 31, 2001 was 300,000 and for the year ended December 31, 2000 were
1,543,000.
AGGREGATED FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning
unexercised stock options as of December 31, 2001. No stock appreciation rights
were granted or are outstanding.
Number of Value of Unexercised
Unexercised Options In-the-Money
Held At 12/31/01 Options At 12/31/01(1)
------------------- ----------------------------------
Shares Acquired
Name Exercisable(#) On Exercise Unexercisable(#) Exercisable($) 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
(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 the Company entered into an employment agreement,
subsequently amended, with Fred Sternberg, the Company's 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 employees and executives of the Company; (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, the Company may terminate the
employment of Mr. Sternberg either with or without cause. If the Company without
good cause terminates
23
the Agreement, the Company 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.
DEBRA FINNEL
In January 2001 the Company 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.
24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
Company's Common Stock beneficially owned at December 31, 2001 (i) by each
person who is known by the Company to own beneficially 5% or more of the
Company's common stock; (ii) by each of the Company's directors; and (ii) by all
executive officers and directors as a group.
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
-----------
(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 347,799 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
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company previously had a consulting agreement with Sternco, Inc.,
an affiliate of Fred Sternberg that provided for commissions on any acquisition
for which Sternco is or was the introducing party or materially contributed to
such acquisition. The consulting agreement was terminated upon the execution of
Mr. Sternberg's employment agreement.
At December 31, 2001, amounts owed to the Company by officers totaled
approximately $104,000. These amounts are expected to be repaid in 2002.
All future transactions between the Company and any officer, director
or 5% shareholder will be on terms no less favorable than could be obtained from
independent third parties and will be approved by a majority of the independent
disinterested directors of the Company. The Company believes that all prior
affiliated transactions except those identified above were made on terms no less
favorable to the Company than available from unaffiliated parties. Loans, if
any, made by the Company to any officer, director or 5% stockholder, will only
be made for bona fide business purposes.
26
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
27
C O N T E N T S
Page
-------------------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 29
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet 30
Statements of Operations 31
Statements of Changes in Stockholders' Equity (Deficiency in Assets) 32
Statements of Cash Flows 33 - 34
Notes to Financial Statements 35 - 53
28
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
29
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
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
============
See accompanying notes.
30
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
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
============= =============
See accompanying notes.
31
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
YEARS ENDED DECEMBER 31, 2001 AND 2000
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
===== ======== ========== ========= ============ ========= ============ ============
See accompanying notes.
32
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
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
=========== ===========
See accompanying notes.
33
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2001 AND 2000
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
---------- ----------
See accompanying notes.
34
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.
35
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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:
Machinery and equipment 5 - 7 years
Computer and office equipment, including items
under capital lease 5 - 7 years
Furniture and fixtures 5 - 7 years
Auto equipment 5 years
Leasehold improvements 5 years
USE OF ESTIMATES
The preparation of financial statements in conformity with
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.
36
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
37
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
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
----------- -----------
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
=========== ===========
38
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
39
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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."
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.
40
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
41
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:
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
===========
The results of the operations beginning October 1, 2000 are
included in the Company's consolidated statements of
operations.
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:
For the
Year Ended
December 31, 2000
-----------------
Revenue $119,372,854
Net income $ 4,640,569
Net income per share $ 0.26
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.
42
NOTE 3. ACQUISITIONS AND DISPOSALS (CONTINUED)
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.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
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
===========
43
NOTE 4. PROPERTY AND EQUIPMENT (CONTINUED)
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.
44
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 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:
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
=========
45
NOTE 8. LONG-TERM DEBT
Long-term debt consisted of the following:
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
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
==========
Aggregate maturities of long-term debt for years subsequent to
December 31, 2001, are as follows:
2002 $ 828,788
2003 622,812
2004 67,000
----------
$1,518,600
==========
46
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:
2001 2000
------------ -----------
Provision (Benefit) For Income Taxes
Current
Federal $ -- $ --
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 $ --
=========== ===========
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 $12,026,000, expiring in various years through
2019.
47
NOTE 10. INCOME TAXES (CONTINUED)
At December 31, 2001, approximate deferred tax assets and
liabilities were as follows:
DEFERRED TAX ASSETS:
Allowances for doubtful accounts $ 1,787,000
Net operating loss carryforward 4,525,000
-----------
Total deferred tax assets 6,312,000
-----------
DEFERRED TAX LIABILITIES:
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)
-----------
$ --
-----------
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.
48
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:
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
==========
The following table summarizes information about stock options
outstanding at December 31, 2001:
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
--------- ---------
49
NOTE 12. STOCK OPTIONS (CONTINUED)
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 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.
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
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:
2002 $ 902,000
2003 624,000
2004 489,000
2005 449,000
2006 249,000
Thereafter 141,000
----------
Total $2,854,000
==========
50
NOTE 13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT CONTRACTS
The Company has employment contracts with certain executives,
physicians and other clinical and administrative employees.
Future annual minimum payments under these employment
agreements for the years ended December 31, are as follows:
2002 $2,556,000
2003 1,023,000
2004 908,000
2005 616,000
----------
$5,103,000
==========
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.
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.
51
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.
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
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.
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.
52
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.
53
The financial statements listed on the index to financial statements on page F-1
are filed as part of this Form 10-KSB.
(a) (2) Exhibits
Exhibits marked with footnote one are filed herewith. The remainders of
the exhibits have heretofore been filed with the Commission and are incorporated
herein by reference. Each management contract or compensation plan or
arrangement filed as an exhibit hereto is identified by a dagger (+).
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation. (1)
3.2 Articles of Amendment to the Articles of Incorporation. (1)
3.3 By-laws. (1)
3.4 Article of Amendment to the Articles of Incorporation designating the
Series A Preferred Stock. (2)
4.1 Specimen Common Stock Certificate. (1)
10.1 Stock Option Plan. (1)
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 submit to the
Securities and Exchange Commission. (3)
10.24 Employment Agreement between Metropolitan Health Networks and Fred
Sternberg, dated January 1, 2000. (3)
10.25 Employment Agreement between Metropolitan Health Networks and Debra
Finnel, dated January 7,2000. (3)
21 Subsidiaries of the Company.
------------------
54
(1) Incorporated by reference to the exhibit of the same number filed with
the Company's Registration Statement on Form SB-2 (No. 333-5884-A)
(2) Incorporated by reference to the Company's Current Report on Form 8-K
dated August 6, 1997
(3) Incorporated by reference to the Exhibit of the same number filed with
the Company's Registration Statement on Form SB-2 (No. 333-61566).
55
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
registrant has duly caused this Form 10KSB/A to be signed on its behalf by the
undersigned, thereunto duly authorized in the Boca Raton, State of Florida on
the 12th of April, 2002.
METROPOLITAN HEALTH NETWORKS, INC.
By: /s/ Fred Sternberg
-------------------------------------
Fred Sternberg, President, Chief
Executive Officer and Chairman
Pursuant to the requirements of the Securities Act, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Fred Sternberg President, Chief Executive April 12, 2002
-------------------------------- Officer and Chairman of the Board
Fred Sternberg
/s/ David S. Gartner Chief Financial Officer and Secretary April 12, 2002
--------------------------------
David S. Gartner
/s/ Michael Cahr Director April 12, 2002
--------------------------------
Michael Cahr
/s/ Marvin Heiman Director April 12, 2002
--------------------------------
Marvin Heiman
/s/ J. Robert Buchanan Director April 12, 2002
--------------------------------
J. Robert Buchanan
/s/ William M. Bulger Director April 12, 2002
--------------------------------
William M. Bulger
/s/ Martin Harrison Director April 12, 2002
--------------------------------
Martin Harrison
56