UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission file number 0-28456
METROPOLITAN HEALTH NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Florida 65-0635748
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
500 Australian Avenue, West Palm Beach, Fl. 33401
(Address of principal executive office) (Zip Code)
(561) 805-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant
(1) has filed all Reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of July 31, 2002
----- -------------------------------
Common Stock par value $.001 31,241,643
Metropolitan Health Networks, Inc.
Index
Page
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
as of June 30, 2002 and December 31, 2001 2
Condensed Consolidated Statements of
Operations for the Three and Six Months
Ended June 30, 2002 and 2001 3
Condensed Consolidated Statements of
Cash Flows for the Six Months Ended
June 30, 2002 and 2001 4
Notes to Condensed Consolidated
Financial Statements 5-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-14
PART II. OTHER INFORMATION
Summary of Legal Proceedings 14
Changes in Securities and Use of Proceeds 14
Default Upon Senior Securities 14
Submission of Matters to a Vote of Security Holders 14
Other Information 14
Forward Looking Statements and
Associated Risks 14
SIGNATURES 14-15
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
JUNE 30, 2002 December 31, 2001
ASSETS (UNAUDITED) (Audited)
------------- -----------------
CURRENT ASSETS
Cash and equivalents $ 838,843 $ 393,968
Accounts receivable, net of allowances 14,226,973 13,362,782
Inventory 994,542 697,489
CDs-restricted 300,000 --
CDs receivable-restricted 700,000 --
Other current assets 608,972 451,627
------------ ------------
Total current assets 17,669,330 14,905,866
PROPERTY AND EQUIPMENT, net 1,382,970 1,336,168
GOODWILL, net 2,955,665 2,977,874
OTHER ASSETS 420,043 142,767
------------ ------------
TOTAL ASSETS $ 22,428,008 $ 19,362,675
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,674,824 $ 4,076,628
Advances from HMO 840,953 1,152,953
Payroll taxes payable 2,423,618 2,631,179
Accrued expenses 980,402 1,000,976
Notes payable 1,487,205 --
Current maturities of capital lease obligations 122,372 106,002
Current maturities of long-term debt 1,351,850 828,788
------------ ------------
Total current liabilities 10,881,224 9,796,526
------------ ------------
CAPITAL LEASE OBLIGATIONS 166,152 197,103
------------ ------------
LONG-TERM DEBT 2,748,445 689,812
------------ ------------
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 500,000 500,000
Common stock, par value $.001 per share; 80,000,000 shares authorized;
31,153,944 and 27,479,087 issued and outstanding 31,154 27,479
Additional paid-in capital 29,735,479 26,044,905
Accumulated deficit (21,198,902) (17,575,786)
Common stock issued for services to be rendered (435,544) (317,364)
------------ ------------
Total stockholders' equity 8,632,187 8,679,234
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,428,008 $ 19,362,675
============ ============
See accompanying notes - unaudited
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Six Months Ended Three Months Ended
--------------------------------- ---------------------------------
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
(UNAUDITED) (UNAUDITED) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
REVENUES $ 77,900,078 $ 60,095,498 $ 39,885,362 $ 30,605,577
------------ ------------ ------------ ------------
EXPENSES
Direct medical costs 63,229,348 51,385,561 34,109,555 25,795,961
Cost of sales 4,651,923 18,383 2,422,616 18,383
Payroll, payroll taxes and benefits 6,268,605 2,881,037 3,071,064 1,511,345
Depreciation and amortization 542,140 420,871 343,549 214,805
Consulting expense 1,425,568 364,279 814,235 225,263
General and administrative 4,169,858 1,665,917 2,445,405 850,213
------------ ------------ ------------ ------------
Total expenses 80,287,442 56,736,048 43,206,424 28,615,970
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE) (2,387,364) 3,359,450 (3,321,062) 1,989,607
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and penalty expense (1,268,073) (350,774) (1,109,328) (171,063)
Other income 32,321 11,999 7,694 11,399
------------ ------------ ------------ ------------
Total other income (expense) (1,235,752) (338,775) (1,101,634) (159,664)
------------ ------------ ------------ ------------
NET INCOME (LOSS) (3,623,116) 3,020,675 (4,422,696) 1,829,943
============ ============ ============ ============
Weighted Average Number of Common Shares
Outstanding 29,456,383 24,363,922 30,247,118 25,998,639
------------ ------------ ------------ ------------
Net earnings (loss) per share - basic $ (0.12) $ 0.12 $ (0.15) $ 0.07
============ ============ ============ ============
Net earnings (loss) per share - diluted $ (0.12) $ 0.11 $ (0.15) $ 0.06
============ ============ ============ ============
See accompanying notes - unaudited
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
JUNE 30, 2002 JUNE 30, 2001
(Unaudited) (Unaudited)
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,623,116) $ 3,020,675
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision and medical cost adjustments related to
HMO receivables 3,456,986 --
Write-down of goodwill 22,209 --
Depreciation and amortization 542,140 420,871
Provision for bad debt -- 200,000
Amortization of discount on note payable 17,383 36,206
Interest expense on beneficial conversion feature 808,372 --
Stock issued as compensation 132,988 --
Stock issued in lieu of cash for services -- 139,331
Options and warrants issued for professional services 100,016 54,077
Changes in assets and liabilities:
Accounts receivable, net (4,321,177) (5,041,417)
Inventory (297,053) --
Other current assets (157,345) (593,282)
Other assets (511,511) (67,046)
Accounts payable and accrued expenses 444,218 (1,159,998)
Payroll taxes payable (207,561) --
Due to related parties -- (105,800)
Unearned revenue -- (906,944)
------------ ------------
Total adjustments 29,665 (7,024,002)
------------ ------------
Net cash used in operating activities (3,593,451) (4,003,327)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of restricted CDs (300,000) --
Capital expenditures (251,871) (166,061)
------------ ------------
Net cash used in investing activities (551,871) (166,061)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on line of credit -- (39,918)
Borrowings on notes payable 5,026,357 198,391
Repayments on notes payable (468,423) (242,310)
Repayments on capital leases (63,006) (13,789)
Proceeds from issuance of stock 530,105 5,177,375
Proceeds from exercise of options 67 386,333
Cash paid for stock price guarantee (122,893) --
Repayments on advances from HMO (312,010) (97,000)
------------ ------------
Net cash provided by financing activities 4,590,197 5,369,082
------------ ------------
NET INCREASE IN CASH AND EQUIVALENTS 444,875 1,199,694
CASH AND EQUIVALENTS - BEGINNING 393,968 44,724
============ ============
CASH AND EQUIVALENTS - ENDING $ 838,843 $ 1,244,418
============ ============
See accompanying notes - unaudited
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and such
adjustments are of a normal recurring nature. Operating results for the
three and six months ended June 30, 2002 are not necessarily indicative
of the results that may be expected for the year ending December 31,
2002.
The audited financial statements at December 31, 2001, which are
included in the Company's Form 10-KSB, should be read in conjunction
with these condensed consolidated financial statements.
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 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. As such, the accompanying financial statements present
information in a format that is consistent with the financial
information used by management for internal use.
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.
The effective tax rate for the six months ended June 30, 2002 differed
from the federal statutory rate due principally to an increase in the
deferred tax asset valuation allowance.
REVENUES
Revenues are recorded when services are rendered or pharmacy products
are sold. Revenues from one Health Maintenance Organization (HMO)
accounted for approximately 89% and 98% of the Company's total revenues
for the quarters ended June 30, 2002 and 2001, and 90% and 98% for the
six months then ended.
Contracts with the HMO are for one and three years in the South
Florida and Daytona markets respectively, and renew automatically
unless cancelled by either party with 120-day notice. These contracts
expire December 31, 2002, however the Company expects the contracts
to continue for the foreseeable future.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 2002 were as follows:
HMO accounts receivable $11,993,000
Non HMO accounts receivable 8,047,000
-----------
Total 20,040,000
Allowance 5,813,000
-----------
Accounts receivable $14,227,000
===========
In the health care environment, it is almost always at least reasonably possible
that accounts receivable estimates could change in the near term as a result of
one or more future confirming events. With regard to revenues, expenses and
resulting accounts receivable 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. Programs with the HMO are
sometimes complex and at times subject to different interpretation by the
Company and the HMO. As a result certain revenue and cost estimates during the
quarter may be settled for amounts different than previously estimated. To
assist it in its efforts to estimate and ultimately collect amounts due from the
HMO, the Company has contracted with several outside consultants that have
worked closely with the HMO or other HMOs for extended periods of time. These
consultants provide numerous services including, but not limited to, HMO
revenue, expense and accounts receivable analysis and monthly claims and
contestation analysis.
Direct HMO 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. This evaluation is typically in conjunction with the
Company's outside consultants. During the quarter ended June 30, 2002, as part
of the Company's periodic review of medical claims, which are retroactively
applied to the period in which they were incurred, management determined that
the IBNR previously estimated were not sufficient to cover approximately $2.0
million in retroactive claims that were charged to the company. Accordingly, an
adjustment to medical costs was recorded to cover the estimated IBNR shortfall.
The estimates of retroactive adjustments to be applied by the HMO are based upon
i) current agreements with the HMO to modify certain amounts previously charged
to the Company and ii) Company estimates of certain charges the HMO has agreed
were charged at incorrect rates but has not yet quantified.
The HMO has agreed to certain credits in their entirety and to analyze other
amounts it has not yet quantified on certain past transactions. The HMO is in
the process of quantifying past transactions charged at incorrect rates. In
connection therewith, management has established a reserve of approximately $1.5
million against the estimated net credits (aggregating $9.5 million) and
therefore $8.0 million is included in accounts receivable, net of allowances.
The estimated credits currently outstanding relate principally to 2002 and 2001
adjustments with approximately 10% relating to adjustments prior to 2001.
Management is in the process of, and intends to pursue collection of all
estimated retroactive adjustments. 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.
In addition to the retroactive adjustments, from time to time the Company is
charged by the HMO for certain medical expenses the Company believes it is not
liable. In connection therewith, the Company, through its outside consultants,
is contesting certain costs aggregating approximately $10.9 million.
Management's estimate of recovery on these contestations is determined based
upon its and the consultants' judgment, and their consideration of several
factors including the nature of the contestations, historical recovery rates and
other qualitative factors. Accordingly, accounts receivable from the HMO
includes approximately $2.2 million, which represents estimated recovery of
20% of 2000, 2001 and 2002 contestations outstanding at June 30, 2002. It is
reasonably possible the Company's estimate of these recoveries could change in
the near term, and those changes may be material.
Under the contracts with the HMO, the Company receives payments from the HMO,
net of direct medical costs paid on behalf of the Company, on a monthly basis.
From time to time the HMO will also make advances to the Company. Payments on
adjustments are paid as precessed by the HMO. However, as it is sometimes
difficult to quantify these adjustments, payment can often be delayed for
extended periods.
Non-HMO accounts receivable, aggregating approximately $8,047,000 at June 30,
2002 relate principally to prescription sales and medical services provided on a
fee for service basis, and are reduced by amounts estimated to be uncollectible
(approximately $4,313,000). 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.
Non-HMO accounts receivable are typically uncollateralized customer obligations
due under normal trade terms requiring payment within 30-90 days from the
invoice date. The Company does not charge late fees or penalties on delinquent
invoices, however it continually evaluates the need for a valuation allowance
(Allowance). The Allowance reflects management's best estimate of the amounts
that will not be collected. Management reviews all non-current accounts
receivable balances on an ongoing basis and based on this assessment of current
creditworthiness, estimates the portion, if any, that will not be collected. 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.
NET INCOME PER SHARE
The Company applies Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (FAS 128) which requires dual presentation of net income
per share; Basic and Diluted. Basic earnings per share is computed using the
weighted average number of common shares outstanding during the period;
30,247,118 and 29,456,383 for the three and six months ended June 30, 2002.
Diluted earnings per share is computed using the weighted average number of
common shares outstanding during the period adjusted for incremental shares
attributed to outstanding options and warrants to purchase shares of common
stock. Outstanding stock equivalents were not considered in the calculation of
diluted earnings (loss) per common share for the three and six months ended June
30, 2002, as their effect would have been anti-dilutive.
Six Months Ended Three Months Ended
----------------------------- -----------------------------
6/30/02 6/30/01 6/30/02 6/30/01
----------- ------------ ------------- ------------
Net Income (loss) $(3,623,116) $ 3,020,675 $ (4,422,696) $ 1,829,943
Less: Preferred stock dividend -- (25,000) -- (12,500)
----------- ------------ ------------- ------------
Income (loss) available to common shareholders (3,623,116) 2,995,675 (4,422,696) 1,817,443
Denominator:
Weighted average common shares outstanding 29,456,383 24,363,922 30,247,118 25,998,639
Basic earnings (loss) per common share $ (0.12) $ 0.12 $ (0.15) $ 0.07
=========== ============ ============= ============
Net Income (loss) $(3,623,115) $ 3,020,675 $ (4,422,696) $ 1,829,943
Interest on convertible securities -- 21,855 -- 10,471
----------- ------------ ------------- ------------
(3,623,115) 3,042,530 (4,422,696) 1,840,414
Weighted average common shares outstanding 29,456,383 27,896,026 30,247,118 29,560,521
Diluted earnings (loss) per common share $ (0.12) $ 0.11 $ (0.15) $ 0.06
=========== ============ ============= ============
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued three new
pronouncements: Statement of Financial Accounting Standards ("SFAS") No 141,
"Business Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets"
and 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. 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 adopted certain provisions of these pronouncements
effective July 1, 2001, as required for goodwill and intangible assets acquired
in purchase business combinations consummated after June 30, 2001. The Company
adopted the remaining provisions of SFAS 141 and SFAS 142 effective January 1,
2002. There was not a cumulative transition adjustment upon adoption as of July
1, 2001 or January 1, 2002. SFAS 141 and SFAS 142 required the Company to
perform the following as of January 1, 2002; (i) review goodwill and intangible
assets for possible reclassifications; (ii) reassess the lives of intangible
assets; and (iii) perform a transitional goodwill impairment test. The Company
has reviewed the balances of goodwill and identifiable intangibles and
determined that the Company does not have any amounts that are required to be
reclassified from goodwill to identifiable intangibles, or vice versa. The
Company has also reviewed the useful lives of its identifiable intangible assets
and determined that the original estimated lives remain appropriate. The Company
has completed the transitional goodwill impairment test and has determined that
the Company did not have a transitional impairment of goodwill.
As required by SFAS 142, the Company has not amortized goodwill associated with
acquisitions completed after June 30, 2001, or any period presented and ceased
amortization of goodwill associated with acquisitions completed prior to July 1,
2001, effective January 1, 2002. Prior to January 1, 2002, the Company amortized
goodwill associated with the pre-July 1, 2001 acquisitions over ten years using
the straight-line method. A reconciliation of reported net income (loss)
adjusted to reflect the adoption of SFAS No. 142 is provided below:
For the Six Months For the Three Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net income (loss) $ (3,623,116) $ 3,020,675 $ (4,422,696) $ 1,829,943
Add-back goodwill amortization, net of tax -- 195,803 -- 98,563
Adjusted net income (loss) (3,623,116) 3,216,478 (4,422,696) 1,928,506
Reported basic net income per share $ (0.12) $ 0.12 $ (0.15) $ 0.07
Add-back goodwill amortization -- 0.01 -- --
Adjusted basic net income (loss) per share (0.12) 0.13 (0.15) 0.07
Reported diluted net income (loss) per share $ (0.12) $ 0.11 $ (0.15) $ 0.06
Add-back goodwill amortization -- 0.01 -- 0.01
Adjusted diluted net income (loss) per share (0.12) 0.12 (0.15) 0.07
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. The Company is currently assessing the
impact of SFAS No. 143, which is not expected to have a material impact
on the Company's financial statements.
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 has adopted SFAS No. 144, and it did not have a
material impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections. This statement, among other things, eliminated
an inconsistency between required accounting for certain sale-leaseback
transactions and provided for other technical corrections. Management
believes adoption of this statement will not have a material effect on
the financial statements of the company.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement addresses
accounting and reporting for costs associated with exit or disposal
activities and nullifies emerging issues Task Force Issue No. 94-3. The
statement is effective for exit or disposal costs initiated after
December 31, 2002, with early application encouraged. This statement
has not yet been adopted by the Company and management has not
determined the impact of this statement on the financial statements of
the Company.
NOTE 3. LIQUIDITY AND CAPITAL RESOURCES
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 negative cash flows from operations,
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 by the fourth quarter of 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 material business segment or overall
operations.
In the first half 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 in
short-term notes payable and $2,780,000 in long-term notes and
debentures, with varying interest rates and maturities (see Notes 5-6).
Management continues to actively pursue an accounts receivable and
inventory line of credit to support the growth in its pharmacy
division. In addition, the Company projects cash flow from the HMO to
increase over the remainder of the year as a result of its
improved contract terms and utilization initiatives. Also, management
has taken measures to reduce overhead and is reviewing its operations
for further reductions.
In conjunction with its review of its operations, as of the date of
this filing the Company has decided to dispose of its clinical
laboratory, which the Company believes will result in an increase in
both operational profitability and cash flow. The effect of this
disposition cannot be accurately determined at this time but management
estimates that a loss on disposition of a business segment of $800,000
to $1,200,000 will be recognized in the quarter ended September 30,
2002.
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 paragraphs, provide the opportunity for the Company to
continue as a going concern, however, there is no assurance this will
occur.
NOTE 4. EQUITY LINE OF CREDIT AGREEMENT
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 established
what is sometimes also referred to as an equity draw down 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 draw down under the Equity Facility by selling
shares of its common stock to the Purchaser, and the Purchaser would be
obligated to purchase the shares.
During 2002, the Company received approximately $40,000 under the
Equity Facility and on March 5, 2002, the Company terminated the Equity
Facility.
NOTE 5. SHORT-TERM DEBT
In the first quarter of 2002, the Company borrowed a total of
$1,700,000 due in June 2002, since extended. The notes bear interest of
24-25% and are collateralized by a total of 3,200,000 shares of common
stock and by all the Company's assets. The proceeds from these
transactions were used for working capital.
NOTE 6. LONG-TERM DEBT
In May 2002, the Company entered into a "Securities Purchase
Agreement", in which it issued $1,580,000 6% Convertible debentures due
May 24, 2004 and 150,000 warrants to purchase common stock. The
purchase price for the promissory note and Warrants was $1,501,000 or
95% of the principal amount of the Convertible Debentures. The Holder
shall have the right at its option to convert the Convertible Debenture
into shares of common stock. The number of shares shall be determined
by dividing the conversion amount (principal plus accrued interest) by
the conversion price as defined ($0.43 per share at issuance). In
connection with the issuance of the convertible debentures the company
recorded an interest charge of $808,000 relating to the beneficial
conversion feature. Approximately $60,000 of the purchase price was
assigned to the warrants and this amount, along with the $79,000
discount, is being amortized and charged to interest expense over two
years under the interest method.
Also in May 2002, the Company entered into a "Securities Purchase
Agreement" in which the Company issued a $1,200,000 principal amount
Promissory Note due May 24, 2004 and 500,000 warrants to purchase
common stock. The purchase price for the promissory note and warrants
was $1.2 million. Interest is payable quarterly at a rate of 12% per
annum, commencing June 30, 2002, and principal is due at maturity.
Approximately $254,000 of the purchase price was assigned to the
warrants and this amount is being amortized and charged to interest
expense over two years under the interest method.
NOTE 7. STOCKHOLDERS' EQUITY
During the first quarter of 2002, the Company issued 500,000 shares of
common stock to accredited investors, resulting in proceeds of
$500,000. In addition, the Company issued approximately 1,200,000
shares of common stock to convert approximately $1,100,000 of long-term
debt to equity.
NOTE 8. 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 the
market value of the underlying stock exceeded the exercise price at the
date of grant. For the three and six months ended June 30, 2002 and
2001 no compensation was recorded.
NOTE 9. COMMITMENTS AND CONTINGENCIES
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 material 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 $1,885,000 at
June 30, 2002. Under the plan the Company made monthly installments of
$100,000 on the amount in arrears. This agreement has expired and the
full amount is deemed due upon demand. The Company is currently
negotiating with the IRS for a new installment agreement and has
proposed a three-year payout whereby the liability would be retired at
the end of the agreement. This amount plus approximately $539,000
related to second quarter payroll taxes are included as payroll taxes
payable at June 30, 2002.
LETTER OF CREDIT
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. Included in CDs receivable - restricted are CDs
(collateralizing the Letter of Credit) that the Company has purchased
from investors. Payments for these CDs are due over ten months at
amounts that result in an effective interest rate of 24% per annum and
at June 30, 2002, $300,000 had been purchased. .
NOTE 10. BUSINESS SEGMENT INFORMATION
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.
THREE MONTHS ENDED JUNE 30, 2002 PSN PHARMACY LABORATORY TOTAL
----------- ----------- ---------- -----------
Revenues from external customers $36,191,000 $ 3,288,000 $ 406,000 $39,885,000
Intersegment revenues -- 319,000 -- 319,000
Segment gain (loss) (3,123,000) (1,054,000) (246,000) (4,423,000)
Allocated corporate overhead included in
gain (loss) 1,649,000 735,000 218,000 2,602,000
THREE MONTHS ENDED JUNE 30, 2001 PSN PHARMACY LABORATORY TOTAL
----------- ----------- ---------- -----------
Revenues from external customers $30,545,000 $ 24,000 $ 37,000 $30,606,000
Intersegment revenues -- -- -- --
Segment gain (loss) 2,223,000 (46,000) (347,000) 1,830,000
Allocated corporate overhead included in
gain (loss) 1,210,000 25,000 183,000 1,418,000
SIX MONTHS ENDED JUNE 30, 2002 PSN PHARMACY LABORATORY TOTAL
----------- ----------- ---------- -----------
Revenues from external customers $70,612,000 $ 6,402,000 $ 886,000 $77,900,000
Intersegment revenues -- 562,000 -- 562,000
Segment gain (loss) (1,101,000) (2,018,000) (504,000) (3,623,000)
Allocated corporate overhead included in
gain (loss) 2,495,000 1,333,000 435,000 4,263,000
SIX MONTHS ENDED JUNE 30, 2001 PSN PHARMACY LABORATORY TOTAL
----------- ----------- ---------- -----------
Revenues from external customers $60,011,000 $ 24,000 $ 60,000 $60,095,000
Intersegment revenues -- -- -- --
Segment gain (loss) 3,621,000 (46,000) (554,000) 3,021,000
Allocated corporate overhead included in
gain (loss) 2,492,000 25,000 256,000 2,773,000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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 27,000 Medicare+Choice patients,
3,000 commercial HMO patients and approximately 15,000 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. Current legislation and a political environment that
has demonstrated support for the Medicare+Choice program have augmented many
opportunities in the managed care industry. 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. The Company'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. The Company believes it can
achieve better management and control to provide 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.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's management to make a variety of
estimates and assumptions. These estimates and assumptions effect, among other
things, the reported amounts of assets and liabilities, the disclosure of
contingent liabilities and the reported amounts of revenues and expenses. Actual
results can differ from the amounts previously estimated, which were based on
the information available at the time the estimates were made.
The critical accounting policies described below are those that the Company
believes are important to the portrayal of the Company's financial condition and
results, and which require management to make difficult, subjective and/or
complex judgments. Critical accounting policies cover accounting matters that
are inherently uncertain because the future resolution of such matters is
unknown. The Company believes that critical accounting policies include accounts
receivable and revenue recognition, use of estimates and goodwill.
Accounts Receivable and Revenue Recognition
The Company recognizes revenues, net of contractual allowances, as medical
services are provided or pharmaceuticals are sold. These services or goods are
typically billed to patients, Medicare, Medicaid, health maintenance
organizations, insurance companies and other third parties. 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 payers.
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 of deficits, if any, on its owned and
non-owned managed medical practices.
Use of Estimates
In the health care environment, it is almost always at least reasonably possible
that accounts receivable estimates could change in the near term as a result of
one or more future confirming events. With regard to revenues, expenses and
resulting accounts receivable 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. Programs with the HMO are
sometimes complex and at times subject to different interpretation by the
Company and the HMO. As a result certain revenue and cost estimates during the
quarter may be settled for amounts different than previously estimated. To
assist it in its efforts to estimate and ultimately collect amounts due from the
HMO, the Company has contracted with several outside consultants that have
worked closely with the HMO or other HMOs for extended periods of time. These
consultants provide numerous services including, but not limited to, HMO
revenue, expense and accounts receivable analysis and monthly claims and
contestation analysis.
Direct HMO 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. This evaluation is typically in conjunction with the
Company's outside consultants. The estimates of retroactive adjustments to be
applied by the HMO are based upon i) current agreements with the HMO to modify
certain amounts previously charged to the Company and ii) Company estimates of
certain charges the HMO has agreed were charged at incorrect rates but has not
yet quantified.
In addition to the retroactive adjustments, from time to time the Company is
charged by the HMO for certain medical expenses the Company believes it is not
liable. In connection therewith, the Company, through its outside consultants,
contests certain costs. Management's estimate of recovery on these contestations
is determined based upon its and the consultants' judgment, and their
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 an estimated recovery rate of 20% all
outstanding contestations. It is reasonably possible the Company's estimate of
these recoveries could change in the near term, and those changes may be
material.
Goodwill
The Company has made several acquisitions in the past that included a
significant amount of goodwill. Under generally accepted accounting principles
in effect thorough December 31, 2001, these assets were amortized over their
useful lives and tested periodically to determine if they were recoverable from
operating earnings on a discounted basis over their useful lives.
Effective January 1, 2002, goodwill is accounted for under SFAS No. 142,
"Goodwill and Other Intangible Assets". The new rules eliminate amortization of
goodwill but subject these assets to impairment tests. See "New Accounting
Pronouncements" in Note 2 for a more complete discussion. Management is required
to make assumptions and estimates, such as the discount factor, in determining
fair value. Such estimated fair values might produce significantly different
results if other reasonable assumptions and estimates were to be used.
RESULTS OF OPERATIONS
The Company had revenues of $39.9 million for the quarter ended June 30, 2002
and operating expenses of $43.2 million, resulting in a loss from operations of
approximately $3.3 million and a net loss of approximately $4.4 million. For the
six months ended June 30, 2002, the Company had revenues of $77.9 million and
operating expenses of $80.3 million, a loss from operations of approximately
$2.4 million and a net loss of approximately $3.6 million. Included in the
quarter and six months ended June 30, 2002 are significant adjustments of
approximately $5.4 million, as discussed below. Excluding these adjustments, the
Company's operating expenses would have been $38.6 and $75.7 for the quarter and
six months ended June 30, 2002, resulting in income from operations of $1.2
million and $2.2 million, respectively. Net income, exclusive of the
adjustments, would have been $942,000 and $1.7 million for the same periods, an
18% improvement over its March 31, 2002 results.
For the same periods in 2001, revenues amounted to $30.6 million for the quarter
and $60.1 million for the six months, resulting in net income of $1.8 million
and $3.0 million respectively. On a diluted per share basis, earnings were $0.06
and $0.11 for the quarter and six months ended June 30, 2001, respectively,
compared to losses of $0.15 and $0.12 for the same periods in 2002.
In addition, the Company had working capital of $6.8 million at June 30, 2002
compared to $8.1 million a year earlier while shareholders' equity was $8.6
million at June 30, 2002 compared to $10.3 million at June 30, 2001.
As disclosed in its previous SEC filings, the Company makes certain cost
estimates with regards to its contract with the HMO. Programs with the HMO are
sometimes complex and at times subject to different interpretation. These cost
estimates may be settled for amounts different than previously estimated or the
Company's estimate of these costs could change in amounts that could be material
to the financial statements. As such, these estimates are continuously reviewed
and, based on its most recent review; management has determined that an
adjustment to direct medical costs of approximately $2.0 million relating to
prior IBNR estimates is required. In addition, management felt an additional
reserve on the remaining carrying amounts of its estimated retroactive cost
adjustments would be prudent. Although it will aggressively attempt to collect
these amounts, the Company has established a $1.5 million reserve by a charge to
its direct medical costs.
Additionally, direct medical expenses are based in part upon estimates of claims
incurred but not reported (IBNR) by the HMO utilizing actuarial methods, and are
continually evaluated by management of the Company based upon its specific
claims experience. During the quarter the HMO revised its Part A (hospital) IBNR
methodology, resulting in a charge to direct medical costs of $1.1 million.
In conjunction with a Convertible Debenture financing completed in May 2002, the
Company incurred a charge to interest of approximately $808,000. This charge was
necessary as the holder may convert the debt at any time into company stock at a
price lower than it was at the issuance of the debt.
During 2001, in an effort to diversify its revenue base and ultimately increase
shareholder value, the Company implemented its pharmacy division and began the
process of filing for its own HMO license. As such, the results for the quarter
and six months ended June 2002 included losses incurred by the Company's
pharmacy and HMO divisions, as well its clinical laboratory, which, including
allocation of corporate overhead, totaled approximately $1.3 million for the
quarter and $2.7 million for the six months. It is expected that these
operations, in total, will achieve profitability by the fourth quarter of 2002
through a combination of increased revenue and cost cutting measures. In line
with this goal, as of the date of this filing the Company has decided to dispose
of its clinical laboratory, which should result in both an increase in
operational profitability and cash flow. The effect of the disposal cannot be
accurately determined at this time, but management estimates that a loss on
disposition of a business segment of $800,000 to $1,200,000 will be recognized
in the quarter ended September 30, 2002.
Quarter Ended June 30, 2002
REVENUES
Revenues for the quarter ended June 30, 2002 increased 30% compared to the same
period in 2001, from $30.6 million to $39.9 million. PSN revenues from the HMO
increased $5.6 million from $30.1 million to $35.7 million. June 2002 PSN
revenues included approximately $1.8 million of additional Medicare and
commercial funding over the June 2001 quarter and the Company expects to receive
similar additional monthly amounts for the foreseeable future. In addition, an
increase in the number of covered lives within the PSN network contributed
approximately $3.8 million of the increase in revenues over the prior year.
Revenues for the second quarter of 2002 included approximately $3.3 million from
Metcare Rx, the Company's pharmacy division, which began operations in the
Daytona market in June 2001, New York in July 2001, and Maryland in October
2001. For the same period in 2001, pharmacy revenues were only $24,000.
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 markets and enter other
markets. Pharmacy sales to the PSN of approximately $319,000 have been
eliminated in consolidation. In addition, revenues for the first quarter of 2002
included $406,000 from its clinical laboratory (Metlabs), as compared to
revenues of only $37,000 in the first quarter of the prior year.
EXPENSES
Operating expenses for the second quarter of 2002 increased 51% over the prior
year, higher than the 30% increase in revenues. However, included in the quarter
are approximately $4.6 million in significant charges to direct medical costs,
as discussed above. Exclusive of these charges, operating expenses increased
35%, more in line with its increase in revenues.
Direct medical costs for the quarter ended June 30, 2002 were $34.1 million
compared to $25.8 million for the quarter ended June 30, 2001. Exclusive of the
significant charges discussed above, the expense for the second quarter would
have been $29.6 million, well in line with the increase in PSN 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. As a percentage of PSN revenues, the medical loss ratio (MLR)
amounted to 95.6% and 85.7% for the quarters ended June 30, 2002 and 2001,
respectively. Adjusted for the charges discussed above, the MLR for the 2002
quarter amounted to 82.9%, an 2.8% improvement over 2001. This improvement
results from the Company's continually improving utilization initiatives,
including its hospitalist, partners in quality (PIQ), and oncology programs, and
the increased funding it received during the quarter, offset in part by
increases in Part A (hospital) costs due to new contracts with hospitals in the
Company's Daytona network.
Cost of sales for the second quarter of 2002 totaled $2.4 million and represents
the cost of the pharmaceuticals sold by MetcareRx. The pharmacy division had a
gross profit percentage for the 2002 quarter of 33%.
Salaries and benefits for the second quarter of 2002 increased $1.6 million over
the second quarter of the prior year to $3.1 million. Since June 30, 2001, the
Company expanded its operations as it continued to implement its business plan.
In July 2001, a medical center was opened in Boca Raton, incurring $107,000 in
payroll costs for the second quarter of 2002. Metlabs accounted for $116,000 of
the increase in payroll expenses while MetcareRx accounted for $915,000 of
incremental payroll costs in its Florida, New York and Maryland facilities. The
Company believes it has the necessary management in place at MetcareRx to
support the revenue growth the Company anticipates in 2002 and beyond. Expansion
of the services the Company provides in its Daytona market in an effort to
control its medical costs accounted for $345,000 of the increase while 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 a $27,000 incremental decrease resulting from the closure of
a medical practice in the second half of 2001.
Depreciation and amortization for the quarter ended June 30, 2002 was $344,000
compared to $215,000 the year before. The increase of approximately $129,000 is
due primarily to amortization of financing costs and an increase in depreciation
on fixed assets acquired over the past twelve months.
Consulting expense increased approximately $589,000, from $225,000 in the
quarter ended June 30, 2001 to $814,000 in the same period in 2002. Of the
increase, $388,000 was incurred in the Company's Hospitalist, Oncology and
Utilization/Quality Assurance/Management programs, which are designed to lower
direct medical costs while improving patient care, $129,000 of incremental
expense was incurred in connection with investment banking and advisory services
and $40,000 was spent in the development of the Company's HMO, part of its
long-term goal to diversify its revenue base. Also, in conjunction with its June
2001 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 $25,000 in incremental expense in
2002. Expenses associated with new operations account for the balance of the
increase.
General and administrative expenses increased from $850,000 in the second
quarter of 2001 to $2.4 million in the second quarter of 2002, an increase of
$1.6 million. The pharmacy operations accounted for $483,000 in incremental
general and administrative expenses while the costs of the Company's Oncology
program accounted for an additional $798,000 in increases. The balance of the
increase was incurred by the Company's clinical laboratory, accounting for
$369,000 of the incremental costs, which were partially offset by the savings of
$58,000 resulting from the closure of a medical practice in the second half of
2001.
Interest expense increased $938,000 for the June quarter, due in large part to
the previously mentioned charge of $808,000 incurred in conjunction with a
Convertible Debenture financing completed in May 2002. The balance of the
increase is due to the increased amount of debt carried by the Company at June
30, 2002 as compared to the prior year.
Six Months Ended June 30, 2002
REVENUES
Revenues for the six months ended June 30, 2002 increased 30% compared to the
same period in 2001, from $60.1 million to $77.9 million. PSN revenues from the
HMO increased $10.7 million from $59.2 million to $69.9 million. June 2002 PSN
revenues included approximately $3.6 million of additional Medicare and
commercial funding over the six months ended June 2001 and the Company expects
to receive similar additional monthly amounts for the foreseeable future. In
addition, an increase in the number of covered lives within the PSN network
contributed approximately $7.1 million of the increase in revenues over the
prior year.
Revenues for the first six months of 2002 included approximately $6.4 million
from Metcare Rx, the Company's pharmacy division, which began operations in the
Daytona market in June 2001, New York in July 2001, and Maryland in October
2001. For the same period in 2001, pharmacy revenues were only $24,000.
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 markets and enter other
markets. Pharmacy sales to the PSN of approximately $562,000 have been
eliminated in consolidation. In addition, revenues for 2002 included $886,000
from its clinical laboratory (Metlabs), as compared to revenues of only $60,000
in the prior year.
EXPENSES
Operating expenses for first six months of 2002 increased 42% over the prior
year, higher than the 30% increase in revenues. However, included in 2002 are
approximately $4.6 million in significant charges to direct medical costs, as
discussed above. Exclusive of these charges, operating expenses increased 33%,
more in line with its increase in revenues.
Direct medical costs for the six months ended June 30, 2002 were $63.2 million
compared to $51.4 million for the same period in 2001. Exclusive of the charges
discussed above, the expense for 2002 would have been $58.7 million, well in
line with the increase in PSN 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. As a
percentage of PSN revenues, the medical loss ratio (MLR) amounted to 90.5% and
86.8% for the six months ended June 30, 2002 and 2001, respectively. Adjusted
for the charges discussed above, the MLR for the 2002 amounted to 84.0%, a 2.8%
improvement over 2001. This improvement results from the Company's continually
improving utilization initiatives, including its hospitalist, partners in
quality (PIQ), and oncology programs, and the increased funding it received
during 2002, offset in part by increases in Part A (hospital) costs due to new
contracts with hospitals in the Company's Daytona network.
Cost of sales for the first two quarters of 2002 totaled $4.7 million and
represents the cost of the pharmaceuticals sold by MetcareRx. The pharmacy
division had a gross profit percentage for the six months ending June 30, 2002
of 33%.
Salaries and benefits for the first six months of 2002 increased $3.4 million
over 2001 to $6.3 million. Since June 30, 2001, the Company expanded its
operations as it continued to implement its business plan. In July 2001, a
medical center was opened in Boca Raton, incurring $202,000 in payroll costs for
the first six months of 2002. Metlabs accounted for $283,000 of the increase in
payroll expenses while MetcareRx accounted for $1.9 million of incremental
payroll costs in its Florida, New York and Maryland facilities. The Company
believes it has the necessary management in place at MetcareRx to support the
revenue growth the Company anticipates in 2002 and beyond. Expansion of the
services the Company provides in its Daytona market in an effort to control its
medical costs accounted for $655,000 of the increase while salary increases,
increases in medical insurance premiums and a bolstering of staffing throughout
the Company, particularly in the PSN, accounted for the balance of the increase,
which was partially offset by a $66,000 incremental decrease resulting from the
closure of a medical practice in the second half of 2001.
Depreciation and amortization for the six months ended June 30, 2002 was
$542,000 compared to $421,000 the year before. The increase of approximately
$121,000 is due primarily to amortization of financing costs and an increase in
depreciation on fixed assets acquired over the past twelve months.
Consulting expense increased approximately $1.1 million, from $364,000 in the
six months ended June 30, 2001 to $1.4 million in the same period in 2002. Of
the increase, $557,000 was incurred in the Company's Hospitalist, Oncology and
Utilization/Quality Assurance/Management programs, which are designed to lower
direct medical costs while improving patient care, $188,000 of incremental
expense was incurred in connection with investment banking and advisory services
and $142,000 was spent in the development of the Company's HMO, part of its
long-term goal to diversify its revenue base. Also, in conjunction with its June
2001 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 $100,000 in incremental expense in
2002. Expenses associated with new operations account for most of balance of the
increase.
General and administrative expenses increased from $1.7 million in the first two
quarters of 2001 to $4.2 million in 2002, an increase of $2.5 million. The
pharmacy operations accounted for $986,000 in incremental general and
administrative expenses while the costs of the Company's Oncology program
accounted for an additional $810,000 in increases. The balance of the increase
was incurred by the Company's clinical laboratory, accounting for $826,000 of
the incremental costs, which were partially offset by the savings of $120,000
resulting from the closure of a medical practice in the second half of 2001.
Interest expense increased $917,000 for the six months ended June 30, 2002 as
compared to 2001, due in large part to the previously mentioned charge to
interest expense of $808,000 incurred in conjunction with a Convertible
Debenture financing completed in May 2002. The balance of the increase is due to
the increased amount of debt carried by the Company at June 30, 2002 as compared
to the prior year.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2002 the Company raised approximately $5.2
million in debt and equity financing. However, the Company has sustained
negative cash flows from operations since 2000, primarily as a result of the
Company's diversification of its revenue base, including the pharmacy and
clinical laboratory operations. Although the Company's goal is to be cash flow
positive from operations in the fourth quarter of 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 statements for the year ended December 31,
2001 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 actively pursue an accounts
receivable and inventory line of credit to support the growth in its pharmacy
division. In addition, the Company projects cash flow from the HMO to increase
significantly over the remainder of the year as a result of its improved
contract terms and utilization initiatives. Also, management has taken measures
to reduce overhead and is reviewing its operations for further reductions.
In conjunction with its review of its operations and in line with its goal of
achieving positive cash flows by the fourth quarter of 2002, the Company has
decided to dispose of its clinical laboratory, which the Company believes will
result in an increase in both operational profitability and cash flow. The
effect of this disposition cannot be accurately determined at this time but
management estimates that a loss on disposition of a business segment of
$800,000 to $1,200,000 will be recognized in the quarter ended September 30,
2002. Management has implemented and continues to review other cost cutting
measures as well as potential sources of increased revenue in order to
accomplish its goals.
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 paragraphs, provide the opportunity for the
Company to continue as a going concern.
During the first quarter of 2002, 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 $1.7 million on short-term notes payable that were due June
2002, since extended, and $625,000 in long-term notes payable, with varying
interest rates ranging from 5% to 24% and beneficial conversion features.
Certain notes also provided 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 May 2002, the Company entered into a "Securities Purchase Agreement", in
which it issued $1,580,000 6% Convertible debentures due 5/24/04 and 150,000
warrants to purchase common stock. The purchase price for the promissory note
and Warrants was $1,501,000 or 95% of the principal amount of the Convertible
Debentures. The Holder shall have the right at its option to convert the
Convertible Debenture into shares of common stock. In addition, in May the
Company entered into a "Securities Purchase Agreement" in which the Company
issued a $1,200,000 principal amount Promissory Note due 5/24/04 and 500,000
warrants to purchase common stock. The purchase price for the promissory note
and warrants was $1.2 million. Interest is payable quarterly at a rate of 12%
per annum, commencing June 30, 2002, and principal is due at maturity.
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 $1.0 million 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 and at June 30, 2002, $300,000 had been
purchased.
As discussed in Note 2, the Company, in conjunction with its outside
consultants, makes certain estimates with regards to revenues, expenses and
resulting accounts receivable arising from agreements with the HMO. While the
Company believes these amounts will ultimately be realizable, the collection
cycle of these estimated amounts usually exceeds the typical collection time
required to collect medical accounts receivable. Often these amounts are subject
to different interpretation by the Company and the HMO and, accordingly, needs
to be reconciled with the HMO. As a result, certain revenue and cost estimates
may be settled for amounts different than previously estimated. Management has
recorded a reserve of $1.5 million against these receivables.
At June 30, 2002 the Company had a recorded liability for unpaid payroll taxes
and related interest and penalties of approximately $2.4 million. The Company
previously negotiated an installment plan with the Internal Revenue Service
(IRS) whereby it made monthly installments of $100,000 on the amount in arrears.
The Company is currently negotiating with the IRS for a new installment
agreement and has proposed a three-year payout whereby the liability would be
retired at the end of the agreement .
PART II OTHER INFORMATION
ITEM 1. SUMMARY OF LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULT UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
No. 99.1 - Certification of CEO
No. 99.2 - Certification of CFO
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Except for historical information contained herein, the matters discussed in
this report are forward-looking statements made pursuant to the safe harbor
provisions of the Securities Litigation Reform Act of 1995. These
forward-looking statements are based largely on the Company's expectation and
are subject to a number of risks and uncertainties, including but not limited to
economic, competitive and other factors affecting the Company's operations,
ability of the Company to obtain competent medical personnel, the cost of
services provided versus payment received for capitated and full-risk managed
care contracts, negative effects of prospective
healthcare reforms, the Company's ability to obtain medical malpractice coverage
and the cost associated with malpractice, access to borrowed or equity capital
on favorable terms, the fluctuation of the Company's common stock price, and
other factors discussed elsewhere in this report and in other documents filed by
the Company with the Securities and Exchange Commission from time to time. Many
of these factors are beyond the Company's control. Actual results could differ
materially from the forward-looking statements. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this report will, in fact, occur.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
Undersigned thereunto duly authorized.
METROPOLITAN HEALTH NETWORKS, INC.
Registrant
Date: August 14, 2002 /s/ Fred Sternberg
------------------------------------
Fred Sternberg
Chairman, President and
Chief Executive Officer
Date: August 14, 2002 /s/ David S. Gartner
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David S. Gartner
Chief Financial Officer