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 March 31, 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 April 30,2002
----- -------------------------------
Common Stock par value $.001 30,057,156
Metropolitan Health Networks, Inc.
Index
Part I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
as of March 31, 2002 and December 31, 2001 2
Condensed Consolidated Statements of
Operations for the Three Months
Ended March 31, 2002 and 2001 3
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 2002 and 2001 4
Notes to Condensed Consolidated
Financial Statements 5-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-11
PART II. OTHER INFORMATION
Summary of Legal Proceedings 11
Changes in Securities and Use of Proceeds 11
Default Upon Senior Securities 11
Submission of Matters to a Vote of Security
Holders 11
Other Information 11-12
Forward Looking Statements and
Associated Risks 12
SIGNATURES 13
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
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MARCH 31, 2002 December 31, 2001
ASSETS (UNAUDITED) (Audited)
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CURRENT ASSETS
Cash and equivalents $ 363,733 $ 393,968
Accounts receivable, net of allowances 16,709,790 13,362,782
Inventory 746,984 697,489
CDs receivable-restricted 1,000,000 --
Other current assets 501,836 451,627
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Total current assets 19,322,343 14,905,866
PROPERTY AND EQUIPMENT, net 1,382,246 1,336,168
GOODWILL, net 2,977,874 2,977,874
OTHER ASSETS 324,665 142,767
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TOTAL ASSETS $24,007,128 $19,362,675
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LIABILITIES AND STOCKHOLDERS' EQUITY
===================================================================================================================================
CURRENT LIABILITIES
Accounts payable $3,674,828 $4,076,628
Advances from HMO 1,017,953 1,152,953
Payroll taxes payable 2,928,892 2,631,179
Accrued expenses 753,184 1,000,976
Notes payable 2,700,000 --
Current maturities of capital lease obligations 122,851 106,002
Current maturities of long-term debt 1,129,032 828,788
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Total current liabilities 12,326,740 9,796,526
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CAPITAL LEASE OBLIGATIONS 196,151 197,103
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LONG-TERM DEBT 161,312 689,812
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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;
29,528,087 and 27,479,087 issued and outstanding 29,528 27,479
Additional paid-in capital 27,866,234 26,044,905
Accumulated deficit (16,776,208) (17,575,786)
Common stock issued for services to be rendered (296,629) (317,364)
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Total stockholders' equity 11,322,925 8,679,234
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,007,128 $19,362,675
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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Three Months Ended
------------------------------------------------
MARCH 31, 2002 March 31, 2001
(UNAUDITED) (Unaudited)
===================================================================================================================================
REVENUES $ 38,014,716 $ 29,489,921
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EXPENSES
Direct medical costs 29,099,903 25,589,600
Cost of sales 2,249,197 --
Payroll, payroll taxes and benefits 3,197,541 1,369,692
Depreciation and amortization 198,591 206,066
Consulting expense 611,333 139,016
General and administrative 1,724,455 815,704
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Total expenses 37,081,020 28,120,078
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INCOME BEFORE OTHER INCOME (EXPENSE) 933,696 1,369,843
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OTHER INCOME (EXPENSE):
Interest and penalty expense (158,744) (179,711)
Other income 24,626 600
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Total other income (expense) (134,118) (179,111)
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NET INCOME 799,578 1,190,732
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Weighted Average Number of Common Shares
Outstanding 28,656,864 22,461,465
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Net earnings per share - basic $ 0.03 $ 0.05
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Net earnings per share - diluted $ 0.03 $ 0.05
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See accompanying notes - unaudited
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
===============================================================================
MARCH 31, 2002 March 31, 2001
(UNAUDITED) (Unaudited)
===================================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 799,578 $1,190,732
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Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 198,591 206,066
Provision for bad debt -- 100,000
Amortization of discount on note payable -- 22,457
Stock issued as compensation 106,119 --
Stock issued in lieu of cash for services -- 77,638
Options and warrants issued for professional services 45,366 --
Changes in assets and liabilities:
Accounts receivable, net (3,347,008) (1,930,759)
Inventory (49,495)
Other current assets (50,209) 9,161
Other assets (217,247) (11,361)
Accounts payable and accrued expenses (87,581) (190,265)
Payroll taxes payable 297,713 --
Due to related parties -- (5,293)
Unearned revenue -- (79,167)
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Total adjustments (3,103,751) (1,801,523)
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Net cash used in operating activities (2,304,173) (610,791)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (122,695) (60,615)
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Net cash used in investing acivities (122,695) (60,615)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on line of credit -- (39,918)
Borrowings on notes payable 2,325,357 198,391
Repayments on notes payable (174,065)
Repayments on capital leases (32,528) (23,670)
Proceeds from issuance of stock 535,705 883,000
Proceeds from exercise of options 67 1,000
Cash paid for stock price guarantee (122,893)
Repayments on advances from HMO (135,010) (97,000)
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Net cash provided by financing activities 2,396,633 921,803
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (30,235) 250,397
CASH AND EQUIVALENTS - BEGINNING 393,968 44,724
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CASH AND EQUIVALENTS - ENDING $ 363,733 $ 295,121
===================================================================================================================================
See accompanying notes - unaudited
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
===============================================================================
NOTE 1. BASIS OF PRESENTATION
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The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles 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 generally accepted accounting principles 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 months ended March 31, 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 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 quarter ended March 31, 2002 differed
from the federal statutory rate due principally to a decrease in the
deferred tax asset valuation allowance.
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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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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.
In the health care environment, it is almost always at least reasonably
possible that estimates could change in the near term as a result of
one or more future confirming events. With regard to revenues, expenses
and receivables arising from agreements with the HMO, the Company
estimates amounts it believes will ultimately be realizable through the
use of judgments and assumptions about future decisions. It is
reasonably possible that some or all of these estimates could change in
the near term by an amount that could be material to the financial
statements.
Revenues from the HMO accounted for approximately 90% and 99% of the
Company's total revenues for the quarters ended March 31, 2002 and
2001. Programs with the HMO are sometimes complex and at times subject
to different interpretation by the Company and the HMO. Certain cost
estimates during the quarter may be settled for amounts different than
previously estimated.
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, 2001 and 2002 contestations outstanding at March 31, 2002. It
is reasonably possible the Company's estimate of these recoveries could
change in the near term, and those changes may be material.
Included in accounts receivable are Company estimates, and agreed upon
adjustments to medical costs aggregating approximately $11.6 million.
These amounts are offset by an allowance for potential non-realization
of approximately $2.1 million. Non-HMO accounts receivable, aggregating
approximately $7,875,000 at March 31, 2002 relate principally to
medical services provided on a fee for service basis, and are reduced
by amounts estimated to be uncollectible (approximately $4,404,000).
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.
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; 28,656,864 at March 31, 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; 31,357,446 at March 31, 2002.
3/31/02 3/31/01
----------- -----------
Net Income $ 799,578 $ 1,190,732
Less: Preferred stock dividend (12,500) (12,500)
----------- -----------
Income available to common shareholders 787,078 1,178,232
Denominator:
Weighted average common shares outstanding 28,656,864 22,461,465
Basic earnings per common share $ 0.03 $ 0.05
=========== ===========
Net Income $ 799,578 $ 1,190,732
Interest on convertible securities 4,274 26,384
----------- -----------
803,852 1,217,116
Weighted average common shares outstanding 31,357,446 25,902,467
Diluted earnings per common share $ 0.03 $ 0.05
=========== ===========
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 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.
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.
===============================================================================
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 substantial 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 third 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 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 in
short-term notes payable (Notes), with varying interest rates and
maturities (see Note 5).
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.
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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 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.
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. The notes bear interest of 24% 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. STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------
During the first quarter of 2002, the Company issued 500,000 shares to
accredited investors, resulting in proceeds of $500,000. In addition,
the Company issued approximately 1,200,000 shares to convert
approximately $1,100,000 of long-term debt to equity.
===============================================================================
NOTE 7. STOCK OPTIONS
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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 months ended March 31, 2002 and 2001
no compensation was recorded.
===============================================================================
NOTE 8. COMMITMENTS AND CONTINGENCIES
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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 $1,905,000 at
March 31, 2002, whereby the Company will make monthly installments of
$100,000 a month until the amount is retired. This amount plus
approximately $1,024,000 related to first quarter payroll taxes are
included as payroll taxes payable at March 31, 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.
===============================================================================
NOTE 9. 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 MARCH 31, 2002 PSN PHARMACY LABORATORY TOTAL
--------------------------------- ----------- ----------- --------- -----------
Revenues from external customers $34,421,000 $ 3,114,000 $ 480,000 $38,015,000
Intersegment revenues -- 242,000 -- 242,000
Segment gain (loss) 1,849,000 (827,000) (222,000) 800,000
Allocated corporate overhead included in
gain (loss) 770,000 460,000 167,000 1,397,000
THREE MONTHS ENDED MARCH 31, 2001 PSN PHARMACY LABORATORY TOTAL
--------------------------------- ----------- ----------- ---------- -----------
Revenues from external customers $29,467,000 $ $ 23,000 $29,490,000
Intersegment revenues -- -- -- --
Segment gain (loss) 1,447,000 -- (256,000) 1,191,000
Allocated corporate overhead included in
gain (loss) 1,080,000 -- 121,000 1,201,000
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 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 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.
RESULTS OF OPERATIONS
The Company had revenues of $38.0 million for the quarter ended March 31, 2002
and operating expenses of $37.1 million, resulting in income from operations of
approximately $950,000 and a net income of approximately $800,000. For the same
quarter in 2001, revenues amounted to $29.5 million resulting in net income of
$1.2 million. On a basic per share basis, earnings were $0.03 and $0.05 for the
quarters ended March 31, 2002 and 2001, respectively.
Earnings before interest, taxes, penalties, depreciation and amortization
(EBITDA) decreased $400,000, from $1.6 million in the first quarter of 2001 to
$1.2 million in 2002.
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
ended March 31, 2002 included losses incurred by the Company's pharmacy and HMO
divisions, as well as the continuing development of its clinical laboratory,
which, including allocation of corporate overhead, amounted to approximately
$1.2 million. It is expected that these operations, in total, will achieve
profitability by the third quarter of 2002.
In addition, Metcare had working capital of $6.9 million at March 31, 2002, up
from $2.1 million a year earlier. Shareholders' equity increased to $11.3
million at March 31, 2002 compared to $3.0 million at March 31, 2001.
REVENUES
Revenues for the quarter ended March 31, 2002 increased 29% compared to the
same period in 2001, from $29.5 million to $38.0 million. PSN revenues
increased $5.1 million from $29.1 million to $34.2 million. March 2002 PSN
revenues included approximately $2.6 million of additional Medicare and
commercial funding over the March 2001 quarter. 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 $2.3 million of the increase in revenues over the prior year.
Revenues for the first quarter of 2002 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 markets and enter other markets. Pharmacy sales to the PSN of
approximately $242,000 have been eliminated in consolidation. In addition,
revenues for the first quarter of 2002 included $480,000 from its clinical
laboratory (Metlabs), as compared to revenues of only $23,000 in the first
quarter of the prior year.
EXPENSES
Operating expenses for the first quarter of 2002 increased 32% over the prior
year, slightly higher than the 29% increase in revenues. Direct medical costs
for the quarter ended March 31, 2002 were $29.1 million compared to $25.6 for
the quarter ended March 31, 2001. 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 85% and
88% for the quarters ended March 31, 2002 and 2001, respectively. This decrease
results from the increased funding the Company 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 first quarter of 2002 totaled $2.2 million and represents
the cost of the pharmaceuticals sold by MetcareRx. The pharmacy division had a
gross profit percentage for the first quarter 2002 of 33%.
Salaries and benefits for the first quarter of 2002 increased $1.8 million over
the first quarter of the prior year to $3.2 million. A number of new operations
were opened throughout in 2001 as the Company continued to implement its
business plan. These new operations accounted for $1.4 million of the increase
in payroll related costs. Three of these new operations (Port Orange, Ormond
Beach and Everglades), totaling $168,000 in incremental 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
$95,000 in payroll costs for the first quarter of 2002. The expansion of Metlabs
accounted for $167,000 of the increase in payroll expenses while MetcareRx
accounted for $940,000 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. Expansion of the services the Company provides
in its Daytona market in an effort to control its medical costs accounted for
$233,000 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 $39,000 incremental
decrease resulting from the closure of a medical practice.
Depreciation and amortization for the quarter ended March 31, 2002 was $199,000
compared to $206,000 the year before. The decrease of approximately $7,000 is
due primarily to the elimination of goodwill amortization of $97,000, offset in
part by amortization of financing costs and an increase in depreciation on
fixed assets acquired over the past twelve months.
Consulting expense increased approximately $472,000, from $139,000 in the
quarter ended March 31, 2001 to $611,000 in the same period in 2002. Of the
increase, $169,000 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, $59,000 of incremental
expense was incurred in connection with investment banking and advisory
services and $108,000 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 $75,000 in incremental
expense in 2002. Expenses associated with new operations account for most of
the increase balance.
General and administrative expenses increased from $816,000 in the first
quarter of 2001 to $1.7 million in the first quarter of 2002, an increase of
$909,000. New operations accounted for $728,000 in incremental general and
administrative expenses while the costs of the Company's Hospitalist and
Oncology programs and the expansion of the Company's Daytona corporate office
accounted for an additional $76,000 in increases. Additionally, the March 2001
expense was reduced by approximately $156,000 in one-time write-offs. These
increases were partially offset by the savings of $67,000 resulting from the
closure of a medical practice.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 2002, the Company had EBITDA of $1.2 million, which was
used to partly fund current operations. In addition, the Company raised
approximately $2.8 million in debt and equity
financing. As a result, working capital increased by $1.9 million in the first
quarter of 2002 and shareholders' equity improved by $2.6 million. However, the
Company has sustained substantial 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 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 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 pursue debt and/or equity financing
and believes it will be successful in doing so, allowing it to fully implement
its pharmacy and HMO divisions.
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.
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 of which $1.2 million
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 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.
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.
The Company is currently pursuing debt and/or equity financing in excess of $5
million for working capital of Metcare Rx, repayment of short-term debt, and
settlement of the payroll tax liability. With the working capital in Metcare
Rx, the Company believes that it would be able to expand and become profitable
by the third quarter of 2002. In any event, the Company is determined to
generate cash flow from operations by the third quarter of 2002.
At March 31, 2002 the Company had a recorded liability for unpaid payroll taxes
and related interest and penalties of approximately $2.9 million. The Company
negotiated an installment plan with the Internal Revenue Service (IRS) whereby
it is currently making monthly installments of $100,000 until the liability is
retired (see Audited Financials).
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
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: May 15, 2002 /s/ Fred Sternberg
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Fred Sternberg
Chairman, President and
Chief Executive Officer
Date: May 15, 2002 /s/ David S. Gartner
--------------------
David S. Gartner
Chief Financial Officer