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 September 30, 2005
|_| 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.)
250 Australian Avenue, Suite 400, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes |_| No |X|
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 October 31, 2005
----- ----------------------------------
Common Stock par value $.001 49,751,526
Metropolitan Health Networks, Inc.
Index
Part I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
as of September 30, 2005 and December 31, 2004 3
Condensed Consolidated Statements of
Operations for the Three and Nine Months Ended
September 30, 2005 and 2004 4
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
September 30, 2005 and 2004 5
Notes to Condensed Consolidated
Financial Statements 6-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20-21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Default Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security
Holders 22
Item 5. Other Information 22
Item 6. Exhibits 22-23
SIGNATURES 24
2
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
==============================================================================================
September 30, 2005 December 31, 2004
ASSETS (Unaudited) (Audited)
------------------ ------------------
CURRENT ASSETS
Cash and equivalents $ 17,227,817 $ 11,344,113
Short-term investments -- 1,500,000
Accounts receivable, net of allowance 3,155,133 1,474,438
Inventory 165,244 217,630
Prepaid expenses 730,735 422,839
Deferred income taxes 2,500,000 3,400,000
Other current assets 368,032 563,991
------------------ ------------------
TOTAL CURRENT ASSETS 24,146,961 18,923,011
CERTIFICATES OF DEPOSIT - restricted -- 1,000,000
PROPERTY AND EQUIPMENT, net 829,256 824,003
INVESTMENTS 601,783 --
GOODWILL, net 1,992,133 1,992,133
DEFERRED INCOME TAXES 5,070,110 4,881,110
OTHER ASSETS 748,863 417,006
------------------ ------------------
TOTAL ASSETS $ 33,389,106 $ 28,037,263
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,053,669 $ 840,470
Advanced premiums 424,476 --
Accrued payroll 903,535 1,433,874
Accrued expenses 937,075 68,289
Current maturities of long-term debt 70,500 882,000
------------------ ------------------
TOTAL CURRENT LIABILITIES 3,389,255 3,224,633
LONG-TERM DEBT -- 250,000
------------------ ------------------
TOTAL LIABILITIES 3,389,255 3,474,633
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.001 per share;
stated value $100 per share; 10,000,000
shares authorized; 5,000 issued and outstanding 500,000 500,000
Common stock, par value $.001 per share;
80,000,000 shares authorized; 49,681,526 and
48,004,262 issued and outstanding, respectively 49,681 48,004
Additional paid-in capital 39,939,859 37,527,529
Accumulated deficit (10,488,741) (13,415,621)
Common stock issued for services to be rendered (948) (97,282)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 29,999,851 24,562,630
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,389,106 $ 28,037,263
================== ==================
See accompanying notes - unaudited
3
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
=========================================================================================================================
=========================================================================================================================
For the nine months For the three months
ended September 30, ended September 30,
2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
REVENUES, net $136,688,653 $117,189,228 $ 44,999,881 $ 40,091,999
------------ ------------ ------------ ------------
OPERATING EXPENSES
Medical expenses
Direct medical costs 114,903,124 95,934,070 37,570,720 32,155,171
Other medical costs 7,776,931 5,829,946 2,566,111 1,948,639
------------ ------------ ------------ ------------
Total medical expenses 122,680,055 101,764,016 40,136,831 34,103,810
Administrative payroll, payroll taxes and benefits 4,211,494 3,429,933 1,529,204 1,217,623
Marketing and advertising 1,433,189 65,108 1,277,000 64,794
General and administrative 4,039,209 2,768,862 1,299,863 1,006,672
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 132,363,947 108,027,919 44,242,898 36,392,899
------------ ------------ ------------ ------------
OPERATING INCOME 4,324,706 9,161,309 756,983 3,699,100
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest and penalty expense (13,281) (264,613) (2,930) (59,663)
Interest and investment income 276,527 59,276 129,126 26,132
Other income 129,624 12,857 10 1,177
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 392,870 (192,480) 126,206 (32,354)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 4,717,576 8,968,829 883,189 3,666,746
INCOME TAXES 1,790,696 -- 343,696 --
------------ ------------ ------------ ------------
NET INCOME $ 2,926,880 $ 8,968,829 $ 539,493 $ 3,666,746
============ ============ ============ ============
NET EARNINGS PER SHARE
Basic $ 0.06 $ 0.20 $ 0.01 $ 0.08
============ ============ ============ ============
Diluted $ 0.06 $ 0.18 $ 0.01 $ 0.07
============ ============ ============ ============
See accompanying notes - unaudited
4
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
===================================================================================================
===================================================================================================
For the nine months
ended September 30,
2005 2004
(Unaudited) (Unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,926,880 $ 8,968,829
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 253,555 259,357
Reserve on note receivable - pharmacy -- 200,000
Deferred income taxes 711,000 --
Tax benefit on exercise of stock options 1,079,000 --
Amortization of discount on notes payable -- 52,185
Stock issued for interest and late fees -- 578
Stock issued for compensation and services -- 60,000
Amortization of securities issued for professional services 96,334 88,058
Changes in operating assets and liabilities:
Accounts receivable, net (1,680,695) (656,553)
Inventory 52,386 18,539
Prepaid expenses (307,896) (159,117)
Other current assets 195,959 (27,530)
Other assets (334,981) (45,467)
Accounts payable 213,199 (1,378,132)
Advanced premiums 424,476 --
Accrued payroll (395,589) (3,444,314)
Accrued expenses 868,786 430,251
------------ ------------
Total adjustments 1,175,534 (4,602,145)
------------ ------------
Net cash provided by operating activities 4,102,414 4,366,684
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments 1,500,000 --
Investments (601,783) --
Redemption of restricted certificates of deposit 1,000,000 --
Capital expenditures (255,684) (240,578)
------------ ------------
Net cash provided by/(used in) investing activities 1,642,533 (240,578)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on notes payable (1,061,500) (913,354)
Repayments on capital lease obligations -- (99,767)
Repurchase of warrants (85,000) (113,250)
Proceeds from exercise of stock options and warrants 1,285,257 590,138
Net proceeds from issuance of common stock -- 2,953,000
Repayments to HMO, net -- (164,536)
------------ ------------
Net cash provided by financing activities 138,757 2,252,231
------------ ------------
NET INCREASE IN CASH AND EQUIVALENTS 5,883,704 6,378,337
CASH AND EQUIVALENTS - BEGINNING 11,344,113 2,176,204
------------ ------------
CASH AND EQUIVALENTS - ENDING $ 17,227,817 $ 8,554,541
============ ============
See accompanying notes - unaudited
5
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America 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 of America 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 nine months ended
September 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005.
The audited financial statements at December 31, 2004, which were included
in the Company's Form 10-K filed on March 22, 2005, should be read in
conjunction with these condensed consolidated financial statements.
Unless otherwise indicated or the context requires, all references in this
Form 10-Q to the "Company" refers to Metropolitan Health Networks, Inc. and
our consolidated subsidiaries.
SEGMENT REPORTING
The Company applies Financial Accounting Standards Boards ("FASB") Statement
No. 131, "Disclosure about Segments of an Enterprise and Related
Information." The Company has considered its operations and has determined
that, in 2004, it operated, and continues to operate in 2005, in two
segments for purposes of presenting financial information and evaluating
performance, a Provider Service Network (managed care and direct medical
services) ("PSN") and a Medicare Advantage HMO (the "HMO").
As such, the accompanying financial statements present information in a
format that is consistent with the financial information used by management
for internal use. See "Note 5. Business Segment Information" for additional
information regarding the Company's business segments.
CASH AND EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. From time to time, the
Company maintains cash balances with financial institutions in excess of
federally insured limits.
SHORT-TERM INVESTMENTS
All investments with original maturities of greater than 90 days are
accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company determines the appropriate classification of an
investment at the time of purchase. The Company had previously categorized
its short-term investments in auction rate securities as a component of
"Cash and equivalents" in the Company's consolidated balance sheets, but has
determined that categorization as "Short-term investments" is more
appropriate. Accordingly, the short-term investments in auction rate
securities have been reclassified for all periods presented. The short-term
investments consisted of auction rate securities classified as
available-for-sale. Investments in these securities are recorded at cost,
which approximates fair value due to their variable interest rates, which
reset every seven to twenty-eight days. Despite the long-term nature of
their stated contractual maturities, there is a readily liquid market for
these securities. As a result, there are no cumulative gross unrealized
holding gains (losses) or gross realized gains (losses) from short-term
investments. All income generated from these short-term securities was
recorded as interest income.
6
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
LONG-TERM INVESTMENTS
Long-term investments, which consist of an equity interest in a
non-assessable reciprocal insurance organization through which the Company
has renewed its malpractice insurance, are carried at cost. If an impairment
occurs that is not considered temporary, the investment will be written down
to net realizable value.
INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"),
which requires income taxes to be accounted for under the asset and
liability method. Under this method, deferred income tax assets and
liabilities are determined based upon differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases using enacted tax rates in effect for the year in which
the differences are expected to reverse. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in earnings in the
period that includes the enactment date.
SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. After consideration of all the evidence, both positive and
negative (including, among others, projections of future taxable income,
current year net operating loss carryforward utilization and the Company's
profitability in recent years), the Company determined that future
realization of its deferred tax assets was more likely than not and,
accordingly, eliminated the valuation allowance against its deferred tax
assets as of December 31, 2004. In the event it is determined that the
Company would not be able to realize all or part of its net deferred tax
assets in the future, an adjustment to record a deferred tax asset valuation
allowance would be charged to income in the period such determination would
be made. Changes in deferred tax assets are reflected in the "Income Taxes"
expense line of the Company's Condensed Consolidated Statements of
Operations.
In the three and nine months ended September 30, 2005, net tax benefits of
$502,000 and $1,079,000, respectively, were recorded directly to equity as a
result of the exercise of non-qualified stock options, resulting in
increases to deferred income taxes and additional paid-in capital.
Due to the availability of deferred tax assets and additional tax benefits
resulting from the exercise of stock options by certain employees during the
three and nine month periods ended September 30, 2005, the Company has not
recorded any amounts payable for U.S. federal income taxes and does not
expect any cash outlay to be required in connection with the income tax
provisions.
REVENUE RECOGNITION
The Company is a party to certain managed care contracts with Humana Inc.
("Humana") and provides medical care to its patients through wholly-owned
and non-owned medical practices. Accordingly, the Company receives a monthly
fee for each patient that chooses one of the Company's physicians as their
primary care physician in exchange for the Company assuming responsibility
for the provision of all necessary medical services, even those it does not
provide directly. Fees under these contracts are reported as 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 Humana contracts, the Company is exposed to
losses to the extent of its share (100% for Medicare Part B, 100% for
Medicare Part A in its Daytona market and 50% for Medicare Part A in South
Florida) of deficits, if any, on its wholly-owned and non-owned managed
medical practices. Revenues from Humana accounted for approximately 98% and
99% of the Company's total revenues for the three months ended September 30,
2005 and 2004, respectively, and 99% of the Company's total revenues for the
nine months ended September 30, 2005 and 2004.
The loss of the contracts with Humana could significantly impact the
operating results of the Company. The Humana agreements may be terminated in
the event the Company participates in activities which Humana reasonably
believes may adversely affect the health or welfare of any Humana member or
upon any other material breach, or upon 180-day notice of non-renewal by
either party.
7
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company also recognizes non-Humana fee-for-service revenues, net of
contractual allowances, as medical services are provided to patients. These
services are typically billed to patients, Medicare, Medicaid, health
maintenance organizations and insurance companies. The Company provides an
allowance for uncollectible amounts and for contractual adjustments relating
to the difference between standard charges and agreed upon rates paid by
certain third party payers.
Effective July 1, 2005 the Company had the requisite Florida and federal
licenses, approvals and contract to begin marketing, enrolling and providing
services to Medicare beneficiaries through its own Medicare Advantage HMO,
METCARE Health Plans, Inc ("MHP"). The contract with the Centers for
Medicare and Medicaid Services ("CMS") renews on an annual basis. The
Company receives a monthly premium for each enrollee in its plan and is
responsible for the provision of all covered medical services for that
enrollee. Premium revenues are recognized as income in the period members
are entitled to receive services, and are net of retroactive membership
adjustments. Retroactive membership adjustments result from enrollment
changes not yet processed, or not yet reported by CMS. Changes in revenues
from CMS resulting from the periodic changes in risk adjustment scores for
our membership are recognized when the amounts become determinable and the
collectibility is reasonably assured. Premiums received prior to the service
period are recorded as advanced premiums. Premium revenues and advanced
premiums amounted to approximately $471,000 and $424,000, respectively, in
the quarter ended September 30, 2005.
MARKETING AND ADVERTISING COSTS
Marketing and advertising costs are expensed as incurred. Marketing and
advertising expense was approximately $1,433,000 and $65,000 for the nine
months ended September 30, 2005 and 2004 and $1,277,000 and $65,000 for the
three months ended September 30, 2005 and 2004, respectively.
RECLASSIFICATION
Certain amounts reported in the comparative financial statements have been
reclassified to conform to the presentation for the periods ended September
30, 2005.
USE OF ESTIMATES
Revenue, Expense and Receivables
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the accompanying financial statements. The most significant area
requiring estimates relates to the Company's arrangement with Humana. Such
estimates are based on knowledge of current events and anticipated future
events, and accordingly, actual results may ultimately differ materially
from those estimates.
With regard to revenues, expenses and receivables arising from its
agreements with Humana, the Company estimates the amounts it believes will
ultimately be realizable based in part upon estimates of claims incurred but
not reported ("IBNR") and estimates of retroactive adjustments or unsettled
costs to be applied by Humana. The IBNR estimates are made by Humana
utilizing actuarial methods and are continually evaluated by management of
the Company based upon its specific claims experience. 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.
From time to time, Humana charges the Company for certain medical expenses,
which the Company believes are erroneous or are not supported by its
underlying agreements with Humana. Management's estimate of recovery on
these contestations is based upon its judgment and its consideration of
several factors including the nature of the contestations, historical
recovery rates and other qualitative factors.
Non-Humana accounts receivable, aggregating approximately $755,000 at
September 30, 2005, relate principally to medical services provided on a fee
for service basis, and are reduced by amounts estimated to be uncollectible
(approximately $498,000). These accounts receivable are typically
uncollateralized patient obligations due under normal trade terms requiring
payment within 30-90 days from the invoice date. The Company does not charge
8
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
late fees or penalties on delinquent invoices, however it continually
evaluates the need for a valuation allowance. Management's estimate of
uncollectible amounts is based upon its analysis of historical collections
and other qualitative factors.
With regards to the HMO, the cost of medical benefits is recognized in the
period in which services are provided and includes an IBNR estimate based on
management's best estimate of medical benefits payable. It is reasonably
possible that this estimate could change in the near term by an amount that
could be material to the financial statements.
Deferred Tax Asset
The Company has recorded a deferred tax asset of approximately $7.6 million
at September 30, 2005. Realization of the deferred tax asset is dependent on
generating sufficient taxable income in the future. The amount of the
deferred tax asset considered realizable could change in the near term if
estimates of future taxable income are modified and those changes could be
material.
ACCOUNTS RECEIVABLE
Accounts receivable at September 30, 2005 and December 31, 2004 were as
follows:
September 30, December 31,
2005 2004
---------- ----------
Humana accounts receivable, net $2,898,000 $1,081,000
Non-Humana accounts receivable, net 257,000 393,000
---------- ----------
Accounts receivable $3,155,000 $1,474,000
========== ==========
EARNINGS PER SHARE
The Company applies Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") which requires presentation of both basic
net income per share and diluted net income per share. Basic earnings per
share is computed using the weighted average number of common shares
outstanding during the period. 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, convertible debt and preferred stock convertible into shares of
common stock.
For the nine months ended For the three months ended
September 30, September 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net Income $ 2,927,000 $ 8,969,000 $ 539,000 $ 3,667,000
Less: Preferred stock dividend (38,000) (38,000) (13,000) (13,000)
------------ ------------ ------------ ------------
Income available to common shareholders $ 2,889,000 $ 8,931,000 $ 526,000 $ 3,654,000
============ ============ ============ ============
Denominator:
Weighted average common shares outstanding 48,716,000 44,493,000 49,269,000 46,013,000
============ ============ ============ ============
Basic earnings per common share $ 0.06 $ 0.20 $ 0.01 $ 0.08
============ ============ ============ ============
Income available to common shareholders $ 2,889,000 $ 8,931,000 $ 526,000 $ 3,654,000
Effect of dilutive securities:
Preferred stock dividends -- 38,000 -- 13,000
Interest on convertible securities -- 3,000 -- --
------------ ------------ ------------ ------------
$ 2,889,000 $ 8,972,000 $ 526,000 $ 3,667,000
============ ============ ============ ============
Denominator:
Weighted average common shares outstanding 48,716,000 44,493,000 49,269,000 46,013,000
9
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Common share equivalents of outstanding stock:
Convertible preferred -- 1,302,000 -- 1,132,000
Convertible debt -- 122,000 -- --
Options 2,786,000 2,485,000 1,879,000 2,838,000
Warrants 3,000 401,000 361,000
------------ ------------ ------------ ------------
Weighted average common shares outstanding 51,505,000 48,803,000 51,148,000 50,344,000
============ ============ ============ ============
Diluted earnings per common share $ 0.06 $ 0.18 $ 0.01 $ 0.07
============ ============ ============ ============
STOCK-BASED COMPENSATION
As currently permitted by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company
uses the disclosure-only provisions of SFAS 123, and has elected to continue
using Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees"("APB 25"), in accounting for employee stock options.
Compensation expense for options granted to employees is recorded to the
extent the market value of the underlying stock exceeds the exercise price
at the date of grant. If compensation cost had been determined based on the
fair value at the grant date for awards during the three and nine months
ended September 30, 2005 and 2004, consistent with the provisions of SFAS
123, the Company's net income and earnings per share would have been reduced
to the pro-forma amounts indicated below:
For the nine months ended For the three months ended
September 30, September 30,
2005 2004 2005 2004
----------- ------------- ----------- -------------
Net Income $ 2,927,000 $ 8,969,000 $ 539,000 $ 3,667,000
Less: Total stock-based employee compensation
expense determined using the fair value
method, net of related tax 789,000 53,000 248,000 18,000
----------- ------------- ----------- -------------
Adjusted pro forma net income $ 2,138,000 $ 8,916,000 $ 291,000 $ 3,649,000
=========== ============= =========== =============
Earnings per share:
Basic, as reported $ 0.06 $ 0.20 $ 0.01 $ 0.08
=========== ============= =========== =============
Basic, pro forma $ 0.04 $ 0.20 $ 0.01 $ 0.08
=========== ============= =========== =============
Diluted, as reported $ 0.06 $ 0.18 $ 0.01 $ 0.07
=========== ============= =========== =============
Diluted, pro forma $ 0.04 $ 0.18 $ 0.01 $ 0.07
=========== ============= =========== =============
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs"
("SFAS No. 151"), which is effective for fiscal periods beginning after June
15, 2005. This statement clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material. These
items are required to be recognized as current period charges regardless of
whether they meet the criterion of "so abnormal." The adoption of SFAS No.
151 did not have a material impact on the Company's financial statements.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchange of Non-Monetary Assets" ("SFAS No. 153"), which
is effective for fiscal periods beginning after June 15, 2005. In the past,
the net book value of the assets relinquished in a non-monetary transaction
was used to measure the value of the assets exchanged. Under SFAS No. 153,
assets exchanged in a non-monetary transaction will be at fair
10
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
value instead of the net book value of the asset relinquished, as long as
the transaction has commercial substance and the fair value of the assets
exchanged is determinable within reasonable limits. The adoption of SFAS
No. 153 did not have a material effect on the Company's financial
statements.
In December 2004, the FASB issued Statement of Financial Accounting Standard
No. 123, as revised, "Share-Based Payments ("SFAS 123(R)"). The provisions
of the new standard were scheduled to go into effect for all interim or
annual periods beginning after June 15, 2005. SFAS 123(R) requires that
compensation cost for all share-based employee payments be recognized in the
statement of operations based on the fair value of awards on their grant
dates, adjusted to reflect actual forfeitures and the outcome of certain
other conditions. The fair value is generally not re-measured, except in
limited circumstances, or if the award is subsequently modified. The
statement will require the Company to estimate the fair value of stock-based
awards and recognize expense in the statement of operations as the related
services are provided. This will change current practice, as, upon adoption,
the Company must cease using the "intrinsic value" method of accounting,
currently permitted by APB 25 that resulted in no expense for all of the
Company's stock option awards. In March 2005, the U.S. Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 107 ("SAB
107") which expresses views of the SEC staff regarding the application of
SFAS 123(R). Among other things, SAB 107 provides interpretive guidance
related to the interaction between SFAS 123(R) and certain SEC rules and
regulations, as well as provides the SEC staff's views regarding the
valuation of share-based payment arrangements for public companies. On April
14, 2005, the SEC announced the adoption of a new rule that amends the
compliance dates of SFAS 123(R). The new rule allows companies to implement
SFAS 123(R) at the beginning of their next fiscal year instead of the next
reporting period that begins after June 15, 2005 or December 15, 2005 for
small business issuers. The Company will adopt the provisions of the
statement as of the beginning of its fiscal year ending December 31, 2006
and for future periods. Adoption of the standard may have a material impact
on the results of operations in future periods. However, the impact of
adoption will depend on levels of share-based payments granted in the
future.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN No. 47"). This
interpretation clarifies that the term "conditional asset retirement
obligation" as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are conditional on
a future event that may or may not be within the control of the entity
incurring the obligation. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing
and/or method of settlement. Thus, the timing and/or method of settlement
may be conditional on a future event. Accordingly, an entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
Uncertainty about the timing and/or method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability, rather than the timing of recognition of the liability, when
sufficient information exists. FIN No. 47 will be effective for the Company
at the end of the fiscal year ended December 31, 2005. FIN No. 47 is not
expected to have a significant impact on the Company's financial position or
results of operations.
SFAS No. 154, Accounting Changes and Error Corrections, was issued in May
2005 and replaces APB Opinion No. 20 (Accounting Changes) and SFAS No. 3
(Reporting Accounting Changes in Interim Financial Statements). SFAS No. 154
requires retrospective application for voluntary changes in accounting
principle in most instances and is required to be applied to all accounting
changes made in fiscal years beginning after December 15, 2005. The
Company's expected January 1, 2006 adoption of SFAS No. 154 is not expected
to have a material impact on the Company's consolidated financial condition
or results of operations.
================================================================================
NOTE 2. DEBT
--------------------------------------------------------------------------------
The Company repaid $1.1 million of long-term debt during the nine months
ended September 30, 2005, including the $850,000 balance remaining on a 12%
promissory note. The remaining debt balance totaled $70,500, representing
amounts due under promissory notes payable to Humana.
On May 6, 2005 the Company executed an unsecured commercial line of credit
agreement with a bank, which provides for borrowings and issuance of letters
of credit of up to $1.0 million and expires on March 31, 2006.
11
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The outstanding balance, if any, bears interest at the bank's prime rate.
The credit facility requires the Company to comply with certain financial
covenants, including a minimum liquidity requirement of $2.0 million. The
availability under the line of credit secures a $1.0 million letter of
credit that the Company has caused to be issued in favor of Humana. This
arrangement allows for $1.0 million of cash, which was formerly invested
in a certificate of deposit and recognized as restricted cash on the
Company's balance sheets, to be available for operations.
================================================================================
NOTE 3. STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
The Company issued 1,629,650 shares of common stock in connection with the
exercise of stock options and warrants during the first nine months of 2005.
In addition, warrants to acquire 47,500 common shares at a price of $0.68
were repurchased for an aggregate purchase price of $85,000 during the first
quarter and 47,614 shares were issued in partial payment of 2004 officer
bonuses totaling approximately $135,000 in the second quarter of 2005.
================================================================================
NOTE 4. COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------
LITIGATION
The Company is party to certain 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.
================================================================================
NOTE 5. BUSINESS SEGMENT INFORMATION
--------------------------------------------------------------------------------
In 2005, the Company is operating in two segments for purposes of presenting
financial information and evaluating performance, the Provider Service
Network (the "PSN") (managed care and direct medical services) and the HMO.
The Company was approved to commence operations as a Medicare Advantage HMO
effective July 1, 2005.
NINE MONTHS ENDED SEPTEMBER 30, 2005 PSN HMO Total
-------------------------------------------------------------------- ------------- ------------- -------------
Segment revenues $ 136,218,000 $ 471,000 $ 136,689,000
Segment gain (loss) before allocated overhead 12,244,000 (4,086,000) 8,158,000
Allocated corporate overhead 2,377,000 1,063,000 3,440,000
Segment gain (loss) after allocated overhead and before income taxes 9,867,000 (5,149,000) 4,718,000
Segment assets 24,888,000 4,567,000 29,455,000
NINE MONTHS ENDED SEPTEMBER 30, 2004 PSN HMO Total
-------------------------------------------------------------------- ------------- ------------- -------------
Segment revenues $ 117,189,000 $ -- $ 117,189,000
Segment gain (loss) before allocated overhead 13,401,000 (138,000) 13,263,000
Allocated corporate overhead 4,211,000 83,000 4,294,000
Segment gain (loss) after allocated overhead and before income taxes 9,190,000 (221,000) 8,969,000
THREE MONTHS ENDED SEPTEMBER 30, 2005 PSN HMO Total
-------------------------------------------------------------------- ------------- ------------- -------------
Segment revenues $ 44,529,000 $ 471,000 $ 45,000,000
Segment gain (loss) before allocated overhead 4,241,000 (2,354,000) 1,887,000
Allocated corporate overhead 558,000 446,000 1,004,000
Segment gain (loss) after allocated overhead and before income taxes 3,683,000 (2,800,000) 883,000
THREE MONTHS ENDED SEPTEMBER 30, 2004 PSN HMO Total
-------------------------------------------------------------------- ------------- ------------- -------------
Segment revenues 40,092,000 $ -- $ 40,092,000
Segment gain (loss) before allocated overhead 5,311,000 (125,000) 5,186,000
Allocated corporate overhead 1,445,000 74,000 1,519,000
Segment gain (loss) after allocated overhead and before income taxes 3,866,000 (199,000) 3,667,000
12
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
NOTE 6. SUBSEQUENT EVENTS
--------------------------------------------------------------------------------
The Company has discontinued its contractual relationship with three of its
South Florida physician practices. These centers accounted for approximately 790
members at September 30, 2005. Two of the centers, accounting for approximately
680 of the members, were cancelled effective October 1, 2005. The other center
was cancelled effective August 1, 2005. These centers provided revenues of
approximately $3,991,000 and generated losses after medical expenses of
approximately $155,000 during the first nine months of 2005.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Sections of this Quarterly Report contain statements that are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"), and we intend that such forward-looking statements be subject
to the safe harbors created thereby. Statements in this Report containing the
words "estimate," "project," "anticipate," "expect," "intend," "believe,"
"will," "could," "should," "may," and similar expressions may be deemed to
create forward-looking statements. Accordingly, such statements, including
without limitation, those relating to our future business, prospects, revenues,
working capital, liquidity, capital needs, interest costs and income, wherever
they may appear in this document or in other statements attributable to us,
involve estimates, assumptions and uncertainties which could cause actual
results to differ materially from those expressed in the forward-looking
statements. Specifically, this Quarterly Report contains forward-looking
statements, including the following:
o our ability to renew our managed care agreements and negotiate terms
which are favorable to us and affiliated physicians;
o our ability to respond to future changes in Medicare reimbursement
levels and reimbursement rates from other third parties;
o our ability to enhance the services we provide to our members;
o our ability to strengthen our medical management capabilities;
o our ability to improve our physician networks;
o our ability to establish new business relationships and expand into
new geographic markets;
o our ability to make capital expenditures and respond to capital
needs;
o our ability to successfully maintain the licensing of our HMO from
the state and federal regulatory agencies; and
o our ability to fund and develop the necessary capabilities to
successfully operate our HMO.
The forward-looking statements reflect our current view about future events and
are subject to risks, uncertainties and assumptions. We wish to caution readers
that certain important factors may have affected and could in the future affect
our actual results and could cause actual results to differ significantly from
those expressed in any forward-looking statement. The following important
factors could prevent us from achieving our goals and cause the assumptions
underlying the forward-looking statements and the actual results to differ
materially from those expressed in or implied by those forward-looking
statements:
o pricing pressures exerted on us by managed care organizations and
the level of payments we receive under governmental programs or from
other payers;
o future legislation and changes in governmental regulations;
o increased operating costs; o o the impact of Medicare Risk
Adjustments on payments we receive for our managed care operations;
o loss of significant contracts;
o general economic and business conditions;
o increased competition;
14
o the relative health of our patients;
o the ability to obtain sufficient quantities of flu vaccine for our
membership;
o changes in estimates and judgments associated with our critical
accounting policies;
o federal and state investigations;
o our ability to successfully recruit and retain key management
personnel and qualified medical professionals; and
o impairment charges that could be required in future periods.
Additional information concerning these and other risks and uncertainties is
contained in our filings with the Securities and Exchange Commission (the
"Commission"), including the section entitled "Risk Factors" in our Annual
Report on Form 10-K for the year ended December 31, 2004.
Forward-looking statements should not be relied upon as a prediction of actual
results. Subject to any continuing obligations under applicable law or any
relevant listing rules, we expressly disclaim any obligation to disseminate,
after the date of this Quarterly Report on Form 10-Q, any updates or revisions
to any such forward-looking statements to reflect any change in expectations or
events, conditions or circumstances on which any such statements are based.
BACKGROUND
The Company was incorporated in the State of Florida in January 1996, and began
operations as a physician practice group. During the late 1990's the Company
acquired a number of physician practices and ancillary service providers. In
late 1999, the group practice strategy was abandoned, in favor of developing a
managed care business.
The first managed care risk contract was secured with Humana Inc. ("Humana") in
1999. In 2000, an additional contract was secured to manage all of Humana's
Medicare Advantage lives in the Daytona, Florida area (Flagler and Volusia
Counties). Under its risk agreements, the Company receives credit for a
significant percentage of the monthly Medicare premiums received by Humana from
the Centers for Medicare and Medicaid Services and is obligated to provide all
of the covered healthcare benefits for the member lives. To the extent the costs
of providing such benefits is less than the related premiums received, the
Company would report a gross profit. Conversely, if the costs exceed related
premiums, the Company loses money. As of September 30, 2005, the Daytona
contract accounted for approximately 19,400 lives or 72.6% of the Company's
total Medicare Advantage lives. The balance of the Company's Humana members,
approximating 7,300 in number, resided in South Florida (Palm Beach, Broward and
Miami-Dade Counties).
The Company has been pursuing a business plan to develop and license its own
Medicare Advantage HMO to operate in certain Florida markets underserved by this
program. As further discussed below, METCARE Health Plans, Inc., a wholly owned
subsidiary of the Company, has been fully licensed by the appropriate State and
Federal agencies and began enrolling and caring for Medicare beneficiaries
effective July 1, 2005. This business has been launched in six Florida counties
and is now marketing its "AdvantageCaresm"-branded plan. MHP recorded its first
revenues in the 2005 third quarter. The Company is not competing in markets in
which it is contracted with Humana and views this growth strategy as an
extension of its existing core competency and organization.
MHP was issued a Health Care Provider Certificate ("HCPC") by Florida's Agency
for Health Care Administration ("AHCA"), which is responsible for oversight of
quality of care issues, for the counties of Martin, St. Lucie and Okeechobee
counties on March 16, 2005. Subsequent to the issuance of the HCPC, MHP
submitted an application to expand its service area and received approval of the
application from AHCA on May 3, 2005 for the counties of Lee, Charlotte and
Sarasota. The Department of Financial Services, Office of Insurance Regulation
("OIR"), which is responsible for issues pertaining to financial stability,
approved MHP's application and a Certificate of Authority to operate a HMO in
the State of Florida (COA) was issued by OIR on April 22, 2005.
In February 2005, the Company submitted a Coordinated Care Plan application to
CMS to provide Medicare Advantage HMO services to Medicare beneficiaries in
Martin, St. Lucie, Okeechobee, Lee, Charlotte and Sarasota
15
counties. In March 2005, CMS conducted its site visit in support of the
application and in May 2005 MHP received approval to commence operations as a
Medicare Advantage HMO effective July 1, 2005. Management believes that the
proposed development efforts, required reserve requirements and start-up costs
for the HMO can be funded by the Company's current resources and projected cash
flows from operations. The Company currently expects to spend between $5 million
and $7 million to develop and operate its HMO in 2005 and 2006. The actual
amount will depend on a number of variables including, but not limited to, the
effectiveness of its sales and marketing efforts in enrolling members and the
HMO's medical expense ratio.
Although the Company has operated as a risk provider since 1999, it has not
operated as a HMO. To successfully operate an HMO the Company believes it will
have to develop certain capabilities, including sales and marketing, customer
service, claims administration and regulatory compliance. No assurances can be
given that the Company will be successful in developing or operating the new
HMO.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 1 of the "Notes to
Condensed Consolidated Financial Statements" included in this Form 10-Q. We
believe our most critical accounting policies include "Use of Estimates,
Revenue, Expense and Receivables" and "Use of Estimates, Deferred Tax Asset."
Use of Estimates, Revenue, Expense and Receivables
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
financial statements. The most significant area requiring estimates relate to
the Company's arrangement with Humana and such estimates are based on knowledge
of current events and anticipated future events, and accordingly, actual results
may ultimately differ materially from those estimates.
With regard to revenues, expenses and receivables arising from agreements with
Humana, the Company estimates amounts it believes will ultimately be realizable
based in part upon estimates of IBNR (claims incurred but not reported) and
estimates of retroactive adjustments or unsettled costs to be applied by Humana.
The IBNR estimates are made by Humana utilizing actuarial methods and are
continually evaluated by the Company's management based upon its specific claims
experience. 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. (See "Notes to Condensed Consolidated Financial Statements," Note 1
- "Use of Estimates, Revenue, Expense and Receivables.")
With regards to the HMO, the cost of medical benefits is recognized in the
period in which services are provided and includes an IBNR estimate based on
management's best estimate of medical benefits payable. It is reasonably
possible that this estimate could change in the near term by an amount that
could be material to the financial statements. (See "Notes to Condensed
Consolidated Financial Statements," Note 1 - "Use of Estimates, Revenue, Expense
and Receivables.")
Use of Estimates, Deferred Tax Asset
The Company has recorded a deferred tax asset of approximately $7.6 million at
September 30, 2005. Realization of the deferred tax asset is dependent on
generating sufficient taxable income in the future. The amount of the deferred
tax asset considered realizable could change in the near term if estimates of
future taxable income are modified and those changes could be material (see
"Notes to Consolidated Financial Statements," Note 1 - "Use of Estimates,
Deferred Tax Asset" and Note 1 - "Income Taxes").
In the future, if Metropolitan determines that it cannot, on a more likely than
not basis, realize all or part of its deferred tax assets in the future, an
adjustment to establish (or record an increase in) the deferred tax asset
valuation allowance would be charged to income in the period in which such
determination is made. Changes in the Company's deferred tax assets are
reflected in the tax expense line of our consolidated statements of operations.
RESULTS OF OPERATIONS
The Company recognized revenues of $45.0 million for the quarter ended September
30, 2005 compared to $40.1 million in the comparable prior year quarter, an
increase of $4.9 million, or 12.2%. Net income, inclusive of an income tax
provision of $344,000 for the 2005 quarter, was $539,000 compared to $3.7
million for the quarter ended
16
September 30, 2004. The prior year's quarter and nine month results do not
reflect income tax expenses as the determination to record the benefit of the
Company's net operating loss carryforwards was not made until year-end 2004.
Accordingly, the prior year's tax provision for the three and nine-month periods
were fully offset by a reduction in the deferred tax valuation allowance.
For the nine months ended September 30, 2005, the Company recognized revenues of
$136.7 million compared to $117.2 million in the comparable prior year period,
an increase of $19.5 million, or 16.6%. Net income, inclusive of an income tax
provision of $1.8 million for the 2005 period, was $2.9 million compared to $9.0
million for the period ended September 30, 2004.
Basic net earnings per share, inclusive of a $0.01 charge to income tax, was
$0.01 for the quarter ended September 30, 2005 compared to $0.08 in the prior
year's quarter. The decrease in the basic net earnings per share for the three
months ended September 30, 2005, while primarily due to the decrease in net
income, partially reflects the increase in the number of weighted average shares
outstanding, from 46,013,000 at September 30, 2004 to 49,269,000 in the current
year.
For the nine months ended September 30, 3005, basic net earnings per share,
inclusive of a $0.04 charge to income tax, was $0.06 compared to $0.20 in the
prior year period. The decrease in the basic net earnings per share for the nine
months ended September 30, 2005, while primarily due to the decrease in net
income, partially reflects the increase in the number of weighted average shares
outstanding, from 44,493,000 at September 30, 2004 to 48,716,000 in the current
year.
The current year operations include both the PSN segment and the start-up
operations of the Company's Medicare Advantage HMO. The PSN segment, prior to
allocation of corporate overhead and income taxes, reported income as a
percentage of revenue of 9.5% and 9.0% for the quarter and nine months ended
September 30, 2005, compared to 13.2% and 11.4% for the prior year periods. The
Company began developing its own Medicare Advantage HMO in the second half of
2004, and officially launched operations in July 2005. This segment incurred a
net loss before allocated overhead and income taxes of $2.4 million and $4.1
million for the quarter and nine months ended September 30, 2005, compared to
only $125,000 and $138,000 in the prior year periods.
Total Medicare Advantage lives increased approximately 1,300 members from
September 2004 to a membership of approximately 27,200 in September 2005. Member
months for the 2005 and 2004 quarters were 80,711 and 75,769, respectively. For
the nine month periods, member months were 240,024 and 226,211 for 2005 and
2004, respectively. Member months for the third quarter of 2005 increased by
nearly 1,000 over the second quarter of 2005 while quarter-to-quarter ending
membership increased by approximately 500 members. Included in these numbers
were approximately 704 member months in the Company's HMO. Total membership
enrolled in the HMO was approximately 975 at September 30, 2005.
During the third quarter the Company discontinued its contractual relationship
with three of its South Florida physician practices due to non-compliance with
the Company's policies and procedures. These centers accounted for approximately
790 members, with corresponding revenue and medical expenses for the nine months
of $4.0 million and $4.1 million, respectively, resulting in a medical expense
ratio of 103.9% and a net loss of approximately $155,000 on this business. Two
of the centers, accounting for approximately 680 of the members, were cancelled
effective October 1, 2005. The other center was cancelled effective August 1,
2005.
Comparison of the Quarter ended September 30, 2005 to the Quarter ended
September 30, 2004
REVENUES
Revenues for the quarter ended September 30, 2005 increased $4.9 million, or
12.2%, over the prior year, from $40.1 million to $45.0 million. PSN revenues
from Humana increased 11.3%, from $39.8 million to $44.3 million. Approximately
$2.1 million in incremental quarterly revenues were generated by 2005 premium
increases that averaged approximately 9.1% in the Daytona market and 11.0% in
South Florida, with net membership increases accounting for the balance.
Revenues for the Company's newly operational HMO amounted to $471,000 for the
quarter.
Non-Humana revenue for the Company's wholly-owned physician practices in the
third quarter of 2005 decreased $64,000 over the same period in 2004. The
Company owned and operated a total of nine physician practices and an oncology
center in the third fiscal quarter of 2005, compared to six practices and the
oncology center in the comparable 2004 quarter.
17
EXPENSES
Operating expenses for the quarter ended September 30, 2005 increased $7.8
million over the comparable prior year quarter, from $36.4 million to $44.2
million. The 2005 quarter included approximately $2.8 million in expenses
related to the Company's HMO division, compared to only $135,000 in the third
quarter of 2004.
Medical expenses represent the total costs of providing patient care and are
comprised of two components. Direct medical costs represent costs incurred in
the PSN and HMO operations that are paid or payable to third parties including
physicians, hospitals and ancillary service providers on a capitated or fee for
service basis. Other medical costs represents the costs associated with the
operations of the Company's wholly owned physician practices and oncology center
including salaries and benefits, supplies, malpractice insurance and office
related expenses. Medical expenses totaled $40.1 million and $34.1 million for
the quarters ended September 30, 2005 and 2004, respectively. The Company's
medical expense ratio ("MER") increased to 89.2% in the third quarter of 2005
from 85.1% in the third quarter of 2004. The MER was adversely affected by a
number of factors. The costs of Humana's plan benefit enhancements in 2005,
intended to increase enrollment, have approximated the 2005 funding increases,
resulting in an incremental MER increase of 0.7% over the prior year quarter.
Second, as discussed above, the Company is discontinuing its relationships with
three South Florida physician practices that the Company had added to its
network in the fourth quarter of 2004. These practices have operated at an MER
exceeding 100% for 2005, resulting in an overall 2005 MER increase of 0.6% over
the 2004 quarter. In addition, the 2004 third quarter included approximately
$800,000 in retroactive Medicare Risk Adjustment funding increases, resulting in
an additional MER variance of 1.7%, when comparing the third quarters of 2004
and 2005. The balance of the 2005 MER increase (1.1%) was due to increased
utilization, principally driven by higher hospital admissions mid-quarter.
Administrative payroll, taxes and benefits include salaries and related costs
for the Company's executive and administrative staff. For the 2005 quarter,
administrative payroll, taxes and benefits were $1.5 million, compared to the
prior year's third quarter total of $1.2 million. The Company's HMO segment
accounted for $754,000 of the current quarter's expense.
Marketing and advertising expense for the quarter was $1.3 million, a $1.2
million increase over the 2004 quarter. This represents the costs and sales
commissions incurred to launch the Company's HMO AdvantageCare brand, and
advertise and sell the Company's new HMO product.
General and administrative expenses for the third quarter of 2005 amounted to
$1.3 million, an increase of $293,000 over the prior year's quarter. The
Company's HMO segment accounted for $439,000 of the current quarter's expense,
primarily in the areas of legal and accounting, outsourced claims and member
services, and software implementation.
Other income and expenses for the third quarter included a $103,000 increase in
interest and investment income and a decrease in interest expense of $57,000
over the prior year quarter as the Company increased its cash balances and
repaid all of the debt and IRS obligations carried by the Company in the first
nine months of 2004.
Comparison of the Nine months ended September 30, 2005 to the Nine months ended
September 30, 2004
REVENUES
Revenues for the nine months ended September 30, 2005 increased $19.5 million,
or 16.6%, over the prior year, from $117.2 million to $136.7 million. PSN
revenues from Humana increased 16.1%, from $116.3 million to $135.1 million.
Approximately $11.2 million in incremental revenues were generated by 2005
premium increases that averaged approximately 9.1% in the Daytona market and
11.0% in South Florida, with net membership increases accounting for the
balance.
Revenues for the Company's newly operational HMO amounted to $471,000 for 2005,
all of which occurred in the third quarter.
18
Non-Humana revenue for the Company's wholly-owned physician practices in the
first three quarters of 2005 increased $267,000 over the same period in 2004.
The Company owned and operated a total of nine physician practices and an
oncology center in 2005, compared to six practices and the oncology center in
2004.
EXPENSES
Operating expenses for the nine months ended September 30, 2005 increased $24.4
million over the prior year period, from $108.0 million to $132.4 million. The
2005 period included approximately $4.6 million in expenses related to the
Company's HMO division, compared to only $156,000 in the comparable 2004 period.
As discussed above, medical expenses represent the total costs of providing
patient care and are comprised of two components, direct medical costs and other
medical costs. Medical expenses totaled $122.7 million and $101.8 million for
the nine months ended September 30, 2005 and 2004, respectively. The Company's
medical expense ratio increased from 86.8% in the first nine months of 2004 to
89.8% in the current year period. As discussed above, the MER was adversely
affected by a number of factors. The costs of plan benefit enhancements designed
to increase enrollment approximated the 2005 funding increases, resulting in an
incremental MER increase of 1.1% over the prior year period. Second, the Company
is discontinuing its relationships with three South Florida physician practices
which have operated at an MER exceeding 100% for 2005, resulting in an overall
2005 MER increase of 0.6% over the 2004 nine month period. The balance of the
MER increase (1.2%) was due to increased utilization, principally driven by
higher hospital admissions early in the second quarter and mid-third quarter.
Administrative payroll, taxes and benefits include salaries and related costs
for the Company's executive and administrative staff. For the 2005 period,
administrative payroll, taxes and benefits were $4.2 million, compared to the
prior year's total of $3.4 million. The Company's HMO segment accounted for $1.5
million of incremental increases.
Marketing and advertising expense for the nine months was $1.4 million, compared
to only $65,000 in the 2004 period. This represents the costs and sales
commissions incurred to launch the Company's HMO AdvantageCare brand, and
advertise and sell the Company's new HMO product.
General and administrative expenses for the first nine months of 2005 amounted
to $4.0 million, an increase of $1.3 million over the prior year period. This
increase was incurred in the development of the Company's HMO, primarily in the
areas of legal and accounting, outsourced claims and member services, and
software implementation.
Other income and expenses for the nine months ended September 30, 2005 included
a decrease in interest expense of $251,000 from the prior year as the Company
repaid all of the debt and IRS obligations carried by the Company in 2004.
Investment income increased $217,000 for the period while miscellaneous income
increased $117,000, primarily resulting from refunds of prior year IRS interest
and penalty charges relating to the Company's discontinued pharmacy division.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and equivalents and short-term investments at September 30, 2005
totaled approximately $17.2 million as compared to approximately $12.8 million
at December 31, 2004. During the first nine months of 2005, the Company improved
its working capital by $5.1 million, while its equity increased $5.4 million.
Net cash provided by operating activities for the nine months ended September
30, 2005 provided approximately $4.1 million in cash flows, of which the net
income of approximately $2.9 million was the largest source. The other largest
sources of cash were:
o an increase in tax benefit on exercise of stock options of $1.1
million;
o an increase in accrued expenses of $869,000;
o a decrease in deferred income taxes of $711,000;
o an increase in advanced premiums of $424,000;
o an increase in depreciation and amortization of $254,000;
o an increase in accounts payable of $213,000; and
o a decrease in other current assets of $196,000.
19
These sources of cash were partially offset by the following uses of cash:
o an increase in accounts receivable of $1.7 million;
o a decrease in accrued payroll of $396,000;
o an increase in other assets of $335,000; and
o an increase in prepaid expenses of $308,000.
Approximately $2.9 million of the $3.2 million balance in accounts receivable at
September 30, 2005 was collected in October 2005.
Cash flow from investing activities for the nine months ended September 30, 2005
provided approximately $1.6 million in cash flows, of which the disposal of
short-term investments and the redemption of restricted certificates of deposit
accounted for $1.5 million and $1.0 million, respectively. Partially offsetting
this were $602,000 and $256,000 in cash utilized for the acquisition of
long-term investments and capital expenditures, respectively.
The Company's financing activities for the nine months ended September 30, 2005
provided approximately $139,000 of cash. The Company received $1.3 million of
proceeds received from option and warrant exercises and the issuance of common
stock. These sources of cash were partially offset by note payments for the
period amounting to $1.1 million and an additional $85,000 expenditure for the
repurchase of warrants.
The Company anticipates that the ongoing development efforts, reserve
requirements and operating costs for its developing HMO segment can continue to
be funded by the Company's current resources and projected cash flows from
operations. The Company currently expects to spend between $5 million and $7
million of its existing and future cash resources to develop and operate its HMO
business in 2005 and 2006. The actual amount will depend on a number of
variables including, but not limited to, the effectiveness of its sales and
marketing efforts in enrolling members and the HMO's medical cost ratio. The HMO
commenced operations in July 2005, however no assurances can be given that the
Company will be successful in this project.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any Off-Balance Sheet Arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in value of a financial instrument as a result of fluctuations
in interest rates and market prices. We do not currently have any trading
derivatives nor do we expect to have any in the future. We have established
policies and internal processes related to the management of market risks, which
we use in the normal course of our business operations.
Interest Rate Risk
We believe a change in interest rates would not have a material impact on our
financial condition, future results of operations or cash flows.
Intangible Asset Risk
We have a substantial amount of intangible assets. We are required to perform
goodwill impairment tests whenever events or circumstances indicate that the
carrying value may not be recoverable from estimated future cash flows. As a
result of our periodic evaluations, we may determine that the intangible asset
values need to be written down to their fair values, which could result in
material charges that could be adverse to our operating results and financial
position. Although at September 30, 2005 we believed our intangible assets were
recoverable, changes in the economy, the business in which we operate and our
own relative performance could change the assumptions used to evaluate
intangible asset recoverability. We continue to monitor those assumptions and
their effect on the estimated recoverability of our intangible assets.
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Equity Price Risk
We do not own any equity investments, other than in our subsidiaries. As a
result, we do not currently have any direct equity price risk.
Commodity Price Risk
We do not enter into contracts for the purchase or sale of commodities. As a
result, we do not currently have any direct commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
Our management, which includes our Chief Executive Officer and our Chief
Financial Officer, has conducted an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
promulgated under the Exchange Act as of the end of the period covered by this
report. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act, is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
There have been no significant changes made in our internal controls over
financial reporting that occurred during our last fiscal quarter that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
21
PART II OTHER INFORMATION
ITEM 1. SUMMARY OF LEGAL PROCEEDINGS
The Company is a party to various legal proceedings which are either
immaterial in amount to the Company and its subsidiaries or involve
ordinary routine litigation incidental to the business of the Company
and its subsidiaries. There are no material pending legal proceedings,
other than routine litigation incidental to the business of the Company
and its subsidiaries, to which the Company or any of its subsidiaries
is a party of or which any property of the Company or its subsidiaries
is the subject.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
3.1 Articles of Incorporation, as amended (1)
3.2 Amended and Restated Bylaws (2)
10.1 Physician Practice Management Participation Agreement, dated August
2, 2001, between Metropolitan of Florida, Inc. and Humana, Inc.
(3)**
10.2 Letter of Agreement, dated February 2003, between Metropolitan of
Florida, Inc. and Humana, Inc. (4)**
10.3 Amended and Restated Employment Agreement between Metropolitan and
Michael M. Earley dated January 3, 2005 (6)
10.4 Amended and Restated Employment Agreement between Metropolitan and
David S. Gartner dated January 3, 2005 (6)
10.5 Amended and Restated Employment Agreement between Metropolitan and
Roberto L. Palenzuela dated January 3, 2005 (6)
10.6 Amended and Restated Employment Agreement between Metropolitan and
Debra A. Finnel dated January 3, 2005 (6)
10.7 Description of Non-Employee Director Compensation Arrangement for
2005 (6)
10.8 2001 Stock Option Plan (7)
10.9 Supplemental Stock Option Plan (7)
10.10 Omnibus Equity Compensation Plan (7)
21.1 List of Subsidiaries (5)
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002*
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002*
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002*
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002*
------------------------
* Filed herewith.
** Portions of the document have been omitted and filed separately with
the SEC on or about the date of filing pursuant to a request for
confidential treatment.
22
(1) Incorporated by reference to Metropolitan's Registration Statement on
Form 8-A12B filed with the SEC on November 19, 2004 (No. 001-32361).
(2) Incorporated by reference to Metropolitan's Current Report on
Form 8-K filed with the SEC on September 30, 2004.
(3) Incorporated by reference to Metropolitan's Amendment to Registration
Statement on Form SB-2/A filed with the SEC on August 2, 2001 (No.
333-61566).
(4) Incorporated by reference to Metropolitan's Amendment to Annual Report
for the fiscal year ended December 31, 2003 on Form 10-K/A filed with
the SEC on July 28, 2004.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003, as filed with the SEC on
March 22, 2004.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2004, as filed with the SEC on
March 22, 2005.
(7) Incorporated by reference to Metropolitan's Registration Statement on
Form S-8 filed with the SEC on February 24, 2005 (No. 333-122976).
23
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: November 14, 2005 /s/ Michael M. Earley
---------------------
Michael M. Earley
Chairman and
Chief Executive Officer
Date: November 14, 2005 /s/ David S. Gartner
--------------------
David S. Gartner
Chief Financial Officer
24