UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
|_| 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: 001-32361
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 offices) (Zip Code)
(561) 805-8500
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal
year, if changed since last report)
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (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 at July 31, 2007
----------------------------------------- -----------------------------------
Common Stock, $.001 par value per share 50,697,864 shares
Metropolitan Health Networks, Inc.
Index
Part I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
as of June 30, 2007 and December 31, 2006 3
Condensed Consolidated Statements of
Income for the Six Months and Three Months Ended
June 30, 2007 and 2006 4
Condensed Consolidated Statements of
Cash Flows for the Six Months and Three Months Ended
June 30, 2007 and 2006 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION 31
Item 1A Risk Factors 31
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 4 Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits 32
SIGNATURES 34
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
===================================================================================================================
ASSETS June 30, 2007 December 31, 2006
------
(unaudited) (audited)
-------------------- ---------------------
CURRENT ASSETS
Cash and equivalents, including $17.8 million $ 29,318,477 $ 23,110,042
in 2007 and $12.5 million in 2006 statutorily
limited to use by the HMO
Accounts receivable, net of allowance of 854,016 674,709
$235,000 in 2007 and $601,000 in 2006
Due from Humana, net of allowance of $0 in 2007 and 6,834,210 2,970,821
$1.6 million in 2006
Inventory 263,841 284,777
Prepaid expenses 1,025,872 706,390
Deferred income taxes 1,460,000 1,600,000
Other current assets 868,553 1,118,099
-------------------- ---------------------
TOTAL CURRENT ASSETS 40,624,969 30,464,838
Property and equipment, net of accumulated 2,237,070 2,275,105
depreciation and amortization of $2,007,000
in 2007 and $1,561,000 in 2006, respectively
Investments 688,997 688,997
Goodwill 1,992,133 1,992,133
Deferred income taxes 4,671,600 5,767,000
Other assets 614,957 652,960
-------------------- ---------------------
TOTAL ASSETS $ 50,829,726 $ 41,841,033
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 594,860 $ 887,174
Accrued payroll and payroll taxes 1,665,804 1,810,428
Estimated medical expenses payable 5,794,944 4,743,737
Unearned premiums 4,534,483 -
Due to CMS 3,706,579 2,702,825
Accrued expenses 1,656,480 767,606
-------------------- ---------------------
TOTAL CURRENT LIABILITIES 17,953,150 10,911,770
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;
50,682,060 in 2007 and 50,268,964 in 2006
issued and outstanding, respectively 50,682 50,269
Additional paid-in capital 42,077,977 41,453,311
Accumulated deficit (9,752,083) (11,074,317)
-------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 32,876,576 30,929,263
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 50,829,726 $ 41,841,033
==================== =====================
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
===================================================================================================================================
Six Months Ended June 30, Three Months Ended June 30,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
---------------------------------------- --------------------------------
REVENUE $ 138,038,090 $ 111,649,144 $ 69,936,634 $ 56,881,610
MEDICAL EXPENSE
Medicaltclaimsaexpense 115,810,183 95,297,419 58,316,918 48,334,576
Medical center costs 5,479,700 5,144,944 2,788,620 2,559,277
------------------- ------------------- --------------- --------------
Total Medical Expense 121,289,883 100,442,363 61,105,538 50,893,853
------------------- ------------------- --------------- --------------
GROSS PROFIT 16,748,207 11,206,781 8,831,096 5,987,757
OPERATING EXPENSES
Payroll, payroll taxes and benefits 6,703,455 5,003,185 3,376,485 2,555,386
Marketing and advertising 2,031,701 1,995,854 422,432 1,021,924
General and administrative 5,693,440 3,549,237 2,702,062 1,977,221
------------------- ------------------- --------------- --------------
Total Operating Expenses 14,428,596 10,548,276 6,500,979 5,554,531
------------------- ------------------- --------------- --------------
OPERATING INCOME 2,319,611 658,505 2,330,117 433,226
OTHER INCOME (EXPENSE):
Interest income 707,245 412,138 326,015 222,700
Other income (expense) (17,221) 1,201 (19,769) 21
------------------- ------------------- --------------- --------------
Total other income (expense) 690,024 413,339 306,246 222,721
INCOME BEFORE INCOME TAX EXPENSE 3,009,635 1,071,844 2,636,363 655,947
INCOME TAX EXPENSE 1,250,400 411,000 1,105,400 251,800
------------------- ------------------- --------------- --------------
NET INCOME $ 1,759,235 $ 660,844 $ 1,530,963 $ 404,147
=================== =================== =============== ==============
NET EARNINGS PER COMMON SHARE:
Basic $ 0.03 $ 0.01 $ 0.03 $ 0.01
=================== =================== =============== ==============
Diluted $ 0.03 $ 0.01 $ 0.03 $ 0.01
=================== =================== =============== ==============
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
=======================================================================================================================
Six Months Ended June 30,
2007 2006
(unaudited) (unaudited)
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,759,235 $ 660,844
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation and amortization 451,185 214,973
Stock-based compensation expense 321,016 363,502
Shares issued for director fees 65,032 -
Excess tax benefits from share based compensation (140,000)
Amortization of securities issued for professional services - 26,175
Deferred income taxes 938,400 411,000
Other - 103
Changes in operating assets and liabilities:
Accounts receivable (4,042,696) 360,316
Inventory 20,936 (39,833)
Prepaid expenses (319,482) (597,435)
Other current assets 244,802 296,895
Other assets 40,375 3,367
Accounts payable (292,314) (323,352)
Accrued payroll and payroll taxes (144,624) (311,348)
Unearned premiums 4,534,483 2,624,366
Estimated medical expenses payable 1,051,207 1,907,298
Due to CMS 1,003,754 712,860
Accrued expenses 888,874 449,427
----------------- -----------------
Net cash provided by operating activities 6,380,183 6,759,158
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments - (5,677,050)
Investments - (312,938)
Capital expenditures (408,778) (848,499)
----------------- -----------------
Net cash used in investing activities (408,778) (6,838,487)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 97,030 139,750
Excess tax benefits from share based compensation 140,000
----------------- -----------------
Net cash provided by financing activities 237,030 139,750
----------------- -----------------
NET INCREASE IN CASH AND EQUIVALENTS 6,208,435 60,421
CASH AND EQUIVALENTS - beginning of period 23,110,042 15,572,862
----------------- -----------------
CASH AND EQUIVALENTS - end of period $ 29,318,477 $ 15,633,283
================= =================
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
METROPOLITAN HEALTH NETWORKS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 UNAUDITED INTERIM INFORMATION
The accompanying unaudited condensed consolidated financial statements of
Metropolitan Health Networks, Inc. and subsidiaries (referred to as
"Metropolitan," "the Company," "we," "us," or "our") have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. 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, or those
normally made in an Annual Report on Form 10-K. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the six month
period and three month period ended June 30, 2007 are not necessarily indicative
of the results that may be reported for the remainder of the year ending
December 31, 2007 or future periods.
The preparation of our condensed consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the amounts reported
in the condensed consolidated financial statements and accompanying notes. The
areas involving the most significant use of estimates are medical expenses
payable, premium revenue, the impact of risk sharing provisions related to our
Medicare contracts and our contracts with Humana, Inc. ("Humana"), amounts in
dispute with Humana, the future benefit of deferred tax assets and the valuation
and related impairment recognition of long-lived assets, including goodwill.
These estimates are based on knowledge of current events and anticipated future
events. We adjust these estimates each period as more current information
becomes available. The impact of any changes in estimates is included in the
determination of earnings in the period in which the estimate is adjusted.
Actual results may ultimately differ materially from those estimates.
For further information, refer to the audited consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2006. These interim condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes to consolidated financial statements included in that
report.
NOTE 2 ORGANIZATION AND BUSINESS ACTIVITY
We own and operate provider service networks (the "PSN") through our wholly
owned subsidiary, Metcare of Florida, Inc. We also operate a health maintenance
organization (the "HMO") through our wholly owned subsidiary, METCARE Health
Plans, Inc.
The PSN operates under two agreements (the "Humana Agreements") with Humana, one
of the largest participants in the Medicare Advantage program in the United
States , to provide medical care to Medicare beneficiaries enrolled under
Humana's health plans. To deliver care, we utilize our wholly-owned medical
practices and have also contracted directly or indirectly through Humana with
third-party medical practices, service providers and hospitals (collectively the
"Affiliated Providers"). The PSN operates in South Florida and Central Florida.
Effective July 1, 2005, the HMO became licensed and entered into a contract with
the Centers for Medicare and Medicaid Services ("CMS") to begin offering
Medicare Advantage plans to Medicare beneficiaries in six Florida counties. The
HMO has been operating and marketing its "AdvantageCare" branded plan since July
2005. Beginning January 1, 2007, the HMO began to offer plans in 12 counties in
Florida. In July 2007, the HMO was approved to operate in Collier County
beginning January 1, 2008. The HMO's agreement with CMS is generally renewable
for a one-year term each December 31 unless CMS notifies the HMO of its decision
not to renew the agreement by May 1 of the contract year, or the HMO notifies
CMS of its decision not to renew by the first Monday in June of the contract
year. Neither we nor CMS provided the other party with a non-renewal notice.
We manage the PSN and HMO as separate business segments.
6
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES
On January 1, 2007 we adopted the provision of Financial Accounting Standards
Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes
("Interpretation No. 48"). Previously, we had accounted for tax contingencies in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 5,
Accounting for Contingencies. As required by Interpretation No. 48, which
clarifies SFAS Statement 109, Accounting for Income Taxes, we recognize the
financial statement benefit of a tax position only after determining that the
relevant tax authority would more-likely-than-not sustain the position following
an audit. For tax positions meeting the more-likely-than-not threshold, the
amount recognized in the financial statements is the largest benefit that has a
greater than 50% likelihood of being realized upon ultimate settlement with the
relevant tax authority. As a result of the adoption of Interpretation No. 48, we
derecognized certain deferred tax assets of approximately $437,000, which was
accounted for as a reduction of retained earnings at January 1, 2007. We have
considered the effects of FASB Staff Position ("FSP") amending Interpretation
No. 48 and have considered this FSP as if it were adopted at the implementation
date of Interpretation No. 48.
We are subject to income taxes in the U.S. federal jurisdiction and the state of
Florida. Tax regulations are subject to interpretation of the related tax laws
and regulations and require significant judgment to apply. We have net operating
loss carry forwards related to years prior to 2003. To the extent such net
operating losses are utilized, the years from which the losses carryforwards
originate are open for examination. Upon adoption of Interpretation No. 48, we
evaluated our tax positions with regard to these years. The statute of
limitations for the federal and Florida 2003 tax years will expire in the next
twelve months. We have recognized tax benefits of $169,000, which would be
recognized if the statute of limitations expires without the relevant taxing
authority examining the applicable returns.
The Internal Revenue Service is presently examining our 2005 Federal income tax
return. We do not expect to recognize a significant change to the total amount
of unrecognized tax benefit as a result of the examination.
We recognize interest accrued related to unrecognized tax benefits in interest
expense, which is included in other income (expense) in the condensed
consolidated statements of income, and penalties in operating expenses for all
periods presented. Interest of $25,000 has been accrued in the second quarter of
2007. No penalties have been accrued in any period presented.
NOTE 4 RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value pursuant to
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. This
statement is effective for fiscal years beginning after November 15, 2007. We
are currently assessing the potential impact that the adoption of SFAS No. 157
will have on our financial statements.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, Including an amendment of FASB Statement No. 115 issued in February
2007, allows entities to voluntarily choose to measure many financial assets and
financial liabilities at fair value through earnings. Upon initial adoption,
SFAS No. 159 provides entities with a one-time chance to elect the fair value
option for existing eligible items. The effect of the first measurement to fair
value is reported as a cumulative-effect adjustment to the opening balance of
retained earnings in the year SFAS no. 159 is adopted. SFAS No. 159 is effective
as of the beginning of fiscal years starting after November 15, 2007. We are
currently assessing the potential impact that the adoption of SFAS No. 157 will
have on our financial statements.
NOTE 5 REVENUE
Our Medicare premium revenue is adjusted periodically to give effect to a risk
component. Risk adjustment uses health status indicators to improve the accuracy
of payments and establish incentives for plans to enroll and treat less healthy
Medicare beneficiaries. Under risk adjustment methodology, managed care plans
must capture, collect, and submit diagnosis code information to CMS. After
reviewing the respective submissions, CMS adjusts the premium payments to
Medicare plans generally at the beginning of the calendar year and in the middle
of calendar year and then issues a final payment in a subsequent year.
In June 2007, the HMO was notified of a 2007 mid-year retroactive Medicare Risk
Adjustment ("MRA") increase from CMS based on the increased medical risk scores
of the HMO's membership. This increase is made effective June 30 and is
retroactively applied to all premiums paid in the first half of 2007. As a
result of this increase, the HMO realized additional revenue of $781,000 in the
2007 second quarter. Premiums for the balance of 2007 will be paid based on the
new medical risk scores. The 2006 mid-year MRA increase recorded in the 2006
second quarter was $280,000.
7
In July 2007 we received the final MRA increase for 2006 premiums paid by CMS to
the HMO of $575,000. This amount is $340,000 higher than our recorded estimate
at December 31, 2006 of $235,000. The $340,000 has been recorded in revenue for
the three and six month period ended June 30, 2007.
NOTE 6 MEDICAL EXPENSE
Each period, we re-examine previously established medical claims payable
estimates based on actual claim submissions and other changes in facts and
circumstances. As the liability estimate recorded in prior periods becomes more
exact, we adjust the amount of our liability estimate, and include the change in
medical expense in the period in which the change is identified. In each
reporting period, our operating results include the effects of more completely
developed medical expense payable estimates associated with previously reported
periods. While we believe our estimated medical expenses payable is adequate to
cover future claims payments required, such estimates are based on claims
experience to date and various assumptions. Therefore, the actual liability
could differ materially from the amount recorded.
We estimate that, on a consolidated basis, 2006 claims paid in 2007 will exceed
the amount originally recorded as estimated medical expenses payable at December
31, 2006 by $1.3 million. This amount increased total medical expense by
approximately 1% for the six months ended June 30, 2007. We also estimate that,
on a consolidated basis 2005 claims paid in 2006 will exceed the amount
originally recorded as estimated medical expenses payable at December 31, 2005
by $1.2 million. This amount increased total medical expense by approximately
1.2% for the six months ended June 30, 2006. The difference between the amount
incurred and the estimated medical claims payable that was recorded was
primarily a result of unfavorable developments in our medical claims expense.
We estimate that claims paid for the PSN and HMO subsequent to March 31, 2007
for services provided prior to that date will exceed the consolidated estimated
medical expenses payable recorded at that date by approximately $450,000. This
is less than 1% of consolidated total medical expense recorded for the quarter
ended June 30, 2007. We also estimate that claims paid for the PSN and HMO
subsequent to March 31, 2006 for services provided prior to that date will
exceed the consolidated estimated medical expenses payable recorded at that date
by approximately $750,000. This is approximately 1.5% of consolidated total
medical expense recorded for the quarter ended June 30, 2006. The difference
between the amount incurred and the estimated medical claims payable that was
recorded was primarily a result of unfavorable developments in our medical
claims expense.
The actuarial process and models develop a range of estimated medical claims
payable. Pursuant to FASB Interpretation No. 14, Reasonable Estimation of the
Amount of a Loss, when no amount within the range is a better estimate than any
other amount, the accrual is recorded at the low end of the range. Through March
31, 2007, we accrued to the low end of the range. During the second quarter of
2007, we determined that, based on historical results, the best estimate for the
PSN is the mid-range and for the HMO the best estimate continues to be the low
end of the range. We estimate liabilities for physician, hospital and other
medical expense disputes based upon an analysis of potential outcomes, assuming
a combination of litigation and settlement strategies.
At June 30, 2007, we determined that the range for estimated medical expenses
payable for the PSN was between $12.3 million and $15.0 million and we recorded
a liability at the mid-range of $13.4 million. This amount is netted in the due
from Humana account in the June 30, 2007 balance sheet. Moving to the mid-range
for the PSN increased consolidated total medical expense in the 2007 second
quarter by $1.1 million and increased our consolidated Medical Expense Ratio by
1.8% and .9% for the three months and six months ended June 30, 2007,
respectively. This change impacted net earnings per common share, basic by $.01
per share.
At June 30, 2007, we estimated that the range for estimated medical claims
payable for the HMO was between $5.6 million and $6.3 million and we recorded a
liability of $5.6 million. Based on historical results, we believe that the low
end of the range continues to be the best estimate within the range for the HMO.
8
NOTE 7 SEPARATION AND RESTRUCTURING EXPENSES
On April 9, 2007 ("Separation Date"), we entered into a mutually agreeable
separation agreement (the "Separation Agreement") with the individual who served
as our President and Chief Operating Officer. Under the Separation Agreement, we
agreed, among other things, to provide this individual with her base salary, to
allow her to participate in certain of our benefit programs and to provide her
with an automobile and mobile phone allowance for twelve months following the
separation date. Under the Separation Agreement, this individual has agreed to
be bound by restrictive covenants regarding, among other things, non-competition
with us for a one-year period, non-solicitation of our employees for a two-year
period and confidentiality. In the second quarter of 2007, we accrued
approximately $500,000 related to the amount payable under the Separation
Agreement and the value of certain options held by this individual that, in
accordance with their terms, became fully vested on the separation date and
subject to a three month exercise period.
On June 26, 2007, we entered in to an agreement with this individual, to
repurchase for $10,000 options she held, with an exercise price of $1.83 per
share, to purchase 800,000 of our common stock. This amount has been reflected
as a reduction of paid in capital.
In July 2007, we implemented a restructuring plan designed to reduce costs and
improve operating efficiency. The restructuring plan, expected to be complete by
the end of August 2007, is anticipated to include the closure of two of the
HMO's office locations, one PSN medical practice (the "PSN Practice"), and a
workforce reduction involving 16 employees. In connection with this plan, we
expect to record approximately $600,000 of restructuring costs during the third
quarter of 2007 including approximately $150,000 of cash for severance payments,
approximately $370,000 of cash for continuing lease obligations on closed
locations, and approximately $80,000 for the write-off of certain fixed assets.
The severance payments and continuing lease obligations will result in future
cash expenditures. We project that the restructuring will enable us to reduce
our related operating expenses by approximately $1.2 million per annum, with no
or limited impact on the HMO's and PSN's ability to serve their existing
members. At June 30, 2007, the PSN Practice being closed served approximately
450 members in South Florida. During the first six months of 2007, this practice
generated $2.6 million of revenue and had a loss before allocated overhead and
income taxes. Of the $600,000, approximately $400,000 relates to the HMO with
the balance of $200,000 associated with the PSN.
NOTE 8 INCOME TAXES
The effective income tax rate was 41.9% for the three months ended June 30, 2007
compared to 38.4% for the three months ended June 30, 2006. For the six months
ended June 30, 2007 and 2006, the effective income tax rate was 41.5% and 38.3%,
respectively. The increase in the effective income tax rate in 2007 is a result
of a decrease in the estimated tax benefit of certain deferred tax assets.
NOTE 9 EARNINGS PER SHARE
Earnings per common share, basic is computed using the weighted average number
of common shares outstanding during the period. Earnings per common share,
diluted is computed using the weighted average number of common shares
outstanding during the period adjusted for incremental shares attributed to
outstanding options and warrants and preferred stock convertible into shares of
common stock.
9
For the six months ended June 30, For the three months ended June 30,
2007 2006 2007 2006
---------------- ----------------- ------------------- ----------------
Net income $ 1,759,000 $ 661,000 $ 1,531,000 $ 404,000
Less: Preferred stock dividend (25,000) (25,000) (13,000) (13,000)
---------------- ----------------- ------------------- ----------------
Income available to common shareholders $1,734,000 $636,000 $ 1,518,000 $ 391,000
================ ================= =================== ================
Denominator:
Weighted average common shares outstanding 50,291,000 49,916,000 50,312,000 49,971,000
================ ================= =================== ================
Basic earnings per common share $ 0.03 $ 0.01 $ 0.03 $ 0.01
================ ================= =================== ================
Income available to common shareholders $ 1,734,000 $ 636,000 $ 1,518,000 $ 391,000
================ ================= =================== ================
Denominator:
Weighted average common shares outstanding 50,291,000 49,916,000 50,312,000 49,971,000
Common share equivalents of outstanding stock:
Convertible preferred stock - - 526,000 -
Restricted stock 157,000 157,000
Options and warrants 1,215,000 1,356,000 935,000 1,369,000
---------------- ----------------- ------------------- ----------------
Weighted average common shares outstanding 51,663,000 51,272,000 51,930,000 51,340,000
================ ================= =================== ================
Diluted earnings per common share $ 0.03 $ 0.01 $ 0.03 $ 0.01
================ ================= =================== ================
Weighted average of antidilutive stock options 600,100 504,000 1,048,000 486,000
================ ================= =================== ================
NOTE 10 STOCKHOLDERS' EQUITY
During the three months ended June 30, 2007, options for 253,800 common shares
were exercised. For the six month period ended June 30, 2007, we issued 255,800
shares of common stock in connection with the exercise of stock options.
During the three and six month period ended June 30, 2007 we awarded 157,296
shares of restricted stock to the independent members of our Board of Directors.
The shares vest over a twelve month period. Compensation expense related to this
stock is recognized ratably over the vesting period.
NOTE 11 COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On March 13, 2007, a complaint was filed by Mr. Noel Guillama, who served as our
President, Chairman of the Board and Chief Executive Officer from January 1996
through February 2000, in the Circuit Court of the Fifteenth Judicial Circuit in
and for Palm Beach County, naming us as a defendant. The dispute involves
1,500,000 restricted shares of common stock issued to Mr. Guillama in connection
with his personal guarantee of a Company line of credit in 1999. We repaid the
line of credit and expected, based on documentation signed by Mr. Guillama, the
1,500,000 shares issued as collateral to be returned to us. Mr. Guillama alleges
that we have breached an agreement to remove the transfer restrictions from
these shares and is seeking damages for breach of contract and specific
performance. We believe this lawsuit is without merit and intend to assert an
appropriate defense. These shares have not been reflected as issued or
outstanding in the year end balance sheet or in the computation of earnings per
share.
We are also a party to certain other claims arising in the ordinary course of
business. We believe that the outcome of these matters will not have a material
adverse effect on our financial position or the results of our operations.
10
Guarantees
In connection with the sale of the assets of our pharmacy division in 2003, the
purchaser of the pharmacy assets agreed to assume our obligation under a lease
which ran through 2012. In the event of the purchaser's default, we could be
responsible for future lease payments totaling approximately $608,000 at June
30, 2007.
NOTE 12 PHYSICIAN PRACTICES
Effective July 31, 2007, we acquired, in a transaction accounted for as a
purchase, certain assets of one of our contracted independent primary care
physician practices for approximately $900,000. We are currently in the process
of determining the allocation of the purchase price.
In addition to the acquisition, we expect the PSN will open an additional
medical center in its Central Florida market during the second half of 2007.
11
NOTE 13 BUSINESS SEGMENT INFORMATION
We manage the PSN and HMO as separate business segments. We identified our
segments in accordance with the aggregation provisions of Statement of Financial
Accounting Standards ("FASB") No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is consistent with information used by
our Chief Executive Officer in managing our business. The segment information
aggregates products with similar economic characteristics. These characteristics
include the nature of customer groups and the nature of the services and
benefits provided. The results of each segment are measured by income before
income taxes. We allocate all selling, general and administrative expenses,
investment and other income, interest expense, goodwill and certain other assets
and liabilities to our segments. Our segments do share overhead costs.
SIX MONTHS ENDED JUNE 30, 2007 PSN HMO Total
----------------------------------------------------------- ---------------- --------------- ------------------
Revenues from external customers $ 113,755,000 $ 24,283,000 $ 138,038,000
Segment gain (loss) before allocated overhead and income
taxes 13,088,000 (5,550,000) 7,538,000
Allocated corporate overhead 2,199,000 2,329,000 4,528,000
Segment gain (loss) after allocated overhead and before
income taxes 10,889,000 (7,879,000) 3,010,000
Segment assets 24,953,000 18,039,000 42,992,000
Goodwill 1,992,000 - 1,992,000
SIX MONTHS ENDED JUNE 30, 2006 PSN HMO Total
----------------------------------------------------------- ---------------- --------------- ------------------
Revenues from external customers $ 100,313,000 $ 11,336,000 $ 111,649,000
Segment gain (loss) before allocated overhead and income
taxes 8,491,000 (4,170,000) 4,321,000
Allocated corporate overhead 1,818,000 1,431,000 3,249,000
Segment gain (loss) after allocated overhead and before
income taxes 6,673,000 (5,601,000) 1,072,000
Segment assets 18,567,000 16,169,000 34,736,000
Goodwill 1,992,000 - 1,992,000
THREE MONTHS ENDED JUNE 30, 2007 PSN HMO Total
----------------------------------------------------------- ---------------- --------------- ------------------
Revenues from external customers $ 56,662,000 $ 13,275,000 $ 69,937,000
Segment gain (loss) before allocated overhead and
income taxes 6,589,000 (1,683,000) 4,906,000
Allocated corporate overhead 1,200,000 1,070,000 2,270,000
Segment gain (loss) after allocated overhead and before
income taxes 5,389,000 (2,753,000) 2,636,000
THREE MONTHS ENDED JUNE 30, 2006 PSN HMO Total
----------------------------------------------------------- ---------------- --------------- ------------------
Revenues from external customers $ 50,236,000 $ 6,646,000 $ 56,882,000
Segment gain (loss) before allocated overhead and income
taxes 4,537,000 (2,242,000) 2,295,000
Allocated corporate overhead 877,000 762,000 1,639,000
Segment gain (loss) after allocated overhead and before
income taxes 3,660,000 (3,004,000) 656,000
Segment assets at June 30, 2007 exclude general corporate assets of $7.9 million
including deferred tax assets of $6.6 million.
Segment assets at June 30, 2006 exclude general corporate assets of $4.1 million
including deferred tax assets of $3.0 million.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006, AS WELL AS THE FINANCIAL
STATEMENTS AND NOTES THERETO.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The condensed consolidated financial statements of the Company in this document
present our financial position, results of operations and cash flows, and should
be read in conjunction with the following discussion and analysis. 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 report contains forward-looking statements, including
the following:
o the PSN's ability to renew its agreements with Humana and maintain
these agreements on favorable terms;
o our ability to adequately predict and control medical expenses and
to make reasonable estimates and maintain adequate accruals for
incurred but not reported (" IBNR") claims; and
o the HMO's ability to renew, maintain or to successfully rebid its
agreement with CMS.
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 reductions in government funding of Medicare programs;
o disruptions in the PSN's, the HMO's or Humana's healthcare provider
networks;
o failure to receive claims processing, billing services, data
collection and other information on a timely basis from Humana or HF
Administrative Services, the third party administrative service
provider for the HMO;
o failure to receive, on a timely or accurate basis, customer
information from CMS;
o future legislation and changes in governmental regulations;
o our ability to grow our HMO customers in our current geographic
markets and our ability to expand our HMO into new geographic
markets;
o increased operating costs;
o the impact of Medicare Risk Adjustments on payments we receive from
CMS or Humana;
13
o the impact of the Medicare prescription drug plan on our operations;
o loss of significant contracts;
o general economic and business conditions;
o increased competition;
o the relative health of our patients;
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, 2006.
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
We operate two business segments in Florida, the PSN which provides and arranges
for medical care primarily to customers of Humana and the HMO which provides
healthcare benefits to Medicare beneficiaries in Florida that have selected our
health plan.
Both our PSN and HMO operations primarily focus on individuals covered by
Medicare, the national, federally-administered health insurance program that
covers the cost of hospitalization, medical care, and some related health
services for U.S. citizens aged 65 and older, qualifying disabled persons and
persons suffering from end-staged renal disease.
Substantially all of our revenue in 2007 and 2006 was generated by providing
services to Medicare beneficiaries through arrangements that require us to
assume responsibility to provide and/or manage the care for all of our
customers' medical needs in exchange for a monthly fee, also known as a
capitated fee or capitation arrangement.
Provider Service Network
------------------------
The PSN has two network contracts (the "Humana Agreements") with Humana, one of
the largest participants in the Medicare Advantage program in the United States.
Our PSN provides, on a non-exclusive basis, healthcare services to Medicare
beneficiaries in Flagler and Volusia counties ("Central Florida") and Palm
Beach, Broward and Miami-Dade counties ("South Florida") who have elected to
receive benefits through Humana's Medicare Advantage Plan. As of June 30, 2007,
the Humana Agreements covered approximately 19,200 Humana Plan Customers (as
defined below) in Central Florida and 6,100 Humana Plan Customers in South
Florida. Approximately 82.0% of our revenue during the first half of 2007 was
generated through the Humana Agreements.
Effective as of August 1, 2007, the PSN entered into a Network Agreement (the
"CarePlus Agreement") with CarePlus Health Plans, Inc., a Medicare Advantage
health plan in Florida. Pursuant to the CarePlus Agreement, the PSN will
provide, on a non-exclusive basis, healthcare services to Medicare beneficiaries
in the following nine Florida counties - Miami-Dade, Broward, Palm Beach,
Orange, Osceola, Seminole, Pasco, Pinellas and Hillsborough counties who have
elected to receive benefits through CarePlus' Medicare Advantage plans.
14
We have built our PSN physician network by contracting with primary care
physicians for their services and acquiring and operating our own physician
practices. At June 30, 2007, we have contracts in place with twenty-eight
independent primary care physician practices (individually an "IPA") and we own
and operate eight primary care physician practices and one medical oncology
physician practice (collectively with the IPAs, the "PSN Physicians"). In
addition, through our Humana Agreements we have established referral
relationships with a large number of specialist physicians, ancillary service
providers and hospitals throughout South Florida and Central Florida.
Under the CarePlus Agreement, the existing PSN Physicians will not be eligible
to participate in the CarePlus Agreement and the PSN will have to develop and/or
acquire and operate a unique network of primary care physicians that are not
otherwise contracted to Humana.
Effective July 31, 2007, the PSN acquired certain assets of one of our IPAs in
the Central Florida market for approximately $900,000. Effective August 1, the
PSN closed a wholly-owned primary care physician practice in South Florida. The
PSN also plans to open an additional primary care physician practice in the
Central Florida market in the latter part of 2007.
Humana directly contracts with CMS and is paid a fixed monthly premium payment
for each customer (each a "Humana Plan Customer") enrolled in Humana's Medicare
Advantage Plan. The monthly premium varies by patient, county, age and severity
of health status. Pursuant to the Humana Agreements, the PSN provides or
arranges for the provision of covered medical services to each Humana Plan
Customer who selects one of the PSN Physicians as his or her primary care
physician (a "Humana Participating Customer"). In return for the provision of
these medical services, the PSN receives from Humana a capitated fee for each
Humana Participating Customer. The fee rates are established by the Humana
Agreements and comprise a substantial portion of the monthly premiums received
by Humana from CMS with respect to Humana Participating Customers.
In Central Florida, our PSN assumes full responsibility for the provision of all
necessary medical care for each Humana Participating Customer, even for services
we do not provide directly. In South Florida, the PSN and Humana share in the
cost of inpatient hospital services and the PSN assumes full responsibility for
the provision of all other medical care provided to the Humana Participating
Customer. To the extent the costs of providing such medical care are less than
the related premiums received from Humana, our PSN generates a gross profit.
Conversely, if medical expenses exceed the premiums received from Humana, our
PSN experiences a gross loss.
CarePlus directly contracts with CMS and is paid a fixed monthly premium payment
for each customer (each a "CarePlus Customer") enrolled in CarePlus's Medicare
Advantage Plan. The monthly premium varies by patient, county, age and severity
of health status. Pursuant to the CarePlus Agreement, the PSN provides or
arranges for the provision of covered medical services to each CarePlus Plan
Customer who selects one of the PSN Physicians as his or her primary care
physician (a "CarePlus Participating Customer"). In return for the provision of
these medical services, the PSN will receive a monthly Network Administration
Fee for each CarePlus Participating Customer. Once the number of CarePlus
Participating Customers exceeds 500 in a given calendar month (but not later
than March 31, 2008), the PSN will then assume full responsibility for the
provision of all necessary medical care for each CarePlus Participating
Customer, even for services we do not provide directly.
Substantially all of our PSN's revenue comes from the Humana Agreements. We do
receive additional revenue in the medical practices we own and operate by
providing primary care services to non-Humana Participating Customers on a
fee-for-service basis.
Health Maintenance Organization
-------------------------------
We operate the HMO through METCARE Health Plans, Inc., our wholly owned
subsidiary that was issued a Health Care Provider Certificate ("HCPC") by
Florida's Agency for Health Care Administration ("AHCA") on March 16, 2005. The
Department of Financial Services, Office of Insurance Regulation ("OIR")
approved the HMO's application and a Certificate of Authority to operate a HMO
in the State of Florida ("COA") on April 22, 2005. The HMO recorded its first
revenue in the third quarter of 2005.
Effective July 1, 2005, the HMO entered into a contract with CMS (the "CMS
Contract") to begin offering Medicare Advantage plans to Medicare beneficiaries
in six Florida counties - Lee, Charlotte, Sarasota, Martin, St. Lucie and
Okeechobee. Beginning January 1, 2007, the HMO began to provide services in
Polk, Glades, Manatee, Marion, Lake and Sumter counties. In July 2007, the HMO
was approved to operate in Collier County beginning January 1, 2008 The HMO has
been marketing its "AdvantageCare" branded plan since July 2005.
The HMO is required to maintain satisfactory minimum net worth in accordance
with requirements established by the Florida State Department of Insurance. The
HMO is restricted from making dividend payments without appropriate regulatory
notifications and approvals or to the extent such dividends would put us out of
compliance with statutory capital requirements.
We continue to evaluate expanding our HMO business into other counties within
Florida. However, we do not intend to provide HMO services in the geographic
markets covered by the Humana Agreements. We view our HMO business as an
extension of our existing core competencies.
15
The HMO's revenue is generated by premiums consisting of monthly payments per
customer that are established by the CMS Contract.
While the HMO's business has continued to grow, such growth has required and is
expected to continue to require a considerable amount of capital. We project
that in 2007, the HMO's business will continue to generate a loss before
allocated overhead and income taxes. The HMO's actual cash needs and losses for
2007 are expected to be strongly influenced by, among other things, the HMO's
membership levels, operating costs and the Medical Expense Ratio as well as the
cost and effectiveness of various marketing programs we may undertake. In July
2007, we restructured our HMO operations by closing two office locations and
terminating eight employees to better match the current size of the HMO. During
the first seven months of 2007, we have transferred $11.0 million to the HMO to
fund the operations and growth of the HMO. See - "LIQUIDITY AND CAPITAL
RESOURCES" section contained in this Form 10-Q.
To successfully operate the HMO, we believe we will have to continue our
development of the following capabilities, among others: sales and marketing,
medical management, customer service and regulatory compliance. No assurances
can be given that we will be successful in operating this segment of our
business despite our allocation of a substantial amount of resources for this
purpose. If the HMO does not develop as anticipated or planned, we would likely
explore strategic alternatives for the business and/or devote additional
managerial and/or capital resources to the HMO, which could limit our ability to
manage and/or grow the PSN. There can be no assurances that, if for any reason,
we elect to discontinue the HMO business and/or seek to sell such business, we
will be able to fully recoup our expenditures to date with respect to the HMO
business.
CRITICAL ACCOUNTING POLICIES
Critical Accounting Policies
----------------------------
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. Actual results may ultimately differ materially from those
estimates. We believe that the following discussion addresses our most critical
accounting policies, including those that are perceived to be the most important
to the portrayal of our financial condition and results of operations and that
require complex and/or subjective judgments by management.
We believe that 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.
Revenue is primarily derived from risk-based health insurance arrangements in
which the premium is fixed and paid to us on a monthly basis. We assume the
economic risk of funding our customers' health care services and related
administrative costs. Premium revenue is recognized in the period in which
eligible individuals are entitled to receive health care services. Because we
have the obligation to fund medical expenses we recognize gross revenue and
medical expenses for these contracts in our consolidated financial statements.
We record health care premium payments we receive in advance of the service
period as unearned premiums.
CMS periodically retroactively adjusts the premiums paid to us based on the
updated health status of participants. The factors considered by CMS include
changes in demographic factors, risk adjustment scores, customer information and
adjustments required by the risk sharing requirements for prescription drug
benefits under Part D of the Medicare program. In addition, CMS retroactively
adjusts the number of customers enrolled in our HMO or PSN as a result of
enrollment changes not yet processed, or not yet reported by Humana or CMS.
These retroactive adjustments could, in the near term, materially impact the
revenue that has been recorded by us for both our HMO and PSN. We record any
adjustments to this revenue at the time the information necessary to make the
determination of the adjustment is received from Humana or CMS and the
collectibility of the amount is reasonably assured.
16
Medical expenses for both the PSN and HMO are recognized in the period in which
services are provided and include an estimate of our obligations for medical
services that have been provided to our customers but for which we have either
not yet received or processed claims, and for liabilities for physician,
hospital and other medical expense disputes. We develop estimates for medical
expense incurred but not reported using an actuarial process that is
consistently applied. The actuarial models consider factors such as time from
date of service to claim receipt, claim backlogs, care provider contract rate
changes, medical care consumption and other medical expense trends. The
actuarial process and models develop a range of estimated medical claims
payable. In accordance with FASB Interpretation No. 14, Reasonable Estimation of
the Amount of a Loss, when no amount within the range is a better estimate than
any other amount, the accrual is recorded at the low end of the range. Through
March 31, 2007, we accrued to the low end of the range. During the second
quarter of 2007, we determined that, based on historical results, the best
estimate within the range for the PSN is the mid-range and for the HMO the best
estimate continues to be the low end of the range. We estimate liabilities for
physician, hospital and other medical expense disputes based upon an analysis of
potential outcomes, assuming a combination of litigation and settlement
strategies.
Each period, we re-examine previously established medical claims payable
estimates based on actual claim submissions and other changes in facts and
circumstances. As the liability estimate recorded in prior periods becomes more
exact, we adjust the amount of our liability estimates, and include the changes
in medical expense in the period in which the change is identified. In each
reporting period, our operating results include the effects of more completely
developed medical expense payable estimates associated with previously reported
periods. While we believe our estimated medical expenses payable are adequate to
cover future claims payments required, such estimates are based on claims
experience to date and various assumptions. Therefore, the actual liability
could differ materially from the amounts recorded.
Use of Estimates, Deferred Tax Assets.
We have recorded deferred tax assets of approximately $6.1 million at June 30,
2007. Realization of the deferred tax assets is dependent on generating
sufficient taxable income in the future. In order to utilize the deferred tax
assets, we would have to generate taxable income of approximately $16.1 million.
We believe that our current operations will generate sufficient income to fully
utilize this asset. 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.
In the event we determine that we cannot, on a more-likely-than-not basis,
realize all or part of our deferred tax assets in the future, an adjustment to
establish a deferred tax asset valuation allowance would be charged to income in
the period such determination is made.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007 AND
JUNE 30, 2006
Summary
During the three months ended June 30, 2007 and 2006 we operated in two
financial reporting segments, the PSN business and the HMO business.
For the three months ended June 30, 2007 (the "2007 second quarter"), we
realized revenue of $69.9 million compared to $56.9 million of revenue realized
for the three months ended June 30, 2006 (the 2006 second quarter), an increase
of approximately $13.0 million or 23.0%. Of this increase, approximately $6.4
million related to the PSN and is primarily due to a rate increase of
approximately 4% in the premiums from CMS and an increase in the average
medicare risk score of customers, offset by a decline in membership.
Approximately $6.6 million of the increase is related to the HMO and is
principally the result of the increase in customer months between the first six
months of 2007 and the first six months of 2006.
Our Medicare premium revenue is adjusted periodically to give effect to a risk
component. Risk adjustment uses health status indicators to improve the accuracy
of payments and establish incentives for plans to enroll and treat less healthy
Medicare beneficiaries. Under risk adjustment methodology, managed care plans
must capture, collect, and submit diagnosis code information to CMS. After
reviewing the respective submissions, CMS adjusts the premium payments to
Medicare plans generally at the beginning of the calendar year and in the middle
of calendar year and then issues a final payment in a subsequent year.
In June 2007, the HMO was notified of a 2007 mid-year retroactive Medicare Risk
Adjustment ("MRA") increase from CMS based on the increased medical risk scores
of the HMO's membership. This increase is made effective June 30 and is
retroactively applied to all premiums paid during the first half of 2007. As a
result of this increase, the HMO realized additional revenue of $781,000 in the
2007 second quarter. Premiums for the balance of 2007 will be paid based on the
new medicare risk scores. The 2006 mid-year MRA increase recorded in the 2006
second quarter was $280,000.
In July 2007 we received the final MRA increase for 2006 premiums paid by CMS to
the HMO of $575,000. This amount is $340,000 higher than our recorded estimate
of $235,000. The $340,000 has been recorded in revenue for the three months
ended June 30, 2007.
17
The PSN also realized a mid-year MRA increase, however because of the larger and
more established customer base we estimate the amount of future retroactive risk
adjustment payments for the PSN on a monthly basis. We adjust the estimated
amounts to actual when the final adjustment amount is available. At June 30,
2007, we estimate that the mid-year MRA increase will be approximately $5.9
million. This amount is recorded ratably throughout the six month period. The
MRA increase recorded in the first six months of 2006 was $3.5 million.
Total medical expense for the 2007 second quarter was $61.1 million, an increase
of $10.2 million over the 2006 second quarter. Our ratio of medical expense to
revenue (the "Medical Expense Ratio") decreased to 87.4% in the 2007 second
quarter compared to 89.5% in the 2006 second quarter. As discussed below,
included in total medical expense for the three month period ended June 30,
2007, is a $1.1 million change in estimate relating to the PSN's estimated
medical claims payable (see below). This change increased total medical expense
by $1.1 million, increased the Medical Expense Ratio by 1.8% and reduced net
income per common share basic and diluted by $.01 for the 2007 second quarter.
We currently estimate that claims paid for the PSN and HMO subsequent to March
31, 2007 for services provided prior to that date will exceed the consolidated
estimated medical expenses payable recorded at that date by approximately
$450,000. This is less than 1% of consolidated total medical expense recorded
for the quarter ended June 30, 2007. We also estimate that claims paid for the
PSN and HMO subsequent to March 31, 2006 for services provided prior to that
date will exceed the consolidated estimated medical expenses payable recorded at
that date by approximately $750,000. This is approximately 1.5% of consolidated
total medical expense recorded for the quarter ended June 30, 2006. The
difference between the amount incurred and the estimated medical claims payable
that was recorded was primarily a result of unfavorable developments in our
medical claims expense.
Income before income tax expense for the 2007 second quarter was $2.6 million
compared to $656,000 in the 2006 second quarter. Net income for the 2007 second
quarter was $1.5 million compared to $404,000 for the 2006 second quarter. Our
results of operations for the 2007 and 2006 second quarters are negatively
impacted by the losses related to the operations of our Medicare Advantage HMO.
Net earnings per common share, basic and diluted was $0.03 for the 2007 second
quarter and $.01 for the 2006 second quarter.
The PSN reported a segment gain before income taxes and allocated overhead of
$6.6 million for the 2007 second quarter, as compared to a gain of $4.5 million
in the 2006 second quarter an increase of $2.1 million or 46.7%. The HMO segment
incurred a net loss before income taxes and allocated overhead of $1.7 million
for the 2007 second quarter, compared to a net loss before income taxes and
allocated overhead of $2.2 million in the 2006 second quarter. Allocated
overhead was $2.3 million and $1.6 million in the 2007 and 2006 second quarters,
respectively.
Customer Information
The table set forth below provides (i) the total number of customers to whom we
were providing healthcare services through the PSN and HMO as of June 30, 2007
and June 30, 2006 and (ii) the aggregate customers months of the PSN and the HMO
during the second quarter of 2007 and 2006. Customer months refer to the
aggregate number of customers to whom we are providing healthcare services for
each month during the period.
18
June 30, 2007 June 30, 2006
--------------------------- ------------------------------
Members at Member Members at Member
End of Months For End of Months for
Period Quarter Period Quarter
--------------------------- ------------------------------
PSN 25,300 76,600 25,900 77,600
HMO 5,100 15,200 3,100 8,400
--------------------------- ------------------------------
Total 30,400 91,800 29,000 86,000
=========================== ==============================
Revenue
The following table provides a breakdown of our sources of revenue by segment
for the 2007 second quarter and the 2006 second quarter:
Three Months Ended June 30 $ %
2007 2006 Increase Change
---------------- --------------- --------------- -------------
PSN revenue from Humana $ 56,316,000 $ 49,906,000 $ 6,410,000 12.8%
PSN fee-for-service revenue 346,000 330,000 16,000 4.8%
---------------- --------------- ---------------
Total PSN revenue 56,662,000 50,236,000 6,426,000 12.8%
---------------- --------------- ---------------
Percentage of total revenue 81.0% 88.3%
HMO revenue 13,275,000 6,646,000 6,629,000 99.7%
Percentage of total revenue 19.0% 11.7%
---------------- --------------- ---------------
Total revenue $ 69,937,000 $ 56,882,000 $ 13,055,000 23.0%
================ =============== ===============
The PSN's most significant source of revenue during both the 2007 and 2006
second quarters was the premium revenue generated pursuant to the Humana
Agreements (the "Humana Related Revenue"). The Humana Related Revenue increased
from $49.9 million in the 2006 second quarter to $56.3 million in the 2007
second quarter, an increase of approximately 12.8%.
The PSN's average per customer per month premium in the 2007 second quarter was
approximately $739, an increase of approximately $92 or 14.2% per customer over
the 2006 second quarter per customer per month premium of $647. This increase is
due to a rate increase of approximately 4% in the premium payment from CMS and
an increase in the average medicare risk score of customers, offset by a decline
in membership.
The fee-for-service revenue represents amounts earned from medical services
provided to non-Humana customers in our owned physician practices.
HMO revenue for the 2007 second quarter was $13.3 million as compared to $6.6
million in 2006. The HMO was in its early stages of development in the 2006
second quarter. The increase in revenue is primarily attributable to the
increase in customer months between the 2007 and 2006 second quarters. Revenue
per customer per month for the HMO increased from $787 for the 2006 second
quarter to $872 for the 2007 second quarter, an increase of 10.8%. This increase
is a combination of a rate increase in the premium payments from CMS of 5.5% and
an increase in the average medical risk scores of customers.
In June 2007, the HMO realized a mid-year retroactive Medicare Risk Adjustment
("MRA") increase from CMS based on the increased medical risk scores of the
HMO's membership. This increase is made effective June 30 and is retroactively
applied to all premiums paid in the first half of the year. As a result of this
increase, the HMO realized additional revenue of $781,000 in the 2007 second
quarter. Premiums for the balance of 2007 will be paid based on the new medical
risk scores. The 2006 mid-year MRA increase recorded in the 2006 second quarter
was $280,000.
In July 2007 we received the final MRA increase for 2006 premiums paid by CMS to
the HMO of $575,000. This amount is $340,000 higher than our recorded estimate
at December 31, 2006 of $235,000. The $340,000 has been recorded in revenue for
the three month period ended June 30, 2007.
19
Medical Expense
Three Months Ended June 30 Increase %
2007 2006 (Decrease) Change
----------------- ----------------- ----------------- -------------
PSN medical expense $ 49,225,000 $ 44,863,000 $ 4,362,000 9.7%
HMO medical expense 11,881,000 6,031,000 5,850,000 97.0%
----------------- ----------------- -----------------
Consolidated total medical expense $ 61,106,000 $ 50,894,000 $ 10,212,000 20.1%
================= ================= =================
PSN Medical Expense Ratio 86.9% 89.3%
================= =================
HMO Medical Expense Ratio 89.5% 90.8%
================= =================
Consolidated Medical Expense Ratio 87.4% 89.5%
================= =================
Total Medical Expense
Total medical expense represents the total cost of providing patient care and is
comprised of two components, medical claims expense and medical center costs.
Medical claims expense includes such costs as inpatient and outpatient services,
pharmacy benefits and physician services by providers other than the PSN's owned
affiliated providers ("Non-Affiliated Providers"). Medical center costs
represent the operating costs of the physician practices owned by the PSN.
Approximately $58.3 million or 95.4% of our total medical expense in the 2007
second quarter and $48.3 million or 95.0% of total medical expense in the 2006
second quarter are attributable to medical claims.
Total medical expense was $61.1 million and $50.9 million for the 2007 and 2006
second quarters, respectively. Our Medical Expense Ratio decreased from 89.5% in
the 2006 second quarter to 87.4% in the 2007 second quarter. As discussed below,
included in total medical expense for the three month period ended June 30,
2007, is a $1.1 million change in estimate relating to the PSN's estimated
medical claims payable (see below). This change increased total medical expense
by $1.1 million, increased the Medical Expense Ratio by 1.8% and reduced net
income per common share basic and diluted by $.01 for the 2007 second quarter.
We currently estimate that claims paid for the PSN and HMO subsequent to March
31, 2007 for services provided prior to that date will exceed the consolidated
estimated medical expenses payable recorded at that date by approximately
$450,000. This is less than 1% of consolidated total medical expense recorded
for the quarter ended June 30, 2007. We also estimate that claims paid for the
PSN and HMO subsequent to March 31, 2006 for services provided prior to that
date will exceed the consolidated estimated medical expenses payable recorded at
that date by approximately $750,000. This is approximately 1.5% of consolidated
total medical expense recorded for the quarter ended June 30, 2006. The
difference between the amount incurred and the estimated medical claims payable
that was recorded was primarily a result of unfavorable developments in our
medical claims expense.
The Humana Agreements provide that the PSN is financially responsible for all
medical services provided to the Humana Participating Customers. The PSN's total
medical expense in the 2007 second quarter was $49.2 million compared to $44.9
million in the 2006 second quarter, an increase of approximately $4.4 million.
The Medical Expense Ratio for the PSN segment improved to 86.9% in the 2007
second quarter as compared to 89.3% in the 2006 second quarter and 88.4% for the
year ended December 31, 2006.
During 2006, the PSN implemented various medical management techniques to
improve the medical management of our customers. Some of these techniques
included chart audits for all PSN Physicians, increased focus on certain
elements of our Partners in Quality Program, implementation of an outreach
program for our more acutely ill customers in an effort to better manage the
care for these individuals and the development of a comprehensive recovery plan
for customers that had serious events, such as hospitalizations or significant
procedures.
The actuarial process and models develop a range of estimated medical claims
payable. At June 30, 2007, estimated medical claims payable for the PSN was
determined to be between $12.3 million and $15.0 million and we recorded a
liability of $13.4 million. In accordance with FASB Interpretation No. 14,
Reasonable Estimation of the Amount of a Loss, when no amount within the range
is a better estimate than any other amount, the accrual is recorded at the low
end of the range. Through March 31, 2007, we accrued to the low end of the
range. During the second quarter of 2007, we determined that, based on
historical results, the best estimate within the range for the PSN is the
mid-range. The change from the low-end of the range to the mid-range increased
total medical expense in the 2007 second quarter by $1.1 million which increased
the PSN's medical expense ratio by approximately 2.2% and its medical expense
per customer by approximately $14.00 in the 2007 second quarter.
20
Included in the PSN's 2007 second quarter's medical expense is a charge of
$370,000 reflecting the amount that we currently estimate claims paid for
services incurred prior to March 31, 2007 exceeded the estimated medical claims
payable at that date. This represents less than 1% of the PSN's total medical
expense for the 2007 second quarter. Claims paid by the PSN in the second
quarter of 2006 related to services provided prior to March 31, 2006 exceeded
the estimated medical claims payable recorded at March 31, 2006 by approximately
$420,000, less than 1% of the PSN's total medical expense for the 2006 second
quarter. The difference between the amount incurred and the estimated medical
claims payable that was recorded was primarily a result of unfavorable
developments in our medical claims expense.
On a per customer per month basis, total medical expense for the PSN in the 2007
second quarter was $642 as compared to $578 in the 2006 second quarter. This $64
increase is primarily a result of increased rates paid to hospitals and an
increase in the intensity of the health services required by our customers as
indicated by the increase in the risk scores of these members.
Approximately $2.8 million of our total medical expense in the 2007 second
quarter related to physician practices we own as compared to $2.5 million in the
2006 second quarter.
Total medical expense for the HMO was $11.9 million in the 2007 second quarter
compared to $6.0 million in the 2006 second quarter. The increase in the 2007
second quarter of 97.0% is due primarily to the substantial increase in the
number of HMO customer months between the 2007 and 2006 second quarters.
The HMO's Medical Expense Ratio in the 2007 second quarter was 89.5% as compared
to 90.8% in the 2006 second quarter and 102.4% for the year ended December 31,
2006. Estimated medical claims payable for the HMO at June 30, 2006 will
ultimately settle for approximately $700,000 more than originally estimated.
Including the impact of this change in estimate in the HMO's 2006 second
quarter's total medical expense would increase the HMO's Medical Expense Ratio
to 101.5%. There is no significant impact of prior period claims in the 2007
second quarter. The difference between the amount incurred and the estimated
medical claims payable that was recorded was primarily a result of unfavorable
developments in our medical claims expense.
At June 30, 2007, we determined that the range for estimated medical claims
payable for the HMO was between $5.6 million and $6.3 million and we recorded a
liability of $5.6 million. Based on historical results, we believe that the low
end of the range continues to be the best estimate within the range for the HMO.
Other Expenses
Three Months Ended June 30 Increase %
2007 2006 (Decrease) Change
----------------- ----------------- ----------------- -------------
Payroll, payroll taxes and benefits $ 3,376,000 $ 2,555,000 $ 821,000 32.1%
Percentage of total revenue 4.8% 4.5%
Marketing and advertising 422,000 1,022,000 ($600,000) -58.7%
Percentage of total revenue 0.6% 1.8%
General and administrative 2,702,000 1,977,000 $725,000 36.7%
Percentage of total revenue 3.9% 3.5%
----------------- ----------------- -----------------
Total operating expenses $ 6,500,000 $ 5,554,000 $ 946,000 17.0%
================= ================= =================
Payroll, Payroll Taxes and Benefits
Payroll, payroll taxes and benefits include salaries and related costs for our
executive, administrative and sales staff. For the 2007 second quarter, payroll,
payroll taxes and benefits were $3.4 million, compared to $2.6 million for the
2006 second quarter, an increase of approximately $821,000. Payroll, payroll
taxes and benefit costs associated with the HMO segment and corporate accounted
for substantially all of this increase.
21
As the HMO customer base has grown, we also increased our HMO staff from 49 at
December 31, 2005 to 70 at June 30, 2007. These employees were added to meet the
operational needs of the of the HMO's growing membership. The increase in full
time employees resulted in payroll, payroll taxes and benefits attributable to
the HMO increasing to $1.4 million in the 2007 second quarter as compared to
$1.0 million in the 2006 second quarter, a 33.1% increase.
Included in corporate salary expense for the second quarter of 2007 is
approximately $500,000 of severance benefits payable pursuant to the Separation
Agreement we entered in to with our former President and Chief Operating Officer
in April 2007.
In July 2007, we communicated to affected employees a restructuring plan
designed to reduce costs and improve operating efficiencies. The restructuring
plan, expected to be complete by the end of August 2007, is anticipated to
include the closure of two of the HMO's office locations, one PSN medical
practice and a workforce reduction involving 16 employees. In connection with
this plan, we expect to record approximately $600,000 of restructuring costs
during the third quarter of 2007, including approximately $150,000 of cash for
severance payments.
Marketing and Advertising
Marketing and advertising expense includes advertising expenses and commissions.
For the 2007 second quarter, marketing and advertising expense was $422,000 as
compared to $1.0 million for the 2006 second quarter, a decrease of 58.7%. In
2006, CMS instituted a limited enrollment period between November and March for
Medicare Advantage plans. This change in the enrollment period results in a more
focused marketing effort for the HMO and a disproportionate portion of
advertising expenses being incurred in the first and last quarters of the year.
In 2006, new members could be enrolled throughout the year and advertising costs
were incurred ratably throughout the year.
General and Administrative
General and administrative expenses for the 2007 second quarter totaled $2.7
million, an increase of $725,000, or 36.7% over the 2006 second quarter.
Approximately $585,000 of the increase in general and administrative costs is
attributable to the growth of the HMO. The HMO realized increased costs of
$300,000 relating to claims processing as the number of customers has grown and
increased professional services fees of $255,000 primarily attributable to the
2008 CMS bid process and costs for actuarial reports related to the
determination of the quarterly estimated medical claims expense.
Corporate general and administrative costs for the 2007 second quarter were
approximately $1.0 million as compared to $866,000 for the 2006 second quarter,
an increase of 18.6%. Approximately $150,000 of the increase relates to an
increase in professional service costs and $50,000 is a result of an increase in
depreciation expense. These increases were offset by a reduction in other
expenses.
Under the restructuring plan we implemented in July 2007, we expect that we will
incur a charge of approximately $370,000 for continuing lease obligations on
closed office locations and approximately $80,000 for the write-off of certain
fixed assets and other associated costs in the third quarter of 2007.
Other Income (Expense)
We realized other income of $306,000 in the 2007 second quarter as compared to
$223,000 in the 2006 second quarter. The increase was primarily as a result of
an increase in investment income as we had more cash to invest and an increase
in interest rates as compared to 2006. Cash is invested in highly liquid
securities, primarily certificates of deposits with short term maturities and
money market fund. We expect to continue to invest our excess cash in this
manner for the remainder of 2007.
Income taxes
Our effective tax rate was 41.9%% in the 2007 second quarter and 38.4% in the
2006 second quarter. The increase in the effective income tax rate in 2007 is a
result of a decrease in the estimated tax benefit of certain deferred tax
assets.
22
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND
JUNE 30, 2006
Summary
During the six months ended June 30, 2007 and 2006, we operated in two financial
reporting segments, the PSN business and the HMO business.
For the six months ended June 30, 2007, we realized revenue of $138.0 million
compared to $111.6 million of revenue realized for the six months ended June 30,
2006, an increase of approximately $26.4 million or 23.6%.
Of this increase, approximately $13.4 million related to the PSN and is
primarily due to a rate increase of approximately 4% in the premiums from CMS
and an increase in the medicare risk scores of customers, offset by a decline in
membership. Approximately $13.0 million of the increase is related to the HMO
and is principally the result of the increase in customer months between the
first six months of 2007 and the first six months of 2006.
In July 2007 we received the final MRA increase for 2006 premiums paid by CMS to
the HMO of $575,000. This amount is $340,000 higher than our recorded estimate
of $235,000. The $340,000 has been recorded in revenue for the six month period
ended June 30, 2007.
Total medical expense for the first six months of 2007 was $121.3 million, an
increase of $20.8 million over the first six months of 2006. Our ratio of total
medical expense to revenue (the "Medical Expense Ratio") decreased to 87.9% for
the first six months of 2007 compared to 90.0% in 2006. As discussed below,
included in total medical expense for the six month period ended June 30, 2007
is a $1.1 million change in estimate relating to the PSN's estimated medical
claims payable. This change increased total medical expense by $1.1 million,
increased the consolidated medical expense ratio by .9% and reduced net income
per common share basic and diluted by $.01 for the six month period ended June
30, 2007.
We currently estimate that, on a consolidated basis, 2006 claims paid in 2007
will exceed the amount originally recorded as estimated medical expenses payable
at December 31, 2006 by $1.3 million. This amount increased total medical
expense by approximately 1.1% for the six months ended June 30, 2007. We also
estimate that, on a consolidated basis 2005 claims paid in 2006 will exceed the
amount originally recorded as estimated medical expenses payable at December 31,
2005 by $1.2 million. This amount increased total medical expense by
approximately 1.2% for the six months ended June 30, 2006. The difference
between the amount incurred and the estimated medical claims payable that was
recorded was primarily a result of unfavorable developments in our medical
claims expense.
Income before income taxes for the first six months of 2007 was $3.0 million
compared to $1.1 million for the first six months of 2006. Net income for the
first six months of 2007 was $1.8 million compared to $661,000 for the first six
months of 2006. Our results of operations for the first six months of 2007 and
2006 are negatively impacted by the losses related to the operations of our
Medicare Advantage HMO.
Net earnings per common share, basic and diluted was $0.03 for the first six
months of 2007 and $0.01 for the first six months of 2006.
The PSN reported a segment gain before income taxes and allocated overhead of
$13.1 million for the first six months of 2007, as compared to $8.5 million for
the first six months of 2006, an increase of $4.6 million or 54.1%. The HMO
segment incurred a net loss before income taxes and allocated overhead of $5.6
million for the first six months of 2007, compared to a net loss before income
taxes and allocated overhead of $4.2 million in the first six months of 2006.
Allocated overhead was $4.5 million and $3.2 million for the first six months of
2007 and 2006, respectively.
Customer Information
The table set forth below provides (i) the total number of customers to whom we
were providing healthcare services through the PSN and HMO as of June 30, 2007
and June 30, 2006 and (ii) the aggregate customers months of the PSN and the HMO
during the first six months of 2007 and 2006. Customer months refer to the
aggregate number of customers to whom we are providing healthcare services for
each month during the period.
23
June 30, 2007 June 30, 2006
-------------------------- ------------------------
Members Member Members at Member
at End Months End of Months
of Period YTD Period YTD
------------------------------------------------------
PSN 25,300 153,400 25,900 155,100
HMO 5,100 28,700 3,100 14,400
-------------------------- ------------------------
Total 30,400 182,100 29,000 169,500
========================== ========================
Revenue
The following table provides a breakdown of our sources of revenue by segment
for year to date 2007 and 2006:
Six Months Ended June $ %
2007 2006 Increase Change
---------------- ---------------- --------------- --------------
PSN revenue from Humana $ 113,061,000 $ 99,608,000 $ 13,453,000 13.5%
PSN fee-for-service revenue 694,000 705,000 (11,000) -1.6%
---------------- ---------------- ---------------
Total PSN revenue 113,755,000 100,313,000 13,442,000 13.4%
---------------- ---------------- ---------------
Percentage of total revenue 82.4% 89.8%
HMO revenue 24,283,000 11,336,000 12,947,000 114.2%
Percentage of total revenue 17.6% 10.2%
---------------- ---------------- ---------------
Total revenue $ 138,038,000 $ 111,649,000 $ 26,389,000 23.6%
================ ================ ===============
The PSN's most significant source of revenue during both the first six months of
2007 and 2006 was the premium revenue generated pursuant to the Humana
Agreements (the "Humana Related Revenue"). The Humana Related Revenue increased
from $99.6 million in the first six months of 2006 to $113.1 million in the
first six months of 2007, an increase of approximately 13.5%.
The PSN's average per customer per month premium in the first six months of 2007
was approximately $742, an increase of approximately $95 or 14.7% per customer
over the first six months of 2006 per customer per month revenue of $647. This
increase is due to an increase of approximately 4% in the premium payment from
CMS and an increase in the average medicare risk score of the PSN's customers,
offset by a decline in membership.
The fee-for-service revenue represents amounts earned from medical services
provided to non-Humana customers in our owned physician practices.
HMO revenue was $24.3 million for the first six months of 2007 as compared to
$11.3 million in the first six months of 2006. The HMO was in its early stages
of development in the first six months of 2006. The increase in revenue is
primarily attributable to the increase in customer months between the first six
months of 2006 and the first six months of 2007. Revenue per customer per month
for the HMO increased to $845 in the first six months of 2007 from $789 in the
first six months of 2006, an increase of 7.1%. This increase is a combination of
a rate increase of approximately 5.5% and an increase in the average medicare
risk score.
In July 2007 we received the final MRA increase for 2006 premiums paid by CMS to
the HMO of $575,000. This amount is $340,000 higher than our recorded estimate
of $235,000. The $340,000 has been recorded in revenue for the six month period
ended June 30, 2007.
24
Medical Expense
$
Six Months Ended June 30 Increase %
2007 2006 (Decrease) Change
----------------- ----------------- ----------------- -------------
PSN medical expense $ 98,853,000 $ 90,144,000 $ 8,709,000 9.7%
HMO medical expense 22,437,000 10,298,000 12,139,000 117.9%
----------------- ----------------- -----------------
Consolidated total medical expense $ 121,290,000 $ 100,442,000 $ 20,848,000 20.8%
================= ================= =================
PSN Medical Expense Ratio 86.9% 89.9%
================= =================
HMO Medical Expense Ratio 92.4% 90.9%
================= =================
Consolidated Medical Expense Ratio 87.9% 90.0%
================= =================
Total Medical Expenses
Total medical expense represents the total costs of providing patient care and
is comprised of two components, medical claims expense and medical center costs.
Medical claims expense includes such costs as inpatient and outpatient services,
pharmacy benefits and physician services by providers other than the PSN's owned
affiliated providers ("Non-Affiliated Providers"). The remaining portion of
total medical expense, our medical center costs, is attributable to the costs
associated with the physician practices owned by the PSN. Approximately $115.8
million or 95.5% and $95.3 million or 94.9% of our total medical expense in the
first six months of 2007 and the first six months of 2006, respectively, are
attributable to medical claims expense.
Total medical expense was $121.3 million and $100.4 million for the first six
months of 2007 and 2006, respectively. Our Medical Expense Ratio decreased from
90.0% in the first six months of 2006 to 87.9% for the first six months of 2007.
As discussed below, included in total medical expense for the six month period
ended June 30, 2007 is a $1.1 million change in estimate relating to the PSN's
estimated medical claims payable. This change increased total medical expense by
$1.1 million, increased the medical expense ratio by .9% and reduced net income
per common share basic and diluted by $.01 for the six month period ended June
30, 2007.
We currently estimate that, on a consolidated basis, 2006 claims paid in 2007
will exceed the amount originally recorded as estimated medical expenses payable
at December 31, 2006 by $1.3 million. This amount increased total medical
expense by approximately 1.1% for the six months ended June 30, 2007. We also
estimate that, on a consolidated basis 2005 claims paid in 2006 will exceed the
amount originally recorded as estimated medical expenses payable at December 31,
2005 by $1.2 million. This amount increased total medical expense by
approximately 1.2% for the six months ended June 30, 2006. The difference
between the amount incurred and the estimated medical claims payable that was
recorded was primarily a result of unfavorable developments in our medical
claims expense.
The Humana Agreements provide that the PSN is financially responsible for all
medical services provided to the Humana Participating Customers. The Medical
Expense Ratio for the PSN segment improved to 86.9% for the first six months of
2007 as compared to 89.9% for the first six months of 2006 and 88.4% for the
year ended December 31, 2006. The PSN's total medical expense for the first six
months of 2007 was $98.9 million, compared to $90.1 million in the first six
months of 2006, an increase of approximately $8.7 million.
During 2006, the PSN implemented various medical management techniques to
improve the medical management of our customers. Some of these techniques
included chart audits for all PSN Physicians, increased focus on certain
elements of our Partners in Quality Program, implementation of an outreach
program for our more acutely ill customers in an effort to better manage the
care for these individuals and development of a comprehensive recovery plan for
customers that had serious events, such as hospitalizations or significant
procedures.
The actuarial process and models develop a range of projected medical claims
payable. At June 30, 2007, estimated medical claims payable for the PSN was
determined to be between $12.3 million and $15.0 million and we recorded a
liability of $13.4 million. In accordance with FASB Interpretation No. 14,
Reasonable Estimation of the Amount of a Loss, when no amount within the range
is a better estimate than any other amount, the accrual is recorded at the low
end of the range. Through March 31, 2007, we accrued to the low end of the
range. During the second quarter of 2007, we determined that, based on
historical results, the best estimate within the range for the PSN is the
mid-range of the range. The change from the low-end of the range to the
mid-range increased the PSN's total medical expense in the first six months of
2007 by $1.1 million which increased the PSN's medical expense ratio for this
period by 1.1% and its medical expense per customer by approximately $7.00.
25
Included in the PSN's medical expense the first six months of 2007 is a charge
of $2.0 million reflecting the amount that we currently estimate 2006 claims
paid in 2007 will exceed the amount recorded as estimated medical claims payable
at December 31, 2006. This represents 2.0% of total medical expense recorded in
the first six months of 2007. We estimate that the 2005 claims paid in the first
six months of 2006 will exceed the estimated medical claims payable that was
recorded at December 31, 2005 by approximately $900,000 or 1% of total medical
expense for the six months ended June 30, 2006. The difference between the
amount incurred and the estimated medical claims payable that was recorded is
primarily a result of unfavorable developments in our medical claims expense.
On a per customer per month basis, total medical expense for the first six
months of 2007 for the PSN was $645 as compared to $581 in the first six months
of 2006. This $64 increase is primarily a result of increased rates paid to
hospitals and for outpatient services and an increase in the intensity of the
health services required by our customers as indicated by the increase in the
risk score of these members.
Approximately $5.5 million of our total medical expense in the first six months
of 2007 related to physician practices we own as compared to $5.1 million in the
first six months of 2006.
Total medical expense for the HMO was $22.4 million for the first six months of
2007 as compared to $10.3 million for the first six months of 2006. The increase
of $117.9% in the first six months of 2007 is substantially due to the increase
in the number of HMO member months between the first six months of 2007 and the
first six months of 2006.
The HMO's Medical Expense Ratio for the first six months of 2007 was 92.4% as
compared to 90.9% for the first six months of 2006 and 102.4% for the year ended
December 31, 2006. Based on subsequent claim payments, we have determined that
the estimated medical expenses payable at June 30, 2006 was understated by
approximately $1.2 million. The impact of this change in estimate on the first
six months of 2006 would have been to increase the HMO's Medical Expense Ratio
for the first six months of 2006 to 101.4%. The difference between the amount
incurred and the estimated medical claims payable that was recorded was
primarily a result of unfavorable developments in our medical claims expense. At
December 31, 2006, the HMO's estimated medical claims payable was estimated to
be $4.6 million. Based on current claims data, we estimate that the estimated
medical claims payable will approximate $3.8 million. This $800,000 reduced the
HMO's medical claims expense in the first six months of 2007, thereby reducing
the HMO's Medical Expense Ratio for the first six months of 2007's by
approximately 3.3%. The difference between the amount incurred and the estimated
medical claims payable that was recorded was primarily a result of favorable
developments in our medical claims expense.
At June 30, 2007, we estimated that the range for estimated medical claims
payable for the HMO was between $5.6 million and $6.3 million and we recorded a
liability of $5.6 million. Based on historical results, we believe that the low
end of the range continues to be the best estimate within the range for the HMO.
Operating Expenses
Six Months Ended June 30 Increase %
2007 2006 (Decrease) Change
----------------- ----------------- ----------------- -------------
Payroll, payroll taxes and benefits $ 6,703,000 $ 5,003,000 $ 1,700,000 34.0%
Percentage of total revenue 4.9% 4.5%
Marketing and advertising 2,032,000 1,996,000 $36,000 1.8%
Percentage of total revenue 1.5% 1.8%
General and administrative 5,693,000 3,549,000 $ 2,144,000 60.4%
Percentage of total revenue 4.1% 3.2%
----------------- ----------------- -----------------
Total operating expenses $ 14,428,000 $ 10,548,000 $ 3,880,000 36.8%
================= ================= =================
26
Payroll, Payroll Taxes and Benefits
Payroll, payroll taxes and benefits include salaries and related costs for our
executive, administrative and sales staff. For the first six months of 2007,
payroll, payroll taxes and benefits were $6.7 million, compared to $5.0 million
in the first six months of 2006, an increase of $1.7 million. Approximately $1.1
million of this increase represents the cost for additional people required to
accommodate the growth of the HMO. Approximately $500,000 of this increase is a
result of severance costs associated with a Separation Agreement with our former
President and Chief Operating Officer.
As the HMO's customer base had grown, we increased our HMO staff from 49 at
December 31, 2005 to 70 at June 30, 2007. These employees were added to meet the
operational needs of the HMO's growing membership. The increase in full time
employees resulted in payroll, payroll taxes and benefits attributable to the
HMO increasing to $3.0 million for the first six months of 2007 as compared to
$1.9 million for the first six months of 2006, a 56.4% increase.
Included in corporate salary expense for the second quarter of 2007 is
approximately $500,000 of severance benefits payable pursuant to the Separation
Agreement we entered into with our former President and Chief Operating Officer
in April 2007.
In July 2007, we communicated to affected employees a restructuring plan
designed to reduce costs and improve operating efficiencies. The restructuring
plan, expected to be complete by the end of August 2007, is anticipated to
include the closure of two of the HMO's office locations, one PSN medical
practice and a workforce reduction involving 16 employees. In connection with
this plan, we expect to record approximately $600,000 of restructuring costs
during the third quarter of 2007, including approximately $150,000 of cash for
severance payments.
Marketing and Advertising
Marketing and advertising expense includes advertising expenses and commissions.
Marketing and advertising expense was $2.0 million for the first six months of
2007 and for the first six months of 2006.
General and Administrative
General and administrative expenses for the first six months of 2007 totaled
$5.7 million, an increase of $2.1 million, or 60.4% over the first six months of
2006.
The HMO incurred general and administrative costs of approximately $2.8 million
for the first six months of 2007 as compared to approximately $1.5 million for
the first six months of 2006 this is an increase of approximately $1.4 million
or 94.6%. This increase is a direct result of the substantial growth in the
HMO's membership, as this growth required additional infrastructure.
Corporate general and administrative costs for the first six months of 2007 were
$2.4 million as compared to $1.6 million for the first six months of 2006, an
increase of 47.8% or $771,000. Approximately $400,000 of this increase relates
to an increase in professional service costs. In addition, depreciation expense
increased $100,000 and fees paid to our Board of Directors increased $60,000.
Under the restructuring plan we implemented in July 2007, we expect that we will
incur a charge of approximately $370,000 for continuing lease obligations on
closed office locations and approximately $80,000 for the write-off of certain
fixed assets and other associated costs in the third quarter of 2007.
Other Income (Expense)
We realized other income of $690,000 for the first six months of 2007 as
compared to $413,000 for the first six months of 2006. The increase was
primarily as a result of an increase in investment income as we had more cash to
invest and rates have increased over 2006. Cash is invested in highly liquid
securities, primarily certificates of deposits with short term maturities and
money market fund. We expect to continue to invest our excess cash in this
manner in 2007.
27
Income taxes
Our effective tax rate was 41.5% for the first six months of 2007 and 38.3% for
the first six months of 2006. The increase in the effective income tax rate in
2007 is a result of a decrease in the estimated tax benefit of certain deferred
tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and equivalents at June 30, 2007 was approximately $29.3 million as
compared to approximately $23.1 million at December 31, 2006. Of our $29.3
million of cash and equivalents at June 30, 2007, $17.8 million was statutorily
limited to use by the HMO.
We had a working capital surplus of approximately $22.7 million as of June 30,
2007 and $19.6 million at December 31, 2006.
In June 2007, the HMO received a July premium payment from CMS of approximately
$4.5 million. This amount is reflected as unearned premiums on our balance
sheet.
Our total stockholders' equity was approximately $33.0 million and $30.9 million
at June 30, 2007 and December 31, 2006, respectively. This following comprised
the changes in stockholders' equity during the first six months of 2007:
o Net income of $1.8 million;
o Stock based compensation of $321,000;
o The exercise of stock options totaling , including the related tax
benefit of $239,000; and
o The impact of the adoption of Interpretation No. 48 which resulted
in a charge of $437,000.
At June 30, 2006, we had no outstanding debt.
During the six months ended June 30, 2007, our cash and equivalents increased
$6.2 million over the balance at December 31, 2006. Net cash provided by
operating activities provided approximately $6.5 million in cash and
equivalents, of which net income accounted for approximately $1.8 million. Other
large sources of cash from operating activities were:
o an increase in unearned premiums of $4.5 million;
o an increase in estimated medical expenses payable of $1.1 million;
o an increase in amounts due to CMS of $1.0 million;
o an increase in accrued expenses of $889,000;
o depreciation and amortization expense of $451,000;
o a decrease in deferred income taxes of $938,000; and
o stock based compensation expense of $321,000.
These sources of cash were partially offset by the following uses of cash:
o an increase in accounts receivable of $4.4 million, primarily a
result of the mid-year MRA adjustment included in due from Humana;
o the write off of uncollectible accounts of $367,000;
o an increase in prepaid expenses of $319,000; and
o a decrease in accounts payable of $292,000;
Net cash used in investing activities for the quarter ended June 30, 2007 was
approximately $409,000 which related to capital expenditures made during the
quarter.
Our financing activities for the quarter ended June 30, 2007 provided
approximately $97,000 of cash in connection with the issuance of common stock
upon the exercise of outstanding options.
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We have a line of credit that expires on March 31, 2008. The outstanding
balance, if any, bears interest at the bank's prime rate. The credit facility
requires us 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 issued in favor of Humana. We have not
utilized this line in the 2007 quarter.
Our HMO has required and continues to require a considerable amount of capital.
We contributed approximately $8.5 million to the HMO during 2006 and another
$11.0 million through July 2007 to finance the operations and growth of the HMO.
We project that in 2007, the HMO's business will continue to generate a loss
before allocated overhead and income taxes. We are continuing to commit
resources in an effort to increase our HMO customer base. The HMO's actual cash
needs and losses for 2007 are expected to be strongly influenced by, among other
things, the HMO's membership levels, operating costs and Medical Expense Ratio
as well as the scale, cost and effectiveness of various marketing programs we
may undertake. In July 2007 we restructured our operations to better match the
current size of the HMO. We are still not in a position to meaningfully estimate
when, if ever, the HMO's business will become profitable and/or generate cash
from operations. We may be required to fund the development and expansion of the
HMO business, including any associated losses, for an extended period of time.
Nonetheless, we anticipate that the on-going development efforts, reserve
requirements and operating costs for our still developing HMO business can be
funded by our current resources and projected cash flows from operations until
at least December 31, 2007.
We have adopted an investment policy with respect to the investment of its cash
and equivalents. The investment policy goal is to obtain the highest yield
possible while investing only in highly rated instruments or investments with
nominal risk of loss of principal. The investment policy sets forth a list of
"Permitted Investments" and provides that the Chief Financial Officer or the
Chief Executive Officer must approve any exceptions to the policy.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any Off-Balance Sheet Arrangements that have or are reasonably
likely to have a current or future effect our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
SUBSEQUENT EVENT
In July 2007, we implemented a restructuring plan designed to reduce costs and
improve operating efficiencies. The restructuring plan, expected to be complete
by the end of August 2007, is anticipated to include the closure of two of the
HMO's office locations, one PSN medical practice (the "PSN Practice"), and a
workforce reduction involving 16 employees. In connection with this plan, we
expect to record approximately $600,000 of restructuring costs during the third
quarter of 2007, including approximately $150,000 of cash for severance
payments, approximately $370,000 of cash for continuing lease obligations on
closed office locations, and approximately $80,000 for the write-off of certain
fixed assets and other associated costs. We project that the restructuring will
enable us to reduce our related operating expenses by approximately $1.2 million
per annum, with no or limited impact on the HMO's and PSN's ability to serve
their existing members, respectively. At June 30, 2007, the PSN Practice being
closed served approximately 450 members in South Florida. For the six months of
2007, this practice generated $2.6 million of revenue and negatively impacted
the PSN's segment profit before allocated overhead and income taxes.
The restructuring costs will be accrued in the third quarter. Of the total
amount, approximately $400,000 relates to the HMO with the balance of $200,000
associated with the PSN.
ITEM 3A 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.
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Intangible Asset Risk
We have intangible assets and 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. We evaluate the continuing value of
goodwill by using valuation techniques based on multiples of earnings, revenue,
EBITDA (i.e., earnings before interest, taxes, depreciation and amortization)
particularly with regard to entities similar to us that have recently been
acquired. We also consider the market value of our own stock and those of
companies similar to ours. As of June 30, 2007 we believe our intangible assets
are recoverable, however, 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.
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
Under the supervision and with the participation of our Chief Executive Officer,
or CEO, and our Chief Financial Officer, or CFO, we carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures for the period ended June 30, 2007.
Based on our evaluation, our CEO and CFO concluded that our disclosure controls
and procedures are effective to ensure that the information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms.
There have been no significant changes in our internal control over financial
reporting that occurred during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 other
than as set forth below.
The following text supplements the risk factors described in out Form 10-K for
the fiscal year ended December 31, 2006 under the heading "Risk Factors - There
Can be No Assurance that We Will be Successful in Our Operation of the HMO".
There Can be No Assurance that We Will be Successful in Our Operation of the
HMO.
To successfully operate the HMO, we believe we will need to reduce its medical
expenses and other operating costs as a percentage of revenue and continue to
develop the following capabilities, among others: sales and marketing, medical
management, customer service and regulatory compliance. No assurances can be
given that we will be successful in such endeavors or in operating this segment
of our business despite our allocation of a substantial amount of resources for
this purpose.
The HMO's actual cash needs and losses for 2007 are expected to be strongly
influenced by, among other things, the HMO's membership levels, operating costs
and Medical Expense Ratio as well as the scale, cost and effectiveness of
various marketing programs we may undertake.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In June 2007, we repurchased from Debra A. Finnel, who served as our President
and Chief Operating Officer until April 9, 2007, options she held to purchase
800,000 shares of our Common Stock with an exercise price of $1.83 at an
aggregate repurchase price of $10,000, as summarized in the table below.
Maximum
Number (or
Approximate
Total Number of Dollar Value)
Shares (or of Shares (or
Units) Units) that
Purchased as May Yet Be
Average Part of Purchased
Total Number of Price Paid Publicly Under the
Shares (or Units) per Share Announced Plans Plans or
Period Purchased* (or Unit) or Programs Programs
------ ---------- --------- --------- --------
June 26, 2007 Options to $0.0125 0 0
purchase 800,000 per share
shares of our underlying
Common Stock the Option
* As discussed above, these options were not repurchased through a publicly
announced plan or program.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders (the "Annual Meeting") was held at the
Marriott Hotel, 1001 Okeechobee Blvd., West Palm Beach, Florida, on June 7, 2007
for the following purposes:
o To elect seven members to our Board of Directors to hold office
until the next Annual Meeting of Shareholders or until their
successors are duly elected and qualified; and
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o To consider and vote upon a proposal to approve of and ratify the
selection of Grant Thornton LLP. as our independent auditors for the
fiscal year ending December 31, 2007.
The number of outstanding shares of our Common Stock as of April 13, 2007, the
record date for the Annual Meeting, was 50,270,964 shares. 42,551,565 shares of
Common Stock were represented in person or by proxy at the Annual Meeting.
Pursuant to our Articles of Incorporation, shareholders are entitled to one vote
for each share of Common Stock.
The following directors were elected at the Annual Meeting: (i) Michael M.
Earley, (ii) Martin W. Harrison, M.D., (iii) Barry T. Zeman, (iv) Karl M. Sachs,
(v) Eric Haskell, (vi) Robert E. Shields and (vii) David A. Florman.
The following table sets forth the number of votes cast for, against, or
withheld for each director nominee, as well as the number of abstentions and
broker non-votes as to each such director nominee:
Votes Cast Votes Cast Broker
Director Nominee For Against Votes Withheld Abstentions Non-Votes
---------------- --- ------- -------------- ----------- ---------
Michael M. Earley 42,369,045 - 182,520 - -
Martin W. Harrison 41,125,808 - 1,425,757 - -
Barry T. Zeman 41,659,433 - 892,132 - -
Karl M. Sachs 41,162,908 - 1,388,657 - -
Eric Haskell 41,635,229 - 916,336 - -
Robert E. Shields 42,424,645 - 126,920 - -
David A. Florman 42,425,645 - 125,920 - -
With respect to the proposal to approve of and ratify the selection of Grant
Thornton LLP as our independent registered public accounting firm for the fiscal
year ending December 31, 2007: (i) 42,491,279 votes were cast for such proposal,
(ii) 35,097 votes were cast against such proposal and (iii) 25,188 shares
abstained from voting on such proposal. No votes were withheld nor were there
any broker non-votes with respect to such proposal. Accordingly, the proposal to
approve of and ratify Grant Thornton LLP as the Company's independent registered
public accounting firm for the fiscal year ending December 31, 2007 was approved
by the shareholders.
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. Physician Practice Management Participation Agreement, dated December 1,
1998, between Metcare of Florida, Inc. and Humana, Inc.(5)
10.4. Supplemental Stock Option Plan (6)
10.5. Omnibus Equity Compensation Plan (7)
10.6. Amended and Restated Employment Agreement between Metropolitan and
Michael M. Earley dated January 3, 2005 (9)
10.7. Amended and Restated Employment Agreement between Metropolitan and
Robert J. Sabo dated November 9, 2006 (10)
10.8. Amended and Restated Employment Agreement between Metropolitan and
Roberto L. Palenzuela dated January 3, 2005 (9)
10.9 Employment Agreement between Metcare of Florida, Inc. and Jose A.
Guethon, M.D. (5)
10.10. Form of Option Award Agreement for Option Grants to Directors pursuant
to the Omnibus Compensation Plan (5)
10.11. Form of Option Award Agreement for Option Grants to Key Employees
pursuant to the Omnibus Compensation Plan (5)
10.12. Form of Option Award Agreement for Option Grants to Employees pursuant
to the Omnibus Compensation Plan (5)
10.13. Agreement between Metcare of Florida, Inc. and the Centers for Medicare
and Medicaid Services (5)
32
10.14. Transition and Severance Agreement between Metropolitan and David S.
Gartner, dated August 18, 2006. (11)
10.15 Transition and Severance Agreement between Metropolitan and Debra A.
Finnel, dated April 9, 2007 (12)
10.16 Summary of 2007 Director Compensation Plan*
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 and the Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
----------------------------------
* filed herewith
** furnished herewith
(1) Incorporated by reference to Metropolitan's Registration Statement on Form
8-A12B filed with the Commission on November 19, 2004 (No. 001-32361).
(2) Incorporated by reference to Metropolitan's Current Report on Form 8-K filed
with the Commission on September 30, 2004.
(3) Incorporated by reference to Metropolitan's Amendment to Registration
Statement on Form SB-2/A filed with the Commission on August 2,. 2001 (No.
333-61566). Portions of this document were omitted and were filed separately
with the SEC on or about August 2, 2001 pursuant to a request for confidential
treatment.
(4) Incorporated by reference to Metropolitan's Amendment to Annual Report for
the year ended December 31, 2003 on Form 10-K/A filed with the Commission on
July 28, 2004. Portions of this document have been omitted and were filed
separately with the SEC on July 28, 2004 pursuant to a request for confidential
treatment.
(5) Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 2005, as filed with the Commission on March 16, 2006.
(6) Incorporated by reference to Metropolitan's Amendment to Annual Report for
the year ended December 31, 2003 on Form 10-K/A filed with the Commission on
July 28, 2004.
(7) Incorporated by reference to Metropolitan's Registration Statement on Form
S-8 filed with the Commission on February 24, 2005 (No. 333-122976).
(8) Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 2003, as filed with the Commission on March 22, 2004.
(9) Incorporated (by reference to our Annual Report on Form 10-K for the year
ended December 31, 2004, as filed with the Commission on March 22, 2005.
(10) Incorporated by reference to Metropolitan's Current Report on Form 8-K
filed with the Commission on October 20, 2006.
(11) Incorporated by reference to Metropolitan's Current Report on Form 8-K
filed with the Commission on August 18, 2006.
(12) Incorporated by reference to Metropolitan's Current Report on Form 8-K
filed with the Commission on April 9, 2007.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
Undersigned thereunto duly authorized.
METROPOLITAN HEALTH NETWORKS, INC.
Registrant
Date: August 6, 2007 /s/ Michael M. Earley
---------------------
Michael M. Earley
Chairman, Chief Executive Officer
/s/ Robert J. Sabo
Robert J. Sabo
Chief Financial Officer
34