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 March 31, 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 April 30, 2007
------------------------------------------------------- ------------------------------------------------------
Common Stock, $.001 par value per share 50,272,864 shares
1
Metropolitan Health Networks, Inc.
Index
Part I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
as of March 31, 2007 and December 31, 2006 3
Condensed Consolidated Statements of
Income for the Three Months Ended
March 31, 2007 and 2006 4
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION 21
Item 1A Risk Factors 21
Item 6. Exhibits 21
SIGNATURES 25
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
================================================================================
March 31, December 31,
ASSETS 2007 2006
(unaudited) (audited)
------------ ------------
CURRENT ASSETS
Cash and equivalents, including $14.1 million in 2007 and $12.5 million in 2006
statutorily limited to use by the HMO $ 27,939,845 $ 23,110,042
Accounts receivable, net of allowance of $461,000 in 2007 and $601,000 in 2006 1,043,265 674,709
Due from Humana, net of allowance of $1.6 million in 2007 and 2006 5,193,815 2,970,821
Inventory 291,751 284,777
Prepaid expenses 894,534 706,390
Deferred income taxes 1,300,000 1,600,000
Other current assets 607,315 1,118,099
------------ ------------
TOTAL CURRENT ASSETS 37,270,525 30,464,838
Property and equipment, net of accumulated depreciation and
amortization of $1,805,000 in 2007 and $1,561,000 in 2006, respectively 2,128,254 2,275,105
Investments 688,997 688,997
Goodwill 1,992,133 1,992,133
Deferred Income Taxes 5,777,000 5,767,000
Other Assets 627,846 652,960
------------ ------------
TOTAL ASSETS $ 48,484,755 $ 41,841,033
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 785,679 $ 887,174
Accrued payroll and payroll taxes 2,429,755 1,810,428
Estimated medical expenses payable 5,484,000 4,743,737
Unearned premiums 4,263,820 --
Due to CMS 3,131,207 2,702,825
Accrued expenses 1,509,921 767,606
------------ ------------
TOTAL CURRENT LIABILITIES 17,604,382 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;
50,270,964 in 2007 and 50,268,964 in 2006 issued and outstanding, respectively 50,271 50,269
Additional paid-in capital 41,613,148 41,453,311
Accumulated deficit (11,283,046) (11,074,317)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 30,880,373 30,929,263
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 48,484,755 $ 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
================================================================================
Three Months Ended March 31,
2007 2006
(unaudited) (unaudited)
-----------------------------
REVENUE $ 68,101,456 $ 54,767,533
MEDICAL EXPENSES 60,184,345 49,548,510
------------ ------------
GROSS PROFIT 7,917,111 5,219,023
OTHER OPERATING EXPENSES
Administrative payroll, payroll taxes and benefits 3,326,970 2,447,799
Marketing and advertising 1,609,269 973,930
General and administrative 2,991,378 1,589,917
------------ ------------
Total Other Operating Expenses 7,927,617 5,011,646
------------ ------------
OPERATING (LOSS) INCOME (10,506) 207,377
OTHER INCOME (EXPENSE):
Interest income 381,230 189,438
Other income (expense) 2,548 19,082
------------ ------------
Total other income (expense) 383,778 208,520
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE 373,272 415,897
Income tax expense 145,000 159,200
------------ ------------
NET INCOME $ 228,272 $ 256,697
============ ============
NET EARNINGS PER COMMON SHARE:
Basic $ -- $ --
============ ============
Diluted $ -- $ --
============ ============
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
================================================================================
Three Months Ended March 31,
2007 2006
(unaudited) (unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES: $ 4,925,787 $ 5,100,872
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments -- (2,380,026)
Capital expenditures (96,684) (329,357)
------------ ------------
Net cash used in investing activities (96,684) (2,709,383)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 700 8,750
------------ ------------
Net cash provided by financing activities 700 8,750
------------ ------------
NET INCREASE IN CASH AND EQUIVALENTS 4,829,803 2,400,239
CASH AND EQUIVALENTS - beginning of period 23,110,042 15,572,862
------------ ------------
CASH AND EQUIVALENTS - end of period $ 27,939,845 $ 17,973,101
============ ============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
Metropolitan Health Networks, Inc. & Subsidiaries
Three Months Ended March 31, 2007
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 (also 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
three-month period ended March 31, 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, a
national health maintenance organization, to provide medical care to Medicare
beneficiaries enrolled under Humana's health plans. To deliver care, we utilize
our wholly-owned medical practices and also have contracted directly or
indirectly through Humana with non-owned 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. 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.
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 FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, Previously, we had accounted for tax
contingencies in accordance with Statement of Financial Accounting Standards 5,
Accounting for Contingencies. As required by Interpretation No. 48, which
clarifies 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 to the January 1, 2007, balance of retained
earnings.
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 require significant judgment to apply. We have net operating
loss carryforwards related to years prior to 2003. To the extent such net
operating losses are utilized, the years from which the loss carryforwards
originate are open for examination. Upon adoption of Interpretation No. 48, we
have evaluated our tax positions with regard to the years. We have been notified
that the Internal Revenue Service will begin examining our 2005 Federal income
tax return in the second quarter of 2007. We do not expect to recognize a
significant change to the total amount of unrecognized tax benefit as a result
of the examination. 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 examine the applicable returns.
We recognize interest accrued related to unrecognized tax benefits in interest
expense and penalties in operating expenses for all periods presented. No
interest or 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 ESTIMATED MEDICAL EXPENSES PAYABLE
Each quarter we update our claims paid information and reevaluate the adequacy
of estimated medical expenses payable accrued at the previous year and prior
quarter end. We currently estimate that 2006 claims paid in 2007 will exceed the
amount originally recorded as estimated medical claims payable at December 31,
2006 by $1.5 million. This represents 2.5% of medical claim expenses recorded in
the 2007 quarter. The $1.5 million change in the amount incurred related to
years prior to 2007 was primarily a result of unfavorable developments in our
medical claims expense.
NOTE 6 INCOME TAXES
The effective income tax rate was 38.8% for the three months ended March 31,
2007 compared to 38.3% for the three months ended March 31, 2006.
7
NOTE 7 EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common shares outstanding during the period
adjusted for incremental shares attributed to outstanding options and warrants,
convertible debt and preferred stock convertible into shares of common stock.
For the three months ended March 31,
2007 2006
-------------------- -----------------
Net Income $228,000 $257,000
Less: Preferred stock dividend (13,000) (13,000)
-------------------- -----------------
Income available to common shareholders $215,000 $244,000
==================== =================
Denominator:
Weighted average common shares outstanding 50,270,000 49,860,000
==================== =================
Basic earnings per common share $0.00 $0.00
==================== =================
Income available to common shareholders $215,000 $244,000
==================== =================
Denominator:
Weighted average common shares outstanding 50,270,000 49,860,000
Common share equivalents of outstanding stock:
options and warrants 1,495,000 1,344,000
-------------------- -----------------
Weighted average common shares outstanding 51,765,000 51,204,000
==================== =================
Diluted earnings per common share $0.00 $0.00
==================== =================
Weighted average of antidilutive stock options 153,000 539,000
NOTE 8 STOCKHOLDERS' EQUITY
We issued 2,000 shares of common stock in connection with the exercise of stock
options during the first three months of 2007.
NOTE 9 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.
8
Compensation
On April 9, 2007, we entered into a separation agreement (the "Separation
Agreement") with 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. The amount payable under the
severance agreement and the value of the options that accelerated at the time of
the Separation Agreement, which total approximately $500,000 and will be accrued
in the second quarter of 2007.
Guarantees
In connection with the 2003 sale of the pharmacy division, the purchaser of the
pharmacy division agreed to assume our obligation under a lease which ran
through 2012. In the event of such purchaser's default, we could potentially be
responsible to fulfill these lease commitments which totals approximately
$640,000 at March 31, 2007.
NOTE 10 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.
THREE MONTHS ENDED MARCH 31, 2007 PSN HMO Total
-------------------------------------------------------------------- ------------ ------------ ------------
Revenues from external customers $ 57,093,000 $ 11,009,000 $ 68,102,000
Segment gain (loss) before allocated overhead and income taxes 6,499,000 (3,867,000) 2,632,000
Allocated corporate overhead 1,015,000 1,244,000 2,259,000
Segment gain (loss) after allocated overhead and before income taxes 5,484,000 (5,111,000) 373,000
Segment assets 23,372,000 16,836,000 40,208,000
Goodwill 1,992,000 - 1,992,000
THREE MONTHS ENDED MARCH 31, 2007 PSN HMO Total
-------------------------------------------------------------------- ------------ ------------ ------------
Revenues from external customers $50,078,000 $4,690,000 $54,768,000
Segment gain (loss) before allocated overhead 3,955,000 (1,928,000) 2,027,000
Allocated corporate overhead 944,000 667,000 1,611,000
Segment gain (loss) after allocated overhead and before income taxes 3,011,000 (2,595,000) 416,000
Segment assets 18,861,000 13,732,000 32,593,000
Goodwill 1,992,000 - 1,992,000
9
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;
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;
10
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 primary businesses 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. As of March 31, 2007, the PSN and the HMO provided
healthcare benefits to approximately 25,500 and approximately 4,800 Medicare
Advantage beneficiaries, respectively.
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 the 2007 and 2006 quarters 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
We have two network contracts (the "Humana Agreements") with Humana. Humana is
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 March 31,
2007, the Humana Agreements covered approximately 19,200 Humana Plan Customers
(as defined below) in Central Florida and 6,300 Humana Plan Customers in South
Florida. Approximately 83.3% of the 2007 quarter's revenue was generated through
the Humana Agreements.
11
We have built our PSN physician network by contracting with primary care
physicians for their services and acquiring and operating our own physician
practices. We currently 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.
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.
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.
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. The HMO has been marketing its
"AdvantageCare" branded plan since July 2005.
The HMO is required to maintain satisfactory minimum net worth 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 are continuing 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.
The HMO's revenue is generated by premiums consisting of monthly payments per
customer that are established by the CMS Contract. The HMO recorded its first
revenue in the third quarter of 2005.
While the HMO's business has continued to grow, such growth has required and is
expected to continue to require a considerable amount of require 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 wells as the
scale, cost and effectiveness of various marketing programs we may undertake. We
are currently restructuring our operations to better match the current size of
the HMO. See - "LIQUIDITY AND CAPITAL RESOUCES" section contained in this Form
10-Q.
12
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 also
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.
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 projected medical claims
payable. In accordance with FASB Interpretation No. 14, Reasonable Estimation of
the Amount of a Loss, which states that when no amount within the range is a
better estimate than any other amount, we accrue to 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 become more
exact, we adjust the amount of our liability estimates, and include the changes
in estimates 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 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.
13
Use of Estimates, Deferred Tax Assets.
We have recorded deferred tax assets of approximately $7.1 million at March 31,
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 $18.8 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 MARCH 31, 2007
AND MARCH 31, 2006
Summary
For the three months ended March 31, 2007 (the "2007 quarter"), we realized
revenue of $68.1 million compared to $54.8 million of revenue realized for the
three months ended March 31, 2006 (the 2006 quarter), an increase of
approximately $13.3 million or 24.3%. Of this increase, approximately $7.0
million related to the PSN is the result of higher per customer premiums.
Approximately $6.3 million of the increase is related to the HMO and is
principally the result of membership growth. Medical expenses for the 2007
quarter were $60.2 million, an increase of $10.6 million over the 2006 quarter.
Our ratio of medical expense to revenue (the "Medical Expense Ratio") decreased
to 88.4% in the 2007 quarter compared to 90.5% in 2006. The Medical Expense
Ratio for the PSN segment improved to 86.9% in the 2007 quarter as compared to
90.4% in the 2006 quarter and 88.4% for all of 2006. For the HMO, the Medical
Expense ratio was 95.9% in the 2007 quarter as compared to 91.9% in the 2006
quarter and 102.4% for all of 2006.
Income from continuing operations before income taxes for the 2007 quarter was
$373,000 compared to $416,000 in the 2006 quarter. As described below, our
results of operations for the 2007 quarter, like those of the 2006 quarter, are
negatively impacted by the losses related to the operations of our Medicare
Advantage HMO. Net income for the 2007 quarter was $228,000 compared to $257,000
for the 2006 quarter.
Net earnings per share, basic was $0.00 for the 2007 and 2006 quarters.
In both the 2007 and 2006 quarters, we operated in two financial reporting
segments, the PSN business and the HMO business.
The PSN reported a segment gain before income taxes and allocated overhead of
$6.5 million for the 2007 quarter, an increase of $2.5 million or 64.3% as
compared to $4.0 million in the 2006 quarter. The HMO segment, which commenced
operations in July 2005, incurred a net loss before income taxes and allocated
overhead of $3.9 million for the 2007 quarter, compared to a net loss before
income taxes and allocated overhead of $1.9 million in the 2006 quarter.
Allocated overhead was $2.3 million and $1.6 million in the 2007 and 2006
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 March 31, 2007
and March 31, 2006 and (ii) the aggregate customers months of the PSN and the
HMO during the first 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.
14
March 31, 2007 March 31, 2006
Member Member
Members Months Members Months
------------------------------------------------------------------------------
PSN 25,500 76,700 26,000 77,500
HMO 4,800 13,500 2,200 5,900
------------------------------------ ------------------------------------
Total 30,300 90,200 28,200 83,400
==================================== ====================================
At April 1, 2007 the HMO had approximately 5,200 customers and the PSN had
approximately 25,600 customers.
Revenue
The following table provides a breakdown of our sources of revenue by segment
for the 2007 quarter and the 2006 quarter:
Three Months Ended March 31 $ %
2007 2006 Increase Change
---------------------- ---------------------- --------------------- ------------------
PSN revenue from Humana $ 56,745,000 $ 49,702,000 $ 7,043,000 14.2%
Percentage of total revenue 83.3% 90.8%
HMO revenue 11,009,000 4,690,000 6,319,000 134.7%
Percentage of total revenue 16.2% 8.6%
Other 347,000 376,000 (29,000) -7.7%
Percentage of total revenue 0.5% 0.7%
---------------------- ---------------------- ---------------------
Total revenue $ 68,101,000 $ 54,768,000 $ 13,333,000 24.3%
====================== ====================== =====================
Revenue for the 2007 quarter increased $13.3 million, or 24.3%, over the 2006
quarter, from $54.8 million of revenue in the 2006 quarter to $68.1 million of
revenue in the 2007 quarter.
PSN revenue is comprised of the following:
$
Three Months Ended March 31 Increase %
2007 2006 (Decrease) Change
------------------------ ---------------------- --------------------- ------------------
Humana premiums $ 56,745,000 $ 49,702,000 $ 7,043,000 14.2%
Fee-for-service 347,000 376,000 ($29,000) -7.7%
------------------------ ---------------------- ---------------------
Total $ 57,092,000 $ 50,078,000 $ 7,014,000 14.0%
======================== ====================== =====================
PSN revenue increased 14.0%, from $50.1 million in the 2006 quarter to $57.1
million in the 2007 quarter.
The PSN's most significant source of revenue during both the 2007 and 2006
quarters was the premium revenue generated pursuant to the Humana Agreements
(the "Humana Related Revenue"). The Humana Related Revenue increased from $49.7
million in the 2006 quarter to $56.7 million in the 2007 quarter, an increase of
approximately 14.2%.
The PSN's average per customer per month premium in the 2007 quarter was
approximately $740, an increase of approximately $99 per customer over the 2006
quarter. This increase is due to a rate increase of approximately 4% in the
payment from CMS and an increase in the average Medicare Risk Adjustment ("MRA")
score of customers.
The fee-for-service revenue represents amounts earned from medical services
provided to non-Humana customers in our owned physician practices.
15
Revenue for the HMO was $11.0 million for the 2007 quarter as compared to $4.7
million in 2006. The HMO began generating revenue during the last two quarters
of 2005 and was in its very early stages of development in the 2006 quarter. The
increase in revenue is primarily attributable to the increase in our customer
base of over 100%. In addition, per customer per month revenue has increased
approximately 3% from the 2006 quarter to the 2007 quarter.
Expenses
$
Three Months Ended March 31 Increase %
2007 2006 (Decrease) Change
-------------------- ----------------------- ---------------------- ---------------
Total medical expenses $ 60,184,000 $ 49,548,000 $ 10,636,000 21.5%
Percentage of total revenue 88.4% 90.5%
Payroll, payroll taxes and benefits 3,327,000 2,448,000 879,000 35.9%
Percentage of total revenue 4.9% 4.5%
Marketing and advertising 1,609,000 974,000 $635,000 65.2%
Percentage of total revenue 2.4% 1.8%
General and administrative 2,991,000 1,589,000 $1,402,000 88.2%
Percentage of total revenue 4.4% 2.9%
-------------------- ----------------------- ----------------------
Total expenses $ 68,111,000 $ 54,559,000 $ 13,552,000 24.8%
==================== ======================= ======================
Total operating expenses for the 2007 quarter were $68.1 million, an increase of
$13.6 million over the 2006 quarter. In the 2007 quarter we incurred
approximately $15.0 million in expenses related to the HMO division, compared to
approximately $6.7 million in the 2006 quarter.
Total Medical Expenses
Total medical expenses represent the total costs of providing patient care and
are comprised of two components, direct medical expenses and other medical
expenses. Total medical expenses were $60.2 million and $49.5 million for the
2007 and 2006 quarters, respectively. Our Medical Expense Ratio decreased from
90.5% in the 2006 quarter to 88.4% in the 2007 quarter. Approximately $57.5
million or 95.5% of our total medical expenses in the 2007 quarter are
attributable to direct medical services such as inpatient and outpatient
services, pharmacy benefits and physician services by non-affiliated providers.
In the 2006 quarter, approximately $47.0 million or 94.8% of our total medical
expenses were attributable to direct medical services. The increase in the 2007
quarter is due, in part, to the substantial increase in the number of HMO
customers. Direct medical expenses attributable to the HMO increased $6.2
million or 145% from the 2006 quarter to the 2007 quarter.
The PSN's medical expenses in the 2007 quarter were $49.6 million, compared to
$45.2 million in the 2006 quarter, an increase of approximately $4.4 million.
Included in the 2007 quarter is a charge of $1.8 million reflecting the amount
that we currently estimate 2006 claims paid in 2007 will exceed the amount
originally estimated as medical claims payable at December 31, 2006. This
represents 3% of medical expenses recorded in the 2007 quarter. The $1.8 million
change in the amount incurred was primarily a result of unfavorable developments
in our medical claims expense. At March 31, 2006, we estimated that the 2005
claims paid in 2006 would exceed the estimated medical claims payable of $12.5
million that was recorded at December 31, 2005 by approximately $200,000.
On a per customer per month basis, medical expense in the 2007 quarter for the
PSN was $647 as compared to $584 in the 2006 quarter. Of this $63 increase, $23
relates to the $1.8 million charge discussed above. The balance of the increase
is a primarily a result of increased rates paid to hospitals and an increase in
the intensity of the patients served as indicated by the increase in the risk
score of these members.
Medical expenses include expenses incurred in connection with the operation of
our wholly owned physician practices and oncology center including salaries,
taxes and benefits, malpractice insurance and office related expenses.
Approximately $2.7 million of our medical expenses in the 2007 quarter related
to physician practices we own as compared to $2.6 million in the 2006 quarter.
16
Because the Humana Agreements provide that the PSN is financially responsible
for all medical services provided to the Humana Participating Customers, direct
medical expenses include the cost of medical services provided to Humana
Participating Customers by providers other than the PSN's affiliated providers
("Non-Affiliated Providers"). The Medical Expense Ratio for the PSN segment
improved to 86.9% in the 2007 quarter as compared to 90.4% in the 2006 quarter.
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, increasing our focus on certain
elements of our Partners in Quality Program, implementing an outreach program
for our more acutely ill customers in an effort to better manage the care for
these individuals and developing a comprehensive recovery plan for customers
that had serious events, such as hospitalizations or significant procedures.
At March 31, 2007, we estimated our IBNR accrual for the PSN was between $12.3
million and $14.7 million and we recorded a liability of $12.3 million.
Medical expense for the HMO was $10.6 million in the 2007 quarter compared to
$4.3 million in the 2006 quarter. The increase in the 2007 quarter is due, in
part, to the substantial increase in the number of HMO member months between the
2007 and 2006 quarter.
The HMO's Medical Expense Ratio in the 2007 quarter was 95.9% as compared to
91.9% in the 2006 quarter. Based on subsequent claim payments, we have
determined that the medical expenses payable at March 31, 2006 of $1.9 million
was understated by approximately $700,000. The impact of this change in estimate
on the 2006 quarter would have been to increase to the 2006 quarter's Medical
Expense Ratio by 15%. This difference was recorded in subsequent quarters'
medical expense. At December 31, 2006, our IBNR accrual was estimated to be $4.6
million. Based on current claims data, we now estimate that the IBNR accrual
will approximate $4.3 million. This $300,000 difference reduced medical claims
expense in the 2007 quarter, an impact of reducing the 2007 quarter's Medical
Expense Ratio by approximately .3%.
In the last part of 2006 and in early 2007, the HMO implemented medical
management techniques and also began negotiations to reduce the cost incurred
for certain provided services. The 2007 quarter's MER begins to reflect the
impact of these efforts.
At March 31, 2007, we estimated our IBNR accrual for the HMO was between $5.3
million and $6.5 million and we recorded a liability of $5.3 million.
Administrative Payroll, Payroll Taxes and Benefits
Administrative payroll, payroll taxes and benefits include salaries and related
costs for our executive, administrative and sales staff. For the 2007 quarter,
administrative payroll, payroll taxes and benefits were $3.3 million, compared
to $2.4 million in the 2006 quarter, an increase of $0.9 million. Administrative
payroll, payroll taxes and benefit costs associated with the HMO segment
accounted for substantially all of this increase.
As the HMO increased in size and activity we also increased our HMO staff from
49 at December 31, 2005 to 75 at March 31, 2007. These employees were added to
meet the operational needs of the growth in membership of the HMO. The increase
in full time employees resulted in administrative payroll, payroll taxes and
benefits attributable to the HMO increasing to $1.6 million in the 2007 quarter
as compared to $856,000 in the 2006 quarter, an 84.6% increase.
Marketing and Advertising
Marketing and advertising expense includes advertising expenses and commissions.
For the 2007 quarter, marketing and advertising expense was $1.6 million as
compared to $974,000 for the 2006 quarter, an increase of 65.2%. This increase
was primarily attributable to the HMO where marketing and advertising costs
increased by $591,000 to $1.5 million in the 2007 quarter. In 2006, CMS
instituted a limited enrollment period for Medicare Advantage plans between
November and March which increased our marketing and advertising costs during
the first quarter of 2007. In 2006, new members could be enrolled through out
the year. This change in the enrollment period resulted in more focused
marketing efforts with a larger portion of our advertising expenses being
incurred in the first and last quarters of the year.
17
General and Administrative
General and administrative expenses for the 2007 quarter totaled $3.0 million,
an increase of $1.4 million, or 88.2% over the prior quarter.
Approximately $789,000 of this increase is attributable to the growth of the
HMO. The HMO incurred increased costs of $312,000 in professional services fees
primarily attributable to the bid process, year end actuarial reports, and the
year end audits and $200,000 relating to claims processing costs as the
membership has grown.
Corporate general and administrative costs increased approximately $610,000
primarily as a result of an increase in professional service costs of
approximately $250,000 and an increase in the fees paid to our Board of
Directors of $140,000.
Other Income (Expense)
We realized other income of $384,000 in the 2007 quarter as compared to $209,000
in the 2006 quarter. The increase was primarily as a result of an increase in
investment income of $192,000 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.
Income taxes
Our effective tax rate was 38.8% in the 2007 quarter and 38.3% in the 2006
quarter.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and equivalents at March 31, 2007 was approximately $27.9 million as
compared to approximately $23.1 million at December 31, 2006. We had a working
capital surplus of approximately $19.7 million as of March 31, 2007 and $19.6
million at December 31, 2006.
In March 2007, we received the April premium payment from CMS of approximately
$4.3 million. This amount is reflected as unearned premiums on our balance
sheet.
Our total stockholders' equity was approximately $30.9 million at December 31,
2006 and March 31, 2006. This following comprised the changes in stockholders'
equity during the quarter:
o Stock based compensation of $157,000;
o Impact of the adoption of Interpretation No. 48 resulted in a charge of
$437,000; and
o Net income of $228,000
At March 31, 2006, we had no outstanding debt.
During the quarter, our cash and equivalents increased $4.8 million over the
balance at December 31, 2006. Net cash provided by operating activities for the
quarter provided approximately $4.9 million in cash and equivalents, of which
net income accounted for approximately $228,000. Other large sources of cash
from operating activities were:
o an increase in unearned premiums of $4.3 million;
o an increase in estimated medical expenses payable of $740,000;
o an increase in accrued payroll of $619,000;
o an increase in accrued expenses of $742,000;
o a decrease in other current assets of $511,000;
o an increase in due to CMS of $428,000; and
o stock based compensation expense of $157,000.
These sources of cash were partially offset by the following uses of cash:
o an increase in due from Humana of $2.2 million;
o An increase in accounts receivable of $369,000;
18
o an increase in deferred income taxes of $147,000;
o an increase in prepaid expenses of $188,000; and
o a decrease in accounts payable of $101,000.
Net cash used in investing activities for the quarter ended March 31, 2007 was
approximately $97,000 which related to capital expenditures made during the
quarter.
Our financing activities for the quarter ended March 31, 2007 provided
approximately $700 of cash in connection with the issuance of common stock upon
the exercise of outstanding options.
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 $6.8 million to the HMO during 2006 and another
$6.5 million subsequent to 2006 year end 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. While we are currently restructuring 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
On April 9, 2007, we entered into a separation agreement (the "Separation
Agreement") with Debra A. Finnel, who served as our President and Chief
Operating Officer until April 9, 2007 (the "Finnel Separation Date"). Under the
terms of the Separation Agreement, we and Ms. Finnel agreed to terminate our
employment relationship and Ms. Finnel was deemed to have resigned from our
Board of Directors. The termination of these relationships did not involve any
disagreements between us and Ms. Finnel. Under the Separation Agreement, we
agreed, among other things, to provide Ms. Finnel 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 Finnel
Separation Date. Under the Separation Agreement, Ms. Finnel has agreed to be
bound by restrictive covenants regarding, among others things, non-competition
with us for a one year period, non-solicitation of our employees for a two-year
period and confidentiality. Ms. Finnel has also provided a general release of
claims in favor of us and parties related to us. The amount payable under the
severance agreement and the value of the options that accelerated at the time of
the Separation Agreement, which total approximately $500,000 and will be accrued
in the second quarter of 2007.
19
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.
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 March 31, 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 quarter ended March 31, 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.
20
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 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)
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)
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
21
(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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
Undersigned thereunto duly authorized.
METROPOLITAN HEALTH NETWORKS, INC.
Registrant
Date: May 8, 2007 /s/ Michael M. Earley
---------------------
Michael M. Earley
Chairman, Chief Executive Officer
/s/ Robert J. Sabo
------------------
Robert J. Sabo
Chief Financial Officer
22