UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
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 0-28456
METROPOLITAN HEALTH NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Florida 65-0635748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5100 Town Center Circle, Boca Raton, Florida 33486
(Address of principal executive office) (Zip Code)
(561) 416-9484
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of February 15, 1999
----- ----------------------------------
Common Stock, par value $0.001 7,402,198
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METROPOLITAN HEALTH NETWORKS, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet-
December 31, 1998 3
Condensed Consolidated Statements of
Operations for the Three Months Ended
December 31, 1998 and 1997 4
Condensed Consolidated Statements of
Operations for the Six Months Ended
December 31, 1998 5
Condensed Consolidated Statements of
Cash Flows for the Six Months Ended
December 31, 1998 and 1997 6-7
Notes to Condensed Consolidated
Financial Statements 8
Item 6. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10
SIGNATURES 16
2
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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31,
1998
ASSETS
CURRENT ASSETS:
Cash $ 32,016
Marketable Securities 41,526
Accounts receivable, net 4,698,929
Other current assets 332,327
------------
Total current assets 5,104,798
PROPERTY AND EQUIPMENT, net 3,997,298
INTANGIBLE ASSETS, net 4,397,995
DEFERRED ACQUISITION COSTS 171,890
OTHER ASSETS 351,631
------------
TOTAL $ 14,023,612
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,706,943
Reserve for claims incurred but not reported 859,160
Line of credit facility 632,404
Current maturities of capital lease obligations 672,679
Current maturities of long-term debt 554,194
------------
Total current liabilities 6,425,380
LONG TERM DEBT 2,867,342
CAPITAL LEASE OBLIGATIONS 1,875,269
------------
Total liabilities 11,167,991
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.001 per share:
40,000,000 shares authorized;
7,026,100 shares issued and outstanding 7,026
Preferred Stock, par value $ .001 per share,
Stated value $100 per share 10,000,000 shares
authorized 5,000 issued and outstanding 500,000
Preferred Stock, par value $.001 per share,
Stated value $1,000 per share 7,000 shares
Authorized 900 issued and outstanding 900,000
Additional paid-in capital 11,093,425
Retained earnings (deficit) (9,644,830)
------------
Total stockholders' equity 2,855,621
------------
TOTAL $ 14,023,612
============
See notes to condensed consolidated financial statements--unaudited.
3
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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
December 31,
------------
1998 1997
---- ----
(Note 2)
REVENUES:
Net patient revenues $ 4,389,674 $ 3,291,295
------------ ------------
EXPENSES:
Salaries and benefits 1,588,971 1,641,798
Depreciation and amortization 462,773 354,461
General and administrative 3,075,518 2,095,014
------------- ------------
Total Expenses 5,127,262 4,091,273
------------- ------------
LOSS FROM OPERATIONS (737,588) (799,978)
------------- -------------
OTHER INCOME (EXPENSE):
Gain on sale of asset (9,157) 761
Interest expense (198,078) (145,479)
Other income (151,211) (4,903)
------------- -------------
Total Other Income (Expense) (358,446) (149,621)
------------- -------------
NET INCOME (LOSS) $ (1,096,034) $ (949,599)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 6,504,458 5,460,520
============ ============
NET LOSS PER COMMON SHARE $ 0.169 $ 0.174
======= =======
See notes to condensed consolidated financial statements--unaudited.
4
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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six
Months Ended
December 31, 1998
-----------------
REVENUES:
Net patient revenues $ 8,377,103
------------
EXPENSES:
Salaries and benefits 3,503,208
Depreciation and amortization 911,934
General and administrative 6,176,855
------------
Total Expenses 10,591,997
------------
LOSS FROM OPERATIONS 2,214,894
------------
OTHER INCOME (EXPENSE):
Gain on sale of asset (9,158)
Interest expense (416,813)
Other income (79,647)
------------
Total Other Income (Expense) (505,618)
------------
NET INCOME (LOSS) $ (2,720,512)
============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 6,504,458
============
NET LOSS PER SHARE $ 0.418
=======
See notes to condensed consolidated financial statements--unaudited.
5
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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six
Months Ended
December 31,
1998 1997
---- ----
Increase (Decrease) in Cash and equivalents from:
OPERATING ACTIVITIES:
Net Loss $(2,720,512) $(1,458,687)
Adjustments to reconcile net cash provided
by operating activities:
Depreciation and amortization 911,934 1,127,324
Provision for bad debts 630,184 1,118,559
Stock issued in lieu of cash -- 37,500
Changes in assets and liabilities:
Accounts receivable, net 1,079,356 (1,855,471)
Trading Securities (204) 204,474
Other current assets (272,261) 42,546
Other assets (72,092) (215,291)
Accounts payable and accrued expenses 1,331,322 678,589
Reserve for claims incurred but not reported 13,626 --
----------- -----------
Net cash provided by/(used in) operating activities 901,353 (320,457)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (360,542) (651,868)
Deferred acquisition costs -- (86,161)
Cash consideration paid for company acquired -- (342,015)
Cash balance of company acquired -- 45,962
----------- -----------
Net cash used in investing activities (360,542) (1,034,082)
----------- -----------
FINANCING ACTIVITIES:
Borrowings (repayments) on lines-of-credit (980,685) 431,771
Repayment of notes to redeemed partners -- (365,353)
Repayment of capital lease obligations (285,855) (599,563)
Issuance of common stock (158,719) --
Issuance of preferred stock -- 440,184
----------- -----------
Net cash used in financing activities (1,425,259) (92,961)
----------- -----------
NET DECREASE IN CASH (884,448) (1,447,500)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 916,464 1,667,887
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 32,016 $ 220,387
=========== ===========
Supplemental Disclosures:
Interest paid $ 384,503 $ 277,999
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
See notes to condensed consolidated financial statements - unaudited.
6
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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
On December 17, 1998, the Company entered into a severance agreement with a
former Executive Vice President, Roman Fisher, whereby 125,000 shares of common
stock ($218,750) would be issued in exchange for 2 year non-compete agreement.
The price per share on December 17, 1998 was $1.75.
See notes to condensed consolidated financial statements--unaudited.
7
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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--Unaudited
1. The accompanying condensed consolidated balance sheet of Metropolitan Health
Networks, Inc. ("Metropolitan" or the "Company") as of December 31, 1998, the
related condensed consolidated statements of operations for the three months
ended December 31, 1998 and 1997 and the condensed consolidated statements of
cash flows for the six months ended December 31, 1998 reflect all normal
recurring adjustments which are, in the opinion of management, necessary for a
fair presentation of such statements. The results of operations for the three
months ended December 31, 1998 are not necessarily indicative of the results
which may be expected for the entire year. These statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended June 30, 1998 included in the Company's form 10-KSB filed
with the Securities and Exchange Commission.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION-- The condensed consolidated financial
statements include Metropolitan Health Networks, Inc. and its subsidiaries. All
material intercompany accounts and transactions have been eliminated.
FINANCIAL RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 - For
comparative purposes, the results of operations for this period were prepared on
an actual as well as a pro forma basis as if the subsidiaries owned by the
Company included in the results of operations for the period ended December 31,
1998 had been acquired as of July 1,1997.
RECLASIFICATION OF AMOUNTS FOR THE THREE MONTHS ENDED DECEMBER 31,
1997--Certain amounts have been reclassified for comparability purposes.
3. SUMMARY OF LEGAL PROCEEDINGS
Dr. Kagan a former Director of the Company and currently Medical
Director of the Company's MRI Scan Center, filed suit in Broward County, Florida
for the payment of principal and interest on a $200,000 note with interest owed
by the Company. The note was part of the acquisition of the MRI Scan Center as
described above. Dr. Kagan had agreed to extend the due date for the final
payment of $200,000 on the note, from April 1, 1998 to September 30, 1998. In
exchange the Company agreed to pay the default rate of 18% on the balance of the
note, and the Company would not object to the release of the underwriter's
lock-up of 100,000 of the Company's common shares owned by Dr. Kagan to be sold
through June 30, 1998. It was further agreed, that if the $200,000 was not paid
by September 30, 1998 the Company would not object to the release of an
additional 100,000 shares. The Company had made payments on the note through
July of 1998. On October 8, 1998, Dr. Kagan filed suit in Broward County,
Florida for the payment of principal and interest. Metropolitan answered the
Complaint with affirmative defenses that any failure to pay was a result of Dr.
Kagan's Breach of Fiduciary Duty and Employment Agreement. Metropolitan believes
it is entitled to a set-off pursuant to Dr. Kagan's breach of his Employment
Agreement.
Dr. Kagan's motion to require Metropolitan to pay employment
compensation during the dispute was denied by the Court. Metropolitan succeeded
in its Motion to Compel Arbitration, as to Breach of the Employment Agreement.
All other issues relating to the Employment Agreement are pending arbitration.
8
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On October 14, 1998, Metropolitan Health Networks, Inc., filed suit in
Palm Beach County, Florida against a former director of the Company, Dr. Robert
Kagan. The suit alleges in part, "breach of fiduciary duty" and "common-law
duty" and "intentional interference with advantageous business relationships."
The Company is seeking monetary damages in excess of $1,000,000 and injunctive
relief. The Company's claim alleges, in part, that Dr. Kagan's significant
decrease in performance and function subsequent to Metropolitan's purchase of
Nuclear Magnetic Imaging, Inc. and Magnetic Imaging Systems, I. Ltd., by
devoting significant time to his outside medical legal business, interrupting
the normal function of MRI Scan Center, has materially damaged the Company. Dr.
Kagan was notified of the Company's intention to terminate his employment
agreement based upon its belief he has violated certain provision in the
agreement and placed on administrative leave. On December 10, 1998, the Company
notified Dr. Kagan in detail of his default and termination. Metropolitan made
demand for payment of the damages in the amount of $2,443,870 and determined not
to allow cure until damages are repaid. Termination was effective 30 days after
receipt of the termination notice. During the interim period, the Company has
accrued all payments for services allegedly due Dr. Kagan under his employment
contract. The outcome of the above noted suit is not readily determinable. The
Company could incur substantial cost in litigating these issues with Dr. Kagan.
Though none is currently anticipated, there may be a reduction in income or cash
collections and/or an increase in expense from the Company's MRI operations. The
Company believes it has taken proper precautions and has made appropriate plans,
however no assurance can be given that these actions are sufficient or that
other unforeseen events could occur. The case is in the discovery phase of
litigation.
On April 2, 1998, Metropolitan and Primedica entered into an Asset
Purchase Agreement and an Additional Issues Agreement. Prior to entering into
the Agreements, Primedica made certain representations concerning the value of
certain assets, and Metropolitan entered into the Agreement and executed a
Promissory Note based on these representations. Subsequent investigations and
information obtained after closing revealed that the value of these assets was
substantially less than represented by Primedica, and certain substantial
liabilities existed. On December 19, 1998, Metropolitan filed a Complaint for
recission of the foregoing instruments, and damages for false and negligent
misrepresentation and omissions. On December 30, 1998, Primedica filed a
counterclaim, alleging Metropolitan breached the Asset Purchase Agreement by
failing to pay when due one or more of the assumed obligations. The case is
currently in the discovery phase of litigation.
9
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW - The Company had operating revenues of $4,390,000 for the
quarter ended December 31, 1998, as compared to revenues of $3,291,000 for
quarter ended December 31, 1997, a $1,099,000 increase. The additional revenues
of $1,850,000 contributed by Skylake operations was offset by reductions in
revenues in the other physician practices ($424,000), MRI ($185,000), Datascan
($140,000), and MetBilling ($160,000). The Company's Loss from Continuing
Operations for the quarters ended December 31, 1998 and 1997 were $838,000 and
$800,000 respectively. The increase in the losses was due to the operational
loss at an acquired physician practice, Skylake ($106,000).
The number of scans performed in the quarter was up slightly from the
prior year due to an increase in managed care referrals. However, the
reimbursement is lower for these scans. The loss at the Skylake facility is
primarily due to the medical costs incurred from the full risk contract. These
medical costs represent approximately 70% of the total cost of operations for
Skylake. The medical costs represent approximately 74% of Skylake's revenue in
the current quarter. This is down from 78% for the quarter ended September 30,
1998. The Company has instituted additional review procedures which the Company
believes will reduce these costs even further. The Company is continuously
reviewing its operating expenses in order to reduce costs. During the second
quarter of fiscal year 1999, the Company reduced staff by two physicians. The
cost savings of this reduction should be realized in the third quarter. In the
fourth quarter of fiscal 1998, the Company identified four physician practices
that were not profitable and would remain unprofitable in the near future.
Therefore, the Company elected to close or sell these practices.
No acquisitions were made during the first or second quarters of fiscal
1999. Subsequent to the second quarter of fiscal 1998, the Company acquired a
full risk primary care physician practice (Skylake). For comparative purposes in
this discussion, reference is made to pro forma amounts, which are detailed
below. The pro forma data is prepared as if the above referenced physician
practice was acquired at the beginning of the first quarter of fiscal 1998; July
1, 1997. All appropriate adjustments to reflect the acquisition, including
amortization of goodwill and compensation adjustments have been reflected.
1998 1997
Revenues $4,390,000 $4,776,000
Salaries and Benefits 1,589,000 1,845,000
Depreciation and Amortization 463,000 411,000
Medical Expenses 1,295,000 1,027,000
General and Administrative 1,782,000 2,204,000
Loss from Continuing Operations 739,000 711,000
OPERATING REVENUES. The Company's operations are dependent upon the
formation and expansion of its network. For the quarter ended December 31, 1998,
approximately $1,916,000 or 44% of the Company's revenue was derived from its
diagnostic companies, compared to the quarter ended December 31, 1997 in which
$2,241,000 or 68% of total revenue was generated from diagnostics. Physician
practices contributed $2,467,000 or 56% in revenues for the quarter ended
December 31, 1998 and $1,041,000 or 32% for the quarter ended December 31, 1997.
The decrease in revenues derived from diagnostics was due to a $185,000 decrease
in revenues derived from the MRI Scan Center and a decrease of $140,000 in
revenues from Datascan. The acquisition of the two full risk medical centers
from Primedica Healthcare, Inc. in April 1998, represents the Company's first
entrance into full risk contracts. Though full risk contracts represent a
greater exposure to the Company, management believes that it currently has or
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will supplement the personnel and procedures to manage these types of contracts.
On a pro forma basis, the Company's overall revenues decreased approximately
$386,000, which was due to the decreases in revenues generated by the MRI Scan
Center, Datascan and the physician practices.
Datascan, the Company's mobile ultrasound unit, had total revenues of
$773,000 for the quarter ended December 31, 1998, and $912,000 for 1997. This
decrease is a direct result of a one-time drug related study performed in the
second quarter ending December 31, 1997. The MRI Scan Center had revenues of
$1,143,000 for the quarter ended December 31, 1998, as compared to $1,329,000
for the quarter ended December 31, 1997. This decrease of $186,000 is due to
increased managed care activity. The number of scans performed during the
quarter ended December 31, 1998, increased 18% from the first quarter 1998 and
2% from the quarter ended December 31, 1997. During the first quarter of fiscal
1999, the Company combined the operations of its diagnostic companies, Datascan
of Florida, Inc. and the MRI Scan Center under a new division, METCARE
Diagnostic Services. This will enable the Company to offer all of its diagnostic
services within one operation. This restructuring will eliminate duplications
and unify and strengthen the combined marketing efforts and are anticipated to
reduce combined operating expenses by $100,000-$150,000. During the first
quarter of fiscal 1999, the Company hired an additional radiologist to assist in
the expansion of the marketing efforts.
The largest component of Physician Practices was Skylake, which
generated $1,850,000 in revenues during the quarter ended December 31, 1998. As
noted above, this practice was acquired in April 1998; therefore there is no
corresponding revenue figure 1997. On a pro forma basis, revenues of Skylake for
the quarter ended December 1997 were $1,645,000, an increase of $205,000. The
Company has consolidated the two practices along with the transfer of patients,
medical personnel and equipment into one facility at Skylake, Florida
("Skylake").
The other physician practices' revenues for the quarter ended December
31, 1998 were $617,000 as compared to the quarter ended December 31, 1997
revenues of $1,042,000. This was primarily due to the closing of two locations,
the sale of the Wand practice at the beginning of the first quarter of fiscal
year 1999, and the decreased referrals in the remaining practices. The Company
is currently in negotiations for the possible sale of one of its two remaining
practices, although there can be no assurances that the Company will be
successful in selling this practice. The Company is in the process of expanding
its medical services at the remaining location with minimal additional costs.
Currently, the existing Physician Practice Management (PPM) industry is
experiencing a period of uncertainty. The historical industry model of
purchasing a physician practice, along with the practice's fixed assets, has
proven to be ineffectual. Rather than "purchasing" physicians, along with the
fixed assets, the Company has determined that the "true" value in any practice
is the patient base. Therefore, the Company is moving away from owning physician
practices and toward a Management Services Organization (MSO). The MSO concept
is one in which METCARE will be able to utilize, where applicable, its wholly
owned diagnostic facilities network to fulfill the management requirements of
the MSO contract. The Company is offering the physicians a variety of additional
services which include: billing and collection, group purchasing, and other
related services.
The Company's ability to increase revenues and achieve profitability is
dependent in part upon its ability to expand its network, maintain reasonable
third party reimbursements, obtain favorable managed care contracts, and expand
billing and collection services for outside healthcare providers. Though the
Company believes it has a superior operating methodology, it currently lacks the
financial resources to execute it. There is no assurance, if or when, the
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Company will achieve profitability. The Company's prospects, therefore, must be
evaluated in light of the risks and expenses normally encountered by a new
entrant into the health care industry.
OPERATING EXPENSES. The Company had operating expenses of $5,127,000
for the quarter ended December 31, 1998, as compared to expenses of $4,091,000
for the quarter ended December 31, 1997, a $1,036,000 increase. Of the expenses
from continuing operations incurred during the quarter ended December 31, 1998,
approximately $1,295,000 was due to the addition of the Skylake center. The
operating expenses consisted primarily of expenses incurred for payroll, payroll
taxes and benefits, depreciation and amortization, full risk insurance
contracts, interest, rent and other general and administrative expenses.
During the first quarter of fiscal 1999, the Company decided to sell
one of its individual physician practices, the Wand practice. This clinic was
operating at a loss and it was projected that the Company could not turn around
this operation in a reasonable period of time. The sale or closure of this
facility resulted in a one-time write off of approximately $193,000.
Payroll related expenses totaling $1,589,000 represented 31% of the
total operating expenses for quarter ended December 31, 1998. For the quarter
ended December 31, 1997, payroll related expenses accounted for $1,642,000 or
50% of the total. Payroll related expenses decreased approximately $255,000 on a
proforma basis. This was due to the cost reductions instituted during the last
quarter of fiscal year 1998 and the first quarter of fiscal year 1999. On a pro
forma basis, payroll related expenses totaling approximately $1,845,000
represented 34% of the total operating expenses for the quarter ended December
31, 1997.
Depreciation and amortization totaled approximately $463,000 or 8% of
the total operating expenses for the quarter ended December 31, 1998 and
$354,000 or 9% for the quarter ended December 31, 1997. This increase is due to
the combination of the acquisition of assets, with the acquisition of the
Skylake facility, and changing the amortization period from 30 years to 10 years
for goodwill. Pro forma depreciation and amortization totaled approximately
$411,000 or 7% of the total operating expenses for the quarter ended December
31, 1997. The increase in depreciation and amortization due to the effect of
changing from 30 years to 10 years for amortization of goodwill is approximately
$50,000.
The Skylake facility added $1,295,000 of full risk insurance contract
expenses during the quarter ended December 31, 1998. On a pro forma basis, the
Company incurred full risk insurance contract expenses of approximately
$1,027,000 or 19% of operating expenses for the quarter ended December 31, 1997.
This variance in costs is a result of an increase in direct medical expenses.
The Company has initiated expense review procedures to review costs and to
determine that all expenses are appropriate. The Company believes that it can
lower its costs per member per month with the installation of these new
procedures and quality control.
Interest expense increased $53,000 to $198,000 or 4% of the total
operating expenses for the quarter ended December 31, 1998 from $145,000 or 4%
of the total for the first quarter ended December 31, 1997. Although interest
expense increased about $65,000 due to the Skylake acquisition, the interest on
the Company's other debt decreased. Approximately $100,000 of the 1998 total is
due to interest on capital leases. Interest on the note issued to purchase the
Skylake practice accounts for approximately $65,000 of the interest expense
amounts on a pro forma basis. The $3,500,000 promissory note payable to
Primedica Healthcare, Inc., calls for 59 monthly installments of $28,000
commencing in May 1998, and a lump sum payment of $3,069,748 in April 2003.
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Rent expense amounted to $250,000 or 5% of the total operating expenses
for fiscal 1998 and $206,000 or 5% for 1997. This increase due to the addition
of the Skylake practice was partially offset by the deletion of the Wand
practice during the first quarter of fiscal year 1999. MRI has three fixed-site
locations plus one warehouse. Total rent related to these leases amounted to
approximately $80,000. All other entities are single site. The rent expense for
the corporate offices is approximately $30,000 for the quarter ended December
31, 1998. There is sufficient capacity at these locations for future growth.
Bad debt expense totaled $467,000 or 9% of the total operating expenses
for the quarter ended December 31, 1998 as compared to $473,000 or 12% for 1997.
A significant portion of the medical group's revenue is generated from personal
injury type claims. Due to the nature of this type of billing, collections can
require up to two years and is not tied to any reimbursement schedule.
Consequently, exact reimbursements cannot be defined at the time of service.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Company's continuing losses from operations from
inception, which has, in addition to operational losses, included the costs
associated with restructuring, closing of operations, cost of severance and
separation agreements, the Company has experienced liquidity and cash flow
problems and the Company received a going concern qualification from its
independent auditors on its audited financial statements for the fiscal year
ended June 30, 1998. If the Company is not able to raise additional capital in
the immediate future, this will pose a significant threat to current operations
and further hamper the Company's future development and growth. There can be no
assurance that the Company will be able to raise sufficient capital.
A primary source of the Company's liquidity is derived from its
accounts receivable, therefore it has selected, designed and implemented an
information system which links the Company's facilities to maximize billing, and
optimally reduce the number of days of sales in accounts receivable. To date,
the Company has been able to reduce the cost of billings and collections,
however, actual reductions in accounts receivable days has not been achieved due
to a decrease in procedures performed and a reduction in reimbursements
percentages. This has caused a reduction in the Company's ability to borrow
against its current lines of credit. The reduction in its current borrowing
limits have decreased approximately $600,000 due to the decrease in revenues and
a change in the eligible accounts receivable needed as collateral. The Company
is in negotiations with one of its current lenders to combine and restructure
its accounts receivable secured line of credit, which will expand the collateral
base to better conform to the personal injury nature of a significant portion of
the Company's accounts receivable. Based on current negotiations, the Company
anticipates, although there are no assurances, to net from borrowings,
approximately $500,000 to $700,000 with the inclusion of substantially all the
Company's accounts receivable and after repayment of its existing borrowings by
the end of the third quarter of fiscal 1999. The terms of this new line of
credit are expected to be similar to the existing line with a slight increase in
the interest rate. Additionally, the Company assumed a line of credit with the
acquisition of the MRI Scan Center that was guaranteed by the former owner and
10% shareholder of the Company. On October 28, 1998, the Company was notified
that a request to withdraw a guarantee had been made to the lender. This request
to withdraw the guarantee caused the Company to be in default of the covenants
of this line of credit agreement, and therefore, the lender would no longer
advance any additional funds. On January 22, 1999, the lender advanced the
Company $210,000 against this line of credit. As of February 16, 1999, the
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amount owed on this line of credit is approximately $325,000. An additional
$608,000 would be available, if the Company was able to draw-down on this line
of credit. During the quarter, the Company was notified by Nasdaq that the
Company no longer met the minimum tangible net worth requirement, of $2,000,000,
for continued listing on The Nasdaq SmallCap Market. The Company submitted a
plan to increase net tangible assets. On January 27, 1999, the Company was
notified that the plan was not accepted and accordingly, would be delisted
February 3, 1999. On February 1, 1999, the Company obtained a stay of such
delisting and was granted an in-person hearing. At this time, Nasdaq has not
scheduled a hearing date. Failure to maintain a Nasdaq listing could have a
material impact on the Company's ability to raise additional capital.
The Company has sold $1,200,000 of its Series B Convertible Preferred
Stock in the last quarter of fiscal 1998. The Company also raised $500,000 in
July 1997 with sale of its Series A Preferred Stock, which was primarily used to
payoff certain notes assumed with the acquisition of Magnetic Resonance Imaging
subsidiary. The Company will attempt to secure additional capital through the
sale of equity securities.
IMPACT OF THE "YEAR 2000" COMPUTER ISSUE
The Company has completed the assessment phase of its Year 2000 project and
determined that it will be required to evaluate, test and modify (when needed)
approximately 50 internally and externally developed software programs and
approximately 100 pieces of equipment. The Company presently believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose material operational problems for its computer systems.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company. The Company has initiated formal communications with
its significant suppliers and large customers to determine the extent to which
the Company's interface systems are vulnerable to those third parties' failure
to remedy their own Year 2000 Issues and have received responses from a
significant number of third party payers with confirmation that they are Year
2000 compliant. This inquiry process is estimated to be completed by the
beginning of the fourth quarter of fiscal 1999. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems.
The Company will utilize both internal and external resources to reprogram
or replace and test software and medical equipment for Year 2000 modifications.
The Company anticipates that the various components of the Year 2000 project
procedures will continue throughout calendar 1999. The Year 2000 project is
currently estimated to have a minimum total cost of $150,000 related to the
review and modification of the Company's computer and software systems not
including the scheduled replacement of equipment or updates in software
previously anticipated in the normal course of business.
The Company expects to complete its review of medical equipment by the end
of March 1999. The majority of the costs related to the Year 2000 project will
be expensed as incurred and are expected to be funded through operating cash
flows. The Company has incurred minimal cost related to the assessment of, and
preliminary efforts on its Year 2000 project. The costs of the project and
estimated completion dates for the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes and all medical equipment.
14
<PAGE>
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Except for historical information contained herein, the matters
discussed in this report are forward-looking statements made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995. These
forward-looking statements are based largely on the Company's expectation and
are subject to a number of risks and uncertainties, including but not limited
to: economic, competitive and other factors affecting the Company's operations,
ability of the Company to obtain competent medical personnel, the cost of
services provided versus payment received for capitated and full risk managed
care contracts, negative effects of prospective healthcare reforms, the
Company's ability to obtain medical malpractice coverage and the cost associated
with malpractice, the availability of appropriate acquisition candidates, the
Company's ability to close once a letter of intent or contract has been
executed, the Company's ability to raise capital to close on such transactions,
access to borrowed or equity capital on favorable terms, the fluctuation of the
Company's common stock price, and other factors discussed elsewhere in this
report and in other documents filed by the Company with the Securities and
Exchange Commission from time to time, including but not limited to the
Company's SB-2, S-3, S-8 and 8-K fillings. Many of these factors are beyond the
Company's control. Actual results could differ materially from the
forward-looking statements. In light of these risks and uncertainties, there can
be no assurance that the forward-looking information contained in this report
will, in fact, occur.
15
<PAGE>
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: February 18, 1999 /s/ Noel J. Guillama
--------------------
Noel J. Guillama
Chairman, President and
Chief Executive Officer
Date: February 18, 1999 /s/ Donald B. Cohen
-------------------
Donald B. Cohen
Executive Vice President,
Chief Financial Officer
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF METROPOLITAN HEALTH NETWORKS, INC. FOR THE THREE MONTHS
ENDED DECEMBER 31 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
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<SECURITIES> 41,526
<RECEIVABLES> 9,695,964
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<CURRENT-LIABILITIES> 6,425,380
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1,400,000
<COMMON> 7,026
<OTHER-SE> 1,448,595
<TOTAL-LIABILITY-AND-EQUITY> 14,023,612
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