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 March 31, 1999
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 May 14, 1999
----- ----------------------------------
Common Stock, par value $0.001 8,926,049
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METROPOLITAN HEALTH NETWORKS, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet-
March 31, 1999 3
Condensed Consolidated Statements of
Operations for the Three Months Ended
March 31, 1999 and 1998 4
Condensed Consolidated Statements of
Operations for the Nine Months Ended
March 31, 1999 5
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
March 31, 1999 and 1998 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)
March 31,
1999
---------
ASSETS
CURRENT ASSETS:
Cash $ 53,105
Marketable Securities 41,526
Accounts receivable, net 5,029,271
Other current assets 257,626
------------
Total current assets 5,381,528
PROPERTY AND EQUIPMENT, net 4,223,060
INTANGIBLE ASSETS, net 4,351,026
DEFERRED ACQUISITION COSTS 171,890
OTHER ASSETS 277,477
------------
TOTAL $ 14,404,981
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 4,341,263
Reserve for claims incurred but not reported 859,160
Line of credit facility 238,438
Current maturities of capital lease obligations 495,621
Current maturities of long-term debt 638,194
------------
Total current liabilities 6,572,676
LONG TERM DEBT 3,518,960
CAPITAL LEASE OBLIGATIONS 1,899,772
------------
Total liabilities 11,991,408
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.001 per share:
40,000,000 shares authorized; 7,229,207 shares
issued and outstanding 7,229
Series A Convertible Preferred Stock, par value $ .001
per share, Stated value $100 per share 10,000,000
shares authorized 5,000 issued and outstanding 500,000
Series B Convertible Preferred Stock, par value $.001
per share, Stated value
$1,000 per share 7,000 shares Authorized 850 issued
and outstanding 850,000
Additional paid-in capital 11,522,267
Retained earnings (deficit) (10,465,923)
------------
Total stockholders' equity 2,413,573
------------
TOTAL $ 14,404,981
============
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
March 31,
--------------------------
1999 1998
------------ -----------
(Note 2)
REVENUES:
Net patient revenues $ 4,450,537 $ 3,050,494
------------ ------------
EXPENSES:
Salaries and benefits 1,836,004 1,703,875
Depreciation and amortization 553,715 337,003
Medical expenses 982,502 0
General and administrative 1,688,702 1,748,299
------------- ------------
Total Expenses 5,060,923 3,789,177
------------- -------------
LOSS FROM OPERATIONS (610,386) (738,683)
------------- -------------
OTHER INCOME (EXPENSE):
Gain on sale of asset 0 (2,606)
Interest expense (98,015) (136,988)
Other expense (112,692) (67,147)
------------- -------------
Total Other Income (Expense) (210,707) (206,741)
------------- -------------
NET INCOME (LOSS) $ (821,093) $ (945,424)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 7,186,899 5,561,318
============ ============
NET LOSS PER COMMON SHARE $ 0.114 $ 0.170
======= =======
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 Nine
Months Ended
March 31, 1999
--------------
REVENUES:
Net patient revenues $ 12,827,640
------------
EXPENSES:
Salaries and benefits 5,339,212
Depreciation and amortization 1,465,649
Medical expenses 3,448,730
General and administrative 5,399,329
Total Expenses 15,652,920
LOSS FROM OPERATIONS 2,825,280
OTHER INCOME (EXPENSE):
Gain on sale of asset (9,158)
Interest expense (514,828)
Other expense (192,338)
Total Other Income (Expense) (716,324)
NET INCOME (LOSS) $(3,541,604)
===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 6,728,618
===========
NET LOSS PER SHARE $ 0.526
===========
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 Nine
Months Ended
March 31,
-------------------
1999 1998
---- ----
Increase (Decrease) in Cash and
equivalents from:
OPERATING ACTIVITIES:
Net Loss $ (3,541,604) $(2,434,111)
Adjustments to reconcile net cash provided
by operating activities:
Depreciation and amortization 1,465,649 1,229,747
Provision for bad debts 738,785 1,139,774
Stock issued in lieu of cash -- 37,500
Changes in assets and liabilities:
Accounts receivable, net 749,013 (1,692,004)
Trading Securities (204) 279,474
Other current assets (99,869) (44,270)
Other assets (109,766) (186,617)
Accounts payable and accrued expenses 1,966,768 1,255,030
Reserve for claims incurred but not reported -- --
--------- ----------
Net cash provided by/(used in) operating
activities 1,168,772 (415,477)
--------- ----------
INVESTING ACTIVITIES:
Capital expenditures (776,769) (597,163)
Deferred acquisition costs -- (88,447)
Cash consideration paid for company acquired -- (342,015)
Cash balance of company acquired -- 45,962
---------- ---------
Net cash used in investing activities (776,769) (981,663)
---------- ------------
FINANCING ACTIVITIES:
Borrowings (repayments) on lines-of-credit (639,032) 918,960
Repayment of notes to redeemed partners -- (359,746)
Repayment of capital lease obligations (438,410) (812,566)
Issuance of common stock (177,920) --
Issuance of preferred stock -- 437,868
---------- ---------
Net cash used in financing activities (1,255,362) 184,516
------------ ----------
NET DECREASE IN CASH (863,359) (1,212,624)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 916,464 1,667,888
----------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 53,105 $ 455,264
=========== ==========
Supplemental Disclosures:
Interest paid $ 505,669 $ 405,154
=========== ==========
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 March 31, 1999,
the related condensed consolidated statements of operations for the three months
ended March 31, 1999 and 1998 and the condensed consolidated statements of cash
flows for the nine months ended March 31, 1999 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 March 31, 1999 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 MARCH 31, 1998 - 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 March 31,
1999 had been acquired as of July 1,1998.
RECLASIFICATION OF AMOUNTS FOR THE THREE MONTHS ENDED MARCH 31,
1998--Certain amounts have been reclassified for comparability purposes.
3. SUMMARY OF LEGAL PROCEEDINGS
On October 8, 1998, Dr. Kagan a former Director of the Company and
former Medical Director of the Company's MRI Scan Center, originally 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 suit was later amended to
seek additional claims for breach of an acquisition agreement, breach of
employment agreement and conversion of alleged personal items. With respect to
the note, it was part of the acquisition of the MRI Scan Center as described
above. Metropolitan answered the amended Complaint with affirmative defenses,
among others that any failure to pay was a result of Dr. Kagan's Breach of
Fiduciary Duty and Employment Agreement. 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 termination. During the
interim period, the Company has accrued all payments for services allegedly due
Dr. Kagan under his employment contract. Metropolitan believes it is entitled to
a set-off pursuant to Dr. Kagan's various breaches. Metropolitan also recently
filed a counterclaim against Dr. Kagan.
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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 issues relating to the Employment Agreement including interim payment of
compensation are pending arbitration.
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". The Company is seeking monetary damages in excess of $1,000,000. 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. 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 28, 1999, Dr. Kagan filed a complaint for eviction against
Metropolitan Health Networks, Inc., on a lease between Magnetic Imaging System
I, Ltd., and Dr. Kagan for a property he owns as landlord. The trial began on
May 7, 1999 and is scheduled for conclusion on September 30, 1999. The Company
can not render an opinion on the outcome, however it believes that the actions
taken are retaliatory in nature.
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.
On April 22, 1999, Datascan of Florida, Inc. ("Datascan") and
Metropolitan Health Networks, Inc. ("Metropolitan") filed a lawsuit against
Michael Goldstein ("Goldstein") in Palm Beach County Circuit Court and amended
their complaint on May 6, 1999. In the amended complaint, Datascan and
Metropolitan are suing Goldstein for temporary and permanent injunctive relief
and damages based on claims of breach of contract and tortuous interference with
advantageous business relationships.
9
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW - The Company had operating revenues of $4,451,000 for the
quarter ended March 31, 1999, as compared to revenues of $3,050,000 for quarter
ended March 31, 1998, a $1,401,000 increase. The additional revenues contributed
by Skylake $1,470,000, MRI $40,000, and other physician practices $20,000 were
offset by reductions in revenues of Datascan ($120,000) and MetBilling ($9,000).
The Company's Loss from Continuing Operations for the quarters ended March 31,
1999 and 1998 were $610,000 and $739,000 respectively. The decrease in the
losses was due to the added contribution of MRI ($192,000), physician practices
($223,000) and Metbilling ($76,000). These decreases were partially offset by
the increases in losses from the quarter ended March 31, 1998 to the quarter
ended March 31, 1999 from the operations of Datascan $263,000, Skylake 11,000
and Corporate operations $88,000.
The number of scans performed in the quarter was down slightly from the
same quarter of fiscal year 1998. However, the number of scans performed during
the third quarter of fiscal year 1999 was an increase over the two previous
quarters of fiscal year 1999 by an average of 10%. However, due to the increase
in managed care referrals the reimbursement is lower for the scans performed in
fiscal year 1999. The loss at the Skylake facility is primarily due to the
medical costs incurred from the full risk contract. The medical costs represent
approximately 67% of Skylake's revenue in the current quarter. This is down from
74% for the quarter ended December 31, 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 third quarter of fiscal year 1999, salaries
were reduced $60,000 for the 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.
During the third quarter of fiscal year 1999 the Company acquired four
centers in the Stuart - Port St. Lucie area of Florida. Subsequent to the third
quarter of fiscal 1998, the Company acquired two full risk primary care
physician practices (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 and centers were
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. The pro forma results
are listed below.
1999 1998
---- ----
Revenues $4,451,000 $4,583,000
Salaries and Benefits 1,836,000 1,911,000
Depreciation and Amortization 554,000 393,000
Medical Expenses 983,000 1,026,000
General and Administrative 1,689,000 1,883,000
Loss from Continuing Operations 611,000 630,000
OPERATING REVENUES. The Company's operations are dependent upon the
formation and expansion of its network. For the quarter ended March 31, 1999,
approximately $2,098,000 or 47% of the Company's revenue was derived from its
diagnostic companies, compared to the quarter ended March 31, 1998 in which
$2,178,000 or 71% of total revenue was generated from diagnostics. Physician
practices contributed $2,038,000 or 46% in revenues for the quarter ended March
31, 1999 and $760,000 or 25% for the quarter ended March 31, 1998. The decrease
in revenues derived from diagnostics was due to a $40,000 increase in revenues
derived from the MRI Scan Center and a decrease of ($120,000) in revenues from
Datascan. The acquisition of the two full risk
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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 will supplement the personnel and procedures to manage these
types of contracts. On a pro forma basis, the Company's overall revenues
decreased approximately $132,000, 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
$762,000 for the quarter ended March 31, 1999, and $882,000 for 1998. This
decrease is a direct result of a one-time drug related study performed in the
second quarter ending February 28, 1998. The MRI Scan Center had revenues of
$1,336,000 for the quarter ended March 31, 1999, as compared to $1,296,000 for
the quarter ended March 31, 1998. This decrease of $40,000 is due to increased
managed care activity. The number of scans performed during the quarter ended
March 31, 1999, increased 20% from the first quarter 1998 and 1% from the
quarter ended December 31, 1998. 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 $1,470,000 in revenues during the quarter ended March 31, 1999. As
noted above, this practice was acquired in April 1998; therefore there is no
corresponding revenue figure for 1997. On a pro forma basis, revenues of Skylake
for the quarter ended March 31, 1998 were $1,645,000, a decrease of $175,000.
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 March 31,
1999 were $576,000 as compared to the quarter ended March 31, 1998 revenues of
$761,000. 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
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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
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 $5,061,000
for the quarter ended March 31, 1999, as compared to expenses of $3,789,000 for
the quarter ended March 31, 1998, a $1,272,000 increase. Of the expenses from
continuing operations incurred during the quarter ended March 31, 1999,
approximately $983,000 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 $1,836,000 represented 36% of the
total operating expenses for quarter ended March 31, 1999. For the quarter ended
March 31, 1998, payroll related expenses accounted for $1,704,000 or 45% of the
total. Payroll related expenses decreased approximately $75,000 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 $1,911,000 represented
37% of the total operating expenses for the quarter ended March 31, 1998.
Depreciation and amortization totaled approximately $554,000 or 11% of
the total operating expenses for the quarter ended March 31, 1999 and $337,000
or 9% for the quarter ended March 31, 1998. 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 $393,000
or 8% of the total operating expenses for the quarter ended March 31, 1998. 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 $983,000 of full risk insurance contract
expenses during the quarter ended March 31, 1999. On a pro forma basis, the
Company incurred full risk insurance contract expenses of approximately
$1,026,000 or 20% of operating expenses for the quarter ended March 31, 1998.
This variance in costs is a result of an decrease 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 decreased $39,000 to $98,000 or 2% of the total
operating expenses for the quarter ended March 31, 1999 from $137,000 or 4% of
the total for the first quarter ended March 31, 1998. Although interest expense
increased about $65,000 due to the Skylake acquisition, the interest on the
Company's other debt decreased. Approximately $75,000 of the 1998 total is due
to interest on capital leases. 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 $265,000 or 5% of the total operating expenses
for the quarter ended March 31, 1999 and $210,000 or 6% for the quarter ended
March 31, 1998. 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 $85,000. All other
entities are single site. The rent expense for the corporate offices is
approximately $30,000 for the quarter ended March 31, 1999. There is sufficient
capacity at these locations for future growth.
Bad debt expense totaled $109,000 or 2% of the total operating expenses
for the quarter ended March 31, 1999 as compared to $288,000 or 8% for 1998. 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. For the past six
months, the Company has bee actively seeking reasonable financing that is
compatible with its on going cash flow requirements. There can be no assurance
that the Company will be able to raise sufficient capital. At the time of this
filing the Company is negotiating with two potential equity investors that have
expressed an interest in investing $1,500,000. No assurance can be given that
these negotiations will be successful.
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 currently negotiating with two lenders on securing a replacement line of
credit. The terms are expected to allow for advances of up to $1,300,000 based
on the Company's current accounts receivable base. No assurance can be given
that these negotiations will be successful. In the past nine months the
Company's line of credit has been reduced by over $1,412,000 thereby
contributing to the Company's liquidity issues. As a result, the Company has
experienced problems in paying suppliers and vendors as well as taxes. The
Company currently owes approximately $280,000 in payroll taxes. If the line of
credit is closed as anticipated, management intends to have the resources to
correct the pressing liquidity issues.
Based on current negotiations, the Company anticipates, although there
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are no assurances, to net from borrowings, approximately $1,000,000 to
$1,200,000 with the inclusion of all the Company's accounts receivable and after
repayment of its existing borrowings by the end of the fourth 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 April 30, 1999, this line of credit has been fully
repaid. During the previous 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. On April 15, 1999, the Company
had a hearing before NASDAQ where the Company detailed its plan to return to
compliance. After the presentation the Company was informed that a notice would
be sent to the Company on its listing status. No notice has been received as of
the date of this filing. Management continues to work to complete the
implementation of its plan to obtain compliance with NASDAQ rules, including net
equity, minimum price on common stock and annual shareholder meeting
requirements. 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 end 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
14
<PAGE>
$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 fiscal 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.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Except for historical information contained herein, the matters
discussed in this Form 10-QSB 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: May 20, 1999 /s/ Noel J. Guillama
--------------------------
Noel J. Guillama
Chairman, President,
Chief Executive Officer
And Acting Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF METROPOLITAN HEALTH NETWORKS, INC. FOR THE
THREE MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-03-1999
<CASH> 53,105
<SECURITIES> 41,526
<RECEIVABLES> 10,100,062
<ALLOWANCES> 5,070,791
<INVENTORY> 0
<CURRENT-ASSETS> 5,381,527
<PP&E> 6,636,748
<DEPRECIATION> 2,413,688
<TOTAL-ASSETS> 14,404,981
<CURRENT-LIABILITIES> 6,572,676
<BONDS> 0
0
1,350,000
<COMMON> 7,229
<OTHER-SE> 1,056,344
<TOTAL-LIABILITY-AND-EQUITY> 14,404,981
<SALES> 4,450,537
<TOTAL-REVENUES> 4,450,537
<CGS> 0
<TOTAL-COSTS> 5,060,923
<OTHER-EXPENSES> 112,692
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,015
<INCOME-PRETAX> (821,093)
<INCOME-TAX> 0
<INCOME-CONTINUING> (821,093)
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<NET-INCOME> (821,093)
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