UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
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.)
250 Australian Avenue South, 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------------------------------------------- ------------------------------------------------------
Common Stock, $.001 par value per share American Stock Exchange
NYSE Arca
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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]
As of June 30, 2005, the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant was $109,454,687 based on the
closing sale price as reported on the American Stock Exchange This calculation
has been performed under the assumption that all directors, officers and
stockholders who own more than 10% of the Company's outstanding voting
securities are affiliates of the Company.
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 March 1, 2006
------------------------------------------------------- ------------------------------------------------------
Common Stock, $.001 par value per share 49,876,526 shares
DOCUMENTS INCORPORATED BY REFERENCE
None.
METROPOLITAN HEALTH NETWORKS, INC.
FORM 10-K
For the Year Ended
December 31, 2005
TABLE OF CONTENTS
Page
ITEM No.
PART I
1 Business ........................................................................................... 3
1A Risk Factors........................................................................................ 19
1B Unresolved Staff Comments .......................................................................... 32
2 Properties ......................................................................................... 32
3 Legal Proceedings .................................................................................. 33
4 Submission of Matters to a Vote of Security Holders ................................................ 33
PART II
5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.......................................................................................... 33
6 Selected Financial Data............................................................................. 34
7 Management's Discussion and Analysis of Financial Conditions and Results of Operations ............. 35
7A Quantitative and Qualitative Disclosures about Market Risk ......................................... 46
8 Financial Statements and Supplementary Data ........................................................ 47
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............... 47
9A Controls and Procedures ............................................................................ 47
9B Other Information................................................................................... 50
PART III
10 Directors and Executive Officers of the Registrant ................................................. 50
11 Executive Compensation ............................................................................. 54
12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...... 63
13 Certain Relationships and Related Transactions ..................................................... 64
14 Principal Accounting Fees and Services ............................................................. 65
PART IV
15 Exhibits, Financial Statement Schedules ............................................................ 66
EXHIBIT INDEX 67
SIGNATURES 69
- 1 -
GENERAL
Unless otherwise indicated or the context otherwise requires, all references in
this Form 10-K to the "Company" or "Metropolitan" refers to Metropolitan Health
Networks, Inc. and its consolidated subsidiaries. Metropolitan disclaims any
intent or obligation to update "forward looking statements".
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the discussion under the captions "Risk Factors", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this Form 10-K may include certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended,
including, without limitation, statements with respect to anticipated future
operations and financial performance, growth and acquisition opportunity and
other similar forecasts and statements of expectation. These statements involve
known and unknown risks and uncertainties, such as the Company's plans,
objectives, expectations and intentions, and other factors that may cause its,
or its industry's, actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the
forward-looking statements. Many of these factors are listed under "Risk
Factors" and elsewhere in this Form 10-K.
In some cases, you can identify forward-looking statements by terminology
such as "expects", "anticipates", "intends", "may", "should", "plans",
"believes", "seeks", "estimates" or other comparable terminology.
Although it believes that the expectations reflected in these
forward-looking statements are reasonable, Metropolitan does not guarantee
future results, levels of activity, performance or achievements. Its actual
results and the timing of certain events could differ materially from those
anticipated in these forward-looking statements. It disclaims any obligation to
update or review any forward-looking statements based on the occurrence of
future events, the receipt of new information or otherwise.
- 2 -
PART I
ITEM 1 DESCRIPTION OF BUSINESS
Introduction
Through its provider service network ("PSN") and its health maintenance
organization ("HMO"), Metropolitan currently provides healthcare benefits to
Medicare beneficiaries in Florida. As of December 1, 2005, the PSN and the HMO
provided healthcare benefits to approximately 26,200 and 1,400 Medicare
Advantage beneficiaries, respectively. The HMO's membership grew to
approximately 1,800 by the end of 2005.
Provider Service Network
Pursuant to two contracts with Humana, Inc. (the "Humana Agreements"), the
second largest participant in the Medicare Advantage program ("Humana"),
Metropolitan's 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 from Humana's Medicare Advantage Plan. As of December 1,
2005, the Humana Agreements covered approximately 19,600 Humana Plan Members (as
defined below) in Central Florida and 6,600 Humana Plan Members in South
Florida.
The PSN is comprised both of medical practices owned by the Company as well as
independently owned medical practices and providers with whom it has contracted
("IPs"). Metropolitan currently owns and operates eight primary care physician
practices and a medical oncology physician practice. The Company also contracts
with twenty-nine primary care IPs. Through its Humana contracts Metropolitan has
established referral relationships with a large number of specialist physicians,
ancillary service providers and hospitals throughout South Florida and Central
Florida. See "Business Model - Provider Agreements" for more information
regarding the PSN's relationships with IPs, specialist physicians, ancillary
service providers and hospitals.
Humana directly contracts with the Centers for Medicare and Medicaid Services
("CMS") and is paid a fixed monthly premium payment for each member ("Humana
Plan Member") enrolled in Humana's Medicare Advantage Plan. The monthly amount
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 Member who selects one of the Company's
affiliated providers as his or her primary care physician (a "Humana
Participating Member"). In return for the provision of these medical services,
the PSN receives from Humana a monthly fee, also known as a "capitated fee", for
each Humana Participating Member. The fee rates are established by the contracts
between the PSN and Humana and comprise a vast majority of the monthly premiums
received by Humana from CMS with respect to Humana Participating Members.
The Company's PSN assumes the full financial responsibility for the provision of
all Medicare-covered medical care to Humana Participating Members, including
those medical services that the PSN does not itself provide. To the extent the
costs of providing such medical care are less than the related premiums
receivable from Humana, the Company's PSN generates an operating profit.
Conversely, if the medical costs exceed the fees receivable from Humana, the
Company's PSN experiences an operating loss.
- 3 -
The vast majority of the Company's PSN revenues come from the Humana Agreements.
The Company does receive additional revenue for providing primary care services
to non-Humana Plan Members on a fee-for-service basis in the medical practices
it owns and operates.
Health Maintenance Organization
Effective July 1, 2005, METCARE Health Plans, Inc., the Company's wholly owned
subsidiary ("MHP"), became licensed as a Medicare Advantage HMO and entered into
a contract with CMS (the "CMS Contract") to begin offering Medicare Advantage
plans to Medicare beneficiaries in six Florida counties which include the cities
of Fort Pierce, Port St. Lucie, Fort Myers, Port Charlotte and Sarasota. MHP has
been marketing its "AdvantageCare" branded plan since July 2005. MHP is seeking
to expand its HMO and as of December 31, 2005, the total number of enrollees in
its plan was approximately 1,800.
In addition to growth within existing service areas, MHP has been exploring the
expansion of its HMO business into new geographic areas. However, Metropolitan
does not intend to provide HMO services in the geographic markets with respect
to which the PSN has a contract with Humana. Metropolitan views its HMO business
as an extension of its existing core competencies.
MHP was issued a Health Care Provider Certificate ("HCPC") by Florida's Agency
for Health Care Administration ("AHCA"), which is responsible for oversight of
quality of care issues, for the counties of Martin, St. Lucie and Okeechobee
counties on March 16, 2005. Subsequent to the issuance of the HCPC, MHP
submitted an application to expand its service area and received approval of the
application from AHCA on May 3, 2005 for the counties of Lee, Charlotte and
Sarasota. The Department of Financial Services, Office of Insurance Regulation
("OIR"), which is responsible for issues pertaining to financial stability,
approved MHP's application and a Certificate of Authority to operate a HMO in
the State of Florida (COA) was issued by OIR on April 22, 2005.
In February 2005, the Company submitted a Coordinated Care Plan application to
CMS to provide Medicare Advantage HMO services to Medicare beneficiaries in
Martin, St. Lucie, Okeechobee, Lee, Charlotte and Sarasota counties. In March
2005, CMS conducted its site visit in support of the application and, in May
2005, MHP received approval to commence operations as a Medicare Advantage HMO
effective July 1, 2005.
MHP's revenues are generated by premiums consisting of monthly payments per
member that are established by the CMS Contract. MHP recorded its first revenues
in the third quarter of fiscal 2005.
Metropolitan believes that the continuing development efforts, required reserve
requirements and operating costs for the HMO can be funded by the Company's
current resources and projected cash flows from operations. The Company is
preparing to file expansion applications to operate in several additional
Florida counties, with enrollments beginning as early as November 2006 for a
January 1, 2007 effective date. During 2005, the Company incurred losses of
approximately $6.6 million in connection with the development and operation of
the its HMO and anticipates incurring additional losses in fiscal 2006. The
actual amount of development costs will depend on a number of variables
including, but not limited to, the effectiveness of our sales and marketing
efforts in enrolling members and the HMO's revenue to medical expense ratio.
- 4 -
Additional information regarding Metropolitan's PSN and HMO segments for fiscal
years 2005, 2004 and 2003 is set forth in Note 11 to Metropolitan's "Notes to
Consolidated Financial Statements" contained in this Form 10-K. Such information
is incorporated herein by reference.
History of the Company
Metropolitan was incorporated in the State of Florida in January 1996, and began
operations as a Physician Practice Management Group. Although it thereafter
acquired a number of physician practices and ancillary service providers, the
group practice strategy was abandoned in late 1999.
The PSN's first Humana contract was secured through an acquisition in late 1997,
and expanded through an additional acquisition in early 1999. Pursuant to this
agreement, the PSN contracted with Humana to manage certain designated Humana
Medicare Advantage lives in South Florida. In 2000, an additional contract was
subsequently secured to manage certain designated Humana Medicare Advantage
lives in Central Florida.
Metropolitan acquired a diagnostic laboratory and a pharmacy business in 2000
and 2001, respectively. The laboratory was shut down in 2002 and the pharmacy
was sold in November 2003.
The PSN renegotiated its most significant contract with Humana, covering the
Central Florida area, effective January 1, 2003. This renegotiation increased
the percentage of Medicare premium the PSN received from Humana and resolved a
number of contractual disputes between the PSN and Humana.
The Company hired Michael Earley as its Chief Executive Officer and President in
March 2003, and subsequently adopted a strategy to focus its resources and
energies on its managed care business.
In December 2003, the Medicare Prescription Drug Improvement and Modernization
Act of 2003 (the "Medicare Modernization Act" or "MMA") was signed into law,
which, among other changes, significantly increased funding for the Medicare
Advantage program beginning in 2004.
Effective July 1, 2005, MHP commenced operations as a Medicare Advantage HMO.
The HMO business has been launched in six Florida counties and MHP has been
marketing its "AdvantageCare"-branded health plan since July 2005.
Metropolitan's principal place of business is 250 Australian Ave., Suite 400,
West Palm Beach, FL 33401. Its telephone number is (561) 805-8500.
- 5 -
Industry
The Florida Medicare Advantage Market
Behind only California, which has 4.3 million Medicare eligibles, Florida has
the second largest Medicare population in the U.S. with an estimated three
million lives. California's Medicare Advantage penetration is approximately 31%
while Florida's is only 18%. Within Florida, the Company believes that of the
approximate 981,000 and 357,000 persons who are eligible for Medicare in the
counties served by its PSN and HMO, respectively, approximately 38% and 7% are
members of Medicare Advantage plans, respectively. Florida's Medicare eligible
population is expected to grow to four million by 2015.
Medicare Advantage Penetration in Counties Served By PSN
--------------------------------------------------------
(CMS data modified January 2006)
Medicare
Medicare Advantage Penetration
County Eligibles Penetration %
------ --------- ----------- -----------
Broward 248,637 106,364 42.8%
Miami-Dade 347,328 160,926 46.3%
Palm Beach 254,676 68,828 27.0%
Flagler 20,064 4,973 24.8%
Volusia 110,013 32,959 30.0%
----------------------------------------------------
980,718 374,050 38.1%
----------------------------------------------------
Medicare Advantage Penetration in Counties Served By HMO
--------------------------------------------------------
(CMS data modified January 2006)
Medicare
Medicare Advantage Penetration
County Eligibles Penetration %
------ --------- ----------- ------------
Charlotte 41,072 3,297 8.0%
Lee 114,348 7,672 6.7%
Sarasota 111,186 5,345 4.8%
Martin 35,181 3,053 8.7%
Okeechobee 7,568 662 8.7%
St. Lucie 47,862 5,474 11.4%
--------------------------------------------------
357,217 25,503 7.1%
--------------------------------------------------
Medicare
A report issued in early 2005 by the Office of the Actuary at CMS estimated that
national healthcare spending in the United States was $1.9 trillion, or $6,280
for every American, in 2004. The CMS report projected that healthcare spending,
which today accounts for nearly 16% of the national economy, would grow to $4.0
trillion by 2015. The projected principal drivers for this growth include
continued cost-increasing medical innovation, inflation, continued strong demand
for prescription drugs and the aging baby-boomer demographic.
Medicare is the nationwide health insurance program providing health insurance
to people aged 65 and older, people entitled to Social Security disability
payments for two years or more, and people with end-stage renal disease,
regardless of income. Medicare currently provides healthcare benefits to
approximately 42 million elderly and disabled Americans. Medicare spending per
beneficiary, including the new Part D prescription benefit described below, is
projected to be $10,621 in 2006 and grow to $15,600 by 2014.
- 6 -
The Medicare program has three primary components:
(i) Part A - Medicare Part A covers inpatient hospital, skilled nursing
facility, home health and hospice care. All citizens of the United States
are automatically enrolled in Medicare Part A upon reaching the age of 65.
(ii) Part B - Medicare Part B covers almost all reasonable and necessary
medical services, including doctors' services, laboratory and x-ray
services, durable medical equipment (wheelchairs, hospital beds),
ambulance services, outpatient hospital care, home health care, blood and
medical supplies. Medicare's Part B is optional and is financed largely by
monthly premiums paid by individuals enrolled in the program. Participants
may have this premium automatically deducted from their Social Security
check. The monthly premium is $88.50 per month in 2006. Medicare Part B
has an annual deductible requirement, which equals $124 in 2006. Once the
deductible has been met, Medicare Part B will generally pay 80% of the
Medicare allowable fee schedule and beneficiaries pay the remaining 20%.
(iii) Part D - First available in 2006, Medicare Part D permits every Medicare
recipient to select a prescription drug plan. Medicare Part D replaces the
transitional prescription drug discount program and replaces Medicaid
prescription drug coverage for dual-eligible beneficiaries.
Initially, Medicare was offered only on a "fee-for-service" ("FFS") basis. Under
the Medicare FFS payment system, an individual can choose any licensed physician
and use the services of any hospital, healthcare provider, or facility certified
by Medicare. CMS reimburses providers if Medicare covers the service and CMS
considers it "medically necessary."
As an alternative to the traditional Medicare "fee-for-service" program,
Medicare offers beneficiaries the option to receive care through private managed
care plans. These private managed care options are part of Medicare Part C,
which has also been known as Medicare+Choice plans, and is now called Medicare
Advantage.
Medicare Advantage plans contract with CMS to provide benefits that exceed those
offered under the traditional FFS Medicare program by at least thirty percent in
exchange for a fixed monthly premium payment per member from CMS. The monthly
premium varies based on the county in which the member resides, as adjusted to
reflect the member's demographics and the plans' risk scores. Individuals who
elect to participate in the Medicare Advantage program receive greater benefits
than traditional FFS Medicare beneficiaries, including, but not limited to, eye
exams, hearing aids and routine physical exams. Out-of-pocket costs for the
Medicare beneficiary may also be lower. However, in exchange for these enhanced
benefits, members are generally required to use only the services and provider
networks offered by the Medicare Advantage plan. This participation of private
health plans in the Medicare Advantage Program under full risk contracts began
in the 1980's and grew to a peak membership in 2000 when Medicare HMOs covered
6.3 million lives. According to information provided by the Henry J. Kaiser
Family Foundation, as of September 1, 2005, Medicare Advantage plans accounted
for slightly more than 12% of the Medicare population, down from a peak
penetration of 16% in 2000. The Balanced Budget Act of 1997 (the "BBA"), among
other things, imposed limitations on reimbursement, which contributed to a
decline in the number of Medicare Advantage plans from 346 in 1998 to 151 in
2003. The exodus of managed care companies from the Medicare program left many
Medicare beneficiaries without a private plan option.
- 7 -
The Medicare Modernization Act
The Medicare Modernization Act, signed into law in December 2003, provided
sweeping changes to the Medicare program. The MMA, among other things (i)
generally increased the rates payable to Medicare Advantage plans from CMS, (ii)
added the Medicare Part D prescription drug benefit beginning in January 2006,
(iii) implemented a competitive bidding process for the Medicare Advantage
Program and (iv) provided a limited annual enrollment period.
Increase in Rates Payable
The MMA made favorable changes to the premium rate calculation methodology and
generally provides for program rates that will better reflect the increased cost
of medical services provided by managed care organizations to Medicare
beneficiaries. The MMA rates for 2004 reflected an average increase of 10.6%
over the prior year rates, the MMA rates for 2005 reflected an average increase
of 6.6% over the prior year rates and the announced MMA rates for 2006 are
expected to reflect an average increase of 4.8% over the prior year.
The MMA's funding increases were intended to both offset medical cost inflation
and to allow enhanced plan benefit design to encourage increased participation
by managed care organizations in the Medicare Advantage program. According to
information provided by the Henry J. Kaiser Family Foundation, as of July 2005,
the number of Medicare Advantage plans had increased to 247, up from 151 in
2003.
Medicare Part D
As part of the MMA, effective January 1, 2006, Medicare beneficiaries are
eligible to receive assistance paying for prescription drugs through new
Medicare Part D. The drug benefit is not part of the traditional fee-for-service
Medicare program, but rather is offered through private insurance plans.
Medicare beneficiaries were able to choose and enroll in a prescription drug
plan through Medicare Part D. Prescription drug coverage under Part D is
voluntary. Fee-for-service beneficiaries may purchase Part D coverage from a
stand-along prescription drug plan (a "PDP") from a list of CMS approved PDPs.
Individuals who are enrolled in a Medicare Advantage plan must receive their
drug coverage through their Medicare Advantage prescription drug plan ("MA-PD
plan") and may not enroll in a separate PDP. Beneficiaries who are eligible for
both Medicare and Medicaid, known as dual eligible beneficiaries, who have not
enrolled in a MA-PD Plan or a PDP have been automatically enrolled by CMS with
approved PDPs in their region.
- 8 -
The Medicare Part D prescription drug benefit will be largely subsidized by the
federal government and is additionally supported by risk-sharing with the
federal government through risk corridors designed to limit the profits or
losses of the drug plans and reinsurance for catastrophic drug costs. The
government subsidy will be based on the national weighted average monthly bid
for this coverage, adjusted for member demographics and risk factor payments.
The subsidy for Part D benefits is estimated for 2006 to be $92.30 per
beneficiary per month on average. The beneficiary will be responsible for
payment of a monthly premium, anticipated to be approximately $32.20 per
beneficiary per month, subject to certain co-pays, an annual deductible, and
late enrollment penalties.
Humana Participating Members and MHP's plan members will be automatically
enrolled in their MA-PD plans as of January 1, 2006 unless they choose another
provider's prescription drug coverage. Any Medicare Advantage member enrolling
in a stand-alone PDP, however, will automatically be disenrolled from the
Medicare Advantage plan altogether, thereby resuming traditional fee-for-service
Medicare. Medicare Advantage members will have the right to change drug plans,
either MA-PD or PDP, two times during the open enrollment period. Duel eligible
beneficiaries and other members qualified for the low-income subsidy (LIS) will
be able to change plans year round.
Competitive Bidding Process
Beginning in 2006 CMS will use a new rate calculation system for Medicare
Advantage plans, which system will be based on a competitive bidding process
that will allow the federal government to share in any cost savings achieved by
Medicare Advantage plans. In general, the statutory payment rate for each
county, which is primarily based on CMS's estimated per beneficiary
fee-for-service expenses, will be relabeled as the "benchmark" amount, and local
Medicare Advantage plans will annually submit bids that reflect the costs they
expect to incur in providing the base Medicare Part A and Part B benefits in
their applicable service areas.
If the bid is less than the benchmark for that year, Medicare will pay the plan
its bid amount, risk adjusted based on its risk scores, plus a rebate equal to
75% of the amount by which the benchmark exceeds the bid, resulting in an annual
adjustment in reimbursement rates. Plans must use the rebate to provide
beneficiaries with extra benefits, reduced cost sharing, or reduced premiums,
including premiums for MA-PD and other supplemental benefits. CMS has the right
to audit the use of these proceeds. The remaining 25% of the excess amount will
be retained in the statutory Medicare trust fund. If a Medicare Advantage plan's
bid is greater than the benchmark, the plan will be entitled to charge a premium
to enrollees equal to the difference between the bid amount and the benchmark,
which is expected to make such plans less competitive. For 2006, the county
benchmarks were 4.8% greater than the 2005 rates, which is the national growth
rate in fee-for-service expenditures.
- 9 -
Enrollment Period
Prior to the MMA, Medicare beneficiaries were permitted to enroll in a Medicare
managed care plan or change plans at any point during the year. Beginning in
2006, Medicare beneficiaries will have defined enrollment periods, similar to
commercial plans, in which they can select a Medicare Advantage plan, a
stand-alone PDP, or traditional fee-for-service Medicare. The initial enrollment
period for 2006 is November 15, 2005 through May 15, 2006 for a MA-PD or
stand-alone PDP. In addition, beneficiaries will have an open election period
from January 1, 2006 through June 30, 2006 in which they can make or change an
equivalent election. Thereafter, the annual enrollment period for a PDP will be
from November 15 through December 31 of each year, and enrollment in Medicare
Advantage plans will occur from November 15 through March 31 of the subsequent
year.
Business Model
PSN Segment
Metropolitan's PSN provides healthcare services to Medicare Advantage
beneficiaries who participate in the Medicare Advantage program through Humana.
Metropolitan conducts all of its PSN business operations through Metcare of
Florida, Inc., its wholly-owned subsidiary.
Humana Agreements
Pursuant to the Humana Agreements, the PSN provides, on a non-exclusive basis,
healthcare services to Medicare beneficiaries in Central Florida and South
Florida who have elected to receive benefits from it, pursuant to Humana's
Medicare Advantage Plan.
The PSN's agreements with Humana (the "Humana Agreements") have one-year terms
and renew automatically each December 31 for additional one-year terms unless
terminated for cause or upon 180 days' prior notice. Pursuant to the Humana
Agreements, the PSN provides or arranges for the provision of covered medical
services to each Humana Plan Member who selects one of its affiliated physicians
as the member's primary care physician. The PSN is entitled to receive a
capitated fee with respect to each Humana Participating Member representing a
vast majority of the premium that Humana receives with respect to the subject
Humana Plan Member.
The Humana Agreements are subject to the changes to the covered benefits that
Humana elects to provide to its members and other terms and conditions.
Pursuant to the Humana Agreements, the Company is required to comply with
Humana's general policies and procedures, including Humana's policies regarding
referrals, approvals, utilization management and quality assessment.
Humana may immediately terminate either of the Humana Agreements and/or any
individual physician credentialed under the Humana Agreements, upon written
notice, (i) if the PSN and/or any of its affiliated physician's continued
participation may adversely affect the health, safety or welfare of any Humana
member or bring Humana into disrepute; (ii) in the event of one of PSN's
physician's death or incompetence; (iii) if any of the PSN's physicians fail to
meet Humana's credentialing criteria; (iv) in accordance with Humana's policies
and procedures as specified in Humana's manual, (v) if the PSN engages in or
acquiesces to any act of bankruptcy, receivership or reorganization; or (vi) if
Humana loses its authority to do business in total or as to any limited segment
or business (but only to that segment). The PSN and Humana may also each
terminate each of the Humana Agreements upon 90 days' prior written notice (with
a 60 day opportunity to cure, if possible) in the event of the other's material
breach of the applicable Humana Agreement.
- 10 -
Humana may provide 30 days notice as to certain amendments or modifications of
the Humana Agreements, including but not limited to, compensation rates, covered
benefits and other terms and conditions. If Humana exercises its right to amend
either of the Humana Agreements upon 30 days' written notice, the PSN may object
to such amendment within the 30 day notice period. If the PSN objects to such
amendment within the requisite time frame, Humana may terminate the applicable
Humana Agreement upon 90 days' written notice.
For the term of the Humana Agreement pertaining to the Central Florida region
(the "Central Florida Humana Agreement"), Humana has agreed that it will not,
with the exception of one existing service provider, enter into any new global
risk deals for Humana's Medicare Advantage HMO products in Central Florida. It
is the PSN's understanding that Humana has an existing risk contract with Island
Doctors for Humana's Medicare Advantage HMO product in Central Florida.
For the term of the Central Florida Humana Contract, the PSN has agreed that it
will not enter into any global, full or limited risk contracts with respect to
Medicare Advantage members with any non-Humana Medicare Advantage HMO or PSO in
the Florida counties in which it and Humana have a Medicare Advantage contract.
In addition, for the term plus one year of each of the Humana Agreements, the
PSN has agreed that it and its affiliated providers will not, directly or
indirectly, engage in any activities which are in competition with Humana's
health insurance, HMO or benefit plans business, including obtaining a license
to become a managed health care plan offering HMO or point of service, or POS,
products, or (ii) acquire, manage, establish or have any direct or indirect
interest in any provider sponsored organization or network for the purpose of
administering, developing, implementing or selling government sponsored health
insurance or benefit plans, including Medicare and Medicaid, or (iii) contract
or affiliate with another licensed managed care organization, where the purpose
of such affiliation is to offer and sponsor HMO or POS products and where the
PSN and/or its affiliated providers obtain an ownership interest in the HMO or
POS products to be marketed, and (iv) not enter into agreements with other
managed care entities, insurance companies or provider sponsored networks for
the provision of healthcare services to Medicare HMO, Medicare POS and/or other
Medicare replacement patients at the same office sites or within five miles of
the office sites where services are provided to the Humana Plan Members.
Provider Agreements
The PSN operates predominantly as an "affiliated" model as contrasted with a
"staff" model in which the physician practices are owned and operated by the
risk provider. Under its model, the physicians maintain their independence but
are aligned with Metropolitan's professional staff that assists in providing
high quality, cost effective health care.
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The Company's PSN is comprised of 37 primary care physician practices, eight of
which Metropolitan owns. The others are IPs that are contracted with the Company
on a exclusive or non-exclusive basis and primarily reimbursed through the
receipt of capitated fees. Under these contracts with the IPs (the "IP
Contracts"), the IP providers are paid a set amount per member, per month, to
provide all the necessary primary care medical services to Participating
Members. The monthly amount is negotiated and is subject to change based on
certain quality metrics under the PSN's Partners In Quality ("PIQ") program, a
proprietary care management model that it implemented in 2002.
PIQ is a "pay for performance" program that measures performance based on
quality metrics including patient satisfaction, disease state management of
high-risk, chronically ill patients, increased frequency of physician-patient
encounters, and enhanced medical record documentation. Management believes that
the PIQ program differentiates the Company's PSN from other PSNs or Management
Service Organizations ("MSOs").
The IP Contracts generally have one-year terms and renew automatically for
one-year periods unless either party provides written notice at least 120 days
prior to the termination date. The IP providers generally may participate in any
number of other provider service networks, HMO's and IPs. However, during the
term of the IP Contract, and for a period of six months after the expiration or
termination of the IP Contract, the IP providers are generally prohibited from
participating in any other provider service network, HMO or IP which contracts
directly or indirectly with the Medicare or Medicaid Program on a capitated or
risk basis. The IP providers are further prohibited during the term and for a
period of six months after the expiration of the terms from encouraging or
soliciting the Participating Members the Company serves to change their primary
care provider, disenroll from their health plan, or leave the PSN's network.
The PSN has established referral relationships with a large number of Humana
contracted specialist physicians, ancillary service providers and hospitals
throughout South Florida and Central Florida. These providers have contracted
with Humana to deliver services to the Company's PSN patients based on certain
fee schedules and care requirements. Specialist physicians, ancillary service
providers and hospitals, are generally paid on a contractual fee-for-service
basis. Certain specialist physicians dealing with high volumes of cases are paid
on a capitated basis.
Claims Processing
The PSN does not pay or process any of the payments to its providers. Pursuant
to the Humana Agreements, Humana, among other things, processes claims received
by affiliated providers, makes a determination whether and to what extent to
allow such claims and makes payments for covered services rendered to Humana
Plan Members using Humana's claims processing policies, procedures and
guidelines. Humana provides notice to the PSN upon qualification of a claim and
it has the opportunity within seven days of receipt of a claim to review such
claim and approve, deny or modify the claim, as appropriate. Humana provides the
PSN with reports of actual claims history. Such data is statistically evaluated
by the PSN for a variety of factors. Once this information is received from
Humana, such data is maintained on a server system maintained at the Company's
executive offices. The PSN's claims suspense staff seeks to identify and correct
non-qualifying claims prior to payment. After payments are made by Humana, the
PSN's contestation staff is responsible for reviewing paid claims, identifying
errors and seeking recoveries. The PSN's management monitors and measures
Humana's estimates of claims incurred but not yet reported (IBNR), for adequacy.
- 12 -
The PSN is certified as a Utilization Review Agent by Florida's Agency for
Health Care Administration. Utilization review is a process whereby multiple
data is analyzed and considered to ensure that appropriate health services are
provided in a cost-effective manner. Factors include the risks and benefits of a
medical procedure, the cost of providing those services, specific payer coverage
guidelines, and historical outcomes of healthcare providers such as physicians
and hospitals.
PSN Growth Strategy
The PSN's growth strategy includes, among other things:
o increase patient volume at its existing medical practices and
affiliated IPs through enhanced marketing efforts; and
o selectively expand its network to include additional medical centers
within its existing geographic markets.
Increasing Patient Volume
The PSN believes its existing network has the capacity to handle additional
Humana Participating Members and could realize certain additional economies of
scale if the number of Participating Members in its network increased. It seeks
to increase the number of patients in its network through the general marketing
efforts of Humana and through its own targeted marketing efforts towards
Medicare eligible patients.
Selectively Expanding Its Network of Medical Centers
Within its existing geographic markets, the PSN seeks to add additional medical
centers to its network either through acquisition, start up or affiliation with
an IP. It expects it will identify and select candidates based in large part on
the following broad criteria:
o a history of profitable operations or a perceived synergy such as
opportunities for economies of scale through a consolidation of
management or service provision functions; and
o a geographic proximity to the Company's current operations.
PSN Competition
The PSN believes there are at least five and fifteen Medicare Advantage plans in
the Central Florida and South Florida markets, respectively. It is its
understanding that as of December 2005 Humana has enrolled in its Medicare
Advantage Plans approximately 16% and 15% of the persons enrolled in Medicare
Advantage Plans in Central Florida and South Florida, respectively. It also
believes through its provider network it provides medical services to
approximately 95% and 5% of the Humana Plan Members in the Central Florida and
South Florida markets, respectively. See "RISK FACTORS - Our Industry is Already
Very Competitive... ."
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HMO Segment
In July 1, 2005, MHP began offering its Medicare Advantage health plan in the
Florida counties of Martin, St. Lucie, Okeechobee, Lee, Charlotte and Sarasota.
Its Medicare Advantage plan covers Medicare eligible members who reside at least
six months or more in its service area with benefits that are better than those
offered under traditional Medicare fee-for-service plans. Through its Medicare
Advantage Plan, MHP has the flexibility to offer benefits not covered under
traditional fee-for-service Medicare. Its plan is designed to be attractive to
seniors and offer a broad range of benefits which include, prescription drug
benefits, eye glasses, hearing aids, dental care, massage therapy and
acupuncture.
During 2006, MHP's Medicare Advantage members, depending on the market, will pay
either a $0 or $10 monthly premium but, in some cases, are subject to
co-payments and deductibles, depending upon the market and benefit. Except in
limited cases, including emergencies, MHP's members are required to use primary
care physicians within MHP's network of providers and generally must receive
referrals from their primary care physician in order to see a specialist or
other ancillary provider.
Pursuant to the agreement between MHP and CMS (the "CMS Agreement"), MHP has
agreed to provide services to Medicare beneficiaries pursuant to the Medicare
Advantage program. Under the CMS Agreement, CMS pays MHP a fixed capitation
payment based on membership and adjusted for demographic and health risk
factors. Inflation, changes in utilization patterns and average per capita
fee-for-service Medicare costs are also considered in the calculation of the
fixed capitation payment by CMS. The initial term of the CMS Agreement expires
on December 31, 2006 and is subject to annual renewal at the election of CMS.
Amounts payable under Medicare Advantage arrangements are subject to annual
revision by CMS. Pursuant to the CMS Agreement, MHP is required to comply with
federal Medicare laws and regulations and the CMS Agreement is subject to
termination by CMS in the event of MHP's noncompliance.
Provider Arrangements and Payment Methods
Metropolitan has attempted to structure its HMO provider arrangements and
payment methods in a manner that encourages the medical provider to deliver high
quality medical care to its members. To date, it has primarily structured its
non-exclusive provider contracts on a fee for service basis.
Management Services
MHP has engaged a third party service provider, HF Administrative Services, Inc.
("HFAS"), to provide various administrative and management services, including,
but not limited to, claims processing and adjudication, certain management
information services, regulatory reporting and customer services pursuant to the
terms of an Administrative Services Agreement (the "Services Agreement").
In addition to approximately $329,000 of implementation and start-up costs it
paid to HFAS during fiscal 2005, MHP compensates HFAS for its management
services based upon the number of enrolled members, subject to various monthly
minimum payments. In addition, HFAS is compensated for providing additional
programming services on an hourly basis. During fiscal 2005, MHP paid an
aggregate of $158,000 to HFAS in accordance with the Services Agreement.
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Pursuant to the Services Agreements, HFAS verifies claims by MHP's affiliated
providers against MHP's policies regarding member eligibility, benefits,
referrals and pre-authorizations and makes a determination whether and to what
extent to allow such claims using MHP's guidelines. HFAS provides notice to MHP
of claim denials. MHP has the right and responsibility within three business
days of receipt of a claim denial to independently review such claim and
approve, deny or modify the claim, as appropriate. It has access to the
management information systems provided and maintained by HFAS for our benefit.
In addition, HFAS is required under the Services Agreement to provide MHP with
reports and information regarding claim adjudication.
The initial term of the Services Agreement expires on June 30, 2010 and
thereafter is automatically renewable for additional one-year terms. After the
initial term, either party may terminate the Services Agreement for any reason
upon 180 days written notice. Either party may also terminate the Services
Agreement upon prior written notice (with a 30 day opportunity to cure) in the
event of the other's material breach of the Services Agreement in any manner,
including but not limited to, MHP's failure to maintain sufficient funds in
order for HFAS to pay claims, or in the event MHP engages in or acquiesce to any
act of bankruptcy, receivership or reorganization or in the event either party
fails to secure any license, government approval or exemption required by law.
See "RISK FACTORS - The Company Depends on Third Parties to Provide It Crucial
Information and Data.."
Sales and Marketing Programs
As of December 31, 2005, MHP's sales force consisted of 37 active third party
agents and 9 internal licensed sales employees. Its third party agents are
compensated on a commission basis. Medicare Advantage enrollment is generally an
individual decision made by the member. Accordingly, MHP's sales agents and
representatives focus their efforts on in-person contacts with potential
enrollees. Its marketing efforts also include television, radio and print
advertising.
Prior to 2006, Medicare beneficiaries could enroll in or change health plans at
any time during the year. Commencing in 2006, Medicare beneficiaries will have a
limited annual enrollment period during which they can choose between a Medicare
Advantage plan and traditional fee-for-service Medicare. After this annual
enrollment period ends, generally only seniors turning 65 during the year,
dual-eligible beneficiaries, Low-Income Subsidy (LIS) beneficiaries and others
who qualify for special needs plans, Medicare beneficiaries permanently
relocating to another service area, and employer group retirees will be
permitted to enroll in or change health plans. See "Industry - The Medicare
Modernization Act - Enrollment Period."
HMO Competition
Metropolitan believes there are at least five Medicare Advantage plans offering
enrollment in the six Florida counties where its HMO operates. As of December
31, 2005, it estimates that it had enrolled approximately 7% of the membership
market in each of the six countries. See "RISK FACTORS - Our Industry is Already
Very Competitive..."
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Insurance
Metropolitan relies upon insurance to protect it from many business risks,
including medical malpractice, errors and omissions and certain significantly
higher than average Participating Member medical expenses. Although Metropolitan
maintains insurance of the types and in the amounts that is believes are
reasonable, there can be no assurances that the insurance policies maintained by
Metropolitan will insulate it from material expenses and/or losses in the
future. See "RISK FACTORS - Claims Relating to Medical Malpractice and Other
Litigation...."
Employees
As of December 31, 2005, Metropolitan had 169 full-time employees, of which 49
were employed at Metropolitan's executive offices. Of this total, 105 and 47
were employed by the PSN and MHP, respectively, with the balance representing
corporate administrative employees. No employees of Metropolitan are covered by
a collective bargaining agreement or are represented by a labor union.
Metropolitan considers its employee relations to be good.
Government Regulation
Metropolitan's businesses are regulated by the federal government and the State
of Florida. The laws and regulations governing its operations are generally
intended for the benefit of health plan members and providers. These laws and
regulations, along with the terms of our contracts, regulate how the Company
does business, what services it offers, and how it interacts with Participating
Members, affiliated providers and the public. The government agencies
administering these laws and regulations have broad latitude to enforce them.
The Company is subject to various governmental reviews, audits and
investigations to verify its compliance with its contracts and applicable laws
and regulations.
The Company believes it is in material compliance with all government
regulations applicable to its business. It further believes it has implemented
reasonable systems and procedures to assist it in maintaining compliance with
such regulations. Nonetheless, it believes it faces a variety of regulatory
related risks. See "Risk Factors - Reductions in Government Funding...", "-The
MMA will materially impact its operations...", "CMS Risk Adjustment Payment
System...", "The Company's Business Activities Are Highly Regulated...", "The
Healthcare Industry is Highly Regulated...", "If The Company Is Required to
Maintain Higher Statutory Capital Levels..." and "The Company Is Required to
Comply with Laws..."
A summary of the material aspects of the government regulations to which the
Company is subject is set forth below.
Federal and State Reimbursement Regulation.
The Company's operations are affected on a day-to-day basis by numerous
legislative, regulatory and industry-imposed operational and financial
requirements, which are administered by a variety of federal and state
governmental agencies as well as by self-regulatory associations and commercial
medical insurance reimbursement programs. The Company has filed for all its
employed physicians the necessary reassignments of billing rights applications
with Medicare.
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Federal "Fraud and Abuse" Laws and Regulations.
The Anti-Kickback Law makes it a criminal felony offense to knowingly and
willfully offer, pay, solicit or receive remuneration in order to induce
business for which reimbursement is provided under federal health care programs,
including without limitation, the Medicare and Medicaid programs. Violations of
these laws are punishable by monetary fines, civil and criminal penalties,
exclusion from care programs and forfeiture of amounts collected in violation of
such laws. The scope of prohibited payments in the Anti-Kickback Law is broad
and includes economic arrangements involving hospitals, physicians and other
health care providers, including joint ventures, space and equipment rentals,
purchases of physician practices and management and personal services contracts.
CMS has promulgated regulations that prohibit health plans with Medicare
contracts from including any direct or indirect payment to physicians or other
providers as an inducement to reduce or limit medically necessary services to a
Medicare beneficiary. These regulations impose disclosure and other requirements
relating to physician incentive plans including bonuses or withholdings that
could result in a physician being at "substantial financial risk" as defined in
Medicare regulations.
Federal False Claims Act.
The Company is subject to a number of laws that regulate the presentation of
false claims or the submission of false information to the federal government.
For example, the federal False Claims Act provides, in part, that the federal
government may bring a lawsuit against any person or entity whom it believes has
knowingly presented, or caused to be presented, a false or fraudulent request
for payment from the federal government, or who has made a false statement or
used a false record to get a claim approved. The federal government has taken
the position that claims presented in violation of the federal Anti-Kickback
Statute may be considered a violation of the federal False Claims Act.
Violations of the False Claims Act are punishable by treble damages and
penalties of up to $11,000 per false claim. In addition to suits filed by the
government, a special provision under the False Claims Act allows a private
individual (e.g., a "whistleblower" such as a disgruntled former employee,
competitor or patient) to bring an action under the False Claims Act on behalf
of the government alleging that an entity has defrauded the federal government
and permits the whistleblower to share in any settlement or judgment that may
result from that lawsuit.
Florida Fraud and Abuse Regulations.
Florida enacted "The Patient Brokering Act" which imposes criminal penalties,
including jail terms and fines, for receiving or paying any commission, bonus,
rebate, kickback, or bribe, directly or indirectly in cash or in kind, or engage
in any split-fee arrangement, in any form whatsoever, to induce the referral of
patients or patronage from a healthcare provider or healthcare facility. The
Florida statutory provisions regulating the practice of medicine include similar
language as grounds for disciplinary action against a physician.
- 17 -
Restrictions on Physician Referrals.
Federal regulations under the Social Security Act that restrict physician
referrals to health care entities with which they have financial relationships
(commonly referred to as the "Stark Law") prohibit certain patient referrals by
physicians. Specifically, the Stark Law prohibits a physician, or an immediate
family member, who has a financial relationship with a health care entity, from
referring Medicare patients with limited exceptions, to that entity for certain
"designated health services". A financial relationship is defined to include an
ownership or investment in, or a compensation relationship with, a health care
entity. The Stark Law also prohibits a health care entity receiving a prohibited
referral from billing the Medicare or Medicaid programs for any services
rendered to a patient as a result of the prohibited referral. The Stark Law
contains certain exceptions that protect parties from liability if the parties
comply with all of the requirements of the applicable exception. The sanctions
under the Stark Law include denial and refund of payments, civil monetary
penalties and exclusions from participation in the Medicare programs.
Privacy Laws.
The privacy, security and transmission of health information is subject to
federal and state laws and regulations, including the Healthcare Insurance
Portability and Accountability Act of 1996 ("HIPAA"). Final regulations with
respect to the privacy of certain individually identifiable health information
(the "Protected Health Information") became effective in April 2003 (the
"Privacy Rule"). The Privacy Rule specifies authorized or required uses and
disclosures of the Protected Health Information, as well as the rights patients
have with respect to their health information. HIPAA also provides that to the
extent that state laws impose stricter privacy standards than the HIPAA privacy
rule, such standards are not preempted, requiring compliance with any stricter
state privacy law. In addition, in October 2002, the electronic data standards
regulations under HIPAA became effective. The final HIPAA security rule became
effective in February 2003, and established security standards with respect to
Protected Health Information transmitted or maintained electronically. These
regulations establish uniform standards relating to data reporting, formatting,
and coding that certain health care providers must use when conducting certain
transactions involving health information.
Clinic Licensure.
AHCA requires the Company to license each of its medical centers individually as
health care clinics. Each medical center must renew its health care clinic
licensure bi-annually.
Occupational Safety and Health Administration ("OSHA").
In addition to OSHA regulations applicable to businesses generally, the Company
must comply with, among other things, the OSHA directives on occupational
exposure to blood borne pathogens, the federal Needlestick Safety and Prevention
Act, OSHA injury and illness recording and reporting requirements, federal
regulations relating to proper handling of laboratory specimens, spill
procedures and hazardous waste disposal, and patient transport safety
requirements.
Medicare Marketing Restrictions
The Company is subject to federal marketing rules and regulations that limit,
among other things, offering any gift or other inducement to Medicare
beneficiaries to encourage them to come to the Company for their health care.
- 18 -
State Regulation
MHP is subject to the rules, regulations and oversight by the Department of
Financial Services, Office of Insurance Regulation and the Agency for Health
Care Administration in the areas of licensing and solvency. It files reports
with these state agencies describing its capital structure, ownership, financial
condition, certain inter-company transactions and business operations. It also
is generally required to demonstrate, among other things, that it has an
adequate provider network, that its systems are capable of processing provider's
claims in a timely fashion and of collecting and analyzing the information
needed to manage their business. State regulations also require the prior
approval or notice of acquisitions or similar transactions involving an HMO, and
of certain transactions between an HMO and its parent or affiliated entities or
persons. Generally, HMOs are limited in their ability to pay dividends to their
stockholders.
MHP is required to maintain a minimum level of statutory capital. These
requirements assess the capital adequacy of an HMO based upon investment asset
risks, insurance risks, interest rate risks and other risks associated with its
business to determine the amount of statutory capital believed to be required to
support the HMO's business. If MHP's statutory capital level falls below certain
required capital levels, it may be required to submit a capital corrective plan
to the state department of insurance, and at certain levels may be subjected to
regulatory orders, including regulatory control through rehabilitation or
liquidation proceedings.
ITEM 1A. RISK FACTORS
The PSN's Operations are Dependent on Humana, Inc.
The PSN currently derives, and expect to continue to derive, the vast majority
of its revenues from its Humana Agreements which provide for the receipt of
capitated fees. For the twelve months ended December 31, 2005, approximately 98%
of its revenue was obtained from these Humana Agreements. Humana may immediately
terminate either of the Humana Agreements and/or any individual physician
credentialed under the Humana Agreements upon the occurrence of certain events.
Humana may also amend the material terms of the Humana Agreements under certain
circumstances. See "ITEM 1. BUSINESS - Humana Agreements" for a detailed
discussion of the Humana Agreements.
Failure to maintain the Humana Agreements on favorable terms, for any reason,
would adversely affect the Company's results of operations and financial
condition. A material decline in enrollees in Humana's Medicare Advantage
program could also have a material adverse effect on the Company's results of
operation.
Because Most of the Company's Revenue Is Established by Contract and Cannot Be
Modified During the Contract Terms, the Company's Operating Margins Could be
Negatively Impacted if It is Unable to Manage Its Medical Expenses Effectively.
The Humana Agreements and the CMS Agreement are risk agreements under which it
receives monthly payments per participating member ("Participating Member") at a
rate established by the agreements, also called a capitated fee. In accordance
with the agreements, the total monthly payment is a function of the number of
Participating Members, regardless of the actual utilization rate of covered
services. In return, the PSN or MHP, as applicable, through its affiliated
providers, assumes full financial responsibility for the provision of all
necessary medical care to the Participating Members, regardless of whether or
not its affiliated providers directly provide the covered medical services.
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To the extent that the Participating Members require more care than is
anticipated, aggregate capitation rates may be insufficient to cover the costs
associated with the treatment of such Participating Members. If medical expenses
exceed the Company's estimates, except in very limited circumstances, it will be
unable to increase the premiums it receives under these contracts during the
then-current terms.
Relatively small changes in the Company's ratio of medical expense to revenue
can create significant changes in its financial results. Accordingly, the
failure to adequately predict and control medical expenses and to make
reasonable estimates and maintain adequate accruals for incurred but not
reported, or IBNR, claims, may have a material adverse effect on the Company's
financial condition, results of operations, or cash flows.
Historically, the Company's medical expenses as a percentage of revenue have
fluctuated. Factors that may cause medical expenses to exceed estimates include:
o higher than expected utilization of new or existing healthcare
services or technologies;
o an increase in the cost of healthcare services and supplies,
including pharmaceuticals, whether as a result of inflation or
otherwise;
o changes to mandated benefits or other changes in healthcare laws,
regulations, and practices;
o Humana's periodic renegotiation of provider contracts with
specialist physicians, hospitals and ancillary providers;
o periodic renegotiation of IP contracts;
o changes in the demographics of our members and medical trends
affecting them;
o contractual or claims disputes with providers, hospitals, or other
service providers within the Humana network; and
o the occurrence of catastrophes, major epidemics, or acts of
terrorism.
Metropolitan attempts to control these costs through a variety of techniques,
including capitation and other risk-sharing payment methods, collaborative
relationships with primary care physicians and other providers, advance approval
for hospital services and referral requirements, case and disease management and
quality assurance programs, information systems, and reinsurance. Despite its
efforts and programs to manage its medical expenses, Metropolitan may not be
able to continue to manage these expenses effectively in the future.
If Its HMO Contracts Are Not Renewed or Are Terminated, MHP's Business Would Be
Negatively Impacted.
Effective July 1, 2005, MHP entered into the CMS Agreement to begin offering
Medicare Advantage plans to Medicare beneficiaries in six Florida counties which
include the cities of Fort Pierce, Port St. Lucie, Fort Myers, Port Charlotte
and Sarasota. The initial term of the CMS Agreement expired on December 31, 2005
and was subject to annual renewal at the election of CMS. A new CMS Agreement
was entered into effective January 1, 2006 and expires on December 31, 2006.
Pursuant to the CMS Agreements, MHP is required to comply with federal Medicare
laws and regulations and the CMS Agreement is subject to termination by CMS in
the event of MHP's noncompliance. If MHP is unable to renew or to successfully
rebid for the CMS Agreement, or if the CMS Agreement is terminated, its business
would be negatively impacted.
- 20 -
Reductions in Government Funding for Medicare Programs Could Adversely Affect
the Company's Results of Operations.
As of December 31, 2005, substantially all of the Company's revenues were
indirectly or directly derived from reimbursements generated by Medicare
Advantage health plans. As a result, its revenue and profitability are dependent
on government funding levels for Medicare Advantage programs. The Medicare
programs are subject to statutory and regulatory changes, retroactive and
prospective rate adjustments, administrative rulings and funding restrictions,
any of which could have the effect of limiting or reducing reimbursement levels.
These government programs, as well as private insurers such as Humana, have
taken and may continue to take steps to control the cost, use and delivery of
health care services. Any changes that limit or reduce Medicare reimbursement
levels could have a material adverse effect on the Company's business. For
example, the following events could result in an adverse effect on its results
of operations:
o reductions in or limitations of reimbursement amounts or rates under
programs;
o reductions in funding of programs;
o elimination of coverage for certain benefits; or
o elimination of coverage for certain individuals or treatments under
programs.
For instance, the President recently signed the Deficit Reduction Act of 2005.
According to the Congressional Budget Office, the provisions of this Act are
expected to reduce federal Medicare spending by $6.4 billion over the next five
years.
In addition, in his 2007 budget proposal, President Bush has requested that
Congress implement legislative changes to produce approximately $35.9 billion in
Medicare savings over five years. The Company cannot predict whether Congress
will implement the changes requested by the President and, if implemented, the
sources of such savings.
The MMA Will Materially Impact the Company's Operations and Could Reduce Its
Profitability and Increase Competition for Members.
The MMA substantially changed the Medicare program and is complex and
wide-ranging. The Company has not yet been able to fully assess the impact of
all of the changes. While it anticipates that many of these changes will
generally benefit the Medicare Advantage sector, certain provisions of the MMA
may increase competition, create challenges with respect to educating the PSN's
and MHP's existing and potential Participating Members about the changes, and
create other risks and substantial and potentially adverse uncertainties,
including the following:
o Increased reimbursement rates for Medicare Advantage plans could
result in an increase in the number of plans that participate in the
Medicare program. This could create new competition that could
adversely affect the number of Participating Members the PSN or MHP
serve and their respective results of operations.
- 21 -
o Managed care companies began offering various new products beginning
in 2006 pursuant to the MMA, including regional preferred provider
organizations, or PPOs, and private fee-for-service plans. Medicare
PPOs and private fee-for-service plans allow their members more
flexibility in selecting physicians than Medicare Advantage HMOs,
which typically require members to coordinate with a primary care
physician. The MMA has encouraged the creation of regional PPOs
through various incentives, including certain risk corridors, or
cost-reimbursement provisions, a stabilization fund for incentive
payments, and special payments to hospitals not otherwise contracted
with a Medicare Advantage plan who treat regional plan enrollees.
The Company currently is unable to determine whether the formation
of regional Medicare PPOs and private fee-for-service plans will
affect its PSN's or HMO's relative attractiveness to existing and
potential Medicare members in its service areas.
o Beginning in 2006, the payments for the local and regional Medicare
Advantage plans will be based on a competitive bidding process that
may directly or indirectly cause the PSN and/or MHP to decrease the
amount of premiums paid to it or cause it to increase the benefits
it offers.
o Beginning in 2006, Medicare beneficiaries generally have a more
limited annual enrollment period during which they can choose to
participate in a Medicare Advantage plan or receive benefits under
the traditional fee-for-service Medicare program. After the annual
enrollment period, most Medicare beneficiaries will not be permitted
to change their Medicare benefits. This "lock-in" may make it
difficult for MHP to retain an adequate sales force. The new annual
enrollment process and subsequent "lock-in" provisions of the MMA
may adversely affect the Company's level of revenue growth as it
will limit its ability to market to and enroll new Participating
Members in its established service areas outside of the annual
enrollment period. Such limitations could adversely and materially
affect its profitability and results of operations.
o Beginning in 2006, managed care companies that offer Medicare
Advantage plans are required to offer prescription drug benefits as
part of their Medicare Advantage plans. Managed care plans offering
drug benefits are, under the new law, called MA-PDs. It is not known
at this time whether the governmental payments will be adequate to
cover the actual costs for these new MA-PD benefits or whether it
will be able to profitably or competitively manage its MA-PD.
Individuals who are enrolled in a Medicare Advantage plan must
receive their drug coverage through their Medicare Advantage
prescription drug plan. Enrollees may prefer a stand-alone drug plan
and may cease to be a Participating Member in order to participate
in a stand-alone drug plan. Accordingly, the new Medicare Part D
prescription drug benefit could reduce the PSN's and/or MHP's
Participating Member enrollment and revenues.
CMS's Risk Adjustment Payment System and Budget Neutrality Payment Adjustments
Make The Company's Revenue and Profitability Difficult to Predict and Could
Result In Material Retroactive Adjustments to Its Results of Operations.
CMS has implemented a risk adjustment payment system for Medicare health plans
to improve the accuracy of payments and establish incentives for Medicare plans
to enroll and treat less healthy Medicare beneficiaries. CMS is phasing-in this
payment methodology with a risk adjustment model that bases a portion of the
total CMS reimbursement payments on various clinical and demographic factors
including hospital inpatient diagnoses, diagnostic data from ambulatory
treatment settings, including hospital outpatient facilities and physician
visits, gender, age, and Medicaid eligibility. CMS requires that all managed
care companies capture, collect, and submit the necessary diagnosis code
information to CMS twice a year for reconciliation with CMS's internal database.
As part of the phase-in, during 2003, risk adjusted payments accounted for 10%
of Medicare health plan payments, with the remaining 90% being reimbursed in
accordance with the traditional CMS demographic rate books. The portion of risk
adjusted payments was increased to 30% in 2004, 50% in 2005, and 75% in 2006,
and will increase to 100% in 2007. As a result of this process, it is difficult
to predict with certainty the Company's future revenue or profitability. In
addition, MHP's and/or Humana's risk scores for any period may result in
favorable or unfavorable adjustments to the payments directly or indirectly
received from CMS and the Company's Medicare premium revenue. There can be no
assurance that the Company's contracting physicians and hospitals will be
successful in improving the accuracy of related recording diagnostic code
information and thereby enhancing its risk scores.
- 22 -
Since 2003, payments to Medicare Advantage plans have also been adjusted by a
"budget neutrality" factor that was implemented by Congress and CMS to prevent
health plan payments from being reduced overall while, at the same time,
directing higher, risk adjusted payments to plans with more chronically ill
enrollees. In general, this adjustment has favorably impacted payments to all
Medicare Advantage plans. The President's budget for 2005 assumed the phasing
out of the budget neutrality adjustments over a five year period from 2007
through 2011. The President recently signed the Deficit Reduction Act of 2005
which, among other changes, provides for an accelerated phase-out of budget
neutrality for risk adjustment of payments made to Medicare Advantage plans.
This legislation will have the effect of reducing payments to Medicare Advantage
plans in general. Consequently, the Company expects the premiums it receives
could be reduced, dependent upon MHP's and Humana's risk scores.
A Disruption in Its or Humana's Healthcare Provider Networks Could Have an
Adverse Effect on The Company's Operations and Profitability.
The PSN's operations are dependent on the management information systems of
Humana. Humana provides the PSN with claims processing, billing services, data
collection and other information, including reports and calculations of costs of
services provided and payments to be received by the PSN. While the PSN relies
on Humana's information systems, it does not own or control such systems and,
accordingly, has limited ability to ensure that these systems are properly
maintained, serviced and updated. In addition, information systems such as these
may be vulnerable to failure, acts of sabotage and obsolescence. Although the
PSN has the contractual right to receive various information and data from
Humana, and it receives monthly downloads of claims data from Humana, the PSN's
business and results of operations could be materially and adversely affected by
its inability, for any reason, to timely receive information from Humana.
A significant portion of the PSN's Total Medical Expenses are payable to
entities that are not members and/or directly contracted with the PSN. Although
virtually all of such entities are Humana approved service providers, and
although the PSN can provide Humana input with respect to Humana's service
providers, the PSN does not control the process by which Humana negotiates
and/or contracts with service providers in the Humana Medicare Advantage
network.
- 23 -
The Company Depends on Third Parties to Provide It with Crucial Information and
Data.
The Company's PSN operations are dependent on the management information systems
of Humana. Humana provides it with claims processing, billing services, data
collection and other information, including reports and calculations of costs of
services provided and payments to be received by us. While it relies on Humana's
information systems, it does not own or control such systems and, accordingly,
has limited ability to ensure that it is properly maintained, serviced and
updated. In addition, information systems such as these may be vulnerable to
failure, acts of sabotage and obsolescence. Although it has the contractual
right to receive various information and data from Humana, and it receives
monthly downloads of claims data from Humana, its business and results of
operations could be materially and adversely affected by its inability, for any
reason, to timely receive information from Humana.
MHP relies on HFAS, a third party service provider, to provide various
administrative and management services, including, but not limited to, claims
processing and adjudication, certain management information services, regulatory
reporting and customer services pursuant to the terms of the Services Agreement.
The initial term of the Services Agreement expires on June 30, 2010 and
thereafter is automatically renewable for additional one-year terms. After the
initial term, either party may terminate the Services Agreement for any reason
upon 180 days written notice. Either party may also terminate the Services
Agreement upon prior written notice (with a 30 day opportunity to cure) in the
event of the other's material breach of the Services Agreement in any manner,
including but not limited to, MHP's failure to maintain sufficient funds for
HFAS to pay claims, or in the event MHP engages in or acquiesce to any act of
bankruptcy, receivership or reorganization or in the event either party fails to
secure any license, government approval or exemption required by law.
Because these matters are outsourced as opposed to handled internally, MHP has
less control over the manner in which these matters are handled and the data
that is ultimately provided to it than it would have if it handled these matters
internally. Additionally, any loss of information by HFAS could have a material
adverse effect on the Company's business and the results of its operations.
Claims Relating to Medical Malpractice and Other Litigation Could Cause the
Company to Incur Significant Expenses.
From time to time, the Company is party to various litigation matters, some of
which seek monetary damages. Managed care organizations may be sued directly for
alleged negligence, including in connection with the credentialing of network
providers or for alleged improper denials or delay of care. In addition,
providers affiliated with the PSN or MHP involved in medical care decisions may
be exposed to the risk of medical malpractice claims. A small percentage of
these providers do not have malpractice insurance. As a result of increased
costs or inability to secure malpractice insurance, the percentage of physicians
who do not have malpractice insurance may increase. Although most of its network
providers are independent contractors, claimants sometimes allege that a PSN
and/or HMO should be held responsible for alleged provider malpractice,
particularly where the provider does not have malpractice insurance, and some
courts have permitted that theory of liability. Similar to other managed care
companies, MHP may also be subject to other claims of Participating Members in
the ordinary course of business, including claims arising out of decisions to
deny or restrict reimbursement for services.
- 24 -
The Company cannot predict with certainty the eventual outcome of any pending
litigation or potential future litigation, and there can be no assurances that
it will not incur substantial expense in defending these or future lawsuits or
indemnifying third parties with respect to the results of such litigation. The
loss of even one of these claims, if it results in a significant damage award,
could have a material adverse effect on its business. In addition, exposure to
potential liability under punitive damage or other theories may significantly
decrease the Company's ability to settle these claims on reasonable terms.
The Company maintains errors and omissions insurance and other insurance
coverage that it believes are adequate based on industry standards. Nonetheless,
potential liabilities may not be covered by insurance, insurers may dispute
coverage or may be unable to meet their obligations, or the amount of insurance
coverage and/or related reserves may be inadequate. There can be no assurances
that it will be able to obtain insurance coverage in the future, or that
insurance will continue to be available on a cost-effective basis, if at all.
Moreover, even if claims brought against it are unsuccessful or without merit,
it would have to defend itself against such claims. The defense of any such
actions may be time-consuming and costly and may distract management's
attention. As a result, it may incur significant expenses and may be unable to
effectively operate its business.
The Company's Industry is Already Very Competitive; Increased Competition Could
Adversely Affect the Company's Revenues; the PSN Competes with Other Service
Providers for Humana's Business.
Metropolitan competes in the highly competitive and regulated health care
industry, which is subject to continuing changes with respect to the
provisioning of services and the selection and compensation of providers.
Substantially all of its revenues come from the Humana Agreements. Humana
competes with other HMOs and PPOs in securing and serving patients in the
Medicare Advantage Program. Companies in other health care industry segments,
some of which have financial and other resources comparable to Humana, may
become competitors to Humana. The market in Florida may become increasingly
attractive to HMOs and PPOs that may compete with Humana or MHP. Humana and MHP
may not be able to continue to compete effectively in the health care industry
if additional competitors enter the same market.
The Humana Agreements are structured as one-year automatically renewable
agreements. In addition to terminations for cause, Humana may terminate such
agreements upon 180 days' notice to the PSN of non-renewal. The PSN competes
with other service providers for Humana's business and Humana competes with
other HMOs and PPOs in securing and serving patients in the Medicare Advantage
Program. Failure to maintain favorable terms in its agreements with Humana would
adversely affect the Company's results of operations and financial condition.
The Company's competitors vary in size and scope, in terms of products and
services offered. It believes that it competes directly with various national,
regional and local companies in providing its services. Some of the PSN's direct
competitors are Continucare Corporation, Primary Care Associates, Inc., MCCI and
Island Doctors, all based and operating in Florida. Metropolitan believes that
Continucare Corporation, Primary Care Associates, Inc. and MCCI provide PSN
services to Humana in South Florida and Island Doctors provides PSN services to
Humana in Central Florida. Additionally, companies in other health care industry
segments, some of which have financial and other resources greater than us, may
become competitors in providing similar services at any given time. The market
in Florida may become increasingly attractive to competitor PSNs due to the
large population of Medicare participants. Humana and the Company may not be
able to continue to compete effectively in the health care industry if
additional competitors enter the same markets.
- 25 -
Metropolitan believes that many of its competitors and potential competitors are
substantially larger than its PSN and/or MHP and have significantly greater
financial, sales and marketing, and other resources. The Company believes that
most of its competitors also have more experience operating as an HMO and that
these competitors may be able to respond more rapidly to changes in the
regulatory environment in which it operates and changes in managed care
organization business or to devote greater resources to the development and
promotion of their services than it can. Furthermore, it is the Company's belief
that some of its competitors may make strategic acquisitions or establish
cooperative relationships among themselves.
The Company is Dependent upon Certain Executive Officers and Key Management
Personnel for Its Future Success.
The Company's success depends to a significant extent on the continued
contributions of certain of its executive officers and key management personnel.
The loss of these persons could have a material adverse effect on the Company's
business, results of operations, financial condition and plans for future
development. While it has employment contracts with certain executive officers
and key members of management, these agreements may not provide sufficient
incentive for these persons to continue their employment with the Company. It
competes with other companies in the industry for executive talent and there can
be no assurance that highly qualified executives would be readily and easily
available without delay, given the limited number of individuals in the industry
with expertise particular to its business operations.
The Company's Business Activities Are Highly Regulated and New and Proposed
Government Regulation or Legislative Reforms Could Increase Its Cost of Doing
Business, and Reduce Its Membership, Profitability, and Liquidity.
The Company's business is subject to substantial federal and state regulation.
These laws and regulations, along with the terms of its contracts and licenses,
directly or indirectly regulate how it does business, what services it offers,
and how it interacts with its members, providers, and the public. Healthcare
laws and regulations are subject to frequent change and varying interpretations.
Changes in existing laws or regulations, or their interpretations, or the
enactment of new laws or the issuance of new regulations could adversely affect
the Company's business by, among other things:
o imposing additional license, registration, or capital reserve
requirements;
o increasing its administrative and other costs;
o forcing it to undergo a corporate restructuring;
o increasing mandated benefits without corresponding premium
increases;
o limiting its ability to engage in inter-company transactions with
our affiliates and subsidiaries;
o forcing it to restructure our relationships with providers; or
o requiring it to implement additional or different programs and
systems.
- 26 -
It is possible that future legislation and regulation and the interpretation of
existing and future laws and regulations could have a material adverse effect on
the Company's ability to operate under the Medicare program and to continue to
serve Participating Members and attract new Participating Members.
The Health Care Industry is Highly Regulated the Company's Failure to Comply
with Laws or Regulations, or a Determination that in the Past It Had Failed to
Comply with Laws or Regulations, Could Have an Adverse Effect on the Company's
Business, Financial Condition and Results of Operations.
The health care services that the Company and its affiliated professionals
provide are subject to extensive federal, state and local laws and regulations
governing various matters such as the licensing and certification of its
facilities and personnel, the conduct of its operations, billing and coding
policies and practices, policies and practices with regard to patient privacy
and confidentiality, and prohibitions on payments for the referral of business
and self-referrals. These laws are generally aimed at protecting patients and
not shareholders of Metropolitan and the agencies charged with the
administration of these laws have broad authority to enforce them. See "ITEM 1.
BUSINESS - Government Regulation" for a discussion of the various federal
government and the State laws and regulations to which we are subject.
The federal and state agencies administering the laws and regulations applicable
to Metropolitan have broad discretion to enforce them. The Company is subject,
on an ongoing basis, to various governmental reviews, audits, and investigations
to verify its compliance with its contracts, licenses, and applicable laws and
regulations. These reviews, audits and investigations can be time consuming and
costly. An adverse review, audit, or investigation could result in any of the
following:
o loss of the PSN's or MHP's right to directly or indirectly
participate in the Medicare program;
o loss of one or more of the PSN's and/or MHP's licenses to act as a
service provider, HMO or third party administrator or to otherwise
provide a service;
o forfeiture or recoupment of amounts the PSN and/or MHP has been paid
pursuant to its contracts;
o imposition of significant civil or criminal penalties, fines, or
other sanctions on the Company and its key employees;
o damage to the Company's reputation in existing and potential
markets;
o increased restrictions on marketing of the PSN's or MHP's products
and services; and
o inability to obtain approval for future products and services,
geographic expansions, or acquisitions.
The U.S. Department of Health and Human Services Office of the Inspector
General, Office of Audit Services, or OIG, is conducting a national review of
Medicare Advantage plans to determine whether they used payment increases
consistent with the requirements of the MMA. Under the MMA, when a Medicare
Advantage plan receives a payment increase, it must reduce beneficiary premiums
or cost sharing, enhance benefits, put additional payment amounts in a benefit
stabilization fund, or use the additional payment amounts to stabilize or
enhance access. There can be no assurances that the findings of an audit or
investigation of the Company's business would not have an adverse effect on it
or require substantial modifications to its operations. In addition, private
citizens, acting as whistleblowers, are entitled to bring enforcement actions
under a special provision of the federal False Claims Act.
- 27 -
A Failure to Estimate Incurred But Not Reported Medical Benefits Expense
Accurately Could Affect the Company's Profitability.
Direct medical expenses incurred by the Company include costs paid by Humana on
its behalf. These costs also include estimates of claims incurred but not
reported ("IBNR"). The IBNR estimates are made by Humana utilizing actuarial
methods and are continually evaluated and adjusted by the Company's management,
based upon its specific claims experience. Adjustments, if necessary, are made
to direct medical expenses when the criteria used to determine IBNR change and
when actual claim costs are ultimately determined. With regards to MHP, the cost
of medical benefits includes an IBNR estimate based on management's best
estimate of medical benefits payable, in conjunction with an independent
actuarial firm. Due to the inherent uncertainties associated with the factors
used in these estimations, materially different amounts could be reported in the
Company's financial statements for a particular period under different possible
conditions or using different, but still reasonable, assumptions. Although its
past estimates of IBNR have typically been adequate, they may be inadequate in
the future, which would adversely affect the Company's results of operations.
Further, the inability to estimate IBNR accurately may also affect its ability
to take timely corrective actions, further exacerbating the extent of any
adverse effect on its results.
If MHP Is Required to Maintain Higher Statutory Capital Levels for Its Existing
Operations or if It Is Subject to Additional Capital Reserve Requirements as It
Pursues New Business Opportunities, the Company's Liquidity May Be Adversely
Affected.
MHP is subject to state regulations that, among other things, require the
maintenance of minimum levels of statutory capital, or net worth. The State of
Florida may raise the statutory capital level from time to time. Other states
have adopted risk-based capital requirements based on guidelines adopted by the
National Association of Insurance Commissioners, which tend to be, although are
not necessarily, higher than existing statutory capital requirements. Regardless
of whether Florida adopts risk-based capital requirements, the Florida state
department of insurance can require MHP to maintain minimum levels of statutory
capital in excess of amounts required under the applicable state laws if it
determines that maintaining additional statutory capital is in the best
interests of MHP's Participating Members. Any increases in these requirements
could materially increase our reserve requirements. In addition, as it continues
to expand plan offerings in Florida or pursue new business opportunities, MHP
may be required to maintain additional statutory capital reserves. In either
case, available funds could be materially reduced, which could harm the
Company's ability to implement its business strategy.
The Company Is Required to Comply With Laws Governing the Transmission, Security
and Privacy of Health Information That Require Significant Compliance Costs, and
Any Failure to Comply With These Laws Could Result in Material Criminal and
Civil Penalties.
Regulations under the Health Insurance Portability and Accountability Act of
1996, or HIPAA, require the Company to comply with standards regarding the
exchange of health information within its company and with third parties,
including healthcare providers, business associates and members. These
regulations include standards for common healthcare transactions, including
claims information, plan eligibility, and payment information; unique
identifiers for providers and employers; security; privacy; and enforcement.
HIPAA also provides that to the extent that state laws impose stricter privacy
standards than HIPAA privacy regulations, a state seeks and receives an
exception from the Department of Health and Human Services regarding certain
state laws, or state laws concern certain specified areas, such state standards
and laws are not preempted.
- 28 -
The Company will conduct its operations in an attempt to comply with all
applicable HIPAA requirements. Given the complexity of the HIPAA regulations,
the possibility that the regulations may change, and the fact that the
regulations are subject to changing and, at times, conflicting interpretation,
its ongoing ability to comply with the HIPAA requirements is uncertain.
Furthermore, a state's ability to promulgate stricter laws, and uncertainty
regarding many aspects of such state requirements, make compliance more
difficult. To the extent that the Company submits electronic healthcare claims
and payment transactions that do not comply with the electronic data
transmission standards established under HIPAA, payments may be delayed or
denied. Additionally, the costs of complying with any changes to the HIPAA
regulations may have a negative impact on operations. Sanctions for failing to
comply with the HIPAA health information provisions include criminal penalties
and civil sanctions, including significant monetary penalties. In addition,
failure to comply with state health information laws that may be more
restrictive than the regulations issued under HIPAA could result in additional
penalties.
Recent Challenges Faced by CMS Related to Implementation of Part D May
Temporarily Disrupt or Adversely the PSN's and MHP's Relationships with their
Respective Members.
Partially in anticipation of the implementation of Part D, CMS transitioned to
new information and reporting systems, which have recently generated confusing
and, the Company believes in some cases, erroneous membership and payment
reports concerning Medicare eligibility and enrollment, most of which it
believes reflects inadvertently disenrolled dual-eligible and other
beneficiaries who were already members of the Company's PSN or HMO. In addition,
recent media reports are prevalent concerning the confusion caused by failures
in systems and reporting for Part D, particularly as these failures adversely
affect the access of dual-eligibles and low-income beneficiaries to their
prescription drugs. These developments have caused the Company's business to
experience short-term disruptions in its operations and challenged its
information and communications systems. Although the Company believes the
current conditions are temporary, there can be no assurance that the current
confusion, systems failures, and mistaken payment reports will not temporarily
disrupt or adversely affect the PSN's or MHP's relationships with their
respective members, which could result in a reduction of membership and
adversely affect its results of operations.
There Can be No Assurance that The Company Will be Successful in Its Operation
of MHP.
Although the Company has operated as a risk provider since 1997, it has only
operated MHP since July 1, 2005. To successfully operate MHP, the Company
believes it will have to continue its development of the following capabilities,
among others: sales and marketing, customer service and regulatory compliance.
The Company anticipates that the continued development efforts and reserve
requirements for MHP can be funded by the Company's current resources and
projected cash flows from operations. The Company expects to spend approximately
$3.0 million to $5.0 million of its existing or future cash resources in 2006 to
continue development and expansion of MHP. No assurances can be given that the
Company will be successful in operating this segment of its business despite its
allocation of a substantial amount of resources for this purpose. If MHP does
not develop as anticipated or planned, the Company may have to devote additional
managerial and/or capital resources to MHP, which could limit the Company's
ability to manage and/or grow its PSN.
- 29 -
The Company May Be Unsuccessful in Implementing Its Growth Strategy If It Is
Unable to Expand into New Service Areas in a Timely Manner in Accordance with
Its Strategic Plans.
The Company's strategy is to continue to focus on growth within certain
geographic regions of Florida. Continued growth may impair its ability to manage
its existing operations and provide its services efficiently and to manage its
employees adequately. Future results of operations could be materially adversely
affected if it is unable to manage its growth efforts effectively.
The Company is seeking to continue to increase PSN and MHP membership and to
expand to new service areas within its existing markets and in other markets.
The Company is likely to incur additional costs if the PSN or MHP enters new
service areas in Florida where they do not respectively currently operate. The
Company's rate of expansion into new geographic areas may also be limited by:
o the time and costs associated with obtaining an HMO license to
operate in the new area or expanding MHP's licensed service area, as
the case may be;
o the PSN and/or MHP's inability to develop a network of physicians,
hospitals, and other healthcare providers that meets their
respecitve requirements and those of the applicable regulators;
o competition, which could increase the costs of recruiting members,
reduce the pool of available members, or increase the cost of
attracting and maintaining providers;
o the cost of providing healthcare services in those areas;
o demographics and population density; and
o the new annual enrollment period and lock-in provisions of the MMA.
The Company has Anti-Takeover Provisions Which May Make it Difficult to Acquire
It or Replace or Remove Current Management.
Provisions in the Company's Articles of Incorporation and Bylaws may delay or
prevent an acquisition of it or a change in its management or similar change in
control transaction, including transactions in which its shareholders might
otherwise receive a premium for their shares over then current prices or that
shareholders may deem to be in their best interests. In addition, these
provisions may frustrate or prevent any attempts by the Company's shareholders
to replace or remove its current management by making it more difficult for
shareholders to replace members of its Board of Directors. Because its Board of
Directors is responsible for appointing the members of its management team,
these provisions could in turn affect any attempt by its shareholders to replace
current members of its management team. These provisions provide, among other
things, that:
o any shareholder wishing to properly bring a matter before a
meeting of shareholders must comply with specified procedural and
advance notice requirements;
- 30 -
o special meetings of the Company's shareholders may be called only by
the Chairman of the Board of Directors, its President or by the
Board of Directors pursuant to a resolution adopted by a majority of
the directors;
o the authorized number of directors may be changed only by resolution
of the Board of Directors; and
o the Board of Directors has the ability to issue up to 10,000,000
shares of preferred stock, with such rights and preferences as may
be determined from time to time by the Board of Directors, without
shareholder approval.
The Company's Quarterly Results Will Likely Fluctuate, Which Could Cause the
Value of Its Common Stock to Decline.
The Company is subject to quarterly variations in its Total Medical Expenses due
to sometimes pronounced fluctuations in patient utilization. It has significant
fixed operating costs and, as a result, is highly dependent on patient
utilization to sustain profitability. Its results of operations for any quarter
are not necessarily indicative of results of operations for any future period or
full year. Metropolitan experiences a greater use of medical services in the
winter months. As a result, its results of operations may fluctuate
significantly from period to period, which could cause the value of its Common
Stock to decline.
The Market Price of the Company's Common Stock Could Fall as a Result of Sales
of Shares of Common Stock in the Market or the Price Could Remain Lower because
of the Perception that Such Sales May Occur.
Metropolitan cannot predict the effect, if any, that future sales or the
possibility of future sales may have on the market price of its Common Stock. As
of December 31, 2005, there were 49,851,526 shares of its Common Stock
outstanding, all of which are freely tradable without restriction with the
exception of approximately 12,100,000 shares, owned by certain of its officers,
directors and affiliates which may be sold publicly at any time subject to the
volume and other restrictions promulgated pursuant to Rule 144 of the Securities
Act. In addition, as of December 31, 2005, approximately 6,400,000 shares of the
Company's Common Stock were reserved for issuance upon the exercise of options
which were previously granted.
Sales of substantial amounts of Metropolitan's Common Stock or the perception
that such sales could occur could adversely affect prevailing market prices
which could impair its ability to raise funds through future sales of its Common
Stock.
The market price and trading volume of Metropolitan's Common Stock could
fluctuate significantly and unexpectedly as a result of a number of factors,
including factors beyond the Company's control and unrelated to its business.
Some of the factors related to Metropolitan's business include: termination of
the Humana Agreements, announcements relating to the Company's business or that
of its competitors, adverse publicity concerning organizations such as
Metropolitan, changes in state or federal legislation and programs, general
conditions affecting the industry, performance of companies comparable to the
Company, and changes in the expectations of analysts with the respect to the
Company's future financial performance. Additionally, Metropolitan's Common
Stock may be affected by general economic conditions or specific occurrences
such as epidemics (such as influenza), natural disasters (including hurricanes),
acts of war or terrorism. Because of the limited trading market for the
Company's Common Stock, and because of the possible price volatility, the
Company's shareholders may not be able to sell their shares of Common Stock when
they desire to do so. The inability to sell shares in a rapidly declining market
may substantially increase the Company's shareholders' risk of loss because of
such illiquidity and because the price for the Company's Common Stock may suffer
greater declines because of its price volatility.
- 31 -
Delisting of Its Common Stock from AMEX Would Adversely Affect the Company and
Its Shareholders.
Metropolitan's Common Stock is listed on the AMEX. To maintain listing of
securities, the AMEX requires satisfaction of certain maintenance criteria that
the Company is not sure that it will continue to be able to satisfy. If it is
unable to satisfy such maintenance criteria in the future and it fails to
comply, its Common Stock may be delisted from trading on AMEX. If its Common
Stock is delisted from trading on AMEX, then trading, if any, might thereafter
be conducted in the over-the-counter market in the so-called "pink sheets" or on
the "Electronic Bulletin Board" of the National Association of Securities
Dealers, Inc. and consequently an investor could find it more difficult to
dispose of, or to obtain accurate quotations as to the price of, the Company's
Common Stock.
The Company's Common Stock May Not be Excepted from "Penny Stock" Rules, Which
May Adversely Affect the Market Liquidity of Our Common Stock.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a "penny stock". The Securities Exchange
Commission's (the "Commission" or the "SEC") regulations generally define a
penny stock to be an equity security that has a market price of less than $5.00
per share, subject to certain exceptions. For example, such exceptions include
any equity security listed on a national securities exchange such as the AMEX.
Currently, Metropolitan's Common Stock meets this exception. Unless an exception
is available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith. In addition, if our Common Stock
becomes delisted from the AMEX and we do not meet another exception to the penny
stock regulations, trading in its Common Stock would be covered by the
Commission's Rule 15g-9 under the Exchange Act for non-national securities
exchange listed securities. Under this rule, broker/dealers who recommend such
securities to persons other than established customers and accredited investors
must make a special written suitability determination for the purchaser and
receive the purchaser's written agreement to a transaction prior to sale.
Securities also are exempt from this rule if the market price is at least $5.00
per share. If the Company's Common Stock becomes subject to the regulations
applicable to penny stocks, the market liquidity for its Common Stock could be
adversely affected. In such event, the regulations on penny stocks could limit
the ability of broker/dealers to sell Metropolitan's Common Stock and thus the
ability of purchasers of its Common Stock to sell their shares in the secondary
market.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2 PROPERTIES
Metropolitan's principal executive offices are located at 250 Australian Avenue
South, Suite 400, West Palm Beach, Florida where it occupies 13,211 square feet
at a current monthly rent of $16,800 pursuant to a lease expiring March 31,
2011. Starting in April 2006, it will occupy an additional 4,890 square feet in
the same office building for an additional monthly fee of $7,100.
- 32 -
Metropolitan has a satellite office in Daytona Beach, Florida with 5,700 square
feet and monthly rent of $8,600. The lease expires December 31, 2006.
The PSN leases seven offices serving patients in Central and South Florida with
an aggregate monthly rental of $33,200 with expiration dates ranging from one to
five years from December 31, 2005.
The HMO leases three offices that are located in Central and South Florida with
an aggregate monthly rental of $8,800 with expiration dates ranging from one to
three years from December 31, 2005.
ITEM 3 LEGAL PROCEEDINGS
The Company is a party to various legal proceedings which are either immaterial
in amount to it and its subsidiaries or involve ordinary routine litigation
incidental to its business and the business of its subsidiaries. There is no
material pending legal proceedings, other than routine litigation incidental to
business and the business of Metropolitan's subsidiaries, to which it or any of
its subsidiaries is a party or of which any our or its subsidiaries' property is
the subject.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
2005.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Metropolitan's Common Stock is currently traded on the American Stock Exchange
and the Pacific Stock Exchange under the symbol "MDF". The following table sets
forth the high and low sales prices for its Common Stock, as reported by
American Stock Exchange, for each full quarterly period within the two most
recent fiscal years:
High Low
($) ($)
COMMON STOCK
Quarter ended March 31, 2004 1.10 0.67
Quarter ended June 30, 2004 1.07 0.81
Quarter ended September 30, 2004 1.70 0.80
Quarter ended December 31, 2004 2.90 1.35
Quarter ended March 31, 2005 3.25 2.14
Quarter ended June 30, 2005 3.14 2.16
Quarter ended September 30, 2005 2.85 2.41
Quarter ended December 31, 2005 2.68 2.00
- 33 -
At March 1, 2006, the price per share of Metropolitan's common stock was $2.16
and it believes we had approximately twelve beneficial shareholders.
Metropolitan has never declared or paid any cash dividends on its Common Stock
and does not intend to pay cash dividends in the foreseeable future. Pursuant to
Florida law, it is prohibited from paying dividends or otherwise distributing
funds to our shareholders, except out of legally available funds. The
declaration and payment of dividends on its common stock and the amount thereof
will be dependent upon its results of operations, financial condition, cash
requirements, future prospects and other factors deemed relevant by the Board of
Directors. No assurance can be given that it will pay any dividends on its
common stock in the future. Metropolitan presently intends to invest its
earnings, if any, in the development and growth of its operations and the
reduction of debt.
Equity Compensation Plan
Information regarding Metropolitan's existing equity compensation plans as of
December 31, 2005 is included in Item 12 of this Form 10-K and is incorporated
herein by reference.
ITEM 6 SELECTED FINANCIAL DATA
Set forth below is Metropolitan's selected historical consolidated financial
data for the five fiscal years ended December 31, 2005. The selected historical
consolidated financial data should be read in conjunction with the consolidated
financial statements and accompanying notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7 of
this Annual Report. The consolidated statement of operations data and balance
sheet data for the years ended December 31, 2001, 2002, 2003, 2004 and 2005 are
derived from its audited consolidated financial statements which have been
audited by Kaufman, Rossin & Co., P.A., Metropolitan's registered public
accounting firm.
For the years ended December 31,
2005 (2) 2004 (1) 2003 2002 2001
------------- ------------- ------------- ------------- -------------
Net revenues $ 183,765,191 $ 158,069,791 $ 143,874,488 $ 140,063,566 $ 128,186,307
Operating income/(loss) 3,232,678 11,855,915 7,106,428 (10,898,177) 2,201,632
Income/(Loss) from continuing
operations before income taxes 3,849,549 11,473,732 5,861,303 (13,865,800) 934,163
Income/(Loss) from continuing
operations 2,381,743 18,853,978 5,861,303 (13,865,800) 934,163
Discontinued operations, net of tax -- (31,266) (1,459,550) (3,215,087) (1,303,404)
Net income/(loss) 2,381,743 18,822,712 4,401,753 (17,080,887) (369,241)
Basic income/(loss) from continuing
operations per share 0.05 0.42 0.17 (0.46) 0.03
Basic earnings/(loss) per share 0.05 0.42 0.13 (0.56) (0.02)
Diluted earnings/(loss) per share 0.05 0.38 0.10 (0.56) (0.02)
Weighted average common shares
outstanding-basic 48,975,803 45,123,843 34,750,173 30,374,669 25,859,411
Weighted average common shares
outstanding-diluted 51,007,396 50,028,303 46,914,839 30,374,669 25,859,411
Cash dividend declared -- -- -- -- --
Financial Position
Cash and equivalents $ 15,572,862 $ 11,344,113 $ 2,176,204 $ 399,614 $ 393,968
Total current assets 24,479,528 18,923,011 5,452,254 5,957,163 12,922,453
Total assets 33,115,106 28,037,263 9,223,729 10,158,911 17,379,262
Total current liabilities 3,416,244 3,224,633 7,822,298 13,784,575 9,796,526
Total liabilities 3,416,244 3,474,633 9,726,390 17,027,204 10,683,441
Total working capital 21,063,284 15,698,378 (2,370,044) (7,827,412) 3,125,927
Long - term obligations,
including current portion -- 1,132,000 2,983,576 5,603,370 1,821,705
Total stockholder's equity/
accumulated deficit 29,698,862 24,562,630 (502,661) (6,868,293) 6,695,821
(1) The financial data for 2004 includes a deferred tax asset of $8,281,110 and
a benefit from income taxes of $7,380,246.
(2) The financial data for 2005 includes a deferred tax asset of $7,993,000 and
an income tax expense of $1,467,806.
- 34 -
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As of December 31, 2005, substantially all of the Company's revenues were
directly or indirectly derived from reimbursements generated by Medicare
Advantage health plans. As a result, the Company's revenue and profitability are
dependent on government funding levels for Medicare Advantage programs. See
"ITEM 1 - DESCRIPTION OF BUSINESS - Medicare", "-Medicare Modernization Act".
For the twelve months ended December 31, 2005, approximately 98% of
Metropolitan's revenue came from the Humana Agreements. The Humana Agreements
have one-year terms and renew automatically each December 31 for additional
one-year terms unless terminated for cause or upon 180 days' prior notice.
Failure to maintain the Humana Agreements on favorable terms would adversely
affect Metropolitan's results of operations and financial condition.
The Humana Agreements and MHP's agreement with CMS are risk agreements under
which the PSN and MHP, respectively, receive net monthly payments per
Participating Member at a rate established by the agreements, also called a
capitated fee. In accordance with the agreements, the capitated fee is a
function of the number of Participating Members, regardless of the actual
utilization rate of covered services.
To the extent that the Participating Members require more care than is
anticipated, aggregate capitation fees may be insufficient to cover the costs
associated with the treatment of such members. If medical expenses exceed the
Company's estimates, except in very limited circumstances, it will be unable to
increase the premiums it receives under these contracts during the then-current
terms.
Relatively small changes in the Company's ratio of medical expense to revenue
can create significant changes in its financial results. Accordingly, the
failure to adequately predict and control medical expenses and to make
reasonable estimates and maintain adequate accruals for incurred but not
reported, or IBNR, claims, may have a material adverse effect on the Company's
financial condition, results of operations and/or cash flows.
- 35 -
See "ITEM 1B. RISK FACTORS" for further discussion of the most significant risks
that affect the Company's business, financial condition, results of operations
and/or cash flows.
Critical Accounting Policies
The Company's significant accounting policies are described in Note 1 on pages
F-8 through F-13 of the "Notes to Consolidated Financial Statements" included in
this Form 10-K. The Company believes that its most critical accounting policies
include "Use of Estimates, Revenue, Expense and Receivables" and "Use of
Estimates, Deferred Tax Asset."
Use of Estimates, Revenue, Expense and Receivables.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
financial statements. The most significant area requiring estimates relate to
the PSN's arrangement with Humana and such estimates are based on knowledge of
current events and anticipated future events, and accordingly, actual results
may ultimately differ materially from those estimates.
With regard to revenues, expenses and receivables arising from the Humana
Agreements, Metropolitan estimates amounts it believes will ultimately be
realizable based in part upon estimates of IBNR (claims incurred but not
reported) and estimates of retroactive adjustments or unsettled costs to be
applied by Humana. The IBNR estimates are made by Humana utilizing actuarial
methods and are continually evaluated by Metropolitan's management based upon
its specific claims experience. With regards to MHP, the cost of medical
benefits is recognized in the period in which services are provided and includes
an IBNR estimate based on management's best estimate of medical benefits
payable, in conjunction with an independent actuarial firm. It is reasonably
possible that some or all of these estimates could change in the near term by an
amount that could be material to the financial statements. See "Notes to
Consolidated Financial Statements," Note 1 - "Use of Estimates, Revenue, Expense
and Receivables" and "RISK FACTORS - "A Failure To Estimate Incurred But Not
Reported...".
During 2005, the Company incurred approximately $4.0 million of medical costs
related to the implantation of certain Implantable Automatic Defibrillators
("AICD's"). CMS has directed that the costs of certain of these procedures that
meet 2005 eligibility requirements be paid by CMS, rather than billed to
Medicare Advantage plans. The Company is working with Humana and the related
providers to secure reimbursement for these amounts, and has estimated a
recovery of approximately $2.2 million at December 31, 2005. It is reasonably
possible that this estimate could change in the near term by an amount that
could be material to the financial statements.
Use of Estimates, Deferred Tax Asset.
The Company has recorded a deferred tax asset of approximately $8.0 million at
December 31, 2005. Realization of the deferred tax asset is dependent on
generating sufficient taxable income in the future. The amount of the deferred
tax asset considered realizable could change in the near term if estimates of
future taxable income are modified and those changes could be material (see
"Notes to Consolidated Financial Statements," Note 1 - "Use of Estimates,
Deferred Tax Asset" and Note 6 - "Income Taxes").
- 36 -
In the future, if Metropolitan determines that it cannot, on a more likely than
not basis, realize all or part of its deferred tax assets in the future, an
adjustment to establish (or record an increase in) the deferred tax asset
valuation allowance would be charged to income in the period in which such
determination is made.
Off-Balance Sheet Arrangements
Metropolitan does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on Metropolitan's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors.
Contractual Obligations
Payment Due by Period
Contractual Less Than 1-3 4-5 More Than
Obligations Total 1 Year Years Years 5 years
----------- ----- ------ ----- ----- -------
Operating lease obligations $ 7,715,000 $ 1,821,000 $ 3,248,000 $ 2,350,000 $ 296,000
Employment obligations 2,368,000 2,368,000 -- -- --
------------- ----------- ----------- ----------- ----------
$ 10,083,000 $ 4,189,000 $ 3,248,000 $ 2,350,000 $ 296,000
============ =========== =========== =========== ==========
As of December 31, 2005, Metropolitan had no long-term debt and no payment
obligations that would constitute capital lease obligations.
Comparison of Fiscal 2005 and 2004
Introduction
For the year ended December 31, 2005, Metropolitan recognized revenues of $183.8
million compared to $158.1 million in the prior year, an increase of $25.7
million or 16.3%. Medical expenses for 2005 were $165.1 million, an increase of
$25.6 million over 2004, resulting in an increase in the Company's medical
expense ratio from 87.1% to 89.9%.
Income before income taxes for 2005 was $3.8 million compared to $11.5 million
in 2004. As described in great detail below, the 2005 results reflect losses
related to the start-up operations of the Company's Medicare Advantage HMO. Net
income for 2005, inclusive of an income tax provision of $1.5 million, was $2.4
million compared to $18.9 million for the year ended December 31, 2004. The
prior year included a $7.4 million tax benefit recorded at December 31, 2004.
Basic net earnings per share, inclusive of a $0.03 charge to income tax, was
$0.05 for the year ended December 31, 2005 compared to $0.42 in 2004. The prior
year included $0.16 per share attributable to the $7.4 million tax benefit
recorded at December 31, 2004. The decrease in the basic net earnings per share
for the year ended December 31, 2005, while primarily due to the decrease in net
income, partially reflects the increase in the number of weighted average shares
outstanding, from 45,123,843 at December 31, 2004 to 48,975,803 in the current
year. The majority of the shares issued during fiscal 2005 relate to shares
issued upon the exercise of stock options.
- 37 -
In both 2004 and 2005, Metropolitan operated in two financial reporting
segments, the PSN business and the Medicare Advantage HMO business.
The PSN reported a segment gain before income taxes and allocated overhead of
$15.5 million for the year ended December 31, 2005, a decrease of $1.7 million
compared to the prior year. The Company began developing the Medicare Advantage
HMO in the second half of 2004, and officially launched operations in July 2005.
The HMO segment incurred a net loss before income taxes and allocated overhead
of $6.6 million for the year ended December 31, 2005, compared to a net loss of
only $433,000 in 2004. Allocated overhead amounted to $5.0 million and $5.4
million in the years ended December 31, 2005 and 2004, respectively.
Membership
Total Medicare Advantage lives, the number of Medicare beneficiaries cared for
either our PSN or HMO, increased approximately 900 members from December 2004 to
a membership of approximately 27,600 for December 2005. Member months, the
combined total membership for each month of the measurement period, were 321,775
and 304,358 for the 2005 and 2004 years, respectively. Included in these numbers
were approximately 4,153 member months in the Company's HMO. Total membership
enrolled in the HMO was approximately 1,401 for December 2005. The HMO's
marketing efforts in December generated approximately 400 additional members
effective January 1, 2006.
During the year the Company discontinued its contractual relationship with three
of its South Florida physician practices due to non-compliance with the
Company's policies and procedures. These centers accounted for approximately 790
members, with corresponding revenue and medical expenses for the nine months of
$3.9 million and $4.1 million, respectively, resulting in a medical expense
ratio of 104.2% and a net loss of approximately $163,000 on this business. Two
of the centers, accounting for approximately 680 of the members, were cancelled
effective October 1, 2005. The other center was cancelled effective August 1,
2005.
Revenues
Year Ended %
12/31/2005 12/31/2004 Change
---------- ---------- ------
PSN revenues from Humana $179,646,034 $ 156,648,863 14.7%
Percentage of total revenue 97.8% 99.1%
HMO revenue 2,825,377 -- n/a
Percentage of total revenue 1.5% 0.0%
Other 1,293,780 1,420,928 -8.9%
Percentage of total revenue 0.7% 0.9%
------------ --------------
Total revenue $183,765,191 $ 158,069,791 16.3%
============ ==============
Revenues for the year ended December 31, 2005 increased $25.7 million, or 16.3%,
over the prior year, from $158.1 million to $183.8 million. PSN revenues from
Humana increased 14.7%, from $156.6 million to $179.6 million. Approximately
$15.4 million in incremental revenues were generated by 2005 premium and MRA
increases that averaged approximately 9.6% in the Daytona market and 10.5% in
South Florida, with net membership increases accounting for the balance.
- 38 -
Included in the 2005 funding increases were medical risk adjustment ("MRA")
increases totaling approximately $2.9 million. The purpose of risk adjustment is
to use health status indicators to improve the accuracy of payments and
establish incentives for plans to enroll and treat less healthy Medicare
beneficiaries. From 2000 to 2003, risk adjusted payment accounted for only 10%
of Medicare health plans payment, with the remaining 90% based on demographic
factors. In 2004 and 2005, the portion of risk-adjusted payment was increased to
30% and 50%, respectively. The portion of risk-adjusted payment has increased to
75% in 2006, with the 100% phase-in of risk-adjusted payment to be completed in
2007.
For the last two fiscal years, the Company believes its Revenues, net have been
positively impacted by Medicare's risk adjustment program. However, the Company
does not believe it can accurately predict the future impact of Medicare's risk
adjustment payment system on its future revenues. See "RISK FACTORS - CMS's Risk
Adjustment System and Budget Neutrality..."
Revenues for the Company's newly operational HMO amounted to $2.8 million for
2005, all of which was generated in the last two quarters of the year.
Expenses
Year Ended %
12/31/2005 12/31/2004 Change
---------- ---------- ------
Total medical expenses 165,130,745 137,756,207 19.9%
Percentage of total revenue 89.9% 87.1%
Administrative payroll, payroll taxes and benefits 6,866,806 $ 4,394,415 56.3%
Percentage of total revenue 3.7% 2.8%
Marketing and advertising 2,754,198 138,823 1884.0%
Percentage of total revenue 1.5% 0.1%
General and administrative 5,780,764 3,924,431 47.3%
Percentage of total revenue 3.1% 2.5%
------------ ------------
Total expenses $180,532,513 $146,213,876 23.5%
============ ============
Operating expenses for the year ended December 31, 2005 increased $34.3 million
over the prior year period, from $146.2 million to $180.5 million. The 2005 year
included approximately $9.5 million in expenses related to the Company's HMO
division, compared to only $460,000 in 2004.
Total Medical Expenses
Medical expenses represent the total costs of providing patient care and are
comprised of two components, direct medical costs and other medical costs.
Medical expenses totaled $165.1 million and $137.8 million for the years ended
December 31, 2005 and 2004, respectively. The Company's medical expense ratio
("MER"), the ratio of total medical expense to revenue, increased from 87.1% in
2004 to 89.9% in the current year. The MER was adversely affected by a number of
factors. The costs of plan benefit enhancements designed to increase enrollment
approximated the 2005 funding increases, resulting in an incremental MER
increase of 0.9% over the prior year. Second, as discussed above, the Company
discontinued its relationships with three South Florida physician practices,
which operated at an MER exceeding 104% for 2005, resulting in an overall 2005
MER increase of 0.4% over 2004. The balance of the MER increase (1.5%) was due
to increased utilization and cost increases. The MER for the Company's HMO
division was approximately 85.4%
- 39 -
Administrative Payroll, Payroll Taxes and Benefits
Administrative payroll, taxes and benefits include salaries and related costs
for the Company's executive administrative and sales staff. For 2005,
administrative payroll, taxes and benefits were $6.9 million, compared to the
prior year's total of $4.4 million. The Company's HMO segment accounted for all
of the net increase.
Marketing and Advertising
Marketing and advertising expense for 2005 was $2.8 million, compared to only
$139,000 in 2004. This represents the costs and sales commissions incurred to
launch the Company's HMO AdvantageCare brand, and advertise and sell the
Company's new HMO product.
General and Administrative
General and administrative expenses for 2005 amounted to $5.8 million, an
increase of $1.9 million over the prior year period. This increase is primarily
attributable to the following expenses incurred in connection with the in the
development, launch and operations of the Company's HMO, principally with
respect to legal and accounting, outsourced claims and member services, and
software implementation.
Other Income and Expenses
Year Ended %
12/31/2005 12/31/2004 Change
---------- ---------- ------
Interest and penalty expense $ (14,462) $ (296,035) -95.1%
Percentage of total revenue 0.0% -0.2%
Interest income 449,752 100,506 347.5%
Percentage of total revenue 0.2% 0.1%
Other 129,913 13,346 873.4%
Percentage of total revenue 0.1% 0.0%
Recovery on note receivable-pharmacy 51,668 -- n/a
Percentage of total revenue 0.0% 0.0%
Reserve on note receivable-pharmacy -- (200,000) -100.0%
Percentage of total revenue 0.0% -0.1%
---------- -----------
Total other income (expense) $ 616,871 $ (382,183) 261.4%
========== ===========
Other income and expenses increased from an expense of $382,000 in 2004 to
income of $617,000 in 2005. Other income and expenses for 2005 included a
decrease in interest expense of $282,000 from the prior year as the Company
repaid all of the debt and IRS obligations carried by the Company in 2004.
Investment income increased $349,000 for the year while other income increased
$117,000, primarily resulting from refunds of prior year IRS interest and
penalty charges relating to the Company's discontinued pharmacy division. The
year ended December 31, 2004 included a $200,000 reserve on the note receivable
from the purchaser ("Purchaser") of the pharmacy operations in 2003. This note
was due in May 2004 and was in default as of December 31, 2004. On February 11,
2005, Metropolitan and the Purchaser executed a settlement agreement requiring
the note to be repaid in monthly installments ranging from $5,000 to $10,000,
with interest at 8%, until paid in full. Approximately $52,000 of this note plus
interest was collected in 2005 and included in other income and expenses.
- 40 -
Income taxes
The 2005 results included income taxes of approximately $1.5 million, as
compared to a $7.4 million tax benefit in 2004 resulting from the recognition of
a deferred tax asset, resulting in a decrease in net income from 2004 to 2005 of
approximately $8.8 million.
Comparison of Fiscal 2004 and 2003
Introduction
For the year ended December 31, 2004, Metropolitan recognized revenues of $158.1
million compared to $143.9 million in the prior year, an increase of $14.2
million or 9.9%. Net income for 2004 was $18.8 million compared to $4.4 million
for the year ended December 31, 2003. The 2004 year included a $7.4 million
benefit from income taxes while the 2003 year included approximately $1.5
million in losses related to its discontinued pharmacy operations. Operating
income improved 66.8%, from $7.1 million in 2003 to $11.9 million in 2004.
Net earnings per share, inclusive of a $0.16 per share benefit from income
taxes, was $0.42 for the year ended December 31, 2004 compared to $0.13 in the
prior year. The increase in the basic net earnings per share for the year ended
December 31, 2004 was partially offset by an increase in the number of weighted
average shares outstanding, from 34,750,173 at December 31, 2003 to 45,123,843
at December 31, 2004.
In February 2004, Metropolitan issued an aggregate of 5,004,999 shares of Common
Stock (the "Private Placement Shares") at a price of $0.60 per share to 24
accredited investors and one non-accredited investor, accounting for much of the
increase in weighted average shares outstanding. Metropolitan received
$2,953,000 in proceeds, net of offering costs of approximately $50,000, from the
sale of these Private Placement Shares. The proceeds of this transaction were
used to settle its longstanding payroll tax obligation for an amount totaling
$3.4 million.
In 2004, Metropolitan operated in two segments for purposes of presenting
financial information and evaluating performance, the PSN (managed care and
direct medical services) and the HMO. The HMO division was in the development
stage. During 2003, Metropolitan also operated in two segments, the PSN and the
pharmacy. Metropolitan disposed of its pharmacy division in November 2003 and,
accordingly, the operations of the pharmacy division are reported as
discontinued operations. The remaining PSN segment, prior to allocation of
corporate overhead, reported an increase in income, from $11.5 million in 2003
to $17.2 million in 2004. In 2004, Metropolitan began the process of developing
its own Medicare Advantage HMO and, as of December 31, 2004, had incurred
$460,000 of related expenses.
- 41 -
The passage of the Medicare Modernization Act in late 2003 brought a number of
sweeping changes to Medicare, including substantially increasing participation
in Medicare Advantage through increased funding commitments. Beginning with a
nationwide average increase of 10.6% in 2004, this stimulus allowed plans to
improve benefits and attract new enrollees.
Membership
Total Medicare Advantage lives increased approximately 1,400 members from
December 31, 2003 to a membership of 26,700 at December 31, 2004. Expansion of
Metropolitan's primary physician network resulted in an incremental increase in
excess of 2,100 members. Attrition slowed considerably in 2004, the result of
the increased funding and a corresponding improvement in member benefits
provided by the MMA. As a result, net membership decreases from attrition, which
were approximately 1,200 in 2003, decreased to 770 in 2004.
Revenues
Year Ended %
12/31/2004 12/31/2003 Change
---------- ---------- ------
PSN revenues from Humana $156,648,863 $142,275,841 10.1%
Percentage of total revenue 99.1% 98.9%
Other 1,420,928 1,598,647 -11.1%
Percentage of total revenue 0.9% 1.1%
------------ ------------
Total revenue $158,069,791 $143,874,488 9.9%
============ ============
Revenues for the year ended December 31, 2004, increased $14.2 million, or 9.9%,
over the prior year, from $143.9 million to $158.1 million. PSN revenues from
Humana increased 10.1%, from $142.3 million to $156.6 million. As previously
discussed, approximately $19.6 million in incremental revenues were generated by
Medicare funding and MRA increases that totaled 13.2% in the Central Florida
market and 15.7% in South Florida, while the addition of three new South Florida
medical practices in the last four months of 2004 accounted for $2.3 million in
incremental revenue. These increases were partially offset by net declines in
membership, resulting in approximately $5.8 million in reduced revenue. In
addition, effective August 1, 2003, Metropolitan cancelled its risk arrangement
with one of its South Florida centers due to noncompliance with Metropolitan's
policies and procedures, resulting in a funding decrease of $1.7 million for the
year ended December 31, 2004 as compared to 2003.
Included in the 2004 funding increases were MRA increases totaling approximately
$2.3 million. The purpose of risk adjustment is to use health status indicators
to improve the accuracy of payments and establish incentives for plans to enroll
and treat less healthy Medicare beneficiaries. From 2000 to 2003, risk adjusted
payment has accounted for only 10 percent of Medicare health plans payment, with
the remaining 90 percent being based on demographic factors used before the BBA
was enacted. In 2004, the portion of risk-adjusted payment was increased to 30
percent, from 10 percent in 2003. The portion of risk-adjusted payment increased
to 50 percent in 2005 and 75 percent in 2006, with the 100% phase-in of
risk-adjusted payment to be completed in 2007.
- 42 -
Expenses
Year Ended %
12/31/2004 12/31/2003 Change
---------- ---------- ------
Total medical expenses $137,756,207 $129,384,684 6.5%
Percentage of total revenue 87.1% 89.9%
Administrative payroll, payroll taxes and benefits 4,394,415 3,856,586 13.9%
Percentage of total revenue 2.8% 2.7%
Marketing and advertising 138,823 106 130865.1%
Percentage of total revenue 0.1% 0.0%
Bad debt expense -- 100,000 -100.0%
Percentage of total revenue 0.0% 0.1%
General and administrative 3,924,431 3,426,684 14.5%
Percentage of total revenue 2.5% 2.4%
------------ ------------
Total expenses $146,213,876 $136,768,060 6.9%
============ ============
Total expenses for the year ended December 31, 2004 increased $9.4 million, or
6.9%, over the year ended December 31, 2003, from $136.8 million to $146.2
million.
Total Medical Expenses
Medical expenses, the largest component of expense, represent the total costs of
providing patient care and are comprised of two components, direct medical costs
and other medical costs. Medical expenses for 2004 were $137.8 million compared
to $129.4 million for 2003. The Company's medical expense ratio improved from
89.9% in 2003 to 87.1% in 2004. While Humana enhanced the benefits provided in
its 2004 Medicare Advantage benefit plans in Metropolitan's markets, increased
Medicare funding and favorable medical utilization more than offset the
increased benefit costs. In addition, the absolute level of Metropolitan's
average benefit costs per member life increased in 2004 relative to 2003 as a
result of, among other things, the most severe flu season in four years, which
resulted in increases in hospital admissions and lengths of stay in the first
quarter of 2004.
Administrative Payroll, Payroll Taxes and Benefits
Administrative payroll, taxes and benefits for 2004 was $4.4 million, as
compared to the 2003 total of $3.9 million, a $538,000 increase. The increase
was primarily due to a $525,000 incremental increase in accrued bonus and
pension expenses.
General and Administrative
General and administrative expenses for 2004 amounted to $3.9 million, an
increase of $497,000 over the prior year. Among the increases, $100,000 resulted
from contributions made by Metropolitan to relief efforts in the aftermath of
Hurricanes Frances and Jeanne, which had a significant impact on Metropolitan's
service area. Another $321,000 of incremental expense was incurred in the
development of Metropolitan's HMO, with the balance of the increase resulting
from small net increases over a wide range of expense categories.
- 43 -
Other income and expenses
Year Ended %
12/31/2004 12/31/2003 Change
---------- ---------- ------
Interest and penalty expense $ (296,035) $ (1,218,208) -75.7%
Percentage of total revenue -0.2% -0.8%
Interest income 100,506 26,758 275.6%
Percentage of total revenue 0.1% 0.0%
Other 13,346 (53,675) -124.9%
Percentage of total revenue 0.0% 0.0%
Reserve on note receivable-pharmacy (200,000) - -100.0%
Percentage of total revenue -0.1% 0.0%
------------------- ---------------
Total other income (expense) $ (382,183) $ (1,245,125) -69.3%
=================== ===============
Other income and expenses for the year included a decrease in interest expense
of $922,000 from the prior year due to the decreased average amount of debt and
IRS obligations carried by Metropolitan in the 2004 period as compared to the
prior year. In addition, as a result of Metropolitan's increased cash balances,
interest income increased from $27,000 in 2003 to $101,000 in 2004. Other income
and expenses also included a $200,000 reserve on the note receivable from the
purchaser ("Purchaser") of the pharmacy operations. This note was due in May
2004 and, as of December 31, 2004 was in default.
Income tax
The Company recorded a benefit from income taxes of approximately $7.4 million
at December 31, 2004. Realization of the benefit and the associated deferred tax
asset is dependent on generating sufficient taxable income in the future. The
amount of the deferred tax asset considered realizable could change in the near
term if estimates of future taxable income are modified and those changes could
be material (See "Notes to Consolidated Financial Statements," Note 6 - "Income
Taxes").
Discontinued operations
Losses related to the discontinued pharmacy operations for the twelve months
were $31,000 in 2004 as compared to $1.5 million in 2003. The pharmacy
operations were sold in November 2003.
Liquidity and Capital Resources
Total cash and equivalents and short-term investments at December 31, 2005
totaled approximately $15.6 million as compared to approximately $12.8 million
at December 31, 2004. As of December 31, 2005, the Company had a working capital
surplus of approximately $21.1 million as compared to a working capital surplus
of approximately $15.7 million as of December 31, 2004, an increase of
approximately $5.4 million or 34.2%.
The company's total stockholder equity increased approximately $5.1 million, or
18.1%, from approximately $24.6 million at December 31, 2004 to approximately
$29.7 million at December 31, 2005.
- 44 -
In 2004, Metropolitan 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 any exceptions to the
policy and procedure must be approved by the Chief Financial Officer or the
Chief Executive Officer. The Company did not have any short-term investments as
of December 31, 2005 as compared to $1.5 million of Short-Term Investments as of
December 31, 2004.
At December 31, 2005, the Company had no outstanding debt.
Net cash provided by operating activities for the year ended December 31, 2005
constituted approximately $2.6 million of the $4.2 million increase in Cash and
equivalents. Net income of $2.4 million was the largest source of cash flow from
operating activities. The other large sources of cash from operating activities
were:
o an increase in deferred income taxes of $1.5 million;
o an increase in IBNR payable of $694,000;
o depreciation and amortization of $355,000; and
o an increase in accrued payroll of $235,000.
These sources of cash were partially offset by the following uses of cash:
o an increase in accounts receivable of $2.7 million; and
o an increase in other assets of $216,000.
During 2005, the Company incurred approximately $4.0 million of medical costs
related to the implantation of certain Implantable Automatic Defibrillators
("AICD's"). CMS has directed that the costs of certain of these procedures that
meet 2005 eligibility requirements be paid by CMS, rather than billed to
Medicare Advantage plans. The Company is working with Humana and the related
providers to secure reimbursement for these amounts, and has estimated a
recovery of approximately $2.2 million at December 31, 2005, which is included
in accounts receivable.
Net cash provided by investing activities for the year ended December 31, 2005
constituted approximately $1.5 million of the $4.2 million increase in cash.
During fiscal 2005, the Company redeemed all of its short-term investments and
restricted certificates of deposit, generating $1.5 million and $1.0 million of
cash, respectively. These sources of cash were partially offset by the Company's
utilization of $628,000 and $421,000 in cash for the acquisition of long-term
investments and capital expenditures, respectively
The Company's financing activities for the year ended December 31, 2005 provided
approximately $211,000 of cash. The Company generated approximately $1.4 million
of cash in connection with the issuance of common stock upon the exercise of
outstanding options and warrants. This source of cash was partially offset by
repayments of notes payable amounting to $1.1 million and an additional $85,000
cash expenditure for the repurchase of warrants.
- 45 -
On May 6, 2005 the Company executed an unsecured commercial line of credit
agreement with a bank, which provides for borrowings and issuance of letters of
credit of up to $1.0 million and expires on March 31, 2006. The outstanding
balance, if any, bears interest at the bank's prime rate. The credit facility
requires the Company to comply with certain financial covenants, including a
minimum liquidity requirement of $2.0 million. The availability under the line
of credit secures a $1.0 million letter of credit that the Company has caused to
be issued in favor of Humana. This arrangement allows for $1.0 million of cash,
which was formerly invested in a certificate of deposit and recognized as
restricted cash on the Company's balance sheets to be available for operations.
As of December 31, 2005, the Company has not utilized this commercial line of
credit.
The Company anticipates that the ongoing development efforts, reserve
requirements and operating costs for its developing HMO business can continue to
be funded by the Company's current resources and projected cash flows from
operations. The Company currently expects to spend additional resources in
expanding and bringing its HMO to profitability. The Company's HMO currently
operates in six counties and is preparing to file expansion applications for
several additional Florida counties. While no assurance is given that approval
will be granted to operate in any or all of these counties, the Company has been
investing resources in network development efforts for this expansion.
Enrollments in these new markets could begin as early as January 2007, with
marketing and sales efforts commencing in 2006.
ITEM 7A 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. The Company does not currently have any
trading derivatives nor does it expect to have any in the future. It has
established policies and internal processes related to the management of market
risks, which it uses in the normal course of our business operations.
Intangible Asset Risk
Metropolitan has a substantial amount of intangible assets. It is required to
perform goodwill impairment tests whenever events or circumstances indicate that
the carrying value may not be recoverable from estimated future cash flows. As a
result of its periodic evaluations, it 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 the Company's operating results and
financial position. Although at December 31, 2005 it believed its intangible
assets were recoverable, changes in the economy, the business in which it
operates and its own relative performance could change the assumptions used to
evaluate intangible asset recoverability. Metropolitan continues to monitor
those assumptions and their effect on the estimated recoverability its
intangible assets.
Equity Price Risk
Metropolitan does not own any equity investments, other than in our
subsidiaries. As a result, it does not currently have any direct equity price
risk.
Commodity Price Risk
Metropolitan does not enter into contracts for the purchase or sale of
commodities. As a result, it does not currently have any direct commodity price
risk.
- 46 -
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements and additional Supplementary Data are included
on pages F-1 to F-21 of this Form 10-K.
Summary of Consolidated Quarterly Earnings (unaudited):
For the Quarter Ended
December 31, 2005** September 30, 2005 June 30, 2005 March 31, 2005
----------------- ------------------ ------------- --------------
Net revenues $ 47,076,537 $ 44,999,881 $ 46,169,207 $ 45,519,566
(Loss)/Income from continuing operations $ (545,138) $ 539,493 $ 1,242,786 $ 1,144,602
Net (Loss)/Income $ (545,138) $ 539,493 $ 1,242,786 $ 1,144,602
Net (Loss)/Income - per share - basic $ (0.01) $ 0.01 $ 0.03 $ 0.02
Net (Loss)/Income - per share - diluted $ (0.01) $ 0.01 $ 0.02 $ 0.02
For the Quarter Ended
December 31, 2004 September 30, 2004 June 30, 2004* March 31, 2004
----------------- ------------------ -------------- --------------
Net revenues $ 40,880,563 $ 40,091,999 $ 38,554,033 $ 38,543,196
Income from continuing operations $ 9,839,757 $ 3,654,603 $ 3,868,851 $ 1,490,767
Net Income $ 9,853,883 $ 3,666,746 $ 3,857,274 $ 1,444,809
Net Income - per share - basic $ 0.21 $ 0.08 $ 0.08 $ 0.03
Net Income - per share - diluted $ 0.19 $ 0.07 $ 0.08 $ 0.03
* Includes $200,000 reclassification of reserve on pharmacy note from
discontinued operations.
** See note 12 to the Consolidated Financial Statements for significant fourth
quarter adjustments.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Metropolitan's management, which includes its Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of its
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
promulgated under the Exchange Act) as of the end of the fiscal year covered by
this report. Based upon that evaluation, the principal executive officer and
principal financial officer concluded that its disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports that it files or submits under the Exchange Act, is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to Metropolitan's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
- 47 -
Management's Annual Report on Internal Control over Financial Reporting
The Company's management, which includes the Chief Executive Officer and the
Chief Financial Officer, is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers and effected by
the company's board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
o pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the company;
o provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
o provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets
that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2005. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework.
Based on our assessment, management believes that, as of December 31, 2005, the
Company's internal control over financial reporting is effective.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2005 has been audited by Kaufman,
Rossin & Co., P.A., our independent registered public accounting firm. They have
issued an attestation report on our assessment of the company's internal control
over financial reporting. Their report appears below.
- 48 -
Report of the Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Metropolitan Health Networks, Inc. and Subsidiaries
West Palm Beach, Florida
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting, that
Metropolitan Health Networks, Inc. maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Metropolitan Health Networks,
Inc.'s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of Metropolitan
Health Networks, Inc.'s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Metropolitan Health Networks, Inc.
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, Metropolitan Health Networks, Inc. maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
- 49 -
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets as
of December 31, 2005 and 2004 and the related consolidated statements of
operations, changes in stockholders' equity (deficiency in assets) and cash
flows for each of the three years in the period ended December 31, 2005 of
Metropolitan Health Networks, Inc. and Subsidiaries and our report dated March
11, 2006 expressed an unqualified opinion thereon.
KAUFMAN, ROSSIN & CO., P.A.
Miami, Florida
March 11, 2006
Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal controls over financial
reporting that occurred during our last fiscal quarter that has materially
affected or is reasonably likely to materially affect Metropolitan's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of the date of this filing, Metropolitan's directors and executive officers
are as follows:
Name Age Position
---- --- --------
Michael M. Earley.............................. 50 Chairman and Chief Executive Officer
Debra A. Finnel ............................... 44 President, Chief Operating Officer and Director
David S. Gartner, CPA.......................... 48 Chief Financial Officer
Jose A. Guethon, M.D. 43 President of PSN
Roberto L. Palenzuela, Esq..................... 42 General Counsel and Secretary
Karl M. Sachs, CPA............................. 69 Director
Martin W. Harrison, M.D........................ 53 Director
Eric Haskell, CPA.............................. 59 Director
Barry T. Zeman ................................ 59 Director
There are no family relationships among any of our officers or directors, nor
are there any arrangements or understandings between any of our directors or
officers or any other person pursuant to which any officer or director was or is
to be selected as an officer or director.
- 50 -
MICHAEL M. EARLEY, Chairman and Chief Executive Officer has been employed by
Metropolitan since March 10, 2003 and previously served as a director of
Metropolitan from June 2000 to December 2002. Mr. Earley became Chairman of the
Board of Directors in September 2004. Mr. Earley has been an advisor to public
and privately owned companies, acting in a variety of management roles since
1997. From 1986 to 1997, he served in a number of senior management roles,
including CEO and CFO of Intermark, Inc. and Triton Group Ltd., both publicly
traded diversified holding companies. He was Chief Executive Office of Triton
Group Management, a corporate consulting firm, from 1997 through December 1999.
He was Chief Executive Officer of Collins Associates, an institutional money
management firm, from January 2000 through December 2002. Mr. Earley was a
self-employed corporate consultant from January 2002 through February 2003.
Since August 2002, Mr. Earley has been serving as a director and member of the
audit committee of MPower Communications, a publicly traded telecommunications
company. Mr. Earley received his undergraduate degrees in Accounting and
Business Administration from the University of San Diego. From 1978 to 1983, he
was an audit and tax staff member of Ernst & Whinney.
DEBRA A. FINNEL, President and Chief Operating Officer, has been employed by
Metropolitan since January 1999 and has served on the Board of Directors of
Metropolitan since 2002. She has over twenty years of healthcare experience in
the South Florida market, specializing in managed care and risk contracting,
including five years as Regional Director with FamilyCare, Inc., the largest
affiliate of International Medical Centers, Inc., Florida's first
Medicare+Choice HMO. Prior to joining Metropolitan, Ms. Finnel was President and
Chief Operating Officer of Advanced HealthCare Consultants, Inc., which managed
and owned physician practices in multiple states and provided turnaround
consulting to managed care providers, MSOs, Independent Physician Associations
and hospitals. She also has extensive experience in provider contracting, claims
administration and customer service. Ms. Finnel has had an affiliated provider
relationship with Humana Medical Plans since their inception in the Florida
market in 1986 and has developed strong relationships with many senior
healthcare executives throughout Florida, as well as state and federal
government.
DAVID S. GARTNER, CPA joined Metropolitan in November 1999 as its Chief
Financial Officer. He is a certified public accountant with over twenty-four
years experience in accounting and finance, including fourteen years of
specialization in the healthcare industry. Previously, from July 1998 through
November 1999, Mr. Gartner served as Chief Financial Officer of Medical
Specialists of the Palm Beaches, Inc., a large Palm Beach County multi-practice,
multi-specialty group of 40 physicians. Prior to Medical Specialists, he held
the position of Chief Financial Officer at National Consulting Group, Inc., a
treatment center licensed for 140 inpatient beds in New York and Florida, from
1991 to 1998. Mr. Gartner is a member of the American Institute of Certified
Public Accountants and is a graduate of the University of Buffalo, where he
received his Bachelor of Science Degree in Accounting.
JOSE A. GUETHON, M.D. was appointed as President of the PSN in January 2006. Dr.
Guethon initially joined Metropolitan in October 2001 and has served in a
variety of positions, including as Medical Director and Staff Physician from
October 2001 through June 2004, as Senior Vice President of Utilization and
Quality Improvement from June 2004 through January 2005 and as Chief Medical
Officer of our HMO from January 2005 through December 2005. Dr. Guethon has
approximately 15 years of healthcare experience both in clinical and
administrative medicine, and is board-certified in family practice. Prior to
joining Metropolitan, Dr. Guethon served as the Regional Medical Director for
JSA Healthcare Corporation, a provider service network located in Tampa, Florida
from April 2001 through October 2001 and as the Medical Director of Humana's
Orlando market operations from April 1998 through April 2001. Dr. Guethon earned
his undergraduate degree from the University of Miami, his doctorate in medicine
degree from the University of South Florida College of Medicine, and completed
an MBA program at Tampa College.
- 51 -
ROBERTO L. PALENZUELA, ESQ. was appointed General Counsel and Secretary in March
2004. Mr. Palenzuela served as General Counsel and Secretary of Continucare
Corporation from May 2002 through March 2004. From 1994 to 2002, Mr. Palenzuela
served as an officer and director of Community Health Plan of the Rockies, Inc.,
a health maintenance organization based in Denver, Colorado. Community Health
Plan of the Rockies, Inc. filed for protection under Chapter 11 of the federal
bankruptcy laws on November 15, 2002, and was released from Chapter 11 on
December 16, 2002. From March 1999 through June 2001, Mr. Palenzuela served as
General Counsel of Universal Rehabilitation Centers of America, Inc. (n/k/a
Universal Medical Concepts, Inc.), a physician practice management company. Mr.
Palenzuela received his Bachelors Degree in Business Administration from the
University of Miami in 1985 and his law degree from the University of Miami
School of Law in 1988.
MARTIN W. HARRISON, M.D. has served as a Director of Metropolitan since June
1999 and currently serves as a member of Metropolitan's Compensation, Audit &
Finance and Governance & Nominating Committees. From 2000 to March 2003, Mr.
Harrison also served as an advisor to the Board of Directors of Metropolitan.
Mr. Harrison is a self-employed medical doctor and has practiced medicine in
South Florida, specializing in preventive and occupational medicine. Dr.
Harrison completed his undergraduate training at the University of Illinois and
obtained his postgraduate and residency training as well as his Masters in
Public Health from Johns Hopkins University. He is currently the owner of H30,
Inc. a privately held research & biomedical company.
KARL M. SACHS, CPA rejoined the Board of Directors in September 2002 after
previously serving as a Director of Metropolitan from March 1999 to December
2001. He currently serves on Metropolitan's Compensation, Audit & Finance and
Governance & Nominating Committees. He is a founding partner and President of
the Miami-based public accounting firm of Sachs & Foccaraci, P.A. A certified
public accountant for more than thirty years, Mr. Sachs is a member of the
American Institute of Certified Public Accountants, Personal Financial Planning
and Tax Sections; Florida Institute of Certified Public Accountants; and the
National Association of Certified Valuation Analysts. The firm of Sachs &
Focaracci, P.A. serves the financial and tax needs of its diverse clients in
addition to providing litigation support services. Mr. Sachs is a qualified
litigation expert for the U.S. Federal District Court, U.S. District Court, U.S.
Bankruptcy Court and Circuit Courts of Dade and Broward Counties and has
previously served as an auditor for the Internal Revenue Service. He is a
graduate of the University of Miami where he received his Bachelors Degree in
Business Administration in 1957.
ERIC HASKELL, CPA joined the Board of Directors of the Company in August 2004.
Mr. Haskell is a certified public accountant with over 30 years of experience in
senior financial positions at several public and private companies and has
significant expertise in the areas of acquisitions and divestitures, strategic
planning and investor relations. Since December 2005, Mr. Haskell has served as
the interim Executive Vice President and Chief Financial Officer of SunCom
Wireless Holdings, Inc., a publicly traded company providing digital wireless
communications services. He has also served as a member of the SunCom's Board of
Directors since November 2003. From 1989 until April 2004, Mr. Haskell served as
the Chief Financial Officer of Systems & Computer Technology Corp., a NASDAQ
listed software and services corporation with annual revenues of approximately
$270 million. Since May 2005, he has served on the Board of Directors and the
Audit and Compensation Committees of Indus International, Inc., a publicly
traded provider of service delivery management solutions. He also serves on the
Board of Directors and Audit and Compensation Committees of eMoney Advisor,
Inc., a provider of web-enabled comprehensive wealth planning solutions. Mr.
Haskell has served on the Board of the Philadelphia Ronald McDonald House since
1996 and currently serves as Chairman of its Finance Committee. Mr. Haskell
received his Bachelors Degree in Business Administration from Adelphi University
in 1969.
- 52 -
BARRY T. ZEMAN joined the Board of Directors in August 2004. Mr. Zeman has 34
years of health care industry and hospital management experience. Mr. Zeman has
operated in the capacity of President and/or Chief Executive Officer of several
hospital organizations throughout the State of New York. He served as Associate
Director of the Long Island Jewish Medical Center from 1971 through 1976. He
served as President and Chief Executive Officer of Staten Island University
Hospital from 1976 to 1989 and was President and Chief Executive Officer of St.
Charles Hospital and Rehabilitation Center from 1991 through 2000. From 2000
through February 2003, Mr. Zeman served as President of the Parker Jewish
Institute, a private not-for-profit rehabilitative, sub-acute and long-term care
institution. In 1989, Mr. Zeman founded U.S. Business Development Corp., a
private consulting firm offering comprehensive and consultative solutions to
professionals in the areas of health care finance, construction, physician group
practices, hospital association activities and health care law. He has served as
President of U.S. Business Development Corp. since its inception. In May 2004,
Mr. Zeman became Regional Business Development Manager for Wells Fargo Home
Mortgage. He currently serves as the Chair of the Building & Grounds Committee
and Secretary of the Board of Directors of Adelphi University and has served on
the Board of Directors of Adelphi University since 1997. Mr. Zeman received his
Bachelors Degree in Business Administration from the University of Cincinnati in
1969.
Legal Proceedings
Metropolitan is not aware of any pending, material legal proceedings to which
any director, officer or affiliate of Metropolitan, any owner of record or
beneficially of more than five percent of any class of voting securities of
Metropolitan, or any associate of any such director, officer, affiliate of
Metropolitan, or security holder is a party adverse to Metropolitan or any of
its subsidiaries or has a material interest adverse to Metropolitan.
Audit and Finance Committee
Metropolitan's Audit & Finance Committee consists of Mr. Sachs, Mr. Haskell, Mr.
Zeman and Dr. Harrison. The Board of Directors has determined that each member
of the Audit Committee is an independent director pursuant to Section 121A of
the AMEX Company Guide and Rule 10A-3 promulgated pursuant to the Securities
Exchange Act of 1934, as amended. The Board has determined that Mr. Sachs and
Mr. Haskell meet the "financial expert" requirements set forth in the rules
established pursuant to the Sarbanes-Oxley Act of 2002. See Mr. Sachs' and Mr.
Haskell's biographies above for more information regarding their relevant
experience.
- 53 -
Procedures for Shareholders to Nominate Directors
There have been no material changes to the procedures by which Metropolitan's
shareholders may recommend nominees to the Board of Director implemented after
the disclosure of those procedures contained in the proxy statement for the our
2005 Annual Meeting of Shareholders.
Code of Business Conduct and Ethics
Metropolitan has adopted a Code of Business Conduct and Ethics applicable to all
employees of the Company, including its principal executive officer, principal
financial officer and principal accounting officer. A copy of the Code of
Business Conduct and Ethics is filed as Exhibit 10.15 to this Annual Report on
Form 10-K.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires Metropolitan's directors and
executive officers, and persons who own more than ten (10%) percent of the
outstanding Common Stock, to file with the SEC initial reports of ownership on
Form 3 and reports of changes in ownership of Common Stock on Forms 4 or 5. Such
persons are required by SEC regulation to furnish Metropolitan with copies of
all such reports they file.
Based solely on its review of the copies of such reports furnished to
Metropolitan or written representations that no other reports were required,
Metropolitan believes that all Section 16(a) filing requirements applicable to
its officers, directors and greater than ten (10%) percent beneficial owners
were complied with during the year ended December 31, 2005 except for the
following: Barry T. Zeman failed to file on a timely basis one report on Form 4
with respect to one transaction; Martin W. Harrison, M.D. failed to file on a
timely basis three reports on Form 4 with respect to four transactions; Karl M.
Sachs failed to file on a timely basis one report on Form 4 with respect to one
transaction; and Michael M. Earley failed to file on a timely basis one report
on Form 4 with respect to two transactions.
ITEM 11. EXECUTIVE COMPENSATION
The following tables present information concerning the compensation awarded to,
earned by or paid to Metropolitan's Chief Executive Officer and the other three
most highly compensated individuals serving as executive officers at the end of
the 2005 fiscal year (collectively, the "Named Executive Officers"). No
executive officer of Metropolitan or its subsidiaries, other than the Named
Executive Officers, earned compensation in excess of $100,000 during the fiscal
year ended December 31, 2005.
Securities All
Fiscal Underlying Other
Name and Principal Position Year Salary Bonus (3)(4) Options Compensation(5)
--------------------------- ---- ------ ------------ ------- ---------------
Michael M. Earley 2005 $300,000 $ 0 0 $ 4,238
Chairman & CEO 2004 $250,000 $125,000 400,000 $ 2,084
2003 $118,000(1) $ 60,000 350,000 --
Debra A. Finnel 2005 $300,000 $ 0 0 $ 26,433
President & COO 2004 $250,000 $125,000 800,000 $ 4,333
2003 $250,000 $160,000 350,000 --
David S. Gartner 2005 $190,000 $ 0 0 $ 21,769
Chief Financial Officer 2004 $160,000 $ 75,000 150,000 $ 4,333
2003 $144,000 $ 60,000 180,000 --
Roberto L. Palenzuela 2005 $190,000 $ 0 0 $ 3,500
Secretary & General Counsel 2004 $129,000(2) $ 60,000 250,000 $ 1,867
Jose A. Guethon 2005 $250,000 $ 25,000 200,000 $ 1,561
President, PSN 2004 $226,000 $ 25,000 100,000 $ 946
2003 $203,000 $ 10,000 50,000 --
--------------------
(1) Mr. Earley became Metropolitan's President and Chief Executive Officer
effective March 10, 2003. The 2003 salary figure above is based on an
annualized salary of $130,000.
(2) Mr. Palenzuela became Metropolitan's Secretary and General Counsel
effective March 8, 2004. The 2004 salary figure above is based on an
annualized salary of $160,000.
(3) Bonuses earned during the 2003 fiscal year were paid in cash in March
2004.
(4) Bonuses earned during the 2004 fiscal year were paid 65% in cash and 35%
in Metropolitan's Common Stock in April 2005. The number of shares of
common stock payable was based upon the closing price of its Common Stock
on December 31, 2004 ($2.83).
(5) The amounts disclosed in this column represent Metropolitan's annual
contribution for the fiscal years 2004 and 2005 to each Named Executive
Officer's plan as well as the payout of accrued vacation time to Ms.
Finnel and Mr. Gartner. Metropolitan's 401(k) Plan was adopted in 2004.
Metropolitan matched each Named Executive Officer's contribution by 33.3%
in 2004 and 25.0% in 2005. In addition, during fiscal 2005, Ms. Finnel and
Mr. Gartner received payouts of accrued vacation time totaling $22,933 and
$18,269, respectively.
- 54 -
Options granted in the Year Ended December 31, 2005 to Named Executive Officers
Percent of
Number of Total Options Potential Realizable Value
Securities Granted to Exercise or at Assumed Annual Rate of
Underlying Employees in Base Price Expiration Stock Price Appreciation
Name Options Fiscal Year (1) ($/Share) Date For Option Term
---- ------- --------------- --------- ---- ---------------
5% 10%
-------- --------
Jose A. Guethon 200,000 (2) 19.8% $2.05 12/9/2015 $257,847 $653,434
(1) The total number of options granted to employees during the 2005 fiscal
year was 1,011,800.
(2) The options granted to Dr. Guethon in fiscal 2005 vest in four equal
annual installments, with the first 50,000 options scheduled to vest on
December 9, 2006.
Aggregated Options Exercises in Fiscal 2005 and Fiscal Year Ending Option Values
The following table sets forth certain information as to the exercise of stock
options during fiscal year 2005 by each of the Named Executive Officers and the
value of unexercised stock options held by each of the Named Executive Officers
at the end of fiscal year 2005. No Named Executive Officer held outstanding
stock appreciation rights during or at the end of fiscal year 2005.
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year-End At Fiscal Year-End
Shares Acquired Value (#) Exercisable/ ($) Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable (1)
---- --------------- ------------ --------------- ------------------
Michael M. Earley..................... 20,000 $43,600 470,000/300,000 $816,500/$171,000
Debra A. Finnel....................... 50,000 $107,000 950,000/600,000 $1,441,500/$342,000
David S. Gartner...................... 0 $0 217,500/112,500 $390,375/$64,125
Roberto L. Palenzuela ................ 0 $0 75,000/175,000 $100,750/$215,750
Jose A. Guethon....................... 0 $0 41,000/275,000 $47,050/$112,750
(1) The closing sale price of the Common Stock on December 31, 2005 as
reported by the American Stock Exchange was $2.40 per share. Value is
calculated by multiplying (a) the difference between $2.40 and the option
exercise price by (b) the number of shares of Common Stock underlying the
options.
- 55 -
Employment Agreements
Metropolitan is a party to employment agreements with Michael M. Earley,
Chairman and Chief Executive Officer, Debra Finnel, President and Chief
Operating Officer, David S. Gartner, Chief Financial Officer, Roberto L.
Palenzuela, General Counsel and Secretary and Dr. Jose Guethon, President of the
PSN.
In 2004, Metropolitan was a party to an employment agreement with Michael M.
Earley, Chairman and Executive Officer, which was amended and restated effective
January 3, 2005. The initial term of Mr. Earley's current employment agreement
was for one year and is automatically renewable for successive one-year terms,
unless earlier terminated in accordance with the terms of the agreement. The
agreement calls for an annual base salary of $300,000 to be reviewed annually.
Metropolitan's Board of Directors in its sole discretion may increase Mr.
Earley's salary and award bonuses and options to Mr. Earley at any time. The
agreement also provides for an automobile allowance in the amount of $800 per
month, a telephone allowance in the amount of $250 per month, vacation,
participation in all benefit plans offered by Metropolitan to its executives and
the reimbursement of reasonable business expenses. The agreement also contains
non-disclosure, non-solicitation and non-compete restrictions. The
non-solicitation and non-compete restrictions survive for a period of two years
and one year, respectively, following the date of termination. Either party may
terminate the contract at any time.
From 2001 through the end of 2004, Metropolitan was a party to an employment
agreement with Debra A. Finnel, President and Chief Operating Officer, which was
amended and restated effective January 3, 2005. The initial term of Ms. Finnel's
current employment agreement was for one year and is automatically renewable for
successive one-year terms, unless earlier terminated in accordance with the
terms of the agreement. The agreement calls for an annual base salary of
$300,000 to be reviewed annually. Metropolitan's Board of Directors in its sole
discretion may increase Ms. Finnel's salary and award bonuses and options to Ms.
Finnel at any time. The agreement also provides for an automobile allowance in
the amount of $1,500 per month, a telephone allowance in the amount of $250 per
month, vacation, participation in all benefit plans offered by Metropolitan to
its executives and the reimbursement of reasonable expenses incurred in the
course of the business of Metropolitan. The agreement also contains
non-disclosure, non-solicitation and non-compete restrictions. The
non-solicitation and non-compete restrictions continue for a period of one year
following the date of termination. Either party may terminate the agreement at
any time.
In 2004, Metropolitan was a party to an employment agreement with David S.
Gartner, Chief Financial Officer, which was amended and restated effective
January 3, 2005. The initial term of Mr. Gartner's current employment agreement
was for one year and is automatically renewable for successive one-year terms,
unless terminated in accordance with the terms of the agreement. The agreement
calls for an annual base salary of $190,000 to be reviewed annually.
Metropolitan's Board of Directors may in its sole discretion increase Mr.
Gartner's salary and award bonuses and options to Mr. Gartner at any time. The
agreement also provides for an automobile allowance in the amount of $500 per
month, a telephone allowance in the amount of $100 per month, vacation,
participation in all benefit plans offered by Metropolitan to its executives and
the reimbursement of reasonable business expenses. The agreement also contains
non-disclosure, non-solicitation and non-compete restrictions. The
non-solicitation and non-compete restrictions survive for a period of two years
and one year, respectively, following the date of termination. Either party may
terminate the agreement at any time.
In 2004, Metropolitan was a party to an employment agreement with Roberto L.
Palenzuela, General Counsel and Secretary, which was amended and restated
effective January 3, 2005. The initial term of Mr. Palenzuela's current
employment agreement was for one year and is automatically renewable for
successive one-year terms, unless earlier terminated in accordance with the
terms of the agreement. The agreement calls for an annual base salary of
$190,000 to be reviewed annually. Metropolitan's Board of Directors in its sole
discretion may increase Mr. Palenzuela's salary and award bonuses and options to
Mr. Palenzuela at any time. The agreement also provides for an automobile
allowance in the amount of $500 per month, a telephone allowance in the amount
of $100 per month, vacation, participation in all benefit plans offered by
Metropolitan to its executives and the reimbursement of reasonable expenses
incurred in the course of the business of Metropolitan. The agreement also
contains non-disclosure, non-solicitation and non-compete restrictions. The
non-solicitation and non-compete restrictions survive for a period of two years
and one year, respectively, following the date of termination. Either party may
terminate the agreement at any time.
Effective February 1, 2005, Dr. Guethon entered into an employment agreement
with Metcare of Florida, Inc., the Company's wholly-owned subsidiary. The
initial term of Dr. Guethon's current employment agreement was for one year and
is automatically renewable for successive one year terms, unless earlier
terminated in accordance with the terms of the agreement. The agreement calls
for an annual base salary of $250,000 to be reviewed annually. Metropolitan's
Board of Directors in its sole discretion may increase Dr. Guethon's salary and
award bonuses and options to Dr. Guethon at any time. The agreement also
provides for a telephone allowance in the amount of $100 per month, vacation,
participation in all benefit plans offered by Metropolitan to its executives and
the reimbursement of reasonable expenses incurred in the course of the business
of Metropolitan. The agreement also contains non-disclosure, non-solicitation
and non-compete restrictions. The non-solicitation and non-compete restrictions
survive for a period of two years and one year, respectively, following the date
of termination. Either party may terminate the agreement at any time.
- 56 -
In the event that any one of Mr. Earley, Ms. Finnel, Mr. Gartner, Mr. Palenzuela
or Dr. Guethon (i) is terminated by Metropolitan without cause, (ii) dies or
becomes disabled, (iii) terminates his/her employment because he/she has been
assigned duties inconsistent with his/her position or because his/her duties and
responsibilities have been diminished or because of a breach of the agreement by
Metropolitan or because he/she has been reassigned to a location outside of the
area for which he/she was hired, he/she will be entitled to reimbursement of all
unreimbursed expenses incurred prior to the date of termination, payment of
unused vacation days and payment of his/her then annual base salary and benefits
for a period of one year following the termination; provided, however, that if
Ms. Finnel's employment is terminated because of her death or disability, she
will be entitled to payment of her then annual base salary and benefits for an
additional one year period for a total of two years after the date of her
termination. If there is a change of control of Metropolitan (as such term is
defined in the agreements), each of Mr. Earley, Ms. Finnel, Mr. Gartner, Mr.
Palenzuela and Dr. Guethon will be entitled to reimbursement of all unreimbursed
expenses incurred prior to the date of termination, payment of unused vacation
days, a single lump sum payment of an amount equal to his/her then annual base
salary plus bonuses payable, the value of annual fringe benefits paid to him/her
in the year preceding the year of termination, and the value of the portion of
his/her benefits under any deferred compensation plan which are forfeited for
reason of the termination.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 2005, the Compensation Committee consisted of
Eric Haskell, Karl Sachs and Dr. Martin Harrison. Each of Mr. Haskell, Mr. Sachs
and Dr. Harrison served on the Compensation Committee for the entire fiscal
year.
Except for Dr. Harrison who served as an advisor to the Board of Directors of
Metropolitan from 2000 through March of 2003, none of the members of the
Compensation Committee are or have served as a consultant to or been employed by
Metropolitan.
No executive officer of Metropolitan served as a director or on the compensation
committee of any entity of which any member of the Board of Directors or
Compensation Committee of Metropolitan is an executive officer during the fiscal
year 2005.
Compensation Committee Report on Executive Compensation
The Company's Compensation Committee is comprised of four directors, all of whom
are "non-employee directors" (within the meaning of Rule 16b-3 of the Securities
Exchange Act of 1934, as amended) and "outside directors". The Compensation
Committee's role is to review and approve practices and policies related to
compensation primarily for executive officers, including the Chairman and Chief
Executive Officer and the Named Executive Officers. To assist the Compensation
Committee establish executive compensation for fiscal 2005, the Compensation
Committee retained the services of Watson Wyatt & Co. as an independent
consultant to assist the Compensation Committee in reviewing is executive
officer compensation scheme.
Compensation Philosophy
The Compensation Committee's philosophy with respect to the compensation of its
executive officers is to offer a compensation package which includes a
competitive salary, competitive benefits, a supportive workplace environment and
bonus and stock options awards based upon the achievement of individual and
company performance goals established by the Board of Directors annually as an
incentive for superior corporate performance. Executive officer salaries are
reviewed annually by the Compensation Committee which makes recommendations to
the Board of Directors for its approval of the salaries, bonuses, and stock
option grants to be awarded to Metropolitan's executive officers. Base salaries
are maintained at competitive market levels and any incentives are linked
closely to financial performance. The Company maintains a pay-for-performance
culture, where a portion of executive compensation is linked to performance.
This emphasis on at-risk compensation supports the Company's goal to control
costs, which is critical to the Company's continued success. It is also the
Compensation Committee's practice to provide a balanced mix of cash and
equity-based compensation that the Committee believes appropriate to align the
short- and long-term interests of the Company's executives with that of its
shareholders and to encourage executives to act as equity owners of the Company.
The Company's executive compensation program consists of the core elements
described below.
- 57 -
Base Salaries
In determining base salaries, the Company identifies a reasonable range around
the median for comparable executive positions in a comparison group of
companies. In setting the compensation of the Company's executive officers for
2005, the Compensation Committee compared the Company's senior management
compensation levels with those of a group of thirteen peer companies (the
"Compensation Comparison Group") generally considered to be comparable to the
Company.
Officer salaries are generally set within the median range based on individual
performance and experience. Annual salary increases, if any, are determined
based on a variety of factors including average increases in comparison
companies, individual performance, competitiveness of the officer's salary, the
Company's financial condition and operating results, and other variable
components of compensation.
For fiscal year 2005, the Chairman and Chief Executive Officer and Chief
Operating Officer were awarded 20% base salary increases. The Chief Financial
Officer and the General Counsel were awarded 19% base salary increases.
Annual Incentives
Awards of annual performance incentives are based upon individual-specific and
company-specific performance goals. The Compensation Committee recommends awards
of bonuses as a percentage of base salary upon the achievement of the various
pre-determined performance goals throughout the year. Individual-specific
performance goals are determined annually by the Board of Directors for the
Chairman and Chief Executive Officer and by the Chairman and Chief Executive
Officer for all other executive officers. For fiscal year 2005, the Board of
Directors adopted company-specific performance goals related to the Company's
attainment of a specified level of operating income and the status of its
developing HMO business segment. Bonuses are generally paid in the form of cash
or restricted stock, or a combination of both.
Other than a $25,000 bonus compensation awarded to Dr. Jose Guethon, President
of the Company's PSN, no bonus compensation was awarded to any of the Named
Executive Officers for performance in fiscal year 2005.
- 58 -
Long Term Incentive Awards
Long term-term incentive awards for executive officers have generally consisted
of grants of stock options. In consultation with independent consultants such as
Watson Wyatt & Co. and/or with management, the Compensation Committee determines
the value of the award to be granted to each recipient.
Other than a grant of 200,000 stock options to Jose Guethon, M.D. upon his
appointment as President of the PSN, no other stock options were granted in 2005
to Named Executive Officers. The stock options granted to Dr. Guethon were
granted pursuant to the Company's Omnibus Equity Compensation Plan and vest in
four equal annual installments, with the first 50,000 options scheduled to vest
on December 9, 2006.
Chairman and Chief Executive Officer Compensation
The Compensation Committee has previously established that the corporate goals
and objectives relevant to Michael M. Earley's, Chairman and Chief Executive
Officer, compensation include, among other things, (i) diversification,
expansion, and broadening of the Company's core business and new service
offerings; (ii) an increase in shareholder value, (iii) fulfillment of customer
expectations, (iv) out-performance of the competition, (v) development of an
employee-valued culture, and (vi) enhancement of social responsibility.
In determining Mr. Earley's overall annual compensation for fiscal year 2005,
the Compensation Committee considered Mr. Earley's performance as the Chairman
and Chief Executive Officer in 2004, in light of the goals described in the
paragraph above, the Company's performance for the fiscal year 2005, and the
findings of Watson Wyatt & Company's study of the Company's executive
compensation scheme. The Compensation Committee recommended to the Board that
Mr. Earley's salary be set at $300,000 for fiscal year 2005. The Compensation
Committee believes that, in light of Mr. Earley's satisfaction of certain
individual goals and Metropolitan's achievement of performance goals for the
fiscal year 2004, the compensation paid to Mr. Earley as Chairman and Chief
Executive Officer for fiscal year 2005 was reasonable when compared to the
compensation paid to other chief executive officers of public companies
competing in the same market as Metropolitan.
Corporate Tax Considerations
The Internal Revenue Code disallows corporate tax deductions for executive
compensation in excess of $1 million for any of the Chairman and Chief Executive
Officer and the next four most highly-compensated officers of the Company.
Internal Revenue Code Section 162(m) allows certain exemptions to the deduction
cap, including pay programs that depend on formulas and, therefore, are
"performance-based."
The Compensation Committee considers the deductibility of compensation when
reviewing and approving pay levels and pay programs; but reserves the right to
award compensation that is not deductible under 162(m) if it's determined to be
in the best interests of the Company and its shareholders. At the present time,
the Company is not at risk of losing a deduction under 162(m) because no
individual covered by the law receives compensation in excess of $1 million.
The Compensation Committee
Martin W. Harrison, M.D.
Eric Haskell
Karl M. Sachs
- 59 -
Compensation of Directors
For fiscal 2005, each of Metropolitan's non-employee directors received a
$20,000 fee for his or her service on our Board of Directors. The Chairpersons
of our Governance & Nominating Committee, Compensation Committee and Audit &
Finance Committee also received an additional annual fee of $2,000, $4,000 and
$6,000 for service in 2005.
In addition, each of our non-employee directors receives $1,500 per meeting of
the Board of Directors attended in person, together with reimbursement of travel
expenses. Non-employee board members receive $750 for attending board meetings
telephonically. Members of the Audit and Finance Committee, Compensation
Committee and Governance and Nominating Committee receive $1,000 for each
meeting of such Board committee attended in person and $500 for each meeting of
such Board committee attended telephonically.
In the year ended December 31, 2005, Metropolitan granted options to purchase
25,000 shares of our Common Stock to each of our non-employee directors.
Metropolitan also entered into employment agreements with Michael Earley and
Debra Finnel as described in the section above entitled "Employment Agreements."
Otherwise, except (i) as described above, (ii) for reimbursement for reasonable
expenses relating to their activities as members of our Board of Directors and
(iii) the grant of stock options, directors are not compensated for their
services as directors.
Performance Graph
The following graph depicts Metropolitan's cumulative total return for the last
five fiscal years relative to the cumulative total returns of the NASDAQ Stock
Market Index and the Nasdaq Healthcare Index. All indices shown in the graph
have been reset to a base of $100 as of December 31, 2000 and assume an
investment of $100 on that date and the reinvestment of dividends paid since
that date.
- 60 -
[Line Chart]
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2005
2000 2001 2002 2003 2004 2005
------- ------- ------- ------- ------- -------
Metropolitan Health Networks Inc 100.00 171.43 20.24 90.48 336.90 285.71
NASDAQ Composite - Total Returns 100.00 79.21 54.46 82.12 89.65 91.54
NASDAQ Health Services 100.00 108.11 93.14 142.44 179.53 246.85
SIC Codes [8000 - 8099] 100.00 101.19 77.25 96.52 110.23 126.06
- 61 -
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding Metropolitan's
Common Stock beneficially owned at March 1, 2006 (i) by each person who is known
by us to beneficially own more than 5% of our Common Stock; (ii) by each of our
directors and named executive officers; and (iii) by named executive officers
and directors as a group. Unless otherwise indicated, each of the shareholders
has sole voting and investment power with respect to the shares of Common Stock
beneficially owned, subject to the community property laws, where these rules
apply.
Amount of Percentage
Name of Beneficial Owner Beneficial Ownership (1) of Class (1)(2)
------------------------ ------------------------ ---------------
Martin W. Harrison, M.D. (3).......................... 5,887,169 11.35%
Karl M. Sachs (4)..................................... 817,066 1.58
Debra A. Finnel (5)................................... 1,032,459 1.99
David S. Gartner (6).................................. 326,776 0.63
Michael M. Earley (7)................................. 537,399 1.04
Roberto L. Palenzuela (8)............................. 132,420 0.26
Jose A. Guethon, M.D. (9)............................ 75,000 0.14
Eric Haskell (10)..................................... 65,333 0.13
Barry T. Zeman (11)................................... 70,064 0.14
Norman Pessin (12).................................... 2,596,655 5.01
Fundamental Management Corporation (13)............... 2,530,000 4.88
Directors and Executive Officers as a Group........... 8,943,686 17.24
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 1, 2006 upon exercise of
options, warrants and convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that options, warrants and
convertible securities that are held by such person (but not those held by
any other person) and that are exercisable within 60 days from March 1,
2006 have been exercised.
(2) Applicable percentage ownership is based on 49,876,526 shares of Common
Stock outstanding as of March 1, 2006.
(3) 250 Australian Ave., Suite 400, West Palm Beach, FL. 33401. Includes (i)
4,872,169 shares owned directly by Dr. Harrison, (ii) 900,000 shares owned
by H30, Inc., a corporation for which Dr. Harrison serves as a Director,
(iii) 20,000 shares issuable upon exercise of options at a price of $0.91,
expiring November 2006, (iv) 70,000 shares issuable upon exercise of
options at a price of $0.70, expiring December 2008, and (v) 25,000 shares
issuable upon exercise of options at a price of $1.83, expiring November
2005. Does not include 25,000 shares issuable upon the exercise of options
at a price of $2.05 that have not yet vested.
(4) 3675 Coral Way, Miami, Florida 33145. Includes (i) 792,066 shares owned
directly by Karl M. Sachs and (ii) 25,000 shares issuable upon the
exercise of options at an exercise price of $1.83. Does not include 25,000
shares issuable upon the exercise of options at an exercise price of $2.05
that have not yet vested.
(5) 250 Australian Ave., Suite 400, West Palm Beach, FL. 33401. Includes (i)
82,459 shares owned directly by Debra A. Finnel, (ii) 100,000 shares
issuable upon the exercise of options at $0.50 per share, expiring between
October 2006 and October 2007, (iii) 300,000 shares issuable upon the
exercise of options at a price of $1.00, expiring between 1/1/07 and
1/1/09, (iv) 350,000 shares issuable upon the exercise of options at a
price of $0.35, expiring in September 2008, and (v) 200,000 shares
issuable upon the exercise of options at an exercise price of $1.83 per
share, expiring in November 2015. Does not include 600,000 shares issuable
upon the exercise of options at a price of $1.83 that have not yet vested.
(6) 250 Australian Ave., Suite 400, West Palm Beach, FL. 33401. Includes (i)
109,276 shares owned directly by David S. Gartner and (ii) 180,000 shares
issuable upon the exercise of options at an exercise price of $0.35 per
share, expiring between December 2008 and December 2009 and (iii) 37,500
shares issuable upon the exercise of options at an exercise price of $1.83
per share, expiring in November 2015. Does not include 112,500 shares
issuable upon the exercise of options at a price of $1.83 that have not
yet vested.
- 62 -
(7) 250 Australian Ave., Suite 400, West Palm Beach, FL. 33401. Includes (i)
67,399 shares owned directly by Michael Earley, (ii) 20,000 shares
issuable upon the exercise of options at a price of $0.30 per share,
expiring in June 2006, (iii) 350,000 shares issuable upon the exercise of
options at a price of $0.35 per share, expiring between December 2008 and
December 2010 and (iv) 100,000 shares issuable upon the exercise of
options at a price of $1.83 per share, expiring in November 2015. Does not
include 300,000 shares issuable upon the exercise of options at a price of
$1.83 per share that have not yet vested
(8) 250 Australian Ave., Suite 400, West Palm Beach, FL. 33401. Includes (i)
7,420 shares owned directly by Mr. Palenzuela, (ii) 100,000 shares
issuable upon the exercise of options at a price of $0.67, expiring
between March 2010 and March 201, (iii) 25,000 shares issuable upon the
exercise of options at a price of $1.83 per share, expiring in November
2015. Does not include 50,000 shares issuable upon the exercise of options
at an exercise price of $0.67 and 75,000 shares issuable upon the exercise
of options at a price of $1.83 that have not yet vested.
(9) 250 Australian Ave., Suite 400, West Palm Beach, FL. 33401. Includes (i)
16,000 shares issuable upon the exercise of options at an exercise price
of $0.35 and (ii) 25,000 shares issuable upon the exercise of options at
an exercise price of $1.83. Does not include 75,000 shares issuable upon
the exercise of options at an exercise price of $1.83 and 200,000 shares
issuable upon the exercise of options at an exercise price of $2.05.
(10) 518 Candace Lane, Villanova, PA. 19085. Includes (i) 40,333 shares owned
directly by Eric Haskell and (ii) 25,000 shares issuable upon the exercise
of options at an exercise price of $1.83. Does not include 25,000 shares
issuable upon the exercise of options at an exercise price of $2.05 that
have not yet vested.
(11) 26 Beaver Street, New York City, New York 10004. Includes (i) 30,250
shares owned directly by Barry Zeman, (ii) 5,614 owned by his spouse,
(iii) 9,200 shares held in his IRA and (iv)25,000 shares issuable upon the
exercise of options at an exercise price of $1.83. Does not include 25,000
shares issuable upon the exercise of options at an exercise price of $2.05
that have not yet vested.
(12) 605 Third Avenue, 14th floor, New York, NY, 10158. Includes (1) 50,000
shares owned by Norman H. Pessin, (2) 699,883 shares owned by Sandra F.
Pessin and (3) 1,846,772 owned f/b/o Norman H. Pessin SEP IRA.
(13) 8567 Coral Way, #138, Miami, FL 33155. Includes (1) 930,000 shares owned
by Active Investors II, Ltd. and (2) 1,600,000 shares owned by Active
Investors III, Ltd.
Equity Compensation Plans
The following table provides certain information regarding Metropolitan's
existing equity compensation plans as of December 31, 2005:
Number of securities Number of
to be issued upon Weighted- average securities
exercise of exercise price of remaining available
outstanding options, outstanding for issuance under
warrants options, warrants equity compensation
and rights and rights plans
------------------------ --------------------- ---------------------
Equity compensation plans approved by
security holders ........................... 6,385,810 $1.63 2,638,400
------------------------ --------------------- ---------------------
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ending December 31, 2005, Metropolitan paid Vitreo
Retinal Consultants, a company owned by Dr. Salomon Melgen, one of its former
directors, $17,000 for services rendered as a provider to Metropolitan's PSN
during the time he was a director. The fees paid were usual and customary for
the services provided. Dr. Melgen resigned as a director of Metropolitan
effective January 13, 2005.
- 63 -
Effective September 1, 2005, the Company entered into an agreement (the
"Consulting Agreement") with Finnel Enterprises, Inc. ("Finnel Enterprises")
pursuant to which Finnel Enterprises agreed to act as the Construction
Management Supervisor in connection with construction required for the Company's
offices located in Sarasota, Ft. Myers, Stuart and West Palm Beach. Mr. Thomas
Finnel, the husband of Metropolitan's Chief Operating Officer, is the President
of Finnel Enterprises. Pursuant to the Consulting Agreement, which was amended
on October 1, 2005, the Company agreed to pay Finnel Enterprises an aggregate of
$28,602, in four equal monthly installments, for services provided under the
Consulting Agreement. The Consulting Agreement expired on February 28, 2006. As
of December 31, 2005, the Company had paid Finnel Enterprises an aggregate of
$21,452 for services provided in accordance with the Consulting Agreement.
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
Kaufman, Rossin & Co., P.A. ("Kaufman") served as Metropolitan's independent
auditors for the fiscal years ended December 31, 2005 and December 31, 2004. In
addition to performing the audit of the Company's consolidated financial
statements, Kaufman provided various other services during fiscal 2005 and 2004.
The following table presents fees billed in each of the last two fiscal years
for services rendered by Kaufman:
Fiscal Year Ended Audit Fees (1) Audit-Related Fees (2) Tax Fees (3) All Other Fees (4)
----------------- ---------------- ---------------------- --------------- ------------------
December 31, 2005 $ 376,701 $ 12,565 $ 38,651 $ 0
December 31, 2004 $ 233,318 $ 22,943 $ 24,810 $ 16,651
(1) "Audit Fees" represents the aggregate fees billed during the applicable
fiscal year for professional services rendered for the audit of Metropolitan's
annual financial statements, the reviews of the financial statements included in
its Quarterly Reports on Form 10-Q and the audits of its internal controls
and/or services normally provided by Kaufman in connection with statutory or
regulatory filings or engagements by Metropolitan during such fiscal year.
(2) "Audit Related Fees" represents the aggregate fees billed during the
applicable fiscal year for assurance and related services reasonably related to
the performance of the audit of Metropolitan's annual financial statements for
those years. For the two years, all audit-related fees were incurred in
connection with SEC registration statement consent procedures.
(3) "Tax Fees" represents the aggregate fees billed during the applicable fiscal
year for the preparation of Metropolitan's federal and state income tax returns.
The "Tax Fees" also included fees billed for professional services related to
tax compliance.
(4) "All Other Fees" represents fees billed for other products and services
rendered by Kaufman to Metropolitan. In 2004 these fees consisted primarily of
services provided in connection with Metropolitan's investigation by the U.S.
Attorneys' Office in Wilmington, Delaware.
Pre-Approval Policies and Procedures of the Audit & Finance Committee
Kaufman was Metropolitan's independent auditor for the years ended December 31,
2004 and December 31, 2005. Consistent with policies of the Securities and
Exchange Commission regarding auditor independence, the Audit and Finance
Committee has responsibility for the appointment, compensation and oversight of
the work of the independent auditor. As part of this responsibility, the Audit
Committee has adopted and our Board has ratified an Audit and Non-Audit Services
Pre-Approval Policy pursuant to which the Audit and Finance Committee is
required to pre-approve the audit and non-audit services performed by the
independent registered public accounting firm in order to assure that they do
not impair the auditor's independence from the Company.
- 64 -
Prior to engagement of the independent auditor for the next year's audit, the
independent auditor and the Chief Financial Officer submits a list of services
and related fees expected to be rendered during that year within each of four
categories of services to the audit committee for approval:
(i) Audit Services: Audit services include the annual financial statement
audit (including required quarterly reviews), subsidiary audits, equity
investment audits and other procedures required to be performed by the
independent auditor to be able to form an opinion on our consolidated financial
statements. Audit Services also include information systems and procedural
reviews and testing performed in order to understand and place reliance on the
systems of internal control, and consultations relating to the audit or
quarterly review as well as the attestation engagement for the independent
auditor's report on management's report on internal controls for financial
reporting.
(ii) Audit-Related Services: Audit-related services are assurance and
related services that are reasonably related to the performance of the audit or
review of our financial statements, including due diligence related to potential
business acquisitions/dispositions; accounting consultations related to
accounting, financial reporting or disclosure matters not classified as "Audit
services"; assistance with understanding and implementing new accounting and
financial reporting guidance from rulemaking authorities; financial audits of
employee benefit plans; agreed-upon or expanded audit procedures related to
accounting and/or billing records required to respond to or comply with
financial, accounting or regulatory reporting matters; and assistance with
internal control reporting requirements.
(iii) Tax Services: Tax services include services such as tax compliance,
tax planning and tax advice; however, the Audit and Finance committee will not
permit the retention of the independent registered public accounting firm in
connection with a transaction initially recommended by the independent
registered public accounting firm the sole business purpose of which may be tax
avoidance and treatment of which may not be supported in the Internal Revenue
Code and related regulations.
(iv) All Other Services: All other services are those permissible
non-audit services that the Audit and Finance Committee believes are routine and
recurring and would not impair the independence of the auditor and are
consistent with the Securities and Exchange Commission's rules on auditor
independence.
Prior to engagement, the Audit and Finance Committee pre-approves the services
and fees of the independent auditor within each of the above categories. During
the year, it may become necessary to engage the independent auditor for
additional services not previously contemplated as part of the engagement. In
those instances, the Audit and Non-Audit Services Pre-Approval Policy requires
that the Audit and Finance Committee specifically approve the services prior to
the independent auditor's commencement of those additional services. Under the
Audit and Non-Audit Services Pre-Approval Policy the Audit and Finance committee
may delegate the ability to pre-approve audit and non-audit services to one or
more of its members provided the delegate reports any pre-approval decision to
the Audit and Finance Committee at its next scheduled meeting. As of the date
hereof, the Audit and Finance Committee has not delegated its ability to
pre-approve audit services.
- 65 -
All of the 2004 and 2005 fees paid to Kaufman described above were pre-approved
by the full Audit and Finance committee in accordance with the Audit and
Non-Audit Services Pre-Approval Policy.
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this Form 10-K:
(1) Financial Statements.
- 66 -
METROPOLITAN HEALTH
NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM................................. F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets .................................................................... F-3
Statements of Operations........................................................... F-4
Statements of Changes in Stockholders' Equity (Deficiency in Assets)............... F-5
Statements of Cash Flows........................................................... F-6-F7
Notes to Financial Statements...................................................... F-8-F-23
F-1-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Metropolitan Health Networks, Inc. and Subsidiaries
West Palm Beach, Florida
We have audited the accompanying consolidated balance sheets of Metropolitan
Health Networks, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of operations, changes in stockholders' equity
(deficiency in assets), and cash flows for each of the three years in the period
ended December 31, 2005. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Metropolitan Health
Networks, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Metropolitan
Health Networks, Inc.'s internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 11, 2006 expressed an unqualified opinion on
management's assessment of internal control over financial reporting and an
unqualified opinion on the effectiveness of internal control over financial
reporting.
KAUFMAN, ROSSIN & CO., P.A.
Miami, Florida
March 11, 2006
F-2-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
December 31,
ASSETS 2005 2004
------ ------------ ------------
CURRENT ASSETS
Cash and equivalents $ 15,572,862 $ 11,344,113
Short-term investments -- 1,500,000
Accounts receivable, net of allowance of $555,295 and $2,921,156,
respectively 4,183,974 1,474,438
Inventory 201,430 217,630
Prepaid expenses 473,286 422,839
Deferred income taxes 3,500,000 3,400,000
Other current assets 547,976 563,991
------------ ------------
TOTAL CURRENT ASSETS 24,479,528 18,923,011
CERTIFICATES OF DEPOSIT - restricted -- 1,000,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $2,210,044 and $2,643,107, respectively 899,998 824,003
INVESTMENTS 627,819 --
GOODWILL 1,992,133 1,992,133
DEFERRED INCOME TAXES 4,493,000 4,881,110
OTHER ASSETS 622,628 417,006
------------ ------------
TOTAL ASSETS $ 33,115,106 $ 28,037,263
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 969,184 $ 840,470
Accrued payroll and payroll taxes 1,459,098 1,317,430
Estimated medical expenses payable 694,410 --
Accrued expenses 293,552 184,733
Current maturities of long-term debt -- 882,000
------------ ------------
TOTAL CURRENT LIABILITIES 3,416,244 3,224,633
LONG-TERM DEBT -- 250,000
------------ ------------
TOTAL LIABILITIES 3,416,244 3,474,633
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.001 per share; stated value $100 per share;
10,000,000 shares authorized; 5,000 issued and outstanding 500,000 500,000
Common stock, par value $.001 per share; 80,000,000 shares authorized;
49,851,526 and 48,004,262 issued and outstanding, respectively 49,851 48,004
Additional paid-in capital 40,182,889 37,527,529
Accumulated deficit (11,033,878) (13,415,621)
Common stock issued for services to be rendered -- (97,282)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 29,698,862 24,562,630
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,115,106 $ 28,037,263
============ ============
See accompanying notes to consolidated financial statements.
F-3-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
For the years ended December 31,
2005 2004 2003
------------- ------------- -------------
REVENUES, net $ 183,765,191 $ 158,069,791 $ 143,874,488
------------- ------------- -------------
OPERATING EXPENSES
Direct medical costs 154,784,254 129,178,725 121,010,410
Other medical costs 10,346,491 8,577,482 8,374,274
------------- ------------- -------------
Total medical expenses 165,130,745 137,756,207 129,384,684
Administrative payroll, payroll taxes and benefits 6,866,806 4,394,415 3,856,586
Marketing and advertising 2,754,198 138,823 106
Bad debt expense -- -- 100,000
General and administrative 5,780,764 3,924,431 3,426,684
------------- ------------- -------------
TOTAL EXPENSES 180,532,513 146,213,876 136,768,060
------------- ------------- -------------
OPERATING INCOME 3,232,678 11,855,915 7,106,428
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest and penalty expense (14,462) (296,035) (1,218,208)
Interest income 449,752 100,506 26,758
Other 129,913 13,346 (53,675)
Recovery on note receivable - pharmacy 51,668 -- --
Reserve on note receivable - pharmacy -- (200,000) --
------------- ------------- -------------
TOTAL OTHER INCOME (EXPENSE) 616,871 (382,183) (1,245,125)
------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 3,849,549 11,473,732 5,861,303
INCOME TAXES (1,467,806) 7,380,246 --
------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS
2,381,743 18,853,978 5,861,303
DISCONTINUED OPERATIONS, NET OF TAX:
Gain (loss) on disposal of business segments -- -- 289,605
Loss from operations of business segments -- (31,266) (1,749,155)
------------- ------------- -------------
TOTAL DISCONTINUED OPERATIONS, NET OF TAX -- (31,266) (1,459,550)
------------- ------------- -------------
NET INCOME $ 2,381,743 $ 18,822,712 $ 4,401,753
============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE:
INCOME FROM CONTINUING OPERATIONS:
Basic $ 0.05 $ 0.42 $ 0.17
============= ============= =============
Diluted $ 0.05 $ 0.38 $ 0.13
============= ============= =============
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX:
Basic $ -- $ -- $ (0.04)
============= ============= =============
Diluted $ -- $ -- $ (0.03)
============= ============= =============
NET EARNINGS PER SHARE:
Basic $ 0.05 $ 0.42 $ 0.13
============= ============= =============
Diluted $ 0.05 $ 0.38 $ 0.10
============= ============= =============
See accompanying notes to consolidated financial statements.
F-4-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
================================================================================
Common
Preferred Preferred Stock Common
Shares Stock Shares Stock
----------- ----------- -------------- ------------
BALANCES - DECEMBER 31, 2002 5,000 $ 500,000 31,376,822 $ 31,376
Shares issued upon conversion of
convertible debt -- -- 3,670,214 3,670
Shares issued for consulting services
and compensation -- -- (480,000) (480)
Shares issued for compensation -- -- 100,000 100
Exercise of options and warrants -- -- 110,000 110
Shares issued for directors' fees -- -- 329,760 330
Shares issued for interest expense, late
fees and loan extension -- -- 2,865,272 2,865
Shares issued in settlement -- -- 555,631 556
Amortization of securities issued for
professional services -- -- -- --
Net income -- -- -- --
---------- ------------ -------------- ------------
BALANCES - DECEMBER 31, 2003 5,000 500,000 38,527,699 38,527
Shares issued in connection with
private placement, net of offering costs -- -- 5,004,999 5,005
Shares issued upon conversion of
convertible debt -- -- 1,868,055 1,869
Exercise of options and warrants -- -- 2,269,202 2,269
Repurchase of warrants -- -- -- --
Shares issued for directors' fees -- -- 233,292 233
Shares issued for interest expense and
late fees -- -- 1,015 1
Shares issued in connection with
loan extension -- -- 100,000 100
Amortization of securities issued for
professional services -- -- -- --
Tax benefit on exercise of options -- --
Net income -- -- -- --
---------- ------------ -------------- ------------
BALANCES - DECEMBER 31, 2004 5,000 500,000 48,004,262 48,004
Shares issued for compensation -- -- 47,614 48
Exercise of options and warrants -- -- 1,799,650 1,799
Repurchase of warrants -- -- -- --
Amortization of securities issued for
professional services -- -- -- --
Tax benefit on exercise of options -- -- -- --
Net income -- -- -- --
---------- ------------ -------------- ------------
BALANCES - DECEMBER 31, 2005 5,000 $ 500,000 49,851,526 $ 49,851
========== ============ ============== ============
Additional
Paid-in Prepaid Accumulated
Capital Expenses Deficit Total
------------ ---------- ------------- ------------
BALANCES - DECEMBER 31, 2002 $ 29,660,886 $ (420,469) $(36,640,086) $ (6,868,293)
Shares issued upon conversion of
convertible debt 1,093,834 -- -- 1,097,504
Shares issued for consulting services
and compensation (63,521) 64,001 -- --
Shares issued for compensation 18,900 -- -- 19,000
Exercise of options and warrants 34,390 -- -- 34,500
Shares issued for directors' fees 57,170 -- -- 57,500
Shares issued for interest expense, late
fees and loan extension 386,195 (120,000) -- 269,060
Shares issued in settlement 156,033 -- -- 156,589
Amortization of securities issued for
professional services -- 329,726 -- 329,726
Net income -- -- 4,401,753 4,401,753
------------ ------------ ------------ ------------
BALANCES - DECEMBER 31, 2003 31,343,887 (146,742) (32,238,333) (502,661)
Shares issued in connection with
private placement, net of offering costs 2,947,995 -- -- 2,953,000
Shares issued upon conversion of
convertible debt 1,013,131 1,015,000
Exercise of options and warrants 1,142,972 -- -- 1,145,241
Repurchase of warrants (113,250) -- -- (113,250)
Shares issued for directors' fees 249,651 -- -- 249,884
Shares issued for interest expense and
late fees 576 -- -- 577
Shares issued in connection with
loan extension 60,567 (60,667) -- --
Amortization of securities issued for
professional services -- 110,127 -- 110,127
Tax benefit on exercise of options 882,000 882,000
Net income -- -- 18,822,712 18,822,712
------------ ------------ ------------ ------------
BALANCES - DECEMBER 31, 2004 37,527,529 (97,282) (13,415,621) 24,562,630
Shares issued for compensation 134,702 -- -- 134,750
Exercise of options and warrants 1,426,658 -- -- 1,428,457
Repurchase of warrants (85,000) -- -- (85,000)
Amortization of securities issued for
professional services -- 97,282 -- 97,282
Tax benefit on exercise of options 1,179,000 -- -- 1,179,000
Net income -- -- 2,381,743 2,381,743
------------ ------------ ------------ ------------
BALANCES - DECEMBER 31, 2005 $ 40,182,889 $ -- $(11,033,878) $ 29,698,862
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-5-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
For the years ended December 31,
2005 2004 2003
(Revised)
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,381,743 $ 18,822,712 $ 4,401,753
------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Gain on sale of business segment -- -- (289,605)
Depreciation and amortization 355,318 341,772 529,228
Reserve on note receivable - pharmacy -- 200,000 --
Provision for bad debts and direct write downs -- -- 100,000
Amortization of discount on notes payable -- 52,185 201,092
Stock issued for interest and late fees -- 577 80,000
Stock issued for compensation and services 134,750 249,884 288,598
Amortization of securities issued for professional
services 97,282 110,127 329,726
Deferred income taxes 1,467,110 (7,399,110) --
Changes in operating assets and liabilities:
Accounts receivable, net (2,709,536) 664,253 (587,350)
Inventory 16,200 86,618 (145,534)
Prepaid expenses (50,447) (88,153) (44,014)
Other current assets 16,014 (265,565) (345,202)
Net change in operating assets held for sale -- -- 65,272
Other assets (215,936) (339,581) 42,008
Accounts payable 128,713 (915,877) (1,870,842)
Accrued payroll 235,201 326,181 386,235
Accrued medical expenses payable 694,410 -- --
Accrued expenses 108,820 (350,531) (295,512)
Payroll taxes payable (93,533) (3,315,203) (396,862)
------------ ------------ ------------
Total adjustments 184,366 (10,642,423) (1,952,762)
------------ ------------ ------------
Net cash provided by operating activities 2,566,109 8,180,289 2,448,991
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments 1,500,000 (1,500,000) --
Investments (627,819) -- --
Redemption of restricted certificates of deposit 1,000,000 -- --
Proceeds from sale of pharmacy -- -- 3,100,000
Purchase of restricted certificates of deposit -- -- (150,000)
Net change in investing assets held for sale -- -- (327,596)
Capital expenditures (420,998) (444,074) (140,962)
------------ ------------ ------------
Net cash provided by/(used in) investing
activities 1,451,183 (1,944,074) 2,481,442
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable -- 282,000 637,137
Repayments on notes payable (1,132,000) (1,063,354) (2,181,834)
Repayments on capital lease obligations -- (107,407) (141,229)
Repurchase of warrants (85,000) (113,250) --
Proceeds from exercise of stock options and warrants 1,428,457 1,145,241 34,500
Net proceeds from issuance of common stock -- 2,953,000 --
Repayments to HMO, net -- (164,536) (1,502,417)
------------ ------------ ------------
Net cash provided by/(used in) financing
activities 211,457 2,931,694 (3,153,843)
------------ ------------ ------------
NET INCREASE IN CASH AND EQUIVALENTS 4,228,749 9,167,909 1,776,590
CASH AND EQUIVALENTS - BEGINNING 11,344,113 2,176,204 399,614
------------ ------------ ------------
CASH AND EQUIVALENTS - ENDING $ 15,572,862 $ 11,344,113 $ 2,176,204
============ ============ ============
See accompanying notes to consolidated financial statements.
F-6-
For the years ended December 31,
2005 2004 2003
(Revised)
----------- ---------- ----------
Supplemental Disclosures:
Interest Paid $ 20,195 $ 306,020 $1,383,863
----------- ---------- ----------
Income Taxes Paid $ -- $ -- $ --
----------- ---------- ----------
Supplemental Disclosure of Non-cash Investing and
Financing Activities:
Tax benefit on exercise of stock options $ 1,179.00 $ 882,000 $ --
----------- ---------- ----------
Fair value of assets received in connection with
new medical facility $ -- $ 19,785 $ --
----------- ---------- ----------
Conversion of debt into common stock $ -- $1,015,000 $1,083,465
----------- ---------- ----------
Common stock issued for extension and interest $ -- $ 60,667 $ 75,000
----------- ---------- ----------
fees on loans payable
Common stock issued in connection with settlements $ -- $ -- $ 147,589
----------- ---------- ----------
Conversion of accrued interest to notes payable $ -- $ -- $ 98,505
----------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-7-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of
Metropolitan Health Networks, Inc. and all subsidiaries. The consolidated group
is referred to, collectively, as the Company. All significant intercompany
balances and transactions have been eliminated in consolidation.
Organization and Business Activity
The Company was incorporated in January 1996, under the laws of the
State of Florida for the purpose of acquiring and operating health care related
businesses. Through its provider service network and its health maintenance
organization, the Company provides healthcare benefits to Medicare Advantage
members in certain areas of Florida.
The Company, through its subsidiary Metcare of Florida, Inc, operates
under agreements (the "Humana Agreements") with a national health maintenance
organization, Humana Inc. ("Humana") to provide medical care to Medicare
Advantage beneficiaries. The Company's business with Humana commenced in 1997
and expanded in 1999. The Company operates principally in South and Central
Florida and utilizes wholly-owned medical and contracted non-owned medical
practices, service providers and hospitals, with whom the Company has contracted
directly or indirectly though Humana (see accounts receivable and revenue
recognition).
In June 2001 the Company opened a pharmacy to service its patient base
in Central Florida. Commencing in the third quarter of 2001, the Company
expanded its pharmacy division into New York and Maryland. In November 2003 the
pharmacy operations were sold.
Effective July 1, 2005, the Company's wholly-owned subsidiary, METCARE
Health Plans, Inc. ("MHP"), 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. MHP has been
operating and marketing its "AdvantageCare"-branded plan since July 2005.
Segment Reporting
The Company applies Financial Accounting Standards Boards ("FASB")
statement No. 131, "Disclosure about Segments of an Enterprise and Related
Information". The Company has considered its operations and has determined that
it operated in two operating segments for purposes of presenting financial
information and evaluating performance. As such, the accompanying financial
statements present information in a format that is consistent with the financial
information used by management for internal use.
Cash and Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. From time to time,
the Company maintains cash balances with financial institutions in excess of
federally insured limits.
F-8-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short-Term Investments
All investments with original maturities of greater than 90 days are
accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company determines the appropriate classification of an
investment at the time of purchase. The Company had previously categorized its
short-term investments in auction rate securities as a component of "Cash and
equivalents" in the Company's consolidated balance sheets, but has determined
that categorization as "Short-term investments" is more appropriate.
Accordingly, the short-term investments in auction rate securities have been
reclassified for 2004. The short-term investments consisted of auction rate
securities classified as available-for-sale. Investments in these securities are
recorded at cost, which approximates fair value due to their variable interest
rates, which reset every seven to twenty-eight days. Despite the long-term
nature of their stated contractual maturities, there is a readily liquid market
for these securities. As a result, there are no cumulative gross unrealized
holding gains (losses) or gross realized gains (losses) from short-term
investments. All income generated from these short-term securities was recorded
as interest income.
Reinsurance Receivable
Reinsurance premiums are reported as a direct medical cost in the
accompanying consolidated statement of operations. Estimated reinsurance
recoveries are reported as a reduction of direct medical costs and included on
the consolidated balance sheets as other current assets.
Inventory
Inventory consists principally of prescription drugs that are stated at
the lower of cost or market with cost determined by the first-in, first-out
method.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major
betterments and additions are charged to the asset accounts, while replacements,
maintenance and repairs, which do not extend the lives of the respective assets,
are charged to expense currently.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset.
Depreciation and Amortization
Depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives of the assets. Amortization
of leasehold improvements and property under capital leases is computed on a
straight-line basis over the shorter of the estimated useful lives of the assets
or the term of the lease. The range of useful lives is as follows:
Machinery and equipment.............................................. 5 - 7 years
Computer and office equipment, including items under capital lease... 5 - 7 years
Furniture and fixtures............................................... 5 - 7 years
Auto equipment....................................................... 5 years
Leasehold improvements............................................... 5 years
Long-Term Investments
Long-term investments, which consist of an equity interest in a
non-assessable reciprocal insurance organization through which the Company has
renewed its malpractice insurance, are carried at cost. If an impairment occurs
that is not considered temporary, the investment will be written down to net
realizable value.
Use of Estimates
Revenue, Expense and Receivables
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the accompanying financial statements. The most significant area requiring
estimates relate to the Company's arrangement with Humana and such estimates are
based on knowledge of current events and anticipated future events, and
accordingly, actual results may ultimately differ materially from those
estimates.
F-9-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
With regard to revenues, expenses and receivables arising from
agreements with Humana, the Company estimates amounts it believes will
ultimately be realizable based in part upon estimates of claims incurred but not
reported (IBNR) and estimates of retroactive adjustments or unsettled costs to
be applied by Humana. The IBNR estimates are made by the Humana utilizing
actuarial methods and are continually evaluated by management of theCompany
based upon its specific claims experience. It is reasonably possible that some
or all of these estimates could change in the near term by an amount that could
be material to the financial statements.
From time to time, Humana charges the Company for certain medical
expenses, which the Company believes are not supported by the underlying
agreement between the companies. Management's estimate of recovery on these
contestations is based upon its judgment and its consideration of several
factors including the nature of the contestations, historical recovery rates and
other qualitative factors.
During 2005, the Company incurred approximately $4.0 million of medical
costs related to the implantation of certain Implantable Automatic
Defibrillators ("AICD's"). CMS has directed that the costs of certain of these
procedures that meet 2005 eligibility requirements be paid by CMS, rather than
billed to Medicare Advantage plans. The Company is working with Humana and the
related providers to secure reimbursement for these amounts, and has estimated a
recovery of approximately $2.2 million at December 31, 2005, which is included
in accounts receivable in the accompanying consolidated balance sheets. It is
reasonably possible that this estimate could change in the near term by an
amount that could be material to the financial statements.
Non-Humana fee for service accounts receivable, aggregating
approximately $797,000 and $3.3 million at December 31, 2005 and 2004,
respectively, relate principally to medical services provided on a non-capitated
basis, and are reduced by amounts estimated to be uncollectible (approximately
$555,000 and $2.9 million at December 31, 2005 and 2004, respectively).
Management's estimate of uncollectible amounts is based upon its analysis of
historical collections and other qualitative factors, however it is possible the
company's estimate of uncollectible amounts could change in the near term. In
addition, accounts receivable at December 31, 2005 includes approximately
$159,000 due to the HMO from CMS.
With regards to the HMO, the cost of medical benefits is recognized in
the period in which services are provided and includes an IBNR estimate based on
management's best estimate of medical benefits payable, in conjunction with an
independent actuarial firm. It is reasonably possible that this estimate could
change in the near term by an amount that could be material to the financial
statements.
Deferred Tax Asset
The Company recorded a deferred tax asset of approximately $8.0 million
at December 31, 2005. Realization of the deferred tax asset is dependent on
generating sufficient taxable income in the future. The amount of the deferred
tax asset considered realizable could change in the near term if estimates of
future taxable income are modified and those changes could be material (see Note
6 - Income Taxes).
In the future, if the Company determines that it cannot, on a more
likely than not basis, realize all or part of its deferred tax assets in the
future, an adjustment to establish (or record an increase in) the deferred tax
asset valuation allowance would be charged to income in the period in which such
determination is made.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires that the Company disclose
estimated fair values for its financial instruments. The following methods and
assumptions were used by the Company in estimating the fair values of each class
of financial instruments disclosed herein:
Cash and Certificates of Deposits - The carrying amount approximates
fair value because of the short term nature of those instruments.
Line of Credit Facilities, Capital Lease Obligations, Long-Term Debt -
The fair value of line of credit facilities, capital lease obligations and
long-term debt are estimated using discounted cash flows analyses based on the
Company's incremental borrowing rates for similar types of borrowing
arrangements. At December 31, 2004, the fair values approximate the carrying
values.
F-10-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations
Revenues from Humana accounted for approximately 98% of the Company's
total revenues in 2005, and 99% of the Company's total revenues, excluding
discontinued segments, for each of the two years in the period ended December
31, 2004 and at December 31, 2005 and 2004, Humana represented approximately 90%
and 73% of the total accounts receivable balance, respectively. The Humana
agreements may immediately be terminated in the event that, among other things,
the Company participates in activities Humana reasonably believes may adversely
affect the health or welfare of any member or other material breach, or upon
180-day notice of non-renewal by either party.
Earnings Per Share
The following table sets forth the computations of basic earnings per
share and diluted earnings per share:
For the years ended December 31,
2005 2004 2003
------------ ------------ ------------
Income from continuing operations $ 2,381,743 $ 18,853,978 $ 5,861,303
Loss from discontinued operations, net of tax -- (31,266) (1,459,550)
------------ ------------ ------------
Net Income 2,381,743 18,822,712 4,401,753
Less: Preferred stock dividend (50,000) (50,000) (50,000)
------------ ------------ ------------
Income available to common shareholders $ 2,331,743 $ 18,772,712 $ 4,351,753
============ ============ ============
Denominator:
Weighted average common shares outstanding 48,975,803 45,123,843 34,750,173
============ ============ ============
Basic earnings per common share $ 0.05 $ 0.42 $ 0.13
============ ============ ============
Income available to common shareholders $ 2,331,743 $ 18,772,712 $ 4,351,753
Effect of Dilutive securities:
Preferred stock dividends -- 50,000 50,000
Interest on convertible securities -- 2,565 81,379
------------ ------------ ------------
$ 2,331,743 $ 18,825,277 $ 4,483,132
============ ============ ============
Denominator:
Weighted average common shares outstanding 48,975,803 45,123,843 34,750,173
Common share equivalents of outstanding stock:
Convertible preferred -- 1,301,876 4,901,963
Convertible debt -- 91,081 7,262,703
Options and warrants 2,031,593 3,511,503 --
------------ ------------ ------------
Weighted average common shares outstanding 51,007,396 50,028,303 46,914,839
============ ============ ============
Diluted earnings per common share $ 0.05 $ 0.38 $ 0.10
============ ============ ============
Securities that would potentially dilute basic earnings per share in
the future were not included in the computation of diluted earnings per share
because to do so would have been anti-dilutive. The anti-dilutive securities
consist of the following:
During the fiscal years 2005, 2004 and 2003, the Company had
outstanding options to purchase 973,325, 3,204,800 and 7,328,467 shares of
common stock, respectively. The weighted average exercise price of the options
was $3.49 in 2005, $2.16 in 2004 and $0.94 in 2003.
For the fiscal year 2005, the Company had 5,000 Series A preferred
shares outstanding. Each share of Series A preferred stock was convertible into
shares of common stock at the option of the holder at the lesser of 85% of the
average closing bid price of the common stock for the ten trading days
immediately preceding the conversion or $6.00.
F-11-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the fiscal years 2004 and 2003, the Company had convertible debt in
the amount of $67,000, which could have been converted into the common stock of
the Company at $2.50 per share.
During the fiscal years 2004 and 2003, the Company had outstanding
warrants to purchase 15,000 and 2,924,775 shares of common stock, respectively.
The exercise prices of the warrants are $1.85 in 2004 and range from $0.32 to
$4.00 in 2003.
Accounts Receivable and Revenue Recognition
The Company is a party to certain managed care contracts with Humana
and provides medical care to its patients through wholly-owned and non-owned
medical practices. Accordingly, the Company receives a monthly fee for each
patient that chooses one of the Company's physicians as their primary care
physician in exchange for the Company assuming responsibility for the provision
of all necessary medical services, even those it does not provide directly. Fees
under these contracts are reported as revenues, and the cost of provider
services under these contracts are not included as a deduction to net revenues
of the Company, but are reported as an operating expense. In connection with its
Humana contracts, the Company is exposed to losses to the extent of its share
(100% for Medicare Part B, 100% for Medicare Part A in its Daytona market and
50% for Medicare Part A in South Florida) of deficits, if any, on its
wholly-owned and non-owned managed medical practices.
The Company also recognizes non-Humana fee-for-service revenues, net of
contractual allowances, as medical services are provided to patients by the
Company's wholly-owned medical practices. These services are typically billed to
patients, Medicare, Medicaid, health maintenance organizations and insurance
companies. The Company provides an allowance for uncollectible amounts and for
contractual adjustments relating to the difference between standard charges and
agreed upon rates paid by certain third party payers.
Effective July 1, 2005 the Company had the requisite Florida and
federal licenses, approvals and contract to begin marketing, enrolling and
providing services to Medicare beneficiaries through its own Medicare Advantage
HMO, MHP. The contract with the CMS renews on an annual basis. The Company
receives a monthly premium for each enrollee in its plan and is responsible for
the provision of all covered medical services for that enrollee. Premium
revenues are recognized as income in the period members are entitled to receive
services, and are net of retroactive membership adjustments. Retroactive
membership adjustments result from enrollment changes not yet processed, or not
yet reported by CMS. Changes in revenues from CMS resulting from the periodic
changes in risk adjustment scores for MHP's membership are recognized when the
amounts become determinable and the collectibility is reasonably assured.
Premium revenues amounted to approximately $2,825,000 in the year ended December
31, 2005.
Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred. Marketing and
advertising expense was approximately $2,754,000 and $139,000 for the years
ended December 31, 2005 and 2004, respectively.
Goodwill
In connection with its acquisitions of physician and ancillary
practices, the Company has recorded goodwill of $1,992,133 at December 31, 2005
and 2004, which is the excess of the purchase price over the fair value of the
net assets acquired. The goodwill is attributable to the general reputation of
these businesses in the communities they serve, the collective experience of the
management and other employees and relationships between the physicians and
their patients. The Company has performed its annual impairment evaluation
relating to retained business segments effective January 1 of each year and has
determined that no impairment exists.
Income Taxes
The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109),
which requires income taxes to be accounted for under the asset and liability
method. Under this method, deferred income tax assets and liabilities are
determined based upon differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in earnings in the period that includes the enactment date.
A valuation allowance is established when it is more likely than not that some
or all of the deferred tax assets will not be realized.
F-12-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Based Compensation
As currently permitted by Statement 123, the Company uses the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" and has elected to continue using
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for employee stock options. Compensation expense for
options granted to employees is recorded to the extent the market value of the
underlying stock exceeds the exercise price at the date of grant. For the years
ended December 31, 2005, 2004 and 2003 no compensation expense related to
options was recorded. If compensation expense had been determined based on the
fair value at the grant date for awards in the years ended December 31, 2005,
2004 and 2003, consistent with the provisions of SFAS 123, the Company's net
income and income per share would have been reduced to the pro-forma amounts
indicated below:
For the years ended December 31,
2005 2004 2003
------------- -------------- -------------
Net Income $ 2,381,743 $ 18,822,712 $ 4,401,753
Less: Total stock-based employee compensation
expense determined using the fair value
method, net of related tax (967,904) (141,398) (543,283)
------------- -------------- -------------
Adjusted net income 1,413,839 18,681,314 3,858,470
============= ============== =============
Earnings per share:
Basic, as reported $ 0.05 $ 0.42 $ 0.13
============= ============== =============
Basic, pro forma $ 0.03 $ 0.41 $ 0.11
============= ============== =============
Diluted, as reported $ 0.05 $ 0.38 $ 0.10
============= ============== =============
Diluted, pro forma $ 0.03 $ 0.37 $ 0.08
============= ============== =============
During 2005, management reviewed its volatility assumptions for the
year ended December 31, 2005 and determined that a volatility of 50% more
accurately reflected the historical and projected volatility of its stock price.
Previously, 2005 interim filings reflected a volatility assumption of 75%.
Accordingly, stock based compensation previously reported has been recalculated
to reflect the revised volatility assumption. The net decrease over the amounts
previously reported was approximately $119,000.
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 151, which is
effective for fiscal periods beginning after June 15, 2005. This statement
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. These items are required to be recognized
as current period charges regardless of whether they meet the criterion of "so
abnormal". The adoption of SFAS No. 151 is not anticipated to have a material
impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 153, which is effective for
fiscal periods beginning after June 15, 2005. In the past, the net book value of
the assets relinquished in a non-monetary transaction was used to measure the
value of the assets exchanged. Under SFAS No. 153, assets exchanged in a
non-monetary transaction will be at fair value instead of the net book value of
the asset relinquished, as long as the transaction has commercial substance and
the fair value of the assets exchanged is determinable within reasonable limits.
The adoption of SFAS No. 153 did not have a material effect on the Company's
financial statements.
F-13-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2004, the FASB issued Statement of Financial Accounting
Standard No. 123, as revised, "Share-Based Payments" ("SFAS 123(R)"). The
provisions of the new standard were scheduled to go into effect for all interim
or annual periods beginning after June 15, 2005. SFAS 123(R) requires that
compensation cost for all share-based employee payments be recognized in the
statement of operations based on the fair value of awards on their grant dates,
adjusted to reflect actual forfeitures and the outcome of certain other
conditions. The fair value is generally not re-measured, except in limited
circumstances, or if the award is subsequently modified. The grant-date fair
value of the award will be estimated using option-pricing models. In addition,
certain tax effects of stock option exercises will be reported as a financing
activity rather than an operating activity in the statements of cash flows. The
statement will require the Company to estimate the fair value of stock-based
awards and recognize expense in the statement of operations as the related
services are provided (usually the vesting period). The effect of expensing
stock options under a fair value approach using the Black-Scholes pricing model
on diluted earnings per common share for the years ended December 31, 2005, 2004
and 2003 is disclosed above under the caption, "Stock Based Compensation".
Furthermore, the classification of cash inflows from any excess tax benefit
associated with exercising stock options will change from an operating activity
to a financing activity in the consolidated statements of cash flows with no
impact on total cash flows. We estimate the impact of this change in
classification will decrease operating cash flows and increase financing cash
flows by approximately $1.2 million in 2005 and $900,000 in 2004. This will
change current practice, as, upon adoption, the Company must cease using the
"intrinsic value" method of accounting, currently permitted by APB 25 that
resulted in no expense for all of the Company's stock option awards. In March
2005, the U.S. Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 107 ("SAB 107") which expresses views of the SEC staff
regarding the application of SFAS 123(R). Among other things, SAB 107 provides
interpretive guidance related to the interaction between SFAS 123(R) and certain
SEC rules and regulations, as well as provides the SEC staff's views regarding
the valuation of share-based payment arrangements for public companies. On April
14, 2005, the SEC announced the adoption of a new rule that amends the
compliance dates of SFAS 123(R). The new rule allows companies to implement SFAS
123(R) at the beginning of their next fiscal year instead of the next reporting
period that begins after June 15, 2005 or December 15, 2005 for small business
issuers. The Company has adopted the provisions of the statement as of January
1, 2006. Adoption of the standard may have a material impact on the results of
operations in future periods. However, the impact of adoption will depend on
levels of share-based payments granted in the future.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting
for Conditional Asset Retirement Obligations" ("FIN No. 47"). This
interpretation clarifies that the term "conditional asset retirement obligation"
as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," refers
to a legal obligation to perform an asset retirement activity in which the
timing and/or method of settlement are conditional on a future event that may or
may not be within the control of the entity incurring the obligation. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and/or method of settlement. Thus, the
timing and/or method of settlement may be conditional on a future event.
Accordingly, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. Uncertainty about the timing and/or method of
settlement of a conditional asset retirement obligation should be factored into
the measurement of the liability, rather than the timing of recognition of the
liability, when sufficient information exists. FIN No. 47 was effective for the
Company at the end of the fiscal year ended December 31, 2005. The adoption of
FIN No. 47 did not have a significant impact on the Company's financial position
or results of operations.
SFAS No. 154, Accounting Changes and Error Corrections, was issued in
May 2005 and replaces APB Opinion No. 20 (Accounting Changes) and SFAS No. 3
(Reporting Accounting Changes in Interim Financial Statements). SFAS No. 154
requires retrospective application for voluntary changes in accounting principle
in most instances and is required to be applied to all accounting changes made
in fiscal years beginning after December 15, 2005. The Company's January 1, 2006
adoption of SFAS No. 154 is not expected to have a material impact on the
Company's consolidated financial condition or results of operations.
Reclassifications
Certain amounts in the 2004 and 2003 financial statements have been
reclassified to conform to the 2005 presentation. In 2005, the Company has
separately disclosed the operating, investing and financing portions of cash
flows attributable to discontinued operations, which in prior periods were
reported on a combined basis as a single amount.
F-14-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS AND DISPOSALS
In November 2003, the Company sold the operations of its pharmacy
division for a cash price of $3.1 million, a note receivable of $200,000, and
the assumption of approximately $1.1 million in liabilities. For the year ended
December 31, 2003, the Company recognized a gain of $290,000 on the disposal of
pharmacy operations. During 2004 the Company was unable to collect the balance
due on the note and recorded a provision, which was included in other expense in
the consolidated statements of operations. On February 11, 2005, Metropolitan
and the Purchaser executed a settlement agreement requiring the note to be
repaid in monthly installments ranging from $5,000 to $10,000, with interest at
8%, until paid in full. Approximately $52,000 of this note plus interest was
collected in 2005 and included in other income in the consolidated statements of
operations.
Revenues from operations of discontinued business segments totaled
$12,906,000 for the year ended December 31, 2003. Losses from operations of
discontinued business segments were $31,000 and $1,700,000 for the years ended
December 31, 2004 and 2003, respectively.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
2005 2004
----------- -----------
Machinery and medical equipment $ 135,037 $ 282,441
Furniture and fixtures 773,975 881,880
Leasehold improvements 759,188 895,481
Computer and office equipment 1,380,462 1,345,928
Automobile equipment 61,380 61,380
----------- -----------
3,110,042 3,467,110
Less: accumulated depreciation and amortization (2,210,044) (2,643,107)
----------- -----------
$ 899,998 $ 824,003
=========== ===========
Depreciation and amortization of property and equipment totaled approximately
$345,000, $280,000 and $365,000 for the years ended December 31, 2005, 2004 and
2003, respectively.
During 2005, the Company disposed of fully depreciated fixed assets with
historical costs of $778,066.
NOTE 4. LONG-TERM DEBT
December 31,
Long-term debt consisted of the following: 2005 2004
---------- ----------
Promissory Note payable to a venture capital group; unsecured, with interest
payable quarterly at a rate of 12%. Principal originally due May 24, 2004. In
March 2004, the Company renegotiated an extension, with payments due over
twenty-four months. This note was repaid in full January 2005 $ -- $ 850,000
Promissory Notes payable to Humana; unsecured, with no interest payable. Payable
in twelve equal installments with final payments due December 1, 2005. The
principal sum of these notes may be used for improvements to three of Humana's
owned physician offices, reducing the Promissory Notes in direct proportion to
the amounts spent on such improvements -- 282,000
---------- ----------
-- 1,132,000
Less current maturities 882,000
---------- ----------
Long-term debt $ -- $ 250,000
========== ==========
F-15-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 6, 2005 the Company executed an unsecured commercial line of
credit agreement with a bank, which provides for borrowings and issuance of
letters of credit of up to $1.0 million and expires on March 31, 2006. The
outstanding balance, if any, bears interest at the bank's prime rate. The credit
facility requires the Company to comply with certain financial covenants,
including a minimum liquidity requirement of $2.0 million. The availability
under the line of credit secures a $1.0 million letter of credit that the
Company has caused to be issued in favor of Humana. This arrangement allows for
$1.0 million of cash, which was formerly invested in a certificate of deposit
and recognized as restricted cash on the Company's balance sheets to be
available for operations. As of December 31, 2005, the Company has not utilized
this commercial line of credit.
NOTE 5. RELATED PARTY TRANSACTIONS
During the years ended December 31, 2005, 2004 and 2003, the Company
paid $17,000, $295,000, and $398,000, respectively, to a company owned by a
shareholder and director for services rendered as a physician in the Company's
provider network during the time he was a director. The director resigned from
the Company's board effective January 13, 2005.
Effective September 1, 2005, the Company entered into an agreement with
the husband of its President and Chief Operating Officer. Pursuant to the
Consulting Agreement, which was amended on October 1, 2005, the Company agreed
to pay an aggregate of approximately $29,000 for services provided under the
agreement. As of December 31, 2005, the Company had paid an aggregate of $21,000
for services provided in accordance with the agreement.
NOTE 6. INCOME TAXES
The components of income taxes from continuing operations were as
follows:
December 31,
2005 2004 2003
------------ ------------ ------------
Provision (Benefit) for Income Taxes
Current
Federal $ -- $ -- $ --
State -- -- --
Deferred
Federal 1,253,000 3,696,000 1,236,000
State 215,000 629,000 213,000
Change in Valuation Allowance -- (11,705,000) (1,449,000)
------------ ------------ ------------
Income Tax Expense (Benefit) $ 1,468,000 $ (7,380,000) $ --
============ ============ ============
A reconciliation of the amount computed by applying the statutory
federal income tax rate to income from continuing operations before income taxes
with the Company's income tax expense/(benefit) for the years ended December 31,
2005, 2004 and 2003 is as follows:
For the years ended December 31,
2005 2004 2003
---- ---- ----
Statutory federal tax $ 1,309,000 $ 3,901,000 $ 1,497,000
State income taxes, net of federal income tax benefit 140,000 417,000 159,000
Permanent differences and other 19,000 7,000 (207,000)
Change in valuation allowance -- (11,705,000) (1,449,000)
------------ ------------ ------------
Income tax expense (benefit) $ 1,468,000 $ (7,380,000) $ --
============ ============ ============
F-16-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The approximate deferred tax assets and liabilities were as follows:
DEFERRED TAX ASSETS:
As of December 31,
2005 2004
---- ----
Allowances for doubtful accounts $ 209,000 $1,099,000
Net operating loss carryforward 7,557,000 6,952,000
Reserve on note receivable - pharmacy 60,000 75,000
Charitable contributions carryover 76,000 38,000
Amortization 129,000 134,000
---------- ----------
Total deferred tax assets 8,031,000 8,298,000
---------- ----------
DEFERRED TAX LIABILITIES:
As of December 31,
2005 2004
---- ----
Depreciation 38,000 17,000
---------- ----------
Total deferred tax liabilities 38,000 17,000
---------- ----------
Net deferred tax asset $7,993,000 $8,281,000
========== ==========
SFAS No. 109, Accounting for Income Taxes, requires a valuation
allowance to reduce the deferred tax assets reported if, based on the weight of
the evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. After consideration of all the
evidence, both positive and negative (including, among others, projections of
future taxable income, net operating loss carryforwards and the Company's
profitability in recent years), the Company determined that future realization
of its deferred tax assets was more likely than not and, accordingly, eliminated
the valuation allowance against its deferred tax assets as of December 31, 2004.
In the event it is determined that the Company would not be able to realize all
or part of its net deferred tax assets in the future, an adjustment to record a
deferred tax asset valuation allowance would be charged to income in the period
such determination would be made.
In 2005 and 2004, tax benefits of $1,179,000 and $882,000,
respectively, were recorded directly to equity as a result of the exercise of
non-qualified stock options.
At December 31, 2005, the Company had net operating loss carryforwards
of approximately $20,082,000 expiring in various years through 2022.
NOTE 7. STOCKHOLDERS' EQUITY
As of December 31, 2005, the Company has designated 10,000,000
preferred shares as Series A preferred stock, par value $.001, of which 5,000
were issued and outstanding. Each share of Series A preferred stock has a stated
value of $100 and pays dividends equal to 10% of the stated value per annum. At
December 31, 2005 and 2004, the aggregate and per share amounts of cumulative
dividend arrearages were approximately $416,667 ($83 per share) and $366,667
($73 per share), respectively. Each share of Series A preferred stock is
convertible into shares of common stock at the option of the holder at the
lesser of 85% of the average closing bid price of the common stock for the ten
trading days immediately preceding the conversion or $6.00. The Company has the
right to deny conversion of the Series A preferred stock, at which time the
holder shall be entitled to receive and the Company shall pay additional
cumulative dividends at 5% per annum, together with the initial dividend rate to
equal 15% per annum. In the event of any liquidation, dissolution or winding up
of the Company, holders of the Series A preferred stock shall be entitled to
receive a liquidating distribution before any distribution may be made to
holders of common stock of the Company.
F-17-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has also designated 7,000 shares of preferred stock as
Series B preferred stock, with a stated value of $1,000 per share. At December
31, 2005 and 2004, there were no shares of series B preferred stock issued and
outstanding.
At December 31, 2004, the Company had outstanding warrants to purchase
62,500 shares of common stock. The warrants were exercisable upon issuance with
expiration dates ranging from two to three years and exercise prices ranging
from $0.68 to $1.85. At December 31, 2005, the Company did not have any
outstanding warrants.
In February 2004, the Company issued an aggregate of 5,004,999 shares
of common stock (the "Private Placement Shares") at a price of $0.60 per share
to 24 accredited investors and 1 non-accredited investor. The Company received
$2,953,000 in proceeds, net of offering costs of approximately $50,000, from the
sale of these Private Placement Shares.
NOTE 8. STOCK OPTIONS
As of December 31, 2005, the Company had three nonqualified stock
option plans, which were administered by the Compensation Committee of the Board
of Directors, the 2001 Stock Option Plan, the Supplemental Stock Option Plan,
and the Omnibus Equity Compensation Plan. A total of 6,000,000 shares of the
Company's common stock are authorized for issuance pursuant to awards granted
under the Omnibus Equity Compensation Plan. Under the terms of the Omnibus
Equity Compensation Plan, the options generally expire 10 years after the date
of the grant.
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") in 1997. The Company has elected to continue using
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for employee stock options. Accordingly, compensation
expense has been recorded to the extent that the market value of the underlying
stock exceeded the exercise price at the date of grant. For the years ended
December 31, 2005, 2004 and 2003, there was no compensation expense related to
stock options.
Stock option activity for the three years ended December 31 was as
follows:
Number of Weighted Average
Options Exercise Price
--------------- --------------
Balance, December 31, 2002............................................ 5,205,717 $ 1.46
Granted during the year............................................... 2,710,400 $ 0.38
Exercised and returned during the year................................ (110,000) $ 0.31
Forfeited during the year ............................................ (477,650) $ 3.67
---------------
Balance, December 31, 2003............................................ 7,328,467 $ 0.94
Granted during the year............................................... 2,449,800 $ 1.76
Exercised and returned during the year................................ (1,339,957) $ 0.39
Forfeited during the year............................................. (994,100) $ 1.25
---------------
Balance, December 31, 2004............................................ 7,444,210 $ 1.27
Granted during the year............................................... 1,111,800 $ 2.55
Exercised and returned during the year................................ (1,784,650) $ 0.79
Forfeited during the year............................................. (385,550) $ 1.19
---------------
Balance, December 31, 2005............................................ 6,385,810 $ 1.63
===============
Exercisable, December 31, 2003........................................ 6,840,134 $ 0.97
===============
Exercisable, December 31, 2004........................................ 4,877,678 $ 1.04
===============
Exercisable, December 31, 2005........................................ 4,048,028 $ 1.45
===============
F-18-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at December 31, 2005:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average Weighted Average
Remaining Remaining
Number of Contractual Life Number of Contractual Life
Exercise Price Options (Years) Options (Years)
-------------- ------- ------- ------- -------
$0.300 - $1.000 2,360,510 2.70 2,260,510 2.57
$1.140 - $2.000 2,493,500 7.97 917,518 6.47
$2.050 - $3.000 1,256,800 5.30 595,000 0.56
$3.500 - $4.500 125,000 0.27 125,000 0.27
$5.500 - $6.500 150,000 1.34 150,000 1.34
----------- ----------
6,385,810 4,048,028
=========== ==========
The weighted average fair value per option as of grant date was $0.88
for stock options granted during the year ended December 31, 2005. The
determination of the fair value of all stock options granted during the year
ended December 31, 2005 was based on (i) risk-free interest rate ranging from
2.82% to 4.43%, (ii) expected option lives ranging from one to four and one-half
years, depending on the vesting provisions of each option, (iii) expected
volatility in the market price of the Company's common stock of 50%, and (iv) no
expected dividends on the underlying stock.
The weighted average fair value per option as of grant date was $0.90
for stock options granted during the year ended December 31, 2004. The
determination of the fair value of all stock options granted during the year
ended December 31, 2004 was based on (i) risk-free interest rate ranging from
1.81% to 3.39%, (ii) expected option lives ranging from two to four and one-half
years, depending on the vesting provisions of each option, (iii) expected
volatility in the market price of the Company's common stock of 75%, and (iv) no
expected dividends on the underlying stock.
The weighted average fair value per option as of grant date was $0.21
for stock options granted during the year ended December 31, 2003. The
determination of the fair value of all stock options granted during the year
ended December 31, 2003 was based on (i) risk-free interest rate of 2.28%, (ii)
expected option lives of three years, depending on the vesting provisions of
each option, (iii) expected volatility in the market price of the Company's
common stock of 100%, and (iv) no expected dividends on the underlying stock.
NOTE 9. EMPLOYEE BENEFIT PLAN
As of July 1, 2004, the Company adopted a tax qualified employee
savings and retirement plan covering the Company's eligible employees, the
Metropolitan Health Network 401(k) Plan (the "401(k) Plan"). The 401(k) Plan is
intended to qualify under Section 401 of the Internal Revenue Code (the "Code")
and contains a feature described in Code Section 401(k) under which a
participant may elect to reduce their compensation by the statutorily prescribed
annual limit of $14,000 (for calendar year ending December 31, 2005) and have
the reduced amount contributed to the 401(k) Plan. Under the 401(k) Plan, new
employees are eligible to participate after three consecutive months of service.
The Company may, at its discretion, make a matching contribution and a
non-elective contribution to the 401(k) Plan. The Company has expensed
approximately $125,000 and $75,000 for purposes of making matching contributions
for the years ending December 31, 2005 and 2004, respectively. The rights of the
participants in the 401(k) Plan to the Company's contributions do not fully vest
until such time as the participant has been employed by the Company for three
years.
F-19-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office and medical facilities under various
non-cancelable operating leases. Approximate future minimum payments under these
leases for the years subsequent to December 31, 2005 are as follows:
Annual Sublease Net Minimum
Amount Amount Payment
------ ------ -------
2006 $ 987,000 $ 109,000 $ 878,000
2007 840,000 111,000 729,000
2008 711,000 110,000 601,000
2009 630,000 114,000 516,000
2010 549,000 117,000 432,000
Thereafter 296,000 213,000 83,000
---------------- ---------------- ----------------
Total $ 4,013,000 $ 774,000 $ 3,239,000
================ ================ ================
In connection with the sale of the pharmacy division, the Company has
subleased pharmacy facilities to the purchaser of the pharmacy division. In the
event of such purchaser's default, the Company potentially could be responsible
to fulfill these lease commitments.
The Company leases various office and medical equipment under
non-cancelable operating leases. Approximate future minimum payments under these
leases for the years subsequent to December 31, 2005 are as follows:
2006 $ 834,000
2007 867,000
2008 830,000
2009 811,000
2010 360,000
----------------
Total $ 3,702,000
================
Employment Contracts
The Company has employment contracts with certain executives,
physicians and other clinical and administrative employees. Future annual
minimum payments under these employment agreements subsequent to December 31,
2005 are $2,368,000. This amount is payable in its entirety during the year
ended December 31, 2006.
Administrative Services Agreement
The Company engaged a third party service provider (the "service
provider") to provide various administrative and management services, including,
but not limited to, claims processing and adjudication, certain management
information services, regulatory reporting and customer services pursuant to the
terms of an Administrative Services Agreement (the "Services Agreement"). The
initial term of the Services Agreement is for five years and it expires on June
30, 2010 and thereafter is automatically renewable for additional one-year terms
unless terminated by either party. In addition to approximately $329,000 of
implementation and start-up costs it paid to the service provider during fiscal
2005, the Company compensates the service provider for its management services
based upon the number of enrolled members subject to monthly minimum payments.
The minimum monthly fee is $25,000 per month through June 30, 2006 and increases
to $60,000 per month for the remaining four years. In addition, the service
provider is compensated for providing additional programming services on an
hourly basis. During 2005, the Company paid an aggregate of $158,000 for monthly
services in accordance with the Services Agreement.
F-20-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation
In July 2003 a pharmacy services company (the "Plaintiff") filed a
complaint against the Company and its pharmacy division, Metropolitan Rx,
seeking amounts and damages of up to $2.5 million related to the acquisition of
the Maryland pharmacy operation in October 2001. On November 6, 2003 the parties
reached a settlement on this complaint in the amount of $500,000, of which the
Company had previously accrued $487,000. Pursuant to the settlement, the Company
paid $285,000 in 2003, with the balance plus accrued interest at 10% payable in
monthly installments of $35,000 until paid in full. This amount was paid in full
in 2004.
The Company is a party to certain other claims arising in the ordinary
course of business. Management believes that the outcome of these matters will
not have a material adverse effect on the financial position or the results of
operations of the Company.
Payroll Taxes Payable
In February 2004, the Company was successful in negotiating a
settlement with the IRS on its outstanding payroll tax liabilities for an amount
totaling approximately $3.4 million, which was accrued for at December 31, 2003.
This amount was paid in full.
NOTE 11. SEGMENTS
In 2005, the Company operated in two segments for purposes of
presenting financial information and evaluating performance, the Provider
Service Network (the "PSN") (managed care and direct medical services) and the
HMO. The HMO division began operations July 2005. During 2003, the Company also
operated in two segments, the PSN and the pharmacy. The Company allocated
corporate overhead to the pharmacy during the period that it was operational.
However, the overhead allocation is not included in the losses from operations
of the discontinued business segments shown in the consolidated statements of
operations.
YEAR ENDED DECEMBER 31, 2005 PSN Pharmacy HMO Total
---------------------------- --- -------- --- -----
Revenues from external customers $ 180,940,000 $ -- $ 2,825,000 183,765,000
Interest (expense) income (3,000) -- 75,000 72,000
Depreciation and amortization 60,000 -- 16,000 76,000
Segment gain (loss) before allocated overhead 15,488,000 -- (6,599,000) 8,889,000
Allocated corporate overhead (3,268,000) -- (1,771,000) (5,039,000)
Segment assets 18,006,000 -- 9,114,000 27,120,000
Segment gain (loss) after allocated overhead and before income taxes 12,220,000 -- (8,370,000) 3,850,000
Included in allocated corporate overhead in 2005 were expenses of $5,587,000,
inclusive of depreciation and amortization of $279,000. In addition, interest
revenue was $374,000, interest expense was $11,000, corporate assets were
$5,995,000, inclusive of a deferred tax asset of $5,523,000.
F-21-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004 PSN Pharmacy HMO Total
---------------------------- --- -------- --- -----
Revenues from external customers $ 158,070,000 $ -- $ -- $ 158,070,000
Interest (expense) income (24,000) 13,000 27,000 16,000
Depreciation and amortization 108,000 -- -- 108,000
Segment gain (loss) before allocated overhead 17,242,000 (31,000) (433,000) 16,778,000
Allocated corporate overhead 5,133,000 -- 203,000 5,336,000
Segment assets 16,277,000 1,000 2,727,000 19,005,000
Segment gain (loss) after allocated overhead 12,109,000 (31,000) (636,000) 11,442,000
and before income taxes
Included in allocated corporate overhead in 2004 were expenses of $4,927,000,
inclusive of depreciation and amortization of $262,000. In addition, interest
revenue was $73,000, interest expense was $296,000, corporate assets were
$9,032,000, inclusive of a deferred tax asset of $8,281,000.
YEAR ENDED DECEMBER 31, 2003 PSN Pharmacy HMO Total
---------------------------- --- -------- --- -----
Revenues from external customers $143,874,000 $ -- $ -- $143,874,000
Intersegment revenues from discontinued business segments -- 1,216,000 -- 1,216,000
Interest expense and penalties 107,000 174,000 -- 281,000
Depreciation and amortization 149,000 85,000 -- 234,000
Revenues from discontinued business segments -- 12,906,000 -- 12,906,000
Segment gain (loss) before allocated overhead 11,522,000 (1,488,000) -- 10,034,000
Allocated corporate overhead 3,686,000 1,946,000 -- 5,632,000
Segment assets 8,214,000 83,000 -- 8,297,000
Segment gain (loss) after allocated overhead 7,836,000 (3,434,000) -- 4,402,000
Included in allocated corporate overhead in 2003 were expenses of $4,419,000,
inclusive of depreciation and amortization of $506,000. In addition, interest
revenue was $27,000, interest expense was $1,216,000 and corporate assets were
$927,000.
NOTE 12. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter the Company made three adjustments deemed to
be material to the results of the quarter. The Company recorded a $2.2 million
receivable for estimated recoveries of medical costs (see Note 1). A portion of
the charges which give rise to the estimated recoveries were recorded in prior
quarters. In addition, the Company increased its IBNR estimate by $400,000 and
accrued $911,000 of payroll, payroll taxes and benefits, primarily related to
non-executive employee bonuses and costs associated with the termination of an
employee.
F-22-
METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's Valuation and Qualifying Accounts consists of
the following:
Years Ended December 31,
2005 2004 2003
------------ ------------ ------------
Allowance for doubtful trade accounts - continuing
operations:
Balance at beginning of period $ 2,921,000 $ 2,539,000 $ 4,648,000
Charged to costs and expenses -- -- 100,000
Increase (Deductions) (2,366,000) 382,000 (2,209,000)
------------ ------------ ------------
Balance at end of period $ 555,000 $ 2,921,000 $ 2,539,000
============ ============ ============
Allowance for doubtful trade accounts - discontinued
operations:
Balance at beginning of period $ -- $ -- $ 314,756
Charged to costs and expenses -- -- 786,576
Deductions -- -- (1,101,332)
------------ ------------ ------------
Balance at end of period $ -- $ -- $ --
============ ============ ============
Allowance for note receivable:
Balance at beginning of period $ 200,000 $ -- $ --
Charged to costs and expenses -- 200,000 --
Increase (Deductions) (39,000) -- --
------------ ------------ ------------
Balance at end of period $ 161,000 $ 200,000 $ --
============ ============ ============
Deferred tax asset valuation allowance:
Balance at beginning of period $ -- $ 11,705,000 $ 13,154,000
Additions $ -- -- --
Deductions $ -- (11,705,000) (1,449,000)
------------ ------------ ------------
Balance at end of period $ -- $ -- $ 11,705,000
============ ============ ============
F-23-
(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required information
is inapplicable or has been included in the Notes to Consolidated Financial
Statements.
(3) Exhibits
Certain exhibits have been previously filed with the Commission and are
incorporated herein by reference.
METROPOLITAN HEALTH NETWORKS, INC.
EXHIBIT INDEX
Year Ended December 31, 2005
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.*
10.4 Supplemental Stock Option Plan (5)
10.5 Omnibus Equity Compensation Plan (6)
10.6 Amended and Restated Employment Agreement between Metropolitan and Michael
M. Earley dated January 3, 2005 (8)
10.7 Amended and Restated Employment Agreement between Metropolitan and David
S. Gartner dated January 3, 2005 (8)
10.8 Amended and Restated Employment Agreement between Metropolitan and Roberto
L. Palenzuela dated January 3, 2005 (8)
10.9 Amended and Restated Employment Agreement between Metropolitan and Debra
A. Finnel dated January 3, 2005 (8)
10.10 Employment Agreement between Metcare of Florida, Inc. and Jose A. Guethon,
M.D.*
10.11 Form of Option Award Agreement for Option Grants to Directors pursuant to
the Omnibus Compensation Plan*
10.12 Form of Option Award Agreement for Option Grants to Key Employees pursuant
to the Omnibus Compensation Plan*
10.13 Form of Option Award Agreement for Option Grants to Employees pursuant to
the Omnibus Compensation Plan*
10.14 Agreement between Metcare of Florida, Inc. and the Centers for Medicare
and Medicaid Services*
10.15 Code of Business Conduct and Ethics*
21.1 List of Subsidiaries (7)
23.1 Consent of Independent Auditors*
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*
- 67 -
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002**
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002**
------------------------
* filed herewith
**furnished herewith
(1) Incorporated by reference to Metropolitan's Registration Statement on
Form 8-A12B filed with the Commission on November 19, 2004 (No.
001-32361).
(2) Incorporated by reference to Metropolitan's Current Report on Form 8-K
filed with the Commission on September 30, 2004.
(3) Incorporated by reference to Metropolitan's Amendment to Registration
Statement on Form SB-2/A filed with the Commission on August 2,. 2001
(No. 333-61566). Portions of this document were omitted and were filed
separately with the SEC on or about August 2, 2001 pursuant to a
request for confidential treatment.
(4) Incorporated by reference to Metropolitan's Amendment to Annual Report
for the fiscal 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 Metropolitan's Amendment to Annual Report
for the fiscal year ended December 31, 2003 on Form 10-K/A filed with
the Commission on July 28, 2004.
(6) Incorporated by reference to Metropolitan's Registration Statement on
Form S-8 filed with the Commission on February 24, 2005 (No.
333-122976).
(7) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003, as filed with the
Commission on March 22, 2004.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2004, as filed with the
Commission on March 22, 2005.
- 68 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, this 16th day of March
2006.
METROPOLITAN HEALTH NETWORKS, INC.
By: /s/ MICHAEL M. EARLEY
----------------------------------------
Michael M. Earley, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
March 16, 2006 /s/ MICHAEL M. EARLEY
---------------------------------------------------
Michael M. Earley
Chairman and Chief Executive Officer
March 16, 2006 /s/ DAVID S. GARTNER
---------------------------------------------------
David S. Gartner
Chief Financial Officer
March 16, 2006 /s/ DEBRA A. FINNEL
---------------------------------------------------
Debra A. Finnel
President, Chief Operating Officer and Director
March 16, 2006 /s/ KARL M. SACHS
--------------------------------------------------
Karl M. Sachs
Director
March 16, 2006 /s/ MARTIN W. HARRISON
---------------------------------------------------
Martin W. Harrison
Director
March 16, 2006 /s/ ERIC HASKELL
---------------------------------------------------
Eric Haskell
Director
March 16, 2006 /s/ BARRY T. ZEMAN
---------------------------------------------------
Barry T. Zeman
Director
- 69 -