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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-K/A
  [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Twelve Month Period Ended December 31, 2003 [   ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-28456 Metropolitan Health Networks, Inc.  Florida
    
    65-0635748(State or other jurisdiction of Incorporation or
    
    (I.R.S. Employer Identification No)organization)250 Australian Avenue South, Suite 400West Palm Beach, Fl.
    
    33401(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number: (561) 805-8500 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par value Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
[   ] Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrants knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [   ] No [X] The aggregate market value of the Registrants voting Common Stock held by
non-affiliates of the registrant was approximately $29,281,051 (computed using
the closing price of $0.76 per share of Common Stock on December 31, 2003 as
reported by OTCBB, based on the assumption that directors and officers and more
than 5% stockholders are affiliates). There were 44,912,951 shares of the registrants Common Stock, par value $.001
per share, outstanding on February 27, 2004. DOCUMENTS INCORPORATED BY REFERENCE None.




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TABLE OF CONTENTS  PART IITEM 1 DESCRIPTION OF BUSINESSITEM 2 DESCRIPTION OF PROPERTYITEM 3 LEGAL PROCEEDINGSITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERSITEM 6 SELECTED FINANCIAL DATAITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONSITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. Controls and ProceduresPART IIIITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACTITEM 11 EXECUTIVE COMPENSATION.ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVITEM 15 EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.EXHIBIT INDEXSIGNATURESLetter Agreement w/ Metcare and HumanaTermination Agreement of Fred SternbergSupplemental Stock Option PlanConsent of Independent AuditorsSec 302 Chief Executive Officer CertificationSec 302 Chief Financial Officer CertificationSec 906 Chief Executive Officer CertificationSec 906 Chief Financial Officer Certification    Table of Contents  GENERAL Unless otherwise indicated or the context otherwise requires, all references in
this Form 10-K to the Company or Metcare refers to Metropolitan Health
Networks, Inc. and our consolidated subsidiaries. We disclaim any intent or
obligation to update forward looking statements. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Sections of this Annual Report contain statements that are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 (the
Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the
Exchange Act), and we intend that such forward-looking statements be subject
to the safe harbors created thereby. Statements in this Report containing the
words estimate, project, anticipate, expect, intend, believe,
will, could, should, may, and similar expressions may be deemed to
create forward-looking statements. Accordingly, such statements, including
without limitation, those relating to our future business, prospects, revenues,
working capital, liquidity, capital needs, interest costs and income, wherever
they may appear in this document or in other statements attributable to us,
involve estimates, assumptions and uncertainties which could cause actual
results to differ materially from those expressed in the forward-looking
statements. Specifically, this Annual Report contains forward-looking
statements, including the following:  
    
    our ability to service our indebtedness, make capital expenditures
and respond to capital needs;
    
    our ability to restructure any of our debt or current liabilities;
    
    our ability to enhance the services we provide to our members;
    
    our ability to strengthen our medical management capabilities;
    
    our ability to improve our physician network;
    
    our ability to renew our managed care agreements and negotiate
terms which are favorable to us and affiliated physicians;
    
    our ability to respond to future changes in Medicare reimbursement
levels and reimbursement rates from other third parties; and
    
    our ability to establish relationships and expand into new
geographic markets. The forward-looking statements reflect our current view about future events and
are subject to risks, uncertainties and assumptions. We wish to caution readers
that certain important factors may have affected and could in the future affect
our actual results and could cause actual results to differ significantly from
those expressed in any forward-looking statement. The following important
factors, in addition to factors we discuss elsewhere in this Annual Report,
including the section entitled Risk Factors, could prevent us from achieving
our goals, and cause the assumptions underlying the forward-looking statements
and the actual results to differ materially from those expressed in or implied
by those forward-looking statements: - 1 -




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
    
    pricing pressures exerted on us by managed care organizations and
the level of payments we receive under governmental programs or from
other payors;
    
    future legislation and changes in governmental regulations;
    
    the impact of Medicare Risk Adjustments on payments we receive for
our managed care operations;
    
    loss of significant contracts;
    
    general economic and business conditions;
    
    changes in estimates and judgments associated with our critical accounting policies;
    
    federal and state investigations;
    
    the enactment of unfavorable legislation by the Congress of the United States;
    
    our ability to successfully recruit and retain medical professionals; and
    
    impairment charges that could be required in future periods. RISK FACTORS Failure to manage our growth effectively could harm our business and results of
operation. We have experienced growth in our business during the last three years.
Continued growth may impair our ability to provide our services efficiently and
to manage our employees adequately. Our strategy is to focus on growth within
geographic parameters, identifying regions throughout Florida. Future results
of operations could be materially adversely affected if we are unable to manage
our growth effectively. Our quarterly results will likely fluctuate, which could cause the value of our
common stock to decline. We are subject to quarterly variations in our medical expenses due to
fluctuations in patient utilization. We have significant fixed operating costs
and, as a result, are highly dependent on patient utilization to sustain
profitability. Our results of operations for any quarter are not necessarily
indicative of results of operations for any future period or full year. We
experience increased patient population and greater use of medical services in
the winter months. As a result, our results of operations may fluctuate
significantly from period to period. In addition, there recently has been
significant volatility in the market price of securities of health care
companies that in many cases we believe has been unrelated to the operating
performance of these companies. We believe that certain factors, such as
legislative and regulatory developments, quarterly fluctuations in our actual
or anticipated results of operations, lower revenues or earnings than those
anticipated by securities analysts, and general economic and financial market
conditions, could cause the price of our common stock to fluctuate
substantially. - 2 -




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The loss of certain agreements and the capitated nature of our revenues could
materially affect our operations. The majority of our revenues come from agreements with one managed care
organization that provides for the receipt of capitated fees. The principal
organization that we contract with is Humana. We have one-year renewable
agreements with Humana to provide healthcare services to members in certain
healthcare networks established or managed by Humana. For the twelve months
ended December 31, 2003, approximately 99% of our revenue was obtained from
these agreements. The Humana agreements may be terminated in the event we
participate 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. Failure to maintain these agreements, or
successfully develop additional sources of revenue could adversely affect our
financial condition. A continuing decline in enrollees in Medicare Advantage
could also have a material adverse effect on our profitability. Under Humana agreements we, through our affiliated providers, generally are
responsible for the provision of all covered hospital benefits, as well as
outpatient benefits, regardless of whether the affiliated providers directly
provide the healthcare services associated with the covered benefits. To the
extent that enrollees require more care than is anticipated, aggregate
capitation rates may be insufficient to cover the costs associated with the
treatment of enrollees. If revenue is insufficient to cover costs, our
operating results could be adversely affected. As a result, our success will
depend in large part on the effective management of health care costs. Pricing
pressures may have a material adverse effect on our operating results. Changes
in health care practices, inflation, new technologies, and other factors
affecting the delivery and cost of health care are beyond our control and may
adversely affect our operating results. Reimbursement for Our Managed Care Operations will be affected by the Medicare
Risk Adjustment The Balanced Budget Act of 1997 directed the Health Care Financing
Administration (now CMS) to replace the existing system of risk adjustment,
which previously relied solely on demographic factors, with one that took
enrollees health status into account (the Medicare Risk Adjustment or
MRA). The demographic-only portion of the payment was adjusted for age,
gender, Medicaid eligibility, institutional status and working aged status. The
revised MRA portion of the payment, however, includes these same categories but
adds health status as a new criteria. Such health status is measured by the
previous medical costs for inpatient hospital stays incurred by the individual.
These are then used to determine each individuals expected future medical risk
and, therefore, how much the health plan in which they are enrolled should be
paid. To ensure that health plans had time to adjust to the new payment method,
CMS built a five-year transition period into the MRA methodology it adopted.
The initial data used to facilitate the transition to MRA was based solely upon
inpatient hospital encounter data. For 2000 and 2001, under the Balanced Budget
Refinement Act of 1999 (BBRA) the transition to risk adjustment was based
upon a blend percentage consisting of 10% risk adjustment payment and 90% on
the adjustment for demographic factors. For 2002, the blend percentage was
adjusted to 20% risk adjustment payment and 80% on the adjustment for
demographic factors. The law requires that the ambulatory data be incorporated
beginning January 1, 2004, at which time the blend percentage will consist of
30% risk adjustment payment and 70% on the adjustment for - 3 -




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demographic factors. In 2005, the blend percentage will consist of 50% risk
adjustment payment and 50% on the adjustment for demographic factors. In 2006,
the blend percentage will consist of 75% risk adjustment payment and 25% on the
adjustment for demographic factors. In 2007, the blend percentage will consist
of 100% risk adjustment payment and 0% on the adjustment for demographic
factors. Through Fiscal 2003, our payments from the HMOs have substantially
been based on the demographic model. However, in Fiscal 2004, we anticipate
that the payments we receive from the HMOs will begin reflecting the MRA
methodology. At this time, it cannot be determined if this impact will be
favorable or unfavorable in future years. The development of management information systems may involve significant time
and expense. Our management information systems are important components of the business and
are becoming a more significant factor in our ability to remain competitive.
We already possess a physician billing and collection system. We are
participating in the development of an integrated management information
system. The development and implementation of such systems involve the risk of
unanticipated delay and expense, which could have an adverse impact on our
operations. The high cost of insurance could adversely effect our financial operation. As a result of the national malpractice award trends and the significant loss
of professional insurance underwriting capacity, the cost of our medical
malpractice insurance has increased while the coverage afforded under the
policies available has decreased. Additionally, as a result of the events of
September 11, 2001, as well as recent high profile director and officer related
litigation, the cost of our director and officer insurance policy has
increased. We anticipate that the cost for both our medical malpractice
insurance as well as our director and officer insurance will increase in 2004.
We also maintain stop-loss insurance for which the premium is based on a cost
per member. We may experience future increases in stop-loss insurance, which
could have a material adverse effect on our business, financial condition and
results of operations. Our industry is already very competitive; increased competition could adversely
affect our revenues. The health care industry is highly competitive and subject to continual changes
in the method in which services are provided and the manner in which health
care providers are selected and compensated. Companies in other health care
industry segments, some of which have financial and other resources greater
than we do, may become competitors in providing similar services. We may not be
able to continue to compete effectively in this industry. Additional
competitors may enter our markets and this increased competition may have an
adverse effect on our revenues. We are dependent upon our key management personnel for our future success. Our success depends to a significant extent on the continued contributions of
our key management. We have no insurance policies for our executive officers.
The loss of these key personnel could have a material adverse effect on our
financial condition, results of operations and plans for future development.
While we have employment contracts with certain key - 4 -




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members of management, we compete with other companies for executive talent and
there can be no assurance that highly qualified executives would be readily
available. The health care industry is highly regulated and our failure to comply with
laws or regulations, or a determination that in the past we have failed to
comply with laws or regulations, could have an adverse effect on our financial
condition and results of operations. The health care services that we and our affiliated professionals provide are
subject to extensive federal, state and local laws and regulations governing
various matters such as the licensing and certification of our facilities and
personnel, the conduct of our operations, our billing and coding policies and
practices, our policies and practices with regard to patient privacy and
confidentiality, and prohibitions on payments for the referral of business and
self-referrals. If we fail to comply with these laws, or a determination is
made that in the past we have failed to comply with these laws, our financial
condition and results of operations could be adversely affected. Changes to
health care laws or regulations may restrict our existing operations, limit the
expansion of our business or impose additional compliance requirements. These
changes, if effected, could have the effect of reducing our opportunities or
continued growth and imposing additional compliance costs on us that may not be
recoverable through price increases. Federal anti-kickback laws and regulations prohibit certain offers, payments or
receipts of remuneration in return for referring Medicaid or other
government-sponsored health care program patients or patient care opportunities
or purchasing, leasing, ordering, arranging for or recommending any service or
item for which payment may be made by a government-sponsored health care
program. In addition, federal physician self-referral legislation, known as the
Stark law, prohibits Medicare or Medicaid payments for certain services
furnished by a physician who has a financial relationship with various
physician-owned or physician-interested entities. These laws are broadly worded
and, in the case of the anti-kickback law, have been broadly interpreted by
federal courts, and potentially subject many business arrangements to
government investigation and prosecution, which can be costly and time
consuming. Violations of these laws are punishable by monetary fines, civil and
criminal penalties, exclusion from participation in government-sponsored health
care programs and forfeiture of amounts collected in violation of such laws,
which could have an adverse effect on our business and results of operations.
Florida also has anti-kickback and self-referral laws, imposing substantial
penalties for violations. Limitations of or reduction in reimbursement amounts or rates by
government-sponsored healthcare programs could adversely affect our financial
condition and results of operations. As of December 31, 2003 approximately 99% of our revenues were derived from
reimbursements by various government-sponsored health care programs. These
government programs, as well as private insurers, have taken and may continue
to take steps to control the cost, use and delivery of health care services.
The following events could result in an adverse effect on our financial
condition and results of operations:  
    
    reductions in or limitations of reimbursement amounts or rates under programs,
    
    reductions in funding of programs, - 5 -




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
    
    elimination of coverage for certain individuals or treatments under
programs, which may be implemented as a result of increasing budgetary
and cost containment pressures on the health care industry, or
    
    new federal or state legislation reducing funding and
reimbursements. We have anti-takeover provisions which may make it difficult to replace or
remove our current management. Our Articles of Incorporation authorize the issuance of 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. Our Board of Directors may, without
shareholder approval, issue preferred stock with dividends, liquidation,
conversion, voting or other rights, which could adversely affect the voting
power, or other rights of the holders of our common stock. The ability of our
board to issue preferred stock may prevent or frustrate shareholder attempts to
replace or remove current management. Due to the substantial number of our shares that will be eligible for sale in
the near future, the market price of our common stock could fall as a result of
sales of a large number of shares of common stock in the market, or the price
could remain lower because of the perception that such sales may occur. These factors could also make it more difficult for us to raise funds through
future offerings of our common stock. As of December 31, 2003, there were
38,527,699 shares of our common stock outstanding, all of which are freely
tradable without restriction with the exception that approximately 7,000,000
shares, which are owned by certain of our officers, directors, affiliates and
third parties, and may be sold publicly at any time subject to the volume and
other restrictions under Rule 144 of the Securities Act of 1933. In addition, as of December 31, 2003, approximately 10,400,000 shares of our
common stock were reserved for issuance upon the exercise of warrants and
options which have been previously granted. Our common stock has experienced in the past, and is expected to experience in
the future, significant price and volume volatility, which substantially
increase the risk of loss to persons owning common stock. Because of the limited trading market for our common stock, and because of the
possible price volatility, you may not be able to sell your shares of common
stock when you desire to do so. The inability to sell your shares in a rapidly
declining market may substantially increase your risk of loss because of such
illiquidity and because the price for our common stock may suffer greater
declines because of its price volatility. Dependency on Reimbursement by Third Parties The Medicare and Medicaid 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. A substantial portion of our - 6 -




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managed care revenues is based upon Medicare reimbursable rates. Any changes
that limit or reduce Medicare reimbursement levels could have a material
adverse effect on our business. Further, significant changes have or may be
made in the Medicare program, which could have a material adverse effect on our
business, results of operations, prospects, financial results, financial
condition or cash flows. In addition, the Congress of the United States may
enact unfavorable legislation, which could adversely affect operations by,
among other things, decreasing Medicare reimbursement rates. 
 PART I 
 ITEM 1 DESCRIPTION OF BUSINESS Introduction Metropolitan Health Networks, Inc. provides healthcare benefits to over 25,000
Medicare Advantage members (formerly Medicare+Choice) in Central and South
Florida under full-risk contracts with Humana, Inc., the second largest
participant in this Medicare program. Metcare entered into this business in
1999, operating a Provider Service Network (PSN), also known as a Managed
Service Organization (MSO). The PSN includes thirty-three (33) primary care physician practices. Metcare
owns six of these practices; the balance are independently owned and operated
under capitation contracts with the Company. In addition to the primary care
practices, the PSN contracts with specialists, ancillary service providers, and
hospitals. The Company also owns and operates an oncology practice, which is
part of the network. Under its risk agreements, Metropolitan receives credit for a significant
percentage of the monthly Medicare premiums received by Humana from the Centers
for Medicare and Medicaid Services (CMS) and is obligated to provide all of the
covered healthcare benefits for the member lives. To the extent the costs of
providing such benefits is less than the related premiums received,
Metropolitan profits. Conversely, if the costs exceed related premiums, the
Company loses money. The Company re-insures against catastrophic losses and
certain diseases annually on a per member basis. The annual stop-loss limits
are $100,000 and $40,000 per member in the Daytona and South Florida markets,
respectively. The Medicare Advantage business accounts for the majority of the Companys
revenues. In addition, Metcare cares for commercial insurance members and
charges a fee for servicing patients in its wholly owned practices. Background The Company was incorporated in the State of Florida in January 1996, and began
operations as a physician practice group. During the late 1990s Metcare
acquired a number of physician practices and ancillary service providers. In
late 1999, the group practice strategy was abandoned in connection with a
change in the senior management team. The first managed care risk contract was secured with Humana in 1999. In 2000
an additional contract was subsequently secured to manage all of Humanas
Medicare Advantage lives in the - 7 -




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Daytona, Florida area (Flagler and Volusia Counties). The Daytona contract
currently accounts for over 19,000 lives or 77% of the Companys total Medicare
Advantage lives. The balance of the Companys Humana lives resides in South
Florida (Palm Beach, Broward and Miami-Dade Counties). Metropolitan renegotiated its most significant contract with Humana, in
Daytona, effective January 1, 2003. This renegotiation increased the
percentage of Medicare premium received by Metcare and resolved a number of
contractual disputes. Metcare acquired a diagnostic laboratory business, renamed Metlabs, Inc., in
2000. This operation was subsequently shut down in 2002. The Company formed
Metcare Rx, a pharmacy business, in 2001. This business was sold in November
2003. Metropolitans Board of Directors replaced the Companys President and CEO in
March 2003, and subsequently adopted a strategy to focus its resources and
energies on its core 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,
is significantly increasing funding for the Medicare Advantage program
beginning in 2004. Included in the MMA was the establishment of a significant
federal marketing budget to promote the Medicare Advantage program. The stated
goal is to triple enrollment in this program over the next several years. Industry A report issued in early 2004 by CMS estimated that national healthcare
spending in the United States was nearly $1.7 trillion, or $5,800 for every
American, in 2003. The CMS report projected that healthcare spending, which
today accounts for more than 15% of the national economy, would grow to $3.4
trillion by 2013, more than 18% of projected Gross Domestic Product. The
principal drivers for this growth include continued cost-increasing medical
innovation, rising price inflation, continued strong demand for prescription
drugs and the aging baby-boomer demographic s . The CMS projections did not
give effect to the December 2003 Medicare Modernization Act, other than to note
that new legislation is not anticipated to have a large impact on overall
spending but is expected to cause sizable shifts in payment sources. Medicare currently provides healthcare benefits to 41 million elderly and
disabled Americans, and was established in 1965. This number is expected to
more than double by 2030. The newly renamed Medicare Advantage program
(formerly Medicare+Choice) represents private health plans participation in
the Medicare program. Under Medicare Advantage plans, private insurers provide
care under contracts with Medicare. These plans represent an alternative to
traditional fee-for-service Medicare and by definition must provide enhanced
benefits in exceeding traditional Medicare by at least 30%. Some of these
enhancements include prescription drugs, eye exams, hearing aids and routine
physical exams. Out-of-pocket cost for the beneficiary may be lower and choice
of physicians is typically restricted to the plans network. This participation of private health plans under risk contracts began in the
1980s and grew to a peak membership in 2000 when Medicare HMOs covered 6.3
million lives. Today, private plans account for slightly more than 10% of
Medicare members, down from a peak penetration of - 8 -




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18%. The Balanced Budget Act of 1997 resulted in significant funding decreases
causing the number of participating plans to drop from 346 in 1998 to 151 in
2003. The exodus of managed care companies from Medicare left many of its
beneficiaries without a private plan option. The Medicare Modernization Act, or MMA, was signed into law in December 2003,
and provides sweeping changes to the Medicare program. At an estimated cost of
over $400 billion for the next ten years, the new law provides for a Medicare
prescription drug offering beginning in 2006, establishes new tax-advantaged
Health Savings Account regulation and makes significant changes to the old
Medicare+Choice (now Medicare Advantage) program. The changes to the
Medicare Advantage program were a response to the decreased managed care
participation in Medicare and the resulting lack of choice for Medicare
beneficiaries. 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 to Medicare beneficiaries. The
new rates for 2004 were announced in January 2004 reflecting an average
increase of 10.6%, which will be reflected in funding beginning in March 2004. The funding increases are intended to both offset medical cost inflation and to
allow enhanced plan benefit design to encourage increased participation in
Medicare Advantage plans. Markets Metcare currently provides healthcare services to nearly 6,000 Medicare
Advantage beneficiaries in South Florida (Palm Beach, Broward and Miami-Dade
Counties) and to over 19,000 members in the Daytona area (Flagler and Volusia
Counties). Behind only California, which has nearly 4 million Medicare
eligibles, Florida has the second largest Medicare population in the U.S. with
almost 3 million lives. However, Californias Medicare Advantage penetration is
approximately 30% while Floridas is only 20%. The most significant counties
in terms of Medicare Advantage membership currently include Palm Beach,
Broward, Miami-Dade and Volusia. Floridas Medicare population is expected to
grow to 4 million by 2015. Business Model Metcare provides turnkey healthcare services to Medicare Advantage
beneficiaries who participate in the Medicare Advantage program through Humana,
Inc. Our current agreements with Humana have one-year terms and renew
automatically for additional one-year terms unless terminated for cause or on
180-days prior notice. Humana is paid a certain premium per member, per month,
for its Medicare Advantage members by Medicare under its contract with CMS.
The monthly amount varies by patient, county and severity of health status.
Humana, in turn, allocates a majority of this amount to Metcare for all
patients cared for by Metcare. Metcare serves over 25,000 patients enrolled by Humana, Inc. in South and
Central Florida. Metcares Provider Service Network (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 the Companys model, the physicians maintain their independence but are
aligned with a professional staff that assists in providing high quality, cost
effective health care. Metcares PSN is comprised of 33 primary care physician
practices, six of which the Company owns. The others are independent practices
that are contracted with on a capitated-basis. Under - 9 -




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these agreements, Metcare pays the physician a set amount per member, per
month, to provide the necessary primary care services on a risk basis. The
monthly amount is negotiated and is subject to change based on certain quality
metrics under the Companys Partners In Quality (PIQ) program. In addition
to primary care physicians, the Companys PSN contracts with specialists,
ancillary service providers and hospitals. These providers deliver services to
the Companys patients based on certain fee schedules and care requirements.
Metcare has capitated (fixed cost) certain high volume specialties, averaging
the cost on a per member, per month basis; the others are paid on a contractual
fee-for-service basis. Metropolitan does not pay or process any of the payments to its PSN physicians
or other providers. All claims processing is handled directly by Humana. The
Company does review and approve claims in advance of payment (prospective
payment review). Incorrect claims are identified and corrected prior to
payment by the Companys claims suspense staff . Paid claims are reviewed
again and errors are handled and recovered by Metcares contestation staff.
The Company regularly monitors and measures Humanas claims escrow pools, or
allocations for claims incurred but not yet reported (IBNR), for accuracy and
underfunding. Metropolitan is certified as a Utilization Review Agent by Floridas Agency for
Health Care Administration. Utilization review is a process whereby multiple
data are 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. The Company has developed a proprietary care management model, Partners In
Quality (PIQ), which was implemented in 2002. PIQ is based on the principle
that optimal clinical outcomes depend on multiple factors including perceptions
of care, efficient utilization of healthcare resources, evidence-based medical
treatment and appropriate follow-up. This model is used to manage and
compensate the Companys primary care physicians in caring for Metcares
patients. The PIQ program 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. Metropolitan believes this focus
provides a competitive advantage as a provider service network. Competition The healthcare industry is highly competitive and is subject to continuing
changes in the provisioning of services and the selection and compensation of
providers. The Company competes with national, regional and local companies in
providing its services. Metcare competes with other risk providers for Humanas
business, and Humana competes with other HMOs in securing and serving patients
in the Medicare Advantage program. Growth Initiatives Membership in Medicare Advantage programs (previously Medicare +Choice) has
declined as a percentage of Medicare eligible lives over the last several
years, principally the result of decreased funding which has negatively
impacted plan benefits. Although the Company has - 10 -




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seen growth in its membership through its expansion of its relationship with
Humana, Metcare has experienced gradual attrition in membership commensurate
with the industry. Net membership decreases from attrition were approximately
1,200 or 4.4% in 2003. The Company expects this trend to reverse with the
passage of the Medicare Modernization Act in late 2003. With operations focused
in Florida, the nations second largest Medicare market, the Company expects
incremental membership growth in its current markets. Among a number of
sweeping changes to Medicare, the legislation is intended to substantially
increase participation in Medicare Advantage through increased funding
commitments. Beginning with an average increase of 10.6% in 2004, this stimulus
allows plans to improve benefits and attract new enrollees. The Companys 2004
premium increases are approximately 9.8% in Daytona and 17.8% in South Florida,
a significant portion of which will be utilized to enhance plan benefits. As
well, Metcare expects that opportunities to expand into other Florida markets
will develop as Humana and other Medicare HMOs grow their respective
businesses. The underlying economics of the Medicare Modernization Act may also provide
sufficient incentive for companies such as Metcare to directly enter the
Medicare Advantage business. The Company is currently evaluating its
opportunities in the Florida, particularly in underserved markets, and may file
for its own Medicare HMO license in 2004. The decision to enter this business
would necessarily be based on a number of factors including analysis of the
opportunity, consideration of alternative strategies and availability of
necessary capital. Employees As of December 31, 2003, the Company had approximately 100 full-time employees,
of which 31 were employed at the Companys executive offices. No employees of
the Company are covered by a collective bargaining agreement or are represented
by a labor union. The Company considers its employee relations to be good. 
 ITEM 2 DESCRIPTION OF PROPERTY Our offices are located at 250 Australian Avenue South, Suite 400, West Palm
Beach, Florida where we occupy 13,211 square feet at a current monthly rent of
$15,700 pursuant to a lease expiring March 31, 2008. The Company has a satellite office in Daytona Beach with 5,700 square feet and
monthly rent of $8,600. The lease expires September 30, 2006. The managed care division leases 6 offices in Florida with an aggregate monthly
rental of $28,800 with expiration dates ranging from one to five years. None of the Companys properties are leased from affiliates. 
 ITEM 3 LEGAL PROCEEDINGS The Company is a party to various claims arising in the ordinary course of
business. There are no material pending legal proceedings, other than routine
litigation incidental to the business of the Company and its subsidiaries, to
which the Company or any of its subsidiaries is a party or of which any
property of the Company or its subsidiaries is the subject. - 11 -




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On May 28, 2003, the Company was informed that the U.S. Attorneys Office in
Wilmington, Delaware was conducting an investigation of the Company. The
Inquiry was not related to Metropolitans underlying healthcare or pharmacy
business practices. The Company fully cooperated with the U.S. Attorneys
Office and on February 9, 2004 the investigation was terminated. 
 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 twelve months ended December
31, 2003. 
 PART II 
 ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Companys Common Stock is currently traded on the OTCBB under the symbol
MDPA. The Companys Warrants traded under the symbol MDPAW until March 15,
2001 when they expired. The following table sets forth the high and low closing
bid prices for the common stock, as reported by OTCBB: High
    
    Low($)
    
    ($)COMMON STOCKQuarter ended March 31, 2002
    
    
    1.40
    
    
    
    0.67Quarter ended June 30, 2002
    
    
    0.83
    
    
    
    0.45Quarter ended September 30, 2002
    
    
    0.46
    
    
    
    0.18Quarter ended December 31, 2002
    
    
    0.47
    
    
    
    0.17Quarter ended March 31, 2003
    
    
    0.27
    
    
    
    0.14Quarter ended June 30, 2003
    
    
    0.20
    
    
    
    0.07Quarter ended September 30, 2003
    
    
    0.34
    
    
    
    0.13Quarter ended December 31, 2003
    
    
    0.79
    
    
    
    0.26
 The foregoing bid prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions. As of the date of this filing there were approximately 1,200 holders of our
common stock. The Company has never declared nor paid any dividends on its common stock. The
Company presently intends to invest its earnings, if any, in the development
and growth of its operations and the reduction of debt. Equity Compensation Plan A table detailing the Companys existing equity compensation plans as of
December 31, 2003 is included in Item 12. - 12 -




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ITEM 6 SELECTED FINANCIAL DATA Set forth below is our selected historical consolidated financial data for
the five fiscal years ended December 31, 2003. The selected historical
consolidated financial data should be read in conjunction with our consolidated
financial statements and accompanying notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere
in this report. The consolidated statement of operations data and balance
sheet data for the years ended December 31, 1999, 2000, 2001, 2002 and 2003 are
derived from our audited consolidated financial statements which have been
audited by Kaufman, Rossin & Co., P.A., our independent auditors. For the fiscal year ended December 31, (1)(2)2003
    
    2002
    
    2001
    
    2000
    
    1999Income:Net revenues
    
    $
    143,874,488
    
    
    $
    140,063,566
    
    
    $
    128,186,307
    
    
    $
    119,047,520
    
    
    $
    18,501,497Income (Loss) from
continuing operations
    
    $
    5,861,303
    
    
    $
    (13,865,800
    )
    
    $
    997,990
    
    
    $
    4,417,862
    
    
    $
    (7,841,805
    )Income (Loss) from
continuing operations
per share basic
    
    $
    0.17
    
    
    $
    (0.46
    )
    
    $
    0.04
    
    
    $
    0.26
    
    
    $
    (1.09
    )Cash dividend declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Financial Position:Total assets
    
    $
    9,223,729
    
    
    $
    10,158,911
    
    
    $
    17,379,262
    
    
    $
    11,159,834
    
    
    $
    11,944,747Long - term
obligations,
including current
portion
    
    $
    2,983,576
    
    
    $
    5,603,370
    
    
    $
    1,821,705
    
    
    $
    1,664,961
    
    
    $
    9,370,948
 (1) The financial data for 2000 includes the operations of Metlabs, Inc. which
was discontinued in 2002. (2) The financial data for the years ended 2003, 2002, 2001 and 2000 are
presented on a calendar year with the Companys year-end being December 31.
The financial data for the year ended 1999 is presented on a fiscal year with
the Companys year-end being June 30. 
  ITEM 7
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Critical Accounting Policies The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Companys management to make a variety of estimates and assumptions. These
estimates and assumptions affect, among other things, the reported amounts of
assets and liabilities, the disclosure of contingent liabilities and the
reported amounts of revenues and expenses. Actual results can differ from the
amounts previously estimated, which were based on the information available at
the time the estimates were made. The critical accounting policies described below are those that the Company
believes are important to the portrayal of the Companys financial condition
and results, and which require management to make difficult, subjective and/or
complex judgments. Critical accounting - 13 -




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policies cover accounting matters that are inherently uncertain because the
future resolution of such matters is unknown. The Company believes that
critical accounting policies include accounts receivable and revenue
recognition, use of estimates and goodwill. Accounts Receivable and Revenue Recognition The Company is a party to certain managed care contracts and provides medical
care to its patients through owned and non-owned medical practices. In
connection with its Provider Service Network (PSN) operations, the Company is
exposed to losses to the extent of its share of deficits. Accordingly,
revenues under these contracts are reported as PSN revenue, and the cost of
provider services under these contracts are reported as an operating expense. The Company recognizes non-Humana revenues, net of contractual allowances, as
medical services are provided. These services are typically billed to patients,
Medicare, Medicaid, health maintenance organizations, insurance companies and
other third parties. 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. Use of Estimates-PSN In HMO-PSN arrangements, accounts receivable estimates often change as a result
of one or more future confirming events. With regard to revenues, expenses and
resulting accounts receivable arising from agreements with Humana, the Company
estimates amounts it believes will ultimately be realizable through the use of
judgments and assumptions. Contractual terms with an HMO are sometimes complex
and at times subject to different interpretation by the Company and Humana. As
a result, certain revenue, expense and accounts receivable estimates may change
from amounts previously recorded in the financial statements and may require
subsequent adjustments. To assist in estimating and collecting amounts due
from Humana, the Company has contracted with several outside consultants that
have worked closely with Humana or other HMOs for extended periods of time.
These consultants provide numerous services including, but not limited to,
revenue, expense and accounts receivable analysis, and monthly claims and
contestation analysis. However, it is possible that actual results may differ
from the estimates. Direct medical expenses include costs incurred directly by the Company and
costs paid by the HMO on the Companys behalf. These costs also include
estimates of claims incurred but not reported (IBNR), estimates of retroactive
adjustments to be applied by Humana and adjustments for charges which the
Company believes it is not liable (contestations). The IBNR estimates are
made by Humana utilizing actuarial methods and are continually evaluated and
adjusted by management of the Company, based upon its specific claims
experience and input from outside consultants. The Company bases its estimates
of retroactive adjustments on agreements with the HMO to modify previous
charges. Some of these adjustments have been quantified while others involve
situations where Humana has agreed the charges were processed at incorrect
rates, but the amount of the correction has not yet been quantified.
Contestations involve charges where the Company, with the assistance of its
consultants, contest certain expenses charged by the HMO. The estimate of
direct medical expense includes an estimated recovery of 20% of - 14 -




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outstanding contestations with Humana. It is possible that estimates of such
recoveries could change and the effect of the change could be material. Accounts receivable from Humana represents the combined effect of the Companys
interpretation of the contract with the HMO and its payment patterns.
Collection times on these accounts typically exceed normal collection periods
reflecting the need to reconcile the different interpretations and the HMOs
cash management practices. Goodwill The Company has made several acquisitions in the past that included a
significant amount of goodwill. Under accounting principles generally accepted
in the United States of America in effect through December 31, 2001, these
assets were amortized over their useful lives and tested periodically to
determine if they were recoverable from operating earnings on a discounted
basis over their useful lives. Effective January 1, 2002, goodwill is accounted for under SFAS No. 142,
Goodwill and Other Intangible Assets. The new rules eliminate amortization
of goodwill but subject these assets to impairment tests. Management is
required to make assumptions and estimates, such as the discount factor, in
determining fair value. Such estimated fair values might produce significantly
different results if other reasonable assumptions and estimates were to be
used. Balance Sheet The Company does not have any Off-Balance Sheet Arrangements. Tabular Disclosure of Contractual Obligations Payment Due by PeriodContractual
    
    
    
    
    
    Less than
    
    1-3
    
    3-5
    
    More thanObligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 YearsLong Term Debt
    
    $
    2,876,169
    
    
    $
    1,990,169
    
    
    $
    886,000
    
    
    $
    
    
    
    $
    Capital Lease
Obligations
    
    
    107,408
    
    
    
    104,316
    
    
    
    3,092Operating Lease
Obligations
    
    
    2,224,602
    
    
    
    629,176
    
    
    
    1,117,376
    
    
    
    419,957
    
    
    
    58,093Employment
Obligations
    
    
    2,297,485
    
    
    
    1,447,485
    
    
    
    850,000$
    7,505,664
    
    
    $
    4,171,146
    
    
    $
    2,856,468
    
    
    $
    419,957
    
    
    $
    58,093
 - 15 -




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Comparison of Fiscal 2003 and 2002 Introduction Revenues for the year ended December 31, 2003 totaled $143.9 million compared
to $140.1 million in the prior year. Net income was $4.4 million for the year
ended December 31, 2003 compared to a net loss of $17.1 million in 2002. On a
per share basis, the Company earned $0.13 for the year ended December 31,
2003, compared to a loss of $0.56 in the prior year. Income from continuing
operations amounted to $5.9 million in 2003, compared to a net loss of $13.9
million in 2002. Results for 2002 included significant adjustments to direct
medical costs of approximately $6.6 million, imputed interest expense of $1.2
million and $520,000 in write-downs of accounts receivable from medical
practices closed in prior years. Included in the 2003 and 2002 years were $1.5 million and $3.2 million,
respectively, of losses related to the discontinued operations. The Company
operated two business segments in 2003, managed care and direct medical
services (PSN) and pharmacy. It operated a third segment in 2002, the clinical
laboratory business, which was disposed of in July 2002. The pharmacy business
was established in 2001 and sold in November 2003. As discussed in the audited financial statements, the PSN segment reported a
gain of $11.5 million before allocated overhead of $3.7 million for 2003,
compared to a loss of $5.0 million in 2002 and a gain of $6.1 million in 2001.
Segment revenues for the same time periods were $143.9 million, $140 million
and $128.2 million, respectively. Expenses, which include direct medical costs
and supplies, physician salaries and other costs relating to the operations of
medical practices, were $132.2 million, $147.2 million, and $122.7 million for
the years ended December 31, 2002, 2001 and 2000, respectively. Revenues Revenues for the year ended December 31, 2003 increased $3.8 million or 2.7%
over the prior year, from $140.1 million to $143.9 million. PSN revenues from
Humana increased 2.8%, from $138.5 million to $142.3 million. Approximately
$12.1 million in incremental revenues were generated by funding increases
resulting from the renegotiation of the Companys contract with Humana in the
Daytona market, combined with governmental funding increases of approximately
1.8%. These increases were partially offset by a decline in the number of
patients in our Daytona network, resulting in approximately $6.7 million in
reduced funding. In connection with the renegotiation of its Daytona HMO
contract, the Company was no longer at risk for the HMOs commercial membership
effective January 1, 2003, resulting in lost revenue of approximately $3.1
million for the year, but increased profitability as this line of business had
been unprofitable. The Companys South Florida centers reported a net increase in PSN revenues
from Humana of $1.6 million over the prior year period, with $1.4 million in
increases from a new center in Broward County, which the Company assumed
management of in October 2002, and $1.9 million due to increased membership at
its Boca Raton medical office. Effective August 1, 2003 the Company cancelled
its risk arrangement with the Broward County center due to noncompliance with
the Companys policies and procedures. These revenue increases were - 16 -




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partially offset by $1.7 million in decreases due to net decreased membership
in the Companys other South Florida medical centers. Total Medicare Advantage lives declined approximately 1,700 members from
year-end 2002 to a membership of approximately 25,500 at December 31, 2003.
Approximately 500 of these belong to the terminated Broward County center, with
the other 1,200 attributable to attrition. Non-Humana revenue for Metcares wholly owned physician practices in 2003
remained the same as the prior year, $1.6 million. The Company operated six
physician practices and an oncology center in each of the years. Expenses Operating expenses for the year ended December 31, 2003 decreased $14.3 million
(9.5%) over the prior year, from $151.0 million to $136.7 million. Operating
expenses other than direct medical costs and medical supplies, which correlate
to revenue, decreased 12.5% over the prior year due in part to several cost
cutting measures undertaken by the Company in late 2002 and 2003. Direct medical costs, the largest component of expense, represents costs
associated with providing services of the PSN operation including direct
medical payments to physician providers, hospitals and ancillaries on a
capitated or fee for service basis. Direct medical costs for 2003 were $121.0
million compared to $133.6 million for 2002, a decrease of $12.6 million, or
9.4%, despite a $3.8 million increase in HMO revenues. A savings of $3.5
million in expenses was realized in 2003 due to no longer being at risk for
commercial membership in conjunction with the Companys renegotiated Daytona
HMO contract. Included in 2002 were significant adjustments to direct medical
costs of approximately $6.6 million relating to prior years. The Company was
able to obtain its own stop-loss insurance in the Daytona market in 2003,
accounting for additional savings estimated at approximately $2.4 million. Salaries and benefits for 2003 increased 1.9% over 2002, from $7.7 million to
$7.8 million. Increases were comprised of approximately $400,000 in management
and staff bonuses, increases of $378,000 in the Companys growing Boca Raton
medical and Daytona oncology offices and $67,000 related to the Companys
Daytona operations. Offsetting the increases were approximately $139,000 in
savings resulting from the closure of two unprofitable medical practices in
2002 and $676,000 related to the termination of the Companys hospitalist
program in the first quarter. Medical supplies were $2.1 million for 2003, compared to $1.9 million in 2002,
as the 2002 expense only represented ten months of operations for the Companys
Daytona oncology offices. Medical supply costs are incurred in all the
Companys medical offices, but most prominently in the Companys Daytona
oncology offices, accounting for 94.0% of the 2003 expense. Depreciation and amortization for the year ended December 31, 2003 totaled
$655,000, a 30.8% decrease over the prior year total of $946,000. The prior
year included $429,000 in amortization and write-offs of financing costs,
compared to $164,000 in the current year. - 17 -




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Rent and leases for the year ended December 31, 2003 totaled $1.0 million, a
$162,000 increase over 2002. Approximately $100,000 of the increase resulted
from increased rent at the Companys new corporate offices, with another
$119,000 arising from the expansion of the aforementioned Boca Raton and
oncology medical offices. These increases were offset in part by $56,000 in
savings resulting for the closure of the medical practices previously
mentioned. Consulting expense for the year decreased approximately $1.3 million, or 49.3%,
from $2.7 million in 2002 to $1.4 million in 2003. These savings resulted in
part from $273,000 in reductions of consulting services connected with the
Companys pharmacy and HMO development efforts. Further savings were achieved
through the discontinued use of medical consultants in the Companys
hospitalist program in the first quarter of 2003 amounting to $973,000, a
$314,000 reduction in marketing consultants and $81,000 in savings due to a
closed medical practice in July 2002. These reductions were partially offset
by $303,000 in increases related to the development of the Companys oncology
practice. General and administrative expenses for the year decreased $492,000, or 16.1%,
from the $3.0 million reported in the year ended December 31, 2002. The result
of cost cutting measures undertaken by the Company in the second half of 2002
and 2003, decreases were recognized in a wide number of expense categories,
most significantly in legal and accounting. These reductions were partly
offset by an increase in insurance costs amounting to $158,000. Other income and expenses for 2003 included a decrease in interest expense of
$1.1 million from the prior year, as 2002 included $1.2 million of imputed
interest due to beneficial conversion features on convertible notes. The
difference of $100,000 is due to the increased average amount of debt carried
by the Company in 2003 as compared to the prior year. Loss from discontinued operations for the year, which includes the Companys
pharmacy division in 2003 and both the pharmacy and clinical laboratory in
2002, was $1.7 million in 2003 compared to $2.4 million in 2002. The 2003 year
also included a $290,000 gain on the disposal of the pharmacy division, while
2002 reported a $834,000 loss on the disposal of the clinical laboratory. Comparison of Fiscal 2002 and 2001 Introduction The Company generated revenues of $140.1 million for the year ended December
31, 2002 compared to $128.2 million in the prior year, and incurred a net loss
of $17.1 million for the year ended December 31, 2002 compared to a net loss of
$369,000 for the year ended December 31, 2001. On a per share basis, losses
were $0.56 and $0.02 for the years ended December 31, 2002 and December 31,
2001, respectively. Included in 2002 are significant adjustments to direct
medical costs of approximately $6.6 million, imputed interest expense of $1.2
million, $520,000 in write-downs of accounts receivable remaining on medical
practices closed in prior years and $3.2 million in losses related to the
discontinued operations of the Companys clinical laboratory and pharmacy
businesses. Generally accepted accounting principles (GAAP) require the Company to make
certain revenue and cost estimates with regards to its contracts with the HMO.
Programs with the HMO are - 18 -




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complex and at times subject to various interpretations. These revenue and cost
estimates may be settled for amounts different than previously estimated or the
Companys estimate could change by amounts that could be material to the
financial statements. The nature of the relationship with the HMO is, and has
been such, that certain estimates made by the Company are based upon verbal
agreements with, or representations from the HMO regarding retroactive
adjustments to amounts previously credited or charged to Metcares fund
balance. These estimates are particularly likely to change as policy, and/or
personnel, at Humana changes. In connection with a change in Humanas
management during 2002, deterioration in the relationship with Humana in the
fourth quarter of 2002, and other factors, during 2002 Metcare recorded
additional medical costs of approximately $6.6 million related to amounts that
were included in accounts receivable at December 31, 2001. Conversely in 2001,
upon favorable resolution of unsettled medical costs, Metcare recorded a
reduction to medical costs of approximately $1.9 million. In the fourth quarter of 2002 the Company incurred significant increases in
Part A (hospital) and related costs due to the loss of a hospital contract by
Humana in the Companys Daytona network. In response to the increased costs,
management approached Humana in the fourth quarter of 2002 seeking to
renegotiate its contract. The Company successfully completed an amendment to
offset the cost increases, allowing the Daytona market to be financially
viable. The amendment was effective January 1, 2003 and provides for increased
funding in addition to other financial concessions. In return, the Company
made certain concessions, a portion of which related to the charge to direct
medical expenses discussed above. In conjunction with a convertible debenture financing completed in May 2002,
the Company incurred charges to interest of approximately $1.2 million. These
charges were necessary as the holder may convert the debt at any time into
company stock at a price lower than it was at the issuance of the debt. As discussed in the audited financial statements, the Company operated in three
segments for fiscal years 2002 and 2001; managed care and direct medical
services (PSN), pharmacy and clinical laboratory. The largest of these, the
PSN division, reported a loss before allocated overhead of $5.0 million for
2002, compared to profits of $6.1 million in 2001 and $4.5 million in 2000.
Revenues for the same time periods were $140.1 million, $128.2 million and
$119.0 million, respectively. Expenses, which include direct medical costs and
supplies, physician salaries and other costs relating to the operations of
medical practices, were $147.0 million, $122.7 million and $114.5 million for
the years ended December 31, 2002, 2001 and 2000, respectively. During 2001 the Company formed its pharmacy division. For the years ended
December 31, 2002 and 2001, the pharmacy division reported losses, before
allocation of corporate overhead, of $1.8 million and $744,000, respectively.
For those same periods, revenues were $12.9 million compared to $2.8 million,
while expenses, which include the costs of pharmaceuticals and other related
expenses, were $15.8 million and $3.8 million for 2002 and 2001, respectively.
The pharmacy was disposed of in November 2003 and, accordingly, the operations
of this division are included in the loss from operations of discontinued
business segments. In the third quarter of 2002, the Company decided to dispose of its third
segment, its clinical laboratory. Accordingly, in the year ended December 31,
2002, the Company recognized $1.4 - 19 -




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million in losses on discontinued operations, compared to losses of $559,000 in
2001 and $95,000 in 2000. Revenues Revenues for the year ended December 31, 2002 increased $11.9 million, or 9.3%,
over the prior year, from $128.2 million to $140.1 million. PSN revenues, the
core of the Companys business, increased 9.1%, from $126.9 million to $138.5
million, due primarily to funding increases from revisions to the Balanced
Budget Act of approximately $7.5 million and approximately $4.0 million
resulting from increased membership. In addition, revenues for 2002 included
$635,000 of fee-for-service billings relating to the Companys newly formed
Daytona oncology practice. Offsetting these increases were decreases in
revenue from the closure of certain medical practices in 2002 and the second
half of 2001 of $388,000. Expenses Operating expenses for the year ended December 31, 2002 increased approximately
20.0%. Direct medical costs, the largest component of expense, represent
certain costs associated with providing services of the PSN operation including
direct medical payments to physician providers, hospitals and ancillaries on a
capitated or fee-for-service basis. Direct medical costs for 2002 were $133.6
million compared to $114.6 million for 2001. During the year the Company
implemented several utilization initiatives, including its hospitalist,
partners in quality (PIQ), and oncology programs, in an effort to improve
patient care and reduce its medical costs. In the fourth quarter, the Company
incurred significant increases in Part A (hospital) and related costs due to
the loss of a hospital contract by Humana in the Companys Daytona network. In
response to the increased costs, management renegotiated the Companys contract
with the Humana. The Company successfully completed an amendment, which offset
the cost increases, allowing the Daytona market to be financially viable. The
amendment was effective January 1, 2003 and provided for increased funding in
addition to other financial concessions. Salaries and benefits for the year increased 26.7% over 2001, from $6.1 million
to $7.7 million. PSN expansion in South Florida accounted for approximately
$415,000 in increases while expansion of the services the Company provides in
its Daytona market in an effort to improve patient care and control medical
costs accounted for another $1.2 million of increases. Salary increases,
increases in medical insurance premiums and a bolstering of staffing throughout
the Company accounted for the balance of the increase, which was partially
offset by $269,000 in savings achieved by the closure of two unprofitable
medical practices Medical supplies were $1.9 million for 2002, compared to $63,000 in 2001, due
to the implementation of the Companys oncology practice in early 2002.
Medical supply costs are incurred in all the Companys medical offices, but
most prominently in the Companys two Daytona oncology offices, accounting for
96.8% of the 2002 supplies expense. Depreciation and amortization for the year ended December 31, 2002 totaled
$946,000, an increase of $101,000 over the prior year. The increase is due
primarily to depreciation on fixed assets acquired in 2002 as well as the
amortization recorded on certain financing costs incurred during the year. - 20 -




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Rent and leases for the year ended December 31, 2002 totaled $854,000, a
$97,000 increase over 2001. The aforementioned new operations accounted for a
majority of the increase, with the balance resulting from annual increases in
rent in our corporate and medical offices. This was offset in part by $84,000
in savings resulting for the closure of the medical practices previously
mentioned. Consulting expense increased approximately $1.6 million, from $1.1 million in
2001 to nearly $2.7 million in 2002. Of the increase, $1.3 million was
incurred in the Companys Hospitalist, Oncology and Utilization/Quality
Assurance/Management programs, which are designed to lower direct medical costs
while improving patient care. In addition, approximately $386,000 of
incremental expense was incurred in connection with investment banking and
advisory services. General and administrative expenses increased from $2.3 million in 2001 to $3.0
million in 2002, an increase of $770,000. Costs associated with the Companys
oncology and hospitalist programs and other PSN expansion accounted for
$411,000 in incremental expense. Increases also were incurred in accounting
and legal fees ($245,000) and insurance ($158,000). The prior year also
included approximately $313,000 in accounts payable write-offs and settlements
relating to discontinued operations. These increases were partially offset by
the savings of $115,000 resulting from the closure of a medical practice in the
second half of 2001 and a $196,000 decrease in billing and collection fees from
2001 to 2002 resulting from the renegotiation and eventual cancellation of the
Companys contract with an outside billing company in the second half of 2001. Other income and expenses for the year ended December 31, 2002 included write
downs of accounts receivable from medical practices closed in prior years of
$520,000 and $3.2 million in losses on discontinued operations relating to the
Companys clinical laboratory and pharmacy divisions. Interest expense
increased $1.8 million for the year, due in large part to the previously
mentioned charge of $1.2 million incurred in conjunction with a Convertible
Debenture financing completed in May 2002. The balance of the increase is due
to the increased amount of debt carried by the Company at December 31, 2002 as
compared to the prior year. Liquidity and Capital Resources For the year ended December 31, 2003 the Company reported a profit of $4.4
million and over $2.1 million in positive cash flows from operations,
significant improvements over the prior year results. These results combined
with proceeds from the sale of the Companys pharmacy business and convertible
debt conversions have enabled the reduction in liabilities by more than $7.3
million during the year, with additional reductions occurring in the first
quarter of 2004 as detailed below. Prior to 2003, however, the Company had
historically sustained negative cash flows from operations, in part as a result
of the Companys diversification efforts, including the pharmacy and clinical
laboratory operations. In 2003 the Company determined to refocus on its core
managed care business. Although the Company expects its cash flow from
operations to continue to be positive, there can be no assurance that this will
occur. In the absence of continuing positive cash flows from operations or
obtaining additional debt or equity financing, the Company may have difficulty
meeting current and long-term obligations. - 21 -




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In the fourth quarter of 2002 the Company incurred significant increases in
Part A (hospital) and related costs due to the loss of a hospital contract by
Humana in the Companys Daytona network. In response to the increased costs,
management successfully renegotiated its Daytona contract, allowing it to be
financially viable. The amendment was effective January 1, 2003 and provided
for increased funding in addition to other financial concessions. The 2003
results reflect the effects of the contract revision. During the first quarter of 2003, the Company borrowed an additional $500,000
from an existing lender on a short-term note bringing the total balance to $1
million, which note was due August 21, 2003. The note was renegotiated during
the year extending the due date and was subsequently paid down to $620,000 at
December 31, 2003. The balance of this note was repaid in the first quarter of
2004. The Company borrowed $1.3 million from Humana during the first half of 2003,
which amount was repaid over the course of the year. The Company sold the operations of its pharmacy division in November 2003 for a
cash price of $3.1 million plus the assumption of approximately $1.1 in
liabilities. The pharmacy incurred losses of $1.5 million and $1.8 million in
2003 and 2002, respectively. The Company believes that this sale will result
in both improved profitability and cash flows. During 2003, approximately $1.1 million of long-term debt was paid through the
issuance of 2.3 million shares, as provided for in the terms of the Convertible
Notes with the investors. In January 2004, the remaining balance of $715,000
on a Convertible Note was paid in full through the issuance of 1.3 million
shares of common stock. In March 2004, two Notes due August 2004 totaling
$300,000 were repaid through the issuance of approximately 611,000 shares of
common stock. Additionally, the Companys remaining significant note payable
for $1.2 million due May 2004 was extended, with payments due over a
twenty-four month period beginning June 2004. In February 2004 the Company successfully negotiated a settlement with the
Internal Revenue Service (IRS) on outstanding payroll tax liabilities for an
amount totaling approximately $3.3 to $3.4 million. $3.2 million of this
settlement has been paid with the balance to be paid once the IRS has
determined the final settlement amount. In conjunction with its IRS settlement, in February 2004 the Company raised
approximately $3 million through the issuance of approximately 5.0 million
shares of common stock under a private placement offering. The proceeds went
toward the settlement of the IRS obligations. Membership in Medicare Advantage programs (previously Medicare+Choice) has
declined as a percentage of Medicare eligible lives over the last several
years, principally the result of decreased funding which has negatively
impacted plan benefits. Although the Company has seen growth in its membership
through its expansion of its relationship with Humana, Metcare has experienced
gradual attrition in membership commensurate with the industry. Net membership
decreases from attrition were approximately 1,200 or 4.4% in 2003. The Company
expects this trend to reverse with the passage of the Medicare Modernization
Act in late 2003. Among a number of sweeping changes to Medicare, the
legislation is intended to substantially increase participation in Medicare
Advantage through increased funding commitments. - 22 -




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Beginning with an average increase of 10.6% in 2004, this stimulus allows plans
to improve benefits and attract new enrollees. With total 2004 premium
increases of approximately 9.8% in Daytona and 17.8% in South Florida, and the
resulting benefit enhancements, the Company expects its Medicare membership to
grow. As well, Metcare expects that opportunities to expand into other Florida
markets will develop as Humana and other Medicare HMOs grow their respective
businesses. The underlying economics of the Medicare Modernization Act may also provide
sufficient incentive for companies such as Metcare to directly enter the
Medicare Advantage business. The Company is currently evaluating its
opportunities in the Florida, particularly in underserved markets, and may file
for its own Medicare HMO license in 2004. The decision to enter this business
would necessarily be based on a number of factors including analysis of the
opportunity, consideration of alternative strategies and availability of
necessary capital. 
 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. We do not currently have any trading
derivatives nor do we expect to have any in the future. We have established
policies and internal processes related to the management of market risks,
which we use in the normal course of our business operations. Intangible Asset Risk We have a substantial amount of intangible assets. We are required to perform
goodwill impairment tests at least on an annual basis and whenever events or
circumstances indicate that the carrying value may not be recoverable from
estimated future cash flows. As a result of our annual and other periodic
evaluations, we may determine that the intangible asset values need to be
written down to their fair values, which could result in material charges that
could be adverse to our operating results and financial position. Although at
December 31, 2003 we believe our intangible assets are recoverable, changes in
the economy, the business in which we operate and our own relative performance
could change the assumptions used to evaluate intangible asset recoverability.
We continue to monitor those assumptions and their consequent effect on the
estimated recoverability of our intangible assets. Equity Price Risk We do not own any equity investments, other than in our subsidiaries. As a
result, we do not currently have any direct equity price risk. Commodity Price Risk We do not enter into contracts for the purchase or sale of commodities. As a
result, we do not currently have any direct commodity price risk. - 23 -




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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Summary of Consolidated Quarterly Earnings (unaudited) For the Quarter Ended,December 31, 2003
    
    September 30, 2003
    
    June 30, 2003
    
    March 31, 2003Net revenues
    
    $
    35,452,435
    
    
    $
    35,680,129
    
    
    $
    35,865,376
    
    
    $
    36,876,548Income (Loss) from continuing
Operations
    
    $
    1,555,763
    
    
    $
    1,691,617
    
    
    $
    1,649,329
    
    
    $
    964,594Net Income (Loss)
    
    $
    1,565,390
    
    
    $
    1,172,972
    
    
    $
    947,694
    
    
    $
    715,697Net Income - per share - basic
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    0.02Net Income - per share - diluted
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    0.02
 For the Quarter EndedDecember 31, 2002
    
    September 30, 2002
    
    June 30, 2002
    
    March 31, 2002Net revenues
    
    $
    34,838,083
    
    
    $
    34,613,150
    
    
    $
    36,191,511
    
    
    $
    34,420,822Income (Loss) from
continuing
Operations
    
    $
    (12,668,802
    )
    
    $
    (311,917
    )
    
    $
    (1,746,023
    )
    
    $
    860,924Net Income (Loss)
    
    $
    (13,449,681
    )
    
    $
    (1,989,225
    )
    
    $
    (2,091,568
    )
    
    $
    449,587Net Income (Loss) -
per share - basic
    
    $
    (0.43
    )
    
    $
    (0.06
    )
    
    $
    (0.07
    )
    
    $
    0.02Net Income (Loss) -
per share - diluted
    
    $
    (0.43
    )
    
    $
    (0.06
    )
    
    $
    (0.07
    )
    
    $
    0.01
 
  ITEM 9
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 
 ITEM 9A. Controls and Procedures Our management, which includes our CEO and our CFO, have conducted an
evaluation of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and
Exchange Act of 1934, as amended) as of the end of the fiscal year covered by
this report. Based upon that evaluation, our management has concluded that the
design and operation of our disclosure controls and procedures are effective
for timely gathering, analyzing and disclosing the information we are required
to disclose in our reports filed under the Securities Exchange Act of 1934, as
amended. There have been no significant changes made 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 our internal
control over financial reporting. - 24 -




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PART III 
  ITEM 10
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. As of the date of this filing, the directors, control persons and executive
officers of the Company are as follows: Name
    
    Age
    
    PositionMichael M. Earley
    
    
    49
    
    
    Chief Executive Officer, President
and DirectorDebra A. Finnel
    
    
    42
    
    
    Vice President, Chief Operating
Officer and DirectorDavid S. Gartner, CPA
    
    
    46
    
    
    Chief Financial OfficerRoberto L. Palenzuela, Esq.
    
    
    40
    
    
    General Counsel and SecretaryKarl M. Sachs, CPA
    
    
    68
    
    
    DirectorMartin W. Harrison, M.D.
    
    
    51
    
    
    DirectorSalomon E. Melgen, M.D.
    
    
    50
    
    
    Director
 MICHAEL M. EARLEYwas appointed President and Chief Executive Officer on March
10, 2003 and previously served as a director of the Company from June 2000 to
December 2002. 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 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, Vice President and Chief Operating Officer has been employed
by the Company since January 1999. She has served on the Board of Directors of
the Company since 2002. She has 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 IMC, Floridas first Medicare+Choice HMO. Prior to joining the
Company, 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, IPAs and hospitals. She also has extensive experience in provider
contracting, claims administration and customer service. Ms. - 25 -




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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, CPAjoined the Company in November 1999 as its Chief
Financial Officer. He has over twenty years experience in accounting and
finance, including thirteen 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 BS in Accounting. ROBERTO L. PALENZUELA, ESQ.was appointed General Counsel and Secretary in
March of 2004. Mr. Palenzuela served as General Counsel and Secretary of
Continucare Corporation from May 2002 through March 2004. From 1994 to 2003,
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. MARTIN W. HARRISON, M.D.was appointed as a Director of the Company in
November 2000. He has served as an advisor to the Board for the past year and
currently serves as a member of the Companys Executive & Compensation
Committee and Audit & Finance Committee. He has been practicing medicine in
South Florida and specializes in preventive and occupational medicine. Dr.
Harrison completed his undergraduate training at the University of Illinois and
postgraduate and residency training at Johns Hopkins University, as well as his
Masters in Public Health. Dr. Harrison has also been on the Faculty of both the
University and Medical School. He is currently the owner of H30, Inc. a
privately held Research & Biomedical Company. SALOMON E. MELGEN, M.D.was appointed as a director of the Company in
September 2002. He currently serves on the Companys Executive & Compensation
Committee and Audit & Finance Committee. He is a Board Certified
Ophthalmologist and the founding Director of Vitreo-Retinal Consultants,
specializing in diseases and surgery of the vitreous and retina. He has
participated in the research and co-authorship of many published medical
reports. Dr. Melgen was accepted as a Fellow of Vitreoretinal Diseases at
Harvard Medical School, Massachusetts Eye and Ear Infirmary, Eye Research
Institute and Retina Associates in Boston, Massachusetts. He is a Director of
the American Board of Eye Surgery and is a clinical scientific associate at The
Schepens Eye Research Institute, Harvard Medical School. Dr. Melgen has been
awarded the highest honor from the government of the Dominican Republic for his
charitable work. - 26 -




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KARL M. SACHS, CPArejoined the Board of Directors in September 2002 after
previously serving as a Director of the Company from March 1999 to December
2001. He currently serves on the Companys Executive & Compensation Committee
and Audit & Finance Committee. He is a founding partner of the Miami-based
public accounting firm of Sachs & Focaracci, 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 BS in Business
Administration. Board of Directors Each director is elected at the Companys annual meeting of shareholders and
holds office until the next annual meeting of stockholders, or until the
successors are elected and qualified. At present, the Companys bylaws provide
for no less than one director and no greater than eleven directors. Currently,
there are five directors in the Company. The bylaws permit the Board of
Directors to fill any vacancy and such director may serve until the next annual
meeting of shareholders or until his successor is elected and qualified.
Officers are elected by the Board of Directors and their terms of office are,
except to the extent governed by employment contracts, at the discretion of the
Board. There are no family relations among any officers or directors of the
Company, nor are there any arrangements or understandings between any of the
directors or officers of the Company or any other person pursuant to which any
officer or director was or is to be selected as an officer or director. The
officers of the Company devote full time to the business of the Company. In
2003, the Board of Directors held sixteen meetings and there were no votes by
Unanimous Written Consent. The Board has adopted a Code of Business Conduct and Ethics, a copy of which is
attached as an exhibit. Board Committees The Company had two active committees in 2003, the Audit & Finance Committee
and the Executive & Compensation Committee. All actions by these committees
shall be subject to the specific Directions of the Board of Directors. The Audit Committee consists of Mr. Sachs, Dr. Melgen and Dr. Harrison. The
Audit Committee selects the independent auditors; reviews the results and scope
of the audit and other services provided by the Companys independent auditors
and reviews and evaluates the Companys internal control functions. As an
advisory function of the Audit Committee, members also participate in
financings, review budgets prior to presentation to the Board of Directors and
review budgets vs. actual reports. The board of directors has determined that
Mr. Sachs is the audit committee financial expert, as such term is defined
under federal securities law, and is independent as such term is defined by
Rule 121A of the American Stock Exchange Company - 27 -




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Guide. Mr. Sachs is an expert by virtue of his extensive career in the
financial and accounting business. The Executive & Compensation Committee may exercise the power of the Board of
Directors in the management of our business and affairs at any time when the
Board of Directors is not in session. The Executive Committee shall, however,
be subject to the specific directions of the Board of Directors. The committee
also makes recommendations to the Board of Directors regarding the compensation
for our executive officers and consultants. It is currently composed of Dr.
Harrison, Mr. Sachs and Dr. Melgen. All actions of the Executive Committee
require a unanimous vote. Shareholder Nominations to the Board of Directors Historically, the Company has not had a formal policy concerning shareholder
recommendations of nominees to the Board of Directors. As of December 31, 2003,
the Company has not received any recommendations from shareholders requesting
that the Company consider a candidate for inclusion among the Companys slate
of nominees in the Companys proxy statement. The absence of such a policy
does not mean, however, that a recommendation would not have been considered
had one been received. The Company will consider this matter fully during the
upcoming year with a view to adopting and publishing a policy on shareholder
recommendations for director nominees prior to the 2004 Annual Meeting of
Shareholders. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Companys
directors and executive officers, and persons who own more than ten (10%)
percent of the outstanding Common Stock, to file with the Securities and
Exchange Commission (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 the Company with copies of all such
reports they file. Based solely on its review of the copies of such reports furnished to the
Company or written representations that no other reports were required, the
Company believes that all Section 16(a) filing requirements applicable to its
officers, directors and greater than (10%) percent beneficial owners were
complied with during the year ended December 31, 2003. 
 ITEM 11 EXECUTIVE COMPENSATION. The following tables present information concerning the cash compensation and
stock options provided to the Companys Chief Executive Officer and also sets
forth the aggregate compensation awarded to, earned by or paid to the other two
most highly compensated officers serving as executive officers at the end of
the 2003 fiscal year and the aggregate compensation awarded to, earned by or
paid to an additional individual who would have been one of the Companys four
most highly compensated officers had he been serving as an executive officer at
the end of the 2003 fiscal year (collectively, with the Chief Executive
Officer, the Named Executive Officers). No executive officer of the Company
or its subsidiaries, other than the - 28 -




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Named Executive Officers, earned compensation in excess of $100,000 during the
fiscal year ended December 31, 2003. SUMMARY COMPENSATION TABLE SecuritiesFiscal
    
    
    
    
    
    
    
    
    
    Underlying
    
    All OtherName and Principal Position
    
    Year
    
    Salary
    
    Bonus
    
    Options
    
    Compensation(5)Michael M. Earley, (1)
    
    
    2003
    
    
    $
    117,821
    
    
    
    
    (2)
    
    
    350,000
    
    
    $
    0President & CEOFred Sternberg (3)
    
    
    2003
    
    
    $
    158,778
    
    
    $
    0
    
    
    
    300,000
    (4)
    
    $
    4,800Former President, CEO and
    
    
    2002
    
    
    $
    309,736
    
    
    $
    0
    
    
    
    
    
    
    $
    9,600Chairman
    
    
    2001
    
    
    $
    224,905
    
    
    $
    0
    
    
    
    
    
    
    $
    9,600Debra A. Finnel
    
    
    2003
    
    
    $
    249,026
    
    
    $
    100,000
    (2)
    
    
    350,000
    
    
    $
    18,000Vice President & COO
    
    
    2002
    
    
    $
    249,849
    
    
    $
    0
    
    
    
    
    
    
    $
    18,0002001
    
    
    $
    227,884
    
    
    $
    0
    
    
    
    300,000
    
    
    $
    18,000David S. Gartner
    
    
    2003
    
    
    $
    143,767
    
    
    
    
    (2)
    
    
    180,000
    
    
    $
    6,000Secretary and CFO
    
    
    2002
    
    
    $
    120,000
    
    
    $
    0
    
    
    
    
    
    
    $
    6,0002001
    
    
    $
    119,423
    
    
    $
    0
    
    
    
    
    
    
    $
    6,000
   (1)
    
    Mr. Earley became the Companys President and Chief Executive Officer
effective March 10, 2003. The salary figure above is based on an
annualized salary of $130,000.(2)
    
    Each of Mr. Earley, Ms. Finnel and Mr. Gartner were awarded a bonus in
the amount of $60,000 on March 19, 2004 for services provided during the
2003 fiscal year.(3)
    
    Mr. Sternberg resigned as President and Chief Executive Officer of the
Company effective March 10, 2003, as Chairman of the Board effective
October 29, 2003 and as a director effective December 19, 2003.(4)
    
    Paid pursuant to a termination agreement, dated October 24, 2003 between
the Company and Mr. Sternberg. See the Section entitled Employment
Agreements for more information regarding the termination agreement.(5)
    
    All amounts included in All Other Compensation relate to automobile
allowances. Options granted in the Year Ended December 31, 2003 to Executives* Potential Realizable ValuePercent of
    
    
    
    
    
    
    
    
    
    at Assumed Annual Rate ofNumber of
    
    Total Options
    
    
    
    
    
    
    
    Stock Price AppreciationSecuritiesUnderlying
    
    Granted toEmployees in
    
    Exercise orBase Price
    
    Expiration
    
    For Option TermName
    
    Options
    
    Fiscal Year(1)
    
    ($/Share)
    
    Date
    
    5%
    
    10%Michael M. Earley
    
    
    116,667
    
    
    
    5.0
    %
    
    $
    0.35
    
    
    
    12/31/08
    
    
    $
    72,331
    
    
    $
    101,966116,667
    
    
    
    5.0
    %
    
    $
    0.35
    
    
    
    12/31/09
    
    
    $
    77,989
    
    
    $
    116,245116,666
    
    
    
    5.0
    %
    
    $
    0.35
    
    
    
    12/31/10
    
    
    $
    83,929
    
    
    $
    131,952Fred Sternberg (2)
    
    
    300,000
    
    
    
    12.8
    %
    
    $
    0.46
    
    
    
    10/24/08
    
    
    $
    183,415
    
    
    $
    255,987Debra A. Finnel
    
    
    350,000
    
    
    
    15.0
    %
    
    $
    0.35
    
    
    
    9/22/08
    
    
    $
    212,561
    
    
    $
    295,225David S. Gartner
    
    
    180,000
    
    
    
    7.7
    %
    
    $
    0.35
    
    
    
    9/22/08
    
    
    $
    109,317
    
    
    $
    151,830
  (1)
    
    A total of 2,340,400 options were granted to employees of the Company in
the fiscal year ended December 31, 2003. Included in this number are
700,000 options that were granted to two directors who are also employees
of the Company. - 29 -




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##### Table of Contents



(2)
    
    Granted pursuant to a termination agreement, dated October 24, 2003
between the Company and Mr. Sternberg. See the Section entitled
Employment Agreements for more information regarding the termination
agreement. Aggregated Options Exercises in Fiscal 2003 and Fiscal Year Ending Option
Values The following table sets forth certain information as to the number and value
of all outstanding options exercised during fiscal year 2003 by the Named
Executive Officers. No stock appreciation rights were granted or are
outstanding. Number ofSecurities Underlying
    
    Value of UnexercisedUnexercised Options
    
    In-the-Money Optionsat Fiscal Year-End
    
    At Fiscal Year-EndShares Acquired
    
    Value
    
    (#) Exercisable/
    
    ($) Exercisable/Name
    
    on Exercise (#)
    
    Realized ($)
    
    Unexercisable
    
    Unexercisable(1)Michael M. Earley
    
    
    0
    
    
    $
    0
    
    
    
    181,667/233,333
    
    
    $
    66,233/$95,667Fred Sternberg
    
    
    0
    
    
    $
    0
    
    
    
    2,160,000/25,000
    
    
    $
    329,600/$0Debra A. Finnel
    
    
    0
    
    
    $
    0
    
    
    
    700,000/100,000
    
    
    $
    182,500/$0David S. Gartner
    
    
    0
    
    
    $
    0
    
    
    
    180,000/0
    
    
    $
    73,800/$0
  (1)
    
    The closing sale price of the Common Stock on December 31, 2003 as
reported by OTCBB was $0.76 per share. Value is calculated by multiplying
(a) the difference between $0.76 and the option exercisable price by (b)
the number of shares of Common Stock underlying. Employment Agreements FRED STERNBERG In January 2000 the Company entered into an employment agreement, subsequently
amended, with Fred Sternberg, the Companys President, Chief Executive Officer
and a director. The term of the agreement was for five years from the effective
date. The annual salary under the Agreement was $150,000. Effective April 1,
2001 the salary was increased to $250,000 per year. Additionally, Mr. Sternberg
was granted options to purchase 300,000 shares of Common Stock at $0.30 per
share and options to purchase 360,000 shares of Common stock at $0.50 per share
upon the signing of the Agreement. Additional longevity options were granted at
the rate of 25,000 options per year of employment at a price of $1.00 per
share. The Agreement also provided for an additional 700,000 options at $0.75
per share vesting on various dates over the life of the Contract. The Agreement also provided, among other things, for (i) participation in any
profit-sharing or retirement plan and in other employee benefits applicable to
employees and executives of the Company; (ii) an automobile allowance of $800
per month and fringe benefits commensurate with the duties and responsibilities
of Mr. Sternberg and (iii) benefits in the event of death or disability. The
Agreement also contains certain non-disclosure and non-competition provisions. Under the terms of the Agreement, the Company could terminate the employment of
Mr. Sternberg either with or without cause. If the Company without good cause
terminated the Agreement, the Company would be obligated to continue to pay Mr.
Sternbergs salary and any - 30 -




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current and future bonuses that would have been earned under the agreement. Mr.
Sternberg would also be entitled to all stock options earned or not yet earned
through the full term of the Agreement. Mr. Sternberg resigned as President and Chief Executive Officer effective March
10, 2003. The Company and Sternberg reached an agreement, dated October 24,
2003 with respect to the terms and conditions of the settlement of Mr.
Sternbergs employment agreement, which ran through December 2004. The total
settlement, which was substantially less than what was due under the remainder
of Sternbergs contract, provides that Sternberg will receive consideration
including $180,000 payable over the twelve months ending June 30, 2004, certain
insurance benefits and options to purchase 300,000 of the Companys common
stock at $0.46, the current market price at date of grant. MICHAEL M. EARLEY Effective January 1, 2004 the Company entered into an employment agreement with
Michael M. Earley, President and Chief Executive Officer. The term of the
agreement is for one year and shall automatically renew on the anniversary
date. The agreement calls for an annual salary of $250,000, a monthly auto allowance
of $800 and certain other fringe benefits commensurate with Mr. Earleys
responsibilities. In addition, the agreement also calls for discretionary
annual increases, bonuses and options as determined by the Companys Board of
Directors. The agreement provides for payment in an amount equal to Mr. Earleys current
twelve month salary in the event that, among other things, (i) Mr. Earley is
terminated by the Company other than for cause, (ii) Mr. Earley dies or becomes
disabled, (iii) there is a change of control of the Company without Mr.
Earleys written consent, (iv) there is a significant change in the nature of
Mr. Earleys duties without his written consent, (v) Mr. Earleys base salary
is reduced by 5% without his written consent, or (vi) if at any time, Mr.
Earley is not a member of the Board of Directors without his written consent. In addition, the agreement contains a confidentiality provision and a 12-month
post termination non-competition restriction. Under Florida law, a court of
competent jurisdiction may determine not to enforce such non-competition
restrictions or partially enforce or modify such provisions. DEBRA A. FINNEL In January 2001 the Company entered into an employment agreement with Debra A.
Finnel, Vice President and Chief Operating Officer. The term of the agreement
is five years and calls for an annual salary of $225,000, which was increased
to $250,000 on July 1, 2001. Ms. Finnel is also eligible to receive a
discretionary bonus and was granted options to purchase 300,000 shares of
Common Stock at $1.00 per share with vesting over three years. The Agreement
also calls for an automobile allowance of $1,500 per month and fringe benefits
commensurate with Ms. Finnels responsibilities as well as certain non-compete
provisions. - 31 -




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In the event Ms. Finnel is terminated by the Company other than for cause, the
agreement provides for payment of all base salary remaining under the term of
the agreement and all of her outstanding options shall vest and become
exercisable. In addition, the agreement contains a 12-month post termination non-competition
and non-solicitation restriction. In the event Ms. Finnel is terminated by the
Company other than for cause or resigns for good reason, the non-competition
and non-solicitation restriction will be of no force and effect. Under Florida
law, a court of competent jurisdiction may determine not to enforce such
non-competition restrictions or partially enforce or modify such provisions. Compensation Committee Interlocks and Insider Participation During the year ended December 31, 2003, the following individuals served as
members of the Companys Executive & Compensation Committee; Dr. Martin
Harrison, Dr. Salomon Melgen and Karl Sachs. Except for Dr. Harrison who was employed by the Company through March of 2003,
none of the members of the Executive & Compensation Committee are or have ever
been employed by the Company. Other than as disclosed in Item 13, none of the
members of the Executive & Compensation Committee have received any
compensation from the Company other than in their capacity as director. No interlocking relationship exists between our Board of Directors or Executive
& Compensation Committee and the Board of Directors or compensation committee
of any other company, nor has any such interlocking relationship existed in the
past. Compensation Committee Report on Executive Compensation The Companys employee compensation policy is to offer a package including a
competitive salary, a bonus based upon individual performance goals,
competitive benefits, and an attractive workplace environment. The Company also
encourages broad-based employee ownership of the Companys stock through a
stock option program in which most employees are eligible to participate. The Board of Directors and the Executive & Compensation Committee reviews and
approves individual officer salaries, bonuses, and stock option grants. The
Executive & Compensation Committee also reviews guidelines and proposals for
compensation, bonus, and stock option grants for non-officer employees. The Companys compensation policy for officers is similar to that for other
employees, and is designed to promote excellent performance and attainment of
corporate and personal goals. The Executive & Compensation Committee annually
reviews and approves the compensation of each of the Companys Named Executive
Officers. Bonuses are tied to performance goals established by the Executive &
Compensation Committee as an incentive for superior corporate performance. - 32 -




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President and Chief Executive Officer Compensation In determining Mr. Earleys overall annual compensation, the Executive &
Compensation Committee considered Mr. Earleys performance as the Chief
Executive Officer in 2003, taking into account the Companys growth and the
competitive environment. In addition, the Executive & Compensation Committee
reviewed publicly disclosed salaries of Chief Executive Officers of a group of
peer comparable companies, including Continucare Corporation. The Executive &
Compensation Committee believes that the compensation paid to Mr. Earley as
President and Chief executive officer, set at $250,000 for the fiscal year
ending 2004 is reasonable compared to the compensation paid to other chief
executive officers of public companies that compete in the same area of
business as the Company. EXECUTIVE & COMPENSATION COMMITTEEDr. Martin HarrisonDr. Salomon MelgenKarl Sachs
 Compensation of Directors The Company reimburses all Directors for their expenses in connection with
their activities as Directors of the Company. The Directors make themselves
available to consult with the Companys management. Currently, two of the five
Directors of the Company are also employees of the Company and do not receive
additional compensation for their services as Directors. Through 2003, a
compensation and stock option agreement was adopted for the Companys outside
Directors in the amount of $18,000 per year, paid quarterly in the Companys
common stock valued at the average closing price for the five last days of each
month in the quarter. In addition, all outside directors received 40,000
options upon joining the Board, of which 20,000 vested immediately and the
remaining 20,000 vest after one year. These options are valued at the market
value of the effective date of board membership. Effective January 1, 2004 the
compensation stock option agreement was amended so that the Companys outside
Directors will be paid $36,000 per year and will no longer be paid in stock.
Additionally, each Director is paid $6,000 annually in stock for both committee
memberships and committee chairmanships. Performance Graph The following graph depicts the Companys stock price performance for the last
five fiscal years relative to the total returns of the NASDAQ Stock Market
Index and a group of peer companies (the Peer Group). All indices shown in
the graph have been reset to a base of 100 as of January 1, 1999 and assume an
investment of $100 on that date and the reinvestment of dividends paid since
that date. - 33 -




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(PERFORMANCE GRAPH) - 34 -




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ITEM 12
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding the Companys
Common Stock beneficially owned at December 31, 2003 (i) by each person who is
known by the Company to own beneficially 5% or more of the Companys common
stock; (ii) by each of the Companys directors; and (ii) by all executive
officers and directors as a group. Amount of
    
    PercentageName of Beneficial Owner
    
    Beneficial Ownership
    
    of ClassMartin Harrison, M.D. (1)
    
    
    5,483,660
    
    
    
    14.23
    %Fred Sternberg (2)*
    
    
    2,462,550
    
    
    
    6.39Karl Sachs (3)
    
    
    756,862
    
    
    
    1.96Debra Finnel (4)
    
    
    850,000
    
    
    
    2.21David S. Gartner (5)
    
    
    280,000
    
    
    
    0.73Salomon Melgen, M.D
    
    
    451,929
    
    
    
    1.17Michael M. Earley (6)**
    
    
    201,607
    
    
    
    0.52Directors and Executive Officers as a Group (7 persons)
    
    
    10,486,608
    
    
    
    27.22
 * Resigned as President and CEO effective March 10, 2003, Chairman of the Board
effective October 29, 2003 and as Director effective December 19, 2003 ** Appointed President, CEO and Director effective March 10, 2003    (1)
    
    Includes (1) 4,437,660 shares held by Dr. Harrison, (2) 900,000 shares
held by H30, Inc., a corporation which Dr. Harrison is a Director, (3)
40,000 shares issuable upon exercise of options at a price of $0.91 until
November 2, 2006 and (4) 70,000 shares issuable upon exercise of options
at a price of $0.70 until December 19, 2008 (5) 21,000 shares issuable
upon exercise of options at a price of $6.938 expiring between April 2004
and April 2005 and (6) 21,000 shares issuable upon exercise of options at
a price of $7.938 expiring between April 2004 and April 2005.(2)
    
    Includes (1) 3,700 shares held by Mr. Sternberg (2) 505,850 shares held
by Sternco, Inc., a corporation which Mr. Sternberg is President, (3)
18,000 shares held by Mr. Sternbergs wife, and (4) 1,960,000 shares
issuable upon the exercise of options at prices ranging from $0.30 to
$2.00 with expirations from May 2004 to December 2008. Does not include
25,000 shares issuable upon the exercise of options at $1.00 per share
that have not yet vested.(3)
    
    Includes (1) 25, 000 shares issuable upon exercise of options at a price
of $0.30, expiring in February 2006, (2) 172,500 shares issuable upon the
exercise of options at a price of $0.35, expiring in September 2008 and
(3) 57,500 shares issuable upon the exercise of options at a price of
$0.35 that expiring in December 2008.(4)
    
    Includes (1) 50,000 shares held by Debra Finnel, (2) 150,000 shares
issuable upon the exercise of options at $0.50 per share, expiring between
October 2005 and October 2007, (3) 200,000 shares issuable upon the
exercise of options at a price of $1.00, expiring between 1/1/07 and
1/1/08 (4) 350,000 shares issuable upon the exercise of options at a price
of $0.35, expiring in September of 2008 and (5) 100,000 shares issuable
upon the exercise of options at a price of $1.00 expiring 1/1/09.(5)
    
    Includes 180,000 shares issuable upon the exercise of options at a price
of $0.35, expiring in September 2008.(6)
    
    Includes (1) 40,000 shares issuable upon the exercise of options at a
price of $0.30 per share, expiring between June 2005 and June 2006, (2)
25,000 shares issuable upon the exercise of options at a price of $2.00
per share, expiring in September 2005 and (3) 116,667 shares issuable upon
the exercise of options at - 35 -




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a price of $0.35 per share, expiring in December 2008. Does not include
233,333 shares issuable upon the exercise of options at a price of $0.35
per share that have not yet vested. Equity Compensation Plan The following table details information regarding the Companys existing equity
compensation plans as of December 31, 2003: Number ofNumber of securities
    
    Weighted-
    
    securitiesto be issued upon
    
    average exercise
    
    remainingexercise of
    
    price of
    
    available foroutstanding options,
    
    outstanding
    
    issuance underwarrants
    
    options, warrants
    
    equity compensaand rights
    
    and rights
    
    tion plansEquity compensation
plans approved by
security holders
(1)
    
    
    2,000,000
    
    
    $
    0.43
    
    
    
    0Equity compensation
plans not approved
by security holders
(2)
    
    
    8,253,242
    
    
    $
    1.22
    
    
    
    0
   (1) Issued pursuant to the Companys 2001 Stock Option Plan. (2) Issued pursuant to the Companys Supplemental Stock Option Plan (the
Supplemental Plan). The Supplemental Stock Option Plan The Supplemental Plan provides for the grant to our officers, directors,
employees and consultants of nonqualified stock options. The Supplemental Plan
provides for the grant of options for up to 8,253,242 shares of the Companys
common stock. The Supplemental Plan is administered by the Compensation
Committee. The Compensation Committee determines the terms of options granted
under the Supplemental Plan, including the number of shares subject to the
option, exercise price, term, and exercisability. The exercise price may be
equal to, more than or less than 100% of fair market value on the date the
option is granted, as determined by the Compensation Committee. Unless
otherwise determined by the Compensation Committee, each option shall expire
and terminate five years after the subject option grant date. Unless otherwise
determined by the Compensation Committee, in the event the holder of an option
leaves the employ of the Company or ceases performing services for the Company
or any subsidiary of the Company for any reason including, without limitation,
termination, resignation, death, disability or otherwise, the unvested portion
of any option shall immediately expire. The Compensation Committee has the authority to amend or terminate the
Supplemental Plan, provided that shareholder approval shall be required if such
approval is necessary to comply with any tax or regulatory requirement. - 36 -




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ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company, for the current year ending December 31, 2003, paid Vitreo Retinal
Consultants, a company owned by Dr. Salomon Melgen, a shareholder and director,
$393,000 for services rendered as a physician in the Companys provider
network. The fees paid were usual and customary for the services provided. The Company, for the current year ending December 31, 2003, paid Dr. Martin
Harrison, a shareholder and director, $25,000 for consulting services. All future transactions between the Company and any officer, director or 5%
shareholder will be on terms no less favorable than could be obtained from
independent third parties and will be approved by a majority of the independent
disinterested directors of the Company. 
 ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES The Audit Committee of the Board of Directors has selected Kaufman, Rossin &
Co. PA as the independent public accountants for the fiscal year ending
December 31, 2003, and the Board of Directors, including a majority of the
Directors who are not interested persons (as defined in the 1940 Act), has
unanimously ratified such selection. Kaufman, Rossin & Co. PAs service is
subject to removal by a majority of the outstanding shares of the Company. The following table presents fees billed in each of the last two fiscal years
for services rendered to the Company by Kaufman, Rossin & Co. PA: Fiscal Year Ended
    
    Audit Fees
    
    Audit-Related Fees
    
    Tax Fees
    
    All Other FeesDecember 31, 2003
    
    $
    285,513
    
    
    $
    31,864
    
    
    $
    32,780
    
    
    $
    17,080December 31, 2002
    
    $
    308,347
    
    
    $
    37,349
    
    
    $
    18,178
    
    
    $
    
 Audit Fees represents fees billed for each of the last two fiscal years for
professional services rendered for the audit of the Companys annual financial
statements and review of financial statements included in the Companys Form
10-Q or services that are normally provided by the accountant in connection
with statutory or regulatory filings or engagements for those fiscal years. Audit Related Fees represents fees billed for each of the last two fiscal
years for assurance and related services reasonably related to the performance
of the audit of the Companys annual financial statements for those years. For
the two years, audit-related fees consisted of SEC registration statement
consent procedures. Tax Fees represents fees billed for each of the last two fiscal years for
professional services related to tax compliance, tax advice and tax planning,
including preparation of federal and state income tax returns. All Other Fees represents fees billed for other products and services
rendered by Kaufman Rossin & Co. PA to the Company for the last two fiscal
years. In 2003, these fees primarily - 37 -




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consisted of services provided in connection with the companys investigation
by the U.S. Attorneys Office in Wilmington, Delaware. Pre-Approval Policies of the Audit Committee. The Audit Committee has
determined that all work performed for the Company by Kaufman Rossin & Co. PA
for the year will be pre-approved by the full Audit Committee and, therefore,
has not adopted pre-approval procedures. All audit and non-audit services
performed by Kaufman Rossin & Co. PA for the Company during 2003, to the extent
that such services related directly to the operations and financial reporting
of the Company, have been pre-approved by the Audit Committee. The percentage
of Audit-Related Fees, Tax-Fees and Other Fees set forth in the table
above that were waived pursuant to 17 CFR 210.2-01(c)(7)(i)(c) was zero. 
 PART IV 
 ITEM 15 EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: (1) Financial Statements - 38 -




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METROPOLITAN HEALTH
NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 C O N T E N T S PageINDEPENDENT AUDITORS REPORT
    
    
    F-2CONSOLIDATED FINANCIAL STATEMENTSBalance Sheets
    
    
    F-3Statements of Operations
    
    
    F-4Statements of Changes in Stockholders Equity (Deficiency in Assets)
    
    
    F-6Statements of Cash Flows
    
    
    F-7Notes to Financial Statements
    
    
    F-9-F-25




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INDEPENDENT AUDITORS REPORT 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, 2003 and 2002, 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, 2003. 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 auditing standards generally
accepted in the United States of America. 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, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. KAUFMAN, ROSSIN & CO., P.A.
 Miami, Florida
February 27, 2004, except for Notes 2, 7 and 14, as to which the date is March 22, 2004 F-2




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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS December 31,2003
    
    2002ASSETSCURRENT ASSETSCash and equivalents
    
    $
    2,176,204
    
    
    $
    399,614Accounts receivable, net of allowance of $2,539,231 and $4,647,663,
respectively
    
    
    2,138,690
    
    
    
    1,651,340Inventory
    
    
    304,248
    
    
    
    158,714Other current assets
    
    
    833,112
    
    
    
    443,896Assets held for sale
    
    
    
    
    
    
    3,303,599TOTAL CURRENT ASSETS
    
    
    5,452,254
    
    
    
    5,957,163CERTIFICATES OF DEPOSIT  restricted
    
    
    1,000,000
    
    
    
    850,000CERTIFICATES OF DEPOSIT RECEIVABLE  restricted
    
    
    
    
    
    
    150,000PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $2,363,354 and $1,998,311, respectively
    
    
    659,682
    
    
    
    883,763GOODWILL, net of accumulated amortization of $752,691
    
    
    1,992,133
    
    
    
    1,992,133OTHER ASSETS
    
    
    119,660
    
    
    
    325,852TOTAL ASSETS
    
    $
    9,223,729
    
    
    $
    10,158,911LIABILITIES AND DEFICIENCY IN ASSETSCURRENT LIABILITIESAdvances from HMO
    
    $
    164,536
    
    
    $
    1,666,953Accounts payable
    
    
    1,756,347
    
    
    
    3,774,778Accrued expenses
    
    
    1,413,195
    
    
    
    1,420,977Current maturities of capital lease obligations
    
    
    104,315
    
    
    
    126,220Current maturities of long-term debt
    
    
    975,169
    
    
    
    2,234,521Payroll taxes payable
    
    
    3,408,736
    
    
    
    3,805,598Liabilities related to assets held for sale
    
    
    
    
    
    
    755,528TOTAL CURRENT LIABILITIES
    
    
    7,822,298
    
    
    
    13,784,575CAPITAL LEASE OBLIGATIONS
    
    
    3,092
    
    
    
    122,416LONG-TERM DEBT
    
    
    1,901,000
    
    
    
    3,120,213TOTAL LIABILITIES
    
    
    9,726,390
    
    
    
    17,027,204COMMITMENTS AND CONTINGENCIESDEFICIENCY IN ASSETSPreferred stock, par value $.001 per share; stated value $100 per share;
10,000,000 shares authorized; 5,000 issued and outstanding
    
    
    500,000
    
    
    
    500,000Common stock, par value $.001 per share; 80,000,000 shares authorized;
38,527,699 and 31,376,822 issued and outstanding, respectively
    
    
    38,527
    
    
    
    31,376Additional paid-in capital
    
    
    31,343,887
    
    
    
    29,660,886Accumulated deficit
    
    
    (32,238,333
    )
    
    
    (36,640,086
    )Common stock issued for services to be rendered
    
    
    (146,742
    )
    
    
    (420,469
    )TOTAL DEFICIENCY IN ASSETS
    
    
    (502,661
    )
    
    
    (6,868,293
    )TOTAL LIABILITIES AND DEFICIENCY IN ASSETS
    
    $
    9,223,729
    
    
    $
    10,158,911
 See accompanying notes to consolidated financial statements. F-3




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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31,2003
    
    2002
    
    2001REVENUES
    
    $
    143,874,488
    
    
    $
    140,063,566
    
    
    $
    128,186,307EXPENSESDirect medical costs
    
    
    121,010,410
    
    
    
    133,587,130
    
    
    
    114,594,876Payroll, payroll taxes and benefits
    
    
    7,846,785
    
    
    
    7,698,593
    
    
    
    6,076,115Medical supplies
    
    
    2,127,009
    
    
    
    1,913,446
    
    
    
    62,717Depreciation and amortization
    
    
    654,942
    
    
    
    946,325
    
    
    
    845,798Bad debt expense
    
    
    100,000
    
    
    
    250,000
    
    
    
    288,000Rent and leases
    
    
    1,016,152
    
    
    
    854,349
    
    
    
    756,906Consulting expense
    
    
    1,351,446
    
    
    
    2,663,362
    
    
    
    1,081,800General and administrative
    
    
    2,556,676
    
    
    
    3,048,538
    
    
    
    2,278,463TOTAL EXPENSES
    
    
    136,663,420
    
    
    
    150,961,743
    
    
    
    125,984,675INCOME/(LOSS) BEFORE OTHER INCOME (EXPENSE)
    
    
    7,211,068
    
    
    
    (10,898,177
    )
    
    
    2,201,632OTHER INCOME (EXPENSE):Gain (loss) on settlements of litigation
    
    
    (105,000
    )
    
    
    (65,389
    )
    
    
    177,000Write down of accounts receivable from closed practices
    
    
    
    
    
    
    (520,000
    )
    
    
    (775,000
    )Interest and penalty expense
    
    
    (1,322,878
    )
    
    
    (2,443,851
    )
    
    
    (649,091
    )Other income
    
    
    78,113
    
    
    
    61,617
    
    
    
    43,449TOTAL OTHER INCOME (EXPENSE)
    
    
    (1,349,765
    )
    
    
    (2,967,623
    )
    
    
    (1,203,642
    )INCOME/(LOSS) FROM CONTINUING OPERATIONS
    
    
    5,861,303
    
    
    
    (13,865,800
    )
    
    
    997,990DISCONTINUED OPERATIONS:Gain (Loss) on disposal of discontinued business segments
    
    
    289,605
    
    
    
    (833,657
    )
    
    
    Loss from operations of discontinued business segments
    
    
    (1,749,155
    )
    
    
    (2,381,430
    )
    
    
    (1,303,404
    )LOSS FROM DISCONTINUED OPERATIONS
    
    
    (1,459,550
    )
    
    
    (3,215,087
    )
    
    
    (1,303,404
    )NET INCOME (LOSS) BEFORE INCOME TAXES
    
    
    4,401,753
    
    
    
    (17,080,887
    )
    
    
    (305,414
    )INCOME TAX EXPENSE
    
    
    
    
    
    
    
    
    
    
    (63,827
    )NET INCOME/(LOSS)
    
    $
    4,401,753
    
    
    $
    (17,080,887
    )
    
    $
    (369,241
    )WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
    
    
    34,750,173
    
    
    
    30,374,669
    
    
    
    25,859,411INCOME (LOSS) FROM CONTINUING OPERATIONS:Basic
    
    $
    0.17
    
    
    $
    (0.46
    )
    
    $
    0.03Diluted
    
    $
    0.13
    
    
    $
    (0.46
    )
    
    $
    0.03LOSS FROM DISCONTINUED OPERATIONS:Basic
    
    $
    (0.04
    )
    
    $
    (0.10
    )
    
    $
    (0.05
    )Diluted
    
    $
    (0.03
    )
    
    $
    (0.10
    )
    
    $
    (0.05
    )NET EARNINGS (LOSS) PER SHARE:Basic
    
    $
    0.13
    
    
    $
    (0.56
    )
    
    $
    (0.02
    )Diluted
    
    $
    0.10
    
    
    $
    (0.56
    )
    
    $
    (0.02
    )
 See accompanying notes to consolidated financial statements F-4




---



##### Table of Contents



METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(DEFICIENCY IN ASSETS)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 Common
    
    
    
    
    
    AdditionalPreferred
    
    Preferred
    
    Stock
    
    Common
    
    Paid-in
    
    Prepaid
    
    AccumulatedShares
    
    Stock
    
    Shares
    
    Stock
    
    Capital
    
    Expenses
    
    Deficit
    
    TotalBALANCES - DECEMBER 31, 2000
    
    
    5,000
    
    
    $
    500,000
    
    
    
    21,717,233
    
    
    $
    21,717
    
    
    $
    18,936,714
    
    
    $
    (33,258
    )
    
    $
    (19,189,958
    )
    
    $
    235,215Shares issued in connection with
private placement, net
    
    
    
    
    
    
    
    
    
    
    3,312,788
    
    
    
    3,313
    
    
    
    5,027,986
    
    
    
    
    
    
    
    
    
    
    
    5,031,299Shares issued upon conversion of
convertible debt
    
    
    
    
    
    
    
    
    
    
    826,298
    
    
    
    826
    
    
    
    799,175
    
    
    
    
    
    
    
    
    
    
    
    800,001Shares issued for consulting services
and compensation
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    25
    
    
    
    15,863
    
    
    
    
    
    
    
    
    
    
    
    15,888Shares issued for prepaid consulting
agreement, net of amortization expense
    
    
    
    
    
    
    
    
    
    
    462,500
    
    
    
    463
    
    
    
    290,252
    
    
    
    (278,174
    )
    
    
    
    
    
    
    12,541Exercise of options and warrants
    
    
    
    
    
    
    
    
    
    
    685,516
    
    
    
    686
    
    
    
    452,202
    
    
    
    
    
    
    
    
    
    
    
    452,888Shares issued for directors fees
    
    
    
    
    
    
    
    
    
    
    63,376
    
    
    
    63
    
    
    
    81,436
    
    
    
    
    
    
    
    
    
    
    
    81,499Shares issued for interest expense and late
fees
    
    
    
    
    
    
    
    
    
    
    139,443
    
    
    
    139
    
    
    
    61,552
    
    
    
    
    
    
    
    
    
    
    
    61,691Shares issued in connection with
line of credit
    
    
    
    
    
    
    
    
    
    
    57,767
    
    
    
    58
    
    
    
    73,919
    
    
    
    
    
    
    
    
    
    
    
    73,977Shares issued in settlement of payables
    
    
    
    
    
    
    
    
    
    
    189,166
    
    
    
    189
    
    
    
    102,579
    
    
    
    
    
    
    
    
    
    
    
    102,768Issuance of options for services, net
of amortization expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203,227
    
    
    
    (5,932
    )
    
    
    
    
    
    
    197,295Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (369,241
    )
    
    
    (369,241
    )BALANCES - DECEMBER 31, 2001
    
    
    5,000
    
    
    $
    500,000
    
    
    
    27,479,087
    
    
    $
    27,479
    
    
    $
    26,044,905
    
    
    $
    (317,364
    )
    
    $
    (19,559,199
    )
    
    $
    6,695,821Shares issued in connection with
private placement, net
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    200
    
    
    
    199,800
    
    
    
    
    
    
    
    
    
    
    
    200,000Shares issued upon conversion of
convertible debt
    
    
    
    
    
    
    
    
    
    
    1,251,778
    
    
    
    1,252
    
    
    
    1,010,371
    
    
    
    
    
    
    
    
    
    
    
    1,011,623Shares issued for consulting services
and compensation
    
    
    
    
    
    
    
    
    
    
    1,070,000
    
    
    
    1,070
    
    
    
    223,897
    
    
    
    (221,100
    )
    
    
    
    
    
    
    3,867Shares issued for commissions, net
    
    
    
    
    
    
    
    
    
    
    265,500
    
    
    
    266
    
    
    
    66,801
    
    
    
    (50,000
    )
    
    
    
    
    
    
    17,067Exercise of options and warrants
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    67Shares issued for directors fees
    
    
    
    
    
    
    
    
    
    
    57,274
    
    
    
    57
    
    
    
    69,943
    
    
    
    
    
    
    
    
    
    
    
    70,000Shares issued for interest expense and late
fees
    
    
    
    
    
    
    
    
    
    
    263,000
    
    
    
    263
    
    
    
    132,130
    
    
    
    (57,778
    )
    
    
    
    
    
    
    74,615Shares issued in connection with
equity line, net
    
    
    
    
    
    
    
    
    
    
    38,475
    
    
    
    38
    
    
    
    35,667
    
    
    
    
    
    
    
    
    
    
    
    35,705Shares issued in settlement of payables
    
    
    
    
    
    
    
    
    
    
    801,641
    
    
    
    801
    
    
    
    271,650
    
    
    
    
    
    
    
    
    
    
    
    272,451Shares cancelled in connection with
previous acquisition
    
    
    
    
    
    
    
    
    
    
    (50,000
    )
    
    
    (50
    )
    
    
    (66,617
    )
    
    
    
    
    
    
    
    
    
    
    (66,667
    )Cancellation of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72,000
    )
    
    
    
    
    
    
    
    
    
    
    (72,000
    )Issuance of options for services, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    523,900
    
    
    
    (189,000
    )
    
    
    
    
    
    
    334,900Imputed interest on beneficial
conversion feature
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,220,372
    
    
    
    
    
    
    
    
    
    
    
    1,220,372Amortization of prepaid expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    414,773
    
    
    
    
    
    
    
    414,773Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,080,887
    )
    
    
    (17,080,887
    )BALANCES - DECEMBER 31, 2002
    
    
    5,000
    
    
    $
    500,000
    
    
    
    31,376,822
    
    
    $
    31,376
    
    
    $
    29,660,886
    
    
    $
    (420,469
    )
    
    $
    (36,640,086
    )
    
    $
    (6,868,293
    )Shares issued upon conversion of
convertible debt
    
    
    
    
    
    
    
    
    
    
    3,670,214
    
    
    
    3,670
    
    
    
    1,093,834
    
    
    
    
    
    
    
    
    
    
    
    1,097,504Cancellation of shares issued for consulting services
    
    
    
    
    
    
    
    
    
    
    (480,000
    )
    
    
    (480
    )
    
    
    (63,521
    )
    
    
    64,001
    
    
    
    
    
    
    
    Shares issued for compensation
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    100
    
    
    
    18,900
    
    
    
    
    
    
    
    
    
    
    
    19,000Exercise of options and warrants
    
    
    
    
    
    
    
    
    
    
    110,000
    
    
    
    110
    
    
    
    34,390
    
    
    
    
    
    
    
    
    
    
    
    34,500Shares issued for directors fees
    
    
    
    
    
    
    
    
    
    
    329,760
    
    
    
    330
    
    
    
    57,170
    
    
    
    
    
    
    
    
    
    
    
    57,500Shares issued for interest expense, late fees
and loan extension
    
    
    
    
    
    
    
    
    
    
    2,865,272
    
    
    
    2,865
    
    
    
    386,195
    
    
    
    (120,000
    )
    
    
    
    
    
    
    269,060Shares issued in settlement of payables
    
    
    
    
    
    
    
    
    
    
    555,631
    
    
    
    556
    
    
    
    156,033
    
    
    
    
    
    
    
    
    
    
    
    156,589Amortization of prepaid expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    329,726
    
    
    
    
    
    
    
    329,726Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,401,753
    
    
    
    4,401,753BALANCES - DECEMBER 31, 2003
    
    
    5,000
    
    
    $
    500,000
    
    
    
    38,527,699
    
    
    $
    38,527
    
    
    $
    31,343,887
    
    
    $
    (146,742
    )
    
    $
    (32,238,333
    )
    
    $
    (502,661
    )
 See accompanying notes to consolidated financial statements F-5




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##### Table of Contents



METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31,2003
    
    2002
    
    2001CASH FLOWS FROM OPERATING ACTIVITIES:Net income/(loss)
    
    $
    4,401,753
    
    
    $
    (17,080,887
    )
    
    $
    (369,241
    )Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:Unfavorable (favorable) resolution of unsettled medical costs
    
    
    
    
    
    
    6,598,563
    
    
    
    (1,879,000
    )Provision and medical cost adjustments related to HMO receivables
    
    
    
    
    
    
    
    
    
    
    Gain on settlements of litigation
    
    
    
    
    
    
    
    
    
    
    (177,000
    )Gain on sale of business segment
    
    
    (289,605
    )
    
    
    
    
    
    
    Write-down of accounts receivable from closed practices
    
    
    
    
    
    
    520,000

    
    
    
    775,000Loss on disposal of business segment
    
    
    
    
    
    
    833,657
    
    
    
    Write-down of goodwill from closed practices
    
    
    
    
    
    
    
    
    
    
    54,161Depreciation and amortization
    
    
    529,228
    
    
    
    946,325
    
    
    
    845,798Provision for bad debts and direct write-downs
    
    
    100,000
    
    
    
    550,000
    
    
    
    288,000Amortization of discount on notes payable
    
    
    201,092
    
    
    
    103,798
    
    
    
    36,206Interest imputed on beneficial conversion feature
    
    
    
    
    
    
    1,220,372
    
    
    
    Stock issued for interest and late fees
    
    
    80,000
    
    
    
    
    
    
    
    61,691Stock issued in connection with settlements
    
    
    
    
    
    
    
    
    
    
    102,768Stock issued for compensation and services
    
    
    288,598
    
    
    
    86,800
    
    
    
    97,362Warrants and options granted in lieu of compensation
    
    
    
    
    
    
    414,773
    
    
    
    81,800Amortization of securities issued for professional services
    
    
    329,726
    
    
    
    313,527
    
    
    
    128,036Changes in assets and liabilities:Accounts receivable, net
    
    
    (587,350
    )
    
    
    756,604
    
    
    
    (2,450,492
    )Inventory
    
    
    (145,534
    )
    
    
    (158,714
    )
    
    
    Other current assets
    
    
    (389,216
    )
    
    
    (66,508
    )
    
    
    (232,900
    )Net change in operating assets held for sale
    
    
    (262,324
    )
    
    
    (2,309,552
    )
    
    
    (238,519
    )Other assets
    
    
    42,008
    
    
    
    (766,166
    )
    
    
    (49,995
    )Due to related parties
    
    
    
    
    
    
    
    
    
    
    (105,800
    )Accounts payable and accrued expenses
    
    
    (1,780,119
    )
    
    
    2,829,581
    
    
    
    219,908Payroll taxes payable
    
    
    (396,862
    )
    
    
    1,235,205
    
    
    
    Unearned revenue
    
    
    
    
    
    
    
    
    
    
    (906,944
    )Total adjustments
    
    
    (2,280,358
    )
    
    
    13,108,265
    
    
    
    (3,349,920
    )Net cash provided by/(used in) operating activities
    
    
    2,121,395
    
    
    
    (3,972,622
    )
    
    
    (3,719,161
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of pharmacy
    
    
    3,100,000
    
    
    
    
    
    
    
    Purchase of restricted certificates of deposit
    
    
    (150,000
    )
    
    
    (850,000
    )
    
    
    Capital expenditures
    
    
    (140,962
    )
    
    
    (194,674
    )
    
    
    (92,882
    )Net cash provided by/(used in) investing activities
    
    
    2,809,038
    
    
    
    (1,044,674
    )
    
    
    (92,882
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings on notes payable
    
    
    637,137
    
    
    
    5,682,315
    
    
    
    733,587Repayments on notes payable
    
    
    (2,181,834
    )
    
    
    (1,359,326
    )
    
    
    (434,113
    )Repayments on capital lease obligations
    
    
    (141,229
    )
    
    
    (102,894
    )
    
    
    (52,049
    )Proceeds from exercise of stock options and warrants
    
    
    34,500
    
    
    
    
    
    
    
    452,888Proceeds from issuance of warrants
    
    
    
    
    
    
    353,075
    
    
    
    Net proceeds from issuance of common stock
    
    
    
    
    
    
    235,772
    
    
    
    5,105,905Advances from (repayments to) HMO
    
    
    (1,502,417
    )
    
    
    214,000
    
    
    
    (1,644,931
    )Net cash (used in)/provided by financing activities
    
    
    (3,153,843
    )
    
    
    5,022,942
    
    
    
    4,161,287NET INCREASE IN CASH AND EQUIVALENTS
    
    
    1,776,590
    
    
    
    5,646
    
    
    
    349,244CASH AND EQUIVALENTS - BEGINNING
    
    
    399,614
    
    
    
    393,968
    
    
    
    44,724CASH AND EQUIVALENTS - ENDING
    
    $
    2,176,204
    
    
    $
    399,614
    
    
    $
    393,968
 See accompanying notes to consolidated financial statements F-6




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##### Table of Contents



For the years ended December 31,2003
    
    2002
    
    2001Supplemental Disclosures:Interest Paid
    
    $
    1,383,863
    
    
    $
    980,475
    
    
    $
    471,130Supplemental Disclosure of Non-cash Investing and
Financing Activities (Note 3)Issuance of notes payable in connection with
acquisitions
    
    $
    
    
    
    $
    
    
    
    $
    150,000Fair value of assets received in connection
with acquisitions
    
    $
    
    
    
    $
    
    
    
    $
    78,608Fair value of liabilities assumed in
connection with acquisitions
    
    $
    
    
    
    $
    
    
    
    $
    507,462Capital lease obligations incurred on
purchases of equipment
    
    $
    
    
    
    $
    45,009
    
    
    $
    277,074Purchase price in excess of net assets acquired
    
    $
    
    
    
    $
    
    
    
    $
    158,853Conversion of debt into common stock
    
    $
    1,083,465
    
    
    $
    1,342,343
    
    
    $
    800,001Commitments to purchase restricted
certificates of deposit
    
    $
    
    
    
    $
    150,000
    
    
    $
    Common stock issued for extension and interest
fees on loans payable
    
    $
    75,000
    
    
    $
    
    
    
    $
    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




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##### Table of Contents



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. The Company operates principally in South and Central Florida. The
Company and certain of the wholly owned general medical practices operate under
agreements with a national health maintenance organization (HMO). Commencing in
1999, the Company entered into additional agreements with the HMO in locations
where it did not have owned medical practices and in connection therewith,
began contracting with physicians to provide medical care to certain patients
through non-owned medical practices (see accounts receivable and revenue
recognition). In October 2000, the Company acquired a clinical laboratory, which
operated in South Florida. The laboratory ceased operations and was closed in
July 2002. 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. 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
in 2001 and 2002 it operated in three segments and in 2003 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 Cash 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. Inventory Inventory consists principally of prescription drugs that are stated at
the lower of cost or market with costs 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. F-8




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##### Table of Contents



METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 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 yearsComputer and office equipment, including items under capital lease
    
    5-7 yearsFurniture and fixtures
    
    5-7 yearsAuto equipment
    
    5 yearsLeasehold improvements
    
    5 years
 Use of Estimates 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 reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses for the periods presented. Actual results could differ from those
estimates. In the health care environment, estimates often change as a result of one
or more future confirming events. With regard to revenues, expenses and
receivables arising from agreements with the HMO, the Company estimates amounts
it believes will ultimately be realizable through the use of judgments and
assumptions. 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. Direct medical costs are based in part upon estimates of claims incurred
but not reported (IBNR) and estimates of retroactive adjustments or unsettled
costs to be applied by the HMO. The IBNR estimates are made by the HMO
utilizing actuarial methods and are continually evaluated by management of the
Company based upon its specific claims experience. The estimates of retroactive
adjustments or unsettled costs to be applied by the HMO are based upon current
agreements and understandings with the HMO to modify certain amounts previously
charged to the Companys fund balances. At December 31, 2003, approximately
$192,000 of estimated retroactive adjustments to medical costs was outstanding
and included as an addition to accounts receivable. At December 31, 2002,
approximately $800,000 of estimated retroactive adjustments to medical costs
was outstanding and included as an offset to advances from HMO and
approximately $500,000 of such adjustments were included in accounts
receivable. Management believes its estimates of IBNR claims and estimates of
retroactive adjustments are appropriate, however, it is reasonably possible the
Companys estimate of these costs could change in the near term, and those
changes may be material. From time to time, the Company is charged for certain medical expenses for
which, under its contract with the HMO, the Company believes it is not liable.
In connection therewith, at December 31, 2003 and 2002, the Company was
contesting certain costs aggregating approximately $4.2 million and $1.8
million, respectively. Managements estimate of recovery on these contestations
is determined based upon its judgment and its consideration of several factors
including the nature of the contestations, historical recovery rates and other
qualitative factors. Accordingly, at December 31, 2003 and 2002 the net amount
due from the HMO includes approximately $835,000 and $370,000, respectively,
which represents an estimated recovery of 20% of contestations outstanding at
each of the two year ends. It is reasonably possible the Companys estimate of
these recoveries could change in the near term, and those changes may be
material. Revenues from the HMO accounted for approximately 99% of the Companys
total revenues, excluding discontinued segments, for each of the three years
ended December 31, 2003 and at December 31, 2003 and 2002, the HMO represented
approximately 83% and 64% of the total accounts receivable balance,
respectively. Direct medical costs relating to revenues from the HMO accounted
for approximately 85% of the Companys HMO revenues in 2003, 96% in 2002 and
90% in 2001. The loss of the contracts with the HMO could significantly impact
the operating results of the Company. F-9




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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) As discussed above, the nature of the relationship with the HMO is, and
has been such that certain estimates made by the Company are based upon verbal
agreements with, or representations from the HMO regarding retroactive
adjustments to amounts previously credited or charged to the Companys fund
balance. These estimates are particularly likely to change as policy, and or
personnel at the HMO changes. For the year ended December 31, 2003 there were
no material changes to net income as a result of favorable or unfavorable
settlements of 2002 estimates. In connection with a change in the HMOs
management during 2002, deterioration in the relationship with the HMO in the
fourth quarter of 2002, and other factors, during 2002 Metropolitan recorded
additional medical costs of approximately $6.6 million related to amounts that
were included in accounts receivable at December 31, 2001. Conversely, in 2001
upon favorable resolution of unsettled medical costs Metropolitan recorded a
reduction to medical costs of approximately $1.9 million. Accordingly, the
2002 gross profit and resulting net income was decreased by approximately $6.6
million due to unfavorable settlements estimated as of December 31, 2001, and
the 2001 gross profit and resulting net income was increased by approximately
$1.9 million due to favorable settlements estimated as of December 31, 2000. Non-HMO accounts receivable, aggregating approximately $2.9 million and
$5.2 million at December 31, 2003 and 2002, respectively, relate principally to
medical services provided on a fee for service basis, and are reduced by
amounts estimated to be uncollectible (approximately $2.5 million and $4.6
million at December 31, 2003 and 2002, respectively). Managements estimate of
uncollectible amounts is based upon its analysis of historical collections and
other qualitative factors, however it is reasonable possible the companys
estimate of uncollectible amounts could change in the near term, and those
changes may be material. 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 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, 2003, the fair values approximate the carrying
values. F-10




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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Net Income (Loss) Per Share The following table sets forth the computations of basic earnings per
share and diluted earnings per share: For the years ended December 31,2003
    
    2002
    
    2001Net Income/(Loss) from continuing operations
    
    $
    5,861,303
    
    
    $
    (13,865,800
    )
    
    $
    934,163Less: Preferred stock dividends
    
    
    (50,000
    )
    
    
    (50,000
    )
    
    
    (50,000
    )5,811,303
    
    
    
    (13,915,800
    )
    
    
    884,163Loss from discontinued operations
    
    
    (1,459,550
    )
    
    
    (3,215,087
    )
    
    
    (1,303,404
    )Income/(Loss) available to common shareholders
    
    $
    4,351,753
    
    
    $
    (17,130,887
    )
    
    $
    (419,241
    )Denominator:Weighted average common shares outstanding
    
    
    34,750,173
    
    
    
    30,374,669
    
    
    
    25,859,411Basic earnings/(loss) per common share
    
    $
    0.13
    
    
    $
    (0.56
    )
    
    $
    (0.02
    )Net Income/(Loss)
    
    $
    4,401,753
    
    
    $
    (17,080,887
    )
    
    $
    (369,241
    )Interest on convertible securities
    
    
    81,379
    
    
    
    
    
    
    
    $
    4,483,132
    
    
    $
    (17,080,887
    )
    
    $
    (369,241
    )Denominator:Weighted average common shares outstanding
    
    
    34,750,173
    
    
    
    30,374,669
    
    
    
    25,859,411Common share equivalents of outstanding stock:Convertible preferred
    
    
    4,901,963
    
    
    
    
    
    
    
    Convertible debt
    
    
    7,262,703
    
    
    
    
    
    
    
    Weighted average common shares outstanding
    
    
    46,914,839
    
    
    
    30,374,669
    
    
    
    25,859,411Diluted earnings/(loss) per common share
    
    $
    0.10
    
    
    $
    (0.56
    )
    
    $
    (0.02
    )
 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 2002 and 2001, 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. During the fiscal years 2003, 2002 and 2001, the Company had outstanding
warrants to purchase 2,924,775, 3,324,775 and 1,844,150 shares of common stock,
respectively. The exercise prices of the warrants range from $0.32 to $4.00 in
2003 and $0.32 to $6.00 in 2002 and 2001. During the fiscal years 2003, 2002 and 2001, the Company had outstanding
options to purchase 7,328,467, 5,205,717 and 5,736,250 shares of common stock,
respectively. The weighted average exercise price of the options was $0.94 in
2003, $1.46 in 2002 and $1.81 in 2001. For the fiscal year 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. For the fiscal year 2002, the Company had convertible debt in the amount
of $2,997,107, which could have been converted into the common stock of the
Company at a range of 75% of market value at the date of conversion to $2.50
per share. F-11




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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the fiscal year 2001, the Company had convertible debt in the amount
of $774,182, which could have been converted into the common stock of the
Company at prices ranging from $0.74 to $2.50 per share. Accounts Receivable and Revenue Recognition The Company recognizes revenues, net of contractual allowances, as medical
services are provided to patients. 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. The Company is a party to certain managed care contracts and provides
medical care to its patients through owned and non-owned medical practices.
Accordingly, revenues under these contracts are reported as Provider Service
Network (PSN) 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 PSN operations, 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 owned and non-owned managed
medical practices. Advances from HMO Advances represent loans from the HMO that are due on demand. These
amounts are expected to be repaid via offsets to future revenues earned from
the HMO. Goodwill In connection with its acquisitions of physician and ancillary practices, the
Company has recorded goodwill of $1,992,133 for each of the two years ended
December 31, 2003, 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 reviewed the useful lives of its
identifiable intangible assets and determined that the original estimated lives
remain appropriate. Effective January 1, 2002 the Company, through the use of
an outside business valuation expert completed a transitional goodwill
impairment test and determined that the Company did not have a transitional
impairment of goodwill. Subsequent to that analysis, during the quarter ended
September 30, 2002, the Company disposed of a segment of its business and
charged off net goodwill of approximately $986,000. The Company has performed
its annual impairment tests relating to retained business segments effective
January 1, 2003 and has determined that no impairment exists. The changes in the carrying amount of goodwill for the years ended
December 31, 2003 and 2002 are as follows: 2003
    
    2002Balance as of January 1
    
    $
    1,992,133
    
    
    $
    2,977,874Goodwill written off related to disposal
of business segment
    
    
    
    
    
    
    (985,741
    )Balance as of December 31, 2003
    
    $
    1,992,133
    
    
    $
    1,992,133
 As required by SFAS 142, Goodwill and Other Intangible Assets, the
Company has not amortized goodwill associated with acquisitions completed after
June 30, 2001, or any period presented and ceased amortization of goodwill
associated with acquisitions completed prior to July 1, 2001, effective January
1, 2002. Prior to January 1, 2002, the Company amortized goodwill associated
with the pre-July 1, 2001 acquisitions over ten years using the straight-line
method. A reconciliation of reported net income (loss) adjusted to reflect the
adoption of SFAS No. 142 is provided below: F-12




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##### Table of Contents



METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Year EndedDecember 31, 2001Reported net income (loss)
    
    $
    (369,241
    )Add-back goodwill amortization, net of tax
    
    
    264,338Adjusted net income (loss)
    
    $
    (104,903
    )Reported basic net income per share
    
    $
    (0.02
    )Add-back goodwill amortization
    
    
    0.01Adjusted basic net income (loss) per share
    
    $
    (0.01
    )Reported diluted net income (loss) per share
    
    $
    (0.02
    )Add-back goodwill amortization
    
    
    0.01Adjusted diluted net income (loss) per share
    
    $
    (0.01
    )
 Income Taxes The Company accounts for income taxes according to Statement of Financial
Accounting Standards No. 109, which requires a liability approach to
calculating deferred income taxes. Under this method, the Company records
deferred taxes based on temporary differences between the tax bases of the
Companys assets and liabilities and their financial reporting bases. 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. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143 which requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred and a corresponding increase
in the carrying amount of the related long-lived asset. Subsequently, the asset
retirement cost should be allocated to expense using a systematic and rational
method over its useful life. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. Adoption of SFAS No. 143 did not have a
material impact on the Companys financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement addresses
accounting and reporting for costs associated with exit or disposal activities
and nullifies emerging issues Task Force Issue No. 94-3. The statement is
effective for exit or disposal costs initiated after December 31, 2002, with
early application encouraged. The Company adopted SFAS No. 146 effective
January 1, 2003, which did not have a material impact on the Companys
financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123.
This statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 amends the disclosure requirements of SFAS 123 to
require disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method on reported results. The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS 123). 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 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, 2003,
2002 and 2001 no compensation was recorded. If compensation cost had been
determined based on the fair value at the grant date for awards in the years
ended December 31, 2003, 2002 and 2001, consistent with the provisions of SFAS
123, the Companys net loss and loss per share would have been reduced to the
pro-forma amounts indicated below: F-13




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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Year Ended December 312003
    
    2002
    
    2001Net Income/(Loss)
    
    $
    4,401,753
    
    
    $
    (17,080,887
    )
    
    $
    (369,241
    )Less: Total stock-based
employee compensation expense
determined using the fair
value method, net of related
tax effects
    
    
    (543,283
    )
    
    
    
    
    
    
    (769,544
    )Adjusted net income/(loss)
    
    
    3,858,470
    
    
    $
    (17,080,887
    )
    
    
    (1,138,785
    )Earnings per share:Basic, as reported
    
    $
    0.13
    
    
    $
    (0.56
    )
    
    $
    (0.02
    )Basic, pro forma
    
    $
    0.11
    
    
    $
    (0.56
    )
    
    $
    (0.05
    )Diluted, as reported
    
    $
    0.10
    
    
    $
    (0.56
    )
    
    $
    (0.02
    )Diluted, pro forma
    
    $
    0.08
    
    
    $
    (0.56
    )
    
    $
    (0.05
    )
 On January 17, 2003, FIN 46, Consolidation of Variable Interest Entities,
an interpretation of ARB 51, was issued. The primary objective of FIN 46 is
to provide guidance on the identification and consolidation of variable
interest entities, or VIEs, which are entities for which control is achieved
through means other than through voting rights. The provision of FIN 46 was
required to be adopted by the Company in fiscal 2003. The Company adopted FIN
46 effective January 1, 2003, with no material impact on its financial
position, results of operations or cash flows. In April 2003, the FASB issued SFAS No. 149, which amends SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. The primary
focus of this Statement is to amend and clarify financial accounting and
reporting for derivative instruments. This Statement is effective for
contracts entered into or modified after June 30, 2003. Adoption of SFAS No.
149 did not have a material impact on the Companys financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting For Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity that, under previous
pronouncements, issuers could account for as equity. The new accounting
guidance contained in SFAS No. 150 requires that those instruments be
classified as liabilities in the balance sheet. SFAS No. 150 affects the
issuers accounting for three types of freestanding financial instruments. One
type is mandatory redeemable shares, which the issuing company is obligated to
buy back in exchange for cash or other assets. A second type includes put
options and forward purchase contracts, which involves instruments that do or
may require the issuer to buy back some of its shares in exchange for cash or
other assets. The third type of instruments that are liabilities under this
Statement is obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as a market
index, or varies inversely with the value of the issuers shares. SFAS No. 150
does not apply to features embedded in a financial instrument that is not a
derivative in its entirety. Most of the provisions of SFAS No. 150 are
consistent with the existing definition of liabilities in FASB Concepts
Statement No. 6, Elements of Financial Statements. The remaining provisions
of this Statement are consistent with the FASBs proposal to revise that
definition to encompass certain obligations that a reporting entity can or must
settle by issuing its own shares. This Statement shall be effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
shall be effective at the beginning of the first interim period beginning after
June 15, 2003, except for mandatory redeemable financial instruments of a
non-public entity, as to which the effective date is for fiscal periods
beginning after December 15, 2003. Adoption of SFAS No. 150 did not have a
material impact on the Companys financial statements. F-14




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##### Table of Contents



METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Reclassifications Certain amounts in the 2002 and 2001 financial statements have been
reclassified to conform to the 2003 presentation. NOTE 2. LIQUIDITY At December 31, 2002 the Company had a working capital deficit of $7.8
million, and prior to that date, the Company incurred substantial negative cash
flows from operations since inception. To address these issues, among other
things in late 2002 Management approached the HMO, seeking to renegotiate its
contract. The Company successfully completed an amendment, which, effective
January 1, 2003, provided for an increase in gross revenues on a per-member
per-month basis. Also, management conducted a review of each division in an
effort, not only to reduce costs, but also to increase revenues or eliminate
non-profitable operations. For the year ended December 31, 2003 the Company achieved positive cash
flows from operating activities of approximately $2.1 million and improved its
working capital deficit from approximately $7.8 million at December 31, 2002 to
$2.4 million at December 31, 2003. Further significant improvements to the
Companys working capital position were realized subsequent to December 31,
2003 as a consequence of certain actions by the Company; i) the Company raised
approximately $3,000,000 under a private placement of its common stock and used
these funds, plus certain cash generated from operations to settle
approximately $3.4 million in past due payroll tax related liabilities, ii) the
Company was able to repay approximately $1.0 million of debt by issuing common
stock, and iii) the Company has finalized an extension for payment over
twenty-four months, of approximately $1.2 million in debt due May 2004. Notwithstanding the improved cash flows and working capital position, the
Company has not demonstrated the ability to achieve income and positive cash
flows for an extended period of time. Also, as the Company derives
substantially all of its revenue from one HMO, and it is subject changes in the
government reimbursement rates, it is at least reasonably possible the
Companys liquidity may not be sufficient to sustain operations or planned
growth. Although management believes the operational and cash flow
improvements realized during 2003 will continue, there are no assurances this
will occur into the foreseeable future. NOTE 3. ACQUISITIONS AND DISPOSALS In the third quarter of 2002 the Company disposed of its clinical
laboratory. Accordingly, for the year ended December 31, 2002, the Company
recognized an $834,000 loss on the disposal of laboratory operations. In November 2003, the Company sold the operations of its pharmacy division
for a cash price of $3.1 million plus the assumption of approximately $1.1 in
liabilities. Accordingly, for the year ended December 31, 2003, the Company
recognized a gain of $290,000 on the disposal of pharmacy operations. Revenues from operations of discontinued business segments totaled
$12,906,000, $13,761,000 and $3,344,000 for the years ended December 31, 2003,
2002 and 2001, respectively. Losses from operations of discontinued business
segments were $1,700,000, $2,400,000 and $1,300,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. F-15




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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following: December 31,2003
    
    2002Equipment under capital lease
    
    $
    674,633
    
    
    $
    674,633Machinery and medical equipment
    
    
    249,881
    
    
    
    249,881Furniture and fixtures
    
    
    382,451
    
    
    
    339,378Leasehold improvements
    
    
    692,297
    
    
    
    655,221Computer and office equipment
    
    
    962,394
    
    
    
    901,581Automobile equipment
    
    
    61,380
    
    
    
    61,3803,023,036
    
    
    
    2,882,074Less accumulated depreciation and amortization
    
    
    (2,363,354
    )
    
    
    (1,998,311
    )$
    659,682
    
    
    $
    883,763
 Accumulated amortization of equipment under capital leases was $534,000
and $435,000 at December 31, 2003 and 2002, respectively. Depreciation and amortization of property and equipment totaled
approximately $365,000, $433,000 and $453,000 for the years ended December 31,
2003, 2002 and 2001, respectively. NOTE 5. UNEARNED REVENUE On August 22, 2000, the Company entered into a Pharmacy Services Agreement
(Pharmacy Agreement) with a medical management and software company (Pharmacy
Consultant), to provide consulting, technology, and software services for the
Companys start-up pharmacy operation, for an initial term of three years. In
connection with this agreement, the Pharmacy Consultant paid the Company
$500,000, subject to return if the Company elects to cancel the Pharmacy
Agreement under certain provisions. On October 6, 2000, the Company received an
additional $500,000 in funding from the Pharmacy Consultant in connection with
a 10-year exclusive preferred provider agreement. This amount was required to
be repaid, together with interest at prime plus 2%, should the Company default
or elect to cancel the Agreement. Of these amounts, approximately $132,000 was
recognized as revenue during the year ended December 31, 2001. On June 1, 2001, the Company terminated these agreements. Under the terms
of the termination, the Company purchased assets totaling $99,000 and assumed
certain liabilities totaling $78,000 of a Daytona pharmacy servicing the
Companys patients. In addition, the Company agreed to retain the Pharmacy
Consultant for a period of one year for a prepaid amount of $300,000. Total
consideration paid for the net assets and the unamortized balances on the
agreements was $1,028,000, on which the Company recognized a gain in the amount
of $68,000. NOTE 6. CAPITAL LEASE OBLIGATIONS The Company is obligated under capital leases relating to certain of its
property and equipment. Future minimum lease payments for capital lease
obligations for years subsequent to December 31, 2003 are as follows: 2004
    
    $
    111,8352005
    
    
    5,285117,120Less amount representing interest
    
    
    (9,713
    )107,407Less current maturities
    
    
    (104,315
    )$
    3,092
 NOTE 7. LONG-TERM DEBT F-16




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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) December 31,2003
    
    2002Long-term debt consisted of the following:Promissory Note payable to a venture
capital group; unsecured, with interest
payable quarterly at a rate of 12%.
Principal due May 24, 2004. The note has
500,000 attached warrants to purchase
common stock of the Company at $0.68.
Approximately $254,000 of the funds
received was assigned to the warrants and
this amount is being amortized and
charged to interest expense over two
years under the interest method. After
the effect of the value assigned to the
warrants, the effective rate on the note
was approximately 29%. In March 2004,
the Company renegotiated an extension,
with payments due over twenty-four
months.
    
    $
    1,182,909
    
    
    $
    1,049,037Convertible debentures payable to a
venture capital group; unsecured, with
interest payable quarterly at a rate of
6%, increasing to 13% on default.
Principal due May 24, 2004. The
debenture has 150,000 attached warrants
to purchase common stock of the Company
at $0.68. The holder, at its
discretion, may convert into shares of
common stock of the Company at 75% of
market value at the date of conversion.
Approximately $60,000 of the funds
received was assigned to the warrants and
this amount, along with a $79,000
discount, is being amortized and charged
to interest expense over two years under
the interest method. After the effect of
the value assigned to the warrants, the
effective rate on the note is 11%.
During 2003, $865,000 of the note balance
was converted into common stock of the
Company. In January 2004, the balance of
the note was converted into common stock.
    
    
    679,906
    
    
    
    1,477,686Promissory note payable to an investment
limited partnership; secured by common
stock of the Company, with interest
payable monthly at 24%. This note was
repaid in full March 2004.
    
    
    620,000
    
    
    
    500,000Convertible debentures payable to a
shareholder; unsecured, with interest
payable quarterly at a rate of 6%. The
holder, at its discretion, may convert
amount outstanding into shares of common
stock of the Company at a price of $0.43.
Principal plus accrued interest due
August 16, 2004. In March 2004, this
note was converted into common stock of
the Company.
    
    
    168,000
    
    
    
    168,000Promissory note payable to a shareholder;
unsecured, with interest payable
quarterly at a rate of 12%. Principal
plus accrued interest due August 16,
2004. In March 2004, this note was
converted into common stock of the
Company.
    
    
    132,000
    
    
    
    132,000Promissory note payable to a shareholder
of the Company, interest at 8% due and
payable on March 30, 2004, or as
otherwise agreed to by the parties. The
payee at his discretion may convert
amount outstanding on the note into
shares of the common stock of the Company
at $2.50 per share. The note has 16,667
attached warrants at prices ranging from
$2.50 to $4.00, also expiring March 30,
2004.
    
    
    67,000
    
    
    
    67,000Note payable to HMO; interest at 5%,
increased to 14% if note defaults;
payable in 60 monthly installments of
$7,489 commencing May 1, 1999;
collateralized by accounts receivable and
property and equipment.
    
    
    26,354
    
    
    
    108,257Convertible notes payable to an offshore
fund; secured by certain assets of the
Company, with interest payable quarterly
at a rate of 23.75%. Interest and
principal payable in monthly
installments. The holder, at its
discretion, may convert amount
outstanding into shares of common stock
of the Company at a price of $0.43.
During 2003, this note was repaid in full
with approximately $218,000 of the note
having been converted into common stock
of the Company.
    
    
    
    
    
    
    1,081,430Convertible notes payable to investor
groups; payable on demand, with interest
payable at 24%. Secured by certificates
of deposit used as collateral for a
letter of credit in favor of the HMO.
These notes were repaid in full in 2003.
    
    
    
    
    
    
    182,466Amount payable to a pharmaceutical
vendor; secured by pharmacy inventory,
payable in three equal monthly
installments with the last payment due
March 2003, with interest at 0%. This
note was repaid in full in 2003.
    
    
    
    
    
    
    300,000
 F-17




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METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) December 31,2003
    
    2002Notes payable to individuals with
interest prepaid in the form of one share
of the Companys common stock for each
dollar loaned, plus 18% additional
interest upon default; principal payable
in 6 equal installments. The holders of
these notes have the right to convert the
outstanding obligation to common stock at
$1 per share at any time. This note was
repaid in full in 2003.
    
    
    
    
    
    
    202,991Note payable to venture capital group
with interest at prime plus 5% (9.25% at
December 31, 2002). Collateralized by
certain accounts receivable and property
and equipment. Repaid in full February
2003.
    
    
    
    
    
    
    71,685Note payable. Repaid in full in 2003.
    
    
    
    
    
    
    14,1822,876,169
    
    
    
    5,354,734Less current maturities, excluding
amounts refinanced or expected to be
refinanced with long-term debt or equity
after December 31, 2003
    
    
    975,169
    
    
    
    2,234,521Long-term debt and amounts refinanced
with long-term debt or equity after
December 31, 2003
    
    $
    1,901,000
    
    
    $
    3,120,213
 Aggregate maturities of long-term debt for years subsequent to December 31, 2003, are as follows: 2004
    
    $
    975,169Debt settled for stock in 2004
    
    
    1,015,0002005
    
    
    600,0002006
    
    
    286,000$
    2,876,169
 NOTE 8. RELATED PARTY TRANSACTIONS Due from Related Parties At December 31, 2002 amounts owed to the Company by officers totaled
$121,666. There were no amounts due to the Company by officers at December 31,
2003. During the year ended December 31, 2003, the Company paid $393,000 to a
company owned by a shareholder and director for services rendered as a
physician in the Companys provider network. NOTE 9. INCOME TAXES The components of income taxes were as follows: December 31,2003
    
    2002
    
    2001Provision (Benefit) for Income TaxesCurrentFederal
    
    $
    
    
    
    $
    
    
    
    $
    64,000State
    
    
    
    
    
    
    
    
    
    
    DeferredFederal
    
    
    1,236,000
    
    
    
    (5,777,000
    )
    
    
    389,000State
    
    
    213,000
    
    
    
    (612,000
    )
    
    
    66,000Change in Valuation Allowance
    
    
    (1,449,000
    )
    
    
    6,389,000
    
    
    
    (455,000
    )Income Tax Expense
    
    $
    
    
    
    $
    
    
    
    $
    64,000
 The effective tax rate for the year ended December 31, 2003, differed from
the federal statutory rate due principally to a decrease in the deferred tax
asset valuation allowance of $1,449,000 offset by state income tax of $159,000. F-18




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##### Table of Contents



METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) The effective tax rate for the year ended December 31, 2002, differed from
the federal statutory rate due principally to an increase in the deferred tax
asset valuation allowance of $6,389,000 offset by state income tax benefits of
$612,000. The effective tax rate for the year ended December 31, 2001, differed from
the federal statutory rate due principally to a decrease in the deferred tax
asset valuation allowance of $455,000 offset partially by alternative minimum
taxes. The Company has net operating loss carryforwards of approximately
$28,129,000, expiring in various years through 2022. The approximate deferred tax assets and liabilities were as follows: DEFERRED TAX ASSETS: As of December 31,2003
    
    2002Allowances for doubtful accounts
    
    $
    956,000
    
    
    $
    1,868,000Net operating loss carryforward
    
    
    10,585,000
    
    
    
    11,445,000Amortization
    
    
    162,000
    
    
    
    Depreciation
    
    
    2,000
    
    
    
    Total deferred tax assets
    
    
    11,705,000
    
    
    
    13,313,000
 DEFERRED TAX LIABILITIES: As of December 31,2003
    
    2002Cash basis subsidiaries
    
    
    
    
    
    
    15,000Amortization
    
    
    
    
    
    
    90,000Depreciation
    
    
    
    
    
    
    54,000Total deferred tax liabilities
    
    
    
    
    
    
    159,000Net deferred tax asset
    
    
    11,705,000
    
    
    
    13,154,000Less valuation allowance
    
    
    (11,705,000
    )
    
    
    (13,154,000
    )$
    
    
    
    $
    
 NOTE 10. STOCKHOLDERS EQUITY As of December 31, 2003, 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, 2003 and 2002, the aggregate and per share amounts of cumulative dividend
arrearages were approximately $316,667 ($63 per share) and $266,667 ($53 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. 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,
2003 and 2002, there were no shares of series B preferred stock issued and
outstanding. F-19




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##### Table of Contents



METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) At December 31, 2003 and 2002, the Company had outstanding warrants to
purchase 2,924,775 and 3,324,775 shares of common stock, respectively. The
warrants are exercisable upon issuance with expiration dates ranging from two
to five years and exercise prices ranging from $0.32 to $4.00 in 2003 and $0.32
to $6.00 in 2002. NOTE 11. STOCK OPTIONS 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, 2003, 2002 and 2001, compensation costs and professional services
related to stock options amounted to approximately $-0-, $16,800 and $81,800,
respectively. Stock option activity for the three years ended December 31 was as follows: Number of
    
    Weighted AverageOptions
    
    Exercise PriceBalance, December 31, 2000
    
    
    5,051,447
    
    
    $
    1.88Granted during the year
    
    
    1,474,000
    
    
    $
    1.48Exercised and returned during the year
    
    
    (514,000
    )
    
    $
    0.59Forfeited during the year
    
    
    (275,197
    )
    
    $
    4.26Balance, December 31, 2001
    
    
    5,736,250
    
    
    $
    1.81Granted during the year
    
    
    200,000
    
    
    $
    0.40Exercised and returned during the year
    
    
    (67
    )
    
    $
    1.00Forfeited during the year
    
    
    (730,466
    )
    
    $
    2.11Balance, December 31, 2002
    
    
    5,205,717
    
    
    $
    1.46Granted during the year
    
    
    2,710,400
    
    
    $
    0.38Exercised and returned during the year
    
    
    (110,000
    )
    
    $
    0.31Forfeited during the year
    
    
    (477,650
    )
    
    $
    3.67Balance, December 31, 2003
    
    
    7,328,467
    
    
    $
    0.94Exercisable, December 31, 2001
    
    
    3,939,974
    
    
    $
    1.85Exercisable, December 31, 2002
    
    
    4,381,946
    
    
    $
    1.46Exercisable, December 31, 2003
    
    
    6,840,134
    
    
    $
    0.97
 The following table summarizes information about stock options outstanding
at December 31, 2003: Options Outstanding
    
    Options ExercisableWeighted Average
    
    
    
    
    
    Weighted AverageRemaining
    
    
    
    
    
    RemainingNumber of
    
    Contractual Life
    
    Number of
    
    Contractual LifeExercise Price
    
    Options
    
    (Years)
    
    Options
    
    (Years)$0.250 - $1.000
    
    
    6,137,867
    
    
    
    3.42
    
    
    
    5,649,534
    
    
    
    3.23$1.140 - $2.000
    
    
    559,000
    
    
    
    2.26
    
    
    
    559,000
    
    
    
    2.26$2.020 - $3.000
    
    
    302,000
    
    
    
    2.48
    
    
    
    302,000
    
    
    
    2.48$3.250 - $5.000
    
    
    132,600
    
    
    
    2.17
    
    
    
    132,600
    
    
    
    2.17$5.500 - $8.000
    
    
    197,000
    
    
    
    2.72
    
    
    
    197,000
    
    
    
    2.727,328,467
    
    
    
    
    
    
    
    6,840,134
 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. F-20




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##### Table of Contents



METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) The weighted average fair value per option as of grant date was $0.58 for
stock options granted during the year ended December 31, 2002. The
determination of the fair value of all stock options granted during the year
ended December 31, 2002 was based on (i) risk-free interest rate of 5.01%, (ii)
expected option lives ranging from 1 to 4 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. The weighted average fair value per option as of grant date was $0.21 for
stock options granted during the year ended December 31, 2001. The
determination of the fair value of all stock options granted during the year
ended December 31, 2001 was based on (i) risk-free interest rate of 5.3%, (ii)
expected option lives ranging from 1 to 7 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 12. 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, 2003 are as follows: Annual
    
    Sublease
    
    Net MinimumAmount
    
    Amount
    
    Payment2004
    
    $
    868,000
    
    
    $
    239,000
    
    
    $
    629,0002005
    
    
    860,000
    
    
    
    247,000
    
    
    
    613,0002006
    
    
    699,000
    
    
    
    195,000
    
    
    
    504,0002007
    
    
    504,000
    
    
    
    197,000
    
    
    
    307,0002008
    
    
    242,000
    
    
    
    129,000
    
    
    
    113,000Thereafter
    
    
    592,000
    
    
    
    534,000
    
    
    
    58,000Total
    
    $
    3,765,000
    
    
    $
    1,541,000
    
    
    $
    2,224,000
 In connection with the sale of the pharmacy division, the Company has
subleased pharmacy facilities to the buyer. In the event of the buyers
default, the Company potentially could be responsible to fulfill these lease
commitments. 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 for the years subsequent to December 31, 2003
are as follows: 2004
    
    $
    1,447,0002005
    
    
    610,0002006
    
    
    240,000$
    2,297,000
 Litigation In July 2003 a pharmacy services company (the Plaintiff) filed a
complaint against the Company and its pharmacy division, Metcare 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 F-21




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##### Table of Contents



METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 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 is included in accounts payable at December 31, 2003. 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. Investigation In June 2003, the Company was informed that the U.S. Attorneys Office in
Wilmington, Delaware was conducting an investigation of the Company. The
Company fully cooperated with the U.S. Attorneys Office and on February 9,
2004 the investigation was terminated. Payroll Taxes Payable In 2000, the Company negotiated an installment plan with the Internal
Revenue Service (IRS) related to unpaid payroll tax liabilities, including
accrued interest and penalties. Under the plan the Company was required to
make monthly installments of $100,000 on the amount in arrears. The agreement
expired and the full amount was deemed due upon demand. 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 $3.3 to $3.4 million. To date, $3.2 million of this settlement
has been paid with the balance to be paid once the IRS has determined the final
settlement amount. NOTE 13. SEGMENTS The Company operated in two segments during 2003 for purposes of
presenting financial information and evaluating performance, PSN (managed care
and direct medical services) and pharmacy. During 2002 and 2001, the Company
also operated a third segment, a clinical laboratory. YEAR ENDED DECEMBER 31, 2003
    
    PSN
    
    Pharmacy
    
    Laboratory
    
    TotalRevenues from external customers
    
    $
    143,874,000
    
    
    $
    
    
    
    $
    
    
    
    $
    143,874,000Intersegment revenues from discontinued business segments
    
    
    
    
    
    
    1,216,000
    
    
    
    
    
    
    
    1,216,000Interest expense and penalties
    
    
    107,000
    
    
    
    174,000
    
    
    
    
    
    
    
    281,000Depreciation and amortization
    
    
    149,000
    
    
    
    85,000
    
    
    
    
    
    
    
    234,000Revenues from discontinued business segments
    
    
    
    
    
    
    12,906,000
    
    
    
    
    
    
    
    12,906,000Segment gain (loss) before allocated overhead
    
    
    11,522,000
    
    
    
    (1,488,000
    )
    
    
    
    
    
    
    10,034,000Allocated corporate overhead
    
    
    3,686,000
    
    
    
    1,946,000
    
    
    
    
    
    
    
    5,632,000Segment assets
    
    
    8,214,000
    
    
    
    83,000
    
    
    
    
    
    
    
    8,297,000Segment gain (loss) after allocated overhead
    
    
    7,836,000
    
    
    
    (3,434,000
    )
    
    
    
    
    
    
    4,402,000
 Included in allocated corporate overhead in 2003 was interest revenue of $27,000, interest expense of
#1,216,000 and depreciation and amortization of $506,000. In addition, corporate assets were $927,000. YEAR ENDED DECEMBER 31, 2002
    
    PSN
    
    Pharmacy
    
    Laboratory
    
    TotalRevenues from external customers
    
    
    140,064,000
    
    
    
    
    
    
    
    
    
    
    
    140,064,000Intersegment revenues from discontinued business segments
    
    
    
    
    
    
    1,174,000
    
    
    
    
    
    
    
    1,174,000Interest expense and penalties
    
    
    16,000
    
    
    
    24,000
    
    
    
    
    
    
    
    40,000Depreciation and amortization
    
    
    397,000
    
    
    
    95,000
    
    
    
    10,000
    
    
    
    502,000Revenue from discontinued business segments
    
    
    
    
    
    
    12,875,000
    
    
    
    886,000
    
    
    
    13,761,000Segment gain (loss) before allocated overhead
    
    
    (4,996,000
    )
    
    
    (1,767,000
    )
    
    
    (1,448,000
    )
    
    
    (8,211,000
    )Allocated corporate overhead
    
    
    5,446,000
    
    
    
    2,970,000
    
    
    
    454,000
    
    
    
    8,870,000Segment assets
    
    
    5,662,000
    
    
    
    3,419,000
    
    
    
    
    
    
    
    9,081,000Segment gain (loss) after allocated overhead
    
    
    (10,442,000
    )
    
    
    (4,737,000
    )
    
    
    (1,902,000
    )
    
    
    (17,081,000
    )
 Included in allocated corporate overhead in 2002 was interest revenue of $23,000, interest expense of
$2,405,000 and depreciation and amortization of $549,000. In addition, corporate assets were $1,078,000. YEAR ENDED DECEMBER 31,2001
    
    PSN
    
    Pharmacy
    
    Laboratory
    
    TotalRevenues from external customers
    
    
    128,186,000
    
    
    
    
    
    
    
    
    
    
    
    128,186,000Intersgement revenues
    
    
    
    
    
    
    296,000
    
    
    
    
    
    
    
    296,000Interest and penalties
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    42
 F-22




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##### Table of Contents



METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) YEAR ENDED DECEMBER 31,2001
    
    PSN
    
    Pharmacy
    
    Laboratory
    
    TotalDepreciation and amortization
    
    
    355,000
    
    
    
    15,000
    
    
    
    10,000
    
    
    
    380,000Revenues from discontinued business segments
    
    
    
    
    
    
    2,781,000
    
    
    
    563,000
    
    
    
    3,344,000Segment gain (loss) before allocated overhead
    
    
    6,142,000
    
    
    
    (744,000
    )
    
    
    (559,000
    )
    
    
    4,839,000Allocated corporate overhead
    
    
    3,911,000
    
    
    
    860,000
    
    
    
    437,000
    
    
    
    5,208,000Segment assets
    
    
    12,292,000
    
    
    
    2,388,000
    
    
    
    1,544,000
    
    
    
    16,224,000Segment gain (loss) after allocated overhead
    
    
    2,231,000
    
    
    
    (1,604,000
    )
    
    
    (996,000
    )
    
    
    (369,000
    )
 Included in allocated corporate overhead in 2003 was interest revenue of $12,000, interest expense of
$649,000 and depreciation and amortization of $491,,000. In addition, corporate assets were $911,000. NOTE 14. SUBSEQUENT EVENTS In January 2004, $715,000 of long-term debt was paid in full through the
issuance of 1.3 million shares of common stock, as provided for in the terms of
the Convertible Notes with the investors. In addition, with payments of
$170,000 in January 2004 and $450,000 in March 2004, the remaining balance of
$620,000 on a second Note was repaid. In June 2003, the Company was informed that the U.S. Attorneys Office in
Wilmington, Delaware was conducting an investigation of the Company. The
Company fully cooperated with the U.S. Attorneys Office and on February 9,
2004 the investigation was terminated. 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 $3.3 to $3.4 million. To date, $3.2 million of this settlement
has been paid with the balance to be paid once the IRS has determined the final
settlement amount. In conjunction with its IRS settlement, in February 2004 the Company
issued approximately 5.0 million shares of common stock in connection with a
private placement, resulting in proceeds of $3.0 million that was used to
settle the IRS obligations. In March 2004, two Notes due August 2004 totaling $300,000 were repaid
through the issuance of approximately 611,000 shares of common stock.
Additionally, the Company finalized an extension, for payment over twenty-four
months, of approximately $1.2 million in debt due May 2004. 100,000 shares of
Company stock were issued in conjunction with the debt. NOTE 15. VALUATION AND QUALIFYING ACCOUNTS Activity in the Companys Valuation and Qualifying Accounts consists of
the following: Year Ended December 31,2003
    
    2002
    
    2001Allowance for doubtful
accounts-continuing operationsBalance at beginning of period
    
    $
    4,648,000
    
    
    $
    4,734,000
    
    
    $
    5,065,000Charged to costs and expenses
    
    
    100,000
    
    
    
    770,000
    
    
    
    1,063,000Deductions
    
    
    (2,209,000
    )
    
    
    (856,000
    )
    
    
    (1,394,000
    )Balance at end of period
    
    $
    2,539,000
    
    
    $
    4,648,000
    
    
    $
    4,734,000Allowance for doubtful
accounts-discontinued operations:Balance at beginning of period
    
    $
    314,756
    
    
    $
    13,925
    
    
    $
    Charged to costs and expenses
    
    
    786,576
    
    
    
    300,831
    
    
    
    208,490Deductions
    
    
    (1,101,332
    )
    
    
    
    
    
    
    (194,565
    )Balance at end of period
    
    $
    
    
    
    $
    314,756
    
    
    $
    13,925Deferred tax asset valuation allowance:Balance at beginning of period
    
    $
    13,154,000
    
    
    $
    6,765,000
    
    
    $
    7,221,000Additions
    
    
    
    
    
    
    6,389,000
    
    
    
    Deductions
    
    
    (1,449,000
    )
    
    
    
    
    
    
    (456,000
    )Balance at end of period
    
    $
    11,705,000
    
    
    $
    13,154,000
    
    
    $
    6,765,000
 F-23




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##### Table of Contents



METROPOLITAN HEALTH NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (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. F-24




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##### Table of Contents



METROPOLITAN HEALTH NETWORKS, INC.
EXHIBIT INDEX Year Ended December 31, 2003
 3.1
    
    Articles of Incorporation, as amended (1)3.2
    
    Bylaws (1)10.1
    
    Physician Practice Management Participation Agreement, dated August
2, 2001, between Metcare of Florida, Inc. and Humana, Inc. (2) (3)10.2
    
    Letter of Agreement, dated February 2003, between Metcare of Florida,
Inc. and Humana, Inc.*(5)10.2
    
    2001 Stock Option Plan (2)10.3
    
    Employment Agreement, dated January 1, 2001, between the Company and
Debra A. Fennel (2)10.4
    
    Employment Agreement, dated January 5, 2004 between the Company and
Michael M. Earley (4)10.5
    
    Termination Agreement, dated October 24, 2003, between the Company
and Fred Sternberg*10.6
    
    Supplemental Stock Option Plan*14.1
    
    Code of Ethics (4)21.1
    
    Subsidiaries (4)23.1
    
    Consent of the Independent Auditors31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002*31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002*32.1
    
    Certification of the Chief Executive Officer 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(1)
    
    Incorporated by reference to the Companys Registration Statement on Form
SB-2 filed with the Commission on October 29, 1996 (No. 333-5884-A)(2)
    
    Incorporated by reference to the Companys Registration Statement on Form
SB-2 filed with the Commission on May 24, 2001 (No. 333-61566)(3)
    
    Portions of this document have been 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 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.(5)
    
    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. (b) Reports on Form 8-K filed during the quarter ended December 31, 2003 October 29, 2003: Disclosure of resignation of Fred Sternberg as Chairman and
from the Board under Item 5 November 14, 2003: Disclosure of sale of pharmacy assets under Item 2




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Act, as amended, the registrant
has duly caused this Form 10-K/A to be signed on its behalf by the undersigned,
thereunto duly authorized, this 28th of July 2004. METROPOLITAN HEALTH NETWORKS, INC.By:
    /s/ MICHAEL M. EARLEYMichael M. Earley, President andChief Executive Officer Pursuant to the requirements of the Securities Act, as amended, this report has
been signed below by the following persons in the capacities and on the dates
indicated. July 28, 2004
    
    /s/ MICHAEL M. EARLEYMichael M. EarleyPresident, Chief Executive Officer and DirectorJuly 28, 2004
    
    /s/ DAVID S. GARTNERDavid S. GartnerChief Financial OfficerJuly 28, 2004
    
    /s/ DEBRA FINNELDebra FinnelChief Operating Officer and DirectorJuly 28, 2004
    
    /s/ KARL SACHSKarl SachsDirectorJuly 28, 2004
    
    /s/ MARTIN HARRISONMartin HarrisonDirectorJuly 28, 2004
    
    /s/ SALOMON MELGENSalomon MelgenDirector