1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-12115
CONTINUCARE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-2716023
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
80 SOUTHWEST EIGHTH STREET
SUITE 2350
MIAMI, FLORIDA 33130
(Address of principal executive offices) (Zip Code)
(305) 350-7515
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
At May 10, 2000, the Registrant had 33,240,091 shares of $0.0001 par value
common stock outstanding.
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CONTINUCARE CORPORATION
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - March 31, 2000 (Unaudited) and June 30,
1999................................................................................. 3
Condensed Consolidated Statements of Operations - Three Months Ended March 31,
2000 (Unaudited) and 1999 (Unaudited)................................................ 4
Condensed Consolidated Statements of Operations - Nine Months Ended March 31,
2000 (Unaudited) and 1999 (Unaudited)................................................ 5
Condensed Consolidated Statements of Cash Flows - Nine Months Ended March 31,
2000 (Unaudited) and 1999 (Unaudited)................................................ 6
Notes to Condensed Consolidated Financial Statements - March 31, 2000
(Unaudited).......................................................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................................. 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................
23
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................................... 23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................... 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................... 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 25
ITEM 5. OTHER INFORMATION....................................................................... 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................ 25
SIGNATURE PAGE..................................................................................... 26
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PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 JUNE 30, 1999
-------------- -------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents........................................... $3,115,992 $3,185,077
Accounts receivable, net of allowance for doubtful accounts of
$5,752,000 at March 31, 2000 and June 30, 1999..................... 4,844 604,524
Due from Medicare................................................... 443,576 --
Other receivables................................................... 586,086 266,057
Prepaid expenses and other current assets........................... 358,179 298,899
----------- -------------
Total current assets............................................ 4,508,677 4,354,557
Equipment, furniture and leasehold improvements, net................... 901,674 1,098,289
Cost in excess of net tangible assets acquired, net of
accumulated amortization of $5,487,000 at March 31, 2000 and
$3,837,000 at June 30, 1999.......................................... 20,375,593 22,346,156
Deferred financing costs, net of accumulated amortization of
$141,000 at March 31, 2000 and $1,203,000 at June 30, 1999........... 3,249,375 2,551,811
Other assets, net...................................................... 75,526 69,165
----------- -------------
Total assets.................................................... $29,110,845 $30,419,978
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.................................................... $861,964 $842,442
Accrued expenses.................................................... 3,116,663 2,358,346
Accrued salaries and benefits....................................... 1,583,792 1,856,140
Medical claims payable.............................................. 1,130,139 4,825,081
Due to Medicare..................................................... -- 302,358
Due to related parties.............................................. 60,000 --
Current portion of convertible subordinated notes payable........... 700,000 45,000,000
Current portion of long term debt................................... 5,832,764 6,857,946
Accrued interest payable............................................ 22,985 2,400,022
Current portion of capital lease obligations........................ 92,063 112,652
----------- -------------
Total current liabilities....................................... 13,400,370 64,554,987
Capital lease obligations, less current portion........................ 121,347 123,436
Convertible subordinated notes payable, less current portion........... 11,400,000 --
Long term debt, less current portion................................... 1,516,497 1,396,753
----------- -------------
Total liabilities............................................... 26,438,214 66,075,176
Commitments and contingencies
Shareholders' equity (deficit)
Common stock; $0.0001 par value; 100,000,000 shares authorized,
36,236,283 shares issued and 33,240,091 shares outstanding at
March 31, 2000; and 17,536,283 shares issued and
14,540,091 shares outstanding at June 30, 1999.................... 3,325 1,455
Additional paid-in capital.......................................... 57,708,595 32,910,465
Accumulated deficit................................................. (49,614,588) (63,142,417)
Treasury stock (2,996,192 shares)................................... (5,424,701) (5,424,701)
----------- -------------
Total shareholders' equity (deficit).............................. 2,672,631 (35,655,198)
----------- -------------
Total liabilities and shareholders' equity (deficit).............. $29,110,845 $30,419,978
=========== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
---- ----
Revenue
Medical services, net............................................. $29,889,660 $49,983,897
Expenses
Medical services:
Medical claims................................................ 19,864,445 36,358,041
Other......................................................... 4,700,767 10,064,148
Payroll and employee benefits..................................... 1,395,032 3,523,160
Provision for bad debt............................................ -- 1,135,713
Professional fees................................................. 193,362 502,982
General and administrative........................................ 1,373,192 3,012,478
Loss on sale of subsidiary........................................ -- 11,003,541
Depreciation and amortization..................................... 773,044 1,502,012
------------- -------------
Subtotal........................................................ 28,299,842 67,102,075
Income (loss) from operations.......................................... 1,589,818 (17,118,178)
Other income (expense)
Interest income................................................... 10,942 50,758
Interest expense.................................................. (708,717) (1,164,240)
Other............................................................. 103,623 --
------------- -------------
Income (loss) before extraordinary item................................ 995,666 (18,231,660)
Gain on extinguishment of debt......................................... 9,471,710 --
------------- -------------
Net income (loss) ..................................................... $10,467,376 $(18,231,660)
============= =============
Per share data:
Basic earnings (loss)............................................. $.43 $ (1.25)
============= =============
Diluted earnings (loss)........................................... $.33 $ (1.25)
============= =============
Weighted average number of common shares outstanding:
Basic........................................................ 24,020,331 14,606,283
============= =============
Diluted...................................................... 31,855,476 14,606,283
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED MARCH 31,
---------------------------------
2000 1999
------------- -------------
Revenue
Medical services, net $ 87,362,881 $ 151,177,818
Management fees 450,000 516,642
------------- -------------
Subtotal 87,812,881 151,694,460
Expenses
Medical services:
Medical claims 62,359,925 101,392,977
Contractual revision of previously recorded medical claims
liability (3,053,853) --
Other 13,711,040 33,201,381
Payroll and employee benefits 4,674,123 11,215,110
Provision for bad debt -- 3,506,217
Professional fees 651,582 1,228,547
General and administrative 4,397,578 9,146,154
Loss on sale of subsidiary -- 15,155,791
Depreciation and amortization 2,340,744 4,651,761
------------- -------------
Subtotal 85,081,139 179,497,938
Income (loss) from operations 2,731,742 (27,803,478)
Other income (expense)
Interest income 35,509 122,313
Interest expense (2,870,952) (3,590,830)
Other 383,623 --
------------- -------------
Income (loss) before extraordinary items 279,922 (31,271,995)
Gains on extinguishment of debt 13,247,907 130,977
------------- -------------
Net income (loss) $ 13,527,829 $ (31,141,018)
============= =============
Per share data:
Basic earnings (loss) $ .76 $ (2.16)
============= =============
Diluted earnings (loss) $ .44 $ (2.16)
============= =============
Weighted average number of common shares outstanding:
Basic 17,731,000 14,428,968
============= =============
Diluted 30,694,636 14,428,968
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED MARCH 31,
-------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 13,527,829 $(31,141,018)
Adjustments to reconcile net income (loss) to cash provided by (used
in) operating activities:
Depreciation and amortization including amortization
of deferred loan costs 3,102,067 5,322,902
Provision for bad debt -- 3,506,217
Loss on sale of subsidiary -- 15,155,791
Contractual revision of previously recorded medical claims liability (350,546) --
Gain on disposal of equipment (23,123) --
Gain on extinguishment of debt (13,247,907) (130,977)
Changes in operating assets and liabilities, excluding the effect of
acquisitions and disposals:
Decrease (increase) in accounts receivable 599,680 (3,283,212)
Decrease in income taxes receivable -- 1,800,000
Increase in prepaid expenses and other current assets (59,280) (507,323)
(Increase) decrease in other receivables (320,029) 692,045
(Increase) decrease in other assets (6,361) 271,840
(Decrease) increase in medical claims payable (3,694,942) 4,521,625
Increase in due to (from) Medicare (108,378) 944,099
Increase in accounts payable and accrued expenses 505,491 457,368
Increase in accrued interest payable 2,045,984 876,466
------------ ------------
Net cash provided by (used in) operating activities 1,970,485 (1,514,177)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions -- (4,225,000)
Cash paid for purchase of contracts -- (734,806)
Property and equipment additions (134,637) (673,638)
Proceeds from sale of subsidiary -- 141,187
Proceeds from notes receivable -- 104,320
------------ ------------
Net cash used in investing activities (134,637) (5,387,937)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment to extinguish debt (210,000) (720,000)
Principal repayments under capital lease obligation (22,815) (369,037)
Payment on notes payable (1,406,326) (1,421,850)
Payment to related party (90,000) --
Proceeds from long term debt -- 5,000,000
Payment of deferred financing costs (175,792) (168,192)
------------ ------------
Net cash (used in) provided by financing activities (1,904,933) 2,320,921
------------ ------------
Net decrease in cash and cash equivalents (69,085) (4,581,193)
------------ ------------
Cash and cash equivalents at beginning of period 3,185,077 7,435,724
------------ ------------
Cash and cash equivalents at end of period $ 3,115,992 $ 2,854,531
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for acquisition $ -- $ 1,811,250
============ ============
Note payable for purchase of contracts $ -- $ 2,500,000
============ ============
Note payable for amendment of contract $ -- $ 3,509,983
============ ============
Note payable issued for refunds due to Medicare for overpayments $ 637,556 $ --
============ ============
Purchase of furniture and fixtures with proceeds of capital lease
obligations $ 158,023 $ --
============ ============
Common stock issued for deferred financing costs $ 3,375,000 $ --
============ ============
Common stock issued for extinguishment of debt $ 21,312,500 $ --
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
NOTE 1 - UNAUDITED INTERIM INFORMATION
The accompanying unaudited condensed consolidated financial statements of
Continucare Corporation ("Continucare" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 2000.
The balance sheet at June 30, 1999 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K/A-2 for
the year ended June 30, 1999.
Certain reclassifications have been made to the prior year amounts to conform to
the current year.
NOTE 2 - GENERAL
Continucare, which was incorporated on February 1, 1996 as a Florida
corporation, is a provider of integrated outpatient healthcare and home
healthcare services in Florida. Continucare's predecessor, Zanart Entertainment,
Incorporated ("Zanart") was incorporated in 1986. On August 9, 1996, a
subsidiary of Zanart merged into Continucare Corporation (the "Merger"). As a
result of the Merger, the shareholders of Continucare became shareholders of
Zanart, and Zanart changed its name to Continucare Corporation. As of March 31,
2000, the Company operated, owned and/or managed: seventeen Staff Model clinics
in South and Central Florida; an Independent Practice Association ("IPA") with
88 physicians; and two Home Health agencies. For the nine months ended March 31,
2000 approximately 55% of net medical services revenue was derived from managed
care contracts with Humana Medical Plans, Inc.("Humana") and 39% of net medical
services revenue was derived from managed care contracts with Foundation Health
Corporation ("Foundation"). For the nine months ended March 31, 1999,
approximately 30% of net medical services revenue was derived from Humana and
53% was derived from Foundation.
Throughout fiscal 1998 and 1999 the Company experienced adverse business
operations, recurring operating losses, negative cash flow from operations, and
significant working capital deficiencies. Furthermore, as discussed below and
further in Note 3, the Company was unable to make the interest payments due
April 30, 1999 and October 31, 1999 on the Company's Convertible Subordinated
Notes Payable (the "Notes"). The Company's operating difficulties were in large
part due to the underperformance of various entities which were acquired in
fiscal years 1999, 1998 and 1997, the inability to effectively integrate and
realize increased profitability through anticipated economies of scale with
these acquisitions, as well as reductions in reimbursement rates under the
Balanced Budget Act of 1997.
The financial statements of the Company have been prepared assuming that the
Company will continue as a going concern. To strengthen Continucare financially
and remain a going concern, the Company began a business rationalization program
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(the "Business Rationalization Program") during the fiscal year ended June 30,
1999 to divest itself of certain unprofitable operations and to close other
underperforming subsidiary divisions, and a financial restructuring program (the
"Financial Restructuring Program") to strengthen its financial condition and
performance. In connection with the implementation of its Business
Rationalization Program, Continucare sold or closed its Outpatient
Rehabilitation subsidiary, its Diagnostic Imaging subsidiary and Physician
Practice subsidiary. These divestitures generated net cash proceeds of
approximately $5,642,000 (after the payment of transaction costs and other
employee-related costs). The rationalization liability associated with these
divestitures was approximately $755,000 at March 31, 2000. No changes occurred
in the rationalization liability during the three months ended March 31, 2000.
The Business Rationalization Program has assisted management with the
commencement and implementation of its Financial Restructuring Program and has
allowed the Company to focus its resources on a core business model. As a part
of the Business Rationalization Program, the Company negotiated a restructuring
of the Company's Notes, which is described in Note 3 below. While the Company
believes that the Business Rationalization Program and Financial Restructuring
Program will improve its cash flow and profitability, there can be no assurance
that it will be able to continue implementing any of the necessary programs and,
if implemented, that the programs will improve the Company's cash flow and
profitability sufficiently to fund its operations and satisfy its obligations as
they become due.
The Company has not provided for income taxes on it's operating results because
it believes it will be able to utilize certain of its net operating loss
carryforwards to offset any income tax liability related to it's operating
results.
NOTE 3 - CONVERTIBLE SUBORDINATED NOTES PAYABLE
On October 30, 1997, the Company issued $46,000,000 of the Notes which accrue
interest at 8% and are due on October 31, 2002. On August 12, 1998, the Company
repurchased $1,000,000 of the Notes and recorded an extraordinary gain on
retirement of debt of $130,977. On April 30, 1999 (the "April Default Date"),
the Company defaulted on its semi-annual payment of interest on the outstanding
Notes. Within thirty (30) days of the April Default Date, the Company commenced
negotiations with an informal committee of the holders of the Notes. On the
April Default Date, the outstanding principal balance of the Notes was
$45,000,000 and the related accrued interest was approximately $1,800,000.
On July 2, 1999, the Company repurchased $4,000,000 of the Notes for $210,000
and recorded a gain on extinguishment of debt of $3,776,197. The Company funded
the purchase of the Notes from working capital. The Company has not provided for
income taxes on the gain because it believes that it will be able to utilize
certain of its net operating loss carryforwards to offset any income tax
liability related to the transaction.
On October 31, 1999 (the "October Default Date") the Company defaulted on its
semi-annual payment of interest on the outstanding Notes. The total amount of
accrued interest on the outstanding Notes at October 31, 1999 was approximately
$3,300,000.
The Company completed a restructuring of the Notes through the execution of a
Consent Letter and Agreement to the First Supplemental Indenture (the
"Restructuring"). The Restructuring was ratified by the shareholders on February
14, 2000. The following occurred as a result of the Restructuring: (a)
$31,000,000 of the outstanding principal of the Notes were converted, on a pro
rata basis, into the Company's common stock at a conversion rate of $2.00 per
share (approximately 15,500,000 shares of capital stock); (b) all interest
accrued on the Notes through October 31, 1999 was forgiven (approximately
$3,300,000); (c) interest which accrued on the $31,000,000 from November 1, 1999
through the date of the Restructuring was forgiven; (d) the interest payment
default on the remaining $10,000,000 principal balance of the Notes was waived
and the Notes were reinstated on the Company's books and records as a performing
non-defaulted loan (the "Reinstated Subordinated Debentures"); (e) the
Reinstated Subordinated Debentures will bear interest at the rate of 7% per
annum commencing November 1, 1999; and (f) the conversion rate for the
Reinstated Subordinated Debentures for the period November 1, 2000 to maturity
will be $2.00. The Restructuring also required the Company to procure a
$3,000,000 bank credit facility and to obtain a financially responsible
person(s) to personally guarantee the bank credit facility for the Company (see
Note 4 below).
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As a result of the Restructuring, the Company recognized a gain of approximately
$9,472,000, net of restructuring costs. The gain consists of the conversion of
$31,000,000 of the outstanding principal balance into 15,500,000 shares of
common stock, which were valued at approximately $21,312,500 based on the
closing price of the Company's stock on February 15, 2000, the forgiveness of
approximately $4,237,000 of accrued interest, the write off of approximately
$1,929,000 of unamortized deferred financing costs and the recording of
$2,100,000 of interest which will accrue on the remaining balance of the Notes
under the revised terms of the agreement through the maturity date of October
31, 2002. In accordance with Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings," the
balance of the outstanding Notes on the balance sheet of $12,100,000 at March
31, 2000, includes interest accrued through March 31, 2000 of $291,667 and the
remaining interest of $1,808,333 which will be payable in semi-annual payments
through October 31, 2002. The Company has not provided for income taxes on the
gain because it believes that it will be able to utilize certain of its net
operating loss carryforwards to offset any income tax liability related to the
transaction.
NOTE 4 - LONG-TERM DEBT
In August 1998, the Company entered into a credit facility with First Union Bank
(the "Credit Facility"). The Credit Facility provided for a $5,000,000
acquisition facility and a $5,000,000 revolving loan. The Company borrowed the
entire $5,000,000 acquisition facility to fund acquisitions. The Company never
utilized the revolving loan. During April 1999, the Company used approximately
$4,000,000 of the net proceeds from the sale of its Rehabilitation subsidiary to
reduce the outstanding balance of the Credit Facility. In connection with the
payment, the Company entered into an amendment to the Credit Facility, which
provided, among other things, for the repayment of the remaining outstanding
principal balance by December 31, 1999. At June 30, 1999, the outstanding
balance of the Credit Facility was approximately $1,000,000 and was included in
Current Portion of Long-Term Debt on the accompanying consolidated balance
sheet. The Company obtained a waiver which extended the due date on the
remaining balance to February 1, 2000 and repaid the remaining outstanding
balance on January 31, 2000.
Effective December 31, 1999, the Company negotiated an amendment to its contract
with Foundation (the "Amendment"). The Amendment reduces the Company's prior
medical claims and long-term debt liabilities to Foundation as of May 31, 1999
to $1,500,000. The Amendment also requires the Company to remit to Foundation
any reinsurance proceeds received for claims generated from Foundation members
for the period June 1, 1998 through August 31, 1999 up to a maximum of
$1,327,400. As a result of this Amendment the Company recorded a contractual
revision of previously recorded medical claims liability of approximately
$3,054,000. This Amendment resulted in the reduction of medical claims payable
by approximately $2,703,000 and the reduction of long-term debt by approximately
$351,000.
In conjunction with the Restructuring, the Company executed a credit facility
agreement (the "New Credit Facility"). The New Credit Facility provides a
revolving loan of $3,000,000. The New Credit Facility is due March 31, 2001 with
annual renewable options, with interest payable monthly at 2.9% plus the 30-day
Dealer Commercial Paper Rate which is 6.1% at March 31, 2000. All assets of the
Company serve as collateral for the New Credit Facility. In addition, the New
Credit Facility has been personally guaranteed by a board member and related
party. In consideration for providing the guaranty, the Company issued 3,000,000
shares of the Company's common stock. These shares, which were valued at
$3,375,000 based on the closing price of the Company's stock on February 11,
2000 when the guarantee was granted, have been recorded as a deferred financing
cost which is being amortized over the term of the guarantee. At March 31, 2000,
the Company had not borrowed any amounts available under the New Credit
Facility.
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NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
----------------------------- ----------------------------
2000 1999 2000 1999
-------------- -------------- ------------ -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Numerator for earnings (loss) before
extraordinary item:
Numerator for basic earnings (loss) per
share - income (loss) before extraordinary
item, as reported ........................ $ 995,666 $ (18,231,660) $ 279,922 $ (31,271,995)
Effect of dilutive securities:
Interest expense related to convertible
subordinated notes ....................... 490,937 -- 2,460,997 --
------------ -------------- ------------ --------------
Numerator for diluted earnings (loss) per
share - income (loss) before extraordinary
item after assumed conversions ........... $ 1,486,603 $ (18,231,660) $ 2,740,919 $ (31,271,995)
============ ============== ============ ==============
Numerator for extraordinary item:
Numerator for basic earnings (loss) per
share - extraordinary item ............... $ 9,471,710 -- $ 13,247,907 $ 130,977
Effect of dilutive securities:
Interest expense related to convertible
subordinated notes ....................... (490,937) -- (2,460,997) --
------------ -------------- ------------ --------------
Numerator for diluted earnings (loss) per
share - extraordinary item ............... $ 8,980,773 -- $ 10,786,910 $ 130,977
============ ============== ============ ==============
Denominator:
Denominator for basic earnings (loss) per
share - weighted-average shares .......... 24,020,331 14,606,283 17,731,000 14,428,968
Dilutive common shares:
Convertible subordinated notes ........... 7,835,145 -- 12,963,636 --
------------ -------------- ------------ --------------
Denominator for diluted earnings (loss) per
share - adjusted weighted-average
shares and assumed conversions ........... 31,855,476 14,606,283 30,694,636 14,428,968
============ ============== ============ ==============
Basic earnings (loss) per share, before
extraordinary item ........................ $ .04 $ (1.25) $ .02 $ (2.17)
Extraordinary item ........................... .39 -- .74 .01
------------ -------------- ------------ --------------
Basic earnings (loss) per share .............. $ .43 $ (1.25) $ .76 $ (2.16)
============ ============== ============ ==============
Diluted earnings (loss) per share before
extraordinary item ........................ $ .05 $ (1.25) $ .09 $ (2.17)
Extraordinary item ........................... .28 -- .35 .01
------------ -------------- ------------ --------------
Diluted earnings (loss) per share ............ $ .33 $ (1.25) $ .44 $ (2.16)
============ ============== ============ ==============
Options and warrants to purchase the Company's common stock were not included in
the computation of diluted earnings (loss) per share because the effect would be
antidilutive.
NOTE 6 - RELATED PARTY TRANSACTIONS
In May 1999, the Company entered into an agreement with Harter Financial, Inc.
("Harter") to assist it with a financial reorganization and to represent the
Company in negotiating the restructuring of the Notes and a settlement with the
noteholders. As compensation for its services, Harter received an initial fee of
$50,000 on May 18, 1999. On October 18, 1999, the Board of Directors approved a
final compensation package to be paid to Harter consisting of a cash payment of
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$150,000 and the issuance of 200,000 unregistered shares of the Company's common
stock, which were valued at $112,500 based on the closing price of the Company's
stock on the date of grant. At March 31, 2000, $60,000 remained unpaid. Mr.
Angel, the Company's president and CEO is also the president and a 15%
shareholder of Harter. However, as of May 18, 1999, Mr. Angel was not an officer
or director of the Company.
NOTE 7 - CONTINGENCIES
On April 10, 1997, the Company, through Continucare Physician Practice
Management, Inc., ("CPPM") a wholly-owned subsidiary, acquired all of the
outstanding stock of certain arthritis rehabilitation centers and affiliated
physician practices. The acquisitions included the purchase of AARDS, INC., a
Florida corporation formerly known as Norman B. Gaylis, M.D., Inc., Rosenbaum,
Weitz & Ritter, Inc., a Florida corporation, and of Arthritis & Rheumatic
Disease Specialties, Inc., a Florida corporation, from Sheridan Healthcare, Inc.
(collectively "AARDS").
In connection with the purchase of AARDS, the Company entered into a management
agreement with ZAG Group, Inc. ("ZAG"), an entity controlled by Jay Ziskind, Ken
Arvin and Dr. Norman Gaylis. The management agreement, among other things,
provided for ZAG to perform certain services in exchange for specified
compensation. In addition, the Company entered into a put/call agreement with
ZAG, which allowed each of the parties to require the other party, after a
two-year period, to either sell or purchase all the issued and outstanding
capital stock of ZAG for a specified price to be paid in a combination of cash
and common stock of the Company. In September 1998, the Company paid
approximately $2,000,000 to ZAG in connection with an agreement and plan of
merger executed between the Company and ZAG that effectively canceled the
put/call agreement. Cash of $115,000 was paid and the remaining $1,885,000 was
paid by issuing 575,000 unregistered shares of the Company's common stock with a
fair market value of approximately $1,600,000 on the date of issuance. However,
because the common stock issued did not have an aggregate fair market value of
approximately $1,885,000 on October 15, 1999, the agreement and plan of merger
provided that the Company would pay additional cash consideration or issue
additional shares of its common stock so that the aggregate value of the stock
issued is approximately $1,885,000. Additional consideration of approximately
$1,600,000 in cash or approximately 1,600,000 shares of the Company's common
stock (based on the March 31, 2000 market price) would have to be issued. At
this time, no additional payment has been made to ZAG.
On November 15, 1999, the Company commenced litigation against ZAG and its
affiliated parties alleging breach of fiduciary duties, improper billing, and
seeking return of all consideration previously paid by the Company to ZAG, and
damages, as well as seeking rescission of the agreement and plan of merger. A
counterclaim was filed against the Company on December 20, 1999 in the Circuit
Court of the 11th Judicial District in and for Dade County, Florida. The
counterclaim alleged breach of contract, tortious interference and conversion.
Continucare may be required to pay in excess of $1,600,000 of additional
consideration, in the form of either cash or stock, representing the difference
between $1,885,000 and the fair market value of the 575,000 unregistered shares
of Continucare common stock previously issued to ZAG in connection with the
agreement and plan of merger.
On September 19, 1997, the Company acquired the stock of Maxicare, Inc.
("Maxicare"), a Florida based home health agency for $4,200,000 including
approximately $900,000 of liabilities assumed. In addition, $300,000 of
additional purchase price was contingent upon maintaining various performance
criteria and, if earned, would be due in equal installments in September 1998
and 1999. No amounts have been paid to the former owner of Maxicare, Inc.
pursuant to the contingent purchase price from the acquisition.
The case of JAMES N. HOUGH, PLAINTIFF, v. INTEGRATED HEALTH SERVICES, INC., A
DELAWARE CORPORATION, AND REHAB MANAGEMENT SYSTEMS, INC., A FLORIDA CORPORATION
("RMS"), AND CONTINUCARE REHABILITATION SERVICES, INC., A FLORIDA CORPORATION
was removed from the active docket on March 14, 2000 and has remained dormant
since that time.
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The Company is a party to the case of MANAGED HEALTHCARE SYSTEMS ("MHS") v.
CONTINUCARE CORPORATION & CONTINUCARE HOME HEALTH SERVICES, INC ("CHHS"). This
case was filed in the Commonwealth of Massachusetts in August, 1998. The
complaint alleges breach of contract for alleged verbal representations by CHHS
in negotiations to acquire MHS and seeks damages in excess of $2,750,000 and
treble damages. The Company believes the action has little merit and intends to
vigorously defend the claim.
The case of AVENTURA COMPREHENSIVE REHABILITATION CENTER, INC. AND ANTHONY J.
DORTO, M.D. v. CONTINUCARE-AVENTURA, INC. AND CONTINUCARE OUTPATIENT MANAGEMENT,
INC. was settled in March, 2000 with no admission of liability. The parties
exchanged general releases.
The Company is a party to the case of WARREN GROSSMAN, M.D., ALAN REICH, M.D.,
AND RICHARD STRAIN, M.D. v. CONTINUCARE PHYSICIAN PRACTICE MANAGEMENT, INC. AND
CONTINUCARE CORPORATION. This case was filed in May 1999 in the Circuit Court
for Broward County, Florida. The complaint alleges breach of employment
contracts based on the early termination of the Plaintiffs' employment and seeks
damages in excess of $2,500,000. On January 5, 2000, the Company filed a
counterclaim alleging breach of contract in connection with the Plaintiffs'
failure to return certain computer equipment, as well as a breach of the
non-compete covenant. The case is set for trial in May, 2000. On February 18,
2000, the Company filed a Motion for Summary Judgment as to two of the
Plaintiffs. The motion is scheduled to be heard in May, prior to the trial
period. The Company believes the action has little merit and intends to
vigorously defend the claim.
The Company is a party to the case of GE MEDICAL SYSTEMS, AN UNINCORPORATED
DIVISION OF GENERAL ELECTRIC COMPANY v. CONTINUCARE OUTPATIENT SERVICES, INC.
N/K/A OUTPATIENT RADIOLOGY SERVICES, INC AND CONTINUCARE CORPORATION. This case
was filed in April, 2000 in the Circuit Court of the 11th Judicial Circuit in
and for Dade County, Florida. The complaint alleges a breach of guaranty
agreement and seeks damages of approximately $676,000.
Two subsidiaries of the Company are parties to the case of NANCY FEIT ET AL. v.
KENNETH BLAZE, D.O. KENNETH BLAZE, D.O., P.A.; SHERIDEN HEALTHCORP, INC.; WAYNE
RISKIN, M.D.; KAHN AND RISKIN, M.D., P.A.; CONTINUCARE PHYSICIAN PRACTICE
MANAGEMENT, INC. D/B/A ARTHRITIS AND RHEUMATIC DISEASE SPECIALTIES, INC.; JAMES
JOHNSON, D.C. AND JOHNSON & FALK, D.C., P.A. The case was filed in December,
1999 in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida and served on the companies in April, 2000. The complaint
alleges vicarious liability and seeks damages in excess of $15,000.
The Company is subject to a variety of claims and suits that arise from time to
time out of the ordinary course of its business, substantially all of which
involve vendor-lease claims and/or claims related to the alleged malpractice of
employed and contracted medical professionals.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used in this Form 10-Q, the words
"believe," "anticipate," "think," "intend," "plan," "will be," and similar
expressions, identify such forward-looking statements. Such statements regarding
future events and/or the future financial performance of the Company are subject
to certain risks and uncertainties, which could cause actual events or the
actual future results of the Company to differ materially from any
forward-looking statement. Certain factors that might cause such a difference
are set forth in the Company's Form 10-K/A-2 for the period ended June 30, 1999,
including the following: the success or failure of the Company in implementing
its current business and operational strategies; the successful implementation
of the Company's Business Rationalization Program and Financial Restructuring
Program; the availability, terms and access to capital and customary trade
credit; general economic and business conditions; competition; changes in the
Company's business strategy; availability, location and terms of new business
development; availability and terms of necessary or desirable financing or
refinancing; labor relations; the outcome of pending or yet-to-be instituted
legal proceedings; and labor and employee benefit costs.
GENERAL
Continucare is a provider of integrated outpatient healthcare and home
healthcare services in Florida. As of March 31, 2000, the Company operated,
owned and/or managed: seventeen Staff Model clinics in South and Central
Florida; an Independent Practice Association (the "IPA") with 88 physicians; and
two home health agencies.
Throughout fiscal 1998 and 1999 the Company experienced adverse
business operations, recurring operating losses, negative cash flow from
operations, and significant working capital deficiencies. Furthermore, as
discussed below under "Liquidity and Capital Resources" and in Note 3 of the
condensed consolidated financial statements, the Company was unable to make the
interest payments due April 30, 1999 and October 31, 1999 on the Convertible
Subordinated Notes Payable (the "Notes"). The Company's operating difficulties
were in large part due to the underperformance of various entities which were
acquired in fiscal years 1999, 1998 and 1997, the inability to effectively
integrate and realize increased profitability through anticipated economies of
scale with these acquisitions, as well as reductions in reimbursement rates
under the Balanced Budget Act of 1997.
The financial statements of the Company have been prepared assuming
that the Company will continue as a going concern. To strengthen the Company
financially, and remain a going concern, the Company began a business
rationalization program (the "Business Rationalization Program") during the
fiscal year ended June 30, 1999 to divest itself of certain unprofitable
operations and to close other underperforming subsidiary divisions and a
financial restructuring program (the "Financial Restructuring Program") to
strengthen its financial condition and performance. In connection with the
implementation of its Business Rationalization Program, the Company considered a
variety of factors in determining which entities to divest and which entities to
reorganize. Some of the determining factors include: (i) projected changes in
the cost structure; (ii) changes in reimbursement rates; (iii) changes in
regulatory environment; (iv) loss of management personnel; (v) loss of
contracts; and (vi) timely opportunity for disposal. As a result of this
analysis, the Company has sold or closed its Outpatient Rehabilitation
subsidiary, Diagnostic Imaging subsidiary and Physician Practice subsidiary.
These divestitures generated net cash proceeds of approximately $5,642,000
(after the payment of transaction costs and other costs) during the fiscal year
ended June 30, 1999. The Business Rationalization Program has assisted
management with the commencement and implementation of its Financial
Restructuring Program and has allowed the Company to focus its resources on a
core business model. While the Company believes that the Business
Rationalization Program and Financial Restructuring Program will improve its
cash flow and profitability, there can be no assurance that it will be able to
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continue implementing any of the necessary programs and, if implemented, that
the programs will improve the Company's cash flow and profitability sufficiently
to fund its operations and satisfy its obligations as they become due. The
Company has not provided for income taxes on it's operating results because it
believes it will be able to utilize certain of its net operating loss
carryforwards to offset any income tax liability related to it's operating
results.
REIMBURSEMENT CONSIDERATIONS
The Company receives reimbursement from the Medicare and Medicaid
programs or payments from insurers, self-funded benefit plans or other
third-party payors. 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. Although the Company has
derived less than 5% of its net patient service revenue directly from Medicare
and Medicaid in fiscal 2000, a substantial portion of the Company's managed care
revenues are based upon Medicare reimbursable rates. Therefore, any changes
which limit or reduce Medicare reimbursement levels could have a material
adverse effect on the Company.
Significant changes have been and may be made in the Medicare program,
which could have a material adverse effect on the Company's business, results of
operations, prospects, financial results, financial condition or cash flows. In
addition, legislation has been or may be introduced in the Congress of the
United States which, if enacted, could adversely affect the operations of the
Company by, for example, decreasing reimbursement by third-party payors such as
Medicare or limiting the ability of the Company to maintain or increase the
level of services provided to patients.
The Balanced Budget Act of 1997 (the "Budget Act") enacted in August
1997 contains numerous provisions related to Medicare and Medicaid
reimbursement. It is unclear whether all of these provisions will be implemented
by the Health Care Financing Administration ("HCFA") as scheduled. The general
thrust of the provisions dealing with Medicare and Medicaid contained in the
Budget Act are intended to incentivize providers to deliver services efficiently
at lower costs.
Changes enacted in the Budget Act impact on the reimbursement
methodology for home health services. Prior to the Budget Act, home health
services were reimbursed on a reasonable cost basis, with statutory per visit
limits in place. Under the Budget Act, Congress mandated that there be a
prospective payment system ("PPS") put in place by the Health Care Financing
Administration ("HCFA") to replace the cost based reimbursement system. Prior to
the PPS, Congress mandated that an interim payment system ("IPS") be implemented
with imposed new visit and per beneficiary limits to control costs. Under this
system, for cost reporting periods beginning on or after October 1, 1997,
Medicare reimbursement for home health services is determined as the lesser of
(i) actual costs (ii) a per visit limit of 105 percent of median costs of
freestanding home health agencies, or (iii) an agency-specific per-beneficiary
cost limit, based on a blend of costs in 1994, adjusted for inflation: 75
percent of 98 percent of the agency-specific costs and 25 percent on 98 percent
of the standardized regional average of the costs for the agency's census
region. The Budget Act was amended by the Omnibus Consolidated and Emergency
Supplemental Appropriations Act of 1999 ("OCESAA") and the Balanced Budget
Refinement Act of 1999 ("Refinement Act"). Changes were made by those amendments
to the reimbursement methodology for home health services. The OCESAA made
changes for the per-visit and per-beneficiary limits for the IPS, effective for
cost reporting periods beginning on or after October 1, 1998. Specifically,
providers with a 12 month cost reporting period ending during FY 1994, whose
per-beneficiary limitations were less than the national median, will get their
current per-beneficiary limitation plus 1/3 of the difference between their rate
and the adjusted national median per-beneficiary limitation. New providers and
providers without a 12 month cost reporting period ending in Federal Fiscal Year
("FFY") 1994 whose first cost-reporting period begins before October 1, 1998
will receive 100 percent of the national median per-beneficiary limitation. New
providers whose first cost reporting periods begin during FFY 1999 will receive
75 percent of the national median per-beneficiary limitation. In the case of a
new provider or a provider that did not have a 12 month cost reporting period
beginning during FFY 1994 that filed an application for HHA provider status
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before October 15, 1998 or that was approved as a branch of its parent agency
before that date and becomes a subunit of the parent agency or a separate
freestanding agency on or after that date, the per-beneficiary limitation will
be set at 100 percent of the median. The per-visit limitation effective for
cost-reporting periods beginning on or after October 1, 1998 is set at 106
percent of the median instead of 105 percent of the median, as mandated by the
BBA. The most notable changes made by the Refinement Act was a modification by
Congress in a previously enacted 15 percent reduction in reimbursement for home
health services. The law now reads that the 15 percent reduction in payments
will take effect one year after implementation of the home health agency PPS.
The Secretary of Health and Human Services is required to report to the Congress
within 6 months after implementation of the PPS analyzing the need for the 15
percent reduction in rates. On October 28, 1999, HCFA issued a proposed rule for
the home health agency PPS, and promulgation of a final rule is expected by July
1, 2000, for an effective date of October 1, 2000.
For cost reporting periods beginning on or after October 1, 1997, the
Budget Act requires HHAs to submit claims for payment for home health services
only on the basis of the geographic location at which the service was furnished.
HCFA has publicly expressed concern that some HHAs are billing for services from
administrative offices in locations with higher per-visit cost limitations than
the cost limitations in effect in the geographic location of the home health
agency furnishing the service. The Company is unable to determine the
reimbursement impact resulting from payments for services based upon geographic
location until HCFA finalizes related regulatory guidance. Any resultant
reduction in the Company's cost limits could have a material adverse effect on
the Company's business, financial condition or results of operations. However,
until regulatory guidance is issued, the effect of such reductions cannot be
predicted with any level of certainty.
Various other provisions of the Budget Act may have an impact on the
Company's business and results of operations. For example, venipuncture will no
longer be a covered skilled nursing home care service unless it is performed in
connection with other skilled nursing services. Additionally, the Budget Act
mandated that payments be frozen for durable medical equipment ("DME"), and
payments for certain reimbursable drugs and biologicals will be reduced. In the
Refinement Act, though, Congress temporarily lifted reimbursement restrictions
for DME in years 2001 and 2002. Beginning with services furnished on or after
January 1, 1998, funding of home health services is currently being shifted over
a period of nine years from Medicare Part A to Medicare Part B except for a
maximum of 100 visits during a spell of illness after a three-day
hospitalization initiated within 14 days after discharge or after receiving any
covered services in a skilled nursing facility, each of which will continue to
be covered under Medicare Part A. Another provision of the Budget Act would
reduce Medicare reimbursements to acute care hospitals for non-Medicare patients
who are discharged from the hospital after a very short inpatient stay to the
care of a home health agency. The impact of these reimbursement changes could
have a material adverse effect on the Company's business, financial condition or
results of operations. However, this impact cannot be predicted with any level
of certainty at this time.
Among the other changes which the Budget Act is attempting to
accomplish are the following: (i) reducing the amounts which the federal
government will pay for services provided to Medicare and Medicaid beneficiaries
by an estimated $115 billion and $13 billion, respectively over a five-year
period. The Refinement Act provided some financial relief from the impacts under
the Budget Act. It is estimated that the Refinement Act provided $16.4 billion
over 5 years above levels mandated by the Budget Act for Medicare reimbursement;
(ii) reducing payments to hospitals for inpatient and outpatient services
provided to Medicare beneficiaries by an estimated $44 billion over a five-year
period; (iii) establishing the Medicare+Choice Program, which expands the
availability of managed care alternatives to Medicare beneficiaries, including
Medical Savings Accounts; (iv) converting the Medicare reimbursement of
outpatient hospital services from a reasonable cost basis to a PPS; (v)
adjusting the manner in which Medicare calculates the amount of copayments which
are deducted from the Medicare payment to hospitals for outpatient services;
(vi) freezing the Medicare hospital PPS and PPS-exempt hospital and distinct
part unit update for Fiscal year 1998, and limiting the level of annual updates
for subsequent years; (vii) reducing various other Medicare payments to
providers; (viii) repealing the federal Boren Amendment, which imposed certain
requirements on the level of reimbursement paid to hospitals for services
rendered to Medicaid beneficiaries; (ix) permitting states to mandate managed
care for Medicaid beneficiaries without the need for federal waivers in
instances of voluntary enrollment; (x) provision is made for mandatory
exclusions of not less than 5 years for an individual or entity convicted of a
criminal offense related to the delivery of an item or service under the
Medicare or State health care program, or the neglect or abuse of a patient,
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whether or not reimbursed under Medicare, Medicaid or any Federal health care
program. Additionally, the Secretary of HHS will be able to deny entry into
Medicare or Medicaid or deny renewal to any provider or supplier convicted of
any felony that the Secretary deems to be "inconsistent with the best interests"
of the program's beneficiaries; and (xi) creating a new civil monetary penalty
for violations of the Federal Medicare/Medicaid Anti-Fraud and Abuse Amendments
to the Social Securities Act ("Anti-Kickback Law") for cases in which a person
contracts with an excluded provider for the provision of health care items or
services where the person knows or should know that the provider has been
excluded from participation in a federal health care program. Violations will
result in damages three times the remuneration involved, as well as a penalty of
$50,000 per violation. There can be no assurance that the Company will not be
subject to the imposition of a fine or other penalty from time to time.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the unaudited condensed consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-Q. The statements of operations include the
operations of acquisitions made during the nine months ended March 31, 1999 from
their respective acquisition dates.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE FOR
THE THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1999
REVENUE
Medical services revenues for the three months ended March 31, 2000 decreased
40.2% to approximately $29,890,000 from approximately $49,984,000 for the three
months ended March 31, 1999. As part of the Company's Business Rationalization
Program, the Company significantly reduced the number of physician practices in
its IPA subsidiary and is no longer at risk for the commercial members of its
IPA physicians. During the three months ended March 31, 1999, the Company
provided managed care services for approximately 94,000 IPA member months
(members per month multiplied by the months for which services were available),
which resulted in approximately $23,600,000 in revenue. During the three months
ended March 31, 2000, the number of IPA member months decreased to approximately
13,000, which resulted in approximately $6,518,000 in revenue. Commercial member
months contributed approximately $4,500,000 of revenue during the three months
ended March 31, 1999. IPA Medicare member months have decreased 68% from
approximately 35,800 member months during the three months ended March 31, 1999
to approximately 11,500 member months during the three months ended March 31,
2000. IPA Medicare member months contributed approximately $6,060,000 and
$18,010,000 during the three months ended March 31, 2000 and 1999, respectively.
During Fiscal 1999 the Company disposed of certain underperforming
assets and subsidiaries (the "Rationalized Entities"). See "Business--General."
During the three months ended March 31, 1999, medical services revenue from the
Rationalized Entities was approximately $4,742,000.
As a result of the rationalization of the non-managed care entities,
the revenue generated by its managed care entities under the Company's contracts
with HMO's increased to 94.8% of medical services revenues for the three months
ended March 31, 2000 compared to 88.7% of medical services revenues for the
three months ended March 31, 1999. Revenue generated by the Humana contract was
59.3% and 31.9% of medical services revenue for the three months ended March 31,
2000 and 1999, respectively. Revenue generated by Foundation contracts was 35.6%
and 56.8% of medical services revenue for the three months ended March 31, 2000
and 1999, respectively.
Revenue received under fee for service arrangements which require the
Company to assume the financial risks relating to payor mix and reimbursement
rates accounted for approximately 9.4% of medical services revenue for the three
months ended March 31, 1999. The contribution from fee for service revenue for
the three months ended March 31, 2000 was insignificant, primarily as a result
of the Business Rationalization Program and the divestiture of the Diagnostic
Imaging and Physician Practice subsidiaries.
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The Company's home health agencies' revenue was 1.8% of medical
services revenue for the three months ended March 31, 1999 and 5.1% of medical
services revenue for the three months ended March 31, 2000 and consisted
primarily of Medicare reimbursement.
EXPENSES
Medical services expenses for the three month period ended March 31,
2000 were approximately $24,565,000 or 82.2% of medical services revenue,
compared to approximately $46,422,000 or 92.9% of medical services revenue for
the three month period ended March 31, 1999. The decrease is primarily due to
the Company's Rationalization Program. Medical services expenses of the
Company's IPA decreased from approximately $24,419,000 to approximately
$6,560,000 as a result of the decrease in IPA members for which the Company is
at risk. During the three months ended March 31, 1999, medical services expenses
for the Rationalized Entities were approximately $3,553,000.
Medical claims represent the costs of medical services provided by
providers other than the Company but which are to be paid by the Company for
individuals covered by the Company's capitated risk contracts with HMOs. Claims
expense was approximately $19,864,000 and $36,358,000 for the three months ended
March 31, 2000 and 1999, respectively, or 66.5% and 72.7% of medical services
revenues. The decrease in claims expense as a percentage of medical services
revenue is due to lower average claims costs per member for both the Company's
staff model centers and the Company's IPA and premium increases passed through
to the Company.
Other direct costs include the salaries and benefits of health
professionals providing the services, capitation payments to the Company's
contracted IPA physicians, and other costs necessary to operate the Company's
facilities. Other direct costs were approximately $4,701,000 and $10,064,000 for
the three months ended March 31, 2000 and 1999, respectively, or 15.8% and 20.1%
of medical services revenues.
Payroll and employee benefits for administrative personnel was
approximately $1,395,000 for the three months ended March 31, 2000, or 4.7% of
revenues, compared to approximately $3,523,000 or 7.0% of revenue for the three
months ended March 31, 1999. The decrease in these costs as a percent of
revenues is primarily due to the rationalization of employees. Payroll and
employee benefits for the Rationalized Entities was approximately $1,065,000 for
the three months ended March 31, 1999.
General and administrative expenses for the three months ended March
31, 2000 were approximately $1,373,000 or 4.6% of revenues compared to
approximately $3,012,000 or 6.0% of revenues for the three months ended March
31, 1999. The decrease in general and administrative expense as a percent of
revenues resulted from a reduction of overhead costs as part of the Company's
Business Rationalization Program. During the three months ended March 31, 1999
general and administrative expenses from the Rationalized Entities was
approximately $1,192,000.
Amortization expense of intangible assets was approximately $662,000
for the three months ended March 31, 2000, as compared to approximately
$1,231,000 for the three months ended March 31, 1999. Amortization expense for
the Rationalized Entities was approximately $185,000 for the three months ended
March 31, 1999. Additionally, during fiscal year ended June 30, 1999, the
Company determined that approximately $11,700,000 of other intangible assets
were impaired and, accordingly, wrote off the impaired assets. Amortization
expense related to these impaired assets which was included in the three months
ended March 31, 1999 totaled approximately $293,000.
Bad debt expense for the three months ended March 31, 1999, was related
to certain of the Rationalized Entities which generated revenues primarily
through fee-for-service billings to third party payors and individual patients.
The absence of bad debt expense for the three months ended March 31, 2000 is
directly attributable to the increase in the percentage of revenue received
under the Company's HMO contracts, for which bad debt expense is nominal.
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During the three months ended March 31, 1999, the Company recorded a
loss on disposal of subsidiaries of $11,004,000 associated with the Company's
Business Rationalization Program. No such charge was recorded during the three
months ended March 31, 2000.
INCOME (LOSS) FROM OPERATIONS
Income from operations for the three months ended March 31, 2000 was
approximately $1,590,000 or 5.3% of total revenues, compared to an operating
loss of approximately $17,118,000 or 34.2% of total revenues for the three
months ended March 31, 1999. The operating loss of the Rationalized Entities for
the three months ended March 31, 1999 was approximately $13,659,000.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
On February 15, 2000, the Company recorded an extraordinary gain on
extinguishment of debt of approximately $9,472,000 as a result of the
restructuring of the convertible subordinated debentures, net of restructuring
costs. The gain resulted primarily from the conversion of $31,000,000 of the
outstanding principal balance into 15,500,000 shares of common stock, which were
valued at approximately $21,312,500 based on the closing price of the Company's
stock on February 15, 2000, the forgiveness of approximately $4,237,000 of
accrued interest, the write off of approximately $1,929,000 of unamortized
deferred financing costs and the recording of $2,100,000 of interest which will
accrue on the remaining balance of the Notes under the revised terms of the
agreement through the maturity date of October 31, 2002. The Company has not
provided for income taxes on the gain because it believes it will be able to
utilize certain of its net operating loss carryforwards to offset any income tax
liability related to the restructuring transaction.
NET INCOME/LOSS
Net income for the three months ended March 31, 2000 was approximately
$10,467,000 compared to a net loss of approximately $18,232,000 for the three
months ended March 31, 1999.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE FOR
THE NINE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THE NINE MONTHS ENDED MARCH
31, 1999
REVENUE
Medical services revenues for the nine months ended March 31, 2000 decreased
42.2% to approximately $87,363,000 from approximately $151,178,000 for the nine
months ended March 31, 1999. As part of the Company's Business Rationalization
Program, the Company significantly reduced the number of physician practices in
its IPA subsidiary and is no longer at risk for the commercial members of its
IPA physicians. IPA commercial member months contributed approximately
$14,030,000 of revenue during the nine months ended March 31, 1999. IPA Medicare
member months have decreased approximately 62% from approximately 101,000 member
months during the nine months ended March 31, 1999 to 38,000 member months
during the nine months ended March 31, 2000. IPA Medicare member months
contributed approximately $20,376,000 and $50,231,000 during the nine months
ended March 31, 2000 and 1999, respectively.
During Fiscal 1999 the Company disposed of certain underperforming
assets and subsidiaries (the "Rationalized Entities"). See "Business--General."
During the nine months ended March 31, 1999, medical services revenue from the
Rationalized Entities was approximately $21,383,000.
As a result of the rationalization of the non-managed care entities,
the revenue generated by its managed care entities under the Company's contracts
with HMO's amounted to 94% and 83% of medical services revenues for the nine
months ended March 31, 2000 and 1999, respectively. Revenue generated by the
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Humana contract was 55% and 30% of medical services revenue for the nine months
ended March 31, 2000 and 1999, respectively. Revenue generated by the Foundation
contract was 39% and 53% of medical services revenue for the nine months ended
March 31, 2000 and 1999, respectively.
Revenue received under fee for service arrangements which require the
Company to assume the financial risks relating to payor mix and reimbursement
rates accounted for approximately 14% of medical services revenue for the nine
months ended March 31, 1999, including approximately 3% derived from the
Company's home health agencies. For the nine months ended March 31, 2000,
approximately 4.5% of medical service revenues was derived from the home health
agencies. The contribution from other sources of fee for service revenue for the
nine months ended March 31, 2000 was insignificant, primarily as a result of the
Business Rationalization Program and the divestiture of the Diagnostic Imaging
and Physician Practice subsidiaries.
Medicare and Medicaid, as a percentage of the Company's medical service
revenue, decreased from 6.8% to 4.5% of medical services revenue for the nine
months ended March 31, 1999 to March 31, 2000, respectively. This decrease was
attributable to a substantial increase in managed care revenues and the
respective sale and closing of the outpatient rehabilitation and physician
practice subsidiaries.
Management fee revenue of $450,000 for the nine months ended March 31,
2000 relates primarily to fees received in July, 1999 through September, 1999
from Foundation. Management fee revenue of approximately $517,000 for the nine
months ended March 31, 1999 relates to services provided by the Outpatient
Rehabilitation and Physician Practice subsidiaries which were respectively sold
and closed during Fiscal 1999.
EXPENSES
Medical services expenses for the nine month period ended March 31,
2000 were approximately $73,017,000 or 83.6% of medical services revenue,
compared to approximately $134,594,000 or 89.0% of medical services revenue for
the nine month period ended March 31, 1999. The decrease is primarily due to the
Company's Rationalization Program. During the nine months ended March 31, 1999,
medical services expenses for the Rationalized Entities were approximately
$14,394,000. Medical services expenses of the Company's IPA decreased from
approximately $67,873,000 to approximately $19,829,000 as a result of the
decrease in IPA members for which the Company is at risk. In addition, effective
December 31, 1999, the Company amended its IPA contract with Foundation which
reduced the Company's prior medical claims and long-term debt liabilities to
Foundation for prior medical claims by approximately $3,054,000, resulting in a
corresponding decrease in medical services expense (See Note 4 of the Company's
Condensed Consolidated Financial Statements).
Medical claims represent the costs of medical services provided by
providers other than the Company but which are to be paid by the Company for
individuals covered by the Company's capitated risk contracts with HMOs. Claims
expense was approximately $62,360,000 and $101,393,000 for the nine months ended
March 31, 2000 and 1999, respectively, or 71.4% and 67.1% of medical services
revenues. The Company began experiencing an increase in its claims loss ratio in
the second quarter of fiscal 1999 which continued through the first quarter of
fiscal 2000. The Company has taken steps to reduce the ratio, including the
reduction in the number of IPA members for which the Company is at risk. While
claims costs as a percentage of medical services revenues had decreased for both
the staff model centers and the IPA to approximately 66% of medical services
revenues in the third quarter of fiscal 2000, there can be no assurance that the
Company's measures will be effective and that the claims loss ratio will not
increase in the future.
Other direct costs include the salaries and benefits of health
professionals providing the services, capitation payments to the Company's
contracted IPA physicians and other costs necessary to operate the Company's
facilities. Other direct costs were approximately $13,711,000 and $33,201,000
for the nine months ended March 31, 2000 and 1998, respectively, or 15.7% and
22.0% of medical services revenues.
Payroll and employee benefits for administrative personnel was
approximately $4,674,000 for the nine months ended March 31, 2000, or 5.4% of
revenues, compared to approximately $11,215,000 or 7.4% of revenue for the nine
months ended March 31, 1999. The decrease in these costs as a percent of
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revenues is primarily due to the rationalization of employees. Payroll and
employee benefits for the Rationalized Entities was approximately $4,219,000 for
the nine months ended March 31, 1999.
General and administrative expenses for the nine months ended March 31,
2000 were approximately $4,398,000 or 5.0% of revenues compared to approximately
$9,146,000 or 6.0% of revenues for the nine months ended March 31, 1999. The
decrease in general and administrative expense as a percent of revenues resulted
from a reduction of overhead costs as part of the Company's Business
Rationalization Program. During the nine months ended March 31, 1999 general and
administrative expenses from the Rationalized Entities was approximately
$4,418,000.
Amortization expense of intangible assets was approximately $1,986,000
for the nine months ended March 31, 2000, as compared to approximately
$3,420,000 for the nine months ended March 31, 1999. Amortization expense for
the Rationalized Entities was approximately $674,000 for the nine months ended
March 31, 1999. Additionally, during fiscal year ended June 30, 1999, the
Company determined that approximately $11,700,000 of other intangible assets
were impaired and, accordingly, wrote off the impaired assets. Amortization
expense related to these impaired assets which was included in the nine months
ended March 31, 1999 totaled approximately $951,000.
Bad debt expense for the nine months ended March 31, 1999, was related
to certain of the Rationalized Entities which generated revenues primarily
through fee-for-service billings to third party payors and individual patients.
The absence of bad debt expense for the nine months ended March 31, 2000 is
directly attributable to the increase in the percentage of revenue received
under the Company's HMO contracts, for which bad debt expense is nominal.
During the nine months ended March 31, 1999, the Company recorded a
loss on disposal of subsidiaries of $15,156,000 associated with the Company's
Business Rationalization Program. No such charge was recorded during the nine
months ended March 31, 2000.
INCOME (LOSS) FROM OPERATIONS
Income from operations for the nine months ended March 31, 2000 was
approximately $2,732,000 or 3.1% of total revenues, compared to an operating
loss of approximately $27,803,000 or 18.3% of total revenues for the nine months
ended March 31, 1999. The operating loss of the Rationalized Entities for the
nine months ended March 31, 1999 was approximately $21,528,000.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
In July, 1999, the Company recorded an extraordinary gain on
extinguishment of debt of approximately $3,776,000 as a result of repurchasing
$4,000,000 of its outstanding convertible subordinated notes payable for a cash
payment of $210,000 and the write-off of related deferred financing costs and
accrued interest payable. The Company has not provided for income taxes on the
gain because it believes that it will be able to utilize certain of its net
operating loss carryforwards to offset any income tax liability related to the
transaction.
In August, 1998, the Company recorded an extraordinary gain on
extinguishment of debt of approximately $130,000 as a result of repurchasing
$1,000,000 of the Notes for a cash payment of approximately $700,000 and the
write-off of related deferred financing costs and accrued interest payable.
On February 15, 2000, the Company recorded an extraordinary gain on
extinguishment of debt of approximately $9,472,000 as a result of the
restructuring of the convertible subordinated debentures, net of restructuring
costs. The gain resulted primarily from the conversion of $31,000,000 of the
outstanding principal balance into 15,500,000 shares of common stock, which were
valued at approximately $21,312,500 based on the closing price of the Company's
stock on February 15, 2000, the forgiveness of approximately $4,237,000 of
accrued interest, the write off of approximately $1,929,000 of unamortized
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deferred financing costs and the recording of $2,100,000 of interest which will
accrue on the remaining balance of the Notes under the revised terms of the
agreement through the maturity date of October 31, 2002. The Company has not
provided for income taxes on the gain because it believes it will be able to
utilize certain of its net operating loss carryforwards to offset any income tax
liability related to the restructuring transaction.
NET INCOME/LOSS
Net income for the nine months ended March 31, 2000 was approximately
$13,528,000 compared to a net loss of approximately $31,141,000 for the nine
months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The discussion herein has been prepared assuming that the Company will
continue as a going concern. In order to strengthen itself financially and
remain a going concern, the Company, during the fiscal year ended June 30, 1999,
divested itself of certain unprofitable operations and disposed of other
underperforming assets.
On July 2, 1999 the Company repurchased $4,000,000 face value of its
Notes for approximately $210,000, recognizing a gain on extinguishment of debt
of approximately $3,776,000. The Company funded the purchase of the Notes from
working capital.
On February 15, 2000, the Company completed a restructuring of the
Notes through the execution of a Consent Letter and Agreement to the First
Supplemental Indenture (the "Restructuring"). The Restructuring resulted in a
gain of approximately $9,472,000 as a result of the conversion of $31,000,000 of
Notes into common stock, the forgiveness of $4,237,000 of accrued interest, the
write off of approximately $1,929,000 of unamortized deferred financing costs
and the recording of $2,100,000 of interest which will accrue on the remaining
balance of the Notes under the revised terms of the agreement through the
maturity date of October 31, 2002. The remaining outstanding principal balance
of the Notes of $10,000,000 were reinstated as a performing non-defaulted loan.
In August 1998, the Company entered into a credit facility with First
Union Bank (the "Credit Facility"). The Credit Facility provided for a
$5,000,000 acquisition facility and a $5,000,000 revolving loan. The Company
borrowed the entire $5,000,000 acquisition facility to fund acquisitions. The
Company never utilized the revolving loan. During April 1999, the Company used
approximately $4,000,000 of the net proceeds from the sale of its Rehabilitation
Subsidiary to reduce the outstanding balance of the Credit Facility. In
connection with the payment, the Company entered into an amendment to the Credit
Facility, which provided, among other things, for the repayment of the remaining
outstanding principal balance by December 31, 1999. At June 30, 1999 the
outstanding balance of the Credit Facility was approximately $1,000,000 and was
included in Current Portion of Long-Term Debt in the accompanying condensed
consolidated financial statements. The Company obtained a waiver which extended
the due date of the remaining balance to February 1, 2000 and repaid the
outstanding balance on January 31, 2000.
Effective December 31, 1999, the Company negotiated an amendment to its
contract with Foundation (the "Amendment"). The Amendment reduces the Company's
prior medical claims and long-term debt liabilities to Foundation as of May 31,
1999 to $1,500,000. The Amendment also requires the Company to remit to
Foundation any reinsurance proceeds received for claims generated from
Foundation members for the period June 1, 1998 through August 31, 1999 up to a
maximum of $1,327,400. As a result of this Amendment the Company recorded a
contractual revision of previously recorded medical claims liability of
approximately $3,054,000. This Amendment resulted in the reduction of medical
claims payable by approximately $2,703,000 and the reduction of long-term debt
by approximately $351,000.
In conjunction with the Restructuring, the Company entered into a
credit facility (the "New Credit Facility"). The New Credit Facility provides a
revolving loan of $3,000,000. The New Credit Facility is due March 31, 2001 with
annual renewable options, with interest payable monthly at 2.9% plus the 30-day
Dealer Commercial Paper Rate which is 6.1% at March 31, 2000. At March 31, 2000,
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the Company had not borrowed any amounts available under the New Credit
Facility. (See Note 4 of the Company's Consolidated Financial Statements.)
The Company's income before extraordinary gain on extinguishment of
debt was approximately $280,000 for the nine months ended March 31, 2000. Net
cash provided by operating activities for the nine months ended March 31, 2000
was approximately $1,970,000 due primarily to the income before extraordinary
gain, non-cash amortization and depreciation expenses of approximately
$3,327,000, a decrease in accounts receivable of approximately $600,000, and
offset by a decrease of medical claims payable of approximately $3,395,000.
Net cash used in investing activities for the nine months ended March
31, 2000 was approximately $135,000, primarily for the purchase of computer
equipment in conjunction with the Company's Year 2000 computer plan. Net cash
used in financing activities for the nine months ended March 31, 2000 was
approximately $1,905,000, comprised primarily of $210,000 paid to redeem
$4,000,000 of the Company's convertible subordinated notes payable, and
approximately $1,406,000 of repayments on the Company's' Credit Facility and
other notes payable.
The Company's working capital deficit was approximately $8,892,000 at
March 31, 2000.
The Company has no current knowledge of any intermediary audit
adjustment trends with respect to previously filed cost reports. However, as is
standard in the industry, the Company remains at risk for disallowances and
other adjustments to previously filed cost reports until final settlement. The
Company's average settlement period with respect to its cost reports has
historically ranged from two to three years.
The Company continues to take steps to improve its cash flow and
profitability. The Company believes that it will be able to fund all of its
capital commitments and operating cash requirements from a combination of cash
on hand, expected cash flow improvements, and the new credit facility. The
Company anticipates its capital expenditures for fiscal 2000 will not exceed
$350,000, a reduction of $400,000 (or 53%) over the prior year. However, there
can be no assurances that any steps taken will improve the Company's cash flow
and profitability sufficiently to fund its operations and satisfy its
obligations as they become due.
If there are continuing operating losses, Continucare may need
additional capital to fund its operations, and there can be no assurance that
such additional capital can be obtained or, if obtained, that it will be on
terms acceptable to Continucare. The incurring or assumption by the Company of
additional indebtedness could result in the issuance of additional equity and/or
debt which could have a dilutive effect on current shareholders and a
significant effect on the Company's operations.
Additionally, the Company has fallen below the continued listing
requirement of the American Stock Exchange with respect to the requirements that
the Company not sustain losses from continuing operations and/or net losses in
two of its three most recent fiscal years. There can be no assurance that the
listing of the Company's common stock will be continued.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of the computer programs being
written using two digits rather than four to define the applicable year. Any
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations and patient care,
including, among other things, a failure of certain patient care applications
and equipment, a failure of control systems, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Since January 1, 2000 the Company has experienced no disruptions in its systems
or those of third parties, or other computer related problems as a result of
processing dates beyond 1999. However, there can be no assurances that the
Company will not experience Year 2000 related problems in the future.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material risk associated with interest rates,
foreign currency exchange rates or commodity prices.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 10, 1997, the Company, through Continucare Physician Practice
Management, Inc., ("CPPM") a wholly-owned subsidiary, acquired all of the
outstanding stock of certain arthritis rehabilitation centers and affiliated
physician practices. The acquisitions included the purchase of AARDS, INC., a
Florida corporation formerly known as Norman B. Gaylis, M.D., Inc., Rosenbaum,
Weitz & Ritter, Inc., a Florida corporation, and of Arthritis & Rheumatic
Disease Specialties, Inc., a Florida corporation, from Sheridan Healthcare, Inc.
(collectively "AARDS").
In connection with the purchase of AARDS, the Company entered into a management
agreement with ZAG Group, Inc. ("ZAG"), an entity controlled by Jay Ziskind, Ken
Arvin and Dr. Norman Gaylis. The management agreement, among other things,
provided for ZAG to perform certain services in exchange for specified
compensation. In addition, the Company entered into a put/call agreement with
ZAG, which allowed each of the parties to require the other party, after a
two-year period, to either sell or purchase all the issued and outstanding
capital stock of ZAG for a specified price to be paid in a combination of cash
and common stock of the Company. In September 1998, the Company paid
approximately $2,000,000 to ZAG in connection with an agreement and plan of
merger executed between the Company and ZAG that effectively canceled the
put/call agreement. Cash of $115,000 was paid and the remaining $1,885,000 was
paid by issuing 575,000 unregistered shares of the Company's common stock with a
fair market value of approximately $1,600,000 on the date of issuance. However,
because the common stock issued did not have an aggregate fair market value of
approximately $1,885,000 on October 15, 1999, the agreement and plan of merger
provided that the Company would pay additional cash consideration or issue
additional shares of its common stock so that the aggregate value of the stock
issued is approximately $1,885,000. Additional consideration of approximately
$1,600,000 in cash or approximately 1,600,000 shares of the Company's common
stock (based on the March 31, 2000 market price) would have to be issued. At
this time, no additional payment has been made to ZAG.
On November 15, 1999, the Company commenced litigation against ZAG and its
affiliated parties alleging breach of fiduciary duties, improper billing, and
seeking return of all consideration previously paid by the Company to ZAG, and
damages, as well as seeking rescission of the agreement and plan of merger. A
counterclaim was filed against the Company on December 20, 1999 in the Circuit
Court of the 11th Judicial District in and for Dade County, Florida. The
counterclaim alleged breach of contract, tortious interference and conversion.
Continucare may be required to pay in excess of $1,600,000 of additional
consideration, in the form of either cash or stock, representing the difference
between $1,885,000 and the fair market value of the 575,000 unregistered shares
of Continucare common stock previously issued to ZAG in connection with the
agreement and plan of merger.
On September 19, 1997, the Company acquired the stock of Maxicare, Inc.
("Maxicare"), a Florida based home health agency for $4,200,000 including
approximately $900,000 of liabilities assumed. In addition, $300,000 of
additional purchase price is contingent upon maintaining various performance
criteria and, if earned, would be due in equal installments in September 1998
and 1999. No amounts have been paid to the former owner of Maxicare, Inc.
pursuant to the contingent purchase price from the acquisition.
The case of JAMES N. HOUGH, PLAINTIFF, v. INTEGRATED HEALTH SERVICES, INC., A
DELAWARE CORPORATION, AND REHAB MANAGEMENT SYSTEMS, INC., A FLORIDA CORPORATION
("RMS"), AND CONTINUCARE REHABILITATION SERVICES, INC., A FLORIDA CORPORATION
was removed from the active docket on March 14, 2000 and has remained dormant
since that time.
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The Company is a party to the case of MANAGED HEALTHCARE SYSTEMS ("MHS") v.
CONTINUCARE CORPORATION & CONTINUCARE HOME HEALTH SERVICES, INC ("CHHS"). This
case was filed in the Commonwealth of Massachusetts in August, 1998. The
complaint alleges breach of contract for alleged verbal representations by CHHS
in negotiations to acquire MHS and seeks damages in excess of $2,750,000 and
treble damages. The Company believes the action has little merit and intends to
vigorously defend the claim.
The case of AVENTURA COMPREHENSIVE REHABILITATION CENTER, INC. AND ANTHONY J.
DORTO, M.D. v. CONTINUCARE-AVENTURA, INC. AND CONTINUCARE OUTPATIENT MANAGEMENT,
INC. was settled in March, 2000 with no admission of liability. The parties
exchanged general releases.
The Company is a party to the case of WARREN GROSSMAN, M.D., ALAN
REICH, M.D., AND RICHARD STRAIN, M.D. v. CONTINUCARE PHYSICIAN PRACTICE
MANAGEMENT, INC. AND CONTINUCARE CORPORATION. This case was filed in May 1999 in
the Circuit Court for Broward County, Florida. The complaint alleges breach of
employment contracts based on the early termination of the Plaintiffs'
employment and seeks damages in excess of $2,500,000. On January 5, 2000, the
Company filed a counterclaim alleging breach of contract in connection with the
Plaintiffs' failure to return certain computer equipment, as well as a breach of
the non-compete covenant. The case is set for trial in May, 2000. On February
18, 2000, the Company filed a Motion for Summary Judgment as to two of the
Plaintiffs. The motion is scheduled to be heard in May, prior to the trial
period. The Company believes the action has little merit and intends to
vigorously defend the claim.
The Company is a party to the case of GE MEDICAL SYSTEMS, AN
UNINCORPORATED DIVISION OF GENERAL ELECTRIC COMPANY v. CONTINUCARE OUTPATIENT
SERVICES, INC. N/K/A OUTPATIENT RADIOLOGY SERVICES, INC AND CONTINUCARE
CORPORATION. This case was filed in April, 2000 in the Circuit Court of the 11th
Judicial Circuit in and for Dade County, Florida. The complaint alleges a breach
of guaranty agreement and seeks damages of approximately $676,000.
Two subsidiaries of the Company are parties to the case of NANCY FEIT
ET AL. v. KENNETH BLAZE, D.O. KENNETH BLAZE, D.O., P.A.; SHERIDEN HEALTHCORP,
INC.; WAYNE RISKIN, M.D.; KAHN AND RISKIN, M.D., P.A.; CONTINUCARE PHYSICIAN
PRACTICE MANAGEMENT, INC. D/B/A ARTHRITIS AND RHEUMATIC DISEASE SPECIALTIES,
INC.; JAMES JOHNSON, D.C. AND JOHNSON & FALK, D.C., P.A. The case was filed in
December, 1999 in the Circuit Court of the 17th Judicial Circuit in and for
Broward County, Florida and served on the companies in April, 2000. The
complaint alleges vicarious liability and seeks damages in excess of $15,000.
The Company is subject to a variety of claims and suits that
arise from time to time out of the ordinary course of its business,
substantially all of which involve vendor-lease claims and/or claims related to
the alleged malpractice of employed and contracted medical professionals.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 11, 2000, the Company was obligated to issue 3,000,000
unregistered shares of the Company's common stock to the guarantor of our New
Credit Facility in consideration for such guaranty. Such shares were issued on
February 15, 2000. On February 15, 2000, the Company issued 15,500,000
unregistered shares of the Company's common stock as a result of the conversion
of an aggregate principal amount of $31,000,000 million of the Company's 8%
convertible subordinated notes. All such shares were issued pursuant to an
exemption set forth under Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on February 14,
2000, the shareholders of the Company voted to elect Charles M. Fernandez, Dr.
Phillip Frost and Spencer J. Angel as Directors of the Company. The number of
votes cast for, against or withheld, with respect to each of the nominees, were
as follows:
NOMINEE FOR AGAINST VOTE WITHHELD
------- --- ------- -------------
Charles M. Fernandez....................... 11,351,832 410,085 --
Dr. Phillip Frost.......................... 11,478,187 283,760 --
Spencer J. Angel........................... 11,477,832 284,085 --
In addition, the shareholders of the Company voted to approve the
restructuring of the Company's 8% convertible subordinated notes due 2002 (the
"Restructuring"). The shareholders cast 7,724,349 votes in favor of the
Restructuring, 15,550 votes against the Restructuring and shareholders abstained
with respect to 1,800 votes.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Merrill Lynch WCMA Loan and Security Agreement
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CONTINUCARE CORPORATION
Dated: May 12, 2000 By: /s/ SPENCER J. ANGEL
---------------------------------------
Spencer J. Angel
Chief Executive Officer and President
By: /s/ JANET L. HOLT
---------------------------------------
Janet L. Holt
Chief Financial Officer
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