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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 DECEMBER 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 February 8, 2001, the Registrant had 33,240,090 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 - December 31, 2000 (Unaudited) and June
30, 2000............................................................................. 3
Condensed Consolidated Statements of Operations - Three Months Ended December
31, 2000 (Unaudited) and 1999 (Unaudited)............................................ 4
Condensed Consolidated Statements of Operations - Six Months Ended December 31,
2000 (Unaudited) and 1999 (Unaudited)................................................ 5
Condensed Consolidated Statements of Cash Flows - Six Months Ended December 31,
2000 (Unaudited) and 1999 (Unaudited)................................................ 6
Notes to Condensed Consolidated Financial Statements - December 31, 2000
(Unaudited).......................................................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................................. 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................................... 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................ 17
SIGNATURE PAGE..................................................................................... 18
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PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 JUNE 30, 2000
----------------- -------------
(UNAUDITED) (NOTE 1)
ASSETS
Current assets
Cash and cash equivalents .............................................. $ 703,475 $ 2,535,540
Accounts receivable, net of allowance for doubtful accounts of
$5,752,000 at December 31, 2000 and June 30, 2000 ..................... 85,022 94,966
------------ ------------
Other receivables ...................................................... 453,773 697,977
Prepaid expenses and other current assets .............................. 146,353 368,431
------------ ------------
Total current assets ............................................... 1,388,623 3,696,914
Equipment, furniture and leasehold improvements, net ...................... 967,040 880,873
Cost in excess of net tangible assets acquired, net of accumulated
amortization of approximately $7,138,000 at December 31, 2000 and
approximately $5,929,000 at June 30, 2000 ............................... 18,724,821 19,932,891
Deferred financing costs, net of accumulated amortization of approximately
$1,086,000 at December 31, 2000 and $426,000 at June 30, 2000 ........... 2,304,375 2,964,375
Other assets, net ......................................................... 89,135 70,127
------------ ------------
Total assets ....................................................... $ 23,473,994 $ 27,545,180
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities
Accounts payable ....................................................... $ 773,704 $ 687,703
Accrued expenses ....................................................... 2,043,124 2,336,398
Accrued salaries and benefits .......................................... 1,068,351 923,656
Medical claims payable ................................................. 2,459,732 985,835
Due to Medicare ........................................................ 538,689 73,527
Current portion of convertible subordinated notes payable .............. 700,000 700,000
Current portion of long term debt ...................................... 3,555,989 2,276,635
Accrued interest payable ............................................... 10,166 6,044
Current portion of capital lease obligations ........................... 165,188 115,685
------------ ------------
Total current liabilities .......................................... 11,314,943 8,105,483
Capital lease obligations, less current portion ........................... 178,171 103,682
Convertible subordinated notes payable, less current portion .............. 10,700,000 11,050,000
Long term debt, less current portion ...................................... 3,769,760 5,023,244
------------ ------------
Total liabilities .................................................. 25,962,874 24,282,409
Commitments and contingencies
Shareholders' (deficit) equity
Common stock; $0.0001 par value; 100,000,000 shares authorized,
36,236,282 shares issued (including treasury shares) and 33,240,090
shares outstanding at both December 31, 2000 and June 30, 2000 ....... 3,325 3,325
Additional paid-in capital ............................................. 57,708,595 57,708,595
Accumulated deficit .................................................... (54,776,099) (49,024,448)
Treasury stock (2,996,192 shares at December 31, 2000 and June 30, 2000) (5,424,701) (5,424,701)
------------ ------------
Total shareholders' equity ........................................... (2,488,880) 3,262,771
------------ ------------
Total liabilities and shareholders' equity ........................... $ 23,473,994 $ 27,545,180
============ ============
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 DECEMBER 31,
-----------------------------------
2000 1999
------------ ------------
Medical services revenue, net ................................................ $ 29,923,561 $ 28,840,728
Expenses
Medical services:
Medical claims ......................................................... 24,842,256 19,496,753
Contractual revision of previously recorded medical claims liability ... -- (3,053,853)
Other .................................................................. 4,348,772 4,576,810
Payroll and employee benefits .............................................. 1,505,331 1,409,532
Professional fees .......................................................... 316,747 304,852
General and administrative ................................................. 1,464,406 1,515,541
Depreciation and amortization .............................................. 729,376 760,166
------------ ------------
Subtotal ................................................................. 33,206,888 25,009,801
(Loss) income from operations ................................................... (3,283,327) 3,830,927
Other income (expense)
Interest income ............................................................ 10,542 5,991
Interest expense ........................................................... (435,087) (1,091,090)
------------ ------------
Net (loss) income ............................................................... $ (3,707,872) $ 2,745,828
============ ============
Basic and diluted (loss) earnings per common share:
Net (loss) income .......................................................... $ (.11) $ .19
============ ============
Weighted average number of common shares outstanding:
Basic and diluted ..................................................... 33,240,090 14,703,135
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)
SIX MONTHS ENDED DECEMBER 31,
-----------------------------------
2000 1999
------------ ------------
Medical services revenue, net ................................................ $ 59,560,052 $ 57,923,221
Expenses
Medical services:
Medical claims ......................................................... 48,188,399 42,495,480
Contractual revision of previously recorded medical claims liability.... -- (3,053,853)
Other .................................................................. 8,541,186 9,010,273
Payroll and employee benefits .............................................. 2,907,691 3,279,091
Professional fees .......................................................... 594,606 458,220
General and administrative ................................................. 2,819,493 3,024,386
Depreciation and amortization .............................................. 1,452,135 1,567,700
------------ ------------
Subtotal ................................................................. 64,503,510 56,781,297
(Loss) income from operations ................................................... (4,943,458) 1,141,924
Other income (expense)
Interest income ............................................................ 24,409 24,567
Interest expense ........................................................... (832,906) (2,162,235)
Other ...................................................................... 304 280,000
------------ ------------
Loss before extraordinary item .................................................. (5,751,651) (715,744)
Gain on extinguishment of debt .................................................. -- 3,776,197
------------ ------------
Net (loss) income ............................................................... $ (5,751,651) $ 3,060,453
============ ============
Basic and diluted (loss) earnings per common share:
Loss before extraordinary item ............................................. $ (.17) $ (.05)
Extraordinary gain on extinguishment of debt ............................... -- .26
------------ ------------
Net (loss) income .......................................................... $ (.17) $ .21
============ ============
Weighted average number of common shares outstanding:
Basic and diluted ..................................................... 33,240,090 14,620,525
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)
SIX MONTHS ENDED DECEMBER 31,
-----------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income ............................................................ $ (5,751,651) $ 3,060,453
Adjustments to reconcile net (loss) income to cash used in operating
activities:
Depreciation and amortization including amortization
of deferred loan costs ..................................................... 2,180,954 2,062,485
Gain on extinguishment of debt ............................................. -- (3,776,197)
Changes in operating assets and liabilities, excluding the effect of
acquisitions and disposals:
Decrease in accounts receivable ............................................ 9,944 567,221
Decrease in prepaid expenses and other current assets ...................... 222,078 72,408
Decrease (increase) in other receivables ................................... 244,204 (93,141)
Increase in other assets ................................................... (19,008) (15,274)
Increase (decrease) in medical claims payable .............................. 1,473,897 (2,531,444)
Increase (decrease) in due to (from) Medicare .............................. 835,784 (122,598)
Decrease in accounts payable and accrued expenses .......................... (62,578) (635,263)
Increase in accrued interest payable ....................................... 4,122 1,639,923
------------ ------------
Net cash used in operating activities ........................................... (862,254) (121,973)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals of property and equipment ............................ 1,500 --
Property and equipment additions ............................................. (165,086) (81,804)
------------ ------------
Net cash used in investing activities ........................................... (163,586) (81,804)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on convertible subordinated notes ................................... (350,000) (210,000)
Principal repayments under capital lease obligation .......................... (42,629) (10,321)
Payments on long term debt ................................................... (413,596) (1,145,629)
------------ ------------
Net cash used in financing activities ........................................... (806,225) (1,365,950)
------------ ------------
Net decrease in cash and cash equivalents ....................................... (1,832,065) (1,569,727)
------------ ------------
Cash and cash equivalents at beginning of period ................................ 2,535,540 3,185,077
------------ ------------
Cash and cash equivalents at end of period ...................................... $ 703,475 $ 1,615,350
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Note payable issued for refunds due to Medicare for overpayments ................ $ 370,622 $ 637,556
============ ============
Purchase of furniture and fixtures with proceeds of capital lease
obligations ..................................................................... $ 166,621 $ 102,948
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 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 six months ended December 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 2001.
The balance sheet at June 30, 2000 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 for the
year ended June 30, 2000.
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 December
31, 2000, the Company operated, owned and/or managed: seventeen staff model
clinics in south and central Florida; an Independent Practice Association
("IPA") with 72 physicians; and three Home Health agencies. For the six months
ended December 31, 2000 approximately 58% of net medical services revenue was
derived from managed care contracts with Humana Medical Plans, Inc. ("Humana")
and 38% of net medical services revenue was derived from managed care contracts
with Foundation Health Corporation ("Foundation"). For the six months ended
December 31, 1999, approximately 54% of net medical services revenue was derived
from Humana and 42% was derived from Foundation.
During the six month period ended December 31, 2000, the Company has experienced
deterioration in its claim loss ratio. Changes in the claims loss ratio are due
to fluctuations in utilization, the timing of claims paid by the HMOs on our
behalf, as well as increases in medical costs without counterbalancing increases
in premium revenues.
The financial statements of the Company have been prepared assuming that the
Company will continue as a going concern. The Company believes that it will be
able to fund its capital commitments, operating cash requirements and satisfy
its obligations as they become due from a combination of cash on hand, expected
operating cash flow improvements through HMO premium increases and improvements
in the benefit structure of HMO contracts effective January 1, 2001, and the
Company's credit facility ("Credit Facility"). However, there can be no
assurances that these sources of funds will be sufficient to fund its operations
and satisfy its obligations as they
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become due, including, but not limited to, its obligation of $350,000 for
interest on the convertible subordinated notes, (the "Notes") due April 30,
2001.
NOTE 3 - CONVERTIBLE SUBORDINATED NOTES PAYABLE
On July 2, 1999, the Company repurchased $4,000,000 of its Notes, which mature
on October 31, 2002, for $210,000 and recorded a gain on extinguishment of debt
of approximately $3,776,000. 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 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 which resulted in, among other things, the conversion of $31,000,000
of Notes into its common stock. The remaining outstanding principal balance of
the Notes of $10,000,000 were reinstated as a performing non-defaulted loan. The
$11,400,000 balance of the outstanding Notes at December 31, 2000 includes
interest accrued through December 31, 2000 of $116,667 as well as the remaining
interest of $1,283,333 which will be payable in semi-annual payments through
October 31, 2002.
NOTE 4 - LONG-TERM DEBT
In March, 2000, the Company entered into a credit facility agreement ("Credit
Facility") to provide a revolving loan of $3,000,000. Interest is payable
monthly at 2.9% above the 30-day Dealer Commercial Paper Rate which was 6.48%
at December 31, 2000. All assets of the Company serve as collateral for the
Credit Facility. In addition, the Credit Facility has been guaranteed by a
board member and an entity controlled by another board member. At December 31,
2000, the Company had not borrowed any amounts available under the Credit
Facility. The Credit Facility currently expires on March 31, 2001 unless
renewed at the option of the lender. As of the date of this filing, the lender
has indicated verbally that it intends to renew the Credit Facility. However,
there can be no assurance that the Credit Facility will be renewed or, if
renewed, that it will be renewed in the same amount or on the same terms as the
current Credit Facility.
NOTE 5 - EARNINGS PER SHARE
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 - CONTINGENCIES
The case of CONTINUCARE CORPORATION, A FLORIDA CORPORATION, CONTINUCARE
PHYSICIAN PRACTICE MANAGEMENT, INC. ("CPPM") v. JAY A. ZISKIND, AN INDIVIDUAL,
KENNETH I. ARVIN, AN INDIVIDUAL, TRACY ARVIN, AN INDIVIDUAL, ZISKIND & ARVIN,
P.A., A PROFESSIONAL ASSOCIATION, NORMAN B. GAYLIS, M.D., AN INDIVIDUAL AND ZAG
GROUP, INC., A FLORIDA CORPORATION, was filed on November 15, 1999 in the
Circuit Court of the 11th Judicial District in and for Miami-Dade County,
alleging breach of fiduciary duties, improper billing, and seeking the 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 and the Registration
Rights Agreement. On December 20, 1999, a counterclaim was filed against the
Company and CPPM alleging breach of contract, tortious interference and
conversion and seeks damages in excess of $l,600,000. On August 11, 2000, the
counterplaintiffs filed their Second Amended Counterclaim. Discovery is
currently pending. The Company believes that there is little merit to the
counterclaim and intends to vigorously defend the claims.
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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
CONTINUECARE CORPORATION. This care 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 $250,000. On January 5, 2000, the Company filed a
counterclaim alleging breach of contract in connection with the Plaintiff's
failure to return certain computer equipment, as well as a breach of the
non-compete covenant. On February 18, 2000, the Company filed a Motion for
Summary Judgment as to all Plaintiffs. On June 5, 2000, the Company filed a
Motion for Judgment on the Pleadings as to all Plaintiffs. On April 28, 2000,
the Plaintiffs filed a Motion for Summary Judgment as to the issue of liability.
All of the aforementioned motions were heard on June 15, 2000. On November 14,
2000, the court granted the Company's motion as to one of the Plaintiffs' claims
for deferred and incentive compensation, but reserved as to his claim for post
termination compensation related to follow-up patient care, if any. The court
denied the Plaintiffs' motion for summary judgment in all respects. The trial
started on February 13, 2001. As of the date of this filing, the trial is still
in progress. The Company believes the action has little merit and intends to
vigorously defend the claims.
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., A FLORIDA CORPORATION AND CONTINUCARE
CORPORATION, A FLORIDA 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. In August 2000, the Company filed a cross-claim and
several third-party claims. The Company believes it has meritorious defenses, as
well as valid indemnification claims against several other parties. Claims
against those parties are being pursued and the Company intends to vigorously
litigate its defenses, as well as its claims of indemnification.
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
filed its answer on May 3, 2000. Discovery is currently pending. The Company has
made a demand for assumption of defense and indemnification from Kahn and
Riskin, M.D., P.A. and Wayne Riskin, M.D. The demand was rejected. The Company
believes it has meritorious defenses and intends to vigorously pursue them.
Prior to Fiscal 2000, the Company closed or dissolved certain subsidiaries, some
of which had pending claims against them. A liability associated with these
subsidiaries was approximately $749,000 at December 31, 2000.
The Company is also involved in various other legal proceedings incidental to
its business that arise from time to time out of the ordinary course of
business, including, but not limited to, claims related to the alleged
malpractice of employed and contracted medical professionals, workers'
compensation claims and other employee-related matters, and minor disputes with
equipment lessors and other vendors.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Unless otherwise indicated or the context otherwise requires, all
references in this Form 10-Q to "we," "us," "our," "Continucare" or the
"Company" refers to Continucare Corporation and its consolidated subsidiaries.
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 Continucare are subject
to certain risks and uncertainties, which could cause actual events or our
actual future results to differ materially from any forward-looking statement.
Certain factors that might cause such a difference are set forth in our Form
10-K for the period ended June 30, 2000, including the following: our success or
failure in implementing our current business and operational strategies; the
availability, terms and access to capital and customary trade credit; general
economic and business conditions; competition; changes in our 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.
Our medical claims payable include estimates of medical claims expenses
incurred by our members but not yet reported to us. These estimates are based on
a number of factors, including our prior claims experience and
pre-authorizations of treatment. Adjustments, if necessary, are made to medical
claims expenses in the period the actual claims costs are ultimately determined.
We cannot assure that actual medical claims costs in future periods will not
exceed our estimates. If these costs exceed our estimates, our profitability in
future periods will be adversely affected.
GENERAL
We are a provider of integrated outpatient healthcare and home
healthcare services in Florida. As of December 31, 2000, we operated, owned
and/or managed seventeen staff model clinics in south and central Florida; an
Independent Practice Association (the "IPA") with 72 physicians; and three home
health agencies.
REIMBURSEMENT CONSIDERATIONS
We receive 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 we derived less than 5% of our net
patient service revenue directly from Medicare and Medicaid in Fiscal 2000, a
substantial portion of our 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 our business.
Significant changes have been and may be made in the Medicare program,
which could have a material adverse effect on our business, results of
operations, prospects, financial results, financial condition or cash flows. In
addition, legislation has been or may be introduced in the Congress of the
United States which, if enacted, could adversely affect operations by, for
example, decreasing reimbursement by third-party payors such as Medicare or
limiting our ability to maintain or increase the level of services provided to
patients.
Title XVIII of the Social Security Act authorizes Medicare Part A, the
health insurance program that pays for inpatient care for covered persons
(generally, those age 65 and older and the long-term disabled) and Medicare
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Part B, a voluntary supplemental medical assistance insurance program.
Healthcare providers may participate in the Medicare program subject to certain
conditions of participation and acceptance of a provider agreement by the
Secretary of Health and Human Services. Only enumerated services, upon
satisfaction of certain criteria, are eligible for Medicare reimbursement.
Relative to the services of our Home Health Agencies and previously owned or
operated Medicare certified outpatient rehabilitation facilities and
Comprehensive Outpatient Rehabilitation Facilities, in the past Medicare has
reimbursed the "reasonable costs" for services up to program limits.
Medicare-reimbursed costs are subject to audit, which may result in a decrease
in payments we have previously received. Historically, Medicare Part B
reimburses the operating cost component of most hospital outpatient services on
a reasonable cost basis, subject to a 5.8% reduction which the Balanced Budget
Act of 1997 (the "BBA"), extended through federal Fiscal year 2000. However,
Medicare regulations became effective on August 1, 2000, pursuant to which
hospital outpatient services are reimbursed on the basis of a prospective
payment system ("PPS"). Such a PPS system was implemented on October 1, 2000.
While we have been operating under PPS during the three month period ended
December 31, 2000, it is to early to predict the effect PPS for these hospital
outpatient services will have on us. There can be no assurance that the
established fees will not change in a manner that could adversely affect our
revenues.
Pursuant to the Medicaid program, the federal government supplements
funds provided by the various states for medical assistance to the medically
indigent. Payment for such medical and health services is made to providers in
an amount determined in accordance with procedures and standards established by
state law under federal guidelines. Significant changes have been and may
continue to be made in the Medicaid program which could have an adverse effect
on our financial condition, results of operations and cash flows.
During certain fiscal years, the amounts appropriated by state
legislatures for payment of Medicaid claims have not been sufficient to
reimburse providers for services rendered to Medicaid patients. Failure of a
state to pay Medicaid claims on a timely basis may have an adverse effect on our
cash flow, results of operations and financial condition.
Payments per visit from managed care organizations typically have been
lower than cost-based reimbursement from Medicare and reimbursement from other
payors for nursing and related patient services. In addition, payors and
employer groups are exerting pricing pressure on home health care providers,
resulting in reduced profitability. Such pricing pressures could have a material
adverse effect on our business, results of operations, prospects, financial
results, financial condition or cash flows.
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 FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE FOR
THE THREE MONTHS ENDED DECEMBER 31, 2000 AS COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1999.
Revenue
Medical services revenues increased 3.8% from approximately $28,841,000
for the three months ended December 31, 1999 to approximately $29,924,000 for
the three months ended December 31, 2000. We provided managed care services for
approximately 68,000 and 63,000 member months (members per month multiplied by
the months for which services were available) during the three months ended
December 31, 2000 and 1999, respectively.
Revenue generated by our managed care entities under our contracts with
HMOs as a percentage of medical services revenue was approximately 96% during
each of the three months ended December 31, 2000 and 1999. Revenue generated by
the Humana Medical Plans, Inc. ("Humana") contract was 58% and 57% of medical
services revenue for the three months ended December 31, 2000 and 1999,
respectively. Revenue generated by
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Foundation Health Corporation ("Foundation") contracts was 38% and 39% of
medical services revenue for the three months ended December 31, 2000 and 1999,
respectively.
Our home health agencies' revenue was approximately 4% of medical
services revenue during the three month periods ended December 31, 2000 and
1999, and consisted primarily of Medicare reimbursement.
Expenses
Medical services expenses for the three month period ended December 31,
2000 were approximately $29,191,000 or 98% of medical services revenue, compared
to approximately $21,020,000 or 73% of medical services revenue for the three
month period ended December 31, 1999 after giving effect to the negotiated
$3,054,000 reduction in medical services expense (the "Contractual Adjustment").
Excluding the Contractual Adjustment, medical services expenses were
approximately $24,074,000 or 83% of medical services revenue for the three month
period ended December 31, 1999.
Medical claims represent the costs of medical services provided by
providers other than us but which are to be paid by us for individuals covered
by our capitated risk contracts with HMOs. Claims expense was approximately
$24,842,000 and $19,497,000 for the three months ended December 31, 2000 and
1999, respectively, or 86.0% and 70.9% of medical services revenues derived from
our managed care entities prior to the Contractual Adjustment of claims expense.
The annualized claims ratio for Fiscal 2000 was 74%. Our claim loss ratio varies
from quarter to quarter due to fluctuations in utilization, the timing of claims
paid by the HMOs on our behalf, as well as increases in medical costs without
counterbalancing increases in premium revenues.
Other direct costs include the salaries and benefits of health
professionals providing primary care services, capitation payments to our
contracted primary care IPA physicians, and other costs necessary to operate our
facilities. Other direct costs were approximately $4,349,000 and $4,577,000 for
the three months ended December 31, 2000 and 1999, respectively, or 14.5% and
15.9% of medical services revenues. The decrease primarily resulted from cost
containment measures which were implemented throughout Fiscal 2000.
Payroll and employee benefits for administrative personnel was
approximately $1,505,000 for the three months ended December 31, 2000, or 5.0%
of revenues, compared to approximately $1,410,000 or 4.9% of revenue for the
three months ended December 31, 1999.
General and administrative expenses for the three months ended December
31, 2000 were approximately $1,464,000 or 4.9% of revenues compared to
approximately $1,516,000 or 5.3% of revenues for the three months ended December
31, 1999.
Interest expense for the three months ended December 31, 2000 was
approximately $435,000 or 1.5% of revenues compared to approximately $1,091,000
or 3.8% of revenues for the three months ended December 31, 1999. Interest
expense for the three months ended December 31, 2000 is comprised primarily of
approximately $353,000 related to amortization of deferred financing costs and
approximately $31,000 of imputed interest expense on non-interest bearing notes.
Interest expense for the three months ended December 31, 1999 was comprised of
approximately $175,000 related to amortization of deferred financing costs,
approximately $57,000 of imputed interest expense on non-interest bearing notes,
and approximately $820,000 of interest on our convertible subordinated notes
(the "Notes"). The Notes were restructured during February, 2000 and, in
accordance with Statement of Financial Accounting Standards, No. 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructurings," all interest which
would accrue over the remaining term of the Notes was included in the
outstanding Notes on the balance sheet. Therefore, no interest expense will be
recorded on the Notes through their maturity date.
Income/Loss from Operations
Loss from operations for the three months ended December 31, 2000 was
approximately $3,283,000 or 11.0% of total revenues, compared to operating
income of approximately $3,831,000 or 13.3% of total revenues for the three
months ended December 31, 1999.
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Net Income/Loss
Net loss for the three months ended December 31, 2000 was approximately
$3,708,000 compared to net income of approximately $2,746,000 for the three
months ended December 31, 1999.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE FOR
THE SIX MONTHS ENDED DECEMBER 31, 2000 AS COMPARED TO THE SIX MONTHS ENDED
DECEMBER 31, 1999.
Revenue
Medical services revenues increased 2.8% from approximately $57,923,000
for the six months ended December 31, 1999 to approximately $59,560,000 for the
six months ended December 31, 2000. We provided managed care services for
approximately 136,000 and 129,000 member months (members per month multiplied by
the months for which services were available) during the six months ended
December 31, 2000 and 1999, respectively.
Revenue generated by our managed care entities under our contracts with
HMOs as a percentage of medical services revenue was approximately 96% during
each of the six months ended December 31, 2000 and 1999. Revenue generated by
the Humana contract was 58% and 54% of medical services revenue for the six
months ended December 31, 2000 and 1999, respectively. Revenue generated by
Foundation contracts was 38% and 42% of medical services revenue for the six
months ended December 31, 2000 and 1999, respectively.
Our home health agencies' revenue was approximately 4% of medical
services revenue during the six month periods ended December 31, 2000 and 1999,
and consisted primarily of Medicare reimbursement.
Expenses
Medical services expenses for the six month period ended December 31,
2000 were approximately $56,730,000 or 95% of medical services revenue, compared
to approximately $48,452,000 or 84% of medical services revenue for the six
month period ended December 31, 1999 after giving effect to the negotiated
$3,054,000 reduction in medical services expense (the "Contractual Adjustment").
Excluding the Contractual Adjustment, medical services expenses were
approximately $51,506,000 or 89% of medical services revenue for the six month
period ended December 31, 1999.
Medical claims represent the costs of medical services provided by
providers other than us but which are to be paid by us for individuals covered
by our capitated risk contracts with HMOs. Claims expense was approximately
$48,188,000 and $42,495,000 for the six months ended December 31, 2000 and 1999,
respectively, or 84.0% and 76.6% of medical services revenues derived from our
managed care entities prior to the Contractual Adjustment of claims expense. The
annualized claims ratio for Fiscal 2000 was 74%. Our claim loss ratio varies
from quarter to quarter due to fluctuations in utilization, the timing of claims
paid by the HMOs on our behalf, as well as increases in medical costs without
counterbalancing increases in premium revenues.
Other direct costs include the salaries and benefits of health
professionals providing primary care services, capitation payments to our
contracted primary care IPA physicians, and other costs necessary to operate our
facilities. Other direct costs were approximately $8,541,000 and $9,010,000 for
the six months ended December 31, 2000 and 1999, respectively, or 14.3% and
15.6% of medical services revenues. The decrease primarily resulted from cost
containment measures which were implemented throughout Fiscal 2000.
Payroll and employee benefits for administrative personnel was
approximately $2,908,000 for the six months ended December 31, 2000, or 4.9% of
revenues, compared to approximately $3,279 ,000 or 5.7% of revenue for the six
months ended December 31, 1999. This decrease is due to certain positions which
were eliminated during Fiscal 2000.
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General and administrative expenses for the six months ended December
31, 2000 were approximately $2,819,000 or 4.7% of revenues compared to
approximately $3,024,000 or 5.2% of revenues for the six months ended December
31, 1999. The decrease in general and administrative expense as a percent of
revenues primarily resulted from cost containment measures which were
implemented throughout Fiscal 2000.
Interest expense for the six months ended December 31, 2000 was
approximately $833,000 or 1.4% of revenues compared to approximately $2,162,000
or 3.7% of revenues for the six months ended December 31, 1999. Interest expense
for the six months ended December 31, 2000 is comprised primarily of
approximately $660,000 related to amortization of deferred financing costs and
approximately $69,000 of imputed interest expense on non-interest bearing notes.
Interest expense for the six months ended December 31, 1999 was comprised of
approximately $357,000 related to amortization of deferred financing costs,
approximately $117,000 of imputed interest expense on non-interest bearing
notes, and approximately $1,599,000 of interest on the Notes. The Notes were
restructured during February, 2000 and, in accordance with Statement of
Financial Accounting Standards, No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings," all interest which would accrue over the
remaining term of the Notes was included in the outstanding Notes on the balance
sheet. Therefore, no interest expense will be recorded on the Notes through
their maturity date.
Income/Loss from Operations
Loss from operations for the six months ended December 31, 2000 was
approximately $4,943,000 or 8.3% of total revenues, compared to operating income
of approximately $1,142,000 or 2.0% of total revenues for the six months ended
December 31, 1999.
Extraordinary Gain on Extinguishment of Debt
In July, 1999, we recorded an extraordinary gain on extinguishment of debt of
approximately $3,776,000 as a result of repurchasing $4,000,000 of our
outstanding convertible subordinated notes payable (the "Notes") for a cash
payment of $210,000 and the write-off of related deferred financing costs and
accrued interest payable. We have not provided for income taxes on the gain
because we believe that we will be able to utilize certain of our net operating
loss carryforwards to offset any income tax liability related to this
transaction.
Net Income/Loss
Net loss for the six months ended December 31, 2000 was approximately
$5,752,000 compared to net income of approximately $3,060,000 for the six months
ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
On July 2, 1999, we repurchased $4,000,000 face value of our Notes for
approximately $210,000, recognizing a gain on extinguishment of debt of
approximately $3,776,000. The purchase of the Notes was funded from working
capital.
On February 15, 2000, we completed a troubled debt restructuring of the
Notes through the execution of a Consent Letter and Agreement to the First
Supplemental Indenture (the "Restructuring") which resulted in, among other
things, the conversion of $31,000,000 of Notes into our common stock. The
remaining outstanding principal balance of the Notes of $10,000,000 were
reinstated as a performing non-defaulted loan.
We have entered into a credit facility (the "Credit Facility") to
provide a revolving loan of $3,000,000. Interest is payable monthly at 2.9%
above the 30-day Dealer Commercial Paper Rate which was 6.48% at December 31,
2000. The Credit Facility has been guaranteed by a board member and an entity
controlled by another board member. At December 31, 2000, we had not borrowed
any amounts available under the Credit Facility. The Credit Facility currently
expires on March 31, 2001 unless renewed at the option of the lender. As of the
date of this filing, the lender has indicated verbally that it intends to renew
the Credit Facility. However, there can be no assurance that the Credit
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Facility will be renewed or, if renewed, that it will be renewed in the same
amount or on the same terms as the current Credit Facility.
Our net loss was approximately $5,752,000 for the six months ended
December 31, 2000. Net cash used in operating activities for the six months
ended December 31, 2000 was approximately $862,000 due primarily to the net loss
of approximately $5,752,000, and offset by non-cash amortization and
depreciation expenses of approximately $2,181,000, an increase in due to
Medicare of approximately $836,000 and an increase in medical claims payable of
approximately $1,480,000.
Net cash used in investing activities for the six months ended December
31, 2000 was approximately $164,000, primarily for the purchase of computer
equipment. Net cash used in financing activities for the six months ended
December 31, 2000 was approximately $806,000, all of which was used for
scheduled payments for various notes payable.
Our working capital deficit was approximately $9,926,000 at December
31, 2000.
We currently have no knowledge of any intermediary audit adjustment
trends with respect to previously filed cost reports. However, as is standard in
the industry, we remain at risk for disallowances and other adjustments to
previously filed cost reports until final settlement. Our average settlement
period with respect to our cost reports has historically ranged from two to
three years.
The financial statements have been prepared assuming we will continue
as a going concern. We believe that we will be able to fund our capital
commitments, operating cash requirements and satisfy our obligations as they
become due from a combination of cash on hand, expected operating cash flow
improvements through HMO premium increases and improvements in the benefit
structure of HMO contracts effective January 1, 2001, and the Credit Facility.
However, there can be no assurances that these sources of funds will be
sufficient to fund our operations and satisfy our obligations as they become
due, including but not limited to our obligation of $350,000 for interest on
the Notes due April 30, 2001.
If we are unable to satisfy our cash requirements, we may be required
to take certain steps, such as borrowing additional funds, restructuring our
indebtedness, selling assets, reducing costs, and reducing or delaying capital
expenditures. If we need additional capital to fund our operations, there can
be no assurance that such additional capital can be obtained or, if obtained,
that it will be on terms acceptable to us. The incurring or assumption 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 our operations.
On November 21, 2000, the American Stock Exchange notified us of its
decision to continue to list our common stock pending a review of our December
31, 2000 Form 10-Q. As of the date of this filing, we are still below the
continued listing requirements of the American Stock Exchange with respect to
requirements which include the need for us to maintain stockholders' equity of
at least $2 million and not sustain losses from continuing operations and/or net
losses in two of its three most recent fiscal years. We are unable to guarantee
that the American Stock Exchange will continue to list our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2000, our cash equivalents were invested in high grade,
very short-term securities, which are not typically subject to material market
risk. We have loans outstanding at fixed rates. For loans with fixed interest
rates, a hypothetical 10% change in interest rates would have no impact on our
future earnings and cash flows related to these instruments and would have an
immaterial impact on the fair value of these instruments. Our Credit Facility is
interest rate sensitive, however, there is no balance currently outstanding. We
have no material risk associated with interest rates, foreign currency exchange
rates or commodity prices.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the case of CONTINUCARE CORPORATION, A FLORIDA CORPORATION,
CONTINUCARE PHYSICIAN PRACTICE MANAGEMENT, INC. ("CPPM") v. JAY A. ZISKIND, AN
INDIVIDUAL, KENNETH I. ARVIN, AN INDIVIDUAL, TRACY ARVIN, AN INDIVIDUAL, ZISKIND
& ARVIN, P.A., A PROFESSIONAL ASSOCIATION, NORMAN B. GAYLIS, M.D., AN INDIVIDUAL
AND ZAG GROUP, INC., A FLORIDA CORPORATION, filed on November 15, 1999 in the
Circuit Court of the 11th Judicial District in and for Miami-Dade County, we are
alleging breach of fiduciary duties, improper billing, and seeking the return of
all consideration previously paid by us to ZAG, and damages, as well as seeking
rescission of the Agreement and Plan of Merger and the Registration Rights
Agreement. On December 20, 1999, a counterclaim was filed against us and CPPM
alleging breach of contract, tortious interference and conversion and seeks
damages in excess of $l,600,000. On August 11, 2000, the counterplaintiffs filed
their Second Amended Counterclaim. Discovery is currently pending. We believe
that there is little merit to the counterclaim and intend to vigorously defend
the claims.
We are 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 $250,000. On January 5, 2000, we filed a counterclaim
alleging breach of contract in connection with the Plaintiff's failure to return
certain computer equipment, as well as a breach of the non-compete covenant. On
February 18, 2000, we filed a Motion for Summary Judgment as to all Plaintiffs.
On June 5, 2000, we filed a Motion for Judgment on the Pleadings as to all
Plaintiffs. On April 28, 2000, the Plaintiffs filed a Motion for Summary
Judgment as to the issue of liability. All of the aforementioned motions were
heard on June 15, 2000. On November 14, 2000, the court granted our motion as to
one of the Plaintiffs' claims for deferred and incentive compensation, but
reserved as to his claim for post termination compensation related to follow-up
patient care, if any. The court denied our motions as to the other two
Plaintiffs. Also on November 14, 2000, the court denied the Plaintiffs' motion
for summary judgment in all respects. The trial started on February 13, 2001. As
of the date of this filing, the trial is still in progress. We believe the
action has little merit and intend to vigorously defend the claims.
We are 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., A FLORIDA CORPORATION AND CONTINUCARE
CORPORATION, A FLORIDA 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. In August 2000, we filed a cross-claim and several
third-party claims. We believe we have meritorious defenses, as well as valid
indemnification claims against several other parties. Claims against those
parties are being pursued and we intend to vigorously litigate our defenses, as
well as our claims of indemnification.
Two of our subsidiaries 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. We filed an
answer on May 3, 2000. Discovery is currently pending. We have made a demand for
assumption of defense and indemnification from Kahn and Riskin, M.D., P.A. and
Wayne Riskin, M.D. The demand was rejected. We believe we have meritorious
defenses and intend to vigorously pursue them.
Prior to Fiscal 2000, we closed or dissolved certain
subsidiaries, some of which had pending claims against them. We are also
involved in various other legal proceedings incidental to our business that
arise from time to time out of the ordinary course of business, including, but
not limited to, claims related to the alleged
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malpractice of employed and contracted medical professionals, workers'
compensation claims and other employee-related matters, and minor disputes with
equipment lessors and other vendors.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders held on December 12, 2000, the
shareholders voted to elect Charles M. Fernandez, Dr. Phillip Frost, Spencer J.
Angel, Robert J. Cresci and Patrick M. Healy 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 23,043,511 7,779,226 --
Dr. Phillip Frost 30,639,609 183,128 --
Spencer J. Angel 30,639,609 183,128 --
Robert J. Cresci 30,639,609 183,128 --
Patrick M. Healy 30,639,609 183,128 --
In addition, our shareholders voted to approve the Amended and Restated
Continucare Corporation 2000 Stock Option Plan (the "Plan"). The shareholders
cast 25,533,489 votes for approval of the Plan, 1,217,300 votes against the Plan
and shareholders abstained with respect to 19,200 votes.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CONTINUCARE CORPORATION
Dated: February 14, 2001 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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