1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A AMENDMENT NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): APRIL 10, 1997 ---------------------------- CONTINUCARE CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) FLORIDA - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation 0-21910 59-2716023 - ------------------------ --------------------------------- (Commission File Number) (IRS Employer Identification No.) 100 SOUTHEAST 2ND STREET, 36TH FLOOR MIAMI, FLORIDA 33131 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (305) 350-7515 -------------------------- - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On April 10, 1997, Continucare Corporation (the "Company") acquired certain arthritis rehab centers and affiliated physician practices from Sheridan Healthcorp, Inc. The acquisition included the purchase of AARDS, Inc. ("AARDS"), a Florida corporation formerly known as Norman B. Gaylis, M.D., Inc., Rosenbaum, Weitz & Ritter, Inc. ("RWR") and Arthritis & Rheumatic Disease Specialties, Inc. ("AARDS, Inc.") Such entities are located in Dade and Broward counties in South Florida. The aggregate purchase was approximately $3.3 million. The source of consideration paid by the Company was approximately $800,000 from a private placement consummated by the Company in August 1996 and $2.5 million from a revolving line of credit and term note from First Union National Bank of Florida. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. The audited financial statements of AARDS (which includes the results of operations of AARDS, Inc.) and RWR as of and for the years ended December 31, 1996 and December 31, 1995 are attached as Exhibit 7(a) and are incorporated herein by reference. (b) PRO FORMA FINANCIAL INFORMATION. The unaudited pro forma balance sheet of the Company as of March 31, 1997, and the unaudited pro forma income statements for the periods from February 12, 1996 (inception) to June 30, 1996, and the nine months ended March 31, 1997, are attached as Exhibit 7(b) and are incorporated herein by reference. (c) EXHIBITS 10.1 Stock Purchase Agreement dated April 10, 1997 between Continucare Corporation, Continucare Physician Practice Management, Inc., AARDS, Inc. and Sheridan Healthcorp, Inc.* 10.2 Stock Purchase Agreement dated April 10, 1997 by and among Continucare Corporation, Continucare Physician Practice Management, Inc., Rosenbaum, Weitz & Ritter, Inc. and Sheridan Healthcorp, Inc.* 10.3 Stock Purchase Agreement dated April 10, 1997 by and among Continucare Corporation, Continucare Medical Management, Inc., Arthritis & Rheumatic Disease Specialties, Inc. and Sheridan Healthcare, Inc.* 23.1 Consent of Independent Auditors. - -------------------- * Previously filed. 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CONTINUCARE CORPORATION Date: June 24, 1997 By: /s/Charles M. Fernandez ----------------------------------------------- Charles M. Fernandez Chairman, Chief Executive Officer and President 4 ATTACHMENT AND EXHIBIT INDEX Attachment Description ---------- ----------- 7(a) Audited Financial Statements of AARDS and RWR as of and for the years ended December 31, 1996 and December 31, 1995 7(b) Unaudited Pro Forma Balance Sheet of the Company as of March 31, 1997, and Unaudited Pro Forma Income Statement of the Company for the Periods of February 12, 1996 (Inception) to June 30, 1996, and the Nine Months Ended March 31, 1997 Exhibit Description ------- ----------- 23.1 Consent of Independent Auditors 5 Attachment 7(a) AARDS, INC. FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 6 INDEPENDENT AUDITOR'S REPORT ---------------------------- To the Shareholder of AARDS, Inc. Hollywood, Florida We have audited the accompanying balance sheet of AARDS, Inc. as of December 31, 1996 and 1995, and the related statements of operations and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AARDS, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ SPEAR, SAFER, HARMON & CO. Miami, Florida April 30, 1997 7 AARDS, INC. Balance Sheets December 31, 1996 and 1995 1996 1995 ---- ---- ASSETS Current Assets: Cash $ -- $ 38,953 Accounts receivable, net of allowances of approximately $225,000 and $159,000, respectively 396,076 230,799 Other receivable 22,243 -- Prepaid expenses 10,291 1,415 --------- --------- Total Current Assets 428,610 271,167 Furniture and Equipment, net 122,048 115,861 Deposits and Other Assets 6,370 11,281 --------- --------- $ 557,028 $ 398,309 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Line of credit $ -- $ 120,000 Accounts payable and accrued expenses 92,354 58,326 Income taxes payable -- 29,000 Due to related parties 453,508 -- Deferred income taxes -- 48,662 Other current liabilities 3,020 16,266 --------- --------- Total Current Liabilities 548,882 272,254 --------- --------- Shareholders' Equity: Common stock, $1.00 par value, 10,000 shares authorized, 1,000 shares issued and outstanding 1,000 1,000 Subscription receivable -- (500) Retained earnings 7,146 125,555 --------- --------- Total Shareholders' Equity 8,146 126,055 --------- --------- $ 557,028 $ 398,309 ========= ========= The accompanying notes are an integral part of these financial statements. 8 AARDS, INC. Statements of Operations and Retained Earnings Years Ended December 31, 1996 and 1995 1996 1995 ---- ---- Net Patient Revenue $ 1,512,608 $ 1,701,538 ----------- ----------- Operating Expenses: Payroll and related costs 718,145 1,043,587 General and administrative 993,452 561,591 ----------- ----------- 1,711,597 1,605,178 ----------- ----------- (198,989) 96,360 Other income 80,580 -- ----------- ----------- (Loss) Income before provision for income taxes (118,409) 96,360 Provision for income taxes -- 33,200 ----------- ----------- Net (Loss) Income (118,409) 63,160 Retained Earnings - Beginning of Year 125,555 62,395 ----------- ----------- Retained Earnings - End of Year $ 7,146 $ 125,555 =========== =========== The accompanying notes are an integral part of these financial statements. 9 AARDS, INC. Statements of Cash Flows Years Ended December 31, 1996 and 1995 1996 1995 ---- ---- Cash Flows from Operating Activities: Net (loss) income $(118,409) $ 63,160 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization 44,446 37,703 (Increase) decrease in - Accounts receivable, net (165,277) (78,942) Prepaid expenses (8,876) 8,585 Deposits and other assets (17,332) 1,511 Increase (decrease) in - Accounts payable and accrued expenses 34,028 (76,752) Income taxes payable (29,000) 29,000 Due to related parties 453,508 -- Deferred income taxes (48,662) 48,662 Other current liabilities (13,246) (73,157) --------- --------- Net Cash Provided by (Used in) Operating Activities 131,180 (40,230) --------- --------- Cash Flows from Investing Activities: Acquisition of property and equipment (50,633) (5,817) --------- --------- Cash Flows from Financing Activities: Net (payments) borrowings on line of credit (120,000) 85,000 Collection of subscription receivable 500 -- --------- --------- Net Cash (Used in) Provided by Financing Activities (119,500) 85,000 --------- --------- (Decrease) Increase in Cash (38,953) 38,953 Cash - Beginning of Year 38,953 -- --------- --------- Cash - End of Year $ -- $ 38,953 ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid during the year for interest $ 1,222 $ 8,377 ========= ========= The accompanying notes are an integral part of these financial statements. 10 AARDS, INC. Notes to Financial Statements Years Ended December 31, 1996 and 1995 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - AARDS, Inc. (the "Company") was organized as a Florida corporation in May 1991 under the name of Norman Gaylis, M.D. P.A. The Company is a provider of arthritic and rheumatic health care. ACCOUNTS RECEIVABLE AND REVENUES - Accounts receivable are primarily amounts due under fee-for-service contracts from third party payors, such as insurance companies, patients, and government health care programs. These receivables are presented net of an estimated allowance for contractual adjustments and uncollectible receivables. Contractual adjustments result from the difference between the rates for services performed and reimbursable amounts from government programs and insurance companies for those services. PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost. Depreciation is computed using accelerated methods over the estimated useful lives of the related assets which is five to ten years. Leasehold improvements are amortized on a straight-line basis over the lease-term which is five years. CREDIT RISK - Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of receivables from third party payors. The Company performs credit evaluations of its patients and their insurance carriers, and establishes allowances for potential losses as considered necessary, in order to limit concentrations of credit risk and potential credit losses. FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments ("SFAS 107") requires disclosure of the fair value of certain financial instruments. Cash, other current assets, other assets, accounts payable and accrued expenses are reflected in the accompanying financial statements at cost which approximates fair value. INCOME TAXES - The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires that deferred income taxes be recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting basis at rates based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. For the year ended December 31, 1996, the Company filed its tax return on a consolidated basis with its parent company. 1 11 AARDS, INC. Notes to Financial Statements (Continued) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) For that year the Company had a deferred tax asset of $76,500 and an income tax benefit of $65,000. For the year ended December 31, 1995, the provision for income taxes consisted of the following: Current $ 29,000 Deferred 4,200 -------- $ 33,200 ======== Federal $ 27,200 State 6,000 -------- $ 33,200 ======== USE OF ESTIMATE - The preparation of financial statements in conformity with generally accepted accounting principles require management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. NOTE 2 - PROPERTY AND EQUIPMENT At December 31, 1996 and 1995, property and equipment consisted of the following: 1996 1995 ---- ---- Furniture and equipment $ 256,217 $ 205,584 Leasehold improvements 10,369 10,369 --------- --------- 266,586 215,953 Accumulated depreciation and amortization (144,538) (100,092) --------- --------- $ 122,048 $ 115,861 ========= ========= 2 12 AARDS, INC. Notes to Financial Statements (Continued) NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES At December 31, 1996 and 1995, accounts payable and accrued expenses consisted of the following: 1996 1995 ---- ---- Accounts payable $35,311 $16,660 Accrued payroll 33,583 16,406 Deferred rent 23,460 25,260 ------- ------- $92,354 $58,326 ======= ======= NOTE 4 - LINE-OF-CREDIT As of December 31, 1995, the Company has a line-of-credit with a bank which bears interest at prime plus 1% (9.5% at December 31, 1995) and is renewable annually. In January 1996, the line-of-credit was repaid and terminated. NOTE 5 - RELATED PARTY TRANSACTIONS During 1996, the Company was a member of an affiliated group whereby management and administrative expenses incurred by an affiliate are allocated to the Company based on number of visits or physicians depending on the type of expense. For the year ended December 31, 1996, approximately $176,000 of such costs were allocated to the Company. In addition, all of the Company's cash receipts and disbursements were administered by this affiliate for which the Company was charged a fee of $135,000. These costs are included in general and administrative expenses on the accompanying 1996 statement of operations and retained earnings. As of December 31, 1996 the total amount due to related parties was approximately $454,000. During 1995, all management and administrative expenses were incurred directly by the Company. NOTE 6 - COMMITMENTS AND CONTINGENCIES INSURANCE - The Company maintains insurance coverage for its professional malpractice claims. Such insurance provides for coverage to the extent individual claims do not exceed $1,000,000 per incident and $7,500,000 in the aggregate per year. 3 13 AARDS, INC. Notes to Financial Statements (Continued) NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Due to the nature of its business, the Company from time to time becomes involved as a defendant in medical malpractice lawsuits and is subject to the attendant risk of substantial damage awards. The Company maintains professional and general liability insurance on a claims made basis in amounts deemed appropriate by management, based upon historical claims and the nature and risks of its business. There can be no assurance, however, that an existing or future claim or claims will exceed the limits of available insurance coverage, that any insurer will remain solvent and able to meet its obligations to provide coverage for any such claims or that such coverage will continue to be available at a reasonable cost to adequately and economically insure the Company's operations in the future. A judgment against the Company in excess of such coverage could have a material adverse effect on the Company. EMPLOYMENT AGREEMENTS - The Company has an employment contract with a physician. Future annual minimum payments under the employment contract are as follows: 1997 $ 450,000 1998 450,000 1999 450,000 2000 450,000 2001 450,000 ---------- $2,250,000 ========== LEASE COMMITMENTS - The Company leases medical office facilities and medical equipment under various non-cancelable operating leases. Rental expense for the years ended December 31, 1996 and 1995 was $128,674 and $95,623, respectively. Approximate future annual minimum payments under operating leases are as follows: 1997 $113,000 1998 111,000 1999 92,000 2000 92,000 2001 92,000 Thereafter 182,000 -------- Total $682,000 ======== NOTE 7 - SUBSEQUENT EVENT In April 1997, the Company sold its net assets to an unrelated party for $1,900,000 in cash. 4 14 ROSENBAUM, WEITZ AND RITTER, INC. FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 15 INDEPENDENT AUDITOR'S REPORT ---------------------------- To the Shareholder of Rosenbaum, Weitz and Ritter, Inc. Hollywood, Florida We have audited the accompanying balance sheets of Rosenbaum, Weitz and Ritter, Inc. as of December 31, 1996 and 1995, and the related statements of operations and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rosenbaum, Weitz and Ritter, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ SPEAR, SAFER, HARMON & CO. Miami, Florida April 30, 1997 16 ROSENBAUM, WEITZ AND RITTER, INC. Balance Sheets December 31, 1996 and 1995 1996 1995 ---- ---- ASSETS Current Assets: Cash $ -- $ 29,714 Accounts receivable, net of allowances of approximately $363,000 and $161,000, respectively 453,202 551,740 Prepaid expenses 30,412 27,906 ----------- ----------- Total Current Assets 483,614 609,360 Property and Equipment, net 442,221 387,839 Deposits and Other Assets 4,028 5,117 ----------- ----------- $ 929,863 $ 1,002,316 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Line-of-credit $ -- $ 400,000 Current portion of long-term debt 16,127 -- Accounts payable and accrued expenses 76,070 133,270 Income taxes payable -- 55,879 Due to related parties 578,952 -- Deferred income taxes -- 15,878 Other current liabilities -- 1,000 ----------- ----------- Total Current Liabilities 671,149 606,027 Long-Term Debt, less current portion 59,249 -- ----------- ----------- 730,398 606,027 ----------- ----------- Shareholders' Equity: Common stock, $1.00 par value, 1,000 shares authorized, issued and outstanding 1,000 1,000 Subscription receivable -- (400) Retained earnings 198,465 395,689 ----------- ----------- Total Shareholders' Equity 199,465 396,289 ----------- ----------- $ 929,863 $ 1,002,316 =========== =========== The accompanying notes are an integral part of these financial statements. 17 ROSENBAUM, WEITZ AND RITTER, INC. Statements of Operations and Retained Earnings Years ended December 31, 1996 and 1995 1996 1995 ---- ---- Net Patient Revenue $ 2,422,753 $ 2,943,863 ----------- ----------- Operating Expenses: Payroll and related costs 1,362,834 1,556,351 General and administrative 1,258,902 1,215,638 ----------- ----------- 2,621,736 2,771,989 ----------- ----------- (198,983) 171,874 Other income 1,759 -- ----------- ----------- (Loss) Income Before Provision for Income Taxes (197,224) 171,874 Provision for Income Taxes -- 71,757 ----------- ----------- Net (Loss) Income (197,224) 100,117 Retained Earnings - Beginning of Year 395,689 295,572 ----------- ----------- Retained Earnings - End of Year $ 198,465 $ 395,689 =========== =========== The accompanying notes are an integral part of these financial statements. 18 ROSENBAUM, WEITZ AND RITTER, INC. Statements of Cash Flows Years Ended December 31, 1996 and 1995 1996 1995 ---- ---- Cash Flows from Operating Activities: Net (loss) income $(197,224) $ 100,117 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization 48,888 30,443 Decrease (increase) in - Accounts receivable, net 98,538 (270,942) Prepaid expenses (2,506) 24,847 Deferred taxes (15,878) 62,878 Deposits and other assets 1,089 20,613 (Decrease) increase in - Accounts payable and accrued expenses (57,200) (62,200) Income taxes payable (55,879) 55,879 Due to related parties 578,952 -- Other current liabilities (1,000) 1,000 --------- --------- Net Cash Provided by (Used in) Operating Activities 397,780 (37,365) --------- --------- Cash Flows from Investing Activities: Acquisition of property and equipment -- (376,589) --------- --------- Cash Flows from Financing Activities: Payments of capital lease obligations (27,894) (44,192) Net (payments) borrowings on line-of-credit (400,000) 400,000 Collection on subscription receivable 400 -- --------- --------- Net Cash (Used in) Provided by Financing Activities (427,494) 355,808 --------- --------- Decrease in Cash (29,714) (58,146) Cash - Beginning of Year 29,714 87,860 --------- --------- Cash - End of Year $ -- $ 29,714 ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid during the year for interest $ 6,821 $ 8,377 ========= ========= Supplemental Disclosure of Non Cash Investing and Financing Transactions: Purchase of medical equipment with proceeds of capital lease obligations $ 103,270 $ -- ========= ========= The accompanying notes are an integral part of these financial statements. 19 ROSENBAUM, WEITZ AND RITTER, INC. Notes to Financial Statements Years Ended December 31, 1996 and 1995 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - Rosenbaum, Weitz and Ritter, Inc. (the "Company") was organized as a Florida corporation in September 1980 under the name of Rosenbaum, Weitz and Ritter, P.A. The Company is a provider of arthritic and rheumatic health care. ACCOUNTS RECEIVABLE AND REVENUES - Accounts receivable are primarily amounts due under fee-for-service contracts from third party payors, such as insurance companies, patients, and government health care programs. These receivables are presented net of an estimated allowance for contractual adjustments and uncollectible receivables. Contractual adjustments result from the difference between the rates for services performed and reimbursable amounts from government programs and insurance companies for those services. PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost. Depreciation is computed using accelerated method over the estimated useful lives of the related assets which is five to ten years. CREDIT RISK - Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of receivables from third party payors. The Company performs credit evaluations of its patients and their insurance carriers and establishes allowance for potential losses as considered necessary in order to limit concentrations of credit risk and potential credit losses. FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments ("SFAS 107") requires disclosure of the fair value of certain financial instruments. Cash, other current assets, other assets, accounts payable and accrued expenses are reflected in the accompanying financial statements at cost which approximates fair value. INCOME TAXES - The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires that deferred income taxes be recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting basis at rates based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. For the year ended December 31, 1996, the Company filed its tax return on a consolidated basis with its parent company. For that year, the Company had a deferred tax asset of $91,000 and an income tax benefit of $68,700. 1 20 ROSENBAUM, WEITZ AND RITTER, INC. Notes to Financial Statements (Continued) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) For the year ended December 31, 1995, the provision for income taxes consisted of the following: Current $55,879 Deferred 15,878 ------- $71,757 ======= Federal $62,579 State 9,178 ------- $71,757 ======= USE OF ESTIMATE - The preparation of financial statements in conformity with generally accepted accounting principles require management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. NOTE 2 - PROPERTY AND EQUIPMENT At December 31, 1996 and 1995, property and equipment consisted of the following: 1996 1995 ---- ---- Furniture and equipment $ 489,808 $ 489,808 Medical equipment 511,930 408,660 Leasehold improvements 274,037 274,037 ---------- ---------- 1,275,775 1,172,505 Accumulated depreciation and amortization 833,554 784,666 ---------- ---------- $ 442,221 $ 387,839 ========== ========== 2 21 ROSENBAUM, WEITZ AND RITTER, INC. Notes to Financial Statements (Continued) NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES At December 31, 1996 and 1995, accounts payable and accrued expenses consisted of the following: 1996 1995 ---- ---- Accounts payable $ 10,539 $ 36,758 Accrued payroll 65,531 96,512 -------- -------- $ 76,070 $133,270 ======== ======== NOTE 4 - LINE-OF-CREDIT As of December 31, 1995, the Company has a line-of-credit with a bank which bears interest at prime plus 1% (9.5% at December 31, 1995) and is renewable annually. In January 1996, the line-of-credit was repaid and terminated. NOTE 5 - OBLIGATIONS ON CAPITAL LEASES Capital lease obligations for purchases of medical equipment mature as follows: Year Ending December 31, ------------ 1997 $16,128 1998 17,818 1999 19,684 2000 21,747 -------- 75,377 Less current maturities 16,128 -------- $ 59,249 ======== 3 22 ROSENBAUM, WEITZ AND RITTER, INC. Notes to Financial Statements (Continued) NOTE 6 - RELATED PARTY TRANSACTIONS During 1996, the Company was a member of an affiliated group whereby management and administrative expenses were incurred by an affiliate and allocated to the Company based on number of visits or physicians depending on the type of expense. For the year ended December 31, 1996, approximately $273,000 of such costs were allocated to the Company. In addition, all of the Company's cash receipts and disbursements were administered by this affiliate for which the Company was charged a fee of $273,000. As of December 31, 1996, the total amount due to related parties was approximately $579,000. During 1995, all management and administrative costs were incurred directly by the Company. NOTE 7 - COMMITMENTS AND CONTINGENCIES INSURANCE - The Company maintains insurance coverage for its professional malpractice claims. Such insurance provides for coverage to the extent individual claims do not exceed $1,000,000 per incident and $7,500,000 in the aggregate per year. Due to the nature of its business, the Company from time to time becomes involved as a defendant in medical malpractice lawsuits and is subject to the attendant risk of substantial damage awards. The Company maintains professional and general liability insurance on a claim made basis in amounts deemed appropriate by management, based upon historical claims and the nature and risks of its business. There can be no assurance however, that an existing or future claim or claims will exceed the limits of available insurance coverage, that any insurer will remain solvent and able to meet its obligations to provide coverages for any such claims or that such coverage will continue to be available at a reasonable cost to adequately and economically insure the Company's operations in the future. A judgment against the Company in excess of such coverage could have a material adverse effect on the Company. NOTE 8 - SUBSEQUENT EVENT On April 10, 1997, the Company sold its net assets to an unrelated party for $1,400,000 in cash. 23 Attachment 7(b) INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS GENERAL The following unaudited pro forma consolidated balance sheet as of March 31, 1997 and the unaudited pro forma consolidated statements of income for the period from February 12, 1996 (inception) to June 30, 1996 and for the nine months ended March 31, 1997 reflect adjustments to Continucare Corporation's (the "Company") historical financial position and results of operations to give effect to the transactions discussed below as if such transactions had been consummated at March 31, 1997, in the case of the consolidated balance sheet, and at February 12, 1996 and July 1, 1996, respectively, in the case of the consolidated statements of income. The accompanying unaudited pro forma consolidated financial statements should be read in connection with the audited consolidated financial statements and notes thereto of the Company for the period from February 12, 1996 (inception) to June 30, 1996 as set forth in the Company's form 10-KSB/A and with the interim unaudited financial statements and notes thereto for the quarterly period ended March 31, 1997 as set forth in the Company's form 10-QSB. The unaudited pro forma consolidated financial statements have been prepared by the Company based, in part, on the audited financial statements of the businesses acquired as required under the Securities Exchange Act of 1934, which financial statements are included in this Form 8-K, adjusted where necessary, with respect to pre-acquisition periods, to the basis of accounting used in the Company's consolidated financial statements. These unaudited financial statements are not intended to be indicative of the results that would have occurred if the transactions had occurred on the dates indicated or which may be realized in the future. ACQUISITION On April 10, 1997, the Company, through Continucare Physician Practice Management, Inc., a wholly-owned subsidiary, acquired all of the outstanding stock of certain arthritis rehabilitation centers and affiliated physician practices. The acquisition included the purchase of AARDS, INC., a Florida corporation formerly known as Norman B. Gaylis, M.D., Inc., of Rosenbaum, Weitz & Ritter, Inc., a Florida corporation, and of Arthritis & Rheumatic Disease Specialties, Inc., a Florida corporation, from Sheridan Healthcare, Inc. ("Sheridan"). The aggregate purchase price was approximately $3.3 million of which approximately $2.5 million was borrowed by the Company under the Company's Revolving Note and Term Note. As a result of the acquisitions, goodwill of approximately $1.8 million was recorded, which is being amortized over 20 years. 24 CONTINUCARE CORPORATION UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 31, 1997 Acquisition Continucare Acquisition Adjustments Pro Forma ----------- ----------- ------------ --------- Assets Current assets Cash and cash equivalents $11,664,505 $ -- $ (800,000)(1) $10,864,505 Accounts receivable, net 6,615,741 955,882 -- 7,571,623 Note receivable 139,333 -- -- 139,333 Prepaid expenses and other current assets 185,183 22,243 -- 207,426 ----------- ----------- ----------- ----------- Total current assets 18,604,762 978,125 (800,000) 18,782,887 Property and equipment, net 670,908 564,269 -- 1,235,177 Intangible assets, net 373,734 -- 1,817,758 (2) 2,191,492 Other assets, net 385,101 10,398 -- 395,499 ----------- ----------- ----------- ----------- Total assets $20,034,505 $ 1,552,792 $ 1,017,758 $22,605,055 =========== =========== =========== =========== Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 35,881 $ 70,550 $ -- $ 106,431 Accrued expenses 1,063,998 -- -- 1,063,998 Accrued interest payable 40,280 -- -- 40,280 Due to related parties -- 1,258,659 (1,258,659)(3) -- Current portion of capital lease 20,491 -- -- 20,491 Income and other taxes payable 1,241,196 -- -- 1,241,196 ----------- ----------- ----------- ----------- Total current liabilities 2,401,846 1,329,209 (1,258,659) 2,472,396 Notes payable 641,500 -- 2,500,000 (4) 3,141,500 Obligation under capital lease 215,484 73,873 (73,873)(3) 215,484 ----------- ----------- ----------- ----------- Total liabilities 3,258,830 1,403,082 1,167,468 5,829,380 ----------- ----------- ----------- ----------- Commitments and contingencies -- -- -- -- Shareholders' equity Common stock 1,215 2,000 (2,000)(5) 1,215 Additional paid-in capital 14,823,469 -- -- 14,823,469 Retained earnings 1,950,991 147,710 (147,710)(5) 1,950,991 ----------- ----------- ----------- ----------- Total shareholders' equity 16,775,675 149,710 (149,710) 16,775,675 ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity $20,034,505 $ 1,552,792 $ 1,017,758 $22,605,055 =========== =========== =========== =========== The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements. 25 CONTINUCARE CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 31, 1997 The acquisition adjustments reflected on the unaudited pro forma consolidated balance sheet are as follows: (1) Represents the cash paid for the acquisition. (2) Represents the goodwill that would have been recorded if the acquisition had occurred on March 31, 1997, as follows: Total purchase price $ 3,300,000 Net assets acquired 1,482,243 ----------- Goodwill $ 1,817,757 =========== (3) Represents the elimination of a liability not assumed by the Company upon the acquisition. (4) Represents long-term debt incurred to finance the purchase price. (5) Represents the elimination of the equity accounts of the acquired entities. 26 CONTINUCARE CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) TO JUNE 30, 1996 Acquisition Continucare Acquisition Adjustments Pro Forma ----------- ----------- ----------- --------- Revenues, net $ 2,507,063 $ 1,475,760 $ -- $ 3,982,823 ----------- ----------- ------------- ----------- Expenses Payroll and employee benefits 973,412 780,367 24,788(1) 1,778,567 Provision for bad debt 242,664 59,408 -- 302,072 Professional fees 203,625 20,329 -- 223,954 General and administrative 54,430 729,896 -- 784,326 Depreciation and amortization 362 35,000 34,861(2) 70,223 ----------- ----------- ----------- ----------- Total expenses 1,474,493 1,625,000 59,649 3,159,142 ----------- ----------- ----------- ----------- Income (loss) from operations 1,032,570 (149,240) (59,649) 823,682 ----------- ----------- ----------- ----------- Other (expenses) income Interest expense (23,204) -- (85,069)(3) (108,273) Other income -- 30,878 -- 30,878 Minority interest (32,686) -- -- (32,686) ----------- ----------- ----------- ----------- Total other (expenses) income (55,890) 30,878 (85,069) (110,082) ----------- ----------- ----------- ----------- Income (loss) before taxes 976,680 (118,362) (144,718) 713,600 Provision for income taxes 332,071 -- -- 332,071 ----------- ----------- ----------- ----------- Net income (loss) $ 644,609 $ (118,362) $ (144,718) $ 381,529 =========== =========== =========== =========== Earnings per common share and common equivalent share $ 0.10 $ 0.06 =========== =========== Earnings per common share and common equivalent share assuming full dilution $ 0.10 $ 0.06 =========== =========== Weighted average shares of common stock outstanding (primary and fully diluted) 6,666,667 6,666,667 =========== =========== The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements. 27 CONTINUCARE CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) TO JUNE 30, 1996 The acquisition adjustments reflected on the unaudited pro forma consolidated statement of income are as follows: (1) Represents the difference between compensation rates that are effective post-acquisition, pursuant to employment agreements entered into in connection with the acquisition, and actual compensation expense recorded by the acquired entities, as follows: Compensation per agreements $ 764,058 Actual compensation 739,270 ---------- Pro Forma adjustment $ 24,788 ========== (2) Represents amortization of the goodwill resulting from the acquisition using the straight-line method over a useful life of 20 years as follows: Goodwill $1,817,757 ========== Amortization period 20 years Amortization expense for the period from February 12, 1996 (inception) to June 30, 1996 $ 34,081 ========== (3) Represents interest expense on the $2.5 million of funds borrowed for the acquisition at an interest rate of 8.75%. 28 CONTINUCARE CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1997 Acquisition Continucare Acquisition Adjustments Pro Forma ----------- ----------- ----------- --------- Revenues, net $ 9,604,216 $ 2,951,521 $ -- $ 12,555,737 ------------ ------------ ------------- ------------ Expenses Payroll and employee benefits 4,425,929 1,560,734 49,577(1) 6,036,240 Provision for bad debt 833,107 118,816 -- 951,923 Professional fees 1,004,543 40,658 -- 1,045,201 General and administrative 518,417 1,459,792 -- 1,978,209 Depreciation and amortization 83,950 70,001 68,228(2) 222,179 ------------ ------------ ------------ ------------ Total expenses 6,865,946 3,250,000 117,805 10,233,751 ------------ ------------ ------------ ------------ Income from operations 2,738,270 (298,479) (117,805) 2,321,986 ------------ ------------ ------------ ------------ Other (expenses) income Interest income (expense) 149,648 -- (166,493)(3) (16,845) Minority interest (162,233) -- -- 162,233) Other income -- 61,754 -- 61,754 Loss on purchase of minority interest (9,081) -- -- (9,081) ------------ ------------ ------------ ------------ Total other (expenses) income (21,666) 61,754 (166,493) (126,405) ------------ ------------ ------------ ------------ Income (loss) before taxes 2,716,604 (236,725) (284,298) 2,195,581 Provision for income taxes 1,035,471 -- -- 1,035,471 ------------ ------------ ------------ ------------ Net income (loss) $ 1,681,133 $ (236,725) $ (284,298) $ 1,160,110 ============ ============ ============ ============ Earnings per common share and common equivalent share $ 0.16 $ 0.11 ============ ============ Primary weighted average shares of common stock outstanding 10,747,596 10,747,596 ============ ============ Earnings per common share and common equivalent share assuming full dilution $ 0.16 $ 0.11 ============ ============ Fully diluted weighted average shares of common stock outstanding 10,742,435 10,742,435 ============ ============ The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements. 29 CONTINUCARE CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1997 The acquisition adjustments reflected on the unaudited pro forma consolidated statement of income are as follows: (1) Represents the difference between compensation rates that are effective post-acquisition, pursuant to employment agreements entered into in connection with the acquisition, and actual compensation expense recorded by the acquired entities, as follows: Compensation per agreements $ 1,528,117 Actual compensation 1,478,540 ------------ Pro Forma adjustment $ 49,577 ============ (2) Represents amortization of the goodwill resulting from the acquisition using the straight-line method over a useful life of 20 years as follows: Goodwill $ 1,817,757 ============= Amortization period 20 years Amortization expense for the nine month period ended March 31, 1997 $ 68,228 ============= (3) Represents interest expense on the $2.5 million of funds borrowed for the acquisition at an interest rate of 8.75%.