1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 31, 1997
CONTINUCARE CORPORATION
--------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
FLORIDA
(STATE OR OTHER JURISDICTION OF INCORPORATION)
0-21910 59-2716023
(COMMISSION FILE NUMBER) (IRS EMPLOYER IDENTIFICATION NO.)
CONTINUCARE CORPORATION
100 SOUTHEAST 2ND STREET, 36TH FLOOR
MIAMI, FLORIDA 33131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 350-7515
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Effective October 31, 1997, Continucare Corporation, a Florida
corporation (the "Registrant"), through a wholly-owned subsidiary, Continucare
Physician Practice Management, Inc., acquired certain of the assets of DHG
Enterprises, Inc. f/k/a Doctor's Health Group, Inc. and Doctor's Health
Partnership, Inc., both Florida corporations (collectively referred to as
"Doctors Health Group" or "DHG"). DHG is an office-based primary physician
practice group formed in 1985 that operates through six owned clinics and one
managed clinic. The aggregate purchase was $14.5 million, of which $1.5 million
was paid in Common Stock of the Registrant. The purchase price was funded from
a portion of the net proceeds from the sale of 8% Convertible Subordinated
Notes Due 2002, sold on October 30, 1997.
The foregoing summary is qualified in its entirety by a copy of the
Agreement attached hereto as an exhibit.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The financial statements of Doctors Health Group for the
six-month period ended June 30, 1997 (unaudited) and for
the years ended December 31, 1996 and 1995 (audited)
are attached as Exhibit 7(a) and incorporated herein by
reference.
(b) Proforma Financial Information.
The unaudited pro forma consolidated balance sheet of the
Registrant as of June 30, 1997 and the unaudited pro forma
consolidated statement of income for the year ended June 30,
1997, are attached as Exhibit 7(b) and are incorporated herein
by reference.
(c) Exhibits
2.1 Purchase Agreement, dated as of September 4, 1997, by and
among Continucare Corporation, Continucare Physician Practice
Management, Inc., a wholly owned subsidiary of Continucare
Corporation, DHG Enterprises, Inc. f/k/a Doctor's Health
Group, Inc. and Doctor's Health Partnership, Inc., both
Florida corporations, and Claudio Alvarez and Yvonne Alvarez.
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: November 13, 1997 By: /s/ Charles M. Fernandez
--------------------------------------
Charles M. Fernandez
Chairman, Chief Executive Officer
and President
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ATTACHMENT AND EXHIBIT INDEX
ATTACHMENT DESCRIPTION
7(a) Financial Statements of DHG Enterprises, Inc. d/b/a Doctor's Health
Group and Doctor's Health Partnership, Inc. for the six-month period
ended June 30, 1997 (unaudited) and for the years ended December 31,
1996 and 1995 (audited)
7(b) Unaudited Pro Forma Consolidated Balance Sheet of Continucare
Corporation as of June 30, 1997 and the unaudited Pro Forma
Consolidated Statement of Income for the year ended June 30, 1997.
EXHIBIT DESCRIPTION
2.1 Purchase Agreement, dated as of September 4, 1997, by and among
Continucare Corporation, Continucare Physician Practice Management,
Inc., a wholly owned subsidiary of Continucare Corporation, DHG
Enterprises, Inc. f/k/a Doctor's Health Group, Inc. and Doctor's
Health Partnership, Inc., both Florida corporations, and Claudio
Alvarez and Yvonne Alvarez.
5
DOCTORS HEALTH GROUP
FINANCIAL STATEMENTS
1
6
DHG ENTERPRISES, INC.
D/B/A DOCTOR'S HEALTH GROUP
AND DOCTOR'S HEALTH PARTNERSHIP, INC.
COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 990,352
Foundation IBNR receivable................................ 1,191,060
Accounts receivable -- Foundation......................... 395,571
Accounts receivable....................................... 54,914
Prepaid expenses and other................................ 59,435
-----------
Total current assets.............................. 2,691,332
Medical Reserve Fund...................................... 240,814
Property and equipment, net............................... 298,286
Security deposits......................................... 24,477
-----------
Total assets...................................... $ 3,254,909
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued expenses............... $ 132,938
Accrued medical claims, including amounts incurred but not
reported............................................... 1,306,684
Current installments of long-term debt.................... 8,669
-----------
Total current liabilities.............................. 1,448,291
DEFERRED INCOME TAXES....................................... 41,809
-----------
Total liabilities................................. 1,490,100
-----------
STOCKHOLDERS' EQUITY:
Capital stock............................................. 400
Retained earnings......................................... 6,096,296
Advances to stockholders.................................. (4,331,887)
-----------
Total stockholders' equity........................ 1,764,809
COMMITMENTS AND CONTINGENCIES (Notes 4, 7)
-----------
Total liabilities and stockholders' equity.................. $ 3,254,909
===========
See accompanying notes to unaudited combined financial statements.
2
7
DHG ENTERPRISES, INC. D/B/A DOCTOR'S HEALTH GROUP
AND DOCTOR'S HEALTH PARTNERSHIP, INC.
COMBINED STATEMENT OF INCOME
SIX-MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
CAPITATION REVENUES......................................... $8,045,685
----------
MEDICAL EXPENSES:
Physician services........................................ 341,565
Hospital and other medical services....................... 4,754,402
Medical supplies.......................................... 27,177
----------
Total medical expenses............................ 5,123,144
----------
GROSS PROFIT................................................ 2,922,541
----------
OPERATING EXPENSES:
Salaries and related benefits............................. 1,089,239
Operating and administrative fees......................... 554,758
Depreciation and amortization............................. 59,500
----------
Total operating expenses.......................... 1,703,497
----------
OTHER INCOME................................................ 10,238
----------
NET INCOME.................................................. $1,229,282
==========
See accompanying notes to unaudited combined financial statements.
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8
DHG ENTERPRISES, INC. D/B/A DOCTOR'S HEALTH GROUP
AND DOCTOR'S HEALTH PARTNERSHIP, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
SIX-MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
TOTAL
RETAINED ADVANCES TO STOCKHOLDERS'
CAPITAL STOCK EARNINGS STOCKHOLDERS EQUITY
------------- ---------- ------------ -------------
BALANCE, DECEMBER 31, 1996................... $400 $4,867,014 $(3,275,362) $ 1,592,052
NET INCOME................................... 1,229,282 1,229,282
ADVANCES TO STOCKHOLDERS .................... (1,056,525) (1,056,525)
---- ---------- ----------- -----------
BALANCE, JUNE 30, 1997....................... $400 $6,096,296 $(4,331,887) $ 1,764,809
==== ========== =========== ===========
See accompanying notes to unaudited combined financial statements.
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9
DHG ENTERPRISES, INC. D/B/A DOCTOR'S HEALTH GROUP
AND DOCTOR'S HEALTH PARTNERSHIP, INC.
COMBINED STATEMENT OF CASH FLOWS
SIX-MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,229,282
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense.................. 59,500
Gain on disposal of fixed assets....................... (4,370)
(Increase) decrease in assets:
Foundation IBNR receivable........................... (235,684)
Accounts receivable -- Foundation.................... 693,133
Accounts receivable.................................. 21,229
Prepaid expenses and other assets.................... (34,904)
Medical reserve fund................................. (2,820)
Increase (decrease) in liabilities:
Accounts payable and other accrued expenses.......... 11,573
Accrued medical claims, including amounts incurred
but not reported.................................... 235,684
-----------
Net cash flows provided by operating activities... 1,972,623
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (35,884)
Proceeds from disposal of fixed assets.................... 14,943
-----------
Net cash used in investing activities............. (20,941)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances to stockholder................................... (1,056,525)
Principal reduction of long-term debt..................... (16,677)
-----------
Net cash used in financing activities............. (1,073,202)
-----------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 878,480
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 111,872
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 990,352
-----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 1,069
-----------
See accompanying notes to unaudited combined financial statements.
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DHG ENTERPRISES, INC. D/B/A DOCTOR'S HEALTH GROUP
AND DOCTOR'S HEALTH PARTNERSHIP, INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1997
1. ORGANIZATION AND OPERATIONS
Organization -- The accompanying combined financial statements are
comprised of the following entities, affiliated through common ownership and
management: DHG Enterprises, Inc. d/b/a Doctor's Health Group ("DHG") and
Doctors' Health Partnership, Inc. ("DHP") (collectively, the "Company").
DHG was incorporated under the laws of the state of Florida on November 30,
1987 and is headquartered in Miami, Florida. DHG changed its name to DHG
Enterprises, but is still d/b/a DHG. DHG owns and manages the DHG Northwest
center ("Northwest"), DHG Cutler Ridge center ("Cutler Ridge"), DHG Hialeah
center ("Hialeah"), DHG Douglas Center ("Douglas"), and the Flagler/Northwest
center ("Flagler"). (Note: these centers are d/b/a Doctor's Medical Centers.)
DHP was incorporated under the laws of the state of Florida on December 3,
1987. This company is a subprovider for members assigned to DHG. DHP contracts
with seven physicians and a medical center managed by an unaffiliated company
for capitated services.
Nature of Operations -- The Company operates in the state of Florida,
providing health care services subject to an affiliated provider agreement
entered into with Foundation Health Services, Inc., formerly known as Care
Florida, Inc. ("Foundation"), a health maintenance organization. For the
six-month period ended June 30, 1997, substantially all of the Company's revenue
was derived from the provider agreement with Foundation. DHG contracts with Dare
to Care, Inc. ("DTC"), another entity affiliated through common ownership and
management, which owns and manages the DHG Weschester Center. The DHG Weschester
Center is d/b/a Primecare Medical Center. Health services are provided to
Foundation members through DHG, DHP and DTC's primary care medical centers and
its network of physicians and health care specialists.
Affiliated Provider Agreements -- Effective July 1, 1995, DHG and DHP
entered into provider agreements with Foundation which will continue until June
30, 2002 unless the Company fails to meet certain provisions of the agreements.
Should the Company or Foundation fail to meet the provisions, either party gets
30-days' written notice to provide a program to correct any deficiency. Failure
to correct the deficiency within the allowed time may result in termination of
the agreement.
Services to be provided by the Company's centers include medical and minor
surgical services, including all procedures furnished in a physician's office
such as X-rays, blood work, drugs, medical supplies and other incidentals. The
Company is responsible for providing all such services and for directing and
authorizing all other care, including emergency and inpatient care for
Foundation members. The Company is financially responsible for all out-of-area
care rendered to a member and to provide direct care as soon as the member is
able to return to the designated medical center.
Foundation has agreed to pay the Company monthly for services provided to
members based upon a predetermined amount per member ("capitation") for primary
care and other services not provided in a Hospital facility as defined by the
contract. DHG shares equally in any profits or losses with Foundation.
Foundation has also agreed to share equally with the Company in income or loss
determined on a quarterly basis for services provided to members based upon a
capitation for hospital-based services and other services defined by the
contract.
Foundation IBNR Receivable and Claims Reserve Funds -- Foundation withholds
certain amounts each month from the Company's Part A and Part B funds in order
to cover claims incurred but not reported or paid. The amount is used by
Foundation to pay the Company's Part A and Part B claims. The amounts withheld
by Foundation to cover incurred but not reported or paid claims varies by center
based on the history of the respective center and is determined solely by
Foundation.
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11
DHG ENTERPRISES, INC. D/B/A DOCTOR'S HEALTH GROUP
AND DOCTOR'S HEALTH PARTNERSHIP, INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts Receivable Foundation -- This amount includes DHG's share of net
income for the quarters ended March 31 and June 30. In addition, Foundation
withholds certain amounts, referred to as the "Medical Reserve Fund." The amount
withheld is used to cover deficits for final settlement with DHG upon
termination of the Foundation agreement.
Independent Physician Contracts -- The Company has entered into contracts
with various independent physicians to provide primary care, specialty and other
referral services both on a prepaid and a negotiated fee-for-service basis.
Prepaid physicians-service costs are based upon a fixed fee per member payable
on a monthly basis. Such costs are presented in the accompanying unaudited
combined statements of income as hospital and other medical services.
Malpractice and Professional Liability Insurance -- The Company is
uninsured with respect to medical malpractice risk. The Company has not
identified any unasserted claims under its incident-reporting system as of June
30, 1997. No accrual for possible losses attributed to incidents that may have
accrued but that have not been identified under the incident-reporting system
have been made, because the amount, if any, is not reasonably estimable.
Reinsurance -- The Company participates in Foundation's pooled reinsurance
program. Under the terms of the program, the Company is reinsured for 80 percent
of eligible claims which exceed a $30,000 deductible per member per calendar
year. The per-member per month premium is $12.58 and $3.12 for each Medicare and
commercial member, respectively. In the event that the pooled catastrophic fund
is in a deficit at December 31, the deficit will be recovered through future
premium adjustments.
Membership -- Foundation members assigned to the Company's centers are
comprised of approximately 2,030 Medicare members and 592 commercial members,
respectively, at June 30, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination -- The accompanying combined financial statements
include the accounts of all the companies listed in Note 1 which are related
through common ownership and management. All significant intercompany balances
and transactions have been eliminated in the accompanying unaudited combined
financial statements.
Revenue and Medical Cost Recognition -- Revenue from Foundation for primary
care (Primary-Care Capitation) is recognized monthly on the basis of the number
of members assigned to each center at the contractually agreed-upon rates.
Revenue, as per Part A and Part B funds, is recorded quarterly. The Company
receives quarterly payments from Foundation after all expenses are paid by
Foundation on behalf of the Company, including estimated claims incurred but not
reported, and claims-reserve-fund balances have been determined. In addition to
Foundation payments, the Company receives copayments from commercial members for
each office visit depending upon the specific plan and options selected.
Services provided to non-Foundation members are on a fee-for-service basis as
patients are seen. Medical services are recorded as expenses in the period in
which they are incurred. Accrued medical claims are based on costs incurred for
services rendered prior to or on the balance sheet date. Included are services
incurred but not reported as of the balance sheet date based on a reasonable
estimate of such costs.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation on plant and equipment is calculated on the straight-line basis
over the estimated useful lives of the assets. Depreciation on leasehold
improvement is calculated on the straight-line basis over the lease term.
Income Taxes -- DHG has elected S corporation status, which passes the tax
effects of the corporations' operations directly to the stockholders. Therefore,
no provision for income taxes has been recorded for this corporation.
7
12
DHG ENTERPRISES, INC. D/B/A DOCTOR'S HEALTH GROUP
AND DOCTOR'S HEALTH PARTNERSHIP, INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DHP accounts for income taxes under the asset and liability method
according to the Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under
the asset and liability method of SFAS 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Change in Accounting Standards -- Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income will be implemented
for the Company's 1998 fiscal year. This Statement establishes standards for the
reporting and displaying of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of financial statements.
In addition, the Company will implement SFAS 131, Disclosures About
Segments of an Enterprise and Related Information during the Company's 1998
fiscal year. This Statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate, and their major customers.
These statements are not expected to have a material impact on the
Company's financial position, operating results, or cash flows.
Cash and Cash Equivalents -- Cash and cash equivalents consist of cash on
deposit and money market funds with an initial term of less than three months.
Fair Value of Financial Instruments -- The carrying amount of cash and cash
equivalents, Foundation IBNR, accounts receivable -- Foundation, prepaid assets,
accounts payable and other accrued expenses, accrued medical claims, and debt
approximates fair value because of the short maturity of these instruments.
Use of Estimates -- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare the
accompanying combined financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 1997:
ESTIMATED
USEFUL LIVES
------------
Medical and office equipment................................ $ 462,305 5-7 years
Leasehold improvements...................................... 302,667 5 years
Automobiles................................................. 292,331 5 years
----------
1,057,303
Less accumulated depreciation............................... (759,017)
----------
Property and equipment, net................................. $ 298,286
==========
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13
DHG ENTERPRISES, INC. D/B/A DOCTOR'S HEALTH GROUP
AND DOCTOR'S HEALTH PARTNERSHIP, INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. LEASES
Future minimum lease payments required under noncancelable operating leases
at June 30, 1997 for each of the five succeeding years and thereafter are as
follows:
YEAR ENDING JUNE 30,
- --------------------
1998................................................... $267,709
1999................................................... 214,962
2000................................................... 107,527
2001................................................... 14,286
--------
Total........................................ $604,484
========
Rental expense incurred under operating leases for the six-month period
ended June 30, 1997 amounted to approximately $146,000. Included in rent expense
for the six-month period ended June 30, 1997 is approximately $76,000 of
payments made to an affiliated company for rent of the Company's corporate
headquarters and certain centers.
5. CAPITAL STOCK
The shares' authorized, issued, stock par value, and additional paid-in
capital for each of the combined companies as of June 30, 1997 is as follows:
STOCK PAR VALUE STOCK TOTAL
AUTHORIZED ISSUED PER STOCK PAR VALUE
---------- ------ --------- -----------
DHG......................................... 50,000 20,000 .01 $200
DHP......................................... 50,000 20,000 .01 200
----
$400
====
6. RELATED PARTY TRANSACTIONS
The Company paid management fees of $575,000 during the six-month period
ended June 30, 1997 to a stockholder. Such fees are included in the unaudited
combined statement of income as salaries expense.
Advances to stockholders at June 30, 1997 amounted to $4,331,887. Such
advances are a component of stockholders' equity and bear no interest.
The Company paid rent to an affiliated company (see Note 4).
7. COMMITMENTS AND CONTINGENCIES
Governmental Regulation -- The Company's operations have been and may
continue to be affected by various forms of governmental regulation and other
actions. It is presently not possible to predict the likelihood of any such
actions, the form which such actions may take, or the effect such actions may
have on the Company.
Distributions -- Florida statutes permit a corporation to make
distributions to its stockholders, provided that after giving effect to the
distribution, the value of the corporation's assets equals or exceeds the value
of its liabilities and the corporation is able to pay its debts as they become
due in the usual course of business. If any portion of the distributions were
determined to have been not in accordance with the statutes, the directors of
the corporation would be liable to pay the corporation the amount of such
portion, and the directors in turn would be entitled to contributions from any
stockholder who accepted the distribution knowing that it was not made in
accordance with the statutes.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
DHG Enterprises, Inc.
d/b/a Doctor's Health Group;
Doctor's Health Partnership, Inc.; and
Managed Group Care, Inc. and subsidiary:
We have audited the combined balance sheets of DHG Enterprises, Inc. d/b/a
Doctor's Health Group; Doctor's Health Partnership, Inc.; and Managed Group
Care, Inc. and subsidiary (collectively, the "Company") as of December 31, 1996
and 1995, and the related combined statements of income, stockholders' equity,
and cash flows for the years then ended. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the Company 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.
KPMG PEAT MARWICK LLP
Miami, Florida
August 4, 1997
1
15
DHG ENTERPRISES, INC.
D/B/A DOCTOR'S HEALTH GROUP;
DOCTOR'S HEALTH PARTNERSHIP, INC.; AND
MANAGED GROUP CARE, INC.
AND SUBSIDIARY
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 96,639 $ 473,819
Foundation IBNR receivable................................ 955,376 838,665
Accounts receivable -- Foundation......................... 1,088,703 984,937
Accounts receivable....................................... 76,144 20,624
Prepaid expenses and other................................ 25,874 81,278
----------- -----------
Total current assets.............................. 2,242,736 2,399,323
Medical Reserve Fund........................................ 237,994 232,970
Property and equipment, net (Note 3)........................ 350,023 437,242
Security deposits........................................... 24,477 31,418
----------- -----------
Total assets...................................... $ 2,855,230 $ 3,100,953
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued expenses............... $ 124,209 $ 193,311
Accrued medical claims, including amounts incurred but not
reported............................................... 1,071,000 1,050,000
Current installments of long-term debt (Note 4)........... 21,201 7,702
----------- -----------
Total current liabilities......................... 1,216,410 1,251,013
Long-term debt, excluding current installments (Note 4)..... 22,341 10,878
Deferred income taxes (Note 8).............................. 13,321 41,809
----------- -----------
Total liabilities................................. 1,252,072 1,303,700
----------- -----------
STOCKHOLDERS' EQUITY (NOTES 6 AND 7):
Capital stock............................................. 500 500
Additional paid-in capital................................ 40,000 40,000
Retained earnings......................................... 4,838,020 4,431,868
Advances to stockholders.................................. (3,275,362) (2,675,115)
----------- -----------
Total stockholders' equity........................ 1,603,158 1,797,253
Commitments and contingencies (Notes 5 and 9)
----------- -----------
Total liabilities and stockholders' equity........ $ 2,855,230 $ 3,100,953
=========== ===========
See accompanying notes to combined financial statements.
2
16
DHG ENTERPRISES, INC.
D/B/A DOCTOR'S HEALTH GROUP;
DOCTOR'S HEALTH PARTNERSHIP, INC.; AND
MANAGED GROUP CARE, INC.
AND SUBSIDIARY
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
Revenue..................................................... $14,906,569 $13,468,449
----------- -----------
MEDICAL EXPENSES:
Physician services........................................ 701,768 717,101
Hospital and other medical services....................... 8,449,267 8,194,701
Medical supplies.......................................... 67,342 68,501
----------- -----------
Total medical expenses............................ 9,218,377 8,980,303
----------- -----------
Gross profit................................................ 5,688,192 4,488,146
----------- -----------
OPERATING EXPENSES:
Salaries and related benefits............................. 1,746,881 1,349,905
Operating and administrative fees......................... 1,293,387 1,219,413
Depreciation and amortization............................. 173,181 174,660
----------- -----------
Total operating expenses.......................... 3,213,449 2,743,978
----------- -----------
OTHER INCOME (EXPENSE):
Interest income........................................... 10,726 6,398
Interest expense.......................................... (793) (191)
Other..................................................... 14,817 36,634
----------- -----------
Income before income tax benefit............................ 2,499,493 1,787,009
Income tax benefit (Note 8)................................. 28,488 121,841
----------- -----------
Net income........................................ $ 2,527,981 $ 1,908,850
=========== ===========
See accompanying notes to combined financial statements.
3
17
DHG ENTERPRISES, INC.
D/B/A DOCTOR'S HEALTH GROUP;
DOCTOR'S HEALTH PARTNERSHIP, INC.; AND
MANAGED GROUP CARE, INC.
AND SUBSIDIARY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
TOTAL
ADDITIONAL RETAINED ADVANCES TO STOCKHOLDERS'
CAPITAL STOCK PAID-IN CAPITAL EARNINGS STOCKHOLDERS EQUITY
------------- --------------- ----------- ------------ -------------
(NOTE 6) (NOTE 6) (NOTE 7)
BALANCE, DECEMBER 31, 1994....... $500 $40,000 $ 3,439,396 $(1,951,147) $ 1,528,749
Net income..................... -- -- 1,908,850 -- 1,908,850
Dividend distributions
(Note 9).................... -- -- (916,378) -- (916,378)
Advances to stockholders....... -- -- -- (723,968) (723,968)
---- ------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995....... 500 40,000 4,431,868 (2,675,115) 1,797,253
Net income..................... -- -- 2,527,981 -- 2,527,981
Dividend distributions
(Note 9).................... -- -- (2,121,829) -- (2,121,829)
Advances to stockholders....... -- -- -- (600,247) (600,247)
---- ------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996....... $500 $40,000 $ 4,838,020 $(3,275,362) $ 1,603,158
==== ======= =========== =========== ===========
See accompanying notes to combined financial statements.
4
18
DHG ENTERPRISES, INC.
D/B/A DOCTOR'S HEALTH GROUP;
DOCTOR'S HEALTH PARTNERSHIP, INC.; AND
MANAGED GROUP CARE, INC.
AND SUBSIDIARY
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,527,981 $ 1,908,850
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 173,181 174,660
Decrease in deferred income taxes...................... (28,488) (121,841)
(Increase) decrease in assets:
Foundation IBNR receivable........................... (116,711) 664,669
Accounts receivable -- Foundation.................... (103,766) (338,077)
Accounts receivable.................................. (55,520) (18,401)
Prepaid expenses and other assets.................... 55,404 (6,123)
Security deposits.................................... 6,941 3,060
Medical reserve fund................................. (5,024) --
Increase (decrease) in liabilities:
Accounts payable and other accrued expenses.......... (69,102) (13,235)
Accrued medical claims, including amounts incurred
but not reported.................................... 21,000 (429,000)
----------- -----------
Net cash provided by operating activities......... 2,405,896 1,824,562
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (85,962) (85,074)
----------- -----------
Net cash used in investing activities............. (85,962) (85,074)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend distributions.................................... (2,121,829) (916,378)
Advances to stockholder................................... (600,247) (723,968)
Principal reduction of long-term debt..................... (13,658) (38,946)
Proceeds from issuance of debt............................ 38,620 17,061
----------- -----------
Net cash used in financing activities............. (2,697,114) (1,662,231)
----------- -----------
(Decrease) increase in cash and cash equivalents............ (377,180) 77,257
Cash and cash equivalents at beginning of year.............. 473,819 396,562
----------- -----------
Cash and cash equivalents at end of year.................... $ 96,639 $ 473,819
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 793 $ 607
=========== ===========
Income tax paid during the year........................... $ -- $ --
=========== ===========
See accompanying notes to combined financial statements.
5
19
DHG ENTERPRISES, INC.
D/B/A DOCTOR'S HEALTH GROUP;
DOCTOR'S HEALTH PARTNERSHIP, INC.; AND
MANAGED GROUP CARE, INC.
AND SUBSIDIARY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND OPERATIONS
(a) Organization
The accompanying combined financial statements are comprised of the
following entities, affiliated through common ownership and management: DHG
Enterprises, Inc. d/b/a Doctor's Health Group ("DHG"); Doctor's Health
Partnership, Inc. ("DHP"); and Managed Group Care, Inc. and subsidiary ("MGC")
(collectively, the "Company").
DHG was incorporated under the laws of the state of Florida on November 30,
1987 and is headquartered in Miami, Florida. DHG changed its name to DHG
Enterprises, but is still d/b/a DHG. DHG owns and manages the DHG Northwest
center ("Northwest"), DHG Cutler Ridge center ("Cutler Ridge"), DHG Hialeah
center ("Hialeah"), DHG Douglas center ("Douglas"), and the Flagler/Northwest
center ("Flagler"). (Note: these centers are d/b/a Doctor's Medical Centers.)
DHP was incorporated under the laws of the state of Florida on December 3,
1987. This company is a subprovider for members assigned to DHG. DHP contracts
with seven physicians and a medical center managed by an unaffiliated company
for capitated services.
MGC was incorporated under the laws of the state of Florida on February 3,
1992. MGC owns 100 percent of Dare to Care, Inc. ("DTC"). This company became
inactive January 1, 1995 and has remained dormant as of and for the period ended
December 31, 1996.
DTC was incorporated under the laws of the state of Florida on July 23,
1992. Although DTC's parent company, MGC, remains dormant, DTC owns and manages
the DGC Westchester center ("Westchester"). The DHG Westchester center is d/b/a
Primecare Medical Center.
(b) Nature of Operations
The Company operates in the state of Florida, providing health care
services subject to an affiliated provider agreement entered into with
Foundation Health Services, Inc., formerly known as CareFlorida, Inc.,
("Foundation"), a health maintenance organization. For the years ended December
31, 1996 and 1995, substantially all of the Company's revenue is derived from
the provider agreement with Foundation. Health services are provided to
Foundation members through DHG, DHP and DTC's primary care medical centers and
its network of physicians and health care specialists.
(c) Affiliated Provider Agreements
Effective July 1, 1995, DHG and DHP entered into provider agreements with
Foundation which will continue until June 30, 2002 unless the Company fails to
meet certain provisions of the agreements. Should the Company or Foundation fail
to meet the provisions, either party gets 30-days' written notice to provide a
program to correct any deficiency. Failure to correct the deficiency within the
allowed time may result in termination of the agreement.
Services to be provided by the Company's centers include medical and minor
surgical services, including all procedures furnished in a physician's office
such as X rays, blood work, drugs, medical supplies and other incidentals. The
Company is responsible for providing all such services and for directing and
authorizing all other care, including emergency and inpatient care for
Foundation members. The Company is financially
6
20
DHG ENTERPRISES, INC.
D/B/A DOCTOR'S HEALTH GROUP;
DOCTOR'S HEALTH PARTNERSHIP, INC.; AND
MANAGED GROUP CARE, INC.
AND SUBSIDIARY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
responsible for all out-of-area care rendered to a member and to provide direct
care as soon as the member is able to return to the designated medical center.
Foundation has agreed to pay the Company monthly for services provided to
members based upon a predetermined amount per member ("capitation") for primary
care and other services not provided in a Hospital facility as defined by the
contract. DHG shares equally in any profits or losses with the HMO. Foundation
has also agreed to share equally with the Company in income or loss determined
on a quarterly basis for services provided to members based upon a capitation
for hospital-based services and other services defined by the contract.
(d) Foundation IBNR Receivable and Claims Reserve Funds
Foundation withholds certain amounts each month from the Company's Part A
and Part B funds in order to cover claims incurred but not reported or paid. The
amount is used by Foundation to pay the Company's Part A and Part B funds. The
amounts withheld by Foundation to cover incurred-but-not-reported-or-paid claims
varies by center based on the history of the respective center and is determined
solely by Foundation.
(e) Accounts Receivable -- Foundation
Accounts receivable -- Foundation includes DHG's share of net income for
the quarters ended September 30 and December 31 and the Primary-Care Capitation
for the month of December. In addition, Foundation withholds certain amounts,
referred to as the "Medical Reserve Fund." The amount withheld is used to cover
deficits for final settlement with DHG upon termination of the Foundation
agreement.
(f) Independent Physician Contracts
The Company has entered into contracts with various independent physicians
to provide primary care, specialty and other referral services both on a prepaid
and a negotiated fee-for-service basis. Prepaid physicians-service costs are
based upon a fixed fee per member payable on a monthly basis. Such costs are
presented in the accompanying combined statements of income as hospital and
other medical services.
(g) Malpractice and Professional Liability Insurance
The Company is uninsured with respect to medical malpractice risk. At
December 31, 1995, the Company has one asserted claim against it which was
settled for $50,000. This amount is included in accounts payable and other
accrued expenses as of December 31, 1995. The Company has not identified any
unasserted claims under its incident-reporting system as of December 31, 1996.
No accrual for possible losses attributed to incidents that may have accrued but
that have not been identified under the incident-reporting system have been
made, because the amount, if any, is not reasonably estimable.
(h) Reinsurance
The Company participates in Foundation's pooled reinsurance program. Under
the terms of the program, the Company is reinsured for 80 percent of eligible
claims which exceed a $30,000 deductible per member per calendar year. The
per-member per month premium is $12.58 and $3.12 for each Medicare and
commercial member, respectively. In the event that the pooled catastrophic fund
is in a deficit at December 31, the deficit will be recovered through future
premium adjustments.
7
21
DHG ENTERPRISES, INC.
D/B/A DOCTOR'S HEALTH GROUP;
DOCTOR'S HEALTH PARTNERSHIP, INC.; AND
MANAGED GROUP CARE, INC.
AND SUBSIDIARY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Membership
Foundation members assigned to the Company's centers are comprised of
approximately 2,221 and 2,220 Medicare members and 655 and 552 commercial
members, respectively, at December 31, 1996 and 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Combination
The accompanying combined financial statements include the accounts of all
the companies listed in note 1(a) which are related through common ownership and
management. All significant intercompany balances and transactions have been
eliminated in the accompanying combined financial statements.
(b) Revenue and Medical Cost Recognition
Revenue from Foundation for primary care (Primary-Care Capitation) is
recognized monthly on the basis of the number of members assigned to each center
at the contractually agreed-upon rates. Revenue, as per Part A and Part B funds,
is recorded quarterly. The Company receives quarterly payments from Foundation
after all expenses are paid by Foundation on behalf of the Company, including
estimated claims incurred but not reported, and claims-reserve-fund balances
have been determined. In addition to Foundation payments, the Company receives
copayments from commercial members for each office visit depending upon the
specific plan and options selected. Services provided to non-Foundation members
are on a fee-for-service basis as patients are seen.
Medical services are recorded as expenses in the period in which they are
incurred. Accrued medical claims are based on costs incurred for services
rendered prior to or on the balance sheet date. Included are services incurred
but not reported as of the balance-sheet date based on actual costs reported
subsequent to the balance-sheet date and a reasonable estimate of additional
costs.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation on plant and
equipment is calculated on the straight-line basis over the estimated useful
lives of the assets. Depreciation on leasehold improvements is calculated on the
straight-line basis over the lease term.
(d) Income Taxes
DHG and MGC have elected S corporation status, which passes the tax effects
of the corporations' operations directly to the stockholders. Therefore, no
provision for income taxes has been recorded for these corporations.
The companies not electing S corporation status, DHP and DTC, account for
income taxes under the asset and liability method according to the Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability method
of SFAS 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or
8
22
DHG ENTERPRISES, INC.
D/B/A DOCTOR'S HEALTH GROUP;
DOCTOR'S HEALTH PARTNERSHIP, INC.; AND
MANAGED GROUP CARE, INC.
AND SUBSIDIARY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(e) Impairment of Long-Lived Assets
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on
January 1, 1996. This Statement required that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events change in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of an asset to be held and used is measured by a
comparison of the carrying amount of the asset to future net cash flows expected
to be generated by the asset. If such an asset is considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of are reported at the lower of the carrying amount or fair values less costs to
sell. Adoption of this Statement did not have a material impact of the Company's
financial position, results of operations, or liquidity at December 31, 1996.
(f) Change in Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" will be implemented for the Company's 1998 fiscal year.
This Statement establishes standards for the reporting and displaying of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of financial statements.
In addition, the Company will implement SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information" during the Company's 1998
fiscal year. This Statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate, and their major customers.
These statements are not expected to have a material impact on the
Company's financial position, operating results, or cash flows.
(g) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit and money market funds
with an initial term of less than three months.
(h) Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, Foundation IBNR, accounts
receivable -- Foundation, prepaid assets, accounts payable and other accrued
expenses, accrued medical claims, and debt approximates fair value because of
the short maturity of these instruments.
(i) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the accompanying
9
23
DHG ENTERPRISES, INC.
D/B/A DOCTOR'S HEALTH GROUP;
DOCTOR'S HEALTH PARTNERSHIP, INC.; AND
MANAGED GROUP CARE, INC.
AND SUBSIDIARY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
combined financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(j) Reclassifications
Certain reclassifications have been made to the 1995 financial statements
in order to conform to the 1996 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1996 and
1995:
ESTIMATED
1996 1995 USEFUL LIVES
---------- ---------- -------------
Medical and office equipment...................... $ 475,776 $ 426,416 5-7 years
Leasehold improvements............................ 322,158 322,158 5 years
Automobiles....................................... 356,595 326,393 5 years
---------- ----------
1,154,529 1,074,967
Less accumulated depreciation..................... (804,506) (637,725)
---------- ----------
Property and equipment, net....................... $ 350,023 $ 437,242
========== ==========
4. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 consists of the following:
1996 1995
------- -------
Installment note payable in monthly installments of $2,800
including interest at 2%; due February 3, 1996; guaranteed
by a stockholder.......................................... $ -- $ 2,791
Installment note payable in monthly installments of $549,
including principal and interest of 9.7%; due October
1998...................................................... 10,550 15,789
Installment note payable in monthly installments of $1,126
including principal and interest of 10.2%; secured by
automobile; due February 1998............................. 14,796 --
Installment note payable in monthly installments of $409
including principal and interest of 9.5%; secured by
automobile; due July 2001................................. 18,196 --
------- -------
Total long-term debt.............................. 43,542 18,580
Less current installments................................... 21,201 7,702
------- -------
Long-term debt, excluding current installments.... $22,341 $10,878
======= =======
10
24
DHG ENTERPRISES, INC.
D/B/A DOCTOR'S HEALTH GROUP;
DOCTOR'S HEALTH PARTNERSHIP, INC.; AND
MANAGED GROUP CARE, INC.
AND SUBSIDIARY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Annual maturities of long-term debt as of December 31, 1996 for each of the
five succeeding years and thereafter are as follows:
1997........................................................ $21,201
1998........................................................ 11,125
1999........................................................ 4,019
2000........................................................ 4,419
2001........................................................ 2,778
Thereafter.................................................. --
-------
Total............................................. $43,542
=======
5. LEASES
Future minimum lease payments required under noncancelable operating leases
at December 31, 1996 for each of the five succeeding years and thereafter are as
follows:
YEAR ENDING DECEMBER 31,
- ------------------------
1997........................................................ $319,552
1998........................................................ 243,441
1999........................................................ 186,482
2000........................................................ 28,572
2001........................................................ --
Thereafter.................................................. --
--------
Total minimum lease payments...................... $778,047
========
Rental expense incurred under operating leases for the years ended December
31, 1996 and 1995 amounted to approximately $385,000 and $311,000, respectively.
Included in rent expense for the years ended December 31, 1996 and 1995,
respectively, is approximately $162,000 and $151,000 for payments made to an
affiliated company for rent of the Company's corporate headquarters and certain
centers.
6. CAPITAL STOCK
The shares' authorized, issued, stock par value, and additional paid-in
capital for each of the combined companies as of December 31, 1996 and 1995 is
as follows:
ADDITIONAL
STOCK PAR VALUE STOCK TOTAL PAID-IN
AUTHORIZED ISSUED PER STOCK PAR VALUE CAPITAL
---------- ------ --------- ----------- ----------
DHG................................... 50,000 20,000 $ .01 $200 $ --
DHP................................... 50,000 20,000 .01 200 --
MGC................................... 7,500 100 1.00 100 40,000
---- -------
$500 $40,000
==== =======
11
25
DHG ENTERPRISES, INC.
D/B/A DOCTOR'S HEALTH GROUP;
DOCTOR'S HEALTH PARTNERSHIP, INC.; AND
MANAGED GROUP CARE, INC.
AND SUBSIDIARY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED-PARTY TRANSACTIONS
The Company paid management fees of $820,000 and $542,000 during the years
ended December 31, 1996 and 1995, respectively, to a stockholder. Such fees are
included in the combined statements of income as operating and administrative
fees.
Advances to stockholders at December 31, 1996 and 1995 amounted to
$3,275,362 and $2,675,115, respectively. Such advances are a component of
stockholders' equity and bear no interest.
The Company paid rent to an affiliated company (see note 5).
8. INCOME TAXES
The components of income tax benefit for the years ended December 31, 1996
and 1995 for DHP and DTC, the entities for which no Subchapter S election is in
effect, are as follows:
1996
----------------------------
CURRENT DEFERRED TOTAL
------- -------- -------
U.S. federal............................................... $ -- $24,324 $24,324
State and local............................................ -- 4,164 4,164
---- ------- -------
$ -- $28,488 $28,488
==== ======= =======
1995
-----------------------------
CURRENT DEFERRED TOTAL
------- -------- --------
U.S. federal............................................. $ -- $102,863 $102,863
State and local.......................................... -- 18,978 18,978
---- -------- --------
$ -- $121,841 $121,841
==== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities for DHP and DTC
for the years ended December 31, 1996 and 1995, are presented as follows:
1996 1995
-------- --------
DEFERRED TAX ASSETS:
Federal and state loss carryforward....................... $172,453 $140,874
Less valuation allowance.................................. -- --
-------- --------
Net deferred tax assets........................... 172,453 140,874
-------- --------
DEFERRED TAX LIABILITIES:
Differences arising from accrual to cash conversion for
tax purposes........................................... 185,774 182,683
-------- --------
Total gross deferred tax liabilities.............. 185,774 182,683
-------- --------
Net deferred tax liabilities...................... $ 13,321 $ 41,809
======== ========
The valuation allowance for deferred tax assets for the years ended
December 31, 1996 and 1995 was zero. There was no change in the valuation
allowance. Management considers it more likely than not that all deferred tax
assets will be realized in the future.
12
26
DHG ENTERPRISES, INC.
D/B/A DOCTOR'S HEALTH GROUP;
DOCTOR'S HEALTH PARTNERSHIP, INC.; AND
MANAGED GROUP CARE, INC.
AND SUBSIDIARY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax benefit differs from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income as a result of the
following:
1996 1995
--------- ---------
Computed "expected" tax expense............................. $ 854,961 $ 659,134
Income tax receivable....................................... -- 8,000
Decrease due to entities having Subchapter S elections in
effect.................................................... (883,449) (788,975)
--------- ---------
Total tax benefit................................. $ (28,488) $(121,841)
========= =========
9. COMMITMENTS AND CONTINGENCIES
(a) Governmental Regulation
The Company's operations have been and may continue to be affected by
various forms of governmental regulation and other actions. It is presently not
possible to predict the likelihood of any such actions, the form which such
actions may take, or the effect such actions may have on the Company.
(b) Distributions
During the years ended December 31, 1996 and 1995, the Company made
distributions to stockholders. Florida statutes permit a corporation to make
distributions to its stockholders, provided that after giving effect to the
distribution, the value of the corporation's assets equals or exceeds the value
of its liabilities and the corporation is able to pay its debts as they become
due in the usual course of business. If any portion of the distributions were
determined to have been not in accordance with the statutes, the directors of
the corporation would be liable to pay the corporation the amount of such
portion, and the directors in turn would be entitled to contributions from any
stockholder who accepted the distribution knowing that it was not made in
accordance with the statutes.
13
27
Attachment 7(b)
INTRODUCTION TO
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
GENERAL
The following unaudited pro forma consolidated balance sheet as of June 30, 1997
and the unaudited pro forma consolidated statement of income for the year ended
June 30, 1997 include the Company's historical financial position and results of
operations, adjusted to reflect the Acquisitions discussed as if all such events
and transactions had occurred as of June 30, 1997 in the case of the
consolidated balance sheet, and as of July 1, 1996 in the case of the
consolidated statement of income.
The unaudited pro forma consolidated financial information has 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,
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.
ACQUISITIONS
On October 31, 1997, the Company acquired certain assets of Doctors Health
Group, Inc. ("DHG") for an aggregate purchase price of approximately $14.5
million of which $13.0 million was paid in cash. The remainder of the purchase
price was in Continucare common stock. The cash portion of the purchase price
was funded from a portion of the proceeds of the sale of $46.0 million of
Convertible Subordinated Notes in October 1997 (the "Notes").
This acquisition generated approximately $8.8 million of goodwill, which will be
amortized over 20 years and $5.6 in intangible assets which will be amortized
over a range of 4 to 28 years. There can be no assurance that this acquisition
will be consummated or, if consummated, that it will be beneficial to the
Company.
-1-
28
CONTINUCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
- --------------------------------------------------------------------------------
Historical
-------------------------------------
Acquired Business
Continucare ----------------- Acquisition Pro
Corporation DHG (1) Adjustments Forma
------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,989,580 $ -- $ -- $ 6,989,580
Accounts receivable, net 2,829,426 -- -- 2,829,426
Prepaid expenses and other assets 401,814 -- -- 401,814
------------ ------------ ------------ ------------
Total current assets 10,220,820 -- -- 10,220,820
Other receivables 5,000,000 -- -- 5,000,000
Property and equipment, net 1,176,049 100,000 -- 1,276,049
Goodwill, net 1,452,557 -- 8,763,637(2) 10,216,194
Other intangible assets, net 980,910 -- 5,636,363(2) 6,617,273
Other assets, net 515,274 -- -- 515,274
Deferred tax asset, net 505,699 -- -- 505,699
------------ ------------ ------------ ------------
Total assets $ 19,851,309 $ 100,000 $ 14,400,000 $ 34,351,309
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 285,518 $ -- $ -- $ 285,518
Accrued expenses 924,018 -- -- 924,018
Accrued interest payable 37,295 -- -- 37,295
Current portion of capital lease obligation 44,055 -- -- 44,055
Current portion of notes payable 811,133 -- -- 811,133
Income and other taxes payable 619,445 -- -- 619,445
------------ ------------ ------------ ------------
Total current liabilities 2,721,464 -- -- 2,721,464
Notes payable 2,330,367 -- 13,000,000(3) 15,330,367
Other long-term debt 181,551 -- -- 181,551
------------ ------------ ------------ ------------
Total liabilities 5,233,382 -- 13,000,000 18,233,382
------------ ------------ ------------ ------------
Commitments and contingencies
Shareholders' equity
Common stock 1,089 -- 24(4) 1,113
Additional paid-in capital 14,549,884 -- 1,499,976(4) 16,049,860
Retained earnings 2,351,284 -- -- 2,351,284
Treasury stock (2,284,330) -- -- (2,284,330)
------------ ------------ ------------ ------------
Total shareholders' equity 14,617,927 -- 1,500,000 16,117,927
------------ ------------ ------------ ------------
Total liabilities and shareholders' equity $ 19,851,309 $ -- $ 14,500,000 $ 34,351,309
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
-2-
29
CONTINUCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
The acquisition adjustments reflected on the unaudited pro forma consolidated
balance sheet are as follows:
1) Represents the historical value of the assets acquired.
2) The aggregate purchase price has been allocated, on a preliminary basis, to
the net assets acquired based on their estimated fair market value. The
allocation of the purchase price is preliminary, while the Company
continues to obtain the information to determine the fair value of the
assets acquired and the liabilities assumed. Therefore, an uncertainty
exists with respect to the effects of the amortization periods assigned as
any adjustment could result in a change to estimated annual amortization
expense.
Total purchase price $14,500,000
Net tangible assets acquired (100,000)
Identifiable intangible assets acquired (5,636,363)
-----------
Goodwill $ 8,763,637
===========
Goodwill will be amortized over 20 years.
The preliminary allocation of the identifiable intangible assets acquired
and the related amortization periods are as follows:
AMORTIZATION
ALLOCATED VALUE PERIOD
--------------- ------------
Patient list $3,981,000 4
Assembled workforce 248,000 28
Non-compete agreement 23,363 7
Internally developed software 24,000 7
Trade name 1,360,000 28
----------
Total identifiable intangible assets $5,636,363
==========
3) Cash paid of $13,000,000 was obtained from the issuance of the Notes.
-3-
30
4) Represents the elimination of the equity accounts of Maxicare and the
issuance of stock to effect the purchase of DHG as follows:
Common stock $ 24
Additional paid-in capital 1,499,976
Retained earnings --
----------
Goodwill $1,500,000
==========
-4-
31
CONTINUCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1997
- ------------------------------------------------------------------------------
Historical
------------------------------------
Continucare Acquisition Pro
Corporation DHG Adjustments Forma
------------ ------------ ------------ ------------
Revenues:
Capitation revenues $ -- $ 15,466,087 $ -- $ 15,466,087
Net patient service revenues 1,041,793 -- -- 1,041,793
Management fees 12,874,592 -- -- 12,874,592
------------ ------------ ------------ ------------
Total revenues 13,916,385 15,466,087 -- 29,382,472
------------ ------------ ------------ ------------
Expenses:
Physician, hospital and other -- 9,552,748 -- 9,552,748
Payroll and employee benefits 6,348,195 2,104,895 (955,000)(1) 7,498,090
Provision for bad debt 1,818,293 -- -- 1,818,293
Professional fees 1,450,790 -- -- 1,450,790
General and administrative 1,176,516 1,310,617 -- 2,487,133
Depreciation and amortization 208,936 134,456 1,497,627(2) 1,841,019
------------ ------------ ------------ ------------
Total expenses 11,002,730 13,102,716 542,627 24,648,073
------------ ------------ ------------ ------------
Income from operations 2,913,655 2,363,371 (542,627) 4,734,399
------------ ------------ ------------ ------------
Other income (expense):
Interest income, net 165,253 16,564 (1,040,000)(3) (858,183)
Minority interest (162,235) -- -- (162,235)
Other (9,081) 22,738 -- 13,657
------------ ------------ ------------ ------------
Total other income (expense) (6,063) 39,302 (1,040,000) (1,006,761)
------------ ------------ ------------ ------------
Income (loss) before income taxes 2,907,592 2,402,673 (1,582,627) 3,727,638
Provision for income taxes 1,200,917 -- 308,583(4) 1,509,500
------------ ------------ ------------ ------------
Net income (loss) $ 1,706,675 $ 2,402,673 $ (1,891,210) $ 2,218,138
============ ============ ============ ============
Weighted average shares of common
stock outstanding 10,921,991 11,162,761
============ ============
Earnings (loss) per common share of common
stock outstanding $ 0.16 $ 0.20
============ ============
Weighted average shares of common
stock outstanding 10,875,785 11,116,555
============ ============
Earnings (loss) per common share and common
equivalent share assuming full dilution $ 0.16 $ 0.20
============ ============
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
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32
CONTINUCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1997
The acquisition adjustments reflected on the unaudited pro forma consolidated
statement of income are as follows:
1) Represents the elimination of management fees paid to a DHG shareholder of
$1,055,000 offset by consulting fees of $100,000 to be paid to the same
shareholder under a new consulting agreement.
2) Represents the amortization of goodwill and other intangible assets related
to the acquisitions as follows:
Goodwill $ 438,182
Patient list 995,250
Assembled workforce 8,857
Non-compete agreement 3,338
Internally developed software 3,429
Trade name 48,571
----------
Total $1,497,627
==========
3) Represents the net effect on interest income (expense) of the issuance of
the Notes.
4) Represents the income tax effect of certain acquisition adjustments and of
DHG's historical income before taxes (as DHG is a subchapter S corporation)
at an assumed tax rate of 37.63%.
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