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 AND EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 13, 1998
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.
On February 13, 1998, Continucare Corporation, a Florida corporation
(the "Registrant"), through a wholly-owned subsidiary, Continucare
Rehabilitation Services, Inc. acquired all of the issued and outstanding capital
stock of Rehab Management Systems, Inc., a Florida corporation, IntegraCare,
Inc., a Florida corporation and J.R. Rehab Associates, Inc., a North Carolina
corporation, each a wholly-owned subsidiary of Integrated Health Services, Inc.,
a Delaware corporation (such subsidiaries being collectively referred to as the
"Rehab Companies"). The Rehab Companies are engaged in the business of providing
outpatient rehabilitation and contract rehabilitation services. The aggregate
purchase was $10.5 million (including commissions). The source of the
consideration paid by the Registrant was as follows: (i) $9,940,000 from a
portion of the net proceeds from the sale of 8% Convertible Subordinated Notes
due 2002, sold on October 30, 1997 and (ii) $560,000 from the Registrant's
working capital.
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
The audited combined financial statements of Rehab Management Systems,
Inc., J.R. Rehab, Inc. and Integracare, Inc. for the years ended December 31,
1997 and December 31, 1996 are attached as Attachment 7(a) and are incorporated
herein by reference.
(B) PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma balance sheet of the Registrant as of December
31, 1997, and the unaudited pro forma consolidated statement of income of the
Registrant for the period ended June 30, 1997 and the six months ended December
31, 1997 are attached as Attachment 7(b) and is incorporated herein by
reference.
(C) EXHIBITS
2.1 Stock Purchase Agreement, dated as of February 13, 1998, by and
among Continucare Corporation, Continucare Rehabilitation Services, Inc.,
Integrated Health Services, Inc., Rehab Management Systems, Inc., IntegraCare,
Inc. and J.R. Rehab Associates, Inc.*
23.1 Consent of Independent Auditors.
- -----------------------
* Previously filed
2
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: April 28, 1998 By: /s/ Charles M. Fernandez
-----------------------------------
Charles M. Fernandez
Chairman, Chief Executive Officer and
President
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ATTACHMENT AND EXHIBIT INDEX
ATTACHMENTS DESCRIPTION
- ----------- -----------
7(a) Audited combined financial statements of Rehab Management
Systems, Inc., J.R. Rehab, Inc. and Integracare, Inc. for the
years ended December 31, 1997 and December 31, 1996.
7(b) Unaudited pro forma balance sheet of the Registrant as of
December 31, 1997 and the unaudited pro forma consolidated
statements of income of the Registrant for the year ended June
30, 1997, and the six months ended December 31, 1997.
EXHIBITS DESCRIPTION
- -------- -----------
23.1 Consent of Independent Auditors
5
Attachment 7(a)
REHAB MANAGEMENT SYSTEMS, INC.,
J. R. REHAB ASSOCIATES, INC. AND THE
REHABILITATIVE DIVISION OF
INTEGRACARE, INC.
COMBINED FINANCIAL REPORT
DECEMBER 31, 1997 and 1996
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INDEPENDENT AUDITOR'S REPORT
Board of Directors
Integrated Health Services, Inc.
Owings Mills, Maryland
We have audited the accompanying combined balance sheets of Rehab Management
Systems, Inc., J. R. Rehab Associates, Inc. and the Rehabilitative Division of
IntegraCare, Inc., (all wholly-owned subsidiaries of Integrated Health Services,
Inc.) as of December 31, 1997 and 1996, and the related combined statements of
operations, stockholder's equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Companies' 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Rehab Management
Systems, Inc., J. R. Rehab Associates, Inc., and the Rehabilitative Division of
IntegraCare, Inc. as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ C.W. Amos & Company, LLC
Baltimore, Maryland
April 15, 1998
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REHAB MANAGEMENT SYSTEMS, INC., J. R. REHAB ASSOCIATES, INC.
AND THE REHABILITATIVE DIVISION OF INTEGRACARE, INC.
COMBINED BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 65,604 $ 334,167
Accounts receivable, net 5,488,824 3,909,481
Equipment lease receivable, net 24,493 --
Prepaid expenses 89,535 49,652
Deferred taxes 615,198 323,577
----------- -----------
Total current assets 6,283,654 4,616,877
----------- -----------
PROPERTY AND EQUIPMENT, NET 1,942,956 1,934,371
----------- -----------
OTHER ASSETS
Intangible assets, net 3,573,753 16,544,873
Deposits and other assets 130,749 53,857
----------- -----------
3,704,502 16,598,730
----------- -----------
$11,931,112 $23,149,978
=========== ===========
The Notes to Combined Financial Statements are an integral part
of these statements.
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1997 1996
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Current maturities of long-term debt $ 33,580 $ 91,507
Accounts payable and accrued expenses 1,209,677 1,141,761
Deferred compensation 93,694 57,176
Related party payable 15,120,425 11,757,489
------------ ------------
Total current liabilities 16,457,376 13,047,933
------------ ------------
LONG-TERM LIABILITIES
Long-term debt 27,770 61,350
Deferred compensation 142,022 235,716
Deferred taxes 523,272 185,076
------------ ------------
693,064 482,142
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY (DEFICIT)
Preferred stock 4,667 4,667
Common stock 13,959 13,959
Additional paid in capital 16,549,271 16,549,271
Accumulated deficit (21,787,225) (6,947,994)
------------ ------------
(5,219,328) 9,619,903
------------ ------------
$ 11,931,112 $ 23,149,978
============ ============
The Notes to Combined Financial Statements are an integral part
of these statements.
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REHAB MANAGEMENT SYSTEMS, INC., J. R. REHAB ASSOCIATES, INC.
AND THE REHABILITATIVE DIVISION OF INTEGRACARE, INC.
COMBINED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
1997 1996
------------ ------------
REVENUES
Revenues $ 30,031,595 $ 26,336,908
Less: contractual allowances 2,946,452 1,399,069
------------ ------------
Net revenues 27,085,143 24,937,839
------------ ------------
EXPENSES
Salaries and benefits:
Professional 16,936,310 15,984,127
General and administrative 2,660,788 2,986,728
Contract services 1,419,620 1,194,448
Medical supplies 321,736 378,136
Depreciation and amortization 1,078,796 977,911
Loss on impairment of goodwill 14,242,485 --
Bad debts 1,046,273 560,002
Other general and administrative 3,854,736 4,630,623
------------ ------------
41,560,744 26,711,975
------------ ------------
Operating loss (14,475,601) (1,774,136)
------------ ------------
OTHER INCOME (EXPENSES)
Miscellaneous income 40,837 12,711
Interest expense, net (646,770) (431,545)
Management fee income (expense) (7,244) 317,271
------------- ------------
(613,177) (101,563)
------------ ------------
Loss before taxes (15,088,778) (1,875,699)
Income tax benefit 249,547 731,066
------------ ------------
Net loss $(14,839,231) $ (1,144,633)
============ ============
The Notes to Combined Financial Statements are an integral part
of these statements.
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REHAB MANAGEMENT SYSTEMS, INC., J. R. REHAB ASSOCIATES, INC.
AND THE REHABILITATIVE DIVISION OF INTEGRACARE, INC.
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
Years Ended December 31, 1997 and 1996
Additional
Preferred Common Paid-In Accumulated
Stock Stock Capital Deficit Total
------------ ------------ ------------ ------------ ------------
BALANCE, JANUARY 1, 1996 $ 4,700 $ 13,959 $ 11,365,238 $ (5,760,643) $ 5,623,254
Redemption of Series A
preferred stock (33) -- (329,554) -- (329,587)
Purchase of RMS by
Integrated Health Services, Inc. -- -- 5,513,587 729,764 6,243,351
Purchase of J. R. Rehab by
Integrated Health Services, Inc. -- -- -- (772,482) (772,482)
Net loss -- -- -- (1,144,633) (1,144,633)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 4,667 13,959 16,549,271 (6,947,994) 9,619,903
Net loss -- -- -- (14,839,231) (14,839,231)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 $ 4,667 $ 13,959 $ 16,549,271 $(21,787,225) $ (5,219,328)
============ ============ ============ ============ ============
The Notes to Combined Financial Statements are an integral part
of these statements.
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REHAB MANAGEMENT SYSTEMS, INC., J. R. REHAB ASSOCIATES, INC.
AND THE REHABILITATIVE DIVISION OF INTEGRACARE, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 and 1996
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,839,231) $ (1,144,633)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 568,795 509,369
Amortization of intangibles 510,001 468,542
Loss on impairment of goodwill 14,242,485 --
Unpaid related party interest expense 632,467 401,835
Provision for uncollectible accounts 742,432 735,762
Deferred taxes 46,575 (292,526)
(Gain) loss on disposal of property and equipment (17,083) 6,894
(Increase) decrease in:
Accounts receivable (2,321,775) (899,194)
Prepaid expenses, deposits and other assets (116,775) 109,988
Equipment lease receivable (24,493) --
Increase (decrease) in:
Accounts payable and accrued expenses 67,916 (2,164,429)
Deferred compensation (57,176) 292,892
------------ ------------
Net cash used by operating activities (565,862) (1,975,500)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (584,786) (789,928)
Proceeds from sale of property and equipment 24,489 2,468
------------ ------------
Net cash used by investing activities (560,297) (787,460)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from parent 949,103 1,364,464
Redemption of preferred stock -- (329,587)
Repayment of long-term debt (91,507) (1,068,285)
------------ ------------
Net cash provided (used) by financing activities 857,596 (33,408)
------------ ------------
Net decrease in cash (268,563) (2,796,368)
Cash, beginning of year 334,167 3,130,535
------------ ------------
Cash, end of year $ 65,604 $ 334,167
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 14,303 $ 29,710
============ ============
Income taxes paid $ 1,500 $ 20,731
============ ============
The Notes to Combined Financial Statements are an integral part
of these statements.
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NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. THE COMPANIES AND THEIR SIGNIFICANT ACCOUNTING POLICIES
The Companies and the principles of combination:
The accompanying financial statements include Rehab Management
Systems, Inc. (RMS); J. R. Rehab Associates, Inc. (J. R. Rehab);
and the Rehabilitative Division of IntegraCare, Inc.
(IntegraCare) (collectively, the "Companies"). The Companies are
wholly-owned subsidiaries of Integrated Health Services, Inc.
(IHS), a publicly traded company. The Companies provide
rehabilitative physical and occupational therapy at hospitals and
freestanding clinics in the Southeast region of the United
States. All material intercompany balances and transactions
between the Companies have been eliminated.
On September 25, 1995, IntegraCare merged with IHS in a
transaction accounted for as a pooling of interests. There were
no transactions between IntegraCare and IHS prior to the
combination. All of the 3,458,726 outstanding shares of common
stock of IntegraCare were exchanged for 749,507 shares of IHS
common stock with a fair value of $22,485,210 at the date of
closing.
On March 19, 1996, IHS acquired all of the outstanding shares of
preferred and common stock of RMS for $10 million, consisting of
$2 million in cash and 385,542 shares of IHS's common stock with
a fair value of $8 million, at the date of closing. IHS incurred
related acquisition costs of approximately $2.9 million. The
acquisition was accounted for as a purchase and, accordingly, the
operating results of RMS have been included in the consolidated
financial statements of IHS since the date of acquisition. Net
income for the period from January 1, 1996 through March 18, 1996
as reported on RMS' unaudited interim financial statements, and
included in these combined financial statements was $62,054. The
excess of the aggregate purchase price over the fair value of net
assets acquired of $12,832,000 was being amortized over 40 years
up to December 31, 1997, when management determined that the
remaining carrying value was impaired. At December 31, 1997, the
carrying value of goodwill acquired from RMS was reduced to
$2,765,000.
On August 1, 1996, IHS acquired all of the outstanding shares of
common stock of J. R. Rehab for $2.3 million, including related
acquisition costs. The acquisition was accounted for as a
purchase and, accordingly, the operating results of J. R. Rehab
have been included in the consolidated financial statements of
IHS since the date of acquisition. Net income for the seven
months ended July 31, 1996, as reported on J. R. Rehab's
unaudited financial statements, and included in these combined
financial statements was $371,936. The excess of the aggregate
purchase price over the fair value of net assets acquired of
$3,159,000 was being amortized over 40 years up to December 31,
1997, when management determined that the remaining carrying
value was impaired. At December 31, 1997, the carrying value of
goodwill acquired from J. R. Rehab was reduced to $597,000.
-8-
13
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. THE COMPANIES AND THEIR SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
On April 7, 1997, IHS acquired the net assets of Coastal
Rehabilitation, Inc., a Florida rehabilitation center for
$1,450,000, including related acquisition costs, on the behalf of
RMS. The operating results and net assets were attributed to RMS
beginning April 1, 1997, in accordance with the provisions of the
agreement. The excess of the aggregate purchase price over the
fair value of net assets acquired of $1,764,000 was being
amortized over 40 years up to December 31, 1997, when management
determined the remaining carrying value of the goodwill was
impaired. At December 31, 1997, the carrying value of this
goodwill was written down in conjunction with the reduction of
goodwill acquired from RMS.
Significant accounting policies not disclosed elsewhere in the
financial statements are as follows:
Revenues and allowances:
Revenues are reported at the estimated net realizable
amounts from patients, third-party payors, and institutions
for services rendered, including estimated retroactive
adjustments under reimbursement agreements with third-party
payors. Retroactive adjustments are accrued on an estimated
basis in the period the related services are rendered and
adjusted in future periods as final settlements are
determined.
Depreciation:
Depreciation is provided on the straight-line method over
the estimated useful lives of the assets, which range from
three to ten years.
Advertising costs:
The Companies expense advertising costs in the periods in
which they are incurred. Advertising expenses were $161,211
and $199,750 for the years ended December 31, 1997 and 1996,
respectively.
Income taxes:
For federal income tax reporting purposes, the Companies are
included in IHS's consolidated federal corporation income
tax return.
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NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. THE COMPANIES AND THEIR SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Accounting estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues
and expenses during the reporting period.
NOTE 2. RECEIVABLES, ALLOWANCES, AND CONTRACTUAL ALLOWANCES
1997 1996
---------- ----------
Accounts receivable, gross $9,369,177 $5,389,937
Less: Allowance for doubtful accounts 1,580,280 837,848
Allowance for the difference between
charges and third-party reimbursement rates 2,300,073 642,608
---------- ----------
Accounts receivable, net $5,488,824 $3,909,481
========== ==========
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at
December 31:
Description 1997 1996
---------- ----------
Equipment $4,608,288 $4,074,378
Leasehold improvements 245,029 169,555
Computer software 44,845 40,244
Automobiles 16,268 16,268
---------- ----------
Total 4,914,430 4,300,445
Less: Accumulated depreciation 2,971,474 2,366,074
---------- ----------
$1,942,956 $1,934,371
========== ==========
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NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 4. INTANGIBLE ASSETS
Intangibles consist of the following at December 31:
Description Useful Life
----------- In Years 1997 1996
----------- ---- ----
Goodwill 40 $3,549,546 $16,747,817
Covenants not-to-compete 2 to 5 390,000 390,000
Patient lists 5 54,775 54,775
Start-up costs 2 39,882 --
Loan acquisition costs -- -- 7,983
---------- -----------
4,034,203 17,200,575
Less: Accumulated amortization 460,450 655,702
---------- -----------
$3,573,753 $16,544,873
========== ===========
NOTE 5. DEFERRED COMPENSATION
RMS has deferred compensation arrangements with two employees and a
former employee. Benefits are to be paid over the terms of the
respective agreements.
NOTE 6. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
Interest Due
Description Rate Date 1997 1996
----------- -------- ---- ---- ----
Equipment note, bank 7.00% 1997 $ -- $ 16,553
Equipment note, bank 7.00% 1998 5,087 12,003
Equipment note, bank 11.00% 1998 6,809 48,232
Equipment loan 9.00% 1998 8,946 24,014
Notes payable, individuals Prime + 1% 1998
through
2000 40,508 52,055
------- --------
$61,350 $152,857
======= ========
Maturities of long-term debt are as follows:
1998 $33,580
1999 11,389
2000 16,381
-------
$61,350
=======
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NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 6. LONG-TERM DEBT - (CONTINUED)
Interest expense on long-term debt, excluding interest expense to IHS
was $14,303 and $29,710 for the years ended December 31, 1997 and
1996, respectively.
The fair value of notes payable approximates the carrying value at
December 31, 1997 and 1996.
NOTE 7. PREFERRED AND COMMON STOCK
Stock information for the Companies as of December 31, 1997 and 1996
is as follows:
Number
of Shares
Issued and Par
Outstanding Value
----------- ---------
Preferred Stock:
RMS - Series A Redeemable Preferred
stock, 20,000 shares authorized,
$.01 par value 16,704.1168 $ 167
RMS - Series B Convertible Preferred
stock, 450,000 shares authorized,
$.01 par value 450,000 4,500
---------
$ 4,667
=========
Common Stock:
J.R. Rehab - Common Stock, 100,000
shares authorized, $1 par value 5,000 $ 5,000
IntegraCare - Common Stock, 20,000,000
shares authorized, $.001 par value 3,458,726 3,459
RMS - Common Stock, 10,000,000
shares authorized, $.01 par value 550,000 5,500
---------
$ 13,959
=========
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NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 7. PREFERRED AND COMMON STOCK - (CONTINUED)
RMS - Series A Redeemable Preferred Stock (Series A stock) provides
for a preference senior to the common stock in the event of voluntary
or involuntary liquidation of RMS, and entitles its holder to receive
cumulative dividends at 11%. Dividends in arrears shall be paid prior
to current dividends. Such dividends were not declared as of December
31, 1997 and 1996. The Series A stock may be redeemed at any time
prior to February 1, 2000 at the option of RMS. For shares remaining
outstanding on February 1, 2000, there will be a mandatory redemption
of one-third of the shares on February 1 of each of the years 2000,
2001 and 2002.
RMS - Series B Convertible Preferred Stock (Series B stock) may be
converted into common shares at the option of the holder based on a
conversion factor as defined in the preferred shareholders agreement.
The Series B stock has voting rights, a preference senior to the
common stock in the event of voluntary or involuntary liquidation of
RMS, and entitles its holder to receive cumulative dividends at 8%.
Such dividends were not declared as of December 31, 1997 and 1996.
NOTE 8. RETIREMENT AND PROFIT SHARING PLANS
The Companies sponsor two 401(k) retirement plans and a profit sharing
plan which were available for all employees of the respective
Companies who met certain eligibility requirements. These Plans were
frozen upon acquisition of the Companies by IHS. No employer or
employee contributions have been made to the plans subsequent to their
respective acquisitions by IHS.
The Companies participate in a Retirement Savings Plan managed by IHS.
Employees are eligible to enter the plan upon attaining at least 21
years of age and 6 months of service. Employees may make contributions
to the plan up to 20% of their compensation. IHS may make a
contribution to employee accounts at its discretion. Employees are
eligible for distributions upon retirement. No employer contributions
were made to the Plan for the years ended December 31, 1997 and 1996.
-13-
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NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 9. RELATED PARTY TRANSACTIONS
The Companies are related through common ownership by IHS. IHS makes
non-interest bearing advances to each of the Companies for purposes of
funding working capital. Advances to the Companies from IHS were
$949,103 and $1,364,464 during 1997 and 1996, respectively. The
Companies made no repayments to IHS. At December 31, 1997 and 1996,
related party payables to IHS were $15,120,425 and $11,757,489,
respectively.
IHS charges each of the Companies interest on acquisition indebtedness
related to their respective acquisitions. Interest expense charged by
IHS was $632,252 and $419,252 for the years ended December 31, 1997
and 1996, respectively.
The combined net revenues of the Companies included revenues from IHS
of $3,778,449 and $2,321,423 for 1997 and 1996, respectively. Accounts
receivable includes amounts due from IHS of $1,161,877 and $672,273 at
December 31, 1997 and 1996, respectively.
RMS provides administrative and management services to J. R. Rehab and
IntegraCare. The related revenue and expenses have been eliminated in
combination.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Employment agreements:
The Companies have various employment agreements with individuals
responsible for the management of their clinics which guarantee
base compensation amounts. The agreements are for varying amounts
and expire through November, 1998. These agreements automatically
renew for additional one year periods unless canceled by either
party with prior notice.
Letter of credit:
RMS is a party to a letter of credit to an individual in the
amount of $34,000, which expires in April, 1999. At December 31,
1997, there was no outstanding balance.
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NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 10. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
Leases:
The Companies lease thirty-eight facilities and certain equipment
under operating leases. Rent expense was $1,087,317 and
$1,599,417 for the years ended December 31, 1997 and 1996,
respectively. Future minimum payments under operating leases are
as follows:
1998 $ 1,267,402
1999 981,855
2000 670,499
2001 385,305
2002 270,062
Thereafter 969,379
-----------
$ 4,544,502
===========
Litigation:
There are several lawsuits pending in which the Companies have
been named as defendants on allegations of malpractice. Attorneys
for insurance companies are representing the Companies. Awards
under these claims are considered remote by the Companies' legal
counsel and are substantially covered by insurance.
NOTE 11. CONCENTRATIONS OF CREDIT RISK
The Companies grant credit without collateral to their institutional
customers and patients, most of whom are local residents and are
insured under third-party payor agreements. The mix of receivables at
December 31, is as follows:
1997 1996
---- ----
Hospitals/Clinics 41% 53%
Medicare 7 6
Workers compensation 9 13
HMO's and PPO's 7 4
Commercial insurance and
other third-party payors 30 17
Self-pay patients 6 7
--------- -------
100% 100%
========= =======
RMS has funds on deposit in a financial institution in excess of
amounts insured by the Federal Deposit Insurance Corporation.
-15-
20
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 12. INCOME TAXES
The components of the Companies' deferred tax assets and liabilities
at December 31 are as follows:
1997 1996
---- ----
Deferred tax assets:
Accounts receivable allowances
for bad debts $615,198 $323,577
-------- --------
Deferred tax liabilities:
Property and equipment, due to
differences in depreciation 138,860 56,358
Intangible assets 384,412 128,718
-------- --------
Total deferred tax liabilities 523,272 185,076
-------- --------
Net deferred tax assets $ 91,926 $138,501
======== ========
The deferred tax assets and liabilities reflected on the Companies'
combined balance sheets at December 31 as follows:
1997 1996
---- ----
Current deferred tax assets $ 615,198 $ 323,577
Non-current deferred tax liabilities (523,272) (185,076)
--------- ---------
Net deferred tax assets $ 91,926 $ 138,501
========= =========
Management of the Companies has determined, based on the Companies'
consistent history of earnings and their expected income, that income
will more likely than not be sufficient to fully utilize these
deferred tax assets related to future deductible items.
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NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 12. INCOME TAXES - (CONTINUED)
Income tax benefit attributable to the combined taxable loss was
$249,547 and $731,066 for the years ended December 31, 1997 and 1996,
respectively, and differed from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to the pre-tax accounting
loss as a result of the following:
1997 1996
---- ----
Computed "expected" tax benefit $(5,130,185) $ (637,738)
Permanent differences 15,910 19,344
Temporary differences related to:
Loss on impairment of goodwill 4,842,445 --
Amortization of intangebles (246,852) (128,599)
Depreciation (12,451) (16,095)
Allowance for bad debts 256,735 250,159
Other (33,899) 40,181
Deferred tax effect 46,575 (292,526)
State and local income taxes, net of federal
income tax benefit 12,174 34,029
----------- -----------
Income tax benefit $ (249,547) $ 731,066
=========== ===========
The components of the Companies' income tax benefit as of December 31,
are as follows:
1997 1996
---- ----
Current $(296,122) $(438,540)
Deferred 46,575 (292,526)
--------- ---------
Income tax benefit, net $(249,547) $(731,066)
========= =========
-17-
22
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 13. SUBSEQUENT EVENT
On February 13, 1998, all of the stock of RMS, J. R. Rehab and
IntegraCare and was acquired by Continucare Rehabilitation Services,
Inc. (Continucare) for $10,000,000. In conjunction with the
transaction, Continucare will not assume any of the related party
payables. In addition, Continucare will not assume any Medicare and
Medicaid cost report adjustments for services rendered by IntegraCare
on or before December 31, 1996.
The loss on impairment of goodwill included in the combined statements
of operations was estimated by management based upon the sales price
of the stock of the Companies to Continucare.
-18-
23
Attachment 7(b)
INTRODUCTION TO
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
GENERAL
The following unaudited pro forma consolidated balance sheet as of December 31,
1997, and the unaudited proforma consolidated statements of income for the year
ended June 30, 1997, and the six months ended December 31, 1997, include the
Company's historical financial position and results of operations, adjusted to
reflect the acquisition described below as if such event had occurred as of
December 31, 1997, in the case of the consolidated balance sheet, and as of July
1, 1996, in the case of the consolidated statements 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.
ACQUISITION
On February 13, 1998, the Company acquired the stock from Integrated Health
Services, Inc. of Rehab Management Systems, Inc., Integracare, Inc., and J.R.
Rehab Associates, Inc., hereinafter referred to in the aggregate as "RMS", for
an aggregate purchase price of approximately $10.5 million of cash. $9,940,000
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")
and $560,000 was funded from the registrant's working capital.
This acquisition generated approximately $ 4.2 million of goodwill, which will
be amortized over 20 years.
24
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
HISTORICAL
---------------------------------
ACQUIRED BUSINESS
CONTINUCARE ----------------- ACQUISITION PRO
CORPORATION R M S ADJUSTMENTS FORMA
----------- ------------ ------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $36,421,623 $ 65,604 $(10,500,000) (1) $25,987,227
Accounts receivable, net 5,327,812 5,488,824 10,816,636
Prepaid expenses and other assets 2,444,009 114,028 2,558,037
----------- ------------ ------------ -----------
Total current assets 44,193,444 5,668,456 (10,500,000) 39,361,900
Other receivables 3,400,000 3,400,000
Property and equipment, net 2,716,280 1,942,956 4,659,236
Goodwill, net 14,336,254 3,573,753 598,903 (2) 18,508,910
Other intangible assets, net 7,950,073 7,950,073
Other assets, net 3,266,938 130,749 3,397,687
Deferred tax asset, net 505,699 615,198 1,120,897
----------- ------------ ------------ -----------
Total assets $76,368,688 $ 11,931,112 $ (9,901,097) 78,398,703
=========== ============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,646,887 $ 1,209,677 $ 2,856,564
Accrued expenses 2,068,391 93,694 2,162,085
Accrued interest payable 566,251 566,251
Current portion of capital lease obligation 46,223 46,223
Current portion of notes payable 272,699 33,580 306,279
Income and other taxes payable -- 523,272 523,272
----------- ------------ ------------ -----------
Total current liabilities 4,600,451 1,860,223 -- 6,460,674
Notes payable 46,000,000 15,120,425 (15,120,425) (3) 46,000,000
Long term debt 702,441 169,792 872,233
----------- ------------ ------------ -----------
Total liabilities 51,302,892 17,150,440 (15,120,425) 53,332,907
----------- ------------ ------------ -----------
Commitments and contingencies
Shareholders' equity
Common stock 1,348 18,626 (18,626) (4) 1,348
Additional paid in capital 27,891,625 16,549,271 (16,549,271) (4) 27,891,625
Retained earnings (542,847) (21,787,225) 21,787,225 (4) (542,847)
Treasury stock (2,284,330) (2,284,330)
----------- ------------ ------------ -----------
Total shareholders' equity 25,065,796 (5,219,328) 5,219,328 25,065,796
----------- ------------ ------------ -----------
Total liabilities and shareholders' equity $76,368,688 $ 11,931,112 $ (9,901,097) $78,398,703
=========== ============ ============ ===========
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
DECEMBER 31, 1997
The acquisition adjustments reflected on the unaudited proforma consolidated
balance sheet are as follows:
1) Amount represents the cash paid for the purchase of "RMS".
2) The aggregate purchase price has been allocated, on a preliminary
basis. 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
estimated annual amortization. The amount represents the net difference
between the goodwill generated through and the write off of goodwill
from the acquired business of $3,573,753. Such amount is reconciled as
follows.
Total Purchase Price $10,500,000
Adjusted Equity 6,327,344
-----------
Goodwill - New 4,172,656
Goodwill - Old 3,573,753
-----------
598,903
===========
Goodwill will be amortized over 20 years.
3) Represents the elimination of RMS intercompany payable to Integrated
Health Services, Inc.
4) Represents the elimination of shareholders' equity.
26
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
TWELVE MONTHS ENDED JUNE 30, 1997
HISTORICAL
-----------------------------------
ACQUIRED BUSINESS
CONTINUCARE ----------------- ACQUISITION PRO
CORPORATION R M S ADJUSTMENTS FORMA
----------- ------------ ------------ -----------
Revenues:
Net patient service revenues 1,041,793 27,085,143 28,126,936
Management fees 12,874,592 12,874,592
----------- ------------ ------------ -----------
Total revenues 13,916,385 27,085,143 -- 41,001,528
----------- ------------ ------------ -----------
Expenses:
Physician, hospital and other -- 18,677,666 18,677,666
Payroll and employee benefits 6,348,195 2,660,788 9,008,983
Provision for bad debt 1,818,293 1,046,273 2,864,566
Professional fees 1,450,790 1,450,790
General and administrative 1,176,516 3,854,736 5,031,252
Depreciation and amortization 208,936 1,078,796 (485,506) (1) 802,226
Loss on impairment of goodwill 14,242,485 (14,242,485) (2) --
----------- ------------ ------------ -----------
Total expenses 11,002,730 41,560,744 (14,727,991) 37,835,483
----------- ------------ ------------ -----------
Income from operations 2,913,655 (14,475,601) 14,727,991 3,166,045
----------- ------------ ------------ -----------
Other income (expense)
Interest income, net 165,253 (646,770) (148,430) (3) (629,947)
Minority interest (162,235) (162,235)
Other income -- 33,593 33,593
Loss on purchase of minority interest (9,081) (9,081)
----------- ------------ ------------ -----------
Total other income (expense) (6,063) (613,177) (148,430) (767,670)
----------- ------------ ------------ -----------
Income (loss) before income taxes 2,907,592 (15,088,778) 14,579,561 2,398,375
Provision for income taxes 1,200,917 249,547 1,042,803
----------- ------------ ------------ -----------
Net income (loss) $ 1,706,675 $(14,839,231) $ 14,579,561 $ 1,355,572
=========== ============ ============ ===========
Weighted average shares of common
stock outstanding 11,162,761 11,162,761
=========== ===========
Earnings (loss) per common share of common
stock outstanding $ 0.15 $ 0.12
=========== ===========
Weighted average shares of common
stock outstanding 11,116,555 11,116,555
=========== ===========
Earnings (loss) per common share and common
equivalent share assuming full dilution $ 0.15 $ 0.12
=========== ===========
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 YEAR ENDED JUNE 30, 1997
The acquisition adjustments reflected on the unaudited proforma
consolidated statement of income are as follows:
1) Represents the elimination of the historical amortization of
goodwill and intangible assets and implementation of purchaser
amortization of goodwill as follows:
Historical amortization of goodwill and
intangible assets $(694,139)
Prospective amortization of goodwill 208,633
---------
Net (485,506)
2) Represents the elimination of a one time non-recurring
historical write down for the impairment of Goodwill.
3) Represents the elimination of interest expense of RMS and
inclusion of interest expense of the purchaser due to the use
of acquisitions funds as follows: $ 795,200
28
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED DECEMBER 31, 1997
HISTORICAL
-----------------------------------
ACQUIRED BUSINESS
CONTINUCARE ----------------- ACQUISITION PRO
CORPORATION R M S ADJUSTMENTS FORMA
----------- ----------- ----------- -----------
Revenues:
Net patient service revenues $ 9,614,132 13,542,572 23,156,704
Management fees 1,727,371 1,727,371
----------- ----------- ----------- -----------
Total revenues 11,341,503 13,542,572 -- 24,884,075
----------- ----------- ----------- -----------
Expenses:
Physician, hospital and other 4,093,924 9,338,833 13,432,757
Payroll and employee benefits 4,342,553 1,330,394 5,672,947
Provision for bad debt 2,514,563 523,137 3,037,700
Professional fees 532,239 532,239
General and administrative 3,188,717 1,927,368 5,116,085
Depreciation and amortization 683,318 539,398 (287,122) (1) 935,594
Loss on Impairment of Goodwill 7,121,243 (7,121,243) (2) --
----------- ----------- ----------- -----------
Total expenses 15,355,314 20,780,372 (7,408,365) 28,727,321
----------- ----------- ----------- -----------
Income from operations (4,013,811) (7,237,801) 7,408,365 (3,843,247)
----------- ----------- ----------- -----------
Other income (expense)
Interest income, net (448,644) (323,385) (74,215) (3) (846,244)
Minority interest --
Other income -- 16,797 16,797
Loss on purchase of minority interest --
----------- ----------- ----------- -----------
Total other income (expense) (448,644) (306,589) (74,215) (829,448)
----------- ----------- ----------- -----------
Income (loss) before income taxes (4,462,455) (7,544,389) 7,334,150 (4,672,694)
Provision for income taxes (1,568,324) 124,774 (1,605,550)
----------- ----------- ----------- -----------
Net income (loss) $(2,894,131) $(7,419,616) $ 7,334,150 $(3,067,144)
=========== =========== =========== ===========
Weighted average shares of common
stock outstanding 11,405,638 11,405,638
=========== ===========
Earnings (loss) per common share of common
stock outstanding $ (0.25) $ (0.27)
=========== ===========
Weighted average shares of common
stock outstanding 11,405,638 11,405,638
=========== ===========
Earnings (loss) per common share and common
equivalent share assuming full dilution $ (0.25) $ (0.27)
=========== ===========
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 SIX MONTHS ENDED DECEMBER 31, 1997
The acquisition adjustments reflected on the unaudited proforma
consolidated statement of income are as follows:
1) Represents the elimination of the historical amortization of
goodwill and intangible assets and the implementation of
purchaser amortization of goodwill as follows:
Historical amortization of goodwill and
intangible assets $(391,439)
Prospective amortization of goodwill 104,317
---------
Net (287,122)
2) Represents the elimination of a one time non-recurring
historical write down for the impairment of Goodwill.
3) Represents the elimination of interest expense of RMS and
inclusion of interest expense of the purchaser due to the use
of acquisitions funds as follows: $ 397,600