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): APRIL 14, 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 April 14, 1998, Continucare Corporation, a Florida corporation (the
"Registrant"), through a wholly-owned subsidiary, CNU Acquisition Corp.,
acquired substantially all of the assets of SPI Managed Care, Inc., SPI Managed
Care of Hillsborough County, Inc., SPI Managed Care of Broward, Inc., Broward
Managed Care, Inc., each a Florida corporation (collectively, the "Companies")
which are direct or indirect subsidiaries of First Medical Corporation and First
Medical Group, Inc., each a Delaware corporation. The Companies are engaged in
the business of providing administrative and health care services. The aggregate
purchase was $6.75 million. The source of the consideration paid by the
Registrant was 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
The audited combined statements of SPI Managed Care, Inc., SPI Managed
Care of Broward, Inc., SPI Managed Care of Hillsborough County, Inc. and Broward
Managed Care, Inc. for the year ended December 31, 1997 are attached as Exhibit
7(a) and are incorporated herein by reference.
(b) PRO FORMA FINANCIAL INFORMATION
The 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 are attached as
Exhibit 7(b) and are incorporated herein by reference.
(c) EXHIBITS
2.1 Asset Purchase Agreement, dated as of April 7, 1998, by and
among (i) SPI Managed Care, Inc., SPI Managed Care of
Hillsborough County, Inc., SPI Managed Care of Broward, Inc.,
Broward Managed Care, Inc., each a Florida corporation (ii)
First Medical Corporation, a Delaware corporation and First
Medical Group, Inc., a Delaware corporation and (iii) CNU
Acquisition Corporation, a Florida corporation.*
23.1 Consent of Independent Auditors
- ----------------------
*Previously filed.
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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: May 11, 1998 By: /s/ Charles M. Fernandez
----------------------------
Charles M. Fernandez
Chairman, Chief Executive Officer and
President
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4
ATTACHMENT AND EXHIBIT
----------------------
ATTACHMENT DESCRIPTION
---------- -----------
7(a) The audited combined statements of SPI Managed Care, Inc., SPI
Managed Care of Broward, Inc., SPI Managed Care of
Hillsborough County, Inc. and Broward Managed Care, Inc. for
the year ended December 31, 1997 are attached as Exhibit 7(a)
and are incorporated herein by reference.
7(b) The 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 are attached as Exhibit
7(b) and are incorporated herein by reference.
EXHIBIT DESCRIPTION
------- -----------
23.1 Consent of Independent Auditors
5
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
Combined Financial Statements
Year Ended December 31, 1997
6
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
CONTENTS
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PAGE
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
Combined balance sheet 4
Combined statement of operations 6
Combined statement of capital deficit 7
Combined statement of cash flows 8
Summary of accounting policies 9
Notes to combined financial statements 16
2
7
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
SPI Managed Care, Inc., SPI Managed Care of Broward, Inc.,
SPI Managed Care of Hillsborough County, Inc., and Broward Managed Care, Inc.
Miami, FL
We have audited the accompanying combined balance sheet of SPI Managed Care,
Inc., SPI Managed Care of Broward, Inc., SPI Managed Care of Hillsborough
County, Inc., and Broward Managed Care, Inc., as of December 31, 1997, and the
related combined statements of operations, capital deficit and cash flows for
the year 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 audit.
We conducted our audit 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 statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such combined financial statements referred to above present
fairly, in all material respects, the combined financial position of SPI Managed
Care, Inc., SPI Managed Care of Broward, Inc., SPI Managed Care of Hillsborough
County, Inc., and Broward Managed Care, Inc. as of December 31, 1997, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Miami, Florida /s/ BDO Seidman, LLP
April 29, 1998
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8
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
COMBINED BALANCE SHEET
================================================================================
DECEMBER 31, 1997
- ------------ ----------
ASSETS
CURRENT:
Humana IBNR receivable and claims reserve funds (Note 4) $5,857,727
----------
Total current assets 5,857,727
PROPERTY AND EQUIPMENT, net (Note 1) 217,172
GOODWILL 1,784,074
OTHER ASSETS 13,043
----------
$7,872,016
==========
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9
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
COMBINED BALANCE SHEET
================================================================================
DECEMBER 31, 1997
-----------
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Checks issued against future deposits $ 293,349
Accounts payable 377,403
Due to former owners of Broward Managed Care, Inc. 1,500,000
Due to parent, net 347,792
Accrued medical claims, including amounts incurred but not reported 5,642,037
Accrued expenses 711,558
-----------
Total current liabilities 8,872,139
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COMMITMENTS AND CONTINGENCIES (Notes 3, 5, 6 and 9)
CAPITAL DEFICIT: (NOTE 2)
Paid-in capital 285,584
Deficit (1,285,707)
-----------
Total capital deficit (1,000,123)
-----------
$ 7,872,016
===========
See accompanying summary of accounting policies
and notes to combined financial statements.
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10
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
COMBINED STATEMENT OF OPERATIONS
================================================================================
YEAR ENDED DECEMBER 31, 1997
------------
REVENUES:
Capitated revenue - Humana (Note 4) $ 49,304,054
Other revenue 891,185
------------
Total revenue 50,195,239
Medical expenses 41,018,490
------------
Gross profit 9,176,749
OPERATING EXPENSES:
Salaries and related benefits (Note 5) 5,393,280
General and administrative 5,331,092
Depreciation and amortization 87,422
------------
Total operating expenses 10,811,794
------------
NET LOSS (1,635,045)
============
See accompanying summary of accounting policies
and notes to combined financial statements.
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11
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
COMBINED STATEMENT OF CAPITAL DEFICIT
================================================================================
RETAINED TOTAL
PAID-IN EARNINGS/ CAPITAL
YEAR ENDED DECEMBER 31, CAPITAL (DEFICIT) DEFICIT
----------- ----------- -----------
Balance, December 31, 1996 $ 285,584 $ 349,338 $ 634,922
Net loss -- (1,635,045) (1,635,045)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $ 285,584 $(1,285,707) $(1,000,123)
=========== =========== ===========
See accompanying summary of accounting policies
and notes to combined financial statements.
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12
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
COMBINED STATEMENT OF CASH FLOWS
================================================================================
YEAR ENDED DECEMBER 31, 1997
-----------
OPERATING ACTIVITIES:
Net loss $(1,635,045)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 87,422
Change in assets and liabilities:
Decrease in Humana IBNR receivable and claims reserve funds 1,490,951
Increase in other assets (24,115)
Increase in accounts payable, checks issued against future deposits 160,328
and accrued expenses
Increase in due to parent, net 408,664
Decrease in accrued medical claims, including amounts incurred
but not reported (428,469)
-----------
Net cash provided by operating activities 59,736
-----------
INVESTING ACTIVITIES:
Capital expenditures (143,596)
-----------
Net cash used in investing activities (143,596)
-----------
Decrease in cash (83,860)
Cash, beginning of year 83,860
-----------
Cash, end of year $ --
===========
SUPPLEMENTAL DISCLOSURE CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ --
Income taxes --
Non-cash transactions:
Additional purchase price of Broward Managed Care, Inc. due to earnout provisions 1,500,000
===========
See accompanying summary of accounting policies
and notes to combined financial statements.
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SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
NATURE OF ORGANIZATION SPI Managed Care, Inc., ("SPI"), incorporated
on February 19, 1988, SPI Managed Care of
Broward, Inc. ("SPI Broward"), incorporated on
July 15, 1992, SPI Managed Care of
Hillsborough County, Inc. ("SPI
Hillsborough"), incorporated on April 20,
1993, and Broward Managed Care, Inc. ("BMC"),
incorporated on January 21, 1994, collectively
(the "Companies"), are providers of physician
practice management services including the
operation of clinical facilities and
management services to medical service groups.
The Companies are wholly-owned subsidiaries of
First Medical Corporation. A wholly-owned
subsidiary of First Medical Group, Inc.
The Companies function in two capacities as a
management services organization: (i) owning
and operating primary care centers which have
full risk contracts for primary care and Part
B services and partial risk (50%) for Part A
services, and (ii) managing multi-speciality
groups with fee-for-service and full risk
contracts for primary care and Part B services
and partial risk (50%) for Part A services.
Full risk contracts are contracts with managed
care companies where the Companies assume
essentially all responsibility for a managed
care member's medical costs and partial risk
contracts are contracts where the Companies
assume partial responsibility for a managed
care member's medical costs.
SPI, SPI Hillsborough, and BMC provide health
care services subject to affiliated provider
agreements entered into with Humana Medical
Plan, Inc.; Humana Health Plan of Florida,
Inc.; and Humana Health Insurance Company of
Florida, Inc. and their affiliates. All of the
Humana entities will collectively be known as
"Humana." The Company is dependent on Humana
for the majority of its operations. For the
year ended December 31, 1997, approximately 98
percent of the Companies' revenue is from such
agreements with Humana.
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SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
SPI operates two centers in Dade County,
Florida located in Kendall and Cutler Ridge.
SPI Hillsborough operates five centers in the
west coast of Florida located in Plant City,
New Port Richey, Lutz, South Dale Mabry and
Springhill.
BMC operates two centers in Broward County,
Florida located in Plantation and Sunrise.
Health services are provided to Humana members
through the centers and their networks of
physicians and health care specialists.
Services to be provided by the centers include
medical and surgical services, including all
procedures furnished in a physician's office
such as X-rays, nursing services, blood work
and other incidental, drugs and medical
supplies. The centers are responsible for
providing all such services and for directing
and authorizing all other care for Humana
members. The centers are financially
responsible for all out-of-area care rendered
to a member and provide direct care as soon as
the member is able to return to the designated
medical center.
Humana has agreed to pay the centers monthly
for services provided to members based on a
predetermined amount per member ("capitation")
comprised of in-hospital services and other
services defined by contract ("Part A"),
in-office ("Primary") and other medical
services defined by the agreements ("Part B").
SPI Broward manages the full risk managed care
segment of a nonaffiliated multi-specialty
group practice in Broward County, Florida.
BASIS OF PRESENTATION In January 1996, First Medical Corporation
acquired BMC for approximately $129,000 in
cash. Goodwill in the amount of $327,778 was
recorded in connection with the purchase.
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15
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
Additionally, pursuant to earn out provisions
in the purchase agreement, First Medical
Corporation recorded $1,500,000 due to the
former owner of BMC in December 1997,
resulting in additional goodwill in the same
amount. There are no further earn out
provisions.
Concurrent with the sale discussed in Note 9,
the ultimate parent will assume the payable in
the amount of $1,500,000.
Accounting practice prescribed by the
Securities and Exchange Commission ("SEC")
requires "push-down" accounting to revalue the
Company's assets at the time of its
acquisition.
The financial statements presented reflect the
push-down accounting of First Medical
Corporation's acquiring BMC through the
transaction described above. This accounting
includes the push-down of goodwill of
$1,827,778 and payables in the amount of
$1,500,000.
The balance of goodwill attributed to the
effect of push-down accounting:
DECEMBER 31, 1997
---------------------------------------------
Goodwill $1,827,778
Less accumulated amortization 43,704
---------------------------------------------
$1,784,074
=============================================
Goodwill is being amortized over 15 years.
The Company continually reevaluates the
propriety of the carrying amount of goodwill
and other intangible assets as well as the
amortization period to determine whether
current events and circumstances warrant
adjustments to the carrying value and
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16
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
estimates of useful lives. As of December 31,
1997, the Company believed that no significant
impairment of goodwill (noted above) have
occurred and that no reduction of the
amortization periods is warranted.
PRINCIPLES OF The combined financial statements include the
COMBINATION accounts of SPI, SPI Broward, SPI Hillsborough
and BMC after elimination of intercompany
accounts and transactions.
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. Actual results could differ from the
estimates.
HUMANA IBNR Humana withholds certain amounts each month
RECEIVABLE AND from the centers' Part A, Part B, and
CLAIMS RESERVE FUNDS supplemental funding in order to cover claims
incurred but not reported or paid. The amount
is used by Humana to pay the centers' Part A,
Part B and supplemental costs. The amounts
withheld by Humana to cover incurred but not
reported or paid claims vary by center based
on the claims history of the respective center
and is determined solely by Humana.
Humana also withholds a certain amount each
month from the centers' Part A capitation
funding. This amount represents a
"catastrophic reserve fund" to be utilized for
the payment of a center's Part A costs in the
event a center ceases operations and the
incurred but not reported reserves are not
adequate to reimburse providers for Part A
services rendered. This amount is calculated
monthly by Humana.
The withholdings are used to pay the centers'
medical claims, which Humana pays on the
centers' behalf. The remaining amount after
claims have been paid is remitted to the
company.
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17
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
PROPERTY AND EQUIPMENT Property and equipment are stated at cost.
Depreciation is calculated on the
straight-line method over the estimated useful
lives, generally 5 to 7 years. Amortization of
leasehold improvements is provided over the
life of each respective lease.
INCOME TAXES The Companies account for income taxes in
accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for
Income Taxes" which requires recognition of
estimated income taxes payable or refundable
on income tax returns for the current year and
for the estimated future tax effect
attributable to temporary differences and
carryforwards. Measurement of deferred income
tax is based on enacted tax laws including tax
rates, with the measurement of deferred income
tax assets being reduced by available tax
benefits not expected to be realized.
The Companies have a net loss for 1997, which
was not able to be used by the ultimate parent
since it also has reported net losses. A
valuation allowance has been set up for
approximately $482,000 related to the deferred
tax asset arising from approximately
$1,300,000 in net operating loss
carryforwards, which expires in years through
2017.
REVENUE AND Revenue from Humana for primary care, Part A,
MEDICAL COST Part B and supplemental funds is recognized
RECOGNITION monthly on the basis of the number of Humana
members assigned to the primary care centers
and the contractually agreed-upon rates. The
primary care centers receive monthly payments
from Humana after all expenses paid by Humana
on behalf of the centers, estimated claims
incurred but not reported and claims reserve
fund balances have been determined. In
addition to Humana payments, the primary care
centers receive copayments from commercial
members from each office visit, depending upon
the specific plan and options selected, and
receive payments from non-Humana members on a
fee-for-service basis.
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18
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
Medical services are recorded as expenses in
the period in which they are incurred. Accrued
medical claims are reflected in the combined
balance sheet and are based upon costs
incurred for services rendered prior to and up
to December 31, 1997. Included are services
incurred but not reported as of December 31,
1997, based upon actual costs reported
subsequent to December 31, 1997 and a
reasonable estimate of additional costs.
Fee-for-service revenue is reported at the
estimated net realizable amounts from patients
and third-party payors as services are
rendered.
FAIR VALUE OF The carrying amount of financial instruments
FINANCIAL including Humana IBNR receivable and claims
INSTRUMENTS reserve funds, accounts payable,
accrued expenses, accrued medical claims and
due to parent approximate fair value at
December 31, 1997 because of the short term
maturity of these instruments.
STOP-LOSS FUNDING The primary care centers are charged a
stop-loss funding fee by Humana for the
purpose of limiting a center's exposure to
Part A costs and certain Part B costs
associated with a member's health services.
For the year ended December 31, 1997, the
stop-loss threshold for both Part A and Part B
costs for Medicare members was $40,000 per
member per calendar year for both SPI, SPI
Hillsborough and BMC. For commercial members,
the stop-loss threshold for both Part A and
Part B costs were $20,000 and $15,000 for SPI
and SPI Hillsborough, respectively.
Since the SPI, SPI Hillsborough and BMC
centers are not responsible for claims in
excess of the threshold, income and the
corresponding expense, both equal to the
stop-loss funding are recognized by SPI, SPI
Hillsborough and BMC. These amounts are
included in revenue and medical expenses,
respectively, in the accompanying combined
statement of operations. Stop-loss
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19
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
funding for the SPI, SPI Hillsborough and BMC
centers for the year ended December 31, 1997
was approximately $5,100,000.
MATERNITY FUNDING The primary care centers are charged a
maternity funding fee on commercial membership
for the purpose of limiting the center's
exposure to Part A and Part B costs associated
with a commercial member's pregnancy or
related illness. Since the SPI and SPI
Hillsborough centers are not responsible for
claims in excess of the amount contributed to
the maternity fund, income and expenses both
equal to the maternity fund are recognized by
SPI and SPI Hillsborough and are included in
revenue and medical expenses, respectively in
the accompany combined statement of
operations. Maternity funding for the SPI and
SPI Hillsborough centers for the year ended
December 31, 1997 was approximately $966,000.
SELLING, GENERAL AND In accordance with Staff Accounting Bulletin
ADMINISTRATIVE EXPENSES No 55, "Allocation of Expenses and Related
Disclosure in Financial Statements of
Subsidiaries, Divisions or Lesser Business
Components of Another Entity" ("SAB 55")
certain expenses incurred by First Medical
Corporation on the Companies' behalf have been
allocated to the Companies. Such allocated
expenses include corporate overhead and other
selling, general and administrative expenses,
such as, salaries, rent and utilities. These
expenses are allocated to the Companies using
the proportional cost allocation method based
on the Companies' operating expenses as a
percentage of total operating expenses, which
the Companies' management believes is
reasonable. For the year ended December 31,
1997, approximately $1,198,000 was allocated
from First Medical Corporation to the
Companies.
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SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
1. PROPERTY AND EQUIPMENT, Property and equipment at December 31, 1997
NET consists of the following:
Medical, computer and
office equipment $ 316,673
Leasehold improvements 117,973
Furniture and fixtures 15,950
----------------------------------------------
450,596
Less: accumulated depreciation (233,424)
----------------------------------------------
Property and equipment $ 217,172
----------------------------------------------
2. COMMON STOCK AND Common stock and paid-in-capital at
PAID-IN-CAPITAL December 31, 1997 consist of the following:
----------------------------------------------
SPI Managed Care Inc.
Common stock, $1.00 par value,
shares authorized 500;
issued and outstanding 0 --
Paid-in capital 1,000
----------------------------------------------
SPI Managed Care of Broward, Inc.
Common stock, $.01 par value,
shares authorized 1,000;
issued and outstanding 0 --
Paid-in capital 5
----------------------------------------------
SPI Managed Care of Hillsborough County, Inc.
Common stock, $.01 par value,
shares authorized 1,000; issued
and outstanding 0 --
Paid-in capital 500
----------------------------------------------
Broward Managed Care, Inc.
Common stock, $.01 par value,
shares authorized 1,000;
issued and outstanding 0 --
Paid-in capital 284,079
----------------------------------------------
285,584
==============================================
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21
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
The Companies were sold to First Medical
Corporation and are all legal entities owned
by First Medical Corporation, as of December
31, 1997. However, the Companies never issued
any of its common stock to First Medical
Corporation.
3. LEASES The Company has several noncancelable
operating leases primarily for office space
and equipment that expire throughout 2001.
Future minimum lease payments required under
noncancelable operating leases at December 31,
1997 are as follows:
YEAR ENDING DECEMBER 31,
----------------------------------------------
1998 $ 72,111
1999 69,050
2000 40,737
2001 28,848
----------------------------------------------
Total minimum lease payments $ 210,746
----------------------------------------------
Rental expense during 1997 amounted to
approximately $76,000.
The Companies also rent medical facilities and
equipment through their affiliated provider
agreements with Humana. The total non-lease
rental expense relating to these facilities
and equipment use is approximately $1,000,000
for the year ended December 31, 1997.
4. BUSINESS AND CREDIT The Company derives the majority of its
CONCENTRATIONS revenue from its affiliated provider
agreements with Humana 98% or approximately
$49,300,000 of the revenue of the Company for
the year ended December 31, 1997 was derived
from such agreements with Humana. The amount
of revenue is based on the number of members
assigned to each of the centers. Humana
members include 8,359 Medicare members and
9,065 commercial members at December 31, 1997.
The fluctuation of the number of members
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22
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
significantly affects the Company's business.
The receivable from Humana at December 31,
1997 is $5,857,727.
5. RETIREMENT PLANS The Companies sponsor a 401(k) plan (the
"Plan") for its domestic operations. Employees
who have worked a minimum of six months or
1000 hours and are at least 21 years of age
may participate in the Plan. Employees may
contribute to the Plan up to 14 percent of
their annual salary, not to exceed $9,500 in
1996. The Company's matching contribution is
25 cents for each dollar of the employee's
elected contribution, up to four percent of
the employee's annual salary. The Company's
matching contribution was approximately
$22,000 for the year ended December 31, 1997.
6. COMMITMENTS AND GOVERNMENTAL REGULATIONS
CONTINGENCIES
The Company's operations have been and may 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 actions may have on the
Company.
PHYSICIAN CONTRACTS
The Company has entered into employment
agreements of two or three years with its
primary care physicians and into contracts
with various independent physicians to provide
specialty and other referral services both on
a prepaid and a negotiated fee-for-service
basis. Such costs are included in the combined
statement of operations as medical expense.
MALPRACTICE AND PROFESSIONAL LIABILITY
INSURANCE
The Company maintains professional liability
insurance on a claims-made basis including
retrospective coverage for acts occurring
since inception of its operations. Incidents
and claims reported during the policy period
are anticipated to be covered by the
malpractice carrier. The Company intends to
keep such
18
23
SPI MANAGED CARE, INC.,
SPI MANAGED CARE OF BROWARD, INC.,
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.,
AND BROWARD MANAGED CARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
insurance in force throughout the foreseeable
future. At December 31, 1997, there are no
asserted claims made against the Company that
were not covered by the policy.
Physicians providing medical services to
members are provided malpractice insurance
coverage (claim-made basis), including
retrospective coverage for acts occurring
since their affiliation with the Company.
7. RELATED PARTY At December 31, 1997, First Medical
TRANSACTIONS Corporation is obligated to a certain
stockholder and former employee for the
following:
Obligation under non compete agreement
with a former employee and stockholder
payable in monthly installments of
$8,333 until June 1998. $50,000
SPI Managed Care, Inc. is contingently liable
for this amount in the event of
non-performance by First Medical Corporation.
8. SUBSEQUENT EVENTS First Medical Group, Inc. entered into an
agreement on April 8, 1998 for the sale of
medical facilities located in Florida,
comprising the business of the Companies. The
facilities are being sold to a publicly held
company for a total consideration of
$6,750,000. The agreement was closed on April
14, 1998.
19
24
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 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 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.
ACQUISITIONS
On April 14, 1998, the Company acquired substantially all of the assets of SPI
Managed Care, Inc., SPI Managed Care of Hillsborough County, Inc., SPI Managed
Care of Broward, Inc., Broward Managed Care, Inc., each a Florida Corporation
(collectively, the "Companies") which are direct or indirect subsidiaries of
First Medical Corporation and First Medical Group, Inc., each a Delaware
corporation. The Companies are engaged in the business of providing
administrative and health care services. The aggregate purchase was
$6.75 million. The source of the consideration paid by the Registrant was from
a portion of the net proceeds from the sale of 8% Convertible Subordinated
Notes due 2002, sold on October 30, 1997.
This acquisition generated approximately $ 6.5 million of goodwill, which will
be amortized over 20 years.
25
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
HISTORICAL
----------------------------
ACQUIRED BUSINESS
CONTINUCARE ----------------- ACQUISITION PRO
CORPORATION SPI ADJUSTMENTS FORMA
ASSETS
Current assets:
Cash and cash equivalents $ 36,421,623 $ -- $ (6,750,000)(1) $ 29,671,623
Accounts receivable, net 5,327,812 5,857,727 (5,857,727)(5) 5,327,812
Prepaid expenses and other assets 2,444,009 2,444,009
------------ ------------ ------------ ------------
Total current assets 44,193,444 5,857,727 (12,607,727) 37,443,444
Other receivables 3,400,000 3,400,000
Property and equipment, net 2,716,280 217,172 2,933,452
Goodwill, net 14,336,254 1,784,074 4,735,711(2) 20,856,039
Other intangible assets, net 7,950,073 7,950,073
Other assets, net 3,266,938 13,043 3,279,981
Deferred tax asset, net 505,699 505,699
------------ ------------ ------------ ------------
Total assets $ 76,368,688 $ 7,872,016 $ (7,872,016) 76,368,688
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,646,887 $ 670,752 $ (670,752)(5) $ 1,646,887
Accrued expenses 2,068,391 6,353,595 (6,353,595)(5) 2,068,391
Accrued interest payable 566,251 566,251
Current portion of capital lease obligation 46,223 46,223
Current portion of notes payable 272,699 -- 272,699
Income and other taxes payable -- -- --
------------ ------------ ------------ ------------
Total current liabilities 4,600,451 7,024,347 (7,024,347) 4,600,451
Notes payable 46,000,000 1,847,792 (1,847,792)(3) 46,000,000
Long term debt 702,441 -- 702,441
------------ ------------ ------------ ------------
Total liabilities 51,302,892 8,872,139 (8,872,139) 51,302,892
------------ ------------ ------------ ------------
Commitments and contingencies
Shareholders' equity
Common stock 1,348 -- -- 1,348
Additional paid in capital 27,891,625 285,584 (285,584)(4) 27,891,625
Retained earnings (542,847) (1,285,707) 1,285,707 (4) (542,847)
Treasury stock (2,284,330) (2,284,330)
------------ ------------ ------------ ------------
Total shareholders' equity 25,065,796 (1,000,123) 1,000,123 25,065,796
------------ ------------ ------------ ------------
Total liabilities and shareholders' equity $ 76,368,688 $ 7,872,016 $ (7,872,016) $ 76,368,688
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
26
CONTINUCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
The acquisition adjustments reflected on the unaudited proforma consolidated
balance sheet is as follows:
1) Represents Continucare Corporation cash purchase of "Companies".
2) The aggregate purchase price has been allocated, on a preliminary basis, to
the net assets acquired based on their net book 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.
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.
Companies
-----------
Total Purchase Price $ 6,750,000
Net Tangible Assets (230,215)
-----------
Goodwill $ 6,519,785
-----------
Goodwill will be amortized over 20 years.
3) Represents the elimination of Companies intercompany payable to First
Medical Corporation and First Medical Group, Inc.
4) Represents the elimination of shareholders' equity.
5) Represents the elimination of non-assumed accounts receivable and
liabilities.
27
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
TWELVE MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
HISTORICAL
--------------------------------
ACQUIRED BUSINESS
CONTINUCARE ----------------- ACQUISITION PRO
CORPORATION SPI ADJUSTMENTS FORMA
Revenues:
Capitation revenues $ -- 50,791,293 $ 50,791,293
Net patient service revenues 1,041,793 1,041,793
Management fees 12,874,592 463,562 13,338,154
------------ ------------ ------------ ------------
Total revenues 13,916,385 51,254,855 -- 65,171,240
------------ ------------ ------------ ------------
Expenses:
Physician, hospital and other -- 42,554,503 42,554,503
Payroll and employee benefits 6,348,195 4,183,695 10,531,890
Provision for bad debt 1,818,293 1,818,293
Professional fees 1,450,790 254,722 1,705,512
General and administrative 1,176,516 3,613,520 4,790,036
Depreciation and amortization 208,936 274,322 325,989(1) 809,247
Loss on Impairment of Goodwill -- -- --
------------ ------------ ------------ ------------
Total expenses 11,002,730 50,880,762 325,989 62,209,481
------------ ------------ ------------ ------------
Income from operations 2,913,655 374,093 (325,989) 2,961,759
------------ ------------ ------------ ------------
Other income (expense)
Interest income, net 165,253 7,245 (532,755)(2) (360,257)
Minority interest (162,235) (162,235)
Other income -- 170,695 170,695
Loss on purchase of minority interest (9,081) (9,081)
------------ ------------ ------------ ------------
Total other income (expense) (6,063) 177,940 (532,755) (360,878)
------------ ------------ ------------ ------------
Income (loss) before income taxes 2,907,592 552,033 (858,744) 2,600,881
Provision for income taxes 1,200,917 -- 1,170,748
------------ ------------ ------------ ------------
Net income (loss) $ 1,706,675 $ 552,033 $ (858,744) $ 1,430,133
============ ============ ============ ============
Weighted average shares of common
stock outstanding 11,162,761 11,162,761
============ ============
Earnings (loss) per common share of common
stock outstanding $ 0.15 $ 0.13
============ ============
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 $ 0.13
============ ============
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
28
CONTINUCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1997
The acquisition adjustment reflected on the unaudited proforma consolidated
statement of income is 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 $ 0
Prospective amortization of goodwill 325,989
---------
Net $ 325,989
2) Represents the elimination of interest expense of Companies and inclusion
of interest expense of the purchaser due to the use of acquisitions funds
as follows:
$ 525,510
29
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
Six Months Ended December 31, 1997
- --------------------------------------------------------------------------------
HISTORICAL
-------------------------------
ACQUIRED BUSINESS
CONTINUCARE ----------------- ACQUISITION PRO
CORPORATION SPI ADJUSTMENTS FORMA
Revenues:
Capitation revenues $ -- 24,106,305 $ 24,106,305
Net patient service revenues 9,614,132 9,614,132
Management fees 1,727,371 249,680 1,977,051
------------ ------------ ------------ -----------
Total revenues 11,341,503 24,355,985 -- 35,697,488
------------ ------------ ------------ ------------
Expenses:
Physician, hospital and other 4,093,924 24,649,773 28,743,697
Payroll and employee benefits 4,342,553 738,653 5,081,206
Provision for bad debt 2,514,563 2,514,563
Professional fees 532,239 191,250 723,489
General and administrative 3,188,717 2,361,008 5,549,725
Depreciation and amortization 683,318 328,654 (90,689)(1) 921,283
Loss on Impairment of Goodwill -- -- --
------------ ------------ ------------ ------------
Total expenses 15,355,314 28,269,338 (90,689) 43,533,963
------------ ------------ ------------ ------------
Income from operations (4,013,811) (3,913,353) 90,689 (7,836,475)
------------ ------------ ------------ ------------
Other income (expense)
Interest income, net (448,644) -- (270,000)(2) (718,644)
Minority interest --
Other income -- -- --
Loss on purchase of minority interest --
------------ ------------ ------------ ------------
Total other income (expense) (448,644) -- (270,000) (718,644)
------------ ------------ ------------ ------------
Income (loss) before income taxes (4,462,455) (3,913,353) (179,311) (8,555,119)
Provision for income taxes (1,568,324) -- (2,970,023)
------------ ------------ ------------ ------------
Net income (loss) $ (2,894,131) $ (3,913,353) $ (179,311) $ (5,585,095)
============ ============ ============ ============
Weighted average shares of common
stock outstanding 11,405,638 11,405,638
============ ============
Earnings (loss) per common share of common
stock outstanding $ (0.25) $ (0.49)
============ ============
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) $ (0.49)
============ ============
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
30
CONTINUCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
The acquisition adjustment reflected on the unaudited proforma consolidated
statement of income is 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 $ 253,684
Prospective amortization of goodwill 162,995
---------
Net $ (90,689)
2) Represents the elimination of interest expense of Companies and inclusion
of interest expense of the purchaser due to the use of acquisitions funds
as follows:
$ 270,000