e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009 |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to |
Commission File Number 001-12115
CONTINUCARE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Florida
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59-2716023 |
(State or Other Jurisdiction of
Incorporation or Organization)
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(IRS Employer Identification No.) |
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7200 Corporate Center Drive |
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Suite 600 |
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Miami, Florida
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33126 |
(Address of Principal Executive Offices)
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(Zip Code) |
(305) 500-2000
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange On Which Registered |
COMMON STOCK
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NYSE AMEX LLC |
$.0001 PAR VALUE |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer x
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No x
At October 23, 2009, the Registrant had 59,501,049 shares of $0.0001 par value common stock
outstanding.
CONTINUCARE CORPORATION
INDEX
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30, |
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June 30, |
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2009 |
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2009 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
22,791,701 |
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$ |
13,895,823 |
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Due from HMOs, net of a liability for incurred
but not reported medical claims of
approximately $24,957,000 and $23,719,000 at
September 30, 2009 and June 30, 2009,
respectively |
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11,663,865 |
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17,323,599 |
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Prepaid expenses and other current assets |
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1,197,263 |
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812,970 |
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Deferred income tax assets |
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142,432 |
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141,420 |
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Total current assets |
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35,795,261 |
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32,173,812 |
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Certificates of deposit, restricted |
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1,239,281 |
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1,233,653 |
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Property and equipment, net |
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11,545,216 |
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10,489,383 |
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Goodwill |
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73,761,077 |
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73,204,582 |
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Intangible assets, net of accumulated amortization
of approximately $3,725,000 and $3,406,000 at
September 30, 2009 and June 30, 2009, respectively |
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5,276,807 |
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5,253,666 |
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Deferred income tax assets |
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2,826,134 |
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2,795,588 |
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Other assets, net |
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133,049 |
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152,702 |
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Total assets |
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$ |
130,576,825 |
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$ |
125,303,386 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
520,184 |
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$ |
652,305 |
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Accrued expenses and other current liabilities |
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2,911,128 |
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4,455,675 |
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Income taxes payable |
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2,588,198 |
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1,575,511 |
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Total current liabilities |
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6,019,510 |
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6,683,491 |
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Deferred income tax liabilities |
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6,475,710 |
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6,435,732 |
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Other liabilities |
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1,135,476 |
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981,640 |
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Total liabilities |
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13,630,696 |
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14,100,863 |
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Commitments and contingencies |
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Shareholders equity: |
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Common stock, $0.0001 par value: 100,000,000
shares authorized; 59,471,049 shares issued and
outstanding at September 30, 2009 and
59,391,049 shares issued and outstanding at
June 30, 2009 |
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5,947 |
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5,939 |
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Additional paid-in capital |
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105,645,778 |
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105,210,519 |
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Accumulated earnings |
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11,294,404 |
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5,986,065 |
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Total shareholders equity |
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116,946,129 |
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111,202,523 |
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Total liabilities and shareholders equity |
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$ |
130,576,825 |
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$ |
125,303,386 |
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
3
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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Three Months Ended |
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September 30, |
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2009 |
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2008 |
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Revenue |
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$ |
75,972,366 |
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$ |
65,064,634 |
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Operating expenses: |
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Medical services: |
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Medical claims |
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52,624,059 |
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47,317,293 |
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Other direct costs |
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7,572,219 |
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7,157,852 |
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Total medical services |
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60,196,278 |
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54,475,145 |
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Administrative payroll and employee benefits |
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3,259,097 |
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2,733,557 |
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General and administrative |
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3,878,513 |
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3,853,321 |
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Total operating expenses |
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67,333,888 |
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61,062,023 |
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Income from operations |
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8,638,478 |
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4,002,611 |
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Other income (expense): |
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Interest income |
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17,510 |
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76,103 |
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Interest expense |
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(3,370 |
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(3,043 |
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Income before income tax provision |
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8,652,618 |
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4,075,671 |
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Income tax provision |
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3,344,279 |
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1,579,539 |
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Net income |
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$ |
5,308,339 |
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$ |
2,496,132 |
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Net income per common share: |
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Basic |
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$ |
.09 |
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$ |
.04 |
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Diluted |
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$ |
.09 |
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$ |
.04 |
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Weighted average common shares outstanding: |
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Basic |
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59,416,938 |
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65,114,930 |
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Diluted |
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61,075,996 |
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66,253,565 |
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
4
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Three Months Ended |
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September 30, |
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2009 |
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2008 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
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$ |
5,308,339 |
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$ |
2,496,132 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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620,104 |
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542,177 |
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Compensation expense related to issuance of stock options |
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296,895 |
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298,137 |
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Excess tax benefits related to exercise of stock options |
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(83,172 |
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Deferred tax expense |
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8,420 |
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(29,371 |
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Changes in operating assets and liabilities: |
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Due from HMOs, net |
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5,659,734 |
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4,110,272 |
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Prepaid expenses and other current assets |
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194,225 |
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(517,828 |
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Other assets, net |
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31,063 |
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31,792 |
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Accounts payable |
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(132,121 |
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73,298 |
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Accrued expenses and other liabilities |
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(1,754,081 |
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(1,846,996 |
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Income taxes payable |
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1,095,859 |
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(141,090 |
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Net cash provided by operating activities |
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11,245,265 |
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5,016,523 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchase of certificates of deposit |
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(5,628 |
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(7,156 |
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Acquisition of Professional Sleep Diagnostics, Inc., net of cash acquired |
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(1,348,614 |
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Purchase of property and equipment |
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(1,094,691 |
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(635,817 |
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Net cash used in investing activities |
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(2,448,933 |
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(642,973 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Principal repayments under capital lease obligations |
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(38,826 |
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(18,496 |
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Proceeds from exercise of stock options |
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55,200 |
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Excess tax benefits related to exercise of stock options |
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83,172 |
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Repurchase of common stock |
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(3,759,486 |
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Net cash provided by (used in) financing activities |
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99,546 |
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(3,777,982 |
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Net increase in cash and cash equivalents |
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8,895,878 |
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595,568 |
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Cash and cash equivalents at beginning of period |
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13,895,823 |
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9,905,740 |
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Cash and cash equivalents at end of period |
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$ |
22,791,701 |
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$ |
10,501,308 |
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SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: |
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Purchase of property and equipment with proceeds of capital lease obligations |
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$ |
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$ |
36,711 |
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Retirement of treasury stock |
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$ |
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$ |
3,116,187 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid for taxes |
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$ |
2,240,000 |
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$ |
1,750,000 |
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Cash paid for interest |
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$ |
3,370 |
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$ |
3,043 |
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(UNAUDITED)
NOTE 1 UNAUDITED INTERIM INFORMATION
The accompanying unaudited condensed consolidated financial statements of Continucare Corporation
have been prepared in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three-month period
ended September 30, 2009 are not necessarily indicative of the results that may be reported for the
remainder of the fiscal year ending June 30, 2010 or future periods. Except as otherwise indicated
by the context, the terms we, us, our, Continucare, or the Company, refer to
Continucare Corporation and its consolidated subsidiaries. All references to a fiscal year refer
to the Companys fiscal year which ends June 30. As used herein, Fiscal 2010 refers to the fiscal
year ending June 30, 2010, Fiscal 2009 refers to the fiscal year ended June 30, 2009, and Fiscal
2008 refers to the fiscal year ended June 30, 2008.
The balance sheet at June 30, 2009 has been derived from the audited financial statements at that
date, but does not include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto
included in our Annual Report on Form 10-K for Fiscal 2009. These interim condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and
notes to consolidated financial statements included in that report.
NOTE 2 GENERAL
We are a provider of primary care physician services on an outpatient basis in Florida. We provide
medical services to patients through employee physicians, advanced registered nurse practitioners
and physicians assistants. Additionally, we provide practice management services to independent
physician affiliates (IPAs). Substantially all of our revenue is derived from managed care
agreements with three health maintenance organizations, Humana Medical Plans, Inc. (Humana),
Vista Healthplan of South Florida, Inc. and its affiliated companies including Summit Health Plan,
Inc. (Vista) and Wellcare Health Plans, Inc. and its affiliated companies (Wellcare)
(collectively, the HMOs). We were incorporated in 1996 as the successor to a Florida corporation
formed earlier in 1996.
On August 12, 2009, we acquired 100% of the issued and outstanding capital stock of Professional
Sleep Diagnostics, Inc., a full service operator of sleep diagnostic centers, for $1.7 million in
cash.
NOTE 3 RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board adopted the Accounting Standards
Codification which identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements that are presented in
conformity with U.S. generally accepted accounting principles. This Standard is effective for
interim and annual reporting periods ending after September 15, 2009. The adoption of the
Accounting Standards Codification did not have a material impact on our consolidated financial
statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(UNAUDITED)
NOTE 4 GOODWILL AND OTHER INTANGIBLE ASSETS
The most significant component of the goodwill and other intangible assets included in the
accompanying condensed consolidated balance sheets consists of the goodwill and other intangible
assets recorded in connection with the acquisition (the Acquisition) of Miami Dade Health
Centers, Inc. and its affiliated companies (collectively, the MDHC Companies) in October 2006.
The purchase price, including acquisition costs, of approximately $66.2 million was allocated to
the estimated fair value of acquired tangible assets of $13.9 million, identifiable intangible
assets of $8.7 million and assumed liabilities of $15.3 million as of October 1, 2006, resulting in
goodwill totaling $58.9 million. The identifiable intangible assets of $8.7 million consist of
estimated fair values of $1.6 million assigned to the trade name, $6.2 million to customer
relationships and $0.9 million to a noncompete agreement. The trade name was determined to have an
estimated useful life of six years and the customer relationships and noncompete agreements were
each determined to have estimated useful lives of eight and five years, respectively. The fair
values of the customer relationships and other identifiable intangible assets are amortized over
their estimated lives using the straight-line method. The customer relationships are
non-contractual. The fair value of the identifiable intangible assets was determined, with the
assistance of an outside valuation firm, based on standard valuation techniques. Amortization
expense for the identifiable intangible assets was $0.3 million for each of the three-month periods
ended September 30, 2009 and 2008.
NOTE 5 SHARE-BASED PAYMENT
We recognize the cost relating to stock-based payment transactions, based on the fair value of the
stock-based awards issued, in the financial statements over the period services are rendered.
We calculate the fair value for employee stock options using a Black-Scholes option pricing model
at the time the stock options are granted and that amount is amortized over the vesting period of
the stock options, which is generally up to four years. The fair value for employee stock options
granted during the three-month periods ended September 30, 2009 and 2008 was calculated based on
the following assumptions: risk-free interest rate ranging from 0.74% to 2.48% and 1.8% to 3.09%,
respectively; dividend yield of 0%; volatility factor of the expected market price of our common
stock of 60.5% and 58.0%, respectively; and weighted-average expected life of the options ranging
from 3 to 6 years depending on the vesting provisions of each option. The expected life of the
options is based on the historical exercise behavior of our employees. The expected volatility
factor is based on the historical volatility of the market price of our common stock as adjusted
for certain events that management deemed to be non-recurring and non-indicative of future events.
For each of the three-month periods ended September 30, 2009 and 2008, we recognized share-based
compensation expense of $0.3 million. For the three-month period ended September 30, 2009, we
recognized excess tax benefits resulting from the exercise of stock options of approximately $0.1
million. For the three-month period ended September 30, 2008, we had no excess tax benefits
resulting from the exercise of stock options.
NOTE 6 DEBT
We have in place a credit facility that provides for a revolving loan to us of $5.0 million (the
Credit Facility) with a maturity date of December 31, 2009. The Credit Facility has a variable
interest rate at a per annum rate equal to the sum of 2.5% and the 30-day Dealer Commercial Paper
Rate (0.22% at September 30, 2009). The Credit Facility includes covenants requiring us, on a
consolidated basis, to maintain a tangible net worth of $12 million and a debt coverage ratio of
1.25 to 1. Substantially all of our assets serve as collateral for the Credit Facility. We are
currently reviewing with our lenders strategies to amend and extend our Credit Facility.
In connection with the Acquisition, we entered into two term loan facilities funded out of lines of
credit (the Term Loans) with maximum loan amounts of $4.8 million and $1.0 million, respectively.
Each of the Term Loans requires mandatory monthly payments that reduce the lines of credit under
the Term Loans. Subject to the terms and conditions of the Term Loans, any prepayments made to the
Term Loans may be re-borrowed on a revolving basis so long as the line of credit applicable to such
Term Loan, as reduced by the mandatory monthly payment, is not exceeded. As of September 30, 2009,
the total maximum amount available for borrowing under the two Term Loans was approximately $4.4
million. The $4.8 million and $1.0 million Term Loans mature on October 31, 2011 and October 31,
2010, respectively. Each of the Term Loans (i) has variable interest rates at a per annum rate
equal to the sum of 2.4% and the One-Month LIBOR (0.25% at September 30, 2009), (ii) requires us,
on a consolidated basis, to maintain a tangible net worth of $12 million and a debt coverage ratio
of 1.25 to 1 and (iii) are secured by substantially all of our assets.
At September 30, 2009, there was no outstanding principal balance on the Credit Facility or the
Term Loans.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(UNAUDITED)
NOTE 7 EARNINGS PER SHARE
A reconciliation of the denominator of the basic and diluted earnings per share computation is as
follows:
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Three-Months Ended |
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September 30, |
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|
2009 |
|
|
2008 |
|
Basic weighted average number of shares outstanding |
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59,416,938 |
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65,114,930 |
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Dilutive effect of stock options |
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1,659,058 |
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1,138,635 |
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|
|
|
|
|
Diluted weighted average number of shares outstanding |
|
|
61,075,996 |
|
|
|
66,253,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not included in calculation of diluted earnings per
share as impact is antidilutive: |
|
|
|
|
|
|
|
|
Stock options outstanding |
|
|
963,000 |
|
|
|
3,675,750 |
|
NOTE 8 INCOME TAXES
We recognize deferred income tax assets and liabilities based upon differences between the
financial reporting and tax bases of assets and liabilities. We measure such assets and
liabilities using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
We recorded an income tax provision of $3.3 million and $1.6 million for the three-month periods
ended September 30, 2009 and 2008, respectively.
We recorded a liability for unrecognized tax benefits of approximately $0.9 million at September
30, 2009 and June 30, 2009 and included such liability in other liabilities on the condensed
consolidated balance sheet. The total amount of unrecognized tax benefits that if recognized would
affect the effective tax rate is $0.9 million, which includes accrued interest and penalties of
approximately $0.1 million at September 30, 2009 and June 30, 2009. We recognize interest accrued
related to unrecognized tax benefits in interest expense and penalties in operating expense. We do
not currently anticipate that the total amount of unrecognized tax benefits will significantly
increase or decrease by the end of Fiscal 2010. We are no longer subject to tax examinations by
tax authorities for fiscal years ended on or prior to June 30, 2005.
NOTE 9 RELATED PARTY TRANSACTIONS
We are a party to a lease agreement for office space owned by Dr. Luis Cruz, a director of the
Company. For each of the three-month periods ended September 30, 2009 and 2008 expenses related to
this lease were approximately $0.1 million.
Effective November 1, 2007, we entered into agreements with Centers of Medical Excellence, Inc., an
entity owned by Dr. Cruz pursuant to which this entity will act as one of our independent physician
affiliates in connection with the provision of primary care health services to a limited number of
Medicare Advantage members enrolled in plans sponsored by CarePlus Health Plans, Inc. The
arrangement is on substantially similar terms to those between us and our other independent
physician affiliates under at risk arrangements where we provide medical utilization services and
pay a primary care capitation fee to the provider. Under this arrangement, CarePlus pays us a
monthly capitation fee based on the number of CarePlus Medicare Advantage members who have selected
Centers of Medical Excellence as their primary care provider and we in turn pay a monthly primary
care capitation fee to Centers of Medical Excellence. Centers of Medical Excellence is also
eligible to receive a bonus from us if they operate in a cumulative surplus. For the three-month
period ended September 30, 2009, we recognized an operating profit of $0.3 million under this
arrangement.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(UNAUDITED)
On September 19, 2008, we purchased an aggregate of 400,000 shares of our common stock from certain
family trusts of Dr. Cruz. Dr. Cruz does not have a beneficial ownership in the shares of common
stock held by these family trusts. We paid $2.14 per share for the shares for an aggregate
purchase price of $856,000. The per share
purchase price paid by us represented a 10% discount from the closing price of our common stock on
September 19, 2008.
On September 19, 2008, we purchased an aggregate of 600,000 shares of its common stock from Mr.
Jose Garcia, an officer of the Company through January 15, 2009. We paid $2.14 per share for the
shares for an aggregate purchase price of $1,284,000. The per share purchase price paid by us
represented a 10% discount from the closing price of our common stock on September 19, 2008.
On October 23, 2008, we entered into a joint venture with Dr. Jacob Nudel, a director of the
Company, that will seek to establish special purpose medical provider networks. During the
three-month period ended September 30, 2009, we made contributions of approximately $0.1 million to
fund the operations of the joint venture.
NOTE 10 CONTINGENCIES
We are involved in legal proceedings incidental to our business that arise from time to time in the
ordinary course of business including, but not limited to, claims related to the alleged
malpractice of employed and contracted medical professionals, workers compensation claims and
other employee-related matters, and minor disputes with equipment lessors and other vendors. We
have recorded an accrual for claims related to legal proceedings, which includes amounts for
insurance deductibles and projected exposure, based on managements estimate of the ultimate
outcome of such claims. We do not believe that the ultimate resolution of these matters will have
a material adverse effect on our business, results of operations, financial condition, or cash
flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable
resolution of one or more of these matters could have a material adverse effect on our business,
results of operations, financial condition, cash flow, and prospects.
NOTE 11 SUBSEQUENT EVENTS
On October 16, 2009, we acquired the assets of Sleep Disorder Solutions, Inc., a full service
operator of sleep diagnostic centers, for $0.2 million in cash. We evaluated and disclosed the
events and transactions that occurred between September 30, 2009 and the time these financial
statements were filed in this quarterly report on Form 10-Q on November 5, 2009.
9
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated or the context otherwise requires, all references in this Quarterly
Report on Form 10-Q to we, us, our, Continucare or the Company refers to Continucare
Corporation and its consolidated subsidiaries. All references to the MDHC Companies refer to
Miami Dade Health Centers, Inc. and its affiliated companies.
The following discussion and analysis should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto appearing elsewhere in this quarterly
Report on Form 10-Q.
General
We are a provider of primary care physician services. Through our network of 18 medical
centers, we provide primary care medical services on an outpatient basis. We also provide practice
management services to independent physician affiliates (IPAs) at 20 medical offices. All of our
medical centers and IPAs are located in Miami-Dade, Broward and Hillsborough Counties, Florida.
Substantially all of our revenues are derived from managed care agreements with three health
maintenance organizations (HMOs), Humana Medical Plans, Inc. (Humana), Vista Healthplan of
South Florida, Inc. and its affiliated companies including Summit Health Plan, Inc. (Vista) and
Wellcare Health Plans, Inc. and its affiliated companies (Wellcare). Our managed care agreements
with these HMOs are primarily risk agreements under which we receive for our services a monthly
capitated fee with respect to the patients assigned to us. The capitated fee is a percentage of
the premium that the HMOs receive with respect to those patients. In return, we assume full
financial responsibility for the provision of all necessary medical care to our patients even for
services we do not provide directly. For the three-month period ended September 30, 2009,
approximately 90% and 7% of our revenue was generated by providing services to Medicare-eligible
and Medicaid-eligible members, respectively, under such risk arrangements. As of September 30,
2009, we provided services to or for approximately 26,200 patients on a risk basis and
approximately 10,100 patients on a limited or non-risk basis. Additionally, we also provided
services to over 4,000 patients as of September 30, 2009 on a non-risk fee-for-service basis.
On August 12, 2009, we acquired Professional Sleep Diagnostics, Inc. (PSD), a full service
operator of sleep diagnostic centers. PSD operates and manages sleep diagnostic centers at 13
locations in South Carolina, North Carolina, West Virginia, Virginia, Colorado and Ohio. The
centers conduct sleep studies to determine whether patients suffer from sleep disorders and, if so,
the severity of the condition. PSDs clinical staff is expertly trained in sleep disorders and
works with physicians, neurologists, respiratory therapists, and clinicians utilizing
state-of-the-art equipment to effectively diagnose and treat patients.
Medicare and Medicaid Considerations
Substantially all of our revenue is generated by providing services to Medicare-eligible
members and Medicaid-eligible members. The federal government and state governments, including
Florida, from time to time explore ways to reduce medical care costs through Medicare and Medicaid
reform, specifically, and through health care reform generally. Any changes that would limit,
reduce or delay receipt of Medicare or Medicaid funding or any developments that would disqualify
us from receiving Medicare or Medicaid funding could have a material adverse effect on our
business, results of operations, prospects, financial results, financial condition and cash flows.
Due to the diverse range of proposals put forth and the uncertainty of any proposals adoption, we
cannot predict what impact any Medicare reform proposal ultimately adopted may have on our
business, financial position or results of operations.
As a result of the Medicare Prescription Drug Plan, our HMO affiliates have established or
expanded prescription drug benefit plans for their Medicare Advantage members. Under the terms of
our risk arrangements, we are financially responsible for a substantial portion of the cost of the
prescription drugs our patients receive, and, in exchange, our HMO affiliates have agreed to
provide us with an additional per member capitated fee related to prescription drug coverage.
However, there can be no assurance that the additional fee that we receive will be sufficient to
reimburse us for the additional costs that we may incur under the Medicare Prescription Drug Plan.
10
In addition, the premiums our HMO affiliates receive from the Centers for Medicare and
Medicaid Services (CMS) for their Medicare Prescription Drug Plans is subject to periodic
adjustment, positive or negative, based upon the application of risk corridors that compare their
plans revenues targeted in their bids to actual prescription drug costs. Variances exceeding
certain thresholds may result in CMS making additional payments to the HMOs or require the HMOs to
refund to CMS a portion of the payments they received. Our contracted HMO affiliates estimate and
periodically adjust premium revenues related to the risk corridor payment adjustment, and a portion
of the HMOs estimated premium revenue adjustment is allocated to us. As a result, the revenues
recognized under our risk arrangements with our HMO affiliates are net of the portion of the
estimated risk corridor adjustment allocated to us. The portion of any such risk corridor
adjustment that the HMOs allocate to us may not directly correlate to the historical utilization
patterns of our patients or the costs that we may incur in future periods. During the three-month
periods ended September 30, 2009 and 2008, our HMO affiliates allocated to us adjustments related
to their risk corridor payments which had the effect of reducing our operating income by
approximately $0.2 million and $0.3 million, respectively.
The Medicare Prescription Drug Plan has also been subject to significant public criticism and
controversy, and members of Congress have discussed possible changes to the program as well as ways
to reduce the programs cost to the federal government. We cannot predict what impact, if any,
these developments may have on the Medicare Prescription Drug Plan or on our future financial
results.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 to the consolidated financial
statements included in our Annual Report on Form 10-K for Fiscal 2009. Included within these
policies are certain policies which contain critical accounting estimates and, therefore, have been
deemed to be critical accounting policies. Critical accounting estimates are those which require
management to make assumptions about matters that were uncertain at the time the estimate was made
and for which the use of different estimates, which reasonably could have been used, or changes in
the accounting estimates that are reasonably likely to occur from period to period, could have a
material impact on the presentation of our financial condition, changes in financial condition or
results of operations.
We base our estimates and assumptions on historical experience, knowledge of current events
and anticipated future events, and we continuously evaluate and update our estimates and
assumptions. However, our estimates and assumptions may ultimately prove to be incorrect or
incomplete and our actual results may differ materially. We believe the following critical
accounting policies involve the most significant judgments and estimates used in the preparation of
our consolidated financial statements.
Revenue Recognition
Under our risk contracts with HMOs, we receive a percentage of premium or other capitated fee
for each patient that chooses one of our physicians as their primary care physician. Revenue under
these agreements is generally recorded in the period we assume responsibility to provide services
at the rates then in effect as determined by the respective contract. As part of the Medicare
Advantage program, CMS periodically recomputes the premiums to be paid to the HMOs based on updated
health status of participants and updated demographic factors. We record any adjustments to this
revenue at the time that the information necessary to make the determination of the adjustment is
received from the HMO.
Under our risk agreements, we assume responsibility for the cost of all medical services
provided to the patient, even those we do not provide directly, in exchange for a percentage of
premium or other capitated fee. To the extent that patients require more frequent or expensive
care, our revenue under a contract may be insufficient to cover the costs of care provided. When
it is probable that expected future health care costs and maintenance costs under a contract or
group of existing contracts will exceed anticipated capitated revenue on those contracts, we
recognize losses on our prepaid health care services with HMOs. No contracts were considered loss
contracts at September 30, 2009 in part because we have the right to terminate unprofitable
physicians and close unprofitable centers under our managed care contracts.
11
Under our limited risk and non-risk contracts with HMOs, we receive a capitation fee or
management fee based on the number of patients for which we are providing services on a monthly
basis. Under our limited risk contracts, we also receive a percentage of the surplus generated as
determined by the respective contract. The fees and our portion of the surplus generated under
these arrangements are recorded as revenue in the period in which services are provided as
determined by the respective contract.
Payments under both our risk contracts and our non-risk contracts (for both the Medicare
Advantage program as well as Medicaid) are also subject to reconciliation based upon historical
patient enrollment data. We record any adjustments to this revenue at the time that the
information necessary to make the determination of the adjustment is received from the HMO or the
applicable governmental body.
Medical Claims Expense Recognition
The cost of health care services provided or contracted for is accrued in the period in which
the services are provided. This cost includes our estimate of the related liability for medical
claims incurred in the period but not yet reported, or IBNR. The liability for IBNR is presented
in the balance sheet netted against amounts due from HMOs. Changes in this estimate can materially
affect, either favorably or unfavorably, our results of operations and overall financial position.
We develop our estimate of IBNR primarily based on historical claims incurred per member per
month. We adjust our estimate if we have unusually high or low utilization or if benefit changes
provided under the HMO plans are expected to significantly increase or reduce our claims exposure.
We also adjust our estimate for differences between the estimated claims expense recorded in prior
months to actual claims expense as claims are paid by the HMO and reported to us. We use an
actuarial analysis as an additional tool to further corroborate our estimate of IBNR.
Based on our analysis as of September 30, 2009, we recorded a liability of approximately $25.0
million for IBNR. The liability for IBNR increased by $1.3 million, or 5.2%, to $25.0 million as
of September 30, 2009 from $23.7 million as of June 30, 2009 primarily due to the timing of claims
paid by our HMO affiliates. The liability of $23.5 million recorded as of September 30, 2008 was
relatively unchanged from the liability of $23.9 million recorded as of June 30, 2008.
Consideration of Impairment Related to Goodwill and Other Intangible Assets
Our balance sheet includes intangible assets, including goodwill and other separately
identifiable intangible assets, of approximately $79.0 million, which represented approximately 61%
of our total assets at September 30, 2009. The most significant component of the intangible assets
consists of the intangible assets recorded in connection with the MDHC Acquisition. The purchase
price, including acquisition costs, of approximately $66.2 million was allocated to the estimated
fair value of acquired tangible assets of $13.9 million, identifiable intangible assets of $8.7
million and assumed liabilities of $15.3 million, resulting in goodwill totaling $58.9 million.
We do not amortize goodwill and intangible assets with indefinite useful lives. We review
such assets for impairment on an annual basis or more frequently if certain indicators of
impairment arise. We amortize intangible assets with definite useful lives over their respective
useful lives to their estimated residual values and also review for impairment annually, or more
frequently if certain indicators of impairment arise. Indicators of an impairment include, among
other things, a significant adverse change in legal factors or the business climate, the loss of a
key HMO contract, an adverse action by a regulator, unanticipated competition, and the loss of key
personnel or allocation of goodwill to a portion of business that is to be sold.
Because we operate in a single segment of business, we have determined that we have a single
reporting unit and we perform our impairment test for goodwill on an enterprise level. In
performing the impairment test, we compare the total current market value of all of our outstanding
common stock, to the current carrying value of our total net assets, including goodwill and
intangible assets. Depending on the market value of our common stock at the time that an
impairment test is required, we may also perform other valuation techniques to measure market value
before reaching a conclusion that impairment exists. Depending on the outcome of our
analyses, there is a risk that a portion of our intangible assets would be considered impaired and
must be written-off during that period. We completed our annual impairment test as of May 1, 2009
and determined that no impairment existed. In addition, no indicators of impairment were noted and
accordingly, no impairment charges were required at September 30, 2009. Should we later determine
that an indicator of impairment exists, we would be required to perform an additional impairment
test.
12
Realization of Deferred Income Tax Assets
We recognize deferred income tax assets and liabilities using enacted tax rates for the effect
of temporary differences between the book and tax bases of recorded assets and liabilities. We
evaluate the realizability of the deferred income tax assets and reduce such assets by a valuation
allowance if it is more likely than not that some portion or all of the deferred income tax asset
will not be realized.
As part of the process of preparing our consolidated financial statements, we estimate our
income taxes based on our actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes. We also recognize as
deferred income tax assets the future tax benefits from net operating loss carryforwards. We
evaluate the realizability of these deferred income tax assets by assessing their valuation
allowances and by adjusting the amount of such allowances, if necessary. Among the factors used to
assess the likelihood of realization are our projections of future taxable income streams, the
expected timing of the reversals of existing temporary differences, and the impact of tax planning
strategies that could be implemented to avoid the potential loss of future tax benefits. However,
changes in tax codes, statutory tax rates or future taxable income levels could materially impact
our valuation of tax accruals and assets and could cause our provision for income taxes to vary
significantly from period to period. At September 30, 2009, we had deferred income tax liabilities
in excess of deferred income tax assets of approximately $3.5 million.
Stock-Based Payment
We recognize compensation costs in our financial statements related to our share-based payment
transactions over the period services are rendered according to the fair value of the stock-based
awards issued. We recognized share-based compensation expense of $0.3 million for each of the
three-month periods ended September 30, 2009 and 2008. For the three-month period ended September
30, 2009, we recognized excess tax benefits resulting from the exercise of stock options of
approximately $0.1 million. For the three-month period ended September 30, 2008, we had no excess
tax benefits resulting from the exercise of stock options.
We have elected to calculate the fair value of our employee stock options using the
Black-Scholes option pricing model. Using this model we calculated the fair value for employee
stock options granted during the three-month periods ended September 30, 2009 and 2008 based on the
following assumptions: risk-free interest rate ranging from 0.74% to 2.48% and 1.87% to 3.09%,
respectively; dividend yield of 0%; weighted-average volatility factor of the expected market price
of our common stock of 60.5% and 58.0%, respectively, and weighted-average expected life of the
options ranging from 3 to 6 years depending on the vesting provisions of each option. The expected
life of the options is based on the historical exercise behavior of our employees. The expected
volatility factor is based on the historical volatility of the market price of our common stock as
adjusted for certain events that management deemed to be non-recurring and non-indicative of future
events.
Because our stock options have characteristics significantly different from traded options and
because changes in the subjective input assumptions can materially affect the fair value estimate,
in managements opinion, it is possible that existing option valuation models may not necessarily
provide a reliable measure of the fair value of our employee stock options. We selected the
Black-Scholes model based on our prior experience with it, its wide use by issuers comparable to
us, and our review of alternate option valuation models.
The effect of applying the fair value method of accounting for stock options on reported net
income for any period may not be representative of the effects for future periods because our
outstanding options typically vest over a period of several years and additional awards may be made
in future periods.
13
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2009 TO THE THREE- MONTH PERIOD ENDED SEPTEMBER 30, 2008
Revenue
Revenue increased by $10.9 million, or 16.8%, to $76.0 million for the three-month period
ended September 30, 2009 from $65.1 million for the three-month period ended September 30, 2008 due
primarily to increases in our Medicare revenue.
The most significant component of our revenue is the revenue we generate from Medicare
patients under risk arrangements which increased by $9.7 million, or 16.6%, during the three-month
period ended September 30, 2009. During the three-month period ended September 30, 2009, revenue
generated by our Medicare risk arrangements increased approximately 18.7% on a per patient per
month basis and Medicare patient months decreased by approximately 1.8% over the comparable period
of Fiscal 2009. The increase in the per patient per month Medicare revenue was primarily due to a
rate increase in the Medicare premiums and an increase in premiums resulting from the Medicare risk
adjustment program.
Based on information received from our HMO affiliates and CMS, we believe that the capitation
payments we receive under our percentage of premium arrangements with our HMO affiliates for our
Medicare Advantage patients will decrease by approximately 5% effective January 1, 2010 without
taking into account any adjustments resulting from changes in Medicare risk adjustment scores. We
anticipate that our HMO affiliates will reduce plan benefits to mitigate the effect of a premium
reduction. We believe, however, that the amount by which our HMO affiliates reduce plan benefits
will not be sufficient to fully offset the effect of a 5% premium reduction. In an effort to
further mitigate the effects of this premium reduction, we will seek to improve medical claims
expense management and pursue other cost reduction strategies. There is, however, no assurance
that our Medicare capitation payments will decrease by this amount or that the HMO benefit
reductions or our cost reduction strategies will mitigate the Medicare Advantage premium reduction.
Failure to mitigate the effects of the Medicare Advantage premium reduction may have a material
adverse effect on our results of operations, financial position and cash flows.
Under the Medicare risk adjustment program, the health status and demographic factors of
Medicare Advantage participants are taken into account in determining premiums paid for each
participant. CMS periodically recomputes the premiums to be paid to the HMOs based on the updated
health status and demographic factors of the Medicare Advantage participants. In addition, the
premiums paid to the HMOs for their Medicare Prescription Drug Plan are subject to periodic
adjustment based upon CMSs risk corridor adjustment methodology. The net effect of these premium
adjustments included in revenue for the three-month periods ended September 30, 2009 and 2008 were
favorable retroactive Medicare adjustments of $0.4 million and $0.5 million, respectively. Future
Medicare risk adjustments may result in reductions of revenue depending on the future health status
and demographic factors of our patients as well as the application of CMSs risk corridor
methodology to the HMOs Medicare Prescription Drug Programs.
Revenue generated by our managed care entities under contracts with Humana, Vista and Wellcare
accounted for approximately 72%, 19% and 6%, respectively, of our total revenue for the three-month
period ended September 30, 2009. Revenue generated by our managed care entities under contracts
with Humana, Vista and Wellcare accounted for approximately 73%, 17% and 9%, respectively, of our
total revenue for the three-month period ended September 30, 2008.
Operating Expenses
Medical services expenses are comprised of medical claims expense and other direct costs
related to the provision of medical services to our patients. Because our risk contracts with HMOs
provide that we are financially responsible for the cost of substantially all medical services
provided to our patients under those contracts, our medical claims expense includes the costs of
prescription drugs our patients receive as well as medical services provided to patients under our
risk contracts by providers other than us. Other direct costs consist primarily of
salaries, taxes and benefits of our health professionals providing primary care services including
a portion of our stock-based compensation expense, medical malpractice insurance costs, capitation
payments to our IPA physicians and fees paid to independent contractors providing medical services
to our patients.
14
Medical services expenses for the three-month period ended September 30, 2009 increased by
$5.7 million, or 10.5%, to $60.2 million from $54.5 million for the three-month period ended
September 30, 2008. Medical claims expense, which is the largest component of medical services
expense, increased by $5.3 million, or 11.2%, to $52.6 million for the three-month period ended
September 30, 2009 from $47.3 million for the three-month period ended September 30, 2008 primarily
due to an increase in Medicare claims expense of $4.5 million, or 10.6%. The increase in Medicare
claims expense resulted from a 12.6% increase in medical claims expenses on a per patient per month
basis, partially offset by a 1.8% decrease in Medicare patient months. The increase in Medicare
per patient per month medical claims expense is primarily attributable to enhanced benefits offered
by our HMO affiliates and inflationary trends in the health care industry, partially offset by
improved utilization outcomes.
As a percentage of revenue, medical services expenses decreased to 79.2% of revenue for the
three-month period ended September 30, 2009 as compared to 83.7% for the three-month period ended
September 30, 2008. Our claims loss ratio (medical claims expense as a percentage of revenue)
decreased to 69.3% for the three-month ended September 30, 2009 from 72.7% for the three-month
period ended September 30, 2008. These decreases were primarily due to an increase in Medicare
revenue at a greater rate than the increase in Medicare claims expense on a per patient per month
basis. HMOs, however, are under continuous competitive pressure to offer enhanced, and possibly
more expensive, benefits to their Medicare Advantage members. The premiums CMS pays to HMOs for
Medicare Advantage members are generally not increased as a result of those benefit enhancements.
This could increase our claims loss ratio in future periods, which could reduce our profitability
and cash flows.
Other direct costs increased by $0.4 million, or 5.8%, to $7.6 million for the three-month
period ended September 30, 2009 from $7.2 million for the three-month period ended September 30,
2008. As a percentage of revenue, other direct costs decreased to 10.0% for the three-month period
ended September 30, 2009 from 11.0% for the three-month period ended September 30, 2008. The
increase in the amount of other direct costs was primarily due to an increase in payroll expense
and related benefits for physicians and medical support personnel, and an increase in patient
transportation expenses.
Administrative payroll and employee benefits expenses increased by $0.6 million, or 19.2%, to
$3.3 million for the three-month period ended September 30, 2009 from $2.7 million for the
three-month period ended September 30, 2008. As a percentage of revenue, administrative payroll
and employee benefits expense increased to 4.3% for the three-month period ended September 30, 2009
from 4.2% for the three-month period ended September 30, 2008. The increase in administrative
payroll and employee benefits expense was primarily due to increases in personnel and incentive
plan accruals.
General and administrative expenses remained relatively unchanged at $3.9 million for the
three-month periods ended September 30, 2009 and 2008. As a percentage of revenue, general and
administrative expenses decreased to 5.1% for the three-month period ended September 30, 2009 from
5.9% for the three-month period ended September 30, 2008.
Income from Operations
Income from operations for the three-month period ended September 30, 2009 increased by $4.6
million, or 115.8% to $8.6 million from $4.0 million for the three-month period ended September 30,
2008.
Taxes
An income tax provision of $3.3 million and $1.6 million was recorded for the three-month
periods ended September 30, 2009 and 2008, respectively. The effective income tax rates remained
relatively unchanged at 38.7% and 38.8% for the three-month periods ended September 30, 2009 and
2008, respectively.
15
Net Income
Net income for the three-month period ended September 30, 2009 increased by $2.8 million, or
112.7%, to $5.3 million from $2.5 million for the three-month period ended September 30, 2008.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2009, working capital was $29.8 million, an increase of $4.3 million from
$25.5 million at June 30, 2009. Cash and cash equivalents increased by $8.9 million to $22.8
million at September 30, 2009 compared to $13.9 million at June 30, 2009. The increases in working
capital and cash and cash equivalents at September 30, 2009 compared to June 30, 2009 were
primarily due to net income of $5.3 million generated during the three-month period ended September
30, 2009. The increase in cash and cash equivalents was also due to the collection of Medicare
premium adjustments during the three-month period ended September 30, 2009 which were included in
amounts due from HMOs at June 30, 2009.
Net cash of $11.2 million was provided by operating activities from continuing operations for
the three-month period ended September 30, 2009 compared to $5.0 million for the three-month period
ended September 30, 2008. This $6.2 million increase in cash provided by operating activities was
primarily due to an increase in net income of $2.8 million, a net decrease in amounts due from HMOs
of $1.5 million and a net increase in income taxes payable of $1.2 million.
Net cash of $2.4 million was used for investing activities for the three-month period ended
September 30, 2009 compared to $0.6 million for the three-month period ended September 30, 2008.
The $1.8 million increase in net cash used for investing activities primarily related to an
increase in net cash used of $1.3 million for the acquisition of Professional Sleep Diagnostics,
Inc. and an increase in cash used of $0.5 million for the purchase of property and equipment.
Net cash of approximately $0.1 million was provided by financing activities for the
three-month period ended September 30, 2009 compared to $3.8 million used for financing activities
for the three-month period ended September 30, 2008. The $3.9 million increase in cash provided by
financing activities for the three-month period ended September 30, 2009 was primarily due to a
$3.8 million net decrease in cash used for the repurchase of common stock.
Pursuant to the terms under our managed care agreements with certain of our HMO affiliates, we
posted irrevocable standby letters of credit amounting to $1.2 million to secure our payment
obligations to those HMOs. We are required to maintain these letters of credit throughout the term
of the managed care agreements.
Our Board of Directors approved a previously announced stock repurchase program to authorize
the repurchase of 15,000,000 shares of our common stock. Any such repurchases will be made from
time to time at the discretion of our management in the open market or in privately negotiated
transactions subject to market conditions and other factors. We anticipate that any such
repurchases of shares will be funded through cash from operations. During the three-month period
ended September 30, 2009, we did not repurchase any of our common stock. As of October 31, 2009,
we had repurchased 11,907,004 shares of our common stock for approximately $25.0 million.
On August 12, 2009, we acquired 100% of the issued and outstanding capital stock of
Professional Sleep Diagnostics, Inc. for $1.7 million in cash.
We believe that we will be able to fund our capital commitments and our anticipated operating
cash requirements for the foreseeable future and satisfy any remaining obligations from our working
capital, anticipated cash flows from operations, our Credit Facility, and our Term Loans. At
September 30, 2009, approximately $4.4 million was available for future borrowing under the Term
Loans and the Credit Facility.
At September 30, 2009, we had no outstanding balance on our Credit Facility and Term Loans.
Our Credit Facility has a maturity date of December 31, 2009. We are currently reviewing with our
lenders strategies to amend and extend our Credit Facility.
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FORWARD-LOOKING STATEMENTS
Our business, financial condition, results of operations, cash flows and prospects, and the
prevailing market price and performance of our common stock, may be adversely affected by a number
of factors, including the matters discussed below. Certain statements and information set forth in
this Quarterly Report on Form 10-Q, as well as other written or oral statements made from time to
time by us or by our authorized executive officers on our behalf, constitute forward-looking
statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. We
intend for our forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and
we set forth this statement and these risk factors in order to comply with such safe harbor
provisions. You should note that our forward-looking statements speak only as of the date of this
report or when made and we undertake no duty or obligation to update or revise our forward-looking
statements, whether as a result of new information, future events or otherwise. Although we believe
that the expectations, plans, intentions and projections reflected in our forward-looking
statements are reasonable, such statements are subject to risks, uncertainties and other factors
that may cause our actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by the forward-looking statements.
The risks, uncertainties and other factors that our shareholders and prospective investors should
consider include, but are not limited to, the following:
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Our operations are dependent on three health maintenance organizations; |
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Under our most important contracts we are responsible for the cost of medical
services to our patients in return for a capitated fee; |
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Our revenues will be affected by the Medicare Risk Adjustment program; |
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If we are unable to manage medical benefits expense effectively, our profitability
will likely be reduced; |
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A failure to estimate incurred but not reported benefits expense accurately will
affect our profitability; |
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We compete with many health care providers for patients and HMO affiliations; |
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We may not be able to successfully recruit or retain existing relationships with
qualified physicians and medical professionals; |
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Our business exposes us to the risk of medical malpractice lawsuits; |
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We primarily operate in Florida; |
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A significant portion of our voting power is concentrated; |
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We are dependent on our executive officers and other key employees; |
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We depend on the management information systems of our affiliated HMOs; |
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We depend on our information processing systems; |
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Volatility of our stock price could adversely affect you; |
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A failure to successfully implement our business strategy could materially and
adversely affect our operations and growth opportunities; |
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Our intangible assets represent a substantial portion of our total assets; |
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Competition for acquisition targets and acquisition financing and other factors may
impede our ability to acquire other businesses and may inhibit our growth; |
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Our acquisitions could result in integration difficulties, unexpected expenses,
diversion of managements attention and other negative consequences; |
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Health care reform initiatives, particularly changes to the Medicare system, could
adversely affect our operations; |
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A decrease to our Medicare capitation payments may have a material adverse effect on
our results of operations, financial position and cash flows; |
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We are subject to government regulation; |
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The health care industry is subject to continued scrutiny; |
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Our insurance coverage may not be adequate, and rising insurance premiums could
negatively affect our profitability; |
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Deficit spending and economic downturns could negatively impact our results of
operations; and |
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Many factors that increase health care costs are largely beyond our ability to
control. |
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We assume no responsibility to update our forward-looking statements as a result of new
information, future events or otherwise. Additional information concerning these and other risks
and uncertainties is contained in our filings with the Securities and Exchange Commission,
including the section entitled Risk Factors in our Annual Report on Form 10-K for Fiscal 2009 and
in Item 1A of Part II of this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2009, we held certificates of deposit and cash equivalent investments in high
grade, short-term securities, which are not typically subject to material market risk. At
September 30, 2009, we had capital lease obligations outstanding at fixed rates. For loans with
fixed interest rates, a hypothetical 10% change in interest rates would have no material impact on
our future earnings and cash flows related to these instruments and would have an immaterial impact
on the fair value of these instruments. Our Term Loans and Credit Facility have variable interest
rates and are interest rate sensitive, however, we had no amount outstanding under these facilities
at September 30, 2009. We have no material risk associated with foreign currency exchange rates or
commodity prices.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) or Rule 15d-15(e)) as of the end of the period covered by this report.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded
that, as of September 30, 2009, our disclosure controls and procedures were effective to ensure
that information required to be disclosed by us in the reports that we file or submit under the
Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified
in the SECs rules and forms and (ii) is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Our Chief Executive Officers and Chief Financial Officers conclusions regarding the
effectiveness of our disclosure controls and procedures should be considered in light of the
following limitations on the effectiveness of our disclosure controls and procedures, some of which
pertain to most, if not all, business enterprises, and some of which arise as a result of the
nature of our business. Our management, including our Chief Executive Officer and our Chief
Financial Officer, does not expect that our disclosure controls and procedures will prevent all
errors or improper conduct. A control system, no matter how well conceived and operated, can
provide only reasonable assurance that the objectives of the control system will be met. Further,
the design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of improper conduct, if any, will be detected. These inherent
limitations include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people or by management
override of the controls. Further, the design of any control system is based, in part, upon
assumptions about the likelihood of future events, and there can be no assurance that any control
system design will succeed in achieving its stated goals under all potential future conditions.
Additionally, over time, controls may become inadequate because of changes in conditions or the
degree of compliance with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and
not be detected. In addition, we depend on our HMO affiliates for certain financial and other
information that we receive concerning the revenue and expenses that we earn and incur. Because our
HMO affiliates generate that information for us, we have less control over the manner in which that
information is generated.
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Changes in Internal Control over Financial Reporting
Based on an evaluation, under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, there has been no change
in our internal control over
financial reporting during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Section 302 Certifications
Provided with this report are certifications of our Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and the SECs
implementing regulations. This Item 4 contains the information concerning the evaluations referred
to in those certifications, and you should read this information in conjunction with those
certifications for a more complete understanding of the topics presented.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Note 10 of our Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in our Form 10-K
for Fiscal 2009 and in other reports filed from time to time with the SEC since the date we filed
our Form 10-K. Readers are urged to carefully review our risk factors since they may cause our
results to differ from the forward-looking statements made in this report or otherwise made by or
on our behalf. Those risk factors are not the only ones we face. Additional risks not presently
known to us or other factors not perceived by us to present significant risks to our business at
this time also may impair our business operation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibits
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Section 302 Certification of the Chief Executive Officer. |
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Section 302 Certification of the Chief Financial Officer. |
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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CONTINUCARE CORPORATION
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Dated: November 5, 2009 |
By: |
/s/ Richard C. Pfenniger, Jr.
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Richard C. Pfenniger, Jr. |
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Chairman of the Board, Chief Executive
Officer and President |
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By: |
/s/ Fernando L. Fernandez
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Fernando L. Fernandez |
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Senior Vice President -- Finance, Chief Financial Officer, Treasurer and Secretary |
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