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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-12115
CONTINUCARE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-2716023
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
80 SOUTHWEST EIGHTH STREET
SUITE 2350
MIAMI, FLORIDA 33130
(Address of principal executive offices)
(Zip Code)
(305) 350-7515
(Registrant's telephone number, including area code)
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 [ ]
At May 11, 2001, the Registrant had 33,240,090 shares of $0.0001 par value
common stock outstanding.
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CONTINUCARE CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - March 31, 2001 (Unaudited) and June 30,
2000................................................................................. 3
Condensed Consolidated Statements of Operations - Three Months Ended March 31,
2001 (Unaudited) and 2000 (Unaudited)................................................ 4
Condensed Consolidated Statements of Operations - Nine Months Ended March 31,
2001 (Unaudited) and 2000 (Unaudited)................................................ 5
Condensed Consolidated Statements of Cash Flows - Nine Months Ended March 31,
2001 (Unaudited) and 2000 (Unaudited)................................................ 6
Notes to Condensed Consolidated Financial Statements - March 31, 2001
(Unaudited).......................................................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................................. 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................................... 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................... 19
ITEM 3. DEFAULTS ON SENIOR SECURITIES........................................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 19
ITEM 5. OTHER INFORMATION....................................................................... 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................ 20
SIGNATURE PAGE..................................................................................... 21
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PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 JUNE 30, 2000
-------------- -------------
(UNAUDITED) (NOTE 1)
ASSETS
Current assets
Cash and cash equivalents ..................................... $ 967,930 $ 2,535,540
Accounts receivable, net of allowance for doubtful accounts of
$5,752,000 at March 31, 2001 and June 30, 2000 ............... 147,744 94,966
Other receivables ............................................. 477,813 697,977
Prepaid expenses and other current assets ..................... 307,136 368,431
------------ ------------
Total current assets ...................................... 1,900,623 3,696,914
Equipment, furniture and leasehold improvements, net ............. 860,217 880,873
Cost in excess of net tangible assets acquired, net of
accumulated amortization of approximately $7,742,000 at
March 31, 2001 and approximately $5,929,000 at June 30, 2000 ... 18,120,786 19,932,891
Deferred financing costs, net of accumulated amortization of
approximately $1,438,000 at March 31, 2001 and $426,000 at
June 30, 2000 .................................................. 1,966,875 2,964,375
Other assets, net ................................................ 91,955 70,127
------------ ------------
Total assets .............................................. $ 22,940,456 $ 27,545,180
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities
Accounts payable .............................................. $ 780,043 $ 687,703
Accrued expenses .............................................. 2,042,662 2,336,398
Accrued salaries and benefits ................................. 1,383,792 923,656
Due (from) to HMOs, net ....................................... (752,940) 985,835
Line of credit ................................................ 600,000 --
Advances from HMO ............................................. 886,689 --
Due to Medicare ............................................... 251,771 73,527
Current portion of convertible subordinated notes payable ..... 10,700,000 700,000
Current portion of long term debt ............................. 3,191,044 2,276,635
Accrued interest payable ...................................... 12,216 6,044
Current portion of capital lease obligations .................. 175,383 115,685
------------ ------------
Total current liabilities ................................. 19,270,660 8,105,483
Capital lease obligations, less current portion .................. 144,329 103,682
Convertible subordinated notes payable, less current portion ..... 700,000 11,050,000
Long term debt, less current portion ............................. 2,920,436 5,023,244
------------ ------------
Total liabilities ......................................... 23,035,425 24,282,409
Commitments and contingencies
Shareholders' (deficit) equity
Common stock; $0.0001 par value; 100,000,000 shares authorized,
36,236,282 shares issued (including treasury
shares) and 33,240,090 shares outstanding at both March 31,
2001 and June 30, 2000 ...................................... 3,325 3,325
Additional paid-in capital .................................... 57,708,595 57,708,595
Accumulated deficit ........................................... (52,382,188) (49,024,448)
Treasury stock (2,996,192 shares at March 31, 2001 and
June 30, 2000) .............................................. (5,424,701) (5,424,701)
------------ ------------
Total shareholders' (deficit) equity ........................ (94,969) 3,262,771
------------ ------------
Total liabilities and shareholders' (deficit) equity ........ $ 22,940,456 $ 27,545,180
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-------------------------------
2001 2000
------------ ------------
Medical services revenue, net .................................. $ 29,589,882 $ 29,889,660
Expenses
Medical services:
Medical claims ........................................... 23,290,468 19,864,445
Contractual revision of previously recorded medical claims
liability .............................................. (3,638,205) --
Other .................................................... 4,275,068 4,700,767
Payroll and employee benefits ................................ 1,494,662 1,395,032
Professional fees ............................................ 256,581 193,362
General and administrative ................................... 1,348,147 1,373,192
Depreciation and amortization ................................ 727,900 773,044
------------ ------------
Subtotal ................................................... 27,754,621 28,299,842
Income from operations ............................................ 1,835,261 1,589,818
Other income (expense)
Interest income .............................................. 6,733 10,942
Interest expense ............................................. (448,083) (708,717)
Other ........................................................ -- 103,623
------------ ------------
Net income before extraordinary item .............................. 1,393,911 995,666
Gain on extinguishment of debt .................................... 1,000,000 9,471,710
------------ ------------
Net income ........................................................ $ 2,393,911 $ 10,467,376
============ ============
Per share data:
Basic earnings .......................................... $ .07 $ .43
============ ============
Diluted earnings ........................................ $ .07 $ .33
============ ============
Weighted average number of common shares outstanding:
Basic ................................................... 33,240,090 24,020,331
============ ============
Diluted ................................................. 33,240,090 31,855,476
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED MARCH 31,
-------------------------------
2001 2000
------------ ------------
Medical services revenue, net .................................. $ 89,149,934 $ 87,812,881
Expenses
Medical services:
Medical claims ........................................... 71,478,867 62,359,925
Contractual revision of previously recorded medical claims
liability .............................................. (3,638,205) (3,053,853)
Other .................................................... 12,816,254 13,711,040
Payroll and employee benefits ................................ 4,402,353 4,674,123
Professional fees ............................................ 851,187 651,582
General and administrative ................................... 4,167,640 4,397,578
Depreciation and amortization ................................ 2,180,035 2,340,744
------------ ------------
Subtotal ................................................... 92,258,131 85,081,139
(Loss) income from operations ..................................... (3,108,197) 2,731,742
Other income (expense)
Interest income .............................................. 31,142 35,509
Interest expense ............................................. (1,280,989) (2,870,952)
Other ........................................................ 304 383,623
------------ ------------
(Loss) income before extraordinary item ........................... (4,357,740) 279,922
Gain on extinguishment of debt .................................... 1,000,000 13,247,907
------------ ------------
Net (loss) income ................................................. $ (3,357,740) $ 13,527,829
============ ============
Per share data:
Basic (loss) earnings ................................... $ (.10) $ .76
============ ============
Diluted (loss) earnings ................................. $ (.10) $ .44
============ ============
Weighted average number of common shares outstanding:
Basic ................................................... 33,240,090 17,731,000
============ ============
Diluted ................................................. 33,240,090 30,694,636
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED MARCH 31,
-------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income .................................................... $ (3,357,740) $ 13,527,829
Adjustments to reconcile net (loss) income to cash used in operating
activities:
Depreciation and amortization including amortization
of deferred loan costs ........................................... 3,270,480 3,102,067
Contractual revision of previously recorded medical claims liability (3,638,205) (3,053,853)
Loss (gain) on disposal of equipment ............................... 33,426 (23,123)
Gain on extinguishment of debt ..................................... (1,000,000) (13,247,907)
Changes in operating assets and liabilities, excluding the effect of
acquisitions and disposals:
(Increase) decrease in accounts receivable ......................... (52,778) 599,680
Decrease (increase) in prepaid expenses and other current assets ... 61,295 (59,280)
Decrease (increase) in other receivables ........................... 220,164 (320,029)
Increase in other assets ........................................... (21,828) (6,361)
Increase (decrease) in due to (from) HMOs .......................... 1,899,430 (991,635)
Increase (decrease) in due to (from) Medicare ...................... 548,866 (108,378)
Increase in accounts payable and accrued expenses .................. 258,740 505,491
Increase in accrued interest payable ............................... 6,172 2,045,984
------------ ------------
Net cash used in operating activities ................................... (1,771,978) 1,970,485
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals of property and equipment .................... 1,500 --
Property and equipment additions ..................................... (215,580) (134,637)
------------ ------------
Net cash used in investing activities ................................... (214,080) (134,637)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit ......................................... 600,000 --
Advances from HMO .................................................... 1,450,000 --
Payments on advances from HMO ........................................ (563,311) --
Payments on convertible subordinated notes ........................... (350,000) (210,000)
Principal repayments under capital lease obligation .................. (66,276) (22,815)
Payments on long term debt ........................................... (651,965) (1,406,326)
Payment to related party ............................................. -- (90,000)
Payment of deferred financing costs .................................. -- (175,792)
------------ ------------
Net cash provided by (used in) financing activities ..................... 418,448 (1,904,933)
------------ ------------
Net decrease in cash and cash equivalents ............................... (1,567,610) (69,085)
------------ ------------
Cash and cash equivalents at beginning of period ........................ 2,535,540 3,185,077
------------ ------------
Cash and cash equivalents at end of period .............................. $ 967,930 $ 3,115,992
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Note payable issued for refunds due to Medicare for overpayments ........ $ 370,622 $ 637,556
============ ============
Purchase of furniture and fixtures with proceeds of capital lease
obligations ........................................................... $ 166,621 $ 158,023
============ ============
Common stock issued for deferred financing costs ........................ $ -- $ 3,375,000
============ ============
Common stock issued for extinguishment of debt .......................... $ -- $ 21,312,500
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
NOTE 1 - UNAUDITED INTERIM INFORMATION
The accompanying unaudited condensed consolidated financial statements of
Continucare Corporation ("Continucare" or the "Company") 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
nine months ended March 31, 2001 are not necessarily indicative of the results
that may be expected for the year ended June 30, 2001.
The balance sheet at June 30, 2000 has been derived from the audited financial
statements at that date but does not include all of the information and notes
required by accounting principles generally accepted in the United States for
complete financial statements.
For further information, refer to the consolidated financial statements and
notes thereto included in the Company's annual report on Form 10-K for the year
ended June 30, 2000.
Certain reclassifications have been made to the prior year amounts to conform to
the current year.
NOTE 2 - GENERAL
Continucare, which was incorporated on February 1, 1996 as a Florida
corporation, is a provider of integrated outpatient healthcare and home
healthcare services in Florida. Continucare's predecessor, Zanart Entertainment,
Incorporated ("Zanart") was incorporated in 1986. On August 9, 1996, a
subsidiary of Zanart merged into Continucare Corporation (the "Merger"). As a
result of the Merger, the shareholders of Continucare became shareholders of
Zanart, and Zanart changed its name to Continucare Corporation. As of March 31,
2001, the Company operated, owned and/or managed: sixteen staff model clinics in
south and central Florida; an Independent Practice Association ("IPA") with 57
physicians; and three Home Health agencies. For the nine months ended March 31,
2001 approximately 57% of net medical services revenue was derived from managed
care contracts with Humana Medical Plans, Inc. ("Humana") and 39% of net medical
services revenue was derived from managed care contracts with Foundation Health
Corporation ("Foundation"). For the nine months ended March 31, 2000,
approximately 55% of net medical services revenue was derived from Humana and
39% was derived from Foundation.
Effective March 31, 2001, the Company negotiated an amendment to its IPA
contract with Foundation (the "Amendment"). The Amendment reduced the long-term
debt liability to Foundation by $1,000,000 (see Note 4) and eliminated the
medical claims liability incurred by the IPA through March 31, 2001. The
Amendment will also terminate the Company's association with certain IPA
physician practices effective May 31, 2001 which represent approximately 70% of
the IPA's membership.
During the nine month period ended March 31, 2001, the Company has experienced
deterioration in its claim loss ratio. Changes in the claims loss ratio are due
to fluctuations in utilization, the timing of claims paid by the health
maintenance organizations ("HMOs") on our behalf, as well as increases in
medical costs without counterbalancing increases in premium revenues.
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The financial statements of the Company have been prepared assuming that the
Company will continue as a going concern. The Company believes that it will be
able to fund its capital commitments, operating cash requirements and satisfy
its obligations as they become due from a combination of cash on hand, expected
operating cash flow improvements through HMO premium increases and improvements
in the benefit structure of HMO contracts effective January 1, 2001, and the
Company's credit facility (see Note 4). However, there can be no assurances that
these sources of funds will be sufficient to fund its operations and satisfy its
obligations as they become due.
NOTE 3 - CONVERTIBLE SUBORDINATED NOTES PAYABLE
On July 2, 1999, the Company repurchased $4,000,000 of its 8% Convertible
Subordinated Notes due 2002 (the "Notes"), which mature on October 31, 2002, for
$210,000 and recorded a gain on extinguishment of debt of approximately
$3,776,000. The Company funded the purchase of the Notes from working capital.
The Company has not provided for income taxes on the gain because it believes
that it will be able to utilize certain of its net operating loss carryforwards
to offset any income tax liability related to the transaction.
On February 15, 2000, the Company completed a restructuring of the Notes through
the execution of a Consent Letter and Agreement to the First Supplemental
Indenture which resulted in, among other things, the conversion of $31,000,000
of Notes into its common stock. The remaining outstanding principal balance of
the Notes of $10,000,000 were reinstated as a performing non-defaulted loan. The
$11,400,000 balance of the outstanding Notes at March 31, 2001 includes interest
accrued through March 31, 2001 of $289,589 as well as the remaining interest of
$1,110,411 which will be payable in semi-annual payments through October 31,
2002.
As discussed in Note 8, the Company is currently in discussions with (i) certain
of its noteholders and a related party to negotiate a transaction whereby a
portion of the outstanding Notes would be purchased by the related party at a
discount and subsequently be converted into common stock at a reduced conversion
ratio, and (ii) certain of its noteholders to restructure certain terms of the
Notes (collectively, the "Restructuring Transaction"). The Restructuring
Transaction may also include the issuance of equity, new debt or a combination
of the two, which could result in substantial dilution to the shareholders. The
Company did not make the April 30, 2001 semi-annual payment of interest on the
Notes. In the event the Company does not conclude the Restructuring Transaction
or does not make the interest payment by or before May 30, 2001, the outstanding
principal balance of the Notes, $10,000,000 at March 31, 2001, and accrued
interest may become due and payable immediately. As there can be no assurances
that the Company will be able to reach a favorable settlement with the holders
of the Notes, $10,000,000, the outstanding principal balance of the Notes, has
been classified as a current liability on the Company's balance sheet. The
long-term portion of the Notes on the Company's balance sheet represents
interest which will accrue after March 31, 2002 and through the maturity date.
NOTE 4 - LONG-TERM DEBT
In March, 2000, the Company entered into a credit facility agreement ("Credit
Facility") to provide a revolving loan of $3,000,000. Interest is payable
monthly at 2.9% above the 30-day Dealer Commercial Paper Rate which was 4.95% at
March 31, 2001. All assets of the Company serve as collateral for the Credit
Facility. In addition, the Credit Facility has been guaranteed by a board member
and an entity controlled by another board member. At March 31, 2001, the
outstanding balance of the Credit Facility was $600,000. The Credit Facility
currently expires on March 31, 2002 unless renewed at the option of the lender.
As discussed in Note 2, effective March 31, 2001, the Company negotiated an
amendment to its IPA contract with Foundation. The Amendment reduced the
long-term debt liability to Foundation by $1,000,000 and eliminated the medical
claims liability incurred by the IPA through March 31, 2001. As a result of this
Amendment, the Company recorded an extraordinary gain on extinguishment of debt
of $1,000,000 and a contractual revision of previously recorded medical claims
liability of approximately $3,638,000. The Company has not provided for income
taxes on the extraordinary gain on extinguishment of debt as it believes that it
will be able to utilize certain of its net operating loss carryforwards to
offset any income tax liability related to this transaction.
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NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------ -------------------------------
2001 2000 2001 2000
-------------- ------------ -------------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Numerator for earnings (loss) before
extraordinary item:
Numerator for basic earnings (loss) per
share-
Income (loss) before extraordinary item,
as reported ........................................... $ 1,393,911 $ 995,666 $ (4,357,740) $ 279,922
Effect of dilutive securities:
Interest expense related to convertible
subordinated notes .................................... -- 490,937 -- 2,460,997
-------------- ------------ -------------- ------------
Numerator for diluted earnings (loss) per
share - income (loss) before extraordinary
item after assumed conversions ......................... $ 1,393,911 $ 1,486,603 $ (4,357,740) $ 2,740,919
============== ============ ============== ============
Numerator for extraordinary item:
Numerator for basic earnings (loss) per
share - extraordinary item .............................. $ 1,000,000 $ 9,471,710 $ 1,000,000 $ 13,247,907
Effect of dilutive securities:
Interest expense related to convertible
subordinated notes ..................................... -- (490,937) -- (2,460,997)
-------------- ------------ -------------- ------------
Numerator for diluted earnings (loss) per
share - extraordinary item .............................. $ 1,000,000 $ 8,980,773 $ 1,000,000 $ 10,786,910
============== ============ ============== ============
Denominator:
Denominator for basic earnings (loss) per
share - weighted-average shares ......................... 33,240,090 24,020,331 33,240,090 17,731,000
Dilutive common shares:
Convertible subordinated notes .......................... -- 7,835,145 -- 12,963,636
-------------- ------------ -------------- ------------
Denominator for diluted earnings (loss) per
share - adjusted weighted-average
shares and assumed conversions .......................... 33,240,090 31,855,476 33,240,090 30,694,636
============== ============ ============== ============
Basic earnings (loss) per share, before
extraordinary item ....................................... $ .04 $ .04 $ (.13) $ .02
Extraordinary item .......................................... .03 .39 .03 .74
-------------- ------------ -------------- ------------
Basic earnings (loss) per share ............................. $ .07 $ .43 $ (.10) $ .76
============== ============ ============== ============
Diluted earnings (loss) per share before
extraordinary item ....................................... $ .04 $ .05 $ (.13) $ .09
Extraordinary item .......................................... .03 .28 .03 .35
-------------- ------------ -------------- ------------
Diluted earnings (loss) per share ........................... $ .07 $ .33 $ (.10) $ .44
============== ============ ============== ============
Options and warrants to purchase the Company's common stock were not included in
the computation of diluted earnings (loss) per share because the effect would be
antidilutive.
NOTE 6 - RELATED PARTY TRANSACTIONS
In May 1999, the Company entered into an agreement with Harter Financial, Inc.
("Harter") to assist it with a financial reorganization and to represent the
Company in negotiating the restructuring of the Notes and a settlement with the
noteholders. As compensation for its services, Harter received an initial fee of
$50,000 on May 18, 1999. On October 18, 1999, the Board of Directors approved a
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final compensation package to be paid to Harter consisting of a cash payment of
$150,000 and the issuance of 200,000 unregistered shares of the Company's common
stock, which were valued at $112,500 based on the closing price of the Company's
stock on the date of grant. The balance of $60,000 remaining unpaid at March 31,
2000 was paid in full prior to June 30, 2000. Mr. Angel, the Company's president
and CEO is also the president and a 15% shareholder of Harter. However, as of
May 18, 1999, Mr. Angel was not an officer or director of the Company.
NOTE 7 - CONTINGENCIES
The case of CONTINUCARE CORPORATION, A FLORIDA CORPORATION, CONTINUCARE
PHYSICIAN PRACTICE MANAGEMENT, INC. ("CPPM") V. JAY A. ZISKIND, AN INDIVIDUAL,
KENNETH I. ARVIN, AN INDIVIDUAL, TRACY ARVIN, AN INDIVIDUAL, ZISKIND & ARVIN,
P.A., A PROFESSIONAL ASSOCIATION, NORMAN B. GAYLIS, M.D., AN INDIVIDUAL AND ZAG
GROUP, INC., A FLORIDA CORPORATION, was filed on November 15, 1999 in the
Circuit Court of the 11th Judicial District in and for Miami-Dade County,
alleging breach of fiduciary duties, improper billing, and seeking the return of
all consideration previously paid by the Company to ZAG, and damages, as well as
seeking rescission of the Agreement and Plan of Merger and the Registration
Rights Agreement. On December 20, 1999, a counterclaim was filed against the
Company and CPPM alleging breach of contract, tortious interference and
conversion and seeks damages in excess of $l,600,000. On August 11, 2000, the
counterplaintiffs filed their Second Amended Counterclaim. The trial has been
scheduled for the June 25, 2001 trial calendar. Discovery is currently pending.
The Company believes that there is little merit to the counterclaim and intends
to vigorously defend the claims.
The Company is a party to the case of WARREN GROSSMAN, M.D., ALAN REICH, M.D.,
AND RICHARD STRAIN, M.D. V. CONTINUCARE PHYSICIAN PRACTICE MANAGEMENT, INC. AND
CONTINUCARE CORPORATION. This case was filed in May 1999 in the Circuit Court
for Broward County, Florida. The complaint alleges breach of employment
contracts based on the early termination of the Plaintiffs' employment and seeks
damages in excess of $250,000. On January 5, 2000, the Company filed a
counterclaim alleging breach of contract in connection with the Plaintiff's
failure to return certain computer equipment, as well as a breach of the
non-compete covenant. On February 18, 2000, the Company filed a Motion for
Summary Judgment as to all Plaintiffs. On June 5, 2000 , the Company filed a
Motion for Judgment on the Pleadings as to all Plaintiffs. On April 28, 2000,
the Plaintiffs filed a Motion for Summary Judgment as to the issue of liability.
All of the aforementioned motions were heard on June 15, 2000. On November 14,
2000, the court granted the Company's motion as to one of the Plaintiffs' claims
for deferred and incentive compensation, but reserved as to his claim for post
termination compensation related to follow-up patient care, if any. The court
denied the Company's motions as to the other two Plaintiffs. Also on November
14, 2000, the court denied the Plaintiffs' motion for summary judgment in all
respects. The trial started on February 13, 2001. As of the date of this filing,
the trial is still in progress and is scheduled to continue in August, 2001. The
Company believes the action has little merit and intends to vigorously defend
the claims.
The case of GE MEDICAL SYSTEMS, AN UNINCORPORATED DIVISION OF GENERAL ELECTRIC
COMPANY V. CONTINUCARE OUTPATIENT SERVICES, INC. N/K/A OUTPATIENT RADIOLOGY
SERVICES, INC., A FLORIDA CORPORATION AND CONTINUCARE CORPORATION, A FLORIDA
CORPORATION was settled between GE Medical Systems ("GE") and the Company on
April 5, 2001 with no admission of liability. As part of the settlement, GE
assigned to the Company all of its claims associated with the litigation. The
Company intends to continue to litigate its claims of indemnification through
its pending cross-claims and/or third party claims.
Two subsidiaries of the Company are parties to the case of NANCY FEIT ET AL. V.
KENNETH BLAZE, D.O. KENNETH BLAZE. D.O., P.A.; SHERIDEN HEALTHCORP, INC.; WAYNE
RISKIN, M.D.; KAHN AND RISKIN, M.D., P.A.; CONTINUCARE PHYSICIAN PRACTICE
MANAGEMENT, INC., D/B/A ARTHRITIS AND RHEUMATIC DISEASE SPECIALTIES, INC.; JAMES
JOHNSON, D.C. AND JOHNSON & FALK, D.C., P.A. The case was filed in December,
1999 in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida and served on the companies in April, 2000. The complaint
alleges vicarious liability and seeks damages in excess of $15,000. The Company
filed its answer on May 3, 2000. Discovery is currently pending. The Company has
made a demand for assumption of defense and indemnification from Kahn and
Riskin, M.D., P.A. and Wayne Riskin, M.D. The demand was initially rejected, but
is currently being re-evaluated. The Company believes it has meritorious
defenses and intends to vigorously pursue them.
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Prior to Fiscal 2000, the Company closed or dissolved certain subsidiaries, some
of which had pending claims against them. A liability associated with these
subsidiaries was approximately $749,000 at March 31, 2001.
The Company is also involved in various other legal proceedings incidental to
its business that arise from time to time out of 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 disputes with
equipment lessors and other vendors.
NOTE 8 - SUBSEQUENT EVENT
The Company is currently in discussions with (i) certain of its noteholders and
a related party to negotiate a transaction whereby a portion of the outstanding
Notes would be purchased by the related party at a discount and subsequently be
converted into common stock at a reduced conversion ratio, and (ii) certain of
its noteholders to restructure certain terms of the Notes (collectively, the
"Restructuring Transaction"). The Restructuring Transaction may also include the
issuance of equity, new debt or a combination of the two, which could result in
substantial dilution to the shareholders. The Company also did not make the
April 30, 2001, $350,000 semi-annual payment of interest on the Notes. Should
the Company not conclude the Restructuring Transaction or make the payment by or
before May 30, 2001, such failure will constitute an event of default under the
Indenture dated October 30, 1997 between the Company and the American Stock
Transfer & Trust Company. If an event of default occurs and is continuing, the
principal of all Notes may be declared due and payable immediately, including
any accrued and unpaid interest. While the Company anticipates that the
restructuring negotiations will be completed by May 30, 2001, there can be no
assurance that the Company will be successful in reaching a favorable settlement
with the holders of the Notes. Due to this uncertainty, $10,000,000, the
outstanding principal balance of the Notes, has been classified as a current
liability on the Company's balance sheet.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless otherwise indicated or the context otherwise requires, all
references in this Form 10-Q to "we," "us," "our," "Continucare" or the
"Company" refers to Continucare Corporation and its consolidated subsidiaries.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used in this Form 10-Q, the words
"believe," "anticipate," "think," "intend," "plan," "will be," and similar
expressions, identify such forward-looking statements. Such statements regarding
future events and/or the future financial performance of Continucare are subject
to certain risks and uncertainties, which could cause actual events or our
actual future results to differ materially from any forward-looking statement.
Certain factors that might cause such a difference are set forth in our Form
10-K for the period ended June 30, 2000, including the following: our success or
failure in implementing our current business and operational strategies; the
availability, terms and access to capital and customary trade credit; general
economic and business conditions; competition; changes in our business strategy;
availability, location and terms of new business development; availability and
terms of necessary or desirable financing or refinancing; labor relations; the
outcome of pending or yet-to-be instituted legal proceedings; and labor and
employee benefit costs.
Medical claims payable include estimates of medical claims expenses
incurred by our members but not yet reported to us. These estimates are based on
a number of factors, including our prior claims experience and
pre-authorizations of treatment. Adjustments, if necessary, are made to medical
claims expenses in the period the actual claims costs are ultimately determined.
We cannot assure that actual medical claims costs in future periods will not
exceed our estimates. If these costs exceed our estimates, our profitability in
future periods will be adversely affected.
GENERAL
We are a provider of integrated outpatient healthcare and home
healthcare services in Florida. As of March 31, 2001, we operated, owned and/or
managed sixteen staff model clinics in south and central Florida; an Independent
Practice Association (the "IPA") with 57 physicians; and three home health
agencies. Effective March 31, 2001, we negotiated an amendment to our IPA
contract with Foundation (the "Amendment"). The Amendment reduced the long-term
debt liability to Foundation by $1,000,000 (see Note 4 to our Condensed
Consolidated Financial Statements) and eliminated the medical claims liability
incurred by the IPA through March 31, 2001. The Amendment will also terminate
our association with certain IPA physician practices effective May 31, 2001
which represents approximately 70% of the IPA's membership.
REIMBURSEMENT CONSIDERATIONS
We receive reimbursement from the Medicare and Medicaid programs or
payments from insurers, self-funded benefit plans or other third-party payors.
The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings
and funding restrictions, any of which could have the effect of limiting or
reducing reimbursement levels. Although we derived less than 5% of our net
patient service revenue directly from Medicare and Medicaid in Fiscal 2001, a
substantial portion of our managed care revenues are based upon Medicare
reimbursable rates. Therefore, any changes which limit or reduce Medicare
reimbursement levels could have a material adverse effect on our business.
Significant changes have been and may be made in the Medicare program,
which could have a material adverse effect on our business, results of
operations, prospects, financial results, financial condition or cash flows. In
addition, legislation has been or may be introduced in the Congress of the
United States which, if enacted, could adversely affect operations by, for
example, decreasing reimbursement by third-party payors such as Medicare or
limiting our ability to maintain or increase the level of services provided to
patients.
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Title XVIII of the Social Security Act authorizes Medicare Part A, the
health insurance program that pays for inpatient care for covered persons
(generally, those age 65 and older and the long-term disabled) and Medicare Part
B, a voluntary supplemental medical assistance insurance program. Healthcare
providers may participate in the Medicare program subject to certain conditions
of participation and acceptance of a provider agreement by the Secretary of
Health and Human Services. Only enumerated services, upon satisfaction of
certain criteria, are eligible for Medicare reimbursement. Relative to the
services of our Home Health Agencies and previously owned or operated Medicare
certified outpatient rehabilitation facilities and Comprehensive Outpatient
Rehabilitation Facilities, in the past Medicare has reimbursed the "reasonable
costs" for services up to program limits. Medicare-reimbursed costs are subject
to audit, which may result in a decrease in payments we have previously
received. Historically, Medicare Part B reimburses the operating cost component
of most home health services on a reasonable cost basis, subject to a 5.8%
reduction which the Balanced Budget Act of 1997 (the "BBA"), extended through
federal Fiscal year 2000. However, Medicare regulations became effective on
August 1, 2000, pursuant to which home health services are reimbursed on the
basis of a prospective payment system ("PPS"). Such a PPS system was implemented
on October 1, 2000. While we have been operating under PPS during the six month
period ended March 31, 2001, it is too early to predict the effect PPS will have
on us. There can be no assurance that the established fees will not change in a
manner that could adversely affect our revenues.
Pursuant to the Medicaid program, the federal government supplements
funds provided by the various states for medical assistance to the medically
indigent. Payment for such medical and health services is made to providers in
an amount determined in accordance with procedures and standards established by
state law under federal guidelines. Significant changes have been and may
continue to be made in the Medicaid program which could have an adverse effect
on our financial condition, results of operations and cash flows.
During certain fiscal years, the amounts appropriated by state
legislatures for payment of Medicaid claims have not been sufficient to
reimburse providers for services rendered to Medicaid patients. Failure of a
state to pay Medicaid claims on a timely basis may have an adverse effect on our
cash flow, results of operations and financial condition.
Payments per visit from managed care organizations typically have been
lower than cost-based reimbursement from Medicare and reimbursement from other
payors for nursing and related patient services. In addition, payors and
employer groups are exerting pricing pressure on home health care providers,
resulting in reduced profitability. Such pricing pressures could have a material
adverse effect on our business, results of operations, prospects, financial
results, financial condition or cash flows.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the unaudited condensed consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-Q.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE FOR
THE THREE MONTHS ENDED MARCH 31, 2001 AS COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2000.
REVENUE
Medical services revenues decreased from approximately $29,890,000 for
the three months ended March 31, 2000 to approximately $29,590,000 for the three
months ended March 31, 2001. We provided managed care services for approximately
64,400 and 63,800 member months (members per month multiplied by the months for
which services were available) during the three months ended March 31, 2001 and
2000, respectively.
Revenue generated by our managed care entities under our contracts with
HMOs as a percentage of medical services revenue was approximately 96% and 95%,
respectively, during the three months ended March 31, 2001 and 2000. Revenue
generated by the Humana Medical Plans, Inc. ("Humana") contract was 56% and 59%
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of medical services revenue for the three months ended March 31, 2001 and 2000,
respectively. Revenue generated by Foundation Health Corporation ("Foundation")
contracts was 40% and 36% of medical services revenue for the three months ended
March 31, 2001 and 2000, respectively.
Our home health agencies' revenue was approximately 4% and 5% of
medical services revenue during the three month periods ended March 31, 2001 and
2000, respectively, and consisted primarily of Medicare reimbursement.
EXPENSES
Effective March 31, 2001, the Company negotiated an amendment to its
IPA contract with Foundation (the "Amendment"). The Amendment reduced the
long-term debt liability to Foundation by $1,000,000 and eliminated the medical
claims liability incurred by the IPA through March 31, 2001. As a result of this
Amendment, the Company recorded an extraordinary gain on extinguishment of debt
of $1,000,000 and a contractual revision of previously recorded medical claims
liability of approximately $3,638,000 (the "2001 Contractual Adjustment").
Medical services expenses for the three month period ended March 31,
2001 were approximately $23,927,000 or 80.8% of medical services revenue after
giving effect to the 2001 Contractual Adjustment, compared to approximately
$24,565,000 or 82.2% of medical services revenue for the three month period
ended March 31, 2000. Excluding the 2001 Contractual Adjustment, medical
services expenses were approximately $27,566,000 or 93.2% of medical services
revenue for the three month period ended March 31, 2001. (See Note 4 of our
Condensed Consolidated Financial Statements.)
Medical claims represent the costs of medical services provided by
providers other than us but which are to be paid by us for individuals covered
by our capitated risk contracts with HMOs. Claims expense was approximately
$23,290,000 and $19,864,000 for the three months ended March 31, 2001 and 2000,
respectively, or 82.4% and 70.0% of medical services revenues derived from our
managed care entities prior to the 2001 Contractual Adjustment of claims
expense. The annualized claims ratio for Fiscal 2000 was 74%. Our claim loss
ratio varies from quarter to quarter due to fluctuations in utilization, the
timing of claims paid by the HMOs on our behalf, as well as increases in medical
costs without counterbalancing increases in premium revenues.
Other direct costs include the salaries and benefits of health
professionals providing primary care services, capitation payments to our
contracted primary care IPA physicians, and other costs necessary to operate our
facilities. Other direct costs were approximately $4,275,000 and $4,701,000 for
the three months ended March 31, 2001 and 2000, respectively, or 14.4% and 15.7%
of medical services revenues. The decrease primarily resulted from cost
containment measures which were implemented throughout Fiscal 2000.
Payroll and employee benefits for administrative personnel was
approximately $1,494,000 for the three months ended March 31, 2001, or 5.1% of
revenues, compared to approximately $1,395,000 or 4.7% of revenue for the three
months ended March 31, 2000. The increase primarily resulted from salary rate
increases during the year.
General and administrative expenses for the three months ended March
31, 2001 were approximately $1,348,000 or 4.6% of revenues compared to
approximately $1,373,000 or 4.6% of revenues for the three months ended March
31, 2000.
Interest expense for the three months ended March 31, 2001 was
approximately $448,000 or 1.5% of revenues compared to approximately $709,000 or
2.4% of revenues for the three months ended March 31, 2000. Interest expense for
the three months ended March 31, 2001 is comprised primarily of approximately
$353,000 related to amortization of deferred financing costs, approximately
$24,000 of imputed interest expense on non-interest bearing notes and interest
expense of approximately $71,000 related to various other notes payable.
Interest expense for the three months ended March 31, 2000 was comprised of
approximately $93,000 related to amortization of deferred financing costs,
approximately $51,000 of imputed interest expense on non-interest bearing notes,
interest expense of approximately $56,000 related to various other notes
payable, and approximately $505,000 of interest on our convertible subordinated
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notes (the "Notes"). The Notes were restructured during February, 2000 and, in
accordance with Statement of Financial Accounting Standards, No. 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructurings," all interest which
would accrue over the remaining term of the Notes was included in the
outstanding Notes on the balance sheet. Therefore, no interest expense will be
recorded on the Notes through the maturity date.
INCOME FROM OPERATIONS
Income from operations for the three months ended March 31, 2001 was
approximately $1,835,000 or 6.2% of total revenues, compared to approximately
$1,590,000 or 5.3% of total revenues for the three months ended March 31, 2000.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
On February 15, 2000, we recorded an extraordinary gain on
extinguishment of debt of approximately $9,472,000 as a result of the
restructuring of the convertible subordinated debentures, net of restructuring
costs. The gain resulted primarily from the conversion of $31,000,000 of the
outstanding principal balance into 15,500,000 shares of common stock, which were
valued at approximately $21,312,500 based on the closing price of our common
stock on February 15, 2000, the forgiveness of approximately $4,237,000 of
accrued interest, the write off of approximately $1,929,000 of unamortized
deferred financing costs and the recording of $2,100,000 of interest which will
accrue on the remaining balance of the Notes under the revised terms of the
agreement through the maturity date of October 31, 2002. We have not provided
for income taxes on the gain because we believe we will be able to utilize
certain of our net operating loss carryforwards to offset any income tax
liability related to the restructuring transaction.
On March 31, 2001, we recorded an extraordinary gain on extinguishment
of debt of $1,000,000 as a result of the Amendment to the IPA contract with
Foundation. The Amendment reduced the long-term liability to Foundation by
$1,000,000 on March 31, 2001. We have not provided for income taxes on the gain
because we believe we will be able to utilize certain of our net operating loss
carryforwards to offset any income tax liability related to this transaction.
NET INCOME
Net income for the three months ended March 31, 2001 was approximately
$2,394,000 compared to approximately $10,467,000 for the three months ended
March 31, 2000.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE FOR
THE NINE MONTHS ENDED MARCH 31, 2001 AS COMPARED TO THE NINE MONTHS ENDED MARCH
31, 2000.
REVENUE
Medical services revenues increased from approximately $87,813,000 for
the nine months ended March 31, 2000 to approximately $89,150,000 for the nine
months ended March 31, 2001. We provided managed care services for approximately
199,900 and 192,600 member months (members per month multiplied by the months
for which services were available) during the nine months ended March 31, 2001
and 2000, respectively.
Revenue generated by our managed care entities under our contracts with
HMOs as a percentage of medical services revenue was approximately 96% and
94.5%, respectively, during the nine months ended March 31, 2001 and 2000.
Revenue generated by the Humana contract was 57% and 55% of medical services
revenue for the nine months ended March 31, 2001 and 2000, respectively. Revenue
generated by Foundation contracts was 39% of medical services revenue for both
the nine month periods ended March 31, 2001 and 2000.
Our home health agencies' revenue was approximately 4% and 5% of
medical services revenue during the nine month periods ended March 31, 2001 and
2000, respectively, and consisted primarily of Medicare reimbursement.
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EXPENSES
Medical services expenses for the nine month period ended March 31,
2001 were approximately $80,657,000 or 90.5% of medical services revenue after
giving effect to the 2001 Contractual Adjustment, compared to approximately
$73,017,000 or 83.2% of medical services revenue for the nine month period ended
March 31, 2000 after giving effect to a negotiated $3,054,000 reduction in
medical services expense (the "2000 Contractual Adjustment"). Excluding the 2001
and 2000 Contractual Adjustments, medical services expenses were approximately
$84,295,000 or 94.5% of medical services revenue for the nine month period ended
March 31, 2001 and $76,071,000 or 86.6% of medical services revenue for the nine
month period ended March 31, 2000.
Medical claims represent the costs of medical services provided by
providers other than us but which are to be paid by us for individuals covered
by our capitated risk contracts with HMOs. Claims expense was approximately
$71,479,000 and $62,360,000 for the nine months ended March 31, 2001 and 2000,
respectively, or 83.4% and 74.4% of medical services revenues derived from our
managed care entities prior to the 2001 and 2000 Contractual Adjustments of
claims expense. The annualized claims ratio for Fiscal 2000 was 74%. Our claim
loss ratio varies from quarter to quarter due to fluctuations in utilization,
the timing of claims paid by the HMOs on our behalf, as well as increases in
medical costs without counterbalancing increases in premium revenues.
Other direct costs include the salaries and benefits of health
professionals providing primary care services, capitation payments to our
contracted primary care IPA physicians, and other costs necessary to operate our
facilities. Other direct costs were approximately $12,816,000 and $13,711,000
for the nine months ended March 31, 2001 and 2000, respectively, or 14.4% and
15.6% of medical services revenues. The decrease primarily resulted from cost
containment measures which were implemented throughout Fiscal 2000.
Payroll and employee benefits for administrative personnel was
approximately $4,402,000 for the nine months ended March 31, 2001, or 4.9% of
revenues, compared to approximately $4,674,000 or 5.3% of revenue for the nine
months ended March 31, 2000. This decrease is due to certain positions which
were eliminated during Fiscal 2000.
General and administrative expenses for the nine months ended March 31,
2001 were approximately $4,168,000 or 4.7% of revenues compared to approximately
$4,398,000 or 5.0% of revenues for the nine months ended March 31, 2000. The
decrease in general and administrative expense as a percent of revenues
primarily resulted from cost containment measures which were implemented
throughout Fiscal 2000.
Interest expense for the nine months ended March 31, 2001 was
approximately $1,281,000 or 1.4% of revenues compared to approximately
$2,871,000 or 3.3% of revenues for the nine months ended March 31, 2000.
Interest expense for the nine months ended March 31, 2001 is comprised primarily
of approximately $1,013,000 related to amortization of deferred financing costs,
approximately $93,000 of imputed interest expense on non-interest bearing notes
and interest expense of approximately $169,000 related to various notes payable.
Interest expense for the nine months ended March 31, 2000 was comprised of
approximately $450,000 related to amortization of deferred financing costs,
approximately $168,000 of imputed interest expense on non-interest bearing
notes, interest expense of approximately $142,000 related to various notes
payable and approximately $2,104,000 of interest on the Notes. The Notes were
restructured during February, 2000 and, in accordance with Statement of
Financial Accounting Standards, No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings," all interest which would accrue over the
remaining term of the Notes was included in the outstanding Notes on the balance
sheet. Therefore, no interest expense will be recorded on the Notes through the
maturity date.
INCOME/LOSS FROM OPERATIONS
Loss from operations for the nine months ended March 31, 2001 was
approximately $3,108,000 or 3.5% of total revenues, compared to operating income
of approximately $2,732,000 or 3.1% of total revenues for the nine months ended
March 31, 2000.
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EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
In July, 1999, we recorded an extraordinary gain on extinguishment of
debt of approximately $3,776,000 as a result of repurchasing $4,000,000 of our
outstanding convertible subordinated notes payable (the "Notes") for a cash
payment of $210,000 and the write-off of related deferred financing costs and
accrued interest payable. We have not provided for income taxes on the gain
because we believe that we will be able to utilize certain of our net operating
loss carryforwards to offset any income tax liability related to this
transaction.
On February 15, 2000, we recorded an extraordinary gain on
extinguishment of debt of approximately $9,472,000 as a result of the
restructuring of the convertible subordinated debentures, net of restructuring
costs. The gain resulted primarily from the conversion of $31,000,000 of the
outstanding principal balance into 15,500,000 shares of common stock, which were
valued at approximately $21,312,500 based on the closing price of our common
stock on February 15, 2000, the forgiveness of approximately $4,237,000 of
accrued interest, the write off of approximately $1,929,000 of unamortized
deferred financing costs and the recording of $2,100,000 of interest which will
accrue on the remaining balance of the Notes under the revised terms of the
agreement through the maturity date of October 31, 2002. We have not provided
for income taxes on the gain because we believe we will be able to utilize
certain of our net operating loss carryforwards to offset any income tax
liability related to the restructuring transaction.
On March 31, 2001, we recorded an extraordinary gain on extinguishment
of debt of $1,000,000 as a result of the Amendment to our IPA contract with
Foundation. The Amendment reduced the long-term liability to Foundation from
$1,500,000 to $500,000 on March 31, 2001. We have not provided for income taxes
on the gain because we believe we will be able to utilize certain of our net
operating loss carryforwards to offset any income tax liability related to this
transaction.
NET INCOME/LOSS
Net loss for the nine months ended March 31, 2001 was approximately
$3,358,000 compared to net income of approximately $13,528,000 for the nine
months ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our consolidated financial statements have been prepared (and the other
information in this Form 10-Q has been presented) assuming we will continue as a
going concern. We have suffered recurring losses from operations and have an
excess of current liabilities over current assets and a capital deficit that
raise substantial doubt about our ability to continue as a going concern. Our
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
On July 2, 1999, we repurchased $4,000,000 face value of our Notes for
approximately $210,000, recognizing a gain on extinguishment of debt of
approximately $3,776,000. The purchase of the Notes was funded from working
capital.
On February 15, 2000, we completed a troubled debt restructuring of the
Notes through the execution of a Consent Letter and Agreement to the First
Supplemental Indenture (the "Restructuring") which resulted in, among other
things, the conversion of $31,000,000 of Notes into our common stock. The
remaining outstanding principal balance of the Notes of $10,000,000 were
reinstated as a performing non-defaulted loan.
We are currently in discussions with (i) certain of our noteholders and
a related party to negotiate a transaction whereby a portion of the outstanding
Notes would be purchased by the related party at a discount and subsequently be
converted into common stock at a reduced converstion ratio, and (ii) certain of
our noteholders to restructure certain terms of the Notes (collectively, the
"Restructuring Transaction"). The Restructuring Transaction may also include the
issuance of equity, new debt or a combination of the two, which could result in
substantial dilution to our shareholders. We did not make the April 30, 2001,
$350,000 semi-annual payment of interest on the Notes. Should we not conclude
the Restructuring Transaction or make the payment by or before May 30, 2001,
such failure will constitute an event of default under the Indenture dated
October 30, 1997 between us and the American Stock Transfer & Trust Company. If
an event of default occurs and is
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continuing, the principal of all Notes may be declared due and payable
immediately, including any accrued and unpaid interest. While we anticipate that
the restructuring negotiations will be completed by May 30, 2001, there can be
no assurance we will be successful in reaching a favorable settlement with the
holders of the Notes. Due to this uncertainty, $10,000,000, the outstanding
principal balance of the Notes, has been classified as a current liability on
our balance sheet.
We have entered into a credit facility (the "Credit Facility") to
provide a revolving loan of $3,000,000. Interest is payable monthly at 2.9%
above the 30-day Dealer Commercial Paper Rate which was 4.95% at March 31, 2001.
The Credit Facility has been guaranteed by a board member and an entity
controlled by another board member. At March 31, 2001, the outstanding balance
of the Credit Facility was $600,000. The Credit Facility currently expires on
March 31, 2002 unless renewed at the option of the lender.
Effective March 31, 2001, we negotiated an amendment to our IPA
contract with Foundation. The Amendment reduced the long-term debt liability to
Foundation from $1,500,000 to $500,000 and eliminated the medical claims
liability incurred by the IPA through March 31, 2001. As a result of this
Amendment, we recorded an extraordinary gain on extinguishment of debt of
$1,000,000 and a contractual revision of previously recorded medical claims
liability of approximately $3,638,000. We have not provided for income taxes on
the extraordinary gain on extinguishment of debt as we believe that we will be
able to utilize certain of our net operating loss carryforwards to offset any
income tax liability related to this transaction. The Amendment will also
terminate our association with certain IPA physician practices effective May 31,
2001 which represents approximately 70% of the IPA's membership.
Our loss before extraordinary gain was approximately $4,358,000 for the
nine months ended March 31, 2001. Net cash used in operating activities for the
nine months ended March 31, 2001 was approximately $1,772,000 due primarily to
the loss before extraordinary gain of approximately $4,358,000 and a net
decrease in Due (from) to HMOs of approximately $1,899,000, and offset by
non-cash amortization and depreciation expenses of approximately $3,270,000 and
an increase in due to Medicare of approximately $549,000.
Net cash used in investing activities for the nine months ended March
31, 2001 was approximately $214,000, primarily for the purchase of computer
equipment. Net cash provided by financing activities for the nine months ended
March 31, 2001 was approximately $418,000 due to scheduled payments for various
notes payable of approximately $1,068,000, and offset by proceeds from the
Credit Facility of $600,000 and net proceeds from Advances from HMO of
approximately $887,000.
Our working capital deficit was approximately $17,370,000 at March 31,
2001.
We currently have no knowledge of any intermediary audit adjustment
trends with respect to previously filed cost reports. However, as is standard in
the industry, we remain at risk for disallowances and other adjustments to
previously filed cost reports until final settlement. Our average settlement
period with respect to our cost reports has historically ranged from two to
three years.
The financial statements have been prepared assuming we will continue
as a going concern. We believe that we will be able to fund our capital
commitments, operating cash requirements and satisfy our obligations as they
become due from a combination of cash on hand, expected operating cash flow
improvements through HMO premium increases and improvements in the benefit
structure of HMO contracts effective January 1, 2001, and the Credit Facility.
However, there can be no assurances that these sources of funds will be
sufficient to fund our operations and satisfy our obligations as they become
due.
If we are unable to satisfy our cash requirements, we may be required
to take certain steps, such as borrowing additional funds, restructuring our
indebtedness, selling assets, reducing costs, and reducing or delaying capital
expenditures. If we need additional capital to fund our operations, there can be
no assurance that such additional capital can be obtained or, if obtained, that
it will be on terms acceptable to us. The incurring or assumption of additional
indebtedness could result in the issuance of additional equity and/or debt which
could have a dilutive effect on current shareholders and a significant effect on
our operations.
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On March 5, 2001, the American Stock Exchange notified us of its
decision to continue to list our common stock pending a review of our March 31,
2001 Form 10-Q. As of the date of this filing, we are still below the continued
listing requirements of the American Stock Exchange with respect to requirements
which include the need for us to maintain stockholders' equity of at least $2
million and not sustain losses from continuing operations and/or net losses in
two of our three most recent fiscal years. We are unable to guarantee that the
American Stock Exchange will continue to list our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2001, our cash equivalents were invested in high grade,
very short-term securities, which are not typically subject to material market
risk. We have loans outstanding at fixed rates. For loans with fixed interest
rates, a 100 basis point adverse movement (increase) in interest rates would
have no 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 Credit Facility is interest rate sensitive. A 100 basis point
adverse movement (increase) in interest rates would have an immaterial impact in
our net loss for the nine months ended March 31, 2001 as there were only
balances outstanding under the Credit Facility for 25 days. There would have
been no impact on net income for the nine months ended March 31, 2000 as there
were no outstanding balances under the Credit Facility at that time. We have no
material risk associated with foreign currency exchange rates or commodity
prices.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The case of GE MEDICAL SYSTEMS, AN UNINCORPORATED DIVISION OF GENERAL
ELECTRIC COMPANY V. CONTINUCARE OUTPATIENT SERVICES, INC. N/K/A OUTPATIENT
RADIOLOGY SERVICES, INC., A FLORIDA CORPORATION AND CONTINUCARE CORPORATION, A
FLORIDA CORPORATION was settled between us and GE Medical Systems ("GE") on
April 5, 2001 with no admission of liability. As part of the settlement, GE
assigned to us all of its claims associated with the litigation. We intend to
continue to litigate our claims of indemnification through our pending
cross-claims and/or third party claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We are currently in discussions with (i) certain of our noteholders and
a related party to negotiate a transaction whereby a portion of the outstanding
Notes would be purchased by the related party at a discount and subsequently be
converted into common stock at a reduced conversion rate, and (ii) certain of
our noteholders to restructure certain terms of the Notes (collectively, the
"Restructuring Transaction"). The Restructuring Transaction may also include
the issuance of equity, new debt or a combination of the two which could result
in substantial dilution to our shareholders. We did not make the April 30, 2001,
$350,000 semi-annual payment of interest on the Notes. Should we not conclude
the Restructuring Transaction or make the payment by or before May 31, 2001,
such failure will constitute an event of default under the Indenture dated
October 30, 1997 between us and the American Stock Transfer & Trust Company. If
an event of default occurs and is continuing, the principal of all Notes may be
declared due and payable immediately, including any accrued and unpaid interest.
We have $10,000,000 principal amount of outstanding Notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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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.
CONTINUCARE CORPORATION
Dated: May 15, 2001 By: /s/ SPENCER J. ANGEL
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Spencer J. Angel
Chief Executive Officer and President
By: /s/ JANET L. HOLT
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Janet L. Holt
Chief Financial Officer
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