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 SEPTEMBER 30, 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 November 8, 2001, the Registrant had 39,459,601 shares of $0.0001 par value
common stock outstanding.
CONTINUCARE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - September 30, 2001 (Unaudited) and
June 30, 2001........................................................................ 3
Condensed Consolidated Statements of Operations - Three Months Ended
September 30, 2001 (Unaudited) and 2000 (Unaudited).................................. 4
Condensed Consolidated Statements of Cash Flows - Three Months Ended
September 30, 2001 (Unaudited) and 2000 (Unaudited).................................. 5
Notes to Condensed Consolidated Financial Statements - September 30, 2001
(Unaudited)..........................................................................
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................................. 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................................... 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................ 15
SIGNATURE PAGE..................................................................................... 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2001 June 30, 2001
------------------ -------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents ................................................ $ 497,402 $ 525,482
Accounts receivable, net of allowance for doubtful accounts of
$5,816,000 at September 30, 2001 and $5,802,000 at June 30, 2001 ....... 117,901 81,132
Other receivables ........................................................ 730,635 763,637
Prepaid expenses and other current assets ................................ 246,751 306,261
------------ ------------
Total current assets ................................................. 1,592,689 1,676,512
Equipment, furniture and leasehold improvements, net ........................ 683,048 703,494
Goodwill, net of accumulated amortization of approximately
$3,661,000 at September 30, 2001 and June 30, 2001 ........................ 14,663,392 14,663,392
Intangible assets, net of accumulated amortization of
approximately $5,053,000 at September 30, 2001 and
approximately $4,685,000 at June 30, 2001 ................................. 2,485,252 2,853,359
Deferred financing costs, net of accumulated amortization of
approximately $2,026,000 at September 30, 2001 and $1,706,000
at June 30, 2001........................................................... 1,378,594 1,698,750
Other assets, net ........................................................... 75,192 74,731
------------ ------------
Total assets ......................................................... $ 20,878,167 $ 21,670,238
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ......................................................... $ 681,960 $ 739,506
Accrued expenses ......................................................... 2,164,739 2,270,695
Accrued salaries and benefits ............................................ 765,334 579,805
Due to (from) HMOs, net .................................................. 213,098 (622,666)
Credit Facility .......................................................... 900,000 500,000
Advances from HMO ........................................................ 300,000 450,000
Due to Medicare, net ..................................................... 349,378 500,045
Current portion of convertible subordinated notes payable ................ 273,896 273,896
Current portion of long term debt ........................................ 5,008,568 4,952,076
Current portion of related party notes payable ........................... 63,854 53,211
Accrued interest payable ................................................. 21,898 17,703
Current portion of capital lease obligations ............................. 160,846 149,915
------------ ------------
Total current liabilities ............................................ 10,903,571 9,864,186
Capital lease obligations, less current portion ............................. 99,187 99,774
Convertible subordinated notes payable, less current portion ................ 4,561,890 4,630,364
Long term debt, less current portion ........................................ 829,622 1,011,704
Related party notes payable, less current portion ........................... 1,125,040 1,135,683
------------ ------------
Total liabilities .................................................... 17,519,310 16,741,711
Commitments and contingencies
Shareholders' equity
Common stock; $0.0001 par value; 100,000,000 shares authorized, 42,455,794
shares issued and 39,459,601 shares
outstanding at September 30, 2001 and June 30, 2001 .................... 3,946 3,946
Additional paid-in capital ............................................... 59,511,632 59,511,632
Accumulated deficit ...................................................... (50,732,020) (49,162,350)
Treasury stock (2,996,193 shares) ........................................ (5,424,701) (5,424,701)
------------ ------------
Total shareholders' equity ............................................. 3,358,857 4,928,527
------------ ------------
Total liabilities and shareholders' equity ............................. $ 20,878,167 $ 21,670,238
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended September 30,
-----------------------------------
2001 2000
------------ ------------
Medical services revenue, net ........................................ $ 23,730,294 $ 29,636,491
Expenses
Medical services:
Medical claims ............................................... 18,497,613 23,346,143
Other ........................................................ 3,185,584 4,192,414
Payroll and employee benefits .................................... 1,285,657 1,402,360
Provision for bad debts .......................................... 13,503 --
Professional fees ................................................ 226,391 277,859
General and administrative ....................................... 1,261,775 1,355,087
Depreciation and amortization .................................... 458,310 722,759
------------ ------------
Subtotal ....................................................... 24,928,833 31,296,622
Loss from operations .................................................. (1,198,539) (1,660,131)
Other income (expense)
Interest income .................................................. 20,853 13,867
Interest expense ................................................. (391,984) (397,819)
Other ............................................................ -- 304
------------ ------------
Net loss .............................................................. $ (1,569,670) $ (2,043,779)
============ ============
Basic and diluted loss per common share ............................... $ (.04) $ (.06)
============ ============
Basic and diluted weighted average number of common shares outstanding 39,459,601 33,240,090
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended September 30,
---------------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ........................................................... $(1,569,670) $(2,043,779)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Depreciation and amortization, including amortization
of deferred loan costs ........................................... 788,297 1,068,077
Provision for bad debts .......................................... 13,503 --
Changes in operating assets and liabilities, excluding the effect of
acquisitions and disposals:
(Increase) decrease in accounts receivable ....................... (50,272) 41,376
Decrease in prepaid expenses and other current assets ............ 59,510 82,548
Decrease (increase) in other receivables ......................... 33,002 (196,925)
Increase in other assets ......................................... (461) (1,547)
Increase in due to/from HMO's, net ............................... 835,764 249,756
(Decrease) increase in due to/from Medicare ...................... (113,287) 391,375
Decrease in accounts payable and accrued expenses ................ 22,027 58,252
Increase in accrued interest payable ............................. 4,195 2,339
----------- -----------
Net cash provided by (used in) operating activities ................... 22,608 (348,528)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of equipment ................................ -- 1,500
Property and equipment additions ................................... (33,505) (109,701)
----------- -----------
Net cash used in investing activities ................................. (33,505) (108,201)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on convertible subordinated notes ......................... (68,474) --
Principal repayments under capital lease obligation ................ (25,908) (17,697)
Net increase in Credit Facility .................................... 400,000 --
Payment on advances from HMOs ...................................... (150,000) --
Repayments to Medicare per agreement ............................... (172,801) (178,891)
----------- -----------
Net cash used in financing activities ................................. (17,183) (196,588)
----------- -----------
Net decrease in cash and cash equivalents ............................. (28,080) (653,317)
----------- -----------
Cash and cash equivalents at beginning of period ...................... 525,482 2,535,540
----------- -----------
Cash and cash equivalents at end of period ............................ $ 497,402 $ 1,882,223
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Note payable issued for refunds due to Medicare for overpayments ...... $ 37,380 $ 62,180
=========== ===========
Purchase of furniture and fixtures with proceeds of capital lease
obligations ........................................................... $ 36,252 $ 31,170
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 generally accepted accounting principles 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 generally accepted accounting principles 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 months ended September 30, 2001 are
not necessarily indicative of the results that may be expected for the year
ended June 30, 2002.
The balance sheet at June 30, 2001 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended June 30, 2001.
Certain reclassifications have been made to the prior year amounts to conform to
the current year presentation.
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 September 30, 2001, the Company operated, owned and/or managed: fifteen
staff model clinics in south and central Florida; an Independent Practice
Association ("IPA") with 29 physicians; and four Home Health agencies. For the
three months ended September 30, 2001, approximately 67% of net medical services
revenue was derived from managed care contracts with Humana Medical Plans, Inc.
("Humana") and 28% of net medical services revenue was derived from managed care
contracts with Foundation Health, A Florida Health Plan, Inc. ("Foundation").
For the three months ended September 30, 2000 approximately 58% of net medical
services revenue was derived from managed care contracts with Humana and 38% of
net medical services revenue was derived from managed care contracts with
Foundation.
During Fiscal 2001 and continuing into Fiscal 2002, the Company has experienced
a deterioration in its claim loss ratio, resulting in operating losses and a
significant working capital deficiency. Changes in the claims loss ratio are due
to fluctuations in utilization, the timing of claims paid by the HMOs on the
Company's behalf, as well as increases in medical costs without counterbalancing
increases in premium revenues from the HMOs.
The financial statements of the Company have been prepared assuming that it 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 advantageous HMO benefit
changes, the Company's credit facility (see Note
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
5) and negotiated extensions of current obligations. However, there can be no
assurances that these sources of funds will be sufficient to fund operations and
satisfy its obligations as they become due.
NOTE 3 - ADOPTION OF NEW ACCOUNTING STANDARD
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142") effective July 1, 2001.
Under SFAS No. 142, goodwill and certain other intangible assets are no longer
amortized but rather reviewed for impairment annually, or more frequently if
certain indicators arise. The Company is required to complete the initial step
of a transitional impairment test within six months of adoption of SFAS No. 142
and to complete the final step of the transitional impairment test by the end of
the fiscal year. Any impairment loss resulting from the transitional impairment
test will be recorded as a cumulative effect of a change of accounting
principle. Subsequent impairment losses will be reflected in operating income in
the income statement. As management has not yet completed the transitional
impairment test and not determined if an impairment loss exists, the cumulative
effect of a change in accounting principle can not be determined at this time.
Had the Company accounted for its goodwill and other intangible assets not
subject to amortization under SFAS No. 142 for all periods presented, the
Company's net loss and loss per share would have been as follows:
Three Months Ended
September 30,
---------------------------
2002 2001
----------- -----------
Reported net loss ........................................ $(1,569,670) $(2,043,779)
Add back amortization of intangible assets no longer
subject to amortization -- 265,329
----------- -----------
$(1,569,670) $(1,778,450)
----------- -----------
Basic and diluted earnings per share:
Reported net income ................................. $ (.04) $ (.06)
Goodwill amortization ............................... -- .01
----------- -----------
Adjusted net income ................................. $ (.04) $ (.05)
----------- -----------
NOTE 4 - CONVERTIBLE SUBORDINATED NOTES PAYABLE AND RELATED PARTY NOTES PAYABLE
On October 30, 1997, the Company issued $46,000,000 of 8% Convertible
Subordinated Notes Payable (the "Notes") originally due on
October 31, 2002. Through a series of repurchases and troubled debt
restructurings in Fiscal 2001 and 2000, the outstanding principal balance of the
Notes on the balance sheet at September 30, 2001 was approximately $3,913,000.
Effective June 30, 2001, the Company completed a restructuring of the Notes
(the "Fiscal 2001 Restructuring") which resulted in the conversion of Notes in
the principal amount of approximately $6,220,000 to approximately 6,220,000
shares of the Company's common stock and the issuance of a new convertible note
(the "New Note") to Frost Nevada Limited Partnership ("Frost Nevada"), an
entity controlled by Dr. Phillip Frost, Vice Chairman of the Company's Board of
Directors, with a principal balance of $912,195.
Also as part of the Fiscal 2001 Restructuring, holders of approximately
$3,780,000 of outstanding Notes remaining have agreed to restructure various
terms of the Notes, which include, among other things, the following: (i) adding
interest of $132,317 which accrued through April 30, 2001 to the outstanding
principal balance; (ii) extending the maturity date through October 2005; (iii)
reducing the conversion rate from $2.00 to $1.00; (iv) providing for quarterly
interest payments; (v) adding a call provision if the outstanding common stock
trades at or above $2.50 per share for twenty trading days and if the common
stock trades an average of at least 100,000 shares per week for a four week
period; and (vi) curing all prior defaults under the Notes. The balance of the
outstanding Notes on the balance sheet of approximately $4,836,000, includes
interest accrued through September 30, 2001 of approximately $46,000 and the
remaining interest of approximately $877,000 which will be payable in quarterly
payments through the current maturity date of October 31, 2005.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
Subsequent to the Fiscal 2001 Restructuring, Frost Nevada transferred
approximately 13% of the New Note in a private transaction to a group of six
investors (the "Related Party Notes"). Mr. Angel, the Company's president and
chief executive officer, and an entity controlled by Mr. Angel comprise 40% of
this investor group. The balance of the outstanding Related Party Notes on the
balance sheet at September 30, 2001 of approximately $1,189,000, includes
interest accrued through September 30, 2001 of approximately $16,000 and the
remaining interest of approximately $261,000 which will be payable in
semi-annual payments through October 31, 2005.
NOTE 5 -CREDIT FACILITY
The Company has entered into a credit facility agreement ("Credit Facility").
The Credit Facility provides a revolving loan of $3,000,000 which is due March
31, 2002. The Credit Facility may be renewed annually at the option of the
lender. Interest is payable monthly at 2.9% plus the 30-day Dealer Commercial
Paper Rate which is 2.63% at September 30, 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 a board member. At
September 30, 2001, the outstanding balance of the Credit Facility was $900,000.
NOTE 6 - EARNINGS PER SHARE
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 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 July 13, 2001, the counterplaintiffs filed their Third
Amended Counterclaim against the Company and included Mr. Charles Fernandez as a
defendant in the action. The Third Amended Counterclaim alleges counts for (i)
breach of contract against the Company and CPPM based on the alleged failure to
register stock pursuant to the Registration Rights Agreement, the alleged
failure to pay contingent merger consideration and the alleged failure to
fulfill obligations pursuant to Rule 144 of the Securities Act of 1933; (ii)
fraud in the inducement against the Company, CPPM and Mr. Fernandez in
connection with the execution of the Registration Rights Agreement and the
Agreement and Plan of Merger; (iii) violation of Florida Blue Sky Laws against
the Company, CPPM and Mr. Fernandez; and (iv) conversion against the Company and
CPPM. The Third Amended Counterclaim seeks an amount in excess of $4,000,000 in
damages. On August 31, 2001, the Company, CPPM and Mr. Fernandez filed their
Answer and Affirmative Defenses to the Third Amended Counterclaim. The matter
may be scheduled for trial after February 2002. Discovery is ongoing. 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
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
non-compete covenant. On February 18, 2000, the Company filed a Motion for
Summary Judgment as to all Plaintiffs. On April 28, 2000, the Plaintiffs filed a
Motion for Summary Judgment as to the issue of liability. On June 5, 2000, the
Company filed a Motion for Judgment on the Pleadings as to all Plaintiffs. 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 motion 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 has been continued and is scheduled to resume on or after February,
2002. The Company believes the action has little merit and intends to vigorously
defend the 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 still proceeding at a slow pace.
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 and the carriers for
Kahn & Riskin, M.D. have been discussing apportionment of responsibilities. The
Company believes it has meritorious defenses and intends to vigorously pursue
them.
In Fiscal 1999, the Company closed or dissolved certain subsidiaries, some of
which had pending claims against them. The liability associated with these
closed or dissolved subsidiaries was approximately $749,000 at September 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 minor disputes with
equipment lessors and other vendors.
Other than the liability discussed in the preceding paragraph, no liability has
been recorded on the above matters as it is not possible to estimate the
liability, if any.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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, 2001, 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.
GENERAL
We are a provider of integrated outpatient healthcare and home
healthcare services in Florida. As of September 30, 2001, we operated, owned
and/or managed fifteen staff model clinics in south and central Florida; an
Independent Practice Association (the "IPA") with 29 physicians; and four home
health agencies.
MEDICARE AND MEDICAID REIMBURSEMENT CONSIDERATIONS
Our home health agencies ("HHAs") 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
only derived approximately 5% of our net patient service revenue directly from
the Medicare and Medicaid programs during the three months ended September 30,
2001, a substantial portion of our managed care revenues are based upon Medicare
reimbursable rates. Therefore, any changes that limit or reduce Medicare
reimbursement levels could have a material adverse effect on our business.
Further, significant changes have or 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,
the Congress of the United States may enact unfavorable legislation, which could
adversely affect operations by, for example, decreasing Medicare reimbursement
rates.
THE MEDICARE PROGRAM
Traditionally, Medicare has reimbursed HHAs for the "reasonable
costs" for services provided to Medicare beneficiaries. Medicare-reimbursed
costs are subject to audit, which may result in a decrease in payments we have
previously received. The Balanced Budget Act of 1997 (the "BBA") enacted in
August 1997 contains numerous provisions related to Medicare and Medicaid
reimbursement. The BBA resulted in deep cuts to provider reimbursements.
Congress enacted the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act
of 1999 ("BBRA") to provide necessary relief to various facets of the health
care delivery system through remedies to both problematic policy and excessive
payment reductions. Prior to the BBA, Medicare reimbursed HHAs through a
cost-based reimbursement system that was criticized for providing few incentives
to HHAs to maximize efficiency or control volume. The BBA, as amended by the
Omnibus Consolidated and Emergency Supplemental Appropriations
10
Act of 1999 ("OCESAA"), called for the development and implementation of a
prospective payment system ("PPS") for Medicare HHA services. The BBA
established an interim payment system ("IPS") until PPS could be implemented.
IPS lowered reimbursement limits for home health visits. The IPS cost limits
apply to us for the cost reporting periods beginning after October 1997 and
ending with the implementation of PPS on October 1, 2000.
The BBA established a 15% reduction (the "Reduction") to the cost
limits and per-patient limits in place as of September 30, 1999. The BBRA
delayed implementation of the Reduction until one year after the implementation
of PPS. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection
Act of 2000 ("BIPA") amends the BBRA to further delay the Reduction for an
additional year. BIPA also provides for restoration of the full home health
market basket update for home health services for the Centers for Medicare and
Medicaid Services ("CMS") fiscal year 2001 and establishes a special rule for
payment under the PPS for HHA services for CMS' fiscal year 2001 based on
adjusted prospective payment amounts. Pursuant to this special rule, BIPA
provides that for purposes of making payments for HHA services for CMS' fiscal
year 2001, CMS is required to (i) with respect to episodes and visits ending on
or after October 1, 2000, and before April 1, 2001, use the final standardized
and budget neutral prospective payment amounts for 60-day episodes and
standardized average per visit amounts for CMS' fiscal year 2001 as published in
the final regulations establishing PPS on July 3, 2000; and (ii) with respect to
episodes and visits ending on or after April 1, 2001, and before October 1,
2001, use such amounts increased by 2.2 percent. Once in effect, the Reduction
may impact both Medicare and managed care reimbursement negatively.
For cost reporting periods beginning on or after October 1, 1997, the
BBA requires HHAs to submit claims for payment for HHA services only on the
basis of the geographic location at which the service was furnished. In the
regulation issued in July 2000, CMS estimates that the re-distributional effects
on HHAs would range from a positive $428 million for freestanding non-profit
agencies to a negative $363 million for freestanding for-profit agencies in
Fiscal 2001. Any resultant reduction in our cost limits could have a material
adverse effect on our business, financial condition or results of operation.
However, as our HHAs only operate in a single county, we have not been impacted
by these requirements.
The BBA has also created a consolidated billing requirement pursuant to
which most services provided by a HHA must be billed by the HHA and outside
suppliers may no longer bill the Medicare program directly for services provided
by the supplier under arrangements with the HHA. Instead, the HHA will have to
provide most home health services either directly or pursuant to an arrangement
with an outside supplier where the HHA bills Medicare directly. CMS clarifies
that the law is silent regarding the specific terms of HHA payments to outside
suppliers and does not authorize Medicare to impose any such requirements. To
the extent that our HHAs utilize outside providers for the provision of
applicable home health services, we believe we are in compliance with the
consolidated billing requirements. Additionally, to the extent that we use
outside providers, our cost to obtain such services may be greater than the
reimbursement provided to by the Medicare program, especially if Medicare
reimbursement decreases but the cost of such services to us increases or stays
consistent.
THE MEDICAID PROGRAM
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 may 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.
MANAGED CARE ORGANIZATIONS
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
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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.
ADDITIONAL PAYOR CONSIDERATIONS
Congress and the State Legislature may propose legislation altering the
financing and delivery of healthcare services provided by us (beyond the changes
made by the BBA). It is difficult to predict the ultimate effect that any future
legislation will have on us.
Medicare retrospectively audits all reimbursements paid to
participating providers, including those now or previously managed and/or owned
by us, including without limitation, hospital outpatient departments, CORFs,
ORFs, and HHAs. Accordingly, at any time, we could be subject to overpayment
notices for Medicare reimbursements the Company has previously received and
refund obligations for prior period cost reports that have not been audited and
settled as of the date hereof.
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 SEPTEMBER 30, 2001 AS COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000.
REVENUE
Medical services revenues decreased 20% from approximately $29,636,000
for the three months ended September 30, 2000 to approximately $23,730,000 for
the three months ended September 30, 2001. We provided managed care services for
approximately 51,000 and 67,000 member months (members per month multiplied by
the months for which services were available) during the three months ended
September 30, 2001 and 2000, respectively. The decrease in revenue and member
months primarily resulted from an amendment to our IPA contract with Foundation
(the "2001 Amendment"). Among other things, the 2001 Amendment terminated our
association with certain physician practices effective May 31, 2001, which
represented approximately 70% of the IPA's membership at that time. During the
three months ended September 30, 2001 and 2000, the IPA's membership was
approximately 4,000 and 13,000, respectively.
Revenue generated by our managed care entities under our contracts with
HMOs as a percentage of medical services revenue was approximately 95% and 96%
during the three months ended September 30, 2001 and 2000, respectively. Revenue
generated by the Humana contract was 67% and 58% of medical services revenue for
the three months ended September 30, 2001 and 2000, respectively. Revenue
generated by Foundation contracts was 28% and 38% of medical services revenue
for the three months ended September 30, 2001 and 2000, respectively.
Our home health agencies' revenue was approximately 5% and 4% of
medical services revenue during the three month periods ended September 30, 2001
and 2000, respectively, and consisted primarily of Medicare reimbursement.
EXPENSES
Medical services expenses for the three month period ended September
30, 2001 were approximately $21,683,000 or 91.4% of medical services revenue,
compared to approximately $27,539,000 or 92.9% of medical services revenue for
the three month period ended September 30, 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
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$18,498,000 and $23,346,000 for the three months ended September 30, 2001 and
2000, respectively, or 82.1% and 81.8% of medical services revenues derived from
our managed care entities. The annualized claims ratio for Fiscal 2001 was
81.8%. 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 the services, capitation payments to our contracted IPA
physicians, and other costs necessary to operate our facilities. Other direct
costs were approximately $3,186,000 and $4,192,000 for the three months ended
September 30, 2001 and 2000, respectively, or 13.4% and 14.1% of medical
services revenues.
Payroll and employee benefits for administrative personnel was
approximately $1,286,000 for the three months ended September 30, 2001, or 5.4%
of revenues, compared to approximately $1,402,000 or 4.7% of revenue for the
three months ended September 30, 2000. The decrease in payroll and employee
benefits expense while increasing as a percentage of revenue resulted primarily
from the 2001 Amendment, which resulted in revenues decreasing more
significantly than payroll and employee benefits.
General and administrative expenses for the three months ended
September 30, 2001 were approximately $1,262,000 or 5.3% of revenues compared to
approximately $1,355,000 or 4.6% of revenues for the three months ended
September 30, 2000. The decrease in general and administrative expenses while
increasing as a percentage of revenue resulted primarily from the 2001
Amendment, which resulted in revenues decreasing more significantly than general
and administrative expenses.
LOSS FROM OPERATIONS
Loss from operations for the three months ended September 30, 2001 was
approximately $1,199,000 or 5.1% of total revenues, compared to a loss from
operations of approximately $1,660,000 or 5.6% of total revenues for the three
months ended September 30, 2000.
NET LOSS
Net loss for the three months ended September 30, 2001 was
approximately $1,570,000 compared to a net loss of approximately $2,044,000 for
the three months ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Effective June 30, 2001, we completed a restructuring of the Notes (the
"Fiscal 2001 Restructuring"). The Fiscal 2001 Restructuring resulted in, among
other things, the conversion of $6,219,511 of Notes into our common stock, the
addition of interest of $132,317 which accrued through April 30, 2001 to the
outstanding principal balance of the Notes, extending the maturity date of the
Notes through October 31, 2005 and the issuance of a new note in the principal
amount of $912,195. The remaining outstanding principal balance of the Notes of
$3,912,806 was reinstated as a performing non-defaulted loan.
The credit facility (the "Credit Facility") provides a revolving loan
of $3,000,000 which is due March 31, 2002. Interest is payable monthly at 2.9%
plus the 30-day Dealer Commercial Paper Rate which is 2.63% at September 30,
2001. The Credit Facility may be renewed annually at the option of the lender.
The Credit Facility has been guaranteed by a board member and an entity
controlled by a board member. At September 30, 2001, the balance outstanding
under the Credit Facility was $900,000.
Our net loss was approximately $1,570,000 for the three months ended
September 30, 2001. Net cash provided by operating activities for the three
months ended September 30, 2001 was approximately $23,000 due
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primarily to our net operating loss being offset by an increase in due to HMO's
of approximately $836,000 and non-cash amortization and depreciation of
approximately $789,000.
Net cash used in investing activities for the three months ended
September 30, 2001 was approximately $34,000, primarily for the purchase of
computer equipment. Net cash used in financing activities for the three months
ended September 30, 2001 was approximately $17,000, which primarily resulted
from a net increase in our Credit Facility of $400,000 and offset by scheduled
payments for various notes payable of approximately $417,000.
Our working capital deficit was approximately $9,311,000 at September
30, 2001.
The financial statements have been prepared assuming we will continue
as a going concern. We continue to take steps to improve our cash flow and
profitability. 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 advantageous HMO benefit changes, the Credit Facility
and negotiated extensions of current obligations. 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 assurances that such 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
can have a dilutive effect on current shareholders and a significant effect on
our operations.
On October 27, 2001, the American Stock Exchange (the "Exchange")
notified us of its decision to continue to list our common stock pending a
review of our Form 10-Q for the period ending December 31, 2001. As of the date
of this filing, we are still below the continued listing requirements of the
Exchange with respect to the requirement to 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 Exchange will continue to list our common
stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2001, we had only cash equivalents, 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 hypothetical 10% change in interest rates would have no impact
on our future earnings and cash flows related to these instruments. A
hypothetical 10% change in interest rates 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 three months ended September 30, 2001.
There would have been no impact on the net loss for the three months ended
September 30, 2000 as there were no balances outstanding under the Credit
Facility during that period. We have no material risk associated with foreign
currency exchange rates or commodity prices.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are 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, we 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, we filed a Motion for Summary Judgment as to all Plaintiffs.
On April 28, 2000, the Plaintiffs filed a Motion for Summary Judgment as to the
issue of liability. On June 5, 2000, we filed a Motion for Judgment on the
Pleadings as to all Plaintiffs. All of the aforementioned motions were heard on
June 15, 2000. On November 14, 2000, the court granted our 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 our motion 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 has been continued and is scheduled to resume on or
after February, 2002. We believe the action has little merit and intends to
vigorously defend the claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement dated October 1, 2001 between
Continucare Corporation and Janet L. Holt.
(b) Reports on Form 8-K
Form 8-K was filed on August 15, 2001 regarding the completion
of the Fiscal 2001 Restructuring which was effective June 30, 2001. Immediately
upon the completion of the Fiscal 2001 Restructuring, Dr. Phillip Frost, a
director, was deemed to beneficially own 55.5% of our outstanding common stock,
assuming conversion of the new note which was issued as part of the Fiscal 2001
Restructuring (the "New Note"). Subsequently, Frost Nevada sold approximately
13% of the shares he acquired as part of the Fiscal 2001 Restructuring, 13% of
the shares of common stock issuable upon conversion of the Notes and transferred
13% of the New Note in a private transaction to a group of six investors. As a
result of this subsequent transaction, Dr. Frost beneficially owns 50% of our
outstanding common stock, assuming conversion of the New Note, or 49% of our
outstanding common stock prior to giving effect to the conversion of the New
Note.
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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: November 14, 2001 By: /s/ Spencer J. Angel
-------------------------------------
Spencer J. Angel
Chief Executive Officer and President
By: /s/ Janet L. Holt
-------------------------------------
Janet L. Holt
Chief Financial Officer
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