Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-12115
CONTINUCARE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Florida
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59-2716023 |
(State or Other Jurisdiction of
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(IRS Employer Identification No.) |
Incorporation or Organization) |
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7200 Corporate Center Drive |
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Suite 600 |
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Miami, Florida
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33126 |
(Address of Principal Executive Offices)
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(Zip Code) |
(305) 500-2000
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange On Which Registered |
COMMON STOCK
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NYSE AMEX LLC |
$.0001 PAR VALUE |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o |
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Accelerated filer þ |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
At April 30, 2009, the Registrant had 59,383,549 shares of $0.0001 par value common stock
outstanding.
CONTINUCARE CORPORATION
INDEX
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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March 31, |
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June 30, |
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2009 |
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2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
10,327,402 |
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$ |
9,905,740 |
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Due from HMOs, net of a liability for incurred
but not reported medical claims of
approximately $22,532,000 and $23,900,000 at
March 31, 2009 and June 30, 2008, respectively |
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14,172,292 |
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15,325,783 |
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Prepaid expenses and other current assets |
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857,177 |
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708,841 |
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Deferred income tax assets |
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411,182 |
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413,932 |
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Total current assets |
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25,768,053 |
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26,354,296 |
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Certificates of deposit, restricted |
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1,294,035 |
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1,274,147 |
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Property and equipment, net |
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9,863,395 |
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8,363,427 |
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Goodwill |
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73,204,582 |
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73,204,582 |
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Intangible assets, net of accumulated amortization
of approximately $3,097,000 and $2,168,000 at
March 31, 2009 and June 30, 2008, respectively |
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5,563,332 |
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6,492,333 |
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Deferred income tax assets |
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2,689,484 |
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2,574,472 |
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Other assets, net |
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101,882 |
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227,047 |
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Total assets |
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$ |
118,484,763 |
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$ |
118,490,304 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
900,722 |
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$ |
402,718 |
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Accrued expenses and other current liabilities |
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3,410,354 |
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4,458,119 |
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Income taxes payable |
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1,010,076 |
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1,198,722 |
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Total current liabilities |
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5,321,152 |
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6,059,559 |
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Deferred income tax liabilities |
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6,206,611 |
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6,256,205 |
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Other liabilities |
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937,013 |
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948,263 |
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Total liabilities |
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12,464,776 |
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13,264,027 |
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Commitments and contingencies |
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Shareholders equity: |
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Common stock, $0.0001 par value: 100,000,000
shares authorized; 59,383,549 shares issued and
outstanding at March 31, 2009 and 64,796,303
shares issued and outstanding at June 30, 2008 |
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5,938 |
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6,480 |
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Additional paid-in capital |
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104,826,660 |
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114,514,853 |
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Accumulated earnings (deficit) |
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1,187,389 |
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(9,295,056 |
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Total shareholders equity |
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106,019,987 |
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105,226,277 |
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Total liabilities and shareholders equity |
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$ |
118,484,763 |
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$ |
118,490,304 |
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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Revenue |
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$ |
75,395,799 |
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$ |
65,936,165 |
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Operating expenses: |
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Medical services: |
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Medical claims |
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53,217,866 |
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45,132,244 |
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Other direct costs |
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7,232,634 |
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6,902,514 |
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Total medical services |
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60,450,500 |
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52,034,758 |
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Administrative payroll and employee benefits |
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3,539,646 |
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3,489,077 |
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General and administrative |
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4,364,000 |
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4,341,247 |
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Total operating expenses |
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68,354,146 |
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59,865,082 |
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Income from operations |
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7,041,653 |
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6,071,083 |
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Other income (expense): |
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Interest income |
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27,843 |
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147,799 |
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Interest expense |
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(9,087 |
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(5,079 |
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Income before income tax provision |
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7,060,409 |
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6,213,803 |
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Income tax provision |
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2,733,906 |
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2,538,302 |
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Net income |
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$ |
4,326,503 |
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$ |
3,675,501 |
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Net income per common share: |
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Basic |
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$ |
.07 |
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$ |
.05 |
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Diluted |
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$ |
.07 |
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$ |
.05 |
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Weighted average common shares outstanding: |
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Basic |
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59,904,532 |
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68,352,586 |
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Diluted |
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60,848,054 |
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69,473,743 |
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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Nine Months Ended |
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March 31, |
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2009 |
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2008 |
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Revenue |
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$ |
206,000,328 |
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$ |
188,344,274 |
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Operating expenses: |
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Medical services: |
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Medical claims |
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145,683,860 |
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133,856,761 |
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Other direct costs |
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21,534,562 |
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20,436,307 |
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Total medical services |
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167,218,422 |
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154,293,068 |
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Administrative payroll and employee benefits |
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9,393,652 |
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8,912,191 |
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General and administrative |
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12,410,761 |
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12,272,352 |
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Total operating expenses |
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189,022,835 |
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175,477,611 |
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Income from operations |
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16,977,493 |
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12,866,663 |
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Other income (expense): |
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Interest income |
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151,634 |
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508,302 |
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Interest expense |
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(17,184 |
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(17,033 |
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Income before income tax provision |
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17,111,943 |
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13,357,932 |
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Income tax provision |
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6,629,498 |
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5,249,249 |
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Net income |
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$ |
10,482,445 |
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$ |
8,108,683 |
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Net income per common share: |
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Basic |
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$ |
.17 |
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$ |
.12 |
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Diluted |
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$ |
.17 |
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$ |
.11 |
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Weighted average common shares outstanding: |
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Basic |
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62,059,381 |
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69,402,996 |
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Diluted |
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63,119,454 |
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70,559,450 |
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Nine Months Ended |
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March 31, |
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2009 |
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2008 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
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$ |
10,482,445 |
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$ |
8,108,683 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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1,660,956 |
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1,904,069 |
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Loss on disposal of fixed assets |
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64,586 |
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Provision for bad debts |
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181,081 |
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Compensation expense related to issuance of stock options |
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908,954 |
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1,036,002 |
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Deferred income tax expense |
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(161,856 |
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(134,130 |
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Changes in operating assets and liabilities: |
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Due from HMOs, net |
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1,153,491 |
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840,297 |
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Prepaid expenses and other current assets |
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(148,336 |
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335,293 |
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Other assets, net |
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93,555 |
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(87,263 |
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Accounts payable |
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498,004 |
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(848,148 |
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Accrued expenses and other current liabilities |
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(1,079,590 |
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(682,033 |
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Income taxes payable |
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(188,646 |
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1,383,378 |
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Net cash provided by operating activities |
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13,283,563 |
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12,037,229 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Proceeds from sales of certificates of deposit |
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15,000 |
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Purchase of certificates of deposit |
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(19,888 |
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(101,677 |
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Purchase of property and equipment |
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(2,161,231 |
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(777,415 |
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Net cash used in investing activities |
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(2,181,119 |
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(864,092 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Repayment on long-term debt |
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(6,083 |
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Principal repayments under capital lease obligations |
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(83,092 |
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(85,351 |
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Proceeds from exercise of stock options |
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10,625 |
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64,375 |
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Payment of fees related to issuance of stock |
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(45,000 |
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Repurchase and retirement of common stock |
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(10,608,315 |
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(5,639,003 |
) |
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Net cash used in financing activities |
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(10,680,782 |
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(5,711,062 |
) |
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Net increase in cash and cash equivalents |
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421,662 |
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5,462,075 |
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Cash and cash equivalents at beginning of period |
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9,905,740 |
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7,262,247 |
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Cash and cash equivalents at end of period |
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$ |
10,327,402 |
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$ |
12,724,322 |
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SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: |
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Purchase of property and equipment with proceeds of capital lease obligations |
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$ |
103,667 |
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$ |
38,922 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid for taxes |
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$ |
6,980,000 |
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$ |
4,000,000 |
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Cash paid for interest |
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$ |
12,184 |
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$ |
17,033 |
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(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 three and nine-month periods ended March 31, 2009 are not necessarily
indicative of the results that may be reported for the remainder of the fiscal year ending June 30,
2009 or future periods. Except as otherwise indicated by the context, the terms the Company or
Continucare mean Continucare Corporation and its consolidated subsidiaries. All references to a
fiscal year refer to the Companys fiscal year which ends June 30. As used herein, Fiscal 2009
refers to the fiscal year ending June 30, 2009, Fiscal 2008 refers to the fiscal year ended
June 30, 2008, and Fiscal 2007 refers to the fiscal year ended June 30, 2007.
The balance sheet at June 30, 2008 has been derived from the audited financial statements at that
date but does not include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto
included in the Companys Annual Report on Form 10-K for Fiscal 2008. These interim condensed
consolidated financial statements should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements included in that report.
Certain reclassifications have been made to the prior year amounts to conform to the current year
presentation.
NOTE 2 GENERAL
The Company is a provider of primary care physician services on an outpatient basis in Florida.
The Company provides medical services to patients through employee physicians, advanced registered
nurse practioners and physicians assistants. Additionally, the Company provides practice
management services to independent physician affiliates (IPAs). Substantially all of the
Companys revenue is derived from managed care agreements with three health maintenance
organizations, Humana Medical Plans, Inc. (Humana), Vista Healthplan of South Florida, Inc. and
its affiliated companies including Summit Health Plan, Inc. (Vista) and Wellcare Health Plans,
Inc. and its affiliated companies (Wellcare) (collectively, the HMOs). The Company was
incorporated in 1996 as the successor to a Florida corporation formed earlier in 1996.
NOTE 3 ACQUISITION
Effective October 1, 2006, the Company completed its acquisition (the Acquisition) of Miami Dade
Health Centers, Inc. and its affiliated companies (collectively, the MDHC Companies). In
connection with the completion of the Acquisition and in consideration for the assets acquired
pursuant to the Acquisition, the Company paid the MDHC Companies approximately $6.7 million in
cash, issued to the MDHC Companies 19.7 million shares of the Companys common stock and assumed or
repaid certain indebtedness and liabilities of the MDHC Companies.
The purchase price, including acquisition costs, of approximately $66.2 million has been allocated
to the estimated fair value of acquired tangible assets of $13.9 million, identifiable intangible
assets of $8.7 million and assumed liabilities of $15.3 million as of October 1, 2006, resulting in
goodwill totaling $58.9 million. This purchase price allocation includes certain adjustments
recorded during the three-month period ended September 30, 2007 that resulted in a decrease in
goodwill of approximately $0.5 million. These adjustments primarily related to Medicare risk
adjustment payments relating to the operations of the MDHC Companies for periods prior to
completion of our acquisition. The identifiable intangible assets of $8.7 million consist of
estimated fair values of $1.6 million assigned to the trade name, $6.2 million to customer relationships and $0.9 million to a noncompete
agreement.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(UNAUDITED)
The trade name was determined to have an estimated useful life of six years and the
customer relationships and noncompete agreements were each determined to have an estimated useful
life of eight and five years, respectively. The fair values of the customer relationships and
other identifiable intangible assets are amortized over their estimated lives using the
straight-line method. The customer relationships are non-contractual. The fair value of the
identifiable intangible assets was determined, with the assistance of an outside valuation firm,
based on standard valuation techniques. The Acquisition consideration of $66.2 million includes
the estimated fair value of Continucares common stock issued to the MDHC Companies of $58.5
million, cash paid to the principal owners of $5.7 million at the closing of the Acquisition, cash
paid to the principal owners of $1.0 million in October 2007, and acquisition costs of
approximately $1.0 million.
NOTE 4 RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141R). SFAS No. 141R expands the definition of a business combination and requires the fair
value of the purchase price of an acquisition, including the issuance of equity securities, to be
determined on the acquisition date. SFAS No. 141R also requires that all assets, liabilities,
contingent consideration, and contingencies of an acquired business be recorded at fair value at
the acquisition date. In addition, SFAS No. 141R requires that acquisition costs generally be
expensed as incurred, restructuring costs generally be expensed in periods subsequent to the
acquisition date and changes in accounting for deferred income tax asset valuation allowances and
acquired income tax uncertainties after the measurement period impact income tax expense. SFAS
No. 141R is effective for the Companys fiscal years beginning on or after December 15, 2008, with
early adoption prohibited. The effect of SFAS No. 141R on the Companys financial statements will
be dependent on the nature and terms of any business combination consummated by the Company on or
after July 1, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 requires minority interests
to be recharacterized as noncontrolling interests and reported as a component of equity. In
addition, SFAS No. 160 requires that purchases or sales of equity interests that do not result in a
change in control be accounted for as equity transactions and, upon a loss of control, requires the
interests sold, as well as any interests retained, to be recorded at fair value with any gain or
loss recognized in earnings. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008, with early adoption prohibited. No material impact on the Companys financial
statements is expected from the adoption of this standard.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivatives and Hedging
Activities, which enhances the requirements under SFAS No. 133, Accounting for Derivatives and
Hedging Activities. SFAS No. 161 requires enhanced disclosures about an entitys derivatives and
hedging activities and how they affect an entitys financial position, financial performance, and
cash flows. This Statement will be effective for fiscal years and interim periods beginning after
November 15, 2008. No material impact on the Companys financial statements is expected from the
adoption of this standard.
NOTE 5 SHARE-BASED PAYMENT
The Company accounts for share-based compensation expense under SFAS No. 123(R), Share-Based
Payment, which is a revision of SFAS No. 123 (SFAS 123(R)), using the modified prospective
transition method.
The Company calculates the fair value for employee stock options using a Black-Scholes option
pricing model at the time the stock options are granted and that amount is amortized over the
vesting period of the stock options, which is generally up to four years. The fair value for
employee stock options granted during the three-month periods ended March 31, 2009 and 2008 was
calculated based on the following assumptions: risk-free interest rate ranging from 0.66% to 2.28%
and 1.61% to 2.71%, respectively; dividend yield of 0%; volatility factor of the expected market
price of the Companys common stock of 60.7% and 59.6%, respectively; and weighted-average expected
life of the options ranging from 2 to 6 years, depending on the vesting provisions of each option.
The fair
value for employee stock options granted during the nine-month periods ended March 31, 2009 and
2008 was calculated based on the following assumptions: risk-free interest rate ranging from 0.66%
to 3.09% and 1.61% to
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(UNAUDITED)
4.22%, respectively; dividend yield of 0%; volatility factor of the expected
market price of the Companys common stock of 58.6% and 59.5%, respectively; and weighted-average
expected life of the options ranging from 2 to 6 years, depending on the vesting provisions of each
option. The expected life of the options is based on the historical exercise behavior of the
Companys employees. The expected volatility factor is based on the historical volatility of the
market price of the Companys common stock as adjusted for certain events that management deemed to
be non-recurring and non-indicative of future events.
For the three-month periods ended March 31, 2009 and 2008, the Company recognized share-based
compensation expense of $0.3 million and $0.4 million, respectively. For the nine-month periods
ended March 31, 2009 and 2008, the Company recognized share-based compensation expense of $0.9
million and $1.0 million, respectively. For the three and nine-month periods ended March 31, 2009
and 2008, the Company had no excess tax benefits resulting from the exercise of stock options.
NOTE 6 DEBT
The Company has in place a credit facility that provides for a revolving loan to the Company of
$5.0 million (the Credit Facility) with a maturity date of December 31, 2009. The Credit
Facility has a variable interest rate at a per annum rate equal to the sum of 2.5% and the 30-day
Dealer Commercial Paper Rate (0.55% at March 31, 2009). The Credit Facility includes covenants
requiring the Company and its subsidiaries, on a consolidated basis, to maintain a tangible net
worth of $12 million and a debt coverage ratio of 1.25 to 1. Substantially all assets of the
Company serve as collateral for the Credit Facility.
In connection with the Acquisition, the Company entered into two term loan facilities funded out of
lines of credit (the Term Loans) with maximum loan amounts of $4.8 million and $1.0 million,
respectively. Each of the Term Loans requires mandatory monthly payments that reduce the lines of
credit under the Term Loans. Subject to the terms and conditions of the Term Loans, any prepayments
made to the Term Loans may be re-borrowed on a revolving basis so long as the line of credit
applicable to such Term Loan, as reduced by the mandatory monthly payment, is not exceeded. As of
March 31, 2009, the total maximum amount available for borrowing under the two Term Loans was
approximately $4.6 million. The Term Loans mature on October 31, 2011 and October 31, 2010,
respectively. Each of the Term Loans (i) has variable interest rates at a per annum rate equal to
the sum of 2.4% and the One-Month LIBOR (0.50% at March 31, 2009), (ii) requires the Company and
its subsidiaries, on a consolidated basis, to maintain a tangible net worth of $12 million and a
debt coverage ratio of 1.25 to 1 and (iii) are secured by substantially all of the assets of the
Company and its subsidiaries.
At March 31, 2009, there was no outstanding principal balance on the Credit Facility or the Term
Loans.
NOTE 7 EARNINGS PER SHARE
A reconciliation of the denominator of the basic and diluted earnings per share computation is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Basic weighted average number
of shares outstanding |
|
|
59,904,532 |
|
|
|
68,352,586 |
|
|
|
62,059,381 |
|
|
|
69,402,996 |
|
Dilutive effect of stock options |
|
|
943,522 |
|
|
|
1,121,157 |
|
|
|
1,060,073 |
|
|
|
1,156,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average
number of shares outstanding |
|
|
60,848,054 |
|
|
|
69,473,743 |
|
|
|
63,119,454 |
|
|
|
70,559,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not included in calculation of
diluted earnings per share as
impact is antidilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding |
|
|
4,133,250 |
|
|
|
2,982,000 |
|
|
|
4,133,250 |
|
|
|
2,982,000 |
|
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(UNAUDITED)
NOTE 8 INCOME TAXES
The Company accounts for income taxes under FASB Statement No. 109, Accounting for Income Taxes
(SFAS 109). Deferred income tax assets and liabilities are determined based upon differences
between the financial reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The Company recorded an income tax provision of $2.3 million and $2.5 million for the three-month
periods ended March 31, 2009 and 2008, respectively, and $6.2 million and $5.2 million for the
nine-month periods ended March 31, 2009 and 2008, respectively.
Effective July 1, 2007, the Company adopted the provisions of Interpretation 48 (FIN 48),
Accounting for Uncertainty in Income Taxes An Interpretation of FASB Statement No. 109. The
implementation of FIN 48 had no impact on our liability for unrecognized tax benefits which was
approximately $0.8 million at March 31, 2009 and July 1, 2007 and is included in other liabilities
on the condensed consolidated balance sheet. The total amount of unrecognized tax benefits that if
recognized would affect the effective tax rate is $0.9 million, which includes accrued interest and
penalties of approximately $52,000 and $47,000, respectively, at March 31, 2009 and June 30, 2008.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense
and penalties in operating expense. The Company does not currently anticipate that the total amount
of unrecognized tax benefits will significantly increase or decrease by the end of Fiscal 2009. The
Company is no longer subject to tax examinations by tax authorities for fiscal years ended on or
prior to June 30, 2005.
NOTE 9 RELATED PARTY TRANSACTIONS
As a result of the Acquisition, the Company became a party to two lease agreements for office space
owned by Dr. Luis Cruz and Jose M. Garcia, principal owners of the MDHC Companies. Dr. Cruz is a
director of the Company and Mr. Garcia was an officer of the Company through January 15, 2009. The
Company terminated one of the lease agreements effective September 30, 2007. Expenses related to
these leases were approximately $0.1 million for each of the three-month periods ended March 31,
2009 and 2008, and $0.3 million for each of the nine-month periods ended March 31, 2009 and 2008.
Effective November 1, 2007, the Company entered into agreements with Centers of Medical Excellence,
Inc., an entity owned by Dr. Cruz pursuant to which this entity will act as one of the Companys
independent physician affiliates in connection with the provision of primary care health services
to a limited number of Medicare Advantage members enrolled in plans sponsored by CarePlus Health
Plans, Inc. The arrangement is on substantially similar terms to those between the Company and its
other independent physician affiliates under at risk arrangements where the Company provides
medical utilization services and pays a primary care capitation fee
to the provider. Under this arrangement, CarePlus pays the Company a global per member capitation
fee and the Company in turn pays a monthly primary care capitation fee to Centers of Medical
Excellence based on the number of CarePlus Medicare Advantage members who have selected Centers of
Medical Excellence as their primary care provider. Centers of Medical Excellence is also eligible
to receive a bonus from the Company if they operate in cumulative surplus. For the nine-month
period ended March 31, 2009, the Company sustained an operating loss of $0.4 million under this
arrangement.
On September 19, 2008, the Company purchased an aggregate of 400,000 shares of its common stock
from certain family trusts of Dr. Cruz. Dr. Cruz does not have a beneficial ownership in the
shares of common stock held by these family trusts. Continucare paid $2.14 per share for the
shares for an aggregate purchase price of $856,000. The per share purchase price paid by
Continucare represented a 10% discount from the closing price of Continucares common stock on
September 19, 2008.
On September 19, 2008, the Company purchased an aggregate of 600,000 shares of its common stock
from Mr. Garcia. Continucare paid $2.14 per share for the shares for an aggregate purchase price
of $1,284,000. The per share purchase price paid by Continucare represented a 10% discount from
the closing price of Continucares common stock on September 19, 2008.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(UNAUDITED)
On October 23, 2008, the Company entered into a joint venture with Dr. Jacob Nudel, a director of
the Company that will seek to establish special purpose medical provider networks. As of March 31,
2009, the Company had made contributions of approximately
$0.2 million to fund operations of the joint
venture.
On January 15, 2009, the Company purchased an aggregate of 1,100,000 shares of its common stock
from Mr. Garcia. Continucare paid $1.71 per share for the shares for an aggregate purchase price
of $1,881,000. The per share purchase price paid by Continucare was the closing price of
Continucares common stock on January 15, 2009.
On March 12, 2009, the Company purchased an aggregate of 350,000 shares of its common stock from
certain family trusts of Dr. Cruz. Dr. Cruz does not have a beneficial ownership in the shares of
common stock held by these family trusts. Continucare paid $1.69 per share for the shares for an
aggregate purchase price of $591,500. The per share purchase price paid by Continucare represented
a 5% discount from the closing price of Continucares common stock on March 12, 2009.
NOTE 10 CONTINGENCIES
The Company is involved in legal proceedings incidental to its business that arise from time to
time in the ordinary course of business including, but not limited to, claims related to the
alleged malpractice of employed and contracted medical professionals, workers compensation claims
and other employee-related matters, and minor disputes with equipment lessors and other vendors.
The Company has recorded an accrual for claims related to legal proceedings, which includes amounts
for insurance deductibles and projected exposure, based on managements estimate of the ultimate
outcome of such claims. The Company does not believe that the ultimate resolution of these matters
will have a material adverse effect on the Companys business, results of operations, financial
condition, or cash flows. However, the results of these matters cannot be predicted with certainty,
and an unfavorable resolution of one or more of these matters could have a material adverse effect
on the Companys business, results of operations, financial condition, cash flow, and prospects.
11
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated or the context otherwise requires, all references in this Quarterly
Report on Form 10-Q to we, us, our, Continucare or the Company refers to Continucare
Corporation and its consolidated subsidiaries. All references to the MDHC Companies refer to
Miami Dade Health Centers, Inc. and its affiliated companies.
The following discussion and analysis should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly
Report on Form 10-Q.
General
We are a provider of primary care physician services. Through our network of 18 medical
centers, we provide primary care medical services on an outpatient basis. We also provide practice
management services to independent physician affiliates (IPAs) at 22 medical offices. All of our
medical centers and IPAs are located in Miami-Dade, Broward and Hillsborough Counties, Florida.
Substantially all of our revenues are derived from managed care agreements with three health
maintenance organizations (HMOs), Humana Medical Plans, Inc. (Humana), Vista Healthplan of
South Florida, Inc. and its affiliated companies including Summit Health Plan, Inc. (Vista) and
Wellcare Health Plans, Inc. and its affiliated companies (Wellcare). Our managed care agreements
with these HMOs are primarily risk agreements under which we receive for our services a monthly
capitated fee with respect to the patients assigned to us. The capitated fee is a percentage of
the premium that the HMOs receive with respect to those patients. In return, we assume full
financial responsibility for the provision of all necessary medical care to our patients even for
services we do not provide directly. For the nine-month period ended March 31, 2009, approximately
90% and 7% of our revenue was generated by providing services to Medicare-eligible and
Medicaid-eligible members, respectively, under such risk arrangements. As of March 31, 2009, we
provided services to or for approximately 25,600 patients on a risk basis and approximately 8,200
patients on a limited or non-risk basis. Additionally, we also provided services to over 2,500
patients as of March 31, 2009 on a non-risk fee-for-service basis.
Medicare and Medicaid Considerations
Substantially all of our revenue is generated by providing services to Medicare-eligible
members and Medicaid-eligible members. The federal government and state governments, including
Florida, from time to time explore ways to reduce medical care costs through Medicare and Medicaid
reform, specifically, and through health care reform generally. Any changes that would limit,
reduce or delay receipt of Medicare or Medicaid funding or mandate increased benefit levels or any
developments that would disqualify us from receiving Medicare or Medicaid funding could have a
material adverse effect on our business, results of operations, prospects, financial results,
financial condition and cash flows. Due to the diverse range of medical care related proposals put
forth and the uncertainty of any proposals adoption, we cannot predict what impact any Medicare
reform proposal ultimately adopted may have on our business, financial position or results of
operations.
The Centers for Medicare and Medicaid Services (CMS) recently announced that it will reduce
Medicare Advantage premiums effective January 2010. Based on information received from our HMO
affiliates and CMS, we believe that the capitation payments we receive under our percentage of
premium arrangements with our HMO affiliates for our Medicare Advantage patients will decrease by
approximately 5% effective January 1, 2010 without taking into account any adjustments resulting
from changes in Medicare risk adjustment scores. We anticipate that our HMO affiliates will
address this premium reduction by reducing plan benefits. In an effort to further mitigate the
effects of this premium reduction, we will seek to improve medical claims expense management and
pursue other cost reduction strategies. There is, however, no assurance that our Medicare
capitation payments will decrease by this amount or that the HMO benefit reductions or our cost
reduction strategies will mitigate the Medicare Advantage premium reduction. Failure to mitigate
the effects of the Medicare Advantage premium reduction may have a material adverse effect on our
results of operations, financial position and cash flows.
12
On January 1, 2006, the Medicare Prescription Drug Plan created by the Medicare Modernization
Act became effective. As a result, our HMO affiliates have established or expanded prescription
drug benefit plans for their Medicare Advantage members. Under the terms of our risk arrangements,
we are financially responsible for a substantial portion of the cost of the prescription drugs our
patients receive, and, in exchange, our HMO affiliates have agreed to provide us with an additional
per member capitated fee related to prescription drug coverage. However, there can be no assurance
that the additional fee that we receive will be sufficient to reimburse us for the additional costs
that we may incur under the Medicare Prescription Drug Plan.
In addition, the premiums our HMO affiliates receive from CMS for their Medicare Prescription
Drug Plans is subject to periodic adjustment, positive or negative, based upon the application of
risk corridors that compare their plans revenues targeted in their bids to actual prescription
drug costs. Variances exceeding certain thresholds may result in CMS making additional payments to
the HMOs or require the HMOs to refund to CMS a portion of the payments they received. Our
contracted HMO affiliates estimate and periodically adjust premium revenues related to the risk
corridor payment adjustment, and a portion of the HMOs estimated premium revenue adjustment is
allocated to us. As a result, the revenues recognized under our risk arrangements with our HMO
affiliates are net of the portion of the estimated risk corridor adjustment allocated to us. The
portion of any such risk corridor adjustment that the HMOs allocate to us may not directly
correlate to the historical utilization patterns of our patients or the costs that we may incur in
future periods. Our HMO affiliates allocated to us adjustments related to their risk corridor
payments which had the effect of reducing our operating income by approximately $0.5 million and
$1.1 million, respectively, during the three-month periods ended March 31, 2009 and 2008, and $1.5
million and $2.8 million, respectively, during the nine-month periods ended March 31, 2009 and
2008.
The Medicare Prescription Drug Plan has also been subject to significant public criticism and
controversy, and members of Congress have discussed possible changes to the program as well as ways
to reduce the programs cost to the federal government. We cannot predict what impact, if any,
these developments may have on the Medicare Prescription Drug Plan or on our future financial
results.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 to the consolidated financial
statements included in our Annual Report on Form 10-K for Fiscal 2008. Included within these
policies are certain policies which contain critical accounting estimates and, therefore, have been
deemed to be critical accounting policies. Critical accounting estimates are those which require
management to make assumptions about matters that were uncertain at the time the estimate was made
and for which the use of different estimates, which reasonably could have been used, or changes in
the accounting estimates that are reasonably likely to occur from period to period, could have a
material impact on the presentation of our financial condition, changes in financial condition or
results of operations.
We base our estimates and assumptions on historical experience, knowledge of current events
and anticipated future events, and we continuously evaluate and update our estimates and
assumptions. However, our estimates and assumptions may ultimately prove to be incorrect or
incomplete and our actual results may differ materially. We believe the following critical
accounting policies involve the most significant judgments and estimates used in the preparation of
our consolidated financial statements.
Revenue Recognition
Under our risk contracts with HMOs, we receive a percentage of premium or other capitated fee
for each patient that chooses one of our physicians as their primary care physician. Revenue under
these agreements is generally recorded in the period we assume responsibility to provide services
at the rates then in effect as determined by the respective contract. As part of the Medicare
Advantage program, CMS periodically recomputes the premiums to be paid to the HMOs based on updated
health status of participants and updated demographic factors. We record any adjustments to this
revenue at the time that the information necessary to make the determination of the adjustment is
received from the HMO.
13
Under our risk agreements, we assume responsibility for the cost of all medical services
provided to the patient, even those we do not provide directly, in exchange for a percentage of
premium or other capitated fee. To the extent that patients require more frequent or expensive
care, our revenue under a contract may be insufficient to cover the costs of care provided. When
it is probable that expected future health care costs and maintenance costs under a contract or
group of existing contracts will exceed anticipated capitated revenue on those contracts, we
recognize losses on our prepaid health care services with HMOs. No contracts were considered loss
contracts at March 31, 2009 because we have the right to terminate unprofitable physicians and
close unprofitable centers under our managed care contracts.
Under our limited risk and non-risk contracts with HMOs, we receive a capitation fee based on
the number of patients for which we are providing services on a monthly basis. The capitation fee
is recorded as revenue in the period in which services are provided as determined by the respective
contract.
Payments under both our risk contracts and our non-risk contracts (for both the Medicare
Advantage program as well as Medicaid) are also subject to reconciliation based upon historical
patient enrollment data. We record any adjustments to this revenue at the time that the
information necessary to make the determination of the adjustment is received from the HMO or the
applicable governmental body.
Medical Claims Expense Recognition
The cost of health care services provided or contracted for is accrued in the period in which
the services are provided. This cost includes our estimate of the related liability for medical
claims incurred in the period but not yet reported, or IBNR. IBNR represents a material portion of
our medical claims liability which is presented in the balance sheet net of amounts due from HMOs.
Changes in this estimate can materially affect, either favorably or unfavorably, our results of
operations and overall financial position.
We develop our estimate of IBNR primarily based on historical claims incurred per member per
month. We adjust our estimate if we have unusually high or low utilization or if benefit changes
provided under the HMO plans are expected to significantly increase or reduce our claims exposure.
We also adjust our estimate for differences between the estimated claims expense recorded in prior
months to actual claims expense as claims are paid by the HMO and reported to us. We use an
actuarial analysis as an additional tool to further corroborate our estimate of IBNR.
Based on our analysis, as of March 31, 2009, we recorded a liability of approximately $22.5
million for IBNR. The liability for IBNR decreased by $1.4 million or 5.7% to $22.5 million as of
March 31, 2009 from $23.9 million as of June 30, 2008 primarily due to the timing of claims paid by
our HMO affiliates and a decrease in patients under risk arrangements. The liability for IBNR as
of March 31, 2008 of $23.4 million was relatively unchanged from the liability for IBNR of $23.6
million recorded as of June 30, 2007.
Consideration of Impairment Related to Goodwill and Other Intangible Assets
Our balance sheet includes intangible assets, including goodwill and other separately
identifiable intangible assets, of approximately $78.8 million,
which represented approximately 66%
of our total assets at March 31, 2009. The most significant component of the intangible assets
consists of the intangible assets recorded in connection with the acquisition (the Acquisition)
of Miami Dade Health Centers, Inc. and its affiliated companies (collectively, the MDHC
Companies). The purchase price, including acquisition costs, of approximately $66.2 million was
allocated to the estimated fair value of acquired tangible assets of $13.9 million, identifiable
intangible assets of $8.7 million and assumed liabilities of $15.3 million, resulting in goodwill
totaling $58.9 million.
Under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, goodwill and intangible assets with indefinite useful lives are no longer amortized, but
are reviewed for impairment on an annual basis or more frequently if certain indicators of
impairment arise. Intangible assets with definite useful lives are amortized over their respective
useful lives to their estimated residual values and also
reviewed for impairment annually or more frequently if certain indicators of impairment arise.
Indicators of an impairment include, among other things, a significant adverse change in legal
factors or the business climate, the loss of a key
14
HMO contract, an adverse action by a regulator,
unanticipated competition, and the loss of key personnel or allocation of goodwill to a portion of
business that is to be sold.
Because we operate in a single segment of business, we have determined that we have a single
reporting unit and we perform our impairment test for goodwill on an enterprise level. In
performing the impairment test, we compare the total current market value of all of our outstanding
common stock, to the current carrying value of our total net assets, including goodwill and
intangible assets. Depending on the market value of our common stock at the time that an
impairment test is required, we may also perform other valuation techniques to measure market value
before reaching a conclusion that impairment exists. Depending on the outcome of our analyses,
there is a risk that a portion of our intangible assets would be considered impaired and must be
written-off during that period. We completed our annual impairment test as of May 1, 2008 and
determined that no impairment existed. In addition, no indicators of impairment were noted and
accordingly, no impairment charges were required for the three and nine-month periods ended March
31, 2009. Should we later determine that an indicator of impairment exists, we would be required
to perform an additional impairment test.
Realization of Deferred Income Tax Assets
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes
(SFAS 109) which requires that deferred income tax assets and liabilities be recognized using
enacted tax rates for the effect of temporary differences between the book and tax bases of
recorded assets and liabilities. SFAS No. 109 also requires that deferred income tax assets be
reduced by a valuation allowance if it is more likely than not that some portion or all of the
deferred income tax asset will not be realized.
As part of the process of preparing our consolidated financial statements, we estimate our
income taxes based on our actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes. We also recognize as
deferred income tax assets the future tax benefits from net operating loss carryforwards. We
evaluate the realizability of these deferred income tax assets by assessing their valuation
allowances and by adjusting the amount of such allowances, if necessary. Among the factors used to
assess the likelihood of realization are our projections of future taxable income streams, the
expected timing of the reversals of existing temporary differences, and the impact of tax planning
strategies that could be implemented to avoid the potential loss of future tax benefits. However,
changes in tax codes, statutory tax rates or future taxable income levels could materially impact
our valuation of tax accruals and assets and could cause our provision for income taxes to vary
significantly from period to period. At March 31, 2009, we had deferred income tax liabilities in
excess of deferred income tax assets of approximately $3.1 million.
Stock-Based Payment
We use the modified prospective transition method under SFAS 123(R). SFAS 123(R) requires us
to recognize compensation costs in our financial statements related to our share-based payment
transactions with employees and directors. SFAS 123(R) requires us to calculate this cost based on
the grant date fair value of the equity instrument. As a result of adopting SFAS No. 123(R), we
recognized share-based compensation expense of $0.3 million and $0.4 million, respectively, for the
three-month periods ended March 31, 2009 and 2008 and $0.9 million and $1.0 million, respectively,
for the nine-month periods ended March 31, 2009 and 2008. For the three and nine-month periods
ended March 31, 2009 and 2008, the Company had no excess tax benefits resulting from the exercise
of stock options.
Consistent with our practices prior to adopting SFAS 123(R), we have elected to calculate the
fair value of our employee stock options using the Black-Scholes option pricing model. Using this
model we calculated the fair value for employee stock options granted during the three-month
periods ended March 31, 2009 and 2008 based on the following assumptions: risk-free interest rate
ranging from 0.66% to 2.28% and 1.61% to 2.71%, respectively; dividend yield of 0%;
weighted-average volatility factor of the expected market price of our common stock of 60.7% and
59.6%, respectively, and weighted-average expected life of the options ranging from 2 to 6 years,
depending on the vesting provisions of each option. The fair value for employee stock options
granted during the
nine-month periods ended March 31, 2009 and 2008 based on the following assumptions: risk-free
interest rate ranging from 0.66% to 3.09% and 1.61% to 4.22%, respectively; dividend yield of 0%;
weighted-average volatility factor of the expected market price of our common stock of 58.6% and
59.5%, respectively, and weighted-average
15
expected life of the options ranging from 2 to 6 years,
depending on the vesting provisions of each option. The expected life of the options is based on
the historical exercise behavior of our employees. The expected volatility factor is based on the
historical volatility of the market price of our common stock as adjusted for certain events that
management deemed to be non-recurring and non-indicative of future events.
SFAS 123(R) does not require the use of any particular option valuation model. Because our
stock options have characteristics significantly different from traded options and because changes
in the subjective input assumptions can materially affect the fair value estimate, in managements
opinion, it is possible that existing models may not necessarily provide a reliable measure of the
fair value of our employee stock options. We selected the Black-Scholes model based on our prior
experience with it, its wide use by issuers comparable to us, and our review of alternate option
valuation models.
The effect of applying the fair value method of accounting for stock options on reported net
income for any period may not be representative of the effects for future periods because our
outstanding options typically vest over a period of several years and additional awards may be made
in future periods.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIOD ENDED MARCH 31, 2009 TO THE THREE- MONTH PERIOD ENDED MARCH
31, 2008
Revenue
Revenue increased by $9.5 million, or 14.3%, to $75.4 million for the three-month period ended
March 31, 2009 from $65.9 million for the three-month period ended March 31, 2008 due primarily to
increases in our Medicare revenue.
The most significant component of our revenue is the revenue we generate from Medicare
patients under risk arrangements which increased by $10.2 million, or 17.4%, during the three-month
period ended March 31, 2009. During the three-month period ended March 31, 2009, revenue generated
by our Medicare risk arrangements increased approximately 19.9% on a per patient per month basis
and Medicare patient months decreased by approximately 2.1% over the comparable period of Fiscal
2008. The increase in the per member per month Medicare revenue was primarily due to a rate
increase in the Medicare premiums and an increase in premiums resulting from the Medicare risk
adjustment program. The increase in Medicare revenue was partially offset by a $1.0 million
decrease in revenue generated by our Medicaid patients due primarily to a decrease in Medicaid
patient months.
Under the Medicare risk adjustment program, the health status and demographic factors of
Medicare Advantage participants are taken into account in determining premiums paid for each
participant. CMS periodically recomputes the premiums to be paid to the HMOs based on the updated
health status and demographic factors of the Medicare Advantage participants. In addition, the
premiums paid to the HMOs for their Medicare Prescription Drug Plan are subject to periodic
adjustment based upon CMSs risk corridor adjustment methodology. The net effect of the premium
adjustments included in revenue for the three-month period ended March 31, 2008 was a favorable
retroactive Medicare adjustment of approximately $0.4 million. There were no retroactive premium
adjustments included in revenue for the three-month period ended March 31, 2009. Future Medicare
risk adjustments may result in reductions of revenue depending on the future health status and
demographic factors of our patients as well as the application of CMSs risk corridor methodology
to the HMOs Medicare Prescription Drug Programs.
Revenue generated by our managed care entities under contracts with Humana, Vista and Wellcare
accounted for approximately 72%, 19% and 7%, respectively, of our total revenue for the three-month
period ended
March 31, 2009. Revenue generated by our managed care entities under contracts with Humana, Vista
and Wellcare accounted for approximately 73%, 17% and 9%, respectively, of our total revenue for
the three-month period ended March 31, 2008.
16
Operating Expenses
Medical services expenses are comprised of medical claims expense and other direct costs
related to the provision of medical services to our patients. Because our risk contracts with HMOs
provide that we are financially responsible for the cost of substantially all medical services
provided to our patients under those contracts, our medical claims expense includes the costs of
prescription drugs our patients receive as well as medical services provided to patients under our
risk contracts by providers other than us. Other direct costs consist primarily of salaries, taxes
and benefits of our health professionals providing primary care services including a portion of our
stock-based compensation expense, medical malpractice insurance costs, capitation payments to our
IPA physicians and fees paid to independent contractors providing medical services to our patients.
Medical services expenses for the three-month period ended March 31, 2009 increased by $8.5
million, or 16.2%, to $60.5 million from $52.0 million for the three-month period ended March 31,
2008. Medical claims expense, which is the largest component of medical services expense,
increased by $8.1 million, or 17.9%, to $53.2 million for the three-month period ended March 31,
2009 from $45.1 million for the three-month period ended March 31, 2008 primarily due to an
increase in Medicare claims expense of $7.9 million, or 19.4%. The increase in Medicare claims
expense resulted from a 21.9% increase on a per patient per month basis in medical claims expenses
related to our Medicare patients and a decrease of 2.1% in Medicare patient months. The increase
in Medicare per patient per month medical claims expense is primarily attributable to enhanced
benefits offered by our HMO affiliates, inflationary trends in the health care industry and higher
than usual favorable adjustments relating to prior period medical claims expenses during the
three-month period ended March 31, 2008.
As a percentage of revenue, medical services expenses increased to 80.2% of revenue for the
three-month period ended March 31, 2009 as compared to 78.9% for the three-month period ended March
31, 2008. Our claims loss ratio (medical claims expense as a percentage of revenue) increased to
70.6% for the three-month ended March 31, 2009 from 68.4% for the three-month period ended March
31, 2008. These increases were primarily due to an increase in Medicare revenue at a lower rate
than the increase in Medicare claims expense on a per patient per month basis. HMOs are under
continuous competitive pressure to offer enhanced and possibly more expensive, benefits to their
Medicare Advantage members. The premiums CMS pays to HMOs for Medicare Advantage members are
generally not increased as a result of those benefit enhancements. This could increase our claims
loss ratio in future periods, which could reduce our profitability and cash flows.
Other direct costs increased by $0.3 million, or 4.8%, to $7.2 million for the three-month
period ended March 31, 2009 from $6.9 million for the three-month period ended March 31, 2008. As
a percentage of revenue, other direct costs decreased to 9.6% for the three-month period ended
March 31, 2009 from 10.5% for the three-month period ended March 31, 2008. The increase in the
amount of other direct costs was primarily due to an increase in payroll expense and related
benefits for physicians and medical support personnel at our medical centers and patient
transportation related expenses.
Administrative payroll and employee benefits expense remained relatively unchanged at $3.5
million for the three-month periods ended March 31, 2009 and 2008. As a percentage of revenue,
administrative payroll and employee benefits expense decreased to 4.7% for the three-month period
ended March 31, 2009 from 5.3% for the three-month period ended March 31, 2008.
General and administrative expenses remained relatively unchanged at $4.4 million and $4.3
million for the three-month periods ended March 31, 2009 and 2008, respectively. As a percentage
of revenue, general and administrative expenses decreased to 5.8% for the three-month period ended
March 31, 2009 from 6.6% for the three-month period ended March 31, 2008.
Income from Operations
Income from operations for the three-month period ended March 31, 2009 increased by $0.9
million, or 16.0%, to $7.0 million from $6.1 million for the three-month period ended March 31,
2008.
17
Taxes
An
income tax provision of $2.7 million and $2.5 million was recorded for the three-month
periods ended March 31, 2009 and 2008, respectively. The
effective income tax rates were 38.7% and
40.8% for the three-month periods ended March 31, 2009 and 2008, respectively.
Net Income
Net
income for the three-month period ended March 31, 2009 increased
by $0.6 million, or
17.7%, to $4.3 million from $3.7 million for the three-month period ended March 31, 2008.
COMPARISON OF THE NINE-MONTH PERIOD ENDED MARCH 31, 2009 TO THE NINE-MONTH PERIOD ENDED MARCH 31,
2008
Revenue
Revenue increased by $17.7 million, or 9.4%, to $206.0 million for the nine-month period ended
March 31, 2009 from $188.3 million for the nine-month period ended March 31, 2008 due primarily to
increases in our Medicare revenue.
The most significant component of our revenue is the revenue we generate from Medicare
patients under risk arrangements which increased by $19.0 million, or 11.4%, during the nine-month
period ended March 31, 2009. During the nine-month period ended March 31, 2009, revenue generated
by our Medicare risk arrangements increased approximately 12.3% on a per patient per month basis
and Medicare patient months decreased by approximately 0.8% over the comparable period of Fiscal
2008. The increase in the per patient per month Medicare revenue was primarily due to a rate
increase in the Medicare premiums and an increase in premiums resulting from the Medicare risk
adjustment program. Included in revenue for the nine-month periods ended March 31, 2009 and 2008
were favorable retroactive Medicare adjustments of $0.6 million and unfavorable retroactive
Medicare adjustments of $1.1 million, respectively, related to Medicare premiums and risk corridor
adjustments. Future Medicare risk adjustments may result in reductions of revenue depending on the
future health status and demographic factors of our patients as well as the application of CMSs
risk corridor methodology to the HMOs Medicare Prescription Drug Programs. The increase in
Medicare revenue was partially offset by a $2.1 million decrease in revenue generated by our
Medicaid patients due primarily to a decrease in Medicaid patient months.
During the nine-month period ended March 31, 2008, we received payments and recorded amounts
due from our HMO affiliates of approximately $0.5 million related primarily to Medicare risk
adjustments relating to the operations of the MDHC Companies for periods prior to completion of the
Acquisition. While these transactions ordinarily are reflected in our results of operations, since
they related to periods prior to our acquisition of the MDHC Companies, they were instead recorded
as purchase accounting adjustments which decreased the amount of goodwill we recorded for the
Acquisition.
Revenue generated by our managed care entities under contracts with Humana, Vista and Wellcare
accounted for approximately 72%, 18% and 8%, respectively, of our total revenue for the nine-month
period ended March 31, 2009. Revenue generated by our managed care entities under contracts with
Humana, Vista and Wellcare accounted for approximately 72%, 19% and 8%, respectively, of our total
revenue for the nine-month period ended March 31, 2008.
Operating Expenses
Medical services expenses for the nine-month period ended March 31, 2009 increased by $12.9
million, or 8.4%, to $167.2 million from $154.3 million for the nine-month period ended March 31,
2008. Medical claims expense, which is the largest component of medical services expense,
increased by $11.8 million, or 8.8%, to $145.7 million for the nine-month period ended March 31,
2009 from $133.9 million for the nine-month period ended March 31, 2008 primarily due to an
increase in Medicare claims expense of $12.6 million, or 10.5%. The
18
increase in Medicare claims
expense resulted from an 11.4% increase in medical claims expense on a per patient per month basis
and a 0.8% decrease in Medicare patient months. The increase in Medicare per patient per month
medical claims expense is primarily attributable to enhanced benefits offered by our HMO affiliates
and inflationary trends in the health care industry. The increase in Medicare claims expense was
partially offset by a decrease in Medicaid claims expense of $0.4 million due primarily to a
decrease in Medicaid patient months.
As a percentage of revenue, medical services expenses decreased to 81.2% of revenue for the
nine-month period ended March 31, 2009 as compared to 81.9% for the nine-month period ended March
31, 2008. Our claims loss ratio (medical claims expense as a percentage of revenue) decreased to
70.7% for the nine-month ended March 31, 2009 from 71.1% for the nine-month period ended March 31,
2008. These decreases were primarily due to an increase in Medicare revenue at a greater rate than
the increase in Medicare claims expense on a per patient per month basis.
Other direct costs increased by $1.1 million, or 5.4%, to $21.5 million for the nine-month
period ended March 31, 2009 from $20.4 million for the nine-month period ended March 31, 2008. As
a percentage of revenue, other direct costs decreased to 10.5% for the nine-month period ended
March 31, 2009 from 10.9% for the nine-month period ended March 31, 2008. The increase in the
amount of other direct costs was primarily due to an increase in payroll expense and related
benefits for physicians and medical support personnel at our medical centers.
Administrative payroll and employee benefits expense increased by $0.5 million, or 5.4%, to
$9.4 million for the nine-month period ended March 31, 2009 from $8.9 million for the nine-month
period ended March 31, 2008. As a percentage of revenue, administrative payroll and employee
benefits expense decreased to 4.6% for the nine-month period ended March 31, 2009 from 4.7% for the
nine-month period ended March 31, 2008. The increase in administrative payroll and employee
benefits expense was primarily due to increases in salaries.
General and administrative expenses remained relatively unchanged at $12.4 million and $12.3
million for the nine-month periods ended March 31, 2009 and 2008, respectively. As a percentage of
revenue, general and administrative expenses decreased to 6.0% for the nine-month period ended
March 31, 2009 from 6.5% for the nine-month period ended March 31, 2008.
Income from Operations
Income from operations for the nine-month period ended March 31, 2009 increased by $4.1
million, or 31.9%, to $17.0 million from $12.9 million for the nine-month period ended March 31,
2008.
Taxes
An
income tax provision of $6.6 million and $5.2 million was recorded for the nine-month
periods ended March 31, 2009 and 2008, respectively. The
effective income tax rates were 38.7% and
39.3% for the nine-month periods ended March 31, 2009 and 2008, respectively.
Net Income
Net
income for the nine-month period ended March 31, 2009 increased
by $2.4 million, or 29.3%,
to $10.5 million from $8.1 million for the nine-month period ended March 31, 2008.
LIQUIDITY AND CAPITAL RESOURCES
At
March 31, 2009, working capital was $20.4 million, an
increase of $0.1 million from $20.3
million at June 30, 2008. Cash and cash equivalents increased by $0.4 million to $10.3 million at
March 31, 2009 compared to $9.9 million at June 30, 2008. The increases in cash and cash
equivalents was primarily due to cash provided by operating activities of
$13.3 million, partially offset by cash used to repurchase our common stock of $10.6 million and
cash used for the purchase of property and equipment of $2.2 million.
19
Net cash of $13.3 million was provided by operating activities for the nine-month period ended
March 31, 2009 compared to $12.0 million for the nine-month period ended March 31, 2008. The $1.3
million increase in cash provided by operating activities was primarily due to an increase in net
income of $2.4 million, partially offset by a net decrease in
income taxes payable of $1.6 million.
Net cash of $2.2 million was used for investing activities for the nine-month period ended
March 31, 2009 compared to $0.9 million for the nine-month period ended March 31, 2008. The $1.3
million increase in net cash used for investing activities primarily related to an increase in cash
used for leasehold improvements.
Net cash of approximately $10.7 million was used for financing activities for the nine-month
period ended March 31, 2009 compared to $5.7 million for the nine-month period ended March 31,
2008. The $5.0 million increase in cash used for financing activities for the nine-month period
ended March 31, 2009 was primarily due to a $5.0 million net increase in cash used for the
repurchase of common stock.
Pursuant to the terms under our managed care agreements with certain of our HMO affiliates, we
posted irrevocable standby letters of credit amounting to $1.2 million to secure our payment
obligations to those HMOs. We are required to maintain these letters of credit throughout the term
of the managed care agreements.
In March 2009, our Board of Directors increased our previously announced program to authorize
the repurchase of an additional 2,500,000 shares of our common stock bringing the total number of
shares of common stock authorized for repurchase under the program to 15,000,000 shares. Any such
repurchases will be made from time to time at the discretion of our management in the open market
or in privately negotiated transactions subject to market conditions and other factors. We
anticipate that any such repurchases of shares will be funded through cash from operations. During
the three and nine-month periods ended March 31, 2009, we repurchased 1,562,232 shares and
5,419,004 shares of our common stock, respectively, for approximately $2.7 million and $10.6
million, respectively. During the period from April 1, 2009 through April 30, 2009, we did not
repurchase any shares. As of April 30, 2009, we had repurchased 11,907,004 shares of our common
stock for approximately $25.0 million.
We believe that we will be able to fund our capital commitments and our anticipated operating
cash requirements for the foreseeable future and satisfy any remaining obligations from our working
capital, anticipated cash flows from operations, our Credit Facility, and our Term Loans. At March
31, 2009, approximately $9.6 million was available for future borrowing under the Term Loans and
the Credit Facility.
FORWARD-LOOKING STATEMENTS
Our business, financial condition, results of operations, cash flows and prospects, and the
prevailing market price and performance of our common stock, may be adversely affected by a number
of factors, including the matters discussed below. Certain statements and information set forth in
this Quarterly Report on Form 10-Q, as well as other written or oral statements made from time to
time by us or by our authorized executive officers on our behalf, constitute forward-looking
statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. We
intend for our forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and
we set forth this statement and these risk factors in order to comply with such safe harbor
provisions. You should note that our forward-looking statements speak only as of the date of this
report or when made and we undertake no duty or obligation to update or revise our forward-looking
statements, whether as a result of new information, future events
or otherwise. Although we believe that the expectations, plans, intentions and projections
reflected in our forward-looking statements are reasonable, such statements are subject to risks,
uncertainties and other factors that may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements expressed or implied
by the forward-looking statements. The risks, uncertainties and other factors that our shareholders
and prospective investors should consider include, but are not limited to, the following:
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Our operations are dependent on three health maintenance organizations; |
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Under our most important contracts we are responsible for the cost of medical
services to our patients in return for a capitated fee; |
20
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If we are unable to manage medical benefits expense effectively, our profitability
will likely be reduced; |
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Medicare premiums have generally risen more slowly than the cost of providing health
care services; |
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A failure to estimate incurred but not reported benefits expense accurately will
affect our profitability; |
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We compete with many health care providers for patients and HMO affiliations; |
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We may not be able to successfully recruit or retain existing relationships with
qualified physicians and medical professionals; |
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Our business exposes us to the risk of medical malpractice lawsuits; |
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Our revenues will be affected by the Medicare Risk Adjustment program; |
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We presently operate only in Florida; |
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Failure to maintain effective internal controls in accordance with Section 404 of
the Sarbanes-Oxley Act could have a material adverse effect on our business and stock
price; |
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A significant portion of our voting power is concentrated; |
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We are dependent on our executive officers and other key employees; |
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We depend on the management information systems of our affiliated HMOs; |
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We depend on our information processing systems; |
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Volatility of our stock price could adversely affect you; |
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The Internal Revenue Service may disagree with the parties description of the
federal income tax consequences; |
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Goodwill and other intangible assets represent a substantial portion of our total
assets; |
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Competition for acquisition targets and acquisition financing and other factors may
impede our ability to acquire other businesses and may inhibit our growth; |
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Our acquisitions could result in integration difficulties, unexpected expenses,
diversion of managements attention and other negative consequences; |
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We are subject to government regulation; |
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The health care industry is subject to continued scrutiny; |
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Our insurance coverage may not be adequate, and rising insurance premiums could
negatively affect our profitability; |
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Deficit spending and economic downturns could negatively impact our results of
operations; |
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Many factors that increase health care costs are largely beyond our ability to
control; and |
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Health care reform initiatives, particularly changes to the Medicare system, could
adversely affect our operations. |
We assume no responsibility to update our forward-looking statements as a result of new
information, future events or otherwise. Additional information concerning these and other risks
and uncertainties is contained in our filings with the Securities and Exchange Commission,
including the section entitled Risk Factors in our Annual Report on Form 10-K for Fiscal 2008 and
in Item 1A of Part II of this Quarterly Report Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2009, we held certificates of deposit and cash equivalent investments in high
grade, short-term securities, which are not typically subject to material market risk. At March
31, 2009, we had capital lease
obligations outstanding at fixed rates. For loans with fixed interest rates, a hypothetical
10% change in interest rates would have no material impact on our future earnings and cash flows
related to these instruments and would have an immaterial impact on the fair value of these
instruments. Our Term Loans and Credit Facility have variable interest rates and are interest rate
sensitive, however, we had no amount outstanding under these facilities at March 31, 2009. We have
no material risk associated with foreign currency exchange rates or commodity prices.
21
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) or Rule 15d-15(e)) as of the end of the period covered by this report.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded
that, as of March 31, 2009, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange
Act (i) is recorded, processed, summarized and reported, within the time periods specified in the
SECs rules and forms and (ii) is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Our Chief Executive Officers and Chief Financial Officers conclusions regarding the
effectiveness of our disclosure controls and procedures should be considered in light of the
following limitations on the effectiveness of our disclosure controls and procedures, some of which
pertain to most, if not all, business enterprises, and some of which arise as a result of the
nature of our business. Our management, including our Chief Executive Officer and our Chief
Financial Officer, does not expect that our disclosure controls and procedures will prevent all
errors or improper conduct. A control system, no matter how well conceived and operated, can
provide only reasonable, but not absolute, assurance that the objectives of the control system will
be met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of improper conduct, if any, will be detected.
These inherent limitations include the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people or by
management override of the controls. Further, the design of any control system is based, in part,
upon assumptions about the likelihood of future events, and there can be no assurance that any
control system design will succeed in achieving its stated goals under all potential future
conditions. Additionally, over time, controls may become inadequate because of changes in
conditions or the degree of compliance with the policies or procedures may deteriorate. Because of
the inherent limitations in a cost-effective control system, misstatements due to error or fraud
may occur and not be detected. In addition, we depend on our HMO affiliates for certain financial
and other information that we receive concerning the revenue and expenses that we earn and incur.
Because our HMO affiliates generate that information for us, we have less control over the manner
in which that information is generated.
Changes in Internal Control over Financial Reporting
In connection with its evaluation of the effectiveness of our internal control over financial
reporting, our management did not identify any changes in our internal control over financial
reporting that occurred during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Section 302 Certifications
Provided with this report are certifications of our Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and the SECs
implementing regulations. This Item 4 contains the information concerning the evaluations referred
to in those certifications, and you should read this information in conjunction with those
certifications for a more complete understanding of the topics presented.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10 of our Condensed Consolidated Financial Statements.
22
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in our Annual
Report on Form 10-K for Fiscal 2008 and in other reports filed from time to time with the SEC since
the date we filed our Annual Report on Form 10-K. Readers are urged to carefully review our risk
factors since they may cause our results to differ from the forward-looking statements made in
this report or otherwise made by or on our behalf. Those risk factors are not the only ones we
face. Additional risks not presently known to us or other factors not perceived by us to present
significant risks to our business at this time also may impair our business operation.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In March 2009, we increased our previously announced stock repurchase program to authorize the
repurchase of an additional 2,500,000 shares of common stock bringing the total number of shares of
common stock authorized for repurchase under the program to 15,000,000 shares. Any such
repurchases will be made from time to time at the discretion of our management in the open market
or in privately negotiated transactions subject to market conditions and other factors. We
anticipate that any such repurchases of shares will be funded through cash from operations. The
stock repurchase program was originally approved by the Board of Directors in February 2005. There
is no expiration date specified for this program. The following table provides information with
respect to our stock repurchases during the second quarter of Fiscal 2009:
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Total Number of |
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Maximum Number of |
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Shares Purchased as |
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Shares that May Yet |
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Total Number of |
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Average Price Paid |
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Part of Publicly |
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Be Purchased Under |
Period |
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Shares Purchased |
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per Share |
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Announced Plan |
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the Plan |
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January 1 to January 31, 2009 |
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1,137,300 |
|
|
$ |
1.71 |
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|
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1,137,300 |
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|
|
3,517,928 |
|
February 1 to February 28, 2009 |
|
|
27,600 |
|
|
$ |
1.95 |
|
|
|
27,600 |
|
|
|
3,490,328 |
|
March 1 to March 31, 2009 |
|
|
397,332 |
|
|
$ |
1.70 |
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|
|
397,332 |
|
|
|
3,092,996 |
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Totals |
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1,562,232 |
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$ |
1.71 |
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1,562,232 |
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders held on March 12, 2009, our shareholders voted to
re-elect each of the Director nominees and to ratify the appointment of Ernst & Young LLP as our
independent registered public accounting firm.
The number of votes cast for or withheld, with respect to each of the nominees, were as
follows:
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|
|
Nominee |
|
For |
|
Withheld |
Richard C. Pfenniger, Jr. |
|
|
54,688,350 |
|
|
|
548,752 |
|
Luis Cruz, M.D. |
|
|
49,724,333 |
|
|
|
5,512,769 |
|
Robert J. Cresci |
|
|
54,931,778 |
|
|
|
305,324 |
|
Neil Flanzraich |
|
|
54,891,524 |
|
|
|
345,578 |
|
Phillip Frost, M.D. |
|
|
50,060,544 |
|
|
|
5,176,558 |
|
Jack Nudel, M.D. |
|
|
55,090,938 |
|
|
|
146,164 |
|
Jacqueline Simkin |
|
|
55,089,938 |
|
|
|
147,164 |
|
A. Marvin Strait |
|
|
55,087,213 |
|
|
|
149,889 |
|
23
There were no other nominees for director.
The number of votes cast for, against or abstain with respect to the ratification of the
appointment of Ernst & Young LLP were as follows:
|
|
|
|
|
For |
|
Against |
|
Abstain |
55,099,565
|
|
16,722
|
|
120,815 |
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
|
31.1 |
|
Section 302 Certification of the Chief Executive Officer. |
|
|
31.2 |
|
Section 302 Certification of the Chief Financial Officer. |
|
|
32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
32.2 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
24
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 7, 2009 |
By: |
/s/ Richard C. Pfenniger, Jr.
|
|
|
|
Richard C. Pfenniger, Jr. |
|
|
|
Chairman of the Board, Chief Executive
Officer and President |
|
|
|
|
|
|
By: |
/s/ Fernando L. Fernandez
|
|
|
|
Fernando L. Fernandez |
|
|
|
Senior Vice President Finance, Chief Financial Officer, Treasurer and Secretary |
|
|
25