<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21910
CONTINUCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
FLORIDA 59-2716023
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
100 SOUTHEAST SECOND STREET
36TH FLOOR
MIAMI, FLORIDA 33131
(Address of principal executive offices)
(Zip Code)
(305) 350-7515
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
At February 17, 1998, the Registrant had 13,731,283 shares of $0.0001 par value
common stock outstanding.
<PAGE> 2
CONTINUCARE CORPORATION
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 1997 (Unaudited)
and June 30, 1997 1
Consolidated Statements of Operations - Three Months Ended
December 31, 1997 (Unaudited) and 1996 (Unaudited) 2
Consolidated Statements of Operations - Six Months Ended
December 31, 1997 (Unaudited) and 1996 (Unaudited) 3
Consolidated Statements of Cash Flows - Six Months Ended
December 31, 1997 (Unaudited) and 1996 (Unaudited) 4
Notes to Consolidated Financial Statements
- - December 31, 1997 (Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 10
PART II - OTHER INFORMATION 19
SIGNATURE PAGE 21
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTINUCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $36,421,623 $ 6,989,580
Accounts receivable, net of allowance
for doubtful accounts of $2,178,880 and $1,061,468,
respectively 5,327,812 2,829,426
Income taxes receivable 1,342,518 --
Prepaid expenses and other current assets 1,101,491 401,814
----------- -----------
Total current assets 44,193,444 10,220,820
Other receivables, net of allowance for doubtful
accounts of $2,200,000 3,400,000 5,000,000
Property and equipment, net 2,716,280 1,176,049
Goodwill, net 14,336,254 1,452,557
Other intangible assets, net 7,950,073 980,910
Deferred financing costs, net 2,966,357 --
Other assets, net 300,581 515,274
Deferred tax asset, net 505,699 505,699
----------- -----------
Total assets $76,368,688 $19,851,309
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,646,887 $ 285,518
Accrued expenses 2,068,391 924,018
Accrued interest payable 566,251 37,295
Current portion of notes payable 272,699 811,133
Current portion of capital lease obligation 46,223 44,055
Income and other taxes payable -- 619,445
----------- -----------
Total current liabilities 4,600,451 2,721,464
Obligation under capital lease 702,441 181,551
Notes payable 46,000,000 2,330,367
----------- -----------
Total liabilities 51,302,892 5,233,382
----------- -----------
Commitments and contingencies -- --
Shareholders' equity
Common stock; $.0001 par value; authorized 100,000,000 shares; issued
and outstanding 13,481,283 at December 31, 1997 and 10,888,993
at June 30, 1997 1,348 1,089
Treasury stock, 2,930,000 shares (2,284,330) (2,284,330)
Additional paid-in-capital 27,891,625 14,549,884
Retained earnings (542,847) 2,351,284
----------- -----------
Total shareholders' equity 25,065,796 14,617,927
----------- -----------
Total liabilities and shareholders' equity $76,368,688 $19,851,309
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE> 4
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues
Fees for medical services, net $ 7,408,967 $ --
Management fees 268,752 3,083,528
------------ ------------
Total Revenues 7,677,719 3,083,528
----------------------------
Expenses
Hospitalization and outpatient services 4,093,924 --
Payroll and employee benefits 2,033,346 1,391,548
Provision for bad debt 258,480 243,129
Provision for notes receivable 2,167,000 --
Professional fees 416,285 277,711
General and administrative 1,764,345 187,501
Start-up and conversion of new services 474,797 --
Depreciation and amortization 579,755 33,310
------------ ------------
Total expenses 11,787,932 2,133,199
------------ ------------
Income (loss) from operations (4,110,213) 950,329
------------ ------------
Other income (expenses)
Interest income (expense), net (477,219) 48,218
Minority interest -- (92,267)
------------ ------------
Other expenses (477,219) (44,049)
------------ ------------
Income (loss) before income taxes (4,587,432) 906,280
Provision (benefit) for income taxes (1,618,001) 367,157
------------ ------------
Net income (loss) $ (2,969,431) $ 539,123
============ ============
Weighted average common shares used in
the per share computation
- primary 11,922,283 12,137,805
============ ============
Earnings per common share and common
equivalent share $ (.25) $ 0.04
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 5
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENT OF OPERATION (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues
Fees for medical services $ 9,614,132
Management Fees 1,727,371 $ 6,006,974
------------ ------------
Total Revenues 11,341,503 6,006,974
------------ ------------
Expenses
Hospitalization and outpatient services 4,093,924 --
Payroll and employee benefits 4,342,553 2,759,458
Provision for bad debt 347,563 469,340
Provision for notes receivable 2,167,000 --
Professional fees 532,239 467,451
General and administrative 2,713,920 232,056
Start-up and conversion of new services 474,797 00
Depreciation and amortization 683,318 40,470
------------ ------------
Total expenses 15,355,314 3,968,775
------------ ------------
Income (loss) from operations (4,013,811) 2,038,199
------------ ------------
Other income (expenses)
Interest income (expense), net (448,644) 65,370
Minority interest -- (171,314)
------------ ------------
Other expenses (448,644) (105,944)
------------ ------------
Income (loss) before income taxes (4,462,455) 1,932,255
Provision (benefit) for income taxes (1,568,324) 748,874
------------ ------------
Net income (loss) $ (2,894,131) $ 1,183,381
============ ============
Weighted average common shares used in
the per share computation
- primary 11,405,638 10,063,999
------------ ------------
Earnings per common share and common
equivalent share $ (.25) $ 0.12
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 6
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,894,131) $ 1,183,381
Adjustments to reconcile net income to
net cash (used) by operating activities:
Depreciation and amortization 599,418 40,470
Provision for bad debt 347,563 469,340
Provision for Note Receivable 2,167,000 9,081
Income applicable to minority interest -- 162,233
Changes in assets and liabilities, excluding the effect of acquisitions:
(Increase) in accounts receivable (2,845,549) (3,333,661)
(Increase) in income taxes receivable (1,342,518)
(Increase) in prepaid expenses and
other current assets (699,677) (168,460)
(Increase) in other receivable (567,000) --
(Increase) in other intangible assets (630,769) (217,780)
Decrease in amortization of deferred
financing costs 83,900 --
Decrease in other assets 214,693 1,030
Increase in accounts payable and
accrued expenses 2,639,474 718,831
Increase in accrued interest payable 528,956 7,912
Increase in unearned revenue -- 66,000
(Decrease) increase in other
taxes payable (619,445) 739,431
------------ ------------
Net cash (used) by operating activities (3,018,085) (322,192)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions (1,065,592) (637,700)
Cash paid for acquisitions (19,443,403) --
------------ ------------
Net cash used by investing activities (20,508,995) (637,700)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Beechwood Repurchase -- (375,000)
Principal repayment of Note Payable
to Stockholder (599,000) --
Proceeds from Notes Payable 2,500,000
Repayment of First Union Note (2,500,000) --
Proceeds from Notes Payable 46,000,000 --
Payment of deferred financing costs (3,050,257) --
Principal repayments of obligation
under capital lease (18,620) (6,614)
Proceeds from issuance of common stock 10,627,000 2,058,389
Cash received from pre-Merger Zanart -- 6,600,000
Proceeds from acceleration of Series A warrants 5,412,060
Costs incurred associated with Private
Placement & Merger -- (225,000)
------------ ------------
Net cash provided by financing activities 52,959,123 13,463,835
------------ ------------
</TABLE>
4
<PAGE> 7
<TABLE>
<S> <C> <C>
Net increase in cash and cash equivalents 29,432,043 12,503,943
Cash and cash equivalents at beginning of period 6,989,580 819,066
------------ -----------
Cash and cash equivalents at end of period $ 36,421,623 $13,323,009
============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Cash paid for income taxes $ 717,155 $ --
============ ===========
Cash paid for interest $ 68,297 $ --
============ ===========
Purchase of Furniture and Fixtures with proceeds
of capital lease obligation $ 762,400 $
---------------------------
PURCHASE OF CAPITAL STOCK OF MAXICARE, INC.:
Fair value of assets acquired $ 196,757
Intangible assets 2,995,269
Accounts payable and accrued expenses (492,026)
------------
Cash paid $ 2,700,000
============
PURCHASE OF ASSETS OF DOCTORS HEALTH GROUP:
Fair value of assets acquired $ 404,880
Intangible assets 14,648,000
Stock issued as part of purchase price (1,500,000)
------------
Cash paid $ 13,552,880
============
PURCHASE OF ASSETS OF BEACON HEALTHCARE GROUP, INC.:
Fair value of assets acquired $ 1,489,497
Intangible assets 2,125,445
Liabilities assumed (914,942)
Stock issued as part of purchase price (490,000)
------------
Cash paid $ 2,210,000
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 8
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
NOTE 1 - UNAUDITED INTERIM INFORMATION
The accompanying interim consolidated financial data for Continucare Corporation
("Continucare" or the "Company") are unaudited; however, in the opinion of
management, the interim data include all adjustments necessary for a fair
presentation of the results for the interim period. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
The results of operations for the three months and six months ended December 31,
1997 are not necessarily indicative of the results to be expected for the year
ending June 30, 1998.
The interim unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended June 30, 1997 as set forth in the Company's Form 10-KSB.
NOTE 2 - BUSINESS COMBINATION
On September 19, 1997, the Company acquired the stock of Maxicare, Inc.
("Maxicare"), a Florida based home health agency, for a purchase price of
$3,000,000. At closing, $2,700,000 was paid in cash, of which $2,500,000 was
borrowed by the Company under a term note which was paid in full on October
30,1997. The remaining $300,000 is due in equal installments at the end of years
two and three and is contingent on various factors. Maxicare is certified by the
Healthcare Financing Administration and is licensed in the state of Florida as a
Medicare and Medicaid home health agency. The acquisition is being accounted for
under the purchase method of accounting. The purchase price in excess of the
fair value of the net tangible assets acquired was approximately $3,000,000 and
is being amortized using the straight line method over a weighted average life
of twenty years. As of December 31, 1997, the consolidated financial statements
include the accounts of Maxicare since the date of purchase.
The following unaudited pro forma statements of operations reflect adjustments
to Continucare's historical financial position and results of operations to give
effect to the acquisition of Maxicare as if such had occurred as of the
beginning of the following periods, after giving effect to certain pro forma
adjustments as described below:
6
<PAGE> 9
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ----------------------------
1997* 1996 1997 1996
----- ---- ---- ----
<S> <C> <C> <C>
Total revenues $ 6,251,000 $ 14,049,000 $12,213,000
=========== ============= ===========
Income (loss) from operations $ 935,000 $ (4,040,000) $ 2,014,000
=========== ============= ===========
Net income (loss) $ 485,000 $ (2,957,000) $ 1,083,000
=========== ============= ===========
Earnings per common share
and common equivalent share
Primary $ .04 $ (.26) $ .11
=========== ============= ===========
</TABLE>
* Acquisition is included in the Company's Statements of Operations for the
three months ended December 31, 1997.
Pro forma adjustments reflect the amortization of the resulting goodwill and the
accrual for interest expense on the funds borrowed to consummate the
acquisition.
On October 31, 1997, the Company purchased the assets of Doctors Health Group, a
company that provides healthcare services at outpatient centers through managed
care contracts. The total purchase price for the acquisition was approximately
$15,000,000, of which $1,500,000 was paid in common stock of the Company and
$13,500,000 was paid in cash. The acquisition is being accounted for under the
purchase method of accounting. The purchase price in excess of the fair value of
the net tangible assets acquired was approximately $14,648,000 and is being
amortized using the straight line method over a weighted average life of eleven
years. As of December 31, 1997, the consolidated financial statements include
the accounts of Doctors Health Group from the purchase date.
The following unaudited pro forma statements of operations reflect adjustments
to Continucare's historical financial position and results of operations to give
effect to the acquisition of Doctors Health Group as if such had occurred as of
the beginning of the following periods, after giving effect to certain pro forma
adjustments as described below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- --------------------------
1997 1996 1997 1996
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 9,006,000 $6,810,000 $16,654,000 $13,460,000
=========== ========== =========== ===========
Income (loss) from
operations $(4,015,000) $1,224,000 $(3,635,000) $ 2,736,000
=========== ========== =========== ===========
Net income (loss) $(3,009,000) $ 414,000 $(3,056,000) $ 935,000
=========== ========== =========== ===========
Earnings per common share
and common equivalent share
Primary $ (.25) $ .03 $ (.27) $ .09
=========== ========== =========== ===========
</TABLE>
Pro forma adjustments reflect the amortization of the resulting goodwill and the
accrual for interest expense on the funds borrowed to consummate the
acquisition.
7
<PAGE> 10
On December 1, 1997, the Company purchased the assets of Beacon Health Care
Group, Inc., a company that provides radiology and diagnostic services in South
Florida. The total purchase price for the acquisition was approximately
$2,700,000 of which approximately $2,200,000 was paid in cash and approximately
$500,000 was paid in common stock of the Company. The acquisition is being
accounted for under the purchase method of accounting. The purchase price in
excess of the fair value of the net tangible assets acquired was approximately
$2,100,000 and is being amortized using the straight line method over a weighted
average life of fifteen years. As of December 31, 1997, the consolidated
financial statements include the accounts of Beacon Health Care Group, Inc. from
the purchase date.
The following unaudited pro forma statements of operations reflect adjustments
to Continucare's historical financial position and results of operations to give
effect to the acquisition of Beacon Health Care Group as if such had occurred as
of the beginning of the following periods, after giving effect to certain pro
forma adjustments as described below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- -------------------------
1997 1996 1997 1996
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Total revenues $ 8,442,000 $ 3,991,000 $13,257,000 $7,776,000
=========== =========== =========== ==========
Income (loss) from
operations $(4,115,000) $ 807,000 $(4,029,000) $1,745,000
=========== =========== =========== ==========
Net income (loss) $(2,992,000) $ 413,000 $(2,969,000) $ 925,000
=========== =========== =========== ==========
Earnings per common share
and common equivalent share
Primary $ (.25) $ .03 $ (.26) $ .09
=========== =========== =========== ==========
</TABLE>
Pro forma adjustments reflect the amortization of the resulting goodwill and the
accrual for interest expense on the funds borrowed to consummate the
acquisition.
NOTE 3 - CONVERTIBLE NOTES OFFERING
On October 30, 1997, the Company issued $46.0 million of 8% convertible
subordinate notes due 2002 (the "Notes"). Interest on the notes is payable
semiannually beginning April 30, 1998. Continucare is using the net proceeds
from the Notes for acquisitions, working capital and other general corporate
purposes.
The Notes can be converted into shares of common stock of the Company at a
conversion price of $7.25 per share at any time after 60 days following the date
of initial issuance. In addition, the Notes are redeemable, in whole or in part,
at the option of the Company at any time on or after October 31, 2000, at the
redemption prices (expressed as a percentage of the principal amount) set forth
below for the 12-month period beginning October 31 of the years indicated:
2000 ............................................. 104.00%
2001 ............................................. 102.00%
and thereafter at 100% of principal amount, together with accrued interest to
the redemption date.
8
<PAGE> 11
The Notes were not registered under the Securities Act of 1933, as amended (the
"Securities Act") and could not be offered or sold without registration or an
applicable exemption from the registration requirements. A registration
statement covering resales of the Notes became effective on January 8, 1998. As
a result, holders of Notes who are identified in the registration statement may
make resales of the Notes, as described in the registration statement, without
any volume limitations or other constraints normally applicable to sales of
"restricted securities."
NOTE 4 - SHAREHOLDERS' EQUITY
On December 5, 1997, the Company completed a private equity placement of
2,250,000 shares of newly issued common stock, representing approximately 19.5%
of the outstanding shares on such date, at an issue price of $5.00 per share.
Proceeds to the Company, net of issue costs, was approximately $10,500,000. The
stock was issued to Strategic Investment Partners Ltd., an investment vehicle
owned by members of the Quantum Group of Funds which is managed by Soros Fund
Management LLC.
On October 1, 1997, warrants to purchase 17,000 shares of common stock were
exercised at an issue price of $6.00 per share.
During the six months ended December 31, 1997, options to purchase shares of
common stock have been granted at an exercise price equal to the fair market
value on the day of grant as follows: 620,000 shares at $5.125; 110,000 shares
at $6.25; 38,000 shares at $6.75.
The Company has adopted Financial Accounting Standards Board Statement No. 128,
"Earnings per Share" ("SFAS 128") in the second quarter of the fiscal year. The
earnings per share calculated under SFAS 128 are not materially different from
the calculations as presented on the face of the financial statements.
NOTE 5 - ASSIGNMENT OF REVENUE CONTRACTS
On September 10, 1997, the Company assigned certain of its Medicare behavioral
health management contracts with freestanding centers to a third party. In
connection with this transaction, the Company discounted the related receivables
by approximately $742,000 which the Company recorded against its bad debt
reserve in the prior fiscal year. The net balance of $5.6 million was converted
to a note receivable to be paid by the programs over a five year term with
interest to accrue at 9% per annum (included as other receivables in the
enclosed balance sheets). The note receivable is secured by all the assets of
the business. As of December 31, 1997 the Company recorded an allowance for
doubtful accounts against the notes receivable for $2,200,000.
The Company is currently negotiating new managed care opportunities under this
line of business. Accordingly, the Company believes that this assignment does
not qualify as discontinued operations.
9
<PAGE> 12
NOTE 6 - SUBSEQUENT EVENTS
Effective December 31, 1997, the Company rescinded its acquisition of Healthnet
Maritime Services II, Inc. and an affiliate, which had originally been made on
October 31, 1997. In unwinding the transaction, the former seller of Healthnet
(i) returned all shares of Common Stock issued in connection with the
acquisition (approximately 241,000 shares), and (ii) agreed to pay the Company
$50,000.
On January 1, 1998, the Company purchased the assets of Medical Services
Organization, Inc. D/B/A Medstar, a Company that acts as an intermediary between
a Health Maintenance Organization and its various network of physicians. The
purchase price for the assets acquired was $860,000 paid in cash. The
acquisition will be accounted for under the purchase method of accounting.
Subsequently, the Company entered into a risk based contract with an HMO to
provide medical services to both Medicare and non-Medicare beneficiaries.
On February 13, 1998, the Company purchased the stock of Rehab Medical Systems,
Inc., Integracare, Inc. and J.R. Associates, Inc., rehabilitation companies
owned by Integrated Health Services, Inc.. The purchase price for the stock was
$10,500,000 paid in cash. The acquisition will be accounted for under the
purchase method of accounting.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-QSB contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this Form 10-QSB, the words "believe,"
"anticipate," "think," "intend," "plan," "will be," and similar expressions,
identify such forward-looking statements. Such statements regarding future
events and/or the future financial performance of the Company are subject to
certain risks and uncertainties which could cause actual events or the actual
future results of the Company to differ materially from any forward-looking
statement. Certain factors that might cause such a difference include the
following: (1) limited operating history of Continucare in current business, (2)
various risks associated with the acquisition of businesses including the
expenses associated with the integration of the acquired businesses,
difficulties in assimilating the operations of the acquired entities, and
diversion of management resources; (3) statutory and regulatory changes,
retroactive and prospective rate adjustments, administrative rulings and funding
restrictions, any of which could limit or reduce reimbursement levels; (4)
ability to attract and retain a sufficient number of qualified medical
professionals; and (5) fluctuations in the volume of services rendered and/or
the number of patients using the Company's services.
GENERAL
The Company provides a continuum of outpatient and ancillary healthcare services
with a primary focus on outpatient treatment of musculoskeletal injuries and
diseases, such as arthritis, osteoporosis, stroke and traumatic injuries. The
Company's services include physical rehabilitation, physician practice
management including laboratory services, home health, and outpatient medical
services including primary care, radiology and diagnostic imaging services.
10
<PAGE> 13
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited consolidated statements and notes thereto appearing elsewhere in this
Form 10-QSB. The following table sets forth, for the periods indicated, certain
items from the statements of operations as a percentage of total revenues. The
statements of operations include the operations of acquisitions made during the
three months and six months ended December 31, 1997 from the acquisition dates.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
FOR THE THREE MONTHS ENDED
DECEMBER 31,
------------
1997 1996
<S> <C> <C>
Revenues:
Fees for medical services, net 96.5% 0.0%
Management fees 3.5 100.0
----- -----
Total revenues 100.0 100.0
Expenses:
Hospitalization and outpatient services 53.3 --
Payroll and employee benefits 26.5 45.1
Provision for bad debt 3.4 7.9
Provision for notes receivable 28.2 --
Professional fees 5.4 9.0
General and administrative 23.0 6.1
Start-up and conversion for new services 6.2 --
Depreciation and amortization 7.5 1.1
----- -----
Total expenses 153.5 69.2
----- -----
Income from operations (53.5) 30.8
----- -----
Other income (expenses):
Interest income (expense), net (6.2) 1.6
Minority interest 0.0 (3.0)
----- -----
Other income (expenses) (6.2) (1.4)
----- -----
Income (loss) before income taxes (59.7) 29.4
Provision (benefit) for income taxes (21.0) 11.9
----- -----
Net income (loss) (38.7)% 17.5%
===== =====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996
REVENUES - Total revenues increased 149% to $7,678,000 for the three months
ended December 31, 1997, from $3,084,000 for the three months ended December 31,
1996. The increase in revenues was primarily attributable to the acquisition of
various physician practices during the latter part of the prior fiscal year in
addition to the acquisitions of the home health agencies, outpatient centers
operated under managed care contracts ("outpatient centers") and an outpatient
radiology and diagnostic imaging services company during the first two quarters
of the current fiscal year.
11
<PAGE> 14
This increase was offset with a shift in focus by the Company from the Medicare
behavioral health area to the healthcare services noted above, which resulted in
the assignment of certain of these Medicare behavioral health management
contracts with freestanding community health centers during the three months
ended September 30, 1997. The effect of this assignment on operations was
reflected in the statements of income for the prior fiscal year.
In addition, during the quarter ended December 31, 1997, the Company recorded an
additional $842,000 for a bad debt write-off to reflect management's estimate of
the realizable value of certain accounts receivable relating to its Medicare
behavioral health management contracts.
A remaining decrease in fees for medical services net, of $1,536,000 for the
quarter ended December 31, 1997, is management's estimate of its provision for
contractual allowance attributable to fees paid for medical services, of
acquired physician practices, outpatient health centers, and contractual
disallowance of the acquired managed care contracts.
The Company's revenues for the three months ended December 31, 1997 were derived
primarily from fees for medical services provided by the physician practices,
home health agencies, the comprehensive outpatient rehabilitation facility
("CORF") owned by the Company, the outpatient centers and the outpatient
radiology and diagnostic imaging services company. These revenues, $7,409,000
for the three months ended December 31, 1997, represent 96.5% of total revenues
for the quarter.
Revenues for the three months ended December 31, 1996 were comprised exclusively
from Medicare behavioral health management contracts with freestanding centers
and hospitals.
EXPENSES - Hospitalization and outpatient services expenses of $4,094,000 for
the three months ended December 31, 1997, were attributable to the acquisitions
which occurred during the first two quarters of the current fiscal year
representing the cost of providing medical services at the home health agencies,
outpatient centers, physician practice management centers and the outpatient
radiology and diagnostic imaging services company.
Payroll and employee benefits decreased from 45.1% of total revenues for the
three months ended December 31, 1996, or $1,392,000, to 26.5% of total revenues,
or $2,033,000, for the three months ended December 31, 1997. This decrease is
primarily attributable to the fact that, although there has been an increase in
the dollar amount of payroll and employee benefits as a result of the
acquisitions noted above, the increase in related revenues has been higher
resulting in the decrease in payroll and employee benefits as a percentage of
revenues.
Provision for bad debts increased to $258,000, or 3.4% of total revenues, for
the three months ended December 31, 1997 from $243,000, or 7.9% of total
revenues, for the three months ended December 31, 1996. The increase is due to
the increase in revenue from medical services. Fees for medical services are
recorded net of discounts and contractual allowances whereas management fees
require the recording of a provision for bad debt to record the related
receivable at net realizable value as determined by management's judgment.
Provision for notes receivable was $2,167,000, or 28.2% of total revenues, for
the three months ended December 31, 1997. The Company has reached final
settlement of its note receivable resulting from the transfer and sale of
certain of its Medicare behavioral health management contracts. As a result, a
provision for Notes Receivable of $2,167,000 was recorded in the quarter ended
December 31, 1997, to reflect management's determination of its estimated net
realizable value.
12
<PAGE> 15
Professional fees increased to $416,000, or 5.4% of total revenues, for the
three months ended December 31, 1997 from $278,000, or 9.0%, of total revenues,
for the three months ended December 31, 1996 primarily as a result of
acquisitions in the current quarter as noted above.
General and administrative expenses were approximately $1,764,000, or 23.0% of
total revenues, for the three months ended December 31, 1997, as compared to
$188,000, or 6.1% of total revenues, for the three months ended December 31,
1996. The increase of $1,576,000 was primarily attributable to the acquisition
of various physician practices during the latter part of the prior fiscal year
in addition to the acquisitions of the home health agencies, outpatient centers
and the outpatient radiology and diagnostic imaging services company during the
first two quarters of the current fiscal year.
Recognized start-up and conversion expenses were approximately $475,000, or 6.2%
of total revenues, for the three months ended December 31, 1997. These expenses
were primarily attributable to the Bally's project and the acquisition of
various physician practices during the latter part of the prior fiscal year in
addition to the acquisitions of the home health agencies, outpatient centers and
the outpatient radiology and diagnostic imaging services company during the
first two quarters of the current fiscal year. The Company anticipates such
start-up and conversion expenses will continue to increase as the company
continues to build its infrastructure to support its absorption of acquisitions.
Depreciation and amortization increased to $580,000, or 7.5% of total revenues,
for the three months ended December 31, 1997 as compared to $33,000, or 1.1% of
total revenues, for the three months ended December 31, 1996 primarily as a
result of the amortization of goodwill and other intangibles related to the
acquisitions noted above.
INTEREST - Consolidated net interest income (expense) for the three months ended
December 31, 1997, was ($477,000), or 6.2% of total revenues, compared to
$48,000, or 1.6% of total revenues, for the three months ended December 31,
1996. Of the $760,000 in total interest expenses approximately $613,000 is
attributed to the Notes issued on October 30, 1997. Interest on the Notes is
payable semiannually beginning April 30, 1998. The increase in interest expense
was offset by approximately $283,000 in interest income primarily attributed to
the investment of the Note's unused proceeds.
During the three months ended December 31, 1996, interest income was primarily
attributable to the proceeds of a private placement during such quarter.
MINORITY INTEREST - Minority interest for the three months ended December 31,
1996, was $92,000, or 3.0% of total revenues, and represented a 25% interest
held by a third-party in the earnings of a Continucare subsidiary. Effective
December 31, 1996, the Company purchased the interest held by the third-party
owner for 40,000 shares of Company Common Stock. As a result, the three months
ended December 31, 1997, reflects no minority interest.
NET INCOME (LOSS) - Continucare's consolidated net loss for the three months
ended December 31, 1997 was approximately ($2,969,000) compared to net income
for the three months ended December 31, 1996 of approximately $539,000.
13
<PAGE> 16
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION - Earnings before
interest, taxes, depreciation and amortization ("EBITDA") is not presented as an
alternative to operating results or cash flow from operations as determined by
Generally Accepted Accounting Principles ("GAAP"), but rather to provide
additional information related to the ability of the Company to meet current
trade obligations and debt service requirements. EBITDA should not be considered
in isolation from, or construed as having greater importance than, GAAP
operating income or cash flows from operations as a measure of an entity's
performance.
EBITDA was approximately ($3,530,000) and $984,000 for the three months ended
December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
FOR THE SIX MONTHS ENDED
DECEMBER 31,
1997 1996
------ ------
<S> <C> <C>
Revenues:
Fees for medical services, net 84.8% 0.0%
Management fees 15.2 100.0
----- -----
Total revenues 100.0 100.0
Expenses:
Hospitalization and outpatient services 36.1 --
Payroll and employee benefits 38.3 45.8
Provision for bad debt 3.1 7.8
Provision for notes receivable 19.1 --
Professional fees 4.7 7.8
General and administrative 23.9 3.9
Start-up and conversion for new services 4.2 --
Depreciation and amortization 6.0 0.7
----- -----
Total expenses 135.4 66.0
----- -----
Income from operations (35.4) 34.0
----- -----
Other income (expenses):
Interest income (expense), net (3.9) 1.1
Minority interest 0.0 (2.9)
----- -----
Other income (expenses) (3.9) (1.8)
----- -----
Income (loss) before income taxes (39.3) 32.2
Provision (benefit) for income taxes (13.8) 12.5
----- -----
Net income (loss) (25.5)% 19.7%
===== =====
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996
REVENUES - Total revenues increased 89% to $11,342,000 for the six months ended
December 31, 1997, from $6,007,000 for the six months ended December 31, 1996.
The increase in revenues was primarily attributable to the acquisition of
various physician practices during the latter part of the prior fiscal year in
addition to the acquisitions of the home health agencies, outpatient centers and
the outpatient radiology and diagnostic imaging services company during the
current six months. This increase was offset with a shift in focus by the
Company from the Medicare behavioral health area to the healthcare services
noted above, which resulted in the assignment of certain of these Medicare
behavioral health management contracts with freestanding community health
centers during the six months ended December 31, 1997.
14
<PAGE> 17
The effect of this assignment on operations was reflected in the statement of
income for the prior fiscal year.
In addition, during the quarter ended December 31 1997, the Company recorded an
additional $842,000 for a bad debt write-off to reflect management's estimate of
the realizable value of certain accounts receivable relating to its Medicare
behavioral health management contracts.
A remaining decrease in fees for medical services net, of $1,536,000 for the
quarter ended December 31, 1997, is management's estimate of its provision for
contractual allowance attributable to fees paid for medical services, of
acquired physician practices, outpatient health centers, and contractual
disallowance of the acquired managed care contracts.
The Company's revenues for the six months ended December 31, 1997 were derived
primarily from fees for medical services provided by the physician practices,
home health agencies, the CORF owned by the Company, the outpatient centers and
outpatient radiology and diagnostic imaging services company. These revenues,
$9,614,000 for the six months ended December 31, 1997, represent 84.8% of total
revenues for this period.
Revenues for the six months ended December 31, 1996 were comprised exclusively
from Medicare behavioral health management contracts with freestanding centers
and hospitals.
EXPENSES - Hospitalization and outpatient services expenses of $4,094,000 for
the six months ended December 31, 1997, were attributable to the acquisitions
which occurred during the current six months representing the cost of providing
medical services at the home health agencies, outpatient centers, physician
practice management centers and the outpatient radiology and diagnostic imaging
services company.
Payroll and employee benefits decreased to 38.3% of total revenues, or
$4,343,000, for the six months ended December 31, 1997, versus 45.9% of total
revenues, or $2,759,000, for the six months ended December 31, 1996. The
decrease in payroll and employee benefits is primarily attributable to the
reclassification of caregiver payroll and benefits to hospitalization and
outpatient services expense.
Provision for bad debts decreased to $348,000, or 3.1% of total revenues, for
the six months ended December 31, 1997 from $469,000, or 7.8% of total revenues,
for the six months ended December 31, 1996. The decrease is due to the shift in
revenue source from management fees to fees for medical services. Fees for
medical services are recorded net of discounts and contractual allowances
whereas management fees require the recording of a provision for bad debt to
record the related receivable at net realizable value as determined by
management's judgment.
Provision for notes receivable was $2,167,000, or 28.2% of total revenues, for
the six months ended December 31, 1997. The Company has reached final settlement
of its note receivable resulting from the transfer and sale of certain of its
Medicare behavioral health management contracts. As a result, a provision for
Notes Receivable of $2,167,000 was recorded in the quarter ended December 31,
1997, to reflect management's determination of its estimated net realizable
value.
15
<PAGE> 18
Professional fees increased to $532,000, or 4.7% of total revenues, for the six
months ended December 31, 1997 from $467,000, or 7.8%, of total revenues, for
the six months ended December 31, 1996 primarily as a result of acquisitions in
this period as noted above.
General and administrative expenses were approximately $2,714,000, or 23.9% of
total revenues, for the six months ended December 31, 1997, as compared to
$232,000, or 3.9% of total revenues, for the six months ended December 31, 1996.
The increase of $2,482,000 was primarily attributable to the acquisition of
various physician practices during the latter part of the prior fiscal year in
addition to the acquisitions of the home health agencies, outpatient centers and
the outpatient radiology and diagnostic imaging services company during the
current six months.
Recognized start-up and conversion expenses were approximately $475,000, or 6.2%
of total revenues, for the six months ended December 31, 1997. These expenses
were primarily attributable to the Bally's project and the acquisition of
various physician practices during the latter part of the prior fiscal year in
addition to the acquisitions of the home health agencies, outpatient centers and
the outpatient radiology and diagnostic imaging services company during the
first two quarters of the current fiscal year. The Company anticipates such
start-up and conversion expenses will continue to increase as the company
continues to build its infrastructure to support its absorption of acquisitions.
Depreciation and amortization increased to $683,000, or 6.0% of total revenues,
for the six months ended December 31, 1997 as compared to $41,000, or 0.7% of
total revenues, for the six months ended December 31, 1996 primarily as a result
of the amortization of goodwill and other intangibles related to the
acquisitions noted above.
INTEREST - Consolidated net interest income (expense) for the six months ended
December 31, 1997, was ($449,000), or 3.9% of total revenues, compared to
$65,000, or 1.1% of total revenues, for the six months ended December 31, 1996.
Of the $796,000 in total interest expense, approximately $613,000 is attributed
to the $46,000,000 Notes. The increase in interest expense was offset by
approximately $347,000 in interest income primarily attributed to the investment
of the Note's unused proceeds.
During the six months ended December 31, 1996, interest income was primarily
attributable to the proceeds of a private placement during such period.
MINORITY INTEREST - Minority interest for the six months ended December 31,
1996, was $171,000, or 2.9% of total revenues, and represented a 25% interest
held by a third-party in the earnings of a Continucare subsidiary. Effective
December 31, 1996, the Company purchased the interest held by the third-party
owner for 40,000 shares of Company Common Stock. As a result, the six months
ended December 31, 1997, reflects no minority interest.
NET INCOME (LOSS) - Continucare's consolidated net loss for the six months ended
December 31, 1997 was approximately ($2,894,000) compared to net income for the
six months ended December 31, 1996 of approximately $1,183,000.
16
<PAGE> 19
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION - Earnings before
interest, taxes, depreciation and amortization ("EBITDA") is not presented as an
alternative to operating results or cash flow from operations as determined by
Generally Accepted Accounting Principles ("GAAP"), but rather to provide
additional information related to the ability of the Company to meet current
trade obligations and debt service requirements. EBITDA should not be considered
in isolation from, or construed as having greater importance than, GAAP
operating income or cash flows from operations as a measure of an entity's
performance.
EBITDA was approximately ($3,330,000) and $2,079,000 for the six months ended
December 31, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position has changed significantly since June 30, 1997.
On October 30, 1997, the Company issued $46,000,000 (of which approximately $3.0
million was used for loan issue costs) of 8% Convertible Subordinated Notes due
September 30, 2002 with interest payable semiannually (the "Notes"). The Notes
are convertible into Common Stock at any time after 60 days following the date
of initial issuance thereof and prior to maturity, unless previously redeemed,
at a conversion price of $7.25 per share. During the first two quarters, the
Company used approximately $13,500,000 of the proceeds of the Notes to purchase
the outpatient centers operated under managed care contracts and approximately
$2,200,000 was used to purchase the outpatient radiology and diagnostic imaging
services company. The Company intends to use the remainder of the proceeds for
additional acquisitions, working capital and other general corporate purposes.
On December 5, 1997, the Company completed a private equity placement of
2,250,000 shares of newly issued common stock, representing approximately 19.5%
of the outstanding shares on such date, at an issue price of $5.00 per share.
Proceeds to the Company, net of issue costs, was approximately $10,500,000. The
stock was issued to Strategic Investment Partners Ltd., an investment vehicle
owned by members of the Quantum Group of Funds which is managed by Soros Fund
Management LLC.
On October 1, 1997, warrants to purchase 17,000 shares of common stock were
exercised at an issue price of $6.00 per share.
For the six months ended December 31, 1997, net cash used in operating
activities was approximately $3,018,000, primarily as a result of an increase in
accounts receivable of approximately $2,846,000 related to accounts receivable
obtained in the acquisitions consummated during the current period. For the six
months ended December 31, 1997, net cash used in investing activities was
approximately $20,509,000, primarily related to acquisitions. Net cash provided
by financing activities for the six months ended December 31, 1997 was
approximately $52,959,000, comprised primarily of the $46,000,000 sale of
principal amount of Notes and $10,500,000 of the sale of 2,250,000 shares of
common stock to Strategic Investment Partners Ltd.
17
<PAGE> 20
The Company's working capital was approximately $39,600,000 at December 31,
1997, compared to $7,499,000 at December 31, 1996. The increase in working
capital is primarily attributable to proceeds related to the issuance of the
Notes.
The Company anticipates that the cash flow from operations, together with funds
raised through the offering of the Notes will be used to make acquisitions in
order to grow its operations and pursue its business strategy. Based upon
current expectations, the Company believes that cash flow from operations will
be sufficient to meets its working capital requirements for fiscal year 1998,
although there can be no assurance that it will be able to do so.
18
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On October 30, 1997, the Company completed the sale of $46 million principal
amount of Notes. Loewenbaum & Company Incorporated ("Loewenbaum") acted as the
exclusive placement agent for the Notes and received a fee of $2,070,000 for
placement of the Notes. The Notes were offered to qualified institutional
investors (as defined in Rule 144A under the Securities Act) and to a limited
number of institutional accredited investors within the meaning of Rule 501(a)
(1) , (2), (3) or (7) of Regulation D under the Securities Act. See Note 3 to
the Company's Consolidated Financial Statements included elsewhere in this Form
10-QSB for additional information regarding the Notes, including information
regarding conversion of the Notes into Common Stock of the Company and the
subsequent filing of a registration statement relating to resales of the Notes.
On December 5, 1997, the Company issued 2,250,000 shares of Common Stock for an
aggregate purchase price of $11,250,000 to Strategic Investment Partners Ltd.,
an investment vehicle owned by members of the Quantum Group of Funds, which are
managed by Soros Fund Management LLC. The Company paid a commission of $675,000
to a broker (the "Broker") in connection with the sale of the shares. The shares
were issued pursuant to an exemption under Section 4(2) of the Securities Act
based on standard "private placement" investment representations.
During the quarter ended December 31, 1997, the Company issued the following
warrants: (i) five-year warrant to purchase 200,000 shares of Common Stock at an
exercise price of $7.25 per share to Loewenbaum, (ii) five-year warrant to
purchase 200,000 shares of Common Stock at an exercise price of $7.25 per share
to the Broker, and (iii) ten-year warrants to purchase 100,000 shares of Common
Stock at an exercise price of $8.00 per share and 100,000 shares of Common Stock
at an exercise price of $12.50 per share to a consultant to the Company. All
warrants were issued pursuant to an exemption under Section 4(2) of the
Securities Act based on standard "private placement" investment representations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
During the quarter ended December 31, 1997, the Company filed
the following reports on Form 8-K: (i) Form 8-K, filed October 6, 1997, to
report an Item 2 event (acquisition of a home health agency), (ii) Form 8-K,
filed October 10, 1997, to report an Item 5 event (issuance of a press release
regarding the commencement of the private placement of the Notes), (iii) Form
8-K, filed November 13, 1997, to report an Item 5 event (issuance of a press
release regarding the issuance of the Notes), (iv) Form 8-K, filed November 13,
1997, to report an Item 2 event (acquisition of an office-based primary
physician practice group, including financial statements for such practice group
and pro forma financial information),
19
<PAGE> 22
(v) Form 8-K, filed December 12, 1997, to report an Item 5 event (issuance of a
press release regarding the sale of 2,250,000 shares to a private investor), and
(vi) Form 8-K/A, filed November 26, 1997, which amended the Form 8-K filed on
October 6, 1997, to report that no financial statements were required to be
filed with respect to the acquisition of the home health agency.
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CONTINUCARE CORPORATION
Dated: February 17, 1998 By: /s/ CHARLES M. FERNANDEZ
Charles M. Fernandez, Chairman,
Chief Executive Officer, President
and Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 36,421,623
<SECURITIES> 0
<RECEIVABLES> 7,506,692
<ALLOWANCES> 2,178,880
<INVENTORY> 0
<CURRENT-ASSETS> 44,193,444
<PP&E> 3,268,918
<DEPRECIATION> 552,638
<TOTAL-ASSETS> 76,368,688
<CURRENT-LIABILITIES> 4,600,451
<BONDS> 46,000,000
0
0
<COMMON> 1,348
<OTHER-SE> 25,064,448
<TOTAL-LIABILITY-AND-EQUITY> 76,368,888
<SALES> 0
<TOTAL-REVENUES> 11,341,503
<CGS> 0
<TOTAL-COSTS> 12,157,433
<OTHER-EXPENSES> 683,318
<LOSS-PROVISION> 2,514,563
<INTEREST-EXPENSE> 448,644
<INCOME-PRETAX> (4,462,455)
<INCOME-TAX> (1,568,324)
<INCOME-CONTINUING> (2,894,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,894,131)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
