<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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)
FLORIDA 59-2716023
- --------------------------------- ---------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
80 SOUTHWEST EIGHTH STREET
SUITE 2350
MIAMI, FLORIDA 33130
(Address of principal executive offices)
(Zip Code)
(305) 350-7515
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
At November 2, 1999, the Registrant had 14,540,091 shares of $0.0001 par value
common stock outstanding.
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CONTINUCARE CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 1999 (Unaudited) and June 30, 1999 ........... 3
Consolidated Statements of Operations - Three Months Ended September 30, 1999 and 1998
(Unaudited) ........................................................................... 4
Consolidated Statements of Cash Flows - Three Months Ended September 30, 1999 and 1998
(Unaudited) ........................................................................... 5
Notes to Consolidated Financial Statements September 30, 1999 (Unaudited) ................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ....................................................................... 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................ 15
PART II - OTHER INFORMATION
SIGNATURE PAGE ........................................................................... 16
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CONTINUCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 JUNE 30, 1999
------------------ -------------
(UNAUDITED) (NOTE 1)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ......................................... $ 2,254,549 $ 3,185,077
Accounts receivable, net of allowance for doubtful accounts of
$5,752,000 at September 30, 1999 and June 30, 1999 ............... 6,350 302,166
Other receivables ................................................. 276,999 266,057
Prepaid expenses and other current assets ......................... 350,383 298,899
------------ ------------
Total current assets .......................................... 2,888,281 4,052,199
Equipment, furniture and leasehold improvements, net ................. 977,399 1,098,289
Cost in excess of net tangible assets acquired, net of
accumulated amortization of $4,162,597 at September 30, 1999
and $3,837,000 at June 30, 1999 .................................... 21,700,747 22,346,156
Deferred financing costs, net of accumulated amortization of
$1,247,122 at September 30, 1999 and $1,208,000 at June 30, 1999 ... 2,151,398 2,551,811
Other assets, net .................................................... 84,418 69,165
------------ ------------
Total assets .................................................. $ 27,802,243 $ 30,117,620
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable .................................................. $ 781,407 $ 842,442
Accrued expenses .................................................. 2,349,745 2,358,346
Accrued salaries and benefits ..................................... 1,513,794 1,856,140
Medical claims payable ............................................ 6,051,770 4,825,081
Convertible subordinated notes payable ............................ 41,000,000 45,000,000
Current portion of long-term debt ................................. 6,686,129 6,857,946
Accrued interest payable .......................................... 3,011,342 2,400,022
Current portion of capital lease obligations ...................... 92,249 112,652
------------ ------------
Total current liabilities ..................................... 61,486,436 64,252,629
Capital lease obligations, less current portion ...................... 139,103 123,436
Long-term debt, less current portion ................................. 1,517,277 1,396,753
------------ ------------
Total liabilities ............................................. 63,142,816 65,772,818
------------ ------------
Commitments and contingencies
Shareholders' deficit
Common stock; $0.0001 par value; 100,000,000 shares
authorized; 17,536,283 shares issued and 14,540,091 shares
outstanding at September 30, 1999 and June 30, 1999 ............. 1,455 1,455
Additional paid-in capital ........................................ 32,910,465 32,910,465
Retained deficit .................................................. (62,827,792) (63,142,417)
Treasury stock (2,996,192 shares) ................................. (5,424,701) (5,424,701)
------------ ------------
Total shareholders' deficit ..................................... (35,340,573) (35,655,198)
------------ ------------
Total liabilities and shareholders' deficit ..................... $ 27,802,243 $ 30,117,620
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
3
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CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Revenue
Medical services, net .............................. $ 28,577,934 $ 48,674,972
Management fees .................................... 504,559 282,927
------------ ------------
Subtotal ......................................... 29,082,493 48,957,899
Expenses
Medical services ................................... 27,432,190 41,385,623
Payroll and employee benefits ...................... 1,869,559 4,026,953
Provision for bad debt ............................. -- 250,525
Professional fees .................................. 153,368 260,842
General and administrative ......................... 1,508,845 3,098,292
Depreciation and amortization ...................... 807,534 1,734,576
------------ ------------
Subtotal ..................................... 31,771,496 50,756,811
Loss from operations .................................... (2,689,003) (1,798,912)
Other income (expenses)
Interest income .................................... 18,576 53,658
Interest expense ................................... (1,071,145) (955,864)
Other .............................................. 280,000 --
------------ ------------
Loss before extraordinary item .......................... (3,461,572) (2,701,118)
Extraordinary gain on extinguishment of debt ........... 3,776,197 130,977
------------ ------------
Net income (loss) ....................................... $ 314,625 $ (2,570,141)
============ ============
Basic and diluted (loss) earnings per common share:
Loss before extraordinary item ..................... $ (.24) $ .19
Extraordinary gain on extinguishment of debt ....... $ .26 $ .01
------------ ------------
Net income (loss) .................................. $ .02 $ (.18)
============ ============
Weighted average shares outstanding
Basic and diluted .................................. 14,540,091 14,063,892
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
4
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CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .............................................................. $ 314,625 $(2,570,141)
Adjustments to reconcile net income (loss) to cash used in operating
activities:
Depreciation and amortization including amortization
of deferred loan costs ....................................................... 964,142 1,734,576
Amortization of discount on note payable ..................................... 86,236 --
Provision for bad debts ...................................................... -- 250,525
Gain on extinguishment of debt ............................................... (3,776,197) (130,977)
Changes in assets and liabilities, excluding the effect of acquisitions and
disposals:
Decrease (increase) in accounts receivable ................................... 616,089 (187,866)
Increase in prepaid expenses and other current assets ........................ (51,484) (133,483)
Decrease (increase) in other receivables ..................................... (10,942) 151,406
Increase in other assets ..................................................... (15,252) (12,783)
Increase (decrease) in medical claims payable ................................ 1,226,688 (159,021)
Decrease in accounts payable and accrued expenses ............................ (411,982) (186,856)
Increase in accrued interest payable ......................................... 824,653 895,101
----------- -----------
Net cash used in operating activities ............................................. (233,424) (349,519)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions ................................................... -- (579,137)
Cash paid for purchase of contracts .......................................... -- (4,225,000)
Property and equipment additions ............................................. (24,566) (352,402)
Proceeds from notes receivable ............................................... -- 11,158
----------- -----------
Net cash used in investing activities ............................................. (24,566) (5,145,381)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment to repurchase convertible subordinated notes ......................... (210,000) (720,000)
Principal repayments under capital lease obligation .......................... (4,736) (129,946)
Payment on notes payable ..................................................... (457,802) (901,252)
Proceeds from note payable ................................................... -- 5,000,000
----------- -----------
Net cash (used in) provided by financing activities ............................... (672,538) 3,248,802
----------- -----------
Net decrease in cash and cash equivalents ......................................... (930,528) (2,246,098)
----------- -----------
Cash and cash equivalents at beginning of period .................................. 3,185,077 7,435,724
----------- -----------
Cash and cash equivalents at end of period ........................................ $ 2,254,549 $ 5,189,626
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for acquisition ...................................................... $ -- $ 1,811,250
=========== ===========
Note payable for purchase of contracts ............................................ $ -- $ 2,500,000
=========== ===========
Notes payable issued for refunds due a third party payor for overpayments ......... $ 320,273 $ --
=========== ===========
Cash paid for interest ............................................................ $ 18,870 $ 60,763
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
5
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CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
NOTE 1 - UNAUDITED INTERIM INFORMATION
The accompanying unaudited condensed consolidated financial statements of
Continucare Corporation ("Continucare" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 2000.
The balance sheet at June 30, 1999 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended June 30, 1999.
Certain reclassifications have been made to the prior year amounts to conform to
the current year.
NOTE 2 - GENERAL
Continucare is a provider of integrated outpatient healthcare and home
healthcare services in Florida. As of September 30, 1999 the Company operated,
owned and/or managed: (i) eighteen Staff Model clinics in South and Central
Florida; an Independent Practice Association with 107 physicians; and two Home
Health agencies. For the three months ended September 30, 1999 approximately 51%
of revenue was derived from managed care contracts with Humana Medical Plans,
Inc.("Humana") and 45% of revenue was derived from managed care contracts with
Foundation Health Corporation ("Foundation"). For the three months ended
September 30, 1998, approximately 29% of revenue was derived from Humana and 49%
was derived from Foundation.
Throughout fiscal 1998 and 1999 the Company experienced adverse business
operations, recurring operating losses, negative cash flow from operations, and
a significant working capital deficiency developed. Furthermore, as discussed
below and further in Note 3, the Company was unable to make the interest
payments due April 30, 1999 and October 31, 1999 on the Company's Convertible
Subordinated Notes Payable (the "Notes"). The Company's operating difficulties
have in large part been due to the underperformance of various entities which
were acquired in fiscal years 1999, 1998 and 1997, the inability to effectively
integrate and realize increased profitability through anticipated economies of
scale with these acquisitions, as well as reductions in reimbursement rates
under the Balanced Budget Act of 1997.
The financial statements of the Company have been prepared assuming that the
Company will continue as a going concern. In order to strengthen itself
financially and remain a going concern, the Company, during fiscal 1999,
divested itself of certain unprofitable operations and disposed of other
underperforming assets. On April 30, 1999 (the "April Default Date") the Company
defaulted on its semi-annual payment of interest on the Notes. The Company
6
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CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 (UNAUDITED)
NOTE 2 - GENERAL (CONTINUED)
also defaulted on the October 31, 1999 semi-annual interest payment on the
Notes. On September 29, 1999 the Company announced an agreement in principle
with the holders of the Notes to enter into a settlement and restructuring
agreement with respect to the remaining $41,000,000 principal balance and
approximately $3,300,000 of interest thereon accruing through October 31, 1999
(the "Debenture Settlement") (see Note 3). The successful completion of the
proposed Debenture Settlement is subject to a number of significant risks and
uncertainties including, but not limited to, the need to draft and execute a
final settlement agreement with the holders of the Notes, the need to enter into
a new credit facility, and the need to obtain shareholder approval of the
Debenture Settlement prior to December 31, 1999.
To strengthen Continucare financially, the Company began a business
rationalization program (the "Business Rationalization Program") during the
fiscal year ended June 30, 1999 to divest itself of certain unprofitable
operations and to close other underperforming subsidiary divisions and a
financial restructuring program (the "Financial Restructuring Program") to
strengthen its financial condition and performance. In connection with the
implementation of its Business Rationalization Program, Continucare sold or
closed its Outpatient Rehabilitation subsidiary, its Diagnostic Imaging
subsidiary and specialty physician practices. These divestitures generated net
cash proceeds of approximately $5,642,000 (after the payment of transaction
costs and other employee-related costs). The Business Rationalization Program
has assisted management with the commencement and implementation of its
Financial Restructuring Program and has allowed the Company to focus its
resources on a core business model. While the Company believes that the Business
Rationalization Program and Financial Restructuring Program will improve its
cash flow and profitability, there can be no assurance that it will be able to
continue implementing any of the necessary programs and, if implemented, that
the programs will improve the Company's cash flow and profitability sufficiently
to fund its operations and satisfy its obligations as they become due.
NOTE 3 - CONVERTIBLE SUBORDINATED NOTES PAYABLE
On October 30, 1997, the Company issued $46,000,000 of the Notes which accrue
interest at 8% and are due on October 31, 2002. On August 12, 1998, the Company
repurchased $1,000,000 of the Notes and recorded an extraordinary gain on
retirement of debt of $130,977. As previously discussed in Note 2, on the "April
Default Date, the Company defaulted on its semi-annual payment of interest on
the outstanding Notes. Within thirty (30) days of the April Default Date, the
Company commenced negotiations with an informal committee of the holders of the
Notes. On the April Default Date, the outstanding principal balance of the Notes
was $45,000,000 and the related accrued interest was approximately $1,800,000.
On July 2, 1999, the Company repurchased $4,000,000 of the Notes for $210,000
and recorded a gain on extinguishment of debt of $3,776,197. The Company funded
the purchase of the Notes from working capital. The Company has not provided for
income taxes on the gain because it believes that it will be able to utilize
certain of its net operating loss carryforwards to offset any income tax
liability related to the transaction.
On October 31, 1999 (the "October Default Date") the Company defaulted on its
semi-annual payment of interest on the outstanding Notes. The total amount of
accrued interest on the outstanding Notes at October 31, 1999 was approximately
$3,300,000.
On September 29, 1999 the Company announced an agreement in principle with the
holders of the Notes to enter into a settlement and restructuring agreement with
respect to the remaining $41,000,000 principal balance and approximately
$3,300,000 of interest thereon accruing through October 31, 1999 (the "Debenture
Settlement"). The
7
<PAGE> 8
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 (UNAUDITED)
NOTE 3 - CONVERTIBLE SUBORDINATED NOTES PAYABLE (CONTINUED)
terms of the proposed Debenture Settlement are as follows: (a) $31,000,000 of
the outstanding principal of the Notes will be converted, on a pro rata basis,
into the Company's common stock at a conversion rate of $2.00 per share
(approximately 15,500,000 shares of capital stock); (b) all interest accrued on
the Notes through October 31, 1999 will be forgiven (approximately $3,300,000);
(c) the interest payment default on the remaining $10,000,000 principal balance
of the Notes will be waived and the Notes will be reinstated on the Company's
books and records as a performing non-defaulted loan (the "Reinstated
Subordinated Debentures"); (d) the Reinstated Subordinated Debentures will bear
interest at the rate of 7% per annum commencing November 1, 1999; (e) the
conversion rate for the Reinstated Subordinated Debentures will be modified as
follows:
TERM CONVERSION RATE
--------------------------------------------------------
Through October 31, 2000 ............. $ 7.25
November 1, 2000 to Maturity ......... $ 2.00
and (f) the Company will obtain a financially responsible person (the
"Guarantor") to personally guarantee a $3,000,000 bank credit facility (the "New
Credit Facility") for the Company. In consideration for providing the guaranty
the Company will issue to the Guarantor 3,000,000 shares of the Company's common
stock. The New Credit Facility will replace the Company's existing bank credit
facility and it will additionally be used to finance the Company's working
capital and capital expenditure requirements.
The Company has agreed to convene a meeting of its shareholders before December
31, 1999 in order to obtain shareholder approval of the Debenture Settlement.
The successful completion of the proposed Debenture Settlement is subject to a
number of significant risks and uncertainties including, but not limited to, the
need to draft and execute a final settlement agreement with the holders of the
Notes, the need to consummate the New Credit Facility, and the need to obtain
shareholder ratification of the Debenture Settlement prior to December 31, 1999.
NOTE 5 - CREDIT FACILITY
In August 1998, the Company entered into a credit facility with First Union Bank
(the "Credit Facility"). The Credit Facility provided for a $5,000,000
acquisition facility and a $5,000,000 revolving loan. The Company borrowed the
entire $5,000,000 acquisition facility to fund acquisitions. The Company never
utilized the revolving loan. Since December 31, 1998 the Company has not been in
compliance with the terms and conditions of the acquisition facility. During
April 1999, the Company used approximately $4,000,000 of the net proceeds from
the sale of its Rehabilitation Subsidiary to reduce the outstanding balance of
the Credit Facility. In connection with the payment, the Company entered into an
amendment to the Credit Facility, which provided, among other things, for the
repayment of the remaining outstanding principal balance by December 31, 1999.
At September 30, 1999 and June 30, 1999, respectively, the outstanding balance
of the Credit Facility was approximately $709,000 and $1,000,000 and is included
in Current Portion of Long-Term Debt on the accompanying consolidated financial
statements.
NOTE 5 - EARNINGS PER SHARE
Options and warrants to purchase 1,138,500 and 1,451,000 shares of the Company's
common stock were outstanding at September 30, 1999 and 1998, respectively, but
were not included in the computation of diluted earnings (loss) per share
because the effect would be antidilutive.
8
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CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 (UNAUDITED)
NOTE 6 - CONTINGENCIES
The Company is a party to the case of JAMES N. HOUGH, Plaintiff, v. INTEGRATED
HEALTH SERVICES, INC., a Delaware corporation, and REHAB MANAGEMENT SYSTEMS,
INC., a Florida corporation ("RMS"), and CONTINUCARE REHABILITATION SERVICES,
INC., a Florida Corporation. Mr. Hough was the founder and former Chief
Executive Officer and President of RMS. Mr. Hough sold RMS to Integrated Health
Services, Inc., ("IHS"), and entered into an Employment Agreement (the
"Employment Agreement") with IHS. RMS was acquired by Continucare in February
1998. Mr. Hough is seeking damages from the Employment Agreement and is alleging
breach of contract. His initial demand of $1.1 million was rejected by the
Company and the Company intends to vigorously defend the claim.
The Company is a party to the case of MANAGED HEALTHCARE SYSTEMS ("MHS") V.
CONTINUCARE CORPORATION & CONTINUCARE HOME HEALTH SERVICES, INC. MHS is alleging
breach of contract and is seeking damages in excess of $1,000,000. The Company
believes the action has little merit and intends to vigorously defend the claim.
The Company is a party to the case of KAMINE CREDIT CORPORATION ("KAMINE") AS
ASSIGNEE OF TRI COUNTY HOME HEALTH V. CONTINUCARE CORPORATION. Kamine is
alleging breach of contract and is seeking damages in excess of $5,000,000. The
Company believes the action has little merit and intends to vigorously defend
the claim.
In connection with the Company's Business Rationalization Program, the Company
has closed or dissolved certain subsidiaries, some of which had pending claims
against them. The Company is also involved in various other legal proceedings
incidental to its business that arise from time to time out of the ordinary
course of business -- including, but not limited to, claims related to the
alleged malpractice of employed and contracted medical professionals, workers'
compensation claims and other employee-related matters, and minor disputes with
equipment lessors and other vendors.
In the opinion of the Company's management, no individual item of litigation or
group of similar items of litigation, taking into account the insurance coverage
maintained by the Company, is likely to have a material adverse effect on the
Company's financial position, results of operations or liquidity.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used in this Form 10-Q, the words
"believe," "anticipate," "think," "intend," "plan," "will be," and similar
expressions, identify such forward-looking statements. Such statements regarding
future events and/or the future financial performance of 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
are set forth in the Company's Form 10-K for the period ended June 30, 1999,
including the following: the success or failure of the Company in implementing
its current business and operational strategies; the ability of the Company to
consummate the Debenture Settlement on the terms specified in such Debenture
Settlement and the timing of such consummation; the approval of the Debenture
Settlement by the Company's shareholders; the successful implementation of the
Company's Business Rationalization Program and Financial Restructuring Program;
the availability, terms and access to capital and custormary trade credit;
general economic and business conditions; competition; changes in the Company's
business strategy; availability, location and terms of new business development;
availability and terms of necessary or desirable financing or refinancing;
unexpected costs of year 2000 compliance or failure by the Company or other
entities with which it does business to achieve compliance; labor relations; the
outcome of pending or yet-to-be instituted legal proceedings; and labor and
employee benefit costs.
GENERAL
Continucare is a provider of integrated outpatient healthcare and home
healthcare services in Florida. As of September 30, 1999, the Company operated,
owned and/or managed: eighteen Staff Model clinics in South and Central Florida;
an Independent Practice Association with 107 physicians; and two Home health
agencies.
Throughout fiscal 1998 and 1999 the Company experienced adverse business
operations, recurring operating losses, negative cash flow from operations, and
a significant working capital deficiency developed. Furthermore, as discussed
below under "Liquidity and Capital Resources" and in Note 3 of the consolidated
financial statements, the Company was unable to make the interest payments due
April 30, 1999 and October 31, 1999 on the 8% Convertible Subordinated Notes
Payable due 2002 (the "Notes").The Company's operating difficulties have in
large part been due to the underperformance of various entities which were
acquired in fiscal years 1999, 1998 and 1997, the inability to effectively
integrate and realize increased profitability through anticipated economies of
scale with these acquisitions, as well as reductions in reimbursement rates
under the Balanced Budget Act of 1997.
The financial statements of the Company have been prepared assuming that the
Company will continue as a going concern. To strengthen Continucare financially,
the Company began a business rationalization program (the "Business
Rationalization Program") during the fiscal year ended June 30, 1999 to divest
itself of certain unprofitable operations and to close other underperforming
subsidiary divisions and a financial restructuring program (the "Financial
Restructuring Program") to strengthen its financial condition and performance.
In connection with the implementation of its Business Rationalization Program,
Continucare sold or closed its Outpatient Rehabilitation subsidiary, Diagnostic
Imaging subsidiary and specialty physician practices. These divestitures
generated net cash proceeds of approximately $5,642,000 (after the payment of
transaction costs and other costs) during the fiscal year ended June 30, 1999.
The Business Rationalization Program has assisted management with the
commencement and implementation of its Financial Restructuring Program and has
allowed the Company to focus its resources on a core business model. While the
Company believes that the Business Rationalization Program and Financial
Restructuring Program will improve its cash flow and profitability, there can be
no assurance that it will be able to continue implementing any of the necessary
programs and, if implemented,
10
<PAGE> 11
that the programs will improve the Company's cash flow and profitability
sufficiently to fund its operations and satisfy its obligations as they become
due.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements and notes thereto appearing
elsewhere in this Form 10-Q. The statements of operations include the operations
of acquisitions made during the three months ended September 30, 1998 from their
respective acquisition dates.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATED TO THE OPERATION OF CONTINUCARE
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1998
REVENUE
Medical services revenue for the three month period ended September 30, 1999
decreased 41% to approximately $28,578,000 from approximately $48,675,000 for
the three month period ended September 30, 1998. The decrease in medical service
revenue was principally a result of (i) the Company's disposal of certain
underperforming assets and subsidiaries (the "Rationalized Entities") during
Fiscal 1999 and (ii) a reduction in the number of patients for whom the Company
is at risk through its Independent Practice Association ("IPA"). IPA Medicare
patients decreased by approximately 50% for the three months ended September 30,
1999 compared with the three months ended September 30, 1998 which resulted in a
decrease in revenue of approximately $7,300,000, and the Company is no longer at
risk for IPA commercial patients under one of its contracts which accounted for
approximately $4,500,000 in revenues during the three months ended September 30,
1998. During the three months ended September 30, 1998, medical services revenue
from the Rationalized Entities was approximately $8,487,000. Revenue received
under the Company's contracts with HMO's amounted to 96% and 78% of medical
services revenues in the three months ended September 30, 1999 and 1998,
respectively.
EXPENSES
Medical services expenses represent the direct cost of providing medical
services to patients as well as the medical claims incurred by the Company under
capitated contracts with HMOs. The costs of the medical services provided
include the salaries and benefits of health professionals providing the
services, insurance and other costs necessary to operate the centers. Medical
claims costs represent the cost of medical services provided by providers other
than the Company but which are to be paid by the Company for individuals covered
by capitated arrangements with HMOs. Medical services expenses for the three
month period ended September 30, 1999 were approximately $27,432,000 or 96% of
medical services revenue, compared to approximately $41,386,000 or 85% of
medical services revenue for the three month period ended September 30, 1998.
The increase in medical services expenses as a percentage of medical services
revenue resulted primarily from increased average medical claims per patient for
which the Company is at risk through certain of its managed care agreements with
HMOs. During the three months ended September 30, 1998, medical services
expenses from the Rationalized Entities was approximately $5,575,000. The
remainder of the decrease in medical services expenses is due to the decrease in
the number of patients for whom the Company is at risk through its IPA.
Payroll and employee benefits for administrative personnel was approximately
$1,870,000 for the three months ended September 30, 1999, or 6.4% of revenues,
compared to approximately $4,027,000 or 8.2% of revenue for the three months
ended September 30, 1998. The decrease in these costs as a percent of revenues
is primarily due to the rationalization of employees. Payroll and employee
benefits for the Rationalized Entities was approximately $1,642,000 for the
three months ended September 30, 1998.
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<PAGE> 12
General and administrative expenses for the three months ended September 30,
1999 were approximately $1,509,000 or 5.2% of revenues compared to approximately
$3,098,000 or 6.3% of revenues for the three months ended September 30, 1998.
The decrease in general and administrative expense as a percent of revenues
resulted from a reduction of overhead costs as part of the Company's Business
Rationalization Program. During the three months ended September 30, 1998
general and administrative expenses from the Rationalized Entities was
approximately $1,642,000.
Amortization expense of intangible assets was approximately $645,000 for the
three months ended September 30, 1999, as compared to approximately $1,091,000
for the three months ended September 30, 1998. Amortization expense for the
Rationalized Entities was approximately $266,000 for the three months ended
September 30, 1998. Additionally, during fiscal year ended June 30, 1999, the
Company determined that approximately $11,700,000 of other intangible assets
were impaired and, accordingly, wrote off the impaired assets. Amortization
expense related to these impaired assets which was included in the three months
ended September 30, 1998 totaled approximately $309,000.
Bad debt expense for the three months ended September 30, 1998, was related to
certain of the Rationalized Entities which generated revenues primarily through
fee-for-service billings to third party payors and individual patients. The
absence of bad debt expense for the three months ended September 30, 1999 is
directly attributable to the increase in revenue received under the Company's
HMO contracts, for which bad debt expense is nominal.
LOSS FROM OPERATIONS
Loss from operations for the three months ended September 30, 1999 was
approximately $2,689,000 or 9.2% of total revenues, compared to an operating
loss of approximately $1,799,000, or 3.7% of total revenues for the three months
ended September 30, 1998. The operating loss of the Rationalized Entities for
the three months ended September 30, 1998 was approximately $1,090,000. The
increase in loss from operations as a percentage of total revenues is primarily
due to increased average medical claims per patient for which the Company is at
risk under its various managed care agreements with HMOs.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
In July, 1999, the Company recorded an extraordinary gain on extinguishment of
debt of approximately $3,776,000 as a result of repurchasing $4,000,000 of its
outstanding convertible subordinated notes payable for a cash payment of
$210,000 and the write-off of related deferred financing costs and accrued
interest payable. The Company has not provided for income taxes on the gain
because it believes that it will be able to utilize certain of its net operating
loss carryforwards to offset any income tax liability related to the
transaction. (See Note 3 of the consolidated financial statements). In August,
1998, the Company recorded an extraordinary gain on extinguishment of debt of
approximately $130,000 as a result of repurchasing $1,000,000 of the Notes for a
cash payment of approximately $700,000 and the write-off of related deferred
financing costs and accrued interest payable.
Net income for the three months ended September 30, 1999 was approximately
$315,000 compared to a net loss of approximately $2,570,000 for the three months
ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The discussion herein has been prepared assuming that the Company will continue
as a going concern. In order to strengthen itself financially and remain a going
concern, the Company, during the fiscal year ended June 30, 1999, divested
itself of certain unprofitable operations and disposed of other underperforming
assets.
The Company did not make the April 30, 1999 (the "April Default Date")
semi-annual payment of interest on its Subordinated Notes Payable or the
October 31, 1999 (the "October Default Date") semi-annual payment. The
12
<PAGE> 13
amount of interest due as of April 30, 1999 was $1,800,000. Within thirty (30)
days of the April Default Date, the Company commenced negotiations with an
informal committee of the holders the Notes to restructure a portion of the debt
and related interest in exchange for common stock and to obtain terms on the
remaining portion of the debt that are more favorable to the Company.
On July 2, 1999 the Company repurchased $4,000,000 face value of its Notes for
approximately $210,000, recognizing a gain on extinguishment of debt of
approximately $3,776,000. The Company funded the purchase of the Notes from
working capital. On September 29, 1999 the Company announced an agreement in
principle with the holders of the Notes to enter into a settlement and
restructuring agreement with respect to the remaining $41,000,000 principal
balance and approximately $3,300,000 of interest thereon accruing through
October 31, 1999. (See Note 3 of the Company's Consolidated Financial
Statements.)
In August 1998, the Company entered into a credit facility with First Union Bank
(the "Credit Facility"). The Credit Facility provided for a $5,000,000
acquisition facility and a $5,000,000 revolving loan. The Company borrowed the
entire $5,000,000 acquisition facility to fund acquisitions. The Company never
utilized the revolving loan. Since December 31, 1998 the Company has not been in
compliance with the terms and conditions of the acquisition facility. During
April 1999, the Company used approximately $4,000,000 of the net proceeds from
the sale of its Rehabilitation Subsidiary to reduce the outstanding balance of
the Credit Facility. In connection with the payment, the Company entered into an
amendment to the Credit Facility, which provided, among other things, for the
repayment of the remaining outstanding principal balance by December 31, 1999.
At September 30, 1999 and June 30, 1999, respectively, the outstanding balance
of the Credit Facility was approximately $709,000 and $1,000,000 and is included
in Current Portion of Long-Term Debt in the accompanying consolidated financial
statements.
The Company's loss before extraordinary gain on extinguishment of debt was
approximately $3,462,000. Net cash used in operating activities for the three
months ended September 30, 1999 was approximately $233,000 due primarily to the
loss before the extraordinary item, offset by non-cash amortization and
depreciation expenses of approximately $1,050,000, an increase in medical claims
payable of approximately $1,227,000, a decrease in accounts receivable of
approximately $616,000 and an increase in accrued interest payable of
approximately $825,000.
Net cash used in investing activities for the three months ended
September 30, 1999 was approximately $25,000 for the purchase of computer
equipment in conjunction with the Company's Year 2000 computer plan. Net cash
used in financing activities for the three months ended September 30, 1999 was
approximately $672,000, comprised primarily of $210,000 paid to redeem
$4,000,000 of the Company's convertible subordinated notes payable, and
approximately $458,000 of repayments on the Company's' Credit Facility and other
notes payable.
The Company's working capital deficit was approximately $58,598,000 at
September 30, 1999, which includes the classification of $41,000,000 of the
Notes as current liabilities due to the Company's default on the April 30, 1999
interest payment.
The Company continues to take steps to improve its cash flow and
profitability through the implementation of its Business Rationalization Program
and Financial Restructuring Program by: (1) assessing the possible divestiture
of non-profitable business units; (2) reducing personnel levels and other
overhead costs; (3) negotiating with the holders of the Notes; and (4)
renegotiating certain of its agreements with HMOs. While the Company believes
that these measures will improve its cash flow and profitability, there can be
no assurances that it will be able to implement any of the above steps and, if
implemented, the steps will improve the Company's cash flow and profitability
sufficiently to fund its operations and satisfy its obligations as they become
due.
If there are continuing operating losses, Continucare may need
additional capital to fund its , and there can be no assurance that such
additional capital can be obtained or, if obtained, that it will be on terms
acceptable to Continucare. The incurring or assumption by the Company of
additional indebtedness could result in the issuance of additional equity and/or
debt which could have a dilutive effect on current shareholders and a
significant effect on the Company's operations.
13
<PAGE> 14
In addition to the Company's liquidity difficulties, the Company is
experiencing administrative difficulties, including the loss of key personnel.
Also, the Company has fallen below the continued listing requirements of the
American Stock Exchange and there can be no assurance that the listing will be
continued.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of the computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations and
patient care, including, among other things, a failure of certain patient care
applications and equipment, a failure of control systems, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on a recent and ongoing assessment, the Company determined that
it will be required to modify or replace certain portions of its software,
hardware and patient care equipment so that its systems will function properly
with respect to dates in the year 2000 and thereafter. Affected systems will
include clinical and biomedical instrumentation and equipment used within the
Company for purposes of direct or indirect patient care such as imaging,
laboratory, pharmacy and respiratory devices; cardiology measurement and support
devices; emergency care devices (including monitors, defibrillators, dialysis
equipment and ventilators); and general patient care devices (including
telemetry equipment and intravenous pumps). The Company presently believes that
with modifications to existing software and conversions to new clinical and
biomedical instrumentation and equipment, the Year 2000 Issue will not pose
significant operational problems. However, if such modifications and conversions
are not made, or are not completed timely, the Year 2000 Issue could have a
material impact on the operations of the Company.
The Company has initiated formal communications with all of its
significant suppliers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 Issues. The Company's total Year 2000 project cost and estimates to
complete include the costs and time associated with the impact of third-party
Year 2000 Issues based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems.
The Company will utilize both internal and external resources to
reprogram, or replace and test the software and patient care equipment for Year
2000 modifications. The Company anticipates completing the Year 2000 project by
December 1, 1999, which is prior to any anticipated impact on its operating
systems. The total cost of the Year 2000 project is estimated at $200,000 and is
being funded through operating cash flows. Of the total projected cost,
approximately $50,000 is attributable to the purchase of new software and
patient care equipment, which will be capitalized. The remaining $150,000 will
be expensed as incurred and is not expected to have a material effect on the
Company's results of operations.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause material differences
include, but are not limited to, the availability and cost of replacement
equipment and personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
The operations of the Company are heavily dependent on its management
information systems. Implementation of new management information systems and
integration of management information systems in connection with acquisitions
require a transition period during which various functions must be converted or
integrated to the new systems. This conversion and integration process may
entail errors, defects or prolonged downtime, especially at the outset, and such
errors, defects or downtime could have a material adverse effect on the
Company's business, results of operations, prospects, financial results,
financial condition or cash flows.
14
<PAGE> 15
Both the software and hardware used by the Company in connection with
the services it provides have been subject to rapid technological change.
Although the Company believes that its technology can be upgraded as necessary,
the development of new technologies or refinements of existing technology could
make the Company's existing equipment obsolete. Although the Company is not
currently aware of any pending technological developments that would be likely
to have a material adverse effect on its business, there is no assurance that
such developments will not occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material risk associated with interest rates, foreign
currency exchange rates or commodity prices.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to the case of JAMES N. HOUGH, PLAINTIFF, V. INTEGRATED
HEALTH SERVICES, INC., A DELAWARE CORPORATION, AND REHAB MANAGEMENT SYSTEMS,
INC., A FLORIDA CORPORATION ("RMS"), AND CONTINUCARE REHABILITATION SERVICES,
INC., A FLORIDA CORPORATION. Mr. Hough was the founder and former Chief
Executive Officer and President of RMS. Mr. Hough sold RMS to Integrated Health
Services, Inc., ("HIS"), and entered into an Employment Agreement (the
"Employment Agreement") with HIS. RMS was acquired by Continucare in February
1998. Mr. Hough is seeking damages from the Employment Agreement and is alleging
breach of contract. His initial demand of $1.1 million was rejected by the
Company and the Company intends to vigorously defend the claim.
The Company is a party to the case of MANAGED HEALTHCARE SYSTEMS ("MHS") V.
CONTINUCARE CORPORATION & CONTINUCARE HOME HEALTH SERVICES, INC..MHS is alleging
breach of contract and is seeking damages in excess of $1,000,000. The Company
believes the action has little merit and intends to vigorously defend the claim.
The Company is a party to the case of KAMINE CREDIT CORPORATION ("KAMINE") AS
ASSIGNEE OF TRI COUNTY HOME HEALTH V. CONTINUCARE CORPORATION. Kamine is
alleging breach of contract and is seeking damages in excess of $5,000,000. The
Company believes the action has little merit and intends to vigorously defend
the claim.
In connection with the Company's Business Rationalization Program, the Company
has closed or dissolved certain subsidiaries, some of which had pending claims
against them. The Company is also involved in various other legal proceedings
incidental to its business that arise from time to time out of the ordinary
course of business -- including, but not limited to, claims related to the
alleged malpractice of employed and contracted medical professionals, workers'
compensation claims and other employee-related matters, and minor disputes with
equipment lessors and other vendors.
In the opinion of the Company's management, no individual item of litigation or
group of similar items of litigation, taking into account the insurance coverage
maintained by the Company, is likely to have a material adverse effect on the
Company's financial position, results of operations or liquidity.
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
Not Applicable
15
<PAGE> 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At September 30, 1999, the Company was not (and currently is not) in compliance
with certain covenants reuired under the terms of its Credit Facility. In April
1999, the Company entered into an amendment to its Credit Facility, which
provides, among other things, for repayment of the remaining outstanding
principal balance by December 31, 1999. At September 30, 1999, the principal
balance outstanding was approximately $709,000.
The Company did not make the April 30, 1999 or October 31, 1999 semi-annual
payments of interest on its Notes. At September 30, 1999 the Company had
$41,000,000 principal amount of the Notes outstanding and the amount of interest
due was approximately $3,007,000. (See Note 3 to the consolidated financial
statements)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
16
<PAGE> 17
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: November 18, 1999 By: /s/ SPENCER J. ANGEL
----------------------------------------
Chief Executive Officer, President and
Principal Financial Officer.
17
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