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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
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)
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 2, 1999, the Registrant had 14,606,283 shares of $0.0001 par value
common stock outstanding.
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CONTINUCARE CORPORATION
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 1998 (Unaudited) and June 30, 1998...........
3
Consolidated Statements of Operations - Three Months Ended December 31, 1998
(Unaudited) and 1997 (Unaudited)..................................................... 4
Consolidated Statements of Operations - Six Months Ended December 31, 1998
(Unaudited) and 1997 (Unaudited)..................................................... 5
Consolidated Statements of Cash Flows - Six Months Ended December 31, 1998
(Unaudited) and 1997 (Unaudited)..................................................... 6
Notes to Consolidated Financial Statements December 31, 1998 (Unaudited)................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................... 10
PART II OTHER INFORMATION
SIGNATURE PAGE..................................................................................... 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CONTINUCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, 1998 JUNE 30, 1998
----------------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents ........................................................ $ 3,867,146 $ 7,435,724
Accounts receivable, net of allowance for doubtful accounts of
$4,442,000 at December 31, 1998 and $2,071,000 at June 30, 1998 ................ 9,660,111 9,009,462
Other receivables ................................................................ 1,037,921 1,091,744
Prepaid expenses and other current assets ........................................ 429,914 595,086
Income taxes receivable .......................................................... -- 1,800,000
------------ ------------
Total current assets ......................................................... 14,995,092 19,932,016
Notes receivable, net of allowance for doubtful accounts of $5,510,000 at
December 31, 1998 and at June 30, 1998 ............................................ 1,584,069 1,644,420
Equipment, furniture and leasehold improvements, net ................................ 3,760,672 5,496,025
Cost in excess of net tangible assets acquired, net of
accumulated amortization of $4,401,000 at December 31, 1998 and
$2,252,000 at June 30, 1998 ....................................................... 37,289,038 38,621,561
Other intangible assets net of accumulated amortization of $251,000 at
December 31, 1998 ................................................................. 9,983,190 --
Deferred financing costs, net of accumulated amortization of $777,000 at
December 31, 1998 and $400,000 at June 30, 1998 ................................... 3,087,656 3,373,999
Other assets, net ................................................................... 96,827 418,084
------------ ------------
Total assets ................................................................. $ 70,796,544 $ 69,486,105
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................................. $ 1,530,406 $ 816,844
Accrued expenses ................................................................. 6,986,034 5,223,153
Medical claims payable ........................................................... 2,512,417 966,251
Current portion of long term debt ................................................ 6,996,170 850,000
Accrued interest payable ......................................................... 634,077 623,556
Current portion of capital lease obligations ..................................... 49,676 328,295
------------ ------------
Total current liabilities .................................................... 18,708,780 8,808,099
Long term debt ...................................................................... 3,639,917 --
Convertible subordinated notes payable .............................................. 45,000,000 46,000,000
Deferred tax liability .............................................................. 954,894 954,894
Obligations under capital lease ..................................................... 364,715 496,766
------------ ------------
Total liabilities ............................................................ $ 68,668,306 $ 56,259,759
------------ ------------
Commitments and contingencies
Shareholders' equity
Common stock; $0.0001 par value; 100,000,000 shares authorized,
17,536,283 shares issued at December 31, 1998 and 16,661,283 at
June 30, 1998; 14,606,283 shares outstanding at December 31, 1998
and 13,731,283 at June 30, 1998 ................................................ 1,462 1,374
Additional paid-in capital ....................................................... 32,910,465 31,099,303
Retained deficit ................................................................. (25,541,009) (12,631,651)
Treasury stock (2,930,000 shares) ................................................ (5,242,680) (5,242,680)
------------ ------------
Total shareholders' equity ..................................................... 2,128,238 13,226,346
------------ ------------
Total liabilities and shareholders' equity ..................................... $ 70,796,544 $ 69,486,105
============ ============
</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 DECEMBER 31,
-------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operations continuing
Revenue
Medical services, net .......................................................... $ 51,684,581 $ 7,043,624
Management fees ................................................................ 266,754 81,250
------------ ------------
Subtotal ..................................................................... $ 51,951,335 $ 7,124,874
Expenses
Medical services ............................................................... 46,009,355 4,028,324
Payroll and employee benefits .................................................. 3,538,313 1,778,187
Provision for bad debt ......................................................... 1,593,067 193,480
Professional fees .............................................................. 436,494 375,198
General and administrative ..................................................... 2,642,909 2,073,966
Depreciation and amortization .................................................. 1,287,437 545,171
------------ ------------
55,507,575 8,994,326
Operations disposed of
Revenue .......................................................................... 801,330 552,845
Expenses ......................................................................... 1,993,044 626,606
------------ ------------
Subtotal ....................................................................... (1,191,714) (73,761)
Provision for notes receivable ................................................. -- 2,167,000
------------ ------------
Subtotal ....................................................................... (1,191,714) (2,240,761)
------------ ------------
Loss from operations ................................................................ (4,747,954) (4,110,213)
Other income (expense)
Loss on sale of subsidiary ..................................................... (4,152,250) --
Interest income ................................................................ 17,897 282,856
Interest expense ............................................................... (1,456,911) (760,075)
------------ ------------
Loss before income taxes ............................................................ (10,339,218) (4,587,432)
Benefit for income taxes ............................................................ -- (1,618,001)
------------ ------------
Net Loss ............................................................................ $(10,339,218) $ (2,969,431)
============ ============
Net loss per share
Basic .......................................................................... $ (.71) $ (.25)
Diluted ........................................................................ $ (.71) $ (.25)
Shares used in earnings per share calculations
Basic .......................................................................... 14,606,283 11,922,283
Diluted ........................................................................ 14,606,283 11,922,283
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
4
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CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
-------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operations continuing
Revenue
Medical services, net .......................................................... $ 99,236,792 $ 9,248,789
Management fees ................................................................ 549,680 465,273
------------ ------------
Subtotal ..................................................................... $ 99,786,472 $ 9,714,062
Expenses
Medical services ............................................................... 86,639,284 4,613,901
Payroll and employee benefits .................................................. 7,249,389 2,980,922
Provision for bad debt ......................................................... 1,730,592 256,803
Professional fees .............................................................. 658,645 386,152
General and administrative ..................................................... 5,454,699 2,870,496
Depreciation and amortization .................................................. 2,899,307 648,734
------------ ------------
104,631,916 11,757,008
Operations disposed of
Revenue .......................................................................... 1,924,092 1,627,441
Expenses ......................................................................... 3,641,081 1,431,306
------------ ------------
Subtotal ....................................................................... (1,716,989) 196,135
Provision for notes receivable ................................................. -- 2,167,000
------------ ------------
Subtotal ....................................................................... (1,716,989) (1,970,865)
------------ ------------
Loss from operations ................................................................ (6,562,433) (4,013,811)
Other income (expenses)
Loss on sale of subsidiary ..................................................... (4,152,250) --
Interest income ................................................................ 71,555 347,184
Interest expense ............................................................... (2,397,207) (795,828)
------------ ------------
Loss before income taxes and extraordinary items .................................... (13,040,335) (4,462,455)
Benefit for income taxes ............................................................ -- (1,568,324)
------------ ------------
Net loss before extraordinary items ................................................. $(13,040,335) $ (2,894,131)
Gain on extinguishment of debt, net of taxes ........................................ 130,977 --
------------ ------------
Net loss ............................................................................ $(12,909,358) $ (2,894,131)
============ ============
Net loss per share before extraordinary items
Basic .......................................................................... $ (.91) $ (.25)
Diluted ........................................................................ $ (.91) $ (.25)
Extraordinary items
Basic .......................................................................... $ .01 $ --
Diluted ........................................................................ $ .01 $ --
Net loss per share
Basic .......................................................................... $ (.90) $ (.25)
Diluted ........................................................................ $ (.90) $ (.25)
Shares used in earnings per share calculations
Basic .......................................................................... 14,340,311 11,405,638
Diluted ........................................................................ 14,340,311 11,405,638
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
5
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CONTINUCARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
-------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................................................ $(12,909,358) $ (2,894,131)
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization including amortization
of deferred loan costs ......................................................... 3,527,148 683,318
Provision for bad debt ......................................................... 2,370,503 347,563
Provision for notes receivable ................................................. -- 2,167,000
Loss on sale of subsidiary ..................................................... 4,152,250 --
Gain on extinguishment of debt, net of taxes ................................... (130,977) --
Changes in assets and liabilities, excluding the effect of acquisitions:
Increase in accounts receivable ................................................ (3,021,152) (2,845,549)
Decrease (increase) in income taxes receivable ................................. 1,800,000 (1,342,518)
Increase in prepaid expenses and other current assets .......................... (10,703) (699,677)
Decrease (increase) in other receivables ....................................... 53,823 (567,000)
Increase in intangible assets .................................................. -- (630,769)
Decrease in other assets ....................................................... 321,257 214,693
Increase in medical claims payable ............................................. 1,546,166 --
Increase in accounts payable and accrued expenses .............................. 1,539,081 2,639,474
Increase in accrued interest payable ........................................... 10,521 528,956
Increase in income and other taxes payable ..................................... -- (619,445)
------------ ------------
Net cash used in operating activities ............................................... (751,441) (3,018,085)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions ....................................................... (4,225,000) (19,443,403)
Cash paid for purchase of contracts .............................................. (652,012) --
Property and equipment additions ................................................. (660,999) (1,065,592)
Proceeds from sale of subsidiary ................................................. 120,000 --
Proceeds from notes receivable ................................................... 60,351 --
------------ ------------
Net cash used in investing activities ............................................... (5,357,660) (20,508,995)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment to extinguish debt ..................................................... (720,000) (2,500,000)
Principal repayments under capital lease obligation ............................ (254,033) (18,620)
Payment on acquisition notes ................................................... (1,317,252)
Proceeds from long term debt ................................................... 5,000,000 48,500,000
Repayment of shareholder note .................................................. -- (599,000)
Payment of deferred financing costs ............................................ (168,192) (3,050,257)
Proceeds from issuance of common stock ......................................... -- 10,627,000
------------ ------------
Net cash provided by financing activities ........................................... 2,540,523 52,959,123
------------ ------------
Net increase (decrease) in cash and cash equivalents ................................ (3,568,578) 29,432,043
------------ ------------
Cash and cash equivalents at beginning of period .................................... 7,435,724 6,989,580
------------ ------------
Cash and cash equivalents at end of period .......................................... $ 3,867,146 $ 36,421,623
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for acquisition ........................................................ $ 1,811,250 $ 1,990,000
============ ============
Note payable for purchase of contracts .............................................. $ 2,500,000 $ --
============ ============
Note payable for amendment of contract .............................................. $ 3,509,983 $ --
============ ============
Cash paid for income taxes .......................................................... $ -- $ 717,155
============ ============
Cash paid for interest .............................................................. $ 1,840,000 $ 68,297
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(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, consisting of
normal recurring accruals, 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, 1998 are not necessarily indicative of the results to be expected
for the year ending June 30, 1999.
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, 1998 as set forth in the Company's Form
10-KSB.
NOTE 2 - GENERAL
The Company believes its cash on hand and anticipated cash flow from
operations may not be sufficient to meet its obligations during fiscal 1999 and
is taking steps to improve its cash flow position and profitability and obtain
additional financing. Assuming the Company obtains the waiver for its
noncompliance with certain financial covenants under its Credit Facility and
First Union National Bank of Florida ("First Union") does not call the balance
outstanding under the Credit Facility, as discussed in Note 6, improves its
cash flow and profitability or obtains additional financing and remains in
compliance with the financial covenants set forth in the Credit Agreement, the
Company believes that it will be able to meet its obligations during fiscal
1999. However, there is no assurance that these assumptions will be met.
NOTE 3 - BASIS OF PRESENTATION
In fiscal 1998, the Company's focus shifted away from the behavioral
health area, an area which had previously been a substantial source of the
Company's revenue. In fiscal 1997, contracts to manage and provide staffing and
billing services for behavioral health programs in hospitals and freestanding
mental health rehabilitation centers represented approximately 86% of total
revenue. In the first quarter of fiscal 1998, the Company assigned its
behavioral health management contracts with freestanding centers and hospitals.
During Fiscal 1999, the Company sold its diagnostic imaging services
subsidiary, see note 9. Accordingly, the results pertaining to these services
are segregated and classified as operations disposed of in the accompanying
consolidated statements of operations.
NOTE 4 - BUSINESS COMBINATION
On April 10, 1997, the Company, through Continucare Physician Practice
Management, Inc., a wholly owned subsidiary, acquired all of the outstanding
stock of certain arthritis rehabilitation centers and affiliated physician
practices. The acquisitions included the purchase of AARDS, INC. ("AARDS"), a
Florida corporation formerly known as Norman G. Gaylis, M.D., Inc. In
connection with the purchase the Company entered into a management agreement
with ZAG Group, Inc. ("ZAG"), an entity controlled by the principals of AARDS.
The management agreement, among other things, provided for ZAG to perform
certain services in exchange for specified compensation. In addition, the
Company entered into a put/call agreement with ZAG, which allowed
7
<PAGE> 8
each of the parties to require the other party, after a two-year period, to
either sell or purchase all the issued and outstanding capital stock of ZAG for
a specified price to be paid in a combination of cash and common stock of the
Company. In August 1998 the Company paid approximately $2 million to ZAG in
connection with the cancellation of the put/call agreement of which $115,000
was paid in cash and the remaining $1,885,000 was paid by issuing 575,000
shares of the Company's common stock with a fair market value of approximately
$1.6 million. In the event that the common stock issued does not have an
aggregate fair market value of approximately $1,885,000 on October 15, 1999,
the Company is obligated to pay additional cash consideration or issue
additional shares of its common stock so that the aggregate value of the stock
issued is approximately $1,885,000. The management agreement was terminated
upon the cancellation of the put/call agreement. The total amount paid in
connection with the cancellation of the put/call agreement is included in cost
in excess of tangible assets acquired on the accompanying balance sheet and is
being amortized over a weighted average life of 14 years.
NOTE 5 - OTHER INTANGIBLE ASSETS
In August 1998 the Company purchased professional provider contracts
with approximately 30 physicians from an unrelated entity. The total purchase
price was approximately $6.7 million of which $4.2 million was paid in cash at
closing the remaining $2.5 million is payable in equal monthly installments
over the ensuing 24 months. The total amount is included in other intangible
assets on the accompanying consolidated balance sheet and is being amortized
over 10 years, the term of the contracts.
Effective August 1, 1998 the Company entered into two amendments to
its professional provider agreements with an HMO. The amendments, among other
things, extended the term of the original agreement from six to ten years and
increased the percentage of Medicare premiums received by the Company effective
January 1, 1999. In exchange for the amendments the Company signed a $4,000,000
non interest bearing promissory note (the "Note") with the HMO of which
$1,000,000 will be paid over the 12 months commencing January 1999 and the
remaining $3,000,000 over the ensuing 24 months. The $4,000,000, net of imputed
interest calculated at 8% of approximately $500,000, is included in other
intangible assets on the accompanying consolidated balance sheet and is being
amortized over 9.6 years, the remaining term of the contract.
NOTE 6 - LONG TERM DEBT
As of December 31, 1998, the Company was not in compliance with
certain covenants required under the terms of its Credit Facility. The Company
is in the process of negotiating a waiver of its noncompliance from First Union,
however, obtaining a waiver can not be assured. In the event First Union does
not grant a waiver subject to the terms of the credit facility, it may demand
repayment of the entire amount owed under the Credit Facility, $5,000,000 at
December 31, 1998, therefore the total amount outstanding has been classified as
a current liability in the accompanying December 31, 1998 consolidated balance
sheet. In the event that the Company does not obtain a waiver from First Union,
remains out of compliance with the loan covenants and payment is demanded, the
Company believes it will need to obtain additional financing from sources
outside of the Company to fund its obligation. The additional financing may be
obtained from, but not limited to, the sale of stock, sale of assets or
additional borrowings. The ultimate outcome of this matter may have a material
adverse effect on the Company's financial position and operations.
NOTE 7 - CONVERTIBLE SUBORDINATED NOTES PAYABLE
In August 1998, the Company purchased $1.0 million face value of its
8% Convertible Subordinated Notes due 2002 for approximately $744,000,
recognizing a gain of approximately $200,000 which is included in gain on
extinguishment of debt on the accompanying consolidated statement of operations
net of the related income taxes.
NOTE 8 - 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
8
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FLORIDA CORPORATION, in the Circuit Court of the Tenth Judicial Circuit in and
for Polk County, Florida, Civil Division. 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 HEALTH CARE SYSTEMS AND
AFFILIATES ("MHS") V. CONTINUCARE ACQUISITION CORP. AND CONTINUCARE HOME HEALTH
SERVICES, INC. MHS is seeking in excess of $1 million damages for an alleged
breach of contract. The Company believes the claim has little merit and intends
to vigorously defend the claim.
The Company is a party to the case of KAMINE CREDIT CORP: AS ASSIGNEE
OF TRICOUNTY HOME HEALTH CARE SERVICES, INC. (KAMINE) V. CONTINUCARE
CORPORATION. Kamine is seeking in excess of $5 million damages for alleged
breach of contract. The Company believes the claim has little merit and intends
to vigorously defend the claim.
The Company is also involved in various legal proceedings incidental
to its business.
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 and any accounts for self-insured
retention, is likely to have a material adverse effect on the Company's
financial position, results of operations or liquidity.
The Company records its results of operations for its managed care
contracts with HMOs based on information provided by the respective HMO and
attempts to monitor the reliability of that information utilizing a variety of
internal analytical tools. One HMO representing two managed care contracts
provided information to the Company indicating a liability to the HMO of
approximately $700,000 at June 30, 1998, and $3,737,000 at December 31, 1998.
Based on such information, the Company's consolidated statements of operations
include a loss of approximately $1,422,000 for the three months ended December
31, 1998 and $746,000 for the six months ended December 31, 1998, relating to
the Company's relationship with the HMO. The Company believes, based on its
internal analysis, that the information provided by the HMO may include claims
that were improperly charged to the Company. The Company has advised the HMO of
this issue and the HMO has advised the Company that it is undertaking a complete
review of the information it previously provided. Because the HMO did not timely
provide the information as required by the contractual relationship, this issue
could not be resolved prior to the filing of this report. Accordingly the
Company's consolidated statements of operations and balance sheets do not
include an estimate of any amount that may be recoverable.
NOTE 9 - LOSS ON SALE OF SUBSIDIARY
On December 27, 1998, the Company sold the stock of its diagnostic
imaging services subsidiary (the "subsidiary") for a cash purchase price of
$120,000. Prior to the sale, the subsidiary conveyed through dividends all of
the accounts receivable of the subsidiary to the Company. All obligations
existing on the date of sale remained the obligations of the Company. As a
result of this transaction, the Company recorded a loss on sale of subsidiary
of approximately $4,152,000, including a write off of approximately $1,800,000
of costs in excess of the net assets acquired, and an accrual for operating
leases not assumed by the seller which expire through 2007 of approximately
$1,000,000.
NOTE 10 - SUBSEQUENT EVENT
On February 9, 1999 the Company signed a term sheet to sell its
rehabilitation subsidiary. The purchase is contingent upon the purchaser
completing acceptable due diligence, execution of a definitive agreement on or
before March 31, 1999 and approval by both parties' Board of Directors. In the
event all the contingencies are resolved and the subsidiary is sold the Company
anticipates recognizing a loss on the transaction, however, the amount of the
loss cannot be determined.
9
<PAGE> 10
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 including statements regarding the potential
adjustment to information provided by an HMO which are reflected in the
Company's consolidated financial statements. There is no assurance that any
adjustment will be achieved nor, if achieved, that the amount of such an
adjustment would be significant. 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, 1998,
including 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
Continucare is a provider of integrated outpatient healthcare services
in Florida. The Company provides a broad continuum of healthcare services
through its network of physician practices, outpatient clinics, rehabilitation
centers, home healthcare services, diagnostic imaging services and laboratory
services (within its group physician practices). As a result of its ability to
provide a quality continuum of healthcare services through approximately 300
locations, the Company has become a preferred healthcare provider in Florida to
some of the nation's largest managed care organizations, including (i) Humana
Medical Plans, Inc., for which, as of December 31, 1998, it managed the care
for approximately 22,000 patients on a capitated basis and (ii) Foundation
Health Corporation Affiliates, for which, as of December 31, 1998, it managed
the care for approximately 39,000 patients on a capitated basis. As of December
31, 1998, the Company's Florida delivery services network included
approximately 300 physicians.
In fiscal 1998, the Company's focus shifted away from the behavioral
health area, an area which had previously been a substantial source of the
Company's revenue. In the fiscal year 1997, the contracts to manage and provide
staffing and billing services for behavioral health programs in hospitals and
freestanding mental health rehabilitation centers represented approximately 86%
of total revenue. In the first quarter of fiscal 1998, the Company assigned its
behavioral health management contracts with freestanding centers and hospitals.
During Fiscal 1999 the Company sold its diagnostic imaging services subsidiary,
see Note 9. Accordingly, the results pertaining to these services are
segregated and classified as operations disposed of in the accompanying
consolidated statement of operations. Comparative data for the three months and
six months ended on December 31, 1998 and the three months and six months ended
December 31, 1997 would represent this change in focus on the Company's
businesses, and the Company has limited its discussion with respect to
comparison of these periods.
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-Q.
10
<PAGE> 11
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AS COMPARED TO THE THREE MONTHS
ENDED DECEMBER 31, 1997
REVENUE FROM OPERATIONS CONTINUING
Medical services revenue increased from approximately $7,044,000 for
the three months ended December 31, 1997 to approximately $51,685,000 for the
three months ended December 31, 1998. The Company made a number of acquisitions
during fiscal 1998 as it developed its outpatient services strategy. The
substantial increase of approximately $44,641,000 in medical services revenues
for the three months ended December 31, 1998 was a result of these
acquisitions.
Approximately 18% of the Company's medical services revenue is derived
from fee-for-service arrangements and 82% from capitated payments from HMOs.
Fee-for-service revenue represents amounts realized that relate
directly to medical services provided by a facility owned by the Company.
Capitated revenue represents a fixed monthly fee from a HMO in exchange for the
Company assuming responsibility for the provision of medical services for each
covered individual. The Company also has arrangements with hospitals whereby a
percentage of the hospital's charges are remitted to the Company for services
provided to patients of the hospital.
EXPENSES FROM OPERATIONS CONTINUING
Medical services expense of approximately $46,009,000 for the three
months ended December 31, 1998, represent the direct cost of providing medical
services to patients as well as the medical claims incurred by the Company
under the 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 of
approximately $4,028,000 for the three months ended December 31, 1997 represent
the direct cost of providing medical services to patients, including salaries
and benefits and insurance and other costs. The increase of approximately
$41,981,000 was attributable to the acquisitions noted above.
Payroll and related benefits increased by approximately $1,760,000, or
99.0%, from approximately $1,778,000 for the three months ended December 31,
1997 to approximately $3,538,000 for the three months ended December 31, 1998.
This increase was a direct result of the growth from the acquisitions made
during 1998.
Provision for bad debts was approximately $1,593,000 for the three
months ended December 31, 1998, as compared to approximately $193,000 for the
three months ended December 31, 1997. The increase is due to growth in revenues
from acquisitions during 1998.
Professional fees were approximately $436,000, or 0.8%, of total
revenue, for the three months ended December 31, 1998 as compared to
approximately $375,000, or 5.3%, of total revenue, for the three months ended
December 31, 1997.
General and administrative expenses were approximately $2,643,000, or
5.1%, of total revenue, for the three months ended December 31, 1998, as
compared to approximately $2,074,000, or 29.1%, of total revenues, for the
three months ended December 31, 1997. The increase of approximately $569,000
was primarily related to the administrative costs related to the rehabilitation
entities, home health agencies and outpatient primary care centers acquired
during fiscal year 1998.
Depreciation and amortization increased to approximately $1,287,000,
or 2.5%, of total revenue, for the three months ended December 31, 1998 as
compared to approximately $545,000, or 7.7%, of total revenue, for the
11
<PAGE> 12
three months ended December 31, 1997 primarily as a result of the amortization
of goodwill and other intangibles related to the acquisitions noted above.
REVENUES AND EXPENSES FROM OPERATIONS DISPOSED OF
Revenue increased approximately $250,000 from approximately $550,000
for the three months ended December 31, 1997 to approximately $800,000 for the
three months ended December 31, 1998. The increase related to additional
services performed.
Expenses increased approximately $1,366,000 from approximately
$627,000 for the three months ended December 31, 1997 to approximately
$1,993,000 for the three months ended December 31, 1998. The increase was
related to additional operational costs incurred related to the disposition of
the subsidiary.
LOSS ON SALE OF SUBSIDIARY
The loss on sale of approximately $4,152,000 for the three months
ended December 31, 1998 related to the sale of the Company's diagnostic
division. There were no such losses recorded for the three months ended
December 31, 1997. The Company may dispose of additional assets in the future
and may realize losses in connection with those disposals.
INTEREST
Consolidated net interest income (expense) for the three months ended
December 31, 1998, was approximately ($1,439,000), or (2.8%), of total
revenues, compared to approximately ($477,000), or (6.7%), of total revenue,
for the three months ended December 31, 1997. Approximately $1,088,000 of
interest expense for the three months ended December 31, 1998 primarily relates
to the $45 million of 8% Convertible Subordinated Notes due September 30, 2002,
(the "Notes") issued on October 30, 1997 and amortization of deferred financing
costs incurred in connection with issuing the Notes. Interest on the Notes is
payable semiannually beginning April 30, 1998.
NET LOSS
Continucare's consolidated net loss for the three months ended
December 31, 1998 was approximately ($10,339,000) compared to net loss for the
three months ended December 31, 1997 of approximately ($2,969,000). The
increase of approximately $7,370,000 was primarily attributable to the loss on
sale of subsidiary of approximately $4,152,000 and the items discussed above.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AS COMPARED TO THE SIX MONTHS ENDED
DECEMBER 31, 1997
REVENUE FROM OPERATIONS CONTINUING
Medical Services revenue increased from approximately $9,249,000 for
the six months ended December 31, 1997 to approximately $99,237,000 for the six
months ended December 31, 1998. The Company made a number of acquisitions
during fiscal 1998 as it developed its outpatient services strategy. The
substantial increase of approximately $89,988,000 in medical services revenues
for the six months ended December 31, 1998 was a result of these acquisitions.
Approximately 19.8% of the Company's medical services revenue is
derived from fee-for-service arrangements 79.6% from capitated payments from
HMOs and remaining 0.6% from other sources.
Fee-for-service revenue represents amounts realized that relate
directly to medical services provided by a facility owned by the Company.
Capitated revenue represents a fixed monthly fee from a HMO in exchange for
12
<PAGE> 13
the Company assuming responsibility for the provision of medical services for
each covered individual. The Company also has arrangements with hospitals
whereby a percentage of the hospital's charges are remitted to the Company for
services provided to patients of the hospital.
EXPENSES FROM OPERATIONS CONTINUING
Medical services expense of approximately $86,639,000 for the six
months ended December 31, 1998, represent the direct cost of providing medical
services to patients as well as the medical claims incurred by the Company
under the 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 of
approximately $4,614,000 for the six months ended December 31, 1997 represent
the direct cost of providing medical services to patients, including salaries
and benefits and insurance and other costs. The increase of approximately
$82,025,000 was attributable to the acquisitions noted above.
Payroll and related benefits increased by approximately $4,268,000, or
143.2%, from approximately $2,981,000 for the six months ended December 31,
1997 to approximately $7,249,000 for the six months ended December 31, 1998.
This increase was a direct result of the growth from the acquisitions made
during 1998.
Provision for bad debts was approximately $1,731,000, or 1.7%, of
total revenues for the six months ended December 31, 1998, as compared to
approximately $257,000, or 2.6%, of total revenue for the six months ended
December 31, 1997. The dollar amount increase is due to the revenue increase
from the acquisitions during 1998.
Professional fees were approximately $659,000, or 0.7%, of total
revenue, for the six months ended December 31, 1998 as compared to
approximately $386,000, or 4.0%, of total revenue, for the six months ended
December 31, 1997. The increase of approximately $273,000 is due to the
increased size of the Company.
General and administrative expenses were approximately $5,455,000, or
5.6%, of total revenue, for the six months ended December 31, 1998, as compared
to approximately $2,870,000, or 29.5%, of total revenues, for the six months
ended December 31, 1997. The increase of approximately $2,585,000 was primarily
related to the increased costs attributable to the administrative costs related
to the rehabilitation entities, home health agencies, outpatient primary care
centers and the outpatient radiology and diagnostic imaging services company
acquired during fiscal year 1998.
Depreciation and amortization increased to approximately $2,899,000,
or 2.9%, of total revenue, for the six months ended December 31, 1998 as
compared to approximately $649,000, or 6.7%, of total revenue, for the six
months ended December 31, 1997 primarily as a result of the amortization of
goodwill and other intangibles related to the acquisitions noted above.
REVENUES AND EXPENSES FROM OPERATIONS DISPOSED OF
Revenue increased approximately $297,000 from approximately $1,627,000
for the three months ended December 31, 1997 to approximately $1,924,000 for
the three months ended December 31, 1998. The increase related to additional
services performed.
Expenses increased approximately $2,210,000 from approximately
$1,431,000 for the three months ended December 31, 1997 to approximately
$3,641,000 for the three months ended December 31, 1998. The increase was
related to additional operational cost incurred related to the disposition of
the subsidiary.
The Company had no revenues or expenses during the six months ended
December 31, 1998, associated with operations disposed of during 1998.
13
<PAGE> 14
LOSS ON SALE OF SUBSIDIARY
The loss on sale of approximately $4,152,000 for the six months ended
December 31, 1998 related to the sale of the Company's diagnostic division.
There were no such losses recorded for the six months ended December 31, 1997.
The Company may dispose of additional assets in the future and may realize
losses in connection with those disposals.
INTEREST
Consolidated net interest income (expense) for the six months ended
December 31, 1998, was approximately ($2,326,000), or (2.3%), of total
revenues, compared to approximately ($449,000), or (4.6%), of total revenue,
for the six months ended December 31, 1997. Approximately $2,177,000 of
interest expense for the six months ended December 31, 1998 primarily relates
to the $45 million of 8% Convertible Subordinated Notes due September 30, 2002,
(the "Notes") issued on October 30, 1997 and amortization of deferred financing
costs incurred in connection with issuing the Notes. Interest on the Notes is
payable semiannually beginning April 30, 1998.
NET LOSS
Continucare's consolidated net loss for the six months ended December
31, 1998 was approximately ($12,909,000) compared to net loss for the six
months ended December 31, 1997 of approximately ($2,894,000) for the reasons
discussed above. The increase of approximately $10,015,000 was primarily
attributable to the loss on sale of subsidiary of approximately $4,152,000 and
the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
In August 1998, the Company entered into a credit facility (the
"Credit Facility") with First Union National Bank of Florida ("First Union")
which provides for a $5,000,000 Acquisition Facility and a $5,000,000 Revolving
Loan. Under the terms of the Credit Facility, the Company may elect the
interest rate to be either the bank's prime rate or the London InterBank
Offered Rate plus 250 basis points. Interest only on each acquisition advance
under the Acquisition Facility is payable monthly in arrears for the first six
months. Commencing six months from the date of each acquisition advance, the
advance shall be repayable in equal monthly amortization payments, based upon a
five year amortization. The Company borrowed the entire $5 million Acquisition
Facility to fund acquisitions in the first quarter of 1999. Interest only on
the Revolving Loan advances is payable quarterly in arrears. In all events, the
Revolving Loan matures and all unpaid principal and interest is due in full on
August 31, 2001. The $5,000,000 Revolving Loan is comprised of (i) $2,000,000
reserved for a pending letter of credit arrangement, and (ii) $3,000,000 which
can be drawn commencing September 30, 1999, as long as the Company is in
compliance with all covenants of the Credit Facility at such time. The Credit
Facility (a) is secured by substantially all of the assets of the Company, (b)
is decreased by $1.5 million placed in a restricted account at First Union if
the pending letter of credit is issued, which will be released when certain
covenants have been met by the Company and (c) contains restrictive covenants
which, among other things, require the Company to maintain certain financial
ratios and minimum liquidity requirements and limit the incurrence of
additional debt, the payment of dividends and the amount of capital
expenditures.
As of December 31, 1998, the Company was not in compliance with
certain covenants required under the terms of its Credit Facility. The Company
is in the process of negotiating a waiver of its noncompliance from First Union,
however, obtaining a waiver can not be assured. In the event First Union does
not grant a waiver subject to the terms of the credit facility, it may, subject
to the terms of the Credit Facility, demand repayment of the entire amount owed
under the Credit Facility ($5,000,000 at December 31, 1998). In the event that
the Company does not obtain a waiver from First Union, remains out of compliance
with the loan covenants and payment is demanded, the Company believes it will
need to obtain additional financing from sources outside of the Company to fund
its obligation. The additional financing may be obtained from, but not limited
to, the sale of stock, sale of assets or additional borrowings. The ultimate
outcome of this matter may have a material adverse effect on the Company's
financial position and operations.
14
<PAGE> 15
For the six months ended December 31, 1998, net cash used in operating
activities was approximately $751,000 primarily as a result of the net loss.
For the six months ended December 31, 1998, net cash used in investing
activities was approximately $5,358,000, primarily related to the purchase of
contracts with approximately 30 physicians from an unrelated entity. Net cash
provided by financing activities for the six months ended December 31, 1998 was
approximately $2,541,000, comprised primarily of the $5 million borrowed under
the Acquisition Facility, partially offset by repayments of other debt.
The Company's working capital deficit was approximately $3,714,000 at
December 31, 1998, which includes the $5,000,000 outstanding under the
acquisition facility due to the Company's violation of certain financial
covenants, see Note 6 to the accompanying consolidated financial statements,
compared to working capital of $11,124,000 at June 30, 1998.
During the six months ended December 31, 1998, capital expenditures
amounted to approximately $661,000. Capital expenditures during fiscal 1999
principally for computers and equipment are not expected to exceed $1.0
million.
The Company believes its cash on hand and anticipated cash flow from
operations may not be sufficient to meet its obligations during fiscal 1999 and
is taking steps to improve its cash flow position, profitability and obtain
additional financing. Assuming the Company obtains the waiver for its
noncompliance with certain financial covenants under its Credit Facility and
First Union does not call the balance outstanding under the Credit Facility, as
discussed in Notes 2 and 6 to the Consolidated Financial Statements, improves
its cash flow and profitability or obtains additional financing and remains in
compliance with the financial covenants set forth in the Credit Agreement, the
Company believes that it will be able to meet its obligations during fiscal
1999. However, there is no assurance that these assumptions will be met.
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.
15
<PAGE> 16
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 Year 2000 project by
June 30, 1999, which is prior to any anticipated impact on its operating
systems. The total cost of the Year 2000 project is estimated at $700,000 and
is being funded through operating cash flows. Of the total projected cost,
approximately $500,000 is attributable to the purchase of new software and
patient care equipment, which will be capitalized. The remaining $200,000,
which will be expensed as incurred, is not expected to have a material effect
on the results of operations. Through December 31, 1998, the Company has
incurred approximately $650,000 ($150,000 expensed and $500,000 capitalized for
new systems and equipment).
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 costs of replacement
equipment and personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental
to its business. Reference is made to Note 8 of the Company's Consolidated
Financial Statements.
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 and any accounts for self-insured
retention, 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of December 31, 1998, the Company was not in compliance with
certain covenants required under the terms of its Credit Facility. The Company
is in the process of obtaining a waiver of the noncompliance from First Union
National Bank of Florida ("First Union"). In the event First Union does not
grant a waiver subject to the terms of the credit facility it may demand
repayment of the entire amount owed under the credit facility, $5,000,000 at
December 31, 1998.
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
Financial Data Schedule (for SEC use only.)
(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: February 19, 1999 By: /s/ CHARLES M. FERNANDEZ
------------------------------------
Charles M. Fernandez, Chairman,
Chief Executive Officer, President
Dated: February 19, 1999 By: /s/BRUCE ALTMAN
------------------------------------
Bruce Altman
Senior Vice President and
Chief Financial Officer
17
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