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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 SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-12115
CONTINUCARE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-2716023
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
80 SOUTHWEST EIGHTH STREET
SUITE 2350
MIAMI, FLORIDA 33130
(Address of principal executive offices)
(Zip Code)
(305) 350-7515
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
At November 9, 2000, the Registrant had 33,240,090 shares of $0.0001 par value
common stock outstanding.
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CONTINUCARE CORPORATION
INDEX
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - September 30, 2000
(Unaudited) and June 30, 2000........................................................ 3
Condensed Consolidated Statements of Operations - Three Months Ended
September 30, 2000 (Unaudited) and 1999 (Unaudited).................................. 4
Condensed Consolidated Statements of Cash Flows - Three Months Ended
September 30, 2000 (Unaudited) and 1999 (Unaudited).................................. 5
Notes to Condensed Consolidated Financial Statements - September 30,
2000 (Unaudited)..................................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................................... 13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................ 14
SIGNATURE PAGE..................................................................................... 15
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PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 30, 2000 June 30, 2000
------------------ -------------
(Unaudited)
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Current assets
Cash and cash equivalents............................................ $ 1,882,223 $ 2,535,540
Accounts receivable, net of allowance for doubtful accounts of
$5,752,000 at September 30, 2000 and June 30, 2000.................. 53,590 94,966
Other receivables.................................................... 894,902 697,977
Prepaid expenses and other current assets............................ 285,883 368,431
------------ ------------
Total current assets............................................. 3,116,598 3,696,914
Equipment, furniture and leasehold improvements, net.................... 901,519 880,873
Cost in excess of net tangible assets acquired, net of
accumulated amortization of approximately $6,533,000 at
September 30, 2000 and approximately $5,929,000 at June 30, 2000...... 19,328,855 19,932,891
Deferred financing costs, net of accumulated amortization of
approximately $733,000 at September 30, 2000 and $426,000 at
June 30, 2000......................................................... 2,656,875 2,964,375
Other assets, net....................................................... 71,674 70,127
------------ ------------
Total assets..................................................... $ 26,075,521 $ 27,545,180
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable..................................................... $ 786,197 $ 687,703
Accrued expenses..................................................... 2,095,389 2,336,398
Accrued salaries and benefits........................................ 1,124,423 923,656
Medical claims payable............................................... 1,235,591 985,835
Due to Medicare...................................................... 402,722 73,527
Current portion of convertible subordinated notes payable............ 700,000 700,000
Current portion of long term debt.................................... 2,403,719 2,276,635
Accrued interest payable............................................. 8,383 6,044
Current portion of capital lease obligations......................... 119,132 115,685
------------ ------------
Total current liabilities........................................ 8,875,556 8,105,483
Capital lease obligations, less current portion......................... 113,708 103,682
Convertible subordinated notes payable, less current portion............ 11,050,000 11,050,000
Long term debt, less current portion.................................... 4,817,265 5,023,244
------------ ------------
Total liabilities................................................ 24,856,529 24,282,409
Commitments and contingencies
Shareholders' equity
Common stock; $0.0001 par value; 100,000,000 shares authorized,
36,236,283 shares issued and 33,240,090 shares
outstanding at September 30, 2000 and June 30, 2000................ 3,325 3,325
Additional paid-in capital........................................... 57,708,595 57,708,595
Accumulated deficit.................................................. (51,068,227) (49,024,448)
Treasury stock (2,996,192 shares).................................... (5,424,701) (5,424,701)
------------ ------------
Total shareholders' equity......................................... 1,218,992 3,262,771
------------ ------------
Total liabilities and shareholders' equity......................... $ 26,075,521 $ 27,545,180
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Ended September 30,
---------------------------------
2000 1999
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Medical services revenue, net .................... $ 29,636,491 $ 29,082,493
Expenses
Medical services:
Medical claims ............................. 23,346,143 22,998,728
Other ...................................... 4,192,414 4,433,462
Payroll and employee benefits .................. 1,402,360 1,869,559
Professional fees .............................. 277,859 153,368
General and administrative ..................... 1,355,087 1,508,845
Depreciation and amortization .................. 722,759 807,534
------------ ------------
Subtotal ..................................... 31,296,622 31,771,496
Loss from operations ................................ (1,660,131) (2,689,003)
Other income (expense)
Interest income ................................ 13,867 18,576
Interest expense ............................... (397,819) (1,071,145)
Other .......................................... 304 280,000
------------ ------------
Loss before extraordinary item ...................... (2,043,779) (3,461,572)
Gain on extinguishment of debt ...................... -- 3,776,197
------------ ------------
Net (loss) income ................................... $ (2,043,779) $ 314,625
============ ============
Basic and diluted (loss) earnings per common share:
(Loss) income before extraordinary item ........ $ (.06) $ (.24)
Extraordinary gain on extinguishment of debt ... -- .26
------------ ------------
Net (loss) income .............................. $ (.06) $ .02
============ ============
Weighted average number of common shares outstanding:
Basic and diluted ......................... 33,240,090 14,540,091
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Three Months Ended September 30,
--------------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income .................................................. $(2,043,779) $ 314,625
Adjustments to reconcile net (loss) income to cash used in operating
activities:
Depreciation and amortization including amortization
of deferred loan costs ........................................... 1,068,077 1,050,378
Gain on extinguishment of debt ................................... -- (3,776,197)
Changes in operating assets and liabilities, excluding the effect of
acquisitions and disposals:
Decrease in accounts receivable .................................. 41,376 747,065
Decrease (increase) in prepaid expenses and other current assets.. 82,548 (51,484)
Increase in other receivables .................................... (196,925) (10,942)
Increase in other assets ......................................... (1,547) (15,252)
Increase in medical claims payable ............................... 249,756 1,226,688
Increase (decrease) in due to (from) Medicare .................... 391,375 (130,976)
Increase (decrease) in accounts payable and accrued expenses ..... 58,252 (411,982)
Increase in accrued interest payable ............................. 2,339 824,653
----------- -----------
Net cash used in operating activities ................................. (348,528) (233,424)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of equipment ................................ 1,500 --
Property and equipment additions ................................... (109,701) (24,566)
----------- -----------
Net cash used in investing activities ................................. (108,201) (24,566)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on convertible subordinated notes ......................... -- (210,000)
Principal repayments under capital lease obligation ................ (17,697) (4,736)
Payments on long term debt ......................................... (178,891) (457,802)
----------- -----------
Net cash used in financing activities ................................. (196,588) (672,538)
----------- -----------
Net decrease in cash and cash equivalents ............................. (653,317) (930,528)
----------- -----------
Cash and cash equivalents at beginning of period ...................... 2,535,540 3,185,077
----------- -----------
Cash and cash equivalents at end of period ............................ $ 1,882,223 $ 2,254,549
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Note payable issued for refunds due to Medicare for overpayments ...... $ 62,180 $ 320,273
=========== ===========
Purchase of furniture and fixtures with proceeds of capital lease
obligations ........................................................... $ 31,170 $ --
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1 - UNAUDITED INTERIM INFORMATION
The accompanying unaudited condensed consolidated financial statements of
Continucare Corporation ("Continucare" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended September 30, 2000 are
not necessarily indicative of the results that may be expected for the year
ended June 30, 2001.
The balance sheet at June 30, 2000 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, 2000.
Certain reclassifications have been made to the prior year amounts to conform to
the current year.
NOTE 2 - GENERAL
Continucare, which was incorporated on February 1, 1996 as a Florida
corporation, is a provider of integrated outpatient healthcare and home
healthcare services in Florida. Continucare's predecessor, Zanart Entertainment,
Incorporated ("Zanart") was incorporated in 1986. On August 9, 1996, a
subsidiary of Zanart merged into Continucare Corporation (the "Merger"). As a
result of the Merger, the shareholders of Continucare became shareholders of
Zanart, and Zanart changed its name to Continucare Corporation. As of September
30, 2000, the Company operated, owned and/or managed: seventeen staff model
clinics in south and central Florida; an Independent Practice Association
("IPA") with 71 physicians; and three Home Health agencies. For the three months
ended September 30, 2000 approximately 58% of net medical services revenue was
derived from managed care contracts with Humana Medical Plans, Inc.("Humana")
and 38% of net medical services revenue was derived from managed care contracts
with Foundation Health Corporation ("Foundation"). For the three months ended
September 30, 1999, approximately 51% of net medical services revenue was
derived from Humana and 45% was derived from Foundation.
NOTE 3 - CONVERTIBLE SUBORDINATED NOTES PAYABLE
On July 2, 1999, the Company repurchased $4,000,000 of its convertible
subordinated notes due October 31, 2002, (the "Notes") for $210,000 and recorded
a gain on extinguishment of debt of approximately $3,776,000. 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.
As a result of the troubled debt restructuring of the Notes which occurred in
February, 2000, the balance of the outstanding Notes on the balance sheet of
$11,750,000 at September 30, 2000, includes interest accrued through
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September 30, 2000 of $291,667 and the remaining interest of $1,458,333 which
will be payable in semi-annual payments through October 31, 2002.
NOTE 4 - LONG-TERM DEBT
In March, 2000, the Company entered into a credit facility agreement ("Credit
Facility"). The Credit Facility provides a revolving loan of $3,000,000 and is
due March 31, 2001. The Credit Facility may be renewed annually at the option of
the Lender. Interest is payable monthly at 2.9% plus the 30-day Dealer
Commercial Paper Rate which is 6.5% at September 30, 2000. All assets of the
Company serve as collateral for the Credit Facility. In addition, the Credit
Facility has been guaranteed by a board member and an entity controlled by a
board member. At September 30, 2000, the Company had not borrowed any amounts
available under the Credit Facility.
NOTE 5 - EARNINGS PER SHARE
Options and warrants to purchase the Company's common stock were not included in
the computation of diluted earnings (loss) per share because the effect would be
antidilutive.
NOTE 6 - CONTINGENCIES
The case of CONTINUCARE CORPORATION, A FLORIDA CORPORATION, CONTINUCARE
PHYSICIAN PRACTICE MANAGEMENT, INC. ("CPPM") V. JAY A. ZISKIND, AN INDIVIDUAL,
KENNETH I. ARVIN, AN INDIVIDUAL, TRACY ARVIN, AN INDIVIDUAL, ZISKIND & ARVIN,
P.A., A PROFESSIONAL ASSOCIATION, NORMAN B. GAYLIS, M.D., AN INDIVIDUAL AND ZAG
GROUP, INC., A FLORIDA CORPORATION, was filed on November 15, 1999 in the
Circuit Court of the 11th Judicial District in and for Miami-Dade County,
alleging breach of fiduciary duties, improper billing, and seeking the return of
all consideration previously paid by the Company to ZAG, and damages, as well as
seeking rescission of the Agreement and Plan of Merger and the Registration
Rights Agreement. On December 20, 1999, a counterclaim was filed against the
Company and CPPM alleging breach of contract, tortious interference and
conversion and seeks damages in excess of $l,600,000. On August 11, 2000, the
counterplaintiffs filed their Second Amended Counterclaim. Discovery is
currently pending. The Company believes that there is little merit to the
counterclaim and intends to vigorously defend the claims.
The Company is a party to the case of WARREN GROSSMAN, M.D., ALAN REICH, M.D.,
AND RICHARD STRAIN, M.D. V. CONTINUCARE PHYSICIAN PRACTICE MANAGEMENT, INC. AND
CONTINUCARE CORPORATION. This case was filed in May 1999 in the Circuit Court
for Broward County, Florida. The complaint alleges breach of employment
contracts based on the early termination of the Plaintiffs' employment and seeks
damages in excess of $250,000. On January 5, 2000, the Company filed a
counterclaim alleging breach of contract in connection with the Plaintiff's
failure to return certain computer equipment, as well as a breach of the
non-compete covenant. On February 18, 2000, the Company filed a Motion for
Summary Judgment as to two of the Plaintiffs. On April 28, the Plaintiffs filed
a Motion for Summary Judgment as to the issue of liability. Both motions were
heard on June 15, 2000. The court has not yet issued a ruling on the motions.
The case was set for trial in September, 2000, but has been postponed to the
court's next trial period in January 2001. The Company believes the action has
little merit and intends to vigorously defend the claims.
The Company is a party to the case of GE MEDICAL SYSTEMS, AN UNINCORPORATED
DIVISION OF GENERAL ELECTRIC COMPANY V. CONTINUCARE OUTPATIENT SERVICES, INC.
N/K/A OUTPATIENT RADIOLOGY SERVICES, INC., A FLORIDA CORPORATION AND CONTINUCARE
CORPORATION, A FLORIDA CORPORATION. This case was filed in April, 2000 in the
Circuit Court of the 11th Judicial Circuit in and for Dade County, Florida. The
Complaint alleges a breach of guaranty agreement and seeks damages of
approximately $676,000. In August 2000, the Company filed a cross-claim and
several third-party claims. The Company believes it has meritorious defenses, as
well as valid indemnification claims against several other parties.
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Claims against those parties are being pursued and the Company intends to
vigorously litigate its defenses, as well as its claims of indemnification.
Two subsidiaries of the Company are parties to the case of NANCY FEIT ET AL. V.
KENNETH BLAZE, D.O. KENNETH BLAZE. D.O., P.A.; SHERIDEN HEALTHCORP, INC.; WAYNE
RISKIN, M.D.; KAHN AND RISKIN, M.D., P.A.; CONTINUCARE PHYSICIAN PRACTICE
MANAGEMENT, INC., D/B/A ARTHRITIS AND RHEUMATIC DISEASE SPECIALTIES, INC.; JAMES
JOHNSON, D.C. AND JOHNSON & FALK, D.C., P.A. The case was filed in December,
1999 in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida and served on the companies in April, 2000. The complaint
alleges vicarious liability and seeks damages in excess of $15,000. The Company
filed its answer on May 3, 2000. Discovery is currently pending. The Company has
made a demand for assumption of defense and indemnification from Kahn and
Riskin, M.D., P.A. and Wayne Riskin, M.D. The demand was rejected. The Company
believes it has meritorious defenses and intends to vigorously pursue them.
Prior to Fiscal 2000, the Company closed or dissolved certain subsidiaries, some
of which had pending claims against them. A rationalization liability associated
with these subsidiaries was approximately $749,000 at September 30, 2000.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Unless otherwise indicated or the context otherwise requires, all
references in this Form 10-Q to "we," "us," "our," "Continucare" or the
"Company" refers to Continucare Corporation and its consolidated subsidiaries.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used in this Form 10-Q, the words
"believe," "anticipate," "think," "intend," "plan," "will be," and similar
expressions, identify such forward-looking statements. Such statements regarding
future events and/or the future financial performance of the Continucare are
subject to certain risks and uncertainties, which could cause actual events or
our actual future results to differ materially from any forward-looking
statement. Certain factors that might cause such a difference are set forth in
our Form 10-K for the period ended June 30, 2000, including the following: our
success or failure in implementing our current business and operational
strategies; the availability, terms and access to capital and customary trade
credit; general economic and business conditions; competition; changes in our
business strategy; availability, location and terms of new business development;
availability and terms of necessary or desirable financing or refinancing; labor
relations; the outcome of pending or yet-to-be instituted legal proceedings; and
labor and employee benefit costs.
GENERAL
We are a provider of integrated outpatient healthcare and home
healthcare services in Florida. As of September 30, 2000, we operated, owned
and/or managed seventeen staff model clinics in south and central Florida; an
Independent Practice Association (the "IPA") with 71 physicians; and three home
health agencies.
REIMBURSEMENT CONSIDERATIONS
We receive reimbursement from the Medicare and Medicaid programs or
payments from insurers, self-funded benefit plans or other third-party payors.
The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings
and funding restrictions, any of which could have the effect of limiting or
reducing reimbursement levels. Although we derived less than 5% of our net
patient service revenue directly from Medicare and Medicaid in Fiscal 2000, a
substantial portion of our managed care revenues are based upon Medicare
reimbursable rates. Therefore, any changes which limit or reduce Medicare
reimbursement levels could have a material adverse effect on our business.
Significant changes have been and may be made in the Medicare program,
which could have a material adverse effect on our business, results of
operations, prospects, financial results, financial condition or cash flows. In
addition, legislation has been or may be introduced in the Congress of the
United States which, if enacted, could adversely affect operations by, for
example, decreasing reimbursement by third-party payors such as Medicare or
limiting our ability to maintain or increase the level of services provided to
patients.
Title XVIII of the Social Security Act authorizes Medicare Part A, the
health insurance program that pays for inpatient care for covered persons
(generally, those age 65 and older and the long-term disabled) and Medicare Part
B, a voluntary supplemental medical assistance insurance program. Healthcare
providers may participate in the Medicare program subject to certain conditions
of participation and acceptance of a provider agreement by the Secretary of
Health and Human Services ("HHS"). Only enumerated services, upon satisfaction
of certain criteria, are eligible for Medicare reimbursement. Relative to the
services of our Home Health Agencies ("HHAs") and previously owned or operated
Medicare certified outpatient rehabilitation facilities ("ORFs") and
Comprehensive Outpatient Rehabilitation Facilities ("CORFs"), in the past
Medicare has reimbursed the "reasonable costs" for services up to program
limits. Medicare-reimbursed costs are subject to audit, which may result in a
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decrease in payments we have previously received. Historically, Medicare Part B
reimburses the operating cost component of most hospital outpatient services on
a reasonable cost basis, subject to a 5.8% reduction which the Balanced Budget
Act of 1997 (the "BBA"), extended through federal Fiscal year 2000. However,
Medicare regulations became effective on August 1, 2000, pursuant to which
hospital outpatient services are reimbursed on the basis of a prospective
payment system ("PPS"). Such a PPS system was implemented on October 1, 2000. It
is currently impossible to predict the effect PPS for these hospital outpatient
services will have on us. There can be no assurance that the established fees
will not change in a manner that could adversely affect our revenues.
Pursuant to the Medicaid program, the federal government supplements
funds provided by the various states for medical assistance to the medically
indigent. Payment for such medical and health services is made to providers in
an amount determined in accordance with procedures and standards established by
state law under federal guidelines. Significant changes have been and may
continue to be made in the Medicaid program which could have an adverse effect
on our financial condition, results of operations and cash flows.
During certain fiscal years, the amounts appropriated by state
legislatures for payment of Medicaid claims have not been sufficient to
reimburse providers for services rendered to Medicaid patients. Failure of a
state to pay Medicaid claims on a timely basis may have an adverse effect on our
cash flow, results of operations and financial condition.
In 1992, the Medicare program began reimbursing physicians and certain
non-physician professionals such as physical, occupational and speech
therapists, clinical psychologists and clinical social workers, pursuant to a
fee schedule derived using a resource-based relative value scale ("RBRVS").
Reimbursement amounts under the physician fee schedule are subject to periodic
review and adjustment and may affect our revenues to the extent they are
dependent on reimbursement under the fee schedule.
Payments per visit from managed care organizations typically have been
lower than cost-based reimbursement from Medicare and reimbursement from other
payors for nursing and related patient services. In addition, payors and
employer groups are exerting pricing pressure on home health care providers,
resulting in reduced profitability. Such pricing pressures could have a material
adverse effect on our business, results of operations, prospects, financial
results, financial condition or cash flows.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the unaudited condensed consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-Q.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999.
REVENUE
Medical services revenues increased 2% from approximately $29,082,000
for the three months ended September 30, 1999 to approximately $29,636,000 for
the three months ended September 30, 2000. We provided managed care services for
approximately 67,634 and 65,819 member months (members per month multiplied by
the months for which services were available) during the three months ended
September 30, 2000 and 1999, respectively.
Revenue generated by our managed care entities under our contracts with
HMOs as a percentage of medical services revenue was approximately 96% during
each of the three months ended September 30, 2000 and 1999. Revenue generated by
the Humana contract was 58% and 51% of medical services revenue for the three
months ended September 30, 2000 and 1999, respectively. Revenue generated by
Foundation contracts was 38% and 45% of medical services revenue for the three
months ended September 30, 2000 and 1999, respectively.
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Our home health agencies' revenue was approximately 4% of medical
services revenue during the three month periods ended September 30, 2000 and
1999, and consisted primarily of Medicare reimbursement.
EXPENSES
Medical services expenses for the three month period ended September
30, 2000 were approximately $27,539,000 or 92.9% of medical services revenue,
compared to approximately $27,432,000 or 94.3% of medical services revenue for
the three month period ended September 30, 1999.
Medical claims represent the costs of medical services provided by
providers other than us but which are to be paid by us for individuals covered
by our capitated risk contracts with HMOs. Claims expense was approximately
$23,346,000 and $22,999,000 for the three months ended September 30, 2000 and
1999, respectively, or 81.8% and 82.3% of medical services revenues derived from
our managed care entities. The annualized claims ratio for Fiscal 2000 was 74%.
Our claim loss ratio varies from quarter to quarter due to fluctuations in
utilization, the timing of claims paid by the HMOs on our behalf, as well as
increases in medical costs without counterbalancing increases in premium
revenues.
Other direct costs include the salaries and benefits of health
professionals providing the services, capitation payments to our contracted IPA
physicians, and other costs necessary to operate our facilities. Other direct
costs were approximately $4,192,000 and $4,433,000 for the three months ended
September 30, 2000 and 1999, respectively, or 14.1% and 15.2% of medical
services revenues.
Payroll and employee benefits for administrative personnel was
approximately $1,402,000 for the three months ended September 30, 2000, or 4.7%
of revenues, compared to approximately $1,870,000 or 6.4% of revenue for the
three months ended September 30, 1999. This decrease is due to certain positions
which were eliminated during Fiscal 2000.
General and administrative expenses for the three months ended
September 30, 2000 were approximately $1,355,000 or 4.6% of revenues compared to
approximately $1,509,000 or 5.2% of revenues for the three months ended
September 30, 1999. The decrease in general and administrative expense as a
percent of revenues resulted primarily from cost containment measures which were
implemented throughout Fiscal 2000.
Interest expense for the three months ended September 30, 2000 was
approximately $398,000 or 1.3% of revenues compared to approximately $1,071,000
or 3.7% of revenues for the three months ended September 30, 1999. Interest
expense for the three months ended September 30, 2000 is comprised primarily of
approximately $308,000 related to amortization of deferred financing costs and
approximately $38,000 of imputed interest expense on non-interest bearing notes.
Interest expense for the three months ended September 30, 1999 was comprised of
approximately $207,000 related to amortization of deferred financing costs,
approximately $60,000 of imputed interest expense on non-interest bearing notes,
and approximately $779,000 of interest on our convertible subordinated notes
payable (the "Notes"). The Notes were restructured during February, 2000 and, in
accordance with Statement of Financial Accounting Standards, No. 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructurings," all interest which
would accrue over the remaining term of the Notes was included in the
outstanding Notes on the balance sheet. Therefore, no interest expense will be
recorded on the Notes through their maturity date.
LOSS FROM OPERATIONS
Loss from operations for the three months ended September 30, 2000 was
approximately $1,660,000 or 5.6% of total revenues, compared to an operating
loss of approximately $2,689,000 or 9.2% of total revenues for the three months
ended September 30, 1999.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
In July, 1999, we recorded an extraordinary gain on extinguishment of
debt of approximately $3,776,000 as a result of repurchasing $4,000,000 of our
outstanding convertible subordinated notes payable (the "Notes") for
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a cash payment of $210,000 and the write-off of related deferred financing costs
and accrued interest payable. We have not provided for income taxes on the gain
because we believe that we will be able to utilize certain of our net operating
loss carryforwards to offset any income tax liability related to this
transaction.
NET INCOME/LOSS
Net loss for the three months ended September 30, 2000 was
approximately $2,044,000 compared to net income of approximately $315,000 for
the three months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
On July 2, 1999, we repurchased $4,000,000 face value of our Notes for
approximately $210,000, recognizing a gain on extinguishment of debt of
approximately $3,776,000. The purchase of the Notes was funded from working
capital.
On February 15, 2000, we completed a restructuring of the Notes through
the execution of a Consent Letter and Agreement to the First Supplemental
Indenture (the "Restructuring") which resulted in, among other things, the
conversion of $31,000,000 of Notes into our common stock. The remaining
outstanding principal balance of the Notes of $10,000,000 were reinstated as a
performing non-defaulted loan.
We have entered into a credit facility (the "Credit Facility") to
provide a revolving loan of $3,000,000 and is due March 31, 2001. Interest is
payable monthly at 2.9% plus the 30-day Dealer Commercial Paper Rate which is
6.5% at September 30, 2000. The Credit Facility may be renewed annually at the
option of the lender. The Credit Facility has been guaranteed by a board member
and an entity controlled by a board member. At September 30, 2000, we had not
borrowed any amounts available under the Credit Facility.
Our net loss was approximately $2,044,000 for the three months ended
September 30, 2000. Net cash used in operating activities for the three months
ended September 30, 2000 was approximately $349,000 due primarily to the net
loss of approximately $2,044,000, an increase in other receivables of
approximately $197,000 and offset by non-cash amortization and depreciation
expenses of approximately $1,068,000, an increase in due to Medicare of
approximately $391,000 and an increase in medical claims payable of
approximately $250,000.
Net cash used in investing activities for the three months ended
September 30, 2000 was approximately $108,000, primarily for the purchase of
computer equipment. Net cash used in financing activities for the three months
ended September 30, 2000 was approximately $197,000, all of which was used for
scheduled payments for various notes payable.
Our working capital deficit was approximately $5,759,000 at
September 30, 2000.
We currently have no knowledge of any intermediary audit adjustment
trends with respect to previously filed cost reports. However, as is standard in
the industry, we remain at risk for disallowances and other adjustments to
previously filed cost reports until final settlement. Our average settlement
period with respect to our cost reports has historically ranged from two to
three years.
We continue to take steps to improve our cash flow and profitability.
We believe that we will be able to fund all of our capital commitments and
operating cash requirements from a combination of cash on hand, expected cash
flow improvements, and the Credit Facility. However, there can be no assurances
that any steps taken will improve our cash flow and profitability sufficiently
to fund our operations and satisfy our obligations as they become due.
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We may need additional capital to fund our operations, and there can be
no assurance that such additional capital can be obtained or, if obtained, that
it will be on terms acceptable to us. The incurring or assumption of additional
indebtedness could result in the issuance of additional equity and/or debt which
could have a dilutive effect on current shareholders and a significant effect on
our operations.
On August 15, 2000, the American Stock Exchange notified us of its
decision to continue to list our common stock pending a review of our annual
report which was filed on September 28, 2000. However, we have fallen below the
continued listing requirements of the American Stock Exchange with respect to
the requirements that we maintain stockholders' equity of at least $2 million
and not sustain losses from continuing operations and/or net losses in two of
its three most recent fiscal years. We are unable to guarantee that the American
Stock Exchange will continue to list our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2000, we had only cash equivalents, invested in high
grade, very short-term securities, which are not typically subject to material
market risk. We have loans outstanding at fixed rates. For loans with fixed
interest rates, a hypothetical 10% change in interest rates would have no impact
on our future earnings and cash flows related to these instruments. A
hypothetical 10% change in interest rates would have an immaterial impact on the
fair value of these instruments. Our Credit Facility is interest rate sensitive;
however, there is no balance currently outstanding. We have no material risk
associated with interest rates, foreign currency exchange rates or commodity
prices.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the case of CONTINUCARE CORPORATION, A FLORIDA CORPORATION,
CONTINUCARE PHYSICIAN PRACTICE MANAGEMENT, INC. ("CPPM") V. JAY A. ZISKIND, AN
INDIVIDUAL, KENNETH I. ARVIN, AN INDIVIDUAL, TRACY ARVIN, AN INDIVIDUAL, ZISKIND
& ARVIN, P.A., A PROFESSIONAL ASSOCIATION, NORMAN B. GAYLIS, M.D., AN INDIVIDUAL
AND ZAG GROUP, INC., A FLORIDA CORPORATION, filed on November 15, 1999 in the
Circuit Court of the 11th Judicial District in and for Miami-Dade County, we are
alleging breach of fiduciary duties, improper billing, and seeking the return of
all consideration previously paid by us to ZAG, and damages, as well as seeking
rescission of the Agreement and Plan of Merger and the Registration Rights
Agreement. On December 20, 1999, a counterclaim was filed against us and CPPM
alleging breach of contract, tortious interference and conversion and seeks
damages in excess of $l,600,000. On August 11, 2000, the counterplaintiffs filed
their Second Amended Counterclaim. Discovery is currently pending. We believe
that there is little merit to the counterclaim and intend to vigorously defend
the claims.
We are a party to the case of WARREN GROSSMAN, M.D., ALAN REICH, M.D.,
AND RICHARD STRAIN, M.D. V. CONTINUCARE PHYSICIAN PRACTICE MANAGEMENT, INC. AND
CONTINUCARE CORPORATION. This case was filed in May 1999 in the Circuit Court
for Broward County, Florida. The complaint alleges breach of employment
contracts based on the early termination of the Plaintiffs' employment and seeks
damages in excess of $250,000. On January 5, 2000, we filed a counterclaim
alleging breach of contract in connection with the Plaintiff's failure to return
certain computer equipment, as well as a breach of the non-compete covenant. On
February 18, 2000, we filed a Motion for Summary Judgment as to two of the
Plaintiffs. On April 28, 2000, the Plaintiffs filed a Motion for Summary
Judgment as to the issue of liability. Both motions were heard on June 15, 2000.
The court has not yet issued a ruling on the motions. The case was set for trial
in September, 2000, but has been postponed to the court's next trial period in
January 2001. We believe the action has little merit and intend to vigorously
defend the claims.
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We are party to the case of GE MEDICAL SYSTEMS, AN UNINCORPORATED
DIVISION OF GENERAL ELECTRIC COMPANY V. CONTINUCARE OUTPATIENT SERVICES, INC.
N/K/A OUTPATIENT RADIOLOGY SERVICES, INC., A FLORIDA CORPORATION AND CONTINUCARE
CORPORATION, A FLORIDA CORPORATION. This case was filed in April, 2000 in the
Circuit Court of the 11th Judicial Circuit in and for Dade County, Florida. The
complaint alleges a breach of guaranty agreement and seeks damages of
approximately $676,000. In August 2000, we filed a cross-claim and several
third-party claims. We believe we have meritorious defenses, as well as valid
indemnification claims against several other parties. Claims against those
parties are being pursued and we intend to vigorously litigate our defenses, as
well as our claims of indemnification.
Two of our subsidiaries are parties to the case of NANCY FEIT ET AL. V.
KENNETH BLAZE, D.O. KENNETH BLAZE., D.O., P.A.; SHERIDEN HEALTHCORP, INC.; WAYNE
RISKIN, M.D.; KAHN AND RISKIN, M.D., P.A.; CONTINUCARE PHYSICIAN PRACTICE
MANAGEMENT, INC., D/B/A ARTHRITIS AND RHEUMATIC DISEASE SPECIALTIES, INC.; JAMES
JOHNSON, D.C. AND JOHNSON & FALK, D.C., P.A. The case was filed in December,
1999 in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida and served on the companies in April, 2000. The complaint
alleges vicarious liability and seeks damages in excess of $15,000. We filed an
answer on May 3, 2000. Discovery is currently pending. We have made a demand for
assumption of defense and indemnification from Kahn and Riskin, M.D., P.A. and
Wayne Riskin, M.D. The demand was rejected. We believe we have meritorious
defenses and intend to vigorously pursue them.
Prior to Fiscal 2000, we closed or dissolved certain subsidiaries, some
of which had pending claims against them. We are also involved in various other
legal proceedings incidental to our 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CONTINUCARE CORPORATION
Dated: November 14, 2000 By: /s/ Spencer J. Angel
-----------------------------------
Spencer J. Angel
Chief Executive Officer and President
By: /s/ Janet L. Holt
-----------------------------------
Janet L. Holt
Chief Financial Officer
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