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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal year ended: June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number: 001-12115
CONTINUCARE CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-2716023
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
80 SW 8th STREET
SUITE 2350
MIAMI, FLORIDA 33130
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 350-7515
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK, AMERICAN STOCK EXCHANGE
$.0001 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
Aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant at September 20, 2000 (computed by reference
to the last reported sale price of the registrant's Common Stock on the American
Stock Exchange on such date): $7,045,833.
Number of shares outstanding of each of the registrant's classes of
Common Stock at September 20, 2000: 33,240,090 shares of Common Stock, $.0001
par value per share.
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GENERAL
Unless otherwise indicated or the context otherwise requires, all
references in this Form 10-K to "we," "us," "Continucare" or the "Company"
refers to Continucare Corporation and our consolidated subsidiaries. We disclaim
any intent or obligation to update "forward looking statements." All references
to a Fiscal year are to our fiscal year which ends June 30. As used herein,
Fiscal 2001 refers to fiscal year ending June 30, 2001, Fiscal 2000 refers to
fiscal year ending June 30, 2000, Fiscal 1999 refers to fiscal year ending June
30, 1999 and Fiscal 1998 refers to Fiscal year ending June 30, 1998.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), we are hereby providing
cautionary statements identifying important factors that could cause our actual
results to differ materially from those projected in forward-looking statements
(as such term is defined in the Reform Act) made by or on behalf of us and
contained herein or which are made orally, whether in presentations, in response
to questions or otherwise. Any statements that express, or involve discussions
as to expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will result," "are expected to," "will continue," "is anticipated," "plans,"
"intends," "estimated," "projection" and "outlook") are not historical facts and
may be forward-looking. Accordingly, such statements, including without
limitation, those relating to our future business, prospects, revenues, working
capital, liquidity, capital needs, interest costs and income, wherever they may
appear in this document or in other statements attributable to us, involve
estimates, assumptions and uncertainties which could cause actual results to
differ materially from those expressed in the forward-looking statements.
Such uncertainties include, among others, the following factors:
OPERATING HISTORY
Our financial position has changed significantly since June 30, 1999.
In Fiscal 2000, we instituted a series of measures intended to reduce losses and
to operate our remaining business units profitably. Such measures have had a
positive impact on profitability and cash flow beginning in the second half of
Fiscal 2000. Furthermore, as discussed below, in Fiscal 2000, we completed a
restructuring of our convertible subordinated notes due 2002 (the "Notes").
There can be no assurance that the measures taken will allow us to maintain
operating profitability with positive cash flows.
Our working capital deficit was approximately $4,409,000 at June 30,
2000. 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, operating
cash requirements and satisfy our obligations as they become due from a
combination of cash on hand, expected operating cash flow improvements and our
new credit facility. However, there can be no assurances that our cash flows and
profitability will be sufficient to fund our operations and satisfy our
obligations as they become due. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS OF FINANCIAL LEVERAGE
Our indebtedness has changed substantially since June 30, 1999. On
February 14, 2000, our shareholders approved a restructuring (the
"Restructuring") of our Notes. The Restructuring resulted in the conversion of
$31,000,000 of Notes into common stock, the forgiveness of approximately
$4,237,000 of accrued interest and modification of other terms of the Notes. Our
remaining indebtedness of $10,000,000 in Notes remains significant in relation
to our total capitalization. Our total indebtedness accounts for approximately
86% of our total capitalization as of June 30, 2000. While we believe that we
will be able to service our debt, there can be no assurance to that effect. The
degree to which we are leveraged could affect our ability to service our
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indebtedness, make capital expenditures, respond to market conditions and
extraordinary capital needs, take advantage of certain business opportunities or
obtain additional financing. Unexpected declines in our future business, or the
inability to obtain additional financing on terms acceptable to us, if required,
could impair our ability to meet our debt service obligations or fund
acquisitions and therefore, could have material adverse effect on our business
and future prospects.
RISKS ASSOCIATED WITH CAPITATED ARRANGEMENTS INCLUDING RISK OF OVER-UTILIZATION
BY MANAGED CARE PATIENTS, RISK OF REDUCTION OF CAPITATED RATES AND REGULATED
RISKS
Our provider entities have entered into several managed care agreements
including certain capitated arrangements with managed care organizations. Under
capitated contracts, the health care provider typically accepts a pre-determined
amount for professional services per patient per month from the managed care
payor in exchange for our assumption of responsibility for the provision of
medical services for each covered individual. The capitated contracts pass much
of the financial risk of providing care, such as over-utilization of healthcare
services, from the payor to the provider. Under the capitated contracts, we
incur costs based on the frequency and extent of medical services provided and
receive a fixed fee for agreeing to assume responsibility for the provision of
such services. To the extent that the patients covered by such managed care
contracts require more frequent or extensive care than is anticipated, our
operating margins may be reduced and, in certain cases, the revenue derived from
such contracts may be insufficient to cover the costs of the services provided.
In either event, our business prospects, financial condition and results of
operations may be materially adversely affected. Our future success will depend
in part upon our ability to negotiate contracts with managed care payors on
terms favorable to us and upon our effective management of health care costs
through various methods, including competitive pricing and utilization
management. The proliferation of capitated contracts in markets served by us
could result in decreased operating margins. There can be no assurance that we
will be able to negotiate satisfactory arrangements on a capitated basis or that
such arrangements will be profitable to us in the future. In addition, in
certain jurisdictions, capitated agreements in which the provider bears the risk
are regulated under state insurance laws. The degree to which these capitated
arrangements are regulated by insurance laws varies on a state by state basis,
and as a result, we may be limited in certain states, such as Florida, in which
we may seek to enter into or arrange capitated agreements for our affiliated
physicians when those capitated contracts involve the assumption of risk. There
can be no guarantee that the state of Florida will continue to maintain the
position that we are not regulated as an insurer. See "Dependence on Contracts
with Managed Care Organizations."
DEPENDENCE ON CONTRACTS WITH MANAGED CARE ORGANIZATIONS
Our ability to expand is dependent in part on increasing the number of
managed care patients served by our staff model clinics, primarily through
negotiating additional and renewing existing contracts with managed care
organizations. Our capitated managed care agreement with Foundation Health
Corporation Affiliates ("Foundation") is a ten-year agreement with the initial
term expiring on June 30, 2008, unless terminated earlier for cause. In the
event of termination of the Foundation agreement, we must continue to provide
services to a patient with a life-threatening or disabling and degenerative
condition for sixty days as medically necessary. Our capitated managed care
agreement with Humana Medical Plans, Inc. ("Humana") is a ten-year agreement
expiring July 31, 2008, unless terminated earlier for cause. The agreement
automatically renews for subsequent one-year terms unless either party provides
180-days written notice of such party's intent not to renew. In addition, the
Humana agreement may be terminated by the mutual consent of both parties at any
time. Under certain limited circumstances, Humana may immediately terminate the
agreement for cause, otherwise termination for cause shall require ninety (90)
days prior written notice with an opportunity to cure, if possible. In the event
of termination of the Humana agreement, we must continue to provide or arrange
for services to any member hospitalized on the date of termination until the
date of discharge or until we have made arrangements for substitute care. In
some cases, Humana may provide 30 days notice as to an amendment or modification
of the agreements, including but not limited to, renegotiation of rates, covered
benefits and other terms and conditions. We maintain other managed care
relationships subject to various negotiated terms. There can be no assurance
that we will be able to renew any of these managed care agreements or, if
renewed, that they will contain terms favorable to us and affiliated physicians.
The loss of any of these contracts or significant reductions in capitated
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reimbursement rates under these contracts could have a material adverse effect
on our business, financial condition and results of operations. See "Reliance on
Key Customers; Related Party Issues", "Risks Associated with Capitated
Arrangements Including Risk of Over-Utilization by Managed Care Patients, Risk
of Reduction of Capitated Rates and Regulatory Risks," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business-Managed Care."
FEE FOR SERVICE ARRANGEMENTS
Certain of our managed care physicians also render services under a
fee-for-service arrangement on a limited basis, as opposed to capitation, and
typically bill various payors, such as governmental programs (e.g. Medicare and
Medicaid), private insurance plans and managed care plans, for these health care
services provided to their patients. There can be no assurance that payments
under governmental programs or from other payors will remain at present levels.
In addition, payors can deny reimbursement if they determine that treatment was
not performed in accordance with the cost-effective treatment methods
established by such payors or was experimental or for other reasons. Also,
fee-for-service arrangements involve credit risks related to the
uncollectibility of accounts receivable.
RISKS RELATED TO INTANGIBLE ASSETS
As of June 30, 2000, intangible assets totaled approximately 83% of our
total assets. Using an amortization period ranging from 3 to 20 years,
amortization expense on our intangible assets will be approximately $2,429,000
per year. In the event we engage in future acquisitions that result in the
recognition of additional intangible assets, our amortization expense would
increase. In certain circumstances, amortization generated by these intangible
assets may not be deductible for tax purposes.
At the time of or following each acquisition, we evaluate each
acquisition and establish an appropriate amortization period based on the
specific underlying facts and circumstances of each such acquisition. Subsequent
to such initial evaluation, we periodically reevaluate such facts and
circumstances to determine if the related intangible asset continues to be
realizable and if the amortization period continues to be appropriate. As the
underlying facts and circumstances subsequent to the date of acquisition can
change, there can be no assurance that we will realize the value of such
intangible assets. At June 30, 2000, we did not consider any of the unamortized
balance of intangible assets to be impaired. Any future determination, based on
reevaluation of the underlying facts and circumstances, that a significant
impairment has occurred would require the write-off of the impaired portion of
un-amortized intangible assets, which could have a material adverse effect on
our business and results of operations.
RELIANCE ON KEY CUSTOMERS; RELATED PARTY ISSUES
In Fiscal 2000, we generated approximately 39% of our revenue from
Foundation Health Corporation and approximately 57% of our revenues from Humana
Medical Plan, Inc. The loss of any of these contracts or significant reductions
in reimbursement rates could have a material adverse effect on us. See
"Dependence on Contracts with Managed Care Organizations".
Medicare regulations limit cost-based reimbursement for healthcare
charges paid to related parties. A party is considered "related" to a provider
if it is deemed to be under common ownership and/or control with the provider.
One test for determining common control for this purpose is whether the
percentage of the total revenues of the party received from services rendered to
the provider is so high that it effectively constitutes control. Another test is
whether the scope of management services furnished under contract is so broad
that it constitutes control. Although we do not believe any of our contracts are
deemed to be with a related party, it is possible that such regulations or the
interpretation thereof could limit the number of management contracts and/or the
fees attributable to such contracts if a particular client of ours is deemed
"related."
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
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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 the Company's 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
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 is scheduled to be implemented shortly
after the year 2000. It is also impossible to predict the effect a PPS system
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. See "--The Balanced Budget Act of 1997."
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.
THE BALANCED BUDGET ACT OF 1997
The Balanced Budget Act of 1997 (the "BBA") enacted in August 1997
contains numerous provisions related to Medicare and Medicaid reimbursement. The
general thrust of those provisions is to incentivize providers to deliver
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services efficiently at lower costs. However, the BBA resulted in deep cuts to
provider reimbursements. Congress's response to these unintended consequences
was the November 1999 enactment of the Medicare, Medicaid and SCHIP Balanced
Budget Refinement Act of 1999 ("BBRA"). The BBRA attempts to provide necessary
relief to various facets of the health care delivery system through remedies to
both problematic policy and excessive payment reductions.
The BBA also provides for implementation of a PPS for home nursing.
Prior to the BBA, Medicare reimbursed home health agencies through a cost-based
reimbursement system that was criticized for providing few incentives to HHAs to
maximize efficiency or control volume. To address this problem, the BBA requires
the Secretary of HHS to implement a PPS for home health agency services, and
reduces the amount of Medicare reimbursement for HHA services. Under such a PPS
system, providers are reimbursed a fixed fee per treatment unit, and those
having costs greater than the prospective amount will incur losses.
Prospective rates determined by the HHS would reflect a 15% reduction
to the cost limits and per-patient limits in place as of September 30, 1999. In
the event the implementation deadline is not met, the reduction will be applied
to the reimbursement system then in place. However, the BBRA delays
implementation of the BBA's 15% reduction in payment limits until one year after
implementation of the home health PPS. Therefore, total payments to HHAs in 2001
will be the same had PPS not been in effect. In addition, the 15% cut to begin
one year after PPS implementation will be based on Fiscal 2001 rates with
updates. This remedial legislation is expected to provide a total of $1.3
billion for home health (and hospice) services over five years, and $1.4 billion
over ten years.
Until the PPS takes effect on October 1, 2000, the BBA established an
interim payment system ("IPS") that provided for the lowering of reimbursement
limits for home health visits. The IPS is Congress's response to concern about
the rapid rising costs of Medicare home health reimbursements due to increased
volume of services. For cost reporting periods beginning on or after October 1,
1997, Medicare-reimbursed home health agencies had their cost limits determined
as the lesser of (i) the agency's reasonable costs; (ii) payments determined
under the per visit limits, with the limits set at 106% of the national median
cost per visit by service type; or (iii) aggregate payments on a formula based
on per beneficiary limits. Note that the BBRA increases the per beneficiary
limit by 2% for HHAs subject to that limit, with less than the national average
in Fiscal 2000. The IPS cost limits apply to us for the cost reporting periods
beginning after October 1997. The failure to implement a PPS for home nursing
services in the next several years could adversely effect our growth strategy
and us.
For cost reporting periods beginning on or after October 1, 1997, the
BBA requires a home health agency to submit claims for payment for home health
services only on the basis of the geographic location at which the service was
furnished. The Health Care Financing Administration ("HCFA") has publicly
expressed concern that some home health agencies are billing for services from
administrative offices in locations with higher per-visit cost limitations than
the cost limitations in effect in the geographic location of the home health
agency furnishing the service. Any resultant reduction in our cost limits could
have a material adverse effect on our business, financial condition or results
of operations. In the regulation issued in July 2000, HCFA estimates that the
redistributional effects on HHAs would range from a positive $428 million for
freestanding non-profit agencies to a negative $363 million for freestanding
for-profit agencies in Fiscal 2001.
Under the BBA's consolidated billing requirement, the HHA that creates
the home health plan of care is responsible for certain enumerated
Medicare-covered home health services. However, the BBRA eliminated coverage of
durable medical equipment ("DME") as a home health service from consolidated
billing. Therefore, the law now requires separate payment for DME items and
services provided under the home health benefit. Specifically, under
consolidated billing, the HHA must submit all Medicare claims for the following
home health services: (i) part-time or intermittent skilled nursing care and
home health aide services; (ii) physical therapy, speech-language pathology,
occupational therapy, and medical social services; (iii) routine and non-routine
medical supplies; (iv) osteoporosis medication; (v) medical services provided by
a hospital intern or resident under an approved teaching program where the HHA
is an affiliate or under common control with a hospital; and (vi) services at
hospitals, skilled nursing facilities ("SNFs"), or rehab centers where equipment
is too cumbersome to bring into the home.
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Also under the July 2000 regulation, HHAs will no longer be able to
unbundle services to outside suppliers that can submit a separate bill to the
Part B carrier. Instead, the HHA will have to provide the home health services
(excluding DME) either directly or pursuant to an arrangement with an outside
supplier where the HHA bills Medicare directly. Therefore, the outside supplier
will have to rely on the HHA for payment, not on Medicare Part B. Through this
provision, HCFA seeks to avoid duplicative billings for the same services and
enhance the HHA's ability to satisfy its existing responsibility to control the
Medicare-covered home health services received by patients. Furthermore,
consistent with SNF PPS consolidated billing, the beneficiary will enjoy freedom
of choice for the entire home health benefit of enumerated services. However,
HCFA clarifies that the law is silent regarding the specific terms of HHA
payments to outside suppliers and does not authorize Medicare to impose any such
requirements. Given its concern over provision of unnecessary services, we will
evaluate ways to address this potential problem.
Various other provisions of the BBA may have an impact on our business
and results of operations. For example, venipuncture will no longer be a covered
skilled nursing home care service unless it is performed in connection with
other skilled nursing services. Under the BBA, beginning with services furnished
on or after January 1, 1998, coverage of home health services is currently being
shifted over a period of six years from Medicare Part A to Medicare Part B
except for a maximum of 100 visits during a spell of illness after a three-day
hospitalization initiated within fourteen days after discharge or after
receiving any covered services in a skilled nursing facility, each of which will
continue to be covered under Medicare Part A. Another provision of the BBA would
reduce Medicare reimbursements to acute care hospitals for non-Medicare patients
who are discharged from the hospital after a very short inpatient stay to the
care of a home health agency. The impact of these reimbursement changes could
have a material adverse effect on our business, financial condition or results
of operations. However, this impact cannot be predicted with any level of
certainty at this time.
Overall, the BBA attempted to reduce the amounts that the federal
government will pay for services provided to Medicare and Medicaid beneficiaries
by an estimated $115 billion and $13 billion, respectively over a five-year
period; (ii) reducing payments to hospitals for inpatient and outpatient
services provided to Medicare beneficiaries by an estimated $44 billion over a
five-year period. However, the BBA seeks to give back $16.4 billion over five
years above current spending and will give back an additional $9.6 billion in
administrative changes. The BBA also reduced payments to hospitals for inpatient
and outpatient services provided to Medicare beneficiaries by an estimated $44
billion over a five-year period but the BBRA will give $7.3 billion back to
hospitals. Furthermore, the BBA established the Medicare+Choice Program, which
expands the availability of managed care alternatives to Medicare beneficiaries,
including Medical Savings Accounts. The BBRA seeks to improve the program's
flexibility, including provisions for enrollment and flexibility to tailor
benefits. The BBA also converted the Medicare reimbursement of outpatient
hospital services from a reasonable cost basis to a PPS and adjusted the method
by which Medicare calculates the copayments deducted from the Medicare payment
to hospitals for outpatient services. The BBRA adjusts the PPS by creating
payment floors during the first three and one half years of the PPS to reduce
disruption and creates a budget-neutral three-year pass-through for certain
drugs, devices, and biologicals. Although the BBA reduced various other Medicare
payments to providers, the BBRA provides targeted updates.
Among other changes the BBA attempted to accomplish are the following:
(i) repealing the federal Boren Amendment, which imposed certain requirements on
the level of reimbursement paid to hospitals for services rendered to Medicaid
beneficiaries; (ii) permitting states to mandate managed care for Medicaid
beneficiaries without the need for federal waivers; and (iii) instituting
permanent, mandatory exclusion from any federal health care program for those
convicted of three health care-related crimes, and a mandatory ten-year
exclusion for those convicted of two health care-related crimes. In addition,
the Secretary of HHS will be able to deny entry into Medicare or Medicaid or
deny renewal to any provider or supplier convicted of any felony that the
Secretary deems to be "inconsistent with the best interests" of the program's
beneficiaries. Moreover, the BBA created a new civil monetary penalty for
violations of the Federal Medicare/Medicaid Anti-Fraud and Abuse Amendments to
the Social Securities Act ("Anti-Kickback Law") for cases in which a person
contracts with an excluded provider for the provision of health care items or
services where the person knows or should know that the provider has been
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excluded from participation in a federal health care program. Violations will
result in damages three times the remuneration involved, as well as a penalty of
$50,000 per violation. There can be no assurance that we will not be subject to
the imposition of a fine or other penalty from time to time.
We expect that there will continue to be numerous initiatives on the
federal and state levels for comprehensive reforms affecting the payment for and
availability of healthcare services.
PROPOSED LEGISLATION
Congress and the State Legislature may propose legislation altering the
financing and delivery of healthcare services provided by us (beyond the changes
made by the BBA). It is difficult to predict the ultimate effect that any future
legislation will have on us.
ADDITIONAL PAYOR CONSIDERATIONS
Medicare retrospectively audits all reimbursements paid to
participating providers, including those now or previously managed and/or owned
by us, cost reports of client hospitals, CORFs, ORFs, and HHAs upon which
Medicare reimbursement for services rendered in the programs managed by us are
based. Accordingly, at any time, we could be subject to refund obligations to
such clients for prior period cost reports that have not been audited and
settled as of the date hereof.
Certain private insurance companies contract with hospitals and other
providers on an "exclusive" or a "preferred provider" basis and some insurers
have introduced plans known as "preferred provider organizations" ("PPOs").
Under such plans, there may be financial incentives for subscribers to use only
those providers that contract with the plans. Under an exclusive provider plan,
which includes most "health maintenance organizations" ("HMOs"), private payors
limit coverage to those services provided by selected providers. With this
contracting authority, private payors may direct patients away from nonselected
providers by denying coverage for services provided by them.
Most PPOs and HMOs currently pay providers on a discounted
fee-for-service basis or on a discounted fixed rate per day of care. Many health
care providers do not have accurate information about their actual costs of
providing specific types of care, particularly since each patient presents a
different mix of services and lengths of stay. Consequently, the discounts
offered to PPOs and HMOs may result in payments at less than actual costs.
Payors, including Medicare and Medicaid, are attempting to manage
costs, resulting in declining amounts paid or reimbursed to hospitals for the
services provided. As a result, we anticipate that the number of patients served
by hospitals on a per diem, episodic or capitated basis will increase in the
future. There can be no assurance that if amounts paid or reimbursed to HHAs
decline, it will not adversely affect us.
INCREASED SCRUTINY OF HEALTHCARE INDUSTRY
The healthcare industry has in general been the subject of increased
government and public scrutiny in recent years, which has focused on the
appropriateness of the care provided, referral and marketing practices and other
matters. Increased media and public attention has recently been focused on the
outpatient services industry in particular as a result of allegations of
fraudulent practices related to the nature and duration of patient treatments,
illegal remuneration and certain marketing, admission and billing practices by
certain healthcare providers. The alleged practices have been the subject of
federal and state investigations, as well as other legal proceedings. Healthcare
is a target for investigations because yearly Medicare payments to these types
of services have increased substantially during the past several years. We are
unable to predict the effect of a post-payment review on any Continucare
provider or publicity in general about the healthcare services industry might
have on us. There can be no assurance that we will not be subject to federal and
state review or investigation from time to time.
Federal and state governments have recently focused significant
attention on healthcare reform intended to control healthcare costs and to
improve access to medical services for uninsured individuals. These proposals
include cutbacks to the Medicare and Medicaid programs and steps to permit
greater flexibility in the administration of Medicaid. See "--Reimbursement
Considerations." It is uncertain at this time what legislation regarding
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healthcare reform may ultimately be enacted or whether other changes in the
administration or interpretation of governmental healthcare programs will occur.
There can be no assurance that future healthcare legislation or other changes in
the administration or interpretation of governmental healthcare programs will
not have a material adverse effect on our business, results of operations,
prospects, financial results, financial condition or cash flows.
GOVERNMENT REGULATION
The federal government and many states including the state in which we
currently operate regulate, certain aspects of the healthcare services provided
by programs managed by us and other healthcare services provided by us. In
particular, the development and operation of healthcare facilities are subject
to federal, state and local licensure and certification laws. Healthcare
facilities are subject to periodic inspection by governmental and other
authorities to assure compliance with the standards established for continued
licensure under state law and certification under the Medicare and Medicaid
programs. Failure to obtain or renew any required regulatory approvals or
licenses could prevent such facility from offering outpatient services or
receiving Medicare, Medicaid or other third party payments.
We are also subject to federal and state laws which govern financial
and other arrangements between healthcare providers. These laws often prohibit
certain direct and indirect payments or fee-splitting arrangements between
healthcare providers that are designed to induce or encourage overutilization,
underutilization or the referral of patients or payor funded business, or the
recommendation of a particular provider for medical products and services.
FEDERAL "FRAUD AND ABUSE" LAWS AND REGULATIONS. The Anti-Kickback Law
makes it a criminal felony offense to knowingly and willfully offer, pay,
solicit or receive remuneration in order to induce business for which
reimbursement is provided under the Medicare or Medicaid programs. In addition
to criminal penalties, including fines of up to $25,000 and five (5) years
imprisonment, violations of the Anti-Kickback Law can lead to civil monetary
penalties (which, pursuant to the BBA, can amount to as much as $50,000 for each
violation, plus up to treble damages, based on the remuneration illegally
offered, paid, received or solicited) and exclusion from Medicare, Medicaid and
certain other state and federal health care programs. The scope of prohibited
payments in the Anti-Kickback Law is broad and includes economic arrangements
involving hospitals, physicians and other health care providers, including joint
ventures, space and equipment rentals, purchases of physician practices and
management and personal services contracts. HHS has published regulations which
describe certain "safe harbor" arrangements that will not be deemed to
constitute violations of the Anti-Kickback Law. The safe harbors described in
the regulations are narrow and do not cover a wide range of economic
relationships which many hospitals, physicians and other health care providers
consider to be legitimate business arrangements not prohibited by the statute.
Because the regulations describe safe harbors and do not purport to describe
comprehensively all lawful or unlawful economic arrangements or other
relationships between health care providers and referral sources, health care
providers having these arrangements or relationships may be required to alter
them in order to ensure compliance with the Anti-Kickback Law.
We believe that our contracts with providers, physicians and other
referral sources are in material compliance with the Anti-Kickback Law and will
make every effort to comply with the Anti-Kickback Law. However, in light of the
narrowness of the safe harbor regulations and the scarcity of case law
interpreting the Anti-Kickback Law, there can be no assurances that we will not
be alleged to have violated the Anti-Kickback Law, and if an adverse
determination is reached, whether any sanction imposed would have a material
adverse effect on our financial condition, results of operations or cash flows.
The Office of the Inspector General of the Department of HHS, the
Department of Justice and other federal agencies interpret these fraud and abuse
provisions liberally and enforce them aggressively. Members of Congress have
proposed legislation that would significantly expand the federal government's
involvement in curtailing fraud and abuse and increase the monetary penalties
for violation of these provisions. In addition, some states restrict certain
business relationships between physicians and other providers of health care
services.
The federal government, private insurers and various state enforcement
agencies have increased their scrutiny of provider business practices and
claims, particularly in the areas of home health care and durable medical
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equipment in an effort to identify and prosecute parties engaged in fraudulent
and abusive practices. In May 1995, the Clinton Administration instituted
Operation Restore Trust ("ORT"), a health care fraud and abuse initiative
focusing on nursing homes, home health care agencies and durable medical
equipment companies. ORT, which initially focused on companies located in
California, Florida, Illinois, New York and Texas, the states with the largest
Medicare populations, has been expanded to all 50 states. While we believe that
we are in material compliance with such laws, there can be no assurance that our
practices, if reviewed, would be found to be in full compliance with such laws,
as such laws ultimately may be interpreted. It is our policy to monitor our
compliance with such laws and to take appropriate actions to ensure such
compliance.
STATE FRAUD AND ABUSE REGULATIONS. Various States also have
anti-kickback laws applicable to licensed healthcare professionals and other
providers and, in some instances, applicable to any person engaged in the
proscribed conduct. For example, Florida enacted "The Patient Brokering Act"
which imposes criminal penalties, including jail terms and fines, for receiving
or paying any commission, bonus, rebate, kickback, or bribe, directly or
indirectly in cash or in kind, or engage in any split-fee arrangement, in any
form whatsoever, to induce the referral of patients or patronage from a
healthcare provider or healthcare facility.
We believe that our contracts with providers, physicians and other
referral sources are in material compliance with the state laws and will make
every effort to comply with the state laws. However, there can be no assurances
that we will not be alleged to have violated the state laws, and if an adverse
determination is reached, whether any sanction imposed would have a material
adverse effect on our financial condition, results of operations or cash flows.
RESTRICTIONS ON PHYSICIAN REFERRALS. The federal Anti-Self Referral Law
(the "Stark Law") prohibits certain patient referrals by interested physicians.
Specifically, the Stark Law prohibits a physician, or an immediate family
member, who has a financial relationship with an entity, from referring Medicare
or Medicaid patients with limited exceptions, to that entity for the following
"designated health services": clinical laboratory services, physical therapy
services, occupational therapy services, radiology or other diagnostic services,
durable medical equipment and supplies, radiation therapy services and supplies,
parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics
and prosthetic devices, home health services, outpatient prescription drugs, and
inpatient and outpatient hospital services. A financial relationship is defined
to include an ownership or investment in, or a compensation relationship with,
an entity. The Stark Law also prohibits an entity receiving a prohibited
referral from billing the Medicare or Medicaid programs for any services
rendered to a patient. The Stark Law contains certain exceptions that protect
parties from liability if the parties comply with all of the requirements of the
applicable exception. The sanctions under the Stark Law include denial and
refund of payments, civil monetary penalties and exclusions from the Medicare
and Medicaid programs.
HHS has proposed regulations further implementing and interpreting the
Stark Law. If adopted as final, these regulations will impact the interpretation
and application of the Stark Law. We are unable to predict the manner in which
those regulations could impact our current compliance with the Stark Law.
We believe that we are presently in material compliance with the Stark
Law and will make every effort to comply with the Stark Law. However, in light
of the lack of regulatory guidance and the scarcity of case law interpreting the
Stark Law, there can be no assurances that we will not be alleged to have
violated the Stark Law, and if an adverse determination is reached, whether any
sanction imposed would have a material adverse effect on our results of
operations, financial condition or cash flows.
CORPORATE PRACTICE OF MEDICINE DOCTRINE. Many states prohibit business
corporations from providing, or holding themselves out as a provider of medical
care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs (including Medicare and Medicaid), asset forfeitures and
civil and criminal penalties. These laws vary from state to state, are often
vague and loosely interpreted by the courts and regulatory agencies. We
currently operate only in Florida, which does not have a corporate practice of
medicine doctrine with respect to the types of physicians employed by or that
contract with us at this time. There, however, can be no assurance that such
laws will not change or ultimately be interpreted in a manner inconsistent with
our practices, and an adverse interpretation could have a material adverse
effect on our results of operations, financial condition or cash flows.
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CERTIFICATES OF NEED AND CERTIFICATES OF EXEMPTION. Many states,
including the state in which we operate, have procedures for the orderly and
economical development of health care facilities, the avoidance of unnecessary
duplication of such facilities and the promotion of planning for development of
such facilities. Such states require health care facilities to obtain
Certificates of Need ("CONs") or Certificates of Exemption ("COEs") before
initiating projects in excess of a certain threshold for the acquisition of
major medical equipment or other capital expenditures; changing the scope or
operation of a health care facility; establishing or discontinuing a health care
service or facility; increasing, decreasing or redistributing bed capacity;
and/or changing of ownership of a health care facility, among others. Possible
sanctions for violation of any of these statutes and regulations include loss of
licensure or eligibility to participate in reimbursement programs and other
penalties. These laws vary from state to state and are generally administered by
the respective state department of health. We have structured our business
operations in compliance with these laws and have sought guidance as to the
interpretation of such laws and the procurement of required CONs and/or COEs.
There can be no assurance, however, that we or any of our client hospitals, or
HHAs will be able to obtain required CONs and/or COEs in the future.
We are unable to predict the future course of federal, state or local
legislation or regulation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework could have a material
adverse effect on our financial condition, results of operations or cash flows.
GEOGRAPHIC CONCENTRATION
All of our net revenues in Fiscal 2000 were derived from our operations
in Florida. It is anticipated that in Fiscal 2001 our net revenue will continue
to be derived from our operations in Florida. Unless and until our operations
become more diversified geographically (as a result of acquisitions or internal
expansion), adverse economic, regulatory, or other developments in Florida could
have a material adverse effect on our financial condition or results of
operations. In the event that we expand our operations into new geographic
markets, we will need to establish new relationships with physicians and other
healthcare providers. In addition, we will be required to comply with laws and
regulations of states that differ from those in which we currently operate, and
may face competitors with greater knowledge of such local markets. There can be
no assurance that we will be able to establish relationships, realize management
efficiencies or otherwise establish a presence in new geographic markets.
DEPENDENCE ON PHYSICIANS
A significant portion of our revenue is derived under our managed care
contracts. Revenue derived by us under capitated managed care contracts depends
on the continued participation of physicians providing medical services to
patients of the managed care companies and independent physicians contracting
with us to participate in provider networks which are developed or managed by
us. Physicians can typically terminate their agreements to provide medical
services under managed care contracts by providing notice of such termination to
the payor. Termination of these agreements by physicians may result in
termination by the payor of a managed care contract between the payor and us.
Any material loss of physicians, whether as a result of the loss of network
physicians or the termination of managed care contracts resulting from the loss
of network physicians or otherwise, could have a material adverse effect on our
business, results of operations, prospects, financial results, financial
condition or cash flows. We competes with general acute care hospitals and other
healthcare providers for the services of medical professionals. Demand for such
medical professionals is high and such professionals often receive competing
offers. No assurance can be given that we will be able to continue to recruit
and retain a sufficient number of qualified medical professionals. The inability
to successfully recruit and retain medical professionals could adversely affect
our ability to successfully implement our growth strategy. See "Business
-Administrative Support Operations."
COMPETITION
The healthcare industry is highly competitive. We compete with several
national competitors and many regional and national healthcare companies, some
of which have greater resources than we do. In addition, healthcare providers
may elect to manage their own outpatient health programs. Competition is
generally based upon reputation, price, the ability to offer financial and other
benefits for the particular provider, and the management expertise necessary to
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enable the provider to offer outpatient programs that provide the full continuum
of outpatient services in a quality and cost-effective manner. The pressure to
reduce healthcare expenditures has emphasized the need to manage the
appropriateness of health services provided to patients. As a result,
competitors without management experience covering the various levels of the
continuum of outpatient services may not be able to compete successfully.
INSURANCE
We carry general liability, comprehensive property damage, malpractice,
workers' compensation, stop-loss and other insurance coverages that management
considers adequate for the protection of our assets and operations. There can be
no assurance, however, that the coverage limits of such policies will be
adequate to cover losses and expenses for lawsuits brought or which may be
brought against us. A successful claim against us in excess of our insurance
coverage could have a material adverse effect on us.
UPGRADE OF MANAGEMENT INFORMATION SYSTEMS; TECHNOLOGICAL OBSOLESCENCE
Our operations are heavily dependent on our management information
systems. Both the software and hardware used by us in connection with the
services we provide have been subject to rapid technological change. Although we
believe that our technology can be upgraded as necessary, the development of new
technologies or refinements of existing technology could make our existing
equipment obsolete. Although we are not currently aware of any pending
technological developments that would be likely to have a material adverse
effect on our business, there is no assurance that such developments will not
occur.
* * * * * * *
The risk factors described above could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements made
by or on behalf of us. Any forward-looking statement speaks only as of the date
on which such statement is made, and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrences of
unanticipated events. New factors emerge from time to time and it is not
possible for us to predict all of such factors. Further, we cannot assess the
impact of each such factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
PART I
ITEM 1. BUSINESS
GENERAL
We are a provider of outpatient healthcare and home healthcare services
in Florida. Our Managed Care Division, through various managed care agreements
and capitated arrangements, is responsible for providing primary care medical
services (the "Primary Care Services") to approximately 21,600 patients at June
30, 2000. The various managed care agreements and capitated arrangements under
which we provide medical services to our patients require that in exchange for a
predetermined amount, per patient per month, we assume responsibility to provide
and pay for all of our patients' medical needs. Our Home Health Division
provides home healthcare services to recovering, disabled, chronically ill and
terminally ill patients in their homes.
HISTORICAL DEVELOPMENT OF BUSINESS
On August 9, 1996, a subsidiary of Zanart Entertainment Incorporated
("Zanart") was merged into Continucare Corporation (the "Merger"), which was
incorporated on February 1, 1996 as a Florida corporation ("Old Continucare").
As a result of the Merger, the shareholders of Old Continucare became
shareholders of Zanart, and Zanart changed its name to Continucare Corporation.
During Fiscal 1997, our business focused on managing and providing services to
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behavioral health programs in hospitals and freestanding centers. We assigned
these contracts in Fiscal 1998 and began to develop our outpatient services
strategy, which currently consists of staff model clinics, Independent Practice
Associations ("IPAs") and Home Health Agencies ("HHAs").
FINANCIAL RESTRUCTURING PROGRAM
In Fiscal 2000, we completed Restructuring of our Notes. The
Restructuring was approved by our shareholders on February 14, 2000. The
following occurred as a result of the Restructuring: (a) $31,000,000 of the
outstanding principal of the Notes was converted, on a pro rata basis, into our
common stock at a conversion rate of $2.00 per share (approximately 15,500,000
shares of common stock); (b) all interest which had accrued on the Notes through
October 31, 1999 was forgiven (approximately $3,300,000); (c) interest which
accrued from November 1, 1999 through the date of the Restructuring (February
15, 2000) on the $31,000,000 which was converted into 15,500,000 shares of our
common stock was forgiven; (d) the interest payment default on the remaining
$10,000,000 principal balance of the Notes was waived and the Notes were
reinstated on our books and records as a performing non-defaulted loan (the
"Restructured Notes"); (e) the Restructured Notes bear interest at the rate of
7% per annum commencing November 1, 1999; and (f) the conversion rate for the
Restructured Notes for the period commencing November 1, 2000 to maturity will
be $2.00. The Restructuring also required us to procure a $3,000,000 bank credit
facility with a guarantee. In accordance with the Restructuring requirements,
we obtained such bank credit facility and guarantee.
INDUSTRY OVERVIEW
We believe the following three principal industry elements have created
an opportunity for us: (i) the continued penetration of the managed care market;
(ii) the highly fragmented nature of the delivery of outpatient services; and
(iii) the shift in the provision of healthcare services from the hospital to
lower cost outpatient locations and the home.
CONTINUED PENETRATION OF MANAGED CARE. In response to escalating
expenditures in healthcare costs, payors, such as Medicare and managed care
organizations, have increasingly pressured physicians, hospitals and other
providers to contain costs. This pressure has led to the growth of lower cost
outpatient care, and to reduce hospital admissions and lengths of stay. To
further increase efficiency and reduce the incentive to provide unnecessary
healthcare services to patients, payors have developed a reimbursement structure
called capitation. Capitation contracts require the payment to healthcare
providers of a fixed amount per patient for a given patient population, and the
providers assume responsibility for servicing all of the healthcare services
needs of those patients, regardless of their condition. We believe that low cost
providers will succeed in the capitation environment because such companies have
the ability to manage the cost of patient care.
HIGHLY FRAGMENTED MARKET. The highly fragmented nature of the delivery
of outpatient services has created an inefficient healthcare services
environment for patients, payors and providers. Managed care companies and other
payors must negotiate with multiple healthcare services providers, including
physicians, hospitals and ancillary services providers, to provide geographic
coverage to their patients. Physicians who practice alone or in small groups
have experienced difficulty negotiating favorable contracts with managed care
companies and have trouble providing the burdensome documentation required by
such entities. In addition, healthcare service providers may lose control of
patients when they refer them out of their network for additional services that
such providers do not offer. We intend to continue affiliating with physicians
who are sole practitioners or who operate in small groups to staff and expand
our network, which should make us a provider of choice to managed care
organizations.
SHIFT TOWARD LOW-COST OUTPATIENT TREATMENT. Outpatient treatment has
grown rapidly as a result of: (i) advances in medical technology, which have
facilitated the delivery of healthcare in alternate sites; (ii) demographic
trends, such as an aging population; and (iii) preferences among patients to
receive care in their homes. We expect this trend to continue as managed care
companies and healthcare providers continue shifting towards the lower cost
providers.
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BUSINESS STRATEGY
We intend to leverage the current industry dynamics by: (i) increasing
our managed care revenue; (ii) maintaining our physician network; (iii)
implementing our staff model in additional selected strategic markets; and (iv)
maintaining our Home Healthcare Division.
INCREASING MANAGED CARE REVENUE. Our core business is comprised of our
established network of staff model clinics from which we provide primary care
services to our patients and to the public at large. By securing additional and
expanding existing managed care contracts with the leading managed care
companies in Florida, we believe that we will be able to increase our managed
care enrollments. We believe that we have been successful in developing managed
care relationships due to our network of quality physicians, the provision of a
range of healthcare services, and our many locations.
MAINTAINING PHYSICIAN NETWORK. The physician network is the platform of
our IPA. We may expand our physician network by: (i) adding physicians to our
IPA and/or (ii) hiring physicians to work in our company-owned physician
practices and clinics.
IMPLEMENTING STAFF MODEL IN SELECTED MARKETS. We have successfully
implemented our staff model in south and central Florida, and intend to
selectively expand the model in other appropriate markets, primarily within
Florida, by tailoring our services and facilities to the needs of individual
markets. At June 30, 2000, we operated seventeen staff model clinics in south
and central Florida.
MAINTAINING HOME HEALTHCARE DIVISION. The home healthcare industry
continues to undergo major restructuring in response to federal legislative
enactments. Significant changes in reimbursement are scheduled to occur in
October 2000. See--"Cautionary Note Regarding Forward-Looking Statements";
"Additional Payor Considerations"; "Increased Scrutiny of Healthcare Industry";
and "Government Legislation." Although we have taken steps to address these
scheduled reimbursement changes, there can be no assurance that these
reimbursement changes will not have a material adverse effect on our business.
BUSINESS MODEL
Our core business model consists of three areas: staff model clinics,
IPAs and Home Health Agencies. We provide these medical services to patients
through our employee physicians, affiliated IPA physicians, nurses, physical
therapists and nurse aides. Additionally, we provide management and
administrative services to both our employee physicians and to the physicians
that are affiliated with us.
STAFF MODEL CLINICS. Our staff model clinics are medical centers where
physicians, who are employed by us, act as primary care physicians practicing in
the area of general, family and internal medicine. Our revenue is generated
through either a percentage of premium monthly capitated fee arrangement with an
HMO or a fee for service arrangement. The monthly fee arrangement is based upon
a negotiated percentage of premium which is related to either Medicare, Medicaid
or a commercial medical insurance program.
IPAS. We have contracted with various physicians and physician
practices, on an independent contractor basis, who currently provide or are
qualified to provide medical services to our Foundation members. We pay the
physicians a capitated fee for providing the services and assume a portion of
the financial risk for the physician's performance related to our Foundation
members. In addition to providing certain administrative services to the
physicians, we also provide utilization assistance. Like the staff model
clinics, the monthly fee arrangement is based upon a negotiated percentage of
premium, which is related to either Medicare, Medicaid or a commercial medical
insurance program.
HOME HEALTH AGENCIES. Our home health services include three home
health agencies, one located in Miami-Dade county and two located in Broward
county. These agencies provide comprehensive nursing, physical therapy, and
nurse's aides to individuals in their home who are disabled, elderly or
recovering from a debilitating illness, accident or surgery. Two of the agencies
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are compensated by Medicare and Medicaid in accordance with a pre-determined
rate schedule. The third agency is a private license home health agency
servicing Broward county. As of June 30, 2000, the private agency was not yet in
operation.
RECENT DEVELOPMENTS - DEBT RESTRUCTURING
As described above, in Fiscal 2000 we completed the Restructuring of
the Notes. This was accomplished through the execution of a Consent Letter and
Agreement to the First Supplemental Indenture. The Restructuring was approved by
our shareholders on February 14, 2000. The following occurred as a result of the
Restructuring: (a) $31,000,000 of the outstanding principal of the Notes was
converted, on a pro rata basis, into our common stock at a conversion rate of
$2.00 per share (approximately 15,500,000 shares of capital stock); (b) all
interest which had accrued on the Notes through October 31, 1999 was forgiven
(approximately $3,300,000); (c) interest which accrued from November 1, 1999
through the date of the Restructuring (February 15, 2000) on the $31,000,000
which was converted into 15,500,000 shares of our common stock was forgiven; (d)
the interest payment default on the remaining $10,000,000 principal balance of
the Notes was waived and the Notes were reinstated on our books and records as a
performing non-defaulted loan (the "Restructured Notes"); (e) the Restructured
Notes bear interest at the rate of 7% per annum commencing November 1, 1999; and
(f) the conversion rate for the Restructured Notes for the period commencing
November 1, 2000 to maturity will be $2.00.
The Restructuring also required us to procure a $3,000,000 bank credit
facility and to obtain a financially responsible person(s) to guarantee the bank
credit facility for us. Accordingly, we executed a credit facility agreement
(the "New Credit Facility") which provides a revolving loan of $3,000,000. The
New Credit Facility is due March 31, 2001 with annual renewable options, with
interest payable monthly at 2.9% plus the 30-day Dealer Commercial Paper Rate
(which is 6.58% at June 30, 2000). All of our assets serve as collateral for the
New Credit Facility. In addition, the New Credit Facility has been guaranteed by
a board member and an entity controlled by a board member. In consideration for
providing the guarantees, we issued an aggregate of 3,000,000 shares of our
common stock. These shares were valued at $3,375,000 based on the closing price
of our stock on February 11, 2000 when the guarantees were granted. At June 30,
2000, we had not borrowed any amounts available under the New Credit Facility.
INTEGRATED OUTPATIENT HEALTHCARE
We are a provider of integrated outpatient healthcare. We have
established a network of physician practices as the primary caregiver to our
patients and to the public at large and we also provide home health services.
OFFICE AND PHYSICIAN/HEALTH CENTER PRACTICES. Since commencing our
operations in 1996, we have expanded our physician network through the
acquisition of physician practices, employment of new physicians and
affiliations with physicians through our IPA. As of June 30, 2000, we operated
seventeen staff model health center clinics, employed or contracted with
approximately 81 physicians all of whom are located in Florida and provided
services to approximately 21,600 patients under capitated managed care contracts
at June 30, 2000.
The physicians within our network treat patients in office-based
settings as well as health centers. A typical office-based practice is located
in a major metropolitan area, in office space that ranges from 5,000 to 8,000
square feet. The office typically employs or contracts with approximately two to
three physicians. The physicians provide primary care services to their
patients. A typical health center is located in or near major metropolitan
areas, in space that ranges from 2,500 to 5,000 square feet. A health center is
typically staffed with approximately two physicians, and is open five days a
week.
HOME HEALTHCARE. We provide home healthcare services to recovering,
disabled, chronically ill and terminally ill patients in their homes. Typically,
a service care provider (such as a registered nurse, home health aide, therapist
or technician) will visit the patient daily, several times a week or the patient
may require around-the-clock care. Treatment may last for several weeks, several
months or the remainder of the patient's life. The services provided by us
include skilled nursing, physical therapy, speech therapy, occupational therapy,
medical social services and home health aide services. Reimbursement for the
home health services provided by us include Medicare, Medicaid and commercial
insurers.
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ADMINISTRATIVE SUPPORT OPERATIONS
ADMINISTRATIVE FUNCTIONS. We enhance administrative operations of our
physician practices by providing management functions such as payor contract
negotiations, credentialing assistance, financial reporting, risk management
services, access to lower cost professional liability insurance and the
operation of integrated billing and collection systems. We believe we offer
physicians increased negotiating power associated with managing their practice
and fewer administrative burdens, which allows the physician to focus on
providing care to patients.
EMPLOYMENT AND RECRUITING OF PHYSICIANS. We generally enter into
multiple-year employment agreements with the physicians in the practices
purchased by us. These agreements usually provide for base compensation and
benefits and may contain incentive compensation provisions based on quality
indicators. The recruitment process includes interviews and reference checks
incorporating a number of credentialing and competency assurance protocols. Our
physicians are generally either board certified or board eligible.
CONTRACT NEGOTIATIONS. We assist our physicians in obtaining managed
care contracts. We believe that our experience in negotiating and managing risk
contracts enhance our ability to market the services of our affiliated
physicians to managed care payors and to negotiate favorable terms from such
payors. The managed care contracts are held, managed and administered by one of
our wholly-owned subsidiaries. We also perform quality assurance and utilization
management under each contract on behalf of our affiliated physicians.
INFORMATION SYSTEMS. We support freestanding systems for our physician
practices to facilitate patient scheduling, patient management, billing,
collection and provider productivity analysis. We have upgraded these
information systems as necessary during Fiscal 2000. Although we are not
currently aware of any pending additional technological developments that will
likely require additional upgrades, there is no assurance that such developments
will not occur. See "Risk Factors -- Upgrade of Management Information Systems;
Technological Obsolescence."
MANAGED CARE
Our strategy is to increase enrollment by adding new payor
relationships and new providers to the existing network and by expanding the
network into new geographic areas where the penetration of managed healthcare is
growing. We believe new payor and provider relationships are possible because of
our ability to manage the cost of health care without sacrificing quality.
During Fiscal 2000, substantially all of the revenues from the Managed Care
Division were generated under a percentage of premium monthly capitated fee
arrangement with HMOs.
CONTRACTS WITH PAYORS. Contracts with payors generally provide for
terms of one to ten years, may be terminated earlier upon notice for cause or
upon renewal and in some cases without cause. Additionally the contracts are
subject to renegotiation of capitation rates, covered benefits and other terms
and conditions. Pursuant to payor contracts, the physicians provide covered
medical services and receive capitation payments from payors for each enrollee
who selects one of our network physicians as his or her primary care physician.
To the extent that patients require more care than is anticipated or require
supplemental medical care that is not otherwise reimbursed by payors, aggregate
capitation payments may be insufficient to cover the costs associated with the
treatment of patients. We maintain stop-loss insurance coverage, which mitigates
the effect of occasional high utilization of health care services. If revenues
are insufficient to cover costs or we are unable to maintain stop-loss coverage
at favorable rates, our business results of operations and financial condition
could be materially adversely affected. The loss of significant payor contracts
and/or the failure to regain or retain such payor's patients or the related
revenues without entering into new payor relationships could have a material
adverse effect on our business results of operations and financial condition.
Our capitated managed care agreement with Foundation is a ten-year
agreement with the initial term expiring on June 30, 2008, unless terminated
earlier by Foundation for cause. In the event of termination of the Foundation
agreement, we must continue to provide services to a patient with a
life-threatening or disabling and degenerative condition for sixty days as
medically necessary. This agreement is automatically renewed for another
five-year period unless notice by either party is provided 120 days in advance
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of the expiration date. Any negotiation must be completed 90 days prior to the
expiration of the term. Foundation can terminate the agreement with respect to
one or more benefit programs; however, we may only terminate the agreement in
its entirety. Foundation may also terminate its agreement with us for cause upon
thirty (30) days written notice of a material breach; provided however, that we
are afforded an opportunity to cure such breach. However, if the breach is one
that cannot reasonably be corrected within thirty (30) days, the agreement will
not be terminated if Foundation determines that we are making substantial and
diligent progress toward correcting the breach. Foundation may also, in a
limited number of circumstances, immediately terminate its agreement with us.
Immediate termination is allowable upon: (1) our documented violation of any
applicable law, rule or regulation; (2) our documented failure to assist
Foundation in upholding the terms, conditions or determinations of any
Utilization Management Program or Quality Management Program or other Benefit
Program Requirements; or (3) Foundation's determination that the health, safety
or welfare of any member may be in jeopardy if the Agreement is not terminated.
Foundation may also terminate the agreement, effective the first day of the
following month, upon at least three (3) business days written notice prior to
the end of the month, notifying us of our failure to pay any capitation payment
which we have received from Foundation, either to the applicable provider or
back to Foundation, during the period between our receipt of the compensation
from Foundation and the last business day of the same month. Under the
Foundation agreement, Foundation may, subject to our mutual agreement, amend the
Medicare compensation rates under the contract with us upon thirty (30) days
written notice. For all other purposes, Foundation may upon twenty (20) days
written notice amend the contract, provided that we do not object to the
amendment within that time frame.
Effective December 31, 1999, we entered into an amendment to our
professional provider agreement with Foundation. This amendment reduced our
prior medical claims and long-term debt liabilities to Foundation for prior
medical claims by approximately $3,054,000.
Our capitated managed care agreement with Humana Medical Plans, Inc.
("Humana") is a ten-year agreement expiring July 31, 2008, unless terminated
earlier for cause. The agreement shall automatically renew for subsequent
one-year terms unless either party provides 180-days written notice of its
intent not to renew. In addition, the Humana agreement may be terminated by the
mutual consent of both parties at any time. Under certain limited circumstances,
Humana may immediately terminate the agreement for cause, otherwise termination
for cause shall require ninety (90) days prior written notice with an
opportunity to cure, if possible. Immediate termination is allowable if Humana
reasonably determines that: (1) we and/or any of our physician's continued
participation in the agreement may affect adversely the health, safety or
welfare of any Humana member; (2) we and/or any of our physician's continued
participation in the agreement may bring Humana or its health care networks into
disrepute; (3) in the event of one of our doctor's death or incompetence; (4) if
any of our physicians fail to meet Humana's credentialing criteria; (5) if we
engage in or acquiesce to any act of bankruptcy, receivership or reorganization;
or (6) if Humana loses its authority to do business in total or as to any
limited segment or business (but only to that segment). In the event of
termination of the Humana agreement, we must continue to provide or arrange for
services to any member hospitalized on the date of termination until the date of
discharge or until we have made arrangements for substitute care. In some cases,
Humana may provide 30 days' notice as to an amendment or modification of the
agreements, including but not limited to, renegotiation of rates, covered
benefits and other terms and conditions. In the event that Humana exercises its
right to amend the agreement upon thirty (30) days written notice, we may object
to such amendment within the thirty (30)-day notice period. Such amendments may
include changes to the compensation rates. If we object to such amendment within
the requisite time frame, Humana may terminate the agreement upon ninety (90)
days written notice.
Effective August 1, 1998, we entered into two amendments to our
professional provider agreements with Humana. 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.
Neither the Foundation nor the Humana agreement imposes a limit on the
number of adjustments that may be made to their provider agreement.
We continually review and attempt to renegotiate the terms of our
managed care agreements in an effort to obtain more favorable terms.
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As of June 30, 2000, we maintained four additional managed care
relationships, none of which individually or in the aggregate are material.
There can be no assurance that we will be able to renew any of our managed care
agreements or, if renewed, that they will contain terms favorable to us and our
affiliated physicians. Although we did not lose, on an aggregate basis, any
significant payor contracts in Fiscal 2000, the loss of any of our current
managed care contracts or significant reductions in capitated reimbursement
rates under these contracts could have a material adverse effect on our
business, financial condition and results of operations. See "Risk
Factors--Risks Associated with Capitated Arrangements Including Risk of
Over-Utilization by Managed Care Patients, Risk of Reduction of Capitated Rates
and Regulatory Risks," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business --Managed Care."
FEE-FOR-SERVICE ARRANGEMENTS. Certain of our managed care physicians
also render services under a fee-for-service arrangement on a limited basis (as
opposed to capitation) and typically bill various payors, such as governmental
programs (e.g., Medicare and Medicaid), private insurance plans and managed care
plans, for the health care services provided to their patients. There can be no
assurance that payments under governmental programs or from other payors will
remain at present levels. In addition, payors can deny reimbursement if they
determine that treatment was not performed in accordance with the cost-effective
treatment methods established by such payors or was experimental or for other
reasons.
COMPLIANCE PROGRAM
We have implemented a compliance program to provide ongoing monitoring
and reporting to detect and correct potential regulatory compliance problems.
The program establishes compliance standards and procedures for employees and
agents. The program includes, among other things: (i) written policies; (ii)
in-service training for each employee on topics such as insider trading,
anti-kickback laws, Federal False Claims Act and Anti-Self Referral Act; and
(iii) a "hot line" for employees to anonymously report violations.
COMPETITION
The healthcare industry is highly competitive. We compete with several
national competitors and many regional and national healthcare companies, some
of which have greater resources than us. In addition, healthcare providers may
elect to manage their own outpatient health programs. Competition is generally
based upon reputation, price, the ability to offer financial and other benefits
for the particular provider, and the management expertise necessary to enable
the provider to offer outpatient programs that provide the full continuum of
outpatient services in a quality and cost-effective manner. The pressure to
reduce healthcare expenditures has emphasized the need to manage the
appropriateness of health services provided to patients. As a result,
competitors without management experience covering the various levels of the
continuum of outpatient services may not be able to compete successfully.
GOVERNMENT REGULATION
GENERAL. Our business is affected by federal, state and local laws and
regulations concerning healthcare. These laws and regulations impact the
development and operation of outpatient programs and the provision of healthcare
to patients in physicians' offices and in patients' homes. Licensing,
certification, reimbursement and other applicable government regulations vary by
jurisdiction and are subject to periodic revision. We are not able to predict
the content or impact of future changes in laws or regulations affecting the
healthcare industry. See "Risk Factors."
PRESENT AND PROSPECTIVE FEDERAL AND STATE REIMBURSEMENT REGULATION. Our
operations are affected on a day-to-day basis by numerous legislative,
regulatory and industry-imposed operational and financial requirements which are
administered by a variety of federal and state governmental agencies as well as
by self-regulatory associations and commercial medical insurance reimbursement
programs.
HHAs, CORFs and ORFs, including those now or previously managed and/or
owned by us, are subject to numerous licensing, certification and accreditation
requirements. These include, but are not limited to, requirements relating to
Medicare participation and payment, requirements relating to state licensing
agencies, private payors and accreditation organizations. Renewal and
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continuance of certain of these licenses, certifications and accreditation are
based upon inspections, surveys, audits, investigations or other review, some of
which may require or include affirmative action or response by us. An adverse
determination could result in a loss, fine or reduction in the scope of
licensure, certification or accreditation or could reduce the payment received
or require the repayment of amounts previously remitted.
Significant changes have been and may be made in the Medicare and
Medicaid programs, which changes could have a material adverse impact on our
financial condition. In addition, legislation has been or may be introduced in
the Congress of the United States which, if enacted, could adversely affect our
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 the 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 federal Secretary
of HHS. Only enumerated services, upon satisfaction of certain criteria, are
eligible for Medicare reimbursement. Relative to our services now or previously
owned, Medicare certified, HHAs, CORFs and ORFs, Medicare reimburses the
"reasonable costs" for services up to program limits. Medicare reimbursed costs
are subject to audit, which may result in either decreases or increases in
payments we have previously received.
The BBA enacted in August 1997 contains numerous provisions related to
Medicare and Medicaid reimbursement. The general thrust of those provisions is
to incentivize providers to deliver services efficiently at lower costs.
However, the BBA resulted in deep cuts to provider reimbursements. Congress's
response to these unintended consequences was the November 1999 enactment of the
Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 ("BBRA").
The BBRA attempts to provide necessary relief to various facets of the health
care delivery system through remedies to both problematic policy and excessive
payment reductions.
The BBA also provides for implementation of a PPS for home nursing.
Prior to the BBA, Medicare reimbursed home health agencies through a cost-based
reimbursement system that was criticized for providing few incentives to HHAs to
maximize efficiency or control volume. To address this problem, the BBA requires
the Secretary of HHS to implement a PPS for home health agency services, and
reduces the amount of Medicare reimbursement for HHA services. Under such a PPS
system, providers are reimbursed a fixed fee per treatment unit, and those
having costs greater than the prospective amount will incur losses.
FEDERAL "FRAUD AND ABUSE" LAWS AND REGULATIONS. The Anti-Kickback Law
makes it a criminal felony offense to knowingly and willfully offer, pay,
solicit or receive remuneration in order to induce business for which
reimbursement is provided under the Medicare or Medicaid programs. In addition
to criminal penalties, including fines of up to $25,000 and five (5) years
imprisonment, violations of the Anti-Kickback Law can lead to civil monetary
penalties (which, pursuant to the BBA, can amount to as much as $50,000 for each
violation, plus up to treble damages, based on the remuneration illegally
offered, paid, received or solicited) and exclusion from Medicare, Medicaid and
certain other state and federal health care programs. The scope of prohibited
payments in the Anti-Kickback Law is broad and includes economic arrangements
involving hospitals, physicians and other health care providers, including joint
ventures, space and equipment rentals, purchases of physician practices and
management and personal services contracts. HHS has published regulations which
describe certain "safe harbor" arrangements that will not be deemed to
constitute violations of the Anti-Kickback Law. The safe harbors described in
the regulations are narrow and do not cover a wide range of economic
relationships which many hospitals, physicians and other health care providers
consider to be legitimate business arrangements not prohibited by the statute.
Because the regulations describe safe harbors and do not purport to describe
comprehensively all lawful or unlawful economic arrangements or other
relationships between health care providers and referral sources, health care
providers having these arrangements or relationships may be required to alter
them in order to ensure compliance with the Anti-Kickback Law.
We believe that our contracts with providers, physicians and other
referral sources are in material compliance with the Anti-Kickback Law and will
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make every effort to comply with the Anti-Kickback Law. However, in light of the
narrowness of the safe harbor regulations and the scarcity of case law
interpreting the Anti-Kickback Law, there can be no assurances that we will not
be alleged to have violated the Anti-Kickback Law, and if an adverse
determination is reached, whether any sanction imposed would have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
The Office of the Inspector General of the Department of HHS, the
Department of Justice and other federal agencies interpret these fraud and abuse
provisions liberally and enforce them aggressively. Members of Congress have
proposed legislation that would significantly expand the federal government's
involvement in curtailing fraud and abuse and increase the monetary penalties
for violation of these provisions. In addition, some states restrict certain
business relationships between physicians and other providers of health care
services.
The federal government, private insurers and various state enforcement
agencies have increased their scrutiny of provider business practices and
claims, particularly in the areas of home health care and durable medical
equipment in an effort to identify and prosecute parties engaged in fraudulent
and abusive practices. In May 1995, the Clinton Administration instituted
Operation Restore Trust ("ORT"), a health care fraud and abuse initiative
focusing on nursing homes, home health care agencies and durable medical
equipment companies. ORT, which initially focused on companies located in
California, Florida, Illinois, New York and Texas, the states with the largest
Medicare populations, has been expanded to all 50 states. While we believe that
we are in material compliance with such laws, there can be no assurance that our
practices, if reviewed, would be found to be in full compliance with such laws,
as such laws ultimately may be interpreted. It is our policy to monitor our
compliance with such laws and to take appropriate actions to ensure such
compliance.
STATE FRAUD AND ABUSE REGULATIONS. Various States also have
anti-kickback laws applicable to licensed healthcare professionals and other
providers and, in some instances, applicable to any person engaged in the
proscribed conduct. For example, Florida enacted "The Patient Brokering Act"
which imposes criminal penalties, including jail terms and fines, for receiving
or paying any commission, bonus, rebate, kickback, or bribe, directly or
indirectly in cash or in kind, or engage in any split-fee arrangement, in any
form whatsoever, to induce the referral of patients or patronage from a
healthcare provider or healthcare facility.
We believe that our contracts with providers, physicians and other
referral sources are in material compliance with the State laws and will make
every effort to comply with the State laws. However, there can be no assurances
that we will not be alleged to have violated the State laws, and if an adverse
determination is reached, whether any sanction imposed would have a material
adverse effect on our financial condition, results of operations or cash flows.
RESTRICTIONS ON PHYSICIAN REFERRALS. The federal Anti-Self Referral Law
(the "Stark Law") prohibits certain patient referrals by interested physicians.
Specifically, the Stark Law prohibits a physician, or an immediate family
member, who has a financial relationship with an entity, from referring Medicare
or Medicaid patients with limited exceptions, to that entity for the following
"designated health services", clinical laboratory services, physical therapy
services, occupational therapy services, radiology or other diagnostic services,
durable medical equipment and supplies, radiation therapy services and supplies,
parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics
and prosthetic devices, home health services, outpatient prescription drugs, and
inpatient and outpatient hospital services. A financial relationship is defined
to include an ownership or investment in, or a compensation relationship with,
an entity. The Stark Law also prohibits an entity receiving a prohibited
referral from billing the Medicare or Medicaid programs for any services
rendered to a patient. The Stark Law contains certain exceptions that protect
parties from liability if the parties comply with all of the requirements of the
applicable exception. The sanctions under the Stark Law include denial and
refund of payments, civil monetary penalties and exclusions from the Medicare
and Medicaid programs.
HHS has proposed regulations further implementing and interpreting the
Stark Law. If adopted as final these regulations will impact the interpretation
and application of the Stark Law. We are unable to predict the manner in which
those regulations could impact our current compliance with the Stark Law.
We believe that we are presently in material compliance with the Stark
Law and will make every effort to comply with the Stark Law. However, in light
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of the lack of regulatory guidance and the scarcity of case law interpreting the
Stark Law, there can be no assurances that we will not be alleged to have
violated the Stark Law, and if an adverse determination is reached, whether any
sanction imposed would have a material adverse effect on our results of
operations, financial condition or cash flows.
CORPORATE PRACTICE OF MEDICINE DOCTRINE. Many states prohibit business
corporations from providing, or holding themselves out as a provider of medical
care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs (including Medicare and Medicaid), asset forfeitures and
civil and criminal penalties. These laws vary from state to state, are often
vague and loosely interpreted by the courts and regulatory agencies. We
currently operate only in Florida, which currently does not have a corporate
practice of medicine doctrine with respect to the types of physicians employed
with us. There, however, can be no assurance that such laws will not change or
ultimately be interpreted in a manner inconsistent with our practices, and an
adverse interpretation could have a material adverse effect on our results of
operations, financial condition or cash flows.
CERTIFICATES OF NEED AND CERTIFICATES OF EXEMPTION. Many states,
including the state in which we operate, have procedures for the orderly and
economical development of health care facilities, the avoidance of unnecessary
duplication of such facilities and the promotion of planning for development of
such facilities. Such states require health care facilities to obtain
Certificates of Need ("CONs") or Certificates of Exemption ("COEs") before
initiating projects in excess of a certain threshold for the acquisition of
major medical equipment or other capital expenditures; changing the scope or
operation of a health care facility; establishing or discontinuing a health care
service or facility; increasing, decreasing or redistributing bed capacity;
and/or changing of ownership of a health care facility, among others. Possible
sanctions for violation of any of these statutes and regulations include loss of
licensure or eligibility to participate in reimbursement programs and other
penalties. These laws vary from state to state and are generally administered by
the respective state department of health. We seek to structure our business
operations in compliance with these laws and has sought guidance as to the
interpretation of such laws and the procurement of required CONs and/or COEs.
There can be no assurance, however, that we or any of our client hospitals, or
HHAs will be able to obtain required CONs and/or COEs in the future.
HEALTHCARE REFORM. Federal and state governments have recently focused
significant attention on healthcare reform intended to control healthcare costs
and to improve access to medical services for uninsured individuals. These
proposals include cutbacks to the Medicare and Medicaid programs and steps to
permit greater flexibility in the administration of Medicaid. It is uncertain at
this time what legislation on healthcare reform may ultimately be enacted or
whether other changes in the administration or interpretation of governmental
healthcare programs will occur. There can be no assurance that future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have a material adverse effect on our
business, financial condition or results of operations.
EMPLOYEES
At June 30, 2000, we employed or contracted with approximately 480
individuals of whom approximately 115 are IPA and staff model physicians. We do
not have any collective bargaining agreements with any unions and believe that
our overall relations with our employees are good.
In September 1999, our Executive Vice President and General Counsel
resigned. Although we have not appointed a new Executive Vice President, one of
our non-executive employees was appointed as the general counsel.
In November 1999, Charles M. Fernandez resigned as our President and
Chief Executive Officer and Spencer J. Angel was appointed as President and
Chief Executive Officer.
During Fiscal 1999, our Chief Financial Officer resigned. In January
2000, Janet L. Holt was appointed as our Chief Financial Officer.
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INSURANCE
We carry general liability, comprehensive property damage, medical
malpractice, workers' compensation, stop-loss and other insurance coverages that
management considers adequate for the protection of our assets and operations.
There can be no assurance, however, that the coverage limits of such policies
will be adequate. A successful claim against us in excess of our insurance
coverage could have a material adverse effect on us.
SEASONALITY
All of our net revenues in Fiscal 2000 were derived from our operations
in Florida. Florida has historically been a transient state with the transient
factor being directly related to seasonal climate changes. It is anticipated
that in Fiscal 2001 all of our net revenue will also be derived from our
operations in Florida. While there are some seasonal fluctuations in our
business, management does not believe that seasonality will play an adverse role
in the our future operations.
ITEM 2. PROPERTIES
We lease approximately 10,000 square feet of space for our corporate
offices in Miami, Florida under a lease expiring in September 2004 with average
annual base lease payments of approximately $200,000. Of the seventeen staff
model clinics that we operated as of June 30, 2000, four are leased from
independent landlords and the other thirteen clinics are leased from Humana. The
thirteen wholly-owned Humana centers are leased on a month to month basis and
these leases are not tied to our managed care arrangement with Humana. As a
month to month tenant, we have limited tenancy rights. These month-to-month
lease arrangements can be cancelled at the option of Humana, without cause, on
30 days written notice. A termination of one or all of the Humana leases could
have an adverse effect on Continucare because we would, on 30 days written
notice, be forced to find replacement facilities at which to provide medical
services to our members. If we were unable to find adequate replacement
facilities, then we could experience a disenrollment of our members.
ITEM 3. 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.
The case of MANAGED HEALTHCARE SYSTEMS ("MHS") V. CONTINUCARE
CORPORATION & CONTINUCARE HOME HEALTH SERVICES, INC. ("CHHS") was filed in the
Commonwealth of Massachusetts in August, 1998. The complaint alleged breach of
contract for alleged verbal representations by CHHS in negotiations to acquire
MHS and sought damages in excess of $2,750,000 and treble damages. The case was
settled in July, 2000 with no admission of liability. The parties exchanged
general releases.
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
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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, 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 is set for trial in
September, 2000, but it is likely to be postponed to the court's next trial
period. We believe the action has little merit and intend to vigorously defend
the claims.
We are 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, 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. We believe we have meritorious defenses and intend to
vigorously pursue them.
In connection with the Business Rationalization Program, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of Fiscal 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET PRICE
The principal U.S. market in which our common stock is traded is the
American Stock Exchange ("AMEX") (symbol: CNU). The following table shows the
high and low sales prices as reported on AMEX for our common stock for the
periods indicated below. These quotations have been obtained from AMEX.
PRICE PERIOD HIGH LOW
------------ ---- ---
Fiscal Year 1999
First Quarter $ 5.25 $ 2.38
Second Quarter 2.87 1.56
Third Quarter 2.00 .44
Fourth Quarter .75 .19
Fiscal Year 2000
First Quarter $ 1.31 $ .31
Second Quarter 1.06 .38
Third Quarter 1.50 .63
Fourth Quarter 1.06 .50
As of September 20, 2000, there were 120 holders of record of our
common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock
and have no present intention to declare or pay cash dividends on our common
stock in the foreseeable future. We intend to retain earnings, if any, which we
may realize in the foreseeable future, to finance our operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The payment of future cash dividends on our common stock will be at
the discretion of our board of directors and will depend on a number of factors,
including future earnings, capital requirements, the financial condition and
prospects of the Company and any restrictions under credit agreements existing
from time to time. There can be no assurance that we will pay any cash dividends
on the Common Stock in the future.
ISSUANCE OF SECURITIES
In connection with the Restructuring, we issued 15,499,999 shares of
common stock to the noteholders, pursuant to the terms of the First Supplemental
Indenture, dated December 9, 2000 and 3,000,000 shares to the guarantors of our
new credit facility. The shares were issued on February 15, 2000 pursuant to an
exemption under Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is our selected historical consolidated financial data
for the four fiscal years ended June 30, 2000 and the period from February 12,
1996 (inception) to June 30, 1996.
The selected historical consolidated financial data for the three
fiscal years ended June 30, 2000, 1999 and 1998, are derived from our audited
consolidated financial statements included herein. The selected historical
consolidated financial data should be read in conjunction with our consolidated
financial statements and related notes included elsewhere herein.
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SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FEBRUARY 12,
1996
FOR THE YEAR ENDED JUNE 30, (INCEPTION)
-------------------------------------------------------------- TO JUNE 30,
2000 1999 1998 1997 1996
------------- ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Medical services revenue, net ...... $ 116,582,895 $ 182,526,752 $ 65,584,293 $ 13,916,385 $ 2,507,063
Expenses
Medical services .................. 97,623,502 163,237,820 54,695,446 4,493,195 542,000
Payroll and employee benefits ..... 5,687,030 13,797,555 5,714,653 1,855,000 431,412
Provision for bad debts ........... -- 6,196,384 5,778,216 1,818,293 242,664
Professional fees ................. 895,716 1,886,661 1,637,957 1,450,790 203,625
General and administrative ........ 5,777,317 10,198,385 8,435,001 1,176,516 54,430
Writedown of long-lived assets .... -- 11,717,073 -- -- --
Loss on disposal of subsidiaries .. -- 15,361,292 -- -- --
Depreciation and amortization ..... 2,918,534 5,791,982 3,247,717 208,936 362
------------- ------------- ------------ ------------ -----------
Subtotal ........................ 112,902,099 228,187,152 79,508,990 11,002,730 1,474,493
------------- ------------- ------------ ------------ -----------
Income (loss) from operations ........ 3,680,796 (45,660,400) (13,924,697) 2,913,655 1,032,570
Other income (expense)
Interest income .................... 43,147 138,963 932,397 165,253 --
Interest expense-convertible
subordinated notes ............... (2,054,710) (3,639,433) (2,453,333) -- --
Interest expense-other ............. (1,182,794) (1,505,779) (553,998) (162,235) (23,204)
Income applicable to minority
interest ......................... -- -- -- -- (32,686)
Other .............................. 383,623 24,906 107,696 (9,081) --
------------- ------------- ------------ ------------ -----------
Income (loss) before income taxes and
extraordinary items ................ 870,062 (50,641,743) (15,891,935) 2,907,592 976,680
(Benefit) provision for income taxes . -- -- (909,000) 1,200,917 332,071
------------- ------------- ------------ ------------ -----------
Income (loss) before extraordinary
items .............................. 870,062 (50,641,743) (14,982,935) 1,706,675 644,609
Extraordinary gain on
extinguishment of debt ......... 13,247,907 130,977 -- -- --
------------- ------------- ------------ ------------ -----------
Net income (loss) .................... $ 14,117,969 $ (50,510,766) $(14,982,935) $ 1,706,675 $ 644,609
============= ============= ============ ============ ===========
Basic and diluted income (loss) from
continuing operations per common
share .............................. $ .04 $ (3.50) $ (1.20) $ .16 $ .10
Cash dividends declared .............. $ -- $ -- $ -- $ -- $ --
FINANCIAL POSITION
Total assets ......................... $ 27,545,180 $ 30,419,978 $ 69,486,105 $ 19,851,309 $ 2,864,896
============= ============= ============ ============ ===========
Long-term obligations, including
current portion .................... $ 19,269,246 $ 53,490,787 $ 47,675,061 $ 3,367,106 $ 655,000
============= ============= ============ ============ ===========
</TABLE>
24
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
We are a provider of outpatient healthcare services in Florida. We
provide healthcare services through our network of staff model clinics, IPA and
Home Health Agencies. As a result of our ability to provide quality healthcare
services through seventeen staff model clinics, approximately 81 IPA associated
physicians and two Home Health divisions, we have become a preferred healthcare
provider in Florida to some of the nation's largest managed care organizations,
including: (i) Humana for which, as of June 30, 2000, we managed the care for
approximately 14,300 patients on a capitated basis; and (ii) Foundation, for
which, as of June 30, 2000, we managed the care for approximately 7,300 patients
on a capitated basis.
Certain statements included herein which are not statements of
historical fact are intended to be, and are hereby identified as,
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Without limiting the foregoing, the words
"believe," "anticipate," "plan," "expect," "estimate," "intend" and other
similar expressions are intended to identify forward-looking statements. We
caution readers that forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievement expressed or implied by such forward-looking statements. Such
factors include, among others, 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.
25
<PAGE> 27
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
in this annual report. The following tables set forth, for the periods
indicated, the percentage of total revenues represented by certain items in our
Consolidated Statements of Operations.
<TABLE>
<CAPTION>
PERCENT OF REVENUE FOR JUNE 30,
---------------------------------
2000 1999 1998
---- ----- -----
<S> <C> <C> <C>
Medical services revenue, net ................. 100.0% 100.0% 100.0%
Expenses
Medical services ............................ 83.7 89.4 83.4
Payroll and employee benefits ............... 4.9 7.6 8.7
Provision for bad debts ..................... -- 3.4 8.8
Professional fees ........................... 0.8 1.0 2.5
General and administrative .................. 5.0 5.6 12.8
Write down of long-lived assets ............. -- 6.4 --
Loss on disposal of subsidiaries ............ -- 8.5 --
Depreciation and amortization ............... 2.5 3.2 5.0
---- ----- -----
Subtotal .................................. 96.9 125.1 121.2
Income (loss) from operations .................... 3.1 (25.1) (21.2)
Other income (expense)
Interest income ............................... 0.1 0.1 1.4
Interest expense-convertible subordinated notes (1.8) (2.0) (3.7)
Interest expense-other ........................ (1.0) (0.8) (0.9)
Other ......................................... 0.3 -- .2
---- ----- -----
Income (loss) before income taxes and
extraordinary items ........................... 0.7 (27.8) (24.2)
Benefit for income taxes ......................... -- 0.0 (1.4)
---- ----- -----
Income (loss) before extraordinary items ......... 0.7 (27.8) (22.8)
---- ----- -----
Extraordinary gain on extinguishment of debt ..... 11.4 0.1 --
---- ----- -----
Net income (loss) ................................ 12.1% (27.7)% (22.8)%
==== ===== =====
</TABLE>
26
<PAGE> 28
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO OUR OPERATIONS FOR THE FISCAL
YEAR ENDED JUNE 30, 2000 AS COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1999.
REVENUE
Medical services revenues for Fiscal 2000 decreased 36.1% to
approximately $116,583,000 from approximately $182,527,000 in Fiscal 1999.
During Fiscal 2000 we significantly reduced the number of physician practices in
our IPA subsidiary and we were no longer at risk for the commercial members of
our IPA physicians which contributed approximately $11,000,000 of revenue during
Fiscal 1999. IPA Medicare member months have decreased approximately 61% from
approximately 128,000 member months during Fiscal 1999 to 50,000 member months
during Fiscal 2000. IPA Medicare member months contributed approximately
$27,000,000 and $58,000,000 during Fiscal 2000 and 1999, respectively.
During Fiscal 1999, we disposed of certain underperforming assets and
subsidiaries (the "Rationalized Entities"). During Fiscal 1999, medical services
revenue from the Rationalized Entities was approximately $22,164,000.
As a result of the rationalization of the non-managed care entities,
the revenue generated by our managed care entities under our contracts with
HMO's amounted to 96% and 85% of medical services revenues for Fiscal 2000 and
1999, respectively. Revenue generated by the Humana contract was 57% and 34% of
medical services revenue for Fiscal 2000 and 1999, respectively. Revenue
generated by the Foundation contract was 39% and 51% of medical services revenue
for Fiscal 2000 and 1999, respectively.
Revenue received under fee for service arrangements, which require us
to assume the financial risks relating to payor mix and reimbursement rates,
accounted for approximately 14.8% of medical services revenue for Fiscal 1999,
including approximately 3.1% derived from our home health agencies. For Fiscal
2000, approximately 4.4% of medical services revenues was derived from the home
health agencies. The contribution from other sources of fee for service revenue
for Fiscal 2000 was insignificant, primarily as a result of our Business
Rationalization Program and the divestiture of our Diagnostic Imaging and
Physician Practice Subsidiaries.
Medicare and Medicaid, as a percentage of our medical service revenue,
decreased from 6.4% to 4.3% of medical services revenue for Fiscal 1999 and
2000, respectively. This decrease was primarily attributable to the respective
sale and closing of our Outpatient Rehabilitation and Physician Practice
Subsidiaries.
EXPENSES
Medical services expenses in Fiscal 2000 were approximately $97,624,000
or 83.7% of medical services revenue, compared to approximately $163,238,000 or
89.4% of medical services revenue for Fiscal 1999. The percentage decrease is
primarily due to tighter operating controls and the disposal of the Rationalized
Entities. During Fiscal 1999, medical services expenses for the Rationalized
Entities were approximately $14,389,000. Medical services expenses of our IPA
decreased from approximately $80,249,000 to approximately $26,137,000 as a
result of the decrease in IPA members for which we are at risk. In addition,
effective December 31, 1999, we amended our IPA contract with Foundation which
reduced our prior medical claims and long-term debt liabilities to Foundation
for prior medical claims by approximately $3,054,000, resulting in a
corresponding decrease in medical services expense (See Note 7 of the Company's
Consolidated Financial Statements).
Medical claims represent the cost 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. Medical claims expense was
approximately $82,480,000 and $117,826,000 for Fiscal 2000 and 1999,
respectively, or 74% and 76% of medical service revenues derived from our
managed care entities.
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
27
<PAGE> 29
costs were approximately $18,197,000 and $45,412,000 during Fiscal 2000 and
1999, respectively, or 15.6% and 24.9% of medical services revenues. Of the
other direct costs incurred during Fiscal 1999, approximately $14,389,000, or 8%
of medical services revenue, was from the Rationalized Entities.
Payroll and employee benefits for administrative personnel was
approximately $5,687,000 during Fiscal 2000, or 4.9% of revenues, compared to
approximately $13,798,000 or 7.6% of revenues during Fiscal 1999. The decrease
in these costs as a percentage of revenues is primarily due to the reduction in
the number of employees as a result of the Rationalization Program. Payroll and
employee benefits for the Rationalized Entities was approximately $4,497,000
during Fiscal 1999.
General and administrative expenses for Fiscal 2000 were approximately
$5,777,000 or 5.0% of revenues compared to approximately $10,198,000 or 5.6% of
revenues for Fiscal 1999. The decrease in general and administrative expense as
a percent of revenues resulted from a reduction of overhead costs as part of our
Business Rationalization Program. In Fiscal 1999, general and administrative
expenses from the Rationalized Entities was approximately $4,428,000.
Amortization expense of intangible assets was approximately $2,429,000
for Fiscal 2000, as compared to approximately $4,162,000 for Fiscal 1999.
Approximately $762,000 of amortization expense in Fiscal 1999 was related to the
Rationalized Entities. Additionally, in Fiscal 1999, we determined that
approximately $11,717,000 of other intangible assets were impaired and,
accordingly, wrote off the impaired assets. Amortization expense related to
these impaired assets which was included in Fiscal 1999 was approximately
$993,000. We determined that there was no impairment to our intangible assets
during Fiscal 2000.
Bad debt expense for Fiscal 1999 was related to certain of the
Rationalized Entities which generated revenues primarily through fee-for-service
billings to third party payors and individual patients. The absence of bad debt
expense for Fiscal 2000 is directly attributable to the increase in the
percentage of revenue received under our HMO contracts, for which bad debt
expense is nominal.
INCOME (LOSS) FROM OPERATIONS
Income from operations for Fiscal 2000 was approximately $3,681,000 or
3.2% of total revenue, compared to an operating loss of approximately
$45,660,000 or 25.0% of total revenues for Fiscal 1999. The operating loss of
the Rationalized Entities for Fiscal 1999 was approximately $22,850,000.
INTEREST EXPENSE
Interest expense for Fiscal 2000 was approximately $3,238,000 as
compared to approximately $5,145,000 in Fiscal 1999. Interest expense recorded
in Fiscal 2000 on the Notes prior to the Restructuring of the Notes was
approximately $2,055,000. Although the interest on the Notes was forgiven as
part of the Restructuring, in accordance with Statement of Financial Accounting
Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings," ("FASB No. 15"), instead of reversing the interest expense, the
forgiveness of interest is reflected in the extraordinary gain (see
Extraordinary Gain below). Also in accordance with FASB No. 15, all interest
accruing at 7% on the remaining $10,000,000 from November 1, 1999 until the
Notes' maturity has been capitalized into the balance of the outstanding Notes.
Therefore, we have not, and will not in the future, recorded interest expense on
the Notes subsequent to the Restructuring. Interest expense recorded in Fiscal
1999 on the Notes was approximately $3,639,000. The remaining interest expense
relates to the other long term debt outstanding during the year and amortization
of deferred financing costs. (See Note 7 of the Company's Consolidated Financial
Statements.)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
In August, 1999, we recorded an extraordinary gain on extinguishment of
debt of approximately $130,000 as a result of repurchasing $1,000,000 of our
Notes for a cash payment of approximately $700,000 and the write-off of related
deferred financing costs and accrued interest payable.
28
<PAGE> 30
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
Notes for 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 we will be able to utilize certain of our
net operating loss carryforwards to offset any income tax liability related to
the transaction.
On February 15, 2000, we recorded an extraordinary gain on
extinguishment of debt of approximately $9,472,000 as a result of the
Restructuring of our Notes, net of restructuring costs. The gain resulted
primarily from the conversion of $31,000,000 of the outstanding principal
balance into 15,500,000 shares of common stock, which were valued at
approximately $21,312,500 based on the closing price of our stock on February
15, 2000, the forgiveness of approximately $4,237,000 of accrued interest
payable, the write-off of approximately $1,929,000 of unamortized deferred
financing costs and the recording of $2,100,000 of interest which will accrue on
the remaining balance of the Notes under the revised terms of the agreement
through the maturity date of October 31, 2002. We have not provided for income
taxes on the gain because we believe we will be able to utilize certain of our
net operating loss carryforwards to offset any income tax liability related to
the restructuring transaction.
NET INCOME (LOSS)
Net income for Fiscal 2000 was approximately $14,118,000 compared to a
net loss of approximately $50,511,000 for Fiscal 1999.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO OUR OPERATIONS FOR THE FISCAL
YEAR ENDED JUNE 30, 1999 AS COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1998.
REVENUE
Total revenues for Fiscal 1999 increased 178% to approximately
$182,527,000 from approximately $65,584,000 in Fiscal 1998.
During Fiscal 1999 we disposed of certain underperforming assets and
subsidiaries. During Fiscal 1999 and 1998 total revenue from these Rationalized
Entities was approximately $22,164,000 and $19,581,000 respectively. The net
patient service revenue of the Diagnostic Division for the period from July 1,
1998 until the date of sale was approximately $1,900,000 and the net operating
loss was approximately $2,000,000 before recording the loss on sale. Net patient
revenues from the Rehabilitation Management Division from July 1, 1998 until the
date of sale were approximately $13,272,000, and the net operating loss was
approximately $2,053,000 before recording the loss on the sale. The net patient
service revenue of the Physician Practice Management Division for the period
from July 1, 1998 until the date of sale was approximately $6,096,000 and the
net operating loss was approximately $2,133,000.
Revenue received under our contracts with HMO's amounted to 85% and 57%
of medical services revenues in Fiscal 1999 and 1998, respectively. During
Fiscal 1998, we provided managed care services for approximately 120,000 member
months (members per month multiplied by the months for which services were
available), which resulted in approximately $35,500,000 in revenue. During
Fiscal 1999, the number of member months increased to approximately 625,000,
which resulted in approximately $154,700,000 in revenue. The increase in member
months was due in part to the August 1998 acquisition of the Caremed, Inc.
contracts which produced revenue of approximately $22,000,000. The remaining
increase in managed care revenue was due to the expansion of the managed care
physician network and patient base.
In the second half of Fiscal 1999 we began to reduce the number of
physician practices in our IPA subsidiary and in Fiscal 2000 will no longer be
at risk for the commercial members of our remaining IPA physicians. IPA
commercial member months contributed approximately $11,000,000 of revenue during
Fiscal 1999. IPA Medicare member months contributed approximately $58,000,000 of
revenue during Fiscal 1999.
Revenue received under fee for service arrangements which require us to
assume the financial risks relating to payor mix and reimbursement rates
29
<PAGE> 31
accounted for 14.8% and 33% of revenue in Fiscal 1999 and 1998, respectively.
The percentage decrease in the fee for service revenue was primarily a result of
the Business Rationalization Program, the divestiture of the Specialty Physician
Practices and Rehabilitation and Diagnostic divisions and the increase in our
managed care revenue.
Medicare and Medicaid, as a percentage of our medical service revenue,
decreased from 22.2% to 6.4% of medical services revenue for Fiscal 1998 and
1999, respectively. This decrease was primarily attributable to the respective
sale and closing of the Outpatient Rehabilitation and Physician Practice
Subsidiaries and the increase in the number of doctors in the IPA .
EXPENSES
Medical services expenses in Fiscal 1999 were approximately
$163,238,000 or 89.4% of medical services revenue, compared to approximately
$54,695,000 or 83.4% of medical services revenue for Fiscal 1998. Medical
services expenses of our IPA increased from approximately $14,224,000 to
approximately $80,249,000 as a result of acquisitions which occurred in Fiscal
1998. During Fiscal 1999 and Fiscal 1998, medical services expenses for the
Rationalized Entities were approximately $14,389,000 and $10,334,000,
respectively.
Medical claims represent the cost 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
$117,826,000 and $30,027,000 for Fiscal 1999 and 1998, respectively, or 76% and
84% of medical service revenues derived from our managed care entities. The
decrease in medical claims as a percentage of medical services revenue was
primarily due to a renegotiating of the terms of the managed care agreements
during Fiscal 1998.
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 $45,412,000 and $24,668,000 during Fiscal 1999 and
1998, respectively, or 24.9% and 37.6% of medical services revenues. The
increase in other direct costs is due primarily to the acquisitions which
occurred in Fiscal 1998.
Payroll and employee benefits for administrative personnel was
approximately $13,798,000 during Fiscal 1999, or 7.6% of revenues, compared to
approximately $5,715,000 or 8.7% of revenues during Fiscal 1998. The decrease in
these costs as a percentage of revenues is primarily due to the acquisitions
which occurred in Fiscal 1998. Payroll and employee benefits for the
Rationalized Entities was approximately $4,497,000 and $5,264,000 during Fiscal
1999 and 1998, respectively.
General and administrative expenses for Fiscal 1999 were approximately
$10,198,000 or 5.6% of revenues compared to approximately $8,435,000 or 12.9% of
revenues for Fiscal 1998. The decrease in general and administrative expense as
a percent of revenues is primarily due to the acquisitions which occurred in
Fiscal 1998. General and administrative expenses from the Rationalized Entities
was approximately $4,428,000 and $4,042,000, respectively.
Amortization expense of intangible assets was approximately $4,162,000
for Fiscal 1999, as compared to approximately $2,279,000 for Fiscal 1998. In
Fiscal 1999, we determined that approximately $11,717,000 of other intangible
assets were impaired and, accordingly, wrote off the impaired assets.
Amortization expense related to these impaired assets which was included in
Fiscal 1999 was approximately $993,000. A similar write off of impaired
intangible assets was determined to not be necessary in Fiscal 1998.
The provision for bad debts includes approximately $1,500,000 and
$4,800,000 related to notes receivable in Fiscal 1999 and 1998, respectively. In
the first quarter of Fiscal 1998, we assigned the accounts receivable related to
our behavioral health programs and assigned our behavioral health management
contracts to third parties in exchange for notes receivable in the aggregate
amount of $7,800,000. During Fiscal 1999, we stopped receiving payments and
fully reserved the outstanding balances of the notes receivable at June 30,
1999. We increased our reserve on these notes for the remaining balance of the
notes of approximately $1.5 million because, despite the issuance of demand
notices to seek reimbursement, we were unsuccessful in our collection efforts.
30
<PAGE> 32
In addition, although we had received partial payments on these notes during
Fiscal 1998, we received payments of only $104,000 on one of these notes during
Fiscal 1999. Excluding amounts related to notes receivable, bad debt expense was
2.5% of total revenue in Fiscal 1999 versus 1.5% for Fiscal 1998. This increase
is a direct result of the adverse business operations which we experienced
during Fiscal 1999. As a result of the Business Rationalization Program, the
operating divisions which previously generated a significant portion of the
accounts receivable balance, Specialty Physician Practice and Diagnostic
Divisions, were rationalized in Fiscal 1999. The rationalization of these two
divisions greatly impeded our ability to successfully collect the outstanding
receivables. Accordingly, a significant increase in the allowance for doubtful
accounts related to the accounts receivable was necessary.
LOSS FROM OPERATIONS
Loss from operations for Fiscal 1999 was approximately $45,660,000 or
25.0% of total revenue, compared to an operating loss of approximately
$13,925,000 or 21.2% of total revenues for Fiscal 1998. Excluding the
approximately $11,717,000 write down of long-lived assets and the approximately
$15,361,000 loss on disposal of subsidiaries, the Fiscal 1999 operating loss was
approximately $18,582,000 or 10.2% of total revenue. Operating loss excluding
the write down of long-lived assets and loss on disposal of subsidiaries
declined as a percentage of revenue due to the implementation of the Business
Rationalization Program, including the sale of underperforming assets.
INTEREST EXPENSE
Interest expense for Fiscal 1999 was approximately $5,145,000 as
compared to approximately $3,007,000 in Fiscal 1998. Interest expense recorded
in Fiscal 1999 on the convertible subordinated notes payable (the "Notes") was
approximately $3,639,000. Interest expense recorded in Fiscal 1998 on the Notes
was approximately $2,453,000. The remaining interest expense relates to the
other long term debt outstanding during the year and amortization of deferred
financing costs. (See Note 7 of the Company's Consolidated Financial
Statements.)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
In August, 1998, we recorded an extraordinary gain on extinguishment of
debt of approximately $130,000 as a result of repurchasing $1,000,000 of our
outstanding convertible subordinated notes payable (the "Notes") for a cash
payment of approximately $700,000 and the write-off of related deferred
financing costs and accrued interest payable.
NET INCOME (LOSS)
Net loss for Fiscal 1999 was approximately $50,511,000 compared to a
net loss of approximately $14,983,000 for Fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our financial position has changed significantly since June 30, 1999.
Throughout Fiscal 1998 and 1999 we experienced adverse business operations,
recurring operating losses, and negative cash flow from operations, resulting in
a significant working capital deficiency. Furthermore, as discussed below, we
were unable to make certain of our scheduled interest payments. Our operating
difficulties were in large part due to the underperformance of various entities
which were acquired in Fiscal 1999, 1998 and 1997, the inability to effectively
integrate and realize increased profitability through anticipated economies of
scale with these acquisitions, as well as reductions in reimbursement rates
under the Balanced Budget Act of 1997. In order to strengthen itself financially
and remain a going concern, we divested certain unprofitable operations and
disposed of other underperforming assets in Fiscal 1999 and completed a
restructuring of the convertible subordinated notes due 2002 (the "Notes") in
Fiscal 2000 as more fully discussed below.
On July 2, 1999 we purchased $4,000,000 face value of our Notes for
approximately $200,000, recognizing a pre-tax gain on extinguishment of debt of
approximately $3,800,000. We funded the purchase of our Notes from working
capital.
31
<PAGE> 33
On February 15, 2000, we completed the Restructuring of the Notes and
recorded a gain of approximately $9,472,000 as a result of the conversion of
$31,000,000 of Notes into common stock, the forgiveness of approximately
$4,237,000 of accrued interest, the write off of approximately $1,929,000 of
unamortized deferred financing costs and the recording of $2,100,000 of interest
which will accrue on the remaining balance of the Notes under the revised terms
of the agreement through the maturity date of October 31, 2001. The remaining
outstanding principal balance of the Notes of $10,000,000 was reinstated as a
performing non-defaulted loan. Also, see Item 1 "Recent Developments - Debt
Restructuring" and Note 6 of the Company's Consolidated Financial Statements.
In conjunction with the Restructuring, we entered into a credit
facility (the "New Credit Facility"). The New Credit Facility provides a
revolving loan of $3,000,000 which matures March 31, 2001. Interest is payable
monthly at 2.9% plus the 30-day Dealer Commercial Paper Rate which is 6.58% at
June 30, 2000. The New Credit Facility may be renewed annually at the option of
the lender. The New Credit Facility has been guaranteed by a board member and an
entity controlled by a board member. At June 30, 2000, we had not borrowed any
amounts available under the New Credit Facility. See Note 7 of the Company's
Consolidated Financial Statements.
In August 1998, we entered into a credit facility with First Union Bank
that provided for a $5,000,000 Acquisition Facility and a $5,000,000 Revolving
Loan. We had borrowed the entire $5,000,000 Acquisition Facility to fund
acquisitions. We never utilized the Revolving Loan. In April 1999 we used
approximately $4,000,000 of the net proceeds from the sale of certain of our
entities to reduce the outstanding balance on the facility. We amended the
credit facility to provide, among other things, for the repayment of the
remaining outstanding principal balance of approximately $1,000,000 by December
31, 1999. We obtained a waiver which extended the due date of the remaining
balance to February 1, 2000 and repaid the outstanding balance on January 31,
2000.
Effective December 31, 1999, we amended our contract with Foundation
(the "Amendment"). The Amendment reduces our prior medical claims and long-term
debt liabilities to Foundation as of May 31, 1999 to $1,500,000. The Amendment
also requires us to remit to Foundation any reinsurance proceeds received for
claims generated from Foundation members for the period June 1, 1998 through
August 31, 1999 up to a maximum of $1,327,400. As a result of this Amendment, we
recorded a contractual revision of previously recorded medical claims liability
of approximately $3,054,000. This Amendment resulted in the reduction of medical
claims payable by approximately $2,703,000 and the reduction of long-term debt
by approximately $351,000.
Effective October 1, 2000, the Company's HHAs, which primarily provide
services to patients eligible under the Medicare program, will begin to be
reimbursed by Medicare under PPS. During Fiscal 2000, the Company has taken
steps to prepare the HHAs for these changes. However, we are unable to determine
the effect PPS 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. See
"Reimbursement Considerations" and "The Balanced Budget Act of 1997."
We have no current 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 disallowance and other adjustment 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.
Our income before extraordinary gain on extinguishment of debt was
approximately $870,000 for Fiscal 2000. Net cash provided by operations was
approximately $2,008,000 due primarily to the income before extraordinary gain,
non-cash amortization and depreciation expenses of approximately $4,011,000, a
decrease in accounts receivable of approximately $510,000, offset by a decrease
of medical claims payable of approximately $3,839,000 and accounts payable and
accrued expenses of approximately $1,109,000.
Our cash used in financing activities was approximately $2,431,000 for
Fiscal 2000. Approximately $2,100,000 of this amount was used for scheduled
payments for various notes payable.
Our working capital deficit was approximately $4,409,000 at June 30,
2000.
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,
operating cash requirements and satisfy our obligations as they become due from
a combination of cash on hand, expected operating cash flow improvements and the
New Credit Facility. However, there can be no assurances that our cash flows and
profitability will be sufficient to fund our operations and satisfy our
obligations as they become due.
32
<PAGE> 34
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. If we incur or assume 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. However, we are unable to guarantee that the American Stock Exchange
will continue to list our common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
At June 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 New 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
<PAGE> 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The executive officers and directors of Continucare are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Spencer J. Angel................... 34 President, Chief Executive Officer, Chief Operating Officer
and Director
Janet L. Holt...................... 53 Chief Financial Officer
Charles M. Fernandez............... 38 Chairman of the Board
Phillip Frost, M.D................. 64 Vice Chairman of the Board
Robert J. Cresci................... 56 Director
Patrick M. Healy................... 42 Director
</TABLE>
SPENCER J. ANGEL has served as our President and Chief Executive
Officer since the resignation of Mr. Fernandez on November 2, 1999. Prior to
that time he served as our Executive Vice President and Chief Operating Officer
since July 12, 1999, and he served as a member of our board of directors since
September 30, 1999. Mr. Angel has served, since 1996, as director and president
of Harter Financial, Inc., a diversified financial consulting firm. See "Certain
Relationships and Related Transactions." In 1999, Mr. Angel served as president
and chief executive officer of Medical Laser Technologies, Inc., a company that
produces digital x-ray picture archiving and communications systems for cardiac
catheterization labs. He was the secretary, treasurer and director of Autoparts
Warehouse, Inc., an auto parts retail and service company, from September 1997
to January 1999. From December 1994 through August 1996 Mr. Angel was president
of 5 East 41 Check Cashing Corp., a company engaged in the payroll service and
armored car business. From November 1991 to 1994 Mr. Angel was an associate
attorney with Platzer, Fineberg & Swergold, a law firm specializing in corporate
financial reorganizations.
JANET L. HOLT was appointed as our Chief Financial Officer in January
2000. Prior to that time she served as the Vice President of Finance - Managed
Care Division since she joined the Company in July 1999. Prior to joining
Continucare, Ms. Holt served as an audit Senior Manager at Ernst & Young, LLP
since November 1997. From June 1995 to November 1997, Ms. Holt served as the
Internal Auditor for InPhyNet Medical Management, Inc., and she served as an
audit manager with Deloitte & Touche, LLP from 1992 to June 1995.
CHARLES M. FERNANDEZ, our Chairman of the Board, is the president and
chief executive officer and a director of Big City Radio, Inc. a company that
owns and operates a network of radio stations, since November 1999. Mr.
Fernandez co-founded Continucare in February 1996 and served as our Chairman of
the Board, President and Chief Executive Officer from our inception until
November 1, 1999, at which time he resigned as the President and Chief Executive
Officer. From July 1999 until November 1999, Mr. Fernandez served as the
chairman of Hispanic Internet Holdings, Inc., a Spanish online service provider
that was acquired by Big City Radio in 1999. He has also served as the
Vice-Chairman of Healthcare2Net Solutions, an internet solutions company, since
March 30, 2000. Mr. Fernandez has also been a director of IVAX Corporation, a
Florida corporation ("IVAX") since June 1998.
PHILLIP FROST, M.D. has served as our Vice Chairman since September
1996. Dr. Frost has served, since 1987, as chairman of the board and chief
executive officer of IVAX, a pharmaceutical manufacturer. He served as IVAX's
president from July 1991 until January 1995. He was the Chairman of the
Department of Dermatology at Mt. Sinai Medical Center of Greater Miami, Miami
Beach, Florida from 1970 to 1992. Dr. Frost was Chairman of the Board of
34
<PAGE> 36
Directors of Key Pharmaceutical, Inc. from 1972 to 1986. He is chairman of the
board of directors of Whitman Education Group, which is engaged in proprietary
education and a director of Northrup Grumman which is in the aerospace industry.
He is Vice Chairman of the Board of Trustees of the University of Miami and a
member of the Board of Governors of the American Stock Exchange.
ROBERT J. CRESCI has served as one of our directors since February
2000. He has been a Managing Director of Pecks Management Partners Ltd., an
investment management firm, since 1990. Mr. Cresci currently serves on the
boards of Sepracor, Inc., Aviva Petroleum Ltd., Film Roman, Inc., Castle Dental
Centers, Inc., Candlewood Hotel Co., SeraCare Inc., JFax.com, Inc., E-Stamp
Corporation and several private companies.
PATRICK M. HEALY has served as one of our directors since February
2000. He has served as president and chief administrative officer and as a
member of the board of directors for Mayo Health Plan, Inc. since its inception
in June 1996. Previously, Mr. Healy was president and chief executive officer
and member of the board of directors for Cleveland Clinic Florida Health Plan
from its inception in 1992 through 1996. Mr. Healy also served as a regional
director of operations-southeast region and executive director Florida/Caribbean
for The Travelers Insurance Company from 1990 through 1992.
Officers serve at the pleasure of the board of directors, subject to
the terms of any employment agreements. See "-Employment Agreements."
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers and persons who own more than ten percent of
our outstanding common stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of common stock. Such persons are required by SEC regulation to
furnish us with copies of all such reports they file.
To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required, all Section 16(a) filing requirements applicable to our officers,
directors and greater than ten percent beneficial owners have been satisfied.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth certain summary information concerning
compensation paid or accrued by us to or on behalf of (i) our chief executive
officer, and (ii) the most highly compensated executive officers who were
serving as an executive officer at the end of the last fiscal year, whose total
annual salary and bonus, determined as of the end of the fiscal year ended June
30, 2000, exceeded $100,000, (hereinafter referred to as the named executive
officers).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- -------------------
NAME AND FISCAL OTHER ANNUAL NO. OF SECURITIES ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION UNDERLYING OPTIONS COMPENSATION
------------------ ---- ---------- --------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Spencer Angel,................... 2000 207,867 0 (1) 0 0
President and Chief Executive
Officer
Charles M. Fernandez,............ 2000 139,891(2) 0 (1) 0 25,000(3)
Chairman of the Board, former 1999 352,782 15,000 (1) 0 0
President and Chief Executive 1998 334,547 0 (1) 100,000 0
Officer
Janet Holt,...................... 2000 83,077 20,000 (1) 0 0
Chief Financial Officer
</TABLE>
35
<PAGE> 37
-------------------
(1) The total perquisites and other personal benefits provided is less than 10%
of the total annual salary and bonus to such officer.
(2) Represents salary earned as President and Chief Executive Officer through
November 1, 1999.
(3) Reflects payments for services rendered as Chairman of the Board of
Directors. See also "Certain Relationships and Related Transactions."
OPTION GRANTS DURING FISCAL 2000
We did not grant any stock options to any of the named executive
officers during Fiscal 2000. In addition, there were no stock appreciation
rights granted in Fiscal 2000.
OPTION EXERCISES IN 2000 AND YEAR END OPTION VALUES
The following table sets forth information with respect to (i) the
number of unexercised options held by the named executive officers as of June
30, 2000, and (ii) the value as of June 30, 2000 of unexercised in-the-money
options. No options were exercised by any of the named executive officers in
Fiscal 2000.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT JUNE 30, 2000 AT JUNE 30, 2000 ($)(1)
----------------------------------- -----------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles M. Fernandez 135,000 0 0 0
</TABLE>
------------------
(1) Market value of shares covered by in-the-money options on June 30, 2000,
less option exercise price. Options are in-the-money if the market value of
the shares covered thereby is greater than the option exercise price.
DIRECTOR COMPENSATION
Other than the chairman of the board of directors, our directors do not
currently receive any cash compensation for service on the board of directors
but may be reimbursed for certain expenses in connection with attendance at
board of director meetings or other meetings on our behalf. As discussed more
fully below, the chairman of the board of directors is currently receiving an
annual compensation of $50,000 during the term of office. Our directors are
eligible to receive options under our Stock Option Plan. See also "Certain
Relationships and Related Transactions."
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Spencer J. Angel and
Charles M. Fernandez.
Mr. Angel's employment agreement is for a one-year period commencing
July 12, 1999, with additional one-year automatic renewals and provides for an
annual base salary of $250,000. Additionally, he is eligible to receive a bonus
equal to 7% of our earnings before interest, taxes, depreciation and
amortization in excess of $3 million for the fiscal year. The agreement may be
terminated by either party with or without cause upon 60 days notice prior to an
anniversary date of the agreement. Pursuant to the terms of his agreement, Mr.
Angel is prohibited from competing with Continucare for a one year period
following termination of his employment with Continucare. In the event that Mr.
Angel is terminated without cause, Mr. Angel is entitled to his base salary for
the period of one year and any unpaid accrued bonus.
In November 1999, Mr. Fernandez, our Chairman of the Board, resigned
from his position as our president and chief executive officer. Upon his
resignation, his employment agreement was modified to provide for an annual
salary of $50,000, payable during his term as chairman of the board of
directors.
36
<PAGE> 38
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Dr. Philip Frost, chairman of the compensation committee until April
2000, is also a director and executive officer of IVAX Corporation. Mr. Charles
Fernandez, a member of the compensation committee since April 2000, served as
our President and Chief Executive Officer until November 1999. Mr. Fernandez
serves on the board of directors at IVAX Corporation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 20,
2000 concerning the beneficial ownership of the common stock by (i) each person
known by Continucare to be the beneficial owner of more than 5% of the
outstanding common stock, (ii) each of the directors and director nominees who
own our shares, (iii) named executive officers, and (iv) all of our executive
officers and directors as a group. All holders listed below have sole voting
power and investment power over the shares beneficially owned by them, except to
the extent such power may be shared with such person's spouse.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) COMMON STOCK(2)
------------------- ----------------------- ---------------
<S> <C> <C>
Spencer J. Angel.......................... 300,800(3) *
80 S.W. 8th Street
Miami, FL 33131
Charles M. Fernandez...................... 2,179,167(4) 6.5
80 S.W. 8th Street
Miami, FL 33131
Dr. Phillip Frost......................... 5,586,133(5) 16.7
4400 Biscayne Boulevard
Miami, FL 33137
Janet L. Holt............................. 0 0
80 S.W. 8th Street
Miami, FL 33131
Robert Cresci............................. 100,000 (6) 0
c/o Pecks Management Partners, Ltd.
One Rockefeller Plaza
Suite 900
New York, NY 10020
Patrick Healey............................ 100,000(6) *
c/o Mayo Health Plan
4168 South Point Parkway
Suite 102
Jacksonville, FL 32216
Strategic Investment Partners, Ltd........ 2,250,000(7) 6.17
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
Franklin Resources, Inc................... 7,821,188(8) 23.1
777 Mariners Island Boulevard
San Mateo, CA
Pecks Management Partners Ltd............. 5,557,821(9) 16.5
One Rockefeller Plaza
Suite 900
New York, NY 10020
All directors and executive officers
as a group (4 persons)................. 8,008,500 23.6
</TABLE>
37
<PAGE> 39
--------------------
* Less than one percent.
(1) For purposes of this table, beneficial ownership is computed pursuant to
Rule 13d-3 under the Exchange Act; the inclusion of shares as beneficially
owned should not be construed as an admission that such shares are
beneficially owned for purposes of the Exchange Act. Under the rules of the
Securities and Exchange Commission, a person is deemed to be a "beneficial
owner" of a security he or she has or shares the power to vote or direct
the voting of such security or the power to dispose of or direct the
disposition of such security. Accordingly, more than one person may be
deemed to be a beneficial owner of the same security.
(2) Based on 33,240,090 shares outstanding as of September 20, 2000.
(3) Includes (i) 800 shares held by Arkangel, Inc., (ii) 200,000 shares held by
Harter Financial, Inc. and (iii) 100,000 shares of common stock underlying
options that are currently exercisable.
(4) Includes (i) 1,816,667 shares of Common Stock are owned of record by the
Fernandez Family Limited Partnership, (ii) 27,500 shares held directly by
Mr. Fernandez and (iii) 335,000 shares of Common Stock underlying options
granted that are currently exercisable.
(5) Includes (i) 4,971,333 shares owed beneficially through Frost Nevada
Limited Partnership (ii) 414,800 shares owned directly by Dr. Frost and
(iii) 200,000 shares of common stock underlying options granted that are
currently exercisable.
(6) Represents shares of common stock underlying options that are currently
exercisable.
(7) Based on the most recent Schedule 13D/A, the Strategic Investment Partners,
Ltd. is deemed to have sole voting power and each of Quasar Strategic
Partners LDC, Quantum Industrial Partners LLC, QIH Management Investors,
L.P. and QIH Management, Inc., Soros Fund Management, LLC and Mr. George
Soros are deemed to have shared power.
(8) Based on the most recent Schedule 13G/A, these shares are beneficially
owned by one or more open or closed-end investment companies or other
managed accounts which are advised by direct or indirect investment
advisory subsidiaries of Franklin Resources, Inc. Such advisory contracts
grant to such advisor subsidiaries all investment and/or voting power over
such shares owned by such advisory clients. Includes 639,188 shares that
may be issued upon conversion of the Convertible Subordinated Notes due
2002.
(9) Includes 454,163 shares of Common Stock that may be issued upon the
conversion of Convertible Subordinated Notes due 2002. Share information
based on the most recent Schedule 13G.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
In May 1999 we entered into an agreement with Harter Financial, Inc.
("Harter") to assist us with a financial reorganization and to represent us in
negotiating the restructuring of the Notes and a settlement with the
noteholders. As compensation for its services, Harter received an initial fee of
$50,000 on May 18, 1999. On October 18, 1999, the board of directors approved a
final compensation package to be paid to Harter consisting of a cash payment of
$150,000 and the issuance of 200,000 unregistered shares of our common stock,
which were valued at $112,500 based on the closing price of our stock on the
date of grant. Mr. Angel, our president and chief executive officer, is also the
president and a 15% shareholder of Harter. However, as of May 18, 1999, Mr.
Angel was not an officer or director of Continucare.
In connection with the restructuring of the convertible subordinated
notes which occurred in February 2000, we were required to procure a $3,000,000
bank credit facility and to obtain a financially responsible person(s) to
guarantee the bank credit facility. We obtained such a bank credit facility and
obtained guarantees from Dr. Phillip Frost, our vice chairman and from the
Fernandez Family Limited Partnership, a trust controlled by Charles M.
Fernandez. In consideration for providing the guarantees, we issued 500,000
shares of our common stock to Mr. Fernandez and 2,500,000 shares to Dr. Frost.
These shares were valued at $3,375,000 based on the closing price of our stock
on February 11, 2000 when the original guarantees were granted.
38
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
Reference is made to the Index set forth on Page F-1 of this
Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
All schedules have been omitted because they are inapplicable
or the information is provided in the consolidated financial
statements, including the notes hereto.
(a)(3) Exhibits
3.1 Restated Articles of Incorporation of Company,
as amended (3)
3.2 Restated Bylaws of Company (3)
4.1 Form of certificate evidencing shares of Common Stock (3)
4.2 Indenture, dated as of October 30, 1997, between the
Company and American Stock Transfer & Trust Company, as
Trustee, relating to 8% Convertible Subordinated Notes due
2002 (5)
4.3 Registration Rights Agreement, dated as of October 30,
1997, by and between the Company and Loewenbaum & Company
Incorporated (5)
4.4 Continucare Corporation Amended and Restated 1995 Stock
Option Plan (7)
4.5 First Supplemental Indenture dated December 9, 1999 (15)
4.6 Merrill Lynch WCMA Loan and Security Agreement, dated March
9, 2000 (15)
4.7 2000 Employee Stock Option Plan (17)
10.1 Employment Agreement between the Company and Charles M.
Fernandez dated as of September 11, 1996 (2)
10.2 Agreement and Plan of Merger by and among Continucare
Corporation, Zanart Entertainment Incorporated and Zanart
Subsidiary, Inc. dated August 9, 1996 (1)
10.3 Stock Purchase Agreement dated April 10, 1997 by and among
Continucare Corporation, Continucare Physician Practice
Management, Inc., AARDS, Inc. and Sheridan Healthcorp. Inc
(4)
10.4 Stock Purchase Agreement dated April 10, 1997 by and among
Continucare Corporation, Continucare Physician Practice
Management, Inc., Rosenbaum, Weitz & Ritter, Inc. and
Sheridan Healthcorp, Inc (4)
10.5 Stock Purchase Agreement dated April 10, 1997 by and among
Continucare Corporation, Continucare Medical Management,
Inc., Arthritis & Rheumatic Disease Specialties, Inc. and
Sheridan Healthcare, Inc (4)
10.6 Placement Agreement, dated as of October 27, 1997, between
the Company and Loewenbaum & Company Incorporated (5)
10.7 Purchase Agreement, dated as of September 4, 1997, by and
among Continucare Corporation, Continucare Physician
Practice Management, Inc., a wholly owned subsidiary of
Continucare Corporation, DHG Enterprises, Inc. f/k/a
Doctor's Health Group, Inc. and Doctor's Health
Partnership, Inc., both Florida corporations, and Claudio
Alvarez and Yvonne Alvarez (6)
39
<PAGE> 41
10.8 Stock Purchase Agreement, dated as of February 13, 1998, by
and among Continucare Corporation, Continucare
Rehabilitation Services, Inc., Integrated Health Services,
Inc., Rehab Management Systems, Inc., IntegraCare, Inc. and
J.R. Rehab Associates, Inc (8)
10.9 Asset Purchase Agreement, dated as of April 7, 1998, by and
among: (i) SPI Managed Care, Inc., SPI Managed Care of
Hillsborough County, Inc., SPI Managed Care of Broward,
Inc., Broward Managed Care, Inc., each a Florida
corporation; (ii) First Medical Corporation, a Delaware
corporation and First Medical Group, Inc., a Delaware
corporation; and (iii) CNU Acquisition Corporation, a
Florida corporation (9) and (10)
10.10 Asset Purchase Agreement, dated as of August 18, 1998, by
and among: (i) Caremed Health Systems, Inc.; (ii) Caremed
Medical Management, Inc.; Caremed Health Administrators,
Inc., each a Florida corporation; and (iii) Continucare
Managed Care, Inc., a Florida corporation (11)
10.11 Physician Practice Management Participation Agreement
between Continucare Medical Management, Inc., and Humana
Medical Plan, Inc. entered into as of the 1st day of
August, 1998 (17)
10.12 Asset Purchase Agreement, dated April 7, 1999, by and
among: (i) Kessler Rehabilitation of Florida, Inc., a
Florida Corporation; Rehab Management Systems, Inc., a
Florida Corporation; Continucare Occmed Services, Inc., a
Florida Corporation; and Continucare Corporation, a Florida
Corporation (12)
10.13 Employment Agreement dated July 12, 1999 between
Continucare Corporation and Spencer Angel (13)
10.14 Lease Agreement, dated as of the 28th day of July 1999,
between Doral Park Joint Venture, Lennar Mortgage Holdings
Corporation, LNR/CREC Brickell Bayview Limited Partnership,
and Universal American Realty Corporation, as
tenants-in-common, and Continucare Corporation (17)
10.15 First Amendment to Employment Agreement, dated October 1,
1999, between Charles Fernandez and Continucare Corporation
(13)
10.16 Second Amendment to Employment Agreement between Charles M.
Fernandez and the Company, entered into as of the 1st day
of November 1999 (14)
10.17 First Amendment to Employment Agreement between Spencer J.
Angel and the Company, entered into as of the 1st day of
November, 1999 (14)
21.1 Subsidiaries of the Company (17) (Exhibit 21.1)
23.1 Consent of Ernst & Young LLP (17) (Exhibit 23.1)
27.1 Financial Data Schedule (17) (Exhibit 27.1 )
99.1 Consent Letter and Agreement to the First Supplemental
Indenture between the Securityholders of the Convertible
Notes due 2002 and Continucare Corporation, dated December
9, 1999 (15)
40
<PAGE> 42
Documents incorporated by reference to the indicated exhibit to the following
filings by the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934.
(1) Current Report Form 8-K dated August 9, 1996.
(2) Form 10-KSB filed with the Commission on September 30,
1996.
(3) Post Effective Amendment No. 1 to the Registration
Statement on SB-2 on Form S-3 Registration Statement
filed on October 29, 1996.
(4) Form 8-K filed with the Commission on April 25, 1997.
(5) Form 8-K dated October 30, 1997 and filed with the
Commission on November 13, 1997.
(6) Form 8-K dated October 31, 1997 and filed with the
Commission on November 13, 1997.
(7) Schedule 14A dated December 26, 1997 and filed with
the Commission on December 30, 1997.
(8) Form 8-K dated February 13, 1998 and filed with the
Commission on February 26, 1997.
(9) Form 8-K dated April 14, 1998 and filed with the
Commission on April 27, 1998.
(10) Form 8-K/A dated May 11, 1998 and filed with the
Commission on May 15, 1998.
(11) Form 8-K dated and filed with the Commission on
September 2, 1998.
(12) Form 8-K dated April 21, 1999 and filed with the
Commission on April 23, 1999.
(13) Form 10-K/A for the fiscal year ended June 30, 1999.
(14) Form 10-K/A, Amendment No. 2 for the fiscal year ended
June 30, 1999.
(15) Form 10-Q for the quarterly period ended December 31,
1999
(16) Form 10-Q for the quarterly period ended March 31,
2000.
(17) Filed herewith.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed with the Securities and
Exchange Commission in the fourth quarter of Fiscal 2000.
41
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONTINUCARE CORPORATION
By:/s/ SPENCER J. ANGEL
-----------------------------------------------
SPENCER J. ANGEL
Chief Executive Officer, Chief Operating
Officer and President
Dated: September 28, 2000
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SPENCER J. ANGEL President, Chief Executive Officer, Chief September 28, 2000
----------------------------- Operating Officer and Director
Spencer J. Angel (Principal Executive Officer)
/s/ JANET L. HOLT Chief Financial Officer September 28, 2000
----------------------------- (Principal Accounting Officer and
Janet L. Holt Principal Financial Officer)
/s/ CHARLES M. FERNANDEZ Chairman of the Board September 28, 2000
-----------------------------
Charles M. Fernandez
/s/ PHILLIP FROST, M.D. Vice Chairman of the Board September 28, 2000
-----------------------------
Phillip Frost, M.D.
/s/ ROBERT CRESCI Director September 28, 2000
-----------------------------
Robert Cresci
/s/ PATRICK HEALY Director September 28, 2000
-----------------------------
Patrick Healy
</TABLE>
42
<PAGE> 44
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants........................................ F-2
Consolidated Balance Sheets as of June 30, 2000 and 1999.................................. F-3
Consolidated Statements of Operations for the years ended June 30, 2000, 1999
and 1998............................................................................. F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
June 30, 2000, 1999 and 1998........................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2000, 1999
and 1998............................................................................. F-6
Notes to Consolidated Financial Statements................................................ F-8
</TABLE>
F-1
<PAGE> 45
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Continucare Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Continucare Corporation and subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the three years in the period ended June 30, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Continucare Corporation and subsidiaries at June 30, 2000 and 1999 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Miami, Florida
September 11, 2000, except for the
third paragraph of Note 7, as to
which the date is September 27, 2000
F-2
<PAGE> 46
CONTINUCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ..................................................... $ 2,535,540 $ 3,185,077
Accounts receivable, net of allowance for doubtful accounts of $5,752,000 and
$5,752,000, respectively .................................................... 94,966 604,524
Other receivables ............................................................. 697,977 266,057
Prepaid expenses and other current assets ..................................... 368,431 298,899
------------ ------------
Total current assets ........................................................ 3,696,914 4,354,557
Equipment, furniture and leasehold improvements, net ............................. 880,873 1,098,289
Cost in excess of net tangible assets acquired, net of accumulated amortization of
$5,929,000 and $3,837,000 respectively ........................................ 19,932,891 22,346,156
Deferred financing costs, net of accumulated amortization of $426,000 and
$1,203,000, respectively ...................................................... 2,964,375 2,551,811
Other assets, net ................................................................ 70,127 69,165
------------ ------------
Total assets ................................................................ $ 27,545,180 $ 30,419,978
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable .............................................................. $ 687,703 $ 842,442
Accrued expenses .............................................................. 2,336,398 2,358,346
Accrued salaries and benefits ................................................. 923,656 1,856,140
Medical claims payable ........................................................ 985,835 4,825,081
Due to Medicare ............................................................... 73,527 302,358
Current portion of convertible subordinated notes payable ..................... 700,000 45,000,000
Current portion of long-term debt ............................................. 2,276,635 6,857,946
Accrued interest payable ...................................................... 6,044 2,400,022
Current portion of capital lease obligations .................................. 115,685 112,652
------------ ------------
Total current liabilities ................................................... 8,105,483 64,554,987
Capital lease obligations, less current portion .................................. 103,682 123,436
Convertible subordinated notes payable ........................................... 11,050,000 --
Long-term debt, less current portion ............................................. 5,023,244 1,396,753
------------ ------------
Total liabilities ........................................................... 24,282,409 66,075,176
Commitments and contingencies
Shareholders' equity (deficit)
Common stock, $0.0001 par value: 100,000,000 shares authorized; 36,236,283
shares issued and 33,240,090 shares outstanding at June 30, 2000; and
17,536,283 shares issued and 14,540,091 shares outstanding at
June 30, 1999 ............................................................... 3,325 1,455
Additional paid-in capital .................................................... 57,708,595 32,910,465
Accumulated deficit ........................................................... (49,024,448) (63,142,417)
Treasury stock (2,996,192 shares at June 30, 2000 and 1999) ................... (5,424,701) (5,424,701)
------------ ------------
Total shareholders' equity (deficit) ........................................ 3,262,771 (35,655,198)
------------ ------------
Total liabilities and shareholders' equity (deficit) ........................ $ 27,545,180 $ 30,419,978
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE> 47
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------
2000 1999 1998
------------- ------------- ------------
<S> <C> <C> <C>
Medical services revenue, net ............................ $ 116,582,895 $ 182,526,752 $ 65,584,293
Expenses
Medical services:
Medical claims ....................................... 82,480,144 117,826,175 30,027,284
Contractual revision of previously recorded medical
claims liability ................................. (3,053,853) -- --
Other ................................................ 18,197,211 45,411,645 24,668,162
Payroll and employee benefits .......................... 5,687,030 13,797,555 5,714,653
Provision for bad debts ................................ -- 6,196,384 5,778,216
Professional fees ...................................... 895,716 1,886,661 1,637,957
General and administrative ............................. 5,777,317 10,198,385 8,435,001
Write down of long-lived assets ........................ -- 11,717,073 --
Loss on disposal of subsidiaries ....................... -- 15,361,292 --
Depreciation and amortization .......................... 2,918,534 5,791,982 3,247,717
------------- ------------- ------------
Subtotal ............................................. 112,902,099 228,187,152 79,508,990
------------- ------------- ------------
Income (loss) from operations ............................... 3,680,796 (45,660,400) (13,924,697)
Other income (expense)
Interest income .......................................... 43,147 138,963 932,397
Interest expense-convertible subordinated notes payable .. (2,054,710) (3,639,433) (2,453,333)
Interest expense-other ................................... (1,182,794) (1,505,779) (553,998)
Other .................................................... 383,623 24,906 107,696
------------- ------------- ------------
Income (loss) before income taxes and extraordinary items ... 870,062 (50,641,743) (15,891,935)
Benefit for income taxes .................................... -- -- (909,000)
------------- ------------- ------------
Income (loss) before extraordinary items .................... 870,062 (50,641,743) (14,982,935)
Extraordinary gain on extinguishment of debt ................ 13,247,907 130,977 --
------------- ------------- ------------
Net income (loss) ........................................... $ 14,117,969 $ (50,510,766) $(14,982,935)
============= ============= ============
Basic and diluted earnings (loss) per common share:
Income (loss) before extraordinary item .................. $ .04 $ (3.50) $ (1.20)
Extraordinary gain on extinguishment of debt ............. .61 .01 --
------------- ------------- ------------
Net income (loss) ........................................ $ .65 $ (3.49) $ (1.20)
============= ============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 48
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED TOTAL
ADDITIONAL EARNINGS SHAREHOLDERS'
COMMON PAID-IN (ACCUMULATED TREASURY EQUITY
STOCK CAPITAL DEFICIT) STOCK (DEFICIT)
------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 ................... $ 1,089 $ 14,549,884 $ 2,351,284 $(2,284,330) $ 14,617,927
Issuance of stock related to Doctors Health
Group ................................... 25 2,311,294 -- -- 2,311,319
Issuance of stock related to other
acquisitions ............................ 8 401,277 -- -- 401,285
Issuance of stock related to private
placement, net of costs ................. 225 10,574,775 -- -- 10,575,000
Exercise of stock warrants and options ..... 27 1,101,973 -- -- 1,102,000
Settlement of former shareholder claim ..... -- 1,385,100 -- (2,958,350) (1,573,250)
Issuance of stock warrants ................. -- 775,000 -- -- 775,000
Net loss ................................... -- -- (14,982,935) -- (14,982,935)
------- ------------ ------------ ----------- ------------
Balance at June 30, 1998 ................... 1,374 31,099,303 (12,631,651) (5,242,680) 13,226,346
Receipt of stock in settlement of receivable (7) -- -- (182,021) (182,028)
Issuance of stock for settlement of former
shareholder claim ....................... 30 (30) -- -- --
Issuance of stock related to ZAG acquisition 58 1,811,192 -- -- 1,811,250
Net loss ................................... -- -- (50,510,766) -- (50,510,766)
------- ------------ ------------ ----------- ------------
Balance at June 30, 1999 ................... 1,455 32,910,465 (63,142,417) (5,424,701) (35,655,198)
Issuance of stock to Harter Financial, Inc. 20 112,480 -- -- 112,500
Issuance of stock to guarantor of credit
facility ................................ 300 3,374,700 -- -- 3,375,000
Issuance of stock for debt restructuring ... 1,550 21,310,950 -- -- 21,312,500
Net income ................................. -- -- 14,117,969 -- 14,117,969
------- ------------ ------------ ----------- ------------
Balance at June 30, 2000 ................... $ 3,325 $ 57,708,595 $(49,024,448) $(5,424,701) $ 3,262,771
======= ============ ============ =========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 49
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
------------------------------------------
2000 1999 1998
---------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .................................................. $ 14,117,969 $(50,510,766) $(14,982,935)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities:
Depreciation and amortization, including amortization of
deferred loan costs .......................................... 3,752,653 6,705,221 3,648,581
Provision for bad debts ......................................... -- 4,656,384 1,953,013
Write down of long-lived assets ................................. -- 11,717,073 --
Provision for notes receivable .................................. -- 1,540,000 3,825,219
Loss on treasury stock transaction .............................. -- -- 426,750
Loss on disposal of subsidiaries ................................ -- 15,361,292 --
Amortization of discount on notes payable ....................... 258,349 254,531 --
Contractual revision of previously recorded medical claims
liability .................................................... (3,053,853) -- --
Gain on disposal of equipment .................................. (23,123) -- --
Gain on early extinguishment of debt ............................ (13,247,907) (130,977) --
Compensation expense on exercise of warrants .................... -- -- 212,500
Changes in assets and liabilities, excluding the effect of
acquisitions and disposals:
Decrease (increase) in accounts receivable ...................... 509,558 290,226 (5,042,680)
(Increase) decrease in prepaid expenses and other current assets (69,532) 191,644 127,467
Increase in other receivables ................................... (431,920) (221,092) (2,891,744)
Decrease in income tax receivable ............................... -- 1,800,000 --
Increase in intangible assets ................................... -- 75,674 --
(Increase) decrease in other assets ............................. (962) 24,141 (206,662)
Decrease in deferred tax asset, net ............................. -- -- 505,699
(Decrease) increase in accounts payable and accrued expenses .... (1,109,171) (1,516,093) 2,311,647
(Decrease) increase in medical claims payable ................... (1,135,939) 3,858,831 --
Increase in due to (from) Medicare ............................. 413,174 2,754,764 1,427,673
Increase in accrued interest payable ............................ 2,029,043 1,776,466 586,261
Decrease in income and other taxes payable ...................... -- -- (693,709)
---------- ---------- ---------
Net cash provided by (used in) operating activities ................... 2,008,339 (1,372,681) (8,792,920)
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash proceeds from disposal of subsidiaries ........................ -- 5,642,216 --
Cash paid for acquisitions ......................................... -- (4,640,000) (37,972,997)
Property and equipment additions ................................... (227,137) (751,708) (1,006,706)
---------- ---------- ---------
Net cash (used in) provided by investing activities ................... (227,137) 250,508 (38,979,703)
---------- ---------- ---------
</TABLE>
CONTINUED ON NEXT PAGE.
F-6
<PAGE> 50
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
------------------------------------------
2000 1999 1998
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Convertible Subordinated Notes .......................... $ (560,000) $ (720,000) $ (2,000,000)
Principal repayments under capital lease obligation ................. (40,319) (247,619) (254,233)
Proceeds received from private placement of common stock ............ -- -- 10,575,000
Payments on acquisition notes ....................................... -- (1,475,000) (892,500)
Payment of deferred financing costs ................................. (15,000) (161,051) (3,000,000)
Payment of restructuring costs ...................................... (310,792) -- --
Proceeds from Convertible Subordinated Notes ........................ -- -- 46,000,000
Proceeds from Term and Revolving Notes .............................. -- 5,000,000 2,500,000
Proceeds from issuance of common stock .............................. -- -- 889,500
Repayment of Term and Revolving Notes ............................... (1,064,255) (3,935,745) (5,000,000)
Repayments to Medicare per agreement ................................ (440,373) (1,736,579) --
Proceeds from note repayment ........................................ -- 147,520 --
Repayment of shareholder note ....................................... -- -- (599,000)
------------ ----------- ------------
Net cash (used in) provided by financing activities .................... (2,430,739) (3,128,474) 48,218,767
------------ ----------- ------------
Net (decrease) increase in cash and cash equivalents ................... (649,537) (4,250,647) 446,144
Cash and cash equivalents at beginning of fiscal year .................. 3,185,077 7,435,724 6,989,580
------------ ----------- ------------
Cash and cash equivalents at end of fiscal year ........................ $ 2,535,540 $ 3,185,077 $ 7,435,724
============ =========== ============
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Notes payable issued for acquisitions .................................. $ -- $ 5,819,411 $ --
============ =========== ============
Receipt of stock in settlement of receivable ........................... $ -- $ 182,028 $ --
============ =========== ============
Stock issued in ZAG acquisition ........................................ $ -- $ 1,811,250 $ --
============ =========== ============
Stock issued for deferred financing costs .............................. $ 3,375,000 $ -- $ --
============ =========== ============
Stock issued for extinguishment of debt ................................ $ 21,312,500 $ -- $ --
============ =========== ============
Note payable issued for refunds due to Medicare for overpayments ....... $ 642,005 $ -- $ --
============ =========== ============
Purchase of furniture and fixtures with proceeds of capital lease
obligations................................................... $ 181,484 $ -- $ --
============ =========== ============
Cash paid for interest ................................................. $ 106,534 $ 2,125,895 $ 2,021,070
============ =========== ============
Cash paid for income taxes ............................................. $ -- $ -- $ 1,528,445
============ =========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE> 51
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
Continucare Corporation ("Continucare" or the "Company"), which was incorporated
on February 1, 1996 as a Florida corporation, is a provider of integrated
outpatient healthcare and home health care 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 June 30, 2000 the Company operated, owned and/or
managed: (i) seventeen staff model clinics in South and Central Florida; an
Independent Practice Association with 81 physicians; and two Home Health
agencies. For Fiscal 2000 approximately 57% of net medical services revenue was
derived from managed care contracts with Humana Medical Plans, Inc. ("Humana")
and 39% of net medical services revenue was derived from managed care contracts
with Foundation Health Corporation ("Foundation"). (Foundation and Humana may
hereinafter be collectively referred to as "the HMOs".) For Fiscal 1999
approximately 34% of net medical services revenue was derived from managed care
contracts with Humana and 51% of net medical services revenue was derived from
managed care contracts with Foundation. For Fiscal 1998 approximately 19% of net
medical services revenue was derived from managed care contracts with Humana and
38% of net medical services revenue was derived from managed care contracts with
Foundation.
Throughout Fiscal 1998 and 1999 the Company experienced adverse business
operations, recurring operating losses, negative cash flow from operations, and
significant working capital deficiencies. Furthermore, as discussed below and
further in Note 6, the Company was unable to make the interest payments due
April 30, 1999 and October 31, 1999 on the Company's Convertible Subordinated
Notes Payable (the "Notes"). The Company's operating difficulties were in large
part due to the underperformance of various entities which were acquired in
fiscal years 1999, 1998 and 1997, the inability to effectively integrate and
realize increased profitability through anticipated economies of scale with
these acquisitions, as well as reductions in reimbursement rates under the
Balanced Budget Act of 1997.
To strengthen the Company financially, during Fiscal 1999 the Company began a
business rationalization program (the "Business Rationalization Program") to
divest itself of certain unprofitable operations and to close other
underperforming subsidiary divisions, and a financial restructuring program (the
"Financial Restructuring Program") to strengthen its financial condition and
performance. In connection with the implementation of its Business
Rationalization Program, the Company sold or closed its Outpatient
Rehabilitation subsidiary, its Diagnostic Imaging subsidiary and Specialty
Physician Practice subsidiary. These divestitures generated net cash proceeds of
approximately $5,642,000 (after the payment of transaction costs and other
employee-related costs). The rationalization liability associated with these
divestitures was approximately $751,000 at June 30, 2000. Other than payments
totally approximately $6,500, there were no changes in the rationalization
liability during Fiscal 2000. The Business Rationalization Program has assisted
management with the commencement and implementation of its Financial
Restructuring Program and has allowed the Company to focus its resources on a
core business model.
The Company's financial position has changed significantly since June 30, 1999.
As a result of the Financial Restructuring Program, in Fiscal 2000, the Company
instituted a series of measures intended to reduce losses and to operate the
remaining acquired businesses profitably. Beginning in the third quarter of
Fiscal 2000, such measures have had a positive impact on profitability and cash
flow of the Company. Furthermore, as discussed in Note 6, in Fiscal 2000, the
Company completed a restructuring of its Notes.
F-8
<PAGE> 52
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents--The Company defines cash and cash equivalents as
those highly-liquid investments purchased with an original maturity of three
months or less.
Deposits in banks may exceed the amount of insurance provided on such deposits.
The Company performs reviews of the credit worthiness of its depository banks.
The Company has not experienced any losses on its deposits.
Accounts Receivable--Accounts receivable result primarily from medical services
provided to patients on a fee-for-service basis and on a capitated basis and
from hospitals where the Company provides medical services. Fee-for-service
amounts are paid by government sponsored health care programs (primarily
Medicare and Medicaid), insurance companies, self-insured employers and
patients.
Accounts receivable include an allowance for contractual adjustments, charity
and other adjustments. Contractual adjustments result from differences between
the rates charged for the service performed and amounts reimbursed under
government sponsored health care programs and insurance contracts. Charity and
other adjustments, which were immaterial for the years ended June 30, 2000,
1999, and 1998, represent services provided to patients for which fees are not
expected to be collected at the time the service is provided. Accounts
receivable are also presented net of intermediary final settlement adjustments.
Equipment, Furniture and Leasehold Improvements--Equipment, furniture and
leasehold improvements are stated at cost. Depreciation is computed using the
straight line method over the estimated useful lives of the related assets,
which range from three to five years. Leasehold improvements are amortized over
the underlying assets' useful lives or the term of the lease, whichever is
shorter. Repairs and maintenance costs are expensed as incurred. Improvements
and replacements are capitalized.
Costs In Excess Of Net Tangible Assets Acquired--Costs in excess of net tangible
assets acquired are stated net of accumulated amortization and are amortized on
a straight-line basis over periods ranging from 3 to 20 years. The Company
periodically evaluates the recovery of the carrying amount of costs in excess of
net tangible assets acquired by determining if a permanent impairment has
occurred. Indicators of a permanent impairment include duplication of resources
resulting from acquisitions, instances in which the estimated undiscounted cash
flows of the entity are less than the remaining unamortized balance of the
underlying intangible assets and other factors. At June 30, 1999, the Company
believed that certain of its costs in excess of net tangible assets acquired -
primarily those related to its Independent Practice Association ("IPA") and one
of its Home Health divisions, $9,200,000 and $2,200,000 respectively - were
impaired based upon recent and anticipated significant cash flow deficiencies.
As the net present value of expected future cash flows for these operating
entities were negative, the following intangible assets were written off during
Fiscal 1999:
Goodwill $ 7,724,000
Identifiable intangibles:
Contract rights 3,159,000
Other, including assembled workforce
and tradenames 564,000
Other 270,000
-----------------
$ 11,717,000
=================
F-9
<PAGE> 53
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
No such adjustment was required at June 30, 2000.
Deferred Financing Costs--Expenses incurred in connection with the New Credit
Facility and the guarantee related to the New Credit Facility have been deferred
and are being amortized using the interest method over the life of the facility
and the guarantee. (See Note 7.)
Fair Value of Financial Instruments--The estimated fair values of financial
instruments have been determined by the Company using available market
information and appropriate valuation methods. Considerable judgment is required
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methods may have a material effect on the
estimated fair value amounts. The Company has used the following market
assumptions and/or estimation methods:
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND
ACCRUED EXPENSES--The carrying values approximate fair value due to the
relatively short maturity of the respective instruments.
CONVERTIBLE SUBORDINATED NOTES PAYABLE--The fair value at June 30, 2000
is approximately $948,000 based on the market value of the Company's
common stock and at June 30, 1999 the fair value approximated
$2,360,000 based on the proposed terms of the Restructuring.
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS--The carrying value at
June 30, 2000 and 1999 approximates fair value based on the terms of
the obligations. The Company has imputed interest on non-interest
bearing debt using an incremental borrowing rate of 8%.
Accounting for Stock-Based Compensation--The Company follows Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related Interpretations in accounting for its employee stock
options. Under APB 25, when the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized (see Note 11).
Earnings per Share--Basic earnings per share is computed by dividing the net
income or loss by the weighted average common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Business Segments--The Company adopted SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information" during Fiscal 1999. The Company has
concluded that it operates in one segment of business, that of managing the
provision of outpatient health care and health care related services, primarily
in the State of Florida.
Revenue--The Company's health care providers provide service to patients on
either a fee for service arrangement or under a fixed monthly fee arrangement
with HMOs or through contracts directly with the payor. Revenue is recorded in
the period services are rendered as determined by the respective contract.
Fee for service arrangements (11% and 29% of medical services net revenue in
Fiscal 1999 and 1998, respectively) require the Company to assume the financial
risks relating to payor mix and reimbursement rates. The Company receives
reimbursement for these services under either the Medicare or Medicaid programs
or payments from the individual, insurers, self-funded benefit plans or
third-party payors. The Company is paid based upon established charges, the cost
of providing services, predetermined rates per diagnosis, or discounts from
established charges. Revenue is recorded as an estimated amount, net of
contractual allowances. These accounts, which are unsecured, have longer
collection periods than capitated fee contracts and require the Company to bear
F-10
<PAGE> 54
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the credit risk of uninsured individuals. The contribution from fee for service
revenue for Fiscal 2000 was insignificant, primarily as a result of the Business
Rationalization Program and the divestiture of the Diagnostic Imaging and
Physician Practice Subsidiaries.
Under the Company's contracts with Humana and Foundation, the Company receives a
fixed, monthly fee from the HMOs for each covered life in exchange for assuming
responsibility for the provision of medical services. Total medical services net
revenue related to Foundation approximated 39%, 51% and 38% for Fiscal 2000,
1999 and 1998, respectively. Total medical services net revenue relating to
Humana approximated 57%, 34% and 19% for Fiscal 2000, 1999 and 1998,
respectively. To the extent that patients require more frequent or expensive
care than was anticipated by the Company, revenue to the Company under a
contract may be insufficient to cover the costs of care provided.
When it is probable that expected future health care costs and maintenance costs
under a contract or group of existing contracts will exceed anticipated
capitated revenue on those contracts, the Company recognizes losses on its
prepaid healthcare services with HMOs. No contracts are considered loss
contracts at June 30, 2000 because the Company has the right to terminate
unprofitable physicians and close unprofitable centers under its managed care
contracts.
Approximately 4% and 10% of the Company's medical services net revenue in Fiscal
1999 and 1998, respectively, was earned through contracts, which are directly
between the payor (i.e., hospital), and the Company. These contracts provide for
payments to the Company based upon a fixed percentage of the hospital's charges
related to the services provided by the Company to patients of the hospital. The
contribution from contracts in Fiscal 2000 was insignificant, primarily as a
result of the Business Rationalization Program and the divestiture of the
Outpatient Rehabilitation Subsidiary.
Certain of the Company's services are paid based on a reasonable cost
methodology. The Company is reimbursed for cost reimbursable items at a
tentative rate with final settlement determined after submission of annual cost
reports and audits thereof by the payor. Changes in the estimated settlements
recorded by the Company may be adjusted in future periods as final settlements
are determined.
Revenue from the Medicare and Medicaid programs, accounted for approximately 4%,
6%, and 50% of the Company's net medical service revenue for the years ended
June 30, 2000, 1999, and 1998, respectively. Laws and regulations governing the
Medicare and Medicaid programs are complex and subject to interpretation. The
Company believes that it is in compliance with all applicable laws and
regulations and is not aware of any pending or threatened investigations
involving allegations of potential wrongdoing. While no such regulatory
inquiries have been made, compliance with such laws and regulations can be
subject to future government review and interpretation as well as significant
regulatory action including fines, penalties, and exclusion from the Medicare
and Medicaid programs.
Medical Service Expense--The Company contracts with or employs various health
care providers to provide medical services to its patients. Primary care
physicians are compensated on either a salary or capitation basis. For patients
enrolled under capitated managed care contracts, the cost of specialty services
are paid on either a fee for service, per diem or capitation basis.
The cost of health care services provided or contracted for is accrued in the
period in which it is provided. In addition, the Company provides for claims
incurred but not yet reported based on past experience together with current
factors. Estimates are adjusted as changes in these factors occur and such
adjustments are reported in the year of determination. Although considerable
variability is inherent in such estimates, management believes that the amounts
accrued are adequate.
F-11
<PAGE> 55
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reinsurance (stop-loss insurance)--Reinsurance premiums are reported as health
care cost which are included in medical service expense in the accompanying
statements of operations, and reinsurance recoveries are reported as a reduction
of related health care costs.
Principles of Consolidation--The consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries, and all entities in
which the Company has a greater than 50% voting interest. All significant
intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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. Changes in the estimates are charged or
credited to operations as the estimates are revised.
Recent Accounting Pronouncements--In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities"
which establishes standards for the accounting and reporting of derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure these instruments at fair value. This statement is
effective for years beginning after June 15, 2000. The adoption of this new
accounting standard is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
Reclassifications--Certain prior year amounts have been reclassified to conform
with the current year presentation.
NOTE 3 - BUSINESS COMBINATIONS AND DISPOSALS
PHYSICIAN PRACTICES
On April 10, 1997, the Company, through Continucare Physician Practice
Management, Inc., ("CPPM") 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., a
Florida corporation formerly known as Norman B. Gaylis, M.D., Inc., of
Rosenbaum, Weitz & Ritter, Inc., a Florida corporation, and of Arthritis &
Rheumatic Disease Specialties, Inc., a Florida corporation, from Sheridan
Healthcare, Inc. (collectively "AARDS") The aggregate purchase price was
approximately $3,300,000. Tangible assets recorded consisted primarily of
receivables and equipment. As a result of the acquisitions, purchase price in
excess of the fair value of the net tangible assets acquired was approximately
$2,149,000 and included approximately $1,173,000 in separately identifiable
intangible assets. Goodwill was being amortized over 20 years and separately
identifiable assets were being amortized over periods ranging from 7 to 10
years. The consolidated financial statements include the accounts of these
acquisitions from the date of the acquisitions.
In connection with the purchase of AARDS, the Company entered into a management
agreement with ZAG Group, Inc. ("ZAG"), an entity controlled by Jay Ziskind, Ken
Arvin and Dr. Norman Gaylis. 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 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 September 1998, the Company paid
approximately $2,000,000 to ZAG in connection with an agreement and plan of
merger executed between the Company and ZAG which effectively canceled the
put/call agreement. Cash of $115,000 was paid and the remaining $1,885,000 was
paid by issuing 575,000 unregistered shares of the Company's common stock with a
fair market value of approximately $1,600,000 on the date of issuance. However,
because the common stock issued did not have an aggregate fair market value of
F-12
<PAGE> 56
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED)
approximately $1,885,000 on October 15, 1999, the agreement and plan of merger
provided that the Company would 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. Additional consideration of approximately
$1,600,000 in cash or approximately 2,327,000 shares of the Company's common
stock (based on the June 30, 2000 market price) would have to be issued. At this
time no additional payment has been made to ZAG.
On November 15, 1999, the Company commenced litigation against ZAG and its
affiliated parties alleging breach of fiduciary duties, improper billing, and
seeking 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. A
counterclaim was filed against the Company on December 20, 1999 in the Circuit
Court of the 11th Judicial District in and for Miami-Dade County, Florida. The
counterclaim alleged breach of contract, tortious interference and conversion.
The Company may be required to pay in excess of $1,600,000 of additional
consideration, in the form of either cash or stock, representing the difference
between $1,885,000 and the fair market value of the 575,000 unregistered shares
of the Company's common stock previously issued to ZAG in connection with the
agreement and plan of merger.
On March 12, 1999, the Company closed CPPM by selling assets totaling
approximately $3,675,000 and closing offices that represented assets totaling
approximately $1,069,000. As a result of closing CPPM, the Company recorded a
loss on disposal of approximately $4,200,000 which consisted of the following:
Equipment, furniture and leasehold improvements $ 405,000
Goodwill 3,131,000
Identifiable intangibles, including contracts
and assembled work force 670,000
Other, including deposits and prepaid expenses 61,000
Liabilities assumed (67,000)
----------------
$4,200,000
================
Net patient revenue and net operating loss for CPPM (prior to recording the loss
on disposal) was approximately $6,096,000 and $2,133,000, respectively, for the
year ended June 30, 1999. Approximately 60 employees were terminated as a result
of the closure of this division. Neither severance nor any other significant
exit costs were incurred as a result of this closure.
HOME HEALTH SERVICES
On September 19, 1997, the Company acquired the stock of Maxicare, Inc.
("Maxicare"), a Florida based home health agency for $4,200,000 including
approximately $900,000 of liabilities assumed. In addition, $300,000 of
additional purchase price was contingent upon maintaining various performance
criteria. No amounts have been paid to the former owner of Maxicare, Inc.
pursuant to the contingent purchase price from the acquisition. The acquisition
is being accounted for under the purchase method of accounting. Tangible assets
recorded consisted primarily of cash, receivables and equipment. The purchase
price in excess of the fair value of the net tangible assets acquired was
approximately $3,048,000 and included approximately $1,189,000 in separately
identifiable intangible assets. Goodwill was being amortized over 20 years and
separately identifiable intangible assets were being amortized over periods
ranging from 3 to 20 years. The consolidated financial statements include the
accounts of Maxicare since the date of acquisition. As discussed in Note 2,
during Fiscal 1999 management determined that the intangible assets associated
with Maxicare were impaired.
F-13
<PAGE> 57
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED)
RADIOLOGY SERVICES
On December 1, 1997, the Company acquired the assets of Beacon Healthcare Group
(principally medical supplies and equipment) for $2,200,000 in cash and 83,000
shares of the Company's common stock with a value of $490,000. The purchase
price in excess of the fair value of the net tangible assets acquired was
approximately $2,000,000 and included approximately $1,142,000 in separately
identifiable intangible assets. Goodwill was being amortized over 20 years and
separately identifiable assets were being amortized over periods ranging from 6
to 15 years.
On December 27, 1998, the Company sold the stock of the Diagnostic Imaging
Services Subsidiary (the "Subsidiary") for a cash purchase price of $120,000 to
Diagnostic Results, Inc. Prior to the sale, the Subsidiary conveyed through
dividends all of the accounts receivable of the Subsidiary to the Company. All
obligations for trade payables existing on the date of sale remained the
obligations of the Company. As a result of this transaction, the Company
recorded a loss on disposal of approximately $4,152,000, which consisted of the
following:
Operating lease accrual $1,000,000
Equipment, furniture and leasehold
improvements 1,512,000
Goodwill 750,000
Contractual rights 1,043,000
Liabilities assumed (33,000)
Consideration received (120,000)
----------------
$4,152,000
================
Net patient revenue and net operating loss (prior to recording the loss on
disposal) were approximately $1,900,000 and $2,000,000, respectively, for the
year ended June 30, 1999. Approximately 60 employees were terminated as a result
of the sale. Neither severance nor any other significant exit costs were
incurred as a result of the sale. The operating lease accrual includes several
leases requiring monthly payments through 2007. Through June 30, 2000
approximately $41,500 of this liability had been paid.
REHABILITATION MANAGEMENT SERVICES
On February 13, 1998, the Company acquired the stock of Rehab Management
Systems, Inc., IntegraCare, Inc. and J.R. Rehab Associates, Inc., collectively
referred to as "RMS", for a total purchase price of approximately $10,500,000,
including acquisition costs of approximately $500,000. RMS operated numerous
rehabilitation clinics in the States of Florida, Georgia, Alabama, North
Carolina and South Carolina as a Medicare and Medicaid provider of outpatient
rehabilitation services. The acquisition was accounted for under the purchase
method of accounting. Tangible assets recorded consisted principally of
receivables and equipment. The purchase price in excess of the fair value of the
net tangible assets acquired of approximately $6,160,000 was recorded as
goodwill and was being amortized using the straight-line method over a weighted
average life of 15 years.
On April 8, 1999, the Company sold substantially all the assets of RMS to
Kessler Rehabilitation of Florida, Inc. ("Kessler") for $5,500,000 in cash and
the assumption of certain liabilities. The Company recorded a loss on sale of
approximately $6,800,000, which consisted of the following:
Net working capital $4,838,000
Equipment, furniture and leasehold improvements 1,739,000
Goodwill 5,723,000
Consideration received (5,500,000)
----------------
$6,800,000
================
F-14
<PAGE> 58
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED)
The consolidated financial statements included the accounts of RMS from the date
of purchase to the date of sale. Net patient revenue and net operating loss
(prior to recording the loss on disposal) were approximately $13,272,000 and
$2,053,000, respectively, for the year ended June 30, 1999. Approximately 600
employees were terminated as a result of the sale and severance costs of
approximately $50,000 was accrued and paid prior to June 30, 1999. No other
significant exit costs were incurred as a result of the sale. A member of the
Company's Board of Directors at the time of the sale was also a director of
Kessler.
MANAGED CARE SERVICES
On October 31, 1997, the Company purchased the assets of DHG Enterprises, Inc.
and Doctors Health Partnership, Inc. (collectively, "Doctors Health Group"), a
company that provides healthcare services at outpatient centers through managed
care contracts. The total purchase price for the acquisition was approximately
$16,000,000, including acquisition costs of approximately $1,052,000. Of this
amount, $1,700,000 was paid in common stock of the Company (242,098 shares),
approximately $13,700,000 was paid in cash and warrants to purchase 200,000
shares of the Company's common stock with an estimated fair market value of
$600,000 were issued. The warrants have an exercise price of $7.25 per share for
a period of 5 years. The acquisition is being accounted for under the purchase
method of accounting. Tangible assets acquired consisted principally of medical
equipment and deposits. The purchase price in excess of the fair value of the
net tangible assets acquired was approximately $15,478,000 and included
approximately $5,636,000 in separately identifiable intangible assets. Goodwill
is being amortized over 20 years and separately identifiable intangible assets
are being amortized over periods ranging from 4 to 20 years. The consolidated
financial statements include the accounts of Doctors Health Group from the
purchase date.
On January 1, 1998, the Company acquired certain of the assets of Medical
Services Organization, Inc. ("MSO") for a total purchase price of $4,260,000.
MSO provides healthcare services at outpatient centers through capitated managed
care contracts. The Company paid $2,560,000 in cash and entered into a note
payable totaling $1,700,000. The acquisition is being accounted for under the
purchase method of accounting. The entire purchase price was in excess of the
net tangible assets acquired and was recorded as contract costs. These costs
were being amortized using the straight-line method over 10 years. The
amortization period is based on the remaining life of the contract acquired. The
note was payable in six equal monthly installments beginning May 1, 1998. At
June 30, 1999 the note had been paid in full. In addition, the Company is
obligated to pay the owners of MSO an additional purchase price up to a maximum
amount of $25,000,000 based on the annualized net revenues of the acquired
contract for the twelve month period ended December 31, 1998, as adjusted under
the terms of the acquisition agreement with the former owner of MSO, times a
multiple of 4.25. The additional purchase price, if any, may be paid entirely in
Common Stock of the Company; however the Company may, at its discretion, pay 50%
of the additional purchase price in cash. Based on the performance of the
contract for that period, the Company has not paid or accrued for any additional
purchase price. Furthermore, as discussed in Note 2, in Fiscal 1999 management
determined that the intangible assets of MSO were impaired. The consolidated
financial statements include the accounts of MSO since the date of purchase.
On April 14, 1998, the Company purchased the assets of SPI Managed Care, Inc.,
SPI Managed Care of Hillsborough County, Inc., SPI Managed Care of Broward,
Inc., and Broward Managed Care, Inc., (collectively "SPI"), which consisted
principally of office and medical equipment. SPI provides healthcare services at
outpatient centers through capitated managed care contracts. The total purchase
price for the acquisition was approximately $6,750,000. The acquisition is being
accounted for under the purchase method of accounting. The purchase price in
excess of the fair value of the net tangible assets acquired of approximately
$6,416,000 was recorded as goodwill and is being amortized using the
straight-line method over a weighted average life of 15 years. The consolidated
financial statements include the accounts of SPI from the purchase date.
In August 1998, the Company purchased the contracts of CareMed Inc. ("CareMed"),
a managed care healthcare company which owns or has agreements with
approximately 30 physician practices. The total purchase price was approximately
$6,700,000, of which $4,200,000 was paid at closing and the remaining balance is
F-15
<PAGE> 59
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED)
payable in equal monthly installments over the ensuing 24 months. The entire
purchase price was in excess of the net tangible assets acquired and was
recorded as contract costs. These costs were being amortized over 10 years. As
discussed in Note 2, management has determined that the intangible assets
associated with this operation were impaired. The consolidated financial
statements included the accounts of CareMed since the acquisition date.
The following unaudited pro forma data summarize the results of operations for
the periods indicated as if the above transactions had been completed at the
beginning of the year preceding the respective transaction dates. The pro forma
data gives effect to actual operating results prior to the transactions and
adjustments to depreciation, interest expense, goodwill amortization and income
taxes. These pro forma amounts do not purport to be indicative of the results
that would have actually been obtained if the transactions had occurred at an
earlier date or that may be obtained in the future. Included in expenses for the
year ended June 30, 1999, are impairment charges of $11,717,073 due to the
write-down of certain intangible assets related to continuing subsidiaries,
while the losses on disposals of $15,361,289 has been excluded in the pro forma
amounts below.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------
2000 1999 1998
----------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
Total revenues .................... $116,582,895 $ 161,039,157 $ 90,185,985
============ ============= ============
Net income (loss) ................. $ 14,117,969 $ (27,571,235) $(10,688,205)
============ ============= ============
Basic and diluted income (loss) per
common share .................... $ .65 $ (1.91) $ (0.85)
</TABLE>
NOTE 4 - NOTES RECEIVABLE
In the first quarter of Fiscal 1998, the Company assigned the accounts
receivable related to its behavioral health programs and assigned its behavioral
health management contracts to third parties in exchange for notes receivable in
the aggregate amount of $7,800,000. The Company recorded no gain or loss on the
assignment since the amount received approximated the net book value of the
assets assigned. The notes receivable were to be paid over a five year term with
interest to accrue at 9% per annum. The notes receivable are secured by all the
assets of the behavioral health business.
During Fiscal 1998, the Company determined that these notes receivable were
impaired and increased its allowance for doubtful accounts against these notes
receivable by approximately $3,800,000. Of this amount, approximately $1,500,000
was recorded in the fourth quarter. The Company did not recognize any interest
income on these notes in fiscal 1998 or 1999. During Fiscal 1999, the Company
increased its reserve on these notes for the remaining balance of $1,600,000
because, despite the issuance of demand notices to seek reimbursement, the
Company was unsuccessful in its collection efforts. In addition, although the
Company had received partial payments on these notes during Fiscal 1998, the
Company received payments of only $104,000 on one of these notes during Fiscal
1999. The balance of the notes at June 30, 1999 and 2000, net of the allowance,
is $0. The Company will apply all payments to principal with interest being
recognized on a cash basis after all principal has been paid. However, the
Company did not receive any payments during Fiscal 2000.
During Fiscal 1999 the Company accepted $29,700 in cash and 66,192 shares of the
Company's common stock in full satisfaction of a $340,000 receivable from a
former employee of the Company and a promissory note due from the same former
employee of $46,750. The shares were valued at $2.75 per share and are included
in treasury stock at June 30, 2000 and 1999.
F-16
<PAGE> 60
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, ESTIMATED
---------------------------------- USEFUL LIVES
2000 1999 (IN YEARS)
---------------- ----------------- -----------------
<S> <C> <C> <C>
Furniture, fixtures and equipment................. $2,178,457 $1,995,740 3-5
Furniture and equipment under capital lease....... 189,173 252,712 5
Vehicles.......................................... 2,184 -- 5
Leasehold improvements............................ 178,897 145,887 5
---------------- -----------------
2,548,711 2,394,339
Less accumulated depreciation..................... (1,667,838) (1,296,050)
---------------- -----------------
$880,873 $1,098,289
================ =================
</TABLE>
Depreciation expense for the years ended June 30, 2000, 1999, and 1998 was
$491,276, $1,481,439, and $969,007, respectively. Accumulated amortization for
assets recorded under capital lease agreements was approximately $145,000 at
June 30, 2000. Amortization of assets recorded under capital lease agreements
was approximately $27,000 at June 30, 2000, and is included in depreciation
expense.
In connection with its acquisitions, the Company entered into various
noncancellable leases for certain furniture and equipment that are classified as
capital leases. The leases are payable over 5 years and the Company has used
incremental borrowing rates ranging from 9% to 35% per annum. In addition, the
Company entered into capital leases during Fiscal 1999 which, in conjunction
with its various business disposals (see Note 3), were canceled or transferred
to the purchasers of those businesses.
Future minimum lease payments under all capital leases are as follows:
For the year ending June 30,
2001.............................................. $127,219
2002.............................................. 78,264
2003.............................................. 44,337
2004.............................................. 907
---------------
250,727
Less amount representing imputed interest......... 31,360
---------------
Present value of obligations under capital lease.. 219,367
Less current portion.............................. 115,685
---------------
Long-term capital lease obligations............... $103,682
===============
NOTE 6 - CONVERTIBLE SUBORDINATED NOTES PAYABLE
On October 30, 1997, the Company issued $46,000,000 of 8% Convertible
Subordinated Notes Payable (the "Notes") due on October 31, 2002. At the time
the Notes were issued, interest on the Notes accrued at 8% and was payable
semiannually beginning April 30, 1998. The Notes could be converted into shares
of common stock of the Company at a conversion price of $7.25 per share at any
time after 60 days following the date of initial issuance which is adjusted upon
the occurrence of certain events. In addition, the Notes were redeemable, in
whole or in part, at the option of the Company at any time on or after October
31, 2000, at redemption prices (expressed as a percentage of the principal
amount) ranging from 100% to 104%.
On August 12, 1998, the Company repurchased $1,000,000 of the Notes and recorded
an extraordinary gain on retirement of debt of $130,197. The Company used cash
from operations to redeem the Notes.
F-17
<PAGE> 61
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - CONVERTIBLE SUBORDINATED NOTES PAYABLE (CONTINUED)
On April 30, 1999 (the "April Default Date"), the Company defaulted on its
semi-annual payment of interest on the outstanding Notes. On the April Default
Date, the outstanding principal balance of the Notes was $45,000,000 and the
related accrued interest was approximately $1,800,000. However, as the Notes
were in default, the outstanding balance of $45,000,000 was classified as a
current obligation at June 30, 1999.
On July 2, 1999, the Company repurchased $4,000,000 of the Notes for $210,000
and recorded a gain on extinguishment of debt of 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.
On October 31, 1999 (the "October Default Date"), the Company defaulted on its
semi-annual payment of interest on the outstanding Notes. The total amount of
accrued interest on the outstanding Notes at October 31, 1999 was approximately
$3,300,000.
The Company completed a restructuring of the Notes and executed a Consent Letter
and Agreement to the First Supplemental Indenture (the "Restructuring"). The
Restructuring was approved by the shareholders on February 14, 2000. The
following occurred as a result of the Restructuring: (a) $31,000,000 of the
outstanding principal of the Notes was converted, on a pro rata basis, into the
Company's common stock at a conversion rate of $2.00 per share (approximately
15,500,000 shares of capital stock); (b) all interest which had accrued on the
Notes through October 31, 1999 was forgiven (approximately $3,300,000); (c)
interest which accrued on from November 1, 1999 through the date of the
Restructuring (February 15, 2000) on the $31,000,000 which was converted into
15,500,000 shares of the Company's common stock was forgiven; (d) the interest
payment default on the remaining $10,000,000 principal balance of the Notes was
waived and the debentures were reinstated on the Company's books and records as
a performing non-defaulted loan (the "Reinstated Subordinated Debentures"); (e)
the Reinstated Subordinated Debentures will bear interest at the rate of 7% per
annum commencing November 1, 1999; and (f) the conversion rate for the
Reinstated Subordinated Debentures for the period commencing November 1, 2000 to
maturity will be $2.00. The Restructuring also required the Company to procure a
$3,000,000 bank credit facility and to obtain a financially responsible
person(s) to guarantee the bank credit facility for the Company (see Note 7
below).
As a result of the Restructuring, the Company recognized a gain of approximately
$9,472,000, net of restructuring costs. The gain consists of the conversion of
$31,000,000 of the outstanding principal balance into 15,500,000 shares of
common stock, which were valued at approximately $21,312,500 based on the
closing price of the Company's stock on February 15, 2000, the forgiveness of
approximately $4,237,000 of accrued interest, the write off of approximately
$1,929,000 of unamortized deferred financing costs and the recording of
$2,100,000 of interest which will accrue on the remaining balance of the Notes
under the revised terms of the agreement through the maturity date of October
31, 2002. In accordance with Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings," the
balance of the outstanding Notes on the balance sheet of $11,750,000 at June 30,
2000, includes interest accrued through June 30, 2000 of $116,667 and the
remaining interest of $1,633,333 which will be payable in semi-annual payments
through October 31, 2002.
F-18
<PAGE> 62
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - LONG-TERM DEBT
The following long-term debt was outstanding as of June 30, 2000 and 1999.
2000 1999
----------------------------------
Contract Modification Note................. $3,856,745 $3,644,337
Acquisition Note........................... 1,500,000 1,804,605
Credit Facility............................ -- 1,064,255
Other Outstanding Notes.................... 1,943,134 1,741,502
----------------------------------
7,299,879 8,254,699
Less Current Portion....................... 2,276,635 6,857,946
----------------------------------
Long-Term.................................. $5,023,244 $1,396,753
==================================
CONTRACT MODIFICATION NOTE--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 $4.0 million non-interest bearing promissory note with the HMO
of which $1,000,000 was to be paid over the 12 months commencing January 1999
and the remaining $3,000,000 over the ensuing 24 months. The note was recorded
net of imputed interest. The $4,000,000 cost, net of imputed interest calculated
at 8%, or 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.
As of June 30, 2000, none of the payments required under this note had been
paid. As the Company was not in compliance with the terms of the note, the
outstanding balance of approximately $3,644,000 was classified as a current
obligation at June 30, 1999. On September 27, 2000, the Company entered into an
agreement to amend the repayment terms. This agreement modified the repayment
terms as follows: (a) commencing on October 1, 2000 and through September 1,
2001, the Company will make monthly payments of $30,000; (b) on October 1, 2001,
the Company will make a single payment of $640,000; and (c) commencing on
November 1, 2001 and through October 1, 2002, the Company will make monthly
payments of $250,000. Accordingly, approximately $270,000 is shown as a current
obligation in the accompanying consolidated balance sheet.
ACQUISITION NOTE--In August 1998, the Company, through its Continucare Managed
Care Subsidiary, purchased professional provider contracts with approximately 30
physicians from an unrelated entity. The total purchase price was approximately
$6,700,000 of which $4,200,000 was paid in cash at closing and the remaining
$2,500,000 is payable in equal monthly installments over the ensuing 24 months.
The note is non-interest bearing. The Company imputed interest at 8%. The
Company has repaid $625,000 of the note. The purchase price was included in
other intangible assets on the accompanying consolidated balance sheet and was
being amortized over 10 years, the term of the contracts. However, later in
Fiscal 1999 management determined that these assets were impaired, as discussed
in Note 2, and the unamortized balance was written-off.
Effective December 31, 1999, the Company negotiated an amendment to its contract
with Foundation (the "Amendment"). The Amendment reduces the Company's prior
medical claims and long-term debt liabilities as of May 31, 1999 to $1,500,000.
The Amendment also requires the Company to remit to Foundation any reinsurance
proceeds received for claims generated from Foundation members for the period
June 1, 1998 through August 31, 1999 up to a maximum of $1,327,400. As a result
of this Amendment, the Company recorded a contractual revision of previously
recorded medical claims liability of approximately $3,054,000. This Amendment
resulted in the reduction of medical claims payable by approximately $2,703,000
and the reduction of long-term debt by approximately $351,000. Under the
amendment, the outstanding balance of $1,500,000 is to be repaid from future
surpluses generated by the IPA.
CREDIT FACILITY--In August 1998, the Company entered into a credit facility with
First Union Bank (the "Credit Facility"). The Credit Facility provided for a
$5,000,000 acquisition facility and a $5,000,000 revolving loan. The Company
borrowed the entire $5,000,000 acquisition facility to fund acquisitions. The
Company never utilized the revolving loan. During April 1999, the Company used
approximately $4,000,000 of the net proceeds from the sale of its Rehabilitation
F-19
<PAGE> 63
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - LONG-TERM DEBT (CONTINUED)
Subsidiary to reduce the outstanding balance of the Credit Facility. In
connection with the payment, the Company entered into an amendment to the Credit
Facility, which provided, among other things, for the repayment of the remaining
outstanding principal balance by December 31, 1999. At June 30, 1999, the
outstanding balance of the Credit Facility was approximately $1,000,000 and was
included in the Current Portion of Long-Term Debt on the accompanying
consolidated balance sheet. The Company obtained a waiver which extended the due
date on the remaining balance to February 1, 2000 and repaid the remaining
outstanding balance on January 31, 2000.
In conjunction with the Restructuring, the Company executed a credit facility
agreement (the "New Credit Facility"). The New Credit Facility provides a
revolving loan of $3,000,000. The New Credit Facility is due March 31, 2001 with
annual renewable options, with interest payable monthly at 2.9% plus the 30-day
Dealer Commercial Paper Rate which is 6.58% at June 30, 2000. All assets of the
Company serve as collateral for the New Credit Facility. In addition, the New
Credit Facility has been guaranteed by a board member and an entity controlled
by a board member. In consideration for providing guarantees, the Company issued
3,000,000 shares of the Company's common stock. These shares, which were valued
at $3,375,000 based on the closing price of the Company's common stock on
February 11, 2000 when the guarantees were granted, have been recorded as a
deferred financing cost which is being amortized over the term of the guarantee.
At June 30, 2000, the Company had not borrowed any amounts available under the
New Credit Facility.
OTHER OUTSTANDING NOTES--In conjunction with the operation of its Home Health
Division, the Company has entered into nine (9) repayment agreements (the
"Repayment Agreements") with a governmental agency. These Repayments Agreements
resulted from various overpayments received by the Company for expenses that
were expected to be generated in conjunction with home health patient care
activities. Four of the nine Repayment Agreements are non interest bearing and
have maturity dates ranging from Fiscal 2003 to Fiscal 2005. Five of the nine
Repayment Agreements have interest rates ranging from 13.25% to 13.5% and have
maturity dates in Fiscal 2003 and Fiscal 2004.
F-20
<PAGE> 64
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - EARNINGS PER SHARE
The following table sets forth share and common share equivalents used in the
computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
2000 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
Numerator for basic and dilutive earnings per
share
Income (loss) before extraordinary items .... $ 870,062 $(50,641,743) $(14,982,935)
Extraordinary gain or extinguishment of debt 13,247,907 130,977 --
----------- ------------ ------------
Net income (loss) ........................... $14,117,969 $(50,510,766) $(14,982,935)
=========== ============ ============
Denominator for basic and diluted earnings
(loss)
Per share-weighted average shares ........... 21,587,086 14,451,493 12,517,503
=========== ============ ============
</TABLE>
Options and warrants to purchase the Company's common stock and the convertible
subordinated notes payable were not included in the computation of diluted
earnings (loss) per share because the effect would be antidilutive.
For additional disclosure regarding the employee stock options and warrants see
Note 11.
F-21
<PAGE> 65
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - RELATED PARTY TRANSACTIONS
During the fiscal year ended June 30, 1998, the Company incurred expenses of
$200,000 for consulting services provided by a corporation in which one of its
shareholders was an executive officer of the Company. On September 18, 1998, the
Company purchased the corporation for $115,000 in cash and 575,000 shares with a
fair market value of approximately $1,600,000 of the Company's restricted common
stock. Additional consideration is contingently due to the former owners based
on the price of the Company's common stock at October 15, 1999 as described
further in Note 3. The Company has commenced litigation and is seeking return of
consideration and rescission of the contract.
During Fiscal years 1999 and 1998, the Company rented various medical facilities
and equipment from corporations owned by physician employees of the Company.
General and administrative expense for fiscal years ended June 30, 1999 and 1998
included approximately $186,000 and $305,000, respectively, under these lease
agreements. The subsidiaries which leased these facilities and equipment were
disposed in Fiscal 1999, and, therefore, there were no such expenses during
Fiscal 2000.
In May 1999, the Company entered into an agreement with Harter Financial, Inc.
("Harter") to assist it with a financial reorganization and to represent the
Company in negotiating the restructuring of the Notes and a settlement with the
noteholders. As compensation for its services, Harter received an initial fee of
$50,000 on May 18, 1999. On October 18, 1999, the Board of Directors approved a
final compensation package to Harter consisting of a cash payment of $150,000
and the issuance of 200,000 unregistered shares of the Company's common stock,
which were valued at $112,500 based on the closing price of the Company's common
stock on the date of grant. Mr. Angel, the Company's president and chief
executive officer is also the president and a 15% shareholder of Harter.
However, as of May 18, 1999, Mr. Angel was not an officer or director of the
Company.
In connection with the restructuring of the convertible subordinated notes which
occurred in February 2000, the Company was required to procure a $3,000,000 bank
credit facility and to obtain a financially responsible person(s) to guarantee
the bank credit facility for the Company. The Company obtained such a bank
credit facility and obtained guarantees from a board member and an entity
controlled by a board member. In consideration for providing the guarantees, the
Company issued an aggregate of 3,000,000 shares of the Company's common stock to
the guarantors. These shares were valued at $3,375,000 based on the closing
price of the Company's stock on February 11, 2000 when the original guarantees
were granted.
NOTE 10 - SETTLEMENT OF FORMER SHAREHOLDER CLAIM
In July 1997, the Company received a demand for arbitration relating to a claim
by a former shareholder of a predecessor of the Company alleging securities
fraud in connection with the redemption of his shares. Pursuant to a settlement
agreement entered into on June 12, 1998, the Company paid $2,000,000 in cash and
on July 12, 1998 issued 300,000 shares of common stock (with a fair market value
of $1,385,000) in settlement of this claim. The Company reflected this
transaction at June 30, 1998 as an increase in treasury stock of $2,958,000 and
legal settlement expense of $426,000, which was reflected as general and
administrative expense in the Fiscal 1998 consolidated statement of operations.
The increase in treasury stock results in recording the treasury stock acquired
at its fair market value at the redemption date.
F-22
<PAGE> 66
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - STOCK OPTION PLAN AND WARRANTS
In January 1999, the Company's shareholders approved an amendment to the
Company's Amended and Restated 1995 Stock Option Plan (the "Stock Option Plan")
to increase the authorized shares for issuance upon the exercise of stock
options from 1,750,000 to 2,400,000 and to cover employees, directors,
independent contractors and consultants of the Company.
Under the terms of the Stock Option Plan, the options expire 10 years after the
date of the grant.
Pro forma information regarding net income and earnings per share is required by
FASB No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 2000,
1999, and 1998, respectively: risk-free interest rates of 5.85%, 5.25% and 5.5%;
dividend yields of 0%; volatility factors of the expected market price of the
Company's common stock of 82.5%, 66.4% and 63.6%, and a weighted-average
expected life of the options of 10, 10 and 3 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Pro forma net income (loss) .......... $ 13,326,315 $ (52,046,336) $ (17,730,428)
Basic and diluted pro forma net income
(loss) per share ................... $ .62 $ (3.60) $ (1.42)
</TABLE>
The following table summarizes information related to the Company's stock option
activity for the years ended June 30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------
2000 1999 1998
----------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
---------- ----------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year... 1,138,500 $5.58 1,388,500 $5.45 376,400 $6.26
Granted................................ 25,000 2.00 562,500 5.90 1,238,000 5.53
Exercised.............................. -- -- -- -- (17,000) 6.00
Forfeited.............................. (669,500) 5.54 (812,500) $5.58 (208,900) $7.19
------------- ------------- -------------
Outstanding at end of the year......... 494,000 1,138,500 1,388,500
============= ============= =============
Exercisable at end of the year......... 464,000 847,085 727,171
============= ============= =============
Weighted average fair value of
options granted during the year..... $ .30 $ 4.18 $ 4.10
============= ============= =============
</TABLE>
F-23
<PAGE> 67
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - STOCK OPTION PLAN AND WARRANTS (CONTINUED)
The following table summarizes information about the options outstanding at June
30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
RANGE --------------------------------------------------------------------------------------------------
OF WEIGHTED AVERAGE
EXERCISE OUTSTANDING AT REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES JUNE 30, 2000 CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.00-$7.25 469,000 7.25 $5.64 464,000 5.64
$2.00 25,000 9.18 $2.00 -- --
</TABLE>
In July 2000, the Board of Directors approved the Continucare Corporation 2000
Employee Stock Option Plan.
In connection with the sale of the Notes in Fiscal 1998 (see Note 6), the
Company issued warrants to purchase 200,000 shares of the Company's common stock
with exercise prices ranging from $8.00 to $12.50 per share as a placement fee.
The fair market value of the warrants at date of issuance was $775,000. This
amount was being amortized, using the interest method, over the life of the
Notes. However, in connection with the Restructuring, the remaining unamortized
balance was written off and is included in the extraordinary gain. During Fiscal
1998, warrants to purchase 250,000 shares of common stock at $3.15 per share
were exercised. The Company has 760,000 warrants outstanding at June 30, 2000
which are exercisable through December 31, 2007, with exercise prices ranging
from $7.25 to $12.50 per share.
Shares of common stock have been reserved for future issuance at June 30, 2000
as follows:
Convertible subordinated notes............................... 1,379,310
Warrants..................................................... 760,000
Stock Options................................................ 494,000
---------------
Total.................................................... 2,633,310
===============
NOTE 12 - INCOME TAXES
The Company accounts for income taxes under FASB Statement No. 109, "Accounting
for Income Taxes". Deferred income tax assets and liabilities are determined
based upon differences between the financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
The components of the provision for income taxes for the years ended June 30,
2000, 1999, and 1998 are as follows:
YEAR ENDED JUNE 30,
-------------------------------
2000 1999 1998
------- ------- -----------
Current income taxes:
Federal ................................ $ -- $ -- $(1,448,000)
State .................................. -- -- 33,000
------- ------- -----------
Total current ........................ -- -- (1,415,000)
------- ------- -----------
Deferred income taxes:
Federal ................................ -- -- 435,000
State .................................. -- -- 71,000
------- ------- -----------
Total deferred ....................... -- -- 506,000
------- ------- -----------
Total (benefit) provision for income taxes $ -- $ -- $ (909,000)
======= ======= ===========
F-24
<PAGE> 68
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net effect of temporary differences between
the carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of temporary
differences that give rise to deferred tax assets and deferred tax liabilities
are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Deferred tax assets:
Bad debt and notes receivable reserve $ 4,817,719 $ 4,065,794 $ 2,610,363
Depreciable/amortizable assets ...... 577,136 762,486 845,133
Alternative minimum tax credit ...... 111,973 111,973 111,973
Other ............................... 1,127,065 454,379 302,544
Impairment charge ................... 3,285,430 3,540,577 --
Capital loss carryover .............. 200,261
Net operating loss carryforward ..... 2,522,780 8,036,027 1,208,747
------------ ------------ -----------
Deferred tax assets ................. 12,642,364 16,971,236 5,078,760
Deferred tax liabilities:
Depreciation and amortization ....... -- -- (337,034)
Specifically identified intangibles . -- -- (954,894)
Other ............................... (23,126) (23,126) (23,126)
Valuation allowance ................. (12,619,238) (16,948,110) (4,718,600)
------------ ------------ -----------
Deferred tax liabilities ............ (12,642,364) (16,971,236) (6,033,654)
------------ ------------ -----------
Net deferred tax (liability) asset ..... $ -- $ -- $ (954,894)
============ ============ ===========
</TABLE>
SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management
determined that a valuation allowance of $12,619,238, $16,948,110 and $4,718,600
is necessary at June 30, 2000, 1999 and 1998, respectively, to reduce the
deferred tax assets to the amount that will more likely than not be realized.
The change in the valuation allowance for the current period was approximately
$4,329,000 for the year ended June 30, 2000. At June 30, 2000, the Company had
available net operating loss carryforwards of $6,704,172, which expire in 2013
through 2019.
For financial reporting purposes, the Company reported a gain of $13,247,907
resulting from the forgiveness of indebtedness relating to certain debt
restructuring. Pursuant to Section 108 of the Internal Revenue Code, the Company
believes that this gain is excluded from income taxation and certain tax
attributes (i.e. net operating losses) of the Company are being reduced by the
amount of such debt forgiveness. As a result, the Company's net operating loss
carryforwards have been reduced by an amount representing the Company's
discharge of indebtedness income.
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate for the years ended June 30, 2000, 1999, and 1998 is
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ----- -----
<S> <C> <C> <C>
Statutory federal rate .............................. 34.0% (34.0)% (34.0)%
State income taxes, net of federal income tax benefit (0.89) (2.6) (3.6)
Goodwill and other non-deductible items ............. 0.84 10.1 1.0
Change in valuation allowance ....................... (30.66) 24.2 28.5
Other ............................................... (3.29) 2.3 2.4
---- ----- -----
Effective (benefit) tax rate ........................ 0% 0% (5.7)%
==== ===== =====
</TABLE>
F-25
<PAGE> 69
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - EMPLOYEE BENEFIT PLAN
As of January 1, 1997, the Company adopted a tax qualified employee savings and
retirement plan covering the Company's eligible employees. The Continucare
Corporation 401(k) Profit Sharing Plan and Trust (the "401(k) Plan") was amended
and restated on July 1, 1998. The 401(k) Plan is intended to qualify under
Section 401 of the Internal Revenue Code (the "Code") and contains a feature
described in Code Section 401(k) under which a participant may elect to have his
or her compensation reduced by up to 16% (subject to IRS limits) and have that
amount contributed to the 401(k) Plan. On February 1, 1999, the Internal Revenue
Service issued a favorable determination letter for the 401(k) Plan.
Under the 401(k) Plan, new employees who are at least eighteen (18) years of age
are eligible to participate in the 401(k) Plan after 90 days of service.
Eligible employees may elect to reduce their compensation by the lesser of 16%
of their annual compensation or the statutorily prescribed annual limit of
$10,500 (for calendar year ending December 31, 2000) and have the reduced amount
contributed to the 401(k) Plan. The Company may, at its discretion, make a
matching contribution and a non-elective contribution to the 401(k) Plan. Such
matching contributions were $51,512 for the year ending June 30, 1998. There
were no matching contributions for the years ending June 30, 2000 or 1999.
Participants in the 401(k) Plan do not begin to vest in the employer
contribution until the end of two years of service, with full vesting achieved
after five years of service.
Under the 401(k) Plan, each participant directs the investment of his or her
401(k) Plan account from among the 401(k) Plan's many options. During Fiscal
1999, the 401(k) Plan underwent an integration and conversion process by which:
(i) certain 401(k) plans of subsidiaries purchased through past acquisitions
were merged into the 401(k) Plan; and (ii) the 401(k) Plan's valuation system
was converted from a quarterly to a daily valuation.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Employment Agreements--The Company maintains employment agreements with certain
officers and key executives expiring at various dates through September 11,
2001. In addition, one employment agreement provides for one additional year
term for each year of service by the executive. The agreements provide for
annual base salaries in the aggregate of approximately $300,000, annual
increases, bonuses and stock option grants. The employment agreements with
certain officers also provide that in the event of a change in control of the
Company, as defined therein, each officer is entitled to an acceleration of the
remainder of the officer's term and the automatic vesting of any unvested stock
options.
Insurance--The Company maintains policies for general and professional liability
insurance jointly with each of the providers. It is the Company's intention to
renew such coverage on an on-going basis.
Leases--The Company leases office space and equipment under various
non-cancelable operating leases. Rent expense under such operating leases was
$2,304,299, $4,520,866, and $2,426,416 for the years ended June 30, 2000, 1999,
and 1998, respectively. Future annual minimum payments under such leases as of
June 30, 2000 are as follows:
For the fiscal year ending June 30,
2001........................................ $820,525
2002........................................ 780,566
2003........................................ 640,836
2004........................................ 403,686
2005........................................ 150,566
Thereafter.................................. 4,750
----------------
Total.................................... $2,800,929
================
Concentrations of Revenues - For the years ended June 30, 2000, 1999 and 1998,
the Company generated approximately 39%, 51% and 38% respectively of total
F-26
<PAGE> 70
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
revenues from Foundation Health Corporation. Humana Medical Plans, Inc.
accounted for 57%, 34% and 19%, respectively, of total revenues in Fiscal 2000,
1999, and 1998.
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, CPPM and Spencer Angel 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 was a party to the case of MANAGED HEALTHCARE SYSTEMS ("MHS") V.
CONTINUCARE CORPORATION & CONTINUCARE HOME HEALTH SERVICES, INC. ("CHHS"). This
case was filed in the Commonwealth of Massachusetts in August, 1998. The
complaint alleged breach of contract for alleged verbal representations by CHHS
in negotiations to acquire MHS and sought damages in excess of $2,750,000 and
treble damages. The case was settled in July, 2000 with no admission of
liability. The parties exchanged general releases.
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 is set for trial in September, 2000, but it is likely to be postponed
to the court's next trial period. 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. 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
F-27
<PAGE> 71
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Riskin, M.D., P.A. and Wayne Riskin, M.D. The Company believes it has
meritorious defenses and intends to vigorously pursue them.
In connection with the Company's Business Rationalization Program, the Company
has closed or dissolved certain subsidiaries, some of which had pending claims
against them. The Company is also involved in various other legal proceedings
incidental to its business that arise from time to time out of the ordinary
course of business -- including, but not limited to, claims related to the
alleged malpractice of employed and contracted medical professionals, workers'
compensation claims and other employee-related matters, and minor disputes with
equipment lessors and other vendors.
F-28
<PAGE> 72
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's Valuation and Qualifying Accounts consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
2000 1999 1998
------------ ------------ ----------
<S> <C> <C> <C>
Allowance for doubtful accounts related to accounts receivable:
Balance at beginning of period ................................ $ 5,752,000 $ 2,071,000 $1,061,000
Provision for doubtful accounts ............................... -- 4,655,000 1,010,000
Write-offs of uncollectible accounts receivable ............... -- (974,000) --
------------ ------------ ----------
Balance at end of period ...................................... $ 5,752,000 $ 5,752,000 $2,071,000
============ ============ ==========
Allowance for doubtful accounts related to notes receivable:
Balance at beginning of period ................................ $ 7,051,000 $ 5,510,000 $ 742,000
Provision for doubtful accounts ............................... -- 1,541,000 4,768,000
Write-offs of uncollectible notes receivable .................. -- -- --
------------ ------------ ----------
Balance at end of period ...................................... $ 7,051,000 $ 7,051,000 $5,510,000
============ ============ ==========
Tax valuation allowance for deferred tax assets:
Balance at beginning of period ................................ $ 16,948,110 $ 4,718,600 $ --
Additions, charged to cost and expenses ....................... -- 12,229,510 4,718,600
Deductions .................................................... (4,328,872) -- --
------------ ------------ ----------
Balance at end of period ...................................... $ 12,619,238 $ 16,948,110 $4,718,600
============ ============ ==========
</TABLE>
F-29
