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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-12115
CONTINUCARE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-2716023
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
80 SOUTHWEST EIGHTH STREET
SUITE 2350
MIAMI, FLORIDA 33130
(Address of principal executive offices)
(Zip Code)
(305) 350-7515
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in RULE 12b-2 of the Exchange Act). Yes [ ] No [X]
At May 15, 2003, the Registrant had 42,379,001 shares of $0.0001 par value
common stock outstanding.
CONTINUCARE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - March 31, 2003 (Unaudited) and June 30,
2002................................................................................. 3
Condensed Consolidated Statements of Operations - Three Months Ended March 31,
2003 (Unaudited) and 2002 (Unaudited)................................................ 4
Condensed Consolidated Statements of Operations - Nine Months Ended March 31,
2003 (Unaudited) and 2002 (Unaudited)................................................ 5
Condensed Consolidated Statements of Cash Flows - Nine Months Ended March 31,
2003 (Unaudited) and 2002 (Unaudited)................................................ 6
Notes to Condensed Consolidated Financial Statements - March 31, 2003
(Unaudited).......................................................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................................. 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 25
ITEM 4. CONTROLS AND PROCEDURES................................................................. 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................................... 25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................... 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................... 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 25
ITEM 5. OTHER INFORMATION....................................................................... 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................ 26
SIGNATURE PAGE..................................................................................... 27
CERTIFICATIONS..................................................................................... 28
2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 JUNE 30, 2002
-------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 116,194 $ 180,410
Restricted cash related to leases, current .............................. 30,757 100,813
Accounts receivable, net of allowance for doubtful accounts of
$4,819,000 and $4,807,000, respectively ................................ 252,118 94,967
Due from Medicare, net .................................................. 189,841 --
Other receivables ....................................................... 418,743 834,227
Due from HMOs, net of a liability for incurred but not reported
medical claims expense of approximately $12,480,000 and
$11,818,000, respectively .............................................. 1,327,022 1,798,651
Prepaid expenses and other current assets ............................... 574,258 548,322
------------ ------------
Total current assets ................................................ 2,908,933 3,557,390
Assets related to discontinued operations .................................. -- 6,646
Equipment, furniture and leasehold improvements, net ....................... 513,573 580,779
Restricted cash related to leases .......................................... 30,000 60,000
Goodwill, net of accumulated amortization of approximately $3,661,000
at March 31, 2003 and June 30, 2002 ...................................... 14,663,392 14,663,392
Managed care contracts, net of accumulated amortization of
approximately $1,628,000 and $1,364,000, respectively .................... 1,881,634 2,146,243
Cost in excess of intangible assets acquired, net of accumulated
amortization of approximately $4,017,000 and $4,012,000, respectively .... 10,711 15,788
Deferred financing costs, net of accumulated amortization of
approximately $3,420,000 and $2,985,000, respectively .................... 645,542 435,375
Other assets, net .......................................................... 101,528 81,372
------------ ------------
Total assets ........................................................ $ 20,755,313 $ 21,546,985
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 542,730 $ 680,443
Accrued expenses ........................................................ 1,864,391 1,841,360
Accrued salaries and benefits ........................................... 1,024,451 559,050
Liabilities related to discontinued operations, net ..................... 416,322 629,789
Credit Facility ......................................................... 1,800,000 2,315,000
Due to Medicare, net .................................................... -- 350,991
Current portion of convertible subordinated notes payable ............... 253,806 273,896
Current portion of long term debt ....................................... 6,743,337 4,375,329
Current portion of related party notes payable .......................... 63,854 63,854
Accrued interest payable ................................................ 22,185 10,708
Current portion of capital lease obligations ............................ 47,593 107,479
------------ ------------
Total current liabilities ........................................... 12,778,669 11,207,899
Capital lease obligations, less current portion ............................ 55,786 42,171
Convertible subordinated notes payable, less current portion ............... 4,171,135 4,356,468
Long term debt, less current portion ....................................... 1,435,534 3,597,122
Related party notes payable, less current portion .......................... 1,029,259 1,061,186
------------ ------------
Total liabilities ................................................... 19,470,383 20,264,846
Commitments and contingencies
Shareholders' equity:
Common stock; $0.0001 par value; 100,000,000 shares authorized 45,375,194
shares issued and 42,379,001 shares outstanding at March
31, 2003 and 42,630,794 shares issued and 39,634,601 shares ........... 4,239 3,964
outstanding at June 30, 2002
Additional paid-in capital .............................................. 60,279,880 59,511,614
Accumulated deficit ..................................................... (53,574,488) (52,808,738)
Treasury stock (2,996,193 shares) ....................................... (5,424,701) (5,424,701)
------------ ------------
Total shareholders' equity ............................................ 1,284,930 1,282,139
------------ ------------
Total liabilities and shareholders' equity ............................ $ 20,755,313 $ 21,546,985
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-------------------------------
2003 2002
------------ ------------
Medical services revenue, net ............................................. $ 25,358,084 $ 25,202,455
Expenses
Medical services:
Medical claims ........................................................ 18,345,344 18,004,434
Other ................................................................. 3,364,276 3,406,549
------------ ------------
Total medical services .................................................. 21,709,620 21,410,983
Payroll and employee benefits ........................................... 1,633,576 1,426,863
Provision for bad debts ................................................. (37,755) 24,023
Professional fees ....................................................... 200,034 686,147
General and administrative .............................................. 1,622,033 993,208
Depreciation and amortization ........................................... 146,852 169,370
------------ ------------
Subtotal .............................................................. 25,274,360 24,710,594
Income from operations .................................................... 83,724 491,861
Other income (expense)
Interest income ......................................................... 1,341 3,551
Interest expense ........................................................ (81,059) (363,814)
Provision for Medicare settlement related to terminated operations ...... -- (2,440,971)
------------ ------------
Income (loss) from continuing operations .................................. 4,006 (2,309,373)
Income (loss) from discontinued operations ................................ 294,370 (113,213)
------------ ------------
Net income (loss) ......................................................... $ 298,376 $ (2,422,586)
============ ============
Basic and diluted income (loss) per common share
Income (loss) from continuing operations ................................ $ -- $ (.06)
Income from discontinued operations ..................................... .01 --
------------ ------------
Net income (loss) ......................................................... $ .01 $ (.06)
============ ============
Basic weighted average number of common shares outstanding ................ 40,555,094 39,479,045
============ ============
Diluted weighted average number of common shares outstanding............... 45,380,289 39,479,045
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED MARCH 31,
-------------------------------
2003 2002
------------ ------------
Medical services revenue, net ............................................. $ 74,708,832 $ 70,625,785
Expenses
Medical services:
Medical claims ........................................................ 54,749,621 52,523,307
Other ................................................................. 9,722,708 9,189,141
------------ ------------
Total medical services .................................................. 64,472,329 61,712,448
Payroll and employee benefits ........................................... 4,768,623 3,959,691
Provision for bad debts ................................................. 12,357 60,472
Professional fees ....................................................... 528,508 1,193,859
General and administrative .............................................. 4,565,797 3,488,150
Depreciation and amortization ........................................... 484,020 851,312
------------ ------------
Subtotal .............................................................. 74,831,634 71,265,932
Loss from operations ...................................................... (122,802) (640,147)
Other income (expense)
Interest income ......................................................... 5,147 33,436
Interest expense ........................................................ (693,077) (1,179,793)
Provision for Medicare settlement related to terminated operations ...... -- (2,440,971)
------------ ------------
Loss from continuing operations ........................................... (810,732) (4,227,475)
Income (loss) from discontinued operations ................................ 44,982 (351,241)
------------ ------------
Net loss .................................................................. $ (765,750) $ (4,578,716)
============ ============
Basic and diluted loss per common share
Loss from continuing operations ......................................... $ (.02) $ (.11)
Loss from discontinued operations ....................................... -- (.01)
------------ ------------
Net loss .................................................................. $ (.02) $ (.12)
============ ============
Basic and diluted weighted average number of common shares outstanding .... 40,251,186 39,465,988
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED MARCH 31,
-----------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ........................................................... $ (765,750) $(4,578,716)
(Income) loss from discontinued operations ......................... (44,982) 351,241
----------- -----------
Loss from continuing operations .................................... (810,732) (4,224,475)
Adjustments to reconcile net loss to cash provided by operating
activities:
Depreciation and amortization, including amortization
of deferred loan costs ........................................... 921,183 1,824,089
Provision for bad debts .......................................... 12,357 60,472
Loss (gain) on disposal of assets and release from capital lease . 500 (28,642)
Director compensation paid through the issuance of restricted
common stock ..................................................... 123,000 --
Changes in operating assets and liabilities:
Increase in accounts receivable .................................. (169,508) (128,530)
Increase in prepaid expenses and other current assets ............ (25,936) (169,606)
Decrease in other receivables .................................... 415,484 205,117
Increase in other assets ......................................... (20,156) (4,466)
Decrease in due from HMO's, net .................................. 471,629 321,459
Increase in due to/from Medicare, net ............................ 153,968 2,515,684
Increase in accounts payable and accrued expenses ................ 350,719 (9,180)
Increase (decrease) in accrued interest payable .................. 11,477 (2,679)
----------- -----------
Net cash provided by continuing operations ......................... 1,433,985 356,243
Net cash used in discontinued operations ........................... (80,333) (206,872)
----------- -----------
Net cash provided by operating activities ............................. 1,353,652 149,371
CASH FLOWS FROM INVESTING ACTIVITY
Proceeds from equipment disposals .................................. 500 --
Proceeds from maturities of restricted cash ........................ 100,056 27,738
Property and equipment additions ................................... (99,798) (156,331)
----------- -----------
Net cash provided by (used in) investing activity ..................... 758 (128,593)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on convertible subordinated notes ......................... (205,423) (205,422)
Payments on related party notes .................................... (31,927) (31,927)
Principal repayments under capital lease obligation ................ (94,601) (83,516)
Third-party assumption of capital lease obligation ................. (1,789) --
Net (decrease) increase in Credit Facility ......................... (515,000) 1,300,000
Advances from HMOs ................................................. 75,000 --
Payment on advances from HMOs ...................................... (75,000) (450,000)
Repayments to Medicare per agreement ............................... (488,380) (479,962)
----------- -----------
Net cash (used in) provided by continuing operations ................ (1,337,120) 49,173
Net cash used in discontinued operations ............................ (81,506) --
----------- -----------
Net cash (used in) provided by financing activities ................... (1,418,626) 49,173
----------- -----------
Net (decrease) increase in cash and cash equivalents .................. (64,216) 69,951
----------- -----------
Cash and cash equivalents at beginning of period ...................... 180,410 371,470
----------- -----------
Cash and cash equivalents at end of period ............................ $ 116,194 $ 441,421
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for deferred financing costs ............................. $ 645,540 $ --
=========== ===========
Note payable issued for refunds due to Medicare for overpayments ...... $ 694,800 $ 2,915,259
=========== ===========
Purchase of furniture and fixtures with proceeds of capital lease
obligations ........................................................... $ 56,463 $ 36,252
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 1 - UNAUDITED INTERIM INFORMATION
The accompanying unaudited condensed consolidated financial statements of
Continucare Corporation ("Continucare" or the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine-month period ended March 31, 2003 are not necessarily indicative of the
results that may be expected for the year ended June 30, 2003. Except as
otherwise indicated by the context, the terms the "Company" or "Continucare"
mean Continucare Corporation and its consolidated subsidiaries.
The balance sheet at June 30, 2002 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended June 30, 2002.
Certain reclassifications have been made to the prior year amounts to conform to
the current year presentation.
NOTE 2 - GENERAL
Continucare, which was incorporated on February 1, 1996 as a Florida
corporation, is a provider of integrated outpatient healthcare and home
healthcare services in Florida. Continucare's predecessor, Zanart Entertainment,
Incorporated ("Zanart") was incorporated in 1986. On August 9, 1996, a
subsidiary of Zanart merged into Continucare Corporation (the "Merger"). As a
result of the Merger, the shareholders of Continucare became shareholders of
Zanart, and Zanart changed its name to Continucare Corporation.
In Fiscal 2000, the Company instituted a series of measures intended to reduce
losses and to operate its core business model profitably. In spite of the
measures instituted in Fiscal 2000, the Company experienced a deterioration in
its claims loss ratio in the first and second quarters of both Fiscal 2001 and
2002. This resulted in operating losses and negative cash flow from operations
which prevented the Company from reversing a significant working capital
deficiency which originated in prior years. Negative changes in the claims loss
ratio, such as were experienced in Fiscal 2001 and 2002, are due to increases in
the utilization of health services as well as increases in medical costs without
counterbalancing increases in premium revenues from the Company's contracts with
Health Maintenance Organizations ("HMOs"). While the Company has not experienced
a similar deterioration in its claims loss ratio in the first three quarters of
Fiscal 2003, there can be no assurance that such a deterioration will not occur
during the fourth quarter of Fiscal 2003. If such a deterioration does occur
during the remainder of Fiscal 2003 that, compounded by the limited availability
of additional financing through the credit facility, could significantly strain
the Company's cash flow.
In an effort to streamline it's cost structure and stem anticipated operating
losses, effective January 1, 2003, the Company terminated the Medicare and
Medicaid lines of business for all of the physician contracts associated with
one of its independent practice associations ("IPA"). The terminated IPA, which
consisted of 29 physicians at the time of the termination and is considered
discontinued operations, contributed approximately $4,488,000 in revenue and
generated operating income of approximately $45,000 during the nine-month period
ended March 31, 2003.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
Severance costs and other exit costs resulting from the termination of the IPA
totaled less than $10,000 and were paid prior to March 31, 2003. At March 31,
2003, liabilities related to discontinued operations of approximately $416,322
consisted primarily of net amounts due to the HMO for medical claims incurred by
the terminated IPA prior to January 1, 2003 and other payables which arose
during the ordinary course of business. There can be no assurances that the
Company will achieve any financial benefits as a result of terminating these IPA
contracts.
On March 31, 2003, the Company's existing credit facility matured. In order to
secure an extension until March 31, 2004, Dr. Phillip Frost, a principal
shareholder of the Company, was required to extend his personal guarantee
through March 31, 2004. In consideration of Dr. Frost's personal guarantee, the
Company issued 1,500,000 shares of restricted stock to an entity related to Dr.
Frost and increased the annual interest rate on a currently outstanding note
payable to an entity related to Dr. Frost from 7% to 9%. (See Notes 3 and 4.) In
addition to Dr. Frost's guarantee, the Company has also agreed that a financial
covenant be added to the credit facility, which requires the Company to maintain
a fixed charge coverage ratio of 1.05 to 1.00 beginning December 31, 2003.
Also on March 31, 2003, the Company modified the terms of the Convertible
Subordinated Notes Payable (the "Notes"). The noteholders have extended the
principal payment of $1,148,000, which was due on October 31, 2003, to October
31, 2006. In consideration for the modification to the Notes, the Company issued
an aggregate of 344,400 shares of restricted stock to the noteholders and
increased the annual interest rate on the deferred principal payment from 7% to
9%. (See Note 3.)
Although the financial statements have been prepared assuming that the Company
will continue as a going concern, there is significant uncertainty as to whether
the Company will be able to fund its obligations and satisfy its debt
obligations as they become due in Fiscal 2003. At March 31, 2003, the working
capital deficit was approximately $9,870,000, total indebtedness accounted for
approximately 91% of the Company's total capitalization and the Company had
principal and interest of approximately $1,822,000 outstanding under the credit
facility. On April 14, 2003, the Company restructured the terms of a $3,850,000
contract modification note with an HMO. Pursuant to the restructuring, the
contract modification note was canceled. (See Note 9.) The Company plans to fund
its capital commitments, operating cash requirements and satisfy its obligations
from a combination of cash on hand and operating cash flow improvements realized
from decreased utilization, HMO premium increases and advantageous HMO benefit
changes. The Company continues to focus on strengthening its core business unit
by enhancing its physician network, streamlining its operations and implementing
measures to contain the rising costs of providing health services to its
members. Such measures include, among other things, emphasizing preventive care,
encouraging frequent health check-ups, monitoring compliance with drug
therapies, entering into contracts with health care providers such as medical
specialists and recommending that its members utilize hospitals and outpatient
facilities that have favorable rate structures. There can be no assurances that
such measures will provide sufficient cash flow to fund the Company's cash
requirements in Fiscal 2003.
NOTE 3 - CONVERTIBLE SUBORDINATED NOTES PAYABLE AND RELATED PARTY NOTES PAYABLE
On October 30, 1997, the Company issued $46,000,000 of 8% Convertible
Subordinated Notes originally due on October 31, 2002 (the "Original Notes").
The Company completed a series of repurchases and troubled debt restructurings
in Fiscal 2000 and 2001, including a restructuring effective June 30, 2001
whereby the Company issued a new convertible note (the "New Note') with a
principal balance of $912,195 to Frost Nevada Limited Partnership ("Frost
Nevada"), an entity controlled by Dr. Phillip Frost who was a director of the
Company at the time of the restructuring. The New Note was issued on modified
terms negotiated between the Company and Frost Nevada in exchange for Notes that
were purchased by Frost Nevada from certain of the holders of the Original Notes
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
in a private transaction between the parties. In July 2001, Frost Nevada
transferred approximately 13% of the New Note in a private transaction to a
group of six investors (the "Investor Group"). Mr. Angel, the Company's
president and chief executive officer, and an entity controlled by Mr. Angel
comprise 40% of the Investor Group. The notes issued to Frost Nevada and the
Investor Group, or their successors, are collectively referred to as the
"Related Party Notes." Also effective June 30, 2001, new notes (collectively,
the "Notes") were issued to the remaining holders of the Original Notes, on
modified terms negotiated between the Company and such holders, in exchange for
their Original Notes, as amended.
Effective March 31, 2003, the Company further modified the terms of the Notes
(the "Fiscal 2003 Note Modification") to, among other things, extend the
principal payment of $1,148,000, which was originally due on October 31, 2003,
to October 31, 2006. As a result, the first principal payment on the Notes will
be due on October 31, 2004. In consideration for the Fiscal 2003 Note
Modification, the Company issued an aggregate of 344,400 shares of restricted
stock to the noteholders and increased the annual interest rate on the deferred
principal payment of $1,148,000 from 7% to 9%. The shares issued, which were
valued at $120,540 based on the closing price of the Company's common stock on
March 31, 2003, have been recorded as a deferred financing cost which will be
amortized over the remaining term of the Notes. The additional interest expense
resulting from the Fiscal 2003 Note Modification on the deferred principal
payment will be recorded as the interest becomes due and payable.
The outstanding principal balance of the Notes at March 31, 2003 was
approximately $3,913,000. The balance of the outstanding Notes on the balance
sheet of approximately $4,425,000 includes interest accrued through March 31,
2003 of approximately $46,000 and interest of approximately $466,000 which will
be payable in quarterly payments through October 31, 2005.
Also, effective March 31, 2003, Dr. Frost extended his personal guarantee on the
Company's credit facility. (See Note 4.) As part of the consideration given to
Dr. Frost for his personal guarantee, the interest rate on the Related Party
Note to Frost Nevada, with an outstanding principal balance of approximately
$797,000 at March 31, 2003, was increased from 7% to 9%. This additional
interest expense will be recorded as the interest becomes due and payable.
The balance of the outstanding Related Party Notes on the balance sheet at March
31, 2003 of approximately $1,093,000 includes interest accrued through March 31,
2003 of approximately $16,000 and interest of approximately $165,000 which will
be payable in quarterly payments through the current maturity date of October
31, 2005.
NOTE 4 -CREDIT FACILITY
The Company has entered into a credit facility agreement ("Credit Facility"),
which provides a revolving loan of $3,000,000. On March 31, 2003, the Credit
Facility matured. In order to secure an extension until March 31, 2004, Dr.
Frost, a principal shareholder of the Company, was required to extend his
personal guarantee of the Credit Facility through March 31, 2004. In addition to
Dr. Frost's guarantee, the Company has also agreed that a financial covenant be
added to the Credit Facility, which requires the Company to maintain a fixed
charge coverage ratio of 1.05 to 1.00 beginning on December 31, 2003. Interest
under the Credit Facility is payable monthly at 2.9% plus the 30-day Dealer
Commercial Paper Rate which was 1.23% on March 31, 2003. In addition, to the
guarantee discussed above, all assets of the Company serve as collateral for the
Credit Facility. At March 31, 2003, the outstanding principal and interest
balance of the Credit Facility was $1,822,000.
In consideration of Dr. Frost's personal guarantee, the Company issued 1,500,000
shares of restricted stock to an entity related to Dr. Frost and increased the
annual interest rate on a currently outstanding note payable to an entity
related to Dr. Frost from 7% to 9%. (See Note 3.) The shares of common stock
issued, which were valued at $525,000 based on the closing price of the
Company's common stock on March 31, 2003 when the guarantee was granted, have
been recorded as a deferred financing cost which will be amortized over the
term of the guarantee which expires March 31, 2004.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 5 - INCOME/LOSS PER SHARE
Options and warrants to purchase the Company's common stock were not included in
the computation of diluted income/loss per share because the effect would be
antidilutive. The dilutive effect resulting from the convertible feature of the
Notes and Related Party Notes is reflected in the weighted average share
computation for the three-month period ended March 31, 2003. No shares from the
potential conversion of the Notes and Related Party Notes were included in the
weighted average share computation for the other periods presented as the
effect would be antidilutive.
NOTE 6 - DIRECTOR COMPENSATION
The Board of Directors granted 100,000 fully vested stock options to all Board
members who served in that capacity during calendar years 2001 and 2002.
Additionally 100,000 fully vested stock options were awarded to the two newly
elected members of the Board. The stock options have an exercise price of $.36
and are valid for a ten-year period. The Board members were given the
opportunity to elect to receive this compensation in the form of restricted
stock instead of stock options. On September 23, 2002, two of the Board members
elected to receive their award in the form of stock options for their service in
calendar years 2001 and 2002, a combined total of 400,000 options. Also on
September 23, 2002, five of the Board members elected to receive their award in
the form of restricted stock for their service in calendar years 2001 and 2002,
a combined total of 800,000 shares of restricted stock. The value of the
restricted stock awarded of $112,000 (based on the closing price of the
Company's common stock on September 23, 2002) has been recorded as director
compensation in the first quarter of Fiscal 2003.
During October 2002, the Board appointed Dr. Jack Nudel as a new member of the
Board. At the time of this appointment, the Board granted 100,000 fully vested
stock options to Dr. Nudel with the opportunity to elect to receive this
compensation in the form of restricted stock. On October 30, 2002, Dr. Nudel
elected to receive this award in the form of restricted stock. The value of the
100,000 shares of restricted stock awarded of $11,000 (based on the closing
price of the Company's common stock on October 30, 2002) was recorded as
director compensation in the second quarter of Fiscal 2003.
NOTE 7 - CONTINGENCIES
The Company is a party to the case of JOAN LINDAHL V. HUMANA MEDICAL PLAN, INC.,
COLUMBIA HOSPITAL COPRORATION OF SOUTH BROWARD D/B/A WESTSIDE REGIONAL MEDICAL
CENTER, INPHYNET CONTRACTING SERVICES, INC., CONTINUCARE MEDICAL MANAGEMENT,
INC., LUIS GUERRERO AND JARSLAW PARKOLAP. This case was filed on January 24,
2002 in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida and served on the companies and individuals in February 2003.
The complaint alleges vicarious liability for medical malpractice and seeks
damages in excess of $15,000. The Company intends to defend this case
vigorously.
The Company is a party to the case of ELBA GONZALEZ AND EFRAIN PELLOT AS
PERSONAL REPRESENTATIVES OF THE ESTATE OF NICHOLAS PELLOT, DECEASED, AND ELBA
GONZALEZ AND EFRAIN PELLOT, INDIVIDUALLY AND JOINTLY AS SURVIVING PARENTS V.
CONTINUCARE CORPORATION; MICHAEL J. CAVANAUGH, M.D.; GUYLENE KERNISANT,
A.R.N.P.; DIAGNOSTIC TESTING GROUP, INC. AND JOHN H. SOKOLOWICZ, M.D. This case
was filed on March 12, 2002 in the Circuit Court of the 11th Judicial Circuit in
and for Dade County, Florida and served on the companies and individuals in
March 2002. The complaint alleges vicarious liability for medical malpractice
and seeks damages in excess of $15,000. Trial was originally set for June 2,
2003; however, the court has granted a continuance and a new trial date has not
been set. The Company intends to defend this case vigorously.
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.; SHERIDAN 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
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
vicarious liability for medical malpractice and seeks damages in excess of
$15,000. The Company filed its answer on May 3, 2000. Discovery is still
proceeding at a slow pace. The Company has made a demand for assumption of
defense and indemnification from Kahn and Riskin, M.D., P.A. and Wayne Riskin,
M.D. The demand was initially rejected, but is currently being re-evaluated by
their new attorney. The Company and the carriers for Kahn & Riskin, M.D. have
been discussing apportionment of responsibilities. The Company intends to defend
this case vigorously.
A decision has been rendered in 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. On June 27, 2002, the court issued its ruling,
dismissing all claims asserted by one of the Plaintiffs. The court found the
Company had improperly terminated the employment contract of the other two
Plaintiffs', but awarded each only nominal damages in the amount of One Dollar
($1) each. The Company requested reimbursement for attorney's fees as to two of
the Plaintiffs and requested the court to deny any request for attorney fees as
to the other Plaintiff based on the award of only nominal damages. The
Plaintiffs' also asserted a right to reimbursement of certain attorney's fees.
The hearing to address these matters was initially heard on March 18, 2003 and
was continued on May 8, 2003. The court ruled that none of the parties will
obtain reimbursement of their attorney fees and costs.
The Company is also involved in 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.
On February 13, 1998, the Company acquired the stock of Rehab Management
Systems, Inc., Integracare, Inc. and J.R. Rehab Associates, Inc. from Integrated
Health Services, Inc. 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 services. On April 8, 1999, the Company sold
substantially all the assets of RMS and the assumption of certain liabilities to
Kessler Rehabilitation of Florida, Inc. ("Kessler"). On August 13, 1999, RMS was
formally dissolved as a corporation with the state of Florida. During the second
quarter of Fiscal 2002, the Company became aware that the Centers for Medicare
and Medicaid Services ("CMS") was pursuing IHS, Kessler and RMS for collection
of principal and interest for certain alleged Medicare overpayments made to
providers purchased from IHS or linked to the purchased entities through the use
of a common provider number for services rendered during calendar years 1996,
1997 and 1998. The Company was aware of its obligation to CMS for any
overpayments for services rendered by the Providers during calendar years 1997
and 1998. At the time the cost reports were completed and submitted to CMS for
services rendered by the Providers during calendar years 1997 and 1998, the
Company recorded an estimate for the overpayments indicated on those cost
reports. When the Company purchased RMS, the purchase agreement included
indemnification from IHS for any overpayments prior to calendar year 1997.
Subsequent to the Company's purchase of RMS, IHS sought protection under Chapter
11 of the United States Bankruptcy Code and, as such, is protected from CMS' and
RMS' efforts to collect on the Alleged Overpayments that relate to calendar year
1996. During the third quarter of Fiscal 2002, it became clear that CMS was
pursuing the Company as the primary obligor for all of the Alleged Overpayments,
including the calendar year 1996. While the Company disputes the validity of
these claims, in an effort to expedite the resolution of these matters and halt
CMS' aggressive collection procedures which included the threat of withholding
payments to the Company's home health agencies, the Company has entered into a
memorandum of understanding for the 1996 cost report year and has recorded an
approximately $2,441,000 Provision for Medicare Settlement Related to Terminated
Operations during the quarter ended March 31, 2002. Under this Memorandum, the
Company will make monthly payments of $10,000 for 24 months with the balance of
the Memorandum due at the end of the term. The Company has retained the right to
dispute the Alleged Overpayments and continues to review and evaluate all
information available to determine the validity of CMS' claims. During September
2002, the Company requested a reopening of the cost reports and supplied various
documentation for cost report years 1996 and 1997 to demonstrate that the
Alleged Overpayments are incorrect. The accrual for all Alleged Overpayments is
approximately $2,585,000 as of March 31, 2003 and is reflected in current
liabilities.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
The Company has recorded a liability for the Alleged Overpayments as discussed
above. Additionally, the Company has recorded an accrual for medical malpractice
claims, which includes amounts for insurance deductibles and legal fees, based
on management's estimate of the ultimate outcome of such claims. No other
liabilities have been recorded for the above matters as it is not possible to
estimate the liability, if any, that will result from the resolution of these
matters.
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure- an amendment of FASB Statement No. 123"
("FAS 148"). This statement amends SFAS No. 123 "Accounting for Stock Based
Compensation" ("FAS 123") to provide alternative methods of voluntarily
transitioning to the fair value based method of accounting for stock-based
employee compensation. FAS 148 also amends the disclosure requirements of FAS
123 to require disclosure of the method used to account for stock-based employee
compensation and the effect of the method on reported results in both annual and
interim financial statements. The disclosure provisions will be effective for
the Company 's year ended June 30, 2003. The annual impact of a change to a fair
value model has been previously disclosed in the Company's Annual Report on Form
10-K for the year ended June 30, 2002. The Company has not yet completed the
final evaluation of the options presented by FAS 148. However, within this
fiscal year, the Company expects to reach a determination of whether and, if so,
when to change the Company's existing accounting for stock-based compensation to
the fair value method in accordance with the transition alternatives of FAS 148.
NOTE 9 - SUBSEQUENT EVENT
On April 14, 2003, the Company executed a Physician Group Participation ("PGP")
agreement with one of its HMO partners. Pursuant to the PGP agreement, the
Company will assume certain management responsibilities for the HMO's Medicare,
Commercial and Medicaid members assigned to selected primary care physicians in
Miami-Dade and Broward counties of Florida. Revenue from this contract will
consist of a monthly management fee designed to cover the costs of providing
these services. Simultaneously with the execution of the PGP agreement, the
Company restructured the terms of a $3,850,000 contract modification note with
the HMO. Pursuant to the restructuring, the contract modification note was
cancelled. A portion of the gain to be recognized from the extinguishment of
debt will be deferred and recognized as services are provided under the PGP
agreement, representing an estimate of the potential profits which may have been
obtainable under a similar contract negotiated without the debt restructuring.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Unless otherwise indicated or the context otherwise requires, all
references in this Form 10-Q to "we," "us," "our," "Continucare" or the
"Company" refers to Continucare Corporation and its consolidated subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We caution our investors that certain important factors may affect our
actual results and could cause such results to differ materially from any
forward-looking statement which may have been deemed to have been made in this
report or which are otherwise made by us or on our behalf. For this purpose, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the generality
of the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intend," "plan," "could," "would," "estimate," "continue" or
"pursue," or the negative other variations thereof or comparable terminology are
intended to identify forward-looking statements. Such statements include, but
are not limited to, statements regarding our ability to fund our obligations and
satisfy our debt obligations as they become due, our plans for future capital
expenditures and capital needs, and our ability to maintain our listing with the
American Stock Exchange. Forward-looking statements involve risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the risk of pricing pressures exerted on us by managed care
organizations and the level of payments we receive under governmental programs
or from other payors, risks relating to the recoverability of our goodwill and
intangible assets, risks related to our ability to recruit and retain medical
professionals, risks related to the collection of our home health agencies
Medicare claims on a timely basis, and risks regarding our ability to expand our
home health agencies into other counties. Other factors that may affect our
future results include certain economic, competitive, governmental and other
factors. We assume no responsibility to update our forward-looking statements as
a result of new information, future events or otherwise. Additional information
concerning these and other risks and uncertainties is contained our filings with
the Securities and Exchange Commission, including the section entitled "Risk
Factors" in our Annual Report on Form 10-K for the year ended June 30, 2002.
GENERAL
We are a provider of integrated outpatient healthcare and home
healthcare services in Florida. As of March 31, 2003, we operated, owned and/or
managed fifteen staff model clinics in south and central Florida; an Independent
Practice Association (the "IPA") with six physicians; and five home health
agencies. Our Managed Care Division, which includes the staff model clinics and
the IPA, provided managed care services for approximately 150,500 and 164,000
member months (members per month multiplied by the months for which services
were available) during the nine-month periods ended March 31, 2003 and 2002,
respectively.
Effective January 1, 2003, we terminated the Medicare and Medicaid
lines of business for all of the physician contracts associated with one of our
independent practice associations. The terminated IPA, which consisted of 29
physicians at the time of the termination and is considered discontinued
operations, contributed approximately $4,488,000 in revenue and generated
operating income of $44,983 during the nine-month period ended March 31, 2003.
Severance costs and other exit costs resulting from the termination of the IPA
totaled less than $10,000 and were paid prior to March 31, 2003. At March 31,
2003, liabilities related to discontinued operations of approximately $416,322
consisted primarily of net amounts due to the HMO for medical claims incurred by
the terminated IPA prior to January 1, 2003 and other payables which arose
during the ordinary course of business. While this termination was intended to
streamline our cost structure and stem anticipated operating losses, there can
be no assurances that we will achieve any financial benefits as a result of
terminating these IPA contracts.
13
On March 31, 2003, our existing credit facility matured. In order to
secure an extension until March 31, 2004, Dr. Phillip Frost, a principal
shareholder, was required to extend his personal guarantee through March 31,
2004. In consideration of Dr. Frost's personal guarantee, we issued 1,500,000
shares of restricted stock to an entity related to Dr. Frost and increased the
annual interest rate on a currently outstanding note payable to an entity
related to Dr. Frost from 7% to 9%. In addition to Dr. Frost's guarantee, we
have also agreed that a financial covenant be added to the credit facility,
which requires us to maintain a fixed charge coverage ratio of 1.05 to 1.00
beginning December 31, 2003.
Also on March 31, 2003, we modified the terms of our Convertible
Subordinated Notes Payable (the "Notes"). The noteholders have extended the
principal payment of $1,148,000, which was due on October 31, 2003, to October
31, 2006. In consideration for the modification to the Notes, we issued an
aggregate of 344,400 shares of restricted stock to the noteholders and increased
the annual interest rate on the deferred principal payment from 7% to 9%.
On April 14, 2003, we executed a Physician Group Participation ("PGP")
agreement with one of our HMO partners. Pursuant to the PGP agreement, we will
assume certain management responsibilities for the HMO's Medicare, Commercial
and Medicaid members assigned to selected primary care physicians in Miami-Dade
and Broward counties of Florida. Revenue from this contract will consist of a
monthly management fee designed to cover our costs for providing these services.
Simultaneously with the execution of the PGP agreement, we restructured the
terms of a $3,850,000 contract modification note with the HMO. Pursuant to the
restructuring, the contract modification note was cancelled. A portion of the
gain to be recognized from the extinguishment of debt will be deferred and
recognized as services are provided under the PGP agreement, representing our
estimate of the potential profits which may have been obtainable under a similar
contract negotiated without the debt restructuring.
REIMBURSEMENT CONSIDERATIONS
Our home health agencies ("HHAs") receive reimbursement from the
Medicare and Medicaid programs, insurers, self-funded benefit plans for home
health agencies and other third-party payors. The Medicare and Medicaid programs
are subject to statutory and regulatory changes, retroactive and prospective
rate adjustments, administrative rulings and funding restrictions, any of which
could have the effect of limiting or reducing reimbursement levels. Although we
derived less than 5% of our net medical services revenue directly from the
Medicare and Medicaid programs in the nine-month period ended March 31, 2003, a
substantial portion of our managed care revenues are based upon Medicare
reimbursable rates. Any changes that limit or reduce Medicare reimbursement
levels could have a material adverse effect on our business. Further,
significant changes 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, the Congress
of the United States may enact unfavorable legislation, which could adversely
affect operations by, for example, decreasing Medicare reimbursement rates.
Effective October 1, 2000, our Medicare HHA services became subject to
the prospective pay system ("PPS"). Under PPS, we are reimbursed a fixed fee per
treatment unit. If we have costs greater than the fixed fee amount, we will
incur losses for our Medicare HHA services. Effective October 1, 2002, we became
subject to a 15% reduction to the cost limits and per-patient limits that were
in place as of September 30, 1999 as a result of the Balanced Budget Act of
1997. This reduction has negatively impacted our home health Medicare
reimbursement. In addition, future changes in reimbursement rates could have a
material adverse effect on our business, financial condition or results of
operations.
Most services provided by a HHA must be billed by the HHA, and outside
suppliers may not bill the Medicare program directly for services provided by
the supplier under arrangements with the HHA. Instead, the HHA must provide most
home health services either directly or pursuant to an arrangement with an
outside supplier if the HHA bills Medicare directly. The Centers for Medicare
and Medicaid Services ("CMS") clarifies that the law is silent regarding the
14
specific terms of HHA payments to outside suppliers and does not authorize
Medicare to impose any such requirements. To the extent that our HHAs utilize
outside providers for the provision of applicable home health services, we
believe we are in compliance with the consolidated billing requirements.
Additionally, to the extent that we use outside providers, our cost to obtain
such services may be greater than the reimbursement provided by the Medicare
program, especially if Medicare reimbursement decreases but the cost of such
services to us increases or stays constant.
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.
ACCOUNTING POLICIES
GENERAL-The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate these estimates, including
those related to our HMO agreements, accounts receivable, intangible assets and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances. These estimates form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from those estimates under different
assumptions or conditions.
Management believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of our consolidated
financial statements. Please refer to the notes to our consolidated financial
statements included in our Annual Report on Form 10-K for the year ended June
30, 2002, particularly Note 2, for a more detailed description of such policies.
REVENUE RECOGNITION-Revenue is recorded in the period services are rendered as
determined by the respective contract.
Under our contracts with HMOs, we receive a percentage of premium ("POP") that
is paid by or on behalf of each covered life that chooses our physicians as
their primary care physicians in exchange for assuming responsibility for the
provision of medical services. To the extent that patients require more frequent
or expensive care, our revenue 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 POP revenue on those contracts, we recognize losses on our
prepaid healthcare services with HMOs. No contracts are considered loss
contracts at March 31, 2003 because we have the right to terminate unprofitable
physicians and close unprofitable centers under our managed care contracts.
We record our medical services revenue for the treatment of individuals covered
by Medicare, Medicaid and other contracted reimbursement programs based on the
cost of services provided or predetermined rates, which are generally less than
the established billing rates of our facilities. Reimbursement rates relating to
these receivables, particularly governmental receivables, are complex and change
frequently. We base our determination of the amount to record as medical
services revenue on historical experience; however, final determination of
amounts received from Medicare and Medicaid is subject to review and audit by
the appropriate agencies. These estimates could be affected by a number of
factors, including changes in legislation or results of audits of our cost
reports. Differences between amounts recorded as estimated settlements and the
audited amounts are reflected as adjustments to revenues in the period the final
determination is made.
RECORDING THE COST OF HEALTH CARE SERVICES-The cost of health care services
provided or contracted for is accrued in the period in which the services are
provided. Management estimates medical claims expense and the related liability
15
for medical claims incurred but not reported each month based on historical
claims incurred per member per month. We adjust our estimate if we have
unusually high or low inpatient utilization. We compare the estimated expense
recorded in prior months to actual claims expense as claims are paid by the HMO
and reported to us and adjust our estimates accordingly. Our estimate also
considers annual changes in the benefits covered by the HMO plans. If benefit
changes are expected to significantly increase or reduce our claims exposure, we
apply a trend factor to the historical claims experience. This monthly
calculation produces what we believe is the best estimate of medical claims
expense and the related liability for medical claims incurred but not reported.
To further corroborate our estimate of medical claims, an independent actuarial
calculation is performed on a quarterly basis. This independent actuarial
calculation indicates that medical claims incurred but not reported as of March
31, 2003 are between approximately $11,809,000 and $13,216,000. As of March 31,
2003, we had recorded a liability of approximately $13,027,000 for medical
claims incurred but not reported, including the medical claims incurred but not
yet reported for discontinued operations, based on our monthly calculation
process. As the amount recorded was within the actuarial range, no further
analysis was deemed necessary.
CONSIDERATION OF IMPAIRMENT OF COSTS IN EXCESS OF NET TANGIBLE ASSETS-Our
balance sheet includes intangible assets, including goodwill and separately
identifiable intangible assets. Effective July 1, 2001, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). Under SFAS No. 142, goodwill and intangible assets with
indefinite useful lives are no longer amortized, but are reviewed annually for
impairment, or more frequently if certain impairment indicators arise.
Intangible assets with definite useful lives are amortized over their respective
useful lives to their estimated residual values and also reviewed for impairment
annually, or more frequently if certain impairment indicators arise. Indicators
of an impairment include, among other things, significant adverse change in
legal factors or the business climate, loss of a key HMO contract, an adverse
action by a regulator, unanticipated competition, loss of key personnel or
allocation of goodwill to a portion of business that is to be sold.
As we operate in a single segment of business, that of managing the provision of
outpatient health care and health care related services in the State of Florida,
management has determined that we have a single reporting unit and perform our
impairment test for goodwill on an enterprise level. In performing the
impairment test, we compare our fair value, as determined by the current market
value of our common stock, to the current carrying value of the total net
assets, including goodwill and intangible assets. We perform our annual
impairment test on May 1st of each year. Should we determine that an indicator
of impairment has occurred, such as those noted above, we would be required to
perform an additional impairment test which could result in the determination
that a portion of our intangible assets are impaired and must be written-off.
Depending on the market value of our common stock at the time that an impairment
test is required, there is a risk that a portion of our intangible assets would
be considered impaired and must be written-off during that period.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the unaudited condensed consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-Q.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2003 AS COMPARED TO THE THREE- MONTH
PERIOD ENDED MARCH 31, 2002.
REVENUE FROM CONTINUING OPERATIONS
Medical services revenues increased 0.6% from approximately $25,202,000
for the three-month period ended March 31, 2002 to approximately $25,358,000 for
the three-month period ended March 31, 2003.
Revenue from continuing operations generated by our managed care
entities under our contracts with Humana Medical Plans, Inc. ("Humana") was 72%
and 73% of medical services revenue for the three-month period ended March 31,
2003 and 2002, respectively. Revenue from continuing operations generated by our
managed care entities under our contracts with Vista of South Florida, Inc. and
16
its affiliated companies ("Vista"), formerly Foundation Health Corporation
Affiliates, was 23% and 22% of medical services revenue for the three-month
periods ended March 31, 2003 and 2002, respectively. Revenue from continuing
operations generated by our home health agencies was approximately 5% of medical
services revenue during both of the three-month periods ended March 31, 2003 and
2002, respectively, and consisted primarily of Medicare reimbursement.
EXPENSES FROM CONTINUING OPERATIONS
Medical services expenses for the three-month period ended March 31,
2003 were approximately $21,710,000 or 85.6% of medical services revenue
compared to approximately $21,411,000 or 85.0% of medical services revenue for
the three-month period ended March 31, 2002. Medical services expense includes
medical claims expense as well as other direct costs associated with providing
medical services.
Medical claims represent the costs of medical services provided by
providers other than us but which are to be paid by us for individuals covered
by our percentage of premium contracts with HMOs. Claims expense was
approximately $18,345,000 and $18,004,000 for the three-month periods ended
March 31, 2003 and 2002, respectively, or 75.8% and 75.6% of medical services
revenues from continuing operations derived from our managed care entities. The
actual claims ratio for continuing operations for the fiscal year ended June 30,
2002 was 76.3%. Our claim loss ratio varies due to fluctuations in utilization,
medical costs and premium revenues.
Other direct costs include the salaries and benefits of health
professionals providing the services, capitation payments to our contracted IPA
physicians, and other costs necessary to operate our facilities. Other direct
costs were approximately $3,364,000 and $3,407,000 for the three-month periods
ended March 31, 2003 and 2002, respectively, or 13.2% and 13.5% of medical
services revenues.
Payroll and employee benefits for administrative personnel was
approximately $1,634,000 for the three-month period ended March 31, 2003, or
6.4% of revenue, compared to approximately $1,427,000 or 5.7% of revenue for the
three-month period ended March 31, 2002. The increase in payroll and employee
benefits during the three-month period ended March 31, 2003 is primarily due to
the following: (i) the filling of the general counsel position which had been
vacant during the three-month period ended March 31, 2002; (ii) annual salary
increases; and (iii) management bonuses.
Professional fees were approximately $200,000 for the three-month
period ended March 31, 2003 as compared to approximately $686,000 for the
three-month period ended March 31, 2002. The decrease in professional fees is
due primarily to various litigation that was significantly resolved or settled
prior to the third quarter of Fiscal 2003.
General and administrative expenses for the three-month period ended
March 31, 2003 were approximately $1,622,000 or 6.4% of revenues compared to
approximately $993,000 or 3.9% of revenues for the three-month period ended
March 31, 2002. During the three-month period ended March 31, 2002, we adjusted
our accruals for various liabilities, some of which related to closed
subsidiaries. The adjustment of these liabilities resulted in a reduction of
approximately $475,000 of general and administrative expenses during the
three-month period ended March 31, 2002. No similar transaction occurred during
the three-month period ended March 31, 2003.
INCOME FROM OPERATIONS
Income from operations for the three-month period ended March 31, 2003
was approximately $84,000 or .3% of total revenues, compared to income from
operations of approximately $492,000 or 2.0% of total revenues for the
three-month period ended March 31, 2002.
INTEREST EXPENSE
Interest expense was approximately $81,000 for the three-month period
ended March 31, 2003 as compared to approximately $364,000 for the three-month
period ended March 31, 2002. The decrease is due to certain deferred financing
costs which became fully amortized during the second quarter of Fiscal 2003.
17
PROVISION FOR MEDICARE SETTLEMENT RELATED TO TERMINATED OPERATIONS
The Provision for Medicare Settlement Related to Terminated Operations
recorded during the three-months ended March 31, 2002, relates to alleged
overpayments by the Centers for Medicare and Medicaid Services ("CMS") to a
former subsidiary. On February 13, 1998, we acquired the stock of Rehab
Management Systems, Inc., Integracare, Inc. and J.R. Rehab Associates, Inc.
("RMS") from Integrated Health Services, Inc. ("IHS"). 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
services. On April 8, 1999, we sold substantially all the assets of RMS and the
assumption of certain liabilities to Kessler Rehabilitation of Florida, Inc.
("Kessler"). On August 13, 1999, RMS was formally dissolved as a corporation
with the state of Florida. During the second quarter of Fiscal 2002, we became
aware that CMS was pursuing IHS, Kessler and RMS for collection of principal and
interest for certain alleged Medicare overpayments made to providers purchased
from IHS or linked to the purchased entities through the use of a common
provider number (the "Providers") for services rendered during calendar years
1996, 1997 and 1998 (collectively, the "Alleged Overpayments"). We were aware of
our obligation to CMS for any overpayments for services rendered by the
Providers during calendar years 1997 and 1998. At the time the cost reports were
completed and submitted to CMS for services rendered by the Providers during
calendar years 1997 and 1998, we recorded an estimate for the overpayments
indicated on those cost reports. When we purchased RMS, the purchase agreement
included indemnification from IHS for any overpayments prior to calendar year
1997. Subsequent to our purchase of RMS, IHS sought protection under Chapter 11
of the United States Bankruptcy Code and, as such, is protected from CMS' and
RMS' efforts to collect on the Alleged Overpayments that relate to calendar year
1996. During the third quarter of Fiscal 2002, it became clear that we were
being pursued by CMS as the primary obligor for all of the Alleged Overpayments,
including those for calendar year 1996. While we dispute the validity of these
claims, in an effort to expedite the resolution of these matters and halt CMS'
aggressive collection procedures which included the threat of withholding
payments to the Company's home health agencies, we have entered into a
memorandum of understanding for the 1996 cost report year (the "Memorandum") and
have recorded an approximately $2,441,000 Provision for Medicare Settlement
Related to Terminated Operations during the three-months ended March 31, 2002.
Under the Memorandum, we will make monthly payments of $10,000 for 24 months
with the balance of the Memorandum due at the end of the term. We retained the
right to dispute the Alleged Overpayments and continue to review and evaluate
all information available to determine the validity of CMS' claims. During
September 2002, we requested a reopening of the cost reports and supplied
various documentation for cost report years 1996 and 1997 to demonstrate that
the Alleged Overpayments are incorrect. (See Note 7-Contingencies to the
Condensed Consolidated Financial Statements.)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Income from discontinued operations was approximately $294,000 for the
three-month period ended March 31, 2003 as compared to a loss from discontinued
operations of approximately $113,000 for the three-month period ended March 31,
2002. Effective January 1, 2003, we terminated the Medicare and Medicaid lines
of business for all of the physician contracts associated with one of our
independent practice associations. The terminated IPA, which consisted of 29
physicians at the time of the termination, contributed approximately $2,967,000
in medical services revenue during the three-month period ended March 31, 2002.
Income generated by discontinued operations during the three-month period ended
March 31, 2003 resulted from a reconciliation of claims expense recorded at the
time of the termination to actual claims paid for the period prior to the
termination. While this termination was intended to streamline our cost
structure and stem anticipated operating losses, there can be no assurances that
we will achieve any financial benefits as a result of terminating these IPA
contracts.
NET INCOME (LOSS)
Net income for the three-month period ended March 31, 2003 was $298,000
compared to a net loss of $2,423,000 for the three-month period ended March 31,
2002.
18
RECENT DEVELOPMENT
On April 14, 2003, we executed a Physician Group Participation
agreement with one of our HMO partners. Pursuant to the PGP agreement, we will
assume certain management responsibilities for the HMO's Medicare, Commercial
and Medicaid members assigned to selected primary care physicians in Miami-Dade
and Broward counties of Florida. Revenue from this contract will consist of a
monthly management fee designed to cover our costs for providing these services.
Simultaneously with the execution of the PGP agreement, we restructured the
terms of a $3,850,000 contract modification note with the HMO. Pursuant to the
restructuring, the contract modification note was cancelled. A portion of the
gain to be recognized from the extinguishment of debt will be deferred and
recognized as services are provided under the PGP agreement, representing our
estimate of the potential profits which may have been obtainable under a similar
contract negotiated without the debt restructuring.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE FOR
THE NINE-MONTH PERIOD ENDED MARCH 31, 2003 AS COMPARED TO THE NINE-MONTH PERIOD
ENDED MARCH 31, 2002.
REVENUE FROM CONTINUING OPERATIONS
Medical services revenues increased 5.8% from approximately $70,626,000
for the nine-month period ended March 31, 2002 to approximately $74,709,000 for
the nine-month period ended March 31, 2003. The increase was primarily the
result of increases in the premium revenue per member and negotiated increases
in the percentage of premium revenue we receive for certain of our members.
Revenue from continuing operations generated by our managed care
entities under our contracts with Humana was 75% and 73% of medical services
revenue for the nine-month period ended March 31, 2003 and 2002, respectively.
Revenue from continuing operations generated by our managed care entities under
our contracts with Vista, was 21% and 22% of medical services revenue for the
nine-month periods ended March 31, 2003 and 2002, respectively. Revenue from
continuing operations generated by our home health agencies was approximately 4%
and 5% of medical services revenue during the nine-month periods ended March 31,
2003 and 2002, respectively, and consisted primarily of Medicare reimbursement.
EXPENSES FROM CONTINUING OPERATIONS
Medical services expenses for the nine-month period ended March 31,
2003 were approximately $64,472,000 or 86.3% of medical services revenue
compared to approximately $61,712,000 or 87.4% of medical services revenue for
the nine-month period ended March 31, 2002. Medical services expense includes
medical claims expense as well as other direct costs associated with providing
medical services.
Medical claims represent the costs of medical services provided by
providers other than us but which are to be paid by us for individuals covered
by our percentage of premium contracts with HMOs. Claims expense was
approximately $54,750,000 and $52,523,000 for the nine-month periods ended March
31, 2003 and 2002, respectively, or 76.4% and 78.9% of medical services revenues
from continuing operations derived from our managed care entities. The actual
claims ratio from continuing operations for the fiscal year ended June 30, 2002
was 76.3%. Our claim loss ratio varies due to fluctuations in utilization,
medical costs and premium revenues.
Other direct costs include the salaries and benefits of health
professionals providing the services, capitation payments to our contracted IPA
physicians, and other costs necessary to operate our facilities. Other direct
costs were approximately $9,723 000 and $9,189,000 for the nine-month periods
ended March 31, 2003 and 2002, respectively, or 13.0% of medical services
revenues for both periods then ended.
Payroll and employee benefits for administrative personnel was
approximately $4,769,000 for the nine-month period ended March 31, 2003, or 6.4%
of revenue, compared to approximately $3,960,000 or 5.6% of revenue for the
nine-month period ended March 31, 2002. The increase in payroll and employee
benefits during the nine-month period ended March 31, 2003 is primarily due to
the following: (i) director compensation of $123,000 during the nine-month
period ended March 31, 2003; (ii) the filling of the general counsel position
which had been vacant during the nine-month period ended March 31, 2002; (iii)
annual salary increases; and (iv) management bonuses.
19
Professional fees were approximately $529,000 for the nine-month period
ended March 31, 2003 as compared to approximately $1,194,000 for the nine-month
period ended March 31, 2002. The decrease in professional fees is due to various
litigation that was significantly resolved or settled prior to the third quarter
of Fiscal 2003 and to a payment from our directors and officers' insurance
carrier reimbursing us for certain legal expenses incurred in prior periods.
General and administrative expenses for the nine-month period ended
March 31, 2003 were approximately $4,566,000 or 6.1% of revenues compared to
approximately $3,488,000 or 4.9% of revenues for the nine-month period ended
March 31, 2002. During the nine-month period ended March 31, 2002, we adjusted
our accruals for various liabilities, including a settlement for a liability
related to a closed subsidiary. The adjustment of these liabilities resulted in
a reduction of approximately $675,000 of general and administrative expenses
during the nine-month period ended March 31, 2002. No similar transaction
occurred during the nine-month period ended March 31, 2003.
Depreciation and amortization decreased approximately 43% to
approximately $484,000 for the nine-month period ended March 31, 2003 from
approximately $851,000 for the nine-month period ended March 31, 2002. The
decrease is due primarily to certain intangible assets which became fully
amortized during the first and second quarters of Fiscal 2002.
LOSS FROM OPERATIONS
Loss from operations for the nine-month period ended March 31, 2003 was
approximately $123,000 or 0.2% of total revenues, compared to a loss from
operations of approximately $640,000 or .9% of total revenues for the nine-month
period ended March 31, 2002.
INTEREST EXPENSE
Interest expense was approximately $693,000 for the three-month period
ended March 31, 2003 as compared to approximately $1,180,000 for the three-month
period ended March 31, 2002. The decrease is due to certain deferred financing
costs which became fully amortized during the second quarter of Fiscal 2003.
PROVISION FOR MEDICARE SETTLEMENT RELATED TO TERMINATED OPERATIONS
The Provision for Medicare Settlement Related to Terminated Operations
recorded during the nine-months ended March 31, 2002, relates to alleged
overpayments by CMS to a former subsidiary. On February 13, 1998, we acquired
the stock of Rehab Management Systems, Inc., Integracare, Inc. and J.R. Rehab
Associates, Inc. from Integrated Health Services, Inc. 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
services. On April 8, 1999, we sold substantially all the assets of RMS and the
assumption of certain liabilities to Kessler Rehabilitation of Florida, Inc. On
August 13, 1999, RMS was formally dissolved as a corporation with the state of
Florida. During the second quarter of Fiscal 2002, we became aware that CMS was
pursuing IHS, Kessler and RMS for collection of principal and interest for
certain alleged Medicare overpayments made to providers purchased from IHS or
linked to the purchased entities through the use of a common provider number for
services rendered during calendar years 1996, 1997 and 1998. We were aware of
our obligation to CMS for any overpayments for services rendered by the
Providers during calendar years 1997 and 1998. At the time the cost reports were
completed and submitted to CMS for services rendered by the Providers during
calendar years 1997 and 1998, we recorded an estimate for the overpayments
indicated on those cost reports. When we purchased RMS, the purchase agreement
included indemnification from IHS for any overpayments prior to calendar year
1997. Subsequent to our purchase of RMS, IHS sought protection under Chapter 11
of the United States Bankruptcy Code and, as such, is protected from CMS' and
RMS' efforts to collect on the Alleged Overpayments that relate to calendar year
1996. During the third quarter of Fiscal 2002, it became clear that we were
being pursued by CMS as the primary obligor for all of the Alleged Overpayments,
including those for calendar year 1996. While we dispute the validity of these
claims, in an effort to expedite the resolution of these matters and halt CMS'
aggressive collection procedures which included the threat of withholding
payments to the Company's home health agencies, we have entered into a
memorandum of understanding for the 1996 cost report year (the "Memorandum") and
have recorded an approximately $2,441,000 Provision for Medicare Settlement
Related to Terminated Operations during the nine-months ended March 31, 2002.
Under the Memorandum, we will make monthly payments of $10,000 for 24 months
20
with the balance of the Memorandum due at the end of the term. We retained the
right to dispute the Alleged Overpayments and continue to review and evaluate
all information available to determine the validity of CMS' claims. During
September 2002, we requested a reopening of the cost reports and supplied
various documentation for cost report years 1996 and 1997 to demonstrate that
the Alleged Overpayments are incorrect. (See Note 7-Contingencies to the
Condensed Consolidated Financial Statements.)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Income from discontinued operations was approximately $45,000 for the
nine-month period ended March 31, 2003 as compared to a loss from discontinued
operations of approximately $351,000 for the nine-month period ended March 31,
2002. Effective January 1, 2003, we terminated the Medicare and Medicaid lines
of business for all of the physician contracts associated with one of our
independent practice associations. The terminated IPA, which consisted of 29
physicians at the time of the termination, contributed approximately $4,488,000
and $7,537,000 in medical services revenue during the nine-month periods ended
March 31, 2003 and 2002, respectively. While this termination was intended to
streamline our cost structure and stem anticipated operating losses, there can
be no assurances that we will achieve any financial benefits as a result of
terminating these IPA contracts.
NET LOSS
Net loss for the nine-month period ended March 31, 2003 was
approximately $766,000 compared to a net loss of approximately $4,579,000 for
the nine-month period ended March 31, 2002.
RECENT DEVELOPMENT
On April 14, 2003, we executed a Physician Group Participation
agreement with one of our HMO partners. Pursuant to the PGP agreement, we will
assume certain management responsibilities for the HMO's Medicare, Commercial
and Medicaid members assigned to selected primary care physicians in Miami-Dade
and Broward counties of Florida. Revenue from this contract will consist of a
monthly management fee designed to cover our costs for providing these services.
Simultaneously with the execution of the PGP agreement, we restructured the
terms of a $3,850,000 contract modification note with the HMO. Pursuant to the
restructuring, the contract modification note was cancelled. A portion of the
gain to be recognized from the extinguishment of debt will be deferred and
recognized as services are provided under the PGP agreement, representing our
estimate of the potential profits which may have been obtainable under a similar
contract negotiated without the debt restructuring.
LIQUIDITY AND CAPITAL RESOURCES
Although our financial statements have been prepared assuming we will
continue as a going concern, there is significant uncertainty as to whether we
will be able to fund our obligations and satisfy our debt obligations as they
become due in Fiscal 2003. At March 31, 2003, the working capital deficit was
approximately $9,870,000, total indebtedness accounted for approximately 91% of
our total capitalization and we had principal and interest of approximately
$1,822,000 outstanding under our credit facility. Our credit facility provides
for a revolving loan of $3,000,000. Interest on our credit facility is payable
monthly at 2.9% plus the 30-day Dealer Commercial Paper Rate which was 1.23% on
March 31, 2003. All of our assets serve as collateral for the credit facility.
On March 31, 2003, our existing credit facility matured. In order to secure an
extension until March 31, 2004, Dr. Phillip Frost, a principal shareholder, was
required to extend his personal guarantee through March 31, 2004. In
consideration of Dr. Frost's personal guarantee, we issued 1,500,000 shares of
restricted stock to an entity related to Dr. Frost and increased the annual
interest rate on a currently outstanding note payable to an entity related to
Dr. Frost from 7% to 9%. (See Notes 3 and 4 of the condensed consolidated
financial statements.) In addition to Dr. Frost's guarantee, we also agreed that
a financial covenant be added to the credit facility, which requires us to
maintain a fixed charge coverage ratio of 1.05 to 1.00 beginning December 31,
2003. In the event we are unable to maintain the fixed charge coverage ratio,
our lender will have the option to require immediate repayment of our credit
facility.
21
On March 31, 2003, we modified the terms of our Convertible
Subordinated Notes Payable. The noteholders extended the principal payment of
$1,148,000, which was due on October 31, 2003, to October 31, 2006. In
consideration for this modification to the Notes, we issued an aggregate of
344,400 shares of restricted stock to the noteholders and increased the annual
interest rate on the deferred principal payment from 7% to 9%. (See Note 3 of
the condensed consolidated financial statements.)
On April 14, 2003, we executed a Physician Group Participation
agreement with one of our HMO partners. Pursuant to the PGP agreement, we will
assume certain management responsibilities for the HMO's Medicare, Commercial
and Medicaid members assigned to selected primary care physicians in Miami-Dade
and Broward counties of Florida. Revenue from this contract will consist of a
monthly management fee designed to cover our costs for providing these services.
Simultaneously with the execution of the PGP agreement, we restructured the
terms of a $3,850,000 contract modification note with the HMO. Pursuant to the
restructuring, the contract modification note was cancelled. A portion of the
gain to be recognized from the extinguishment of debt will be deferred and
recognized as services are provided under the PGP agreement, representing our
estimate of the potential profits which may have been obtainable under a similar
contract negotiated without the debt restructuring.
In Fiscal 2000, we instituted a series of measures intended to reduce
losses and to operate our core business model profitably. In spite of the
measures instituted in Fiscal 2000, we experienced a deterioration in our claims
loss ratio in the first and second quarters of both Fiscal 2001 and 2002. This
resulted in operating losses and negative cash flow from operations, which
prevented us from reversing a significant working capital deficiency which
originated in prior years. Negative changes in the claims loss ratio, such as we
experienced in Fiscal 2001 and 2002, are due to increases in the utilization of
health services as well as increases in medical costs without counterbalancing
increases in premium revenues from the HMOs. While we have not experienced a
similar deterioration in our claims loss ratio in the first three quarters of
Fiscal 2003, there can be no assurance that such a deterioration will not occur
during the fourth quarter of Fiscal 2003. If such a deterioration does occur
during the remainder of Fiscal 2003 that, compounded by the limited availability
of additional financing through the credit facility, could significantly strain
our cash flow.
We plan to fund our capital commitments, operating cash requirements
and satisfy our obligations from a combination of cash on hand and operating
cash flow improvements realized from decreased utilization, HMO premium
increases and advantageous HMO benefit changes. We continue to focus on
strengthening our core business unit by enhancing our physician network,
streamlining our operations and implementing measures to contain the rising
costs of providing health services to our members. Such measures include, among
other things, emphasizing preventive care, encouraging frequent health
check-ups, monitoring compliance with drug therapies, entering into our own
contracts with health care providers such as medical specialists and
recommending that our members utilize hospitals and outpatient facilities that
have favorable rate structures. If we cannot continue to improve our controls
and procedures for managing our costs, our business, results of operations, and
cash flow may be materially adversely affected and we may be unable to meet our
financial obligations as they become due.
If we are unable to satisfy our cash requirements, we may be required
to take certain steps, such as borrowing additional funds, restructuring our
indebtedness, selling assets, selling equity, reducing or delaying capital
expenditures or payments to trade creditors and forgoing certain business
opportunities. If we need additional capital to repay our obligations or fund
operations, there can be no assurances that such capital can be obtained or, if
obtained, that it will be on terms acceptable to us. The incurring or assumption
of additional indebtedness could result in the issuance of additional equity
and/or debt which can have a dilutive effect on current shareholders and a
significant effect on our operations.
22
Pursuant to a request from our workers compensation insurance carrier
to set up a fund to guarantee a portion of the annual premium, on April 24, 2003
we established a $70,000 letter of credit (the "Letter of Credit") in favor of
the insurance carrier. The establishment of this Letter of Credit required us to
pledge a $70,000 certificate of deposit as collateral.
Our loss from continuing operations was approximately $811,000 for the
nine-month period ended March 31, 2003. Cash provided by continuing operations
for the nine-month period ended March 31, 2003 was approximately $1,434,000. The
following were the most significant items which are reflected in our loss from
continuing operations but did not impact our cash flows from operations during
the nine-month period ended March 31, 2003:
o Depreciation and amortization, including the amortization of
deferred loan costs, reduced income from continuing operations by
approximately $921,000, without reducing cash from operations.
o The net increase in due to/from Medicare was approximately $154,000.
This increase reflects (i) the transfer of amounts due to Medicare
for overpayments in prior years for filed cost reports to long term
debt in connection with the execution of a note payable; (ii) a
decrease in due from Medicare for amounts due to us for filed cost
reports for prior years; and (iii) an increase in the receivable
from Medicare generated from current home health operations. The
transfer of amounts due to Medicare to long term debt did not impact
our loss from continuing operations for the nine-months ended March
31, 2003 and did not require a cash outflow from operations in the
same nine month period. The decrease in due from Medicare for
amounts due to us for filed cost reports for prior years did not
impact our loss from continuing operations but did provide cash
during the nine-month period ended March 31, 2003. The increase in
the receivable from Medicare for current operations reduced our loss
from continuing operations for the nine-month period ended March 31,
2003, but did not impact the cash flows from operations in the same
nine-month period.
o Increases in accounts payable and accrued expenses reduced income
from continuing operations by approximately $351,000, without
reducing cash from operations.
o During the nine-month period ended March 31, 2003, we recorded
$123,000 in director compensation which was paid through the
issuance of 900,000 shares of restricted common stock. This director
compensation reduced income from continuing operations without
reducing cash from operations.
o Increases in accounts receivable of approximately $170,000 reduced
our loss from continuing operations during the nine-month period
ended March 31, 2003, but did not impact the cash flows from
operations in the same nine-month period.
The above items were offset by the following items which did not impact our loss
continuing operations during the nine-month period ended March 31, 2003, but did
increase cash from operations during the same nine-month period:
o Our net receivable from HMOs decreased by approximately $472,000 and
did not impact our loss from continuing operations but did provide
cash during the nine-month period ended March 31, 2003.
o Decreases in other receivables of approximately $415,000 did not
impact our loss from continuing operations but did provide cash
during the nine-month period ended March 31, 2003.
Cash used by discontinued operations was approximately $80,000 during the
nine-month period ended March 31, 2003.
Net cash provided by operating activities was approximately $1,354,000
during the nine-month period ended March 31, 2003.
Our cash provided by investing activities of $758 for the nine-month
period ended March 31, 2003 includes approximately $100,000 in proceeds from
maturities of restricted cash offset by approximately $100,000 for the purchase
of equipment. Our cash used in financing activities for the nine-month period
ended March 31, 2003 was approximately $1,419,000, primarily due to net
repayments of $515,000 on our credit facility and payments of various notes
payable of approximately $904,000.
23
Approximately 4% of our medical services revenue during the nine-month
period ended March 31, 2003 was derived from our HHAs. Effective October 1,
2000, two of our HHAs, which primarily provide services to patients eligible
under the Medicare program, began to be reimbursed by Medicare under the
prospective payment system ("PPS"). Under PPS, we are paid a predetermined fee
for services provided to patients for every 60-day period for which care is
rendered. On October 1, 2002, a 15% reduction to the cost limits and per-patient
limits that were in place as of September 30, 1999 became effective as a result
of the Balanced Budget Act of 1997. This reduction resulted in a decrease in the
predetermined fees under PPS, on average, by approximately 4% to 6% in the
localities in which we operate our HHAs. We continue to take steps to operate
effectively and efficiently under PPS' predetermined fee schedule. This
reduction in the reimbursement under PPS' predetermined fee schedule had a
negative impact on our business, results of operations and cash flow.
Prior to the implementation of PPS, our HHAs were reimbursed for
services provided based on a reasonable cost methodology. We were reimbursed for
cost reimbursable items at a tentative rate with final settlement determined
after submission of annual cost reports and subsequent audits by CMS. Changes in
the estimated settlements we recorded may be adjusted in future periods as final
settlements are determined and may have a material adverse affect on our results
of operations and cash flow. See Note 5 in our Consolidated Financial Statements
in our Annual Report on Form 10-K for the year ended June 30, 2002 regarding
amounts currently due to CMS.
One of our HMO contracts requires that we fund a claims reserve out of
operating profits of certain of our staff model clinics. As a result of
increased membership, the balance of this reserve fund will increase by
approximately $85,000 effective May 1, 2003. The HMO can only draw upon this
reserve in the event that the staff model clinics in question have incurred an
account deficit and that we are unable or unwilling to satisfy the HMOs' demand
to fund the deficit. At no time during the nine-month period ended March 31,
2003 were the staff model clinics in question in an account deficit position.
Other factors that could affect our liquidity and cash flow which are
also discussed in our Annual Report on Form 10-K for the year ended June 30,
2002 include: (i) increasing costs of health care services; (ii) loss of a
material contract; (iii) decreases in reimbursement rates by third-party payors;
(iv) retroactive cost report adjustments; (v) adverse governmental regulation,
(vi) damage awards under pending or future litigation; and (vii) increased
insurance costs.
On July 30, 2002, the American Stock Exchange notified us it had
completed its review of our listing qualifications and has accepted our plan to
regain compliance with continued listing standards by December 31, 2003. The
plan includes quarterly milestones. If we do not show progress in obtaining
these milestones or if we are unable to regain compliance with the continued
listing standards by December 31, 2003, our common stock may be delisted from
the Exchange. As of the date of this filing, we are still below the continued
listing requirements of the Exchange with respect to requirements which include
the need for us to maintain stockholders' equity of at least $4 million and not
sustain losses from continuing operations and/or net losses in two of our three
most recent fiscal years. We are unable to guarantee that the Exchange will
continue to list our common stock.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2003, 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 and would
have an immaterial impact on the fair value of these instruments. Our Credit
Facility is interest rate sensitive. A 100 basis point adverse movement
(increase) in interest rates would have immaterially increased our net loss for
the nine-month periods ended March 31, 2003 and 2002. We have no material risk
associated with foreign currency exchange rates or commodity prices.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures within the last ninety days and have concluded that the disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company and its subsidiaries required to be included
in our periodic filings with the Securities and Exchange Commission. There were
no significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the last day they were
evaluated by our Chief Executive Officer and Chief Financial Officer, nor were
there any corrective actions required with regard to significant deficiencies
and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 of our Condensed Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 31, 2003, 1,500,000 shares of our common stock were issued to
an entity related to Dr. Phillip Frost as consideration for his
personal guarantee of our credit facility. Also on March 31, 2003, an
aggregate amount of 344,400 shares of our common stock were issued to
holders of our Convertible Subordinated Notes Payable as consideration
for their modifying certain terms of the notes. The common stock was
issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Not Applicable
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Form of Convertible Promissory Note, dated June 30, 2001.
4.2 Amendment to Convertible Promissory Note, dated March 31,
2003, between the Company and Frost Nevada Limited
Partnership.
4.3 Form of Amendment to Convertible Promissory Note, dated
March 31, 2003.
10.1 Agreement, dated March 31, 2003, between the Company and
Phillip Frost, M.D., Frost Gamma Investments Trust and Frost
Nevada Investments Trust.
10.2 Agreement, dated March 31, 2003, between the Company and
Pecks Management Partners, Ltd.
10.3 Agreement, dated March 31, 2003, between the Company and
Carret & Company.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Form 8-K was filed on April 15, 2003 regarding the following: (i) the
extension of our $3,000,000 credit facility, (ii) the extension of the
personal guarantee of Dr. Frost of the credit facility through the new
maturity date, (iii) modification of the terms of our Convertible
Subordinated Notes Payable, and (iv) the issuance of shares of our
common stock as consideration in these transactions.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CONTINUCARE CORPORATION
Dated: May 15, 2003 By: /s/ SPENCER J. ANGEL
-----------------------------------------
Spencer J. Angel
Chief Executive Officer and President
By: /s/ JANET L. HOLT
-----------------------------------------
Janet L. Holt
Chief Financial Officer
27
CERTIFICATION
I, Spencer J. Angel, Chief Executive Officer of Continucare Corporation (the
"Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's Chief Financial Officer and I are responsible for
establishing and maintaining "disclosure controls and procedures" (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Company's Chief Financial Officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and to the audit
committee of the Company's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's Chief Financial Officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003 By: /s/ SPENCER J. ANGEL
------------------------------------------------
SPENCER J. ANGEL
Chief Executive Officer, Chief Operating
Officer and President
28
CERTIFICATION
I, Janet L. Holt, Chief Financial Officer of Continucare Corporation (the
"Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report.
4. The Company's Chief Executive Officer and I are responsible for
establishing and maintaining "disclosure controls and procedures" (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Company's Chief Executive Officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and to the audit
committee of the Company's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's Chief Executive Officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003 By: /s/ JANET L. HOLT
-------------------------------------
JANET L. HOLT
Chief Financial Officer
29
EXHIBIT INDEX
DESCRIPTION EXHIBIT NUMBER
----------- --------------
Form of Convertible Promissory Note, dated June 30, 2001...................... 4.1
Amendment to Convertible Promissory Note, dated March 31, 2003, between the
Company and Frost Nevada Investments Trust.................................... 4.2
Form of Amendment to Convertible Promissory Note, dated March 31, 2003........ 4.3
Agreement, dated March 31, 2003, between the Company and Phillip Frost, M.D.,
Frost Gamma Investments Trust and Frost Nevada Investments Trust.............. 10.1
Agreement, dated March 31, 2003, between the Company and Pecks Management
Partners, Ltd. ............................................................... 10.2
Agreement, dated March 31, 2003, between the Company and Carret & Company.....
10.3
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002....... 99.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002....... 99.2
30