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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: June 30, 2009
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-12115
CONTINUCARE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| Florida | 59-2716023 | |
| (State or Other Jurisdiction of | (I.R.S. Employer Identification No.) | |
| Incorporation or Organization) | ||
| 7200 Corporate Center Drive | ||
| Suite 600 | ||
| Miami, Florida | 33126 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code (305) 500-2000
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange On Which Registered | |
| COMMON STOCK | NYSE AMEX | |
| $.0001 PAR VALUE |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes
o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes
o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. Check one:
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the voting common stock held by non-affiliates of the registrant
on December 31, 2008 was approximately $70,184,000.
Number of shares outstanding of each of the registrant’s classes of Common Stock at August 31,
2009: 59,411,049 shares of Common Stock, $.0001 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant’s 2009 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K.
CONTINUCARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2009
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2009
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GENERAL
Unless otherwise indicated or the context otherwise requires, all references in this Annual
Report on Form 10-K to “we,” “us,” “our,” “Continucare” or the “Company” refer to Continucare
Corporation and its consolidated subsidiaries, and all references to “the MDHC Companies” refer to
Miami Dade Health Centers, Inc. and its affiliated companies. All references to a “Fiscal” year
refer to our fiscal year which ends June 30.
PART I
| ITEM 1. | BUSINESS |
The following business description should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.
Company Overview
We are a provider of primary care physician services. Through our network of 18 medical
centers, we provide primary care medical services on an outpatient basis. We also provide practice
management services to independent physician affiliates (“IPAs”) at 21 medical offices. All of our
medical centers and IPAs are located in Miami-Dade, Broward and Hillsborough Counties, Florida.
Substantially all of our revenues are derived from managed care agreements with three health
maintenance organizations (“HMOs”), Humana Medical Plans, Inc. (“Humana”), Vista Healthplan of
South Florida, Inc. and its affiliated companies including Summit Health Plan, Inc. (“Vista”) and
Wellcare Health Plans, Inc. and its affiliated companies (“Wellcare”). Our managed care agreements
with these HMOs are primarily risk agreements under which we receive for our services a monthly
capitated fee with respect to the patients assigned to us. The capitated fee is a percentage of
the premium that the HMOs receive with respect to those patients. In return, we assume full
financial responsibility for the provision of all necessary medical care to our patients even for
services we do not provide directly. Revenue generated by our managed care entities under
contracts with Humana, Vista and Wellcare accounted for approximately 72%, 18% and 8%,
respectively, of our total revenue for Fiscal 2009. For Fiscal 2009, approximately 91% and 7% of
our revenue was generated by providing services to Medicare-eligible and Medicaid-eligible members,
respectively, under such risk arrangements. As of June 30, 2009, we provided services to or for
approximately 25,800 patients on a risk basis and approximately 8,800 patients on a limited or
non-risk basis. Additionally, as of June 30, 2009 we also provided services to over 4,000 patients
on a non-risk fee-for-service basis.
Effective October 1, 2006, we completed the acquisition of the MDHC Companies (the
“Acquisition”). Accordingly, the revenues, expenses and results of operations of the MDHC
Companies have been included in our consolidated statements of income from the date of acquisition.
The MDHC Companies, which opened their first medical center in 1999, provided primary care
physician services and certain medical specialty and diagnostic services to approximately 17,000
patients at the time of the Acquisition in five medical centers in Miami-Dade County, Florida. The
majority of the MDHC Companies’ patients are participants in Medicare and Medicaid HMO plans and
substantially all of the MDHC Companies contracts with HMOs are on a risk basis. See Note 3 to the
consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for
unaudited pro forma financial information for Fiscal 2007 presenting our operating results as
though the Acquisition occurred at the beginning of the fiscal year.
On August 12, 2009, we acquired Professional Sleep Diagnostics, Inc. (“PSD”), a full service
operator of sleep diagnostic centers. PSD operates and manages sleep diagnostic centers at 13
locations in South Carolina, North Carolina, West Virginia, Virginia, Colorado and Ohio. The
centers conduct sleep studies to determine whether patients suffer from sleep disorders and, if so,
the severity of the condition. PSD’s clinical staff is expertly trained in sleep disorders and
works with physicians, neurologists, respiratory therapists, and clinicians utilizing
state-of-the-art equipment to effectively diagnose and treat patients.
We were incorporated in Florida in 1996 as the successor to a Florida corporation formed
earlier in 1996. During Fiscal 2000 and 2001 we restructured much of our indebtedness, including
the convertible subordinated notes we then had outstanding. During Fiscal 2004, the notes were
converted into shares of our common stock. In an effort to streamline and stem operating losses,
we implemented a plan to dispose of our home health operations in December 2003. The home health
disposition occurred in three separate transactions and was concluded in February 2004.
Our principal place of business is 7200 Corporate Center Drive, Suite 600, Miami, Florida
33126. Our telephone number is 305-500-2000.
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Acquisition
Effective October 1, 2006, we completed the acquisition of the MDHC Companies. In connection
with the completion of the Acquisition and in consideration for the assets acquired pursuant to the
Acquisition, we paid the MDHC Companies approximately $5.7 million in cash, issued 20.0 million
shares of our common stock to the MDHC Companies and assumed or repaid certain
indebtedness and liabilities of the MDHC Companies. The 20.0 million shares of our common stock
issued in connection with the Acquisition were issued pursuant to an exemption under the Securities
Act of 1933, as amended, and 1.5 million of such 20.0 million shares were placed in escrow as
security for indemnification obligations of the MDHC Companies and their principal owners. In
Fiscal 2007, 264,142 of such shares were cancelled in connection with post-closing purchase price
adjustments. The balance of the shares held in escrow was released to the principal owners of the
MDHC Companies in April 2008 in accordance with the terms of the escrow agreement. Pursuant to the
terms of the Acquisition, we paid the principal owners of the MDHC Companies an additional $1.0
million in cash in October 2007. We also made certain other payments to the principal owners of
the MDHC Companies of approximately $0.1 million related to the collection of certain receivables
that were fully reserved on the books of the MDHC Companies as of December 31, 2005.
The purchase price, including acquisition costs, of approximately $66.2 million was allocated
to the estimated fair value of acquired tangible assets of $13.9 million, identifiable intangible
assets of $8.7 million and assumed liabilities of $15.3 million, resulting in goodwill totaling
$58.9 million. This purchase price allocation includes certain adjustments recorded during Fiscal
2008 and 2007 that resulted in a decrease in goodwill of approximately $0.5 million and $3.3
million, respectively. These adjustments primarily related to Medicare risk adjustments and
pharmacy rebates relating to the operations of the MDHC Companies for periods prior to the
completion of the Acquisition and to adjustments to increase the estimated fair values of the
identifiable intangible assets based on updated available information and assumptions. The
identifiable intangible assets of $8.7 million consist of estimated fair values of $1.6 million
assigned to the trade name, $6.2 million to customer relationships and $0.9 million to a noncompete
agreement. The trade name was determined to have an estimated useful life of six years and the
customer relationships and noncompete agreements were each determined to have an estimated useful
life of eight and five years, respectively. The fair values of the customer relationships and
other identifiable intangible assets are amortized over their estimated lives using the straight
line method. The customer relationships are non-contractual. The fair value of the identifiable
intangible assets was determined, with the assistance of an outside valuation firm, based on
standard valuation techniques. The Acquisition consideration of $66.2 million includes the
estimated fair value of our common stock issued to the MDHC Companies of $58.5 million, cash paid
to the principal owners of $5.7 million, cash paid to the principal owners of $1.0 million in
October 2007, and acquisition costs of approximately $1.0 million. The estimated fair value of the
20.0 million shares of our common stock issued effective October 1, 2006 to the MDHC Companies was
based on a per share consideration of $2.96 which was calculated based upon the average of the
closing market prices of our common stock for the period two days before through two days after the
announcement of the execution of the Asset Purchase Agreement for the Acquisition. The fair value
of the 264,142 shares cancelled in Fiscal 2007 in connection with post-closing purchase price
adjustments was approximately $0.7 million based upon the closing market price of our common stock
on the dates the shares were cancelled.
On September 26, 2006, we entered into two term loan facilities funded out of lines of credit
(the “Term Loans”) with maximum loan amounts of $4.8 million and $1.0 million, respectively. Each
of the Term Loans requires mandatory monthly payments that reduce the lines of credit under the
Term Loans. Subject to the terms and conditions of the Term Loans, any prepayments made to the Term
Loans may be re-borrowed on a revolving basis so long as the line of credit applicable to such Term
Loan, as reduced by the mandatory monthly payment, is not exceeded. The $4.8 million and $1.0
million Term Loans mature on October 31, 2011 and October 31, 2010, respectively. Each of the Term
Loans (i) has variable interest rates at a per annum rate equal to the sum of 2.4% and the
One-Month LIBOR (0.31% at June 30, 2009), (ii) requires us and our subsidiaries, on a consolidated
basis, to maintain a tangible net worth of $12 million and a debt coverage ratio of 1.25 to 1, and
(iii) are secured by substantially all of our assets, including those assets acquired pursuant to
the Acquisition. Effective October 1, 2006, we fully drew on these Term Loans to fund certain
portions of the cash payable upon the closing of the Acquisition and these drawings were repaid
during Fiscal 2007. As of June 30, 2009, we had no outstanding principal balance on our Term
Loans.
Also effective September 26, 2006, we amended the terms of our existing credit facility that
provides for a revolving loan to us of $5.0 million (the “Credit Facility”). As a result of this
amendment, we, among other things, eliminated the financial covenant which previously required our
EBITDA to exceed $1,500,000 on a trailing 12-month basis any time during which amounts are
outstanding under the Credit Facility and replaced such covenant with covenants requiring us and
our subsidiaries, on a consolidated business, to maintain a tangible net worth of $12 million and a
debt coverage ratio of 1.25 to 1. Effective October 1, 2006, we drew approximately $1.8 million
under the Credit Facility to fund portions of the cash payable upon the closing of the Acquisition
and this drawing was repaid during Fiscal 2007. The Credit Facility has a maturity date of
December 31, 2009. As of June 30, 2009, we had no outstanding principal balance on our Credit
Facility.
As a result of the Acquisition, we became a party to two lease agreements for office space
owned by certain of the principal owners of the MDHC Companies, one of which we terminated
effective September 30, 2007. For Fiscal Years 2009, 2008 and 2007, expenses related to these two
leases were approximately $0.4 million, $0.4 million and $0.3 million, respectively.
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Industry Overview
The United States health care market is large and growing. According to the Centers For
Medicare and Medicaid Services (“CMS”), total outlays on health care in the United States were
approximately $2.2 trillion in 2007 and were projected to reach approximately $4.4 trillion in
2018, representing an annual rate of increase of approximately 6.2%. The rate of the overall
increase of health care outlays in the United States has been greater than the growth of the
economy as a whole (measured by gross domestic product, or GDP). For example, in 2007 the rate of growth of total United States medical
outlays was approximately one percentage point higher than the growth of GDP. The high growth rate
of health care outlays is expected to continue. In 2007, health care outlays represented
approximately 16.2% of GDP. CMS projects that this amount will increase to 20.3% of GDP by 2018.
In addition, United States health care outlays have increased at a faster rate than the consumer
price index. According to CMS, medical outlays in the United States were projected to grow by
approximately 6.1% in 2008, as compared to actual increases of 6.1% in 2007, 6.7% in 2006 and 6.8%
in 2005.
The Medicare sector of the United States health care market is also large and growing.
Medicare provided health care benefits to approximately 45 million elderly and disabled Americans
in 2008, or approximately 15% of the population of the United States. With the coming retirement
of the “Baby Boom” generation, a significant increase in the number of Medicare beneficiaries is
forecast, with the number of Medicare beneficiaries expected to rise to over 75 million, or greater
than 20% of the projected population of the United States, by 2030. Medicare outlays have also
grown faster than both the GDP and the consumer price index, which growth is forecast to continue.
For example, annual Medicare outlays exceeded $400 billion in 2007 and are expected to grow to over
$900 billion by 2018.
Medicare was established in 1965 and traditionally provided fee-for-service (indemnity)
coverage for its members. Under fee-for-service coverage, Medicare assumes responsibility for
paying all or a portion of the member’s covered medical fees, subject, in some cases, to a
deductible or coinsurance payment. There are private Medicare managed care programs that provide
an alternative to traditional fee-for-service coverage. Through a contract with CMS, private
insurers, such as HMOs, may contract with CMS to provide health insurance coverage in exchange for
a fixed monthly payment per member per month for Medicare-eligible individuals. Individuals who
elect to participate in private Medicare managed care programs typically receive additional
benefits not covered by Medicare’s traditional fee-for-service coverage program and are relieved of
the obligation to pay some or all deductible or coinsurance amounts due.
Participation in private Medicare managed care programs increased during the 1990s reaching a
peak of 6.2 million participants in 1998, or approximately 16% of the Medicare-eligible population.
As of November 2003, the number of participants had decreased to 4.6 million, or approximately 11%
of the Medicare-eligible population. The number of participating private health plans also
decreased during this period going from 346 plans in 1998 to 155 in November 2003. This decline in
participation has been attributed to unpredictable and insufficient payments resulting from the
alteration of payments to private plans associated with the Balanced Budget Act of 1997.
The Medicare Modernization Act, adopted in December 2003, was intended, in part, to modernize
and revitalize private plans under Medicare. The Medicare Modernization Act established the
Medicare prescription drug offering that began in 2006, established new tax-advantaged Health
Savings Account regulations and made significant changes to the private Medicare managed care
programs which were named Medicare Advantage. These changes were a response to the decreased
managed care participation in Medicare and the resulting lack of choice for Medicare beneficiaries.
The Medicare Modernization Act made favorable changes to the premium rate calculation methodology
and generally provides for program rates that we believe will better reflect the increased cost of
medical services provided to Medicare beneficiaries.
As a result of the Medicare Modernization Act’s enhanced payment rates and other provisions
designed to expand Medicare Advantage offerings and make them more attractive to plan sponsors and
beneficiaries, enrollment in Medicare Advantage programs has generally increased since December
2003 from approximately 5.3 million participants, or approximately 13% of the Medicare-eligible
population, to approximately 10.7 million participants, or approximately 23% of the
Medicare-eligible population, as of July 2009. The number of participating private health plans
also increased dramatically during this period going from 155 plans in November 2003 to 633 plans
in July 2009.
As a result of the growing increases in health care outlays in the United States, insurers,
employers, state and federal governments and other health insurance payors have sought to reduce or
control the sustained increases in health care costs. One response to these cost increases has
been a shift away from the traditional fee-for-service method of paying for health care to managed
health care models, such as HMOs.
HMOs offer a comprehensive health care benefits package in exchange for a fixed prepaid
monthly fee or premium per enrollee that does not vary through the contract period regardless of
the quantity of medical services required or used. HMOs enroll members by entering into contracts
with employer groups or directly with individuals to provide a broad range of health care services
for a prepaid charge, with minimal deductibles or co-payments required of the members. HMOs
contract directly with medical clinics, independent physician associations, hospitals and other
health care providers to administer medical care to HMO enrollees. The affiliated physician
organization contracts with the HMOs provide for payment to the affiliated physician organizations.
Often the payment to the affiliated physician organization is in the form of a fixed monthly fee
per enrollee, which is called a capitation payment. Once negotiated, the total payment is based on
the number of enrollees covered, regardless of the actual need for and utilization of covered
services.
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Physicians, including sole practitioners and small physician groups, find themselves at a
competitive disadvantage in the current managed care environment. Physicians are generally not equipped by training or
experience to handle all of the functions of a modern medical practice, such as negotiation of
contracts with specialists and HMOs, claims administration, financial services, provider relations,
member services, medical management including utilization management and quality assurance, data
collection and management information systems. Additionally, a proliferation of state and federal
regulations has increased the paperwork burden and hampered the application of the traditional
controls used by managed care organizations. Physicians increasingly are responding to these
pressures within the managed care industry by affiliating with organizations such as ours to assist
them in managing their practices.
Our Market and Business Strategy
The population of Florida was approximately 18.3 million in 2008, and approximately 29% of
those residents were located in Miami-Dade, Broward and Hillsborough Counties. As of July 2009,
approximately 953,000 residents of Florida were enrolled in Medicare Advantage plans out of a
Medicare-eligible population of approximately 3.3 million. The three primary HMOs with which we
are affiliated account for approximately 47% of Medicare Advantage participants in the markets we
serve.
Our strategy is to:
| • | increase patient volume at our existing medical centers; | ||
| • | selectively expand our network to include additional medical centers or other medical facilities and to penetrate new geographic markets; | ||
| • | further develop our IPA management activities; and | ||
| • | selectively expand our operations into other areas in which we believe we can leverage our expertise in order to establish additional sources of revenue. |
Increasing Patient Volume
Our core business is comprised of our established network of medical centers from which we
provide primary care services on an outpatient basis. The dominant focus of these medical centers
has historically been serving patients enrolled in Medicare Advantage plans sponsored by our HMO
affiliates. We seek to increase the number of patients using our medical centers through the
general marketing efforts of our affiliated HMOs and on our own through targeted marketing efforts.
In addition to building our Medicare Advantage patient base we seek to increase the number of
patients we serve in other lines of business. In particular we desire to increase our Medicaid
patient base. In furtherance of this objective we have modified our arrangements with certain of
our existing HMO affiliates to add Medicaid as a covered line of business and intend to expand our
Medicaid HMO affiliations.
Selectively Expanding Our Network
In addition to the MDHC Acquisition, we may seek to add additional medical centers or other
medical facilities to our network either through acquisition or start up, although no assurance can
be given of our ability to establish or acquire any additional locations. To date, we have focused
on Miami-Dade, Broward and Hillsborough Counties, Florida. We expect we will identify and select
acquisition candidates based in large part on the following broad criteria:
| • | staffed with highly qualified medical professionals; | ||
| • | a history of profitable operations or a predictable synergy such as opportunities for economies of scale through a consolidation of management functions; | ||
| • | a competitive environment with respect to a high concentration of hospitals and physicians; and | ||
| • | a geographic proximity to our current operations. |
Developing Our IPA Management Activities
We currently provide management services to a network of IPAs at 21 medical offices. We
enhance the operations of our IPA physician practices by providing assistance with medical
utilization management, pharmacy management and specialist network development. Additionally, we
provide financial reports for our IPA practices to further assist with their operations. We
believe that we can leverage our skill at providing practice management services to IPA practices
to a larger group of IPA practices and will seek to selectively add new IPA practices to enhance
our IPA management activities. We intend to continue affiliating with physicians who are sole
practitioners or who operate in small groups to staff and expand our network.
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Selectively Expanding Our Operations Into Other Areas
We are actively exploring expansion of our operations into other areas in which we believe we
can leverage our expertise in order to establish additional sources of revenue. As part of this
strategy, on August 12, 2009, we acquired PSD, a full service operator of sleep diagnostic centers.
PSD operates and manages sleep diagnostic centers at 13 locations in South Carolina, North
Carolina, West Virginia, Virginia, Colorado and Ohio. The centers conduct sleep studies to
determine whether patients suffer from sleep disorders and, if so, the severity of the condition.
The most common sleep disorder, obstructive sleep apnea (or OSA), is a serious, though often
undiagnosed health condition that afflicts more than 18 million adults in the United States. OSA
sufferers stop breathing repeatedly during sleep in intervals that may last 10 seconds to a minute
or longer. Key symptoms of OSA include daytime sleepiness, loud snoring, gasping or choking during
sleep, and depression and irritability. OSA increases the risk of hypertension, heart disease,
mood and memory problems. It also increases the risks of automobile crashes and other accidents.
PSD’s clinical staff is expertly trained in sleep disorders and works with physicians,
neurologists, respiratory therapists, and clinicians utilizing state-of-the-art equipment to
effectively diagnose and treat patients.
Our Medical Centers
At our medical centers, physicians who are our employees or independent contractors act as
primary care physicians practicing in the area of general, family and internal medicine with
medical specialty services provided in certain of our centers. A typical medical center is
operated in an office space that ranges from 5,000 to 8,000 square feet although two of our medical
centers comprise approximately 23,000 and 49,000 square feet of space. In addition, certain of our
medical centers provide diagnostic imaging services. A medical center is typically staffed with
approximately two to three physicians, and is open five days a week. The physicians we employ or
with whom we contract are generally retained under written agreements that provide for a rolling
one-year term, subject to earlier termination in some circumstances. Under our standard physician
agreements we are responsible for providing our physicians with malpractice insurance coverage.
Our IPAs
We provide practice management assistance to IPAs. Our services include providing assistance
with medical utilization management, pharmacy management and specialist network development.
Additionally, we provide financial reports for our IPAs to further assist with their practices.
These services currently relate primarily to those patients served by the IPAs who are enrolled in
health plans offered by Humana, Vista and CarePlus Health Plans, Inc. (“CarePlus”). As of June 30,
2009, these IPAs provided services to approximately 1,400 patients on a risk basis and
approximately 1,000 patients on a limited or non-risk basis.
Effective January 1, 2006, we entered into an Independent Practice Association Participation
Agreement (the “Risk IPA Agreement”) with Humana under which we agreed to assume certain management
responsibilities on a risk basis for Humana’s Medicare and Medicaid members assigned to certain
IPAs practicing in Miami-Dade and Broward Counties, Florida. Effective November 1, 2007, we
entered into an agreement with CarePlus under which we agreed to assume certain management
responsibilities on a risk basis for CarePlus Medicare members assigned to certain IPAs practicing
in Miami-Dade County, Florida. Under these two agreements, we receive a capitation fee established
as a percentage of the premium that the health plans receive for those members who have selected
the IPAs as their primary care physicians and assume responsibilities for the cost of substantially
all medical services provided to these members, even those we do not provide directly. Effective
January 1, 2008, we entered into an agreement with Vista under which we agreed to assume certain
management responsibilities on a limited risk basis for Vista’s Medicare members assigned to
certain IPAs practicing in Miami-Dade and Broward Counties, Florida. Our IPAs practice primary
care medicine on an outpatient basis in facilities similar to our medical centers. Our IPA
physicians typically earn a capitated fee for the services they provide and may be entitled to
obtain bonus distributions if they operate their practice in accordance with their negotiated
contract. As of June 30, 2009, the IPAs provided services to or for approximately 2,100 Medicare
and Medicaid patients enrolled in Humana, Vista and CarePlus managed care plans.
Medicare and Medicaid Considerations
In Fiscal 2009, approximately 91% and 7% of our revenue was generated by providing services to
Medicare-eligible members and Medicaid-eligible members, respectively. The federal government and
state governments, including Florida, from time to time explore ways to reduce medical care costs
through Medicare and Medicaid reform, specifically, and through health care reform generally. Any
changes that would limit, reduce or delay receipt of Medicare or Medicaid funding or any
developments that would disqualify us from receiving Medicare or Medicaid funding could have a
material adverse effect on our business, results of operations, prospects, financial results,
financial condition and cash flows. Due to the diverse range of proposals put forth and the
uncertainty of any proposal’s adoption, we cannot predict what impact any Medicare reform proposal
ultimately adopted may have on our business, financial position or results of operations.
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On January 1, 2006, the Medicare Prescription Drug Plan created by the Medicare Modernization
Act became effective. As a result, our HMO affiliates have established or expanded prescription
drug benefit plans for their Medicare Advantage members. Under the terms of our risk arrangements,
we are financially responsible for a substantial portion of the cost of the prescription drugs our
patients receive, and, in exchange, our HMO affiliates have agreed to provide us with an additional
per member capitated fee related to prescription drug coverage. However, there can be no assurance
that the additional fee that we receive will be sufficient to reimburse us for the additional costs
that we may incur under the Medicare Prescription Drug Plan.
In addition, the premiums our HMO affiliates receive from CMS for their Medicare Prescription
Drug Plans are subject to periodic adjustment, positive or negative, based upon the application of
risk corridors that compare their plans’ revenues as estimated in their bids to actual prescription
drug costs. Variances exceeding certain thresholds may result in CMS making additional payments to
the HMOs or require the HMOs to refund to CMS a portion of the payments they received. Our
contracted HMO affiliates estimate and periodically adjust premium revenues related to the risk
corridor payment adjustments, and a portion of each such HMO’s estimated premium revenue adjustment
is allocated to us. As a result, the revenues recognized under our risk arrangements with these
HMOs are net of the portion of the estimated risk corridor adjustment allocated to us. The portion
of any such risk corridor adjustment that the HMOs allocate to us may not directly correlate to the
historical utilization patterns of our patients or the costs that we may incur in future periods.
During Fiscal 2009, 2008 and 2007, our HMO affiliates allocated to us adjustments related to their
risk corridor payments which had the effect of reducing our operating income by approximately $2.2
million, $3.1 million and $2.3 million, respectively.
The Medicare Prescription Drug Plan has also been subject to significant public criticism and
controversy, and members of Congress have discussed possible changes to the program as well as ways
to reduce the program’s cost to the federal government. We cannot predict what impact, if any,
these developments may have on the Medicare Prescription Drug Plan or on our future financial
results.
Our HMO Affiliates
We currently have managed care agreements with several HMOs. Our most significant HMO
affiliates are Humana, Vista and Wellcare. Under our risk agreements with Humana, Vista and
Wellcare, we receive for our services capitated monthly payments per patient at a rate established
by the contract. In return, we assume full financial responsibility for the provision of all
necessary medical care to our patients, even services we do not provide directly. In Fiscal 2009,
we generated approximately 72%, 18% and 8% of our revenue from contracts with Humana, Vista and
Wellcare, respectively. We continually review and attempt to renegotiate the terms of our managed
care agreements in an effort to obtain more favorable terms. We may selectively add new HMO
affiliations, but we can provide no assurance that we will be successful in doing so. The loss of
significant HMO contracts and/or the failure to regain or retain such HMO’s patients or the related
revenues without entering into new HMO affiliations could have a material adverse effect on our
business, results of operations and financial condition.
Humana
We currently have three agreements with Humana under which we provide medical services to
members of Humana’s Medicare, Medicaid, commercial and other group health care plans; however, the
majority of the revenue that we derive from our relationship with Humana is generated under two
agreements, a Physician Practice Management Participation Agreement (the “Humana PPMP Agreement”)
and an Integrated Delivery System Participation Agreement (the “IDS Agreement”). Under these
agreements we provide or arrange for the provision of covered medical services to each Humana
member who selects one of our physicians as his or her primary care physician. We receive a
capitated fee with respect to the patients assigned to us. For most of our Humana patients the
capitated fee is a percentage of the premium that Humana receives with respect to those patients.
These agreements are subject to Humana’s changes to the covered benefits that it elects to provide
to its members and other terms and conditions. We must also comply with the terms of Humana’s
policies and procedures, including Humana’s policies regarding referrals, approvals and utilization
management and quality assessment.
The term of the Humana PPMP Agreement extends through July 31, 2011, unless terminated earlier
for cause, and, thereafter, the Humana PPMP Agreement renews for subsequent three-year terms unless
either party provides 90-days written notice of its intent not to renew. The IDS Agreement extends
through April 1, 2011 with automatic subsequent three-year renewal terms unless either party
provides 180-days written notice of its intent not to renew. Each of these agreements provide
Humana the right to immediately terminate the agreement, and/or any individual physician
credentialed under the agreements, upon written notice, (i) if we and/or any of our physician’s
continued participation in the relevant agreement may affect adversely the health, safety or
welfare of any Humana member; (ii) if we and/or any of our physician’s continued participation in
the relevant agreement may bring Humana or its health care networks into disrepute; (iii) in the
event of one of our doctor’s death or incompetence; (iv) if any of our physicians fail to meet
Humana’s credentialing criteria; (v) in accordance with Humana’s policies and procedures, (vi) if
we engage in or acquiesce to any act of bankruptcy, receivership or reorganization; or (vii) if
Humana loses its authority to do business in total or as to
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any limited segment or business (but
only to that segment). We and Humana may also each terminate these agreements upon 90 days’ prior
written notice (with an opportunity to cure, if possible) in the event of the other’s material
breach of the relevant agreement.
In some cases, Humana may provide 30 days’ notice as to an amendment or modification of these
agreements, including but not limited to, renegotiation of rates, covered benefits and other terms
and conditions. Such amendments may include changes to the compensation rates. If Humana
exercises its right to amend these agreements upon 30 days’ written notice, we may object to such
amendment within the 30-day notice period. If we object to such amendment within the
requisite time frame, Humana may terminate the relevant agreement upon 90 days’ written notice.
The third agreement we have with Humana is the Risk IPA Agreement. Under the Risk IPA
Agreement, we agreed to assume certain management responsibilities on a risk basis for Humana’s
Medicare and Medicaid members assigned to selected primary care physicians at eleven medical
offices in Miami-Dade and Broward Counties, Florida in return for a capitated fee per patient. The
capitated fee is based on a percentage of the premium that Humana receives with respect to that
patient.
Vista
We provide medical services to members of Vista’s Medicare, Medicaid, commercial and
individual health care plans. Under our agreements with Vista, we provide or arrange for the
provision of covered medical services to each Vista member who selects one of our physicians as his
or her primary care physician. Under our two primary agreements with Vista, we receive a capitated
fee with respect to the Vista patients assigned to us. For commercial and individual Vista patients
the capitated fee is a fixed monthly payment per member. For Medicare and Medicaid patients the
capitated fee is a percentage of the premium that Vista receives with respect to those patients.
Our agreements with Vista are subject to Vista’s changes to the covered benefits that Vista elects
to provide to its members and other terms and conditions. We must also comply with the terms of
Vista’s policies and procedures, including Vista’s policies regarding referrals, approvals and
utilization management and quality assessment.
One of our two primary agreements with Vista expires on June 30, 2010 and the other expires on
September 1, 2010 and each will automatically renew for successive one year periods unless either
party provides the other with 60-days notice of its intent to terminate such agreement. Vista may
terminate either of these agreements with us immediately if we materially breach the relevant
agreement, provided that we are given an opportunity to cure such breach, and if we experience
certain events of bankruptcy or insolvency. In addition, each of these agreements permits Vista to
immediately terminate the agreement if Vista determines, in its sole reasonable discretion, that
(i) our actions or inactions or those of our health care professionals are causing or may cause
imminent danger to the health, safety or welfare of any Vista member; (ii) our or our health care
professionals’ licenses, DEA registrations, hospital staff privileges, rights to participate in the
Medicare or Medicaid program or other accreditations are restricted, suspended or revoked or if any
of our health care professionals voluntarily relinquish any of those credentials and we do not
promptly terminate that professional; (iii) our health care professionals’ ability to practice
medicine is effectively impaired by an action of the Board of Medicine or other governmental
agency; (iv) we are convicted of a criminal offense related to our involvement in Medicaid,
Medicare or social service programs under Title XX of the Social Security Act; or (v) we or our
medical professionals engaged in any other behavior or activity that could be hazardous or
injurious to any Vista member.
Effective January 1, 2008, we entered into an agreement with Vista under which we agreed to
assume certain management responsibilities on a limited risk basis for Vista’s Medicare members
assigned to certain IPAs practicing at ten medical offices in Miami-Dade and Broward Counties,
Florida.
Wellcare
We are a party to two agreements with Wellcare under which we provide or arrange for the
provision of medical services to each member of Wellcare’s Medicare plans who selects one of our
physicians as his or her primary care physician. One of these agreements, the Physician Provider
Agreement, was initially entered into on September 1, 2004 as a non-risk arrangement and was
amended effective March 1, 2007 to a risk arrangement under which we receive for our services a
capitated fee with respect to the patients assigned to us. The capitated fee is a percentage of
the premium that Wellcare receives with respect to those patients. This agreement has a one-year
term and automatic subsequent one-year renewal terms, subject to certain termination provisions
stipulated in the agreement. Under the risk arrangement we assume financial responsibility for the
provision of all necessary medical care to our patients. Our other agreement with Wellcare, which
is also a risk arrangement for Wellcare’s Medicare members, expires November 1, 2009 with automatic
subsequent one year renewal terms unless either party provides the other with 90-days notice of
its intent to terminate.
We also have contracts with Wellcare and its affiliates for the provision of care for members
of their Medicaid plans.
Under our agreements with Humana, Vista and Wellcare, there exist circumstances under which we
could be obligated to continue to provide medical services to patients in our care following a
termination of the applicable agreement. In certain cases, this obligation could require us to
provide care to patients following the bankruptcy or insolvency of our HMO affiliate. Accordingly,
our
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obligations to provide medical services to our patients (and the associated costs we incur) may
not terminate at the time that our agreement with the HMO terminates, and we may not be able to
recover our cost of providing those services from the HMO.
Compliance Program
We have implemented a compliance program intended to provide ongoing monitoring and reporting
to detect and correct potential regulatory compliance problems but we cannot assure that it will
detect or prevent all regulatory problems. The program
establishes compliance standards and procedures for employees and agents. The program includes,
among other things: written policies, including our Code of Conduct and Ethics; in-service training
for our employees on topics such as insider trading, anti-kickback laws, Federal False Claims Act
and Anti-Self Referral Act; and a “hot line” for employees to anonymously report violations.
Competition
The health care industry is highly competitive. We compete for patients with many other
health care providers, including local physicians and practice groups as well as local, regional
and national networks of physicians and health care companies. We believe that competition for
patients is generally based upon the reputation of the physician treating the patient, the
physician’s expertise, the physician’s demeanor and manner of engagement with the patient, and the
HMOs that the physician is affiliated with. We also compete with other local, regional and
national networks of physicians and health care companies for the services of physicians and for
HMO affiliations. Some of our competitors have greater resources than we do, and we may not be
able to continue to compete effectively in this industry. Further, additional competitors may
enter our markets, and this increased competition may have an adverse effect on our revenues.
Government Regulation
General. Our business is primarily regulated by the federal government and the State of
Florida. The laws and regulations governing our operations are generally intended to benefit and
protect health plan members and providers. The government agencies administering these laws and
regulations have broad latitude to enforce them. These laws and regulations, along with the terms
of our contracts, regulate how we do business, what services we offer, and how we interact with our
members, other providers and the public. We are subject to various governmental reviews, audits
and investigations to verify our compliance with our contracts and applicable laws and regulations.
A summary of the material aspects of the government regulations to which we are subject is set
forth below. However, there can be no assurance that any such laws will not change or ultimately
be interpreted in a manner inconsistent with our practices, and an adverse interpretation could
have a material adverse effect on our operations, financial condition or cash flows.
Present and Prospective Federal and State Reimbursement Regulation. Our operations are
affected on a day-to-day basis by numerous legislative, regulatory and industry-imposed operational
and financial requirements, which are administered by a variety of federal and state governmental
agencies as well as by self-regulatory associations and commercial medical insurance reimbursement
programs. Our physicians must reassign their Medicare billing and collection rights to us.
Accordingly, we have filed with Medicare the necessary applications for all our physicians to
reassign their Medicare billing and collection rights to us.
Federal “Fraud and Abuse” Laws and Regulations. The Anti-Kickback Law makes it a criminal
felony offense to knowingly and willfully offer, pay, solicit or receive remuneration in order to
induce business for which reimbursement is provided under federal health care programs, including
without limitation, the Medicare and Medicaid programs. Violations of these laws are punishable by
monetary fines, civil and criminal penalties, exclusion from care programs and forfeiture of
amounts collected in violation of such laws. The scope of prohibited payments in the Anti-Kickback
Law is broad and includes economic arrangements involving hospitals, physicians and other health
care providers, including joint ventures, space and equipment rentals, purchases of physician
practices and management and personal services contracts. The Anti-Kickback Law provides for
certain safe harbors to its prohibitions, however, failure to meet a safe harbor does not
necessarily mean that an arrangement violates the Anti-Kickback Law. Rather, each arrangement must
be analyzed based on its specific facts and the intent of the parties.
State Fraud and Abuse Regulations. Various states also have anti-kickback laws applicable to
licensed health care professionals and other providers and, in some instances, applicable to any
person engaged in the proscribed conduct. For example, the Florida “Patient Brokering Act” imposes
criminal penalties, including jail terms and fines, for offering, soliciting, receiving or paying
any commission, bonus, rebate, kickback, or bribe, directly or indirectly in cash or in kind, or
engaging in any split-fee arrangement, in any form whatsoever, in return for the referral of
patients or patronage from a health care provider or health care facility or in return for the
acceptance or acknowledgement of treatment from a health care provider or health care facility.
The Florida statutory provisions regulating the practice of medicine include similar language as
grounds for disciplinary action against a physician.
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Restrictions on Physician Referrals. Federal regulations under the Social Security Act that
restrict physician referrals to health care entities with which they have financial relationships
(commonly referred to as the “Stark Law”) prohibit certain patient referrals by physicians.
Specifically, the Stark Law prohibits a physician, or an immediate family member, who has a
financial relationship with a health care entity, from referring Medicare or Medicaid patients with
limited exceptions, to that entity for the following “designated health services”: clinical
laboratory services, physical therapy services, occupational therapy services, speech-language
pathology services, radiology services, including magnetic resonance imaging, computerized axial
tomography scans and ultrasound services, speech-language pathology services, durable medical
equipment and supplies, radiation therapy services and supplies, parenteral and enteral nutrients,
equipment and supplies, prosthetics, orthotics and prosthetic devices, home health services,
outpatient prescription drugs, and inpatient and outpatient hospital services. A financial
relationship is defined to include an ownership or investment in, or a compensation relationship
with, a health care entity. The Stark Law also prohibits a health care entity
receiving a prohibited referral from billing the Medicare or Medicaid programs for any
services rendered to a patient as a result of the prohibited referral. The Stark Law contains
certain exceptions that protect parties from liability if the parties comply with all of the
requirements of the applicable exception. The sanctions under the Stark Law include denial and
refund of payments, civil monetary penalties and exclusions from participation in the Medicare and
Medicaid programs.
Further, the Florida “Anti-Kickback” statute makes it unlawful for any health care provider to
offer, pay, solicit or receive remuneration or payment by or on behalf of a provider of health care
services or items to any person as an incentive or inducement to refer patients for past or future
services or items, when the payment is not tax deductible as an ordinary and necessary expense.
Violation of the Florida “Anti-Kickback” statute is a third degree felony. Unlike the federal
Anti-Kickback Law, the Florida “Anti-Kickback” statute does not provide for safe harbors. Rather,
each arrangement must be analyzed based on its facts and the intent of the parties.
The Florida Patient Self Referral Act of 1992 (“Florida Act”) regulates patient referrals by a
health care provider to certain providers of health care services in which the referring provider
has an investment interest. Unlike the federal Stark regulations, the Florida act applies only to
investment interests and does not affect compensation relationships between the referring provider
and the entity to which the provider is referring patients. The penalties for breach of the
Florida Act include denial and refund of claims payments and civil monetary penalties. Further,
the Florida Act is not limited to referrals for items and services paid for by the Medicare or
Medicaid programs.
Privacy Laws. The privacy, security and transmission of health information is subject to
federal and state laws and regulations, including the Healthcare Insurance Portability and
Accountability Act of 1996 (“HIPAA”) and regulations enacted under HIPAA with respect to, among
other things, the privacy of certain individually identifiable health information, the transmission
of protected health information and standards for the security of electronic health information.
Florida professional licensing statutes also include privacy laws specific to the profession. For
example, there are certain privacy laws that apply to physicians and mental health professionals.
Corporate Practice of Medicine Doctrine. Many states prohibit business corporations from
providing, or holding themselves out as a provider of medical care. Possible sanctions for
violation of any of these restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs (including Medicare and Medicaid), asset forfeitures and
civil and criminal penalties. These laws vary from state to state, are often vague and loosely
interpreted by the courts and regulatory agencies. Currently, we operate primarily in Florida,
which does not have a corporate practice of medicine doctrine with respect to the types of
physicians employed with us.
Clinic Regulation and Licensure. The State of Florida Agency for Health Care Administration
requires us to license each of our medical centers. Each medical center must renew its health care
clinic licensure bi-annually. Further, the Florida Health Care Clinic Act requires that clinics
have a medical director and prohibits such medical director or any physician affiliated with the
medical director’s group practice from making referrals to the clinic if the clinic provides
certain health care services, such as magnetic resonance imaging, static radiographs, computed
tomography, or positron emission tomography. Violation of this prohibition against medical
director referrals is a third degree felony.
Limitations on Contractual Joint Ventures. The Office of Inspector General (“OIG”) issued a
Special Advisory Bulletin raising concerns throughout the healthcare industry about the legality of
a variety of provider joint ventures. The suspect arrangements involve a healthcare provider
expanding into a related service line by contracting with an existing provider of that service to
serve the providers existing patient population. In the OIG’s view, the provider’s share of the
profits of the new venture constitutes remuneration for the referral of the provider’s
Medicare/Medicaid patients and thus may violate the federal Anti-kickback Statute.
Occupational Safety and Health Administration (“OSHA”). In addition to OSHA regulations
applicable to businesses generally, we must comply with, among other things, the OSHA directives on
occupational exposure to blood borne pathogens, the federal Needlestick Safety and Prevention Act,
OSHA injury and illness recording and reporting requirements, federal regulations relating to
proper handling of laboratory specimens, spill procedures and hazardous waste disposal, and patient
transport safety requirements.
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Environmental Regulations. Our clinics are required to comply with federal and state
regulations applicable to the disposal of biomedical waste, the use of radiology and nuclear
medicine, and the use of diagnostic imaging equipment.
Medicare Marketing Restrictions. As a health care provider, we are subject to federal
marketing rules and regulations that limit, among other things, offering any gift or other
inducement to Medicare beneficiaries to encourage them to come to us for their health care.
Sanctioned Parties. The Balanced Budget Act of 1997 (“BBA”) includes provisions that allow
for the temporary or permanent exclusion from participation in Medicare or any state health care
program of any individual or entity who or which has been convicted of a health care related crime
as well as specified. The BBA also provides for fines against any person that arranges or
contracts with an excluded person for the provision of items or services.
Healthcare Reform. The federal government is currently focused on exploring ways to reduce
medical care cost through Medicare reform and through healthcare reform, generally. Any changes
that would limit, reduce or delay receipt of Medicare funding could have a material adverse effect
on our business, results of operations, prospects, financial results, financial condition or cash
flows. Due to the diverse range of proposals put forth and the uncertainty of any proposal’s
adoption, we cannot predict what impact any Medicare reform proposal ultimately adopted may have on
our business, financial position or results of operations.
Health Care Professional Licensure and Supervision. Our physicians are subject to
licensure requirements administered by the applicable Florida professional licensing board,
including the Florida Board of Medicine and the Florida Board of Nursing. The failure of a health
care professional to maintain a license with the applicable board could result in a shortage of
health care providers and may trigger termination of one or more of our managed care agreements.
Employees
At June 30, 2009, we employed or contracted with approximately 610 individuals of whom
approximately 65 are physicians in our medical centers.
Insurance
We rely on insurance to protect us from many business risks, including medical malpractice and
“stop-loss” insurance. Our business entails an inherent risk of claims against physicians for
professional services rendered to patients, and we periodically become involved as a defendant in
medical malpractice lawsuits. Medical malpractice claims are subject to the attendant risk of
substantial damage awards. Although we maintain insurance against these claims, if liability
results from any of our pending or any future medical malpractice claims, there can be no assurance
that our medical malpractice insurance coverage will be adequate to cover liability arising out of
these proceedings. There can be no assurance that pending or future litigation will not have a
material adverse affect on us or that liability resulting from litigation will not exceed our
insurance coverage.
In most cases, as is the trend in the health care industry, as insurance policies expire we
may be required to procure policies with narrower coverage, more exclusions and higher premiums. In
some cases, coverage may not be available at any price. There can be no assurance that the
insurance that we maintain and intend to maintain will be adequate, or that the cost of insurance
and limitations in coverage will not adversely affect our business, financial position or results
of operations.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the
SEC. You may read and copy any document we file at the SEC’s public reference rooms in Washington,
D.C., New York, New York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to the public from
the SEC’s website at http://www.sec.gov.
Our website address is www.continucare.com. We make available free of charge on or through
our internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such
material has been filed with, or furnished to, the SEC. Information on our website does not
constitute part of this Annual Report on Form 10-K.
| ITEM 1A. | RISK FACTORS |
Our business, financial condition, results of operations, cash flows and prospects, and the
prevailing market price and performance of our common stock, may be adversely affected by a number
of factors, including the matters discussed below. Certain statements and information set forth in
this Annual Report on Form 10-K, as well as other written or oral statements made from time
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to time by us or by our authorized officers on our behalf, constitute “forward-looking statements” within
the meaning of the Federal
Private Securities Litigation Reform Act of 1995. We intend for our forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. You should note that forward-looking statements in this
document speak only as of the date of this Annual Report on Form 10-K and we undertake no duty or
obligation to update or revise our forward-looking statements, whether as a result of new
information, future events or otherwise. Although we believe that the expectations, plans,
intentions and projections reflected in our forward-looking statements are reasonable, such
statements are subject to risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. The risks, uncertainties and
other factors that our shareholders and prospective investors should consider include the
following:
Risks related to our business
Our operations are dependent on three health maintenance organizations.
We derive substantially all of our revenues under our managed care agreements with three HMOs,
Humana, Vista and Wellcare. In Fiscal 2009, we generated approximately 72%, 18% and 8% of our
revenues from contracts with Humana, Vista and Wellcare, respectively. These agreements have terms
ranging from one to three years, with automatic renewal terms unless a party provides prior notice
of its intention not to renew. These agreements also provide the HMOs with the right to terminate
an agreement prior to the expiration of the term upon the occurrence of specified events.
Accordingly, there is no assurance that these agreements will remain in effect. The loss of our
managed care agreements with these HMOs, particularly Humana or Vista or significant reductions in
payments to us under these contracts could have a material adverse effect on our business,
financial condition and results of operations.
Under our most important contracts we are responsible for the cost of medical services to our
patients in return for a capitated fee.
Our most important contracts with Humana, Vista and Wellcare are risk agreements under which
we receive for our services fixed monthly payments per patient at a rate established by the
contract, also called a capitated fee. In return, we assume full financial responsibility for the
provision of all necessary medical care to our patients, even services we do not provide directly.
Accordingly, we will be unable to adjust the revenues we receive under those contracts and, if
medical claims expense exceeds our estimates, our profits may decline. Relatively small changes in
the ratio of our health care expenses to capitated revenues we receive can create significant
changes in our financial results.
Our revenues will be affected by the Medicare Risk Adjustment program.
The majority of patients to whom we provide care are Medicare-eligible and participate in the
Medicare Advantage program. CMS implemented its Medicare Risk Adjustment project whereby it
transitioned its premium calculation methodology to a new system that takes into account the health
status of Medicare Advantage participants in determining premiums paid for each participant, rather
than only considering demographic factors, as was historically the case. Beginning January 1,
2004, the new risk adjustment system required that ambulatory data be incorporated into the premium
calculation, starting from a blend consisting of a 30% risk adjustment payment and the remaining
70% based on demographic factors. For 2005, the blend of risk adjustment payments and demographic
factors were given equal weight. For 2006, the blend consisted of a 75% risk adjustment payment
and 25% based on demographic factors. For 2007, 2008 and 2009, the premium calculation is 100%
based on risk adjustment payments.
We believe the risk adjustment methodology has generally increased our revenues per patient to
date but cannot assure what future impact this risk adjustment methodology will continue to have on
our business, results of operations, or financial condition. It is also possible that the risk
adjustment methodology may result in fluctuations in our revenues from year to year.
CMS has announced that it will perform audits of selected Medicare Advantage plans to validate
the provider coding practices under the risk-adjustment methodology used to reimburse Medicare
Advantage plans. These audits will involve a comprehensive review of medical records and the first
of such audits will focus on risk-adjustment data for 2006 used to determine 2007 payment amounts.
We are unable to predict the outcome of these audits, or whether these audits would ultimately
result in a payment adjustment to us. If a payment adjustment occurs as a result of these audits,
any such adjustment could have a material adverse effect on our results of operations, financial
position, and cash flows.
If we are unable to manage medical benefits expense effectively, our profitability will likely be
reduced.
We cannot be profitable if our costs of providing the required medical services exceed the
revenues that we derive from those services. However, our most important contracts with Humana,
Vista and Wellcare require us to assume full financial responsibility for the provision of all
necessary medical care in return for a capitated fee per patient at a rate established by the
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contract. Accordingly, as the costs of providing medical services to our patients under those
contracts increases, the profits we receive with respect to those patients’ decreases. If the cost
of providing medical services to our patients under those contracts exceeds our estimates or if we
are not able to properly manage our services, our business, results of operations, financial
condition and ability to satisfy our obligations could be adversely affected.
A failure to estimate incurred but not reported medical benefits expense accurately will affect our
profitability.
Our medical benefits expense includes estimates of medical claims incurred but not reported,
or IBNR. We estimate our medical cost liabilities using actuarial methods based on historical data
adjusted for payment patterns, cost trends, utilization of health care services and other relevant
factors. Actual conditions, however, could differ from those assumed in the estimation process.
Due to the inherent uncertainties associated with the factors used in these assumptions, materially
different amounts could be reported in our financial statements for a particular period under
different possible conditions or using different, but still reasonable, assumptions. Adjustments,
if necessary, are made to medical benefits expense when the criteria used to determine IBNR change
and when actual claim costs are ultimately determined. Although we believe our past estimates of
IBNR have been adequate, they may prove to have been inadequate in the future and our future
estimates may not be adequate, any of which would adversely affect our results of operations and
cash flows. Further, our inability to estimate IBNR accurately may also affect our ability to take
timely corrective actions, further exacerbating the extent of any adverse effect on our results of
operations.
We compete with many health care providers for patients and HMO affiliations.
The health care industry is highly competitive. We compete for patients with many other
health care providers, including local physicians and practice groups as well as local, regional
and national networks of physicians and health care companies. We believe that competition for
patients is generally based upon the reputation of the physician treating the patient, the
physician’s expertise, and the physician’s demeanor and manner of engagement with the patient, and
the HMOs with which the physician is affiliated. We also compete with other local, regional and
national networks of physicians and health care companies for the services of physicians and for
HMO affiliations. Some of our competitors have greater resources than we do, and we may not be
able to continue to compete effectively in this industry. Further, additional competitors may
enter our markets, and this increased competition may have an adverse effect on our revenues.
We may not be able to successfully recruit or retain existing relationships with qualified
physicians and medical professionals.
We depend on our physicians and other medical professionals to provide medical services to our
managed care patients and independent physicians contracting with us to participate in provider
networks we develop or manage. We compete with general acute care hospitals and other health care
providers for the services of medical professionals. In addition, the reputation, expertise and
demeanor of our physicians and other medical professionals are instrumental to our ability to
attract patients. Demand for physicians and other medical professionals are high and such
professionals often receive competing offers. If we are unable to successfully recruit and retain
medical professionals our ability to successfully implement our business strategy could suffer. No
assurance can be given that we will be able to continue to recruit and retain a sufficient number
of qualified physicians and other medical professionals.
Our business exposes us to the risk of medical malpractice lawsuits.
Our business entails an inherent risk of claims against physicians for professional services
rendered to patients, and we periodically become involved as a defendant in medical malpractice
lawsuits. Medical malpractice claims are subject to the attendant risk of substantial damage
awards. Although we maintain insurance against these claims, if liability results from any of our
pending or any future medical malpractice claims, there can be no assurance that our medical
malpractice insurance coverage will be adequate to cover liability arising out of these proceedings
or that as a result of such liability we will be able to renew our medical malpractice insurance
coverage on acceptable terms, if at all. There can be no assurance that pending or future
litigation will not have a material adverse affect on us or that liability resulting from
litigation will not exceed our insurance coverage.
We primarily operate in Florida.
Our revenues are primarily derived from our operations in Florida. Adverse economic,
regulatory, or other developments in Florida (including hurricanes) could have a material adverse
effect on our financial condition or results of operations. In the event that we expand our
primary operations into new geographic markets, we will need to establish new relationships with
physicians and other health care providers. In addition, we will be required to comply with laws
and regulations of states that differ from the ones in which we currently operate, and may face
competitors with greater knowledge of such local markets. There can be no assurance that we will
be able to establish relationships, realize management efficiencies or otherwise establish a
presence in new geographic markets.
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A significant portion of our voting power is concentrated.
One of our directors, Dr. Phillip Frost, and entities affiliated with him, beneficially owned
approximately 44% of our outstanding common stock as of August 31, 2009. Based on the
significant beneficial ownership of our common stock by Dr. Frost, other shareholders have limited
ability to influence corporate actions requiring shareholder approval, including the election of
directors. Dr. Frost may exert significant influence over any actions requiring shareholder
approval. This influence may make us less attractive as a target for a takeover proposal. It may
also make it more difficult to discourage a merger proposal that Dr. Frost favors or to wage a
proxy contest for the removal of incumbent directors. As a result, this may deprive the holders of
our common stock of an opportunity they might otherwise have to sell their shares at a premium over
the prevailing market price in connection with a merger or acquisition of us or with or by another
company.
We are dependent on our executive officers and other key employees.
Our operations are highly dependent on the efforts of our Chief Executive Officer and our
other key employees. Our executive officers and key employees do not have employment agreements
with us, but are instead employed on an “at will” basis. While we believe that we could find
replacements, the loss of any of their leadership, knowledge and experience could negatively impact
our operations. Replacing any of our executive officers or key employees might be difficult or
take an extended period of time because a limited number of individuals in the managed care
industry have the breadth and depth of skills and experience necessary to operate a business such
as ours. Our success is also dependent on our ability to hire and retain qualified management,
technical and medical personnel. We may be unsuccessful in recruiting and retaining such
personnel, which could negatively impact our operations.
We depend on the management information systems of our affiliated HMOs.
Our operations are dependent on the management information systems of the HMOs with which we
contract. Our affiliated HMOs provide us with certain financial and other information, including
reports and calculations of costs of services provided and payments to be received by us. Both the
software and hardware our HMO affiliates use to provide us with that information have been subject
to rapid technological change. Because we rely on this technology but do not own or have direct
access to it, we have limited ability to ensure that it is properly maintained, serviced and
updated. In addition, information systems such as these may be vulnerable to failure, acts of
sabotage such as “hacking”, and obsolescence. If our principal HMO affiliates were to temporarily
or permanently lose the use of the information systems that provide us with the information on
which we depend or the underlying patient and physician data, our business and results of
operations could be materially and adversely affected. Because our HMO affiliates generate certain
of the information on which we depend, we have less control over the manner in which that
information is generated than we would if we generated the information internally.
We depend on our information processing systems.
Our information processing systems allow us to monitor the medical services we provide to
patients. They also enable us to provide our HMO affiliates with information they use to calculate
the payments due to us. For example, revenue we are entitled to receive under our HMO agreements
is dependent, in part, on the health status of our patients and demographic factors, and we rely on
our information processing systems to compile all or a portion of that data. The failure to
accurately and timely provide that data to our HMO affiliates could impact the revenue we receive
for our patients. These systems are vital to our growth. Although we license most of our
information processing systems from third-party vendors we believe to be reliable, we developed
certain elements of our information processing systems internally. Our current systems may not
perform as expected or provide efficient operational solutions if:
| • | we fail to adequately identify or are unsuccessful in implementing solutions for our information and processing needs; | ||
| • | our processing or information systems fail; or | ||
| • | we fail to upgrade systems as necessary. |
Volatility of our stock price could adversely affect you.
The market price of our common stock could fluctuate significantly as a result of many
factors, including factors that are beyond our ability to control or foresee. These factors
include:
| • | state and federal budget decreases; | ||
| • | adverse publicity regarding HMOs and other managed care organizations; | ||
| • | government action regarding eligibility; | ||
| • | changes in government payment levels; | ||
| • | changes in state mandatory programs; |
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| • | changes in expectations of our future financial performance or changes in financial estimates, if any, of public market analysts; | ||
| • | announcements relating to our business or the business of our competitors; | ||
| • | conditions generally affecting the managed care industry or our provider networks; | ||
| • | the success of our operating strategy; | ||
| • | the operating and stock price performance of other comparable companies; | ||
| • | the termination of any of our contracts; | ||
| • | regulatory or legislative changes; | ||
| • | acts of war or terrorism or an increase in hostilities in the world; and | ||
| • | general economic conditions, including inflation and unemployment rates. |
A failure to successfully implement our business strategy could materially and adversely affect our
operations and growth opportunities.
Our business strategy is to increase patient volume at our existing medical centers;
selectively expand our network to include additional medical centers or other medical facilities
and to penetrate new geographic markets; further develop our IPA management activities; and
selectively expand our operations into other areas in which we believe we can leverage our
expertise in order to establish additional sources of revenue. Our ability to achieve our business
strategy is subject to a variety of factors, many of which are beyond our control, and we may not
be successful in implementing our strategy. In addition, the implementation of our strategy may not
lead to improved operating results. We may decide to alter or discontinue aspects of our business
strategy and may adopt alternative or additional strategies due to business or competitive factors
or factors not currently expected, such as unforeseen costs and expenses or events beyond our
control. Any failure to successfully implement our business strategy could materially and adversely
affect our results of operations and growth opportunities.
Our intangible assets represent a substantial portion of our total assets.
Our balance sheet includes intangible assets, including goodwill and other separately
identifiable intangible assets, of approximately $78.5 million, which represented approximately 63%
of our total assets at June 30, 2009. The most significant component of our intangible assets
consists of intangible assets recorded as a result of the Acquisition, which increased goodwill by
approximately $58.9 million and other intangible assets by approximately $5.3 million at June 30,
2009.
We are required to review our intangible assets, including our goodwill, for impairment on an
annual basis or more frequently if certain indicators of permanent impairment arise. Because we
report as a single segment of business, we perform our impairment test on an enterprise level. In
performing the impairment test, we compare the then-current market price of our outstanding shares
of common stock to the current value of our total net assets, including goodwill and intangible
assets. Should we determine that an indicator of impairment has occurred we would be required to
perform an additional impairment test. Indicators of impairment include, among other things:
| • | a significant adverse change in legal factors or the business climate; | ||
| • | the 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. |
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. The market price of our common stock can fluctuate
significantly because of many factors, including factors that are beyond our ability to control or
foresee and which, in some cases, may be wholly unrelated to us or our business. As a result,
fluctuations in the market price of our common stock, even those wholly unrelated to us or our
business may result in us incurring an impairment charge relating to the write-off of our
intangible assets. Such a write-off could have a material adverse effect on our results of
operations and a further adverse impact on the market price of our common stock.
Competition for acquisition targets and acquisition financing and other factors may impede our
ability to acquire other businesses and may inhibit our growth.
We anticipate that a portion of our future growth may be accomplished through acquisitions.
The success of this strategy depends upon our ability to identify suitable acquisition candidates,
reach agreements to acquire these companies, obtain necessary financing on acceptable terms and
successfully integrate the operations of these businesses. In pursuing acquisition and investment
opportunities, we may compete with other companies that have similar growth strategies. Some of
these competitors are larger and have greater financial and other resources than we have. This
competition may prevent us from acquiring businesses that could improve our growth or expand our
operations.
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Our acquisitions could result in integration difficulties, unexpected expenses, diversion of
management’s attention and other negative consequences.
As part of our growth strategy, we plan to continue to evaluate potential business acquisition
opportunities that we anticipate will provide new product and market opportunities, benefit from
and maximize our existing assets and add critical mass. Any such acquisitions would require us to
integrate the technology, products and services, operations, systems and personnel of the acquired
businesses with our own and to attempt to grow the acquired businesses as part of our company. The
successful integration of businesses we have acquired and may acquire in the future is critical to
our future success, and if we are unsuccessful in integrating these businesses, our operations and
financial results could suffer. The risks and challenges associated with the acquisition and
integration of an acquired business include, but are not limited to, the following:
| • | we may be unable to centralize and consolidate our financial, operational and administrative functions with those of the businesses we acquire; | ||
| • | our management’s attention may be diverted from other business concerns; | ||
| • | we may be unable to retain and motivate key employees of an acquired company; | ||
| • | litigation, indemnification claims and other unforeseen claims and liabilities may arise from the acquisition or operation of acquired businesses; | ||
| • | the costs necessary to complete integration may exceed our expectations or outweigh some of the intended benefits of the transactions we complete; | ||
| • | we may be unable to maintain the patients or goodwill of an acquired business; and | ||
| • | the costs necessary to improve the operating systems and services of an acquired business may exceed our expectations. |
Risks related to our industry
Health care reform initiatives, particularly changes to the Medicare system, could adversely affect our operations.
Substantially all of our revenues from continuing operations are based upon Medicare funded
programs. The President and both houses of Congress are currently engaged in active debate
concerning the reformation of the structure and funding for the U.S. healthcare system, including
the Medicare program. Although none of the bills currently being considered have become law,
various proposals contain items that would have a material adverse impact on Medicare Advantage
funding. We are not able to predict with any certainty what provisions will become law, if any.
However, any changes in the Medicare program that would limit, reduce or delay receipt of Medicare
funding could have a material adverse effect on our business, results of operations, prospects,
financial results, financial condition or cash flows. Also, changes in the Medicaid program that
would limit, reduce or delay receipt of Medicaid funding could have a material adverse effect on
our business, results of operations, prospects, financial results, financial condition or cash
flows.
A decrease to our Medicare capitation payments may have a material adverse effect on our results of
operations, financial position and cash flows.
CMS recently announced that it will reduce Medicare Advantage premiums effective January 2010.
Based on information received from our HMO affiliates and CMS, we believe that the capitation
payments we receive under our percentage of premium arrangements with our HMO affiliates for our
Medicare Advantage patients will decrease by approximately 5% effective January 1, 2010 without
taking into account any adjustments resulting from changes in Medicare risk adjustment scores. We
anticipate that our HMO affiliates will address this premium reduction by reducing plan benefits.
There is, however, no assurance that our Medicare capitation payments will decrease by this amount.
A decrease to our Medicare capitation payment may have a material adverse effect on our results of
operations, financial position and cash flows.
We are subject to government regulation.
Our primary business is regulated by the federal government and the State of Florida. The
laws and regulations governing our operations are generally intended to benefit and protect health
plan members and providers rather than our shareholders. The government agencies administering
these laws and regulations have broad latitude to enforce them. These laws and regulations, along
with the terms of our contracts, regulate how we do business, what services we offer, and how we
interact with our patients, other providers and the public. We are subject to various governmental
reviews, audits and investigations to verify our compliance with our contracts and applicable laws
and regulations. Any adverse review, audit or investigation could result in:
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| • | forfeiture of amounts we have been paid; | ||
| • | imposition of civil or criminal penalties, fines or other sanctions on us; | ||
| • | loss of our right to participate in government-sponsored programs, including Medicare and Medicaid; | ||
| • | damage to our reputation in various markets; | ||
| • | increased difficulty in hiring or retaining qualified medical personnel or marketing our products and services; and | ||
| • | loss of one or more of our licenses to provide health care services. |
Any of these events could reduce our revenues and profitability and otherwise adversely affect
our operating results.
The health care industry is subject to continued scrutiny.
The health care industry, generally, and HMOs specifically, have been the subject of increased
government and public scrutiny in recent years, which has focused on the appropriateness of the
care provided, referral and marketing practices and other matters. Increased media and public
attention has focused on the outpatient services industry in particular as a result of allegations
of fraudulent practices related to the nature and duration of patient treatments, illegal
remuneration and certain marketing, admission and billing practices by certain health care
providers. The alleged practices have been the subject of federal and state investigations, as
well as other legal proceedings. There can be no assurance that we or our HMO affiliates will not
be subject to federal or state review from time to time, and any such investigation could adversely
impact our business or results of operations, even if we are not ultimately found to have violated
the law.
Our insurance coverage may not be adequate, and rising insurance premiums could negatively affect
our profitability.
We rely on insurance to protect us from many business risks, including, “stop loss” insurance.
In most cases, as is the trend in the health care industry, as insurance policies expire, we may
only be able to procure policies with narrower coverage, more exclusions and higher premiums. In
some cases, coverage may not be available at any price. There can be no assurance that the
insurance that we maintain and intend to maintain will be adequate, or that the cost of insurance
and limitations in coverage will not adversely affect our business, financial position or results
of operations.
Deficit spending and economic downturns could negatively impact our results of operations.
Adverse developments in the economy often result in decreases in the federal budget and
associated changes in the federal government’s spending priorities. We are presently in a period
of deficit spending by the federal government, and those deficits are expected to continue for at
least the next several years. Continued deficit spending by the federal government could lead to
increased pressure to reduce governmentally funded programs such as Medicare and Medicaid. If
governmental funding of the Medicare or Medicaid programs was reduced without a counterbalancing
adjustment in the benefits offered to patients, our results of operations could be negatively
impacted. In addition, decreases in state budgets and associated changes in state spending could
negatively affect our profitability.
Many factors that increase health care costs are largely beyond our ability to control.
Increased utilization or unit cost, competition, government regulations and many other factors
may, and often do, cause actual health care costs to increase and these cost increases can
adversely impact our profitability. These factors may include, among other things:
| • | increased use of medical facilities and services, including prescription drugs and doctors’ office visits; | ||
| • | increased cost of such services; | ||
| • | new benefits to patients added by the HMOs to their covered services, whether as a result of the Medicare Modernization Act or otherwise; | ||
| • | changes or reductions of our utilization management functions such as preauthorization of services, concurrent review or requirements for physician referrals; | ||
| • | catastrophes (including hurricanes), epidemics or terrorist attacks; | ||
| • | the introduction of new or costly treatments, including new technologies; | ||
| • | new government mandated benefits or other regulatory changes; and | ||
| • | increases in the cost of “stop loss” or other insurance. |
Many of these factors are beyond our ability to control or predict.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
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| ITEM 2. | PROPERTIES |
We lease approximately 9,800 square feet of corporate office space in Miami, Florida under a
lease expiring in December 2009 with average annual base lease payments of approximately $14,000.
Of the 18 medical centers that we operated as of June 30, 2009, five are leased from
independent landlords, one is leased from a landlord affiliated with certain of the principal
owners of the MDHC Companies, and ten are leased from Humana. The leases with Humana are tied to
our managed care arrangement. We also own a facility in Hialeah, Florida, comprising approximately
49,000 square feet of medical office and administrative space and a 7,000 square foot medical
facility in Homestead, Florida.
| ITEM 3. | LEGAL PROCEEDINGS |
We are involved in legal proceedings incidental to our business that arise from time to time
in 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. We
record an accrual for claims related to legal proceedings, which includes amounts for insurance
deductibles and projected exposure, based on our estimate of the ultimate outcome of such claims.
We do not believe that the ultimate resolution of these matters will have a material adverse effect
on our business, results of operations, financial condition, or cash flows. However, the results of
these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of
these matters could have a material adverse effect on our business, results of operations,
financial condition, cash flow, and prospects.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of our shareholders during the fourth quarter of the
fiscal year ended June 30, 2009.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the NYSE Amex, formerly the American Stock Exchange (“NYSE
Amex”), under the symbol “CNU”. The following table sets forth the high and low sale prices of our
common stock as reported by the composite tape of NYSE Amex for each of the quarters indicated.
| HIGH | LOW | |||||||
Fiscal Year 2009: |
||||||||
Quarter Ended June 30, 2009 |
$ | 2.55 | $ | 1.71 | ||||
Quarter Ended March 31, 2009 |
2.12 | 1.57 | ||||||
Quarter Ended December 31, 2008 |
2.63 | 1.53 | ||||||
Quarter Ended September 30, 2008 |
2.67 | 2.06 | ||||||
Fiscal Year 2008 |
||||||||
Quarter Ended June 30, 2008 |
$ | 2.79 | $ | 1.04 | ||||
Quarter Ended March 31, 2008 |
2.68 | 1.70 | ||||||
Quarter Ended December 31, 2007 |
2.90 | 2.16 | ||||||
Quarter Ended September 30, 2007 |
3.10 | 2.08 | ||||||
As of the close of business on August 31, 2009, there were approximately 119 record holders of
our common stock. We have not declared or paid dividends on our common stock and do not
contemplate declaring or paying dividends in the foreseeable future.
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Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of June 30, 2009, with respect to all of our
compensation plans under which equity securities are authorized for issuance:
| Number of securities to | Weighted average | |||||||||||
| be issued upon exercise | exercise price of | Number of securities | ||||||||||
| of outstanding options, | outstanding options, | remaining available | ||||||||||
| Plan Category | warrants and rights | warrants and rights | for future issuance | |||||||||
Equity compensation
plans approved by
stockholders |
6,296,304 | $ | 2.00 | 1,288,417 | ||||||||
Equity compensation
plans not approved
by stockholders |
— | — | — | |||||||||
| 6,296,304 | 1,288,417 | |||||||||||
Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder return on
Continucare’s common stock against the cumulative total return of the NYSE Amex Composite Index and
the NASDAQ Health Services Index for the period from June 30, 2004 to June 30, 2009, based on a
$100 investment.
| Cumulative Total Return | ||||||||||||||||||||||||
| 6/04 | 6/05 | 6/06 | 6/07 | 6/08 | 6/09 | |||||||||||||||||||
Continucare Corporation |
100.00 | 127.60 | 153.65 | 160.94 | 121.35 | 121.35 | ||||||||||||||||||
NYSE Amex Composite |
100.00 | 131.88 | 164.58 | 205.93 | 204.46 | 151.95 | ||||||||||||||||||
NASDAQ Health Services |
100.00 | 125.34 | 121.93 | 135.51 | 105.84 | 85.29 | ||||||||||||||||||
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In November 2008 and March 2009, we increased our previously announced stock repurchase
program to authorize the repurchase of an additional 2,500,000 and 2,500,000 shares of common
stock, respectively, bringing the total number of shares of common stock authorized for repurchase
under the program to 15,000,000 shares. Any such repurchases will be made from time to time at the
discretion of our management in the open market or in privately negotiated transactions subject to
market conditions and other factors. We anticipate that any such repurchases of shares will be
funded through cash from operations. The stock repurchase program was originally approved by the
Board of Directors in February 2005. There is no expiration date specified for this program.
During the three months ended June 30, 2009, we did not repurchase any shares of our common stock.
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| ITEM 6. | SELECTED FINANCIAL DATA |
Set forth below is our selected historical consolidated financial data as of and for Fiscal
2009, 2008, 2007, 2006 and 2005 that has been derived from our audited consolidated financial
statements. The selected historical consolidated financial data should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the
consolidated financial statements and accompanying notes included elsewhere herein.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
| For the Year Ended June 30, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Revenue |
$ | 281,270,360 | $ | 254,440,048 | $ | 217,146,287 | $ | 132,990,912 | $ | 112,231,113 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Medical services: |
||||||||||||||||||||
Medical claims |
199,167,856 | 181,097,183 | 161,153,828 | 97,781,447 | 81,104,665 | |||||||||||||||
Other direct costs |
28,456,121 | 26,942,472 | 22,919,746 | 13,137,396 | 12,648,297 | |||||||||||||||
Total medical services |
227,623,977 | 208,039,655 | 184,073,574 | 110,918,843 | 93,752,962 | |||||||||||||||
Administrative payroll and employee benefits |
12,655,975 | 12,119,139 | 9,192,670 | 6,538,295 | 5,107,672 | |||||||||||||||
General and administrative |
16,261,750 | 16,413,801 | 13,990,439 | 7,584,205 | 7,059,602 | |||||||||||||||
Gain on extinguishment of debt |
— | — | — | — | (3,000,000 | ) | ||||||||||||||
Total operating expenses |
256,541,702 | 236,572,595 | 207,256,683 | 125,041,343 | 102,920,236 | |||||||||||||||
Income from operations |
24,728,658 | 17,867,453 | 9,889,604 | 7,949,569 | 9,310,877 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
174,039 | 602,826 | 356,192 | 331,001 | 108,000 | |||||||||||||||
Interest expense |
(21,255 | ) | (67,898 | ) | (49,746 | ) | (12,870 | ) | (702,946 | ) | ||||||||||
Income before income tax provision (benefit) |
24,881,442 | 18,402,381 | 10,196,050 | 8,267,700 | 8,715,931 | |||||||||||||||
Income tax provision (benefit) |
9,600,321 | 7,132,727 | 3,892,605 | 2,930,161 | (7,175,561 | ) | ||||||||||||||
Net income |
$ | 15,281,121 | $ | 11,269,654 | $ | 6,303,445 | $ | 5,337,539 | $ | 15,891,492 | ||||||||||
Net income per common share: |
||||||||||||||||||||
Basic |
$ | .25 | $ | .16 | $ | .10 | $ | .11 | $ | .32 | ||||||||||
Diluted |
$ | .24 | $ | .16 | $ | .10 | $ | .10 | $ | .31 | ||||||||||
CONSOLIDATED BALANCE SHEET DATA:
| As of June 30, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Total assets |
$ | 125,303,386 | $ | 118,490,304 | $ | 116,937,548 | $ | 41,994,347 | $ | 34,137,935 | ||||||||||
Long-term obligations, including current portion |
$ | 204,985 | $ | 196,379 | $ | 331,319 | $ | 195,819 | $ | 107,710 | ||||||||||
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
The following discussion and analysis should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. We
are a provider of primary care physician services. Through our network of 18 medical centers, we
provide primary care medical services on an outpatient basis. We also provide practice management
services to IPAs at 21 medical offices. All of our medical centers and IPAs are located in
Miami-Dade, Broward and Hillsborough Counties, Florida. As of June 30, 2009, we provided services
to or for approximately 25,800 patients on a risk basis and approximately 8,800 patients on a
limited or non-risk basis. Additionally, we also provided services to over 4,000 patients as of
June 30, 2009 on a non-risk fee-for-service basis. In Fiscal 2009, approximately 91% and 7% of our
revenue was generated by providing services to Medicare-eligible and Medicaid-eligible members,
respectively, under risk agreements that require us to assume responsibility to provide and pay for
all of our patients’ medical needs in exchange for a capitated fee, typically a percentage of the
premium received by an HMO from various payor sources.
Effective October 1, 2006, we completed the acquisition of the MDHC Companies. Accordingly,
the revenues, expenses and results of operations of the MDHC Companies have been included in our
consolidated statements of income from the date of acquisition. See Note 3 to the consolidated
financial statements included elsewhere in this Annual Report on Form 10-K for unaudited pro forma
financial information for Fiscal 2007 presenting our operating results as though the Acquisition
occurred at the beginning of the fiscal year.
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Medicare and Medicaid Considerations
Substantially all of our revenue is generated by providing services to Medicare-eligible
members and Medicaid-eligible members. The federal government and state governments, including
Florida, from time to time explore ways to reduce medical care costs through Medicare and Medicaid
reform, specifically, and through health care reform generally. Any changes that would limit,
reduce or delay receipt of Medicare or Medicaid funding or mandate increased benefit levels or any
developments that would disqualify us from receiving Medicare or Medicaid funding could have a
material adverse effect on our business, results of operations, prospects, financial results,
financial condition and cash flows. Due to the diverse range of medical care related proposals put
forth and the uncertainty of any proposal’s adoption, we cannot predict what impact any Medicare
reform proposal ultimately adopted may have on our business, financial position or results of
operations.
CMS recently announced that it will reduce Medicare Advantage premiums effective January 2010.
Based on information received from our HMO affiliates and CMS, we believe that the capitation
payments we receive under our percentage of premium arrangements with our HMO affiliates for our
Medicare Advantage patients will decrease by approximately 5% effective January 1, 2010 without
taking into account any adjustments resulting from changes in Medicare risk adjustment scores. We
anticipate that our HMO affiliates will address this premium reduction by reducing plan benefits.
In an effort to further mitigate the effects of this premium reduction, we will seek to improve
medical claims expense management and pursue other cost reduction strategies. There is, however,
no assurance that our Medicare capitation payments will decrease by this amount or that the HMO
benefit reductions or our cost reduction strategies will mitigate the Medicare Advantage premium
reduction. Failure to mitigate the effects of the Medicare Advantage premium reduction may have a
material adverse effect on our results of operations, financial position and cash flows.
On January 1, 2006, the Medicare Prescription Drug Plan created by the Medicare Modernization
Act became effective. As a result, our HMO affiliates have established or expanded prescription
drug benefit plans for their Medicare Advantage members. Under the terms of our risk arrangements,
we are financially responsible for a substantial portion of the cost of the prescription drugs our
patients receive, and, in exchange, our HMO affiliates have agreed to provide us with an additional
per member capitated fee related to prescription drug coverage. However, there can be no assurance
that the additional fee that we receive will be sufficient to reimburse us for the additional costs
that we may incur under the new Medicare Prescription Drug Plan.
In addition, the premiums our HMO affiliates receive from the Centers for Medicare and
Medicaid Services (“CMS”) for their Medicare Prescription Drug Plans is subject to periodic
adjustment, positive or negative, based upon the application of risk corridors that compare their
plans’ revenues targeted in their bids to actual prescription drug costs. Variances exceeding
certain thresholds may result in CMS making additional payments to the HMOs or require the HMOs to
refund to CMS a portion of the payments they received. Our contracted HMO affiliates estimate and
periodically adjust premium revenues related to the risk corridor payment adjustment, and a portion
of the HMO’s estimated premium revenue adjustment is allocated to us. As a result, the revenues
recognized under our risk arrangements with our HMO affiliates are net of the portion of the
estimated risk corridor adjustment allocated to us. The portion of any such risk corridor
adjustment that the HMOs allocate to us may not directly correlate to the historical utilization
patterns of our patients or the costs that we may incur in future periods. Our HMO affiliates
allocated to us adjustments related to their risk corridor payments which had the effect of
reducing our operating income by approximately $2.2 million, $3.1 million and $2.3 million,
respectively, during Fiscal 2009, 2008 and 2007, respectively.
The Medicare Prescription Drug Plan has also been subject to significant public criticism and
controversy, and members of Congress have discussed possible changes to the program as well as ways
to reduce the program’s cost to the federal government. We cannot predict what impact, if any,
these developments may have on the Medicare Prescription Drug Plan or on our future financial
results.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements and accompanying notes, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements and accompanying notes requires us to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
Certain of the amounts recorded on our financial statements could change materially under
different, yet still reasonable, estimates and assumptions. We base our estimates and assumptions
on historical experience, knowledge of current events and expectations of future events, and we
continuously evaluate and update our estimates and assumptions. However, our estimates and
assumptions may ultimately prove to be incorrect or incomplete and, as a result, our actual results
may differ materially from those previously reported. We believe the following critical accounting
policies involve the most significant judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition
Under our risk contracts with HMOs, we receive a percentage of premium or other capitated fee
for each patient that chooses one of our physicians as their primary care physician. Revenue under
these agreements is generally recorded in the period we assume
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responsibility to provide services at the rates then in effect as determined by the respective
contract. As part of the Medicare Advantage program, CMS periodically recomputes the premiums to
be paid to the HMOs based on updated health status of participants and updated demographic factors.
We record any adjustments to this revenue at the time that the information necessary to make the
determination of the adjustment is received from the HMO.
Under our risk agreements, we assume responsibility for the cost of all medical services
provided to the patient, even those we do not provide directly, in exchange for a percentage of
premium or other capitated fee. 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 capitated revenue on those contracts, we
recognize losses on our prepaid health care services with HMOs. No contracts were considered loss
contracts at June 30, 2009 because we have the right to terminate unprofitable physicians and close
unprofitable centers under our managed care contracts.
Under our limited risk and non-risk contracts with HMOs, we receive a capitation fee or
management fee based on the number of patients for which we are providing services on a monthly
basis. Under our limited risk contracts, we also receive a percentage of the surplus generated as
determined by the respective contract. The fees and our portion of the surplus generated under
these arrangements are recorded as revenue in the period in which services are provided as
determined by the respective contract.
Payments under both our risk contracts and our non-risk contracts (for both the Medicare
Advantage program as well as Medicaid) are also subject to reconciliation based upon historical
patient enrollment data. We record any adjustments to this revenue at the time that the information
necessary to make the determination of the adjustment is received from the HMO or the applicable
governmental body.
Medical Claims Expense Recognition
The cost of health care services provided or contracted for is accrued in the period in which
the services are provided. This cost includes our estimate of the related liability for medical
claims incurred in the period but not yet reported, or IBNR. The liability for IBNR is presented
in the balance sheet netted against amounts due from HMOs. Changes in this estimate can materially
affect, either favorably or unfavorably, our results from operations and overall financial
position.
We develop our estimate of IBNR primarily based on historical claims incurred per member per
month. We adjust our estimate if we have unusually high or low inpatient utilization or if benefit
changes provided under the HMO plans are expected to significantly increase or reduce our claims
exposure. We also adjust our estimate for differences between the estimated claims expense
recorded in prior months to actual claims expense as claims are paid by the HMO and reported to us.
We use an actuarial analysis as an additional tool to further corroborate our estimate of IBNR.
Based on our analysis as of June 30, 2009, we recorded a liability of $23.7 million for IBNR
which was relatively unchanged from the liability of $23.9 million recorded as of June 30, 2008.
The liability of $23.9 million recorded as of June 30, 2008 was relatively unchanged from the
liability of $23.6 million recorded as of June 30, 2007.
Consideration of Impairment Related to Goodwill and Other Intangible Assets
Our balance sheet includes intangible assets, including goodwill and other separately
identifiable intangible assets, of approximately $78.5 million, which represented approximately 63%
of our total assets at June 30, 2009. The most significant component of the intangible assets
consists of the intangible assets recorded in connection with the Acquisition. The purchase price,
including acquisition costs, of approximately $66.2 million was allocated to the estimated fair
value of acquired tangible assets of $13.9 million, identifiable intangible assets of $8.7 million
and assumed liabilities of $15.3 million, resulting in goodwill totaling $58.9 million.
Under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible
Assets”, goodwill and intangible assets with indefinite useful lives are no longer amortized, but
are reviewed for impairment on an annual basis or more frequently if certain indicators of
impairment 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 indicators of impairment arise. Indicators of impairment include, among
other things, a significant adverse change in legal factors or the business climate, the loss of a
key HMO contract, an adverse action by a regulator, unanticipated competition, and the loss of key
personnel or allocation of goodwill to a portion of business that is to be sold.
Because we operate in a single segment of business, we have determined that we have a single
reporting unit and we perform our impairment test for goodwill on an enterprise level. In
performing the impairment test, we compare the total current market value of all of our outstanding
common stock to the current carrying value of our total net assets, including goodwill and
intangible assets. Depending on the market value of our common stock at the time that an
impairment test is required, we may also perform other
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valuation techniques to measure market value before reaching a conclusion that impairment
exists. Depending on the outcome of our analyses, there is a risk that a portion of our intangible
assets would be considered impaired and must be written-off during that period. We completed our
annual impairment test as of May 1, 2009, and determined that no impairment existed. In addition,
no indicators of impairment were noted and accordingly, no impairment charges were required at June
30, 2009. Should we later determine that an indicator of impairment exists, we would be required
to perform an additional impairment test.
Realization of Deferred Income Tax Assets
We account for income taxes in accordance with Statement of Financial Accounting Standards No.
109, “Accounting for Income Taxes” (“SFAS 109”) which requires that deferred income tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary differences between
the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that
deferred income tax assets be reduced by a valuation allowance if it is more likely than not that
some portion or all of the deferred income tax asset will not be realized.
As part of the process of preparing our consolidated financial statements, we estimate our
income taxes based on our actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes. We also recognize as
deferred income tax assets the future tax benefits from net operating loss carryforwards. We
evaluate the realizability of these deferred income tax assets by assessing their valuation
allowances and by adjusting the amount of such allowances, if necessary. Among the factors used to
assess the likelihood of realization are our projections of future taxable income streams, the
expected timing of the reversals of existing temporary differences, and the impact of tax planning
strategies that could be implemented to avoid the potential loss of future tax benefits. However,
changes in tax codes, statutory tax rates or future taxable income levels could materially impact
our valuation of income tax accruals and assets and could cause our provision for income taxes to
vary significantly from period to period. At June 30, 2009, we had deferred income tax liabilities
in excess of deferred income tax assets of approximately $3.5 million.
Share-Based Payment
We apply the provisions of SFAS No. 123 (R), “Share-Based Payment” (“SFAS 123 (R)”). SFAS
123(R) requires that the costs relating to stock-based payment transactions be recognized in the
financial statements over the period services are rendered according to the fair value of the
stock-based awards issued.
We have elected to calculate the fair value of our employee stock options using the
Black-Scholes option pricing model. Using this model we calculated the fair value for employee
stock options granted during Fiscal 2009 and 2008 based on the following assumptions: risk-free
interest rate ranging from 0.66% to 3.19% and 1.61% to 4.22%, respectively; dividend yield of 0%;
weighted-average volatility factor of the expected market price of our common stock of 58.6% and
59.5%, respectively, and weighted-average expected life of the options ranging from 2 to 6 years
depending on the vesting provisions of each option. The fair value for employee stock options
granted during Fiscal 2007 was calculated based on the following assumptions: risk-free interest
rate ranging from 4.81% to 5.18%; dividend yield of 0%; volatility factor of the expected market
price of the Company’s common stock of 63.7%; and weighted-average expected life of the option
ranging from 2 to 6 years depending on the vesting provisions of each option. The expected life of
the options is based on the historical exercise behavior of our employees. The expected volatility
factor is based on the historical volatility of the market price of our common stock as adjusted
for certain events that management deemed to be non-recurring and non-indicative of future events.
We recognized share-based compensation cost of $1.2 million, $1.3 million and $1.7 million,
respectively, for Fiscal 2009, 2008 and 2007. For Fiscal 2009, the Company recognized excess tax
benefits resulting from the exercise of stock options of approximately $0.1 million. For Fiscal
2008, the Company did not recognize any excess tax benefits resulting from the exercise of stock
options. For Fiscal 2007, the Company recognized excess tax benefits of approximately $0.5 million
resulting from the exercise of stock options. As of June 30, 2009, there was $0.8 million of total
unrecognized compensation cost related to non-vested options, which is expected to be recognized
over a weighted average period of 1.8 years.
SFAS 123(R) does not require the use of any particular option valuation model. Because our
stock options have characteristics significantly different from traded options and because changes
in the subjective input assumptions can materially affect the fair value estimate, in management’s
opinion, it is possible that existing models may not necessarily provide a reliable measure of the
fair value of our employee stock options. We selected the Black-Scholes model based on our
experience with it, its wide use by issuers comparable to us, and our review of alternate option
valuation models.
The effect of applying the fair value method of accounting for stock options on reported net
income for any period may not be representative of the effects for future periods because our
outstanding options typically vest over a period of several years and additional awards may be made
in future periods.
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Results of Operations
The following tables set forth, for the periods indicated, selected operating data as a
percentage of total revenue.
| Year ended June 30, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Revenue |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Operating expenses: |
||||||||||||
Medical services: |
||||||||||||
Medical claims |
70.8 | 71.2 | 74.2 | |||||||||
Other direct costs |
10.1 | 10.6 | 10.6 | |||||||||
Total medical services |
80.9 | 81.8 | 84.8 | |||||||||
Administrative payroll and employee benefits |
4.5 | 4.7 | 4.2 | |||||||||
General and administrative |
5.8 | 6.5 | 6.4 | |||||||||
Total operating expenses |
91.2 | 93.0 | 95.4 | |||||||||
Income from operations |
8.8 | 7.0 | 4.6 | |||||||||
Other income (expense): |
||||||||||||
Interest income |
— | 0.2 | 0.1 | |||||||||
Income before income tax provision |
8.8 | 7.2 | 4.7 | |||||||||
Income tax provision |
3.4 | 2.8 | 1.8 | |||||||||
Net income |
5.4 | % | 4.4 | % | 2.9 | % | ||||||
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 2009 TO FISCAL YEAR ENDED JUNE 30, 2008
Revenue
Revenue increased by $26.9 million, or 10.5%, to $281.3 million for Fiscal 2009 from $254.4
million for Fiscal 2008 due primarily to increases in our Medicare revenue.
The most significant component of our revenue is the revenue we generate from Medicare
patients under risk arrangements which increased by $28.7 million, or 12.7%, during Fiscal 2009.
During Fiscal 2009, revenue generated by our Medicare risk arrangements increased approximately
13.9% on a per patient per month basis and Medicare patient months decreased by approximately 1.1%
over Fiscal 2008. The increase in the per member per month Medicare revenue was primarily due to a
rate increase in Medicare premiums and an increase in premiums resulting from the Medicare risk
adjustment program. The decrease in Medicare patient months was primarily due to the termination
of management services related to certain IPA practices. The increase in Medicare revenue was
partially offset by a $2.8 million decrease in revenue generated by our Medicaid patients due
primarily to a decrease in Medicaid patient months.
Under the Medicare risk adjustment program, the health status and demographic factors of
Medicare Advantage participants are taken into account in determining premiums paid for each
participant. CMS periodically recomputes the premiums to be paid to the HMOs based on the updated
health status and demographic factors of the Medicare Advantage participants. In addition, the
premiums paid to the HMOs for their Medicare Prescription Drug Plan are subject to periodic
adjustment based upon CMS’s risk corridor adjustment methodology. The net effect of these premium
adjustments included in revenue for the three-month periods ended June 30, 2009 and 2008 were
favorable retroactive Medicare adjustments of $0.7 million and $1.0 million, respectively, and for
Fiscal 2009 and 2008 were favorable retroactive Medicare adjustments of $0.9 million and
unfavorable retroactive Medicare adjustments of $0.3 million, respectively. Future Medicare risk
adjustments may result in reductions of revenue depending on the future health status and
demographic factors of our patients as well as the application of CMS’s risk corridor methodology
to the HMOs Medicare Prescription Drug Programs.
Revenue generated by our managed care entities under contracts with Humana, Vista and Wellcare
accounted for approximately 72%, 18% and 8%, respectively, of our total revenue for Fiscal 2009.
Revenue generated by our managed care entities under contracts with Humana, Vista and Wellcare
accounted for approximately 72%, 19% and 8%, respectively, of our total revenue for Fiscal 2008.
Operating Expenses
Medical services expenses are comprised of medical claims expense and other direct costs
related to the provision of medical services to our patients. Because our risk contracts with HMOs
provide that we are financially responsible for the cost of substantially all medical services
provided to our patients under those contracts, our medical claims expense includes the costs of
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prescription drugs these patients receive as well as medical services provided to patients by
providers other than us. Other direct costs consist primarily of salaries, taxes and benefits of
our health professionals providing primary care services including a portion of our share-based
compensation cost, medical malpractice insurance costs, capitation payments to our IPA physicians
and fees paid to independent contractors providing medical services to our patients.
Medical services expenses for Fiscal 2009 increased by $19.6 million, or 9.4%, to $227.6
million from $208.0 million for Fiscal 2008. Medical claims expense, which is the largest
component of medical services expense, increased by $18.1 million, or 10.0%, to $199.2 million for
Fiscal 2009 from $181.1 million for Fiscal 2008 primarily due to an increase in Medicare claims
expense of $18.3 million, or 11.2%. The increase in Medicare claims expense resulted from a 12.4%
increase in medical claims expense on a per patient per month basis, partially offset by a 1.1%
decrease in Medicare patient months. The increase in Medicare per patient per month medical claims
expense is primarily attributable to enhanced benefits offered by our HMO affiliates and
inflationary trends in the health care industry.
As a percentage of revenue, medical services expenses decreased to 80.9% for Fiscal 2009 as
compared to 81.8% for Fiscal 2008. Our claims loss ratio (medical claims expense as a percentage
of revenue) decreased to 70.8% for Fiscal 2009 from 71.2% for Fiscal 2008. These decreases were
primarily due to an increase in Medicare revenue at a greater rate than the increase in our claims
expense on a per patient per month basis. HMOs, however, are under continuous competitive pressure
to offer enhanced and possibly more expensive benefits to their Medicare Advantage members. The
premiums CMS pays to HMOs for Medicare Advantage members are generally not increased as a result of
those benefit enhancements. This could increase our claims loss ratio in future periods, which
could reduce our profitability and cash flows.
Other direct costs increased by $1.6 million, or 5.6%, to $28.5 million for Fiscal 2009 from
$26.9 million for Fiscal 2008. As a percentage of revenue, other direct costs decreased to 10.1%
for Fiscal 2009 from 10.6% for Fiscal 2008. The increase in the amount of other direct costs was
primarily due to an increase in payroll expense and related benefits for physicians and medical
support personnel at our medical centers.
Administrative payroll and employee benefits expenses increased by $0.6 million, or 4.4%, to
$12.7 million for Fiscal 2009 from $12.1 million for Fiscal 2008. As a percentage of revenue,
administrative payroll and employee benefits expenses decreased to 4.5% for Fiscal 2009 from 4.7%
for Fiscal 2008. The increase in administrative payroll and employee benefits expenses was
primarily due to an increase in salaries.
General and administrative expenses remained relatively unchanged at $16.3 million and $16.4
million for Fiscal 2009 and 2008, respectively. As a percentage of revenue, general and
administrative expenses decreased to 5.8% for Fiscal 2009 from 6.5% for Fiscal 2008.
Income from Operations
Income from operations for Fiscal 2009 increased by $6.8 million, or 38.4%, to $24.7 million
from $17.9 million for Fiscal 2008.
Taxes
An income tax provision of $9.6 million and $7.1 million was recorded for Fiscal 2009 and
2008, respectively. The effective income tax rates remained relatively unchanged at 38.6% and
38.8% for Fiscal 2009 and 2008, respectively.
Net Income
Net income for Fiscal 2009 increased by $4.0 million, or 35.6%, to $15.3 million from $11.3
million for Fiscal 2008.
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 2008 TO FISCAL YEAR ENDED JUNE 30, 2007
Revenue
Revenue increased by $37.3 million, or 17.2%, to $254.4 million for Fiscal 2008 from $217.1
million for Fiscal 2007 due primarily to increases in our Medicare revenue.
The most significant component of our revenue is the revenue we generate from Medicare
patients under risk arrangements which increased by $32.2 million, or 16.6%, during Fiscal 2008.
During Fiscal 2008, revenue generated by our Medicare risk arrangements increased approximately
7.0% on a per patient per month basis and Medicare patient months increased by approximately 9.0%
over Fiscal 2007. The increase in the per member per month Medicare revenue was primarily due to a
rate increase in Medicare premiums and an increase in premiums resulting from the Medicare risk
adjustment program. The increase in
Medicare patient months was primarily due to the operations associated with the MDHC Companies
which we acquired effective October 1, 2006 and which were included in our results for only part of
Fiscal 2007.
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Under the Medicare risk adjustment program, the health status and demographic factors of
Medicare Advantage participants are taken into account in determining premiums paid for each
participant. CMS periodically recomputes the premiums to be paid to the HMOs based on the updated
health status and demographic factors of the Medicare Advantage participants. In addition, the
premiums paid to the HMOs for their Medicare Prescription Drug Plan are subject to periodic
adjustment based upon CMS’s risk corridor adjustment methodology. The net effect of these premium
adjustments included in revenue for the three-month periods ended June 30, 2008 and 2007 were
favorable retroactive Medicare adjustments of $1.0 million and $1.5 million, respectively, and for
Fiscal 2008 and 2007 were unfavorable retroactive Medicare adjustments of $0.3 million and $0.1
million, respectively. Future Medicare risk adjustments may result in reductions of revenue
depending on the future health status and demographic factors of our patients as well as the
application of CMS’s risk corridor methodology to the HMOs Medicare Prescription Drug Programs.
During Fiscal 2008 and 2007, we received payments and recorded amounts due from our HMO
affiliates of approximately $0.5 million and $3.6 million, respectively, related primarily to
Medicare risk adjustments and pharmacy rebates relating to the operations of the MDHC Companies for
periods prior to completion of the Acquisition. While these transactions ordinarily are reflected
in our results of operations, since they related to periods prior to our acquisition of the MDHC
Companies, they were instead recorded as purchase accounting adjustments which decreased the amount
of goodwill we recorded for the Acquisition.
Revenue generated by our managed care entities under contracts with Humana, Vista and Wellcare
accounted for approximately 72%, 19% and 8%, respectively, of our total revenue for Fiscal 2008.
Revenue generated by our managed care entities under contracts with Humana, Vista and Wellcare
accounted for approximately 74%, 20% and 5%, respectively, of our total revenue for Fiscal 2007.
Operating Expenses
Medical services expenses are comprised of medical claims expense and other direct costs
related to the provision of medical services to our patients. Because our risk contracts with HMOs
provide that we are financially responsible for the cost of substantially all medical services
provided to our patients under those contracts, our medical claims expense includes the costs of
prescription drugs these patients receive as well as medical services provided to patients under
our risk contracts by providers other than us. Other direct costs consist primarily of salaries,
taxes and benefits of our health professionals providing primary care services including a portion
of our share-based compensation cost, medical malpractice insurance costs, capitation payments to
our IPA physicians and fees paid to independent contractors providing medical services to our
patients.
Medical services expenses for Fiscal 2008 increased by $23.9 million, or 13.0%, to $208.0
million from $184.1 million for Fiscal 2007 primarily due to the medical expenses related to the
operations of the MDHC Companies being included in our results for the entire Fiscal 2008 period.
Medical claims expense, which is the largest component of medical services expense, increased by
$19.9 million, or 12.4%, to $181.1 million for Fiscal 2008 from $161.2 million for Fiscal 2007
primarily due to an increase in Medicare claims expense of $17.0 million, or 11.6%. The increase
in Medicare claims expense resulted from a 2.5% increase in medical claims expense on a per patient
per month basis and a 9.0% increase in Medicare patient months. The increase in Medicare per
patient per month medical claims expense is primarily attributable to enhanced benefits offered by
our HMO affiliates and inflationary trends in the health care industry, partially offset by a
general improvement in medical claims expense management and utilization outcomes. The increase in
Medicare patient months is primarily attributable to the operations associated with the MDHC
Companies which we acquired effective October 1, 2006 and which were included in our results for
only part of Fiscal 2007.
As a percentage of revenue, medical services expenses decreased to 81.8% for Fiscal 2008 as
compared to 84.8% for Fiscal 2007. Our claims loss ratio (medical claims expense as a percentage
of revenue) decreased to 71.2% for Fiscal 2008 from 74.2% for Fiscal 2007. This decrease was
primarily due to an increase in revenue at a greater rate than the increase in both our medical
services expenses and our medical claims expense resulting primarily from a general improvement in
medical claims expense management and utilization outcomes. HMOs, however, are under continuous
competitive pressure to offer enhanced, and possibly more expensive benefits to their Medicare
Advantage members. The premiums CMS pays to HMOs for Medicare Advantage members are generally not
increased as a result of those benefit enhancements. This could increase our claims loss ratio in
future periods, which could reduce our profitability and cash flows.
Other direct costs increased by $4.0 million, or 17.6%, to $26.9 million for Fiscal 2008 from
$22.9 million for Fiscal 2007. As a percentage of revenue, other direct costs remained unchanged
at 10.6% for Fiscal 2008 and 2007. The increase in the amount of other direct costs was primarily
due to the expenses related to the operations of the MDHC Companies being included in our results
for the entire Fiscal 2008 period.
Administrative payroll and employee benefits expenses increased by $2.9 million, or 31.8%, to
$12.1 million for Fiscal 2008 from $9.2 million for Fiscal 2007. As a percentage of revenue,
administrative payroll and employee benefits expenses
increased to 4.7% for Fiscal 2008 from 4.2% for Fiscal 2007. The increase in administrative
payroll and employee benefits expenses was
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primarily due to an increase in incentive plan accruals related to our earnings during Fiscal 2008
and an increase in personnel in connection with the acquisition of the MDHC Companies which were
reflected in our results for the entire Fiscal 2008 period.
General and administrative expenses increased by $2.4 million, or 17.3%, to $16.4 million for
Fiscal 2008 from $14.0 million for Fiscal 2007. As a percentage of revenue, general and
administrative expenses increased to 6.5% for Fiscal 2008 from 6.4% for Fiscal 2007. The increase
in general and administrative expenses was primarily due to expenses related to the operations of
the MDHC Companies and an increase in amortization expense resulting from the intangible assets
recorded in connection with the acquisition of the MDHC Companies which were reflected in our
results for the entire Fiscal 2008 period as well as an increase in marketing expenses.
Income from Operations
Income from operations for Fiscal 2008 increased by $8.0 million to $17.9 million from $9.9
million for Fiscal 2007.
Taxes
An income tax provision of $7.1 million and $3.9 million was recorded for Fiscal 2008 and
2007, respectively. The effective income tax rates were 38.8% and 38.2% for Fiscal 2008 and 2007,
respectively. The increase in the effective tax rate was primarily due to an increase in the
statutory federal income tax rate resulting from an increase in taxable income.
Net Income
Net income for Fiscal 2008 increased by $5.0 million, or 78.8%, to $11.3 million from $6.3
million for Fiscal 2007.
Liquidity and Capital Resources
At June 30, 2009, working capital was $25.5 million, an increase of $5.2 million from $20.3
million at June 30, 2008. Cash and cash equivalents increased by $4.0 million to $13.9 million at
June 30, 2009 compared to $9.9 million at June 30, 2008. The increases in working capital and cash
and cash equivalents at June 30, 2009 as compared to June 30, 2008 was primarily due to net cash
provided by operating activities of $17.6 million for Fiscal 2009, partially offset by $10.6
million of cash used to repurchase our common stock and $3.1 million of cash used for the purchase
of property and equipment. In August 2009, we collected approximately $5.3 million of Medicare
premium adjustments which were included in amounts due from HMOs at June 30, 2009. At August 31,
2009, our cash and cash equivalents increased to approximately $22.2 million.
Net cash of $17.6 million was provided by operating activities during Fiscal 2009 compared to
$15.2 million in Fiscal 2008 and $10.9 million in Fiscal 2007. The $2.4 million increase in cash
provided by operating activities for Fiscal 2009 compared to Fiscal 2008 was primarily due to an
increase in net income of $4.0 million, partially offset by net increases in amounts due from HMOs
of $0.7 million and prepaid expenses and other current assets of $0.8 million. The $4.3 million
increase in cash provided by operating activities for Fiscal 2008 compared to Fiscal 2007 was
primarily due to an increase in net income of $5.0 million.
Net cash of $3.1 million was used for investing activities in Fiscal 2009 compared to $1.0
million in Fiscal 2008 and $7.0 million in Fiscal 2007. The $2.1 million increase in net cash used
for investing activities for Fiscal 2009 compared to Fiscal 2008 primarily related to an increase
in cash used for leasehold improvements. The $6.0 million decrease in net cash used for investing
activities for Fiscal 2008 primarily related to the Acquisition of the MDHC Companies in Fiscal
2007.
Net cash of $10.6 million was used in financing activities in Fiscal 2009 compared to net cash
used of $11.6 million in Fiscal 2008 and $7.3 million in Fiscal 2007. The $1.0 million decrease in
cash used for financing activities for Fiscal 2009 compared to Fiscal 2008 was primarily due a $0.8
million net decrease in cash used to repurchase our common stock. The $4.3 million increase in
cash used for financing activities for Fiscal 2008 was primarily due to $11.5 million of cash used
to repurchase our common stock during Fiscal 2008, partially offset by $7.8 million of cash used
for the repayment of long-term debt related to the acquisition of the MDHC Companies, net of
proceeds from the long-term debt, during Fiscal 2007.
Pursuant to the terms under our managed care agreements with certain of our HMO affiliates, we
posted irrevocable standby letters of credit amounting to $1.2 million to secure our payment
obligations to those HMOs. We are required to maintain these letters of credit throughout the term
of the managed care agreements.
In November 2008 and March 2009, we increased our previously announced stock repurchase
program to authorize the repurchase of an additional 2,500,000 and 2,500,000 shares of common
stock, respectively, bringing the total number of shares of common stock authorized for repurchase
under the program to 15,000,000 shares. Any such repurchases will be made from time to time at the
discretion of our management in the open market or in privately negotiated transactions subject to
market conditions and other factors. We anticipate that any such repurchases of shares will be
funded through cash from operations. During Fiscal 2009 and 2008 we repurchased 5,419,004 shares
and 5,330,533 shares, respectively, of our common stock for approximately $10.6 million
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and $11.5 million, respectively. We did not repurchase any shares of our common stock during
Fiscal 2007. As of August 31, 2009, we had repurchased 11,907,004 shares of our common stock for
approximately $25.0 million.
On August 12, 2009, we acquired 100% of the issued and outstanding capital stock of PSD for
$1.7 million in cash.
We believe that we will be able to fund our capital commitments and our anticipated operating
cash requirements for the foreseeable future and satisfy any remaining obligations from our working
capital, anticipated cash flows from operations, our Credit Facility, and our Term Loans. At June
30, 2009, approximately $9.5 million was available for future borrowing under those facilities.
As of June 30, 2009, we had no outstanding balance on our Credit Facility and Term Loans. Our
Credit Facility has a maturity date of December 31, 2009. We are currently reviewing with our
lenders strategies to amend and extend our Credit Facility.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of June 30, 2009, and have not entered into any
transactions involving unconsolidated, limited purpose entities or commodity contracts.
Contractual Obligations
The following is a summary of our long-term debt, capital and operating lease obligations, and
contractual obligations as of June 30, 2009:
| Payment due by Period | ||||||||||||||||||||
| Less than | More than | |||||||||||||||||||
| Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
Capital Lease Obligations (1) |
$ | 208,935 | $ | 130,695 | $ | 78,240 | $ | — | $ | — | ||||||||||
Operating Lease Obligations (1) |
5,363,311 | 1,852,224 | 2,167,701 | 917,815 | 425,571 | |||||||||||||||
Total |
$ | 5,572,246 | $ | 1,982,919 | $ | 2,245,941 | $ | 917,815 | $ | 425,571 | ||||||||||
| (1) | The payments shown above for Capital Lease Obligations and Operating Lease Obligations reflect all payments due under the terms of the respective leases. See Note 4 to our Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K to reconcile the payments shown above to the capital lease obligations recorded in our Consolidated Balance Sheets. |
FORWARD-LOOKING STATEMENTS
Our business, financial condition, results of operations, cash flows and prospects, and the
prevailing market price and performance of our common stock, may be adversely affected by a number
of factors, including the matters discussed below. Certain statements and information set forth in
this Annual Report on Form 10-K, as well as other written or oral statements made from time to time
by us or by our authorized executive officers on our behalf, constitute “forward-looking
statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. We
intend for our forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and
we set forth this statement and these risk factors in order to comply with such safe harbor
provisions. You should note that our forward-looking statements speak only as of the date of this
Annual Report on Form 10-K or when made and we undertake no duty or obligation to update or revise
our forward-looking statements, whether as a result of new information, future events or otherwise.
Although we believe that the expectations, plans, intentions and projections reflected in our
forward-looking statements are reasonable, such statements are subject to risks, uncertainties and
other factors that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or implied by the
forward-looking statements. The risks, uncertainties and other factors that our shareholders and
prospective investors should consider include, but are not limited to, the following:
| • | Our operations are dependent on three health maintenance organizations; | ||
| • | Under our most important contracts we are responsible for the cost of medical services to our patients in return for a capitated fee; | ||
| • | Our revenues will be affected by the Medicare Risk Adjustment program; | ||
| • | If we are unable to manage medical benefits expense effectively, our profitability will likely be reduced; | ||
| • | A failure to estimate incurred but not reported benefits expense accurately will affect our profitability; | ||
| • | We compete with many health care providers for patients and HMO affiliations; | ||
| • | We may not be able to successfully recruit or retain existing relationships with qualified physicians and medical professionals; | ||
| • | Our business exposes us to the risk of medical malpractice lawsuits; |
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| • | We primarily operate in Florida; | ||
| • | A significant portion of our voting power is concentrated; | ||
| • | We are dependent on our executive officers and other key employees; | ||
| • | We depend on the management information systems of our affiliated HMOs; | ||
| • | We depend on our information processing systems; | ||
| • | Volatility of our stock price could adversely affect you; | ||
| • | A failure to successfully implement our business strategy could materially and adversely affect our operations and growth opportunities; | ||
| • | Our intangible assets represent a substantial portion of our total assets; | ||
| • | Competition for acquisition targets and acquisition financing and other factors may impede our ability to acquire other businesses and may inhibit our growth; | ||
| • | Our acquisitions could result in integration difficulties, unexpected expenses, diversion of management’s attention and other negative consequences; | ||
| • | Health care reform initiatives, particularly changes to the Medicare system, could adversely affect our operations; | ||
| • | A decrease to our Medicare capitation payments may have a material adverse effect on our results of operations, financial position and cash flows; | ||
| • | We are subject to government regulation; | ||
| • | The health care industry is subject to continued scrutiny; | ||
| • | Our insurance coverage may not be adequate, and rising insurance premiums could negatively affect our profitability; | ||
| • | Deficit spending and economic downturns could negatively impact our results of operations; and | ||
| • | Many factors that increase health care costs are largely beyond our ability to control. |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
At June 30, 2009, we held certificates of deposit and cash equivalent investments in high
grade, short-term securities, which are not typically subject to material market risk. At June 30,
2009, we had capital lease obligations outstanding at fixed rates. For loans with fixed interest
rates, a hypothetical 10% change in interest rates would have no material 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 Term Loans and Credit Facility have variable interest rates
and are interest rate sensitive, however, we had no amount outstanding under these facilities at
June 30, 2009. We have no material risk associated with foreign currency exchange rates or
commodity prices.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our consolidated financial statements and independent registered public accounting firm’s
report thereon appear beginning on page F-2. See index to such consolidated financial statements
and reports on page F-1.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) or Rule 15d-15(e)) as of the end of the period covered by this Annual
Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of June 30, 2009, our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Our Chief Executive Officer’s and Chief Financial Officer’s conclusions regarding the
effectiveness of our disclosure controls and procedures should be considered in light of the
following limitations on the effectiveness of our disclosure controls and procedures, some of which
pertain to most, if not all, business enterprises, and some of which arise as a result of the
nature of our business. Our management, including our Chief Executive Officer and our Chief
Financial Officer, does not expect that our disclosure controls and procedures will prevent all
errors or improper conduct. A control system, no matter how well conceived and
operated, can provide only reasonable assurance that the objectives of the control system will
be met. Further, the design of a control system
30
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must reflect the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues and instances of
improper conduct, if any, will be detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of some persons, by
collusion of two or more people or by management override of the controls. Further, the design of
any control system is based, in part, upon assumptions about the likelihood of future events, and
there can be no assurance that any control system design will succeed in achieving its stated goals
under all potential future conditions. Additionally, over time, controls may become inadequate
because of changes in conditions or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected. In addition, we depend on our HMO affiliates
for certain financial and other information that we receive concerning the revenue and expenses
that we earn and incur. Because our HMO affiliates generate that information for us, we have less
control over the manner in which that information is generated.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Exchange Act Rules Rule 13a-15(f) or Rule 15d-15(f)). Our
internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted accounting principles and includes
those policies and procedures that (i) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our management and
directors, and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material effect on our
financial statements. Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our internal control over financial
reporting as of the end of the period covered by this report based on the Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, our management concluded that our internal control over
financial reporting was effective as of June 30, 2009. Ernst & Young LLP, our independent
registered public accounting firm, which audited our financial statements included in this report,
has issued an attestation report on our internal control over financial reporting. Their report is
included herein.
Changes in Internal Control over Financial Reporting
Based on an evaluation, under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, there has been no change
in our internal control over financial reporting during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Section 302 Certifications
Provided with this report are certifications of our Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and the SEC’s
implementing regulations. This Item 9A contains the information concerning the evaluations referred
to in those certifications, and you should read this information in conjunction with those
certifications for a more complete understanding of the topics presented.
31
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Continucare Corporation
Continucare Corporation
We have audited Continucare Corporation’s internal control over financial reporting as of June
30, 2009, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Continucare Corporation’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Continucare Corporation maintained, in all material respects, effective
internal control over financial reporting as of June 30, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Continucare Corporation as of
June 30, 2009 and 2008, and the related consolidated statements of income, shareholders’ equity,
and cash flows for each of the three years in the period ended June 30, 2009 of Continucare
Corporation and our report dated September 10, 2009 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP | ||||
| Certified Public Accountants | ||||
Fort Lauderdale, Florida
September 10, 2009
September 10, 2009
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by Item 10 is incorporated by reference to our Proxy Statement for
our 2009 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the end of the fiscal year covered by this Form 10-K, or,
alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of
such 120 day period.
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| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by Item 11 is incorporated by reference to our Proxy Statement for
our 2009 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the end of the fiscal year covered by this Form 10-K, or,
alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of
such 120 day period.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Item 12 is incorporated by reference to our Proxy Statement for
our 2009 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the end of the fiscal year covered by this Form 10-K, or,
alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of
such 120 day period.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Item 13 is incorporated by reference to our Proxy Statement for
our 2009 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the end of the fiscal year covered by this Form 10-K, or,
alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of
such 120 day period.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by Item 14 is incorporated by reference to our Proxy Statement for
our 2009 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the end of the fiscal year covered by this Form 10-K, or,
alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of
such 120 day period.
PART IV
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial Statements
Reference is made to the Index set forth on Page F-1 of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
All schedules have been omitted because they are inapplicable or the information is
provided in the consolidated financial statements, including the notes hereto.
(a)(3) Exhibits
3.1
|
Restated Articles of Incorporation, as amended (1) | |
3.2
|
Amended and Restated Bylaws (2) | |
3.3
|
First Amendment to the Amended and Restated Bylaws (18) | |
4.1
|
Form of certificate evidencing shares of Common Stock (1) | |
4.2
|
Registration Rights Agreement, dated as of October 30, 1997, by and between Continucare Corporation and Loewenbaum & Company Incorporated (3) | |
4.3
|
Continucare Corporation Amended and Restated 1995 Stock Option Plan** (4) | |
4.4
|
Amended and Restated 2000 Stock Option Plan ** (19) | |
4.5
|
Convertible Subordinated Promissory Note (6) | |
4.6
|
Form of Convertible Promissory Note, dated June 30, 2001 (7) | |
4.7
|
Amendment to Convertible Promissory Note, dated March 31, 2003, between Continucare Corporation and Frost Nevada Limited Partnership (7) | |
4.8
|
Form of Amendment to Convertible Promissory Note, dated March 31, 2003 (7) | |
10.1
|
Form of Stock Option Agreement**(8) |
33
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10.2
|
Physician Practice Management Participation Agreement between Continucare Medical Management, Inc., and Humana Medical Plan, Inc. entered into as of the 1st day of August, 1998 (9) | |
10.3
|
Amended and Restated Primary Care Provider Services dated November 12, 2004, by and between Vista Healthplan of South Florida, Inc., Vista Insurance Plan, Inc. and Continucare Medical Management, Inc. (10) | |
10.4
|
Airport Corporate Center office lease dated June 3, 2004, by and between Miami RPFIV Airport Corporate Center Associates Limited Liability Company and Continucare Corporation (11) | |
10.5
|
Agreement, dated March 31, 2003, between the Company and Pecks Management Partners, Ltd. (7) | |
10.6
|
Agreement, dated March 31, 2003, between Continucare Corporation and Carret & Company (7) | |
10.7
|
WCMA Loan and Security Agreement dated March 9, 2000 between Merrill Lynch Business Financial Services, Inc. and Continucare Corporation (12) | |
10.8
|
Letter Agreement dated March 18, 2005 between Merrill Lynch Business Financial Services, Inc. and Continucare Corporation (13) | |
10.9
|
Form of Promissory Note dated December 29, 2004 (14) | |
10.10
|
Letter Agreement between Continucare Corporation and Merrill Lynch Business Financial Services, Inc. regarding amendment and extension of Credit Facility (15) | |
10.11
|
Asset Purchase Agreement, dated as of May 10, 2006, among Continucare Corporation, a Florida corporation, CNU Blue 1, Inc., a Florida corporation and a wholly-owned subsidiary of CNU, CNU Blue2, LLC, a Florida limited liability company and a wholly-owed subsidiary of Buyer, Miami Dade Health and Rehabilitation Services, Inc., a Florida corporation, Miami Dade Health Centers, Inc., a Florida corporation, West Gables Open MRI Services, Inc., a Florida corporation, Kent Management Systems, Inc., Pelu Properties, Inc., a Florida corporation, Peluca Investments, LLC, a Florida limited liability company owned by the Owners, and Miami Dade Health Centers One, Inc., a Florida corporation, MDHC Red, Inc., a Florida corporation, and each of the shareholders of each Seller identified therein. (16) | |
10.12
|
Integrated Delivery System Participation Agreement effective as of April 1, 1999 between MDHRS and Humana Medical Plan, Inc., as amended (17) | |
10.13
|
Management Services Agreement dated as of September 1, 2004 between MDHC and Vista Healthplan, Inc., as amended (17) | |
10.14
|
WCMA Reducing Revolver Loan and Security Agreement dated September 26, 2006, between Continucare MDHC LLC and Merrill Lynch Business Financial Services, Inc. (17) | |
10.15
|
WCMA Reducing Revolver Loan and Security Agreement dated September 26, 2006, between Continucare MDHC LLC and Merrill Lynch Business Financial Services, Inc. (17) | |
10.16
|
Amendment of Credit Facility dated September 26, 2006, between Continucare Corporation and Merrill Lynch Business Financial Services, Inc. (17) | |
10.17
|
Independent Practice Association Participation Agreement dated as of October 11, 2007 by and among Continucare Medical Management, Inc. and Humana Insurance Company, Humana Health Insurance Company of Florida, Inc., Humana Medical Plan, Inc. and their affiliates that underwrite or administer health plans. (20) | |
10.18
|
Independent Practice Association Participation Agreement dated as of October 11, 2007 by and among Continucare Medical Management, Inc. and Humana Insurance Company, Humana Health Insurance Company of Florida, Inc., Humana Medical Plan, Inc. and their affiliates that underwrite or administer health plans. (20) | |
10.19
|
Independent Practice Association Participation Agreement dated as of October 11, 2007 by and among Continucare Medical Management, Inc. and Humana Insurance Company, Humana Health Insurance Company of Florida, Inc., Humana Medical Plan, Inc. and their affiliates that underwrite or administer health plans. (20) | |
21.1
|
Subsidiaries of the Company* | |
23.1
|
Consent of Independent Registered Public Accounting Firm * | |
31.1
|
Section 302 Certification of Chief Executive Officer * | |
31.2
|
Section 302 Certification of Chief Financial Officer * | |
32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * |
34
Table of Contents
32.2
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * |
Documents incorporated by reference to the indicated exhibit to the following filings by the
Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934.
| (1) | Post Effective Amendment No. 1 to the Registration Statement on SB-2 on Form S-3 Registration Statement filed on October 29, 1996. | ||
| (2) | Form 8-K dated September 12, 2006, filed September 13, 2006. | ||
| (3) | Form 8-K dated October 30, 1997 and filed with the Commission on November 13, 1997. | ||
| (4) | Schedule 14A dated December 26, 1997 and filed with the Commission on December 30, 1997. | ||
| (5) | Schedule 14A dated January 8, 2007, filed January 8, 2007. | ||
| (6) | Form 8-K dated August 3, 2001, filed August 15, 2001. | ||
| (7) | Form 10-Q for the quarterly period ended March 31, 2003. | ||
| (8) | Form 10-Q for the quarterly period ended September 30, 2004. | ||
| (9) | Form 10-K for the fiscal year ended June 30, 2000. | ||
| (10) | Form 10-Q for the quarterly period ended December 31, 2004. | ||
| (11) | Form 10-K for the fiscal year ended June 30, 2004. | ||
| (12) | Form 10-Q for the quarterly period ended March 31, 2000. | ||
| (13) | Form 10-Q for the quarterly period ended March 31, 2005. | ||
| (14) | Form 8-K dated December 30, 2004, filed January 5, 2005. | ||
| (15) | Form 8-K dated March 8, 2006, and filed on March 10, 2006. | ||
| (16) | Form 8-K dated May 10, 2006 and filed on May 11, 2006. | ||
| (17) | Form 10-Q for the quarterly period ended September 30, 2006. | ||
| (18) | Form 8-K dated November 6, 2007 and filed November 7, 2007. | ||
| (19) | Form 10-K for the fiscal year ended June 30, 2007. | ||
| (20) | Form 8-K dated October 11, 2007 and filed on October 15, 2007. |
| * | Filed herewith | |
| ** | Management contract or compensatory plan or arrangement |
35
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| CONTINUCARE CORPORATION |
||||
| By: | /s/ Richard C. Pfenniger, Jr. | |||
| RICHARD C. PFENNIGER, JR. | ||||
| Chairman of the Board, Chief Executive Officer and President | ||||
Dated: September 10, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| SIGNATURE | TITLE | DATE | ||
/s/ Richard C. Pfenniger, Jr.
|
Chairman of the Board, Chief Executive
Officer, President and Director (Principal Executive Officer) |
September 10, 2009 | ||
/s/ Fernando L. Fernandez
|
Senior Vice President — Finance, Chief
Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) |
September 10, 2009 | ||
/s/ Luis Cruz, M.D.
|
Vice Chairman of the Board and Director | September 10, 2009 | ||
/s/ Robert J. Cresci
|
Director | September 10, 2009 | ||
/s/ Neil Flanzraich
|
Director | September 10, 2009 | ||
/s/ Phillip Frost, M.D.
|
Director | September 10, 2009 | ||
/s/ Jacob Nudel, M.D.
|
Director | September 10, 2009 | ||
/s/ Jacqueline Simkin
|
Director | September 10, 2009 | ||
/s/ A. Marvin Strait
|
Director | September 10, 2009 |
36
Table of Contents
INDEX TO FINANCIAL STATEMENTS
| PAGE | ||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-8 | ||||
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Continucare Corporation
Continucare Corporation
We have audited the accompanying consolidated balance sheets of Continucare Corporation as of June
30, 2009 and 2008, and the related consolidated statements of income, shareholders’ equity, and
cash flows for each of the three years in the period ended June 30, 2009. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Continucare Corporation at June 30, 2009 and 2008,
and the consolidated results of its operations and its cash flows for each of the three years in
the period ended June 30, 2009, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Continucare Corporation’s internal control over financial reporting as of
June 30, 2009, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 10,
2009 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP | ||||
| Certified Public Accountants | ||||
Fort Lauderdale, Florida
September 10, 2009
September 10, 2009
F-2
Table of Contents
CONTINUCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
| June 30, | ||||||||
| 2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 13,895,823 | $ | 9,905,740 | ||||
Due from HMOs, net of a liability for
incurred but not reported medical claims
expense of approximately $23,719,000 and
$23,900,000 at June 30, 2009 and 2008,
respectively |
17,323,599 | 15,325,783 | ||||||
Prepaid expenses and other current assets |
812,970 | 708,841 | ||||||
Deferred income tax assets |
141,420 | 413,932 | ||||||
Total current assets |
32,173,812 | 26,354,296 | ||||||
Certificates of deposit, restricted |
1,233,653 | 1,274,147 | ||||||
Property and equipment, net |
10,489,383 | 8,363,427 | ||||||
Goodwill |
73,204,582 | 73,204,582 | ||||||
Intangible assets, net of accumulated
amortization of approximately $3,406,000 and
$2,168,000 at June 30, 2009 and 2008,
respectively |
5,253,666 | 6,492,333 | ||||||
Deferred income tax assets |
2,795,588 | 2,574,472 | ||||||
Other assets, net |
152,702 | 227,047 | ||||||
Total assets |
$ | 125,303,386 | $ | 118,490,304 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 652,305 | $ | 402,718 | ||||
Accrued expenses and other current liabilities |
4,455,675 | 4,458,119 | ||||||
Income taxes payable |
1,575,511 | 1,198,722 | ||||||
Total current liabilities |
6,683,491 | 6,059,559 | ||||||
Deferred income tax liabilities |
6,435,732 | 6,256,205 | ||||||
Other liabilities |
981,640 | 948,263 | ||||||
Total liabilities |
14,100,863 | 13,264,027 | ||||||
Commitments and contingencies |
||||||||
Shareholders’ equity: |
||||||||
Common stock, $0.0001 par value: 100,000,000
shares authorized; 59,391,049 shares issued
and outstanding at June 30, 2009 and
64,796,303 shares issued and outstanding at
June 30, 2008 |
5,939 | 6,480 | ||||||
Additional paid-in capital |
105,210,519 | 114,514,853 | ||||||
Accumulated earnings (deficit) |
5,986,065 | (9,295,056 | ) | |||||
Total shareholders’ equity |
111,202,523 | 105,226,277 | ||||||
Total liabilities and shareholders’ equity |
$ | 125,303,386 | $ | 118,490,304 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
CONTINUCARE
CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF INCOME
| For the Year Ended June 30, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Revenue |
$ | 281,270,360 | $ | 254,440,048 | $ | 217,146,287 | ||||||
Operating expenses: |
||||||||||||
Medical services: |
||||||||||||
Medical claims |
199,167,856 | 181,097,183 | 161,153,828 | |||||||||
Other direct costs |
28,456,121 | 26,942,472 | 22,919,746 | |||||||||
Total medical services |
227,623,977 | 208,039,655 | 184,073,574 | |||||||||
Administrative payroll and employee benefits |
12,655,975 | 12,119,139 | 9,192,670 | |||||||||
General and administrative |
16,261,750 | 16,413,801 | 13,990,439 | |||||||||
Total operating expenses |
256,541,702 | 236,572,595 | 207,256,683 | |||||||||
Income from operations |
24,728,658 | 17,867,453 | 9,889,604 | |||||||||
Other income (expense): |
||||||||||||
Interest income |
174,039 | 602,826 | 356,192 | |||||||||
Interest expense |
(21,255 | ) | (67,898 | ) | (49,746 | ) | ||||||
Income before income tax provision |
24,881,442 | 18,402,381 | 10,196,050 | |||||||||
Income tax provision |
9,600,321 | 7,132,727 | 3,892,605 | |||||||||
Net income |
$ | 15,281,121 | $ | 11,269,654 | $ | 6,303,445 | ||||||
Net income per common share: |
||||||||||||
Basic |
$ | .25 | $ | .16 | $ | .10 | ||||||
Diluted |
$ | .24 | $ | .16 | $ | .10 | ||||||
Weighted average common shares outstanding: |
||||||||||||
Basic |
61,405,620 | 68,862,836 | 65,044,319 | |||||||||
Diluted |
62,488,340 | 70,007,760 | 66,324,613 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Additional | Accumulated | Total | ||||||||||||||||||
| Common Stock | Paid-In | Earnings | Shareholders’ | |||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Equity | ||||||||||||||||
Balance at June 30, 2006 |
50,242,478 | $ | 5,024 | $ | 63,838,051 | $ | (26,868,155 | ) | $ | 36,974,920 | ||||||||||
Recognition of compensation expense related to
issuance of stock options |
— | — | 1,692,190 | — | 1,692,190 | |||||||||||||||
Excess tax benefits related to exercise of stock
options |
— | — | 523,964 | — | 523,964 | |||||||||||||||
Issuance of stock related to acquisition of MDHC
Companies |
19,735,858 | 1,974 | 58,502,594 | — | 58,504,568 | |||||||||||||||
Fees related to issuance of stock |
— | — | (44,402 | ) | — | (44,402 | ) | |||||||||||||
Issuance of stock upon exercise of stock options |
64,750 | 6 | 103,694 | — | 103,700 | |||||||||||||||
Net income |
— | — | — | 6,303,445 | 6,303,445 | |||||||||||||||
Balance at June 30, 2007 |
70,043,086 | 7,004 | 124,616,091 | (20,564,710 | ) | 104,058,385 | ||||||||||||||
Recognition of compensation expense related to
issuance of stock options |
— | — | 1,332,786 | — | 1,332,786 | |||||||||||||||
Tax deficiency related to exercise of stock options |
— | — | (1,776 | ) | — | (1,776 | ) | |||||||||||||
Issuance of stock upon exercise of stock options |
83,750 | 9 | 64,366 | — | 64,375 | |||||||||||||||
Repurchase and retirement of common stock |
(5,330,533 | ) | (533 | ) | (11,451,614 | ) | — | (11,452,147 | ) | |||||||||||
Fees related to issuance of stock |
— | — | (45,000 | ) | — | (45,000 | ) | |||||||||||||
Net income |
— | — | — | 11,269,654 | 11,269,654 | |||||||||||||||
Balance at June 30, 2008 |
64,796,303 | 6,480 | 114,514,853 | (9,295,056 | ) | 105,226,277 | ||||||||||||||
Recognition of compensation expense related to
issuance of stock options |
— | — | 1,163,472 | — | 1,163,472 | |||||||||||||||
Excess tax benefits related to exercise of stock
options |
— | — | 116,593 | — | 116,593 | |||||||||||||||
Issuance of stock upon exercise of stock options |
13,750 | 1 | 23,374 | — | 23,375 | |||||||||||||||
Repurchase and retirement of common stock |
(5,419,004 | ) | (542 | ) | (10,607,773 | ) | — | (10,608,315 | ) | |||||||||||
Net income |
— | — | — | 15,281,121 | 15,281,121 | |||||||||||||||
Balance at June 30, 2009 |
59,391,049 | $ | 5,939 | $ | 105,210,519 | $ | 5,986,065 | $ | 111,202,523 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
CONTINUCARE
CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Year Ended June 30, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||
Net income |
$ | 15,281,121 | $ | 11,269,654 | $ | 6,303,445 | ||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||
Depreciation and amortization |
2,303,327 | 2,507,535 | 2,013,486 | |||||||||
Loss on impairment of fixed assets |
— | 171,515 | — | |||||||||
Loss on disposal of fixed assets |
65,760 | — | 35,924 | |||||||||
Provision for bad debts |
— | 181,081 | 165,181 | |||||||||
Compensation expense related to issuance of stock options |
1,163,472 | 1,332,786 | 1,692,190 | |||||||||
Excess tax benefits related to exercise of stock options |
(116,593 | ) | — | (523,964 | ) | |||||||
Deferred income tax expense |
230,923 | (198,598 | ) | 2,172,618 | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Due from HMOs, net |
(1,997,816 | ) | (1,251,657 | ) | (1,803,016 | ) | ||||||
Prepaid expenses and other current assets |
(104,129 | ) | 676,782 | (870,957 | ) | |||||||
Other assets |
42,735 | (128,743 | ) | 151,360 | ||||||||
Accounts payable |
249,587 | (605,151 | ) | 369,688 | ||||||||
Accrued expenses and other current liabilities |
(33,689 | ) | 145,851 | (275,196 | ) | |||||||
Income taxes payable |
549,398 | 1,131,324 | 1,419,894 | |||||||||
Net cash provided by operating activities |
17,634,096 | 15,232,379 | 10,850,653 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||||||
Purchases of certificates of deposit |
(682,948 | ) | (112,512 | ) | (49,648 | ) | ||||||
Proceeds from sales of certificates of deposit |
723,442 | 15,000 | — | |||||||||
Proceeds from sales of fixed assets |
— | — | 70,000 | |||||||||
Acquisition of MDHC Companies, net of cash acquired |
— | — | (6,109,980 | ) | ||||||||
Purchase of property and equipment |
(3,100,935 | ) | (939,270 | ) | (894,325 | ) | ||||||
Net cash used in investing activities |
(3,060,441 | ) | (1,036,782 | ) | (6,983,953 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||||||
Proceeds from note payable |
— | — | 1,813,317 | |||||||||
Repayments on note payable |
— | — | (1,813,317 | ) | ||||||||
Proceeds from long-term debt |
— | — | 6,917,808 | |||||||||
Repayment on long-term debt |
— | (6,083 | ) | (14,690,960 | ) | |||||||
Principal repayments under capital lease obligations |
(115,225 | ) | (113,249 | ) | (96,248 | ) | ||||||
Proceeds from exercise of stock options |
23,375 | 64,375 | 103,700 | |||||||||
Excess tax benefits related to exercise of stock options |
116,593 | — | 523,964 | |||||||||
Payment of fees related to issuance of stock |
— | (45,000 | ) | (44,402 | ) | |||||||
Repurchase of common stock |
(10,608,315 | ) | (11,452,147 | ) | — | |||||||
Net cash used in financing activities |
(10,583,572 | ) | (11,552,104 | ) | (7,286,138 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
3,990,083 | 2,643,493 | (3,419,438 | ) | ||||||||
Cash and cash equivalents at beginning of fiscal year |
9,905,740 | 7,262,247 | 10,681,685 | |||||||||
Cash and cash equivalents at end of fiscal year |
$ | 13,895,823 | $ | 9,905,740 | $ | 7,262,247 | ||||||
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Table of Contents
CONTINUCARE
CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
| For the Year Ended June 30, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING AND
FINANCING TRANSACTIONS: |
||||||||||||
Purchase of equipment,
furniture and fixtures with
proceeds of capital lease
obligations |
$ | 123,831 | $ | 38,922 | $ | 171,135 | ||||||
Retirement of treasury stock |
$ | 10,608,315 | $ | 11,452,147 | $ | — | ||||||
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION: |
||||||||||||
Cash paid for taxes |
$ | 8,820,000 | $ | 6,200,000 | $ | 306,000 | ||||||
Cash paid for interest |
$ | 16,255 | $ | 20,898 | $ | 49,746 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
General
Continucare Corporation (“Continucare” or the “Company”), is a provider of primary care physician
services on an outpatient basis in Florida. The Company provides medical services to patients
through employee physicians, advanced registered nurse practitioners and physicians’ assistants.
Additionally, the Company provides practice management services to independent physician affiliates
(“IPAs”). Substantially all of the Company’s revenues are derived from managed care agreements
with three health maintenance organizations, Humana Medical Plans, Inc. (“Humana”), Vista
Healthplan of South Florida, Inc. and its affiliated companies (“Vista”) and Wellcare Health Plans,
Inc. and its affiliated companies (“Wellcare”) (collectively, the “HMOs”). The Company was
incorporated in 1996 as the successor to a Florida corporation formed earlier in 1996. All
references to a “Fiscal” year refer to the Company’s fiscal year which ends June 30.
Business
Effective October 1, 2006, the Company completed the acquisition (the “Acquisition”) of Miami Dade
Health Centers, Inc. and its affiliated companies (collectively, the “MDHC Companies”).
Accordingly, the revenues, expenses and results of operations of the MDHC Companies have been
included in the Company’s consolidated statements of income from the date of acquisition. See Note
3 for a description of the Acquisition and for unaudited pro forma financial information for Fiscal
2007 presenting the Company’s operating results as though the Acquisition occurred at the beginning
of the fiscal year.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Company is as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have been eliminated in
consolidation.
Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States (“generally accepted accounting principles”) requires
management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Because of the inherent uncertainties of this process, actual
results could differ from those estimates. Such estimates include the recognition of revenue, the
recoverability of intangible assets, the collectibility of receivables, the realization of deferred
income tax assets and the accrual for incurred but not reported (“IBNR”) claims.
Fair Value of Financial Instruments
The Company’s financial instruments consist mainly of cash and cash equivalents, certificates of
deposit, amounts due from HMOs, accounts payable, and capital lease obligations. The carrying
amounts of the Company’s cash and cash equivalents, certificates of deposit, amounts due from HMOs,
accounts payable and accrued expenses approximate fair value due to the short-term nature of these
instruments. At June 30, 2009 and 2008, the carrying value of the Company’s capital lease
obligations approximate fair value based on the terms of the obligations.
Cash and Cash Equivalents
The Company defines cash and cash equivalents as those highly-liquid investments purchased with
maturities of three months or less from the date of purchase.
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Certificates of Deposit
Certificates of deposit have original maturities of greater than three months and are pledged as
collateral in support of various stand-by letters of credit issued as required under the managed
care agreements with the Company’s HMO affiliates and as security for various leases. Included in
the consolidated balance sheet as of June 30, 2009 are two separate certificates of deposit for
approximately $0.6 million and $0.7 million which each exceed the $250,000 Federal Deposit
Insurance Corporation limit.
Due from HMOs
The HMOs process and pay medical claims and certain other costs on the Company’s behalf. Based on
the terms of the contracts with the HMOs, the Company receives a net payment from the HMOs that is
calculated by offsetting revenue earned with medical claims expense, calculated as claims paid on
the Company’s behalf plus an amount reserved for claims incurred but not reported. Therefore, the
amounts due from the HMOs are presented on the balance sheet net of an estimated liability for
claims incurred but not reported which is independently calculated by the Company based on
historical data adjusted for payment patterns, cost trends, utilization of health care services and
other relevant factors.
Property and Equipment
Equipment, furniture and leasehold improvements are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets, which range from
three to five years. Leasehold improvements are amortized over the underlying assets’ useful lives
or the term of the lease, whichever is shorter. The buildings and land purchased in connection
with the Acquisition of the MDHC Companies were recorded at their estimated fair values as of the
date of the Acquisition. The buildings are depreciated using the straight-line method over their
estimated useful lives which approximate forty years. Repairs and maintenance costs are expensed
as incurred. Improvements and replacements are capitalized.
Goodwill and Other Intangible Assets
The Company accounts for goodwill and other intangible assets under Statement of Financial
Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”).
Under SFAS No. 142, goodwill and intangible assets with indefinite useful lives are reviewed
annually for impairment, or more frequently if certain indicators arise. Intangible assets with
definite useful lives are amortized over their respective estimated useful lives to their estimated
residual values, and also reviewed for impairment annually, or more frequently if certain
indicators arise, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”). Indicators of an impairment include, among other things,
significant adverse changes 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 a business that is to be sold.
As the Company operates in a single segment of business, the Company has determined that it has a
single reporting unit and performs the impairment test for goodwill on an enterprise level. In
performing the impairment test, the Company compares the current market value of all of its
outstanding common stock to the current carrying value of the Company’s total net assets, including
goodwill and intangible assets. Depending on the aggregate market value of the Company’s
outstanding common stock at the time that an impairment test is required, there is a risk that a
portion of the intangible assets would be considered impaired and must be written-off during that
period. The Company performs the annual impairment test as of May 1st of each year.
Should it later be determined that an indicator of impairment has occurred, the Company would be
required to perform an additional impairment test. No impairment charges were required during the
fiscal years ended June 30, 2009, 2008 or 2007.
The most significant component of goodwill and other intangible assets consists of the intangible
assets recorded in connection with the acquisition of the MDHC Companies (see Note 3). The
identifiable intangible assets recorded in connection with the acquisition of the MDHC Companies
are subject to amortization and are being amortized over a weighted average amortization period of
7.2 years. Total amortization expense for intangible assets subject to amortization was
approximately $1.3 million, $1.6 million, and $1.3 million during Fiscal 2009, 2008 and 2007,
respectively. The estimated aggregate amortization expense for intangible assets as of June 30,
2009 will be approximately $1.2 million, $1.2 million, $1.1 million, $0.9 million, and $0.8 million
for each of the five succeeding fiscal years, respectively.
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Table of Contents
Share-Based Payment
The Company applies the provisions of SFAS No. 123(R) (“SFAS No. 123(R)”), “Share-Based Payment”.
SFAS No. 123(R) requires that the cost relating to stock-based payment transactions be recognized
in the financial statements over the period services are rendered according to the fair value of
the stock-based awards issued.
Earnings Per Share
Basic earnings per share is computed by dividing net income or loss by the weighted average common
shares outstanding for the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in the earnings of the
Company (see Note 6).
Revenue Recognition
The Company provides services to patients on either a fixed monthly fee arrangement with HMOs or
under a fee for service arrangement. The percentage of total revenue relating to Humana
approximated 72%, 72% and 74% for Fiscal 2009, 2008 and 2007, respectively. The percentage of
total revenue relating to Vista approximated 18%, 19% and 20% for Fiscal 2009, 2008 and 2007,
respectively. The percentage of total revenue relating to Wellcare approximated 8%, 8% and 5% for
Fiscal 2009, 2008 and 2007, respectively.
Under the Company’s risk contracts with Humana, Vista and Wellcare, the Company receives a
capitated monthly fee from the HMOs for each patient that chooses one of the Company’s physicians
as their primary care physician. The capitated monthly fee is typically based on a percentage of
the premium received by the HMOs from various payor sources. Revenue under these agreements is
generally recorded in the period the Company assumes responsibility to provide services at the
rates then in effect as determined by the respective contract. As part of the Medicare Advantage
program, the Centers for Medicare Services (“CMS”) periodically recomputes the premiums to be paid
to the HMOs based on updated health status of participants and updated demographic factors. The
Company records any adjustments to this revenue at the time that the information necessary to make
the determination of the adjustment is received from the HMO.
Under the Company’s risk agreements, the Company assumes responsibility for the cost of all medical
services provided to the patient, even those it does not provide directly in exchange for a
percentage of premium or other capitated fee. To the extent that patients require more frequent or
expensive care than was anticipated by the Company, revenue to the Company under a contract may be
insufficient to cover the costs of care provided. When it is probable that expected future health
care costs and maintenance costs under a contract or group of existing contracts will exceed
anticipated capitated revenue on those contracts, the Company recognizes losses on its prepaid
health care services with HMOs. No contracts were considered loss contracts at June 30, 2009 and
June 30, 2008 because the Company has the right to terminate unprofitable physicians and close
unprofitable centers under its managed care contracts.
The Company’s HMO contracts have various expiration dates ranging from one to three years with
automatic renewal terms. Upon negotiation of any of the HMO contracts, the expiration dates may be
extended beyond the automatic renewal terms.
Under the Company’s limited risk and non-risk contracts with HMOs, the Company receives a
capitation fee or management fee based on the number of patients for which the Company provides
services on a monthly basis. Under the Company’s limited risk contracts, it also receives a
percentage of the surplus generated as determined by the respective contract. The fees and the
Company’s portion of the surplus generated under these arrangements are recorded as revenue in the
period in which services are provided as determined by the respective contract.
Medical Service Expense
The Company contracts with or employs various health care providers to provide medical services to
its patients. Primary care physicians are compensated on either a salary or capitation basis. For
patients enrolled under risk managed care contracts, the cost of specialty services are paid on
either a fee for service, per diem or capitation basis.
The cost of health care services provided or contracted for under risk managed care contracts is
accrued in the period in which services are provided. The Company provides for an estimate of the
related liability for medical claims incurred but not yet reported based on historical claims experience and current factors such as
inpatient
F-10
Table of Contents
utilization and benefit changes provided under HMO plans. Estimates are adjusted as
changes in these factors occur and such adjustments are reported in the period of determination.
The Company uses an actuarial analysis as an additional tool to further corroborate the Company’s
estimate of the related liability for medical claims incurred but not yet reported.
Stop-loss Insurance
Effective June 1, 2007, the health care costs for the Company’s 18 medical centers are limited
through agreements with the HMOs. The HMOs charge the Company a per member per month fee that
limits the Company’s health care costs for any individual patient. Health care costs in excess of
annual limits are generally handled directly by the HMOs and the Company is not entitled to and
does not receive any related insurance recoveries. Prior to June 1, 2007, the Company purchased
stop-loss insurance for three of its 18 medical centers. Health care costs in the accompanying
Consolidated Statements of Income for the three medical centers include expenses of approximately
$0.6 million of stop-loss insurance premiums and reductions of expenses of approximately $0.7
million of related recoveries for Fiscal 2007.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No.
141R”). SFAS No. 141R expands the definition of a business combination and requires the fair value
of the purchase price of an acquisition, including the issuance of equity securities, to be
determined on the acquisition date. SFAS No. 141R also requires that all assets, liabilities,
contingent consideration, and contingencies of an acquired business be recorded at fair value at
the acquisition date. In addition, SFAS No. 141R requires that acquisition costs generally be
expensed as incurred, restructuring costs generally be expensed in periods subsequent to the
acquisition date and changes in accounting for deferred income tax asset valuation allowances and
acquired income tax uncertainties after the measurement period impact income tax expense. SFAS No.
141R is effective for the Company’s fiscal years beginning on or after December 15, 2008, with
early adoption prohibited. The effect of SFAS No. 141R on the Company’s financial statements will
be dependent on the nature and terms of any business combination consummated by the Company on or
after July 1, 2009.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 requires minority interests
to be recharacterized as noncontrolling interests and reported as a component of equity. In
addition, SFAS No. 160 requires that purchases or sales of equity interests that do not result in a
change in control be accounted for as equity transactions and, upon a loss of control, requires the
interests sold, as well as any interests retained, to be recorded at fair value with any gain or
loss recognized in earnings. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008, with early adoption prohibited. No material impact on the Company’s financial
statements is expected from the adoption of this standard.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivatives and Hedging
Activities”, which enhances the requirements under SFAS No. 133, “Accounting for Derivatives and
Hedging Activities”. SFAS No. 161 requires enhanced disclosures about an entity’s derivatives and
hedging activities and how they affect an entity’s financial position, financial performance, and
cash flows. This Statement will be effective for fiscal years and interim periods beginning after
November 15, 2008. No material impact on the Company’s financial statements is expected from the
adoption of this standard.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”. SFAS No. 165 incorporates specific
accounting and disclosure requirements for subsequent events into U.S. generally accepted
accounting principles, as part of the codification effort and in conjunction with SFAS No. 162,
“The Hierarchy of Generally Accepted Accounting Principles”, and SFAS No. 168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a Replacement
of FASB Statement No. 162.” The adoption of these provisions, effective April 1, 2009, did not
have a material impact on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168 which identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of financial
statements that are presented in conformity with U.S. generally accepted accounting principles.
This Statement will be effective for interim and annual reporting ending after September 15, 2009.
We do not expect SFAS No. 168 to have a material impact on
our consolidated financial statements.
F-11
Table of Contents
Other Comprehensive Income
The Company had no comprehensive income items other than net income for all years presented.
Subsequent Events
The Company evaluated the events and transactions that occurred between June 30, 2009 and the time
these financial statements were filed in this Annual Report on Form 10-K on September 10, 2009. On August 12, 2009, we acquired 100% of the issued and
outstanding capital stock of Professional Sleep Diagnostics, Inc., a full service operator of sleep diagnostic centers, for $1.7 million in cash.
NOTE 3 — ACQUISITION
Effective October 1, 2006, the Company completed its acquisition of the MDHC Companies. In
connection with the completion of the Acquisition and in consideration for the assets acquired
pursuant to the Acquisition, the Company paid the MDHC Companies approximately $5.7 million in
cash, issued to the MDHC Companies 20.0 million shares of the Company’s common stock and assumed or
repaid certain indebtedness and liabilities of the MDHC Companies. The 20.0 million shares of the
Company’s common stock issued in connection with the Acquisition were issued pursuant to an
exemption under the Securities Act of 1933, as amended, and 1.5 million of such 20.0 million shares
were placed in escrow as security for indemnification obligations of the MDHC Companies and their
principal owners, and, in Fiscal 2007, 264,142 of such shares were cancelled in connection with
post-closing purchase price adjustments. The balance of the shares held in escrow were released to
the principal owners of the MDHC Companies in April 2008 in accordance with the terms of the escrow
agreement. Pursuant to the terms of the Acquisition, the Company paid the principal owners of the
MDHC Companies an additional $1.0 million in cash in October 2007. The Company also made certain
other payments to the principal owners of the MDHC Companies of approximately $0.1 million related
to the collection of certain receivables that were fully reserved on the books of the MDHC
Companies as of December 31, 2005.
The purchase price, including acquisition costs, of approximately $66.2 million was allocated to
the estimated fair value of acquired tangible assets of $13.9 million, identifiable intangible
assets of $8.7 million and assumed liabilities of $15.3 million, resulting in goodwill totaling
$58.9 million. This purchase price allocation includes certain adjustments recorded during Fiscal
2008 and 2007 that resulted in a decrease in goodwill of approximately $0.5 million and $3.3
million, respectively. These adjustments primarily related to Medicare risk adjustments and
pharmacy rebates relating to the operations of the MDHC Companies for periods prior to completion
of our acquisition and to adjustments to increase the estimated fair values of the identifiable
intangible assets based on updated available information and assumptions. The identifiable
intangible assets of $8.7 million consist of estimated fair values of $1.6 million assigned to the
trade name, $6.2 million to customer relationships and $0.9 million to a noncompete agreement. The
trade name was determined to have an estimated useful life of six years and the customer
relationships and noncompete agreements were each determined to have an estimated useful life of
eight and five years, respectively. The fair values of the customer relationships and other
identifiable intangible assets are amortized over their estimated lives using the straight-line
method. The customer relationships are non-contractual. The fair value of the identifiable
intangible assets was determined, with the assistance of an outside valuation firm, based on
standard valuation techniques. The Acquisition consideration of $66.2 million includes the
estimated fair value of Continucare’s common stock issued to the MDHC Companies of $58.5 million,
cash paid to the principal owners of $5.7 million at the closing of the Acquisition, cash paid to
the principal owners of $1.0 million in October 2007, and acquisition costs of approximately $1.0
million. The estimated fair value of the 20.0 million shares of Continucare’s common stock issued
effective October 1, 2006 to the MDHC Companies was based on a per share consideration of $2.96
which was calculated based upon the average of the closing market prices of Continucare’s common
stock for the period two days before through two days after the announcement of the execution of
the Asset Purchase Agreement for the Acquisition. The fair value of the 264,142 shares cancelled
in Fiscal 2007 in connection with post-closing purchase price adjustments was approximately $0.7
million based upon the closing market price of Continucare’s common stock on the dates the shares
were cancelled.
On September 26, 2006, the Company entered into two term loan facilities funded out of lines of
credit (the “Term Loans”) with maximum loan amounts of $4.8 million and $1.0 million, respectively.
Each of the Term Loans requires mandatory monthly payments that reduce the lines of credit under
the Term Loans. Subject to the terms and
conditions of the Term Loans, any prepayments made to the Term Loans may be re-borrowed on a
revolving basis so long as the line of credit applicable to such Term Loan, as reduced by the
mandatory monthly payment, is not
F-12
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exceeded. The $4.8 million and $1.0 million Term Loans mature on
October 31, 2011 and October 31, 2010, respectively. Each of the Term Loans (i) has variable
interest rates at a per annum rate equal to the sum of 2.4% and the One-Month LIBOR rate (0.31% at
June 30, 2009), (ii) requires the Company and its subsidiaries, on a consolidated basis, to
maintain a tangible net worth of $12 million and a debt coverage ratio of 1.25 to 1 and (iii) are
secured by substantially all of the assets of the Company and its subsidiaries, including those
assets acquired pursuant to the Acquisition. Effective October 1, 2006, the Company fully drew on
these Term Loans to fund certain portions of the cash payable upon the closing of the Acquisition
and these drawings were repaid during Fiscal 2007. As of June 30, 2009, the Company had no
outstanding principal balance on its Term Loans.
Also effective September 26, 2006, the Company amended the terms of its existing credit facility
that provides for a revolving loan to the Company of $5.0 million (the “Credit Facility”). As a
result of this amendment, the Company, among other things, eliminated the financial covenant which
previously required the Company’s EBITDA to exceed $1,500,000 on a trailing 12-month basis any time
during which amounts are outstanding under the Credit Facility and replaced such covenant with
covenants requiring the Company and its subsidiaries, on a consolidated business, to maintain a
tangible net worth of $12 million and a debt coverage ratio of 1.25 to 1. Effective October 1,
2006, the Company drew approximately $1.8 million under the Credit Facility to fund portions of the
cash payable upon the closing of the Acquisition and this drawing was repaid during Fiscal 2007.
The Credit Facility has a maturity date of December 31, 2009. As of June 30, 2009, the Company had
no outstanding principal balance on its Credit Facility.
The following unaudited pro forma consolidated financial information is presented for illustrative
purposes only and presents the operating results for the Company for the year ended June 30, 2007
as though the Acquisition of the MDHC Companies occurred at the beginning of the fiscal year. The
unaudited pro forma consolidated financial information is not intended to be indicative of the
operating results that actually would have occurred if the transaction had been consummated on the
dates indicated, nor is the information intended to be indicative of future operating results. The
unaudited pro forma consolidated financial information does not give effect to any integration
expenses or cost savings or unexpected acquisition costs that may be incurred or realized in
connection with the Acquisition. For Fiscal 2007, pre-tax non-continuing compensation expenses
incurred by the MDHC Companies of approximately $8.3 million are included in the unaudited pro
forma consolidated net income. The unaudited pro forma financial information reflects adjustments
for the amortization of intangible assets established as part of the Acquisition consideration
allocation in connection with the Acquisition, additional depreciation expense resulting from the
property adjustment to reflect estimated fair value, additional rent expense related to a lease for
a warehouse building excluded from the Acquisition, a reduction in interest income resulting from
the use of cash for payment of the cash consideration in the Acquisition and the income tax effect
on the pro forma adjustments. The pro forma adjustments are based on estimates. In addition,
adjustments to goodwill subsequent to the Acquisition were primarily from adjustments to amounts
due from HMOs, other receivables and accrued expenses as additional information was obtained.
| Year Ended | ||||
| June 30, 2007 | ||||
Revenue |
$ | 240,389,071 | ||
Net income |
277,454 | |||
Diluted earnings per share |
— | |||
The Acquisition was accounted for by the Company under the purchase method of accounting in
accordance with SFAS No. 141, “Business Combinations”. Accordingly, the results of operations of
the MDHC Companies have been included in the Company’s consolidated statements of income from the
date of acquisition.
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Table of Contents
NOTE 4 — PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
| Estimated | ||||||||||||
| June 30, | Useful Lives | |||||||||||
| 2009 | 2008 | (in years) | ||||||||||
Land |
$ | 1,919,746 | $ | 1,919,746 | — | |||||||
Building and improvements |
4,754,375 | 4,738,175 | 40 | |||||||||
Construction in progress |
1,175,462 | 119,829 | — | |||||||||
Vehicles |
724,479 | 622,444 | 5 | |||||||||
Furniture, fixtures and equipment |
5,028,440 | 4,894,797 | 3-5 | |||||||||
Furniture and equipment under capital lease |
474,389 | 517,253 | 3-5 | |||||||||
Leasehold improvements |
1,160,692 | 267,526 | 5 | |||||||||
| 15,237,583 | 13,079,770 | |||||||||||
Less accumulated depreciation and amortization |
(4,748,200 | ) | (4,716,343 | ) | ||||||||
| $ | 10,489,383 | $ | 8,363,427 | |||||||||
Depreciation expense for the years ended June 30, 2009, 2008 and 2007 was approximately $1,033,000,
$901,000 and $687,000, respectively.
The Company has entered into various noncancellable leases for certain furniture and equipment that
are classified as capital leases. The leases are payable over three to five years at incremental
borrowing rates ranging from 6% to 8% per annum. Accumulated amortization for assets recorded under
capital lease agreements was approximately $322,000 and $384,000 at June 30, 2009 and 2008,
respectively. Amortization of assets recorded under capital lease agreements was approximately
$103,000, $100,000 and $74,000 for the years ended June 30, 2009, 2008 and 2007, respectively, and
is included in depreciation expense for all years presented.
Included in general and administrative expense for Fiscal 2008 is a loss on impairment of fixed
assets of approximately $0.2 million related to the ValuClinic operations, a line of consumer
oriented, retail-based health centers, that were terminated in September 2008.
Future minimum lease payments under all capital leases are as follows:
For the year ending June 30, |
||||
2010 |
$ | 130,695 | ||
2011 |
63,467 | |||
2012 |
14,773 | |||
| 208,935 | ||||
Less amount representing imputed interest |
3,950 | |||
Present value of obligations under capital lease |
204,985 | |||
Less current portion |
122,702 | |||
Long-term capital lease obligations |
$ | 82,283 | ||
The current and long-term portions of obligations under capital leases are classified within
accrued expenses and other current liabilities and other liabilities, respectively, in the
accompanying consolidated balance sheets.
NOTE 5 — DEBT
The Company has in place a Credit Facility that provides for a revolving loan to the Company of
$5.0 million and two Term Loans with maximum loan amounts available for borrowing totaling $4.5
million as of June 30, 2009 (see Note 3). At June 30, 2009 and 2008, there was no outstanding
principal balance on the Credit Facility and Term Loans. The Credit Facility and Term Loans have
variable interest rates at a per annum rate equal to the sum of 2.5% and the 30-day Dealer
Commercial Paper Rate (0.35% at June 30, 2009) and the sum of 2.4% and the one-month LIBOR (0.31%
at June 30, 2009), respectively. All assets, excluding capitalized lease assets, of the Company
serve as collateral for the Credit Facility and Term Loans.
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Table of Contents
NOTE 6 — EARNINGS PER SHARE
A reconciliation of the denominator of the basic and diluted earnings per share computation is as
follows:
| Year Ended June 30, | ||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||
Basic weighted average number of shares outstanding |
61,405,620 | 68,862,836 | 65,044,319 | |||||||||||||
Dilutive effect of stock options |
1,082,720 | 1,144,924 | 1,280,294 | |||||||||||||
Diluted weighted average number of shares outstanding |
62,488,340 | 70,007,760 | 66,324,613 | |||||||||||||
Not included in calculation of dilutive earnings per
share as impact is antidilutive: |
||||||||||||||||
Stock options outstanding |
3,775,750 | 2,998,250 | 18,000 | |||||||||||||
Warrants |
— | — | 760,000 | |||||||||||||
NOTE 7 — SHARE-BASED PAYMENT
The Amended and Restated Continucare Corporation 2000 Stock Incentive Plan (the “2000 Stock
Incentive Plan”), which has been approved by the Company’s shareholders, permits the grant of stock
options and restricted stock awards in respect of up to 9,000,000 shares of common stock to the
Company’s employees, directors, independent contractors and consultants. Under the terms of the
2000 Stock Incentive Plan, options are granted at the fair market value of the stock at the date of
grant and expire no later than ten years after the date of grant. Options granted under the plan
generally vest over four years, but the terms of the 2000 Stock Incentive Plan provide for
accelerated vesting if there is a change in control of the Company. Historically, the Company has
issued authorized but previously unissued shares of common stock upon option exercises. However,
the Company does not have a policy regarding the issuance or repurchase of shares upon option
exercise or the source of those shares. No restricted stock awards have been issued under the 2000
Stock Incentive Plan.
The Company applies the provisions of SFAS No. 123(R), “Share-Based Payment”. SFAS No. 123(R)
requires that the cost relating to stock-based payment transactions be recognized in the financial
statements over the period services are rendered according to the fair value of the stock-based
awards issued.
The Company calculates the fair value for employee stock options using a Black-Scholes option
pricing model at the time the stock options are granted and that amount is amortized over the
vesting period of the stock options, which is generally up to four years. The fair value for
employee stock options granted during Fiscal 2009 and 2008 was calculated based on the following
assumptions: risk-free interest rate ranging from 0.66% to 3.19% and 1.61% to 4.22%, respectively;
dividend yield of 0%; weighted-average volatility factor of the expected market price of the
Company’s common stock of 58.6% and 59.5%, respectively; and weighted-average expected life of the
options ranging from 2 to 6 years depending on the vesting provisions of each option. The fair
value for employee stock options granted during Fiscal 2007 was calculated based on the following
assumptions: risk-free interest rate ranging from 4.81% to 5.18%; dividend yield of 0%; volatility
factor of the expected market price of the Company’s common stock of 63.7%; and weighted-average
expected life of the option ranging from 2 to 6 years depending on the vesting provisions of each
option. The expected life of the options is based on the historical exercise behavior of the
Company’s employees. The expected volatility factor is based on the historical volatility of the
market price of the Company’s common stock as adjusted for certain events that management deemed to
be non-recurring and non-indicative of future events.
The Company recognized share-based compensation cost of $1.2 million, $1.3 million and $1.7 million
for Fiscal 2009, 2008 and Fiscal 2007, respectively. For Fiscal 2009, the Company recognized
excess tax benefits resulting from the exercise of stock options of approximately $0.1 million.
For Fiscal 2008, the Company did not recognize any excess tax benefits resulting from the exercise
of stock options. For Fiscal 2007, the Company recognized excess tax benefits of approximately
$0.5 million resulting from the exercise of stock options. The excess tax benefits had a positive
effect on cash flow from financing activities with a corresponding reduction in cash flow from
operating activities in Fiscal 2009 and Fiscal 2007 of $0.1 million and $0.5 million, respectively.
During Fiscal 2009, 2008 and 2007, the Company issued 13,750 shares, 83,750 shares and 64,750
shares, respectively, of common stock resulting from the exercise of stock options.
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Table of Contents
The following table summarizes information related to the Company’s stock option activity for
Fiscal 2009:
| Number | Weighted Average | |||||||
| of Shares | Exercise Price | |||||||
Outstanding at beginning of the year |
5,373,804 | $ | 1.95 | |||||
Granted |
1,017,500 | 2.27 | ||||||
Exercised |
(13,750 | ) | 1.70 | |||||
Forfeited |
(48,750 | ) | 2.55 | |||||
Expired |
(32,500 | ) | 2.29 | |||||
Outstanding at end of the year |
6,296,304 | $ | 2.00 | |||||
Exercisable at end of the year |
4,324,654 | |||||||
Weighted
average fair value per share of options granted during the
year |
$ | 1.04 | ||||||
The weighted average fair value per share of options granted during Fiscal 2008 and 2007 was $1.17
and $1.42, respectively.
The following table summarizes information about options outstanding and exercisable at June 30,
2009:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||
| Range of | Weighted | Weighted Average | Weighted | Weighted Average | ||||||||||||||||||||
| Exercise | Number | Average | Remaining | Number | Average | Remaining | ||||||||||||||||||
| Prices | Outstanding | Exercise Price | Contractual Life | Exercisable | Exercise Price | Contractual Life | ||||||||||||||||||
$0.66-$2.38
|
3,383,054 | $ | 1.48 | 5.6 | 2,516,804 | $ | 1.18 | 4.4 | ||||||||||||||||
$2.40-$3.57
|
2,913,250 | $ | 2.59 | 7.1 | 1,807,850 | $ | 2.60 | 6.9 | ||||||||||||||||
The total intrinsic value of options outstanding and options exercisable was $2.9 million at June
30, 2009. The total intrinsic value of options exercised during Fiscal 2009, 2008 and 2007 was
approximately $9,000, $0.1 million and $0.1 million, respectively. As of June 30, 2009, there was
approximately $0.8 million of total unrecognized compensation cost related to non-vested stock
options, which is expected to be recognized over a weighted-average period of 1.8 years.
The Company had 7,584,721 shares of common stock reserved for future issuance related to stock
options at June 30, 2009.
NOTE 8 — INCOME TAXES
The Company accounts for income taxes under FASB Statement No. 109, “Accounting for Income Taxes”.
Deferred income tax assets and liabilities are determined based upon differences between the
financial reporting and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to reverse.
In July 2006, the FASB issued Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income
Taxes — An Interpretation of FASB Statement No. 109”. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with
SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return.
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Effective July 1, 2007, the Company adopted the provisions of FIN 48. The implementation of
FIN 48 had no impact on our liability for unrecognized tax benefits. Our liability for
unrecognized tax benefits was approximately $0.9 million at June 30, 2009 and approximately $0.8
million at both June 30, 2008 and July 1, 2007 and is included in other liabilities on the
consolidated balance sheets. The total amount of unrecognized tax benefits that if recognized
would affect the effective tax rate is $0.9 million, which includes accrued interest and penalties
of approximately $52,000, $47,000 and $20,000 at June 30, 2009, June 30, 2008 and July 1, 2007,
respectively. The Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expense. The Company does not currently anticipate
that the total amount of unrecognized tax benefits will significantly increase or decrease by the
end of Fiscal 2010. The Company is no longer subject to tax examinations by tax authorities for
fiscal years ended on or prior to June 30, 2005.
The Company recorded an income tax provision of $9.6 million, $7.1 million and $3.9 million for
Fiscal 2009, 2008 and 2007, respectively. The income tax provision consisted of the following:
| Year Ended June 30, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 8,199,853 | $ | 6,408,183 | $ | 1,425,993 | ||||||
State |
1,158,154 | 923,142 | 293,994 | |||||||||
Total |
9,358,007 | 7,331,325 | 1,719,987 | |||||||||
Deferred: |
||||||||||||
Federal |
181,483 | (171,415 | ) | 1,897,669 | ||||||||
State |
60,831 | (27,183 | ) | 274,949 | ||||||||
Total |
242,314 | (198,598 | ) | 2,172,618 | ||||||||
Total income tax provision |
$ | 9,600,321 | $ | 7,132,727 | $ | 3,892,605 | ||||||
Deferred income taxes reflect the net effect of temporary differences between the carrying amount
of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. The tax effects of temporary differences that give rise to deferred income tax assets and
deferred income tax liabilities are as follows:
| June 30, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Deferred income tax assets: |
||||||||||||
Bad debt and notes receivable reserve |
$ | — | $ | 303,871 | $ | 296,420 | ||||||
Other |
75,573 | 110,062 | 434,225 | |||||||||
Impairment charge |
999,617 | 1,256,398 | 1,476,110 | |||||||||
Share-based compensation |
1,861,818 | 1,318,073 | 823,320 | |||||||||
Deferred income tax assets |
2,937,008 | 2,988,404 | 3,030,075 | |||||||||
Deferred income tax liabilities: |
||||||||||||
Depreciable/amortizable assets |
(5,818,179 | ) | (5,638,652 | ) | (5,342,721 | ) | ||||||
Basis difference in tangible assets |
(617,553 | ) | (617,553 | ) | (872,762 | ) | ||||||
Deferred income tax liabilities |
(6,435,732 | ) | (6,256,205 | ) | (6,215,483 | ) | ||||||
Net deferred income tax liabilities |
$ | (3,498,724 | ) | $ | (3,267,801 | ) | $ | (3,185,408 | ) | |||
SFAS No. 109 requires a valuation allowance to reduce the deferred income tax assets reported if,
based on the weight of the evidence, it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. After consideration of all the evidence, both
positive and negative (including, among others, the Company’s projections of future taxable income
and profitability in recent fiscal years), management determined that no valuation allowance was
necessary at June 30, 2009, 2008 and 2007 to reduce the deferred income tax assets to the amount
that will more likely than not be realized. At June 30, 2009, the Company did not have any net
operating losses available for carryforward.
A reconciliation of the statutory federal income tax rate with the Company’s effective income tax
rate for the years ended June 30, 2009, 2008 and 2007 is as follows:
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Table of Contents
| Year Ended June 30, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Statutory federal rate |
35.00 | % | 35.00 | % | 34.00 | % | ||||||
State income taxes, net of federal income tax benefit |
3.58 | 3.58 | 3.63 | |||||||||
Goodwill and other non-deductible items |
0.01 | 0.18 | 0.55 | |||||||||
Effective tax rate |
38.59 | % | 38.76 | % | 38.18 | % | ||||||
NOTE 9 — SHARE REPURCHASE PROGRAM
In November 2008 and March 2009, the Company’s Board of Directors increased the Company’s
previously announced program to authorize the repurchase of an additional 2,500,000 and 2,500,000
shares of the Company’s common stock, respectively, bringing the total number of shares of common
stock authorized for repurchase under the program to 15,000,000 shares. Any such repurchases will
be made from time to time at the discretion of our management in the open market or in privately
negotiated transactions subject to market conditions and other factors. As of August 31, 2009, the
Company had repurchased 11,907,004 shares of its common stock for approximately $25.0 million.
NOTE 10 — EMPLOYEE BENEFIT PLAN
As of January 1, 1997, the Company adopted a tax qualified employee savings and retirement plan
covering the Company’s eligible employees. The Continucare Corporation 401(k) Profit Sharing Plan
(the “401(k) Plan”) was amended and restated in June 2001. The 401(k) Plan is intended to qualify
under Section 401 of the Internal Revenue Code (the “Code”) and contains a feature described in
Code Section 401(k) under which a participant may elect to have his or her compensation reduced by
up to 75% (subject to IRS limits) and have that amount contributed to the 401(k) Plan. In October
2001, the Internal Revenue Service issued a favorable determination letter for the 401(k) Plan.
Under the 401(k) Plan, new employees who are at least 18 years of age are eligible to participate
in the 401(k) Plan after 90 days of service. Eligible employees may elect to contribute to the
401(k) Plan up to a maximum amount of tax deferred contribution allowed by the Internal Revenue
Code. The Company may, at its discretion, make a matching contribution and a non-elective
contribution to the 401(k) Plan. There were no matching contributions for the years ended June 30,
2009, 2008 or 2007. Participants in the 401(k) Plan would not begin to vest in the employer
contribution until the end of two years of service, with full vesting achieved after five years of
service.
NOTE 11 — COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in legal proceedings incidental to its business that arise from time to
time in 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.
The Company has recorded an accrual for claims related to legal proceedings, which includes amounts
for insurance deductibles and projected exposure, based on management’s estimate of the ultimate
outcome of such claims. The Company does not believe that the ultimate resolution of these matters
will have a material adverse effect on the Company’s business, results of operations, financial
condition, or cash flows. However, the results of these matters cannot be predicted with certainty,
and an unfavorable resolution of one or more of these matters could have a material adverse effect
on the Company’s business, results of operations, financial condition, cash flow, and prospects.
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Table of Contents
Leases
The Company leases office space and equipment under various non-cancelable operating leases. Rent
expense under such operating leases was approximately $2.7 million, $2.8 million and $2.6 million
for the years ended June 30, 2009, 2008 and 2007, respectively. Future annual minimum payments
under such leases as of June 30, 2009 are as follows:
For the fiscal year ending June 30,
2010 |
$ | 1,852,224 | ||
2011 |
1,446,603 | |||
2012 |
721,098 | |||
2013 |
431,701 | |||
2014 and thereafter |
911,685 | |||
Total |
$ | 5,363,311 | ||
NOTE 12 — VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company’s valuation and qualifying accounts consists of the following:
| Year ended June 30, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Allowance for doubtful accounts related to
accounts and other receivables: |
||||||||||||
Balance at beginning of period |
$ | 783,741 | $ | 802,239 | $ | 798,257 | ||||||
Provision for doubtful accounts |
— | 181,081 | 165,181 | |||||||||
Write-offs of uncollectible accounts receivable |
(783,741 | ) | (199,579 | ) | (161,199 | ) | ||||||
Balance at end of period |
$ | — | $ | 783,741 | $ | 802,239 | ||||||
NOTE 13 — RELATED PARTY TRANSACTIONS
As a result of the acquisition of the MDHC Companies, the Company became a party to two lease
agreements for office space owned by Dr. Luis Cruz and Jose M. Garcia, principal owners of the MDHC
Companies. Dr. Cruz is a director of the Company and Mr. Garcia was an officer of the Company
through January 15, 2009. The Company terminated one of the lease agreements effective September
30, 2007. For Fiscal 2009, 2008 and 2007, expenses related to these leases were approximately $0.4
million, $0.4 million and $0.3 million.
Effective November 1, 2007, the Company entered into agreements with Centers of Medical Excellence,
Inc., an entity owned by Dr. Cruz pursuant to which this entity will act as one of the Company’s
independent physician affiliates in connection with the provision of primary care health services
to a limited number of Medicare Advantage members enrolled in plans sponsored by CarePlus Health
Plans, Inc. The arrangement is on substantially similar terms to those between the Company and its
other independent physician affiliates under at risk arrangements where the Company provides
medical utilization services and pays a primary care capitation fee to the provider. Under this
arrangement, CarePlus pays the Company a monthly capitation fee based on the number of CarePlus
Medicare Advantage members who have selected Centers of Medical Excellence as their primary care
provider and the Company in turn pays a monthly primary care capitation fee to Centers of Medical
Excellence. Centers of Medical Excellence is also eligible to receive a bonus from the Company if
they operate in a cumulative surplus. For Fiscal 2009, the Company sustained an operating loss of
$0.2 million under this arrangement.
On February 5, 2008, the Company repurchased an aggregate of 600,000 shares of its common stock
from Dr. Cruz, as trustee of the Luis Cruz Irrevocable Trust A, the Luis Cruz Irrevocable Trust B
and the Luis Cruz Irrevocable Trust C. The Company paid $2.25 per share for the shares for an
aggregate purchase price of $1,350,000. The per share purchase price paid by the Company
represented a 10% discount from the closing price of the Company’s common stock on February 4,
2008.
On September 19, 2008, the Company purchased an aggregate of 400,000 shares of its common stock
from certain
family trusts of Dr. Cruz. Dr. Cruz does not have a beneficial ownership in the shares of common
stock held by these family trusts. Continucare paid $2.14 per share for the shares for an
aggregate purchase price of $856,000.
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Table of Contents
The per share purchase price paid by Continucare represented a 10% discount from the closing price
of Continucare’s common stock on September 19, 2008.
On September 19, 2008, the Company purchased an aggregate of 600,000 shares of its common stock
from Mr. Garcia. Continucare paid $2.14 per share for the shares for an aggregate purchase price
of $1,284,000. The per share purchase price paid by Continucare represented a 10% discount from
the closing price of Continucare’s common stock on September 19, 2008.
On October 23, 2008, the Company entered into a joint venture with Dr. Jacob Nudel, a director of
the Company, that will seek to establish special purpose medical provider networks. As of June 30,
2009, the Company had made contributions of approximately $0.3 million to fund operations of the
joint venture.
On January 15, 2009, the Company purchased an aggregate of 1,100,000 shares of its common stock
from Mr. Garcia. Continucare paid $1.71 per share for the shares for an aggregate purchase price
of $1,881,000. The per share purchase price paid by Continucare was the closing price of
Continucare’s common stock on January 15, 2009.
On March 12, 2009, the Company purchased an aggregate of 350,000 shares of its common stock from
certain family trusts of Dr. Cruz. Dr. Cruz does not have a beneficial ownership in the shares of
common stock held by these family trusts. Continucare paid $1.69 per share for the shares for an
aggregate purchase price of $591,500. The per share purchase price paid by Continucare represented
a 5% discount from the closing price of Continucare’s common stock on March 12, 2009.
NOTE 14 — QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
| For the Year Ended June 30, 2009 | ||||||||||||||||||||
| First | Third | Full | ||||||||||||||||||
| Quarter | Second Quarter | Quarter | Fourth Quarter | Year | ||||||||||||||||
Total revenue |
$ | 65,064,634 | $ | 65,539,894 | $ | 75,395,799 | $ | 75,270,033 | $ | 281,270,360 | ||||||||||
Net income |
$ | 2,496,132 | $ | 3,659,810 | $ | 4,326,503 | $ | 4,798,676 | $ | 15,281,121 | ||||||||||
Net income per common share: |
||||||||||||||||||||
Basic |
$ | .04 | $ | .06 | $ | .07 | $ | .08 | $ | .25 | ||||||||||
Diluted |
$ | .04 | $ | .06 | $ | .07 | $ | .08 | $ | .24 | ||||||||||
| For the Year Ended June 30, 2008 | ||||||||||||||||||||
| First | Third | Full | ||||||||||||||||||
| Quarter | Second Quarter | Quarter | Fourth Quarter | Year | ||||||||||||||||
Total revenue |
$ | 60,922,664 | $ | 61,485,447 | $ | 65,936,165 | $ | 66,095,772 | $ | 254,440,048 | ||||||||||
Net income |
$ | 1,921,500 | $ | 2,511,685 | $ | 3,675,501 | $ | 3,160,968 | $ | 11,269,654 | ||||||||||
Basic and
diluted net income per
common share |
$ | .03 | $ | .04 | $ | .05 | $ | .05 | $ | .16 | ||||||||||
Basic and diluted net income per common share for each of the quarters presented above are
based on the respective weighted average number of common shares outstanding for the quarters. The
sum of the quarterly basic and diluted net income per common share amounts may not be equal to the
full year basic and diluted net income per common share amounts due to rounding.
F-20
Table of Contents
EXHIBIT INDEX
| Exhibit | ||||
| Description | Number | |||
Subsidiaries of the Company |
21.1 | |||
Consent of Independent Registered Public Accounting Firm |
23.1 | |||
Section 302 Certification of Chief Executive Officer |
31.1 | |||
Section 302 Certification of Chief Financial Officer |
31.2 | |||
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
32.1 | |||
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
32.2 | |||