UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number 001-12115
CONTINUCARE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Florida
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59-2716023
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(State or Other Jurisdiction of
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(IRS Employer Identification No.)
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Incorporation or Organization)
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7200 Corporate Center Drive
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Suite 600
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Miami, Florida
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33126
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(Address of Principal Executive Offices)
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(Zip Code)
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(305) 500-2000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 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):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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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
At January 27, 2011, the Registrant had 60,576,516 shares of $0.0001 par value common stock
outstanding.
CONTINUCARE CORPORATION
INDEX
2
PART I — FINANCIAL INFORMATION
ITEM 1. — FINANCIAL STATEMENTS
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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December 31,
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June 30,
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2010
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2010
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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38,228,964
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$
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37,542,445
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Certificate of deposit
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—
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668,755
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Due from HMOs, net of a liability for incurred but not
reported medical claims expense of approximately
$20,902,000 and $23,394,000 at December 31, 2010 and
June 30, 2010, respectively
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16,257,826
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18,920,388
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Prepaid expenses and other current assets
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4,705,880
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2,631,136
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Deferred income tax assets
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147,885
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140,057
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Total current assets
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59,340,555
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59,902,781
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Property and equipment, net
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14,569,403
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12,728,184
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Goodwill
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79,670,896
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73,994,444
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Intangible assets, net of accumulated amortization of
approximately $5,565,000 and $4,705,000
at December 31, 2010 and June 30, 2010, respectively
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7,344,827
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4,296,507
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Deferred income tax assets
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2,987,376
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2,830,929
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Other assets, net
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177,414
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112,747
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Total assets
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$
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164,090,471
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$
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153,865,592
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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1,142,196
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$
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810,376
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Accrued expenses and other current liabilities
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6,017,863
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9,041,162
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Income taxes payable
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779,019
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590,673
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Total current liabilities
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7,939,078
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10,442,211
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Deferred income tax liabilities
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7,372,451
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7,145,507
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Other liabilities
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89,717
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249,248
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Total liabilities
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15,401,246
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17,836,966
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Commitments and contingencies
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Shareholders’ equity:
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Common stock, $0.0001 par value: 100,000,000 shares
authorized; 60,569,609 shares issued and outstanding
at December 31, 2010 and 60,504,012 shares issued and
outstanding at June 30, 2010
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6,057
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6,050
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Additional paid-in capital
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108,529,874
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107,860,204
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Accumulated earnings
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40,153,294
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28,162,372
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Total shareholders’ equity
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148,689,225
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136,028,626
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Total liabilities and shareholders’ equity
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$
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164,090,471
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$
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153,865,592
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
3
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended
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December 31,
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2010
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2009
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Revenue
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$
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80,314,998
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$
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75,256,100
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Operating expenses:
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Medical services:
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Medical claims
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50,208,880
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50,356,650
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Other direct costs
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10,027,926
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7,800,724
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Total medical services
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60,236,806
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58,157,374
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Administrative payroll and employee benefits
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4,183,225
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3,792,742
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General and administrative
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5,807,178
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4,698,632
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Total operating expenses
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70,227,209
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66,648,748
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Income from operations
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10,087,789
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8,607,352
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Other income (expense):
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Interest income
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18,532
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15,672
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Interest expense
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(5,447
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)
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(3,135
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)
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Income before income tax provision
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10,100,874
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8,619,889
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Income tax provision
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3,902,704
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3,331,210
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Net income
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$
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6,198,170
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$
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5,288,679
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Net income per common share:
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Basic
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$
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.10
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$
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.09
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Diluted
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$
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.10
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$
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.09
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Weighted average common shares outstanding:
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Basic
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60,566,692
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59,571,382
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Diluted
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62,469,159
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61,329,587
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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Six Months Ended
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December 31,
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2010
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2009
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Revenue
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$
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159,256,843
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$
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151,228,464
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Operating expenses:
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Medical services:
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Medical claims
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103,064,411
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102,980,709
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Other direct costs
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18,611,401
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15,372,943
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Total medical services
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121,675,812
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118,353,652
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Administrative payroll and employee benefits
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7,334,506
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7,051,839
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General and administrative
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10,736,254
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8,577,143
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Total operating expenses
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139,746,572
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133,982,634
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Income from operations
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19,510,271
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17,245,830
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Other income (expense):
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Interest income
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41,359
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33,183
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Interest expense
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(11,938
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)
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(6,505
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)
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Income before income tax provision
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19,539,692
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17,272,508
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Income tax provision
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7,548,770
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6,675,489
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Net income
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$
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11,990,922
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$
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10,597,019
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Net income per common share:
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Basic
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$
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.20
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$
|
.18
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Diluted
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$
|
.19
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$
|
.17
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Weighted average common shares outstanding:
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Basic
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60,558,743
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59,494,605
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Diluted
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62,260,699
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61,203,236
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended
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December 31,
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2010
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2009
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net income
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$
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11,990,922
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$
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10,597,019
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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1,876,146
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1,340,723
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Provision for bad debt
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161,390
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—
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Loss on disposal of fixed assets
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9,086
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3,597
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Compensation expense related to issuance of stock options
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724,432
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594,808
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Excess tax benefits related to exercise of stock options
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(55,228
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)
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(210,480
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)
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Deferred tax expense
|
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|
62,669
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|
40,369
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|
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Changes in operating assets and liabilities:
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Due from HMOs, net
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2,662,562
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4,409,420
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Prepaid expenses and other current assets
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(929,586
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)
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(672,405
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)
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Other assets, net
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(47,201
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)
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6,079
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Accounts payable
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30,443
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(170,229
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)
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Accrued expenses and other current liabilities
|
|
|
(4,991,395
|
)
|
|
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(464,881
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)
|
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Income taxes payable
|
|
|
1,286,101
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|
|
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(77,565
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)
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|
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Net cash provided by operating activities
|
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|
12,780,341
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|
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15,396,455
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CASH FLOWS FROM INVESTING ACTIVITIES
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Purchase of certificates of deposit
|
|
|
—
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|
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(9,746
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)
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Proceeds from maturity of certificates of deposit
|
|
|
668,755
|
|
|
|
—
|
|
|
Acquisition of sleep diagnostic centers, net of cash acquired
|
|
|
(10,839,964
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)
|
|
|
(1,609,827
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)
|
|
Purchase of property and equipment
|
|
|
(1,746,913
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)
|
|
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(2,002,287
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)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(11,918,122
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)
|
|
|
(3,621,860
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)
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|
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|
|
|
|
|
|
|
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CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
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Principal repayments under capital lease obligations
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|
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(120,947
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)
|
|
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(189,038
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)
|
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Proceeds from exercise of stock options
|
|
|
183,850
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|
|
|
668,088
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Shares withheld in connection with exercise of stock options
|
|
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(293,831
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)
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|
—
|
|
|
Excess tax benefits related to exercise of stock options
|
|
|
55,228
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|
|
|
210,480
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|
|
|
|
|
|
|
|
|
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Net cash (used in) provided by financing activities
|
|
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(175,700
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)
|
|
|
689,530
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|
|
|
|
|
|
|
|
|
|
|
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|
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Net increase in cash and cash equivalents
|
|
|
686,519
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|
|
|
12,464,125
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|
|
Cash and cash equivalents at beginning of period
|
|
|
37,542,445
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|
|
|
13,895,823
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|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
38,228,964
|
|
|
$
|
26,359,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment with proceeds of capital lease obligations
|
|
$
|
—
|
|
|
$
|
222,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
6,200,000
|
|
|
$
|
7,100,000
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
11,938
|
|
|
$
|
6,505
|
|
|
|
|
|
|
|
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
(UNAUDITED)
NOTE 1 — UNAUDITED INTERIM INFORMATION
The accompanying unaudited condensed consolidated financial statements of Continucare Corporation
have been prepared in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three and
six-month periods ended December 31, 2010 are not necessarily indicative of the results that may be
reported for the remainder of the fiscal year ending June 30, 2011 or future periods. Except as
otherwise indicated by the context, the terms “we”, “us”, “our”, “Continucare”, or the “Company”,
refer to Continucare Corporation and its consolidated subsidiaries. All references to a “fiscal
year” refer to the Company’s fiscal year which ends June 30. As used herein, Fiscal 2011 refers to
the fiscal year ending June 30, 2011, Fiscal 2010 refers to the fiscal year ended June 30, 2010,
and Fiscal 2009 refers to the fiscal year ended June 30, 2009.
The balance sheet at June 30, 2010 has been derived from the audited financial statements at that
date, but does not include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto
included in our Annual Report on Form 10-K for Fiscal 2010. These interim condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and
notes to consolidated financial statements included in that report.
NOTE 2 — GENERAL
We are primarily a provider of primary care physician services on an outpatient basis in Florida.
We provide medical services to patients through employee physicians, advanced registered nurse
practitioners and physician’s assistants. Substantially all of our revenue is 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 including Summit Health Plan,
Inc. (“Vista”), and Wellcare Health Plans, Inc. and its affiliated companies (“Wellcare”)
(collectively, the “HMOs”). Additionally, we provide practice management services to independent
physician affiliates (“IPAs”). Also, through our subsidiary, Seredor Corporation, we operate sleep
diagnostic centers in 15 states.
In August 2010 and September 2010, we acquired three operators of sleep diagnostic centers and a
related entity that provides continuous positive airway pressure (CPAP) devices and supplies. The
three acquired operators of sleep
diagnostic centers operate a combined 58 sleep diagnostic centers in nine states. The aggregate
total purchase price for these acquired entities consisted of cash consideration paid of $11.2
million and future contingent cash consideration up to a maximum of
$2.0 million subject to the
achievement of certain future earnings targets. As of December 31, 2010, we accrued $1.5 million
of the contingent cash consideration based on a preliminary fair value estimate on the acquisition
date, which was determined using a probability-weighted income approach and discounted to present
value using a weighted-average cost of capital. We will re-measure the fair value of the
contingent cash consideration on a quarterly basis and any subsequent adjustments based on actual
payments or revised estimates will be recognized in the condensed consolidated statements of income
during the period of adjustment. The revenues, expenses and results of operations of the acquired
companies have been included in our condensed consolidated statements of income from the dates of
acquisition.
NOTE 3 — GOODWILL AND OTHER INTANGIBLE ASSETS
The most significant component of the goodwill and other intangible assets included in the
accompanying condensed consolidated balance sheets consists of the goodwill and other intangible
assets recorded in connection with the acquisition of Miami Dade Health Centers, Inc. and its
affiliated companies (collectively, the “MDHC Companies”) in October 2006. Goodwill and other
identifiable intangible assets recorded in connection with the
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
(UNAUDITED)
acquisition of the MDHC Companies
were $58.9 million and $8.7 million, respectively. The identifiable intangible assets of $8.7
million consisted 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 estimated useful lives 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 weighted
average amortization period for these identifiable intangible assets is 7.1 years. 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 purchase price related to the acquisition of the three operators of sleep diagnostic centers
and a related entity that provides CPAP devices and supplies was allocated, on a preliminary basis,
to the estimated fair values of the acquired tangible and intangible assets and the assumed
liabilities during the six-month period ended December 31, 2010. Goodwill and other identifiable
intangible assets recorded in connection with these acquisitions were $5.6 million and $3.9
million, respectively. The identifiable intangible assets of $3.9 million, which primarily consist
of the estimated fair value of customer relationships, have a weighted average amortization period
of 5.1 years. The fair value of the identifiable intangible assets was determined based on
standard valuation techniques.
Total amortization expense for identifiable intangible assets was $0.5 million and $0.3 million for
the three-month periods ended December 31, 2010 and 2009, respectively, and $0.9 million and $0.6
million for the six-month periods ended December 31, 2010 and 2009, respectively.
The change in goodwill for our two reporting units during the six-month period ended December 31,
2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provider
|
|
|
Sleep
|
|
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
Total
|
|
|
Balance at June 30, 2010
|
|
$
|
73,204,582
|
|
|
$
|
789,862
|
|
|
$
|
73,994,444
|
|
|
Acquisition of sleep diagnostic centers
|
|
|
—
|
|
|
|
5,644,530
|
|
|
|
5,644,530
|
|
|
Purchase price adjustments
|
|
|
—
|
|
|
|
31,922
|
|
|
|
31,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
73,204,582
|
|
|
$
|
6,466,314
|
|
|
$
|
79,670,896
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 — SHARE-BASED PAYMENT
We recognize the cost relating to share-based payment transactions, based on the fair value of the
share-based awards issued, in the financial statements over the period services are rendered.
We calculate 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. There were no options granted during the
three-month period ended December 31, 2010. The fair value for employee stock options granted
during the three-month period ended December 31, 2009 was calculated based on the following
assumptions: risk-free interest rate ranging from 0.93% to 2.56%; dividend yield of 0%; volatility
factor of the expected market price of our common stock of 60.0%; and weighted-average expected
life of the options ranging from 3 to 6 years depending on the vesting provisions of each option.
The fair value for employee stock options granted during the six-month periods ended December 31,
2010 and 2009 was calculated based on the following assumptions: risk-free interest rate ranging
from 0.63% to 1.72% and 0.73% to 2.56%, respectively; dividend yield of 0%; volatility factor of
the expected market price of our common stock of 59.7% and 60.5%, respectively; and
weighted-average expected life of the options ranging from 3 to 7 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.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
(UNAUDITED)
We recognized share-based compensation expense of $0.3 million for each of the three-month periods
ended December 31, 2010 and 2009, and $0.7 million and $0.6 million for the six-month periods ended
December 31, 2010 and 2009, respectively. For each of the three and six-month periods ended
December 31, 2010, we recognized excess tax benefits resulting from the exercise of stock options
of approximately $0.1 million. For the three and six-month periods ended December 31, 2009, we
recognized excess tax benefits resulting from the exercise of stock options of approximately $0.1
million and $0.2 million, respectively.
NOTE 5 — DEBT
In December 2009, we entered into a credit facility agreement (the “Credit Facility”) in order to
renew and refinance our existing credit facilities. The Credit Facility consists of two revolving
credit facilities totaling $10,000,000 with a maturity date of January 31, 2012. Interest on
borrowings under the Credit Facility accrues at a per annum rate equal to the sum of 2.40% and the
one-month LIBOR (0.26% at December 31, 2010), floating daily. The Credit Facility contains certain
customary representations and warranties, and certain financial and other customary covenants
including covenants requiring us, on a consolidated basis, to maintain an adjusted tangible net
worth of at least $25 million and a fixed charge coverage ratio of not less than 1.50 to 1.
Substantially all of our assets serve as collateral for the Credit Facility. At December 31, 2010,
there was no outstanding principal balance on the Credit Facility. At December 31, 2010, we had
letters of credit outstanding of $1.3 million which reduced the amount available for borrowing
under the Credit Facility to $8.7 million.
NOTE 6 — EARNINGS PER SHARE
A reconciliation of the denominator of the basic and diluted earnings per share computation is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Basic weighted average number
of shares outstanding
|
|
|
60,566,692
|
|
|
|
59,571,382
|
|
|
|
60,558,743
|
|
|
|
59,494,605
|
|
|
Dilutive effect of stock options
|
|
|
1,902,467
|
|
|
|
1,758,205
|
|
|
|
1,701,956
|
|
|
|
1,708,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average
number of shares outstanding
|
|
|
62,469,159
|
|
|
|
61,329,587
|
|
|
|
62,260,699
|
|
|
|
61,203,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not included in calculation of
diluted earnings per share as
impact is antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding
|
|
|
—
|
|
|
|
13,000
|
|
|
|
—
|
|
|
|
13,000
|
|
NOTE 7 — INCOME TAXES
We recognize deferred income tax assets and liabilities based upon differences between the
financial reporting and tax bases of assets and liabilities. We measure such assets and
liabilities using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
We recorded an income tax provision of $3.9 million and $3.3 million for the three-month periods
ended December 31, 2010 and 2009, respectively, and $7.5 million and $6.7 million for the six-month
periods ended December 31, 2010 and 2009, respectively.
We recorded a liability for unrecognized tax benefits of approximately $0.9 million at December 31,
2010 and June 30, 2010 and included such liability in accrued expenses and other current
liabilities on the condensed consolidated balance sheets. The total amount of unrecognized tax
benefits that if recognized would affect the effective tax rate is $1.1 million at December 31,
2010 and $1.0 million at June 30, 2010, which includes accrued interest and penalties of
approximately $0.2 million and $0.1 million at December 31, 2010 and June 30, 2010, respectively.
We recognize interest accrued related to unrecognized tax benefits in interest expense and
penalties in operating expense.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
(UNAUDITED)
It is reasonably possible that our unrecognized tax benefits may
decrease by approximately $1.1 million within the next twelve months primarily as a result of the
lapse of the applicable statute of limitations. We are no longer subject to tax examinations by
tax authorities for fiscal years ended on or prior to June 30,
2006.
NOTE 8 — RELATED PARTY TRANSACTIONS
We are a party to a lease agreement for office space owned by Dr. Luis Cruz, a director of the
Company through February 2010. For each of the three and six-month periods ended December 31, 2010
and 2009, expenses related to this lease were approximately $0.1 million and $0.2 million,
respectively.
Effective December 31, 2009, we terminated our agreements with Centers of Medical Excellence, Inc.,
an entity owned by Dr. Cruz, pursuant to which this entity acted as one of our 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.
For the three and six-month periods ended December 31, 2009, we recognized operating profits of
$0.2 million and $0.5 million, respectively, under this arrangement.
In October 2008, we entered into a joint venture with Dr. Jacob Nudel, a director of the Company,
that sought to establish special purpose medical provider networks. We made contributions of
approximately $0.1 million and $0.2 million, respectively, during the three and six-month periods
ended December 31, 2009 to fund the operations of the joint venture. In April 2010, we terminated
the business activities of the joint venture.
NOTE 9 — CONTINGENCIES
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
have 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. 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.
The Centers for Medicare and Medicaid Services (“CMS”) is performing 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 involve a review of a sample of medical
records for the HMO contracts selected for audit. CMS has selected for audit several of the
contracts of our HMO affiliates for the 2007 contract year and we expect that CMS will continue
conducting such audits beyond the 2007 contract year. Due to the uncertainties principally related
to CMS’ audit payment adjustment methodology, we are unable to determine whether these audits would
ultimately result in an unfavorable adjustment to us. Accordingly, we are unable to estimate the
financial impact of such adjustment if one occurs as a result of these audits. Although the amount
of the adjustment to us, if
any, is not reasonably estimable at this time, such adjustment may have a material adverse effect
on our results of operations, financial position, and cash flows.
NOTE 10 — SUBSEQUENT EVENTS
We evaluated subsequent events for recognition or disclosure through the time these financial
statements were filed in this quarterly report on Form 10-Q.
10
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated or the context otherwise requires, all references in this Quarterly
Report on Form 10-Q to “we,” “us,” “our,” “Continucare” or the “Company” refers to Continucare
Corporation and its consolidated subsidiaries. All references to the “MDHC Companies” refer to
Miami Dade Health Centers, Inc. and its affiliated companies.
The following discussion and analysis should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly
Report on Form 10-Q.
General
We are primarily 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”). 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. For the six-month period ended December 31, 2010,
approximately 88% and 7% of our revenue was generated by providing services to Medicare-eligible
and Medicaid-eligible members, respectively, under such risk arrangements. As of December 31,
2010, we provided services to or for approximately 26,200 patients on a risk basis and
approximately 8,400 patients on a limited or non-risk basis. Additionally, we also provided
services to over 6,000 patients on a non-risk fee-for-service basis.
We also operate or manage sleep diagnostic centers at over 70 locations in 15 states through
Seredor Corporation, a subsidiary established to conduct sleep service activities. The centers
conduct sleep studies to determine whether patients suffer from sleep disorders and, if so, the
severity of the condition. The clinical staff at the centers are expertly trained in sleep
disorders and work with physicians, respiratory therapists, and clinicians utilizing
state-of-the-art equipment to effectively diagnose and treat patients. In August 2010 and
September 2010, we acquired three operators of sleep diagnostic centers and a related entity that
provides continuous positive airway pressure (CPAP) devices and supplies. The aggregate total
purchase price for these acquired entities consisted of cash consideration paid of $11.2 million
and future contingent cash consideration up to a maximum of $2.0 million subject to the achievement
of certain future earnings targets. The three acquired operators of sleep diagnostic centers
operate a combined 58 sleep diagnostic centers in nine states.
Medicare and Medicaid Considerations
Substantially all of our revenue is generated by providing services to Medicare-eligible
patients and Medicaid-eligible patients. The federal government has enacted significant reforms to
the U.S. health care system which will have an impact on future revenues that we generate from our
Medicare and Medicaid patients. In March 2010, the President signed into law The Patient
Protection and Affordable Care Act, and The Health Care and Education Reconciliation Act of 2010.
The provisions of these new laws include, among other things, limitations on Medicare Advantage
payment rates and Medicaid coverage expansion to individuals with incomes under 133% of the poverty
level beginning in 2014. Because there is considerable uncertainty regarding the financial impact
of these reforms, we cannot currently predict the effect such reforms will have on our business.
However, the lowering of future Medicare Advantage payment rates as well as other provisions of
these new laws may have a material adverse effect on our business, results of operations, financial
position and cash flows.
The Centers for Medicare and Medicaid Services (“CMS”) announced that it will reduce Medicare
Advantage premiums effective January 2011. Based on information received from our HMO affiliates
and CMS,
11
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 2%
effective January 1, 2011 without taking into account any adjustments resulting from changes in
Medicare risk adjustment scores. We believe that the changes our HMO affiliates made to plan
benefits effective January 1, 2011 will not mitigate the effect of the Medicare Advantage premium
reduction. We will, however, seek to improve medical claims expense management and pursue other
cost reduction strategies in an effort to mitigate the effects of the Medicare Advantage premium
reduction. There is no assurance that our Medicare capitation payments will decrease by this
amount or that 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.
As a result of the Medicare Prescription Drug Plan, 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 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 $0.4 million and
$0.2 million during the three-month periods ended December 31, 2010 and 2009, respectively, and by
$0.3 million during each of the six-month periods ended December 31, 2010 and 2009.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 to the consolidated financial
statements included in our Annual Report on Form 10-K for Fiscal 2010. Included within these
policies are certain policies which contain critical accounting estimates and, therefore, have been
deemed to be “critical accounting policies.” Critical accounting estimates are those which require
management to make assumptions about matters that were uncertain at the time the estimate was made
and for which the use of different estimates, which reasonably could have been used, or changes in
the accounting estimates that are reasonably likely to occur from period to period, could have a
material impact on the presentation of our financial condition, changes in financial condition or
results of operations.
We base our estimates and assumptions on historical experience, knowledge of current events
and anticipated 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 our actual results may differ materially. 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 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
12
the premiums
to be paid to the HMOs based on updated health status of participants and updated demographic
factors. In addition, the premiums paid to the HMOs are subject to periodic adjustment based on
CMS’s risk corridor adjustment methodology related to the Medicare Prescription Drug Plan. We
record adjustments to revenue at the time that the information necessary to make the determination
of the adjustment is received from the HMO or the applicable government body and it is determined
that the collectibility of such adjustments is reasonably assured or the likelihood of repayment is
probable. The net effect of these premium adjustments included in revenue were unfavorable
retroactive Medicare adjustments of $0.1 million and $0.2 million for the three-month periods ended
December 31, 2010 and 2009, respectively, and an unfavorable retroactive Medicare adjustment of
$34,000 and a favorable retroactive Medicare adjustment of $0.3 million for the six-month periods
ended December 31, 2010 and 2009, respectively.
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 December 31, 2010 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 of 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 utilization or if benefit changes
provided under the HMO plans are expected to significantly increase or reduce our claims exposure.
We also make adjustments for differences between the estimated claims expense recorded in prior
months and 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.
As medical claims are settled, actual amounts paid for claims incurred in prior periods vary
from previously estimated liabilities. During the three-month periods ended December 31, 2010 and
2009, we recorded favorable adjustments of $0.4 million and $1.4 million, respectively, to medical
claims expense as a result of the differences between the amounts paid for claims incurred in prior
periods and the related liabilities for IBNR previously recorded. The favorable developments in
medical claims expense during the three-month periods ended December 31, 2010 and 2009 primarily
resulted from better than estimated utilization outcomes. These adjustments represented 0.7% and
2.8% of total medical claims expense recorded for the three-month periods ended December 31, 2010
and 2009, respectively.
13
During the six-month periods ended December 31, 2010 and 2009, we recorded a favorable
adjustment of $0.5 million and an unfavorable adjustment of $7,000, respectively, to medical claims
expense as a result of the differences between the amounts paid for claims incurred in prior
periods and the related liabilities for IBNR previously recorded. The favorable development in
medical claims expense during the six-month period ended December 31, 2010 primarily resulted from
better than estimated utilization outcomes. The adjustment for the six-month period ended December
31, 2010 represented 0.5% of total medical claims expense.
Based on our analysis as of December 31, 2010, we recorded a liability of approximately $20.9
million for IBNR. The liability for IBNR decreased by $2.5 million, or 10.7%, to $20.9 million as
of December 31, 2010 from $23.4 million as of June 30, 2010 primarily due to the timing of claims
paid by our HMO affiliates and favorable developments in medical claims expense. The liability for
IBNR of $23.1 million recorded as of December 31, 2009 decreased by $0.6 million, or 2.8%, from
$23.7 million as of June 30, 2009 primarily due to the timing of claims paid by our HMO affiliates.
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 $87.0 million, which represented approximately 53%
of our total assets at December 31, 2010. The most significant component of the intangible assets
consists of the intangible assets recorded in connection with the acquisition of the MDHC
Companies. Goodwill and other identifiable intangible assets recorded in connection with the
acquisition of the MDHC Companies were $58.9 million and $8.7 million, respectively.
We do not amortize goodwill and intangible assets with indefinite useful lives. We review
such assets for impairment on an annual basis or more frequently if certain indicators of
impairment arise. We amortize intangible assets with definite useful lives over their respective
useful lives to their estimated residual values and also review for impairment annually, or more
frequently if certain indicators of impairment arise. Indicators of an 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.
We completed our annual impairment test as of May 1, 2010 and determined that no impairment
existed. In addition, no indicators of impairment were noted and accordingly, no impairment
charges were required at December 31, 2010. 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 recognize deferred income tax assets and liabilities using enacted tax rates for the effect
of temporary differences between the book and tax bases of recorded assets and liabilities. We
evaluate the realizability of the deferred income tax assets and reduce such assets 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 tax accruals and assets and could cause our provision for income taxes to vary
significantly from period to period. At December 31, 2010, we had deferred income tax liabilities
in excess of deferred income tax assets of approximately $4.2 million.
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Share-Based Payment
We recognize the cost relating to share-based payment transactions, based on the fair value of
the share-based awards issued, in the financial statements over the period services are rendered.
We recognized share-based compensation expense of $0.3 million for each of the three-month periods
ended December 31, 2010 and 2009, and $0.7 million and $0.6 million for the six-month periods ended
December 31, 2010 and 2009, respectively. For each of the three and six-month periods ended
December 31, 2010, we recognized excess tax benefits resulting from the exercise of stock option of
approximately $0.1 million. For the three and six-month periods ended December 31, 2009, we
recognized excess tax benefits resulting from the exercise of stock options of approximately $0.1
million and $0.2 million, respectively.
We calculate 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. There were no options granted
during the three-month period ended December 31, 2010. The fair value for employee stock options
granted during the three-month period ended December 31, 2009 was calculated based on the following
assumptions: risk-free interest rate ranging from 0.93% to 2.56%; dividend yield of 0%; volatility
factor of the expected market price of our common stock of 60.0%; and weighted-average expected
life of the options ranging from 3 to 6 years depending on the vesting provisions of each option.
The fair value for employee stock options granted during the six-month periods ended December 31,
2010 and 2009 was calculated based on the following assumptions: risk-free interest rate ranging
from 0.63% to 1.72% and 0.73% to 2.56%, respectively; dividend yield of 0%; volatility factor of
the expected market price of our common stock of 59.7% and 60.5%, respectively; and
weighted-average expected life of the options ranging from 3 to 7 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.
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 option valuation 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 prior 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.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIOD ENDED DECEMBER 31, 2010 TO THE THREE-MONTH PERIOD ENDED
DECEMBER 31, 2009
Revenue
Revenue increased by $5.0 million, or 6.7%, to $80.3 million for the three-month period ended
December 31, 2010 from $75.3 million for the three-month period ended December 31, 2009 due
primarily to increases in our Medicare revenue and in our revenue related to the operations of the
sleep diagnostic centers.
The most significant component of our revenue is the revenue we generate from Medicare
patients under risk arrangements which increased by $1.9 million, or 2.8%, during the three-month
period ended December 31, 2010. During the three-month period ended December 31, 2010, revenue
generated by our Medicare risk arrangements increased approximately 4.7% on a per patient per month
basis and Medicare patient months
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decreased by approximately 1.9% over the comparable period of
Fiscal 2010. The increase in the per patient per month
Medicare revenue was primarily due to an increase in premiums resulting from the Medicare risk
adjustment program.
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 2% effective January 1, 2011 before
taking into account any adjustments resulting from changes in Medicare risk adjustment scores. We
believe that the changes our HMO affiliates made to plan benefits effective January 1, 2011 will
not mitigate the effect of the Medicare Advantage premium reduction. We will, however, seek to
improve medical claims expense management and pursue other cost reduction strategies in an effort
to mitigate the effects of the Medicare Advantage premium reduction. There is no assurance that
our Medicare capitation payments will decrease by this amount or that 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.
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 December 31, 2010 and 2009 were
unfavorable retroactive Medicare adjustments of $0.1 million and $0.2 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 69%, 19% and 5%, respectively, of our total revenue for the three-month
period ended December 31, 2010. Revenue generated by our managed care entities under contracts
with Humana, Vista and Wellcare accounted for approximately 72%, 19% and 6%, respectively, of our
total revenue for the three-month period ended December 31, 2009.
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 our 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
stock-based compensation expense, 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 the three-month period ended December 31, 2010 increased by $2.0
million, or 3.6%, to $60.2 million from $58.2 million for the three-month period ended December 31,
2009. Medical claims expense, which is the largest component of medical services expense,
decreased by $0.2 million, or 0.3%, to $50.2 million for the three-month period ended December 31,
2010 from $50.4 million for the three-month period ended December 31, 2009 primarily due to a
decrease in Medicare claims expense of $0.5 million, or 1.0%. The decrease in Medicare claims
expense resulted from a 1.9% decrease in Medicare patient months, partially offset by a 0.9%
increase on a per patient per month basis in medical claims expenses related to our Medicare
patients. The increase in Medicare per patient per month medical claims expense is primarily
attributable to inflationary trends in the health care industry, partially offset by improved
utilization outcomes.
As a percentage of revenue, medical services expenses decreased to 75.0% of revenue for the
three-month period ended December 31, 2010 as compared to 77.3% for the three-month period ended
December 31, 2009. Our claims loss ratio (medical claims expense as a percentage of revenue
generated under risk arrangements) decreased
to 66.6% for the three-month ended December 31, 2010 from 68.7% for the three-month
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period
ended December 31, 2009. These decreases were primarily due to an increase in Medicare revenue at
a greater rate than the increase in Medicare 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 $2.2 million, or 28.6%, to $10.0 million for the three-month
period ended December 31, 2010 from $7.8 million for the three-month period ended December 31,
2009. As a percentage of revenue, other direct costs increased to 12.5% for the three-month period
ended December 31, 2010 from 10.4% for the three-month period ended December 31, 2009. The
increase in the amount of other direct costs was primarily due to an increase in payroll expense
and related benefits related to the operations of the sleep diagnostic centers.
Administrative payroll and employee benefits expense increased by $0.4 million, or 10.3%, to
$4.2 million for the three-month period ended December 31, 2010 from $3.8 million for the
three-month period ended December 31, 2009. As a percentage of revenue, administrative payroll and
employee benefits expense increased to 5.2% for the three-month period ended December 31, 2010 from
5.0% for the three-month period ended December 31, 2009. The increase in administrative payroll
and employee benefits expense was primarily due to increases in such expenses related to the
operations of the sleep diagnostic centers.
General and administrative expenses increased by $1.1 million, or 23.6%, to $5.8 million for
the three-month period ended December 31, 2010 from $4.7 million for the three-month period ended
December 31, 2009. As a percentage of revenue, general and administrative expenses increased to
7.2% for the three-month period ended December 31, 2010 from 6.2% for the three-month period ended
December 31, 2009. The increase in general and administrative expenses was primarily due to an
increase in expenses related to the operations of the sleep diagnostic centers.
Income from Operations
Income from operations for the three-month period ended December 31, 2010 increased by $1.5
million, or 17.2%, to $10.1 million from $8.6 million for the three-month period ended December 31,
2009.
Taxes
An income tax provision of $3.9 million and $3.3 million was recorded for the three-month
periods ended December 31, 2010 and 2009, respectively. The effective income tax rates remained
relatively unchanged at 38.6% for each of the three-month periods ended December 31, 2010 and 2009.
Net Income
Net income for the three-month period ended December 31, 2010 increased by $0.9 million, or
17.2%, to $6.2 million from $5.3 million for the three-month period ended December 31, 2009.
COMPARISON OF THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2010 TO THE SIX-MONTH PERIOD ENDED DECEMBER
31, 2009
Revenue
Revenue increased by $8.1 million, or 5.3%, to $159.3 million for the six-month period ended
December 31, 2010 from $151.2 million for the six-month period ended December 31, 2009 due
primarily to increases in our Medicare revenue and in our revenue related to the operations of the
sleep diagnostic centers.
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The most significant component of our revenue is the revenue we generate from Medicare
patients under risk arrangements which increased by $4.2 million, or 3.1%, during the six-month
period ended December 31, 2010.
During the six-month period ended December 31, 2010, revenue generated by our Medicare risk
arrangements increased approximately 5.1% on a per patient per month basis and Medicare patient
months decreased by approximately 1.9% over the comparable period of Fiscal 2010. The increase in
the per patient per month Medicare revenue was primarily due to an increase in premiums resulting
from the Medicare risk adjustment program. Included in revenue for the six-month periods ended
December 31, 2010 and 2009 was an unfavorable retroactive Medicare adjustment of $34,000 and a
favorable retroactive Medicare adjustment of $0.3 million, respectively, related to Medicare
premiums and risk corridor adjustments. 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 69%, 19% and 5%, respectively, of our total revenue for the six-month
period ended December 31, 2010. Revenue generated by our managed care entities under contracts
with Humana, Vista and Wellcare accounted for approximately 72%, 19% and 6%, respectively, of our
total revenue for the six-month period ended December 31, 2009.
Operating Expenses
Medical services expenses for the six-month period ended December 31, 2010 increased by $3.3
million, or 2.8%, to $121.7 million from $118.4 million for the six-month period ended December 31,
2009. Medical claims expense, which is the largest component of medical services expense,
increased by $0.1 million, or 0.1%, to $103.1 million for the six-month period ended December 31,
2010 from $103.0 million for the six-month period ended December 31, 2009 primarily due to an
increase in Medicare claims expense of $0.3 million, or 0.3%. The increase in Medicare claims
expense resulted from a 2.3% increase in medical claims expense on a per patient per month basis
and a 1.9% decrease in Medicare patient months. The increase in Medicare per patient per month
medical claims expense is primarily attributable to inflationary trends in the health care
industry, partially offset by improved utilization outcomes.
As a percentage of revenue, medical services expenses decreased to 76.4% of revenue for the
six-month period ended December 31, 2010 as compared to 78.3% for the six-month period ended
December 31, 2009. Our claims loss ratio (medical claims expense as a percentage of revenue
generated under risk arrangements) decreased to 67.9% for the six-month period ended December 31,
2010 from 69.7% for the six-month period ended December 31, 2009. These decreases were primarily
due to an increase in Medicare revenue at a greater rate than the increase in Medicare claims
expense on a per patient per month basis.
Other direct costs increased by $3.2 million, or 21.1%, to $18.6 million for the six-month
period ended December 31, 2010 from $15.4 million for the six-month period ended December 31, 2009.
As a percentage of revenue, other direct costs increased to 11.7% for the six-month period ended
December 31, 2010 from 10.2% for the six-month period ended December 31, 2009. The increase in the
amount of other direct costs was primarily due to an increase in payroll expense and related
benefits related to the operations of the sleep diagnostic centers.
Administrative payroll and employee benefits expense increased by $0.2 million, or 4.0%, to
$7.3 million for the six-month period ended December 31, 2010 from $7.1 million for the six-month
period ended December 31, 2009. As a percentage of revenue, administrative payroll and employee
benefits expense decreased to 4.6% for the six-month period ended December 31, 2010 from 4.7% for
the six-month period ended December 31, 2009. The increase in administrative payroll and employee
benefits expense was primarily due to an increase in such expenses related to the operations of the
sleep diagnostic centers.
General and administrative expenses increased by $2.1 million, or 25.2% to $10.7 million for
the six-month period ended December 31, 2010 from $8.6 million for the six-month period ended
December 31, 2009. As a percentage of revenue, general and administrative expenses increased to
6.7% for the six-month period ended December 31, 2010 from 5.7% for the six-month period ended
December 31, 2009. The increase in general and administrative expenses was primarily due to an
increase in expenses related to the operations of the sleep diagnostic centers.
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Income from Operations
Income from operations for the six-month period ended December 31, 2010 increased by $2.3
million, or 13.1%, to $19.5 million from $17.2 million for the six-month period ended December 31,
2009.
Taxes
An income tax provision of $7.5 million and $6.7 million was recorded for the six-month
periods ended December 31, 2010 and 2009, respectively. The effective income tax rates remained
relatively unchanged at 38.6% for each of the six-month periods ended December 31, 2010 and 2009.
Net Income
Net income for the six-month period ended December 31, 2010 increased by $1.4 million, or
13.2%, to $12.0 million from $10.6 million for the six-month period ended December 31, 2009.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2010, working capital was $51.4 million, an increase of $1.9 million from
$49.5 million at June 30, 2010. Cash and cash equivalents increased by $0.7 million to $38.2
million at December 31, 2010 compared to $37.5 million at June 30, 2010. The increases in working
capital and cash and cash equivalents at December 31, 2010 compared to June 30, 2010 were primarily
due to net income of $12.0 million generated during the six-month period ended December 31, 2010,
partially offset by net cash of $10.8 million used for the acquisition of sleep diagnostic centers.
Net cash of $12.8 million was provided by operating activities for the six-month period ended
December 31, 2010 compared to $15.4 million for the six-month period ended December 31, 2009. This
$2.6 million decrease in net cash provided by operating activities was primarily due to a net
decrease in accrued expense and other current liabilities of $4.5 million, partially offset by a
net increase in net income of $1.4 million.
Net cash of $11.9 million was used for investing activities for the six-month period ended
December 31, 2010 compared to $3.6 million for the six-month period ended December 31, 2009. The
$8.3 million increase in net cash used for investing activities primarily related to net cash used
of $10.8 million for the acquisition of sleep diagnostic centers.
Net cash of approximately $0.2 million was used in financing activities for the six-month
period ended December 31, 2010 compared to $0.7 million provided by financing activities for the
six-month period ended December 31, 2009. The $0.9 million increase in net cash used in financing
activities for the six-month period ended December 31, 2010 was primarily due to a net decrease of
$0.6 million in proceeds and excess tax benefits related to the exercise of stock options.
Pursuant to the terms under our managed care agreements with certain of our HMO affiliates, we
posted irrevocable standby letters of credit amounting to $1.3 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 December 2009, we entered into a credit facility agreement (the “Credit Facility”) in order
to renew and refinance our existing credit facilities. The Credit Facility consists of two
revolving credit facilities totaling $10,000,000 with a maturity date of January 31, 2012.
Interest on borrowings under the Credit Facility accrues at a per annum rate equal to the sum of
2.40% and the one-month LIBOR (0.26% at December 31, 2010), floating daily. The Credit Facility
contains certain customary representations and warranties, and certain financial and other
customary covenants including covenants requiring us, on a consolidated basis, to maintain an
adjusted tangible net worth of at least $25 million and a fixed charge coverage ratio of not less
than 1.50 to 1. Substantially all of our assets serve as collateral for the Credit Facility. At
December 31, 2010, there was no outstanding principal balance
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on the Credit Facility. At December 31, 2010, we had letters of credit outstanding of $1.3 million
which reduced the amount available for borrowing under the Credit Facility to $8.7 million.
Our Board of Directors approved a previously announced stock repurchase program to authorize
the repurchase of 15,000,000 shares of our common stock. 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 the three and six-month
periods ended December 31, 2010, we did not repurchase any of our common stock. As of January 27,
2011, we had repurchased 11,907,004 shares of our common stock for approximately $25.0 million
pursuant to this stock repurchase program.
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, and our Credit Facility.
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 Quarterly Report on Form 10-Q, 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
report 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:
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Our operations are dependent on three health maintenance organizations;
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Under our most important contracts we are responsible for the cost of medical
services to our patients in return for a capitated fee;
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Our revenues will be affected by the Medicare Risk Adjustment program;
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If we are unable to manage medical benefits expense effectively, our profitability
will likely be reduced;
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A failure to estimate incurred but not reported medical benefits expense accurately
will affect our profitability;
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We compete with many health care providers for patients and HMO affiliations;
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We may not be able to successfully recruit or retain existing relationships with
qualified physicians and medical professionals;
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Our business exposes us to the risk of medical malpractice lawsuits;
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We primarily operate in Florida;
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A significant portion of our voting power is concentrated;
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We are dependent on our executive officers and other key employees;
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We depend on the management information systems of our affiliated HMOs;
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We depend on our information processing systems;
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Volatility of our stock price could adversely affect you;
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A failure to successfully implement our business strategy could materially and
adversely affect our operations and growth opportunities;
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Our intangible assets represent a substantial portion of our total assets;
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Competition for acquisition targets and acquisition financing and other factors may
impede our ability to acquire other businesses and may inhibit our growth;
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Our acquisitions could result in integration difficulties, unexpected expenses,
diversion of management’s attention and other negative consequences;
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Recently enacted health care reform, including The Patient Protection and Affordable
Care Act and The Health Care and Education Reconciliation Act of 2010, could have a
material adverse effect on our business;
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A decrease to our Medicare capitation payments may have a material adverse effect on
our results of operations, financial position and cash flows;
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We are subject to government regulation;
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The health care industry is subject to continued scrutiny;
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Our insurance coverage may not be adequate, and rising insurance premiums could
negatively affect our profitability;
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Deficit spending and economic downturns could negatively impact our results of
operations; and
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Many factors that increase health care costs are largely beyond our ability to
control.
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We assume no responsibility to update our forward-looking statements as a result of new
information, future events or otherwise. Additional information concerning these and other risks
and uncertainties is contained in our filings with the Securities and Exchange Commission,
including the section entitled “Risk Factors” in our Annual Report on Form 10-K for Fiscal 2010.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2010, we held cash equivalent investments in high grade, short-term
securities, which are not typically subject to material market risk. At December 31, 2010, 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 Credit Facility has a variable interest rate and is interest rate
sensitive, however, we had no amount outstanding under the Credit Facility at December 31, 2010.
We have no material risk associated with foreign currency exchange rates or commodity prices.
ITEM 4. 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 report.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded
that, as of December 31, 2010, 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 must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
21
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.
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 4 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.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 9 of our Condensed Consolidated Financial Statements.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in our Form 10-K
for Fiscal 2010. Readers are urged to carefully review our risk factors since they may cause our
results to differ from the “forward-looking statements” made in this report or otherwise made by or
on our behalf. Those risk factors are not the only ones we face. Additional risks not presently
known to us or other factors not perceived by us to present significant risks to our business at
this time also may impair our business operation.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
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Exhibits
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31.1
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Section 302 Certification of the Chief Executive Officer.
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31.2
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Section 302 Certification of the Chief Financial Officer.
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32.1
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CONTINUCARE CORPORATION
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Dated: February 4, 2011
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By:
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/s/ Richard C. Pfenniger, Jr.
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Richard C. Pfenniger, Jr.
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Chairman of the Board, Chief Executive
Officer
and President (principal executive
officer)
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By:
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/s/ Fernando L. Fernandez
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Fernando L. Fernandez
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Senior Vice President -- Finance, Chief Financial
Officer, Treasurer and Secretary (principal
financial and accounting officer)
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