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file | filename |
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EX-31.1 - EX-31.1 - CONTINUCARE CORP | g24576exv31w1.htm |
EX-21.1 - EX-21.1 - CONTINUCARE CORP | g24576exv21w1.htm |
EX-32.2 - EX-32.2 - CONTINUCARE CORP | g24576exv32w2.htm |
EX-31.2 - EX-31.2 - CONTINUCARE CORP | g24576exv31w2.htm |
EX-32.1 - EX-32.1 - CONTINUCARE CORP | g24576exv32w1.htm |
EX-23.1 - EX-23.1 - CONTINUCARE CORP | g24576exv23w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 2010
For the fiscal year ended: June 30, 2010
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
For the transition period from to
Commission file number: 001-12115
CONTINUCARE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Florida | 59-2716023 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
7200 Corporate Center Drive | ||
Suite 600 | ||
Miami, Florida | 33126 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants Telephone Number, Including Area Code (305) 500-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange On Which Registered | |
COMMON STOCK | NYSE AMEX | |
$.0001 PAR VALUE |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. Check one:
Large accelerated filer o | Accelerated filer x | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No x
The aggregate market value of the voting common stock held by non-affiliates of the registrant
on December 31, 2009 was approximately $141,201,000.
Number of shares outstanding of each of the registrants classes of Common Stock at August 31,
2010: 60,553,546 shares of Common Stock, $.0001 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrants Annual Meeting of Shareholders for the fiscal
year ended June 30, 2010 are incorporated by reference into Part III of this Form 10-K.
CONTINUCARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2010
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2010
TABLE OF CONTENTS
PAGE | ||||||||
3 | ||||||||
Item 1. | 3 | |||||||
Item 1A. | 12 | |||||||
Item 1B. | 18 | |||||||
Item 2. | 18 | |||||||
Item 3. | 18 | |||||||
Item 4. | 18 | |||||||
Item 5. | 18 | |||||||
Item 6. | 20 | |||||||
Item 7. | 21 | |||||||
Item 7A. | 30 | |||||||
Item 8. | 30 | |||||||
Item 9. | 30 | |||||||
Item 9A. | 30 | |||||||
Item 9B. | 32 | |||||||
Item 10. | 32 | |||||||
Item 11. | 32 | |||||||
Item 12. | 32 | |||||||
Item 13. | 32 | |||||||
Item 14. | 32 | |||||||
Item 15. | 33 | |||||||
35 | ||||||||
EX-21.1 | ||||||||
EX-23.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
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Table of Contents
GENERAL
Unless otherwise indicated or the context otherwise requires, all references in this Annual
Report on Form 10-K to we, us, our, Continucare or the Company refer to Continucare
Corporation and its consolidated subsidiaries, and all references to the MDHC Companies refer to
Miami Dade Health Centers, Inc. and its affiliated companies. All references to a Fiscal year
refer to our fiscal year which ends June 30.
PART I
ITEM 1. | BUSINESS |
The following business description should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.
Company Overview
We are 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
medical 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. Revenue generated by our managed care entities under
contracts with Humana, Vista and Wellcare accounted for approximately 72%, 20% and 6%,
respectively, of our total revenue for Fiscal 2010. For Fiscal 2010, approximately 90% and 7% of
our revenue was generated by providing services to Medicare-eligible and Medicaid-eligible members,
respectively, under such risk arrangements. As of June 30, 2010, we provided services to or for
approximately 25,700 patients on a risk basis and approximately 9,000 patients on a limited or
non-risk basis. Additionally, we provided services to over 6,000 patients on a non-risk
fee-for-service basis. We also operate and manage sleep diagnostic centers in a number of states.
We were incorporated in Florida in 1996 as the successor to a Florida corporation formed
earlier in 1996. Our principal place of business is 7200 Corporate Center Drive, Suite 600, Miami,
Florida 33126. Our telephone number is 305-500-2000.
Acquisitions
In October 2006, we completed the acquisition of the MDHC Companies. The MDHC Companies
provide primary care physician services and certain medical specialty and diagnostic services in
five medical centers in Miami-Dade County, Florida. The majority of the MDHC Companies patients
are participants in Medicare and Medicaid HMO plans and substantially all of the MDHC Companies
contracts with HMOs are on a risk basis. In connection with the completion of the acquisition of
the MDHC Companies and in consideration for the assets acquired pursuant to the acquisition of the
MDHC Companies, we paid the MDHC Companies approximately $6.7 million in cash, issued 19.7 million
shares of our common stock and assumed or repaid certain indebtedness and liabilities of the MDHC
Companies.
The purchase price, including acquisition costs, of approximately $66.2 million was allocated
to the estimated fair value of acquired tangible assets of $13.9 million, identifiable intangible
assets of $8.7 million and assumed liabilities of $15.3 million as of October 1, 2006, resulting in
goodwill totaling $58.9 million. This purchase price allocation includes certain adjustments
recorded during Fiscal 2008 and 2007 that resulted in a decrease in goodwill of approximately $0.5
million and $3.3 million, respectively. These adjustments primarily related to Medicare risk
adjustments and pharmacy rebates relating to the operations of the MDHC Companies for periods prior
to the completion of the acquisition of the MDHC Companies and to adjustments to increase the
estimated fair values of the identifiable intangible assets based on updated available information
and assumptions. The identifiable intangible assets of $8.7 million consist of estimated fair
values of $1.6 million assigned to the trade name, $6.2 million to customer relationships and $0.9
million to a noncompete agreement. The trade name was determined to have an estimated useful life
of six years and the customer relationships and noncompete agreements were each determined to have
an estimated useful life of eight and five years, respectively. The fair values of the customer
relationships and other identifiable intangible assets are amortized over their estimated lives
using the straight line method. The customer relationships are non-contractual. The fair value of
the identifiable intangible assets was determined, with the assistance of an outside valuation
firm, based on standard valuation techniques. The purchase price of $66.2 million includes the
estimated fair value of our common stock issued to the MDHC Companies of $58.5 million, cash paid
to the principal owners of $6.7 million, and acquisition costs of approximately $1.0 million.
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As a result of the acquisition of the MDHC Companies, we became a party to two lease
agreements for office space owned by certain of the principal owners of the MDHC Companies, one of
which we terminated effective September 30, 2007. For Fiscal Years 2010, 2009 and 2008, expenses
related to these two leases were approximately $0.4 million in each fiscal year.
In 2009, we acquired two operators of sleep diagnostic centers and in August 2010 we acquired
a South Florida-based sleep diagnostic center business. Through Seredor Corporation, a subsidiary
established to conduct sleep service activities, we operate and manage sleep diagnostic centers in
Florida, South Carolina, North Carolina, West Virginia, Virginia, Colorado and Ohio. The centers
conduct sleep studies to determine whether patients suffer from sleep disorders and, if so, the
severity of the condition. The clinical staff at the centers are expertly trained in sleep
disorders and work with physicians, neurologists, respiratory therapists, and clinicians utilizing
state-of-the-art equipment to effectively diagnose and treat patients.
Industry Overview
The United States health care market is large and growing. According to the Centers For
Medicare and Medicaid Services (CMS), total outlays on health care in the United States were
approximately $2.3 trillion in 2008 and were projected to reach approximately $4.5 trillion in
2019, representing an annual rate of increase of approximately 6.1%. The rate of the overall
increase of health care outlays in the United States has been greater than the growth of the
economy as a whole (measured by gross domestic product, or GDP). For example, in 2008 the rate of
growth of total United States medical outlays was approximately two percentage points higher than
the growth of GDP. The high growth rate of health care outlays is expected to continue. In 2008,
health care outlays represented approximately 16.2% of GDP. CMS projects that this amount will
increase to 19.3% of GDP by 2019. In addition, United States health care outlays have increased at
a faster rate than the consumer price index. According to CMS, medical outlays in the United
States were projected to grow by approximately 5.7% in 2009, as compared to actual increases of
4.4% in 2008, 6.0% in 2007 and 6.6% in 2006.
The Medicare sector of the United States health care market is also large and growing.
Medicare provided health care benefits to approximately 46 million elderly and disabled Americans
in 2009, or approximately 15% of the population of the United States. With the coming retirement
of the Baby Boom generation, a significant increase in the number of Medicare beneficiaries is
forecast, with the number of Medicare beneficiaries expected to rise to over 75 million, or greater
than 20% of the projected population of the United States, by 2030. Medicare outlays have also
grown faster than both the GDP and the consumer price index, which growth is forecast to continue.
For example, annual Medicare outlays exceeded $400 billion in 2008 and are expected to grow to over
$900 billion by 2019.
Medicare was established in 1965 and traditionally provided fee-for-service (indemnity)
coverage for its members. Under fee-for-service coverage, Medicare assumes responsibility for
paying all or a portion of the members covered medical fees, subject, in some cases, to a
deductible or coinsurance payment. There are private Medicare managed care programs that provide
an alternative to traditional fee-for-service coverage. Through a contract with CMS, private
insurers, such as HMOs, may contract with CMS to provide health insurance coverage in exchange for
a fixed monthly payment per member per month for Medicare-eligible individuals. Individuals who
elect to participate in private Medicare managed care programs typically receive additional
benefits not covered by Medicares traditional fee-for-service coverage program and are relieved of
the obligation to pay some or all deductible or coinsurance amounts due.
Participation in private Medicare managed care programs increased during the 1990s reaching a
peak of 6.2 million participants in 1998, or approximately 16% of the Medicare-eligible population.
As of November 2003, the number of participants had decreased to 4.6 million, or approximately 11%
of the Medicare-eligible population. The number of participating private health plans also
decreased during this period going from 346 plans in 1998 to 155 in November 2003. This decline in
participation has been attributed to unpredictable and insufficient payments resulting from the
alteration of payments to private plans associated with the Balanced Budget Act of 1997.
The Medicare Modernization Act, adopted in December 2003, was intended, in part, to modernize
and revitalize private plans under Medicare. The Medicare Modernization Act established the
Medicare prescription drug offering that began in 2006, established new tax-advantaged Health
Savings Account regulations and made significant changes to the private Medicare managed care
programs which were named Medicare Advantage. These changes were a response to the decreased
managed care participation in Medicare and the resulting lack of choice for Medicare beneficiaries.
The Medicare Modernization Act made favorable changes to the premium rate calculation methodology
and generally provides for program rates that we believe will better reflect the increased cost of
medical services provided to Medicare beneficiaries.
As a result of the Medicare Modernization Acts enhanced payment rates and other provisions
designed to expand Medicare Advantage offerings and make them more attractive to plan sponsors and
beneficiaries, enrollment in Medicare Advantage programs has increased since December 2003 from
approximately 5.3 million participants, or approximately 13% of the Medicare-eligible population,
to approximately 11.3 million participants, or approximately 24% of the Medicare-eligible
population, as of June 2010. The number of participating private health plans also increased
dramatically during this period going from 155 plans in November 2003 to 574 plans in June 2010.
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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.
As a result of the growing increases in health care outlays in the United States, insurers,
employers, state and federal governments and other health insurance payors have sought to reduce or
control the sustained increases in health care costs. One response to these cost increases has
been a shift away from the traditional fee-for-service method of paying for health care to managed
health care models, such as HMOs.
HMOs offer a comprehensive health care benefits package in exchange for a fixed prepaid
monthly fee or premium per enrollee that does not vary through the contract period regardless of
the quantity of medical services required or used. HMOs enroll members by entering into contracts
with employer groups or directly with individuals to provide a broad range of health care services
for a prepaid charge. HMOs contract directly with medical clinics, independent physicians,
hospitals and other health care providers to administer medical care to HMO enrollees. Often the
payment to physicians is in the form of a fixed monthly fee per enrollee, which is called a
capitation payment. Once negotiated, the total payment is based on the number of enrollees
covered, regardless of the actual need for and utilization of covered services.
Physicians, including sole practitioners and small physician groups, find themselves at a
competitive disadvantage in the current managed care environment. Physicians are generally not
equipped by training or experience to handle all of the functions of a modern medical practice,
such as negotiation of contracts with specialists and HMOs, claims administration, financial
services, provider relations, member services, medical management including utilization management
and quality assurance, data collection and management information systems. Additionally, a
proliferation of state and federal regulations has increased the paperwork burden and hampered the
application of the traditional controls used by managed care organizations. Physicians
increasingly are responding to these pressures within the managed care industry by affiliating with
organizations such as ours to assist them in managing their practices.
Our Market and Business Strategy
The population of Florida was approximately 18.5 million in 2009, and approximately 29% of
those residents were located in Miami-Dade, Broward and Hillsborough Counties. As of June 2010,
approximately 1.1 million residents of Florida were enrolled in Medicare Advantage plans out of a
Medicare-eligible population of approximately 3.3 million. The three primary HMOs with which we
are affiliated account for approximately 47% of Medicare Advantage participants in the markets we
serve.
Our strategy is to:
| increase patient volume at our existing medical centers; | ||
| selectively expand our network to include additional medical centers or other medical facilities and to penetrate new geographic markets; | ||
| further develop our IPA management activities; and | ||
| selectively expand our operations into other areas in which we believe we can leverage our expertise in order to establish additional sources of revenue. |
Increasing Patient Volume
Our core business is comprised of our established network of medical centers from which we
provide primary care services on an outpatient basis. The dominant focus of these medical centers
has historically been serving patients enrolled in Medicare Advantage plans sponsored by our HMO
affiliates. We seek to increase the number of patients using our medical centers through the
general marketing efforts of our affiliated HMOs and on our own through targeted marketing efforts.
In addition to building our Medicare Advantage patient base we seek to increase the number of
patients we serve in other lines of business. In particular we desire to increase our Medicaid
patient base. In furtherance of this objective we have modified our arrangements with certain of
our existing HMO affiliates to add Medicaid as a covered line of business and have expanded our
Medicaid HMO affiliations.
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Selectively Expanding Our Network
In addition to the acquisition of the MDHC Companies, we may seek to add additional medical
centers or other medical facilities to our network either through acquisition or start up, although
no assurance can be given of our ability to establish or acquire any additional locations. To
date, we have focused on Miami-Dade, Broward and Hillsborough Counties, Florida. We expect we will
identify and select acquisition candidates based in large part on the following broad criteria:
| staffed with highly qualified medical professionals; | ||
| a history of profitable operations or a predictable synergy such as opportunities for economies of scale through a consolidation of management functions; | ||
| a competitive environment with respect to a high concentration of hospitals and physicians; and | ||
| a geographic proximity to our current operations. |
Developing Our IPA Management Activities
We currently provide management services to a network of IPAs at approximately 50 medical
offices. We enhance the operations of our IPA physician practices by providing assistance with
medical utilization management, pharmacy management and specialist network development.
Additionally, we provide financial reports for our IPA practices to further assist with their
operations. We believe that we can leverage our skill at providing medical management services to
IPA practices to a larger group of IPA practices and will seek to selectively add new IPA practices
to enhance our IPA management activities. We intend to continue affiliating with physicians who
are sole practitioners or who operate in small groups to staff and expand our network.
Selectively Expanding Our Operations Into Other Areas
We are actively exploring expansion of our operations into other areas in which we believe we
can leverage our expertise in order to establish additional sources of revenue. As part of this
strategy, in 2009 we acquired two operators of sleep diagnostic centers and in August 2010 we
acquired a South Florida-based sleep diagnostic center business. Through Seredor Corporation, we
operate and manage sleep diagnostic centers at 15 locations in Florida, South Carolina, North
Carolina, West Virginia, Virginia, Colorado and Ohio. The centers conduct sleep studies to
determine whether patients suffer from sleep disorders and, if so, the severity of the condition.
The most common sleep disorder, obstructive sleep apnea (or OSA), is a serious, though often
undiagnosed health condition that afflicts more than 18 million adults in the United States. OSA
sufferers stop breathing repeatedly during sleep in intervals that may last 10 seconds to a minute
or longer. Key symptoms of OSA include daytime sleepiness, loud snoring, gasping or choking during
sleep, and depression and irritability. OSA increases the risk of hypertension, heart disease,
mood and memory problems. It also increases the risks of automobile crashes and other accidents.
The clinical staff at the centers are expertly trained in sleep disorders and work with physicians,
neurologists, respiratory therapists, and clinicians utilizing state-of-the-art equipment to
effectively diagnose and treat patients.
Our Medical Centers
At our medical centers, physicians who are our employees or independent contractors act as
primary care physicians practicing in the area of general, family and internal medicine with
medical specialty services provided in certain of our centers. A typical medical center is
operated in an office space that ranges from 5,000 to 8,000 square feet although two of our medical
centers comprise approximately 23,000 and 49,000 square feet of space. In addition, certain of our
medical centers provide diagnostic imaging services. A medical center is typically staffed with
approximately two to three physicians, and is open five days a week. The physicians we employ or
with whom we contract are generally retained under written agreements that provide for a rolling
one-year term, subject to earlier termination in some circumstances. Under our standard physician
agreements we are responsible for providing our physicians with malpractice insurance coverage.
Our IPAs
We provide management assistance to IPAs. Our services include providing assistance with
medical utilization management, pharmacy management and specialist network development.
Additionally, we provide financial reports for our IPAs to further assist with their practices.
These services currently relate primarily to those patients served by the IPAs who are enrolled in
health plans offered by Humana and Vista. As of June 30, 2010, these IPAs provided services to
over 3,000 patients.
Effective January 1, 2006, we entered into an Independent Practice Association Participation
Agreement (the Risk IPA Agreement) with Humana under which we agreed to assume certain management
responsibilities on a risk basis for Humanas Medicare and Medicaid members assigned to certain
IPAs practicing in Miami-Dade and Broward Counties, Florida. Under the Risk IPA Agreement, we
receive a capitation fee established as a percentage of the premium that the health plan receives
for those members who have selected the IPAs as their primary care physicians and assume
responsibilities for the cost of substantially all medical
services provided to these members, even those we do not provide directly. Effective January
1, 2008, we entered into an agreement with Vista under which we agreed to assume certain management
responsibilities on a limited risk basis for Vistas Medicare members assigned to certain IPAs
practicing in Miami-Dade and Broward Counties, Florida. Our IPAs practice primary care medicine on
an outpatient basis in facilities similar to our medical centers. Our IPA physicians typically
earn a capitated fee for the services they provide and may be entitled to obtain bonus
distributions if they operate their practice in accordance with their negotiated contract.
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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 premiums our HMO affiliates receive from CMS for their Medicare Prescription Drug Plans
are subject to periodic adjustment, positive or negative, based upon the application of risk
corridors that compare their plans revenues as estimated in their bids to actual prescription drug
costs. Variances exceeding certain thresholds may result in CMS making additional payments to the
HMOs or require the HMOs to refund to CMS a portion of the payments they received. Our contracted
HMO affiliates estimate and periodically adjust premium revenues related to the risk corridor
payment adjustments, and a portion of each such HMOs estimated premium revenue adjustment is
allocated to us. As a result, the revenues recognized under our risk arrangements with these HMOs
are net of the portion of the estimated risk corridor adjustment allocated to us. The portion of
any such risk corridor adjustment that the HMOs allocate to us may not directly correlate to the
historical utilization patterns of our patients or the costs that we may incur in future periods.
During Fiscal 2010, 2009 and 2008, 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, $0.2 million and $3.1 million, respectively.
Our HMO Affiliates
We currently have managed care agreements with several HMOs. Our most significant HMO
affiliates are Humana, Vista and Wellcare. Under our risk agreements with Humana, Vista and
Wellcare, we receive for our services capitated monthly payments per patient at a rate established
by the respective contract. In return, we assume full financial responsibility for the provision
of all necessary medical care to our patients, even services we do not provide directly. In Fiscal
2010, we generated approximately 72%, 20% and 6% of our revenue from contracts with Humana, Vista
and Wellcare, respectively. We continually review and attempt to renegotiate the terms of our
managed care agreements in an effort to obtain more favorable terms. We may selectively add new HMO
affiliations, but we can provide no assurance that we will be successful in doing so. The loss of
significant HMO contracts and/or the failure to regain or retain such HMOs patients or the related
revenues without entering into new HMO affiliations could have a material adverse effect on our
business, results of operations and financial condition.
Humana
We currently have three agreements with Humana under which we provide medical services to
members of Humanas Medicare, Medicaid, commercial and other group health care plans; however, the
majority of the revenue that we derive from our relationship with Humana is generated under two
agreements, a Physician Practice Management Participation Agreement (the Humana PPMP Agreement)
and an Integrated Delivery System Participation Agreement (the IDS Agreement). Under these
agreements we provide or arrange for the provision of covered medical services to each Humana
member who selects one of our physicians as his or her primary care physician. We receive a
capitated fee with respect to the patients assigned to us. For most of our Humana patients the
capitated fee is a percentage of the premium that Humana receives with respect to those patients.
These agreements are subject to Humanas changes to the covered benefits that it elects to provide
to its members and other terms and conditions. We must also comply with the terms of Humanas
policies and procedures, including Humanas policies regarding referrals, approvals and utilization
management and quality assessment.
The term of the Humana PPMP Agreement extends through July 31, 2011, unless terminated earlier
for cause, and, thereafter, the Humana PPMP Agreement renews for subsequent three-year terms unless
either party provides 90-days written notice of its intent not to renew. The IDS Agreement extends
through April 1, 2011 with automatic subsequent three-year renewal terms unless either party
provides 180-days written notice of its intent not to renew. Each of these agreements provide
Humana the right to immediately terminate the agreement, and/or any individual physician
credentialed under the agreements, upon written notice, (i) if we and/or any of our physicians
continued participation in the relevant agreement may affect adversely the health, safety or
welfare of any Humana
member; (ii) if we and/or any of our physicians continued participation in the relevant
agreement may bring Humana or its health care networks into disrepute; (iii) in the event of one of
our doctors death or incompetence; (iv) if any of our physicians fail to meet Humanas
credentialing criteria; (v) in accordance with Humanas policies and procedures, (vi) if we engage
in or acquiesce to any act of bankruptcy, receivership or reorganization; or (vii) if Humana loses
its authority to do business in total or as to any limited segment or business (but only to that
segment). We and Humana may also each terminate these agreements upon 90 days prior written
notice (with an opportunity to cure, if possible) in the event of the others material breach of
the relevant agreement.
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In some cases, Humana may provide 30 days notice as to an amendment or modification of these
agreements, including but not limited to, renegotiation of rates, covered benefits and other terms
and conditions. Such amendments may include changes to the compensation rates. If Humana
exercises its right to amend these agreements upon 30 days written notice, we may object to such
amendment within the 30-day notice period. If we object to such amendment within the requisite
time frame, Humana may terminate the relevant agreement upon 90 days written notice.
The third agreement we have with Humana is the Risk IPA Agreement. Under the Risk IPA
Agreement, we agreed to assume certain management responsibilities on a risk basis for Humanas
Medicare and Medicaid members assigned to selected primary care physicians at twelve medical
offices in Miami-Dade and Broward Counties, Florida in return for a capitated fee per patient. The
capitated fee is based on a percentage of the premium that Humana receives with respect to that
patient.
Vista
We provide medical services to members of Vistas Medicare, Medicaid, commercial and
individual health care plans. Under our agreements with Vista, we provide or arrange for the
provision of covered medical services to each Vista member who selects one of our physicians as his
or her primary care physician. Under our two primary agreements with Vista, we receive a capitated
fee with respect to the Vista patients assigned to us. For commercial and individual Vista patients
the capitated fee is a fixed monthly payment per member. For Medicare and Medicaid patients the
capitated fee is a percentage of the premium that Vista receives with respect to those patients.
Our agreements with Vista are subject to Vistas changes to the covered benefits that Vista elects
to provide to its members and other terms and conditions. We must also comply with the terms of
Vistas policies and procedures, including Vistas policies regarding referrals, approvals and
utilization management and quality assessment.
One of our two primary agreements with Vista expires on June 30, 2011 and the other expires on
September 1, 2011 and each will automatically renew for successive one year periods unless either
party provides the other with 60-days notice of its intent to terminate such agreement. Vista may
terminate either of these agreements with us immediately if we materially breach the relevant
agreement, provided that we are given an opportunity to cure such breach, and if we experience
certain events of bankruptcy or insolvency. In addition, each of these agreements permits Vista to
immediately terminate the agreement if Vista determines, in its sole reasonable discretion, that
(i) our actions or inactions or those of our health care professionals are causing or may cause
imminent danger to the health, safety or welfare of any Vista member; (ii) our or our health care
professionals licenses, DEA registrations, hospital staff privileges, rights to participate in the
Medicare or Medicaid program or other accreditations are restricted, suspended or revoked or if any
of our health care professionals voluntarily relinquish any of those credentials and we do not
promptly terminate that professional; (iii) our health care professionals ability to practice
medicine is effectively impaired by an action of the Board of Medicine or other governmental
agency; (iv) we are convicted of a criminal offense related to our involvement in Medicaid,
Medicare or social service programs under Title XX of the Social Security Act; or (v) we or our
medical professionals engaged in any other behavior or activity that could be hazardous or
injurious to any Vista member.
Effective January 1, 2008, we entered into an agreement with Vista under which we agreed to
assume certain management responsibilities on a limited risk basis for Vistas Medicare members
assigned to certain IPAs practicing at ten medical offices in Miami-Dade and Broward Counties,
Florida.
Wellcare
We are a party to two agreements with Wellcare under which we provide or arrange for the
provision of medical services to each member of Wellcares Medicare plans who selects one of our
physicians as his or her primary care physician. One of these agreements, the Physician Provider
Agreement, is a risk arrangement under which we receive for our services a capitated fee with
respect to the patients assigned to us. The capitated fee is a percentage of the premium that
Wellcare receives with respect to those patients. This agreement has a one-year term and automatic
subsequent one-year renewal terms, subject to certain termination provisions stipulated in the
agreement. Under the risk arrangement we assume financial responsibility for the provision of all
necessary medical care to our patients. Our other agreement with Wellcare, which is also a risk
arrangement for Wellcares Medicare members, expires November 1, 2010 with automatic subsequent one
year renewal terms unless either party provides the other with 90-days notice of its intent to
terminate.
We also have contracts with Wellcare and its affiliates for the provision of care for members
of their Medicaid plans.
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Under
our agreements with Humana, Vista and Wellcare, there are circumstances under which we
could be obligated to continue to provide medical services to patients in our care following a
termination of the applicable agreement. In certain cases, this obligation could require us to
provide care to patients following the bankruptcy or insolvency of our HMO affiliate. Accordingly,
our obligations to provide medical services to our patients (and the associated costs we incur) may
not terminate at the time that our agreement with the HMO terminates, and we may not be able to
recover our cost of providing those services from the HMO.
Compliance Program
We have implemented a compliance program intended to provide ongoing monitoring and reporting
to detect and correct potential regulatory compliance problems but we cannot assure that it will
detect or prevent all regulatory problems. The program establishes compliance standards and
procedures for employees and agents. The program includes, among other things: written policies,
including our Code of Conduct and Ethics; in-service training for our employees on topics such as
insider trading, anti-kickback laws, Federal False Claims Act and Anti-Self Referral Act; and a
hot line for employees to anonymously report violations.
Competition
The health care industry is highly competitive. We compete for patients with many other
health care providers, including local physicians and practice groups as well as local, regional
and national networks of physicians and health care companies. We believe that competition for
patients is generally based upon the reputation of the physician treating the patient, the
physicians expertise, the physicians demeanor and manner of engagement with the patient, and the
HMOs that the physician is affiliated with. We also compete with other local, regional and
national networks of physicians and health care companies for the services of physicians and for
HMO affiliations. Some of our competitors have greater resources than we do, and we may not be
able to continue to compete effectively in this industry. Further, additional competitors may
enter our markets, and this increased competition may have an adverse effect on our revenues.
Government Regulation
General. Our business is primarily regulated by the federal government and various states
where we operate. The laws and regulations governing our operations are generally intended to
benefit and protect health plan members and providers. The government agencies administering these
laws and regulations have broad latitude to enforce them. These laws and regulations, along with
the terms of our contracts, regulate how we do business, what services we offer, and how we
interact with our members, other providers and the public. We are subject to various governmental
reviews, audits and investigations to verify our compliance with our contracts and applicable laws
and regulations.
A summary of the material aspects of the government regulations to which we are subject is set
forth below. However, there can be no assurance that any such laws will not change or ultimately
be interpreted in a manner inconsistent with our practices, and an adverse interpretation could
have a material adverse effect on our operations, financial condition or cash flows.
Present and Prospective Federal and State Reimbursement Regulation. Our operations are
affected on a day-to-day basis by numerous legislative, regulatory and industry-imposed operational
and financial requirements, which are administered by a variety of federal and state governmental
agencies as well as by self-regulatory associations and commercial medical insurance reimbursement
programs. Our physicians must reassign their Medicare billing and collection rights to us.
Accordingly, we have filed with Medicare the necessary applications for all our physicians to
reassign their Medicare billing and collection rights to us.
Federal Fraud and Abuse Laws and Regulations. The Anti-Kickback Law makes it a criminal
felony offense to knowingly and willfully offer, pay, solicit or receive remuneration in order to
induce business for which reimbursement is provided under federal health care programs, including
without limitation, the Medicare and Medicaid programs. Violations of these laws are punishable by
monetary fines, civil and criminal penalties, exclusion from health care programs and forfeiture of
amounts collected in violation of such laws. The scope of prohibited payments in the Anti-Kickback
Law is broad and includes economic arrangements involving hospitals, physicians and other health
care providers, including joint ventures, space and equipment rentals, purchases of physician
practices and management and personal services contracts. The Anti-Kickback Law provides for
certain safe harbors to its prohibitions, however, failure to meet a safe harbor does not
necessarily mean that an arrangement violates the Anti-Kickback Law. Rather, each arrangement must
be analyzed based on its specific facts and the intent of the parties.
State Fraud and Abuse Regulations. Various states also have anti-kickback laws applicable to
licensed health care professionals and other providers and, in some instances, applicable to any
person engaged in the proscribed conduct. For example, the Florida Patient Brokering Act imposes
criminal penalties, including jail terms and fines, for offering, soliciting, receiving or paying
any commission, bonus, rebate, kickback, or bribe, directly or indirectly in cash or in kind, or
engaging in any split-fee arrangement, in any form whatsoever, in return for the referral of
patients or patronage from a health care provider or health care facility or in return for the
acceptance or acknowledgement of treatment from a health care provider or health care facility.
The Florida statutory provisions regulating the practice of medicine include similar language as
grounds for disciplinary action against a physician,
a practice commonly known as fee splitting. The applicability of such laws is dependent
upon the particular state in which we conduct business.
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Federal Restrictions on Physician Referrals. Federal regulations under the Social Security Act
restrict physician referrals to health care entities with which such physicians have financial
relationships (commonly referred to as the Stark Law). Specifically, the Stark Law prohibits a
physician, or an immediate family member, who has a financial relationship with a health care
entity, from referring Medicare or Medicaid patients with limited exceptions, to that entity for
the following designated health services: clinical laboratory services, physical therapy
services, occupational therapy services, speech-language pathology services, radiology services,
including magnetic resonance imaging, computerized axial tomography scans and ultrasound services,
speech-language pathology services, durable medical equipment and supplies, radiation therapy
services and supplies, parenteral and enteral nutrients, equipment and supplies, prosthetics,
orthotics and prosthetic devices, home health services, outpatient prescription drugs, and
inpatient and outpatient hospital services. A financial relationship is defined to include an
ownership or investment in, or a compensation relationship with, a health care entity. The Stark
Law also prohibits a health care entity receiving a prohibited referral from billing the Medicare
or Medicaid programs for any services rendered to a patient as a result of the prohibited referral.
The Stark Law contains certain exceptions that protect parties from liability if the parties
comply with all of the requirements of the applicable exception. The sanctions under the Stark Law
include denial and refund of payments, civil monetary penalties and exclusions from participation
in the Medicare and Medicaid programs.
State Restrictions on Physician Referrals. Various states also have laws that restrict
physician referrals to health care entities with which such physicians have financial
relationships. In Florida, for example, the Florida Patient Self Referral Act of 1992 (Florida
Act) regulates patient referrals by a health care provider to certain providers of health care
services in which the referring provider has an investment interest. Unlike the federal Stark
regulations, the Florida act applies only to investment interests and does not affect compensation
relationships between the referring provider and the entity to which the provider is referring
patients. The penalties for breach of the Florida Act include denial and refund of claims payments
and civil monetary penalties. Further, the Florida Act is not limited to referrals for items and
services paid for by the Medicare or Medicaid programs, and instead applies to all payors,
including health insurers and private pay. The applicability of such state laws is dependent upon
the particular state in which we conduct business.
Privacy Laws. The privacy, security and transmission of health information is subject to
federal and state laws and regulations, including the Healthcare Insurance Portability and
Accountability Act of 1996 (HIPAA) and regulations enacted under HIPAA with respect to, among
other things, the privacy of certain individually identifiable health information, the transmission
of protected health information and standards for the security of electronic health information.
Florida state professional licensing statutes also include privacy laws specific to the profession.
For example, there are certain privacy laws that apply to physicians and mental health
professionals.
Corporate Practice of Medicine Doctrine. Many states prohibit business corporations from
providing, or holding themselves out as a provider of medical care. Possible sanctions for
violation of any of these restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs (including Medicare and Medicaid), asset forfeitures and
civil and criminal penalties. These laws vary from state to state, are often vague and loosely
interpreted by the courts and regulatory agencies. Florida, the state in which we primarily
operate our clinics, does not have a corporate practice of medicine doctrine with respect to the
types of physicians employed with us. Our operations in other states are primarily facility-based
and not subject to these types of restrictions.
Clinic and Facility Regulation and Licensure. Each state has its own laws regarding the
regulation and licensure of clinics and facilities. For example, in Florida The Agency for Health
Care Administration (AHCA) requires us to license each of our medical centers and sleep study
laboratories. Each medical center must renew its health care clinic licensure bi-annually.
Further, the Florida Health Care Clinic Act requires that clinics have a medical director and
prohibits such medical director or any physician affiliated with the medical directors group
practice from making referrals to the clinic if the clinic provides certain health care services,
such as magnetic resonance imaging, static radiographs, computed tomography, or positron emission
tomography. Violation of this prohibition against medical director referrals is a third degree
felony. Each state has different requirements and regulations.
Limitations on Contractual Joint Ventures. The Office of Inspector General (OIG) issued a
Special Advisory Bulletin raising concerns throughout the healthcare industry about the legality of
a variety of provider joint ventures. The suspect arrangements involve a healthcare provider
expanding into a related service line by contracting with an existing provider of that service to
serve the providers existing patient population. In the OIGs view, the providers share of the
profits of the new venture constitutes remuneration for the referral of the providers
Medicare/Medicaid patients and thus may violate the federal Anti-kickback Statute.
Occupational Safety and Health Administration (OSHA). In addition to OSHA regulations
applicable to businesses generally, we must comply with, among other things, the OSHA directives on
occupational exposure to blood borne pathogens, the federal Needlestick Safety and Prevention Act,
OSHA injury and illness recording and reporting requirements, federal regulations relating to
proper handling of laboratory specimens, spill procedures and hazardous waste disposal, and patient
transport safety requirements.
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Environmental Regulations. Our clinics are required to comply with federal and state
regulations applicable to the disposal of biomedical waste, the use of radiology and nuclear
medicine, and the use of diagnostic imaging equipment.
Medicare Marketing Restrictions. As a health care provider, we are subject to federal
marketing rules and regulations that limit, among other things, offering any gift or other
inducement to Medicare beneficiaries to encourage them to come to us for their health care.
Sanctioned Parties. The Balanced Budget Act of 1997 (BBA) includes provisions that allow
for the temporary or permanent exclusion from participation in Medicare or any state health care
program of any individual or entity who or which has been convicted of a health care related crime
as well as specified. The BBA also provides for fines against any person that arranges or
contracts with an excluded person for the provision of items or services.
Healthcare Reform. The federal government has enacted significant reforms to the U.S. health
care system. 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, limiting Medicare Advantage payment rates. While there is
considerable uncertainty of the financial impact of these reforms, 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.
Health Care Professional Licensure and Supervision. Our physicians are subject to licensure
requirements administered by the applicable state professional licensing boards, including the
particular states Board of Medicine, Board of Nursing, and other licensing boards. The failure of
a health care professional to maintain a license with the applicable board could result in a
shortage of health care providers and may trigger termination of one or more of our managed care
agreements.
Employees
At June 30, 2010, we employed or contracted with approximately 725 individuals of whom
approximately 69 are physicians in our medical centers.
Insurance
We rely on insurance to protect us from many business risks, including medical malpractice and
stop-loss insurance. Our business entails an inherent risk of claims against physicians for
professional services rendered to patients, and we periodically become involved as a defendant in
medical malpractice lawsuits. Medical malpractice claims are subject to the attendant risk of
substantial damage awards. Although we maintain insurance against these claims, if liability
results from any of our pending or any future medical malpractice claims, there can be no assurance
that our medical malpractice insurance coverage will be adequate to cover liability arising out of
these proceedings. There can be no assurance that pending or future litigation will not have a
material adverse affect on us or that liability resulting from litigation will not exceed our
insurance coverage.
In most cases, as is the trend in the health care industry, as insurance policies expire we
may be required to procure policies with narrower coverage, more exclusions and higher premiums. In
some cases, coverage may not be available at any price. There can be no assurance that the
insurance that we maintain and intend to maintain will be adequate, or that the cost of insurance
and limitations in coverage will not adversely affect our business, financial position or results
of operations.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the
SEC. You may read and copy any document we file at the SECs public reference rooms in Washington,
D.C., New York, New York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to the public from
the SECs website at http://www.sec.gov.
Our website address is www.continucare.com. We make available free of charge on or through
our internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such
material has been filed with, or furnished to, the SEC. Information on our website does not
constitute part of this Annual Report on Form 10-K.
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ITEM 1A. | RISK FACTORS |
Our business, financial condition, results of operations, cash flows and prospects, and the
prevailing market price and performance of our common stock, may be adversely affected by a number
of factors, including the matters discussed below. Certain statements and information set forth in
this Annual Report on Form 10-K, as well as other written or oral statements made from time to time
by us or by our authorized officers on our behalf, constitute forward-looking statements within
the meaning of the Federal Private Securities Litigation Reform Act of 1995. We intend for our
forward-looking statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995. You should note that
forward-looking statements in this document speak only as of the date of this Annual Report on Form
10-K and we undertake no duty or obligation to update or revise our forward-looking statements,
whether as a result of new information, future events or otherwise. Although we believe that the
expectations, plans, intentions and projections reflected in our forward-looking statements are
reasonable, such statements are subject to risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking statements. The risks,
uncertainties and other factors that our shareholders and prospective investors should consider
include the following:
Risks related to our business
Our operations are dependent on three health maintenance organizations.
We derive substantially all of our revenues under our managed care agreements with three HMOs,
Humana, Vista and Wellcare. In Fiscal 2010, we generated approximately 72%, 20% and 6% of our
revenues from contracts with Humana, Vista and Wellcare, respectively. These agreements have terms
ranging from one to three years, with automatic renewal terms unless a party provides prior notice
of its intention not to renew. These agreements also provide the HMOs with the right to terminate
an agreement prior to the expiration of the term upon the occurrence of specified events.
Accordingly, there is no assurance that these agreements will remain in effect. The loss of our
managed care agreements with these HMOs, particularly Humana or Vista or significant reductions in
payments to us under these contracts could have a material adverse effect on our business,
financial condition and results of operations.
Under our most important contracts we are responsible for the cost of medical services to our
patients in return for a capitated fee.
Our most important contracts with Humana, Vista and Wellcare are risk agreements under which
we receive for our services fixed monthly payments per patient at a rate established by the
contract, also called a capitated fee. In return, we assume full financial responsibility for the
provision of all necessary medical care to our patients, even services we do not provide directly.
Accordingly, we will be unable to adjust the revenues we receive under those contracts and, if
medical claims expense exceeds our estimates, our profits may decline. Relatively small changes in
the ratio of our health care expenses to capitated revenues we receive can create significant
changes in our financial results.
Our revenues will be affected by the Medicare Risk Adjustment program.
The majority of patients to whom we provide care are Medicare-eligible and participate in the
Medicare Advantage program. CMS implemented its Medicare Risk Adjustment project whereby it
transitioned its premium calculation methodology to a system that takes into account the health
status of Medicare Advantage participants in determining premiums paid for each participant, rather
than only considering demographic factors, as was historically the case. Beginning January 1,
2007, the premium calculation under the risk adjustment system is 100% based on risk adjustment
payments.
We believe the risk adjustment methodology has generally increased our revenues per patient to
date but cannot assure what future impact this risk adjustment methodology will continue to have on
our business, results of operations, or financial condition. It is also possible that the risk
adjustment methodology may result in fluctuations in our revenues from year to year.
CMS 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.
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If we are unable to manage medical benefits expense effectively, our profitability will likely be
reduced.
We cannot be profitable if our costs of providing the required medical services exceed the
revenues that we derive from those services. However, our most important contracts with Humana,
Vista and Wellcare require us to assume full financial responsibility for the provision of all
necessary medical care in return for a capitated fee per patient at a rate established by the
contract. Accordingly, as the costs of providing medical services to our patients under those
contracts increases, the profits we receive with respect to those patients decreases. If the cost
of providing medical services to our patients under those contracts exceeds our estimates or if we
are not able to properly manage our services, our business, results of operations, financial
condition and ability to satisfy our obligations could be adversely affected.
A failure to estimate incurred but not reported medical benefits expense accurately will affect our
profitability.
Our medical benefits expense includes estimates of medical claims incurred but not reported,
or IBNR. We estimate our medical cost liabilities using actuarial methods based on historical data
adjusted for payment patterns, cost trends, utilization of health care services and other relevant
factors. Actual conditions, however, could differ from those assumed in the estimation process.
Due to the inherent uncertainties associated with the factors used in these assumptions, materially
different amounts could be reported in our financial statements for a particular period under
different possible conditions or using different, but still reasonable, assumptions. Adjustments,
if necessary, are made to medical benefits expense when the criteria used to determine IBNR change
and when actual claim costs are ultimately determined. Although we believe our past estimates of
IBNR have been adequate, they may prove to have been inadequate in the future and our future
estimates may not be adequate, any of which would adversely affect our results of operations and
cash flows. Further, our inability to estimate IBNR accurately may also affect our ability to take
timely corrective actions, further exacerbating the extent of any adverse effect on our results of
operations.
We compete with many health care providers for patients and HMO affiliations.
The health care industry is highly competitive. We compete for patients with many other
health care providers, including local physicians and practice groups as well as local, regional
and national networks of physicians and health care companies. We believe that competition for
patients is generally based upon the reputation of the physician treating the patient, the
physicians expertise, and the physicians demeanor and manner of engagement with the patient, and
the HMOs with which the physician is affiliated. We also compete with other local, regional and
national networks of physicians and health care companies for the services of physicians and for
HMO affiliations. Some of our competitors have greater resources than we do, and we may not be
able to continue to compete effectively in this industry. Further, additional competitors may
enter our markets, and this increased competition may have an adverse effect on our revenues.
We may not be able to successfully recruit or retain existing relationships with qualified
physicians and medical professionals.
We depend on our physicians and other medical professionals to provide medical services to our
managed care patients and independent physicians contracting with us to participate in provider
networks we develop or manage. We compete with general acute care hospitals and other health care
providers for the services of medical professionals. In addition, the reputation, expertise and
demeanor of our physicians and other medical professionals are instrumental to our ability to
attract patients. Demand for physicians and other medical professionals are high and such
professionals often receive competing offers. If we are unable to successfully recruit and retain
medical professionals our ability to successfully implement our business strategy could suffer. No
assurance can be given that we will be able to continue to recruit and retain a sufficient number
of qualified physicians and other medical professionals.
Our business exposes us to the risk of medical malpractice lawsuits.
Our business entails an inherent risk of claims against physicians for professional services
rendered to patients, and we periodically become involved as a defendant in medical malpractice
lawsuits. Medical malpractice claims are subject to the attendant risk of substantial damage
awards. Although we maintain insurance against these claims, if liability results from any of our
pending or any future medical malpractice claims, there can be no assurance that our medical
malpractice insurance coverage will be adequate to cover liability arising out of these proceedings
or that as a result of such liability we will be able to renew our medical malpractice insurance
coverage on acceptable terms, if at all. There can be no assurance that pending or future
litigation will not have a material adverse affect on us or that liability resulting from
litigation will not exceed our insurance coverage.
We primarily operate in Florida.
Our revenues are primarily derived from our operations in Florida. Adverse economic,
regulatory, or other developments in Florida (including hurricanes) could have a material adverse
effect on our financial condition or results of operations. In the event that we expand our
primary operations into new geographic markets, we will need to establish new relationships with
physicians and other health care providers. In addition, we will be required to comply with laws
and regulations of states that differ from the ones in which
we currently operate, and may face competitors with greater knowledge of such local markets.
There can be no assurance that we will be able to establish relationships, realize management
efficiencies or otherwise establish a presence in new geographic markets.
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A significant portion of our voting power is concentrated.
One of our directors, Dr. Phillip Frost, and entities affiliated with him, beneficially owned
approximately 43% of our outstanding common stock as of August 31, 2010. Based on the significant
beneficial ownership of our common stock by Dr. Frost, other shareholders have limited ability to
influence corporate actions requiring shareholder approval, including the election of directors.
Dr. Frost may exert significant influence over any actions requiring shareholder approval. This
influence may make us less attractive as a target for a takeover proposal. It may also make it
more difficult to discourage a merger proposal that Dr. Frost favors or to wage a proxy contest for
the removal of incumbent directors. As a result, this may deprive the holders of our common stock
of an opportunity they might otherwise have to sell their shares at a premium over the prevailing
market price in connection with a merger or acquisition of us or with or by another company.
We are dependent on our executive officers and other key employees.
Our operations are highly dependent on the efforts of our Chief Executive Officer and our
other key employees. Our executive officers and key employees do not have employment agreements
with us, but are instead employed on an at will basis. While we believe that we could find
replacements, the loss of any of their leadership, knowledge and experience could negatively impact
our operations. Replacing any of our executive officers or key employees might be difficult or
take an extended period of time because a limited number of individuals in the managed care
industry have the breadth and depth of skills and experience necessary to operate a business such
as ours. Our success is also dependent on our ability to hire and retain qualified management,
technical and medical personnel. We may be unsuccessful in recruiting and retaining such
personnel, which could negatively impact our operations.
We depend on the management information systems of our affiliated HMOs.
Our operations are dependent on the management information systems of the HMOs with which we
contract. Our affiliated HMOs provide us with certain financial and other information, including
reports and calculations of costs of services provided and payments to be received by us. Both the
software and hardware our HMO affiliates use to provide us with that information have been subject
to rapid technological change. Because we rely on this technology but do not own or have direct
access to it, we have limited ability to ensure that it is properly maintained, serviced and
updated. In addition, information systems such as these may be vulnerable to failure, acts of
sabotage such as hacking, and obsolescence. If our principal HMO affiliates were to temporarily
or permanently lose the use of the information systems that provide us with the information on
which we depend or the underlying patient and physician data, our business and results of
operations could be materially and adversely affected. Because our HMO affiliates generate certain
of the information on which we depend, we have less control over the manner in which that
information is generated than we would if we generated the information internally.
We depend on our information processing systems.
Our information processing systems allow us to monitor the medical services we provide to
patients. They also enable us to provide our HMO affiliates with information they use to calculate
the payments due to us. For example, revenue we are entitled to receive under our HMO agreements
is dependent, in part, on the health status of our patients and demographic factors, and we rely on
our information processing systems to compile all or a portion of that data. The failure to
accurately and timely provide that data to our HMO affiliates could impact the revenue we receive
for our patients. These systems are vital to our growth. Although we license most of our
information processing systems from third-party vendors we believe to be reliable, we developed
certain elements of our information processing systems internally. Our current systems may not
perform as expected or provide efficient operational solutions if:
| we fail to adequately identify or are unsuccessful in implementing solutions for our information and processing needs; | ||
| our processing or information systems fail; or | ||
| we fail to upgrade systems as necessary. |
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Volatility of our stock price could adversely affect you.
The market price of our common stock could fluctuate significantly as a result of many
factors, including factors that are beyond our ability to control or foresee. These factors
include:
| state and federal budget decreases; | ||
| adverse publicity regarding HMOs and other managed care organizations; | ||
| government action regarding eligibility; | ||
| changes in government payment levels; | ||
| changes in state mandatory programs; | ||
| changes in expectations of our future financial performance or changes in financial estimates, if any, of public market analysts; | ||
| announcements relating to our business or the business of our competitors; | ||
| conditions generally affecting the managed care industry or our provider networks; | ||
| the success of our operating strategy; | ||
| the operating and stock price performance of other comparable companies; | ||
| the termination of any of our contracts; | ||
| regulatory or legislative changes; | ||
| acts of war or terrorism or an increase in hostilities in the world; and | ||
| general economic conditions, including inflation and unemployment rates. |
A failure to successfully implement our business strategy could materially and adversely affect our
operations and growth opportunities.
Our business strategy is to increase patient volume at our existing medical centers;
selectively expand our network to include additional medical centers or other medical facilities
and to penetrate new geographic markets; further develop our IPA management activities; and
selectively expand our operations into other areas in which we believe we can leverage our
expertise in order to establish additional sources of revenue. Our ability to achieve our business
strategy is subject to a variety of factors, many of which are beyond our control, and we may not
be successful in implementing our strategy. In addition, the implementation of our strategy may not
lead to improved operating results. We may decide to alter or discontinue aspects of our business
strategy and may adopt alternative or additional strategies due to business or competitive factors
or factors not currently expected, such as unforeseen costs and expenses or events beyond our
control. Any failure to successfully implement our business strategy could materially and adversely
affect our results of operations and growth opportunities.
Our intangible assets represent a substantial portion of our total assets.
Our balance sheet includes intangible assets, including goodwill and other separately
identifiable intangible assets, of approximately $78.3 million, which represented approximately 51%
of our total assets at June 30, 2010. The most significant component of our intangible assets
consists of intangible assets recorded as a result of the acquisition of the MDHC Companies in
October 2006, which increased goodwill by approximately $58.9 million and other intangible assets
by approximately $4.0 million at June 30, 2010.
We are required to review our intangible assets, including our goodwill, for impairment on an
annual basis or more frequently if certain indicators of impairment
arise. The goodwill impairment test is performed annually for each of
our two reporting units: Provider Services and Sleep Services. Should we determine that an indicator of impairment has occurred we would be required to
perform an additional impairment test. Indicators of impairment include, among other things:
| a significant adverse change in legal factors or the business climate; | ||
| the loss of a key HMO contract; | ||
| an adverse action by a regulator; | ||
| unanticipated competition; | ||
| loss of key personnel; or | ||
| allocation of goodwill to a portion of business that is to be sold. |
If
we determine that an impairment of goodwill exists as a result of our
annual impairment test or that indicators of impairment exist, there is a risk that a portion of our intangible assets would be considered impaired and
must be written-off during that period. Such a write-off could have a material adverse effect on our results of
operations.
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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.
We anticipate that a portion of our future growth may be accomplished through acquisitions.
The success of this strategy
depends upon our ability to identify suitable acquisition candidates, reach agreements to acquire
these companies, obtain necessary financing on acceptable terms and successfully integrate the
operations of these businesses. In pursuing acquisition and investment opportunities, we may
compete with other companies that have similar growth strategies. Some of these competitors are
larger and have greater financial and other resources than we have. This competition may prevent us
from acquiring businesses that could improve our growth or expand our operations.
Our acquisitions could result in integration difficulties, unexpected expenses, diversion of
managements attention and other negative consequences.
As part of our growth strategy, we plan to continue to evaluate potential business acquisition
opportunities that we anticipate will provide new product and market opportunities, benefit from
and maximize our existing assets and add critical mass. Any such acquisitions would require us to
integrate the technology, products and services, operations, systems and personnel of the acquired
businesses with our own and to attempt to grow the acquired businesses as part of our company. The
successful integration of businesses we have acquired and may acquire in the future is critical to
our future success, and if we are unsuccessful in integrating these businesses, our operations and
financial results could suffer. The risks and challenges associated with the acquisition and
integration of an acquired business include, but are not limited to, the following:
| we may be unable to centralize and consolidate our financial, operational and administrative functions with those of the businesses we acquire; | ||
| our managements attention may be diverted from other business concerns; | ||
| we may be unable to retain and motivate key employees of an acquired company; | ||
| litigation, indemnification claims and other unforeseen claims and liabilities may arise from the acquisition or operation of acquired businesses; | ||
| the costs necessary to complete integration may exceed our expectations or outweigh some of the intended benefits of the transactions we complete; | ||
| we may be unable to maintain the patients or goodwill of an acquired business; and | ||
| the costs necessary to improve the operating systems and services of an acquired business may exceed our expectations. |
Risks related to our industry
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.
The federal government has enacted significant reforms to the U.S. health care system. 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, limiting Medicare Advantage payment rates. While there is considerable
uncertainty of the financial impact of these reforms, 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.
A decrease to our Medicare capitation payments may have a material adverse effect on our results of
operations, financial position and cash flows.
CMS recently announced that it will reduce Medicare Advantage premiums effective January 2011.
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 without
taking into account any adjustments resulting from changes in Medicare risk adjustment scores.
Presently, we do not know whether our HMO affiliates will take any action to mitigate the effect of
the Medicare Advantage premium reduction, such as reducing plan benefits that will become effective
January 1, 2011. 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.
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We are subject to government regulation.
Our primary business is regulated by the federal government and the State of Florida. The
laws and regulations governing our operations are generally intended to benefit and protect health
plan members and providers rather than our shareholders. The government agencies administering
these laws and regulations have broad latitude to enforce them. These laws and regulations, along
with the terms of our contracts, regulate how we do business, what services we offer, and how we
interact with our patients, other providers and the public. We are subject to various governmental
reviews, audits and investigations to verify our compliance with our contracts and applicable laws
and regulations. Any adverse review, audit or investigation could result in:
| forfeiture of amounts we have been paid; | ||
| imposition of civil or criminal penalties, fines or other sanctions on us; | ||
| loss of our right to participate in government-sponsored programs, including Medicare and Medicaid; | ||
| damage to our reputation in various markets; | ||
| increased difficulty in hiring or retaining qualified medical personnel or marketing our products and services; and | ||
| loss of one or more of our licenses to provide health care services. |
Any of these events could reduce our revenues and profitability and otherwise adversely affect
our operating results.
The health care industry is subject to continued scrutiny.
The health care industry, generally, and HMOs specifically, have been the subject of increased
government and public scrutiny in recent years, which has focused on the appropriateness of the
care provided, referral and marketing practices and other matters. Increased media and public
attention has focused on the outpatient services industry in particular as a result of allegations
of fraudulent practices related to the nature and duration of patient treatments, illegal
remuneration and certain marketing, admission and billing practices by certain health care
providers. The alleged practices have been the subject of federal and state investigations, as
well as other legal proceedings. There can be no assurance that we or our HMO affiliates will not
be subject to federal or state review from time to time, and any such investigation could adversely
impact our business or results of operations, even if we are not ultimately found to have violated
the law.
Our insurance coverage may not be adequate, and rising insurance premiums could negatively affect
our profitability.
We rely on insurance to protect us from many business risks, including, stop loss insurance.
In most cases, as is the trend in the health care industry, as insurance policies expire, we may
only be able to procure policies with narrower coverage, more exclusions and higher premiums. In
some cases, coverage may not be available at any price. There can be no assurance that the
insurance that we maintain and intend to maintain will be adequate, or that the cost of insurance
and limitations in coverage will not adversely affect our business, financial position or results
of operations.
Deficit spending and economic downturns could negatively impact our results of operations.
Adverse developments in the economy often result in decreases in the federal budget and
associated changes in the federal governments spending priorities. We are presently in a period
of deficit spending by the federal government, and those deficits are expected to continue for at
least the next several years. Continued deficit spending by the federal government could lead to
increased pressure to reduce governmentally funded programs such as Medicare and Medicaid. If
governmental funding of the Medicare or Medicaid programs was reduced without a counterbalancing
adjustment in the benefits offered to patients, our results of operations could be negatively
impacted. In addition, decreases in state budgets and associated changes in state spending could
negatively affect our profitability.
Many factors that increase health care costs are largely beyond our ability to control.
Increased utilization or unit cost, competition, government regulations and many other factors
may, and often do, cause actual health care costs to increase and these cost increases can
adversely impact our profitability. These factors may include, among other things:
| increased use of medical facilities and services, including prescription drugs and doctors office visits; | ||
| increased cost of such services; | ||
| new benefits to patients added by the HMOs to their covered services, whether as a result of the Medicare Modernization Act or otherwise; | ||
| changes or reductions of our utilization management functions such as preauthorization of services, concurrent review or requirements for physician referrals; | ||
| catastrophes (including hurricanes), epidemics or terrorist attacks; | ||
| the introduction of new or costly treatments, including new technologies; | ||
| new government mandated benefits or other regulatory changes; and | ||
| increases in the cost of stop loss or other insurance. |
Many of these factors are beyond our ability to control or predict.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
We lease approximately 9,800 square feet of corporate office space in Miami, Florida under a
lease expiring in January 2015 with average annual lease payments of approximately $0.2 million.
Of the 18 medical centers that we operated as of June 30, 2010 located in Miami-Dade, Broward
and Hillsborough Counties, Florida, five are leased from independent landlords, one is leased from
a landlord affiliated with certain of the principal owners of the MDHC Companies, and ten are
leased from Humana. The leases with Humana are tied to our managed care arrangement. We also own
a facility in Hialeah, Florida, comprising approximately 49,000 square feet of medical office and
administrative space and a 7,000 square foot medical facility in Homestead, Florida.
ITEM 3. | LEGAL PROCEEDINGS |
We are involved in legal proceedings incidental to our business that arise from time to time
in the ordinary course of business including, but not limited to, claims related to the alleged
malpractice of employed and contracted medical professionals, workers compensation claims and
other employee-related matters, and minor disputes with equipment lessors and other vendors. We
record an accrual for claims related to legal proceedings, which includes amounts for insurance
deductibles and projected exposure, based on our estimate of the ultimate outcome of such claims.
We do not believe that the ultimate resolution of these matters will have a material adverse effect
on our business, results of operations, financial condition, or cash flows. However, the results of
these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of
these matters could have a material adverse effect on our business, results of operations,
financial condition, cash flow, and prospects.
ITEM 4. | (REMOVED AND RESERVED) |
PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the NYSE Amex, formerly the American Stock Exchange (NYSE
Amex), under the symbol CNU. The following table sets forth the high and low sale prices of our
common stock as reported by the composite tape of NYSE Amex for each of the quarters indicated.
HIGH | LOW | |||||||
Fiscal Year 2010: |
||||||||
Quarter Ended June 30, 2010 |
$ | 4.25 | $ | 3.28 | ||||
Quarter Ended March 31, 2010 |
5.25 | 3.66 | ||||||
Quarter Ended December 31, 2009 |
4.50 | 2.57 | ||||||
Quarter Ended September 30, 2009 |
3.29 | 2.31 | ||||||
Fiscal Year 2009 |
||||||||
Quarter Ended June 30, 2009 |
$ | 2.55 | $ | 1.71 | ||||
Quarter Ended March 31, 2009 |
2.12 | 1.57 | ||||||
Quarter Ended December 31, 2008 |
2.63 | 1.53 | ||||||
Quarter Ended September 30, 2008 |
2.67 | 2.06 |
As of the close of business on August 31, 2010, there were approximately 98 record holders of
our common stock. We have not declared or paid dividends on our common stock and do not
contemplate declaring or paying dividends in the foreseeable future.
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Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of June 30, 2010, with respect to all of our
compensation plans under which equity securities are authorized for issuance:
Number of | ||||||||||||
securities to be | ||||||||||||
issued upon | Weighted average | |||||||||||
exercise of | exercise price of | Number of | ||||||||||
outstanding | outstanding | securities | ||||||||||
options, warrants | options, warrants | remaining available | ||||||||||
Plan Category | and rights | and rights | for future issuance | |||||||||
Equity compensation
plans approved by
stockholders |
5,849,334 | $ | 2.50 | 4,287,167 | ||||||||
Equity compensation
plans not approved
by stockholders |
| | | |||||||||
5,849,334 | 4,287,167 | |||||||||||
Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder return on
Continucares common stock against the cumulative total return of the NYSE Amex Composite Index and
the NASDAQ Health Services Index for the period from June 30, 2005 to June 30, 2010, based on a
$100 investment.
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Cumulative Total Return | ||||||||||||||||||||||||
6/05 | 6/06 | 6/07 | 6/08 | 6/09 | 6/10 | |||||||||||||||||||
Continucare Corporation |
100.00 | 120.41 | 126.12 | 95.10 | 95.10 | 136.73 | ||||||||||||||||||
NYSE Amex Composite |
100.00 | 124.35 | 155.26 | 152.04 | 112.30 | 133.12 | ||||||||||||||||||
NASDAQ Health Services |
100.00 | 115.51 | 144.32 | 141.83 | 134.71 | 171.20 |
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
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. The stock repurchase program
was originally approved by the Board of Directors in February 2005. There is no expiration date
specified for this program. During the three months ended June 30, 2010, we did not repurchase any
shares of our common stock.
ITEM 6. | SELECTED FINANCIAL DATA |
Set forth below is our selected historical consolidated financial data as of and for Fiscal
2010, 2009, 2008, 2007 and 2006 that has been derived from our audited consolidated financial
statements. The selected historical consolidated financial data should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and accompanying notes included elsewhere herein.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
For the Year Ended June 30, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Revenue |
$ | 310,791,463 | $ | 281,270,360 | $ | 254,440,048 | $ | 217,146,287 | $ | 132,990,912 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Medical services: |
||||||||||||||||||||
Medical claims |
208,857,229 | 199,167,856 | 181,097,183 | 161,153,828 | 97,781,447 | |||||||||||||||
Other direct costs |
31,484,513 | 28,456,121 | 26,942,472 | 22,919,746 | 13,137,396 | |||||||||||||||
Total medical services |
240,341,742 | 227,623,977 | 208,039,655 | 184,073,574 | 110,918,843 | |||||||||||||||
Administrative payroll and employee benefits |
16,308,854 | 12,655,975 | 12,119,139 | 9,192,670 | 6,538,295 | |||||||||||||||
General and administrative |
18,021,123 | 16,261,750 | 16,413,801 | 13,990,439 | 7,584,205 | |||||||||||||||
Total operating expenses |
274,671,719 | 256,541,702 | 236,572,595 | 207,256,683 | 125,041,343 | |||||||||||||||
Income from operations |
36,119,744 | 24,728,658 | 17,867,453 | 9,889,604 | 7,949,569 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
65,957 | 174,039 | 602,826 | 356,192 | 331,001 | |||||||||||||||
Interest expense |
(116,041 | ) | (21,255 | ) | (67,898 | ) | (49,746 | ) | (12,870 | ) | ||||||||||
Income before income tax provision |
36,069,660 | 24,881,442 | 18,402,381 | 10,196,050 | 8,267,700 | |||||||||||||||
Income tax provision |
13,893,353 | 9,600,321 | 7,132,727 | 3,892,605 | 2,930,161 | |||||||||||||||
Net income |
$ | 22,176,307 | $ | 15,281,121 | $ | 11,269,654 | $ | 6,303,445 | $ | 5,337,539 | ||||||||||
Net income per common share: |
||||||||||||||||||||
Basic |
$ | .37 | $ | .25 | $ | .16 | $ | .10 | $ | .11 | ||||||||||
Diluted |
$ | .36 | $ | .24 | $ | .16 | $ | .10 | $ | .10 | ||||||||||
As of June 30, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
CONSOLIDATED BALANCE SHEET DATA: |
||||||||||||||||||||
Total assets |
$ | 153,865,592 | $ | 125,303,386 | $ | 118,490,304 | $ | 116,937,548 | $ | 41,994,347 | ||||||||||
Long-term obligations, including current portion |
$ | 326,309 | $ | 204,985 | $ | 196,379 | $ | 331,319 | $ | 195,819 |
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
The following discussion and analysis should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. We
are 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 IPAs. All of our medical centers and IPAs are located in Miami-Dade,
Broward and Hillsborough Counties, Florida. As of June 30, 2010, we provided services to or for
approximately 25,700 patients on a risk basis and approximately 9,000 patients on a limited or
non-risk basis. Additionally, we also provided services to over 6,000 patients as of June 30, 2010
on a non-risk fee-for-service basis. In Fiscal 2010, approximately 90% and 7% of our revenue was
generated by providing services to Medicare-eligible and Medicaid-eligible members, respectively,
under risk agreements that require us to assume responsibility to provide and pay for all of our
patients medical needs in exchange for a capitated fee, typically a percentage of the premium
received by an HMO from various payor sources.
In Fiscal 2010, we acquired two operators of sleep diagnostic centers for an aggregate total
purchase price of $1.9 million. Through Seredor Corporation, a subsidiary established to conduct
sleep service activities, we operate and manage sleep diagnostic centers in Florida, South
Carolina, North Carolina, West Virginia, Virginia, Colorado and Ohio. The centers conduct sleep
studies to determine whether patients suffer from sleep disorders and, if so, the severity of the
condition. The clinical staff at the centers are expertly trained in sleep disorders and work with
physicians, neurologists, respiratory therapists, and clinicians utilizing state-of-the-art
equipment to effectively diagnose and treat patients.
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.
CMS recently announced that it will reduce Medicare Advantage premiums effective January 2011.
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 without
taking into account any adjustments resulting from changes in Medicare risk adjustment scores.
Presently, we do not know whether our HMO affiliates will take any action to mitigate the effect of
the Medicare Advantage premium reduction, such as reducing plan benefits that will become effective
January 1, 2011. 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 HMOs 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, $0.2 million and $3.1 million during Fiscal 2010, 2009 and 2008, respectively.
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The Medicare Prescription Drug Plan has also been subject to significant public criticism and
controversy, and members of Congress have discussed possible changes to the program as well as ways
to reduce the programs cost to the federal government. We cannot predict what impact, if any,
these developments may have on the Medicare Prescription Drug Plan or on our future financial
results.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements and accompanying notes, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements and accompanying notes requires us to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
Certain of the amounts recorded on our financial statements could change materially under
different, yet still reasonable, estimates and assumptions. We base our estimates and assumptions
on historical experience, knowledge of current events and expectations of future events, and we
continuously evaluate and update our estimates and assumptions. However, our estimates and
assumptions may ultimately prove to be incorrect or incomplete and, as a result, our actual results
may differ materially from those previously reported. We believe the following critical accounting
policies involve the most significant judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition
Under our risk contracts with HMOs, we receive a percentage of premium or other capitated fee
for each patient that chooses one of our physicians as their primary care physician. Revenue under
these agreements is generally recorded in the period we assume responsibility to provide services
at the rates then in effect as determined by the respective contract. As part of the Medicare
Advantage program, CMS periodically recomputes the premiums to be paid to the HMOs based on updated
health status of participants and updated demographic factors. In addition, the premiums paid to
the HMOs are subject to periodic adjustment based on CMSs 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 favorable retroactive Medicare adjustments of $0.4 million and
$0.9 million for Fiscal 2010 and 2009, respectively, and an unfavorable retroactive Medicare
adjustment of $0.3 million for Fiscal 2008.
Under our risk agreements, we assume responsibility for the cost of all medical services
provided to the patient, even those we do not provide directly, in exchange for a percentage of
premium or other capitated fee. To the extent that patients require more frequent or expensive
care, our revenue under a contract may be insufficient to cover the costs of care provided. When
it is probable that expected future health care costs and maintenance costs under a contract or
group of existing contracts will exceed anticipated capitated revenue on those contracts, we
recognize losses on our prepaid health care services with HMOs. No contracts were considered loss
contracts at June 30, 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 from operations and overall financial
position.
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We develop our estimate of IBNR primarily based on historical claims incurred per member per
month. We adjust our estimate if we have unusually high or low inpatient utilization or if benefit
changes provided under the HMO plans are expected to significantly increase or reduce our claims
exposure. We also 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 Fiscal 2010, amounts paid related to claims incurred
in prior fiscal years were $1.0 million lower than the related liability for IBNR recorded as of
June 30, 2009 resulting in a corresponding favorable adjustment to medical claims expense in Fiscal
2010. This difference represents 0.5% of medical claims expense recorded in Fiscal 2010.
During Fiscal 2009, amounts paid related to claims incurred in prior fiscal years were $0.3
million higher than the related liability for IBNR recorded as of June 30, 2008 resulting in a
corresponding unfavorable adjustment to medical claims expense in Fiscal 2009. This difference
represents 0.1% of medical claims expense recorded in Fiscal 2009.
During Fiscal 2008, amounts paid related to claims incurred in prior fiscal years were $3.6
million lower than the related liability for IBNR recorded as of June 30, 2007 resulting in a
corresponding favorable adjustment to medical claims expense in Fiscal 2008. This adjustment was
primarily due to the favorable resolution with the HMOs of certain contested claims for which the
realization of such amounts was not probable until received. Moreover, prior to the receipt of
such amounts, the Company lacked sufficient historical information on which to make a reasonably
reliable estimate. The favorable adjustment represents 2.0% of medical claims expense recorded in
Fiscal 2008.
Based on our analysis as of June 30, 2010, we recorded a liability of $23.4 million for IBNR
which was relatively unchanged from the liability of $23.7 million recorded as of June 30, 2009.
The liability of $23.7 million recorded as of June 30, 2009 was relatively unchanged from the
liability of $23.9 million recorded as of June 30, 2008.
Consideration of Impairment Related to Goodwill and Other Intangible Assets
Our balance sheet includes intangible assets, including goodwill and other separately
identifiable intangible assets, of approximately $78.3 million, which represented approximately 51%
of our total assets at June 30, 2010. The most significant component of the intangible assets
consists of the intangible assets recorded in connection with the acquisition of the MDHC
Companies. The purchase price, including acquisition costs, of approximately $66.2 million was
allocated to the estimated fair value of acquired tangible assets of $13.9 million, identifiable
intangible assets of $8.7 million and assumed liabilities of $15.3 million, resulting in goodwill
totaling $58.9 million.
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.
The goodwill impairment test requires the allocation of goodwill and all other assets and
liabilities to reporting units. We have determined that we have two reporting units: Provider
Services and Sleep Services. Our goodwill impairment reviews are determined using a two-step
process. The first step of the process is to compare the fair value of a reporting unit with its
carrying amount, or book value, including goodwill. If the fair value of a reporting unit exceeds
its carrying amount, the goodwill of the reporting unit is not impaired and the second step of the
impairment review is not necessary. If the carrying amount of a reporting unit exceeds its fair
value, the second step of the goodwill impairment review is required to be performed to estimate
the implied fair value of the reporting units goodwill. The implied fair value of the reporting
units goodwill is compared with the carrying amount of that goodwill. If the carrying amount of
the reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss
is recognized in an amount equal to that excess. 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 June 30, 2010. Should we later
determine that an indicator of impairment exists, we would be required to perform an additional
impairment test.
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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 income tax accruals and assets and could cause our provision for income taxes to
vary significantly from period to period. At June 30, 2010, we had deferred income tax liabilities
in excess of deferred income tax assets of approximately $4.2 million.
Stock-Based Payment
We recognize compensation costs in our financial statements related to our stock-based payment
transactions over the period services are rendered according to the fair value of the stock-based
awards issued.
We have elected to calculate the fair value of our employee stock options using the
Black-Scholes option pricing model. Using this model we calculated the fair value for employee
stock options granted during Fiscal 2010 and 2009 based on the following assumptions: risk-free
interest rate ranging from 0.73% to 3.05% and 0.66% to 3.19%, respectively; dividend yield of 0%;
weighted-average volatility factor of the expected market price of our common stock of 60.4% and
58.6%, respectively, and weighted-average expected life of the options ranging from 2 to 7 years
depending on the vesting provisions of each option. The fair value for employee stock options
granted during Fiscal 2008 was calculated based on the following assumptions: risk-free interest
rate ranging from 1.61% to 4.22%; dividend yield of 0%; volatility factor of the expected market
price of our common stock of 59.5%; and weighted-average expected life of the option ranging from 2
to 6 years depending on the vesting provisions of each option. The expected life of the options is
based on the historical exercise behavior of our employees. The expected volatility factor is
based on the historical volatility of the market price of our common stock as adjusted for certain
events that management deemed to be non-recurring and non-indicative of future events.
We recognized share-based compensation cost of $1.4 million, $1.2 million and $1.3 million,
respectively, for Fiscal 2010, 2009 and 2008. For Fiscal 2010 and 2009, we recognized excess tax
benefits resulting from the exercise of stock options of approximately $1.4 million and $0.1
million, respectively. For Fiscal 2008, we did not recognize any excess tax benefits resulting
from the exercise of stock options. As of June 30, 2010, there was $1.2 million of total
unrecognized compensation cost related to non-vested options, which is expected to be recognized
over a weighted average period of 2 years.
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 managements opinion, it is possible that existing models may not necessarily provide a reliable
measure of the fair value of our employee stock options. We selected the Black-Scholes model based
on our experience with it, its wide use by issuers comparable to us, and our review of alternate
option valuation models.
The effect of applying the fair value method of accounting for stock options on reported net
income for any period may not be representative of the effects for future periods because our
outstanding options typically vest over a period of several years and additional awards may be made
in future periods.
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Results of Operations
The following table sets forth, for the periods indicated, selected operating data as a
percentage of total revenue.
Year ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenue |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Operating expenses: |
||||||||||||
Medical services: |
||||||||||||
Medical claims |
67.2 | 70.8 | 71.2 | |||||||||
Other direct costs |
10.1 | 10.1 | 10.6 | |||||||||
Total medical services |
77.3 | 80.9 | 81.8 | |||||||||
Administrative payroll and employee benefits |
5.3 | 4.5 | 4.7 | |||||||||
General and administrative |
5.8 | 5.8 | 6.5 | |||||||||
Total operating expenses |
88.4 | 91.2 | 93.0 | |||||||||
Income from operations |
11.6 | 8.8 | 7.0 | |||||||||
Other income (expense): |
||||||||||||
Interest income |
| | 0.2 | |||||||||
Income before income tax provision |
11.6 | 8.8 | 7.2 | |||||||||
Income tax provision |
4.5 | 3.4 | 2.8 | |||||||||
Net income |
7.1 | % | 5.4 | % | 4.4 | % | ||||||
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 2010 TO FISCAL YEAR ENDED JUNE 30, 2009
Revenue
Revenue increased by $29.5 million, or 10.5%, to $310.8 million for Fiscal 2010 from $281.3
million for Fiscal 2009 due primarily to increases in our Medicare revenue.
The most significant component of our revenue is the revenue we generate from Medicare
patients under risk arrangements which increased by $24.2 million, or 9.5%, during Fiscal 2010.
During Fiscal 2010, revenue generated by our Medicare risk arrangements increased approximately
12.2% on a per patient per month basis and Medicare patient months decreased by approximately 2.4%
over Fiscal 2009. The increase in the per member per month Medicare revenue was primarily due to a
rate increase in Medicare premiums and an increase in premiums resulting from the Medicare risk
adjustment program. The decrease in Medicare patient months was primarily due to the termination
of at risk management services related to certain IPA practices.
Effective January 1, 2010, the capitation payments we receive under our percentage of premium
arrangements with our HMO affiliates for our Medicare Advantage patients decreased by approximately
5% before taking into account any premium adjustments resulting from changes in Medicare risk
adjustment scores. After taking into account our premium adjustments resulting from changes in
Medicare risk adjustment scores, revenue generated by our Medicare risk arrangements increased
approximately 6.8% on a per patient per month basis for the six-month period ended June 30, 2010.
Based on information received from our HMO affiliates and CMS, we believe that the capitation
payments we receive under our percentage of premium arrangements with our HMO affiliates for our
Medicare Advantage patients will decrease by approximately 2% effective January 1, 2011 before
taking into account any adjustments resulting from changes in Medicare risk adjustment scores.
Presently, we do not know whether our HMO affiliates will take any action to mitigate the effect of
the Medicare Advantage premium reduction, such as reducing plan benefits that will become effective
January 1, 2011. 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 CMSs risk corridor adjustment methodology. The net effect of these premium
adjustments included in revenue for the three-month periods ended June 30, 2010 and 2009 were
favorable retroactive Medicare adjustments of $0.5 million and $0.7 million, respectively, and for
Fiscal 2010 and 2009 were favorable retroactive Medicare adjustments of $0.4 million and $0.9
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 CMSs risk corridor methodology
to the HMOs Medicare Prescription Drug Programs.
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Revenue generated by our managed care entities under contracts with Humana, Vista and Wellcare
accounted for approximately 72%, 20% and 6%, respectively, of our total revenue for Fiscal 2010.
Revenue generated by our managed care entities under contracts with Humana, Vista and Wellcare
accounted for approximately 72%, 18% and 8%, respectively, of our total revenue for Fiscal 2009.
Operating Expenses
Medical services expenses are comprised of medical claims expense and other direct costs
related to the provision of medical services to our patients. Because our risk contracts with HMOs
provide that we are financially responsible for the cost of substantially all medical services
provided to our patients under those contracts, our medical claims expense includes the costs of
prescription drugs these patients receive as well as medical services provided to patients by
providers other than us. Other direct costs consist primarily of salaries, taxes and benefits of
our health professionals providing primary care services including a portion of our share-based
compensation cost, medical malpractice insurance costs, capitation payments to our IPA physicians
and fees paid to independent contractors providing medical services to our patients.
Medical services expenses for Fiscal 2010 increased by $12.7 million, or 5.6%, to $240.3
million from $227.6 million for Fiscal 2009. Medical claims expense, which is the largest
component of medical services expense, increased by $9.7 million, or 4.9%, to $208.9 million for
Fiscal 2010 from $199.2 million for Fiscal 2009 primarily due to an increase in Medicare claims
expense of $6.9 million, or 3.8%. The increase in Medicare claims expense resulted from a 6.4%
increase in medical claims expense on a per patient per month basis, partially offset by a 2.4%
decrease in Medicare patient months. The increase in Medicare per patient per month medical claims
expense is primarily attributable to enhanced benefits offered by our HMO affiliates in 2009 and
inflationary trends in the health care industry, partially offset by improved utilization outcomes.
As a percentage of revenue, medical services expenses decreased to 77.3% for Fiscal 2010 as
compared to 80.9% for Fiscal 2009. Our claims loss ratio (medical claims expense as a percentage
of revenue generated under risk arrangements) decreased to 68.8% for Fiscal 2010 from 72.0% for
Fiscal 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 $3.0 million, or 10.6%, to $31.5 million for Fiscal 2010 from
$28.5 million for Fiscal 2009. As a percentage of revenue, other direct costs remained relatively
unchanged at 10.1% for Fiscal 2010 and 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 that we acquired in Fiscal 2010.
Administrative payroll and employee benefits expenses increased by $3.6 million, or 28.9%, to
$16.3 million for Fiscal 2010 from $12.7 million for Fiscal 2009. As a percentage of revenue,
administrative payroll and employee benefits expenses increased to 5.3% for Fiscal 2010 from 4.5%
for Fiscal 2009. The increase in administrative payroll and employee benefits expenses was
primarily due to increases in personnel, annual salary increases and increases in incentive plan
accruals related to our earnings in Fiscal 2010.
General and administrative expenses increased by $1.7 million, or 10.8%, to $18.0 million for
Fiscal 2010 from $16.3 million for Fiscal 2009. As a percentage of revenue, general and
administrative expenses remained relatively unchanged at 5.8% for Fiscal 2010 and 2009. The
increase in general and administrative expenses was primarily due to expenses related to the
operations of the sleep diagnostic centers that we acquired in Fiscal 2010.
Income from Operations
Income from operations for Fiscal 2010 increased by $11.4 million, or 46.1%, to $36.1 million
from $24.7 million for Fiscal 2009.
Taxes
An income tax provision of $13.9 million and $9.6 million was recorded for Fiscal 2010 and
2009, respectively. The effective income tax rates remained
relatively unchanged at 38.5% and 38.6% for
Fiscal 2010 and 2009, respectively.
Net Income
Net income for Fiscal 2010 increased by $6.9 million, or 45.1%, to $22.2 million from $15.3
million for Fiscal 2009.
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COMPARISON OF FISCAL YEAR ENDED JUNE 30, 2009 TO FISCAL YEAR ENDED JUNE 30, 2008
Revenue
Revenue increased by $26.9 million, or 10.5%, to $281.3 million for Fiscal 2009 from $254.4
million for Fiscal 2008 due primarily to increases in our Medicare revenue.
The most significant component of our revenue is the revenue we generate from Medicare
patients under risk arrangements which increased by $28.7 million, or 12.7%, during Fiscal 2009.
During Fiscal 2009, revenue generated by our Medicare risk arrangements increased approximately
13.9% on a per patient per month basis and Medicare patient months decreased by approximately 1.1%
over Fiscal 2008. The increase in the per member per month Medicare revenue was primarily due to a
rate increase in Medicare premiums and an increase in premiums resulting from the Medicare risk
adjustment program. The decrease in Medicare patient months was primarily due to the termination
of management services related to certain IPA practices. The increase in Medicare revenue was
partially offset by a $2.8 million decrease in revenue generated by our Medicaid patients due
primarily to a decrease in Medicaid patient months.
Included in revenue for the three-month periods ended June 30, 2009 and 2008 were favorable
retroactive Medicare adjustments related to Medicare premiums and risk corridor adjustments of $0.7
million and $1.0 million, respectively, and for Fiscal 2009 and 2008 were favorable retroactive
Medicare adjustments of $0.9 million and unfavorable retroactive Medicare adjustments of $0.3
million, respectively. Future Medicare risk adjustments may result in reductions of revenue
depending on the future health status and demographic factors of our patients as well as the
application of CMSs risk corridor methodology to the HMOs Medicare Prescription Drug Programs.
Revenue generated by our managed care entities under contracts with Humana, Vista and Wellcare
accounted for approximately 72%, 18% and 8%, respectively, of our total revenue for Fiscal 2009.
Revenue generated by our managed care entities under contracts with Humana, Vista and Wellcare
accounted for approximately 72%, 19% and 8%, respectively, of our total revenue for Fiscal 2008.
Operating Expenses
Medical services expenses for Fiscal 2009 increased by $19.6 million, or 9.4%, to $227.6
million from $208.0 million for Fiscal 2008. Medical claims expense, which is the largest
component of medical services expense, increased by $18.1 million, or 10.0%, to $199.2 million for
Fiscal 2009 from $181.1 million for Fiscal 2008 primarily due to an increase in Medicare claims
expense of $18.3 million, or 11.2%. The increase in Medicare claims expense resulted from a 12.4%
increase in medical claims expense on a per patient per month basis, partially offset by a 1.1%
decrease in Medicare patient months. The increase in Medicare per patient per month medical claims
expense is primarily attributable to enhanced benefits offered by our HMO affiliates and
inflationary trends in the health care industry.
As a percentage of revenue, medical services expenses decreased to 80.9% for Fiscal 2009 as
compared to 81.8% for Fiscal 2008. Our claims loss ratio (medical claims expense as a percentage
of revenue generated under risk arrangements) decreased to 72.0% for Fiscal 2009 from 72.2% for
Fiscal 2008. 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 $1.6 million, or 5.6%, to $28.5 million for Fiscal 2009 from
$26.9 million for Fiscal 2008. As a percentage of revenue, other direct costs decreased to 10.1%
for Fiscal 2009 from 10.6% for Fiscal 2008. The increase in the amount of other direct costs was
primarily due to an increase in payroll expense and related benefits for physicians and medical
support personnel at our medical centers.
Administrative payroll and employee benefits expenses increased by $0.6 million, or 4.4%, to
$12.7 million for Fiscal 2009 from $12.1 million for Fiscal 2008. As a percentage of revenue,
administrative payroll and employee benefits expenses decreased to 4.5% for Fiscal 2009 from 4.7%
for Fiscal 2008. The increase in administrative payroll and employee benefits expenses was
primarily due to an increase in salaries.
General and administrative expenses remained relatively unchanged at $16.3 million and $16.4
million for Fiscal 2009 and 2008, respectively. As a percentage of revenue, general and
administrative expenses decreased to 5.8% for Fiscal 2009 from 6.5% for Fiscal 2008.
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Income from Operations
Income from operations for Fiscal 2009 increased by $6.8 million, or 38.4%, to $24.7 million
from $17.9 million for Fiscal 2008.
Taxes
An income tax provision of $9.6 million and $7.1 million was recorded for Fiscal 2009 and
2008, respectively. The effective income tax rates remained relatively unchanged at 38.6% and
38.8% for Fiscal 2009 and 2008, respectively.
Net Income
Net income for Fiscal 2009 increased by $4.0 million, or 35.6%, to $15.3 million from $11.3
million for Fiscal 2008.
Liquidity and Capital Resources
At June 30, 2010, working capital was $49.5 million, an increase of $24.0 million from $25.5
million at June 30, 2009. Cash and cash equivalents increased by $23.6 million to $37.5 million at
June 30, 2010 compared to $13.9 million at June 30, 2009. The increases in working capital and
cash and cash equivalents at June 30, 2010 as compared to June 30, 2009 was primarily due to net
income of $22.2 million for Fiscal 2010. In August 2010, we collected approximately $5.1 million
of Medicare premium adjustments which were included in amounts due from HMOs at June 30, 2010. At
August 31, 2010, our cash and cash equivalents increased to approximately $43.0 million.
Net cash of $27.0 million was provided by operating activities during Fiscal 2010 compared to
$17.6 million in Fiscal 2009 and $15.2 million in Fiscal 2008. The $9.4 million increase in cash
provided by operating activities for Fiscal 2010 compared to Fiscal 2009 was primarily due to an
increase in net income of $6.9 million and an increase in accrued expenses and other current
liabilities of $3.3 million relating primarily to incentive plan accruals. The $2.4 million
increase in cash provided by operating activities for Fiscal 2009 compared to Fiscal 2008 was
primarily due to an increase in net income of $4.0 million, partially offset by net increases in
amounts due from HMOs of $0.7 million and prepaid expenses and other current assets of $0.8
million.
Net cash of $4.3 million was used for investing activities in Fiscal 2010 compared to $3.1
million in Fiscal 2009 and $1.0 million in Fiscal 2008. The $1.2 million increase in net cash used
for investing activities for Fiscal 2010 primarily related to the net cash used of $1.5 million for
the acquisition of sleep diagnostic centers. The $2.1 million increase in net cash used for
investing activities for Fiscal 2009 compared to Fiscal 2008 primarily related to an increase in
cash used for leasehold improvements.
Net cash of $1.0 million was provided by financing activities in Fiscal 2010 compared to net
cash used of $10.6 million in Fiscal 2009 and $11.6 million in Fiscal 2008. The $11.6 million
increase in cash provided by financing activities for Fiscal 2010 was primarily due to a $10.6
million net decrease in cash used for the repurchase our common stock. The $1.0 million decrease
in cash used for financing activities for Fiscal 2009 compared to Fiscal 2008 was primarily due a
$0.8 million net decrease in cash used to repurchase our common stock.
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.
On December 18, 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 (0.35% at June 30, 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
June 30, 2010, there was no outstanding principal balance on the Credit Facility. At June 30,
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. Under the Credit Facility, we are no longer
required to use certificates of deposit as collateral for outstanding letters of credit.
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. We did not repurchase any
shares of our common stock during Fiscal 2010. During Fiscal 2009 and 2008 we repurchased
5,419,004 shares and 5,330,533 shares, respectively, of our common stock for approximately $10.6
million and $11.5 million, respectively. As of August 31, 2010, we had repurchased a total of
11,907,004 shares of our common stock for approximately $25.0 million pursuant to this stock
repurchase program.
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We believe that we will be able to fund our capital commitments and our anticipated operating
cash requirements for at least the next twelve months and satisfy any remaining obligations from
our working capital, anticipated cash flows from operations and our
Credit Facility.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of June 30, 2010, and have not entered into any
transactions involving unconsolidated, limited purpose entities or commodity contracts.
Contractual Obligations
The following is a summary of our long-term debt, capital and operating lease obligations, and
contractual obligations as of June 30, 2010:
Payment due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
Capital Lease Obligations (1) |
$ | 346,201 | $ | 188,838 | $ | 157,363 | $ | | $ | | ||||||||||
Operating Lease Obligations (1) |
7,473,360 | 2,566,085 | 2,642,704 | 2,029,050 | 235,521 | |||||||||||||||
Total |
$ | 7,819,561 | $ | 2,754,923 | $ | 2,800,067 | $ | 2,029,050 | $ | 235,521 | ||||||||||
(1) | The payments shown above for Capital Lease Obligations and Operating Lease Obligations reflect all payments due under the terms of the respective leases. See Note 4 to our Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K to reconcile the payments shown above to the capital lease obligations recorded in our Consolidated Balance Sheets. |
FORWARD-LOOKING STATEMENTS
Our business, financial condition, results of operations, cash flows and prospects, and the
prevailing market price and performance of our common stock, may be adversely affected by a number
of factors, including the matters discussed below. Certain statements and information set forth in
this Annual Report on Form 10-K, as well as other written or oral statements made from time to time
by us or by our authorized executive officers on our behalf, constitute forward-looking
statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. We
intend for our forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and
we set forth this statement and these risk factors in order to comply with such safe harbor
provisions. You should note that our forward-looking statements speak only as of the date of this
Annual Report on Form 10-K or when made and we undertake no duty or obligation to update or revise
our forward-looking statements, whether as a result of new information, future events or otherwise.
Although we believe that the expectations, plans, intentions and projections reflected in our
forward-looking statements are reasonable, such statements are subject to risks, uncertainties and
other factors that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or implied by the
forward-looking statements. The risks, uncertainties and other factors that our shareholders and
prospective investors should consider include, but are not limited to, the following:
| Our operations are dependent on three health maintenance organizations; | ||
| Under our most important contracts we are responsible for the cost of medical services to our patients in return for a capitated fee; | ||
| Our revenues will be affected by the Medicare Risk Adjustment program; | ||
| If we are unable to manage medical benefits expense effectively, our profitability will likely be reduced; | ||
| A failure to estimate incurred but not reported medical benefits expense accurately will affect our profitability; | ||
| We compete with many health care providers for patients and HMO affiliations; | ||
| We may not be able to successfully recruit or retain existing relationships with qualified physicians and medical professionals; | ||
| Our business exposes us to the risk of medical malpractice lawsuits; | ||
| We primarily operate in Florida; | ||
| A significant portion of our voting power is concentrated; | ||
| We are dependent on our executive officers and other key employees; | ||
| We depend on the management information systems of our affiliated HMOs; | ||
| We depend on our information processing systems; | ||
| Volatility of our stock price could adversely affect you; | ||
| A failure to successfully implement our business strategy could materially and adversely affect our operations and growth opportunities; |
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| Our intangible assets represent a substantial portion of our total assets; | ||
| Competition for acquisition targets and acquisition financing and other factors may impede our ability to acquire other businesses and may inhibit our growth; | ||
| Our acquisitions could result in integration difficulties, unexpected expenses, diversion of managements attention and other negative consequences; | ||
| 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; | ||
| A decrease to our Medicare capitation payments may have a material adverse effect on our results of operations, financial position and cash flows; | ||
| We are subject to government regulation; | ||
| The health care industry is subject to continued scrutiny; | ||
| Our insurance coverage may not be adequate, and rising insurance premiums could negatively affect our profitability; | ||
| Deficit spending and economic downturns could negatively impact our results of operations; and | ||
| Many factors that increase health care costs are largely beyond our ability to control. |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
At June 30, 2010, we held certificates of deposit and cash equivalent investments in high
grade, short-term securities, which are not typically subject to material market risk. At June 30,
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 June 30, 2010.
We have no material risk associated with foreign currency exchange rates or commodity prices.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our consolidated financial statements and independent registered public accounting firms
report thereon appear beginning on page F-2. See index to such consolidated financial statements
and reports on page F-1.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) or Rule 15d-15(e)) as of the end of the period covered by this Annual
Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of June 30, 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 SECs 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 Officers and Chief Financial Officers 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. 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.
30
Table of Contents
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Exchange Act Rules Rule 13a-15(f) or Rule 15d-15(f)). Our
internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted accounting principles and includes
those policies and procedures that (i) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our management and
directors, and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material effect on our
financial statements. Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our internal control over financial
reporting as of the end of the period covered by this report based on the Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, our management concluded that our internal control over
financial reporting was effective as of June 30, 2010. Ernst & Young LLP, our independent
registered public accounting firm, which audited our financial statements included in this report,
has issued an attestation report on our internal control over financial reporting. Their report is
included herein.
Changes in Internal Control over Financial Reporting
Based on an evaluation, under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, there has been no change
in our internal control over financial reporting during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Section 302 Certifications
Provided with this report are certifications of our Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and the SECs
implementing regulations. This Item 9A contains the information concerning the evaluations referred
to in those certifications, and you should read this information in conjunction with those
certifications for a more complete understanding of the topics presented.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Continucare Corporation
We have audited Continucare Corporations internal control over financial reporting as of June 30,
2010, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Continucare
Corporations management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Managements Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the companys assets that could have a material effect on the financial statements.
31
Table of Contents
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Continucare Corporation maintained, in all material respects, effective internal
control over financial reporting as of June 30, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Continucare Corporation as of June 30,
2010 and 2009 and the related consolidated statements of income, shareholders equity and cash
flows for each of the three years in the period ended June 30, 2010 and our report dated September
9, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Certified Public Accountants
Certified Public Accountants
Miami, Florida
September 9, 2010
September 9, 2010
ITEM 9B. | OTHER INFORMATION |
None.
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by Item 10 is incorporated by reference to our Proxy Statement for
our Annual Meeting of Shareholders for the fiscal year ended June 30, 2010, which will be filed
with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year
covered by this Form 10-K, or, alternatively, by amendment to this Form 10-K under cover of Form
10-K/A no later than the end of such 120 day period.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by Item 11 is incorporated by reference to our Proxy Statement for
our Annual Meeting of Shareholders for the fiscal year ended June 30, 2010, which will be filed
with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year
covered by this Form 10-K, or, alternatively, by amendment to this Form 10-K under cover of Form
10-K/A no later than the end of such 120 day period.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Item 12 is incorporated by reference to our Proxy Statement for
our Annual Meeting of Shareholders for the fiscal year ended June 30, 2010, which will be filed
with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year
covered by this Form 10-K, or, alternatively, by amendment to this Form 10-K under cover of Form
10-K/A no later than the end of such 120 day period.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Item 13 is incorporated by reference to our Proxy Statement for
our Annual Meeting of Shareholders for the fiscal year ended June 30, 2010, which will be filed
with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year
covered by this Form 10-K, or, alternatively, by amendment to this Form 10-K under cover of Form
10-K/A no later than the end of such 120 day period.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by Item 14 is incorporated by reference to our Proxy Statement for
our Annual Meeting of Shareholders for the fiscal year ended June 30, 2010, which will be filed
with the Securities and Exchange Commission no later than
120 days after the end of the fiscal year covered by this Form 10-K, or, alternatively, by
amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120 day
period.
32
Table of Contents
PART IV
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial Statements
Reference is made to the Index set forth on Page F-1 of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
All schedules have been omitted because they are inapplicable or the information is
provided in the consolidated financial statements, including the notes hereto.
(a)(3) Exhibits
3.1 | Restated Articles of Incorporation, as amended. (1) |
|||
3.2 | Amended and Restated Bylaws. (2) |
|||
3.3 | First Amendment to the Amended and Restated Bylaws. (3) |
|||
4.1 | Form of certificate evidencing shares of Common Stock. (4) |
|||
4.2 | Registration Rights Agreement, dated as of October 30, 1997, by and
between Continucare Corporation and Loewenbaum & Company Incorporated.
(5) |
|||
10.1 | Continucare Corporation Amended and Restated 1995 Stock Option Plan.** (6) |
|||
10.2 | Amended and Restated 2000 Stock Option Plan (as amended and restated on
November 4, 2009). ** (7) |
|||
10.3 | Form of Stock Option Agreement.**(8) |
|||
10.4 | Physician Practice Management Participation Agreement between Continucare
Medical Management, Inc., and Humana Medical Plan, Inc. entered into as
of the 1st day of August, 1998. (9) |
|||
10.5 | Amended and Restated Primary Care Provider Services dated November 12,
2004, by and between Vista Healthplan of South Florida, Inc., Vista
Insurance Plan, Inc. and Continucare Medical Management, Inc. (10) |
|||
10.6 | WCMA Loan and Security Agreement dated March 9, 2000 between Merrill
Lynch Business Financial Services, Inc. and Continucare Corporation. (11) |
|||
10.7 | Letter Agreement dated March 18, 2005 between Merrill Lynch Business
Financial Services, Inc. and Continucare Corporation. (12) |
|||
10.8 | Form of Promissory Note dated December 29, 2004. (13) |
|||
10.9 | Letter Agreement between Continucare Corporation and Merrill Lynch
Business Financial Services, Inc. regarding amendment and extension of
Credit Facility. (14) |
|||
10.10 | Asset Purchase Agreement, dated as of May 10, 2006, among Continucare
Corporation, a Florida corporation, CNU Blue 1, Inc., a Florida
corporation and a wholly-owned subsidiary of CNU, CNU Blue2, LLC, a
Florida limited liability company and a wholly-owed subsidiary of Buyer,
Miami Dade Health and Rehabilitation Services, Inc., a Florida
corporation, Miami Dade Health Centers, Inc., a Florida corporation, West
Gables Open MRI Services, Inc., a Florida corporation, Kent Management
Systems, Inc., Pelu Properties, Inc., a Florida corporation, Peluca
Investments, LLC, a Florida limited liability company owned by the
Owners, and Miami Dade Health Centers One, Inc., a Florida corporation,
MDHC Red, Inc., a Florida corporation, and each of the shareholders of
each Seller identified therein. (15) |
|||
10.11 | Integrated Delivery System Participation Agreement effective as of April
1, 1999 between MDHRS and Humana Medical Plan, Inc., as amended. (16) |
|||
10.12 | Management Services Agreement dated as of September 1, 2004 between MDHC
and Vista Healthplan, Inc., as amended. (17) |
|||
10.13 | WCMA Reducing Revolver Loan and Security Agreement dated September 26,
2006, between Continucare MDHC LLC and Merrill Lynch Business Financial
Services, Inc. (18) |
33
Table of Contents
10.14 | WCMA Reducing Revolver Loan and Security Agreement dated September 26,
2006, between Continucare MDHC LLC and Merrill Lynch Business Financial
Services, Inc. (19) |
|||
10.15 | Amendment of Credit Facility dated September 26, 2006, between
Continucare Corporation and Merrill Lynch Business Financial Services,
Inc. (20) |
|||
10.16 | Independent Practice Association Participation Agreement dated as of
October 11, 2007 by and among Continucare Medical Management, Inc. and
Humana Insurance Company, Humana Health Insurance Company of Florida,
Inc., Humana Medical Plan, Inc. and their affiliates that underwrite or
administer health plans. (21) |
|||
10.17 | Independent Practice Association Participation Agreement dated as of
October 11, 2007 by and among Continucare Medical Management, Inc. and
Humana Insurance Company, Humana Health Insurance Company of Florida,
Inc., Humana Medical Plan, Inc. and their affiliates that underwrite or
administer health plans. (22) |
|||
10.18 | Independent Practice Association Participation Agreement dated as of
October 11, 2007 by and among Continucare Medical Management, Inc. and
Humana Insurance Company, Humana Health Insurance Company of Florida,
Inc., Humana Medical Plan, Inc. and their affiliates that underwrite or
administer health plans. (23) |
|||
10.19 | Credit Facility Agreement, dated as of December 18, 2009, among
Continucare Corporation, as a Borrower, Continucare MDHC, LLC, as a
Borrower, and Bank of America, N.A., as Bank. (24) |
|||
21.1 | Subsidiaries of the Company.* |
|||
23.1 | Consent of Independent Registered Public Accounting Firm. * |
|||
31.1 | Section 302 Certification of Chief Executive Officer. * |
|||
31.2 | Section 302 Certification of Chief Financial Officer. * |
|||
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*** |
|||
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*** |
Documents incorporated by reference to the exhibit number indicated below to the following filings
by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934.
(1 | ) | Exhibit 3.1 to the Post Effective Amendment No. 1 to the Registration
Statement on SB-2 on Form S-3 Registration Statement filed on October 30, 1996. |
||
(2 | ) | Exhibit 3.1 to the Form 8-K dated September 12, 2006, filed September
13, 2006. |
||
(3 | ) | Exhibit 3.2 to the Form 8-K dated November 6, 2007, filed November 7,
2007. |
||
(4 | ) | Exhibit 4.1 to the Post Effective Amendment No. 1 to the Registration
Statement on SB-2 on Form S-3 Registration Statement filed on October 30, 1996. |
||
(5 | ) | Exhibit 4.2 to the Form 8-K dated October 30, 1997, filed November 13,
1997. |
||
(6 | ) | Schedule 14A dated December 26, 1997 and filed with the Commission on
December 30, 1997. |
||
(7 | ) | Exhibit 10.1 to the Form 8-K dated February 9, 2010, filed February 12,
2010. |
||
(8 | ) | Exhibit 10.1 to the Form 10-Q for the quarterly period ended September
30, 2004. |
||
(9 | ) | Exhibit 10.11 to the Form 10-K for the fiscal year ended June 30, 2000. |
||
(10 | ) | Exhibit 10.1 to the Form 10-Q for the quarterly period ended December
31, 2004. |
||
(11 | ) | Exhibit 4.1 to the Form 10-Q for the quarterly period ended March 31,
2000. |
||
(12 | ) | Exhibit 10.1 to the Form 10-Q for the quarterly period ended March 31,
2005. |
||
(13 | ) | Exhibit 10.1 to the Form 8-K dated December 30, 2004, filed January 5,
2005. |
||
(14 | ) | Exhibit 10.1 to the Form 8-K dated March 8, 2006, filed on March 10,
2006. |
||
(15 | ) | Exhibit 10.1 to the Form 8-K dated May 10, 2006, filed on May 11, 2006. |
||
(16 | ) | Exhibit 10.1 to the Form 10-Q for the quarterly period ended September
30, 2006. |
||
(17 | ) | Exhibit 10.2 to the Form 10-Q for the quarterly period ended September
30, 2006. |
||
(18 | ) | Exhibit 10.3 to the Form 10-Q for the quarterly period ended September
30, 2006. |
||
(19 | ) | Exhibit 10.4 to the Form 10-Q for the quarterly period ended September
30, 2006. |
||
(20 | ) | Exhibit 10.5 to the Form 10-Q for the quarterly period ended September
30, 2006. |
||
(21 | ) | Exhibit 10.1 to the Form 8-K dated October 11, 2007, filed on October
15, 2007. |
||
(22 | ) | Exhibit 10.2 to the Form 8-K dated October 11, 2007, filed on October
15, 2007. |
||
(23 | ) | Exhibit 10.3 to the Form 8-K dated October 11, 2007, filed on October
15, 2007. |
||
(24 | ) | Exhibit 4.1 to the Form 8-K dated December 18, 2009, filed December 23,
2009. |
* | Filed herewith | |
** | Management contract or compensatory plan or arrangement | |
*** | Furnished herewith |
34
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CONTINUCARE CORPORATION |
||||
By: | /s/ Richard C. Pfenniger, Jr. | |||
RICHARD C. PFENNIGER, JR. | ||||
Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) |
||||
Dated: September 9, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE | TITLE | DATE | ||
/s/ Richard C. Pfenniger, Jr.
|
Chairman of the Board, Chief Executive
Officer, President and Director (Principal Executive Officer) |
September 9, 2010 | ||
/s/ Fernando L. Fernandez
|
Senior Vice President Finance, Chief
Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) |
September 9, 2010 | ||
/s/ Robert J. Cresci
|
Director | September 9, 2010 | ||
/s/ Neil Flanzraich
|
Director | September 9, 2010 | ||
/s/ Phillip Frost, M.D.
|
Director | September 9, 2010 | ||
/s/ Jacob Nudel, M.D.
|
Director | September 9, 2010 | ||
/s/ Marvin Sackner, M.D.
|
Director | September 9, 2010 | ||
/s/ Jacqueline Simkin
|
Director | September 9, 2010 | ||
/s/ A. Marvin Strait
|
Director | September 9, 2010 |
35
Table of Contents
INDEX TO FINANCIAL STATEMENTS
PAGE | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-8 |
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Continucare Corporation
We have audited the accompanying consolidated balance sheets of Continucare Corporation as of June
30, 2010 and 2009, and the related consolidated statements of income, shareholders equity, and
cash flows for each of the three years in the period ended June 30, 2010. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Continucare Corporation at June 30, 2010 and 2009,
and the consolidated results of its operations and its cash flows for each of the three years in
the period ended June 30, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Continucare Corporations internal control over financial reporting as of
June 30, 2010, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 9,
2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Certified Public Accountants
Certified Public Accountants
Miami, Florida
September 9, 2010
September 9, 2010
F-2
Table of Contents
CONTINUCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
June 30, | ||||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 37,542,445 | $ | 13,895,823 | ||||
Certificate of deposit |
668,755 | | ||||||
Due from HMOs, net of a liability for
incurred but not reported medical claims
expense of approximately $23,394,000 and
$23,719,000 at June 30, 2010 and 2009,
respectively |
18,920,388 | 17,323,599 | ||||||
Prepaid expenses and other current assets |
2,631,136 | 812,970 | ||||||
Deferred income tax assets |
140,057 | 141,420 | ||||||
Total current assets |
59,902,781 | 32,173,812 | ||||||
Certificates of deposit, restricted |
| 1,233,653 | ||||||
Property and equipment, net |
12,728,184 | 10,489,383 | ||||||
Goodwill |
73,994,444 | 73,204,582 | ||||||
Intangible assets, net of accumulated
amortization of approximately $4,705,000 and
$3,406,000 at June 30, 2010 and 2009,
respectively |
4,296,507 | 5,253,666 | ||||||
Deferred income tax assets |
2,830,929 | 2,795,588 | ||||||
Other assets, net |
112,747 | 152,702 | ||||||
Total assets |
$ | 153,865,592 | $ | 125,303,386 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 810,376 | $ | 652,305 | ||||
Accrued expenses and other current liabilities |
9,041,162 | 4,455,675 | ||||||
Income taxes payable |
590,673 | 1,575,511 | ||||||
Total current liabilities |
10,442,211 | 6,683,491 | ||||||
Deferred income tax liabilities |
7,145,507 | 6,435,732 | ||||||
Other liabilities |
249,248 | 981,640 | ||||||
Total liabilities |
17,836,966 | 14,100,863 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Common stock, $0.0001 par value: 100,000,000 shares authorized; 60,504,012 shares issued
and outstanding at June 30, 2010 and
59,391,049 shares issued and outstanding at
June 30, 2009 |
6,050 | 5,939 | ||||||
Additional paid-in capital |
107,860,204 | 105,210,519 | ||||||
Accumulated earnings |
28,162,372 | 5,986,065 | ||||||
Total shareholders equity |
136,028,626 | 111,202,523 | ||||||
Total liabilities and shareholders equity. |
$ | 153,865,592 | $ | 125,303,386 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenue |
$ | 310,791,463 | $ | 281,270,360 | $ | 254,440,048 | ||||||
Operating expenses: |
||||||||||||
Medical services: |
||||||||||||
Medical claims |
208,857,229 | 199,167,856 | 181,097,183 | |||||||||
Other direct costs |
31,484,513 | 28,456,121 | 26,942,472 | |||||||||
Total medical services |
240,341,742 | 227,623,977 | 208,039,655 | |||||||||
Administrative payroll and employee benefits |
16,308,854 | 12,655,975 | 12,119,139 | |||||||||
General and administrative |
18,021,123 | 16,261,750 | 16,413,801 | |||||||||
Total operating expenses |
274,671,719 | 256,541,702 | 236,572,595 | |||||||||
Income from operations |
36,119,744 | 24,728,658 | 17,867,453 | |||||||||
Other income (expense): |
||||||||||||
Interest income |
65,957 | 174,039 | 602,826 | |||||||||
Interest expense |
(116,041 | ) | (21,255 | ) | (67,898 | ) | ||||||
Income before income tax provision |
36,069,660 | 24,881,442 | 18,402,381 | |||||||||
Income tax provision |
13,893,353 | 9,600,321 | 7,132,727 | |||||||||
Net income |
$ | 22,176,307 | $ | 15,281,121 | $ | 11,269,654 | ||||||
Net income per common share: |
||||||||||||
Basic |
$ | .37 | $ | .25 | $ | .16 | ||||||
Diluted |
$ | .36 | $ | .24 | $ | .16 | ||||||
Weighted average common shares outstanding: |
||||||||||||
Basic |
59,777,789 | 61,405,620 | 68,862,836 | |||||||||
Diluted |
61,565,397 | 62,488,340 | 70,007,760 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Additional | Accumulated | Total | ||||||||||||||||||
Common Stock | Paid-In | Earnings | Shareholders | |||||||||||||||||
Shares | Amount | Capital | (Deficit) | Equity | ||||||||||||||||
Balance at June 30, 2007 |
70,043,086 | $ | 7,004 | $ | 124,616,091 | $ | (20,564,710 | ) | $ | 104,058,385 | ||||||||||
Recognition of compensation expense related to
issuance of stock options |
| | 1,332,786 | | 1,332,786 | |||||||||||||||
Tax deficiency related to exercise of stock options |
| | (1,776 | ) | | (1,776 | ) | |||||||||||||
Issuance of stock upon exercise of stock options |
83,750 | 9 | 64,366 | | 64,375 | |||||||||||||||
Repurchase and retirement of common stock |
(5,330,533 | ) | (533 | ) | (11,451,614 | ) | | (11,452,147 | ) | |||||||||||
Fees related to issuance of stock |
| | (45,000 | ) | | (45,000 | ) | |||||||||||||
Net income |
| | | 11,269,654 | 11,269,654 | |||||||||||||||
Balance at June 30, 2008 |
64,796,303 | 6,480 | 114,514,853 | (9,295,056 | ) | 105,226,277 | ||||||||||||||
Recognition of compensation expense related to
issuance of stock options |
| | 1,163,472 | | 1,163,472 | |||||||||||||||
Excess tax benefits related to exercise of stock
options |
| | 116,593 | | 116,593 | |||||||||||||||
Issuance of stock upon exercise of stock options |
13,750 | 1 | 23,374 | | 23,375 | |||||||||||||||
Repurchase and retirement of common stock |
(5,419,004 | ) | (542 | ) | (10,607,773 | ) | | (10,608,315 | ) | |||||||||||
Net income |
| | | 15,281,121 | 15,281,121 | |||||||||||||||
Balance at June 30, 2009 |
59,391,049 | 5,939 | 105,210,519 | 5,986,065 | 111,202,523 | |||||||||||||||
Recognition of compensation expense related to
issuance of stock options |
| | 1,391,768 | | 1,391,768 | |||||||||||||||
Excess tax benefits related to exercise of stock
options |
| | 1,374,921 | | 1,374,921 | |||||||||||||||
Issuance of stock upon exercise of stock options |
1,112,963 | 111 | 1,417,176 | | 1,417,287 | |||||||||||||||
Shares withheld in connection
with exercise of stock options |
| | (1,408,079 | ) | | (1,408,079 | ) | |||||||||||||
Purchase of noncontrolling interest in sleep
diagnostic centers |
| | (126,101 | ) | | (126,101 | ) | |||||||||||||
Net income |
| | | 22,176,307 | 22,176,307 | |||||||||||||||
Balance at June 30, 2010 |
60,504,012 | $ | 6,050 | $ | 107,860,204 | $ | 28,162,372 | $ | 136,028,626 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||
Net income |
$ | 22,176,307 | $ | 15,281,121 | $ | 11,269,654 | ||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||
Depreciation and amortization |
2,895,621 | 2,303,327 | 2,507,535 | |||||||||
Loss on impairment of fixed assets |
96,000 | | 171,515 | |||||||||
Loss on disposal of fixed assets |
18,668 | 65,760 | | |||||||||
Provision for bad debts |
118,895 | | 181,081 | |||||||||
Compensation expense related to issuance of stock options |
1,391,768 | 1,163,472 | 1,332,786 | |||||||||
Excess tax benefits related to exercise of stock options |
(1,374,921 | ) | (116,593 | ) | | |||||||
Deferred income tax expense |
675,796 | 230,923 | (198,598 | ) | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Due from HMOs, net |
(1,596,789 | ) | (1,997,816 | ) | (1,251,657 | ) | ||||||
Prepaid expenses and other current assets |
88,596 | (104,129 | ) | 676,782 | ||||||||
Other assets, net |
56,365 | 42,735 | (128,743 | ) | ||||||||
Accounts payable |
137,270 | 249,587 | (605,151 | ) | ||||||||
Accrued expenses and other current liabilities |
3,270,660 | (33,689 | ) | 145,851 | ||||||||
Income taxes payable |
(984,838 | ) | 549,398 | 1,131,324 | ||||||||
Net cash provided by operating activities |
26,969,398 | 17,634,096 | 15,232,379 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||||||
Purchases of certificates of deposit |
(10,705 | ) | (682,948 | ) | (112,512 | ) | ||||||
Proceeds from maturities of certificates of deposit |
575,603 | 723,442 | 15,000 | |||||||||
Acquisition of sleep diagnostic centers, net of cash acquired |
(1,507,858 | ) | | | ||||||||
Purchase of property and equipment |
(3,337,260 | ) | (3,100,935 | ) | (939,270 | ) | ||||||
Net cash used in investing activities |
(4,280,220 | ) | (3,060,441 | ) | (1,036,782 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||||||
Principal repayments under capital lease obligations |
(300,584 | ) | (115,225 | ) | (113,249 | ) | ||||||
Repayment on long-term debt |
| | (6,083 | ) | ||||||||
Proceeds from exercise of stock options |
1,417,287 | 23,375 | 64,375 | |||||||||
Shares withheld in connection with exercise of stock options |
(1,408,079 | ) | | | ||||||||
Excess tax benefits related to exercise of stock options |
1,374,921 | 116,593 | | |||||||||
Payment of fees related to issuance of stock |
| | (45,000 | ) | ||||||||
Purchase of noncontrolling interest in sleep diagnostic centers |
(126,101 | ) | | | ||||||||
Repurchase of common stock |
| (10,608,315 | ) | (11,452,147 | ) | |||||||
Net cash provided by (used in) financing activities |
957,444 | (10,583,572 | ) | (11,552,104 | ) | |||||||
Net increase in cash and cash equivalents |
23,646,622 | 3,990,083 | 2,643,493 | |||||||||
Cash and cash equivalents at beginning of fiscal year |
13,895,823 | 9,905,740 | 7,262,247 | |||||||||
Cash and cash equivalents at end of fiscal year |
$ | 37,542,445 | $ | 13,895,823 | $ | 9,905,740 | ||||||
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CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Year Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING AND
FINANCING TRANSACTIONS: |
||||||||||||
Purchase of equipment,
furniture and fixtures with
proceeds of capital lease
obligations |
$ | 228,413 | $ | 123,831 | $ | 38,922 | ||||||
Retirement of treasury stock |
$ | | $ | 10,608,315 | $ | 11,452,147 | ||||||
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION: |
||||||||||||
Cash paid for taxes |
$ | 13,870,000 | $ | 8,820,000 | $ | 6,200,000 | ||||||
Cash paid for interest |
$ | 19,041 | $ | 16,255 | $ | 20,898 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
General
Continucare Corporation (we, us, our, Continucare or the Company), is 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
physicians assistants. Additionally, we provide medical management services to independent
physician affiliates (IPAs). Also, through our subsidiary, Seredor Corporation, we operate sleep
diagnostic centers in seven states. 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 (Vista), and Wellcare Health
Plans, Inc. and its affiliated companies (Wellcare) (collectively, the HMOs). We were
incorporated in 1996 as the successor to a Florida corporation formed earlier in 1996. All
references to a Fiscal year refer to our fiscal year which ends June 30.
Business
In Fiscal 2010, we acquired two operators of sleep diagnostic centers for an aggregate total
purchase price of $1.9 million. Accordingly, the revenues, expenses and results of operations of
these sleep diagnostic centers have been included in our consolidated statements of income from the
dates of acquisition.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by us is as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (generally accepted accounting principles) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Because of the inherent uncertainties of this process, actual results could differ from those estimates. Such estimates include the recognition of revenue, the recoverability of intangible assets, the collectibility of receivables, the realization of deferred income tax assets and the accrual for incurred but not reported (IBNR) claims.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (generally accepted accounting principles) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Because of the inherent uncertainties of this process, actual results could differ from those estimates. Such estimates include the recognition of revenue, the recoverability of intangible assets, the collectibility of receivables, the realization of deferred income tax assets and the accrual for incurred but not reported (IBNR) claims.
Fair Value of Financial Instruments
Our financial instruments consist mainly of cash and cash equivalents, certificates of deposit, amounts due from HMOs, accounts payable, and capital lease obligations. The carrying amounts of our cash and cash equivalents, certificates of deposit, amounts due from HMOs, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. At June 30, 2010 and 2009, the carrying value of our capital lease obligations approximate fair value based on the terms of the obligations.
Our financial instruments consist mainly of cash and cash equivalents, certificates of deposit, amounts due from HMOs, accounts payable, and capital lease obligations. The carrying amounts of our cash and cash equivalents, certificates of deposit, amounts due from HMOs, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. At June 30, 2010 and 2009, the carrying value of our capital lease obligations approximate fair value based on the terms of the obligations.
Cash and Cash Equivalents
We define cash and cash equivalents as those highly-liquid investments purchased with maturities of three months or less from the date of purchase.
We define cash and cash equivalents as those highly-liquid investments purchased with maturities of three months or less from the date of purchase.
Certificates of Deposit
Certificates of deposit have original maturities of greater than three months. Included in the consolidated balance sheet as of June 30, 2010 is one certificate of deposit for approximately $0.7 million which exceeds the $250,000 Federal Deposit Insurance Corporation limit.
Certificates of deposit have original maturities of greater than three months. Included in the consolidated balance sheet as of June 30, 2010 is one certificate of deposit for approximately $0.7 million which exceeds the $250,000 Federal Deposit Insurance Corporation limit.
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Due from HMOs
Under the terms of our contracts with our HMO affiliates, we have the right to offset amounts due to our HMO affiliates against amounts our respective HMO affiliates owe us and each of our HMO affiliates has a comparable right.
Under the terms of our contracts with our HMO affiliates, we have the right to offset amounts due to our HMO affiliates against amounts our respective HMO affiliates owe us and each of our HMO affiliates has a comparable right.
Our HMO affiliates process and pay medical claims and certain other costs on our behalf. Based on
the terms of the contracts with our HMO affiliates, we receive a net payment from our HMO
affiliates that is calculated by offsetting revenue earned with medical claims expense, which is
calculated as claims paid on our behalf plus an amount reserved for claims incurred but not
reported. Therefore, the amounts due from the HMOs are presented on the balance sheet net of an
estimated liability for claims incurred but not reported, which is calculated based on historical
data adjusted for payment patterns, cost trends, utilization of health care services and other
relevant factors. In the event medical claims expense exceeds revenue, our HMO affiliates have the
right to offset future payments owed to us by the amount of such deficit.
Property and Equipment
Equipment, furniture and leasehold improvements are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Leasehold improvements are amortized over the underlying assets useful lives or the term of the lease, whichever is shorter. The buildings and land purchased in connection with the acquisition of Miami Dade Health Centers, Inc. and its affiliated companies (collectively, the MDHC Companies) were recorded at their estimated fair values as of the date of the acquisition. The buildings are depreciated using the straight-line method over their estimated useful lives which approximate forty years. Repairs and maintenance costs are expensed as incurred. Improvements and replacements are capitalized.
Equipment, furniture and leasehold improvements are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Leasehold improvements are amortized over the underlying assets useful lives or the term of the lease, whichever is shorter. The buildings and land purchased in connection with the acquisition of Miami Dade Health Centers, Inc. and its affiliated companies (collectively, the MDHC Companies) were recorded at their estimated fair values as of the date of the acquisition. The buildings are depreciated using the straight-line method over their estimated useful lives which approximate forty years. Repairs and maintenance costs are expensed as incurred. Improvements and replacements are capitalized.
Goodwill and Other Intangible Assets
We do not amortize goodwill and intangible assets with indefinite useful lives. We review goodwill and intangible assets with indefinite useful lives annually for impairment, or more frequently if certain indicators arise. We amortize intangible assets with definite useful lives over their respective estimated useful lives to their estimated residual values and also review for impairment annually, or more frequently if certain indicators 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, loss of key personnel or allocation of goodwill to a portion of a business that is to be sold.
We do not amortize goodwill and intangible assets with indefinite useful lives. We review goodwill and intangible assets with indefinite useful lives annually for impairment, or more frequently if certain indicators arise. We amortize intangible assets with definite useful lives over their respective estimated useful lives to their estimated residual values and also review for impairment annually, or more frequently if certain indicators 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, loss of key personnel or allocation of goodwill to a portion of a business that is to be sold.
The goodwill impairment test requires the allocation of goodwill and all other assets and
liabilities to reporting units. We have determined that we have two reporting units: Provider
Services and Sleep Diagnostic Services. Our goodwill impairment reviews are determined using a
two-step process. The first step of the process is to compare the fair value of a reporting unit
with its carrying amount, or book value, including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, the goodwill of the reporting unit is not impaired and the second step
of the impairment review is not necessary. If the carrying amount of a reporting unit exceeds its
fair value, the second step of the goodwill impairment review is required to be performed to
estimate the implied fair value of the reporting units goodwill. The implied fair value of the
reporting units goodwill is compared with the carrying amount of that goodwill. If the carrying
amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. We perform the annual impairment
test as of May 1st of each year. Should it later be determined that an indicator of
impairment has occurred, we would be required to perform an additional impairment test. No
impairment charges were required during the fiscal years ended June 30, 2010, 2009 or 2008.
Share-Based Payment
We recognize compensation costs in our financial statements related to our stock-based payment transactions over the period services are rendered according to the fair value of the stock-based awards issued.
We recognize compensation costs in our financial statements related to our stock-based payment transactions over the period services are rendered according to the fair value of the stock-based awards issued.
Earnings Per Share
Basic earnings per share is computed by dividing net income or loss by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings (see Note 6).
Basic earnings per share is computed by dividing net income or loss by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings (see Note 6).
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Revenue Recognition
We provide services to patients on either a capitated monthly fee arrangement with HMOs or under a fee for service arrangement. The percentage of total revenue relating to Humana approximated 72% for Fiscal 2010, 2009 and 2008. The percentage of total revenue relating to Vista approximated 20%, 18% and 19% for Fiscal 2010, 2009 and 2008, respectively. The percentage of total revenue relating to Wellcare approximated 6%, 8% and 8% for Fiscal 2010, 2009 and 2008, respectively.
We provide services to patients on either a capitated monthly fee arrangement with HMOs or under a fee for service arrangement. The percentage of total revenue relating to Humana approximated 72% for Fiscal 2010, 2009 and 2008. The percentage of total revenue relating to Vista approximated 20%, 18% and 19% for Fiscal 2010, 2009 and 2008, respectively. The percentage of total revenue relating to Wellcare approximated 6%, 8% and 8% for Fiscal 2010, 2009 and 2008, respectively.
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 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 CMSs 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 favorable retroactive Medicare adjustments of $0.4 million and
$0.9 million for Fiscal 2010 and 2009, respectively, and an unfavorable retroactive Medicare
adjustment of $0.3 million for Fiscal 2008.
Under our risk agreements, we assume responsibility for the cost of all medical services provided
to the patient, even those we do not provide directly, in exchange for a percentage of premium or
other capitated fee. To the extent that patients require more frequent or expensive care, our
revenue under a contract may be insufficient to cover the costs of care provided. When it is
probable that expected future health care costs and maintenance costs under a contract or group of
existing contracts will exceed anticipated capitated revenue on those contracts, we recognize
losses on our prepaid health care services with HMOs. No contracts were considered loss contracts
at June 30, 2010 and June 30, 2009 because we have the right to terminate unprofitable physicians
and close unprofitable centers under our managed care contracts.
Our HMO contracts have various expiration dates ranging from one to three years with automatic
renewal terms. Upon negotiation of any of the HMO contracts, the expiration dates may be extended
beyond the automatic renewal terms.
Under 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 provide 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 Service Expense
We contract with or employ various health care providers to provide medical services to our patients. Primary care physicians are compensated on either a salary or capitation basis. For patients enrolled under risk managed care contracts, the cost of specialty services are paid on either a fee for service, per diem or capitation basis.
We contract with or employ various health care providers to provide medical services to our patients. Primary care physicians are compensated on either a salary or capitation basis. For patients enrolled under risk managed care contracts, the cost of specialty services are paid on either a fee for service, per diem or capitation basis.
The cost of health care services provided or contracted for is accrued in the period in which the
services are provided. This cost includes an estimate of the related liability for medical claims
incurred but not yet reported that is primarily based on historical claims experience and current
factors such as unusually high or low utilization and benefit changes provided under HMO plans.
Estimates are adjusted as changes in these factors occur and such adjustments are reported in the
period of determination. We use an actuarial analysis as an additional tool to further corroborate
our estimate of the related liability for medical claims incurred but not yet reported.
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Table of Contents
Stop-loss Insurance
Our health care costs are limited through agreements with the HMOs. The HMOs charge us a per member per month fee that limits our health care costs for any individual patient. Health care costs in excess of annual limits are generally handled directly by the HMOs and we are not entitled to and do not receive any related insurance recoveries.
Our health care costs are limited through agreements with the HMOs. The HMOs charge us a per member per month fee that limits our health care costs for any individual patient. Health care costs in excess of annual limits are generally handled directly by the HMOs and we are not entitled to and do not receive any related insurance recoveries.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board adopted the Accounting Standards Codification which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with U.S. generally accepted accounting principles. This Standard is effective for interim and annual reporting periods ending after September 15, 2009. The adoption of the Accounting Standards Codification did not have a material impact on our consolidated financial statements.
In June 2009, the Financial Accounting Standards Board adopted the Accounting Standards Codification which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with U.S. generally accepted accounting principles. This Standard is effective for interim and annual reporting periods ending after September 15, 2009. The adoption of the Accounting Standards Codification did not have a material impact on our consolidated financial statements.
Other Comprehensive Income
We had no comprehensive income items other than net income for all years presented.
We had no comprehensive income items other than net income for all years presented.
Subsequent Events
We evaluated subsequent events for recognition or disclosure through the time these financial statements were filed in this Annual Report on Form 10-K.
We evaluated subsequent events for recognition or disclosure through the time these financial statements were filed in this Annual Report on Form 10-K.
NOTE 3 GOODWILL AND OTHER INTANGIBLE ASSETS
The most significant component of the goodwill and other intangible assets included in the
accompanying consolidated balance sheets consists of the goodwill and other intangible assets
recorded in connection with the acquisition of the MDHC Companies in October 2006. The purchase
price, including acquisition costs, of approximately $66.2 million was allocated to the estimated
fair value of acquired tangible assets of $13.9 million, identifiable intangible assets of $8.7
million and assumed liabilities of $15.3 million as of October 1, 2006, resulting in goodwill
totaling $58.9 million. The identifiable intangible assets of $8.7 million consist of estimated
fair values of $1.6 million assigned to the trade name, $6.2 million to customer relationships and
$0.9 million to a noncompete agreement. The trade name was determined to have an estimated useful
life of six years and the customer relationships and noncompete agreements were each determined to
have 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 increase in goodwill of $0.8 million during Fiscal 2010 was related to the goodwill recorded in
connection with the acquisition of two operators of sleep diagnostic centers.
Total amortization expense for identifiable intangible assets was $1.3 million, $1.3 million and
$1.6 million for Fiscal 2010, 2009 and 2008, respectively. The estimated aggregate amortization
expense for intangible assets as of June 30, 2010 will be approximately $1.3 million, $1.2 million,
$0.9 million, $0.9 million, and $0 for each of the five succeeding fiscal years, respectively.
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NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
Estimated | ||||||||||||
June 30, | Useful Lives | |||||||||||
2010 | 2009 | (in years) | ||||||||||
Land |
$ | 1,919,746 | $ | 1,919,746 | | |||||||
Building and improvements |
5,328,851 | 4,754,375 | 40 | |||||||||
Construction in progress |
313,411 | 1,175,462 | | |||||||||
Vehicles |
1,012,677 | 724,479 | 5 | |||||||||
Furniture, fixtures and equipment |
5,638,814 | 5,028,440 | 3-5 | |||||||||
Furniture and equipment under capital lease |
762,293 | 474,389 | 3-5 | |||||||||
Leasehold improvements |
2,920,223 | 1,160,692 | 5 | |||||||||
17,896,015 | 15,237,583 | |||||||||||
Less accumulated depreciation and amortization |
(5,167,831 | ) | (4,748,200 | ) | ||||||||
$ | 12,728,184 | $ | 10,489,383 | |||||||||
Depreciation expense for the years ended June 30, 2010, 2009 and 2008 was approximately $1.6
million, $1.0 million and $0.9 million, respectively.
We entered into various noncancellable leases for certain furniture and equipment that are
classified as capital leases. The leases are payable over three to five years at incremental
borrowing rates ranging from 6% to 8% per annum. Accumulated amortization for assets recorded under
capital lease agreements was approximately $0.5 million and $0.3 million at June 30, 2010 and 2009,
respectively. Amortization of assets recorded under capital lease agreements was approximately
$0.2 million, $0.1 million and $0.1 million for the years ended June 30, 2010, 2009 and 2008,
respectively, and is included in depreciation expense for all years presented.
Future minimum lease payments under all capital leases are as follows:
For the year ending June 30, |
||||
2011 |
$ | 188,838 | ||
2012 |
103,584 | |||
2013 |
53,779 | |||
346,201 | ||||
Less amount representing imputed interest |
19,892 | |||
Present value of obligations under capital lease |
326,309 | |||
Less current portion |
169,665 | |||
Long-term capital lease obligations |
$ | 156,644 | ||
The current and long-term portions of obligations under capital leases are classified within
accrued expenses and other current liabilities and other liabilities, respectively, in the
accompanying consolidated balance sheets.
NOTE 5 DEBT
On December 18, 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 (0.35% at June 30, 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
June 30, 2010, there was no outstanding principal balance on the Credit Facility. At June 30,
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. Under the Credit Facility, we are no longer
required to use certificates of deposit as collateral for outstanding letters of credit.
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NOTE 6 EARNINGS PER SHARE
A reconciliation of the denominator of the basic and diluted earnings per share computation is as
follows:
Year Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Basic weighted average number of shares outstanding |
59,777,789 | 61,405,620 | 68,862,836 | |||||||||
Dilutive effect of stock options |
1,787,608 | 1,082,720 | 1,144,924 | |||||||||
Diluted weighted average number of shares outstanding |
61,565,397 | 62,488,340 | 70,007,760 | |||||||||
Not included in calculation of dilutive earnings per
share as impact is antidilutive: |
||||||||||||
Stock options outstanding |
267,500 | 3,775,750 | 2,998,250 |
NOTE 7 SHARE-BASED PAYMENT
The Amended and Restated Continucare Corporation 2000 Stock Incentive Plan (the 2000 Stock
Incentive Plan), which has been approved by our shareholders, permits the grant of stock options
and restricted stock awards in respect of up to 13,000,000 shares of common stock to our employees,
directors, independent contractors and consultants. On February 9, 2010, our shareholders approved
an amendment and extension of the 2000 Stock Incentive Plan to increase the aggregate number of
shares of common stock authorized for issuance pursuant to the 2000 Stock Incentive Plan from
9,000,000 to 13,000,000 and to extend the expiration date of the 2000 Stock Incentive Plan from
2010 to 2020. Under the terms of the 2000 Stock Incentive Plan, options are granted at the fair
market value of the stock at the date of grant and expire no later than ten years after the date of
grant. Options granted under the plan generally vest over four years, but the terms of the 2000
Stock Incentive Plan provide for accelerated vesting if there is a change in control of the
Company. Historically, we have issued authorized but previously unissued shares of common stock
upon option exercises. However, we do not have a policy regarding the issuance or repurchase of
shares upon option exercise or the source of those shares. No restricted stock awards have been
issued under the 2000 Stock Incentive Plan.
We recognize the cost relating to stock-based payment transactions in the financial statements over
the period services are rendered according to the fair value of the stock-based awards issued.
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. The fair value for employee stock options
granted during Fiscal 2010 and 2009 was calculated based on the following assumptions: risk-free
interest rate ranging from 0.73% to 3.05% and 0.66% to 3.19%, respectively; dividend yield of 0%;
weighted-average volatility factor of the expected market price of our common stock of 60.4% and
58.6%, respectively; and weighted-average expected life of the options ranging from 2 to 7 years
depending on the vesting provisions of each option. The fair value for employee stock options
granted during Fiscal 2008 was calculated based on the following assumptions: risk-free interest
rate ranging from 1.61% to 4.22%; dividend yield of 0%; volatility factor of the expected market
price of our common stock of 59.5%; and weighted-average expected life of the option ranging from 2
to 6 years depending on the vesting provisions of each option. The expected life of the options is
based on the historical exercise behavior of our employees. The expected volatility factor is
based on the historical volatility of the market price of our common stock as adjusted for certain
events that management deemed to be non-recurring and non-indicative of future events.
We recognized share-based compensation cost of $1.4 million, $1.2 million and $1.3 million for
Fiscal 2010, 2009 and Fiscal 2008, respectively. For Fiscal 2010 and 2009, we recognized excess
tax benefits resulting from the exercise of stock options of approximately $1.4 million and $0.1
million, respectively. For Fiscal 2008, we did not recognize any excess tax benefits resulting
from the exercise of stock options. The excess tax benefits had a positive effect on cash flow
from financing activities with a corresponding reduction in cash flow from operating activities in
Fiscal 2010 and 2009 of $1.4 million and $0.1 million, respectively. During Fiscal 2010, 2009 and
2008, we issued
1,112,963 shares, 13,750 shares and 83,750 shares, respectively, of common stock resulting from the
exercise of stock options.
F-13
Table of Contents
The following table summarizes information related to our stock option activity for Fiscal 2010:
Weighted | ||||||||
Number | Average | |||||||
of Shares | Exercise Price | |||||||
Outstanding at beginning of the year |
6,296,304 | $ | 2.00 | |||||
Granted |
1,282,500 | 3.27 | ||||||
Exercised |
(1,448,220 | ) | 0.98 | |||||
Forfeited |
(240,000 | ) | 2.51 | |||||
Expired |
(41,250 | ) | 2.49 | |||||
Outstanding at end of the year |
5,849,334 | $ | 2.50 | |||||
Exercisable at end of the year |
3,760,149 | |||||||
Weighted average fair value per
share of options granted during the
year |
$ | 1.59 | ||||||
The weighted average fair value per share of options granted during Fiscal 2009 and 2008 was $1.04
and $1.17, respectively.
The following table summarizes information about options outstanding and exercisable at June 30,
2010:
Options Outstanding | Options Exercisable | |||||||||||
Weighted | Weighted | |||||||||||
Average | Average | |||||||||||
Range of | Weighted | Remaining | Weighted | Remaining | ||||||||
Exercise | Number | Average | Contractual | Number | Average | Contractual | ||||||
Prices | Outstanding | Exercise Price | Life | Exercisable | Exercise Price | Life | ||||||
$0.69-$2.51
|
3,482,584 | $2.14 | 6.0 | 2,581,649 | $2.04 | 5.4 | ||||||
$2.59-$4.06 | 2,366,750 | $3.04 | 7.5 | 1,178,500 | $2.96 | 6.4 |
The total intrinsic value of options outstanding and options exercisable was $4.0 million at June
30, 2010. The total intrinsic value of options exercised during Fiscal 2010, 2009 and 2008 was
approximately $4.4 million, $9,000 and $0.1 million, respectively. As of June 30, 2010, there was
approximately $1.2 million of total unrecognized compensation cost related to non-vested stock
options, which is expected to be recognized over a weighted-average period of 2 years.
We had 10.1 million shares of common stock reserved for future issuance related to stock options at
June 30, 2010.
NOTE 8 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 a liability for unrecognized tax benefits of approximately $0.9 million at June 30,
2010 and 2009 and included such liability in accrued expenses and other current liabilities at June
30, 2010 and in other long-term liabilities at June 30, 2009 on the accompanying consolidated
balance sheets. The total amount of unrecognized tax benefits that if recognized would affect the
effective tax rate is $1.0 million, which includes accrued interest and penalties of approximately
$0.1 million at June 30, 2010 and 2009. We recognize interest accrued related to unrecognized tax
benefits in interest expense and penalties in operating expense. It is reasonably possible that
our unrecognized tax benefits may decrease by approximately $1.0 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.
F-14
Table of Contents
We recorded an income tax provision of $13.9 million, $9.6 million and $7.1 million for Fiscal
2010, 2009 and 2008, respectively. The income tax provision consisted of the following:
Year Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 10,847,528 | $ | 8,199,853 | $ | 6,408,183 | ||||||
State |
2,370,029 | 1,158,154 | 923,142 | |||||||||
Total |
13,217,557 | 9,358,007 | 7,331,325 | |||||||||
Deferred: |
||||||||||||
Federal |
543,787 | 181,483 | (171,415 | ) | ||||||||
State |
132,009 | 60,831 | (27,183 | ) | ||||||||
Total |
675,796 | 242,314 | (198,598 | ) | ||||||||
Total income tax provision |
$ | 13,893,353 | $ | 9,600,321 | $ | 7,132,727 | ||||||
Deferred income taxes reflect the net effect of temporary differences between the carrying amount
of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. The tax effects of temporary differences that give rise to deferred income tax assets
and deferred income tax liabilities are as follows:
June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Deferred income tax assets: |
||||||||||||
Bad debt and notes receivable reserve |
$ | 17,023 | $ | | $ | 303,871 | ||||||
Other |
56,873 | 75,573 | 110,062 | |||||||||
Impairment charge |
742,836 | 999,617 | 1,256,398 | |||||||||
Share-based compensation |
2,154,254 | 1,861,818 | 1,318,073 | |||||||||
Deferred income tax assets |
2,970,986 | 2,937,008 | 2,988,404 | |||||||||
Deferred income tax liabilities: |
||||||||||||
Depreciable/amortizable assets |
(6,527,954 | ) | (5,818,179 | ) | (5,638,652 | ) | ||||||
Basis difference in tangible assets |
(617,553 | ) | (617,553 | ) | (617,553 | ) | ||||||
Deferred income tax liabilities |
(7,145,507 | ) | (6,435,732 | ) | (6,256,205 | ) | ||||||
Net deferred income tax liabilities |
$ | (4,174,521 | ) | $ | (3,498,724 | ) | $ | (3,267,801 | ) | |||
After consideration of all the evidence, both positive and negative (including, among others, our
projections of future taxable income and profitability in recent fiscal years), management
determined that no valuation allowance was necessary at June 30, 2010, 2009 and 2008 to reduce the
deferred income tax assets to the amount that will more likely than not be realized. At June 30,
2010, we did not have any net operating losses available for carryforward.
A reconciliation of the statutory federal income tax rate with our effective income tax rate for
the years ended June 30, 2010, 2009 and 2008 is as follows:
Year Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Statutory federal rate |
35.00 | % | 35.00 | % | 35.00 | % | ||||||
State income taxes, net of federal income tax benefit |
3.58 | 3.58 | 3.58 | |||||||||
Goodwill and other non-deductible items |
(0.06 | ) | 0.01 | 0.18 | ||||||||
Effective tax rate |
38.52 | % | 38.59 | % | 38.76 | % | ||||||
F-15
Table of Contents
NOTE 9 SHARE REPURCHASE PROGRAM
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. As of August 31, 2010, we had
repurchased 11,907,004 shares of our common stock for approximately $25.0 million.
NOTE 10 EMPLOYEE BENEFIT PLAN
In January 1997, we adopted a tax qualified employee savings and retirement plan covering our
eligible employees. The Continucare Corporation 401(k) Profit Sharing Plan (the 401(k) Plan) was
most recently amended and restated in December 2008. The 401(k) Plan is intended to qualify under
Section 401 of the Internal Revenue Code (the Code) and contains a feature described in Code
Section 401(k) under which a participant may elect to have his or her compensation reduced by up to
75% (subject to IRS limits) and have that amount contributed to the 401(k) Plan. In October 2001,
the Internal Revenue Service issued a favorable determination letter for the 401(k) Plan, and the
latest amendment and restatement has been timely submitted to the Internal Revenue Service for a
new favorable determination letter.
Under the 401(k) Plan, new employees who are at least 18 years of age are eligible to participate
in the 401(k) Plan after 90 days of service. Eligible employees may elect to contribute to the
401(k) Plan up to a maximum amount of tax deferred contribution allowed by the Internal Revenue
Code. We may, at our discretion, make a matching contribution and a non-elective contribution to
the 401(k) Plan. There were no matching contributions for the years ended June 30, 2010, 2009 or
2008. Participants in the 401(k) Plan would not begin to vest in the employer contribution until
the end of two years of service, with full vesting achieved after five years of service.
NOTE 11 COMMITMENTS AND CONTINGENCIES
Legal Proceedings
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 managements 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.
Contingencies
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.
F-16
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Leases
We lease office space and equipment under various non-cancelable operating leases. Rent expense under such operating leases was approximately $2.9 million, $2.7 million and $2.8 million for the years ended June 30, 2010, 2009 and 2008, respectively. Future annual minimum payments under such leases as of June 30, 2010 are as follows:
We lease office space and equipment under various non-cancelable operating leases. Rent expense under such operating leases was approximately $2.9 million, $2.7 million and $2.8 million for the years ended June 30, 2010, 2009 and 2008, respectively. Future annual minimum payments under such leases as of June 30, 2010 are as follows:
For the fiscal year ending June 30, |
||||
2011 |
$ | 2,566,085 | ||
2012 |
1,466,525 | |||
2013 |
1,176,179 | |||
2014 |
1,101,967 | |||
2015 and thereafter |
1,162,604 | |||
Total |
$ | 7,473,360 | ||
NOTE 12 VALUATION AND QUALIFYING ACCOUNTS
Activity in our valuation and qualifying accounts consists of the following:
Year ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Allowance for doubtful accounts related to
accounts and other receivables: |
||||||||||||
Balance at beginning of period |
$ | | $ | 783,741 | $ | 802,239 | ||||||
Provision for doubtful accounts |
118,895 | | 181,081 | |||||||||
Write-offs of uncollectible accounts receivable |
(74,766 | ) | (783,741 | ) | (199,579 | ) | ||||||
Balance at end of period |
$ | 44,129 | $ | | $ | 783,741 | ||||||
NOTE 13 RELATED PARTY TRANSACTIONS
We became a party to a lease agreement for office space owned by Dr. Luis Cruz, a director of the
Company through February 2010. For Fiscal 2010, 2009 and 2008, expenses related to this lease were
approximately $0.4 million for each fiscal year. This lease is scheduled to terminate on December
31, 2011 with an option to renew for an additional five years.
Effective November 1, 2007, we entered into 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. The
arrangement was on substantially similar terms to arrangements we have with our other independent
physician affiliates under at risk arrangements where we provide medical utilization services and
pay a primary care capitation fee to the provider. Under this arrangement, CarePlus paid us a
monthly capitation fee based on the number of CarePlus Medicare Advantage members who selected
Centers of Medical Excellence as their primary care provider and we in turn paid a monthly primary
care capitation fee to Centers of Medical Excellence. Centers of Medical Excellence was also
eligible to receive a bonus from us if they operated in a cumulative surplus. For Fiscal 2010,
2009 and 2008, we recognized an operating profit of $0.3 million, an operating loss of $0.2 million
and $0, respectively, related to this arrangement. Effective December 31, 2009, we terminated our
agreements with Centers of Medical Excellence, Inc.
On February 5, 2008, we repurchased an aggregate of 600,000 shares of our common stock from Dr.
Cruz, as trustee of the Luis Cruz Irrevocable Trust A, the Luis Cruz Irrevocable Trust B and the
Luis Cruz Irrevocable Trust C. We paid $2.25 per share for the shares for an aggregate purchase
price of $1,350,000. The per share purchase price paid by us represented a 10% discount from the
closing price of our common stock on February 4, 2008.
On September 19, 2008, we purchased an aggregate of 400,000 shares of our common stock from certain
family trusts of Dr. Cruz. Dr. Cruz does not have a beneficial ownership in the shares of common
stock held by these family trusts. Continucare paid $2.14 per share for the shares for an
aggregate purchase price of $856,000. The per share purchase price paid by Continucare represented
a 10% discount from the closing price of Continucares common stock on September 19, 2008.
F-17
Table of Contents
On September 19, 2008, we purchased an aggregate of 600,000 shares of our common stock from Mr.
Garcia. Continucare paid $2.14 per share for the shares for an aggregate purchase price of
$1,284,000. The per share
purchase price paid by Continucare represented a 10% discount from the closing price of
Continucares common stock on September 19, 2008.
On October 23, 2008, we entered into a joint venture with Dr. Jacob Nudel, a director of the
Company, that sought to establish medical provider networks to provide services on an outpatient
basis to patients sustaining injuries related to automobile accidents, which we refer to as special
purpose provider networks. Under the revenue and cost sharing provisions of the joint venture,
provided that we had a liquidation preference with respect to 100% of our capital contributions,
(i) all ordinary cash flow of the joint venture would have been distributed to us and Dr. Nudel,
pro rata in accordance with the parties ownership interest, and (ii) all net proceeds from capital
transaction or liquidation proceeds would have been distributed, first, to us until such time as we
had received aggregate distributions equal to our aggregate capital contributions, and thereafter,
to us and Dr. Nudel, pro rata in accordance with the parties ownership interest. The Company and
Dr. Nudel each had a 50% ownership interest in the joint venture. For Fiscal 2010 and 2009, we
recorded operating expenses of approximately $0.4 million and $0.3 million, respectively, related
to the joint venture. In April 2010, we terminated the business activities of the joint venture and
recognized a loss on impairment of fixed assets of approximately $0.1 million during Fiscal 2010.
On January 15, 2009, we purchased an aggregate of 1,100,000 shares of its common stock from Mr.
Garcia. Continucare paid $1.71 per share for the shares for an aggregate purchase price of
$1,881,000. The per share purchase price paid by Continucare was the closing price of
Continucares common stock on January 15, 2009.
On March 12, 2009, we purchased an aggregate of 350,000 shares of its common stock from certain
family trusts of Dr. Cruz. Dr. Cruz does not have a beneficial ownership in the shares of common
stock held by these family trusts. Continucare paid $1.69 per share for the shares for an
aggregate purchase price of $591,500. The per share purchase price paid by Continucare represented
a 5% discount from the closing price of Continucares common stock on March 12, 2009.
NOTE 14 QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
For the Year Ended June 30, 2010 | |||||||||||||||||||||
First | Second | Third | Fourth | Full | |||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||||
Total revenue |
$ | 75,972,366 | $ | 75,256,100 | $ | 80,274,545 | $ | 79,288,452 | $ | 310,791,463 | |||||||||||
Net income |
$ | 5,308,339 | $ | 5,288,679 | $ | 5,900,611 | $ | 5,678,678 | $ | 22,176,307 | |||||||||||
Net income per common share: |
|||||||||||||||||||||
Basic |
$ | .09 | $ | .09 | $ | .10 | $ | .09 | $ | .37 | |||||||||||
Diluted |
$ | .09 | $ | .09 | $ | .09 | $ | .09 | $ | .36 |
For the Year Ended June 30, 2009 | |||||||||||||||||||||
First | Second | Third | Fourth | Full | |||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||||
Total revenue |
$ | 65,064,634 | $ | 65,539,894 | $ | 75,395,799 | $ | 75,270,033 | $ | 281,270,360 | |||||||||||
Net income |
$ | 2,496,132 | $ | 3,659,810 | $ | 4,326,503 | $ | 4,798,676 | $ | 15,281,121 | |||||||||||
Net income per common share: |
|||||||||||||||||||||
Basic |
$ | .04 | $ | .06 | $ | .07 | $ | .08 | $ | .25 | |||||||||||
Diluted |
$ | .04 | $ | .06 | $ | .07 | $ | .08 | $ | .24 |
Basic and diluted net income per common share for each of the quarters presented above are based on
the respective weighted average number of common shares outstanding for the quarters. The sum of
the quarterly basic and diluted net income per common share amounts may not be equal to the full
year basic and diluted net income per common share amounts due to rounding.
F-18
Table of Contents
EXHIBIT INDEX
Exhibit | ||||
Description | Number | |||
Subsidiaries of the Company |
21.1 | |||
Consent of Independent Registered Public Accounting Firm |
23.1 | |||
Section 302 Certification of Chief Executive Officer |
31.1 | |||
Section 302 Certification of Chief Financial Officer |
31.2 | |||
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
32.1 | |||
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
32.2 |