-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fu+ijlYBplOB3b0ujdGBavT1bkjxhyRsv8mAcF2J0HiqfjjNv7xRX/Oj4yzOkof1 0aLeop92WV4y78pvRo6XFA== 0000950144-98-006151.txt : 19980515 0000950144-98-006151.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950144-98-006151 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980414 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980514 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINUCARE CORP CENTRAL INDEX KEY: 0000803352 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 592716063 STATE OF INCORPORATION: FL FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-12115 FILM NUMBER: 98620183 BUSINESS ADDRESS: STREET 1: 100 SOUTHEAST 2ND ST STREET 2: 36TH FLOOR CITY: MIAMI STATE: FL ZIP: 33131 BUSINESS PHONE: 3053507515 FORMER COMPANY: FORMER CONFORMED NAME: ZANART ENTERTAINMENT INC DATE OF NAME CHANGE: 19950420 8-K/A 1 CONTINUCARE CORP. 8-K/A 4/14/98 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A Amendment No. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 14, 1998 CONTINUCARE CORPORATION -------------------------------------------------- (Exact Name of Registrant as Specified in Charter) FLORIDA ---------------------------------------------- (State or Other Jurisdiction of Incorporation) 0-21910 59-2716023 - ------------------------ --------------------------------- (Commission File Number) (IRS Employer Identification No.) CONTINUCARE CORPORATION 100 SOUTHEAST 2ND STREET, 36TH FLOOR MIAMI, FLORIDA 33131 - --------------------------------------- ---------- (Address of Principal Executive Office) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 350-7515 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On April 14, 1998, Continucare Corporation, a Florida corporation (the "Registrant"), through a wholly-owned subsidiary, CNU Acquisition Corp., acquired substantially all of the assets of SPI Managed Care, Inc., SPI Managed Care of Hillsborough County, Inc., SPI Managed Care of Broward, Inc., Broward Managed Care, Inc., each a Florida corporation (collectively, the "Companies") which are direct or indirect subsidiaries of First Medical Corporation and First Medical Group, Inc., each a Delaware corporation. The Companies are engaged in the business of providing administrative and health care services. The aggregate purchase was $6.75 million. The source of the consideration paid by the Registrant was from a portion of the net proceeds from the sale of 8% Convertible Subordinated Notes due 2002, sold on October 30, 1997. The foregoing summary is qualified in its entirety by a copy of the Agreement attached hereto as an exhibit. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) FINANCIAL STATEMENTS The audited combined statements of SPI Managed Care, Inc., SPI Managed Care of Broward, Inc., SPI Managed Care of Hillsborough County, Inc. and Broward Managed Care, Inc. for the year ended December 31, 1997 are attached as Exhibit 7(a) and are incorporated herein by reference. (b) PRO FORMA FINANCIAL INFORMATION The unaudited pro forma consolidated balance sheet as of December 31, 1997 and the unaudited proforma consolidated statements of income for the year ended June 30, 1997 and the six months ended December 31, 1997 are attached as Exhibit 7(b) and are incorporated herein by reference. (c) EXHIBITS 2.1 Asset Purchase Agreement, dated as of April 7, 1998, by and among (i) SPI Managed Care, Inc., SPI Managed Care of Hillsborough County, Inc., SPI Managed Care of Broward, Inc., Broward Managed Care, Inc., each a Florida corporation (ii) First Medical Corporation, a Delaware corporation and First Medical Group, Inc., a Delaware corporation and (iii) CNU Acquisition Corporation, a Florida corporation.* 23.1 Consent of Independent Auditors - ---------------------- *Previously filed. 2 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CONTINUCARE CORPORATION Date: May 11, 1998 By: /s/ Charles M. Fernandez ---------------------------- Charles M. Fernandez Chairman, Chief Executive Officer and President 3 4 ATTACHMENT AND EXHIBIT ---------------------- ATTACHMENT DESCRIPTION ---------- ----------- 7(a) The audited combined statements of SPI Managed Care, Inc., SPI Managed Care of Broward, Inc., SPI Managed Care of Hillsborough County, Inc. and Broward Managed Care, Inc. for the year ended December 31, 1997 are attached as Exhibit 7(a) and are incorporated herein by reference. 7(b) The unaudited pro forma consolidated balance sheet as of December 31, 1997 and the unaudited proforma consolidated statements of income for the year ended June 30, 1997 and the six months ended December 31, 1997 are attached as Exhibit 7(b) and are incorporated herein by reference. EXHIBIT DESCRIPTION ------- ----------- 23.1 Consent of Independent Auditors 5 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. Combined Financial Statements Year Ended December 31, 1997 6 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. CONTENTS ================================================================================ PAGE ---- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3 FINANCIAL STATEMENTS Combined balance sheet 4 Combined statement of operations 6 Combined statement of capital deficit 7 Combined statement of cash flows 8 Summary of accounting policies 9 Notes to combined financial statements 16 2 7 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors SPI Managed Care, Inc., SPI Managed Care of Broward, Inc., SPI Managed Care of Hillsborough County, Inc., and Broward Managed Care, Inc. Miami, FL We have audited the accompanying combined balance sheet of SPI Managed Care, Inc., SPI Managed Care of Broward, Inc., SPI Managed Care of Hillsborough County, Inc., and Broward Managed Care, Inc., as of December 31, 1997, and the related combined statements of operations, capital deficit and cash flows for the year then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such combined financial statements referred to above present fairly, in all material respects, the combined financial position of SPI Managed Care, Inc., SPI Managed Care of Broward, Inc., SPI Managed Care of Hillsborough County, Inc., and Broward Managed Care, Inc. as of December 31, 1997, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. Miami, Florida /s/ BDO Seidman, LLP April 29, 1998 3 8 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. COMBINED BALANCE SHEET ================================================================================
DECEMBER 31, 1997 - ------------ ---------- ASSETS CURRENT: Humana IBNR receivable and claims reserve funds (Note 4) $5,857,727 ---------- Total current assets 5,857,727 PROPERTY AND EQUIPMENT, net (Note 1) 217,172 GOODWILL 1,784,074 OTHER ASSETS 13,043 ---------- $7,872,016 ==========
4 9 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. COMBINED BALANCE SHEET ================================================================================
DECEMBER 31, 1997 ----------- LIABILITIES AND CAPITAL DEFICIT CURRENT LIABILITIES: Checks issued against future deposits $ 293,349 Accounts payable 377,403 Due to former owners of Broward Managed Care, Inc. 1,500,000 Due to parent, net 347,792 Accrued medical claims, including amounts incurred but not reported 5,642,037 Accrued expenses 711,558 ----------- Total current liabilities 8,872,139 ----------- COMMITMENTS AND CONTINGENCIES (Notes 3, 5, 6 and 9) CAPITAL DEFICIT: (NOTE 2) Paid-in capital 285,584 Deficit (1,285,707) ----------- Total capital deficit (1,000,123) ----------- $ 7,872,016 ===========
See accompanying summary of accounting policies and notes to combined financial statements. 5 10 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. COMBINED STATEMENT OF OPERATIONS ================================================================================
YEAR ENDED DECEMBER 31, 1997 ------------ REVENUES: Capitated revenue - Humana (Note 4) $ 49,304,054 Other revenue 891,185 ------------ Total revenue 50,195,239 Medical expenses 41,018,490 ------------ Gross profit 9,176,749 OPERATING EXPENSES: Salaries and related benefits (Note 5) 5,393,280 General and administrative 5,331,092 Depreciation and amortization 87,422 ------------ Total operating expenses 10,811,794 ------------ NET LOSS (1,635,045) ============
See accompanying summary of accounting policies and notes to combined financial statements. 6 11 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. COMBINED STATEMENT OF CAPITAL DEFICIT ================================================================================
RETAINED TOTAL PAID-IN EARNINGS/ CAPITAL YEAR ENDED DECEMBER 31, CAPITAL (DEFICIT) DEFICIT ----------- ----------- ----------- Balance, December 31, 1996 $ 285,584 $ 349,338 $ 634,922 Net loss -- (1,635,045) (1,635,045) ----------- ----------- ----------- BALANCE, DECEMBER 31, 1997 $ 285,584 $(1,285,707) $(1,000,123) =========== =========== ===========
See accompanying summary of accounting policies and notes to combined financial statements. 7 12 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. COMBINED STATEMENT OF CASH FLOWS ================================================================================
YEAR ENDED DECEMBER 31, 1997 ----------- OPERATING ACTIVITIES: Net loss $(1,635,045) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 87,422 Change in assets and liabilities: Decrease in Humana IBNR receivable and claims reserve funds 1,490,951 Increase in other assets (24,115) Increase in accounts payable, checks issued against future deposits 160,328 and accrued expenses Increase in due to parent, net 408,664 Decrease in accrued medical claims, including amounts incurred but not reported (428,469) ----------- Net cash provided by operating activities 59,736 ----------- INVESTING ACTIVITIES: Capital expenditures (143,596) ----------- Net cash used in investing activities (143,596) ----------- Decrease in cash (83,860) Cash, beginning of year 83,860 ----------- Cash, end of year $ -- =========== SUPPLEMENTAL DISCLOSURE CASH FLOW INFORMATION: Cash paid during the year for: Interest $ -- Income taxes -- Non-cash transactions: Additional purchase price of Broward Managed Care, Inc. due to earnout provisions 1,500,000 ===========
See accompanying summary of accounting policies and notes to combined financial statements. 8 13 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. SUMMARY OF ACCOUNTING POLICIES ================================================================================ NATURE OF ORGANIZATION SPI Managed Care, Inc., ("SPI"), incorporated on February 19, 1988, SPI Managed Care of Broward, Inc. ("SPI Broward"), incorporated on July 15, 1992, SPI Managed Care of Hillsborough County, Inc. ("SPI Hillsborough"), incorporated on April 20, 1993, and Broward Managed Care, Inc. ("BMC"), incorporated on January 21, 1994, collectively (the "Companies"), are providers of physician practice management services including the operation of clinical facilities and management services to medical service groups. The Companies are wholly-owned subsidiaries of First Medical Corporation. A wholly-owned subsidiary of First Medical Group, Inc. The Companies function in two capacities as a management services organization: (i) owning and operating primary care centers which have full risk contracts for primary care and Part B services and partial risk (50%) for Part A services, and (ii) managing multi-speciality groups with fee-for-service and full risk contracts for primary care and Part B services and partial risk (50%) for Part A services. Full risk contracts are contracts with managed care companies where the Companies assume essentially all responsibility for a managed care member's medical costs and partial risk contracts are contracts where the Companies assume partial responsibility for a managed care member's medical costs. SPI, SPI Hillsborough, and BMC provide health care services subject to affiliated provider agreements entered into with Humana Medical Plan, Inc.; Humana Health Plan of Florida, Inc.; and Humana Health Insurance Company of Florida, Inc. and their affiliates. All of the Humana entities will collectively be known as "Humana." The Company is dependent on Humana for the majority of its operations. For the year ended December 31, 1997, approximately 98 percent of the Companies' revenue is from such agreements with Humana. 9 14 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. SUMMARY OF ACCOUNTING POLICIES ================================================================================ SPI operates two centers in Dade County, Florida located in Kendall and Cutler Ridge. SPI Hillsborough operates five centers in the west coast of Florida located in Plant City, New Port Richey, Lutz, South Dale Mabry and Springhill. BMC operates two centers in Broward County, Florida located in Plantation and Sunrise. Health services are provided to Humana members through the centers and their networks of physicians and health care specialists. Services to be provided by the centers include medical and surgical services, including all procedures furnished in a physician's office such as X-rays, nursing services, blood work and other incidental, drugs and medical supplies. The centers are responsible for providing all such services and for directing and authorizing all other care for Humana members. The centers are financially responsible for all out-of-area care rendered to a member and provide direct care as soon as the member is able to return to the designated medical center. Humana has agreed to pay the centers monthly for services provided to members based on a predetermined amount per member ("capitation") comprised of in-hospital services and other services defined by contract ("Part A"), in-office ("Primary") and other medical services defined by the agreements ("Part B"). SPI Broward manages the full risk managed care segment of a nonaffiliated multi-specialty group practice in Broward County, Florida. BASIS OF PRESENTATION In January 1996, First Medical Corporation acquired BMC for approximately $129,000 in cash. Goodwill in the amount of $327,778 was recorded in connection with the purchase. 10 15 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. SUMMARY OF ACCOUNTING POLICIES ================================================================================ Additionally, pursuant to earn out provisions in the purchase agreement, First Medical Corporation recorded $1,500,000 due to the former owner of BMC in December 1997, resulting in additional goodwill in the same amount. There are no further earn out provisions. Concurrent with the sale discussed in Note 9, the ultimate parent will assume the payable in the amount of $1,500,000. Accounting practice prescribed by the Securities and Exchange Commission ("SEC") requires "push-down" accounting to revalue the Company's assets at the time of its acquisition. The financial statements presented reflect the push-down accounting of First Medical Corporation's acquiring BMC through the transaction described above. This accounting includes the push-down of goodwill of $1,827,778 and payables in the amount of $1,500,000. The balance of goodwill attributed to the effect of push-down accounting: DECEMBER 31, 1997 --------------------------------------------- Goodwill $1,827,778 Less accumulated amortization 43,704 --------------------------------------------- $1,784,074 ============================================= Goodwill is being amortized over 15 years. The Company continually reevaluates the propriety of the carrying amount of goodwill and other intangible assets as well as the amortization period to determine whether current events and circumstances warrant adjustments to the carrying value and 11 16 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. SUMMARY OF ACCOUNTING POLICIES ================================================================================ estimates of useful lives. As of December 31, 1997, the Company believed that no significant impairment of goodwill (noted above) have occurred and that no reduction of the amortization periods is warranted. PRINCIPLES OF The combined financial statements include the COMBINATION accounts of SPI, SPI Broward, SPI Hillsborough and BMC after elimination of intercompany accounts and transactions. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. HUMANA IBNR Humana withholds certain amounts each month RECEIVABLE AND from the centers' Part A, Part B, and CLAIMS RESERVE FUNDS supplemental funding in order to cover claims incurred but not reported or paid. The amount is used by Humana to pay the centers' Part A, Part B and supplemental costs. The amounts withheld by Humana to cover incurred but not reported or paid claims vary by center based on the claims history of the respective center and is determined solely by Humana. Humana also withholds a certain amount each month from the centers' Part A capitation funding. This amount represents a "catastrophic reserve fund" to be utilized for the payment of a center's Part A costs in the event a center ceases operations and the incurred but not reported reserves are not adequate to reimburse providers for Part A services rendered. This amount is calculated monthly by Humana. The withholdings are used to pay the centers' medical claims, which Humana pays on the centers' behalf. The remaining amount after claims have been paid is remitted to the company. 12 17 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. SUMMARY OF ACCOUNTING POLICIES ================================================================================ PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated on the straight-line method over the estimated useful lives, generally 5 to 7 years. Amortization of leasehold improvements is provided over the life of each respective lease. INCOME TAXES The Companies account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which requires recognition of estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carryforwards. Measurement of deferred income tax is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized. The Companies have a net loss for 1997, which was not able to be used by the ultimate parent since it also has reported net losses. A valuation allowance has been set up for approximately $482,000 related to the deferred tax asset arising from approximately $1,300,000 in net operating loss carryforwards, which expires in years through 2017. REVENUE AND Revenue from Humana for primary care, Part A, MEDICAL COST Part B and supplemental funds is recognized RECOGNITION monthly on the basis of the number of Humana members assigned to the primary care centers and the contractually agreed-upon rates. The primary care centers receive monthly payments from Humana after all expenses paid by Humana on behalf of the centers, estimated claims incurred but not reported and claims reserve fund balances have been determined. In addition to Humana payments, the primary care centers receive copayments from commercial members from each office visit, depending upon the specific plan and options selected, and receive payments from non-Humana members on a fee-for-service basis. 13 18 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. SUMMARY OF ACCOUNTING POLICIES ================================================================================ Medical services are recorded as expenses in the period in which they are incurred. Accrued medical claims are reflected in the combined balance sheet and are based upon costs incurred for services rendered prior to and up to December 31, 1997. Included are services incurred but not reported as of December 31, 1997, based upon actual costs reported subsequent to December 31, 1997 and a reasonable estimate of additional costs. Fee-for-service revenue is reported at the estimated net realizable amounts from patients and third-party payors as services are rendered. FAIR VALUE OF The carrying amount of financial instruments FINANCIAL including Humana IBNR receivable and claims INSTRUMENTS reserve funds, accounts payable, accrued expenses, accrued medical claims and due to parent approximate fair value at December 31, 1997 because of the short term maturity of these instruments. STOP-LOSS FUNDING The primary care centers are charged a stop-loss funding fee by Humana for the purpose of limiting a center's exposure to Part A costs and certain Part B costs associated with a member's health services. For the year ended December 31, 1997, the stop-loss threshold for both Part A and Part B costs for Medicare members was $40,000 per member per calendar year for both SPI, SPI Hillsborough and BMC. For commercial members, the stop-loss threshold for both Part A and Part B costs were $20,000 and $15,000 for SPI and SPI Hillsborough, respectively. Since the SPI, SPI Hillsborough and BMC centers are not responsible for claims in excess of the threshold, income and the corresponding expense, both equal to the stop-loss funding are recognized by SPI, SPI Hillsborough and BMC. These amounts are included in revenue and medical expenses, respectively, in the accompanying combined statement of operations. Stop-loss 14 19 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. SUMMARY OF ACCOUNTING POLICIES ================================================================================ funding for the SPI, SPI Hillsborough and BMC centers for the year ended December 31, 1997 was approximately $5,100,000. MATERNITY FUNDING The primary care centers are charged a maternity funding fee on commercial membership for the purpose of limiting the center's exposure to Part A and Part B costs associated with a commercial member's pregnancy or related illness. Since the SPI and SPI Hillsborough centers are not responsible for claims in excess of the amount contributed to the maternity fund, income and expenses both equal to the maternity fund are recognized by SPI and SPI Hillsborough and are included in revenue and medical expenses, respectively in the accompany combined statement of operations. Maternity funding for the SPI and SPI Hillsborough centers for the year ended December 31, 1997 was approximately $966,000. SELLING, GENERAL AND In accordance with Staff Accounting Bulletin ADMINISTRATIVE EXPENSES No 55, "Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity" ("SAB 55") certain expenses incurred by First Medical Corporation on the Companies' behalf have been allocated to the Companies. Such allocated expenses include corporate overhead and other selling, general and administrative expenses, such as, salaries, rent and utilities. These expenses are allocated to the Companies using the proportional cost allocation method based on the Companies' operating expenses as a percentage of total operating expenses, which the Companies' management believes is reasonable. For the year ended December 31, 1997, approximately $1,198,000 was allocated from First Medical Corporation to the Companies. 15 20 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS ================================================================================ 1. PROPERTY AND EQUIPMENT, Property and equipment at December 31, 1997 NET consists of the following: Medical, computer and office equipment $ 316,673 Leasehold improvements 117,973 Furniture and fixtures 15,950 ---------------------------------------------- 450,596 Less: accumulated depreciation (233,424) ---------------------------------------------- Property and equipment $ 217,172 ---------------------------------------------- 2. COMMON STOCK AND Common stock and paid-in-capital at PAID-IN-CAPITAL December 31, 1997 consist of the following: ---------------------------------------------- SPI Managed Care Inc. Common stock, $1.00 par value, shares authorized 500; issued and outstanding 0 -- Paid-in capital 1,000 ---------------------------------------------- SPI Managed Care of Broward, Inc. Common stock, $.01 par value, shares authorized 1,000; issued and outstanding 0 -- Paid-in capital 5 ---------------------------------------------- SPI Managed Care of Hillsborough County, Inc. Common stock, $.01 par value, shares authorized 1,000; issued and outstanding 0 -- Paid-in capital 500 ---------------------------------------------- Broward Managed Care, Inc. Common stock, $.01 par value, shares authorized 1,000; issued and outstanding 0 -- Paid-in capital 284,079 ---------------------------------------------- 285,584 ============================================== 16 21 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS ================================================================================ The Companies were sold to First Medical Corporation and are all legal entities owned by First Medical Corporation, as of December 31, 1997. However, the Companies never issued any of its common stock to First Medical Corporation. 3. LEASES The Company has several noncancelable operating leases primarily for office space and equipment that expire throughout 2001. Future minimum lease payments required under noncancelable operating leases at December 31, 1997 are as follows: YEAR ENDING DECEMBER 31, ---------------------------------------------- 1998 $ 72,111 1999 69,050 2000 40,737 2001 28,848 ---------------------------------------------- Total minimum lease payments $ 210,746 ---------------------------------------------- Rental expense during 1997 amounted to approximately $76,000. The Companies also rent medical facilities and equipment through their affiliated provider agreements with Humana. The total non-lease rental expense relating to these facilities and equipment use is approximately $1,000,000 for the year ended December 31, 1997. 4. BUSINESS AND CREDIT The Company derives the majority of its CONCENTRATIONS revenue from its affiliated provider agreements with Humana 98% or approximately $49,300,000 of the revenue of the Company for the year ended December 31, 1997 was derived from such agreements with Humana. The amount of revenue is based on the number of members assigned to each of the centers. Humana members include 8,359 Medicare members and 9,065 commercial members at December 31, 1997. The fluctuation of the number of members 17 22 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS ================================================================================ significantly affects the Company's business. The receivable from Humana at December 31, 1997 is $5,857,727. 5. RETIREMENT PLANS The Companies sponsor a 401(k) plan (the "Plan") for its domestic operations. Employees who have worked a minimum of six months or 1000 hours and are at least 21 years of age may participate in the Plan. Employees may contribute to the Plan up to 14 percent of their annual salary, not to exceed $9,500 in 1996. The Company's matching contribution is 25 cents for each dollar of the employee's elected contribution, up to four percent of the employee's annual salary. The Company's matching contribution was approximately $22,000 for the year ended December 31, 1997. 6. COMMITMENTS AND GOVERNMENTAL REGULATIONS CONTINGENCIES The Company's operations have been and may be affected by various forms of governmental regulation and other actions. It is presently not possible to predict the likelihood of any such actions, the form which such actions may take, or the effect actions may have on the Company. PHYSICIAN CONTRACTS The Company has entered into employment agreements of two or three years with its primary care physicians and into contracts with various independent physicians to provide specialty and other referral services both on a prepaid and a negotiated fee-for-service basis. Such costs are included in the combined statement of operations as medical expense. MALPRACTICE AND PROFESSIONAL LIABILITY INSURANCE The Company maintains professional liability insurance on a claims-made basis including retrospective coverage for acts occurring since inception of its operations. Incidents and claims reported during the policy period are anticipated to be covered by the malpractice carrier. The Company intends to keep such 18 23 SPI MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, INC., SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AND BROWARD MANAGED CARE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS ================================================================================ insurance in force throughout the foreseeable future. At December 31, 1997, there are no asserted claims made against the Company that were not covered by the policy. Physicians providing medical services to members are provided malpractice insurance coverage (claim-made basis), including retrospective coverage for acts occurring since their affiliation with the Company. 7. RELATED PARTY At December 31, 1997, First Medical TRANSACTIONS Corporation is obligated to a certain stockholder and former employee for the following: Obligation under non compete agreement with a former employee and stockholder payable in monthly installments of $8,333 until June 1998. $50,000 SPI Managed Care, Inc. is contingently liable for this amount in the event of non-performance by First Medical Corporation. 8. SUBSEQUENT EVENTS First Medical Group, Inc. entered into an agreement on April 8, 1998 for the sale of medical facilities located in Florida, comprising the business of the Companies. The facilities are being sold to a publicly held company for a total consideration of $6,750,000. The agreement was closed on April 14, 1998. 19 24 INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION GENERAL The following unaudited pro forma consolidated balance sheet as of December 31, 1997, and the unaudited proforma consolidated statements of income for the year ended June 30, 1997, and the six months ended December 31, 1997, include the Company's historical financial position and results of operations, adjusted to reflect the Acquisitions discussed as if all such events and transactions had occurred as of June 30, 1997, in the case of the consolidated balance sheet, and as of July 1, 1996, in the case of the consolidated statements of income. The unaudited pro forma consolidated financial information has been prepared by the Company based, in part, on the audited financial statements of the businesses acquired as required under the Securities Exchange Act of 1934, adjusted where necessary, with respect to pre-acquisition periods, to the basis of accounting used in the Company's consolidated financial statements. These unaudited financial statements are not intended to be indicative of the results that would have occurred if the transactions had occurred on the dates indicated or which may be realized in the future. ACQUISITIONS On April 14, 1998, the Company acquired substantially all of the assets of SPI Managed Care, Inc., SPI Managed Care of Hillsborough County, Inc., SPI Managed Care of Broward, Inc., Broward Managed Care, Inc., each a Florida Corporation (collectively, the "Companies") which are direct or indirect subsidiaries of First Medical Corporation and First Medical Group, Inc., each a Delaware corporation. The Companies are engaged in the business of providing administrative and health care services. The aggregate purchase was $6.75 million. The source of the consideration paid by the Registrant was from a portion of the net proceeds from the sale of 8% Convertible Subordinated Notes due 2002, sold on October 30, 1997. This acquisition generated approximately $ 6.5 million of goodwill, which will be amortized over 20 years. 25 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 - --------------------------------------------------------------------------------
HISTORICAL ---------------------------- ACQUIRED BUSINESS CONTINUCARE ----------------- ACQUISITION PRO CORPORATION SPI ADJUSTMENTS FORMA ASSETS Current assets: Cash and cash equivalents $ 36,421,623 $ -- $ (6,750,000)(1) $ 29,671,623 Accounts receivable, net 5,327,812 5,857,727 (5,857,727)(5) 5,327,812 Prepaid expenses and other assets 2,444,009 2,444,009 ------------ ------------ ------------ ------------ Total current assets 44,193,444 5,857,727 (12,607,727) 37,443,444 Other receivables 3,400,000 3,400,000 Property and equipment, net 2,716,280 217,172 2,933,452 Goodwill, net 14,336,254 1,784,074 4,735,711(2) 20,856,039 Other intangible assets, net 7,950,073 7,950,073 Other assets, net 3,266,938 13,043 3,279,981 Deferred tax asset, net 505,699 505,699 ------------ ------------ ------------ ------------ Total assets $ 76,368,688 $ 7,872,016 $ (7,872,016) 76,368,688 ============ ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,646,887 $ 670,752 $ (670,752)(5) $ 1,646,887 Accrued expenses 2,068,391 6,353,595 (6,353,595)(5) 2,068,391 Accrued interest payable 566,251 566,251 Current portion of capital lease obligation 46,223 46,223 Current portion of notes payable 272,699 -- 272,699 Income and other taxes payable -- -- -- ------------ ------------ ------------ ------------ Total current liabilities 4,600,451 7,024,347 (7,024,347) 4,600,451 Notes payable 46,000,000 1,847,792 (1,847,792)(3) 46,000,000 Long term debt 702,441 -- 702,441 ------------ ------------ ------------ ------------ Total liabilities 51,302,892 8,872,139 (8,872,139) 51,302,892 ------------ ------------ ------------ ------------ Commitments and contingencies Shareholders' equity Common stock 1,348 -- -- 1,348 Additional paid in capital 27,891,625 285,584 (285,584)(4) 27,891,625 Retained earnings (542,847) (1,285,707) 1,285,707 (4) (542,847) Treasury stock (2,284,330) (2,284,330) ------------ ------------ ------------ ------------ Total shareholders' equity 25,065,796 (1,000,123) 1,000,123 25,065,796 ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity $ 76,368,688 $ 7,872,016 $ (7,872,016) $ 76,368,688 ============ ============ ============ ============
The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements. 26 CONTINUCARE CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 The acquisition adjustments reflected on the unaudited proforma consolidated balance sheet is as follows: 1) Represents Continucare Corporation cash purchase of "Companies". 2) The aggregate purchase price has been allocated, on a preliminary basis, to the net assets acquired based on their net book value. The allocation of the purchase price is preliminary, while the Company continues to obtain the information to determine the fair value of the assets acquired. Therefore, an uncertainty exists with respect to the effects of the amortization periods assigned as any adjustment could result in a change to estimated annual amortization. Companies ----------- Total Purchase Price $ 6,750,000 Net Tangible Assets (230,215) ----------- Goodwill $ 6,519,785 ----------- Goodwill will be amortized over 20 years. 3) Represents the elimination of Companies intercompany payable to First Medical Corporation and First Medical Group, Inc. 4) Represents the elimination of shareholders' equity. 5) Represents the elimination of non-assumed accounts receivable and liabilities. 27 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME TWELVE MONTHS ENDED JUNE 30, 1997 - --------------------------------------------------------------------------------
HISTORICAL -------------------------------- ACQUIRED BUSINESS CONTINUCARE ----------------- ACQUISITION PRO CORPORATION SPI ADJUSTMENTS FORMA Revenues: Capitation revenues $ -- 50,791,293 $ 50,791,293 Net patient service revenues 1,041,793 1,041,793 Management fees 12,874,592 463,562 13,338,154 ------------ ------------ ------------ ------------ Total revenues 13,916,385 51,254,855 -- 65,171,240 ------------ ------------ ------------ ------------ Expenses: Physician, hospital and other -- 42,554,503 42,554,503 Payroll and employee benefits 6,348,195 4,183,695 10,531,890 Provision for bad debt 1,818,293 1,818,293 Professional fees 1,450,790 254,722 1,705,512 General and administrative 1,176,516 3,613,520 4,790,036 Depreciation and amortization 208,936 274,322 325,989(1) 809,247 Loss on Impairment of Goodwill -- -- -- ------------ ------------ ------------ ------------ Total expenses 11,002,730 50,880,762 325,989 62,209,481 ------------ ------------ ------------ ------------ Income from operations 2,913,655 374,093 (325,989) 2,961,759 ------------ ------------ ------------ ------------ Other income (expense) Interest income, net 165,253 7,245 (532,755)(2) (360,257) Minority interest (162,235) (162,235) Other income -- 170,695 170,695 Loss on purchase of minority interest (9,081) (9,081) ------------ ------------ ------------ ------------ Total other income (expense) (6,063) 177,940 (532,755) (360,878) ------------ ------------ ------------ ------------ Income (loss) before income taxes 2,907,592 552,033 (858,744) 2,600,881 Provision for income taxes 1,200,917 -- 1,170,748 ------------ ------------ ------------ ------------ Net income (loss) $ 1,706,675 $ 552,033 $ (858,744) $ 1,430,133 ============ ============ ============ ============ Weighted average shares of common stock outstanding 11,162,761 11,162,761 ============ ============ Earnings (loss) per common share of common stock outstanding $ 0.15 $ 0.13 ============ ============ Weighted average shares of common stock outstanding 11,116,555 11,116,555 ============ ============ Earnings (loss) per common share and common equivalent share assuming full dilution $ 0.15 $ 0.13 ============ ============
The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements. 28 CONTINUCARE CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1997 The acquisition adjustment reflected on the unaudited proforma consolidated statement of income is as follows: 1) Represents the elimination of the historical amortization of goodwill and intangible assets and the implementation of purchaser amortization of goodwill as follows: Historical amortization of goodwill and intangible assets $ 0 Prospective amortization of goodwill 325,989 --------- Net $ 325,989 2) Represents the elimination of interest expense of Companies and inclusion of interest expense of the purchaser due to the use of acquisitions funds as follows: $ 525,510 29 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME Six Months Ended December 31, 1997 - --------------------------------------------------------------------------------
HISTORICAL ------------------------------- ACQUIRED BUSINESS CONTINUCARE ----------------- ACQUISITION PRO CORPORATION SPI ADJUSTMENTS FORMA Revenues: Capitation revenues $ -- 24,106,305 $ 24,106,305 Net patient service revenues 9,614,132 9,614,132 Management fees 1,727,371 249,680 1,977,051 ------------ ------------ ------------ ----------- Total revenues 11,341,503 24,355,985 -- 35,697,488 ------------ ------------ ------------ ------------ Expenses: Physician, hospital and other 4,093,924 24,649,773 28,743,697 Payroll and employee benefits 4,342,553 738,653 5,081,206 Provision for bad debt 2,514,563 2,514,563 Professional fees 532,239 191,250 723,489 General and administrative 3,188,717 2,361,008 5,549,725 Depreciation and amortization 683,318 328,654 (90,689)(1) 921,283 Loss on Impairment of Goodwill -- -- -- ------------ ------------ ------------ ------------ Total expenses 15,355,314 28,269,338 (90,689) 43,533,963 ------------ ------------ ------------ ------------ Income from operations (4,013,811) (3,913,353) 90,689 (7,836,475) ------------ ------------ ------------ ------------ Other income (expense) Interest income, net (448,644) -- (270,000)(2) (718,644) Minority interest -- Other income -- -- -- Loss on purchase of minority interest -- ------------ ------------ ------------ ------------ Total other income (expense) (448,644) -- (270,000) (718,644) ------------ ------------ ------------ ------------ Income (loss) before income taxes (4,462,455) (3,913,353) (179,311) (8,555,119) Provision for income taxes (1,568,324) -- (2,970,023) ------------ ------------ ------------ ------------ Net income (loss) $ (2,894,131) $ (3,913,353) $ (179,311) $ (5,585,095) ============ ============ ============ ============ Weighted average shares of common stock outstanding 11,405,638 11,405,638 ============ ============ Earnings (loss) per common share of common stock outstanding $ (0.25) $ (0.49) ============ ============ Weighted average shares of common stock outstanding 11,405,638 11,405,638 ============ ============ Earnings (loss) per common share and common equivalent share assuming full dilution $ (0.25) $ (0.49) ============ ============
The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements. 30 CONTINUCARE CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 The acquisition adjustment reflected on the unaudited proforma consolidated statement of income is as follows: 1) Represents the elimination of the historical amortization of goodwill and intangible assets and the implementation of purchaser amortization of goodwill as follows: Historical amortization of goodwill and intangible assets $ 253,684 Prospective amortization of goodwill 162,995 --------- Net $ (90,689) 2) Represents the elimination of interest expense of Companies and inclusion of interest expense of the purchaser due to the use of acquisitions funds as follows: $ 270,000 EX-23.1 2 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Continucare Corporation: We consent to the incorporation by reference in the registration statements on Forms S-3 (Nos. 333-43231 and 333-16801) and on Form S-8 (No. 333-44431) of Continucare Corporation of our report, dated April 29, 1998, which report appears in the Form 8-K/A Amendment No. 1, dated April 14, 1998 of Continucare Corporation, relating to the combined balance sheet of SPI Managed Care, Inc., SPI Managed Care of Broward, Inc., SPI Managed Care of Hillsborough County, Inc. and Broward Managed Care, Inc. as of December 31, 1997, and the related combined statements of operations, capital deficit and cash flows for the year then ended. Miami, Florida /s/ BDO Seidman, LLP May 14, 1998 -----END PRIVACY-ENHANCED MESSAGE-----