SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21910
CONTINUCARE CORPORATION
(Exact name of registrant as specified in its charter)
Florida 59-2716063
(State or other jurisdiction of incorporation(I.R.S. Employer
or organization) Identification No.)
100 Southeast Second Street
36th Floor
Miami, Florida 33131
(Address of principal executive offices)
(Zip Code)
(305) 350-7515
(Registrant's telephone number, including area code)
Zanart Entertainment Incorporated
7641 Burnet Avenue
Van Nuys, California 91405
(Former name, former address and fiscal year, if changed since
last report)
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
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
At November 11, 1996, the Registrant had 11,202,983 shares of
$0.0001 par value common stock outstanding.
Page 1 of __ pages
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CONTINUCARE CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1996 (Unaudited) and
June 30, 1996. . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Income for the Quarter Ended September
30, 1996 (Unaudited). . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Cash Flow for the Three Months Ended
September 30, 1996 (Unaudited). . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements. . . . . . . . . . .
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . .
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . .
SIGNATURE PAGE. . . . . . . . . . . . . . . . . . . . . . . . .
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Continucare Corporation
Consolidated Balance Sheet
September 30,
1996
(Unaudited)
Assets
Current assets
Cash and cash equivalents $9,326,633
Accounts receivable, net of allowance
for doubtful accounts of $372,903 and
$146,692, respectively 3,147,757
Prepaid expenses and other current assets 77,871
Total current assets 12,552,261
Property and equipment, net 256,555
Intangible assets, net 46,186
Net assets held for sale 500,000
Other assets, net 63,645
Total assets $13,418,647
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $322,081
Accrued expenses 791,694
Accrued interest payable 6,422
Unearned revenue 51,301
Income and other taxes payable 787,681
Total current liabilities 1,959,179
Notes payable 599,000
Total liabilities 2,558,179
Minority interest 111,732
Commitments and contingencies
Shareholders' equity
Common stock; $.0001 par value; 100,000,000 shares
authorized, 11,202,983 issued and outstanding 1,120
Additional paid-in capital 9,833,499
Retained earnings 914,117
Total shareholders' equity 10,748,736
Total liabilities and shareholders' equity $13,418,647
Assets June 30, 1996
Current assets
Cash and cash equivalents $ 819,066
Accounts receivable, net of allowance
for doubtful accounts of $312,283 and $146,692,
respectively 1,967,978
Prepaid expenses and other current assets 800
Total current assets 2,787,844
Property and equipment, net 4,806
Intangible assets, net 1,499
Net assets held for sale
Other assets, net 70,747
Total assets $2,864,896
Current liabilities
Accounts payable $270,374
Accrued expenses 44,210
Accrued interest payable 23,161
Unearned revenue 18,301
Income and other taxes payable 412,686
Total current liabilities 768,732
Notes payable 655,000
Total liabilities 1,423,732
Minority interest 32,686
Commitments and contingencies
Shareholders' equity
Common stock; $.0001 par value; 100,000,000 shares
authorized, 11,202,983 issued and outstanding 100
Additional paid-in capital 763,769
Retained earnings 644,609
Total shareholders' equity 1,408,478
Total liabilities and shareholders' equity $2,864,896
The accompanying notes are an integral part of these
consolidated financial statements.
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Continucare Corporation
Consolidated Statement of Income
For the
Quarter Ended
September 30, 1996
(Unaudited)
Revenues $2,923,446
Expenses
Payroll and employee benefits 1,367,910
Provision for bad debt 226,211
Professional fees 189,740
General and administrative 44,555
Depreciation and amortization 7,160
Total expenses 1,835,576
Income from operations 1,087,870
Other income (expenses)
Interest income 17,152
Minority interest (79,047)
Other expenses (61,895)
Income before taxes 1,025,975
Provision for income taxes 381,717
Net income $ 644,258
Earnings per common share and common equivalent share $0.09
Earnings per common share and common equivalent share
assuming full dilution $0.09
The accompanying notes are an integral part of these
consolidated financial statements.
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Continucare Corporation
Consolidated Statement of Cash Flow
Three Months Ended
September 30, 1996
(Unaudited)
Cash flows from operating activities
Net income $ 644,258
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,160
Bad debt expense 226,211
Income applicable to minority interest 79,047
Changes in assets and liabilities, excluding
the effect of acquisitions:
(Increase) in accounts receivable (1,405,990)
(Increase) in prepaid expenses and other
current assets (77,072)
(Increase) in intangible assets (45,329)
Decrease in other assets 7,102
Increase in accounts payable and accrued
expenses 743,191
(Decrease) in accrued interest payable (16,739)
Increase in unearned revenue 33,000
Increase in income and other taxes payable 374,995
Net cash provided by operating activities 569,834
Cash flows from investing activities
Property and equipment additions 258,267
Net cash used by investing activities (258,267)
Cash flows from financing activities
Beechwood Repurchase (375,000)
Proceeds from Private Placement 6,600,000
Costs incurred associated with Private
Placement & Merger (225,000)
Cash received from pre-Merger Zanart 2,196,000
Net cash provided by financing activities 8,196,000
Net increase in cash and cash equivalents 8,507,567
Cash and cash equivalents at beginning of period 819,066
Cash and cash equivalents at end of period $ 9,326,633
The accompanying notes are an integral part of these consolidated
financial
statements.
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CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(unaudited)
NOTE 1 - UNAUDITED INTERIM INFORMATION
The accompanying interim consolidated financial data for
Continucare Corporation ("Continucare" or the "Company") are
unaudited; however, in the opinion of management, the interim data
include all adjustments necessary for a fair presentation of the
results for the interim period. 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 at the
date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ from those estimates.
The results of operations for the three months ended September 30,
1996 are not necessarily indicative of the results to be expected
for the year ending June 30, 1997.
The interim unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial
statements and notes thereto for the period from February 12, 1996
(inception) to June 30, 1996 as set forth in the Company's Form 10-
KSB/A.
NOTE 2 - MERGER
On August 9, 1996, the Company signed a definitive Agreement and
Plan of Merger (the "Merger Agreement") with Zanart Subsidiary,
Inc. ("ZSI"), a wholly-owned subsidiary of the Company, and
Continucare Acquisition Corp. (formerly known as Continucare
Corporation), a Florida corporation ("CAC"). The Merger Agreement
provided for the merger (the "Merger") of ZSI with and into CAC.
Upon the consummation of the Merger, which occurred on September
11, 1996 (the "Closing Date"), the separate existence of ZSI
terminated, CAC became a wholly-owned subsidiary of the Company,
the Company agreed to sell or otherwise dispose of its assets
(other than cash) and discharge all liabilities relating to its
existing licensing business prior to December 11, 1996 and the
Company's Board of Directors and management became comprised of
designees of CAC. On October 8, 1996, the Company changed its
corporate name to Continucare Corporation. Prior to the Merger,
CAC was a development stage company established for the purpose of
managing mental and physical rehabilitation health care programs.
NOTE 3 - INTANGIBLE ASSETS
As a result of the Merger and the listing of shares of the
Company's common stock, $.0001 par value (the "Common Stock"),
issued to the former shareholders of pre-merger Continucare
Corporation on the American Stock Exchange, the Company incurred
certain costs which were capitalized as organization costs. These
are being amortized using the straight line method over ten years.
NOTE 4 - EARNINGS PER SHARE
The treasury stock method was used to determine the dilutive effect
of the options and warrants on earnings per share data.
Earnings per share and the weighted average number of shares
outstanding used in the computation are summarized elsewhere
herein.
NOTE 5 - NET ASSETS HELD FOR SALE
Pursuant to the Merger, the operations of the licensing business of
pre-merger Zanart Entertainment, Inc. ("Zanart") are in the process
of being terminated. As a result, the estimated net assets of
Zanart's operations, other than cash, are reflected as Assets Held
for Sale in the accompanying consolidated balance sheet.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company entered into new employment agreements with two of its
executive officers which became effective in September 1996. The
agreements are for terms of three years (with one agreement
providing for one additional year term for each year of service by
such executive). The agreements also provide for payment of
bonuses and one agreement provides for a one-time grant of stock
options to purchase 100,000 shares of Common Stock at $5.00 per
share, vesting at a rate of 20% per year.
As provided for in the management contracts with the Company's
providers, the Company maintains annual claims made policies for
general and professional liability insurance jointly with each of
the providers. Coverage under the policies are $1,000,000 per
incident and $3,000,000 aggregate. It is the Company's intention
to renew such coverage on an on-going basis.
NOTE 7 - RECENT DEVELOPMENTS
On August 26, 1996, the Company entered into a letter of intent to
purchase a certain comprehensive outpatient rehabilitation facility
(the CORF"). The purchase agreement was consummated on November
12, 1996. Under the terms of the letter of intent, the Company
provided management services to the CORF for a fee of $30,000
per month from the date of the letter of intent until the Closing
Date (as defined in the related purchase agreement). This fee is
included as revenue in the accompanying unaudited consolidated
financial statements.
NOTE 8 - SUBSEQUENT EVENTS
On October 1, 1996, the Company began managing a partial
hospitalization and an inpatient program under its agreement with
an ORNDA Healthcorp. subsidiary. The management fees for each of
the two new programs are expected to be approximately $32,500 per
month and are based on the actual costs of the program and a markup
percentage to cover the Company's overhead.
The Company has entered into consulting agreements with a company
controlled by Mr. Douglas Miller and a company controlled by Mr.
Barry Goldstein (collectively, the "Consulting Agreements").
Messrs. Miller and Goldstein served as executive officers of CAC
prior to the Merger. Each of the Consulting Agreements, which are
effective as of the date of the Merger, contain the following
terms: (i) three year term, (ii) annual payments, payable semi-
monthly, of approximately $325,000, (iii) ability of the Company to
terminate the agreement without "cause" (as defined) with 30 days'
notice, provided that the consultant will receive a termination
payment equal to the amount otherwise payable under the Consulting
Agreement through the end of the term over the period of the
remaining term of the agreement, and (iv) ability of the Company to
terminate the agreement for "cause" at any time with no payment due
to the consultant.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Pre-Merger Continucare was incorporated on February 12, 1996, in
the State of Florida. Continucare develops and manages mental and
physical rehabilitation health care programs that offer a continuum
of mental and physical rehabilitation health services ranging from
partial hospitalization care to day treatment and outpatient
services. Continucare offers a comprehensive mental health care
product line by providing the following types of services to
general acute care and psychiatric hospitals, community mental
health centers and CORFs: clinical development, marketing,
financial management, operational oversight, human resources
support, quality assurance and outcome measurement.
On August 9, 1996, the Company signed the Merger Agreement with
ZSI, and CAC (formerly known as Continucare Corporation). The
Merger Agreement provided for the Merger of ZSI with and into CAC.
Upon the consummation of the Merger on the Closing Date, the
separate existence of ZSI terminated, CAC became a wholly-owned
subsidiary of the Company, the Company agreed to sell or otherwise
dispose of its assets (other than cash) and discharge all
liabilities relating to its existing licensing business prior to
December 11, 1996 and the Company's Board of Directors and
management became comprised of designees of CAC. On October 8,
1996, the Company changed its corporate name to Continucare
Corporation.
As previously noted, pre-Merger Continucare commenced operations on
February 12, 1996. Accordingly, no comparative data is available
for the three month period ending September 30, 1995. Further,
management does not believe that its results for the quarter ended
September 30, 1996 are indicative of the Company's future
performance. Accordingly, the Company has limited its discussions
with respect to this area.
Revenues
Total revenues were approximately $2,923,000 for the quarter ended
September 30, 1996. Revenues from the employee leasing operations
and the billing service, for which certain assets, contracts and
liabilities were acquired effective May 1, 1996, are included in
the revenues of the entire current period. In addition, the
current period includes the opening of two hospital based programs
for which the management fees are based on the actual costs
incurred in the management of the programs as well as a markup to
cover overhead and, on August 26, 1996, the Company entered into a
letter of intent to purchase a CORF. The purchase agreement was
consummated on November 12, 1996. Under the terms of the
letter of intent, the Company provided management services to
the CORF for a fee of $30,000 per month from the date of the letter
of intent until the Closing Date (as defined in the related
purchase agreement). Fees earned under this arrangement account
for approximately 1% of total revenues for the quarter ended
September 30, 1996.
Expenses
Payroll and employee benefits were approximately $1,368,000 for the
three month period ended September 30, 1996, 46.8% of total
revenues. Of total consolidated payroll and employee benefits,
approximately $972,000 or 71.0% was payroll and benefits paid to
employees of the employee leasing operation.
Continucare's provision for bad debt for the quarter ended
September 30, 1996 was approximately $226,000, or 7.7% of total
revenues.
Professional fees were approximately to $190,000 in the current
quarter. Total professional fees for the quarter ended September
30, 1996 include $105,000 under a subcontract agreement with a
third-party.
General and administrative expenses (SG&A") were approximately
$45,000 for the quarter ended September 30, 1996. As a percentage
of total revenues, SG&A was approximately 1.5%. For the quarter
ended September 30, 1996, SG&A was comprised of expenses such as
rent, utilities and supplies.
Interest
Net interest income for the quarter ended September 30, 1996 was
approximately $17,000 and is primarily attributable to interest
earned on the $6,600,000 raised by the Company as a result of the
Private Placement that took place in August 1996.
Minority Interest
Minority interest, which was approximately $79,000 for the quarter
ended September 30, 1996, represents a 25% interest held by a third
party in the net income of a subsidiary of Continucare.
Provision for Income Taxes
The provision for income taxes was $382,000 as a result of income
before taxes for the quarter ended September 30, 1996 of
approximately $1,026,000. The provision for income taxes was
calculated at a rate of approximately 37% which equals the
statutory federal income tax rate.
Net Income
Continucare had net income of approximately $644,000 for the
quarter ended September 30, 1996. As a percentage of total
revenues, net income was 22% of total revenues for the quarter
ended September 30, 1996.
Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDA is not presented as an alternative to operating results or
cash flow from operations as determined by generally accepted
accounting principles (GAAP"), but rather to provide additional
information related to the ability of Continucare to meet current
trade obligations and debt service requirements. EBITDA should not
be considered in isolation from, or construed as having greater
importance than, GAAP operating income or cash flows from
operations as a measure of an entity's performance.
EBITDA was approximately $1,016,000 for the quarter ended September
30, 1996.
Liquidity and Capital Resources
During the quarter ended September 30, 1996, the Company financed
its operations from operating cash flow. For the three month
period then ended, the Company's operating cash flow was
approximately $570,000.
The Company's working capital was approximately $10,593,000, with
a current ratio of 6.4 to 1, at September 30, 1996. The Company's
working capital and current ratio at June 30, 1996 were $2,019,000
and 3.6 to 1, respectively. The improvement in working capital and
the current ratio are due to cash generated by the Company from the
Private Placement of 3,300,000 shares at $2.00 per share in August
1996, and the cash received from pre-Merger Zanart is a result of
the Merger in September 1996, and current assets generated from
operations.
The Company anticipates that the funds raised through the Private
Placement and the cash received from pre-Merger Zanart as a result
of the Merger, together with cash flow generated by operations,
will be used to make strategic acquisitions in order to grow its
operations and pursue its business strategy. Based upon current
expectations, the Company believes that cash flow from operations
will be sufficient to meet its working capital requirements through
the end of the current fiscal year, although there can be no
assurance that it will be able to do so.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities
(a) None.
(b) None.
(c) Recent Sales of Unregistered Securities.
Prior to the Merger, CAC effectuated the private sale of an
aggregate of 3,300,000 shares (the "Shares") of its common stock
which was completed on August 29, 1996 (the "Private Offering").
Such shares were issued in accordance with the exemption provided
by Section 4(2) of the Securities Act of 1933, as amended, as a
transaction not involving a public offering. The aggregate dollar
amount raised from the Private Offering was $6,600,000. No
commissions or discounts were given in connection with the Private
Offering. Such Shares were converted on a one for one basis into
Company Common Stock on September 11, 1996, the date of the
consummation of the Merger.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11 Statement re: computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed two Form 8-Ks dated August 9, 1996 and
September 11, 1996, respectively, during the Company's first
quarter of fiscal 1997. The report dated August 9, 1996 reported
under Item 5 of Form 8-K the execution of that certain Agreement
and Plan of Merger (the "Merger Agreement") by and among CAC, the
Company and ZSI. The report dated September 11, 1996 reported
under Item 2 of Form 8-K the closing of the Merger Agreement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
CONTINUCARE CORPORATION
Dated: November 14, 1996 By: /s/ CHARLES M. FERNANDEZ
Charles M. Fernandez, Chairman,
Chief Executive Officer and
President
Dated: November 14, 1996 By: /s/ MARIA T. SOSA
Maria T. Sosa, Principal
Accounting Officer
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Exhibit 11
Continucare Corporation
Computation of Earnings Per Common Share
(unaudited)
September 30,
1996
Net income $ 644,258
Primary Earnings Per Share
Number of shares:
Weighted average common shares outstanding 7,094,321
Add: Net additional shares issuable (1) 4,800
Weighted average shares used in the per share
computation 7,099,121
Earnings per common and common equivalent share $ 0.09
Fully Diluted Earnings Per Share
Number of shares:
Weighted average common shares outstanding 7,094,321
Add: Net additional shares issuable (1) 440,000
Weighted average shares used in the per share
computation 7,534,321
Earnings per common and common equivalent share $ 0.09
(1) Assumes exercise of outstanding common stock equivalents
(options and warrants) at the beginning of the period.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 9,326,633
<SECURITIES> 0
<RECEIVABLES> 3,520,660
<ALLOWANCES> 372,903
<INVENTORY> 0
<CURRENT-ASSETS> 12,552,261
<PP&E> 263,435
<DEPRECIATION> 6,880
<TOTAL-ASSETS> 13,418,647
<CURRENT-LIABILITIES> 1,959,179
<BONDS> 599,000
0
0
<COMMON> 1,120
<OTHER-SE> 10,747,616
<TOTAL-LIABILITY-AND-EQUITY> 13,418,647
<SALES> 0
<TOTAL-REVENUES> 2,923,446
<CGS> 0
<TOTAL-COSTS> 1,367,910
<OTHER-EXPENSES> 241,455
<LOSS-PROVISION> 226,211
<INTEREST-EXPENSE> 14,821
<INCOME-PRETAX> 1,025,975
<INCOME-TAX> 381,717
<INCOME-CONTINUING> 644,258
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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