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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM _______________ TO
_______________
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COMMISSION FILE NO. 0-21910
CONTINUCARE CORPORATION
(Name of small business issuer in its charter)
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FLORIDA 59-2716063
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 SOUTHEAST SECOND STREET 33131
(Address of Principal Executive Offices) (Zip Code)
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(305) 350-7515
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
COMMON STOCK, PAR VALUE $.0001 PER SHARE, UNITS AND SERIES A WARRANTS
Securities registered under Section 12(g) of the Exchange Act:
None.
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 / /
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. / /
The issuer's revenues for the fiscal year ended June 30, 1996 were
$2,503,506.
The aggregate market value of the voting stock held by non-affiliates of
the issuer based on the last sale price of $10.50 of such common stock, as of
October 10, 1996, is $35,139,815.
As of October 11, 1996, the Company had outstanding a total of 11,202,983
shares (the "Shares") of Common Stock, par value $.0001 per share (the "Common
Stock") and 920,000 Series A Warrants each of which entitles the holder thereof
to purchase one share of the Company's Common Stock at a purchase price of $6.00
per share at any time through May 10, 2000. Additionally, as of such date
Underwriter Options to purchase 80,000 Units remain outstanding and unexercised.
Each Underwriter Option entitles the holder thereof to purchase for $7.50,
through May 10, 2000, one share of Common Stock and one Series A Warrant
exercisable for one share of Common Stock at a price of $7.50 at any time
through May 10, 2000.
Transitional Small Business Disclosure Format Yes / / No /X/
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CONTINUCARE CORPORATION
FORM 10-KSB/A
FISCAL YEAR ENDED JUNE 30, 1996
TABLE OF CONTENTS
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Item 1. Description of Business......................................................
Item 9. Directors and Executive Officers of the Company..............................
Item 10. Executive Compensation.......................................................
Item 11. Security Ownership of Certain Beneficial Owners and Management...............
Item 12. Certain Relationships and Related Transactions...............................
Item 13. Exhibits and Reports on Form 8-K.............................................
SIGNATURES..............................................................................
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ITEM 1. DESCRIPTION OF BUSINESS
On August 9, 1996, Zanart Entertainment Incorporated, a Florida corporation
("Zanart"), signed a definitive Agreement and Plan of Merger (the "Merger
Agreement") with Zanart Subsidiary, Inc. ("ZSI"), a wholly-owned subsidiary of
Zanart, and Continucare Corporation, a Florida corporation. Pursuant to the
Merger Agreement, on September 11, 1996 (the "Closing Date"), ZSI merged (the
"Merger") with and into Continucare Corporation. Upon the consummation of the
Merger, and pursuant to the terms of the Merger Agreement, (i) each issued and
outstanding share of common stock of Continucare Corporation converted into one
share of Zanart common stock, par value $.0001 per share (the "Common Stock"),
the separate existence of ZSI terminated and Continucare Corporation became a
wholly-owned subsidiary of Zanart, (ii) Zanart agreed to sell or otherwise
dispose of its assets (other than cash) and discharge all liabilities relating
to Zanart's existing licensing business prior to December 11, 1996 and (iii)
Zanart's Board of Directors and management became comprised of designees of
Continucare Corporation. On October 8, 1996, Zanart changed its corporate name
to "Continucare Corporation." All references herein to Zanart and the Zanart
Business refer to the historical licensing operations of Zanart before giving
effect to the Merger, and all references to Continucare or the Company and the
Continucare or the Company Business refer to the mental and physical
rehabilitation health care business of Continucare and its subsidiaries prior to
and after giving effect to the Merger.
CONTINUCARE BUSINESS
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 ("CMHCs") and
comprehensive outpatient rehabilitation facilities ("CORFs"): clinical
development, marketing, financial management, operational oversight, human
resources support, quality assurance and outcome measurement. Through its
ability to organize and provide such services Continucare is able to develop and
manage for its clients the series of mental and physical rehabilitation health
care programs that comprise a continuum of mental and physical rehabilitation
health care services.
At October 11, 1996, Continucare had management contracts with five general
acute care hospitals, one free-standing psychiatric hospital, 16 CMHCs, and one
CORF. As of such date, 22 of such contracts were in operation covering various
treatment programs.
Continucare's strategy is to (i) continue to develop all elements of the
continuum of mental health and physical rehabilitation services provided to
existing and new clients, (ii) aggressively pursue new management contracts for
the provision of mental and physical health services, (iii) emphasize its
outcome measurement system ("Outcome Measurement System") as an additional
service and (iv) expand the types of services offered by it to include physical
and medical rehabilitation services, home health services and primary care
services.
ZANART BUSINESS
Zanart designs, publishes, packages and markets wall decor and collectible
art which incorporate popular images from motion pictures, television and
animation. Zanart's products include framed art, matted prints, lithographs and
serigraphs, calendars, posters, blueprints, movie and television card portfolio
sets and animation sericels which are produced pursuant to licensing or other
agreements with entertainment companies. The images for the printed products are
provided to Zanart by the licensor or designed by Zanart, and the products are
printed, manufactured and framed for Zanart by manufacturers according to
Zanart's instructions and specifications. Zanart's product line consists of over
200 individual products. Zanart's products are sold through retail chain stores,
independent retail stores, catalogs and a television shopping network. The
future of Zanart's licensing business is subject to the terms of the Merger
Agreement as described below.
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RECENT DEVELOPMENTS
Pursuant to the Merger, on September 11, 1996, ZSI merged with and into
Continucare Corporation. Each share of pre-Merger Continucare common stock
issued and outstanding immediately prior to the Closing Date was converted on
the Closing Date into one share of Common Stock. Under the terms of the Merger
Agreement, Zanart agreed to sell or otherwise dispose of its assets (other than
cash) and discharge all liabilities relating to Zanart's existing licensing
business prior to December 11, 1996. In addition, upon the consummation of the
Merger (i) Zanart's existing Board of Directors and management resigned and (ii)
Zanart's new Board of Directors and management became comprised of Continucare
designees.
The Merger Agreement contains various customary representations and
warranties of the parties thereto, and includes a post closing adjustment
provision requiring the issuance of a certain number of additional shares (the
"Additional Shares") of Common Stock to the holders of pre-Merger Continucare
common stock immediately prior to the Closing Date in the event that the Closing
Cash Balance (as such term is defined in the Merger Agreement) of the Company is
less than $2,000,000 on December 12, 1996.
Prior to the Merger, Continucare effectuated the private sale of an
aggregate of 3,300,000 shares of pre-Merger Continucare common stock which was
completed on August 29, 1996. Further, Zanart agreed to register on Form S-3 (i)
an aggregate of 1,462,500 shares of Common Stock to be issued upon exercise of
outstanding warrants and options, (ii) the 8,300,000 shares of Common Stock
issued in connection with the Merger, and (iii) the Additional Shares.
CONTINUCARE STRATEGY
Continucare's strategy is to (i) continue to develop all elements of the
continuum of mental health and physical rehabilitation services provided to
existing and new clients, (ii) aggressively pursue new management contracts for
the provision of mental and physical health services, (iii) emphasize its
Outcome Measurement System as an additional service and (iv) expand its types of
services offered to include physical and medical rehabilitation services, home
health services and primary care services.
Continue to Develop the Continuum of Mental Health Services
Continucare believes that institutional and professional providers of
mental health services must have the ability to offer a complete line of mental
health care services in order to operate mental health care programs that
satisfy the current and anticipated demands of managed care companies and other
third-party payors. The mental health industry is recognizing the need to
provide patients with an organized plan of treatment, from most intensive to
least intensive, in order to properly monitor and treat patients as they
progress. The development of mental health services beyond traditional inpatient
hospitalization has been a key focus in Continucare's efforts to provide
management services covering the full continuum of mental health services. Prior
to August 1996, Continucare focused only on the management of programs offering
outpatient mental health services. Since that time, it has expanded its
management services to cover additional elements of the continuum of mental
health services, including day treatment and intensive as well as traditional
and group oriented outpatient services.
Add New Mental Health Management Contracts
Continucare believes that there is a substantial opportunity to provide
mental health care contract management services to institutional and
professional mental health care providers. Continucare utilizes a systematic
approach to identify potential clients and then offers its services to these
potential clients by emphasizing its expertise in managing the continuum of
mental health services and the benefits to the potential clients of offering
mental health programs. Such benefits typically include increased revenue,
greater opportunity to allocate fixed expenses, expanded influence and outreach
to the community, improvement in the quality of mental health care programs
offered and the ability to attract new physicians. Continucare's sales efforts
also emphasize the value of quality, independently managed mental health
programs to managed care companies and other third-party payors.
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Continucare intends to offer its current line of mental health care
services to individual and group practitioners that provide traditional primary
and specialty health care services. This strategy is based on the results of
studies that have indicated that 70% or more of illnesses are psychosomatic in
nature. By adding mental health services to traditional primary and specialty
care practices, practitioners are able to provide a more coordinated and
comprehensive treatment program that addresses the mental and physical needs of
patients. The types of mental health services typically added to individual and
group practices include psycho-pharmacology, individual therapy, group therapy
and structured outpatient programs for mental health, addiction and other
disease-specific support issues. The professionals delivering these services
include:
- Psychiatrists
- Psychologists
- Licensed Clinical Social Workers
- Licensed Mental Health Counselors
- Advanced Registered Nurse Practitioners
Continucare is also currently expanding its target market to include
non-traditional sources of funding such as state and federal grant programs.
Emphasize Continucare's Outcome Measurement System
Continucare intends to continue to emphasize its Outcome Measurement
System, which provides outcome information regarding the effectiveness of a
provider's mental health and physical rehabilitation programs. The availability
of such information is intended to enable Continucare's clients to demonstrate
to third-party payors whether patients are improving as a result of the
treatment provided. It also provides Continucare and the client with a valuable
tool to compare clinical results and refine clinical treatment programs. With
the growth of managed care and its emphasis on effectiveness, Continucare
believes that its Outcome Measurement System will become a more important
component of the services it provides.
Expand the Types of Services Offered by Continucare
Continucare intends to expand its range of services offered to health care
providers to include physical and medical rehabilitation services, home health
services and primary care services. Such new areas of services share in common
(i) the need to provide a continuum of services that range from most intensive
to least intensive and (ii) the need for a system of development and management
support similar to that required by mental health related services. Continucare
believes that the same types of development and management services it offers to
mental health care providers are needed by providers offering physical and
medical rehabilitation services, home health services and primary care services.
Continucare further believes that its existing relationships with general acute
care hospitals and its medical directors serving clients under contract with
Continucare provide a significant opportunity for the development of the
aforementioned services. Continucare intends to utilize its marketing, outcome
measurement, utilization review and clinical management expertise to expand its
management of such services.
CONTINUCARE OPERATIONS
General
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. The development and management of such programs requires
the delivery to health care providers of the following types of services in a
consistent and efficient manner:
Clinical Development -- Each health program has a team of personnel
comprised of primary doctors, psychiatrists, therapists and nurses that are
focused on the direct delivery of care to patients. Administrative
personnel comprised of a program director, clinical coordinators, sales
staff and secretaries are responsible for the management of specific
programs as well as the entire continuum of programs
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being offered by a particular provider. Continucare offers the service of
recruiting and training such personnel in addition to designing the
particular program structure in which they operate.
Community Outreach -- Health care providers rely almost exclusively on
community service representatives to inform and educate the public about
their respective mental and physical rehabilitation health programs.
Community service representatives are responsible for identifying and
developing patient referral sources in addition to developing a particular
program's community development plan. The community service representative
informs physicians, other professionals and nursing homes in the particular
community of the treatment programs managed by Continucare in order to
promote interest in such programs. Continucare offers the service of hiring
and training community service representatives to successfully inform and
educate the public about each type of outpatient health care program.
Financial Management -- Providers of mental and physical
rehabilitation health care services must address the same financial
management concerns as any other business. Continucare has the ability to
provide full-service financial management services to each of its clients.
Continucare offers (directly and through leasing services) the following
types of financial management services:
- Physician Billing and Collecting
- Other Outpatient Billing and Collecting
- Partial Hospitalization Billing and Collections
- Internal Auditing and Bill Compliance
- Access to Accounts Receivable Financing
Operational Oversight -- Continucare offers day-to-day operational
oversight to each of the programs offered by mental and physical
rehabilitation health care providers that comprise the continuum of health
care services.
Human Resources -- Continucare offers to its clients full human
resources capabilities which include the recruiting, hiring and termination
of all classes of health care professionals and staff. Continucare further
develops training programs and policy and procedure manuals specific to the
needs of health care providers. In addition, Continucare offers permanent,
long-term and short-term employee leasing to its managed programs and other
clients. Continucare offers to lease the following types of employees:
- Psychologists
- Physician Assistants
- Advanced Registered Nurse Practitioners
- Registered Nurses
- Licensed Practical Nurses
- Certified Nurse Assistants
- Licensed Clinical Social Workers
- Licensed Mental Health Counselors
- Master Level Social Workers
- Mental Health Technicians
- Psychiatrists
- Physical Therapists
Quality Assurance -- Continucare offers ongoing training to each of
the professionals and staff under its supervision to maintain the desired
level of effectiveness of its programs. The Company also monitors the
effectiveness of such training on an ongoing basis.
Regulatory Compliance -- As further discussed below, health care
providers are subject to an array of regulatory rules and guidelines.
Continucare assists its clients during the developmental stage of mental
and physical rehabilitation health programs in such matters as licensing,
certificate of need approvals and Medicare/Medicaid certification.
Continucare also provides the service of reviewing a particular provider's
compliance with all applicable regulations and making recommendations to
assure that such provider remains or becomes in compliance with such
regulations.
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Outcome Measurement -- Continucare offers a clinical outcome
measurement system that enables health providers to demonstrate clinical
results to third-party payors and that assists clinicians in evaluating the
effectiveness of treatment programs. Continucare began offering its Outcome
Measurement System to health providers in July 1996. The Outcome
Measurement System provides a qualitative and quantitative tool for
clinical staff to evaluate the clinical effectiveness of the treatment
programs and to make adjustments in the programs in order to improve
quality and appropriateness of care. It also assists the client hospitals
and health centers in complying with the increasing demands of regulatory
and accrediting bodies for quality assessment of their outpatient health
programs.
The typical key indicators captured and evaluated include:
- Functional level at admission
- Average length of stay
- Return to home or previous setting
- Return to work
- Readmission rates
- Mortality rates
Each of the above-listed types of data is captured on a diagnosis specific
basis. This enables providers to tangibly differentiate their services from
their competitors.
Under the Outcome Management System, sample data is collected from randomly
selected patients at admission, during treatment, at discharge and 90 to 120
days after discharge. Semiannual outcome reports include a summary of patient
characteristics and outcome measures. A multi-disciplinary committee reviews and
analyzes the data in order to identify specific areas for program improvement. A
regional clinical consultant then prepares an implementation plan. Program
improvements implemented through this process are evaluated for use at other
treatment programs managed by Continucare. Continucare trains and supervises
on-site personnel to ensure the collection of accurate outcome measurement data.
The services provided by the Outcome Management System enable the client
hospitals to demonstrate to third-party payors the results of the treatment
provided. At October 11, 1996, approximately 20% of Continucare's management
contracts included the Outcome Management System.
MANAGEMENT CONTRACTS
Continucare provides its development and management services under
contracts with client hospitals and community mental health centers. Continucare
tailors (or customizes) each contract to address the differing needs of each
client and the anticipated needs of such client's patients. Continucare and the
client determine the mental and physical rehabilitation health programs and
services to be offered, which may consist of one or more treatment programs
offering partial hospitalization, day treatment or outpatient services.
Under each contract, Continucare receives a fee for its services provided
to or on behalf of the client. The fees received by Continucare are fixed and
are often subject to periodic adjustments as a result of changes in the medical
consumer price index.
THE OUTPATIENT HEALTH CARE CONTINUUM
Through its ability to deliver services described above, Continucare offers
mental health care providers the structure and management of a complete
continuum of mental and physical rehabilitation health care services ranging
from partial hospitalization care to day treatment and outpatient services.
Partial Hospitalization
Partial hospitalization services are provided for limited periods per day
at established intervals with the patient returning home at the conclusion of
each day's treatment. Partial hospitalization services are designed to be both
an alternative to inpatient hospitalization services and a key component of care
following inpatient hospitalization. Continucare successfully operates over
twenty partial hospitalization programs in four states.
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Continucare operates under two partial hospitalization models. The primary model
is a freestanding program licensed as a full service CMHC. This model enables
Continucare not only to provide partial hospitalization services but also to
provide, manage or contract for the following types of services:
- 24 Hour Crisis Response
- Crisis Stabilization Beds
- Structured/Intensive Outpatient Programs
- Counseling and Education
The second model is a partial hospitalization program operating under a
hospital license. These programs deliver the same services as provided to CMHCs,
but in a hospital or hospital campus location subject to hospital regulations.
Day Treatment
Continucare has recently expanded beyond the partial hospitalization
business to include day treatment services. These programs serve as step-down
alternatives to patients that no longer require the more extensive treatment
provided under partial hospitalization programs. This treatment model assists
patients in transitioning back into their communities. Additionally, this
treatment model seeks to prevent patients from regressing, thus reducing the
number of expensive inpatient psychiatric hospital admissions. The Company
currently operates two day treatment programs and anticipates opening twelve day
treatment programs in the next twelve months.
Outpatient Services
Outpatient services consist generally of consultative sessions which can be
rendered in a variety of individual or group settings at various locations,
including hospitals, clinics or the offices of mental health providers.
Outpatient service providers can also serve as gatekeepers for persons being
evaluated for treatment. Once an individual is assessed for treatment in an
outpatient environment, the individual is provided the appropriate level of
service in relation to the diagnosis. Continucare provides outpatient services
to hospitals, physicians, assisted living facilities, skilled nursing facilities
and CMHCs.
Physical Rehabilitation Services
As part of its commitment to the total continuum of outpatient care,
Continucare manages a certified CORF, which provides a wide range of outpatient
rehabilitation services and programs to individuals with disabilities and
illnesses, including orthopedic, neurological and neuromuscular diseases and
other conditions. CORFs provide diagnostic, therapeutic and restorative services
to individuals on an outpatient basis under the direction of a medical doctor.
The multitude of illnesses and injuries capable of being treated at a CORF
include amputation, arthritis, stroke, neck and lower back pain, sports
injuries, neuromuscular disease, orthopedic and neurological conditions and
peripheral nerve injuries.
COMPETITION
The mental and physical rehabilitation health contract management services
industry is highly competitive. Continucare competes with several national
competitors and many regional and local competitors, some of which have
substantially greater resources than Continucare. In addition, providers may
elect to manage their own mental health programs.
Competition among contract managers for mental and physical rehabilitation
health programs is generally based upon reputation, price, the ability to
provide financial and other benefits for the particular provider, and the
management expertise necessary to enable the provider to offer mental and
physical rehabilitation health programs that provide the full continuum of
mental and physical rehabilitation health services in a quality and
cost-effective manner. The pressure to reduce health care expenditures has
emphasized the need to manage the appropriateness of health services provided to
patients. As a result, competitors without management experience covering the
various levels of the continuum of mental and
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physical rehabilitation health services may not be able to compete successfully.
Continucare believes that it will be able to compete in this rapidly changing
market.
GOVERNMENT REGULATION
General
Continucare's business is affected by federal, state and local laws and
regulations concerning, among other matters, mental health facilities and
reimbursement for mental health services. These regulations impact the
development and operation of mental and physical rehabilitation health programs
managed by Continucare for its clients. Licensing, certification, reimbursement
and other applicable government regulations vary by jurisdiction and are subject
to periodic revision. Continucare is not able to predict the content or impact
of future changes in laws or regulations affecting the mental and physical
rehabilitation health industry.
Mental and Physical Rehabilitation Health Facility Use and Certification
The facilities of institutional and professional providers are subject to
various federal, state and local regulations, including facilities use,
licensure and inspection requirements, and licensing or certification
requirements of federal, state and local health agencies. Many states also have
certificate of need laws intended to avoid the proliferation of unnecessary or
under-utilized health care services and facilities. The mental and physical
health programs which Continucare manages are also subject to licensure and
certification requirements. Continucare assists its clients in obtaining and
renewing required approvals for its managed programs. Some approval processes
may lengthen the time required for new programs to commence operations. In
granting and renewing a facility's licenses, governmental agencies generally
consider, among other factors, the physical condition of the facility, the
qualifications of administrative and professional staff, the quality of
professional and other services, and the continuing compliance of such facility
with the laws and regulations applicable to its operations. Continucare believes
that the mental and physical health programs it manages and the facilities used
in its operation of such programs comply in all material respects with
applicable licensing and certification requirements.
Reimbursement for Mental and Physical Rehabilitation Health Services
Most of Continucare's clients receive reimbursement under one or more of
the Medicare or Medicaid programs for mental and physical rehabilitation health
services provided in programs managed by Continucare. Continucare is paid
directly by its clients for the management services it provides. While fees paid
to Continucare by its clients are not subject to or based upon reimbursement
under the Medicare or Medicaid programs or from any other third-party payor,
under a limited number of its management contracts Continucare is obligated to
refund a portion of its fee if either Medicare denies reimbursement for an
individual patient treatment or if the fee paid to Continucare is denied by
Medicare as a reimbursable cost (which may result from retroactive adjustments
under such programs). In order to receive reimbursement under the Medicare or
Medicaid programs, each facility must meet applicable requirements promulgated
by the United States Department of Health and Human Services relating to the
type of facility, personnel, standards of patient care and compliance with all
state and local laws, rules and regulations. Continucare believes that the
programs it manages comply in all material respects with applicable Medicare or
Medicaid requirements.
In the mid-1980's, changes in reimbursement rates and procedures included
the creation of the Medicare prospective payment system using predetermined
reimbursement rates for diagnosis related groups ("DRGs"). The DRG system
established fixed payment amounts per discharge for diagnoses generally provided
by acute care hospitals. Mental health services provided by acute care hospitals
which qualify for an exemption are deemed to be distinct part units ("DPUs") and
are not included in the DRG system. Services provided by DPUs are reimbursed on
an actual cost basis, subject to certain limitations. The Company believes that
the mental and physical health programs managed by it which are eligible for
reimbursement under the Medicare program currently meet the applicable
requirements for designation as DPUs and are exempt from the DRG system. In the
future, however, it is possible that Medicare reimbursement for mental
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and physical health services, including those provided by programs managed by
Continucare, could be under the DRG system or otherwise altered. Since a
substantial portion of the patients of the programs managed by Continucare are
covered by Medicare, any changes which limit or reduce Medicare reimbursement
levels could have a material adverse effect on Continucare's clients and, in
turn, on Continucare.
Federal law contains certain provisions designed to ensure that services
rendered by providers to Medicare and Medicaid patients are medically necessary
and meet professionally recognized standards. These provisions include a
requirement that treatment of Medicare and Medicaid patients must be reviewed in
a timely manner to determine the medical necessity of such treatment. In
addition, these provisions state that a provider may be required by the federal
government to reimburse the government for the cost of Medicare-reimbursed
services that are determined by a peer review organization to have been
medically unnecessary. Continucare and its clients have developed and
implemented quality assurance programs and procedures for utilization review and
retrospective patient care evaluation intended to meet these requirements.
Patient Referral Laws
Various federal and state laws regulate the relationships between health
care providers and referral sources, including federal and state fraud and abuse
laws prohibiting individuals and entities from knowingly and willfully offering,
paying, soliciting or receiving remuneration in order to induce referrals for
the furnishing of health care services or items. These federal laws generally
apply only to referrals for items or services reimbursed under the Medicare or
Medicaid programs or any state health care program. The objective of these laws
is generally to ensure that the purpose of a referral is quality of care and not
monetary gain by the referring party.
In addition, federal and some state laws impose restrictions on referrals
for certain designated health services by physicians and, in a few states,
psychologists and other mental health care professionals to entities with which
they have financial relationships. Continucare believes that its operations
comply with these restrictions to the extent applicable, although no assurances
can be given regarding compliance in any particular factual situation. Federal
legislation has been considered to expand current law from its application to
Medicare and Medicaid business to all payors and to additional health services.
Certain states are considering adopting similar restrictions or expanding the
scope of existing restrictions. There can be no assurance that the federal
government or other states in which Continucare operates will not enact similar
or more restrictive legislation or restrictions that could under certain
circumstances adversely impact Continucare's operations.
Under a significant number of its management contracts, Continucare
receives a flat fee for its services. In addition, Continucare has entered into
agreements with physicians to serve as medical directors at the mental health
programs and facilities managed by Continucare, which generally provide for
payments to such persons by Continucare as compensation for their administrative
services. These medical directors also generally provide professional services
at such mental health programs and facilities. In 1991, regulations were issued
under federal fraud and abuse laws creating certain "safe harbors" for
relationships between health care providers and referral sources. Any
relationship that satisfies the terms of the safe harbor is considered
permitted.
Violations of these laws can result in felony criminal penalties, civil
sanctions and exclusion from participation in the Medicare and Medicaid
programs.
Health Care Reform
Federal and state governments have recently focused significant attention
on health care reform intended to control health care costs and to improve
access to medical services for uninsured individuals. These proposals include
cutbacks to the Medicare and Medicaid programs and steps to permit greater
flexibility in the administration of Medicaid. It is uncertain at this time what
legislation on health care reform may ultimately be enacted or whether other
changes in the administration or interpretation of governmental health care
programs will occur. There can be no assurance that future health care
legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on
Continucare's business, financial condition or results of operations.
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FACILITIES
Continucare leases approximately 13,000 square feet of space for its
corporate offices in Miami, Florida under a lease expiring in September 2001.
EMPLOYEES
At October 11, 1996, Continucare employed approximately 200 individuals and
managed approximately 150 individuals providing services on behalf of
Continucare. Continucare has no collective bargaining agreement with any unions
and believes that its overall relations with its employees are good. In
addition, at October 11, 1996, Continucare had administrative contacts with
approximately 45 physicians to serve as medical directors for the programs
managed by Continucare.
INSURANCE
Continucare carries general liability, comprehensive property damage,
malpractice, workers' compensation and other insurance coverages that management
considers adequate for the protection of Continucare's assets and operations.
There can be no assurance, however, that the coverage limits of such policies
will be adequate. A successful claim against Continucare in excess of its
insurance coverage could have a material adverse effect on Continucare.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
Charles M. Fernandez................... 34 Chairman of the Board, Chief Executive
Officer and President
Dr. Phillip Frost...................... 60 Vice Chairman of the Board
Susan Tarbe............................ 40 Executive Vice President and General
Counsel
Arthur M. Goldberg..................... 54 Director
Richard B. Frost....................... 47 Director
Mark J. Hanna.......................... 47 Director
Dr. Michael C. Piercey................. 51 Director
</TABLE>
CHARLES M. FERNANDEZ co-founded Continucare in February of 1996 and has
been involved in all aspects of its operations since that time serving as its
Chairman of the Board, President and Chief Executive Officer. Prior to founding
Continucare, Mr. Fernandez was the Executive Vice President and Director of
Heftel Broadcasting Corporation, a public company owning a network of radio
stations, since 1985. Mr. Fernandez has also been an officer of Bally
Entertainment Corporation since January 1996.
PHILLIP FROST, M.D. has served as the Vice Chairman of Continucare since
September 1996. Dr. Frost has served, since 1987, as Chairman of the Board and
Chief Executive Officer of IVAX Corporation, a Florida corporation ("IVAX"), the
world's largest generic pharmaceutical manufacturer. He served as IVAX's
President from July 1991 until January 1995. Dr. Frost also serves as Vice
Chairman of the Board of Pan American World Airways, Inc. He was the Chairman of
the Department of Dermatology at Mt. Sinai Medical Center of Greater Miami,
Miami Beach, Florida from 1990 to 1992. Dr. Frost was Chairman of the Board of
Directors of Key Pharmaceutical, Inc. from 1972 to 1986. He is Vice Chairman of
the Board of Directors of North American Vaccine, Inc. ("NAV"), and a Director
of American Exploration Company, which is engaged in oil and gas exploration and
production, NaPro BioTherapeutics, Inc., a biopharmaceutical research and
development firm ("NaPro"), Whitman Education Group, which is engaged in
proprietary education ("Whitman") and Northrup Grumman. He is a trustee of the
University of Miami and a member of the Board of Governors of the American Stock
Exchange. Dr. Frost is the uncle of Richard Frost.
9
<PAGE> 12
SUSAN TARBE joined Continucare in September 1996 as Executive Vice
President and General Counsel. Prior to joining the Company, Ms. Tarbe was an
Assistant United States Attorney for the Southern District of Florida since
September 1985. During her employment with the United States Attorney's office,
Ms. Tarbe specialized in the area of white-collar criminal offenses, and since
May of 1994 was the Chief of the Economic Crimes Unit. From August 1984 to
August 1985, Ms. Tarbe was a law clerk to the Honorable William M. Hoeveler,
U.S. District Judge for the Southern District of Florida.
ARTHUR M. GOLDBERG has served as a Director of Continucare since September
1996. Mr. Goldberg for the past five years has been Chairman of the Board of
Directors, Chief Executive Officer and President of Bally Entertainment Corp,
Chairman of the Board of Directors, President and Chief Executive Officer of
Bally's Casino Holdings, Inc., Chairman of the Board of Directors and Chief
Executive Officer of Bally's Park Place, Inc., GNOC, CORP., Bally's Grand, Inc.
and Bally Total Fitness Holding Corporation. Mr. Goldberg is also the Chairman
of the Board of Directors, President and Chief Executive Officer of Di Giorgio
Corporation and Managing Partner of Arveron Investments L.P. Mr. Goldberg is
also a director of First Union Corporation, a financial services company.
RICHARD B. FROST has served as a Director of Continucare since September
1996. Mr. Frost has been Chief Executive Officer and Chairman of the Board of
Directors of Frost Hanna Mergers Group, Inc. ("FH") since its formation in
October 1993. Mr. Frost also serves as a director of Pan American World Airways,
Inc. Mr. Frost was the Chief Executive Officer and Chairman of the Board of
Directors of Frost Hanna Acquisition from April 1993 until January 1996, at
which time LFS merged with and into a wholly-owned subsidiary of Frost Hanna
Acquisition (the "LFS Merger"), Frost Hanna Acquisition changed its name to
"Little Folks Shops" and Mr. Frost resigned from the Frost Hanna Acquisition
Board. From June 1992 to May 1994, Mr. Frost held similar positions at Frost
Hanna Halpryn until the merger of Sterling Healthcare, Inc. and Sterling Health
Care Group, Inc. with and into a wholly-owned subsidiary of Frost Hanna Halpryn,
whereby Frost Hanna Halpryn changed its name to Sterling Healthcare, Inc. (the
"Sterling Merger"). From February 1992 through May 1992, Mr. Frost was Regional
Director of GKN Securities Corp., a broker-dealer ("GKN") where his
responsibilities included the recruitment and training of GKN brokerage
personnel located or to be located in Florida. From May 1982 through February
1992, Mr. Frost was a Vice President and Branch Manager of Dean Witter Reynolds,
a broker-dealer, where his responsibilities included the management and
day-to-day operations of the West Boca Raton and Lighthouse Point, Florida,
branch offices of such brokerage firm.
MARK J. HANNA has served as a Director of Continucare since September 1996.
Mr. Hanna also serves as a director of Pan American World Airways, Inc. Mr.
Hanna has been the President and a member of the Board of Directors of FH since
its inception. Mr. Hanna was the President and a member of the Board of
Directors of Frost Hanna Acquisition from April 1993 until January 1996,
whereupon Mr. Hanna resigned from the Frost Hanna Acquisition Board following
the LFS Merger. Mr. Hanna held similar positions at Frost Hanna Halpryn from
June 1992 until the Sterling Merger in May 1994. From February 1992 through May
1992, Mr. Hanna was a registered representative with GKN. From January 1992
through February 1992, Mr. Hanna was a registered representative with Barron
Chase Securities, Inc. From September 1990 through January 1992, Mr. Hanna was a
registered representative with Prudential Bache Securities, Inc.
MICHAEL C. PIERCEY, M.D. has served as a Director of Continucare since
September 1996. Dr. Piercey has been a Board Member, Executive Vice President
and Medical Director of Health Care America, Inc., a health care management
company which owns and operates acute care hospitals, long-term rehabilitation
hospitals, psychiatric hospitals, community living programs, and a full array of
partial hospital and outpatient services in Texas, Colorado, Florida, Oklahoma,
Tennessee, and Virginia, since 1994. Since 1992, Dr. Piercey has been an Officer
and Director of DHP, Inc. which operates the Rock Creek Center, a psychiatric
hospital and outpatient service system in the Southwestern Chicago suburbs. He
was the Clinical Director at Four Winds, Inc., a psychiatric hospital company
with affiliates in Saratoga Springs, New York and Chicago from 1978 to 1992, and
in 1986 he assumed the additional responsibilities of Executive Director and
Chief Operating Officer.
10
<PAGE> 13
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10 percent of
the Company's Common Stock, to file with the Securities and Exchange Commission
(the "SEC") initial reports of ownership and reports of changes in ownership of
Common Stock. Officers, directors and greater than 10 percent shareholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company, during the fiscal year ended June 30, 1996 its
officers, directors and greater than ten percent beneficial owners were in
compliance with all Section 16(a) filing requirements.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid to the President of
Zanart during Zanart's last three fiscal years (the "Named Officer"). No other
executive officer of Zanart was paid in excess of $100,000 during the fiscal
year ended June 30, 1996.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------- ------------
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#)
- --------------------------------------------------------- ------------- --------- ------------
<S> <C> <C> <C> <C>
Thomas Zotos, President.................................. 1996 75,000 0 --
1995 51,000 40,000 --
1994 36,000 0 --
</TABLE>
- ---------------
(1) Mr. Zotos resigned his position as President effective upon the consummation
of the Merger.
OPTION GRANTS DURING 1996 AND 1995
Thomas Zotos did not receive any option grants from the Company during
fiscal year 1996.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Charles M.
Fernandez and Susan Tarbe. Mr. Fernandez's employment agreement is for a term of
three years plus one additional year for each year of service and became
effective on September 11, 1996, and provides for an annual base salary of
$350,000 and a bonus of $100,000 payable in 20 equal installments of $5,000 over
the first five years of such agreement. Pursuant to the terms of Mr. Fernandez's
employment agreement, he may receive additional bonuses at the discretion of the
Board. Mr. Fernandez is prohibited from competing with the Company for the
duration of his employment agreement and for a period of two years thereafter
unless he is terminated without cause, and he is additionally prohibited from
disclosing confidential information. Ms. Tarbe's employment agreement is for a
term of three years commencing September 23, 1996, and provides for an annual
base salary of $130,000 and a bonus equal to at least 10% of her then base
salary plus such other bonus amounts as may be approved by the Board. Under the
terms of Ms. Tarbe's employment agreement, she received an option, which vests
at a rate of 20% per year, to purchase 100,000 shares of the Company at $5.00
per share. Upon a change in control of the Company, Ms. Tarbe is entitled to an
acceleration of the remainder of her employment agreement and automatic vesting
of any unvested portion of her aforementioned warrant. Ms. Tarbe is prohibited
from competing with the Company for the duration of his employment agreement and
for a period of ninety days thereafter unless she is terminated without cause,
and she is additionally prohibited from disclosing confidential information.
Effective September 11, 1996, the Company amended each of its employment
agreements with Robert A. Stein, Thomas Zotos and Todd Slayton (the
"Executives"). Pursuant to such amendments, the executives resigned as officers
of the Company and shall continue as employees through December 11, 1996. On
such date, each Executive shall receive severance compensation equal to six
months salary, the aggregate amount of which for all three Executives shall
equal approximately $107,500.
11
<PAGE> 14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of October 11, 1996
concerning the beneficial ownership of the Common Stock by (i) each person known
by the Company to be the beneficial owner of more than 5% of the outstanding
Common Stock, (ii) each of the executive officers and directors of the Company,
(iii) the Named Officer, and (iv) all executive officers and directors of the
Company as a group. All holders listed below have sole voting power and
investment power over the shares beneficially owned by them, except to the
extent such power may be shared with such person's spouse.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) COMMON STOCK(2)
- -------------------------------------------------------- ----------------------- ---------------
<S> <C> <C>
Charles M. Fernandez.................................... 1,626,767(3) 14.5%
100 S.E. Second Street
36th Floor
Miami, FL 33131
Arthur M. Goldberg...................................... 925,000(4) 8.2%
380 Middlesex Avenue
Carteret, NJ 07008
Dr. Phillip Frost....................................... 1,458,333(5) 12.7%
4400 Biscayne Boulevard
Miami, FL 33137
Michael C. Piercey...................................... 0 0
100 S.E. Second Street
36th Floor
Miami, FL 33131
Richard B. Frost........................................ 306,000 2.7%
7700 W. Camino Real
Boca Raton, FL 33433
Mark J. Hanna........................................... 307,000 2.7%
7700 W. Camino Real
Boca Raton, FL 33433
Sailfish Investments, LLC............................... 925,000(4) 8.2%
380 Midlesex Avenue
Carteret, NJ 07008
Frost Nevada Limited Partnership........................ 1,458,333(5) 12.7%
3500 Lakeside Court
Suite 200
Reno, NV 89509
Douglas Miller.......................................... 1,616,666 14.4%
303 Egret Lane
Fort Lauderdale, FL 33327
Barry Goldstein......................................... 1,626,667(6) 14.5%
1900 N.E. 211th Street
North Miami Beach, FL 33179
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) COMMON STOCK(2)
- -------------------------------------------------------- --------- ----
<S> <C> <C>
Susan Tarbe............................................. 0 0
100 S.E. Second Street
36th Floor
Miami, FL 33131
Thomas Zotos............................................ 258,125 2.3%
7641 Burnet Avenue
Van Nuys, CA 91405
All directors and executive officers as a group (7
persons).............................................. 4,623,100 40.4%
</TABLE>
- ---------------
* Less than one percent
(1) For purposes of this table, beneficial ownership is computed pursuant to
Rule 13d-3 under the Exchange Act; the inclusion of shares as beneficially
owned should not be construed as an admission that such shares are
beneficially owned for purposes of the Exchange Act. Under the rules of the
Securities and Exchange Commission, a person is deemed to be a "beneficial
owner" of a security he or she has or shares the power to vote or direct
the voting of such security or the power to dispose of or direct the
disposition of such security. Accordingly, more than one person may be
deemed to be a beneficial owner of the same security.
(2) Assumes no exercise of the Underwriter Purchaser Options issued to
affiliates of First Equity Corporation, the Company's underwriter of its
public offering which closed in May 1995 or their Series A Warrants sold in
the May 1995 public offering.
(3) Includes 10,000 shares of Common Stock held by the wife of Mr. Fernandez.
(4) All of the shares of Common Stock owned beneficially by Arthur M. Goldberg
are owned of record by Sailfish Investments, LLC. The members of Sailfish
Investments, LLC are Mr. Goldberg and the Arthur M. Goldberg Lifetime
Trust.
(5) All of the shares of Common Stock owned beneficially by Dr. Phillip Frost
are owned of record by Frost Nevada Limited Partnership. Such number of
shares includes 250,000 shares of Common Stock underlying options granted
which are currently exercisable.
(6) Includes 10,000 shares of Common Stock held by Barry Goldstein's wife and
two daughters.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has contracted with a company owned in equal interests by
Douglas Miller and Barry Goldstein, each of whom own more than 5% of the
Company's Common Stock, to perform certain managerial and administrative
services on behalf of the Company. The Company reimburses such company for the
actual cost of expenses incurred by it in the direct performance of such
services. For the period ended June 30, 1996, total expenses incurred by the
Company for these services totaled $407,700. In addition, the Company provides
management services for four facilities owned by such company in return for a
management fee which is based on the Company's estimated cost of providing such
services. For the period ended June 30, 1996, management fees charged by
Continucare to such company were $324,700. As of June 30, 1996, the net amount
payable by the Company to such company under these arrangements was $83,000.
The Company intends to enter into consulting agreements with a company
controlled by Douglas Miller, and a company controlled by Barry Goldstein
(collectively, the "Consulting Agreements"). Messrs. Miller and Goldstein served
as executive officers of Continucare Corporation prior to the Merger. Each of
the Consulting Agreements, which will be effective as of the date of the Merger,
is expected to 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'
written 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.
13
<PAGE> 16
The Company is obligated to Charles M. Fernandez for a note payable in the
amount of $599,750 (the "Fernandez Note"). The Fernandez Note, which is
collateralized by substantially all of the Company's assets, bears interest at
10% per annum and is due, in full, on February 12, 1998. Interest is due
semiannually commencing on August 12, 1996. Accrued interest and interest
expense related to this note was $21,662 as of and for the fiscal year ended
June 30, 1996.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Underwriting Agreement dated May 18, 1995 between the Company and First Equity
Corporation of Florida. (3) (Exhibit 1)
1.2 -- Series A Warrant Agreement. (3) (Exhibit 2)
3.1 -- Restated Articles of Incorporation of Company, as amended. (1) (Exhibit 3.1)
3.2 -- Restated Bylaws of Company. (1) (Exhibit 3.2)
4.1 -- Form of certificate evidencing shares of Common Stock. (1) (Exhibit 4.1)
4.2 -- Form of Series A Warrant. (1) (Exhibit 4.2)
4.3 -- Unit Purchase Option Certificate dated May 18, 1995. (3) (Exhibit 3)
5.1 -- Opinion of Berman Wolfe & Rennert, P.A. (2) (Exhibit 5.1)
10.1 -- Employment Agreement dated as of July 21, 1994 by and between Company and Thomas
Zotos. (1) (Exhibit 10.1)
10.2 -- Employment Agreement dated as of July 21, 1994 by and between Company and Robert A.
Stein. (1) (Exhibit 10.2)
10.3 -- Purchase Agreement dated February 9, 1994 by and between Company and Frost Nevada
Limited Partnership. (1) (Exhibit 10.6)
10.4 -- Promissory Note dated February 9, 1994, in the principal amount of $500,000 issued
by Company to Frost Nevada Limited Partnership. (1) (Exhibit 10.7)
10.5 -- Warrant dated February 9, 1994 to purchase 500,000 shares of Company issued to
Frost Nevada Limited Partnership. (1) (Exhibit 10.8)
10.6 -- Memorandum and Registration Rights Agreement dated February 9, 1994 regarding
issuance of 325,000 shares of Company Common Stock to Eric Stein. (1) (Exhibit
10.9)
10.7 -- Memorandum and Registration Rights Agreement dated February 9, 1994 regarding
issuance of 520,000 shares of Company Common Stock to Richard B. Frost. (1)
(Exhibit 10.10)
10.8 -- Memorandum and Registration Rights Agreement dated February 9, 1994 regarding
issuance of 505,000 shares of Company Common Stock to Mark J. Hanna. (1) (Exhibit
10.11)
10.9 -- Stock Restriction Agreements dated May 18, 1995 by and between the Company and each
of Steven Adelman, Richard B. Frost, Frost Nevada Limited Partnership, Mark J.
Hanna, Mark Politi, Jacqueline Simkin, Todd Slayton, Ronald Stein and Susan Stein,
Robert Stein and Thomas Zotos. (3) (Exhibit 4)
10.10 -- Employment Agreement dated October 31, 1994 by and between Company and Todd
Slayton. (1) (Exhibit 10.13)
10.11 -- Exchange Agreement dated December 30, 1994 by and between Company and Frost Nevada
Limited Partnership. (1) (Exhibit 10.14)
10.12 -- Promissory Note dated December 30, 1994 in the principal amount of $400,000 issued
by the Company to Frost Nevada Limited Partnership. (1) (Exhibit 10.15)
10.13 -- Subscription Agreement dated December 7, 1994 by and between Company and Jacqueline
Simkin. (1) (Exhibit 10.16)
10.14 -- Registration Rights Agreement dated December 7, 1994 by and between Company and
Jacqueline Simkin. (1) (Exhibit 10.17)
10.15 -- Agreement dated January 4, 1995 by and between Signs and Glassworks and Company.
(1) (Exhibit 10.18)
10.16 -- Commercial Lease dated August 20, 1993 by and between City Art and Company. (2)
(Exhibit 10.19)
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <C> <S>
10.17 -- License Agreement dated February 18, 1994 by and between DC Comics and Company. (2)
(Exhibit 10.20)
10.18 -- License Agreement dated December 2, 1993 by and between Warner Bros. and Company.
(2) (Exhibit 10.21)
10.19 -- License Agreement dated October 1, 1994 by and between Viacom Consumer Products and
Company. (2) (Exhibit 10.22)
10.20 -- License Agreement dated July 8, 1994 by and between Lucasfilm Ltd. and Company. (2)
(Exhibit 10.23)
10.21 -- License Agreement dated March 1, 1993 by and between Paramount Licensing Group and
Company. (2) (Exhibit 10.24)
10.22 -- Memorandum regarding waiver of registration rights pursuant to Registration Rights
Agreement dated February 9, 1994 between Company and Eric Stein. (2) (Exhibit
10.25)
10.23 -- Memorandum regarding waiver of registration rights pursuant to Registration Rights
Agreement dated February 9, 1994 between Company and Richard B. Frost. (2) (Exhibit
10.26)
10.24 -- Memorandum regarding waiver of registration rights pursuant to Registration Rights
Agreement dated February 9, 1994 between Company and Mark J. Hanna. (2) (Exhibit
10.27)
10.25 -- Memorandum regarding waiver of registration rights pursuant to Registration Rights
Agreement dated February 9, 1994 between Company and Frost Nevada Limited
Partnership. (2) (Exhibit 10.28)
10.26 -- Memorandum regarding waiver of registration rights pursuant to Registration Rights
Agreement dated December 7, 1994 between Company and Jacqueline Simkin. (2)
(Exhibit 10.29)
10.27 -- 1995 Stock Option Plan. (4) (Exhibit 10.30)
10.28 -- Amendment to Employment Agreement between the Company and Tom Zotos dated as of
September 11, 1996. (5)
10.29 -- Amendment to Employment Agreement between the Company and Robert A. Stein dated as
of September 11, 1996. (5)
10.30 -- Amendment to Employment Agreement between the Company and Todd Slayton dated as of
September 11, 1996. (5)
10.31 -- Employment Agreement between the Company and Charles M. Fernandez dated as of
September 11, 1996. (6) (Exhibit 10.36)
10.32 -- Employment Agreement between the Company and Susan Tarbe dated as of September 23,
1996.
10.33 -- Agreement and Plan of Merger by and among Continucare Corporation, Zanart
Entertainment Incorporated and Zanart Subsidiary, Inc. dated August 9, 1996. (5)
(Exhibit 2)
21 -- Subsidiaries of the Company. (6) (Exhibit 21)
99.1 -- Continucare's Audited Consolidated financial statements for the period February 12,
1996 (inception) to June 30, 1996.
</TABLE>
Documents incorporated by reference to the indicated exhibit to the
following filings by the Company under the Securities Act of 1933 or the
Securities Exchange Act of 1934.
(1) Registration Statement on Form SB-2, Securities Act File No.
33-88580, filed with the Commission on January 17, 1995.
(2) Amendment No. 1 to Registration Statement on Form SB-2, Securities
Act File No. 33-88580, filed with the Commission on March 21, 1995.
(3) Current Report on Form 8-K, dated May 18, 1995.
(4) Form 10-KSB filed with the Commission on September 29, 1995.
(5) Current Report Form 8-K dated August 9, 1996.
(6) Form 10-KSB filed with the Commission on September 30, 1996.
(b) Reports on Form 8-K.
None.
15
<PAGE> 18
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINUCARE CORPORATION
By: /s/ CHARLES M. FERNANDEZ
------------------------------------
Charles M. Fernandez,
Chairman, Chief Executive Officer
and President
Date: October 17, 1996
In accordance with 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ---------------------------- ----------------
<S> <C> <C>
/s/ CHARLES M. FERNANDEZ Chairman, Chief Executive October 17, 1996
- ----------------------------------- Officer and President
Charles M. Fernandez (Principal Executive Officer)
/s/ PHILLIP FROST, M.D. Vice-Chairman October 17, 1996
- -----------------------------------
Phillip Frost, M.D.
/s/ SUSAN TARBE Executive Vice President and October 17, 1996
- ----------------------------------- General Counsel
Susan Tarbe
/s/ MARIA T. SOSA Chief Accounting Officer October 17, 1996
- ----------------------------------- (Principal Accounting Officer)
Maria T. Sosa
/s/ ARTHUR M. GOLDBERG Director October 17, 1996
- -----------------------------------
Arthur M. Goldberg
/s/ RICHARD FROST Director October 17, 1996
- -----------------------------------
Richard Frost
/s/ MARK HANNA Director October 17, 1996
- -----------------------------------
Mark Hanna
/s/ MICHAEL PIERCEY, M.D. Director October 17, 1996
- -----------------------------------
Michael Piercey, M.D.
</TABLE>
16
<PAGE> 1
Exhibit 10.32
SUSAN TARBE EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of the 23rd
day of August, 1996 by and between CONTINUCARE CORPORATION, a Florida
corporation (the "Company") and SUSAN TARBE (the "Employee").
RECITALS
A. The Board of Directors of the Company (the "Board") believes that
the Employee can contribute to the growth and success of the
Company, and desires to assure the Company of the Employee's
employment and to compensate her therefor.
B. the Board has determined that this Agreement will reinforce and
encourage the Employee's attention and dedication to the Company.
C. The Employee is willing to make her services available to the
Company on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants set forth
herein, the parties agree as follows:
1. EMPLOYMENT
1.1 GENERAL. The Company hereby agrees to employ the Employee, and
the employee hereby agrees to serve the Company on the terms and
conditions set forth herein.
1.2 DUTIES OF EMPLOYEE. During the term of this Agreement, the
employee shall serve as Executive Vice President, General Counsel,
and shall diligently perform all services as may be assigned to
her by the C.E.O., and shall exercise such power and authority as
may from time to time be delegated to her by the Board. The
Employee shall devote substantially all of her business time and
attention to the business and affairs of the Company, render such
services to the best of her ability, and use her best efforts to
promote the interests of the Company.
<PAGE> 2
2. TERM. Except as otherwise provided in Section 5 hereof, the term
of this Agreement shall commence on September 23, 1996 and shall
terminate at the end of the Term ("Term"). The Term shall be a
three-year period commencing September 23, 1996 and ending on
September 22, 1999.
3. COMPENSATION
3.1 BASE SALARY. The Employee shall receive a base salary at
the annual rate of One Hundred Thirty Thousand Dollars
($130,000) (the "Base Salary") during the Term of this
Agreement, with such base Salary payable in installments
consistent with the Company's normal payroll schedule,
subject to applicable withholding and other taxes.
3.2 BONUS. The Employee shall receive a bonus (the "Bonus")
equal t at least 10% of the Base Salary, which amount
shall be payable in equal quarterly installments over the
one-year period following the date hereof. The Employee
shall also be eligible to receive an additional bonus in
an amount determined by the majority vote of all members
of the Company's Board of Directors, based upon the
Company's operating results, financial condition,
prospects and intended utilization of earnings, if any.
3.3 COST-OF-LIVING INCREASE. Commencing August 23, 1997, and
each Anniversary Date thereafter during the term, the Base
Salary shall be increased, but shall not be decreased, by
that percentage by which the Consumer Price Index (All
Items Less Shelter), Urban Wage Earnings and Clerical
Workers for the Miami Florida area published by the United
States government (the "Index") for the immediately
preceding calendar year exceeds such Index for the next
preceding calendar year. If publication of the Index is
discontinued, the parties hereto shall accept comparable
statistics on the cost of living for the Miami, Florida
area as computed and published by an agency of the United
States government or, if no such agency computes and
publishes such statistics, by any regularly published
national financial periodical that does compute and
publish such statistics. The employee shall also be
eligible to receive an additional annual increase in
salary in an amount determined by the CEO of the Company.
3.4 STOCK OPTION. The Employee shall receive a warrant of
100,000 shares of the Company at a price of $5.00 per
share, which represents 90.0% of the fair market value of
the stock of the Company at the time of the offer. On
august 19, 1996 the closing price of Zanart on Nasdaq was
$6.00. The warrant shall vest gradually over a 5-year
period at a rate of 20% a year.
3.5 CHANGE OF CONTROL. Upon a change of control in the
Company, the Employee shall be entitled to an acceleration
of the remainder of the Employee's
<PAGE> 3
Agreement and the automatic vesting of the total warrant
of 100,000 shares of the Company.
4. EXPENSE REIMBURSEMENT AND OTHER BENEFITS
4.1 OTHER REIMBURSABLE EXPENSES. During the term of the
Employee's employment hereunder, the Company, upon the
submission of proper substantiation by the employee, shall
reimburse the Employee for all other reasonable expenses
actually and necessarily paid or incurred by the Employee
in the course of and pursuant to the business of the
Company, including annual Florida bar and American Bar
Association dues and continuing legal education courses
necessary to maintain licensure with the Florida Bar.
4.2 OTHER BENEFITS. The Employee and her immediate family
shall be entitled to participate in all medical and
hospitalization, group life insurance, and any and all
other plans as are presently and hereinafter provided by
the Company to its executives. The Employee shall also be
entitled to three weeks vacation in accordance with the
Company's prevailing policy for its executives, with any
additional vacation time to be determined by the CEO.
4.3 WORKING FACILITIES. The Company shall furnish the Employee
with an office, secretarial help and such other facilities
and services suitable to her position and adequate for the
performance of her duties hereunder.
4.4 AUTOMOBILE ALLOWANCE. The Employee shall be entitled to an
automobile allowance of $400 per month, which amount is
intended to compensate Employee for wear and tear and
other expenses incurred by Employee by reason of the use
of Employee's automobile for Company business from time to
time.
5. TERMINATION
5.1 TERMINATION FOR CAUSE. The Company shall at all times have
the right, upon written notice to the Employee, to
terminate the employee's employment hereunder for "Cause"
(as hereinafter defined). For purposes of this Agreement,
the term "Cause" shall mean (I) the willful failure or
refusal of the employee to perform material duties or
render material services assigned to her from time to time
by the CEO or the Board (except during reasonable vacation
periods or sick leave) , (ii) the conviction of the
employee of a falony, (iii) the association, directly or
indirectly, of the employee for her profit or financial
benefit, with any person, firm, partnership, association,
entity or corporation that competes with the Company in
any material way, excluding purchases of stock by the
Employee not to exceed 5% of any publicly held company
which so competes, (iv) the disclosing or using of any
material trade secret or confidential information of the
Company at any time by the Employee, except
<PAGE> 4
as required in connection with her duties to the Company,
or (v) the intentional breach by the employee of her
fiduciary duty to the Company as defined by applicable
law. Upon any termination pursuant to this Section 5.1,
the Employee shall be entitled to be paid her Base Salary
to the date of termination and the amount, if any, of the
unpaid Bonus in accordance with Section 3.2 hereof, and
the Company shall have no further liability hereunder
(other than for reimbursement for reasonable business
expenses incurred prior to the date of termination).
5.2 DISABILITY. The Company shall at all times have the right,
upon written notice to the Employee, to terminate the
Employee's employment hereunder if the employee shall, as
the result of mental or physical incapacity, illness or
disability, become unable to perform her duties hereunder
for in excess of ninety (90) days in any 12-month period
so long as the Company is in compliance with applicable
law. Upon any termination pursuant to this Section 5.2,
the Company shall pay to the employee any unpaid amounts
of her base Salary accrued through the effective date of
termination and the amount, if any, of the unpaid Bonus in
accordance with Section 3.2 hereof, and an additional
amount to be determined by the majority vote of the Board
of Directors in their discretion, the Company shall have
no further liability hereunder (other than for
reimbursement for reasonable business expenses incurred
prior to the date of termination, subject, however, to the
provisions of Section 4.1).
5.3 DEATH. In the event of the death of the Employee during
the term of her employment hereunder, the Company shall
pay to the estate of the deceased Employee any unpaid
amounts of her Base Salary accrued through the effective
date of her death and the amount, if any, of the unpaid
Bonus in accordance with Section 3.2 hereof, and the
Company shall have no further liability hereunder (other
than for reimbursement for reasonable business expenses
incurred prior to the date of the employee's death,
subject, however, to the provisions of Section 4.1). In
the event of the death of the Employee on Company
business, the Board of Directors may consider payment of
an amount determined by a majority of the Board to the
estate of the Employee.
5.4 TERMINATION WITHOUT CAUSE. At any time the Company shall
have the right to terminate the employee's employment
hereunder by written notice to the employee; provided,
however, that the Company shall continue to pay to the
Employee the Base Salary for the balance of the Agreement
per Section 2 following the effective date of termination
specified in such notice in accordance with the Company's
normal payroll policies and the amount, if any, of the
unpaid Bonus in accordance with Section 3.2 hereof. In
addition, the stock option as described in Section 3.4
shall vest immediately and in the full amount of 100,000
shares. The Company shall have no further liability
hereunder (other than for reimbursement for reasonable
business expenses
<PAGE> 5
incurred prior to the date of termination, subject,
however, to the provisions of Section 4.1).
5.5 RESIGNATION BY EMPLOYEE. The Employee shall at all times
have the right, upon 180 days' written notice to the
Company, to terminate the Employee's employment hereunder.
Upon any termination pursuant to this Section 5.5, the
Employee shall be entitled to be paid her Base Salary to
the date of termination and the amount, if any, of the
unpaid Bonus in accordance with Section 3.2 hereof, and
the Company shall have no further liability hereunder
(other than for reimbursement for reasonable business
expenses incurred prior to the date of termination,
subject, however, to the provisions of Section 4.1).
5.6 CHANGE OF CONTROL. Upon a change of control in the
Company, upon 60 days notice, the warrant described in
Section 3.4 shall vest immediately in the amount of
100,000 shares. Change of control will also include any
termination of Charles M. Fernandez in his position of
Chairman and CEO of the Company, or the sale of more than
50% of Mr. Fernandez' holding in the Company.
6. RESTRICTIVE COVENANTS
6.1 NON-COMPETITION. While employed by the Company and for a
period of ninety (90) days following the termination of
the Emp0loyee's employment hereunder (other than a
termination without cause, as contemplated by Section 5.4
hereof), the Employee shall not, directly or indirectly,
engage in or have any interest in any sole proprietorship,
partnership, corporation, or business or any other person
or entity (whether as an employee, officer, director,
partner, agent, security holder, creditor, consultant, or
otherwise) that directly or indirectly engages primarily
in the outpatient psychiatric healthcare business (the
"Business") in competition with the Company and/or its
"affiliates" (as such term is defined in rule 12b-2 as
promulgated under the Securities Exchange Act of 1934, as
amended) or otherwise similar to the business of the
Company and its affiliates in Florida or in any other
state in which the Company and/or its affiliates are
conducting business at the time of termination or
separation.
6.2 NONDISCLOSURE. Employee shall not divulge, communicate,
sue to the detriment of the Company or any affiliate or
for the benefit of any other person or persons, or misuse
in any way, any confidential information pertaining to the
business of the Company or any affiliate. Any confidential
information or data now known or hereafter acquired by the
employee with respect to the business of the Company or
any affiliate (which shall include but not be limited to
information concerning the Company's or any affiliates'
financial condition, prospects, patients, sources, and
methods of doing business) shall be deemed a valuable,
special and unique asset of the Company that is received
by the
<PAGE> 6
employee in confidence and as a fiduciary, and the
employee shall remain a fiduciary to the Company with
respect to all such information except for information
which is in the public domain and any and all information
or documents requested by legal process, that is, by
subpoena, with the employee to provide sufficient
notification to the Company upon receipt of such legal
process.
6.3 NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. While employed
by the Company, and for a period of three years (except
that the period with respect to the prohibition in Clause
(ii) hereof shall be one year if Employee's employment is
terminated pursuant to Section 5.4 hereof) following the
date her employment is terminated hereunder, the employee
shall not, directly or indirectly, for herself or for any
other person, firm, corporation, partnership, association
or other entity, (I) attempt to employ or enter into any
contractual arrangement with any employee or former
employee of the Company, unless such employee or former
employee has not been employed by the Company for a period
in excess of six months, and/or (ii) call on or solicit
any of the actual or targeted patients of the Company, nor
shall the Employee make known the names and addresses of
such patients.
6.4 BOOKS AND RECORDS. All books, records, and accounts
relating in any manner to the customers or clients of the
Company, whether prepared by the employee or otherwise
coming into the Employee's possession, shall be the
exclusive property of the Company and shall be returned
immediately to the Company on termination of the
employee's employment hereunder or on the Company's
request at any time.
7. INJUNCTION. It is recognized and hereby acknowledged by the
parties hereto that a breach by the Employee of any of the
covenants contained in Section 6 of this Agreement will cause
irreparable harm and damage to the Company, the monetary amount
of which may be virtually impossible to ascertain. As a result,
the employee recognizes and hereby acknowledges that the company
shall be entitled to an injunction from any court of competent
jurisdiction enjoining and restraining any violation of any or
all of the covenants contained in Section 6 of this Agreement by
the employee or any of her affiliates, associates, partners or
agents, either directly or indirectly, and that such right to
injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
8. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Florida without
regard to any conflict of law, rule or principle that would give
effect to the laws of another jurisdiction.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter
hereof and, upon its effectiveness, shall supersede all prior
agreements, understandings, and arrangement, both oral and
<PAGE> 7
written, between the Employee and the Company (or any of its
affiliates, including, without limitation, Continucare
Corporation) with respect to such subject matter. This Agreement
may not be modified in any way unless by a written instrument
signed by both the Company and the Employee.
10. NOTICES. Any notice required or permitted to be given hereunder
shall be deemed given when delivered by hand or when deposited in
the United States mail, by registered or certified mail, return
receipt requested, postage prepaid, to the parties hereto at
their respective address set forth in the Purchase Agreement or
to such other address as either party hereto may from time to
time give notice of to the other.
11. BENEFITS; BINDING EFFECT. This Agreement shall be for the benefit
of and binding upon the parties hereto and their respective
heirs, personal representative, legal representatives, successors
and, where applicable, assigns, including without limitation any
successor to the Company, whether by merger, consolidation, sale
of stock, sale of assets or otherwise; provided, however, that
the Employee shall not delegate her employment obligations
hereunder, or any portion thereof, to any other person.
12. SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses or sections contained in this
Agreement shall not affect the enforceability of the remaining
portions of this Agreement or any part thereof, all of which are
inserted conditionally on their being valid in law and, in the
event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared
invalid, this Agreement shall be construed as if such invalid
word or words, phrase or phrases, sentence or sentences, clause
or clauses, or section or sections has not be inserted. If such
invalidity is caused by length of time or size of area, or both,
the otherwise invalid provision will be considered to be reduced
to a period or area which would cure such invalidity.
13. WAIVERS. The waiver by either party hereto of a breach or
violation of any term or provision of this Agreement shall not
operate nor be construed as a waiver of any subsequent breach or
violation.
14. DAMAGES. Nothing contained herein shall be construed to prevent
the Company or the employee from seeking and recovering from the
other damages sustained by either or both of them as a result of
its or her breach of any term or provision of this Agreement. In
the event that either party hereto brings suit for the collection
of any damages resulting from, or for the injunction of any
action constituting a breach of any of the terms or provisions of
this Agreement, then the party found to be at fault shall pay all
reasonable court costs and attorneys' fees of the other.
15. SECTION HEADINGS. The section headings contained in this
Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement.
<PAGE> 8
16. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended, nor shall be construed to confer upon or
give any person other than the Company, the Employee and their
respective heirs, personal representatives, legal
representatives, successors and assigns, as applicable, any
rights or remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
CONTINUCARE CORPORATION
By: /s/ Charles M. Fernandez
----------------------------------------
Charles M. Fernandez
C.E.O.
/s/ Susan Tarbe
----------------------------------------
Susan Tarbe
<PAGE> 1
Exhibit 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Continucare Corporation
and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Continucare
Corporation and subsidiaries (the "Company") as of June 30, 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for the
period February 12, 1996 (inception) to June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of June 30,
1996 and the results of its operations and its cash flows for the period
February 12, 1996 (inception) to June 30, 1996 in conformity with generally
accepted accounting principles.
Deloitte & Touche, LLP
August 9, 1996, except for
paragraphs six through eleven of Note 11,
as to which the date is October 2, 1996.
<PAGE> 2
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 819,066
Accounts receivable, net of allowance for doubtful accounts
of $146,692 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
OTHER ASSETS, net 70,747
-----------
TOTAL ASSETS $ 2,864,896
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY
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; $1.00 par value; 100 shares
authorized, 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
===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 3
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) TO JUNE 30, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
REVENUES $ 2,507,063
-----------
EXPENSES:
Payroll and employee benefits 973,412
Provision for bad debts 242,664
Professional fees 203,625
General and administrative 54,430
Depreciation and amortization 362
-----------
Total expenses 1,474,493
-----------
INCOME FROM OPERATIONS 1,032,570
-----------
OTHER EXPENSES:
Interest 23,204
Minority interest 32,686
-----------
Other expenses 55,890
-----------
INCOME BEFORE INCOME TAXES 976,680
PROVISION FOR INCOME TAXES 332,071
-----------
NET INCOME $ 644,609
===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) TO JUNE 30, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Shareholders'
Stock Capital Earnings Equity
<S> <C> <C> <C> <C>
Issuance of 100 shares
for initial capitalization of Company $ 100 $ 900 $ 1,000
Issuance of stock in subsidiary
to purchase net assets 762,869 762,869
Net income $ 644,609 644,609
---------- ---------- ---------- -------------
$ 100 $ 763,769 $ 644,609 $ 1,408,478
========== ========== ========== =============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) TO JUNE 30, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 644,609
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 362
Provision for bad debts 242,664
Income applicable to minority interest 32,686
Changes in assets and liabilities, excluding the effect of acquisitions:
Increase in accounts receivable (1,445,590)
Increase in prepaid expenses and other current assets (800)
Increase in intangible assets (1,579)
Increase in other assets (67,221)
Increase in accounts payable and accrued expenses 314,584
Increase in accrued interest payable 23,161
Increase in unearned revenue 18,301
Increase in income and other taxes payable 406,976
-----------
Net cash provided by operating activities 168,153
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (5,087)
-----------
Net cash used by investing activities (5,087)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of related shareholders notes payable 655,000
Proceeds from issuance of common stock 1,000
-----------
Net cash provided by financing activities 656,000
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS, END OF YEAR $ 819,066
-----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest $ 43
-----------
Cash payments for income taxes $
-----------
NON CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of assets and liabilities in exchange for subsidiary stock $ 762,869
-----------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) TO JUNE 30, 1996
- --------------------------------------------------------------------------------
1. GENERAL
DESCRIPTION OF BUSINESS - Continucare Corporation (the "Company") was
incorporated on February 12, 1996 in the State of Florida. Together with
its subsidiaries, the Company is a full-service healthcare management
organization that creates and implements operational, marketing,
administrative, staffing and financial programs for specialized
outpatient institutional and professional providers (collectively, the
"Providers"). The Company, which specializes in mental and physical
rehabilitative programs, offers an expanded healthcare product line,
including setting up and managing partial hospitalization and
full-service community-based outpatient healthcare centers. The Company
manages nineteen partial hospitalization programs in three states and two
day-treatment programs which serve as a step-down alternative to patients
that no longer require partial hospitalization in order to assist the
patients in transitioning back into their communities. Of the nineteen
programs, four are also owned by shareholders of the Company. See Note 4.
As of May 1, 1996, the Company, through Continucare Medical Care Network,
Inc. ("CMCN"), a majority-owned subsidiary, provides full-service
financial management including billing and collection services and
various employee leasing options. See further discussion below.
BUSINESS COMBINATIONS - On May 1, 1996, the Company, through CMCN, a then
wholly-owned subsidiary, acquired certain contracts, assets, and
liabilities of Joanne Telmosse Consulting, Inc. ("Consulting"), based in
Coral Springs, Florida, which provides billing and collection services.
Concurrently, the Company acquired certain contracts, assets and
liabilities of ProCare Staffing, Inc. (a related company of Consulting by
common ownership), which offers permanent, long-term and short-term
employee leasing to physicians, community hospitals, community mental
health centers and partial hospitalization programs. In exchange for the
net assets acquired, the Company issued 25 shares of CMCN's common stock
(representing a 25% interest) to the common owner of the acquired
companies. The Company recorded as additional paid-in capital $762,869,
which the Company estimates is the fair value of the net assets acquired.
The transaction was accounted for under the purchase method. The income
generated from the net assets acquired are incorporated in the
Consolidated Income Statement for the period from May 1, 1996, the
effective date of the transaction, to June 30, 1996.
In conjunction with these transactions, the Company entered into a
subcontract agreement with Medical Billing Service Systems, Inc., which
is a related company of Consulting by common ownership (the "Subcontract
Agreement"), whereby Medical Billing Service Systems, Inc. is to provide
the billing and collection services for the contracts acquired by the
Company from Consulting in return for a $35,000 monthly fee. The
Subcontract Agreement is cancelable without cause by either party with
180 days notice.
<PAGE> 7
The following unaudited consolidated pro forma combined condensed
statement of income for the period from February 12, 1996 (inception) to
June 30, 1996 has been prepared to reflect these acquisitions as if they
were consummated as of February 12, 1996 (inception), after giving effect
to certain pro forma adjustments as described below.
Total Revenues $ 4,043,100
-----------
Net income $ 893,700
-----------
Pro forma adjustments reflect minority interest, provision for bad debt,
the recording of the monthly fee under the Subcontract Agreement and an
accrual for income taxes.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned and
majority-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE - The Company derives its revenues based on contracts with
Providers. The contracts have terms ranging from one to fifteen years,
with the majority in the fifteen-year category, and are cancelable
without cause by either party with 180 days notice. Revenue is recognized
in the period earned. The Company also recognizes revenues from its
employee leasing services at the time services are rendered. Revenues for
billing services are recognized upon billing of services to the payors.
The Providers receive reimbursement under either the Medicare or
Medicaid programs or payments from insurers, self-funded benefit plans or
other third-party payors for services provided by programs managed by the
Company. The Medicare and Medicaid programs are subject to statutory and
regulatory changes, retroactive and prospective rate adjustments,
administrative rulings and funding restrictions, any of which could have
the effect of limiting or reducing reimbursement levels to the Company's
clients which in return could affect the Company. A majority of the
patients utilizing the Provider programs managed by the Company are
covered by Medicare.
USE OF 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
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values of
financial instruments have been determined by the Company using available
market information and appropriate valuation methods. Considerable
judgment is required in interpreting market data to develop the estimates
of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methods may have a material effect on the estimated fair value
amounts. The Company has used the following market assumptions and/or
estimation methods:
CASH AND CASH EQUIVALENTS - The carrying amount reported in the
balance sheet is a reasonable estimate of fair value.
NOTES PAYABLE - The carrying value at June 30, 1996 approximates fair
value based on the terms of the note.
CASH AND CASH EQUIVALENTS - The Company defines cash and cash equivalents
as those highly liquid investments purchased with an original maturity of
three months or less.
ACCOUNTS RECEIVABLE - In the normal course of business, the Company
extends credit to its customers. The Company performs ongoing credit
evaluations of its customers, and records allowances for potential losses
based on management's expectations of their ultimate collection.
<PAGE> 8
OTHER ASSETS - Other assets include primarily long-term deposits and the
deferred tax assets.
INCOME TAXES - Deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax bases of assets
and liabilities, using enacted tax rates in effect for the year in which
the differences are expected to reverse. Current income taxes are based
on the current year's income taxable for federal and state reporting
purposes.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost of
acquisition. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related
assets, which range from three to five years. Repairs and maintenance
costs are expensed as incurred. Improvements and replacements are
capitalized.
3. INCOME TAXES
The components of the provision for income taxes for the period from
February 12, 1996 (inception) to June 30, 1996 are as follows:
<TABLE>
<S> <C>
Current income taxes:
Federal $ 337,776
State 49,170
-----------
Total current 386,946
-----------
Deferred income taxes:
Federal (46,855)
State (8,020)
-----------
Total deferred (54,875)
-----------
Total provision for income taxes $ 332,071
===========
</TABLE>
The total income tax provision is at a rate of approximately 34% which
equals the statutory federal income tax rate.
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at June 30, 1996 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Bad debt reserve $ 55,170
-----------
Gross deferred tax assets 55,170
-----------
Deferred tax liabilities:
Depreciation and amortization (295)
-----------
Gross deferred tax liabilities (295)
-----------
Net deferred tax asset $ 54,875
===========
</TABLE>
<PAGE> 9
4. RELATED PARTY TRANSACTIONS
The Company subleases office space from Community Behavioral Services
("CBS"). As of June 30, 1996, three of the four shareholders of the
Company are one third owners of CBS. The lease is a month-to-month
agreement with monthly lease payments of $3,805.
The Company has contracted with CBS to perform certain managerial and
administrative services on behalf of the Company. The Company reimburses
CBS for the actual cost of expenses incurred by CBS in the direct
performance of such services. For the period ended June 30, 1996, total
expenses incurred by the Company for these services totaled $407,700 and
are recorded in the appropriate expense categories in the Consolidated
Statement of Income. In addition, the Company provides management
services for four facilities owned by CBS in return for a management fee
which is based on the Company's estimated cost of providing such
services. The management fee charged by the Company is calculated based
on the ratio of patient volume represented by CBS to total Company
patient volume at other Provider facilities, applied to certain of the
Company's expenses. This management fee is recorded by the Company as a
reduction of the related expense. For the period, management fees charged
by the Company to CBS were $324,700. As of June 30, 1996, the net payable
by the Company to CBS under these arrangements was $83,000 which is
reflected in accounts payable and accrued expenses in the Consolidated
Balance Sheet.
The Company, as of late May 1996, also provides management services to
Interphase, Inc. ("Interphase"), a related Company which is partially
owned by three of the Company's shareholders at June 30, 1996. The
Company receives a management fee for the services provided based on the
Company's cost of providing such services. The management fee charged by
the Company is calculated based on the ratio of patient volume
represented by Interphase to total Company patient volume at other
Provider facilities, applied to certain of the Company's expenses. The
management fee charged is recorded as a reduction of the Company's
related expenses. As of and for the period from February 12, 1996
(inception) to June 30, 1996, the balance receivable from and the
revenues earned under this arrangement was $19,100.
The Company is obligated to a shareholder (the "Shareholder Note"), for a
note payable in the amount of $599,750 and is reflected in notes payable
in the accompanying Consolidated Financial Statements. The Shareholder
Note, which is collateralized by substantially all of the Company's
assets, bears interest at 10% per annum and is due, in full, on February
12, 1998. Interest is due semiannually commencing on August 12, 1996.
Accrued interest and interest expense related to this note was $21,662 as
of and for the fiscal year ended June 30, 1996.
The Company is obligated to Health Care Management Partners, Inc., a
company which is owned jointly by three of the four shareholders of the
Company, for a note payable in the amount of $55,250 as of June 30, 1996
(the "HCMP Note") and is reflected in notes payable in the accompanying
Consolidated Financial Statements. The HCMP Note, which is subordinate to
the Shareholder Note, bears interest at 10% and is due, in full, on
February 12, 1998. Interest expense related to this note was $1,500 for
the fiscal year ended June 30, 1996.
5. LONG-TERM DEBT
Long-term debt is comprised entirely of the Shareholder Note and the HCMP
Note as described in Note 4.
<PAGE> 10
6. COMMITMENTS AND CONTINGENCIES
The Company has employment contracts with its four executives. These
contracts have indefinite terms and are cancelable at the option of the
Company or employee. The contracts provide for increases in annual base
salary, a flat bonus and an additional bonus at the discretion of the
Company's Board of Directors based upon the Company's operating results,
financial condition, prospects and intended utilization of earnings, if
any. Subsequent to year-end, one of the executives resigned. See
discussion at Note 7.
As provided for in the management contracts with the 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.
7. SUBSEQUENT EVENTS AND OTHER MATTERS
On July 3, 1996, the Company entered into a Letter of Intent with a
large, national hospital chain (the "Chain") to develop, staff and manage
outpatient psychiatric treatment and physical rehabilitation programs
(the "Programs") for hospitals affiliated with the Chain. The Programs
are to be initiated in seventeen treatment facilities and may be expanded
to cover additional facilities upon the mutual agreement of the parties.
The scope and duration of the services to be provided by the Company, as
well as the management fee to be paid to the Company, will be determined
upon the mutual agreement of the parties depending upon the specific
requirements of each Program. The Company estimates that such management
fees shall range from $25,000 to $35,000 per month, per Program.
Management also anticipates additional operating costs will be incurred
in providing such services.
On July 8, 1996, the Company entered into a management contract with an
ORNDA Healthcorp. subsidiary to perform certain management services for
certain partial hospitalization programs. The contract, which is for an
initial term of five years, is expected to generate a total of
approximately $4,080,000 ($816,000 annually) in revenue over the initial
term. The contract may be renewed for additional periods of one year each
upon the mutual consent of the parties and may be terminated upon certain
conditions as defined in the agreement. Management also anticipates
additional operating costs will be incurred in providing such services.
On July 15, 1996, the Company entered into a Stock Purchase and
Redemption Agreement with Beechwood Partners, Ltd., a limited partnership
("Beechwood"), to repurchase Beechwood's 25% investment in the Company's
common stock for $375,000 which will be accounted for as treasury stock.
In connection with this transaction, one of the executives resigned from
his position with the Company. Certain provisions of the Stock Purchase
and Redemption Agreement require the Company to make an additional
payment to Beechwood upon the occurrence of certain events. The
additional payment is comprised of a flat amount not to exceed $600,000
and a variable portion payable only if the remaining executives receive
new employment agreements providing for "excessive compensation" as
defined in the Stock Purchase and Redemption Agreement.
On August 9, 1996, the Company has entered into contracts to provide
certain staffing services with a not-for-profit corporation which
operates a community mental health center and a partial hospitalization
program from its facilities. The contracts have an initial term of one
year and is automatically renewable unless terminated in accordance with
the provisions in the contract, such contracts are expected to
<PAGE> 11
generate approximately $600,000 of revenue over the initial term. Management
also anticipates additional costs will be incurred in providing such services.
Effective August 6, 1996, the Company amended its Articles of Incorporation to
increase its authorized common shares to 10,000,000, par value $1.
Concurrently, the Company authorized each issued and outstanding share be
converted to 66,666.666 shares reflecting a 66,666.666 for one stock split.
The stock split has not been reflected in the accompanying financial
statements. The par value was subsequently amended to $.0001.
On August 9, 1996, the Company signed a merger agreement (the "Merger
Agreement") with Zanart Entertainment, Inc. ("Zanart") and Zanart Subsidiary,
Inc. ("ZSI"). Pursuant to the Merger Agreement, on September 11, 1996 (the
"Closing Date") ZSI merged with and into the Company (the "Merger"). Each
share of pre-Merger Company common stock issued and outstanding prior to the
Closing Date was converted on the Closing Date into one share of Zanart common
stock. Under the terms of the Merger Agreement, Zanart agreed to sell or
otherwise dispose of its assets (other than cash) and discharge all liabilities
relating to Zanart's existing business, which is to design, publish, package
and market wall decor and collectible art which incorporates popular images
from motion pictures, television and animation, prior to December 11, 1996. In
addition, upon the consummation of the Merger (i) Zanart's existing Board of
Directors and management resigned and (ii) Zanart's new Board of Directors and
management became comprised of Continucare designees.
The Merger Agreement contains various customary representations and warrantees
of the parties thereto, and includes a post closing adjustment provision
requiring the issuance of a certain number of additional shares (the
"Additional Shares") of Zanart common stock to the holders of pre-Merger
Company common stock immediately prior to the Closing Date in the event that
the Closing Cash Balance (as such term is defined in the Merger Agreement) of
Zanart is less than $2,000,000 on December 12, 1996.
Prior to the Merger, the Company effectuated the private sale of an aggregate
of 3,300,000 shares of pre-Merger Company common stock at $2.00 a share which
was completed on August 29, 1996.
On August 29, 1996, the Company entered into a lease agreement for
approximately 13,500 square feet of space for its corporate offices in Miami,
Florida. The lease, which is for an initial term of five years, provides for
annual lease payments of approximately $172,000 in the first year, $176,000 in
the second year, $180,000 in the third year, $184,000 in the fourth year, and
$189,000 in the fifth year. The Company's previous sub-lease for office space
with CBS as discussed in Note 4 was terminated as of October 2, 1996.
The Company has entered into new employment agreements with two executives of
the Company effective in September 1996. The agreements are for terms of three
years and one provides for additional years based on each year of service. The
agreements have provisions for bonuses, vesting and stock options.
The Company intends to enter 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 Continucare Corporation prior to the
Merger.
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