<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission file number: 0-21910
CONTINUCARE CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 59-2716023
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
100 SOUTHEAST SECOND STREET, 36TH FLOOR
MIAMI, FLORIDA 33131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 350-7515
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
COMMON STOCK, AMERICAN STOCK EXCHANGE
$.0001 PAR VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-KSB. [X]
Registrant's revenues for the fiscal year ended June 30, 1997 were
$13,916.385.
Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at September 15, 1997 (computed by reference to
the last reported sale price of the registrant's Common Stock on the American
Stock Exchange on such date): $49,125,950.
Number of shares outstanding of each of the registrant's classes of
Common Stock at June 30, 1997: 10,888,993 shares of Common Stock, $.0001 par
value per share.
Transactional Small Business Disclosure Format. Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, which will be
filed with the Commission subsequent to the date hereof (the "Proxy Statement"),
are incorporated by reference into Part III of this Form 10-KSB.
================================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Continucare Corporation ("Continucare" or the "Company") provides a
continuum of outpatient and ancillary healthcare services with a primary focus
on outpatient treatment of musculoskeletal injuries and diseases, such as
arthritis, osteoporosis, stroke and traumatic injuries. The Company's services
include physical rehabilitation, physician practice management, home healthcare,
behavioral health management and laboratory services within its physician
practices. Commencing its current business in February 1996, the Company has
derived substantially all of its revenues from contracts to provide management,
staffing and billing services for physical rehabilitation and behavioral health
programs in hospitals and freestanding rehabilitation centers. The Company is
actively expanding its Florida delivery services network (the "Network") to
establish a mature continuum services model to replicate in other selected
markets. See " -- Recent Developments."
Due to the fragmented nature of the delivery of outpatient services,
coordination of care is often difficult to achieve as a patient moves from one
setting to another. By bundling a variety of outpatient services in a selected
region, the Company is able to offer patients and payors a more comprehensive
and cost effective continuum of care. The advantages of the Company's approach
include: (i) improved patient care through coordination of multiple services,
(ii) lower costs due to efficiencies resulting from centralization of certain
administrative functions (such as billing, collection and purchasing) and
certain healthcare services (such as laboratory and pharmacy services within its
physician practices), (iii) new business opportunities resulting from
cross-marketing, (iv) contracting opportunities with national and regional
managed care payors seeking lower costs and bundling of services, and
(v) effective management of reimbursement and other risks stemming from the
diversification of revenue sources.
RECENT DEVELOPMENTS
The Company recently expanded its Florida Network to include home
health services. In July 1997, the Company acquired Sunset Harbor Health, a
Medicare certified home health agency licensed in Florida. In September 1997,
the Company acquired Maxicare, Inc., a Florida based home health agency
established in 1975 that renders a variety of home health services throughout
Broward County, Florida, for a purchase price of approximately $3.0 million.
See also Note 3 to the Company's Consolidated Financial Statements as used
elsewhere in this Form 10-KSB.
In August 1997, the Company entered into an asset purchase agreement to
acquire the assets of Doctors Health Group (the "DHG Acquisition") for an
aggregate purchase price of approximately $14.5 million, of which $1.5 million
will be paid in common stock of the Company, par value $0.0001 ("Common Stock").
The Company has also entered into a letter of intent to sell its Medicare
behavioral health management contracts with freestanding centers and hospitals
and is currently negotiating the purchase of the assets of a Florida based
company that provides behavioral health services to outpatient physician centers
and hospitals through managed care contracts at eight locations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition, the Company has entered into a letter of intent to
purchase three Florida based companies that provide healthcare services to the
cruise line industry and to outpatient centers through managed care contracts
for a purchase price between $2.5 and $5.0 million, of which 80% will be paid in
Common Stock of the Company. The closings of these transactions are subject to
various conditions, including satisfactory completion of due diligence
investigations, negotiations of final terms regarding financial and other
conditions to closing, obtaining necessary consents and approvals and, in
certain cases, securing financing. The financing of these transactions may be
funded from a variety of sources, including bank financing or the issuance of
notes, which may be convertible into the Company's Common Stock. There can be no
assurance that these transactions will be consummated or, if consummated, will
result in financial or other benefit to the Company.
<PAGE> 3
CONTINUCARE STRATEGY
The Company's strategy is to continue to provide and expand the
continuum of outpatient and ancillary healthcare services offered to clients,
such as hospitals and outpatient centers, and patients in physician offices and
their homes. The Company believes that its integrated system offers payors the
convenience of dealing with a single provider for multiple services. The key
elements of the Company's strategy are as follows: (i) initiate rollout of
outpatient rehabilitation facilities in Bally's Total Fitness ("Bally") fitness
centers, (ii) add new outpatient management services contracts, (iii) expand the
Network, (iv) implement continuum services model in selected markets, and
(v) market continuum services model to managed care organizations and other
payors.
INITIATE ROLLOUT OF OUTPATIENT REHABILITATION CENTERS AT BALLY FITNESS
FACILITIES. In July 1997, Continucare began implementing its February 1997
agreement with Bally to establish outpatient rehabilitation facilities at 100
Bally fitness centers nationwide. Based on published industry reports, Bally is
the largest commercial operator of fitness centers in the United States.
Continucare will be responsible for staffing the rehabilitation facilities at
the Bally fitness centers with physicians and other necessary personnel, such as
physical therapists, but will not be required to fund any operating losses or
capital requirements. The Company is scheduled to open rehabilitation facilities
in five Florida based Bally fitness centers by December 31, 1997, and intends to
continue its rollout during fiscal 1998 in other states such as Illinois,
Missouri and Texas. The Company believes that its relationship with Bally
provides it with a unique growth opportunity because it can leverage off Bally's
large base of health club facilities to expand its Network in selected
geographic regions.
ADD NEW OUTPATIENT MANAGEMENT SERVICES CONTRACTS. Continucare believes
that there is a substantial opportunity to provide outpatient healthcare
contract management services to institutional and professional healthcare
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 outpatient health services and the
benefits to the potential clients of offering outpatient health programs. Such
benefits typically include increased revenue and profitability, greater
opportunity to allocate fixed expenses, expanded influence and outreach to the
community, improvement in the quality of outpatient healthcare programs offered
and the ability to attract new physicians.
EXPAND THE NETWORK. The Company intends to continue to expand its
Network primarily through strategic acquisitions of and affiliations with
physician practices, physical rehabilitation centers and home healthcare
providers, and by providing other ancillary services, such as laboratory and
pharmacy services within its practices. The Company also intends to expand the
traditional physician practice management services it provides, such as
integrated billing and collection systems and risk management services, to meet
the needs of physicians in its expanding Network.
IMPLEMENT CONTINUUM SERVICES MODEL IN SELECTED MARKETS. The Company
seeks, where appropriate, to provide an integrated continuum services model of
healthcare services, which includes primary care (delivered in physician's
offices and patient's homes), rehabilitation care (delivered in outpatient
centers, hospitals, physician offices and patient's homes) and ancillary
services such as laboratory and pharmacy (delivered within physician practices).
Additionally, Continucare believes that its model provides cost saving
opportunities for payors as a result of bundling of services. The Company has
implemented its integrated continuum services model in Florida, and intends to
expand the model into other appropriate markets, by tailoring its services and
facilities to the market needs of the selected area.
MARKET TO MANAGED CARE ORGANIZATIONS AND OTHER PAYORS. As the Company
continues to expand its Network and implement its continuum services model, the
Company continues to focus on the development of contractual relationships with
managed care organizations, major insurance companies, large regional and
national employer groups and provider alliances and networks. The Company
believes that its experience in delivering quality healthcare services at
reasonable prices should enhance its attractiveness to such entities and provide
the
2
<PAGE> 4
Company a competitive advantage over competitors that do not offer multiple
services through an integrated network.
CONTINUCARE OPERATIONS
Continucare provides a continuum of outpatient and ancillary healthcare
services with a primary focus on outpatient treatment of musculoskeletal related
injuries and diseases. The Company's services include physical rehabilitation,
physician practice management, home healthcare, behavioral health management and
laboratory services within its physician practices.
PHYSICAL REHABILITATION. The continuing emphasis on containing the
increases in healthcare costs, as evidenced by Medicare's prospective payment
system, the growth in managed care and the various alternative healthcare reform
proposals, often results in the early discharge of patients from acute care
facilities. As a result, many hospital patients may not receive the intensity of
services necessary for them to achieve a full recovery from their diseases,
disorders or traumatic conditions. The Company's outpatient rehabilitation
services play a significant role in the continuum of care because they provide a
high level of service, in terms of intensity, quality and frequency, in a more
cost-efficient setting.
When a patient is referred to one of the Company's rehabilitation
facilities, a multi-disciplinary team of professionals work with the patient,
the patient's family and physicians to establish a rehabilitation care plan
designed specifically for that patient. Depending upon the patient's disability,
this process may involve the services of a single discipline, such as physical
therapy for a knee injury, or of multiple disciplines, as in the case of a
complicated stroke patient. The rehabilitation care plan is designed to address
the medical, physical, occupational, social, emotional and communication
impairments of a patient as a result of trauma and physical conditions. Emphasis
is placed on maximizing functional independence in regard to mobility, self-care
and daily living skills related to environment and leisure activities.
Rehabilitative healthcare services are provided by a variety of healthcare
professionals including psychiatrists, rehabilitation nurses, physical
therapists, occupational therapists, speech-language pathologists, respiratory
therapists, recreation therapists, social workers, psychologists, rehabilitation
counselors and others.
The Company has developed numerous rehabilitation programs, which
include treatment for stroke, head injury, peripheral nerve injury,
neuromuscular injury, speech and language disorder, amputation, arthritis,
cerebral palsy and multiple sclerosis. Patients treated at the Company's
outpatient centers will undergo varying courses of therapy depending upon their
needs. Some patients may only require a few hours of therapy per week for a few
weeks, while others may spend up to four hours per day in therapy for six months
or more, depending on the nature, severity and complexity of their injuries.
Each facility's goal is to provide a rehabilitation program that will restore
the patient to a productive, active and independent lifestyle as soon as
possible.
In July 1997, Continucare began implementing its February 1997
agreement with Bally to establish outpatient rehabilitation facilities at 100
Bally fitness centers nationwide. Continucare will be responsible for staffing
the rehabilitation facilities at the Bally fitness centers with physicians and
other necessary personnel, such as physical therapists, but will not be required
to fund any operating losses or capital requirements. The Company is scheduled
to open rehabilitation facilities in five Florida based Bally fitness centers by
December 31, 1997, and intends to continue its rollout during fiscal 1998 in
other states such as Illinois, Missouri and Texas. Each Bally rehabilitation
facility is expected to take approximately three to six months to complete. The
Company believes that its relationship with Bally provides it with a unique
growth opportunity because it can leverage off Bally's large base of health club
facilities to expand its Network in selected geographic regions.
PHYSICIAN PRACTICE MANAGEMENT. The Company intends to continue to
expand its Network primarily through strategic acquisitions of and affiliations
with primary and specialty physician practices, especially musculoskeletal
specialists such as rheumatologists, orthopedic surgeons, psychiatrists and
neurologists. Rheumatologists typically treat chronic diseases such as
rheumatoid arthritis, osteoporosis, and back pain.
3
<PAGE> 5
Treatment of these diseases involve the utilization of physical rehabilitation,
bone densitometry, home healthcare, and laboratory services.
The Company acquired its first physician practice in April 1997, at
which time it purchased from Sheridan Healthcorp., Inc. three Florida based
physician practices, including two arthritis rehabilitation centers, for an
aggregate purchase price of approximately $3.3 million (the "Arthritis Rehab
Acquisition"). In fiscal year ended 1996, these combined practices purchased by
the Company generated approximately $4.0 million of revenues, employed
approximately 33 full time employees, and generated approximately 24,000 patient
visits.
The Company generally enters into seven-year employment agreements with
the physicians in the practices purchased by the Company. These agreements
usually provide for base compensation and benefits and may contain incentive
compensation provisions based on increases in productivity and efficiency.
The Company's provision of management services such as an integrated billing and
collections systems, risk management services and lower-cost professional
liability insurance, allows the physician to focus on the practice of medicine.
The Company believes that it competes effectively with traditional
physician practice management companies and independent practice associations
because its physicians are linked to the Company's Network. As a result, a
strategic alliance of cost effective services can be "bundled" thereby
delivering quality healthcare at a lower cost. The Company also believes it
offers physicians increased negotiating power associated with managing their
practice and fewer administrative burdens, which allows the physician to focus
on providing care to patients.
HOME HEALTHCARE. The Company believes that home healthcare will
continue to experience substantial growth for several reasons, including
(i) payors' increasing focus on reducing costs through shorter hospital stays,
(ii) recent advances in medical technology which have facilitated the delivery
of medical services in sites other than a hospital, (iii) increase in the
population of people over the age of 65, and (iv) patients' desires to be
treated at home.
As part of the Company's strategy to expand its Network and enhance its
continuum services model, the Company acquired Maxicare, Inc. in September 1997
for a purchase price of approximately $3.0 million, and Sunset Harbor Home
Health, a certified Medicare home health agency licensed in Florida, in July
1997. Maxicare, a Florida based home health agency established in 1975,
generated approximately 178,000 home visits for the 12-month period ended May
31, 1997. Maxicare is certified by the Healthcare Financing Administration and
is licensed in the state of Florida as a Medicare and Medicaid home health
agency. Maxicare's revenues for the 12-month period ended May 31, 1997 were
approximately $11.8 million, derived substantially from Medicare.
As a result of the acquisition of the home health agencies,
Continucare's continuum services model now includes the provision of home
healthcare services to recovering, disabled, chronically ill and terminally ill
patients in their homes. Typically, a service care provider (such as a
registered nurse, home health aide, therapist or technician) will visit the
patient one or two times a day or the patient may require around-the-clock care.
Treatment may last for several weeks, several months or the remainder of the
patient's life. The services provided by the Company include skilled nursing,
physical therapy, speech therapy, occupational therapy, medical social services
and home health aide services. Reimbursement for the home health services
provided by the Company include Medicare, Medicaid and managed care.
BEHAVIORAL HEALTH SERVICES. The Company historically derived most of
its revenue from contracts to provide management, staffing and billing services
for behavioral health programs in hospitals and freestanding
4
<PAGE> 6
rehabilitation centers. These services are provided through partial
hospitalization, day treatment and as outpatient services.
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 operates under two partial
hospitalization models. The primary model is a freestanding program licensed as
a full service Community Mental Health Center ("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: (i) 24 hour
crisis response, (ii) crisis stabilization beds, (iii) structured/intensive
outpatient programs, and (iv) 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.
Reimbursement coverage for the behavioral health services provided by
the Company include Medicare and managed care. However, the Company intends to
focus its development efforts in the area of managed care rather than Medicare.
See " -- Recent Developments."
COMPETITION
The healthcare industry is highly competitive. Continucare competes
with several national competitors and many regional and national healthcare
companies, some of which have greater resources than Continucare. In addition,
healthcare providers may elect to manage their own outpatient health programs.
Competition is generally based upon reputation, price, the ability to offer
financial and other benefits for the particular provider, and the management
expertise necessary to enable the provider to offer outpatient programs that
provide the full continuum of outpatient services in a quality and
cost-effective manner. The pressure to reduce healthcare 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 outpatient services may not be able to
compete successfully.
GOVERNMENT REGULATION
GENERAL. Continucare's business is affected by federal, state and local
laws and regulations concerning healthcare. These laws and regulations impact
the development and operation of outpatient programs managed by Continucare for
its clients and the provision of healthcare to patients in physicians' offices
and in patient's homes. 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 healthcare industry.
HEALTH FACILITY USE AND CERTIFICATION. The Company is 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 healthcare services and facilities. The outpatient 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
outpatient programs it manages and the facilities used in its operation of such
programs comply in all material respects with applicable licensing and
certification requirements.
5
<PAGE> 7
REIMBURSEMENT FOR HEALTHCARE SERVICES. Most of Continucare's clients
receive reimbursement under one or more of the Medicare or Medicaid programs for
outpatient 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. 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 outpatient 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 outpatient
services could be subject to the DRG system or otherwise altered. 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.
PATIENT REFERRAL LAWS. Various federal and state laws regulate the
relationships between healthcare 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 healthcare 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 healthcare
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 healthcare professionals to entities with
which they have financial relationships. Continucare believes that its
operations comply in all material respects with these restrictions to the extent
applicable; however, there can be no assurance that such restrictions ultimately
will be interpreted in a manner consistent with the practices of the Company.
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.
6
<PAGE> 8
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 outpatient
programs and facilities managed by Continucare, which generally provide for
payments to such persons by Continucare as compensation for their administrative
services. In 1991, regulations were issued under federal fraud and abuse laws
creating certain "safe harbors" for relationships between healthcare 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.
PRESENT AND PROSPECTIVE FEDERAL AND STATE REIMBURSEMENT REGULATION. The
operations of home health agencies ("HHAs") and comprehensive outpatient
rehabilitation facilities ("CORF"), like other healthcare providers throughout
the country, will be affected on a day-to-day basis by numerous legislative,
regulatory and industry-imposed operational and financial requirements which are
administered by a variety of federal and state governmental agencies as well as
by self-regulatory associations and commercial medical insurance reimbursement
programs. It is impossible, however, to predict the effect of any such
legislation and regulations on the operations or financial condition of
Continucare's HHAs and CORFs.
HHAs and CORFs, including those of Continucare, are subject to
numerous licensing, certification and accreditation requirements. These include,
but are not limited to, requirements relating to Medicare participation and
payment, requirements relating to state licensing agencies, private payors and
accreditation organizations. Renewal and continuance of certain of these
licenses, certifications and accreditation are based upon inspections, surveys,
audits, investigations or other review, some of which may require or include
affirmative action or response by Continucare. An adverse determination could
result in a loss, fine or reduction in the scope of licensure, certification or
accreditation or could reduce the payment received or require the repayment of
amounts previously remitted.
Significant changes have been and may be made in the Medicare and
Medicaid programs, which changes could have a material adverse impact on
Continucare's financial condition. In addition, legislation has been or may be
introduced in the Congress of the United States which, if enacted, could
adversely affect the operations of Continucare by, for example, decreasing
reimbursement by third-party payors such as Medicare or limiting the ability of
Continucare to maintain or increase the level of services provided to the
patients.
Title XVIII of the Social Security Act authorizes Part A of the
Medicare program, the health insurance program that pays for inpatient care for
covered persons (generally, those age 65 and older and the long-term disabled)
and Medicare Part B, a voluntary supplemental medical assistance insurance
program. Healthcare providers, including Continucare's HHAs and CORFs may
participate in the Medicare program subject to certain conditions of
participation and acceptance of a provider agreement by the federal Secretary of
Health and Human Services ("HHS"). Only enumerated services, upon satisfaction
of certain criteria, are eligible for Medicare reimbursement. Relative to the
services of Continucare's Medicare certified HHAs and CORFs, Medicare reimburses
the "reasonable costs" for services up to program limits. Medicare reimbursed
costs are subject to audit, which may result in either decreases or increases in
payments the Company has previously received.
The Balanced Budget Act ("Act") recently passed by Congress and signed
into law by President Clinton on August 5, 1997, contains a number of provisions
that may affect Continucare's HHAs and CORFs. The Act expands the current
requirements that hospitals have a discharge planning process, including
information on the availability of home health services and providers in the
area. Each plan must also identify the entities to whom a patient is referred in
which the hospital has a "disclosable financial interest" or which has such an
interest in the provider. The effective date of the disclosure provisions is not
known at this time. The Secretary of HHS is required to issue regulations
implementing such provisions within one year of the date of enactment. Hence,
the Act provides Continucare's HHAs with greater access to hospital patients, a
market previously more restricted. The Act also requires the Secretary of Health
and Human Services to implement a prospective payment system for both CORF and
HHA services. Under such a system, providers will be reimbursed a fixed fee per
treatment unit, and a provider having costs greater than the prospective amount
will incur losses. It can not be predicted what effect, if any, such new
prospective payment systems will have on the operations of Continucare. The Act
also established per beneficiary caps on certain outpatient rehabilitation
services.
In September 1997, President Clinton imposed, subject to certain narrow
exceptions, a six month moratorium on the certification of new
Medicare-participating HHAs. As a result, it is unlikely that new HHAs will be
certified by the Health Care Financing Administration in Continucare's markets.
HEALTHCARE REFORM. Federal and state governments have recently focused
significant attention on healthcare reform intended to control healthcare 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 healthcare reform may ultimately be enacted or
whether other changes in the administration or interpretation of governmental
healthcare programs will occur. There can be no assurance that future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have a material adverse effect on
Continucare's business, financial condition or results of operations.
EMPLOYEES
At June 30, 1997, Continucare employed approximately 200 individuals
and managed approximately 60 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.
INSURANCE
Continucare carries general liability, comprehensive property damage,
medical 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.
PREDECESSOR COMPANY
Continucare's predecessor, Zanart Entertainment, Incorporated ("Zanart")
was incorporated in 1986. On August 9, 1996, a subsidiary of Zanart merged into
Continucare Corporation (the "Merger"), which was incorporated on February 12,
1996 as a Florida corporation ("Old Continucare"). As a result of the Merger,
the shareholders of Old Continucare became the shareholders of Zanart, Zanart
changed its name to Continucare Corporation, and Zanart's Board of Directors and
management became comprised of designees of Continucare. In December 1996, the
Company discontinued Zanart's business of designing and marketing
collectible art.
ITEM 2. PROPERTIES
Continucare leases approximately 13,500 square feet of space for its
corporate offices in Miami, Florida under a lease expiring in September 2001
with average annual base rent lease payments of $180,312.
7
<PAGE> 9
ITEM 3. LEGAL PROCEEDINGS
In July 1997, the Company received a demand for arbitration relating to
a claim by a former shareholder of Old Continucare prior to the Merger alleging
securities fraud in connection with the redemption of his shares. The former
shareholder is seeking rescission of the redemption agreement or, in the
alternative, damages in excess of $5.0 million. The Company believes the claim
is without merit and intends to vigorously defend the claim. Otherwise, the
Company is not a party and its property is not subject to any material
litigation nor, to the knowledge of management, is any such litigation presently
threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None - not applicable.
8
<PAGE> 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET PRICE
The principal U.S. market in which the Company's Common Stock is traded
is the American Stock Exchange ("AMEX") (symbol: CNU). Prior to the Company's
listing of its Common Stock on AMEX, which occurred on September 11, 1996, such
shares of Common Stock were traded on the Nasdaq Small-Cap Market. The following
table shows the high and low sales prices as reported on Nasdaq, and on AMEX for
the Common Stock for the periods indicated below. These quotations have been
obtained from Nasdaq and AMEX.
PRICE PERIOD HIGH LOW
------------ ---- ---
Fiscal Year 1996
First Quarter $7.00 $2.37
Second Quarter 5.31 2.62
Third Quarter 4.00 1.50
Fourth Quarter 4.81 1.75
Fiscal Year 1997
First Quarter 13.12 3.31(1)
Second Quarter 12.00 7.62
Third Quarter 9.87 5.87
Fourth Quarter 6.38 5.19
-----------------------
(1) On August 9, 1996, the Merger was consummated.
As of June 30, 1997, there were 115 holders of record of the Common
Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock and has no present intention to declare or pay cash dividends on the
Common Stock in the foreseeable future. The Company is subject to various
financial covenants with its lenders that could limit and/or prohibit the
payment of dividends in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company intends to retain
earnings, if any, which it may realize in the foreseeable future to finance its
operations. Any future determination as to the payment of cash dividends on the
Common Stock will depend on a number of factors, including future earnings,
capital requirements, the financial condition and prospects of the Company and
any restrictions under credit agreements existing from time to time, as well as
such other factors as the Board of Directors may deem relevant. There can be no
assurance that the Company will pay any cash dividends on the Common Stock in
the future.
9
<PAGE> 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-KSB contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used in this Form 10-KSB, the words
"believe," "anticipate," "think," "intend," "plan," "will be," and similar
expressions, identify such forward-looking statements. Such statements regarding
future events and/or the future financial performance of the Company are subject
to certain risks and uncertainties which could cause actual events or the actual
future results of the Company to differ materially from any forward-looking
statement. Certain factors that might cause such a difference include the
following: (1) limited operating history of Continucare in current business, (2)
various risks associated with the acquisition of businesses including the
expenses associated with the integration of the acquired businesses,
difficulties in assimilating the operations of the acquired entities, and
diversion of management resources; (3) statutory and regulatory changes,
retroactive and prospective rate adjustments administrative rulings and funding
restrictions, any of which could limit or reduce reimbursement levels; (4)
ability to attract and retain a sufficient number of qualified medical
professionals; and (5) fluctuations in the volume of services rendered and/or
the number of patients using the Company's services.
GENERAL
The Company provides a continuum of outpatient and ancillary healthcare
services with a primary focus on outpatient treatment of musculoskeletal
injuries and diseases, such as arthritis, osteoporosis, stroke and traumatic
injuries. The Company's services include physical rehabilitation, physician
practice management, home healthcare, behavioral health management and
laboratory services within its physician practices. Commencing its current
business in February 1996, the Company has derived substantially all of its
revenues from contracts to provide management, staffing and billing services for
physical rehabilitation and behavioral health programs in hospitals and
freestanding rehabilitation centers. The Company is actively expanding its
Florida Network to establish a mature continuum services model to replicate in
other selected markets. See "Business -- Recent Developments" and Note 3 to the
Company's Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
in this Annual Report. Continucare commenced operations in its current business
on February 12, 1996. Accordingly, comparative data for the fiscal year ended
June 30, 1997 is not available, and the Company has limited its discussions with
respect to these periods. The following table sets forth, for the periods
indicated the percentage of total revenues represented by certain items in the
Company's Consolidated Statement of Income. The percentage period to period
increase (decrease) of certain income and expense items is not presented as they
are not comparable periods.
10
<PAGE> 12
<TABLE>
<CAPTION>
PERCENT OF TOTAL REVENUE
FISCAL YEAR ENDED
---------------------------------
YEAR ENDED INCEPTION(1) TO
JUNE 30, JUNE 30,
1997 1996
--------------- ---------------
<S> <C> <C>
Revenues.................................................. 100.0% 100.0%
Expenses:
Payroll and employee benefits.......................... 45.6 38.8
Provision for bad debt................................. 13.1 9.7
Professional fees...................................... 10.4 8.1
General and administrative............................. 8.5 2.3
Depreciation and amortization.......................... 1.5 --
--------------- ---------------
Total expenses................................... 79.1 58.9
--------------- ---------------
Income from operations.................................... 20.9 41.1
Other income (expense)
Interest income (expense), net......................... 1.2 (0.9)
Minority Interest...................................... (1.2) (1.3)
Other.................................................. (0.1) --
--------------- ---------------
Other expenses................................... (0.1) (2.2)
--------------- ---------------
Income before income taxes and cumulative effect.......... 20.8 38.9
Provision for income taxes................................ (8.6) (13.2)
--------------- ---------------
Net income................................................ 12.2 25.7
=============== ===============
</TABLE>
- ------------------
(1) February 12, 1996
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE FOR
THE FISCAL YEAR ENDED JUNE 30, 1997.
REVENUES
During fiscal year ended June 30, 1997, Continucare derived the
majority of its revenues from contracts to manage and provide staffing and
billing services for behavioral health programs in hospital and free standing
rehabilitation centers. These contracts represented approximately $11,950,000,
or 85.9% of total revenues as compared to 100% of revenues for the period from
February 12, 1996 (inception) to June 30, 1996, representing approximately
$2,507,000. The increase in these revenues is primarily due to the fact that the
Company had operations for less than five months in the prior period as compared
to a full year in the fiscal year ended June 30, 1997 as well as an increase in
the number of such contracts from nineteen at June 30, 1996 to up to thirty
during fiscal year 1997. At June 30, 1997, the Company provided management,
staffing and/or billing services to fifteen behavioral health programs. The
Company intends to focus its development efforts in the area of managed care
rather than Medicare for behavioral health services. See "Business -- Recent
Developments." During fiscal year ended June 30, 1997, the Company also derived
revenues from the management and ownership of comprehensive outpatient
rehabilitation facilities ("CORFs") and the ownership of physician practices
acquired in the Arthritis Rehab Acquisition. These operations commenced during
the fiscal year ended June 30, 1997 and, as such, there were no comparable
revenues for the period from February 12, 1996 (inception) to June 30, 1996.
CORF revenues during the year ended June 30, 1997
11
<PAGE> 13
were approximately $924,000, or 6.6% of total revenues. Physician practice
revenues were approximately $1,042,000, or 7.5% of total revenues as a result
of the Arthritis Rehab Acquisition consummated in April 1997.
EXPENSES
Payroll and employee benefits for the fiscal year ended June 30, 1997
were approximately $6,348,000. Of total consolidated payroll and employee
benefits for the year, approximately $2,846,000 or 44.8%, was attributable to
the employees of the clinical staffing services provided by the Company to
behavioral health programs in hospital and free standing rehabilitation centers,
approximately $759,000 or 12.0%, was attributable to non-clinical employees
providing management services to those facilities, approximately $499,000 or
7.9%, was attributable to the physician practices acquired in the Arthritis
Rehab Acquisition, approximately $389,000 or 6.1%, was attributable to the
operation and management of the CORFs, and the remainder was attributable to
corporate employees. Payroll and employee benefits increased to 45.6% of total
revenues in the current year, from 38.8% of total revenues in the prior period
from February 12, 1996 (inception) to June 30, 1996. This increase was primarily
attributable to the increase in staffing necessary to support growth.
The provision for bad debt for the year ended June 30, 1997 was
approximately $1,818,000. Of the total consolidated provision for bad debts,
approximately $1,635,000, 89.9%, was attributable to revenues and accounts
receivables generated from the contracts to manage and provide staffing and
billing services for behavioral health programs in hospital and free standing
rehabilitation centers. The provision for bad debt increased from 9.7% of total
revenues in the period from February 12, 1996 (inception) to June 30, 1996 to
13.1% of total revenues for the current fiscal year. During fiscal year ended
June 30, 1997, the Company was in the process of obtaining Medicare
certifications on behalf of certain of the mental health rehabilitation programs
it manages. The certifications were not obtained until the third fiscal quarter
of the current year. As a result of the delay in obtaining the certifications
for these centers, the Company experienced delays in the collection of its
receivables and, accordingly, increased the provision for bad debt for those
programs amounting to approximately $742,000. See further discussion in
"Liquidity and Capital Resources."
Professional fees for the year ended June 30, 1997 $1,451,000, 10.4% of
total revenues, and include consulting, legal and other professional fees. Of
total consolidated professional fees for the fiscal year, $420,000 represent
fees under a subcontract agreement with a company which provides billing
services on behalf of the Company.
General and administrative expenses ("G&A") were approximately
$1,177,000, for the fiscal year ended June 30, 1997. G&A for the year was
comprised of expenses such as rent, utilities, travel and supplies. G&A
increased to 8.5% of total revenues, from 2.3% in the period from February 12,
1996 (inception) to June 30, 1996. This increase was primarily attributable to
the following: (1) increase in rent and utilities due to the expansion of
operations, the additional locations acquired in the Arthritis Rehab
Acquisition, and the move of the corporate offices to a larger space in Miami,
Florida; (2) increase in travel expenses as the Company obtained contracts to
manage mental health rehabilitation programs in facilities in other states
including Texas, Illinois and Ohio; and (3) increase in office and medical
supplies due to the expansion of operations and services.
INTEREST
Net interest income for the fiscal year ended June 30, 1997 was
approximately $165,000, 1.2% of total revenues, and was primarily attributable
to interest earned on the $6,600,000 of proceeds from the private placement of
3,300,000 shares of common stock at $2.00 per share in August 1996 (the "Private
Placement") and the proceeds of approximately $5,442,000 received from the
acceleration of the exercise period of the Series A Warrants in December 1996.
12
<PAGE> 14
MINORITY INTEREST AND LOSS ON PURCHASE OF MINORITY INTEREST
Minority interest was approximately $162,000, 1.2% of total revenues,
for the year ended June 30, 1997 and represented a 25% interest held by a
third-party in the earnings of a Continucare subsidiary. Effective December 31,
1996, the Company purchased the interest held by the third-party owner for
40,000 shares of Company Common Stock. As a result, the minority interest on the
Company's consolidated balance sheet as of December 31, 1996, approximately
$195,000, was eliminated and a loss on the purchase of approximately $9,000 was
recorded.
PROVISION FOR INCOME TAXES
The provision for income taxes on a consolidated basis for the year
ended June 30, 1997 was approximately $1,201,000, 8.6% of total revenues, as a
result of income before taxes of approximately $2,908,000 for the year. The
provision for income taxes was calculated at a rate of approximately 39.2%,
which estimates the blended statutory federal and state income tax rates.
NET INCOME
Continucare's consolidated net income for the fiscal year ended June
30, 1997 was approximately $1,707,000, 12.2% of total revenues, and was
primarily attributable to operations related to the contracts to manage and
provide staffing and billing services to behavioral health programs in hospital
and free standing rehabilitation centers. The operations of the physician
practices and related arthritis rehabilitation centers from the Arthritis Rehab
Acquisition in April of 1997 represent approximately $139,000 of total
consolidated net income.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
Earnings before interest, taxes, depreciation and amortization
("EBITDA") is not presented as an alternative to operating results or cash flow
from operations as determined by Generally Accepted Accounting Principles
("GAAP"), but rather to provide additional information related to the ability of
the Company to meet current trade obligations and debt service requirements.
EBITDA should not be considered in isolation from, or construed as having
greater importance than, GAAP operating income or cash flows from operations as
a measure of an entity's performance.
EBITDA was approximately $2,960,000 for the year ended June 30, 1997.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATIONS OF CONTINUCARE
DURING THE PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) TO JUNE 30, 1996.
REVENUES
Continucare derived substantially all of its revenues from contracts to
manage behavioral health programs in hospitals and free standing rehabilitation
centers. Continucare's revenues for the period from February 12, 1996
(inception) to June 30, 1996 were approximately $2,507,000, of which $1,688,000
were derived from such management agreements. Continucare also recognizes
revenues from clinic staffing and billing services in connection with such
programs. These operations were obtained by a subsidiary of Continucare on May
1, 1996 through the acquisition of certain contracts, assets and liabilities.
Revenues received from these services from May 1, 1996 to June 30, 1996 were
approximately $819,000.
EXPENSES
Payroll and employee benefits for the period from February 12, 1996
(inception) to June 30, 1996 were approximately $973,000, or 38.8% of total
revenues. Of total consolidated payroll and employee benefits, approximately
$542,000 or 56%, was payroll and benefits paid to the employees of the clinical
staffing services provided by the Company.
13
<PAGE> 15
Continucare's provision for bad debt for the period from February 12,
1996 (inception) to June 30, 1996 was approximately $243,000, or 9.7% of total
revenues.
Professional fees are comprised primarily of legal and audit fees. In
addition, total professional fees for the period from February 12, 1996
(inception) to June 30, 1996 of $204,000 included approximately $70,000 under a
subcontract agreement with a third party.
General and administrative expenses ("SG&A") were approximately
$54,000, 2.3% of total revenues, for the period from February 12, 1996
(inception) to June 30, 1996 and were comprised primarily of costs such as rent,
public relations and travel.
INTEREST
Interest expense was approximately $23,000, or less than 1% of total
revenues, for the period from February 12, 1996 (inception) to June 30, 1996 and
was comprised primarily of interest on a note payable to a shareholder of the
Company (the "Shareholder Note"). The Shareholder Note bears interest at 10% per
annum and was satisfied in full in August 1997.
MINORITY INTEREST
Minority interest was approximately $33,000, or 1.3% of total revenue.
The minority interest represents a 25% interest held by a third party in the net
income of a Continucare subsidiary .
PROVISION FOR INCOME TAXES
The provision for income taxes for the period from February 12, 1996
(inception) to June 30, 1996 was approximately $332,000, 13.2% of total
revenues, and was calculated at a rate of approximately 34% which equals the
statutory federal income tax rate.
NET INCOME
Continucare had net income of approximately $645,000 for the period
from February 12, 1996 (inception) to June 30, 1996.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
EBITDA was approximately $1,000,000 for the period from February 12, 1996
(inception) to June 30, 1996, or approximately 39.9% of total revenues.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended June 30, 1997, net cash used in operating
activities was approximately $3,667,000, primarily as a result of the increase
in other receivables of approximately $5,000,000 and in accounts receivable
exclusive of the effect of acquisitions of approximately $2,032,000 during the
year. During this time, the Company had been in the process of obtaining
Medicare certification for five of the mental health rehabilitation programs it
manages which would facilitate the collection of the accounts receivable from
such programs. The Company obtained such certification during January and
February of 1997. In addition, the Company, subsequent to June 30, 1997,
renegotiated the payment terms of the receivables from certain of the mental
health rehabilitation programs. As a result, the receivables balance will be
discounted by approximately $742,000 which the Company has previously recorded
as bad debt reserve against such receivables, the net balance of approximately
$5,000,000 will be converted to a note receivable to be paid by the programs
over a five year term with interest to accrue at 9% per annum. The $5,000,000
net balance has been reflected as Other Receivables in the Company's
consolidated balance sheet at June 30, 1997. For the fiscal year ended June 30,
14
<PAGE> 16
1997, net cash used in investing activities was approximately $3,879,000
primarily related to the $3,300,000 paid for the Arthritis Rehab Acquisition and
the acquisition of property and equipment. Net cash provided by financing
activities for the year was approximately $13,716,000, comprised primarily of
the $6,600,000 of proceeds from the Private Placement in August 1996 and the
proceeds of approximately $5,442,000 received from the acceleration of the
exercise period of the Series A Warrants in December 1996.
The Company's working capital was approximately $7,499,000 at June 30,
1997, compared to $2,019,000 at June 30, 1996. The improvement in working
capital is primarily attributable to the cash generated from the proceeds of the
Private Placement and the acceleration of the Series A Warrants and the increase
in net accounts receivable, including the effects of the Arthritis Rehab
Acquisition, of approximately $861,000 from June 30, 1996 to June 30, 1997.
During 1997, the Company and First Union National Bank of Florida
("First Union") entered into a $2,000,000 Revolving Loan Promissory Note (the
"Revolving Note"). Concurrently the Company and First Union executed a
$3,000,000 Revolving Term Promissory Note (the "Term Note") and Security
Agreement. Under the terms of the Revolving Note and the Term Note, the Company
may elect the interest rate to be either the bank's prime plus 1/4 or the London
InterBank Offered Rate ("LIBOR") plus 275 basis points. Interest on the
Revolving Note is payable quarterly in arrears on any outstanding balances.
Interest on advances made under the Term Note is due monthly in arrears for the
first six months. On the seventh month and thereafter, interest and principal is
due. In all events, the Notes mature and all unpaid principal and interest is
due in full on November 15, 1999. The Notes are secured by substantially all of
the assets of the Company and contain restrictive covenants which, among other
things, require the Company to maintain certain financial ratios, limit the
incurrence of additional debt and limit the payment of dividends. As of June 30,
1997, the Company had borrowed a total of $2,500,000 under the Revolving Note
and the Term Note which was used to fund a portion of the purchase price for the
Arthritis Rehab Acquisition. In September 1997, the Company borrowed the
remaining $2,500,000 under the Term Note to fund a portion of the purchase price
for the acquisition of a Florida based home healthcare company.
The Company is currently contemplating various acquisitions. The
financing of these transactions may be funded from a variety of sources,
including bank financing or the issuance of notes which may be convertible into
the Company's Common Stock. The Company anticipates that the cash flow from
operations, together with the cash received in the Private Placement, the cash
received from pre-Merger Zanart as a result of the Merger, the cash received
from the acceleration of the exercise period of the Series A Warrants, and the
funds obtained from other financing arrangements will be used to make
acquisitions in order to grow its operations and pursue its business strategy.
Based upon current expectations, the Company believes that cash flow from
operations will be sufficient to meets its working capital requirements for
fiscal year 1998, although there can be no assurance that it will be able to do
so. See "Business - Recent Developments."
15
<PAGE> 17
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements included herein, commencing at page F-1, have
been prepared in accordance with Regulation S-B.
16
<PAGE> 18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The accounting firm of Arthur Andersen LLP ("Arthur Andersen")
represented pre-Merger Zanart as its independent accountants during fiscal years
1996 and 1995 and was dismissed by the Board of Directors on November 15, 1996
in connection with the Merger. During the fiscal years ended 1996 and 1995 and
subsequent interim period, there were no disagreements between pre-Merger Zanart
and Arthur Andersen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen, would
have caused it to make reference to the subject matter of the disagreement in
connection with its reports. Arthur Andersen's reports on the financial
statements of pre-Merger Zanart for the fiscal years ended 1996 and 1995 did not
contain an adverse opinion or a disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope, or accounting principles.
The accounting firm of Deloitte & Touche LLP ("Deloitte & Touche")
represented pre-Merger Continucare as its independent accountants during the
period from February 12, 1996 (inception) to June 30, 1996 and was appointed as
the Company's independent accountants by the Board of Directors for fiscal year
1997. There have been no reported disagreements on any matter of accounting
principles or practice or financial statement disclosure at any time during the
period that operations have been audited by Deloitte & Touche.
17
<PAGE> 19
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors and executive officers of the
Company is incorporated by reference to the registrant's Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
ITEM 10. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C> <C>
(a) (1) Financial Statements
Reference is made to the Index set forth on page F-1 of this Annual Report on Form 10-KSB.
(a)(2) Financial Statement Schedules
None
(a)(3) Exhibits
3.1 Restated Articles of Incorporation of Company, as amended. (4) (Exhibit 3.1)
3.2 Restated Bylaws of Company. (4) (Exhibit 3.2)
4.1 Form of certificate evidencing shares of Common Stock. (4) (Exhibit 4.1)
10.1 Employment Agreement between the Company and Charles M. Fernandez dated as of September 11,
1996. (2) (Exhibit 10.36)
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
<S> <C> <C>
10.2 Employment Agreement between the Company and Susan Tarbe dated as of September 23, 1996.(3)
10.3 Agreement and Plan of Merger by and among Continucare Corporation, Zanart Entertainment
Incorporated and Zanart Subsidiary, Inc. dated August 9, 1996. (1) (Exhibit 2)
10.4 Stock Purchase Agreement dated April 10, 1997 by and among Continucare Corporation,
Continucare Physician Practice Management, Inc., AARDS, Inc. and Sheridan Healthcorp. Inc. (6)
(Exhibit 10.1)
10.5 Stock Purchase Agreement dated April 10, 1997 by and among Continucare Corporation,
Continucare Physician Practice Management, Inc., Rosenbaum, Weitz & Ritter, Inc. and Sheridan
Healthcorp, Inc. (6) (Exhibit 10.2)
10.6 Stock Purchase Agreement dated April 10, 1997 by and among Continucare Corporation,
Continucare Medical Management, Inc., Arthritis & Rheumatic Disease Specialties, Inc. and
Sheridan Healthcare, Inc. (6) (Exhibit 10.3)
10.7 Acquisition Facility ($3,000,000), Revolving Credit Facility ($2,000,000) and Security
Agreement among Continucare Corporation, Borrower and First Union National Bank of Florida,
dated November 14, 1996, as amended on March 4, 1997. (9)
11.1 Computation of Earnings Per Common Share. (7)
16.1 Acknowledgment letter from Arthur Andersen LLP regarding its dismissal as the Company's
independent public accountants. (5)
21.1 Subsidiaries of the Company. (7)
27.1 Financial Data Schedule (7)
</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
<TABLE>
<CAPTION>
<S> <C> <C>
(1) Current Report Form 8-K dated August 9, 1996.
(2) Form 10-KSB filed with the Commission on September 30, 1996.
(3) Form 10-KSB filed with the Commission on October 21, 1996.
(4) Post Effective Amendment No. 1 to the Registration Statement on SB-2 on Form S-3
Registration Statement filed on October 29, 1996.
(5) Form 8-K/A filed with the Commission on December 3, 1996.
(6) Form 8-K filed with the Commission on April 25, 1997.
(7) Filed herewith.
</TABLE>
(b) There was one report on Form 8-K filed with the SEC in the fourth
quarter of fiscal 1997. The Form 8-K was filed on April 25, 1997 and
amended on Form 8-K/A filed on June 24, 1997 regarding the acquisition
of certain arthritis rehabilitation centers and affiliated physician
practices from Sheridan Healthcorp, Inc.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONTINUCARE CORPORATION
By: /s/ CHARLES M. FERNANDEZ
--------------------------------------
Charles M. Fernandez
Chairman of the Board, Chief Executive
Officer, and President
Dated: September 26, 1997
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- -------------------------------------- ------------------------------
<S> <C> <C>
/s/CHARLES M. FERNANDEZ Chairman of the Board, Chief Executive September 26, 1997
- ------------------------------------- Officer and President (principal
Charles M. Fernandez executive officer)
/s/PHILLIP FROST, M.D. Vice Chairman of the Board September 26, 1997
- -------------------------------------
Phillip Frost, M.D.
/s/MARIA T. SOSA Principal Accounting Officer (principal September 26, 1997
- ------------------------------------- financial officer and principal
Maria T. Sosa accounting officer)
/s/ARTHUR M. GOLDBERG Director September 26, 1997
- -------------------------------------
Arthur M. Goldberg
/s/RICHARD B. FROST Director September 26, 1997
- -------------------------------------
Richard B. Frost
/s/MARK J. HANNA Director September 26, 1997
- -------------------------------------
Mark J. Hanna
/s/ELIAS F. GHANEM, M.D. Director September 26, 1997
- -------------------------------------
Elias F. Ghanem, M.D.
</TABLE>
-20-
<PAGE> 22
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................................... F-2
Consolidated Balance Sheets as of June 30, 1997 and 1996.................................. F-3
Consolidated Statements of Income for the year ended June 30, 1997 and
the Period from February 12, 1996 (inception) to June 30, 1996...................... F-4
Consolidated Statements of Shareholders' Equity as of June 30, 1997 and 1996.............. F-5
Consolidated Statements of Cash Flows for the year ended June 30, 1997 and
the Period from February 12, 1996 (inception) to June 30, 1996..................... F-6
Notes to Consolidated Financial Statements................................................ F-7
</TABLE>
F-1
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Continucare Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Continucare
Corporation and subsidiaries (the "Company") as of June 30, 1997 and 1996 and
the related consolidated statements of income, shareholders' equity and cash
flows for the year ended June 30, 1997 and for the period February 12, 1996
(inception) to June 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits 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 audits provide 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, 1997
and 1996 and the results of its operations and its cash flows for the year ended
June 30, 1997 and the period February 12, 1996 (inception) to June 30, 1996 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Miami, Florida
September 23, 1997
F-2
<PAGE> 24
CONTINUCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 6,989,580 $ 819,066
Accounts receivable, net
of allowance for doubtful
accounts of $1,061,468 and
$146,692, respectively 2,829,426 1,967,978
Prepaid expenses and other current assets 401,814 800
----------- -----------
Total current assets 10,220,820 2,787,844
Other receivables 5,000,000 --
Property and equipment, net 1,176,049 4,806
Goodwill, net 1,452,557 --
Other intangible assets, net 980,910 1,499
Other assets, net 515,274 15,872
Deferred tax asset, net 505,699 54,875
----------- -----------
Total assets $19,851,309 $ 2,864,896
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 285,518 $ 288,675
Accrued expenses 924,018 44,210
Accrued interest payable 37,295 23,161
Current portion of notes payable 811,133 --
Current portion of capital lease obligation 44,055 --
Income and other taxes payable 619,445 412,686
----------- -----------
Total current liabilities 2,721,464 768,732
Notes payable 2,330,367 655,000
Long-term debt 181,551 --
----------- -----------
Total liabilities 5,233,382 1,423,732
----------- -----------
Minority interest -- 32,686
----------- -----------
Commitments and contingencies -- --
Shareholders' equity
Common stock; $0.0001 par value;
100,000,000 shares authorized, issued
and outstanding - 10,888,993, 6/30/97;
6,666,667, 6/30/96 1,089 667
Additional paid-in capital 14,549,884 763,202
Retained earnings 2,351,284 644,609
Treasury Stock (1997 - 2,930,000 shares) (2,284,330) --
----------- -----------
Total shareholders' equity 14,617,927 1,408,478
----------- -----------
Total liabilities and shareholders' equity $19,851,309 $ 2,864,896
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 25
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FEBRUARY 12, 1996
FOR THE YEAR ENDED (INCEPTION) TO
JUNE 30, 1997 JUNE 30, 1996
------------------- -------------------
<S> <C> <C>
Revenues:
Management fees $12,874,592 $ 2,507,063
Net patient service revenue 1,041,793 --
----------- -----------
Total revenues 13,916,385 2,507,063
Expenses
Payroll and employee benefits 6,348,195 973,412
Provision for bad debt 1,818,293 242,664
Professional fees 1,450,790 203,625
General and administrative 1,176,516 54,430
Depreciation and amortization 208,936 362
----------- -----------
Total expenses 11,002,730 1,474,493
----------- -----------
Income from operations 2,913,655 1,032,570
----------- -----------
Other income (expenses)
Interest income (expense), net 165,253 (23,204)
Income applicable to minority interest (162,235) (32,686)
Other (9,081) --
----------- -----------
Other expenses (6,063) (55,890)
Income before taxes 2,907,592 976,680
Provision for income taxes 1,200,917 332,071
----------- -----------
Net income $ 1,706,675 $ 644,609
=========== ===========
Earnings per common share
and common equivalent share $ 0.16 $ 0.10
=========== ===========
Earnings per common share
and common equivalent share
assuming full dilution $ 0.16 $ 0.10
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE> 26
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
<S> <C> <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
Stock split 567 (567) --
Net income -- -- $ 644,609 644,609
------------ ------------ ------------ ------------
Balance at June 30, 1996 $ 667 $ 763,202 $ 644,609 $ 1,408,478
Issuance of stock related
to private placement
net of costs 330 6,499,670 -- 6,500,000
Issuance of stock/merger
with Zanart net of
merger costs 290 1,845,428 -- 1,845,718
Exercise of stock warrants 91 5,441,584 -- 5,441,675
Buyout of minority
interest in subsidiary 4 -- -- 4
Repurchase of stock (293) -- -- $(2,284,330) (2,284,623)
Net income -- -- 1,706,675 -- 1,706,675
------------ ------------ ------------ ----------- ------------
Balance at June 30, 1997 $ 1,089 $ 14,549,884 $ 2,351,284 $(2,284,330) $ 14,617,927
============ ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE> 27
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FEBRUARY 12, 1996
FOR THE YEAR ENDED (INCEPTION) TO
JUNE 30, 1997 JUNE 30, 1996
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,706,675 $ 644,609
Adjustments to reconcile net income
to cash (used in) provided by
operating activities:
Depreciation and amortization 208,936 362
Bad debt expense 1,818,293 242,664
Loss on purchase of minority interest 9,081 --
Income applicable to minority interest 162,235 32,686
Changes in assets and liabilities,
excluding the effect of acquisitions:
Increase in accounts receivable (2,031,859) (1,445,590)
Increase in prepaid expenses and
other current assets (368,373) (800)
Increase in other receivables (5,000,000) --
Increase in intangible assets (249,063) (1,579)
Increase in other assets (499,402) (12,346)
Increase in deferred tax asset, net (450,824) (54,875)
Increase in accounts payable and accrued expenses 813,681 332,885
Increase in accrued interest payable 14,134 23,161
Increase in income and other taxes payable 199,179 406,976
------------ ------------
Net cash (used in) provided by operating activities (3,667,307) 168,153
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid in acquisitions (3,342,500) --
Property and equipment additions (536,091) (5,087)
------------ ------------
Net cash used in investing activities (3,878,591) (5,087)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of related shareholder
notes payable -- 655,000
Payments to acquire treasury stock (2,284,623) --
Issuance of common stock to purchase minority
interest (204,000) --
Principal repayments under capital lease obligation (27,105) --
Proceeds received from Private Placement 6,600,000 --
Proceeds from acceleration of Series A Warrants 5,441,675 --
Costs incurred associated with Private Placement
& Merger (225,000) --
Proceeds from Term and Revolving Notes 2,500,000 --
Proceeds from issuance of common stock 1,970,715 1,000
Repayment of loan from HCMP (55,250)
------------ ------------
Net cash provided by financing activities 13,716,412 656,000
------------ ------------
Net increase in cash and cash equivalents 6,170,514 819,066
Cash and cash equivalents at beginning of period 819,066 --
------------ ------------
Cash and cash equivalents at end of period $ 6,989,580 $ 819,066
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Cash paid for income taxes $ 1,457,000 $ --
============ ============
Cash paid for interest $ 86,348 $ 43
============ ============
Purchase of furniture and fixtures
with proceeds of capital
lease obligation $ 252,712 $ --
============ ============
Purchase of assets and liabilities
in exchange for subsidiary stock $ -- $ 762,869
============ ============
</TABLE>
During fiscal year 1997, the Company purchased all of the capital stock of
AARDS, INC., and Arthritis & Rheumatic Disease Specialties, Inc.,(the "Physician
Practices") for $3,300,000. The acquisition was recorded under the purchase
method of accounting. The fair values of the Physician Practices' assets and
liabilities at the date of acquisition are presented below:
Fair value of assets acquired $ 1,221,458
Intangible assets 2,149,092
Accounts payable and accrued expenses (70,550)
-----------
Cash paid $ 3,300,000
===========
The Company purchased certain assets of a comprehensive outpatient
rehabilitation facility in Florida (the "Aventura-CORF") for $85,000. The
acquisition was recorded under the purchase method of accounting. The Company
assumed the Medicare Provider Number of the Aventura-CORF in exchange for
$42,500 cash paid at closing and a $42,500 promissory note.
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE> 28
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
Description of Business - Continucare Corporation ("Continucare" or the
"Company"), together with its subsidiaries, provides a continuum of outpatient
and ancillary healthcare services. The Company provides services such as
physical rehabilitation, physician practice management, behavioral health
management and laboratory services within its physician practices. At June 30,
1997, the Company, through its wholly-owned subsidiaries, managed fifteen
behavioral health programs in six hospitals in Florida, Missouri and Illinois,
nine freestanding centers in Florida and Tennessee, and a comprehensive
outpatient rehabilitation facility ("CORF"). Since the acquisition of certain
arthritis rehabilitation centers in April 1997, the Company has focused on the
outpatient treatment of musculoskeletal injuries and diseases, such as arthritis
and osteoporosis. The Company has also entered into a management agreement with
Bally's Total Fitness ("Bally") whereby the Company will provide outpatient
rehabilitation services at Bally's Total Fitness centers. During the next three
years, the Company expects to open outpatient rehabilitation centers at Bally
facilities in Florida, Texas, Illinois and Ohio. Historically the Company has
derived substantially all of its revenues from contracts to provide management,
staffing and billing services to behavioral health programs in hospitals and
freestanding rehabilitation centers (collectively, the "Providers") (see Note
13).
Zanart Merger - Continucare's predecessor, Zanart Entertainment, Incorporated
("Zanart") was incorporated in 1986. On August 9, 1996, a subsidiary of Zanart
merged into Continucare Corporation (the "Merger"), which was incorporated on
February 12, 1996 as a Florida corporation ("Old Continucare"). As a result of
the Merger, the shareholders of Old Continucare became shareholders of Zanart,
and Zanart changed its name to Continucare Corporation. In December 1996, in
conjunction with the merger agreement, Zanart disposed of its assets and
liabilities relating to its licensing business. The assets remaining and
recorded on Continucare's financial statements were approximately $2,000,000 in
cash and a $152,000 note receivable. The remaining balance on the note at June
30, 1997 was written off.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
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 providing management services
under the contracts with Providers, 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. The Company also receives payment for services rendered
from federal and state agencies, managed care health plans, commercial insurance
companies and patients. The amount of payments received from such third-party
payors is dependent upon mandated payment rates in the case of Medicare and
Medicaid programs, and negotiated payment rates in the case of other third-party
payors. The Company records an allowance for contractual adjustments which
represents the difference between established rates and contractual obligations
from third-party payors. The Company also provides an allowance for doubtful
accounts for management fees, third-party payors and patients based on
historical experience of amounts that result to be uncollectible. Accordingly,
accounts receivable are reflected in the consolidated balance sheet net of such
contractual allowances.
F-7
<PAGE> 29
Prepaid Expenses and Other Current Assets - Prepaid expenses and other current
assets are comprised primarily of the current portion of prepaid directors' and
officers' insurance.
Other Receivables - Other receivables represent receivables which, subsequent
to year end, will be converted to a note (see Note 13).
Other Assets - Other assets are comprised primarily of the non-current portion
of prepaid directors' and officers' insurance, long-term deposits and deferred
tax assets.
Property and Equipment - Property and equipment are stated at cost. Depreciation
is computed using the straight line method over the estimated useful lives of
the related assets, which range from three to five years. Repairs and
maintenance costs are expensed as incurred. Improvements and replacements are
capitalized.
Intangible Assets - Intangible assets are comprised of the following:
Non-Compete Agreements - Non-compete agreements are being amortized on a
straight-line basis over the terms of the agreements, typically two to
ten years.
Patient Lists - Patient lists are amortized over five to ten years, using
the straight-line method.
Goodwill - Goodwill, the excess of the aggregate purchase price over the
fair value of the net assets acquired is amortized over lives ranging
from twenty to thirty years using the straight-line method. The goodwill
includes the value assigned to the assembled workforce (employees of the
acquired business).
Other Intangibles - Represent organization costs incurred as a result of
the Merger and the listing of shares of the Company's common stock on the
American Stock Exchange, deferred acquisition, and deferred loan costs.
These are being amortized using the straight line method over the lives
of the underlying assets or agreements, which range from three to ten
years.
The weighted average life of intangible assets related to acquisitions is twenty
years. The carrying value of intangible assets is periodically reviewed by
Management and impairments, if any, are recognized when the expected future
undiscounted cash flows derived from such intangible assets are less than their
carrying value.
F-8
<PAGE> 30
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of certain 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 values at June 30, 1997 and 1996
approximate fair value based on the terms of the notes.
Income Taxes - There are two components of the income tax provision, current and
deferred. Current income tax provisions approximate taxes to be paid or refunded
for the applicable period.
Balance sheet amounts of deferred taxes are recognized on the temporary
differences between the bases of assets and liabilities as measured by tax laws
and their bases as reported in the financial statements. Deferred tax expense
or benefit is then recognized for the change in deferred tax liabilities or
assets between periods. Recognition of deferred tax balance sheet amounts is
based on management's belief that it is more likely than not that the tax
benefit associated with certain temporary differences will be realized.
Stock Options - In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which requires companies to either recognize expense for
stock-based awards based on their fair value on the date of grant or provide
footnote disclosures regarding the impact of such changes. The Company has
adopted the provisions of SFAS 123, but will continue to account for options
issued to employees or directors under the Company's non-qualified stock option
plan in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." The exercise prices of the Company's
stock options equal the market price of the underlying stock on the date of
grant; therefore, no compensation expense is recognized under APB 25.
Earnings per Share - Primary earnings per share is computed based upon the
weighted average number of common and common equivalent shares outstanding,
assuming proceeds from the assumed exercise of options were used to purchase
common shares at the average market price during the period, unless such
exercise would be antidilutive. Fully diluted earnings per share assumes that
the proceeds from the assumed exercise of options were used to purchase common
shares at the higher of the market value per share at the end of each period or
the average market value during the period, unless such exercise is
antidilutive.
Revenues - The Company historically has derived its revenues primarily based on
management, billing and/or staffing contracts with Providers. The management
contracts have terms ranging from one to fifteen years, and are cancelable by
either party with 180 days notice. Revenues are recognized in the period earned
and at the time services are rendered for employee leasing services. 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 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.
The Company's physician practices subsidiary derives its revenues from
agreements with third-party payors, including government programs and managed
care plans, under which the Company is paid based upon established charges, the
cost of providing services, predetermined rates per diagnosis, or discounts from
established charges. Revenues are recorded as estimated amounts due from
patients and third-party payors for the healthcare services provided.
Settlements under reimbursement agreements with third-party payors are estimated
and recorded in the period the related services are rendered.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries, and all
entities controlled by the Company. All significant intercompany transactions
and balances have been eliminated in consolidation.
F-9
<PAGE> 31
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 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.
Reclassification - Certain prior year amounts have been reclassified to conform
with the current period presentation.
New Accounting Pronouncements - In February 1997, the FASB issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which
changes the method of calculating earnings per share. SFAS 128 requires the
presentation of "basic" earnings per share and "diluted" earnings per share on
the face of the income statement. Basic earnings per share is computed by
dividing the net income or loss attributable to common shareholders by the
weighted average common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted earnings per share is computed similarly to fully diluted
earnings per share under APB Opinion No. 15. This statement applies to entities
with publicly held stock or potential common stock, is effective for financial
statements issued for periods ending after December 15, 1997 and does not permit
earlier application. This statement requires restatement of all prior period EPS
data presented. The Company will adopt SFAS 128 in the second quarter of the
fiscal year ending June 30, 1998. The pro forma basic earnings per share and
diluted earnings per share calculated in accordance with SFAS 128 for the year
ended June 30, 1997 and the period from February 12, 1996 (inception) to June
30, 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Pro forma basic earnings per share $ 0.16 $ 0.10
Pro forma diluted earnings per share $ 0.16 $ 0.10
</TABLE>
During February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 ("SFAS 129"), "Disclosure of Information about Capital
Structure." SFAS 129 requires entities to explain, in summary form within their
financial statements, the pertinent rights and privileges of the various
securities outstanding. Information that shall be disclosed should include
dividend and liquidation preferences, participation rights, call prices and
dates, conversion or exercise prices or rates and pertinent dates, sinking fund
requirements, unusual voting rights, and significant terms of contracts to issue
additional shares. SFAS 129 is effective for periods ending after December 15,
1997.
During June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes
standards for reporting and display
F-10
<PAGE> 32
of comprehensive income and its components (revenues, expenses, gains and
losses) in general purpose financial statements and requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS 130 does not require a
specific format, but requires an entity to (a) classify items of other
comprehensive income by their nature and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
130 is effective for fiscal years beginning after December 15, 1997 and requires
reclassification for earlier periods provided for comparative purposes.
Also during June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information." SFAS 131 establishes standards for the way that public
enterprises report selected information about operating segments in annual
financial statements and requires them to report selected segment information in
interim financial reports issued to shareholders. SFAS 131, which supersedes
SFAS 14, "Financial Reporting for Segments of a Business Enterprise," retains
the requirement to report information about major customers, requires that a
public company report financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources to
segments. SFAS 131 requires that a public company report a measure of segment
profit or loss, certain specific revenue and expense items, and segment assets.
However, SFAS 131 does not require the reporting of information that is not
prepared for internal use if reporting it would be impracticable. SFAS 131 also
requires that a public company report descriptive information about the way that
the operating segments were determined, the products and services provided by
the operating segments, differences between the measurements used in reporting
segment information and those used in the enterprise's general-purpose financial
statements, and changes in the measurement of segment amounts from period to
period. SFAS 131 is effective for periods beginning after December 15, 1997. In
the initial year of application, comparative information for earlier years is to
be restated. The Company has not determined the effects, if any, that SFAS 131
will have on its consolidated financial statements.
NOTE 3 - BUSINESS COMBINATIONS
On May 1, 1996, Continucare, through a subsidiary, acquired certain contracts,
assets and liabilities of Joanne Telmosse Consulting, Inc. ("Consulting"), based
in Coral Springs, Florida, a provider of billing and collection services.
Concurrently, the Company acquired certain contracts, assets and liabilities of
ProCare Staffing, Inc. ("ProCare", 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 the acquiring subsidiary's common stock (representing a 25%
interest in such subsidiary, the "Minority Interest") to the common owner of the
acquired companies. Continucare 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. Accordingly, the
accounts of Consulting and ProCare have been consolidated with those of
Continucare for periods subsequent to May 1, 1996, the effective date of the
acquisition.
In conjunction with the acquisitions of Consulting and ProCare, the Company
entered into a subcontract agreement with Medical Billing Service Systems, Inc.,
which is a related company of Consulting and ProCare by common ownership (the
"Subcontract Agreement"), whereby Medical
F-11
<PAGE> 33
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.
Effective December 31, 1996, (the "Effective Date"), the Company purchased the
25% Minority Interest in exchange for 40,000 shares of Continucare common stock,
$0.0001 par value, having a market value of $204,000 on the Effective Date. Such
amounts were offset against a receivable due from the minority shareholder. As a
result, the Minority Interest on Continucare's consolidated balance sheet,
approximately $195,000 as of the Effective Date, was eliminated and a loss on
the purchase of minority interest of approximately $9,000 was recorded.
On November 12, 1996, the Company entered into an asset purchase agreement (the
"Asset Purchase Agreement") to purchase certain assets of a Medicare certified
comprehensive outpatient rehabilitation facility (the "Aventura-CORF"). The
Aventura-CORF provides various physical rehabilitation services to patients in
the South Florida area and bills the Medicare program for the cost of covered
CORF services rendered to Medicare beneficiaries. Under the terms of the Asset
Purchase Agreement, the Company assumed the Medicare Provider Number of the
Aventura-CORF in exchange for $85,000 (the "Purchase Price"). The Purchase Price
consisted of cash at closing of $42,500 and a promissory note (the "Promissory
Note") in the amount of $42,500. The Promissory Note, which bears interest at
10% per annum, provides for full payment of all principal and accrued interest
on November 12, 1997. This acquisition was accounted for under the purchase
method and, accordingly, the accounts of the Aventura-CORF have been
consolidated with those of Continucare for periods subsequent to November 12,
1996, the acquisition date.
On April 10, 1997, the Company, through Continucare Physician Practice
Management, Inc., a wholly-owned subsidiary, acquired all of the outstanding
stock of certain arthritis rehabilitation centers and affiliated physician
practices. The acquisition included the purchase of AARDS, INC., a Florida
corporation formerly known as Norman B. Gaylis, M.D., Inc., of Rosenbaum, Weitz
& Ritter, Inc., a Florida corporation, and of Arthritis & Rheumatic Disease
Specialties, Inc., a Florida corporation (the "Physician Practices"), from
Sheridan Healthcare, Inc. ("Sheridan"). The aggregate purchase price was
approximately $3,300,000 of which approximately $2,500,000 was borrowed by the
Company under the Company's Revolving Note and Term Note (see Note 6). As a
result of the acquisitions, goodwill and other intangible assets of
approximately $2,149,000 was recorded, which is being amortized over weighted
average life of 20 years.
The allocation of the purchase price is preliminary, while the Company
continues to obtain information to determine the fair value of the assets
acquired and the identifiable intangible assets.
The following unaudited pro forma statements of income reflect adjustments to
Continucare's historical financial position and results of operations to give
effect to the acquisitions of the Physician Practices as if such had occurred as
of the beginning of the period from February 12, 1996 (inception) to June 30,
1996 and the fiscal year ended June 30, 1997, after giving effect to certain pro
forma adjustments as described below:
<TABLE>
<CAPTION>
For the Period From
Feb 12, 1996
(Inception)
June 30, 1997 to June 30, 1996
----------------- -------------------
<S> <C> <C>
Total revenues $ 16,867,906 $ 6,797,444
============ ============
Income from operations 2,511,369 $ 794,143
============ ============
Net income 1,176,957 $ 309,508
============ ============
Earnings per common share
and common equivalent share
Primary $ 0.11 $ 0.05
============ ============
Fully diluted $ 0.11 $ 0.05
============ ============
</TABLE>
F-12
<PAGE> 34
Pro forma adjustments reflect the difference in compensation rates that are
effective post-acquisition pursuant to employment agreements entered into in
connection with the acquisitions and actual compensation expense recorded by the
acquired entities, amortization of the resulting goodwill, and the accrual for
interest expense on the funds borrowed to consummate the acquisitions.
NOTE 4 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
A provision has been made and an allowance established for potential losses from
receivables in the normal course of business. Since these allowances are based
on estimates, there is no assurance that such allowances will be sufficient to
cover unforeseen losses. The activity in the allowance account is as follows:
<TABLE>
<CAPTION>
For the Period From
For the Year Ended Feb 12, 1996 (Inception)
June 30, 1997 to June 30, 1996
------------------ ------------------------
<S> <C> <C>
Allowance for doubtful accounts:
Beginning balance $ 146,692 $ 97,601
Provision 1,818,293 242,664
Write-offs, net of recoveries (903,517) (193,573)
----------- -----------
Ending balance $ 1,061,468 $ 146,692
=========== ===========
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
Estimated
useful lives
June 30, 1997 June 30, 1996 (in years)
------------- ------------- ------------
<S> <C> <C> <C>
Furniture, fixtures and equipment $ 951,207 $5,088 3 - 5
Furniture and equipment under
capital lease 252,712 -
Vehicles 23,000 - 5
Leasehold improvements 107,161 - 5
---------- ------
$1,334,080 $5,088
Less accumulated depreciation (158,031) (282)
---------- ------
$1,176,049 $4,806
========== ======
</TABLE>
Depreciation expense for the year ended June 30, 1997 was $157,749. Depreciation
expense for the period from February 12, 1996 (inception) to June 30, 1996 was
$282.
On November 12, 1996, in connection with the Aventura-CORF acquisition, the
Company entered into a noncancellable lease for certain furniture and equipment
(the "Equipment Lease") that is classified as
F-13
<PAGE> 35
a capital lease. The Equipment Lease, which was entered into concurrent with the
Asset Purchase Agreement for the Aventura-CORF on November 12, 1996, provides
for monthly payments of approximately $5,300, including interest. In calculating
the present value of the lease payments required under the Equipment Lease, the
Company has used an incremental borrowing rate of 10% per annum. Payments under
the Equipment Lease for the year ended June 30, 1997 were approximately $42,600
of which approximately $15,500 represented interest.
Future minimum lease payments under the Equipment Lease, including imputed
interest, is as follows:
For the year ending June 30,
<TABLE>
<S> <C>
1998 $ 63,900
1999 63,900
2000 63,900
2001 63,900
2002 21,320
--------
276,920
Less amount representing
imputed interest 51,314
--------
Present value of obligation under
capital lease 225,606
Less current portion 44,055
--------
Long-term capital lease obligation $181,551
========
</TABLE>
NOTE 6 - LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of the following:
June 30,
1997 1996
---------- ----------
Shareholder Note(a) $ 599,000 $ 599,750
Promissory Note(b) 42,500 --
HCMP Note(c) -- 55,250
Revolving Note and Term Note(d) 2,500,000 --
---------- ----------
3,141,500 655,000
Less: current portion 811,133 --
---------- ----------
Long-term portion of debt $2,330,367 $ 655,000
========== ==========
The maturity schedule of long-term debt as of June 30, 1997 is as follows:
Fiscal year ending Total
------------------ ----------
1998 $ 811,133
1999 244,141
2000 2,086,226
----------
$3,141,500
==========
(a) 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 on the Shareholder Note is due semiannually each
August and February. Accrued interest and interest expense at June 30, 1997
and for the year then ended were $985 and $59,938 respectively. At June 30,
1996, the Shareholder Note was included as a component of Long-term Debt in
the Consolidated Balance Sheet. Accrued interest and interest expense
related to the Shareholder Note was $21,662 as of June 30, 1996 and for the
period from February 12, 1996 to June 30, 1996. Subsequent to June 30, 1997,
the Shareholder Note, together with accrued interest, was paid in full.
(b) In November 1996, the Company signed a Promissory Note for $42,500, which
bears interest at 10% per annum, provides for full payment of all principal
and accrued interest on November 12, 1997. Accrued interest and interest
expense at June 30, 1997 and for the year then ended were $2,818 and $2,833,
respectively.
(c) The note payable to Health Care Management Partners, Inc. (the "HCMP Note"),
a company owned by three of the four shareholders of the Company at the time
of the HCMP Note, had a balance of $55,250 at June 30, 1996. The HCMP Note
bore interest at 10%, was due in full on February 12, 1998, and was
subordinate to the Shareholder Note. For the period from February 12, 1996
(inception) to June 30, 1996, the interest expense related to the HCMP
Note was $1,500. For the fiscal year ended June 30, 1997, interest expense
on the HCMP Note was $4,144. In April 1997, the HCMP Note was settled in
connection with the termination of certain consulting agreements (the
"Consulting Agreements") with companies controlled by Mr. Miller and Mr.
Goldstein. Such companies were related to Health Care Management Partners,
Inc. through common ownership. Upon termination of the Consulting
Agreements, all amounts due under the HCMP Note were included in the
settlement.
F-14
<PAGE> 36
(d) During 1997, the Company and First Union National Bank of Florida ("First
Union") entered into a $2,000,000 Revolving Loan Promissory Note (the
"Revolving Note"). Concurrently, the Company and First Union executed a
$3,000,000 Revolving Term Promissory Note (the "Term Note") and Security
Agreement. Under the terms of the Revolving Note and the Term Note, the
Company may elect the interest rate to be either the bank's prime plus 1/4
or the London InterBank Offered Rate ("LIBOR") plus 275 basis points.
Interest on the Revolving Note is payable quarterly in arrears on any
outstanding balances. Interest on advances made under the Term Note is due
monthly in arrears for the first six months. On the seventh month and
thereafter, interest and principal is due. In all events, the Notes mature
and all unpaid principal and interest is due in full on November 15, 1999.
The Notes are secured by substantially all of the assets of the Company and
contain restrictive covenants which, among other things, require the Company
to maintain certain financial ratios, limit the incurrence of additional
debt and limit the payment of dividends. As of June 30, 1997, the Company
was in compliance with the financial covenants of the notes. As of June 30,
1997, the outstanding principal balance under the Revolving Note and the
Term Note was $2,500,000, which was used to fund a portion of the purchase
price of the Physician Practice acquisition. Accrued interest payable and
interest expense under the Revolving and the Term Note as of and for the
year ended June 30, 1997 were $32,363 and $48,545 respectively. The interest
rate for the Revolving Note and the Term Note as of June 30, 1997 was 8.75%.
NOTE 7 - STOCK OPTION PLAN AND WARRANTS
Stock Option Plan - In December 1996, the Company's shareholders approved the
Company's Amended and Restated 1995 Stock Option Plan (the "Stock Option Plan")
covering employees of the Company. The Stock Option Plan authorizes 1,200,000
shares for issuance upon the exercise of stock options. The Stock Option Plan
authorizes (i) the granting of Incentive or Non-Qualified stock options to
purchase Common Stock to employees of the Company determined to contribute
significantly to the successful performance of the Company, (ii) the provision
of loans for the purpose of financing the exercise of options and the amount of
taxes payable in connection therewith, and (iii) the use of already owned Common
Stock as payment of the exercise price for options granted under the Stock
Option Plan.
The stock options outstanding as of February 12, 1996 (inception) relate to
options issued by pre-Merger Zanart. In 1994, pre-Merger Zanart entered into two
consulting agreements granting options to acquire 20,000 shares of Common Stock
at a purchase price of $6.00 per share. These stock options have not been
exercised or canceled as of June 30, 1997.
Under the terms of the Stock Option Plan, the exercise price for options granted
is required to be at least the fair market value of the Company's common stock
on the date of grant.
The following table summarizes information related to the Company's stock
options activity for the year ended June 30, 1997 and the period from February
12, 1996 (inception) to June 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 12, 1996 TO
JUNE 30, 1997 JUNE 30, 1996
NUMBER WTD. AVG. NUMBER WTD. AVG.
OF SHARES EX. PRICE OF SHARES EX. PRICE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning
of the period 20,000 $ 6.00 20,000 $ 6.00
Granted 266,400 $ 6.66 -- --
------- ---------- ------- ----------
Outstanding at end
of the period 286,400 $ 6.62 20,000 $ 6.00
======= ========== ======= ==========
Exercisable at end
of the period 72,062 12,500
======= =======
</TABLE>
The Company applies APB 25 and related interpretations in accounting for its
stock option plan as described in Note 2. The fair value of each option granted
is determined on the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions: no dividend yield, expected
volatility of 0.636, risk-free interest rate of 6.32%, and expected option life
of three years. The fair market value as of the various grant dates of the stock
options is between $0.93 and $5.84 per stock option.
Warrants - On November 20, 1996, the Company, pursuant to the terms of the
Series A Warrant Agreement, dated as of May 11, 1995 (the "Warrant Agreement"),
between the Company and Fidelity Transfer Company (the prior Warrant Agent),
accelerated the exercise period for each of the Company's issued and outstanding
Series A Warrants (the "Warrants"). The exercise period was set to expire on
December 20, 1996. As a result of the acceleration of the exercise period,
approximately $5,440,000 was received by the Company. The exercise of the
Warrants is reflected in the equity section of the accompanying consolidated
balance sheet as of June 30, 1997. There are no warrants outstanding as of June
30, 1997.
F-15
<PAGE> 37
NOTE 8 - INCOME TAXES
The components of the provision for income taxes for the year ended June 30,
1997 and for the period from February 12, 1996 (inception) to June 30, 1996 are
as follows:
1997 1996
----------- -----------
Current income taxes:
Federal $ 1,410,318 $ 337,776
State 241,423 49,170
----------- -----------
Total current 1,651,741 386,946
----------- -----------
Deferred income taxes:
Federal (398,752) (46,855)
State (52,072) (8,020)
----------- -----------
Total deferred (450,824) (54,875)
----------- -----------
Total provision for income taxes $ 1,200,917 $ 332,071
=========== ===========
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at June 30, 1997 and June 30, 1996 are as follows:
1997 1996
----------- -----------
Deferred tax assets:
Bad debt reserve $ 712,418 $ 55,170
Depreciable/amortizable assets 26,010 --
----------- -----------
Gross deferred tax assets 738,428 55,170
----------- -----------
Deferred tax liabilities:
Depreciation and amortization -- (295)
Change in tax accounting method (197,770) --
Other (34,959) --
----------- -----------
Gross deferred tax liabilities (232,729) (295)
----------- -----------
Net deferred tax asset $ 505,699 $ 54,875
=========== ===========
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate for the year ended June 30, 1997 and the period from
February 12, 1996 (inception) to June 30, 1996 is as follows:
1997 1996
----------- -----------
Statutory federal rate 34.0% 34.0%
State income taxes, net of federal
income tax benefit 4.1 --
Goodwill 0.4 --
Other 0.7 --
----------- -----------
Effective tax rate 39.2% 34.0%
=========== ===========
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Employment Agreements - The Company maintains employment agreements with certain
officers and key executives expiring at various dates through July 2002. In
addition, one employment agreement
F-16
<PAGE> 38
provides for one additional year term for each year of service by the executive.
The agreements provide for base salaries in aggregate of approximately $755,000,
annual increases, bonuses and stock option grants. The employment agreement with
a certain officer also provides that in the event of a change in control of the
Company, as defined therein, the officer is entitled to an acceleration of the
remainder of the officer's term and the automatic vesting of any unvested stock
options.
Insurance - As provided for in the management contracts with the Company's
providers, the Company maintains annual claims made policies for general and
professional liability insurance jointly with each of the providers. Coverage
under the policies are $1,000,000 per incident and $3,000,000 aggregate. It is
the Company's intention to renew such coverage on an on-going basis.
Consulting Agreements - Effective September of 1996, the Company entered into
consulting agreements with a company controlled by Mr. Douglas Miller and a
company controlled by Mr. Barry Goldstein (collectively, the "Consulting
Agreements"). Messrs. Miller and Goldstein served as executive officers of CAC
prior to the Merger. Each of the Consulting Agreements contained 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 therein) with 30 days' notice, provided that the
consultant will receive a termination payment equal to the amount otherwise
payable under the Consulting Agreement through the end of the term over the
period of the remaining term of the agreement, and (iv) ability of the Company
to terminate the agreement for "cause" at any time with no payment due to the
consultant. In April 1997, the Company terminated the Consulting Agreements with
the companies controlled by Mr. Douglas Miller and Mr. Barry Goldstein.
Concurrently, the Company repurchased approximately 1,262,000 shares of Company
Common Stock from Messrs. Miller and Goldstein which were accounted for as
treasury stock.
Leases - The Company leases office space and equipment under various
non-cancelable operating leases. Rent expense under such operating leases was
$357,339 for the year ended June 30, 1997 and $630 for the period from February
12, 1996 (inception) to June 30, 1996. Future annual minimum payments under such
leases as of June 30, 1997 are as follows:
For the fiscal year ending June 30,
<TABLE>
<S> <C>
1998 $ 593,907
1999 595,530
2000 479,932
2001 361,368
2002 50,190
-----------
Total $ 2,080,927
===========
</TABLE>
Concentrations of Revenues - The Company historically has generated the majority
of its revenues by providing services under management or other similar
arrangements. For the year ended June 30, 1997, the Company generated
approximately 68.0% of total revenues from CMHC's owned by two individuals.
Additionally, during the same period, approximately 10.5% of total revenues were
derived from a certain hospital chain. No other facility and/or chain accounted
for 10% or more of the Company's total revenues.
Legal Proceedings - In July 1997, the Company received a demand for arbitration
relating to a claim by a former shareholder of CAC prior to the Merger alleging
securities fraud in connection with the redemption of his shares. The former
shareholder is seeking rescission of the redemption agreement or, in the
alternative, damages in excess of $5,000,000. The Company believes the claim is
without merit and intends to vigorously defend the claim. Otherwise, the Company
is not a party and its property is not subject to any material litigation nor,
to the knowledge of management, is any such litigation presently threatened.
F-17
<PAGE> 39
NOTE 10 - EMPLOYEE BENEFIT PLAN
As of January 1, 1997, the Company adopted a tax qualified employee savings and
retirement plan (the "401(k) Plan") covering the Company's employees. Pursuant
to the 401(k) Plan, eligible employees may elect to contribute to the 401(k)
Plan up to the lesser of 15% of their annual compensation or the statutorily
prescribed annual limit ($9,500 in 1996). The Company matches 33% of the
contributions of employees, up to 6% of each employee's salary. All employees
who were employed at January 1, 1997, and new hires who thereafter attain at
least three months' service, are eligible to participate in the 401(k) Plan.
Participants in the plan do not vest in the employer contribution until the end
of the plan year.
The Trustees of the 401(k) Plan, at the direction of each participant, invest
the assets of the 401(k) Plan in designated investment options. The 401(k) Plan
is intended to qualify under Section 401 of the Code, so that contributions to
the 401(k) Plan, and income earned on the 401(k) Plan contributions, are not
taxable until withdrawn. Matching contributions by the Company are deductible
when made.
NOTE 11 - BUSINESS SEGMENTS
The Company operates one reportable segment, the physician practices which is
comprised of the operations acquired from Sheridan on April 10, 1997.
Information concerning this segment for the fiscal year ended June 30, 1997 is
shown in the table below. There were no separately identifiable segments in
operation during the period from February 12, 1996 (inception) to June 30, 1996.
Income from operations is total revenue less operating expenses. In computing
income from operations, interest expense and other income and expenses,
including interest income, have not been considered. Identifiable assets by
segment are those assets that are used in the Company's operation in each
segment. General corporate assets consist primarily of cash and cash
equivalents, accounts receivable, property and equipment, and deferred
financing costs.
<TABLE>
<CAPTION>
For the Year Ended
June 30, 1997
------------------
<S> <C>
Revenues:
Physician practices $ 1,041,793
Management fees 12,874,592
-----------
Consolidated revenues $13,916,385
===========
Income from operations:
Physician practices $ 142,488
Other 2,771,167
Interest expense (145,790)
Other income, net 301,962
-----------
Consolidated income from
continuing operations before
income taxes and minority interest $ 3,069,827
===========
Identifiable assets:
Physician practices $ 4,528,684
General corporate assets 15,322,625
-----------
Consolidated assets $19,851,309
===========
Capital expenditures:
Physician practices $ 548,885
Other 780,107
-----------
Consolidated capital expenditures $ 1,328,992
===========
Depreciation and amortization:
Physician practices $ 53,225
Other 155,711
-----------
Consolidated depreciation and
amortization $ 208,936
===========
</TABLE>
F-18
<PAGE> 40
NOTE 12 - RELATED PARTY TRANSACTIONS
At June 30, 1997, the Company is obligated to a shareholder under the
Shareholder Note, for a note payable in the amount of approximately $599,000.
Subsequent to June 30, 1997, the Shareholder Note, together with accrued
interest, was paid in full.
From February 12, 1996 (inception) to June 30, 1996 and during the first two
quarters of fiscal year ended June 30, 1997, the Company sublet office space
from a company owned by certain shareholders of Continucare. The lease, which
was a month-to-month agreement, called for monthly lease payments of
approximately $4,000 and was terminated in October 1996 when the Company moved
into its current offices in Miami, Florida.
From February 12, 1996 (inception) to June 30, 1996 and during the three
quarters of fiscal year ended June 30, 1997, the Company provided certain
management services to five facilities owned by Mr. Barry Goldstein and Mr. Doug
Miller, shareholders of Continucare, in return for a management fee based on
Continucare's estimated cost of providing such services. The management fee
charged was calculated based on the ratio of patient volume represented by the
five facilities to total patient volume managed by Continucare, applied to
certain of Continucare's expenses that were related to the provision of such
services. The resulting management fee was recorded by Continucare as a
reduction of the respective expense financial statement line items. For the
fiscal year ended June 30, 1997, management fees related to this agreement were
approximately $878,000. For the period from February 12, 1996 (inception) to
June 30, 1996, management fees were approximately $344,000. In April 1997, this
agreement was terminated in connection with the Termination & Settlement
Agreement between Continucare and Messrs. Miller and Goldstein.
In addition, during the period from February 12, 1996 (inception) to June 30,
1996 and during the first two quarters of fiscal year ended June 30, 1997,
Continucare had contracted with a company owned, in part, by Messrs. Miller and
Goldstein to provide certain managerial and administrative services to and on
behalf of Continucare at cost. For the year ended June 30, 1997 and for the
period from February 12, 1996 (inception) to June 30, 1996, total expenses
incurred by the Company for these services totaled approximately $314,000 and
$408,000, respectively, and are recorded in the appropriate expense categories
in the Consolidated Statements of Income. This agreement was also terminated in
connection with the Termination & Settlement Agreement between Continucare and
Messrs. Miller and Goldstein in April 1997.
During the fiscal year ended June 30, 1997 and at June 30, 1996, the Company was
obligated under the HCMP Note to a company owned by certain shareholders of the
Company at that time. In April 1997, the HCMP Note was settled in connection
with the Termination & Settlement Agreement between Continucare and Messrs.
Miller and Goldstein.
NOTE 13 - SUBSEQUENT EVENTS
On July 10, 1997, the Company acquired a certain arthritis and rheumatic health
care provider and related physician practices. The aggregate purchase price was
approximately $360,400 paid in cash. The acquisition will be accounted for under
the purchase method of accounting.
On July 15,1997, the Company acquired a certain start-up, Medicare-certified
home health agency in Dade County, Florida for an aggregate purchase price of
$400,000 paid in cash. The acquisition will be accounted for under the purchase
method of accounting.
On September 19, 1997, the Company acquired the stock of Maxicare, Inc., a
Florida based home health agency, for a purchase price of $3,000,000. At
closing, $2,700,000 was paid in cash, of which $2,500,000 was borrowed by the
Company under the Term Note. The remaining $300,000 is due in equal installments
at the end of years two and three and is contingent on various factors. Maxicare
is certified by the Healthcare Financing Administration and is licensed in the
state of Florida as a Medicare and Medicaid home health agency. The acquisition
will be accounted for under the purchase method of accounting.
The Company is renegotiating the payment terms of the receivables from certain
of the mental health rehabilitation programs. As a result, the receivables
balance will be discounted by approximately $742,000 which the Company has
previously recorded as bad debt reserve against such receivables, and the net
balance of approximately $5,000,000 will be converted to a note receivable to be
paid by the programs over a five year term with interest to accrue at 9% per
annum (included as Other Receivables as of June 30, 1997). The note will be
secured by all assets of the business.
In August 1997, the Company entered into an asset purchase agreement to acquire
the assets of Doctors Health Group (the "DHG Acquisition") for an aggregate
purchase price of approximately $14.5 million, of which $1.5 million will be
paid in common stock of the Company, par value $0.0001 ("Common Stock"). The
Company has also entered into a letter of intent to sell its Medicare behavioral
health management contracts with freestanding centers and hospitals and is
currently negotiating the purchase of the assets of a Florida based company that
provides behavioral health services to outpatient physician centers and
hospitals through managed care contracts at eight locations which represents
approximately $11.9 million of current revenues. In addition, the Company has
entered into a letter of intent to purchase three Florida based companies that
provide healthcare services to the cruise line industry and to outpatient
centers through managed care contracts for a purchase price between $2.5 and
$5.0 million, of which 80% will be paid in Common Stock of the Company. The
closings of these transactions are subject to various conditions, including
satisfactory completion of due diligence investigations, negotiations of final
terms regarding financial and other conditions to closing, obtaining necessary
consents and approvals and, in certain cases, securing financing. The financing
of these transactions may be funded from a variety of sources, including bank
financing, or the issuance of notes which may be convertible into the Company's
common stock. There can be no assurance that these transactions will be
consummated or, if consummated, will result in financial or other benefit to the
Company.
F-19
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
10.7 Acquisition Facility ($3,000,000), Revolving Credit Facility ($2,000,000) and Security Agreement
among Continucare Corporation, Borrower, and First Union National Bank of Florida, dated
November 14, 1996, as amended on March 4, 1997.
11.1 Computation of Earnings Per Common Share
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10.7
ACQUISITION FACILITY ($3,000,000.00),
REVOLVING CREDIT FACILITY ($2,000,000.00) AND SECURITY AGREEMENT
Among
CONTINUCARE CORPORATION
"Borrower"
and
FIRST UNION NATIONAL BANK OF FLORIDA
"Bank"
DATED NOVEMBER 14, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Section Number
1. Definitions
Defined Terms ............................................................ 1.1
Financial Terms ...................................................... 1.2
2. Representations and Warranties
Valid Existence and Power ............................................ 2.1
Authority ............................................................ 2.2
Financial Condition .................................................. 2.3
Litigation ........................................................... 2.4
Agreements, Etc ...................................................... 2.5
Authorizations ....................................................... 2.6
Title ................................................................ 2.7
Collateral ........................................................... 2.8
Location ............................................................. 2.9
Taxes ................................................................ 2.10
Withholding Taxes .................................................... 2.11
Labor Law Matters .................................................... 2.12
Accounts ............................................................. 2.13
Use and Location of Collateral ....................................... 2.14
Judgment Liens ....................................................... 2.15
Intent and Effect of Transactions .................................... 2.16
Subsidiaries ......................................................... 2.17
Hazardous Materials .................................................. 2.18
ERISA ................................................................ 2.19
Investment Company Act ............................................... 2.20
Additional Representations ........................................... 2.21
3. The Acquisition Loan
Acquisition Loan ..................................................... 3.1
Limitations on Advances .............................................. 3.2
Notice and Manner of Borrowing ....................................... 3.3
Calculation of Interest .............................................. 3.4
Unused Fee ........................................................... 3.5
Repayment Terms ...................................................... 3.6
4. The Revolving Loan
Revolving Loan ....................................................... 4.1
Limitations on Revolving Loan Advances ............................... 4.2
Notice and Manner of Borrowing ....................................... 4.3
Calculation of Interest .............................................. 4.4
Overdue Amounts ...................................................... 4.7
Unused Fee ........................................................... 4.6
30 Day Clean Up Requirement .......................................... 4.7
Repayment Terms ...................................................... 4.8
Letters of Credit; Banker's Acceptances .............................. 4.9
5. Conditions Precedent to Borrowing
Conditions Precedent to Initial Advance .............................. 5.1
Conditions Precedent to Each Advance ................................. 5.2
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
6. Covenants of the Borrower
Use of Loan Proceeds ................................................. 6.1
Maintenance of Business and Properties ............................... 6.2
Insurance ............................................................ 6.3
Notice of Default .................................................... 6.4
Inspections .......................................................... 6.5
Financial Information ................................................ 6.6
Debt ................................................................. 6.7
Liens ................................................................ 6.8
Executive Compensation ............................................... 6.9
Intentionally Omitted ................................................ 6.10
Key Executives as Primary Officers ................................... 6.11
Corporate Accounts ................................................... 6.12
Dividends ............................................................ 6.13
Merger, Sale, Etc .................................................... 6.14
Loans and Other Investments .......................................... 6.16
Change in Business ................................................... 6.16
Accounts ............................................................. 6.17
Transactions with Affiliates ......................................... 6.18
No Change in Name, Offices; Removal of Collateral .................... 6.19
No Sale, Leaseback ................................................... 6.20
Margin Stock ......................................................... 6.21
Payment of Taxes, Etc ................................................ 6.22
Subordination ........................................................ 6.23
Compliance; Hazardous Materials ...................................... 6.24
Subsidiaries ......................................................... 6.25
Compliance with Assignment Laws ...................................... 6.26
Further Assurances ................................................... 6.27
Withholding Taxes .................................................... 6.28
Other Covenants ...................................................... 6.29
7. Defaults
Events of Default .................................................... 7.1
Remedies ............................................................. 7.2
Receiver 7.3
8. Security Agreement
Security Interest .................................................... 8.1
Remedies ............................................................. 8.2
Power of Attorney .................................................... 8.3
Entry ................................................................ 8.4
Deposits; Insurance .................................................. 8.5
Other Rights ......................................................... 8.6
Accounts ............................................................. 8.7
Tangible Collateral .................................................. 8.8
Waiver of Marshalling ................................................ 8.9
9. Arbitration
Preservation and Limitation of Remedies .............................. 9.1
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
10. Miscellaneous
No Waiver, Remedies Cumulative ....................................... 10.1
Survival of Representations .......................................... 10.2
Expenses ............................................................. 10.3
Notices .............................................................. 10.4
Governing Law ........................................................ 10.5
Successors and Assigns ............................................... 10.6
Counterparts ......................................................... 10.7
No Usury ............................................................. 10.8
Powers ............................................................... 10.9
Approvals ............................................................ 10.10
Multiple Borrowers .............................................. 10.11
Conflict ........................................................ 10.12
Other Provisions ................................................ 10.13
Waiver of Jury Trial ............................................ 10.14
Recitals ........................................................ 10.15
</TABLE>
-iii-
<PAGE> 5
ACQUISITION FACILITY, REVOLVING CREDIT FACILITY AND
SECURITY AGREEMENT
THIS AGREEMENT (the "Agreement"), dated as of November 14, 1996 between
CONTINUCARE CORPORATION, a Florida corporation (the "Borrower"), and FIRST UNION
NATIONAL BANK OF FLORIDA, a national banking association (the "Bank");
W I T N E S S E T H :
WHEREAS, Borrower has applied to Bank for an Acquisition Facility Loan,
as defined below, in the maximum principal amount of Three Million Dollars
($3,000,000.00) to be evidenced by a promissory note executed by the Borrower;
and
WHEREAS, Borrower has applied to Bank for a Revolving Loan, as defined
below, in the maximum principal amount of Two Million Dollars ($2,000,000.00) to
be evidenced by a promissory note executed by Borrower; and
WHEREAS, as security for the loans the Borrower has agreed to execute
and deliver to the Lender this Acquisition Facility, Revolving Credit Facility
and Security Agreement and other documentation as reasonably desired by Lender
to create a first security interest in favor of the Bank in and to the business
assets of Borrower; and
WHEREAS, the Bank has agreed to make the loans to the Borrower subject
to the terms of this Agreement and the other Loan Documents, as defined below.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and to induce the Bank to extend credit to the
Borrower, the parties agree as follows:
1. DEFINITIONS. In addition to terms defined elsewhere in this
Agreement, the following terms have the meanings indicated:
1.1. DEFINED TERMS.
"ACCOUNT" shall mean any account receivable, including
any rights of payment for services rendered or goods sold or leased, which is
not evidenced by an instrument or chattel paper, whether or not it has been
earned by performance, and in addition includes all property included in the
definition of "accounts" as used in the Code, together with any guaranties,
letters of credit and other security therefor.
"ACCOUNT DEBTOR" shall mean a Person who is obligated
under any Account, Chattel Paper, General Intangible or instrument (as
instrument is defined in the Code).
"ACQUISITION FACILITY" OR ACQUISITION LOAN" shall mean
the $3,000,000 acquisition loan facility as more fully set forth in Section 3
below to be advanced in accordance with and subject to the terms of this
Agreement.
"ACQUISITION NOTE" shall mean a promissory note
evidencing Advances under the Acquisition Loan.
<PAGE> 6
"ACTUAL/360 METHOD" shall mean the method of determining
the annual effective interest yield by taking the stated (nominal) interest rate
for a year's period and the dividing said rate by 360 to determine the daily
periodic rate to be applied for each day in the interest period. Application of
such computation produces an annualized effective interest rate exceeding that
of the nominal rate.
"ADVANCE" shall mean an advance of proceeds of the
Revolving Loan and/or the Acquisition Loan to the Borrower pursuant to this
Agreement, on any given Advance Date.
"ADVANCE DATE" shall mean the date as of which an Advance
is made.
"ADVANCE REQUEST" shall mean the written request for an
Advance.
"AFFILIATE" of a named Person shall mean (a) any Person
owning 5% more of the voting stock or rights of such named Person or of which
the named Person owns 5% or more of such voting stock or rights; (b) any Person
controlling, controlled by or under common control with such named Person; (c)
any officer or director of such named Person or any Affiliates of the named
Person; and (d) any family member of the named Person or any Affiliate of such
named Person.
"BUSINESS DAY" shall mean a weekday on which commercial
banks are open for business in Miami , Florida.
"CHATTEL PAPER" shall mean all writing or writings which
evidence both a monetary obligation and a security interest in or the lease of
specific goods and in addition includes all property included in the definition
of "chattel paper" as used in the Code, together with any guaranties, letters of
credit and other security therefor.
"CODE" shall mean the Uniform Commercial Code, as in
effect in Florida from time to time.
"COLLATERAL" means the following property of the
Borrower, wherever located and whether now owned by Borrower or hereafter
acquired: (a) all Inventory; (b) all General Intangibles; (c) all Accounts and
Chattel Paper and any other instruments or intangibles representing payment for
goods or services; (d) all Equipment; (e) any other collateral described in
Exhibit 1.1A hereto (if any) or in which the Bank may be hereafter granted a
security interest or Lien; (f) all funds on deposit with or under the control of
the Bank or its agents or correspondents; and (g) all parts, replacements,
substitutions, profits, products and cash and non-cash proceeds of any of the
foregoing (including insurance proceeds payable by reason of loss or damage
thereto) in any form and wherever located. Collateral shall include all written
or electronically recorded records relating to any such Collateral and other
rights relating thereto.
"DEBT" shall mean all liabilities of a Person as
determined under generally accepted accounting principles and all obligations
which such Person has guaranteed or endorsed or is otherwise secondarily or
jointly liable, and shall include, without limitation (a) all obligations of
such Person for borrowed money or purchased assets, (b) obligations secured by
assets of such Person whether or not any personal liability exists, (c) the
capitalized amount of any capital or finance lease obligations of such Person,
(d) the unfunded portion of pension or benefit plans or other similar
liabilities of such Person, (e) obligations of such Person as a general partner,
(f) contingent obligations of such Person pursuant to guaranties, endorsements,
letters of credit and other secondary liabilities, and (g) obligations for
deposits.
"DEFAULT RATE" shall mean a rate equal to five percent
(5%) over the applicable rate then in effect under this Agreement..
-2-
<PAGE> 7
"EQUIPMENT" shall mean all of Borrower's equipment,
machinery, trade fixtures, library materials, software and manuals presently
existing or hereafter acquired, wherever located, and all parts and equipment
which may be attached to or which are necessary to the operation of such
personal property or fixtures, including but not limited to those items
described in Exhibit 1.1A.
"EVENT OF DEFAULT" shall mean any event specified as such
in Section 7.1 hereof ("Events of Default"), provided that there shall have been
satisfied any requirement in connection with such event for the giving of notice
or the lapse of time, or both; "DEFAULT" or "default" shall mean any of such
events, whether or not any such requirement for the giving of notice or the
lapse of time or the happening of any further condition, event or act shall have
been satisfied.
"GENERAL INTANGIBLES" shall mean all intangible personal
property (including things in action) except Accounts, Chattel Paper and
instruments (as defined in the Code), including all contract rights, copyrights,
trademarks, trade names, service marks, patents, patent drawings, designs,
formulas, rights to a Person's name itself, customer lists, rights to all
prepaid expenses, marketing expenses, rights to receive future contracts, fees,
commissions and orders relating in any respect to any business of a Person, all
licenses and permits, all computer programs and other software owned by a
Person, or which a Person has the right to use, and all rights for breach of
warranty or other claims for funds to which a Person may be entitled, and in
addition includes all property included in the definition of "general
intangibles" as used in the Code.
"INDEBTEDNESS" shall mean all obligations now or
hereafter owed to the Bank by the Borrower, whether related or unrelated to the
Loans, including, without limitation, amounts owed or to be owed under the terms
of the Loan Documents, including, without limitations, amounts owed or to be
owed or arising out of the transactions described therein, including, without
limitation, the Loans, sums advanced to pay overdrafts on any account maintained
by the Borrower with the Bank, reimbursement obligations for outstanding letters
of credit or banker's acceptances issued to the account of the Borrower, or its
Subsidiaries, amounts paid by the Bank under letters of credit or drafts
accepted by the Bank for the account of the Borrower or its Subsidiaries,
together with all interest accruing thereon, all reasonable fees of the Bank,
all costs of collection, attorneys' fees and expenses of or advances by the Bank
which the Bank pays or incurs in discharge of obligations of the Borrower or to
repossess, protect, preserve, store or dispose of any Collateral, whether such
amounts are now due or hereafter become due, direct or indirect and whether such
amounts due are from time to time reduced or entirely extinguished and
thereafter re-incurred.
"INVENTORY" means all goods, merchandise and other
personal property of a Person which is held for sale or lease or furnished or to
be furnished under a contract for services or raw materials, and all work in
process and materials used or consumed or to be used or consumed in a Person's
business, and in addition, includes all property included in the definition of
"inventory" as used in the Code.
"LIEN" (collectively "LIENS") shall mean any mortgage,
pledge, statutory lien or other lien arising by operation of law, security
interest, trust arrangement, financing lease, collateral assignment or other
encumbrance, or any segregation of assets or revenues (whether or not
constituting a security interest) with respect to any present or future assets,
revenues or rights to the receipt of income of the Person referred to in the
context in which the term is used.
"LOANS" shall mean the Acquisition Loan and the Revolving
Loan.
"LOAN DOCUMENTS" shall mean this Agreement, any other
Security Agreement, the Notes, the Advance Requests, UCC-l financing statements
and all other documents and instruments now or hereafter evidencing, describing,
guaranteeing or securing the Indebtedness contemplated hereby or delivered in
connection herewith, as they may be modified.
-3-
<PAGE> 8
"MATURITY DATE" shall mean November ____, 1999.
"MAXIMUM ACQUISITION LOAN AMOUNT" shall mean Three
Million Dollars ($3,000,000.00).
"MAXIMUM REVOLVING LOAN AMOUNT" shall mean Two Million
Dollars ($2,000,000.00).
"NOTES" shall mean the Acquisition Note and the Revolving
Note, and any other promissory notes now or hereafter evidencing any
Indebtedness, and all modifications, extensions and renewals thereof.
"PERMITTED DEBT" shall mean (a) the Indebtedness; and (b)
any other Debt listed on Exhibit 1.1C hereto (if any) and any extensions,
renewals, replacements, modifications and refundings of any such Debt if, and to
the extent, permitted by Exhibit 1.1C; provided, however, that the principal
amount of such Debt may not be increased from the amount shown as outstanding on
such exhibit; and (c) such other Debt as the Bank may consent to in writing from
time to time.
"PERMITTED LIENS" shall mean (a) Liens securing the
Indebtedness; (b) Liens for taxes and other statutory Liens, landlord's Liens
and similar Liens arising out of operation of law (provided they are subordinate
to the Bank's Liens on Collateral) so long as the obligations secured thereby
are not past due or are being contested as permitted herein; (c) Liens described
on Exhibit 1.1D hereto (if any), provided, however, that no debt not now secured
by such Liens shall become secured by such Liens hereafter and such Liens shall
not encumber any other assets; and (d) such other Liens as the Bank may consent
to in writing from time to time.
"PERSON" shall mean any natural person, corporation,
unincorporated organization, trust, joint-stock company, joint venture,
association, company, limited or general partnership, any government, or any
agency or political subdivision of any government.
"REVOLVING FACILITY " OR "REVOLVING LOAN" shall mean the
$2,000,000.00 revolving loan facility as set forth in Section 4 hereof.
"REVOLVING NOTE" shall mean the $2,000,000.00 promissory
note evidencing the Revolving Loan.
"SECURITY AGREEMENT" shall mean this Agreement as it
relates to a security interest in the Collateral, and any other mortgage,
security agreement or similar instrument now or hereafter executed by the
Borrower or other Person granting the Bank a security interest in any Collateral
to secure the Indebtedness.
"SUBSIDIARY" shall mean any corporation, partnership or
other Person in which the Borrower, directly or indirectly, owns more than fifty
percent (50%) of the stock, capital or income interests, or other beneficial
interests, or which is effectively controlled by the Borrower. The term
"control" means the possession, directly or indirectly, of the power to cause
the direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
1.2. FINANCIAL TERMS. All financial terms used herein shall
have the meanings assigned to them under generally accepted accounting
principles unless another meanings shall be specified.
2. REPRESENTATIONS AND WARRANTIES. In order to induce the Bank to enter
into this Agreement and to make the Loans provided for herein, the Borrower
makes the following representations and warranties,
-4-
<PAGE> 9
all of which shall survive the execution and delivery of the Loan Documents.
Unless otherwise specified, such representations and warranties shall be deemed
made as of the date hereof and as of the Advance Date of any Advance by the Bank
to the Borrower:
2.1. VALID EXISTENCE AND POWER. The Borrower and each
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization is duly
qualified or licensed to transact business in all places where the failure to be
so qualified would have a material adverse effect on it. The Borrower has the
power to make and perform the Loan Documents executed by it and all such
instruments will constitute the legal, valid and binding obligations of the
Borrower, enforceable in accordance with their respective terms, subject only to
bankruptcy and similar laws affecting creditors' rights generally.
2.2. AUTHORITY. The execution, delivery and performance
thereof by the Borrower have been duly authorized by all necessary action of the
Borrower, and do not and will not violate any provision of law or regulation, or
any writ, order or decree of any court or governmental or regulatory authority
or agency or any provision of the governing instruments of the Borrower, and do
not and will not, with the passage of time or the giving of notice, result in a
breach of, or constitute a default or require any consent under, or result in
the creation of any Lien upon any property or assets of the Borrower pursuant
to, any law, regulation, instrument or agreement to which the Borrower is a
party or by which the Borrower or its properties may be subject, bound or
affected.
2.3. FINANCIAL CONDITION. Other than as disclosed in financial
statements delivered on or prior to the date hereof to the Bank, neither the
Borrower nor any Subsidiary has any direct or contingent obligations or
liabilities (including any guarantees or leases) or any material unrealized or
anticipated losses from any commitments of such Person except as described on
Exhibit 2.3 (if any). The Borrower is not aware of any material adverse fact
(other than facts which are generally available to the public and not particular
to the Borrower, such as general economic or industry trends) concerning the
conditions or future prospects of the Borrower or any Subsidiary which has not
been fully disclosed to the Bank, including any material adverse change in the
operations or financial condition of such Person since the date of the most
recent financial statements delivered to the Bank.
2.4. LITIGATION. Except as disclosed on Exhibit 2.4 (if any),
there are no suits or proceedings pending, or to the knowledge of the Borrower
threatened, before any court or by or before any governmental or regulatory
authority, commission, bureau of agency or public regulatory body against or
affecting the Borrower, any Subsidiary, or their assets, which if adversely
determined would have a material adverse effect on the financial condition or
business of the Borrower or such Subsidiary.
2.5. AGREEMENTS, ETC. Neither the Borrower nor any Subsidiary
is a party to any agreement or instrument or subject to any court order,
governmental decree or any charter or other corporate restriction, materially
adversely affecting its business, properties or assets, operations or condition
(financial or otherwise) nor is any such Person in default in the performance,
observance or fulfillment of any of the material obligations, covenants or
conditions contained in any material agreement or instrument to which it is a
party, or any law, regulation, decree, order or the like.
2.6. AUTHORIZATIONS. All authorizations, consents, approvals
and licenses required under applicable law or regulation for the ownership or
operation of the property owned or operated by the Borrower or any Subsidiary or
for the conduct of any business in which it is engaged have been duly issued and
are in full force and effect except where the failure to have any such
authorization, consent, approval or license would not have a material adverse
effect on the business or financial condition of the Borrower, and it is not in
default, nor has any event occurred which with the passage of time or the giving
of notice, or both, would constitute a default, under any of the terms or
provisions of any part thereof, or under any order, decree, ruling, regulation,
closing agreement or other decision or instrument of any governmental
commission, bureau or
-5-
<PAGE> 10
other administrative agency or public regulatory body having jurisdiction over
such Person, which default would have a material adverse effect on such Person.
Except as noted herein, no approval, consent or authorization of, or filing or
registration with, any governmental commission, bureau or other regulatory
authority or agency is required with respect to the execution, delivery or
performance of any Loan Document.
2.7. TITLE. The Borrower and each Subsidiary has good title to
all of the assets shown in its financial statements free and clear of all Liens,
except Permitted Liens and except for such assets which have been disposed of in
the ordinary course of the Borrower's business since the date of such financial
statements.
2.8. COLLATERAL. The security interests granted to the Bank
herein and pursuant to any other Security Agreement (a) constitute and, as to
subsequently acquired property included in the Collateral covered by the
Security Agreement, will constitute, security interests under the Code entitled
to all of the rights, benefits and priorities provided by the Code and (b) are,
and as to such subsequently acquired Collateral will be fully perfected,
superior and prior to the rights of all third persons, now existing or hereafter
arising, subject only to Permitted Liens. All of the Collateral is intended for
use solely in the Borrower's business.
2.9. LOCATION. The chief executive office of the Borrower
where the Borrower's business records are located is the address designated
for notices in Section 10.4 ("NOTICES") and the Borrower has no other places
of business except as shown on Exhibit 2.9 (if any).
2.10. TAXES. The Borrower and each Subsidiary has filed all
federal and state income and other tax returns which, to the best knowledge of
the Borrower, are required to be filed, and have paid all taxes as shown on said
returns and all taxes, including AD VALOREM taxes, shown on all assessments
received by it to the extent that such taxes have become due. Neither the
Borrower nor any Subsidiary is subject to any federal, state or local tax Liens
nor has such Person received any notice of deficiency or other official notice
to pay any taxes. The Borrower and each Subsidiary has paid all sales and excise
taxes payable by it.
2.11. WITHHOLDING TAXES. The Borrower and each Subsidiary
has paid all withholding, FICA and other payments required by federal, state or
local governments with respect to any wages paid to employees.
2.12. LABOR LAW MATTERS. No goods or services have been or
will be produced by the Borrower or any Subsidiary in violation of any
applicable labor laws or regulations or any collective bargaining agreement or
other labor agreements or in violation of any minimum wage, wage-and-hour or
other similar laws or regulations.
2.13. ACCOUNTS. Each Account, instrument, Chattel Paper and
other writing constituting any portion of the Collateral is (a) genuine and
enforceable in accordance with its terms except for such limits thereon arising
from bankruptcy and similar laws relating to creditors' rights; (b) not subject
to any defense, setoff, claim or counterclaim of a material nature against the
Borrower except as to which the Borrower has notified the Bank in writing or
which is ordinary and usual in the conduct of the Borrower's business or
businesses similarly situated; and (c) not subject to any other circumstances
known to the Borrower that would impair the validity, enforceability or amount
of such Collateral except as to which the Borrower has notified the Bank in
writing or which is ordinary and usual in the conduct of the Borrower's business
or businesses similarly situated..
2.14. USE AND LOCATION OF COLLATERAL. The Collateral is
located only, and shall at all times be kept and maintained only, at the
Borrower's location or locations as described herein. No such Collateral is
attached or affixed to any real property so as to be classified as a fixture
unless the Bank has otherwise agreed in writing.
-6-
<PAGE> 11
2.15. JUDGMENT LIENS. Neither the Borrower nor any
Subsidiary, nor any of their assets, are subject to any unpaid judgments
(whether or not stayed) or any judgment liens in any jurisdiction.
2.16. INTENT AND EFFECT OF TRANSACTIONS. This Agreement and
the transactions contemplated herein (a) are not made or incurred with intent to
hinder, delay or defraud any person to whom the Borrower has been, is now, or
may hereafter become indebted; (b) do not render the Borrower insolvent nor is
the Borrower insolvent on the date of this Agreement; (c) do not leave the
Borrower with unreasonably small capital with which to engage in its business or
in any business or transaction in which it intends to engage; and (d) are not
entered into with the intent to incur, or with the belief that the Borrower
would incur, debts that would be beyond its ability to pay as such debts mature.
2.17. SUBSIDIARIES. If the Borrower has any Subsidiaries,
they are listed on Exhibit 2.17.
2.18. HAZARDOUS MATERIALS. Except as referenced in Section
6.25, the Borrower's property and improvements thereon have not in the past been
used, are not presently being used, and will not in the future be used for, nor
does the Borrower or any Subsidiary engage in, the handling, storage,
manufacture, disposition, processing, transportation, use or disposal of
hazardous or toxic materials.
2.19. ERISA. NEITHER THE BORROWER NOR ANY SUBSIDIARY HAS
ANY PENSION, PROFIT-SHARING OR OTHER BENEFIT PLAN SUBJECT TO THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA").
2.20. INVESTMENT COMPANY ACT. Neither the Borrower nor
any Subsidiary is an "investment company" as defined in the Investment Company
Act of 1940, as amended.
2.21. ADDITIONAL REPRESENTATIONS. Any additional
representations or warranties set forth on Exhibit 2.21 (if any) hereto are true
and correct in all material respects.
3. THE ACQUISITION LOAN
3.1. ACQUISITION LOAN. Subject to the terms of this Agreement,
the Bank agrees to lend to the Borrower a total principal amount not to exceed
Three Million Dollars ($3,000,000.00) to be used for acquisition by Borrower of
business entities and assets. The Acquisition Loan shall be evidenced by and
payable in accordance with the terms of a promissory note in the face amount of
$3,000,000.00. The Acquisition Note shall evidence the outstanding principal
balance of the Acquisition Loan, as it may change from time to time.
Advances under the Acquisition Loan shall be subject to the following terms:
(a) Advances of proceeds of the Acquisition Loan shall be
limited to an aggregate of Three Million Dollars ($3,000,000.00) ("Maximum
Acquisition Loan Amount") at any time outstanding;
(b) The Borrower shall be entitled to initial Advances of
proceeds of the Acquisition Loan up to an aggregate amount of Five Hundred
Thousand Dollars ($500,000.00) without prior approval from Bank;
(c) Any Advance of proceeds of the Acquisition Loan after
the initial $500,000 of Advances shall require the prior written consent of
Bank.
(d) All Acquisition Advances by the Bank to or for the
account of the Borrower, whether or not in excess of the Maximum Acquisition
Loan Amount, shall be considered part of the Indebtedness under the Acquisition
Note, shall bear interest as provided in the Acquisition Note, and shall be
entitled to all rights and benefits hereunder and under all other Loan
Documents; and
-7-
<PAGE> 12
(e) The Borrower shall not request and the Bank will not
be required to consider requests for Acquisition Advances after the Maturity
Date; provided that the Bank may in its discretion extend such date in writing
and further provided that the repayment obligations of the Borrower for
Acquisition Advances made by the Bank after such date (as it may be extended)
shall be binding on the Borrower or other persons liable for any Indebtedness to
the same extent as obligations with respect to Acquisition Advances made prior
to such date.
3.2. LIMITATIONS ON ADVANCES. The outstanding principal
balance of the Acquisition Loan may increase and decrease from time to time, and
Acquisition Advances thereunder may be repaid and reborrowed, but the total of
Acquisition Advances outstanding at any one time under the Acquisition Loan
shall never exceed the Maximum Acquisition Loan Amount. The Borrower shall
immediately pay to the Bank any amount by which the Acquisition Loan exceeds the
Maximum Acquisition Loan Amount. The Bank may, in its discretion, make, or
permit to remain outstanding, Advances to the Borrower in excess of the Maximum
Acquisition Loan Amount and all such amounts shall be part of the Acquisition
Loan and Indebtedness, shall bear interest as provided in the Acquisition Note,
shall be payable ON DEMAND and shall be entitled to all rights and security
provided for herein, in the Security Agreement and all other Loan Documents.
3.3. NOTICE AND MANNER OF BORROWING. Unless another
satisfactory procedure for disbursements is agreed upon in writing by the
parties, the following procedure will be used for disbursement of proceeds of
the Acquisition Loan. For the initial $500,000.00 of Advances, the Borrower
shall deliver a written and signed Advance Request to the Bank not later than
12:00 noon, Jacksonville time, not less than two (2) business days prior to the
proposed Advance Date, setting forth the amount of the requested Advance,
setting forth the intended acquisition, and specifying the date (which shall be
a Business Day), and the amount of the proposed Advance of proceeds, and
providing such other information as the Bank may require. If the Advance Request
is for an amount in excess of $500,000.00, or if the Advance request is
submitted on a date after the Advance of the initial $500,000.00, Borrower shall
deliver the Advance Request not less than fifteen (15) business days prior to
the proposed Advance Date, and shall furnish to Bank documentation evidencing
the proposed Acquisition in form and substance reasonably satisfactory to Bank.
Any Acquisition Advance in excess of $500,000 or which occurs after the initial
Advance of $500,000 shall be subject to the prior written consent of Bank, which
Bank may withhold in its sole discretion.
The time within which any Advance is to be made shall be extended
for the period of any delay beyond Lender's reasonable control. In no event
shall Lender have any liability to Borrower for consequential or special damages
resulting from a failure to fund within the time periods specified above.
3.4. CALCULATION OF INTEREST. All interest under the
Acquisition Note or hereunder shall be calculated on the basis of a 360-day year
for the actual number of days elapsed in an interest period (Actual/360 method),
unless the Bank shall otherwise elect.
3.5. UNUSED FEE. Borrower shall pay to Bank each quarter, for
so long as the Acquisition Loan is outstanding, on the fifteenth day of January,
April, July and October of each year, a fee equal to one-eighth of one percent
(1/8%) of the unused balance of the Acquisition Facility based upon the average
unused balance during the previous calendar quarter.
3.6. REPAYMENT TERMS. All Advances under the Acquisition
Facility shall bear interest at the rate specified in the Acquisition Note.
Interest only on each Acquisition Advance shall be payable monthly in
arrears for a period of six (6) months.
-8-
<PAGE> 13
Commencing six months from the date of each Acquisition Advance,
the Advance shall be repayable in equal monthly amortization payments, based
upon a 5 year amortization on the basis of the principal amount of such
Acquisition Advance outstanding on the six month anniversary thereof.
4. THE REVOLVING LOAN
4.1. REVOLVING LOAN. Subject to the terms of this
Agreement the Bank agrees to lend to the Borrower a total principal amount not
to exceed the amount of Two Million Dollars ($2,000,000.00) for working capital
to be used in the operation of the Borrower's business. The Revolving Loan shall
be evidenced by and payable in accordance with the terms of a promissory note in
the face amount of $2,000,000.00. The Revolving Note shall evidence the
outstanding principal balance of the Revolving Loan, as it may change from time
to time. Advances under the Revolving Loan shall be subject to the following
terms:
(a) Advances of proceeds of the Revolving Loan shall be
limited to an aggregate principal of $2,000,000.00 (the "Maximum Revolving Loan
Amount") at any time outstanding;
(b) Advances of proceeds of the Revolving Loan shall be
in increments of Fifty Thousand Dollars ($50,000.00) each.
(c) Should there occur any overdraft of any deposit
account maintained by the Borrower with the Bank, the Bank may, at its option,
disburse funds (whether or not in excess of the Maximum Revolving Loan Amount)
to eliminate such overdraft and such disbursement shall be deemed an Advance of
Revolving Loan proceeds hereunder entitled to all of the benefits of the Loan
Documents. Nothing herein shall be deemed an authorization of or consent to the
creation of an overdraft in any account or create any obligations on the part of
the Bank;
(d) All Revolving Advances by the Bank to or for the
account of the Borrower, whether or not in excess of the Maximum Revolving Loan
Amount, shall be considered part of the Indebtedness under the Revolving Note,
shall bear interest as provided in the Revolving Note, and shall be entitled to
all rights and benefits hereunder and under all other Loan Documents; and
(e) The Borrower shall not request and the Bank will not
be required to consider requests for Revolving Advances after the Maturity Date;
provided that the Bank may in its discretion extend such date in writing and
further provided that the repayment obligations of the Borrower for Advances
made by the Bank after such date (as it may be extended) shall be binding on the
Borrower or other persons liable for any Indebtedness to the same extent as
obligations with respect to Advances made prior to such date.
4.2. LIMITATIONS ON REVOLVING LOAN ADVANCES. The outstanding
principal balance of the Revolving Loan may increase and decrease from time to
time, and Advances thereunder may be repaid and reborrowed, but the total of
Advances outstanding at any one time under the Revolving Loan shall never exceed
the Maximum Revolving Loan Amount. All prepayments shall be in increments of
Fifty Thousand Dollars ($50,000.00) each.
The Borrower shall immediately pay to the Bank any amount by which the Revolving
Loan exceeds the Maximum Revolving Loan Amount. The Bank may, in its discretion,
make, or permit to remain outstanding, Revolving Advances to the Borrower in
excess of the Maximum Revolving Loan Amount and all such amounts shall be part
of the Loan and Indebtedness, shall bear interest as provided in the Revolving
Note, shall be payable on demand and shall be entitled to all rights and
security provided for herein, the Security Agreement and all other Loan
Documents.
-9-
<PAGE> 14
4.3. NOTICE AND MANNER OF BORROWING. Unless another
satisfactory procedure for disbursements is agreed upon in writing by the
parties, the following procedure will be used for disbursement of proceeds of
the Revolving Loan. The Borrower shall deliver a written and signed Advance
Request to the Bank not later than 12:00 noon, Jacksonville, Florida, time, on
the Business Day of the proposed Advance Date, specifying the date (which shall
be a Business Day), and the amount of the proposed Advance of proceeds, and
providing such other information as the Bank may require.
The time within which any Advance is to be made shall be extended
for the period of any delay beyond Lender's reasonable control. In no event
shall Lender have any liability to Borrower for consequential or special damages
resulting from a failure to fund within the time periods specified above.
4.4. CALCULATION OF INTEREST. All interest under the Note
or hereunder shall be calculated on the basis of a 360-day year for the actual
number of days elapsed in an interest period (Actual/360 method), unless the
Bank shall otherwise elect.
4.5. OVERDUE AMOUNTS. Any payments not made as and when
due shall bear interest from the date due until paid at the Default Rate.
4.6. UNUSED FEE. Borrower shall pay to Bank each quarter
for so long as the Revolving Loan is outstanding, on the fifteenth day of
January, April, July and October of each year, a fee equal to one-eighth of one
percent (1/8%) of the unused balance of the Revolving Facility based upon the
average unused balance during the previous calendar quarter.
4.7. 30 DAY CLEAN UP REQUIREMENT. During each year
between October 1 and the succeeding September 30 Borrower shall repay in full
the Revolving Loan and not borrow any additional funds thereunder for a period
not less than 30 days, so that for a period of not less than 30 days each year
there shall be no outstanding Advances under the Revolving Loan.
4.8 REPAYMENT TERMS. All Advances under the Revolving Facility
shall bear interest at the rate specified in the Revolving Note. Interest only
on the Advances shall be payable quarterly in arrears on the fifteenth day of
each January, April, July and October of each year. The entire outstanding
principal balance plus unpaid accrued interest thereon shall be repayable on the
Maturity Date.
4.9. LETTERS OF CREDIT; BANKER'S ACCEPTANCES.
(a) At its discretion the Bank may from time to time
issue, extend or renew letters of credit and banker's acceptances for the
account of the Borrower or its Subsidiaries. The availability of Advances under
the Revolving Loan shall be reduced by outstanding obligations of the Bank under
any letters and banker's acceptances issued, extended or renewed pursuant to
this Agreement. All payments made by the Bank under any such letters of credit
or banker's acceptances and all fees, commissions, discounts and other amounts
owed or to be owed to the Bank in connection therewith, shall be deemed to be
Revolving Advances under the Revolving Note, shall be secured by the Collateral,
and shall be repaid on demand. The Borrower shall complete and sign such
applications and supplemental agreements and provide such other documentation as
the Bank may reasonably require. The form and substance of all letters of credit
and acceptances, including expiration dates, shall be subject to the Bank's
approval. The Bank may charge a fee or commission for issuance, renewal or
extension of a letter of credit or acceptance. The Borrower unconditionally
guarantees all obligations of any Subsidiary with respect to letters of credit
issued by the Bank for the account of such Subsidiary and all acceptances of any
Subsidiaries' drafts. If after the occurrence of an Event of Default the Bank
should accelerate and demand payment of the Revolving Loan, the Borrower shall,
on demand, deliver to the Bank good funds equal to 100% of the Bank's maximum
liability under all outstanding letters of credit and banker's acceptances
issued for the account of the Borrower and its
-10-
<PAGE> 15
Subsidiaries under this Agreement, to be held as cash collateral for the
Borrower's reimbursement obligations and other indebtedness.
(b) In order to induce Bank to issue letters of credit
and banker's acceptances, the Borrower agrees that neither Bank nor its
correspondents or agents shall be liable or responsible for, and the Borrower's
unconditional obligation to reimburse Bank for draws under and payments made by
the Bank in respect to such letters of credit and bankers acceptances shall not
be affected by, any event or circumstance, including without limitation: (i) the
validity, enforceability, genuineness or sufficiency of documents or of any
endorsement thereon existing in connection with any such letter of credit or
banker's acceptance, even if such documents should in fact prove in any or all
respects to be invalid unenforceable, insufficient, fraudulent or forged; (ii)
any breach of contract or other dispute between the Borrower and any beneficiary
of a letter of credit or holder of a draft accepted by the Bank; (iii) payment
by the Bank upon presentation of a draft or documents which do not comply in any
respect with the terms of such letter of credit or draft; (iv) loss of or damage
to any collateral; (v) the invalidity or insufficiency of any endorsements; (vi)
delay in giving or failure to give notice of arrival or any other notice; (vii)
failure of any instrument to bear any reference or adequate reference to the
letter of credit or draft or to documents to accompany any instrument at
negotiation; or (viii) failure of any person to note the amount of any payment
on the reverse of the letter of credit or to surrender to or take up the letter
of credit or draft or to forward documents in the manner required by the letter
of credit or draft; or (ix) any other matter whatsoever excepting only with
respect to each of the foregoing items the gross negligence (or negligence as to
(iii) above) or willful misconduct of the Bank or its agent. The Borrower agrees
that any action taken or permitted to be taken by the Bank or its agent under or
in connection with any letter of credit or banker's acceptance, including
related drafts, documents, or property, unless constituting gross negligence or
willful misconduct (or negligence as to (iii) above on the part of the Bank or
its agent), shall be binding on the Borrower and shall not create any resulting
liability to the Borrower on the part of the Bank or its agent. The Borrower
will promptly examine a copy of the letter of credit (and any amendments
thereof) or draft sent to it by the Bank or its agent, and the Borrower will
immediately notify the Bank in writing of any claim or irregularity.
(c) Any letter of credit issued hereunder shall be
governed by the Uniform Customs of Practice for Documentary Credit (1993 Rev.),
International Chamber of Commerce Publication No. 500, as revised from time to
time.
5. CONDITIONS PRECEDENT TO BORROWING. Prior to any Advance of the
proceeds of any Loans, the following conditions shall have been satisfied, in
the sole opinion of the Bank and its counsel:
5.1. CONDITIONS PRECEDENT TO INITIAL ADVANCE. In addition
to any other requirement set forth in this Agreement, the Bank will not make the
initial Advance under the Loans unless and until the following conditions shall
have been satisfied:
(a) LOAN DOCUMENTS. The Borrower and each other party to
any Loan Documents, as applicable, shall have executed and delivered this
Agreement, the Notes, and other required Loan Documents, all in form and
substance satisfactory to the Bank.
(b) SUPPORTING DOCUMENTS. The Borrower shall cause to be
delivered to the Bank the following documents:
(i) A copy of the governing instruments of the
Borrower and each Subsidiary, and a good standing certificate of the
Borrower and each Subsidiary, certified by the appropriate official of its
state of incorporation and the State of Florida, if different;
-11-
<PAGE> 16
(ii) Incumbency certificate and certified
resolutions of the board of directors (or other appropriate Persons) of the
Borrower executing any Loan Documents authorizing the execution, delivery and
performance of the Loan Documents; and
(iii) UCC-11 searches and other Lien searches
showing no existing security interests in or Liens on the Collateral other
than the security interests of the Bank and other than Permitted Liens.
(c) INSURANCE. The Borrower shall have delivered to the
Bank satisfactory evidence of insurance meeting the requirements of Section 6.3
("INSURANCE").
(d) PERFECTION OF LIENS. UCC-l financing statements
covering the Collateral executed by the Borrower shall duly have been recorded
or filed in the manner and places required by law to establish, preserve,
protect and perfect the interests and rights created or intended to be created
by this Agreement and any other Security Agreement; and all taxes, fees and
other charges in connection with the execution, delivery and filing of this
Agreement, the Security Agreement and the financing statements shall duly have
been paid.
(e) LANDLORD SUBORDINATIONS. If required by Bank after
review of the Collateral, the Bank shall have received subordinations
satisfactory to it from all lessors that might have landlord' s liens on any
Collateral. (f) ADDITIONAL DOCUMENTS. The Borrower shall have delivered to the
Bank all additional opinions, documents, certificates and other assurances that
the Bank or its counsel may reasonably require.
5.2. CONDITIONS PRECEDENT TO EACH ADVANCE. The following
conditions, in addition to any other requirements set forth in this Agreement,
shall have been met or performed by the applicable Advance Date with respect to
any Advance Request:
(a) ADVANCE REQUEST. The Borrower shall have delivered to
the bank an Advance Request and other information, as required under in Section
3 or 4, as applicable ("NOTICE AND MANNER OF BORROWING").
(b) NO DEFAULT. No Default shall have occurred and be
continuing or will occur upon the making of the Advance in question and the
Borrower shall have delivered to the Bank an officer's certificate to such
effect, which shall be incorporated in the Advance Request.
(c) CORRECTNESS OF REPRESENTATIONS. All representations
and warranties made by the Borrower shall be true and correct with the same
effect as though the representations and warranties had been made on and as of
the proposed Advance Date and the Borrower shall have delivered to the Bank an
officer's certificate to such effect, which shall be incorporated in the Advance
Request.
(d) NO ADVERSE CHANGE. There shall have been no material
adverse change in the condition, financial or otherwise, of the Borrower from
such condition as it existed on the date of the most recent financial statements
of such Person delivered prior to date hereof.
(e) FURTHER ASSURANCES. The Borrower shall have delivered
such further documentation or assurances as the Bank may reasonably require.
-12-
<PAGE> 17
6. COVENANTS OF THE BORROWER. The Borrower covenants and
agrees that from the date hereof and until payment in full of the Indebtedness
and the formal termination of this Agreement, unless the Bank shall otherwise
consent in writing, the Borrower and each Subsidiary:
6.1. USE OF LOAN PROCEEDS. Shall use the proceeds of the
Loans only for the commercial purposes permitted herein or otherwise permitted
by the Bank and furnish the Bank all evidence that it may reasonably require
with respect to such use.
6.2. MAINTENANCE OF BUSINESS AND PROPERTIES. Shall at all
times maintain, preserve and protect all Collateral and all the remainder of its
material property used or useful in the conduct of its business, and keep the
same in good repair, working order and condition, and from time to time make, or
cause to be made, all material needful and proper repairs, renewals,
replacements, betterments and improvements thereto so that the business carried
on in connection therewith may be conducted properly and in accordance with
standards generally accepted in businesses of a similar type and size at all
times, and maintain and keep in full force and effect all licenses and permits
necessary to the proper conduct of its business.
6.3. INSURANCE. Shall maintain such liability insurance,
workers' compensation insurance, business interruption insurance and casualty
insurance as may be required by law, customary and usual for prudent businesses
in its industry or as may be reasonably required by the Bank and shall insure
and keep insured all Collateral and other properties in good and responsible
insurance companies satisfactory to the Bank. All hazard insurance covering
Collateral shall be in amounts and shall contain co-insurance and deductible
provisions approved by the Bank, shall name and directly insure the Bank as
secured party and loss payee under a long-form New York standard loss payee
clause, or its equivalent, and shall not be terminable except upon 30 days'
written notice to the Bank.
6.4. NOTICE OF DEFAULT. Shall provide to the Bank immediate
notice of (a) the occurrence of a Default, (b) any material litigation or
material changes in existing litigation or any judgment against it or its
assets, (c) any material damage or loss to property in excess of applicable
insurance coverage therefor, (d) any notice from taxing authorities as to
claimed deficiencies or any tax lien or any notice relating to alleged ERISA
violations, (e) any Reportable Event, as defined in ERISA, (f) any rejection,
return, offset, dispute, loss or other circumstance having a material adverse
effect on any Collateral, and (g) any loss or threatened loss of material
licenses or permits.
6.5. INSPECTIONS. Shall permit inspections of the Collateral
and the records of such Person pertaining thereto, at such times and in such
manner as may be reasonably required by the Bank and shall further permit such
inspection, review and audits of its other records and its properties (with such
reasonable frequency and at such reasonable times as the Bank may desire) by the
Bank as the Bank may deem necessary or desirable from time to time. The cost of
such audits, reviews and inspections shall be borne by the Borrower.
6.6. FINANCIAL INFORMATION. Shall maintain books and
records in accordance with generally accepted accounting principles and shall
furnish to the Bank the following periodic financial information:
(a) MONTHLY REPORTS. Within fifteen days of the end of
each month (or more frequently if required by the Bank), a report listing
Accounts of the Borrower as of the last Business Day of such month (the
"Accounts Receivable Report") which shall include the amount and age of each
Account, the name and mailing address of each Account Debtor and such other
information as the Bank may reasonably require, all in reasonable detail and in
form reasonably acceptable to the Bank;
(b) QUARTERLY REPORTS. Within 30 days after the end of
each fiscal quarter, an income statement and a balance sheet prepared in
accordance with generally accepted accounting principles,
-13-
<PAGE> 18
as at the end of any for such month and year-to-date, each certified by the
chief financial officer or president of the Borrower as being true and accurate
(subject to year end audit adjustments);
(c) ANNUAL REPORTS. Within 90 days after the end of each
fiscal year, an income statement and a reconciliation of surplus statement of
the Borrower for such year, and a balance sheet as of the end of such year,
prepared in accordance with generally accepted accounting principles, reviewed
by independent certified public accountants of recognized standing selected by
the Borrower and reasonably satisfactory to the Bank; and
(d) NO DEFAULT CERTIFICATES. Together with each report
required by Subsection (b) and (c), shall submit a certificate of its president
or chief financial officer that no Default or Event of Default then exists or if
a Default or Event of Default exists, the nature and duration thereof and the
Borrower's intention with respect thereto. If the Borrower has Subsidiaries, the
financial statements required above shall be in consolidated and, if required by
the Bank, consolidating form for the Borrower and all Subsidiaries required by
generally accepted accounting principles to be consolidated for financial
reporting purposes. In addition to the financial statements required herein, the
Bank reserves the right in its reasonable discretion to require other or
additional financial or other information concerning the Borrower, its
Subsidiaries, and/or the Collateral.
6.7 DEBT. Shall not create or permit to exist any Debt,
including any guaranties or other contingent obligations, except Permitted Debt.
6.8. LIENS. Shall not create or permit to exist any Liens
on any of its property except Permitted Liens.
6.9. EXECUTIVE COMPENSATION. Shall not pay on an annual
basis more than $350,000 in any calendar year to the primary executive of
Borrower (the "Key Executive"), Charles Fernandez.
6.10 Intentionally Omitted.
6.11. KEY EXECUTIVE AS PRIMARY OFFICER. Shall not allow
or permit Charlie Fernandez to be removed or discharged or terminated from his
position as the Chief Executive Officer of Borrower.
6.12 CORPORATE ACCOUNT. Shall maintain its primary
operating and business bank accounts with Lender.
6.13 DIVIDENDS. Shall not pay or declare any dividends
(other than stock dividends) or other distribution or purchase, redeem or
otherwise acquire any stock or other equity interests or pay or acquire any debt
subordinate to the Indebtedness unless, after giving effect thereto, there shall
be no Default hereunder and such payment or acquisition is specifically
permitted by Exhibit 6.13 hereto (if any); provided, however, that any
Subsidiary may pay dividends to the Borrower or another Subsidiary wholly-owned
by the Borrower.
6.14. MERGER, SALE, ETC. Shall maintain its corporate
existence, good standing and necessary qualifications to do business and shall
not merge or consolidate with any Person or acquire all or substantially all of
the assets of, or 70% or more of any class of equity interest of, any Person or
sell, lease, assign or otherwise dispose of any Collateral or substantial
portion of its other assets (other than sales of obsolete or worn-out equipment
and sales of Inventory in the ordinary course of business), or sell or otherwise
dispose of stock of any Subsidiary.
6.15. LOANS AND OTHER INVESTMENTS. Shall not make or
permit to exist any advances or loans to, or guarantee or become contingently
liable, directly or indirectly, in connection with the obligations,
-14-
<PAGE> 19
leases, stock or dividends of, or own, purchase or make any commitment to
purchase any stock, bonds, notes, debentures or other securities of, or any
interest in, or make any capital contributions to (all of which are sometimes
collectively referred to herein as "Investments") any Person except for (a)
purchases of direct obligations of the federal government, (b) deposits in
commercial banks, (c) commercial paper of any U.S. corporation having the
highest ratings then given by Moody's Investors Service, Inc. or Standard &
Poor's Corporation, (d) investments in Subsidiaries, (e) endorsement of
negotiable instruments for collection in the ordinary course of business, and
(f) acquisitions permitted under this Agreement.
6.16. CHANGE IN BUSINESS. Shall not enter into any
business which is substantially different from the business or businesses in
which it is presently engaged.
6.17. ACCOUNTS. (a) shall not sell, assign or discount
any of its Accounts, Chattel Paper or any promissory notes held by it other than
the discount of such notes in the ordinary course of business for collection;
and (b) shall notify the Bank promptly in writing with any discount, offset or
other deductions not shown on the face of an Account invoice and any dispute
over an Account, and any information relating to an adverse change in any
Account Debtor's financial condition or ability to pay its obligations.
6.18. TRANSACTIONS WITH AFFILIATES. Shall not directly or
indirectly purchase, acquire or lease any property from, or sell, transfer or
lease any property to, or otherwise deal with, in the ordinary course of
business or otherwise, any Affiliate (other than a Subsidiary); provided,
however, that any acts or transactions prohibited by this Section may be
performed or engaged in, if upon terms not less favorable to the Borrower or
such Subsidiary than if no such relationship existed. Any such Affiliate may be
a director, officer, employee of the Borrower or any Subsidiary, subject to the
limitations on compensation contained in this Section and elsewhere in this
Agreement.
6.19. NO CHANGE IN NAME, OFFICES; REMOVAL OF COLLATERAL.
Shall not, unless it shall have given 60 days' advance written notice thereof to
the Bank, (a) change its name or the location of its chief executive office or
other office where books or records are kept or (b) permit any Inventory or
other tangible Collateral to be located at any location other than as specified
in Section 2.9. ("LOCATION").
6.20. NO SALE, LEASEBACK. Shall not enter into any
sale-and-leaseback or similar transaction.
6.21. MARGIN STOCK. Shall not use any proceeds of the
Loan to purchase or carry any margin stock (within the meaning of Regulation U
of the Board of Governors of Federal Reserve System) or extend credit to others
for the purpose of purchasing or carrying any margin stock.
6.22. PAYMENT OF TAXES, ETC. Shall pay before delinquent all
of its debts and taxes except that the Bank shall not unreasonably withhold its
consent to nonpayment of taxes being actively contested in accordance with law
(provided that the Bank may require bonding or other reasonable assurances if
such contest were to pose a material threat to the lien or priority of the Bank
Security interest in any Collateral or the forfeiture of any Collateral).
6.23. SUBORDINATION. Shall cause all debt and other
obligations now or hereafter owed to any Affiliate to be subordinated in right
of payment and security to the Indebtedness in accordance with subordination
agreements reasonably satisfactory to the Bank.
6.24. COMPLIANCE; HAZARDOUS MATERIALS. Shall strictly
comply with all laws, regulations, ordinances and other legal requirements,
specifically including, without limitation, ERISA, all securities laws and all
laws relating to hazardous materials and the environment. Neither the Borrower
nor any Subsidiary shall engage in the storage, manufacture, disposition,
processing, handling, use or transportation of any hazardous or toxic materials,
whether or not in compliance with applicable laws and regulations.
-15-
<PAGE> 20
6.25. SUBSIDIARIES. Except with respect to acquisitions
permitted under this Agreement, shall not acquire, form or dispose of any
Subsidiaries or permit any Subsidiary to issue capital stock except to its
parent.
6.26. COMPLIANCE WITH ASSIGNMENT LAWS. Shall if
reasonably required by the Bank comply with the Federal Assignment of Claims Act
and any other applicable law relating to assignment of government contracts.
6.27. FURTHER ASSURANCES. Shall take such further action
and provide to the Bank such further assurances as may be reasonably requested
to ensure compliance with the intent of this Agreement and the other Loan
Documents.
6.28. WITHHOLDING TAXES. Pay as and when due all employee
withholding, FICA and other payments required by federal, state and local
governments with respect to wages paid to employees.
6.29. OTHER COVENANTS. Shall comply with such additional
covenants as may be set forth in Exhibit 6.30 hereto.
7. DEFAULT.
7.1. EVENTS OF DEFAULT. Each of the following shall
constitute an Event of Default:
(a) Any representation or warranty made by the Borrower
herein or therein or in any certificate or report furnished in connection
herewith or therewith shall prove to have been untrue or incorrect in any
material respect when made; or
(b) There shall occur any default by the Borrower in the
payment, when due, of any principal of or interest on the Notes, or any of the
Notes, any amounts due hereunder or any other Loan Document or any other
Indebtedness (not cured within any grace period provided in such Note or in the
document or instrument evidencing such Indebtedness), it being expressly
understood and agreed that a default under any of the Acquisition Note or the
Revolving Note shall constitute a default under all Notes;
(c) There shall occur any default by the Borrower in the
performance of any agreement, covenant or obligation contained in this Agreement
or such Loan Document not provided for elsewhere in this Section 7 and such
default is not cured within any grace period provided in this Agreement or such
other Loan Document in respect to such default;
(d) Any other obligation now or hereafter owed by the
Borrower or any Subsidiary to the Bank shall be in default and not cured within
any applicable period of grace provided therein or any such Person shall be in
default under any other obligation for the payment of money in excess of
$100,000.00 owed to any other obligee, which default entitles the obligee to
accelerate any such obligations or exercise other remedies with respect thereto;
or
(e) A total of more than fifteen (15) of the management
contracts of the Borrower pertaining to mental health centers, partial
hospitalization programs and acute care hospitals are canceled or terminated in
any calendar year; or
(f) Management contracts of Borrower pertaining to mental
health centers, partial hospitalization programs and acute care hospitals which
collectively yield more than 10% of the annual revenue of Borrower are cancelled
or terminated in any calendar year; or
-16-
<PAGE> 21
(g) The Borrower or any Subsidiary shall (i) voluntarily
liquidate or terminate operations or apply for or consent to the appointment of,
or the taking of possession by, a receiver, custodian, trustee or liquidator of
such Person or of all or of a substantial part of its assets, (ii) admit in
writing its inability, or be generally unable, to pay its debts as the debts
become due, (iii) make a general assignment for the benefit of its creditors,
(iv) commence a voluntary case under the federal Bankruptcy Code (as now or
hereafter in effect), (v) file a petition seeking to take advantage of any other
law relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or adjustment of debts, (vi) fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against it in
an involuntary case under the Bankruptcy Code, or (vii) take any corporate
action for the purpose of effecting any of the foregoing; or
(h) Without its application, approval or consent, a
proceeding shall be commenced, in any court of competent jurisdiction, seeking
in respect of such Person any remedy under the federal Bankruptcy Code, the
liquidation, reorganization, dissolution, winding-up, or composition or
readjustment of debt, the appointment of a trustee, receiver, liquidator or the
like of such Person, or of all or any substantial part of the assets of such
Person, or other like relief under any law relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts which is not
dismissed within sixty (60) days of the commencement thereof; or
(i) Any security interest or Lien of the Bank hereunder
or under any other Security Agreement shall not constitute a perfected security
interest of first priority in the Collateral thereby encumbered, subject only to
Permitted Liens; or
(j) There shall occur any material loss, theft, damage or
destruction of any of the Collateral, which loss is not fully insured unless the
Borrower provides additional Collateral or other adequate assurances to the Bank
upon demand; or
(k) A judgment in excess of $50,000.00 shall be rendered
against the Borrower or any Subsidiary and shall remain undischarged,
undismissed and unstayed for more than ten days (except judgments validly
covered by insurance with a deductible of not more than $50,000.00) or there
shall occur any levy upon, or attachment, garnishment or other seizure of, any
material portion of the Collateral or other assets of the Borrower or, any
Subsidiary by reason of the issuance of any tax levy, judicial attachment or
garnishment or levy of execution which remains undischarged, undismissed and
unstayed for more than ten days; or
(l) Changes occur in the Federal regulations or laws
governing Medicare and/or Medicaid programs which materially adversely impact
the operations and business of Borrower, in the reasonable opinion of Bank.
7.2. REMEDIES. If any Default shall occur, the Bank may,
without notice to the Borrower, at its option, withhold further Advances to the
Borrower of proceeds of the Loans. Should (a) any nonmonetary Event of Default
occur and not be cured within thirty (30) days following delivery of written
notice thereof by the Bank to the Borrower (which notice shall be complete upon
hand or overnight delivery or upon facsimile delivery or mailing by certified
mail, return receipt requested) or, if such nonmonetary default is not curable
with said 30 day period, if action to cure is commenced within said 30 day
period and diligently pursued, and the Collateral or the security for the Loan
is not impaired, a reasonable time to cure shall be afforded, not to exceed a
total of ninety (90) days after such notice or (b) any monetary Event of Default
occur, the Bank may declare any or all Indebtedness to be immediately due and
payable (if not earlier demanded), bring suit against the Borrower to collect
the Indebtedness, exercise any remedy available to the Bank hereunder and take
any action or exercise any remedy provided herein or in any other Loan Document
or under applicable law. No remedy shall be exclusive of other remedies or
impair the right of the Bank to exercise any other remedies.
-17-
<PAGE> 22
7.3 RECEIVER. In addition to any other remedy available to it,
the Bank shall have the absolute right, upon the occurrence of an Event of
Default, to seek and obtain the appointment of a receiver to take possession of
and operate and/or dispose of the business and assets of the Borrower and any
costs and expenses incurred by the Bank in connection with such receivership
shall bear interest at the Default Rate and shall be secured by all Collateral.
8. SECURITY AGREEMENT.
8.1. SECURITY INTEREST.
(a) As security for the payment and performance of any
and all of the Indebtedness and the performance of all other obligations and
covenants of the Borrower hereunder and under the Loan Documents, certain or
contingent, now existing or hereafter arising, which are now, or may at any time
or times hereafter be owing by the Borrower to the Bank, the Borrower hereby
pledges to the Bank and give the Bank a continuing security interest in and
general Lien upon and right of set-off against, all right, title and interest of
the Borrower in and to the Collateral, whether now owned or hereafter acquired
by the Borrower.
(b) Except as herein or by applicable law otherwise
expressly provided, the Bank shall not be obligated to exercise any degree of
care in connection with any Collateral in its possession, to take any steps
necessary to preserve any rights in any of the Collateral or to preserve any
rights therein against prior parties, and the Borrower agrees to take such
steps. In any case the Bank shall be deemed to have exercised reasonable care if
it shall have taken such steps for the care and preservation of the Collateral
or rights therein as the Borrower may have reasonably requested the Bank to take
and the Bank's omission to take any action not requested by the Borrower shall
not be deemed a failure to exercise reasonable care. No segregation or specific
allocation by the Bank of specified items of Collateral against any liability of
the Borrower shall waive or affect any security interest in or Lien against
other items of Collateral or any of the Bank's options, powers or rights under
this Agreement or otherwise arising.
(c) Upon the occurrence of an Event of Default and the
expiration of any applicable grace or cure period the Bank may at any time and
from time to time, with or without notice to the Borrower, (i) transfer into the
name of the Bank or the name of the Bank's nominee any of the Collateral, (ii)
notify any Account Debtor or other obligor of any Collateral to make payment
thereon direct to the Bank of any amounts due or to become due thereon and (iii)
receive and after a default direct the disposition of any proceeds of any
Collateral.
(d) In the event that Borrower and Bank execute any
International Swap Dealers Association (ISDA) Master Agreements and Schedules
then the Collateral shall also secure such ISDA Master Agreement and Schedules,
together with confirmation letters, which may hereafter be executed between
Borrower and Bank.
8.2. REMEDIES.
(a) If an Event of Default shall have occurred and be
continuing, without waiving any of its other rights hereunder or under any other
Loan Documents, the Bank shall have all rights and remedies of a secured party
under the Code (and the Uniform Commercial Code of any other applicable
jurisdiction) and such other rights and remedies as may be available hereunder,
under other applicable law or pursuant to contract. If requested by the Bank,
the Borrower will promptly assemble the Collateral and make it available to the
Bank at a place to be designated by the Bank. The Borrower agrees that any
notice by the Bank of the sale or disposition of the Collateral or any other
intended action hereunder, whether required by the Code or otherwise, shall
constitute reasonable notice to the Borrower if the notice is mailed to the
Borrower by regular or certified mail, postage prepaid, at least ten days before
the action to be taken.
-18-
<PAGE> 23
The Borrower shall be liable for any deficiencies in the event the proceeds of
the disposition of the Collateral do not satisfy the Indebtedness in full.
(b) If an Event of Default shall have occurred and be
continuing, the Bank may demand, collect and sue for all amounts owed pursuant
to Accounts, General Intangibles, Chattel paper or for proceeds of any
Collateral (either in the Borrower's name or the Bank's name at the latter's
option), with the right to enforce, compromise, settle or discharge any such
amounts. The Borrower appoints the Bank as the Borrower's attorney-in-fact to
endorse the Borrower's name on all checks, commercial paper and other
instruments pertaining to Collateral or proceeds.
8.3. POWER OF ATTORNEY. The Borrower authorizes the Bank
at the Borrower's expense to file any financing statements relating to the
Collateral (without the Borrower's signature thereon) which the Bank reasonably
deems appropriate and the Borrower irrevocably appoints the Bank as its
attorney-in-fact to execute any such financing statements in the Borrower's name
and to perform all other acts which the Bank reasonably deems appropriate to
perfect and to continue perfection of the security interest of the Bank. The
Borrower hereby appoints the Bank as the Borrower's attorney-in-fact to, upon
the occurrence and continuance of any Event of Default, endorse, present and
collect on behalf of the Borrower and in the Borrower's name any draft, checks
or other documents necessary or desirable to collect any amounts which the
Borrower may be owed.
8.4. ENTRY. The Borrower hereby irrevocably consents to
any act by the Bank or its agents in entering upon any premises for the purposes
of inspecting the Collateral and the Borrower hereby waives its right to assert
against the Bank or its agents any claim based upon trespass or any similar
cause of action for entering upon any premises where the Collateral may be
located.
8.5. DEPOSITS; INSURANCE. Upon the occurrence and
continuance of an Event of Default, the Borrower authorizes the Bank to collect
and apply against the Indebtedness when due any cash or deposit accounts in its
possession, and any refund of insurance premiums or any insurance proceeds
payable on account of the loss or damage to any of the Collateral and
irrevocably appoints the Bank as its attorney-in-fact to endorse any check or
draft or take other action necessary to obtain such funds.
8.6. OTHER RIGHTS. The Borrower authorizes the Bank
without affecting the Borrower's obligations hereunder or under any other Loan
Document from time to time (i) to take from any party and hold additional
Collateral or guaranties for the payment of the Indebtedness or any part
thereof, and to exchange, enforce or release such collateral or guaranty of
payment of the Indebtedness or any part thereof and to release or substitute any
endorser or guarantor or any party who has given any security interest in any
collateral as security for the payment of the Indebtedness or any part thereof
or any party in any way obligated to pay the Indebtedness or any part thereof;
and (ii) upon the occurrence and continuance of any Event of Default to direct
the manner of the disposition of the Collateral and the enforcement of any
endorsements, guaranties, letters of credit or other security relating to the
Indebtedness or any part thereof as the Bank in its sole discretion may
determine.
8.7. ACCOUNTS. Upon the occurrence and continuance of any
Event of Default, the Bank may notify any Account Debtor of the Bank's security
interest and may direct such Account Debtor to make payment directly to the Bank
for application against the Indebtedness. Any such payments received by or on
behalf of the Borrower at any time, whether before or after default, shall be
the property of the Bank, shall be held in trust for the Bank and not commingled
with any other assets of any Person (except to the extent they may be commingled
with other assets of the Borrower in an account with the Bank) and shall be
immediately delivered to the Bank in the form received. The Bank shall have the
right to apply any proceeds of Collateral to such of the Indebtedness as it may
determine.
-19-
<PAGE> 24
8.8. TANGIBLE COLLATERAL. Except as otherwise provided herein
or agreed to in writing by the Bank, no Inventory or other tangible Collateral
shall be commingled with, or become an accession to or part of, any property of
any other Person so long as such property is Collateral. Upon the occurrence and
continuance of any Event of Default, the Borrower shall, upon the request of the
Bank, promptly assemble all tangible Collateral for delivery to the Bank or its
agents. No tangible Collateral shall be allowed to become a fixture unless the
Bank shall have given its prior written authorization.
8.9. WAIVER OF MARSHALLING. The Borrower hereby waives
any right it may have to require marshalling of its assets.
9. ARBITRATION. Upon demand of any party hereto, whether
made before or after institution of any judicial proceeding, any dispute, claim
or controversy arising out of, connected with or relating to this Agreement, and
other Loan Documents ("Disputes") between or among parties to this Agreement,
shall be resolved by binding arbitration as provided herein. Institution of a
judicial proceeding by a party does not waive the right of that party to demand
arbitration hereunder. Disputes may include, without limitation, tort claims,
counterclaims, disputes as to whether a matter is subject to arbitration, claims
brought as class actions, claims arising from Loan Documents executed in the
future, or claims arising out of or connected with the transaction reflected by
this Agreement.
Arbitration shall be conducted under and governed by the
Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the
American Arbitration Association (the "AAA") and Title 9 of the U.S. Code. All
arbitration hearings shall be conducted in the city in which the office of Bank
first stated above is located. The expedited procedures set forth in Rule 51 ET
SEQ. of the Arbitration Rules shall be applicable to claims of less than
$1,000,000. All applicable statutes of limitation shall apply to any Dispute. A
judgment upon the award may be entered in any court having jurisdiction. The
panel from which all arbitrators are selected shall be comprised of licensed
attorneys. The single arbitrator selected for expedited procedure shall be a
retired judge from the highest court of general jurisdiction, state or federal,
of the state where the hearing will be conducted or if such person is not
available to serve, the single arbitrator may be a licensed attorney.
Notwithstanding the foregoing, this arbitration provision does not apply to
disputes under or related to swap agreements.
9.1 PRESERVATION AND LIMITATION OF REMEDIES. Notwithstanding
the preceding binding arbitration provisions, Bank and Borrower agree to
preserve, without diminution, certain remedies that any party hereto may employ
or exercise freely, independently or in connection with an arbitration
proceeding or after an arbitration action is brought. Bank and Borrower shall
have the right to proceed in any court of proper jurisdiction or by self-help to
exercise or prosecute the following remedies, as applicable: (i) all rights to
foreclose against any real or personal property or other security by exercising
a power of sale granted under Loan Documents or under applicable law or by
judicial foreclosure and sale, including a proceeding to confirm the sale; (ii)
all rights of self-help including peaceful occupation of real property and
collection of rents, set-off, and peaceful possession of personal property; and
(iii) obtaining provisional or ancillary remedies including injunctive relief,
sequestration, garnishment, attachment, appointment of receiver and filing an
involuntary bankruptcy proceeding. Preservation of these remedies does not limit
the power of an arbitrator to grant similar remedies that may be requested by a
party in a Dispute.
Borrower and Bank agree that they shall not have a remedy of punitive or
exemplary damages against the other in any Dispute and hereby waive any right or
claim to punitive or exemplary damages they have now or which may arise in the
future in connection with any Dispute whether the Disputes is resolved by
arbitration or judicially.
-20-
<PAGE> 25
10. MISCELLANEOUS.
10.1. NO WAIVER, REMEDIES CUMULATIVE. No failure on the
part of the Bank to exercise, and no delay in exercising, any right hereunder or
under any other Loan Document shall operate as a waiver thereof, nor shall any
single or partial exercise of any right hereunder preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and are in addition to any other remedies provided by
law, any Loan Document or otherwise.
10.2. SURVIVAL OF REPRESENTATIONS. All representations and
warranties made herein shall survive the making of the Loans hereunder and the
delivery of the Notes, and shall continue in full force and effect so long as
any Indebtedness is outstanding, there exists any commitment by the Bank to the
Borrower, and until this Agreement is formally terminated in writing.
10.3. EXPENSES. Whether or not the Loans herein provided for
shall be made, the Borrower shall pay all reasonable costs and expenses in
connection with the preparation, execution, delivery, amendment and enforcement
of this Agreement and any Loan Document, including the reasonable fees and
disbursements of counsel for the Bank in connection therewith, whether suit be
brought or not and whether incurred at trial or on appeal, and all costs of
repossession, storage, disposition, protection and collection of Collateral. If
the Borrower should fail to pay any tax or other amount required by this
Agreement to be paid or which may be reasonably necessary to protect or preserve
any Collateral or the Borrower's or Bank's interests therein, the Bank may make
such payment and the amount thereof shall be payable on demand, shall bear
interest at the Default Rate from the date of demand until paid and shall be
deemed to be Indebtedness entitled to the benefit and security of the Loan
Documents.
In addition, the Borrower agrees to pay and save the Bank harmless against any
liability for payment of any state documentary stamp taxes, intangible taxes or
similar taxes (including interest or penalties, if any) which may now or
hereafter be determined to be payable in respect to the execution, delivery or
recording of any Loan Document or the making of any Advance, whether originally
thought to be due or not, and regardless of any mistake of fact or law on the
part of the Bank or the Borrower with respect to the applicability of such tax.
The provisions of this Section shall survive payment in full of the Loans and
termination of this Agreement.
10.4. NOTICES. Any notice or other communication hereunder to
any party hereto shall be by hand delivery, overnight delivery, facsimile,
telegram, telex or registered or certified mail and unless otherwise provided
herein shall be deemed to have been given or made when delivered, telegraphed,
telexed, faxed or deposited in the mails, postage prepaid, addressed to the
party at its address specified below (or at any other address that the party may
hereafter specify to the other parties in writing):
The Bank:
First Union National Bank of Florida
200 S. Biscayne Boulevard, Suite 1500
Miami, Florida 33133
Attention: Jorge Gonzalez, Vice President
and
Robert Grigg, Sr. Vice President
-21-
<PAGE> 26
The Borrower:
Continucare Corporation
100 S.E. Second Street
36th Floor
Miami, Florida 33131
Attention: Charles M. Fernandez,
Chief Executive Officer
10.5. GOVERNING LAW. This Agreement and the Loan Documents
shall be deemed contracts made under the laws of the State of Florida and shall
be governed by and construed in accordance with the laws of said state except
insofar as the laws of another jurisdiction may govern the perfection, priority
and enforcement of security interests in Collateral located in another
jurisdiction.
10.6. SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and shall inure to the benefit of the Borrower and the Bank, and
their respective successors and assigns; provided, that the Borrower may not
assign any of its rights hereunder without the prior written consent of the
Bank, and any such assignment made without such consent will be void.
10.7. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed an original and all
of which when taken together shall constitute but one and the same instrument.
10.8. NO USURY. Notwithstanding anything contained in this
Agreement, the Notes, or in any other Loan Document to the contrary, in no event
will interest or other charges deemed to be interest be chargeable against the
Borrower if such amount (combined with any other amounts considered to be in the
nature of interest) would exceed the maximum amount permitted by law from time
to time while any of the Indebtedness is outstanding, and in the event any
amount in excess of the lawful maximum is charged or collected by the Bank or
paid by the Borrower, the Borrower shall be entitled to the reimbursement of
such excess together with interest thereon at the highest lawful rate at the
time of such overcharge.
10.9. POWERS. All powers of attorney granted to the Bank
are coupled with an interest and are irrevocable.
10.10. APPROVALS. If this Agreement calls for the
approval or consent of the Bank, such approval or consent may be given or
withheld in the discretion of the Bank unless otherwise specified herein.
10.11. MULTIPLE BORROWERS. If more than one Person is
named herein as the Borrower, all obligations, representations and covenants
herein and in other Loan Documents to which the Borrower is a party shall be
joint and several.
10.12. CONFLICT. In the event of a conflict between this
Agreement and any other Loan Document the terms of this Agreement shall be
controlling.
10.13. OTHER PROVISIONS. Any other or additional terms
and conditions set forth in Exhibit 10.13 (if any) are hereby incorporated
herein.
10.14. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER OF THEM
MAY HAVE
-22-
<PAGE> 27
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED UPON THIS AGREEMENT OR
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT AND ANY OTHER LOAN
DOCUMENT AND ANY OTHER AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION
HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE PARTIES ENTERING INTO THIS AGREEMENT.
10.15 RECITALS. The recitals contained on page 1 of this
Agreement are true and correct and are incorporated herein by reference.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
CONTINUCARE CORPORATION
By: /s/ Charles M. Fernandez
-----------------------------------
Its: President
FIRST UNION NATIONAL BANK OF FLORIDA
By: /s/ Robert Grigg
-----------------------------------
Its: Vice President
-23-
<PAGE> 28
FIRST AMENDMENT TO ACQUISITION FACILITY ($3,000,000.00), REVOLVING CREDIT
FACILITY ($2,000,000.00) AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO ACQUISITION FACILITY ($3,000,000.00), REVOLVING
CREDIT FACILITY ($2,000,000.00) AND SECURITY AGREEMENT, dated as of March 4,
1997 (the "First Amendment"), is by and between CONTINUCARE CORPORATION, a
Florida corporation (the "Borrower"), and FIRST UNION NATIONAL BANK OF FLORIDA,
a national banking association (the "Bank").
W I T N E S S E T H:
WHEREAS, the Borrower and the Bank have heretofore entered into that
certain Acquisition Facility ($3,000,000.00), Revolving Credit Facility
($2,000,000.00) and Security Agreement, dated as of November 14, 1996 (the
"Agreement"), pursuant to which the Bank made available to the Borrower an
Acquisitions Facility Loan in the maximum principal amount at any one time
outstanding of not to exceed $3,000,000.00 and a Revolving Loan in the
aggregate principal amount at any time outstanding not to exceed $2,000,000.00
(capitalized terms used herein and not defined herein shall have the meanings
given such terms in the Agreement, as amended hereby); and
WHEREAS, the Borrower and the Bank have agreed to make certain
modifications to the Agreement as more fully set forth herein;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. AMENDMENTS TO AGREEMENT. The parties hereto hereby agree
that the Agreement is hereby amended as follows:
SECTION 1.1. Section 1 of the Agreement is hereby amended
to add or modify each of the following definitions, each of which shall read
in their entirety as follows:
"FIRST AMENDMENT" SHALL MEAN THAT CERTAIN FIRST AMENDMENT
TO AGREEMENT, DATED AS OF MARCH 4, 1997, AMONG THE BORROWER AND
THE BANK.
"FIRST AMENDMENT EFFECTIVE DATE" SHALL MEAN THE LAST DATE
AS OF WHICH ALL OF THE PARTIES TO THE FIRST AMENDMENT SHALL HAVE
DULY EXECUTED AND DELIVERED THE FIRST AMENDMENT.
"MATURITY DATE" SHALL MEAN NOVEMBER 15, 1999.
SECTION 1.2. Section 2.7 (Title) of the Agreement is hereby
amended by adding at the end thereof the following:
AND EXCEPT FOR THE SALE OF THE ZANART ASSETS PURSUANT TO THE
PROVISIONS OF THAT CERTAIN ASSET PURCHASE AGREEMENT, DATED AS
OF NOVEMBER __, 1996 [SIC], BY AND AMONG THE BORROWER AND
GLOBAL ONE DISTRIBUTION & MERCHANDISING, INC.
<PAGE> 29
SECTION 1.3. The representation made by the Borrower in Section
2.10 (Taxes) of the Agreement is hereby qualified to the extent that the
Borrower maintains a deferred tax liability as more fully described in Note 5 to
the Financial Statements contained in the Borrower's Annual Report on Form
10-KSB for the Borrower's fiscal year ended June 30, 1996 (the "Deferred
Taxes").
SECTION 1.4. The representation made by the Borrower in Section
2.19 (ERISA) of the Agreement is hereby qualified as follows:
AS OF JANUARY 1, 1997, THE BORROWER MAINTAINS A QUALIFIED 401(k)
PLAN FOR ITS EMPLOYEES. ADDITIONALLY, PURSUANT TO ITS AMENDED
AND RESTATED 1995 STOCK OPTION PLAN, THE BORROWER HAS AUTHORIZED
UP TO 1,200,000 SHARES OF COMMON STOCK OF THE BORROWER FOR
ISSUANCE UPON EXERCISE OF STOCK OPTIONS GRANTED PURSUANT TO THE
STOCK OPTION PLAN. THE STOCK OPTION PLAN IS NOT QUALIFIED UNDER THE
PROVISIONS OF SECTION 401(a) OF THE INTERNAL REVENUE CODE OF
1986.
SECTION 1.5. Section 4.1(c) of the Agreement is hereby deleted
in its entirety and shall intentionally remain blank.
SECTION 1.6. The last sentence of Section 6.5 (Inspections) of
the Agreement is hereby amended in its entirety to read as follows:
THE COST OF SUCH AUDITS, REVIEWS AND INSPECTIONS SHALL BE BORNE
BY THE BORROWER; PROVIDED THAT, SO LONG AS NO MATERIAL ADVERSE
CHANGE IN THE BUSINESS OR FINANCIAL CONDITION OF THE BORROWER
SHALL HAVE OCCURRED IN THE REASONABLE DISCRETION OF THE BANK,
THE BORROWER SHALL NOT BE OBLIGATED TO PAY THE COST OF ANY SUCH
AUDIT, REVIEW OR INSPECTION CONDUCTED MORE FREQUENTLY THAN ONCE
IN EACH TWELVE-MONTH PERIOD COMMENCING ON THE CLOSING DATE.
SECTION 1.7. Section 6.9 (Executive Compensation) of the
Agreement is hereby amended in its entirety to read as follows:
6.9. EXECUTIVE COMPENSATION. SHALL NOT PAY ON AN ANNUAL
BASIS MORE THAN $350,000 (PLUS THE OTHER COST-OF-LIVING
INCREASES, BONUSES AND OTHER BENEFITS PROVIDED IN THAT CERTAIN
CHARLES M. FERNANDEZ EMPLOYMENT AGREEMENT, DATED AS OF SEPTEMBER
11, 1996, BETWEEN ZANART ENTERTAINMENT INCORPORATED, AND CHARLES
M. FERNANDEZ), IN ANY CALENDAR YEAR TO THE PRIMARY EXECUTIVE
OF BORROWER (THE "KEY EXECUTIVE"), CHARLES FERNANDEZ.
SECTION 1.8. Section 6.14 (Merger, Sale, Etc.) of the Agreement
is hereby amended to permit, notwithstanding the provisions thereof,
acquisitions which are financed in whole or in part with the proceeds of the
Loans or are otherwise permitted by the Bank in accordance with the provisions
of the Agreement and the merger of any Subsidiaries of the Borrower with and
into each other and/or with and into the Borrower.
SECTION 1.9. Section 6.15 (Loans and Other Investments) of the
Agreement is hereby qualified to the extent of the existence of the contingent
liabilities described in Exhibit 2.3 to the Agreement, as amended hereby.
SECTION 1.10. Notwithstanding the provisions of Section 6.18
(Transactions with Affiliates) of the Agreement to the contrary, the Borrower
shall be permitted to repay the obligations and indebtedness of the Borrower
owed to Charles M. Fernandez as evidenced by that certain 10%
2
<PAGE> 30
Promissory Note, dated February 12, 1996 (the "Fernandez Note"), made by the
Borrower payable to the order of Charles M. Fernandez in the original principal
amount of $600,000.00; provided that the Fernandez Note is repaid in full prior
to the date which is six (6) months following the First Amendment Effective
Date; and the Borrower shall be permitted to continue to enjoy and perform its
rights and obligations with respect to the following:
(a) The Borrower and its Subsidiaries have contracted with
Community Behavioral Services ("CBS"), an entity with
common shareholders of the Borrower, to perform certain
managerial and administrative services on behalf of the
Borrower and its Subsidiaries. The Borrower and its
Subsidiaries reimburse CBS for the actual cost of expenses
incurred by CBS in the direct performance of such services.
In addition, the Borrower (and/or its Subsidiaries) provides
management services for four facilities owned by CBS in
return for a management fee which is based on the Borrower's
estimated cost of providing such services. The management
fee charged by the Borrower is calculated based on the ratio
of patient volume represented by CBS to total Borrower
patient volume at other Provider facilities.
(b) The Borrower and its Subsidiaries provides management
services to Interphase, Inc. ("Interphase"), which is
partially owned by common shareholders of the Borrower.
The Borrower receives a management fee for the services
provided based on the Borrower's cost of providing such
services. The management fee charged by the Borrower is
calculated based on the ratio of patient volume represented
by Interphase to total Borrower patient volume at other
Provider facilities.
SECTION 1.11. Notwithstanding the provisions of Section 6.22 (Payment
of Taxes, Etc.) of the Agreement to the contrary, the Borrower shall be
permitted to continue to defer payment of the Deferred Taxes to the extent that,
and for so long as, such deferral is permitted in accordance with generally
accepted accounting principles and is not inconsistent with the provisions of
the Internal Revenue Code of 1986, as amended.
SECTION 1.12. Notwithstanding the provisions of Section 6.23
(Subordination) to the contrary, the Borrower shall be permitted to pay its
Affiliates wages and salaries (subject, in the case of Charles M. Fernandez, to
the limitations contained elsewhere in the Agreement, as amended hereby) at a
fair and reasonable rate and payment for services rendered or property furnished
to the Borrower at a fair and reasonable value and the Borrower shall be
permitted to repay the Fernandez Note in accordance with the provisions of
Section 6.18 of the Agreement, as amended hereby.
SECTION 1.13. Section 6.29 (Other Covenants) of the Agreement is hereby
amended by replacing the reference therein to "EXHIBIT 6.30" with "EXHIBIT
6.29."
SECTION 1.14. Section 7.2 (Remedies) of the Agreement is hereby
amended by deleting the parenthetical phrase "(IF NOT EARLIER DEMANDED)" in
clause (b) thereof in its entirety.
3
<PAGE> 31
SECTION 1.15. Exhibits 1.1C, 1.1D, 2.3, 2.9, 2.17 and 5.10 (renumbered
as 6.13) to the Agreement are hereby amended in their entirety to read as
Exhibits 1.1C, 1.1D, 2.3, 2.9, 2.17 and 6.13 attached hereto and made a part
hereof.
SECTION 1.16. Exhibit 5.26 to the Agreement is hereby renumbered as
Exhibit 6.29 and is hereby amended as follows:
SECTION 1.16.1. Clause 1(e) (Limitation on Debt) of Exhibit
6.29 is hereby amended to permit the Borrower and its Subsidiaries to be liable
for and in respect of Permitted Debt (as defined in the Agreement, as amended
hereby).
SECTION 1.16.2. Clause 1(f) (Loans and Advances) of Exhibit
6.29 is hereby amended to permit the Borrower and its Subsidiaries to make such
loans, advances and other investments as are otherwise permitted pursuant to the
provisions of the Agreement, as amended hereby.
SECTION 1.16.3. Clause 2 (Leases) of Exhibit 6.29 is hereby
amended by replacing the dollar amount of "$250,000.00" with "$500,000.00."
SECTION 1.16.4. Clause 3 (Capital Expenditures) of Exhibit
6.29 is hereby amended by replacing the dollar amount of "$100,000.00" with
$500,000.00."
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower
hereby represents and warrants to the Bank that, after giving effect to the
provisions of this First Amendment, no Default or Event of Default will have
occurred and be continuing, and further that the representations and warranties
of the Borrower set forth in the Agreement, as amended by this First Amendment,
the Notes and each of the other Loan Documents, is true and correct as of the
date hereof as if made on and as of the date hereof. The Borrower hereby further
ratifies and confirms its obligations and indebtedness under the Agreement, as
amended by this First Amendment, the Notes and each of the other Loan
Documents, and hereby represents and warrants that the Borrower does not have or
claim any causes of action, defenses, offsets or counterclaims to or with
respect to any such obligations or indebtedness under the Agreement, as amended
by this First Amendment or any of the other Loan Documents.
SECTION 3. NO THIRD PARTY BENEFICIARIES. Nothing expressed or implied in
this First Amendment is intended, or shall be construed, to confer upon or give
any Person other than the parties hereto and their respective successors and
permitted assigns, any rights or remedies under or by reason of this First
Amendment.
SECTION 4. SEVERABILITY. In the event any one or more of the words,
phrases, sentences, clauses, sections or subsections contained in this First
Amendment or any part hereof, all of which are inserted conditionally on their
being valid in law, shall be declared invalid, this First Amendment shall be
construed as if such word or words, phrase or phrases, sentence or sentences,
section or sections, or subsection or subsections, had not been inserted.
SECTION 5. COUNTERPARTS. This First Amendment may be executed in any number
of counterparts and by the several parties hereto in separate counterparts, each
of which shall constitute an original but all together shall constitute but one
and the same instrument.
4
<PAGE> 32
SECTION 6. SUCCESSORS AND ASSIGNS. This First Amendment shall be binding
upon the Borrower's employees, agents, trustees, executors, administrators,
predecessors, successors and permitted assigns. This First Amendment shall inure
to the benefit of the Bank's officers, directors, employees, agents, trustees,
executors, administrators, predecessors, successors and assigns.
SECTION 7. ENTIRE AGREEMENT. This First Amendment constitutes the entire
agreement among the parties hereto, and supersedes all prior agreements,
understandings, negotiations and discussions, both written and oral, among the
parties hereto, in each case with respect to the subject matter hereof, all of
which prior agreements, understandings, negotiations and discussions, both
written and oral, are merged into this First Amendment. Nothing herein is
intended to supersede or annul any express written term or provision of the
Agreement, as amended by this First Amendment, or any of the Loan Documents,
except as expressly provided herein.
SECTION 8. MODIFICATIONS. This First Amendment may not be amended or
modified in any way except by a written instrument executed by all of the
parties hereto.
SECTION 9. LIMITED MODIFICATION OF AGREEMENT. Except as may be expressly
modified hereby, all other covenants, terms and conditions contained in the
Agreement shall remain unchanged and in full force and effect.
SECTION 10. GOVERNING LAW. This First Amendment shall be governed by and
construed in accordance with the substantive laws of the State of Florida
without regard to the conflict of laws principles thereunder.
SECTION 11. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER OF THEM MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED UPON THIS AGREEMENT OR
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT AND ANY OTHER LOAN
DOCUMENT AND ANY OTHER AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION
HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE PARTIES ENTERING INTO THIS FIRST AMENDMENT.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be effective as of the date first above written, but have in fact executed this
First Amendment as of this 13th day of March, 1997.
BORROWER: CONTINUCARE CORPORATION
By: /s/ Charles M. Fernandez
--------------------------
Its: CEO
5
<PAGE> 33
BANK: FIRST UNION NATIONAL BANK OF
FLORIDA
By: /s/ Jorge Gonzalez
--------------------------------
Its: V.P.
STATE OF New Jersey )
) ss:
COUNTY OF Bergen )
The foregoing instrument was acknowledged before me this 13th day of March,
1997, by Charles M. Fernandez, as President of Continucare Corporation, a
Florida corporation, on behalf of the corporation.
[ ] Personally Known [X] Produced Drivers License
/s/ Rene Ferraris
------------------------------------
Notary Public
"OFFICIAL SEAL"
-------------------------------------
Typed or Printed Name of Notary
Rene Ferraris
Notary Public, State of New Jersey
My Commission Expires 4/17/2000
My commission expires:
Serial No., if any:
6
<PAGE> 1
Exhibit 11.1
Continucare Corporation
Computation of Earnings Per Common Share
<TABLE>
<CAPTION>
For the Year
Ended
June 30, 1997
-------------
<S> <C>
Net Income......................................................... $1,706,675
=============
PRIMARY EARNINGS PER SHARE
Number of shares:
Weighted average common shares outstanding(1).................. 10,875,785
Add:
Net additional shares issuable(2).............................. 46,206
------------
Weighted average shares used in the per share computation...... 10,921,991
============
Earnings per common and common equivalent share.................... $0.16
============
FULLY DILUTED EARNINGS PER SHARE
Number of shares:
Weighted average common shares outstanding(1).................. 10,875,785
------------
Weighted average shares used in the per share computation...... 10,875,785
============
Earnings per common and common equivalent share.................... $0.16
============
</TABLE>
- ----------------------
(1) Includes warrants exercised during the period as of the beginning of the
period.
(2) Assumes exercise of outstanding common stock equivalents (options) at the
beginning of the period.
<PAGE> 1
EXHIBIT 21.1
1. Continucare Outpatient Management, Inc.
2. Continucare In-Patient Management, Inc.
3. Continucare Medical Care Network, Inc.
4. Continucare-Aventura, Inc.
5. Continucare Outpatient Rehabilitation Management, Inc.
6. Continucare Physician Practice Management, Inc.
7. Continucare Home Health Services, Inc.
8. Continucare Primary Care, Inc. (8/22/97)
9. Continucare Home Health of Broward, Inc. (9/97)
10. Arthritis and Rheumatic Disease Specialties, Inc.
11. Weitz and Ritter, Inc.
12. AARDS, Inc.
13. Kahn & Riskin, M.D.'s, P.A.
14. Sunset Harbor Home Health, Inc.
15. Maxicare, Inc. d/b/a Maxicare of Broward
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 6,989,580
<SECURITIES> 0
<RECEIVABLES> 2,829,426
<ALLOWANCES> 1,061,468
<INVENTORY> 0
<CURRENT-ASSETS> 10,220,820
<PP&E> 1,334,080
<DEPRECIATION> 158,031
<TOTAL-ASSETS> 19,851,309
<CURRENT-LIABILITIES> 2,721,464
<BONDS> 2,511,918
0
0
<COMMON> 1,089
<OTHER-SE> 14,616,838
<TOTAL-LIABILITY-AND-EQUITY> 19,851,309
<SALES> 0
<TOTAL-REVENUES> 13,916,385
<CGS> 0
<TOTAL-COSTS> 6,348,195
<OTHER-EXPENSES> 2,836,242
<LOSS-PROVISION> 1,818,293
<INTEREST-EXPENSE> 145,790
<INCOME-PRETAX> 2,907,592
<INCOME-TAX> 1,200,917
<INCOME-CONTINUING> 1,706,675
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,706,675
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
