<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-12115
CONTINUCARE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-2716023
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
80 SOUTHWEST EIGHTH STREET
SUITE 2350
MIAMI, FLORIDA 33130
(Address of principal executive offices) (Zip Code)
(305) 350-7515
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
At May 10, 2000, the Registrant had 33,240,091 shares of $0.0001 par value
common stock outstanding.
<PAGE> 2
CONTINUCARE CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - March 31, 2000 (Unaudited) and June 30,
1999................................................................................. 3
Condensed Consolidated Statements of Operations - Three Months Ended March 31,
2000 (Unaudited) and 1999 (Unaudited)................................................ 4
Condensed Consolidated Statements of Operations - Nine Months Ended March 31,
2000 (Unaudited) and 1999 (Unaudited)................................................ 5
Condensed Consolidated Statements of Cash Flows - Nine Months Ended March 31,
2000 (Unaudited) and 1999 (Unaudited)................................................ 6
Notes to Condensed Consolidated Financial Statements - March 31, 2000
(Unaudited).......................................................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................................. 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................
23
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................................... 23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................... 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................... 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 25
ITEM 5. OTHER INFORMATION....................................................................... 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................ 25
SIGNATURE PAGE..................................................................................... 26
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000 JUNE 30, 1999
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................................... $3,115,992 $3,185,077
Accounts receivable, net of allowance for doubtful accounts of
$5,752,000 at March 31, 2000 and June 30, 1999..................... 4,844 604,524
Due from Medicare................................................... 443,576 --
Other receivables................................................... 586,086 266,057
Prepaid expenses and other current assets........................... 358,179 298,899
----------- -------------
Total current assets............................................ 4,508,677 4,354,557
Equipment, furniture and leasehold improvements, net................... 901,674 1,098,289
Cost in excess of net tangible assets acquired, net of
accumulated amortization of $5,487,000 at March 31, 2000 and
$3,837,000 at June 30, 1999.......................................... 20,375,593 22,346,156
Deferred financing costs, net of accumulated amortization of
$141,000 at March 31, 2000 and $1,203,000 at June 30, 1999........... 3,249,375 2,551,811
Other assets, net...................................................... 75,526 69,165
----------- -------------
Total assets.................................................... $29,110,845 $30,419,978
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.................................................... $861,964 $842,442
Accrued expenses.................................................... 3,116,663 2,358,346
Accrued salaries and benefits....................................... 1,583,792 1,856,140
Medical claims payable.............................................. 1,130,139 4,825,081
Due to Medicare..................................................... -- 302,358
Due to related parties.............................................. 60,000 --
Current portion of convertible subordinated notes payable........... 700,000 45,000,000
Current portion of long term debt................................... 5,832,764 6,857,946
Accrued interest payable............................................ 22,985 2,400,022
Current portion of capital lease obligations........................ 92,063 112,652
----------- -------------
Total current liabilities....................................... 13,400,370 64,554,987
Capital lease obligations, less current portion........................ 121,347 123,436
Convertible subordinated notes payable, less current portion........... 11,400,000 --
Long term debt, less current portion................................... 1,516,497 1,396,753
----------- -------------
Total liabilities............................................... 26,438,214 66,075,176
Commitments and contingencies
Shareholders' equity (deficit)
Common stock; $0.0001 par value; 100,000,000 shares authorized,
36,236,283 shares issued and 33,240,091 shares outstanding at
March 31, 2000; and 17,536,283 shares issued and
14,540,091 shares outstanding at June 30, 1999.................... 3,325 1,455
Additional paid-in capital.......................................... 57,708,595 32,910,465
Accumulated deficit................................................. (49,614,588) (63,142,417)
Treasury stock (2,996,192 shares)................................... (5,424,701) (5,424,701)
----------- -------------
Total shareholders' equity (deficit).............................. 2,672,631 (35,655,198)
----------- -------------
Total liabilities and shareholders' equity (deficit).............. $29,110,845 $30,419,978
=========== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
---- ----
<S> <C> <C>
Revenue
Medical services, net............................................. $29,889,660 $49,983,897
Expenses
Medical services:
Medical claims................................................ 19,864,445 36,358,041
Other......................................................... 4,700,767 10,064,148
Payroll and employee benefits..................................... 1,395,032 3,523,160
Provision for bad debt............................................ -- 1,135,713
Professional fees................................................. 193,362 502,982
General and administrative........................................ 1,373,192 3,012,478
Loss on sale of subsidiary........................................ -- 11,003,541
Depreciation and amortization..................................... 773,044 1,502,012
------------- -------------
Subtotal........................................................ 28,299,842 67,102,075
Income (loss) from operations.......................................... 1,589,818 (17,118,178)
Other income (expense)
Interest income................................................... 10,942 50,758
Interest expense.................................................. (708,717) (1,164,240)
Other............................................................. 103,623 --
------------- -------------
Income (loss) before extraordinary item................................ 995,666 (18,231,660)
Gain on extinguishment of debt......................................... 9,471,710 --
------------- -------------
Net income (loss) ..................................................... $10,467,376 $(18,231,660)
============= =============
Per share data:
Basic earnings (loss)............................................. $.43 $ (1.25)
============= =============
Diluted earnings (loss)........................................... $.33 $ (1.25)
============= =============
Weighted average number of common shares outstanding:
Basic........................................................ 24,020,331 14,606,283
============= =============
Diluted...................................................... 31,855,476 14,606,283
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
---------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Revenue
Medical services, net $ 87,362,881 $ 151,177,818
Management fees 450,000 516,642
------------- -------------
Subtotal 87,812,881 151,694,460
Expenses
Medical services:
Medical claims 62,359,925 101,392,977
Contractual revision of previously recorded medical claims
liability (3,053,853) --
Other 13,711,040 33,201,381
Payroll and employee benefits 4,674,123 11,215,110
Provision for bad debt -- 3,506,217
Professional fees 651,582 1,228,547
General and administrative 4,397,578 9,146,154
Loss on sale of subsidiary -- 15,155,791
Depreciation and amortization 2,340,744 4,651,761
------------- -------------
Subtotal 85,081,139 179,497,938
Income (loss) from operations 2,731,742 (27,803,478)
Other income (expense)
Interest income 35,509 122,313
Interest expense (2,870,952) (3,590,830)
Other 383,623 --
------------- -------------
Income (loss) before extraordinary items 279,922 (31,271,995)
Gains on extinguishment of debt 13,247,907 130,977
------------- -------------
Net income (loss) $ 13,527,829 $ (31,141,018)
============= =============
Per share data:
Basic earnings (loss) $ .76 $ (2.16)
============= =============
Diluted earnings (loss) $ .44 $ (2.16)
============= =============
Weighted average number of common shares outstanding:
Basic 17,731,000 14,428,968
============= =============
Diluted 30,694,636 14,428,968
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 13,527,829 $(31,141,018)
Adjustments to reconcile net income (loss) to cash provided by (used
in) operating activities:
Depreciation and amortization including amortization
of deferred loan costs 3,102,067 5,322,902
Provision for bad debt -- 3,506,217
Loss on sale of subsidiary -- 15,155,791
Contractual revision of previously recorded medical claims liability (350,546) --
Gain on disposal of equipment (23,123) --
Gain on extinguishment of debt (13,247,907) (130,977)
Changes in operating assets and liabilities, excluding the effect of
acquisitions and disposals:
Decrease (increase) in accounts receivable 599,680 (3,283,212)
Decrease in income taxes receivable -- 1,800,000
Increase in prepaid expenses and other current assets (59,280) (507,323)
(Increase) decrease in other receivables (320,029) 692,045
(Increase) decrease in other assets (6,361) 271,840
(Decrease) increase in medical claims payable (3,694,942) 4,521,625
Increase in due to (from) Medicare (108,378) 944,099
Increase in accounts payable and accrued expenses 505,491 457,368
Increase in accrued interest payable 2,045,984 876,466
------------ ------------
Net cash provided by (used in) operating activities 1,970,485 (1,514,177)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions -- (4,225,000)
Cash paid for purchase of contracts -- (734,806)
Property and equipment additions (134,637) (673,638)
Proceeds from sale of subsidiary -- 141,187
Proceeds from notes receivable -- 104,320
------------ ------------
Net cash used in investing activities (134,637) (5,387,937)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment to extinguish debt (210,000) (720,000)
Principal repayments under capital lease obligation (22,815) (369,037)
Payment on notes payable (1,406,326) (1,421,850)
Payment to related party (90,000) --
Proceeds from long term debt -- 5,000,000
Payment of deferred financing costs (175,792) (168,192)
------------ ------------
Net cash (used in) provided by financing activities (1,904,933) 2,320,921
------------ ------------
Net decrease in cash and cash equivalents (69,085) (4,581,193)
------------ ------------
Cash and cash equivalents at beginning of period 3,185,077 7,435,724
------------ ------------
Cash and cash equivalents at end of period $ 3,115,992 $ 2,854,531
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for acquisition $ -- $ 1,811,250
============ ============
Note payable for purchase of contracts $ -- $ 2,500,000
============ ============
Note payable for amendment of contract $ -- $ 3,509,983
============ ============
Note payable issued for refunds due to Medicare for overpayments $ 637,556 $ --
============ ============
Purchase of furniture and fixtures with proceeds of capital lease
obligations $ 158,023 $ --
============ ============
Common stock issued for deferred financing costs $ 3,375,000 $ --
============ ============
Common stock issued for extinguishment of debt $ 21,312,500 $ --
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
NOTE 1 - UNAUDITED INTERIM INFORMATION
The accompanying unaudited condensed consolidated financial statements of
Continucare Corporation ("Continucare" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 2000.
The balance sheet at June 30, 1999 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K/A-2 for
the year ended June 30, 1999.
Certain reclassifications have been made to the prior year amounts to conform to
the current year.
NOTE 2 - GENERAL
Continucare, which was incorporated on February 1, 1996 as a Florida
corporation, is a provider of integrated outpatient healthcare and home
healthcare services in Florida. 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"). As a
result of the Merger, the shareholders of Continucare became shareholders of
Zanart, and Zanart changed its name to Continucare Corporation. As of March 31,
2000, the Company operated, owned and/or managed: seventeen Staff Model clinics
in South and Central Florida; an Independent Practice Association ("IPA") with
88 physicians; and two Home Health agencies. For the nine months ended March 31,
2000 approximately 55% of net medical services revenue was derived from managed
care contracts with Humana Medical Plans, Inc.("Humana") and 39% of net medical
services revenue was derived from managed care contracts with Foundation Health
Corporation ("Foundation"). For the nine months ended March 31, 1999,
approximately 30% of net medical services revenue was derived from Humana and
53% was derived from Foundation.
Throughout fiscal 1998 and 1999 the Company experienced adverse business
operations, recurring operating losses, negative cash flow from operations, and
significant working capital deficiencies. Furthermore, as discussed below and
further in Note 3, the Company was unable to make the interest payments due
April 30, 1999 and October 31, 1999 on the Company's Convertible Subordinated
Notes Payable (the "Notes"). The Company's operating difficulties were in large
part due to the underperformance of various entities which were acquired in
fiscal years 1999, 1998 and 1997, the inability to effectively integrate and
realize increased profitability through anticipated economies of scale with
these acquisitions, as well as reductions in reimbursement rates under the
Balanced Budget Act of 1997.
The financial statements of the Company have been prepared assuming that the
Company will continue as a going concern. To strengthen Continucare financially
and remain a going concern, the Company began a business rationalization program
7
<PAGE> 8
(the "Business Rationalization Program") during the fiscal year ended June 30,
1999 to divest itself of certain unprofitable operations and to close other
underperforming subsidiary divisions, and a financial restructuring program (the
"Financial Restructuring Program") to strengthen its financial condition and
performance. In connection with the implementation of its Business
Rationalization Program, Continucare sold or closed its Outpatient
Rehabilitation subsidiary, its Diagnostic Imaging subsidiary and Physician
Practice subsidiary. These divestitures generated net cash proceeds of
approximately $5,642,000 (after the payment of transaction costs and other
employee-related costs). The rationalization liability associated with these
divestitures was approximately $755,000 at March 31, 2000. No changes occurred
in the rationalization liability during the three months ended March 31, 2000.
The Business Rationalization Program has assisted management with the
commencement and implementation of its Financial Restructuring Program and has
allowed the Company to focus its resources on a core business model. As a part
of the Business Rationalization Program, the Company negotiated a restructuring
of the Company's Notes, which is described in Note 3 below. While the Company
believes that the Business Rationalization Program and Financial Restructuring
Program will improve its cash flow and profitability, there can be no assurance
that it will be able to continue implementing any of the necessary programs and,
if implemented, that the programs will improve the Company's cash flow and
profitability sufficiently to fund its operations and satisfy its obligations as
they become due.
The Company has not provided for income taxes on it's operating results because
it believes it will be able to utilize certain of its net operating loss
carryforwards to offset any income tax liability related to it's operating
results.
NOTE 3 - CONVERTIBLE SUBORDINATED NOTES PAYABLE
On October 30, 1997, the Company issued $46,000,000 of the Notes which accrue
interest at 8% and are due on October 31, 2002. On August 12, 1998, the Company
repurchased $1,000,000 of the Notes and recorded an extraordinary gain on
retirement of debt of $130,977. On April 30, 1999 (the "April Default Date"),
the Company defaulted on its semi-annual payment of interest on the outstanding
Notes. Within thirty (30) days of the April Default Date, the Company commenced
negotiations with an informal committee of the holders of the Notes. On the
April Default Date, the outstanding principal balance of the Notes was
$45,000,000 and the related accrued interest was approximately $1,800,000.
On July 2, 1999, the Company repurchased $4,000,000 of the Notes for $210,000
and recorded a gain on extinguishment of debt of $3,776,197. The Company funded
the purchase of the Notes from working capital. The Company has not provided for
income taxes on the gain because it believes that it will be able to utilize
certain of its net operating loss carryforwards to offset any income tax
liability related to the transaction.
On October 31, 1999 (the "October Default Date") the Company defaulted on its
semi-annual payment of interest on the outstanding Notes. The total amount of
accrued interest on the outstanding Notes at October 31, 1999 was approximately
$3,300,000.
The Company completed a restructuring of the Notes through the execution of a
Consent Letter and Agreement to the First Supplemental Indenture (the
"Restructuring"). The Restructuring was ratified by the shareholders on February
14, 2000. The following occurred as a result of the Restructuring: (a)
$31,000,000 of the outstanding principal of the Notes were converted, on a pro
rata basis, into the Company's common stock at a conversion rate of $2.00 per
share (approximately 15,500,000 shares of capital stock); (b) all interest
accrued on the Notes through October 31, 1999 was forgiven (approximately
$3,300,000); (c) interest which accrued on the $31,000,000 from November 1, 1999
through the date of the Restructuring was forgiven; (d) the interest payment
default on the remaining $10,000,000 principal balance of the Notes was waived
and the Notes were reinstated on the Company's books and records as a performing
non-defaulted loan (the "Reinstated Subordinated Debentures"); (e) the
Reinstated Subordinated Debentures will bear interest at the rate of 7% per
annum commencing November 1, 1999; and (f) the conversion rate for the
Reinstated Subordinated Debentures for the period November 1, 2000 to maturity
will be $2.00. The Restructuring also required the Company to procure a
$3,000,000 bank credit facility and to obtain a financially responsible
person(s) to personally guarantee the bank credit facility for the Company (see
Note 4 below).
8
<PAGE> 9
As a result of the Restructuring, the Company recognized a gain of approximately
$9,472,000, net of restructuring costs. The gain consists of the conversion of
$31,000,000 of the outstanding principal balance into 15,500,000 shares of
common stock, which were valued at approximately $21,312,500 based on the
closing price of the Company's stock on February 15, 2000, the forgiveness of
approximately $4,237,000 of accrued interest, the write off of approximately
$1,929,000 of unamortized deferred financing costs and the recording of
$2,100,000 of interest which will accrue on the remaining balance of the Notes
under the revised terms of the agreement through the maturity date of October
31, 2002. In accordance with Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings," the
balance of the outstanding Notes on the balance sheet of $12,100,000 at March
31, 2000, includes interest accrued through March 31, 2000 of $291,667 and the
remaining interest of $1,808,333 which will be payable in semi-annual payments
through October 31, 2002. The Company has not provided for income taxes on the
gain because it believes that it will be able to utilize certain of its net
operating loss carryforwards to offset any income tax liability related to the
transaction.
NOTE 4 - LONG-TERM DEBT
In August 1998, the Company entered into a credit facility with First Union Bank
(the "Credit Facility"). The Credit Facility provided for a $5,000,000
acquisition facility and a $5,000,000 revolving loan. The Company borrowed the
entire $5,000,000 acquisition facility to fund acquisitions. The Company never
utilized the revolving loan. During April 1999, the Company used approximately
$4,000,000 of the net proceeds from the sale of its Rehabilitation subsidiary to
reduce the outstanding balance of the Credit Facility. In connection with the
payment, the Company entered into an amendment to the Credit Facility, which
provided, among other things, for the repayment of the remaining outstanding
principal balance by December 31, 1999. At June 30, 1999, the outstanding
balance of the Credit Facility was approximately $1,000,000 and was included in
Current Portion of Long-Term Debt on the accompanying consolidated balance
sheet. The Company obtained a waiver which extended the due date on the
remaining balance to February 1, 2000 and repaid the remaining outstanding
balance on January 31, 2000.
Effective December 31, 1999, the Company negotiated an amendment to its contract
with Foundation (the "Amendment"). The Amendment reduces the Company's prior
medical claims and long-term debt liabilities to Foundation as of May 31, 1999
to $1,500,000. The Amendment also requires the Company to remit to Foundation
any reinsurance proceeds received for claims generated from Foundation members
for the period June 1, 1998 through August 31, 1999 up to a maximum of
$1,327,400. As a result of this Amendment the Company recorded a contractual
revision of previously recorded medical claims liability of approximately
$3,054,000. This Amendment resulted in the reduction of medical claims payable
by approximately $2,703,000 and the reduction of long-term debt by approximately
$351,000.
In conjunction with the Restructuring, the Company executed a credit facility
agreement (the "New Credit Facility"). The New Credit Facility provides a
revolving loan of $3,000,000. The New Credit Facility is due March 31, 2001 with
annual renewable options, with interest payable monthly at 2.9% plus the 30-day
Dealer Commercial Paper Rate which is 6.1% at March 31, 2000. All assets of the
Company serve as collateral for the New Credit Facility. In addition, the New
Credit Facility has been personally guaranteed by a board member and related
party. In consideration for providing the guaranty, the Company issued 3,000,000
shares of the Company's common stock. These shares, which were valued at
$3,375,000 based on the closing price of the Company's stock on February 11,
2000 when the guarantee was granted, have been recorded as a deferred financing
cost which is being amortized over the term of the guarantee. At March 31, 2000,
the Company had not borrowed any amounts available under the New Credit
Facility.
9
<PAGE> 10
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
----------------------------- ----------------------------
2000 1999 2000 1999
-------------- -------------- ------------ -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator for earnings (loss) before
extraordinary item:
Numerator for basic earnings (loss) per
share - income (loss) before extraordinary
item, as reported ........................ $ 995,666 $ (18,231,660) $ 279,922 $ (31,271,995)
Effect of dilutive securities:
Interest expense related to convertible
subordinated notes ....................... 490,937 -- 2,460,997 --
------------ -------------- ------------ --------------
Numerator for diluted earnings (loss) per
share - income (loss) before extraordinary
item after assumed conversions ........... $ 1,486,603 $ (18,231,660) $ 2,740,919 $ (31,271,995)
============ ============== ============ ==============
Numerator for extraordinary item:
Numerator for basic earnings (loss) per
share - extraordinary item ............... $ 9,471,710 -- $ 13,247,907 $ 130,977
Effect of dilutive securities:
Interest expense related to convertible
subordinated notes ....................... (490,937) -- (2,460,997) --
------------ -------------- ------------ --------------
Numerator for diluted earnings (loss) per
share - extraordinary item ............... $ 8,980,773 -- $ 10,786,910 $ 130,977
============ ============== ============ ==============
Denominator:
Denominator for basic earnings (loss) per
share - weighted-average shares .......... 24,020,331 14,606,283 17,731,000 14,428,968
Dilutive common shares:
Convertible subordinated notes ........... 7,835,145 -- 12,963,636 --
------------ -------------- ------------ --------------
Denominator for diluted earnings (loss) per
share - adjusted weighted-average
shares and assumed conversions ........... 31,855,476 14,606,283 30,694,636 14,428,968
============ ============== ============ ==============
Basic earnings (loss) per share, before
extraordinary item ........................ $ .04 $ (1.25) $ .02 $ (2.17)
Extraordinary item ........................... .39 -- .74 .01
------------ -------------- ------------ --------------
Basic earnings (loss) per share .............. $ .43 $ (1.25) $ .76 $ (2.16)
============ ============== ============ ==============
Diluted earnings (loss) per share before
extraordinary item ........................ $ .05 $ (1.25) $ .09 $ (2.17)
Extraordinary item ........................... .28 -- .35 .01
------------ -------------- ------------ --------------
Diluted earnings (loss) per share ............ $ .33 $ (1.25) $ .44 $ (2.16)
============ ============== ============ ==============
</TABLE>
Options and warrants to purchase the Company's common stock were not included in
the computation of diluted earnings (loss) per share because the effect would be
antidilutive.
NOTE 6 - RELATED PARTY TRANSACTIONS
In May 1999, the Company entered into an agreement with Harter Financial, Inc.
("Harter") to assist it with a financial reorganization and to represent the
Company in negotiating the restructuring of the Notes and a settlement with the
noteholders. As compensation for its services, Harter received an initial fee of
$50,000 on May 18, 1999. On October 18, 1999, the Board of Directors approved a
final compensation package to be paid to Harter consisting of a cash payment of
10
<PAGE> 11
$150,000 and the issuance of 200,000 unregistered shares of the Company's common
stock, which were valued at $112,500 based on the closing price of the Company's
stock on the date of grant. At March 31, 2000, $60,000 remained unpaid. Mr.
Angel, the Company's president and CEO is also the president and a 15%
shareholder of Harter. However, as of May 18, 1999, Mr. Angel was not an officer
or director of the Company.
NOTE 7 - CONTINGENCIES
On April 10, 1997, the Company, through Continucare Physician Practice
Management, Inc., ("CPPM") a wholly-owned subsidiary, acquired all of the
outstanding stock of certain arthritis rehabilitation centers and affiliated
physician practices. The acquisitions included the purchase of AARDS, INC., a
Florida corporation formerly known as Norman B. Gaylis, M.D., Inc., Rosenbaum,
Weitz & Ritter, Inc., a Florida corporation, and of Arthritis & Rheumatic
Disease Specialties, Inc., a Florida corporation, from Sheridan Healthcare, Inc.
(collectively "AARDS").
In connection with the purchase of AARDS, the Company entered into a management
agreement with ZAG Group, Inc. ("ZAG"), an entity controlled by Jay Ziskind, Ken
Arvin and Dr. Norman Gaylis. The management agreement, among other things,
provided for ZAG to perform certain services in exchange for specified
compensation. In addition, the Company entered into a put/call agreement with
ZAG, which allowed each of the parties to require the other party, after a
two-year period, to either sell or purchase all the issued and outstanding
capital stock of ZAG for a specified price to be paid in a combination of cash
and common stock of the Company. In September 1998, the Company paid
approximately $2,000,000 to ZAG in connection with an agreement and plan of
merger executed between the Company and ZAG that effectively canceled the
put/call agreement. Cash of $115,000 was paid and the remaining $1,885,000 was
paid by issuing 575,000 unregistered shares of the Company's common stock with a
fair market value of approximately $1,600,000 on the date of issuance. However,
because the common stock issued did not have an aggregate fair market value of
approximately $1,885,000 on October 15, 1999, the agreement and plan of merger
provided that the Company would pay additional cash consideration or issue
additional shares of its common stock so that the aggregate value of the stock
issued is approximately $1,885,000. Additional consideration of approximately
$1,600,000 in cash or approximately 1,600,000 shares of the Company's common
stock (based on the March 31, 2000 market price) would have to be issued. At
this time, no additional payment has been made to ZAG.
On November 15, 1999, the Company commenced litigation against ZAG and its
affiliated parties alleging breach of fiduciary duties, improper billing, and
seeking return of all consideration previously paid by the Company to ZAG, and
damages, as well as seeking rescission of the agreement and plan of merger. A
counterclaim was filed against the Company on December 20, 1999 in the Circuit
Court of the 11th Judicial District in and for Dade County, Florida. The
counterclaim alleged breach of contract, tortious interference and conversion.
Continucare may be required to pay in excess of $1,600,000 of additional
consideration, in the form of either cash or stock, representing the difference
between $1,885,000 and the fair market value of the 575,000 unregistered shares
of Continucare common stock previously issued to ZAG in connection with the
agreement and plan of merger.
On September 19, 1997, the Company acquired the stock of Maxicare, Inc.
("Maxicare"), a Florida based home health agency for $4,200,000 including
approximately $900,000 of liabilities assumed. In addition, $300,000 of
additional purchase price was contingent upon maintaining various performance
criteria and, if earned, would be due in equal installments in September 1998
and 1999. No amounts have been paid to the former owner of Maxicare, Inc.
pursuant to the contingent purchase price from the acquisition.
The case of JAMES N. HOUGH, PLAINTIFF, v. INTEGRATED HEALTH SERVICES, INC., A
DELAWARE CORPORATION, AND REHAB MANAGEMENT SYSTEMS, INC., A FLORIDA CORPORATION
("RMS"), AND CONTINUCARE REHABILITATION SERVICES, INC., A FLORIDA CORPORATION
was removed from the active docket on March 14, 2000 and has remained dormant
since that time.
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The Company is a party to the case of MANAGED HEALTHCARE SYSTEMS ("MHS") v.
CONTINUCARE CORPORATION & CONTINUCARE HOME HEALTH SERVICES, INC ("CHHS"). This
case was filed in the Commonwealth of Massachusetts in August, 1998. The
complaint alleges breach of contract for alleged verbal representations by CHHS
in negotiations to acquire MHS and seeks damages in excess of $2,750,000 and
treble damages. The Company believes the action has little merit and intends to
vigorously defend the claim.
The case of AVENTURA COMPREHENSIVE REHABILITATION CENTER, INC. AND ANTHONY J.
DORTO, M.D. v. CONTINUCARE-AVENTURA, INC. AND CONTINUCARE OUTPATIENT MANAGEMENT,
INC. was settled in March, 2000 with no admission of liability. The parties
exchanged general releases.
The Company is a party to the case of WARREN GROSSMAN, M.D., ALAN REICH, M.D.,
AND RICHARD STRAIN, M.D. v. CONTINUCARE PHYSICIAN PRACTICE MANAGEMENT, INC. AND
CONTINUCARE CORPORATION. This case was filed in May 1999 in the Circuit Court
for Broward County, Florida. The complaint alleges breach of employment
contracts based on the early termination of the Plaintiffs' employment and seeks
damages in excess of $2,500,000. On January 5, 2000, the Company filed a
counterclaim alleging breach of contract in connection with the Plaintiffs'
failure to return certain computer equipment, as well as a breach of the
non-compete covenant. The case is set for trial in May, 2000. On February 18,
2000, the Company filed a Motion for Summary Judgment as to two of the
Plaintiffs. The motion is scheduled to be heard in May, prior to the trial
period. The Company believes the action has little merit and intends to
vigorously defend the claim.
The Company is a party to the case of GE MEDICAL SYSTEMS, AN UNINCORPORATED
DIVISION OF GENERAL ELECTRIC COMPANY v. CONTINUCARE OUTPATIENT SERVICES, INC.
N/K/A OUTPATIENT RADIOLOGY SERVICES, INC AND CONTINUCARE CORPORATION. This case
was filed in April, 2000 in the Circuit Court of the 11th Judicial Circuit in
and for Dade County, Florida. The complaint alleges a breach of guaranty
agreement and seeks damages of approximately $676,000.
Two subsidiaries of the Company are parties to the case of NANCY FEIT ET AL. v.
KENNETH BLAZE, D.O. KENNETH BLAZE, D.O., P.A.; SHERIDEN HEALTHCORP, INC.; WAYNE
RISKIN, M.D.; KAHN AND RISKIN, M.D., P.A.; CONTINUCARE PHYSICIAN PRACTICE
MANAGEMENT, INC. D/B/A ARTHRITIS AND RHEUMATIC DISEASE SPECIALTIES, INC.; JAMES
JOHNSON, D.C. AND JOHNSON & FALK, D.C., P.A. The case was filed in December,
1999 in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida and served on the companies in April, 2000. The complaint
alleges vicarious liability and seeks damages in excess of $15,000.
The Company is subject to a variety of claims and suits that arise from time to
time out of the ordinary course of its business, substantially all of which
involve vendor-lease claims and/or claims related to the alleged malpractice of
employed and contracted medical professionals.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q 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-Q, 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
are set forth in the Company's Form 10-K/A-2 for the period ended June 30, 1999,
including the following: the success or failure of the Company in implementing
its current business and operational strategies; the successful implementation
of the Company's Business Rationalization Program and Financial Restructuring
Program; the availability, terms and access to capital and customary trade
credit; general economic and business conditions; competition; changes in the
Company's business strategy; availability, location and terms of new business
development; availability and terms of necessary or desirable financing or
refinancing; labor relations; the outcome of pending or yet-to-be instituted
legal proceedings; and labor and employee benefit costs.
GENERAL
Continucare is a provider of integrated outpatient healthcare and home
healthcare services in Florida. As of March 31, 2000, the Company operated,
owned and/or managed: seventeen Staff Model clinics in South and Central
Florida; an Independent Practice Association (the "IPA") with 88 physicians; and
two home health agencies.
Throughout fiscal 1998 and 1999 the Company experienced adverse
business operations, recurring operating losses, negative cash flow from
operations, and significant working capital deficiencies. Furthermore, as
discussed below under "Liquidity and Capital Resources" and in Note 3 of the
condensed consolidated financial statements, the Company was unable to make the
interest payments due April 30, 1999 and October 31, 1999 on the Convertible
Subordinated Notes Payable (the "Notes"). The Company's operating difficulties
were in large part due to the underperformance of various entities which were
acquired in fiscal years 1999, 1998 and 1997, the inability to effectively
integrate and realize increased profitability through anticipated economies of
scale with these acquisitions, as well as reductions in reimbursement rates
under the Balanced Budget Act of 1997.
The financial statements of the Company have been prepared assuming
that the Company will continue as a going concern. To strengthen the Company
financially, and remain a going concern, the Company began a business
rationalization program (the "Business Rationalization Program") during the
fiscal year ended June 30, 1999 to divest itself of certain unprofitable
operations and to close other underperforming subsidiary divisions and a
financial restructuring program (the "Financial Restructuring Program") to
strengthen its financial condition and performance. In connection with the
implementation of its Business Rationalization Program, the Company considered a
variety of factors in determining which entities to divest and which entities to
reorganize. Some of the determining factors include: (i) projected changes in
the cost structure; (ii) changes in reimbursement rates; (iii) changes in
regulatory environment; (iv) loss of management personnel; (v) loss of
contracts; and (vi) timely opportunity for disposal. As a result of this
analysis, the Company has sold or closed its Outpatient Rehabilitation
subsidiary, Diagnostic Imaging subsidiary and Physician Practice subsidiary.
These divestitures generated net cash proceeds of approximately $5,642,000
(after the payment of transaction costs and other costs) during the fiscal year
ended June 30, 1999. The Business Rationalization Program has assisted
management with the commencement and implementation of its Financial
Restructuring Program and has allowed the Company to focus its resources on a
core business model. While the Company believes that the Business
Rationalization Program and Financial Restructuring Program will improve its
cash flow and profitability, there can be no assurance that it will be able to
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continue implementing any of the necessary programs and, if implemented, that
the programs will improve the Company's cash flow and profitability sufficiently
to fund its operations and satisfy its obligations as they become due. The
Company has not provided for income taxes on it's operating results because it
believes it will be able to utilize certain of its net operating loss
carryforwards to offset any income tax liability related to it's operating
results.
REIMBURSEMENT CONSIDERATIONS
The Company receives reimbursement from the Medicare and Medicaid
programs or payments from insurers, self-funded benefit plans or other
third-party payors. 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. Although the Company has
derived less than 5% of its net patient service revenue directly from Medicare
and Medicaid in fiscal 2000, a substantial portion of the Company's managed care
revenues are based upon Medicare reimbursable rates. Therefore, any changes
which limit or reduce Medicare reimbursement levels could have a material
adverse effect on the Company.
Significant changes have been and may be made in the Medicare program,
which could have a material adverse effect on the Company's business, results of
operations, prospects, financial results, financial condition or cash flows. 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 the
Company by, for example, decreasing reimbursement by third-party payors such as
Medicare or limiting the ability of the Company to maintain or increase the
level of services provided to patients.
The Balanced Budget Act of 1997 (the "Budget Act") enacted in August
1997 contains numerous provisions related to Medicare and Medicaid
reimbursement. It is unclear whether all of these provisions will be implemented
by the Health Care Financing Administration ("HCFA") as scheduled. The general
thrust of the provisions dealing with Medicare and Medicaid contained in the
Budget Act are intended to incentivize providers to deliver services efficiently
at lower costs.
Changes enacted in the Budget Act impact on the reimbursement
methodology for home health services. Prior to the Budget Act, home health
services were reimbursed on a reasonable cost basis, with statutory per visit
limits in place. Under the Budget Act, Congress mandated that there be a
prospective payment system ("PPS") put in place by the Health Care Financing
Administration ("HCFA") to replace the cost based reimbursement system. Prior to
the PPS, Congress mandated that an interim payment system ("IPS") be implemented
with imposed new visit and per beneficiary limits to control costs. Under this
system, for cost reporting periods beginning on or after October 1, 1997,
Medicare reimbursement for home health services is determined as the lesser of
(i) actual costs (ii) a per visit limit of 105 percent of median costs of
freestanding home health agencies, or (iii) an agency-specific per-beneficiary
cost limit, based on a blend of costs in 1994, adjusted for inflation: 75
percent of 98 percent of the agency-specific costs and 25 percent on 98 percent
of the standardized regional average of the costs for the agency's census
region. The Budget Act was amended by the Omnibus Consolidated and Emergency
Supplemental Appropriations Act of 1999 ("OCESAA") and the Balanced Budget
Refinement Act of 1999 ("Refinement Act"). Changes were made by those amendments
to the reimbursement methodology for home health services. The OCESAA made
changes for the per-visit and per-beneficiary limits for the IPS, effective for
cost reporting periods beginning on or after October 1, 1998. Specifically,
providers with a 12 month cost reporting period ending during FY 1994, whose
per-beneficiary limitations were less than the national median, will get their
current per-beneficiary limitation plus 1/3 of the difference between their rate
and the adjusted national median per-beneficiary limitation. New providers and
providers without a 12 month cost reporting period ending in Federal Fiscal Year
("FFY") 1994 whose first cost-reporting period begins before October 1, 1998
will receive 100 percent of the national median per-beneficiary limitation. New
providers whose first cost reporting periods begin during FFY 1999 will receive
75 percent of the national median per-beneficiary limitation. In the case of a
new provider or a provider that did not have a 12 month cost reporting period
beginning during FFY 1994 that filed an application for HHA provider status
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before October 15, 1998 or that was approved as a branch of its parent agency
before that date and becomes a subunit of the parent agency or a separate
freestanding agency on or after that date, the per-beneficiary limitation will
be set at 100 percent of the median. The per-visit limitation effective for
cost-reporting periods beginning on or after October 1, 1998 is set at 106
percent of the median instead of 105 percent of the median, as mandated by the
BBA. The most notable changes made by the Refinement Act was a modification by
Congress in a previously enacted 15 percent reduction in reimbursement for home
health services. The law now reads that the 15 percent reduction in payments
will take effect one year after implementation of the home health agency PPS.
The Secretary of Health and Human Services is required to report to the Congress
within 6 months after implementation of the PPS analyzing the need for the 15
percent reduction in rates. On October 28, 1999, HCFA issued a proposed rule for
the home health agency PPS, and promulgation of a final rule is expected by July
1, 2000, for an effective date of October 1, 2000.
For cost reporting periods beginning on or after October 1, 1997, the
Budget Act requires HHAs to submit claims for payment for home health services
only on the basis of the geographic location at which the service was furnished.
HCFA has publicly expressed concern that some HHAs are billing for services from
administrative offices in locations with higher per-visit cost limitations than
the cost limitations in effect in the geographic location of the home health
agency furnishing the service. The Company is unable to determine the
reimbursement impact resulting from payments for services based upon geographic
location until HCFA finalizes related regulatory guidance. Any resultant
reduction in the Company's cost limits could have a material adverse effect on
the Company's business, financial condition or results of operations. However,
until regulatory guidance is issued, the effect of such reductions cannot be
predicted with any level of certainty.
Various other provisions of the Budget Act may have an impact on the
Company's business and results of operations. For example, venipuncture will no
longer be a covered skilled nursing home care service unless it is performed in
connection with other skilled nursing services. Additionally, the Budget Act
mandated that payments be frozen for durable medical equipment ("DME"), and
payments for certain reimbursable drugs and biologicals will be reduced. In the
Refinement Act, though, Congress temporarily lifted reimbursement restrictions
for DME in years 2001 and 2002. Beginning with services furnished on or after
January 1, 1998, funding of home health services is currently being shifted over
a period of nine years from Medicare Part A to Medicare Part B except for a
maximum of 100 visits during a spell of illness after a three-day
hospitalization initiated within 14 days after discharge or after receiving any
covered services in a skilled nursing facility, each of which will continue to
be covered under Medicare Part A. Another provision of the Budget Act would
reduce Medicare reimbursements to acute care hospitals for non-Medicare patients
who are discharged from the hospital after a very short inpatient stay to the
care of a home health agency. The impact of these reimbursement changes could
have a material adverse effect on the Company's business, financial condition or
results of operations. However, this impact cannot be predicted with any level
of certainty at this time.
Among the other changes which the Budget Act is attempting to
accomplish are the following: (i) reducing the amounts which the federal
government will pay for services provided to Medicare and Medicaid beneficiaries
by an estimated $115 billion and $13 billion, respectively over a five-year
period. The Refinement Act provided some financial relief from the impacts under
the Budget Act. It is estimated that the Refinement Act provided $16.4 billion
over 5 years above levels mandated by the Budget Act for Medicare reimbursement;
(ii) reducing payments to hospitals for inpatient and outpatient services
provided to Medicare beneficiaries by an estimated $44 billion over a five-year
period; (iii) establishing the Medicare+Choice Program, which expands the
availability of managed care alternatives to Medicare beneficiaries, including
Medical Savings Accounts; (iv) converting the Medicare reimbursement of
outpatient hospital services from a reasonable cost basis to a PPS; (v)
adjusting the manner in which Medicare calculates the amount of copayments which
are deducted from the Medicare payment to hospitals for outpatient services;
(vi) freezing the Medicare hospital PPS and PPS-exempt hospital and distinct
part unit update for Fiscal year 1998, and limiting the level of annual updates
for subsequent years; (vii) reducing various other Medicare payments to
providers; (viii) repealing the federal Boren Amendment, which imposed certain
requirements on the level of reimbursement paid to hospitals for services
rendered to Medicaid beneficiaries; (ix) permitting states to mandate managed
care for Medicaid beneficiaries without the need for federal waivers in
instances of voluntary enrollment; (x) provision is made for mandatory
exclusions of not less than 5 years for an individual or entity convicted of a
criminal offense related to the delivery of an item or service under the
Medicare or State health care program, or the neglect or abuse of a patient,
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whether or not reimbursed under Medicare, Medicaid or any Federal health care
program. Additionally, the Secretary of HHS will be able to deny entry into
Medicare or Medicaid or deny renewal to any provider or supplier convicted of
any felony that the Secretary deems to be "inconsistent with the best interests"
of the program's beneficiaries; and (xi) creating a new civil monetary penalty
for violations of the Federal Medicare/Medicaid Anti-Fraud and Abuse Amendments
to the Social Securities Act ("Anti-Kickback Law") for cases in which a person
contracts with an excluded provider for the provision of health care items or
services where the person knows or should know that the provider has been
excluded from participation in a federal health care program. Violations will
result in damages three times the remuneration involved, as well as a penalty of
$50,000 per violation. There can be no assurance that the Company will not be
subject to the imposition of a fine or other penalty from time to time.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the unaudited condensed consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-Q. The statements of operations include the
operations of acquisitions made during the nine months ended March 31, 1999 from
their respective acquisition dates.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE FOR
THE THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1999
REVENUE
Medical services revenues for the three months ended March 31, 2000 decreased
40.2% to approximately $29,890,000 from approximately $49,984,000 for the three
months ended March 31, 1999. As part of the Company's Business Rationalization
Program, the Company significantly reduced the number of physician practices in
its IPA subsidiary and is no longer at risk for the commercial members of its
IPA physicians. During the three months ended March 31, 1999, the Company
provided managed care services for approximately 94,000 IPA member months
(members per month multiplied by the months for which services were available),
which resulted in approximately $23,600,000 in revenue. During the three months
ended March 31, 2000, the number of IPA member months decreased to approximately
13,000, which resulted in approximately $6,518,000 in revenue. Commercial member
months contributed approximately $4,500,000 of revenue during the three months
ended March 31, 1999. IPA Medicare member months have decreased 68% from
approximately 35,800 member months during the three months ended March 31, 1999
to approximately 11,500 member months during the three months ended March 31,
2000. IPA Medicare member months contributed approximately $6,060,000 and
$18,010,000 during the three months ended March 31, 2000 and 1999, respectively.
During Fiscal 1999 the Company disposed of certain underperforming
assets and subsidiaries (the "Rationalized Entities"). See "Business--General."
During the three months ended March 31, 1999, medical services revenue from the
Rationalized Entities was approximately $4,742,000.
As a result of the rationalization of the non-managed care entities,
the revenue generated by its managed care entities under the Company's contracts
with HMO's increased to 94.8% of medical services revenues for the three months
ended March 31, 2000 compared to 88.7% of medical services revenues for the
three months ended March 31, 1999. Revenue generated by the Humana contract was
59.3% and 31.9% of medical services revenue for the three months ended March 31,
2000 and 1999, respectively. Revenue generated by Foundation contracts was 35.6%
and 56.8% of medical services revenue for the three months ended March 31, 2000
and 1999, respectively.
Revenue received under fee for service arrangements which require the
Company to assume the financial risks relating to payor mix and reimbursement
rates accounted for approximately 9.4% of medical services revenue for the three
months ended March 31, 1999. The contribution from fee for service revenue for
the three months ended March 31, 2000 was insignificant, primarily as a result
of the Business Rationalization Program and the divestiture of the Diagnostic
Imaging and Physician Practice subsidiaries.
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The Company's home health agencies' revenue was 1.8% of medical
services revenue for the three months ended March 31, 1999 and 5.1% of medical
services revenue for the three months ended March 31, 2000 and consisted
primarily of Medicare reimbursement.
EXPENSES
Medical services expenses for the three month period ended March 31,
2000 were approximately $24,565,000 or 82.2% of medical services revenue,
compared to approximately $46,422,000 or 92.9% of medical services revenue for
the three month period ended March 31, 1999. The decrease is primarily due to
the Company's Rationalization Program. Medical services expenses of the
Company's IPA decreased from approximately $24,419,000 to approximately
$6,560,000 as a result of the decrease in IPA members for which the Company is
at risk. During the three months ended March 31, 1999, medical services expenses
for the Rationalized Entities were approximately $3,553,000.
Medical claims represent the costs of medical services provided by
providers other than the Company but which are to be paid by the Company for
individuals covered by the Company's capitated risk contracts with HMOs. Claims
expense was approximately $19,864,000 and $36,358,000 for the three months ended
March 31, 2000 and 1999, respectively, or 66.5% and 72.7% of medical services
revenues. The decrease in claims expense as a percentage of medical services
revenue is due to lower average claims costs per member for both the Company's
staff model centers and the Company's IPA and premium increases passed through
to the Company.
Other direct costs include the salaries and benefits of health
professionals providing the services, capitation payments to the Company's
contracted IPA physicians, and other costs necessary to operate the Company's
facilities. Other direct costs were approximately $4,701,000 and $10,064,000 for
the three months ended March 31, 2000 and 1999, respectively, or 15.8% and 20.1%
of medical services revenues.
Payroll and employee benefits for administrative personnel was
approximately $1,395,000 for the three months ended March 31, 2000, or 4.7% of
revenues, compared to approximately $3,523,000 or 7.0% of revenue for the three
months ended March 31, 1999. The decrease in these costs as a percent of
revenues is primarily due to the rationalization of employees. Payroll and
employee benefits for the Rationalized Entities was approximately $1,065,000 for
the three months ended March 31, 1999.
General and administrative expenses for the three months ended March
31, 2000 were approximately $1,373,000 or 4.6% of revenues compared to
approximately $3,012,000 or 6.0% of revenues for the three months ended March
31, 1999. The decrease in general and administrative expense as a percent of
revenues resulted from a reduction of overhead costs as part of the Company's
Business Rationalization Program. During the three months ended March 31, 1999
general and administrative expenses from the Rationalized Entities was
approximately $1,192,000.
Amortization expense of intangible assets was approximately $662,000
for the three months ended March 31, 2000, as compared to approximately
$1,231,000 for the three months ended March 31, 1999. Amortization expense for
the Rationalized Entities was approximately $185,000 for the three months ended
March 31, 1999. Additionally, during fiscal year ended June 30, 1999, the
Company determined that approximately $11,700,000 of other intangible assets
were impaired and, accordingly, wrote off the impaired assets. Amortization
expense related to these impaired assets which was included in the three months
ended March 31, 1999 totaled approximately $293,000.
Bad debt expense for the three months ended March 31, 1999, was related
to certain of the Rationalized Entities which generated revenues primarily
through fee-for-service billings to third party payors and individual patients.
The absence of bad debt expense for the three months ended March 31, 2000 is
directly attributable to the increase in the percentage of revenue received
under the Company's HMO contracts, for which bad debt expense is nominal.
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During the three months ended March 31, 1999, the Company recorded a
loss on disposal of subsidiaries of $11,004,000 associated with the Company's
Business Rationalization Program. No such charge was recorded during the three
months ended March 31, 2000.
INCOME (LOSS) FROM OPERATIONS
Income from operations for the three months ended March 31, 2000 was
approximately $1,590,000 or 5.3% of total revenues, compared to an operating
loss of approximately $17,118,000 or 34.2% of total revenues for the three
months ended March 31, 1999. The operating loss of the Rationalized Entities for
the three months ended March 31, 1999 was approximately $13,659,000.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
On February 15, 2000, the Company recorded an extraordinary gain on
extinguishment of debt of approximately $9,472,000 as a result of the
restructuring of the convertible subordinated debentures, net of restructuring
costs. The gain resulted primarily from the conversion of $31,000,000 of the
outstanding principal balance into 15,500,000 shares of common stock, which were
valued at approximately $21,312,500 based on the closing price of the Company's
stock on February 15, 2000, the forgiveness of approximately $4,237,000 of
accrued interest, the write off of approximately $1,929,000 of unamortized
deferred financing costs and the recording of $2,100,000 of interest which will
accrue on the remaining balance of the Notes under the revised terms of the
agreement through the maturity date of October 31, 2002. The Company has not
provided for income taxes on the gain because it believes it will be able to
utilize certain of its net operating loss carryforwards to offset any income tax
liability related to the restructuring transaction.
NET INCOME/LOSS
Net income for the three months ended March 31, 2000 was approximately
$10,467,000 compared to a net loss of approximately $18,232,000 for the three
months ended March 31, 1999.
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE FOR
THE NINE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THE NINE MONTHS ENDED MARCH
31, 1999
REVENUE
Medical services revenues for the nine months ended March 31, 2000 decreased
42.2% to approximately $87,363,000 from approximately $151,178,000 for the nine
months ended March 31, 1999. As part of the Company's Business Rationalization
Program, the Company significantly reduced the number of physician practices in
its IPA subsidiary and is no longer at risk for the commercial members of its
IPA physicians. IPA commercial member months contributed approximately
$14,030,000 of revenue during the nine months ended March 31, 1999. IPA Medicare
member months have decreased approximately 62% from approximately 101,000 member
months during the nine months ended March 31, 1999 to 38,000 member months
during the nine months ended March 31, 2000. IPA Medicare member months
contributed approximately $20,376,000 and $50,231,000 during the nine months
ended March 31, 2000 and 1999, respectively.
During Fiscal 1999 the Company disposed of certain underperforming
assets and subsidiaries (the "Rationalized Entities"). See "Business--General."
During the nine months ended March 31, 1999, medical services revenue from the
Rationalized Entities was approximately $21,383,000.
As a result of the rationalization of the non-managed care entities,
the revenue generated by its managed care entities under the Company's contracts
with HMO's amounted to 94% and 83% of medical services revenues for the nine
months ended March 31, 2000 and 1999, respectively. Revenue generated by the
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<PAGE> 19
Humana contract was 55% and 30% of medical services revenue for the nine months
ended March 31, 2000 and 1999, respectively. Revenue generated by the Foundation
contract was 39% and 53% of medical services revenue for the nine months ended
March 31, 2000 and 1999, respectively.
Revenue received under fee for service arrangements which require the
Company to assume the financial risks relating to payor mix and reimbursement
rates accounted for approximately 14% of medical services revenue for the nine
months ended March 31, 1999, including approximately 3% derived from the
Company's home health agencies. For the nine months ended March 31, 2000,
approximately 4.5% of medical service revenues was derived from the home health
agencies. The contribution from other sources of fee for service revenue for the
nine months ended March 31, 2000 was insignificant, primarily as a result of the
Business Rationalization Program and the divestiture of the Diagnostic Imaging
and Physician Practice subsidiaries.
Medicare and Medicaid, as a percentage of the Company's medical service
revenue, decreased from 6.8% to 4.5% of medical services revenue for the nine
months ended March 31, 1999 to March 31, 2000, respectively. This decrease was
attributable to a substantial increase in managed care revenues and the
respective sale and closing of the outpatient rehabilitation and physician
practice subsidiaries.
Management fee revenue of $450,000 for the nine months ended March 31,
2000 relates primarily to fees received in July, 1999 through September, 1999
from Foundation. Management fee revenue of approximately $517,000 for the nine
months ended March 31, 1999 relates to services provided by the Outpatient
Rehabilitation and Physician Practice subsidiaries which were respectively sold
and closed during Fiscal 1999.
EXPENSES
Medical services expenses for the nine month period ended March 31,
2000 were approximately $73,017,000 or 83.6% of medical services revenue,
compared to approximately $134,594,000 or 89.0% of medical services revenue for
the nine month period ended March 31, 1999. The decrease is primarily due to the
Company's Rationalization Program. During the nine months ended March 31, 1999,
medical services expenses for the Rationalized Entities were approximately
$14,394,000. Medical services expenses of the Company's IPA decreased from
approximately $67,873,000 to approximately $19,829,000 as a result of the
decrease in IPA members for which the Company is at risk. In addition, effective
December 31, 1999, the Company amended its IPA contract with Foundation which
reduced the Company's prior medical claims and long-term debt liabilities to
Foundation for prior medical claims by approximately $3,054,000, resulting in a
corresponding decrease in medical services expense (See Note 4 of the Company's
Condensed Consolidated Financial Statements).
Medical claims represent the costs of medical services provided by
providers other than the Company but which are to be paid by the Company for
individuals covered by the Company's capitated risk contracts with HMOs. Claims
expense was approximately $62,360,000 and $101,393,000 for the nine months ended
March 31, 2000 and 1999, respectively, or 71.4% and 67.1% of medical services
revenues. The Company began experiencing an increase in its claims loss ratio in
the second quarter of fiscal 1999 which continued through the first quarter of
fiscal 2000. The Company has taken steps to reduce the ratio, including the
reduction in the number of IPA members for which the Company is at risk. While
claims costs as a percentage of medical services revenues had decreased for both
the staff model centers and the IPA to approximately 66% of medical services
revenues in the third quarter of fiscal 2000, there can be no assurance that the
Company's measures will be effective and that the claims loss ratio will not
increase in the future.
Other direct costs include the salaries and benefits of health
professionals providing the services, capitation payments to the Company's
contracted IPA physicians and other costs necessary to operate the Company's
facilities. Other direct costs were approximately $13,711,000 and $33,201,000
for the nine months ended March 31, 2000 and 1998, respectively, or 15.7% and
22.0% of medical services revenues.
Payroll and employee benefits for administrative personnel was
approximately $4,674,000 for the nine months ended March 31, 2000, or 5.4% of
revenues, compared to approximately $11,215,000 or 7.4% of revenue for the nine
months ended March 31, 1999. The decrease in these costs as a percent of
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<PAGE> 20
revenues is primarily due to the rationalization of employees. Payroll and
employee benefits for the Rationalized Entities was approximately $4,219,000 for
the nine months ended March 31, 1999.
General and administrative expenses for the nine months ended March 31,
2000 were approximately $4,398,000 or 5.0% of revenues compared to approximately
$9,146,000 or 6.0% of revenues for the nine months ended March 31, 1999. The
decrease in general and administrative expense as a percent of revenues resulted
from a reduction of overhead costs as part of the Company's Business
Rationalization Program. During the nine months ended March 31, 1999 general and
administrative expenses from the Rationalized Entities was approximately
$4,418,000.
Amortization expense of intangible assets was approximately $1,986,000
for the nine months ended March 31, 2000, as compared to approximately
$3,420,000 for the nine months ended March 31, 1999. Amortization expense for
the Rationalized Entities was approximately $674,000 for the nine months ended
March 31, 1999. Additionally, during fiscal year ended June 30, 1999, the
Company determined that approximately $11,700,000 of other intangible assets
were impaired and, accordingly, wrote off the impaired assets. Amortization
expense related to these impaired assets which was included in the nine months
ended March 31, 1999 totaled approximately $951,000.
Bad debt expense for the nine months ended March 31, 1999, was related
to certain of the Rationalized Entities which generated revenues primarily
through fee-for-service billings to third party payors and individual patients.
The absence of bad debt expense for the nine months ended March 31, 2000 is
directly attributable to the increase in the percentage of revenue received
under the Company's HMO contracts, for which bad debt expense is nominal.
During the nine months ended March 31, 1999, the Company recorded a
loss on disposal of subsidiaries of $15,156,000 associated with the Company's
Business Rationalization Program. No such charge was recorded during the nine
months ended March 31, 2000.
INCOME (LOSS) FROM OPERATIONS
Income from operations for the nine months ended March 31, 2000 was
approximately $2,732,000 or 3.1% of total revenues, compared to an operating
loss of approximately $27,803,000 or 18.3% of total revenues for the nine months
ended March 31, 1999. The operating loss of the Rationalized Entities for the
nine months ended March 31, 1999 was approximately $21,528,000.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
In July, 1999, the Company recorded an extraordinary gain on
extinguishment of debt of approximately $3,776,000 as a result of repurchasing
$4,000,000 of its outstanding convertible subordinated notes payable for a cash
payment of $210,000 and the write-off of related deferred financing costs and
accrued interest payable. The Company has not provided for income taxes on the
gain because it believes that it will be able to utilize certain of its net
operating loss carryforwards to offset any income tax liability related to the
transaction.
In August, 1998, the Company recorded an extraordinary gain on
extinguishment of debt of approximately $130,000 as a result of repurchasing
$1,000,000 of the Notes for a cash payment of approximately $700,000 and the
write-off of related deferred financing costs and accrued interest payable.
On February 15, 2000, the Company recorded an extraordinary gain on
extinguishment of debt of approximately $9,472,000 as a result of the
restructuring of the convertible subordinated debentures, net of restructuring
costs. The gain resulted primarily from the conversion of $31,000,000 of the
outstanding principal balance into 15,500,000 shares of common stock, which were
valued at approximately $21,312,500 based on the closing price of the Company's
stock on February 15, 2000, the forgiveness of approximately $4,237,000 of
accrued interest, the write off of approximately $1,929,000 of unamortized
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<PAGE> 21
deferred financing costs and the recording of $2,100,000 of interest which will
accrue on the remaining balance of the Notes under the revised terms of the
agreement through the maturity date of October 31, 2002. The Company has not
provided for income taxes on the gain because it believes it will be able to
utilize certain of its net operating loss carryforwards to offset any income tax
liability related to the restructuring transaction.
NET INCOME/LOSS
Net income for the nine months ended March 31, 2000 was approximately
$13,528,000 compared to a net loss of approximately $31,141,000 for the nine
months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The discussion herein has been prepared assuming that the Company will
continue as a going concern. In order to strengthen itself financially and
remain a going concern, the Company, during the fiscal year ended June 30, 1999,
divested itself of certain unprofitable operations and disposed of other
underperforming assets.
On July 2, 1999 the Company repurchased $4,000,000 face value of its
Notes for approximately $210,000, recognizing a gain on extinguishment of debt
of approximately $3,776,000. The Company funded the purchase of the Notes from
working capital.
On February 15, 2000, the Company completed a restructuring of the
Notes through the execution of a Consent Letter and Agreement to the First
Supplemental Indenture (the "Restructuring"). The Restructuring resulted in a
gain of approximately $9,472,000 as a result of the conversion of $31,000,000 of
Notes into common stock, the forgiveness of $4,237,000 of accrued interest, the
write off of approximately $1,929,000 of unamortized deferred financing costs
and the recording of $2,100,000 of interest which will accrue on the remaining
balance of the Notes under the revised terms of the agreement through the
maturity date of October 31, 2002. The remaining outstanding principal balance
of the Notes of $10,000,000 were reinstated as a performing non-defaulted loan.
In August 1998, the Company entered into a credit facility with First
Union Bank (the "Credit Facility"). The Credit Facility provided for a
$5,000,000 acquisition facility and a $5,000,000 revolving loan. The Company
borrowed the entire $5,000,000 acquisition facility to fund acquisitions. The
Company never utilized the revolving loan. During April 1999, the Company used
approximately $4,000,000 of the net proceeds from the sale of its Rehabilitation
Subsidiary to reduce the outstanding balance of the Credit Facility. In
connection with the payment, the Company entered into an amendment to the Credit
Facility, which provided, among other things, for the repayment of the remaining
outstanding principal balance by December 31, 1999. At June 30, 1999 the
outstanding balance of the Credit Facility was approximately $1,000,000 and was
included in Current Portion of Long-Term Debt in the accompanying condensed
consolidated financial statements. The Company obtained a waiver which extended
the due date of the remaining balance to February 1, 2000 and repaid the
outstanding balance on January 31, 2000.
Effective December 31, 1999, the Company negotiated an amendment to its
contract with Foundation (the "Amendment"). The Amendment reduces the Company's
prior medical claims and long-term debt liabilities to Foundation as of May 31,
1999 to $1,500,000. The Amendment also requires the Company to remit to
Foundation any reinsurance proceeds received for claims generated from
Foundation members for the period June 1, 1998 through August 31, 1999 up to a
maximum of $1,327,400. As a result of this Amendment the Company recorded a
contractual revision of previously recorded medical claims liability of
approximately $3,054,000. This Amendment resulted in the reduction of medical
claims payable by approximately $2,703,000 and the reduction of long-term debt
by approximately $351,000.
In conjunction with the Restructuring, the Company entered into a
credit facility (the "New Credit Facility"). The New Credit Facility provides a
revolving loan of $3,000,000. The New Credit Facility is due March 31, 2001 with
annual renewable options, with interest payable monthly at 2.9% plus the 30-day
Dealer Commercial Paper Rate which is 6.1% at March 31, 2000. At March 31, 2000,
21
<PAGE> 22
the Company had not borrowed any amounts available under the New Credit
Facility. (See Note 4 of the Company's Consolidated Financial Statements.)
The Company's income before extraordinary gain on extinguishment of
debt was approximately $280,000 for the nine months ended March 31, 2000. Net
cash provided by operating activities for the nine months ended March 31, 2000
was approximately $1,970,000 due primarily to the income before extraordinary
gain, non-cash amortization and depreciation expenses of approximately
$3,327,000, a decrease in accounts receivable of approximately $600,000, and
offset by a decrease of medical claims payable of approximately $3,395,000.
Net cash used in investing activities for the nine months ended March
31, 2000 was approximately $135,000, primarily for the purchase of computer
equipment in conjunction with the Company's Year 2000 computer plan. Net cash
used in financing activities for the nine months ended March 31, 2000 was
approximately $1,905,000, comprised primarily of $210,000 paid to redeem
$4,000,000 of the Company's convertible subordinated notes payable, and
approximately $1,406,000 of repayments on the Company's' Credit Facility and
other notes payable.
The Company's working capital deficit was approximately $8,892,000 at
March 31, 2000.
The Company has no current knowledge of any intermediary audit
adjustment trends with respect to previously filed cost reports. However, as is
standard in the industry, the Company remains at risk for disallowances and
other adjustments to previously filed cost reports until final settlement. The
Company's average settlement period with respect to its cost reports has
historically ranged from two to three years.
The Company continues to take steps to improve its cash flow and
profitability. The Company believes that it will be able to fund all of its
capital commitments and operating cash requirements from a combination of cash
on hand, expected cash flow improvements, and the new credit facility. The
Company anticipates its capital expenditures for fiscal 2000 will not exceed
$350,000, a reduction of $400,000 (or 53%) over the prior year. However, there
can be no assurances that any steps taken will improve the Company's cash flow
and profitability sufficiently to fund its operations and satisfy its
obligations as they become due.
If there are continuing operating losses, Continucare may need
additional capital to fund its operations, and there can be no assurance that
such additional capital can be obtained or, if obtained, that it will be on
terms acceptable to Continucare. The incurring or assumption by the Company of
additional indebtedness could result in the issuance of additional equity and/or
debt which could have a dilutive effect on current shareholders and a
significant effect on the Company's operations.
Additionally, the Company has fallen below the continued listing
requirement of the American Stock Exchange with respect to the requirements that
the Company not sustain losses from continuing operations and/or net losses in
two of its three most recent fiscal years. There can be no assurance that the
listing of the Company's common stock will be continued.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of the computer programs being
written using two digits rather than four to define the applicable year. Any
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations and patient care,
including, among other things, a failure of certain patient care applications
and equipment, a failure of control systems, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Since January 1, 2000 the Company has experienced no disruptions in its systems
or those of third parties, or other computer related problems as a result of
processing dates beyond 1999. However, there can be no assurances that the
Company will not experience Year 2000 related problems in the future.
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<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material risk associated with interest rates,
foreign currency exchange rates or commodity prices.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 10, 1997, the Company, through Continucare Physician Practice
Management, Inc., ("CPPM") a wholly-owned subsidiary, acquired all of the
outstanding stock of certain arthritis rehabilitation centers and affiliated
physician practices. The acquisitions included the purchase of AARDS, INC., a
Florida corporation formerly known as Norman B. Gaylis, M.D., Inc., Rosenbaum,
Weitz & Ritter, Inc., a Florida corporation, and of Arthritis & Rheumatic
Disease Specialties, Inc., a Florida corporation, from Sheridan Healthcare, Inc.
(collectively "AARDS").
In connection with the purchase of AARDS, the Company entered into a management
agreement with ZAG Group, Inc. ("ZAG"), an entity controlled by Jay Ziskind, Ken
Arvin and Dr. Norman Gaylis. The management agreement, among other things,
provided for ZAG to perform certain services in exchange for specified
compensation. In addition, the Company entered into a put/call agreement with
ZAG, which allowed each of the parties to require the other party, after a
two-year period, to either sell or purchase all the issued and outstanding
capital stock of ZAG for a specified price to be paid in a combination of cash
and common stock of the Company. In September 1998, the Company paid
approximately $2,000,000 to ZAG in connection with an agreement and plan of
merger executed between the Company and ZAG that effectively canceled the
put/call agreement. Cash of $115,000 was paid and the remaining $1,885,000 was
paid by issuing 575,000 unregistered shares of the Company's common stock with a
fair market value of approximately $1,600,000 on the date of issuance. However,
because the common stock issued did not have an aggregate fair market value of
approximately $1,885,000 on October 15, 1999, the agreement and plan of merger
provided that the Company would pay additional cash consideration or issue
additional shares of its common stock so that the aggregate value of the stock
issued is approximately $1,885,000. Additional consideration of approximately
$1,600,000 in cash or approximately 1,600,000 shares of the Company's common
stock (based on the March 31, 2000 market price) would have to be issued. At
this time, no additional payment has been made to ZAG.
On November 15, 1999, the Company commenced litigation against ZAG and its
affiliated parties alleging breach of fiduciary duties, improper billing, and
seeking return of all consideration previously paid by the Company to ZAG, and
damages, as well as seeking rescission of the agreement and plan of merger. A
counterclaim was filed against the Company on December 20, 1999 in the Circuit
Court of the 11th Judicial District in and for Dade County, Florida. The
counterclaim alleged breach of contract, tortious interference and conversion.
Continucare may be required to pay in excess of $1,600,000 of additional
consideration, in the form of either cash or stock, representing the difference
between $1,885,000 and the fair market value of the 575,000 unregistered shares
of Continucare common stock previously issued to ZAG in connection with the
agreement and plan of merger.
On September 19, 1997, the Company acquired the stock of Maxicare, Inc.
("Maxicare"), a Florida based home health agency for $4,200,000 including
approximately $900,000 of liabilities assumed. In addition, $300,000 of
additional purchase price is contingent upon maintaining various performance
criteria and, if earned, would be due in equal installments in September 1998
and 1999. No amounts have been paid to the former owner of Maxicare, Inc.
pursuant to the contingent purchase price from the acquisition.
The case of JAMES N. HOUGH, PLAINTIFF, v. INTEGRATED HEALTH SERVICES, INC., A
DELAWARE CORPORATION, AND REHAB MANAGEMENT SYSTEMS, INC., A FLORIDA CORPORATION
("RMS"), AND CONTINUCARE REHABILITATION SERVICES, INC., A FLORIDA CORPORATION
was removed from the active docket on March 14, 2000 and has remained dormant
since that time.
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The Company is a party to the case of MANAGED HEALTHCARE SYSTEMS ("MHS") v.
CONTINUCARE CORPORATION & CONTINUCARE HOME HEALTH SERVICES, INC ("CHHS"). This
case was filed in the Commonwealth of Massachusetts in August, 1998. The
complaint alleges breach of contract for alleged verbal representations by CHHS
in negotiations to acquire MHS and seeks damages in excess of $2,750,000 and
treble damages. The Company believes the action has little merit and intends to
vigorously defend the claim.
The case of AVENTURA COMPREHENSIVE REHABILITATION CENTER, INC. AND ANTHONY J.
DORTO, M.D. v. CONTINUCARE-AVENTURA, INC. AND CONTINUCARE OUTPATIENT MANAGEMENT,
INC. was settled in March, 2000 with no admission of liability. The parties
exchanged general releases.
The Company is a party to the case of WARREN GROSSMAN, M.D., ALAN
REICH, M.D., AND RICHARD STRAIN, M.D. v. CONTINUCARE PHYSICIAN PRACTICE
MANAGEMENT, INC. AND CONTINUCARE CORPORATION. This case was filed in May 1999 in
the Circuit Court for Broward County, Florida. The complaint alleges breach of
employment contracts based on the early termination of the Plaintiffs'
employment and seeks damages in excess of $2,500,000. On January 5, 2000, the
Company filed a counterclaim alleging breach of contract in connection with the
Plaintiffs' failure to return certain computer equipment, as well as a breach of
the non-compete covenant. The case is set for trial in May, 2000. On February
18, 2000, the Company filed a Motion for Summary Judgment as to two of the
Plaintiffs. The motion is scheduled to be heard in May, prior to the trial
period. The Company believes the action has little merit and intends to
vigorously defend the claim.
The Company is a party to the case of GE MEDICAL SYSTEMS, AN
UNINCORPORATED DIVISION OF GENERAL ELECTRIC COMPANY v. CONTINUCARE OUTPATIENT
SERVICES, INC. N/K/A OUTPATIENT RADIOLOGY SERVICES, INC AND CONTINUCARE
CORPORATION. This case was filed in April, 2000 in the Circuit Court of the 11th
Judicial Circuit in and for Dade County, Florida. The complaint alleges a breach
of guaranty agreement and seeks damages of approximately $676,000.
Two subsidiaries of the Company are parties to the case of NANCY FEIT
ET AL. v. KENNETH BLAZE, D.O. KENNETH BLAZE, D.O., P.A.; SHERIDEN HEALTHCORP,
INC.; WAYNE RISKIN, M.D.; KAHN AND RISKIN, M.D., P.A.; CONTINUCARE PHYSICIAN
PRACTICE MANAGEMENT, INC. D/B/A ARTHRITIS AND RHEUMATIC DISEASE SPECIALTIES,
INC.; JAMES JOHNSON, D.C. AND JOHNSON & FALK, D.C., P.A. The case was filed in
December, 1999 in the Circuit Court of the 17th Judicial Circuit in and for
Broward County, Florida and served on the companies in April, 2000. The
complaint alleges vicarious liability and seeks damages in excess of $15,000.
The Company is subject to a variety of claims and suits that
arise from time to time out of the ordinary course of its business,
substantially all of which involve vendor-lease claims and/or claims related to
the alleged malpractice of employed and contracted medical professionals.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 11, 2000, the Company was obligated to issue 3,000,000
unregistered shares of the Company's common stock to the guarantor of our New
Credit Facility in consideration for such guaranty. Such shares were issued on
February 15, 2000. On February 15, 2000, the Company issued 15,500,000
unregistered shares of the Company's common stock as a result of the conversion
of an aggregate principal amount of $31,000,000 million of the Company's 8%
convertible subordinated notes. All such shares were issued pursuant to an
exemption set forth under Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on February 14,
2000, the shareholders of the Company voted to elect Charles M. Fernandez, Dr.
Phillip Frost and Spencer J. Angel as Directors of the Company. The number of
votes cast for, against or withheld, with respect to each of the nominees, were
as follows:
<TABLE>
<CAPTION>
NOMINEE FOR AGAINST VOTE WITHHELD
------- --- ------- -------------
<S> <C> <C> <C>
Charles M. Fernandez....................... 11,351,832 410,085 --
Dr. Phillip Frost.......................... 11,478,187 283,760 --
Spencer J. Angel........................... 11,477,832 284,085 --
</TABLE>
In addition, the shareholders of the Company voted to approve the
restructuring of the Company's 8% convertible subordinated notes due 2002 (the
"Restructuring"). The shareholders cast 7,724,349 votes in favor of the
Restructuring, 15,550 votes against the Restructuring and shareholders abstained
with respect to 1,800 votes.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Merrill Lynch WCMA Loan and Security Agreement
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CONTINUCARE CORPORATION
Dated: May 12, 2000 By: /s/ SPENCER J. ANGEL
---------------------------------------
Spencer J. Angel
Chief Executive Officer and President
By: /s/ JANET L. HOLT
---------------------------------------
Janet L. Holt
Chief Financial Officer
26
<PAGE> 1
EXHIBIT 4.1
MERRILL LYNCH (LOGO) WCMA*LOAN AND SECURITY AGREEMENT
WCMA LOAN AND SECURITY AGREEMENT NO. 79D-07298 ("Loan Agreement") dated as of
March 9, 2000, between CONTINUCARE CORPORATION F/K/A ZANART ENTERTAINMENT
INCORPORATED, a corporation organized and existing under the laws of the State
of Florida having its principal office at 80 SW 8th Street, Suite 2350, Miami,
FL 33130 ("Customer"), and MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a
corporation organized and existing under the laws of the State of Delaware
having its principal office at 222 North LaSalle Street, Chicago, IL 60601
("MLBFS").
In accordance with the certain WORKING CAPITAL MANAGEMENT ACCOUNT
AGREEMENT NO. 79D-07298 ("WCMA Agreement") between Customer and MLBFS'
affiliate, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("MLPF&S"),
Customer has subscribed to the WCMA Program described in the WCMA Agreement. The
WCMA Agreement is by this reference incorporated as a part hereof, in
conjunction therewith and as part of the WCMA Program. Customer has requested
that MLFBFS provide, and subject to the terms and conditions herein set forth
MLBFS has agreed to provide, a commercial line of credit for Customer (the "WCMA
Line of Credit").
Accordingly, and in consideration of the premises and of the mutual covenants
of the parties hereto, Customer and MLBFS hereby agree as follows:
ARTICLE I. DEFINITIONS
1.1 SPECIFIC TERMS. In addition to terms defined elsewhere in this Loan
Agreement, when used herein the following terms shall have the following
meanings:
(a) "Account Debtor" shall mean any party who is or may become obligated with
respect to an Account or Chattel Paper.
(b) "Activation Date" shall mean the date upon which MLBFS shall cause the WCMA
Line of Credit to be fully activated under MLPF&S' computer system as part of
the WCMA Program.
(c) "Additional Agreements" shall mean all agreements, instruments, documents
and opinions other than this Loan Agreement, whether with or from Customer or
any other party, which are contemplated hereby or otherwise reasonably required
by MLBFS in connection herewith, or which evidence the creation, guaranty or
collateralization of any of the Obligations or the granting or perfection of
liens or security interests upon the Collateral or any other collateral for the
Obligations.
(d) "Bankruptcy Event" shall mean any of the following: (i) a proceeding under
any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt
or receivership law or statute shall be filed or consented to by Customer or
any Guarantor; or (ii) any such proceeding shall be filed against Customer or
any Guarantor and shall not be dismissed or withdrawn within sixty (60) days
after filing; or (iii) Customer or any Guarantor shall make a general
assignment for the benefit of creditors; or (iv) Customer or any Guarantor
shall generally fail to pay or admit in writing its inability to pay its debts
as they become due; or (v) Customer or any Guarantor shall be adjudicated a
bankrupt or insolvent.
(e) "Business Day" shall mean any day other than a Saturday, Sunday, federal
holiday or other day on which the New York Stock Exchange is regularly closed.
(f) "Collateral" shall mean all Accounts, Chattel Paper, Contract Rights,
Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts,
Documents, Instruments, Investment Property and Financial Assets of Customer,
howsoever arising, whether now owned or existing or hereafter acquired or
arising, and wherever located; together with all parts thereof (including spare
parts), all accessories and accessers thereto, all books and records (including
computer records) directly related thereto, all proceeds thereof (including,
without limitation, proceeds in the form of Accounts and insurance proceeds),
and the additional collateral described in Section 3.6(b) hereof.
(g) "Commitment Expiration Date" shall mean April 6, 2000.
(h) "Default" shall mean either an "Event of Default" as defined in Section 3.5
hereof, or an event which with the giving of notice, passage of time, or both,
would constitute such Event of Default.
(i) "Default Interest Rate" shall mean a rate equal to the sum of the "Interest
Rate", as determined below, plus two percent (2%) per annum.
(j) "General Funding Conditions" shall mean each of the following conditions to
any WCMA Loan by MLBFS hereunder: (i) no Default shall have occurred and be
continuing or would result from the making of any WCMA Loan hereunder by MLBFS;
(ii) there shall not have occurred and be continuing any material adverse
change in the business or financial condition of Customer or any Guarantor;
(iii) any representations and warranties of Customer or any Guarantor herein or
in any Additional Agreements shall then be true and correct in all material
respects; (iv) MLBFS shall have received this Loan Agreement and all of the
Additional Agreements, duly executed and filed or recorded where applicable,
all of which shall be in form and substance reasonably satisfactory to MLBFS;
(v) MLBFS shall have received evidence reasonably satisfactory to it as to the
ownership of the Collateral and the perfection and priority of MLBFS' liens and
security interests thereon, as well as the ownership of and the perfection and
priority of MLBFS' liens and security interests on any other collateral for the
Obligations furnished pursuant to any of the Additional Agreements; (vi) MLBFS
shall have received evidence reasonably satisfactory to it of the insurance
required hereby or by any of the Additional Agreements; and (vii) any
additional conditions specified in the "WCMA Line of Credit Approval" letter
executed by MLBFS with respect to the transactions contemplated hereby shall
have been met to the reasonable satisfaction of MLBFS.
<PAGE> 2
(k) "Guarantor" shall mean a person or entity who has either guaranteed or
provided collateral for any or all of the Obligations.
(l) "Initial Maturity Date" shall mean the first date upon which the WCMA Line
of Credit will expire (subject to renewal in accordance with the terms hereof);
to be March 31, 2001.
(m) "Interest Due Date" shall mean the last Business Day of each calendar month
during the term hereof (or, if Customer makes special arrangements with MLPF&S,
the last Friday of each calendar month during the term hereof).
(n) "Interest Rate" shall mean a variable per annum rate of interest equal to
the sum of 2.90% and the 30-day Dealer Commercial Paper Rate. The "30-day
Dealer Commercial Paper Rate" shall mean, as of the date of any determination,
the interest rate from time to time published in the "Money Rates" section of
THE WALL STREET JOURNAL as the "Dealer Commercial Paper" rate for 30-day
high-grade unsecured notes sold through dealers by major corporations. The
Interest Rate will change as of the date of publication in THE WALL STREET
JOURNAL of a 30-day Dealer Commercial Paper Rate that is different from that
published on the preceding Business Day. In the event that THE WALL STREET
JOURNAL shall, for any reason, fail or cease to publish the 30-day Dealer
Commercial Paper Rate, MLBFS will choose a reasonably comparable index or
source to use as the basis for the Interest Rate. Upon the occurrence and
during the continuance of a Default, the Interest Rate with respect the WCMA
Line of Credit may be increased to the "Default Interest Rate", as herein
provided.
(o) "Line Fee" shall mean a fee of $15,000.00 payable periodically by Customer
to MLBFS in accordance with the provisions of Section 2.2(k) hereof.
(p) "Location of Tangible Collateral" shall mean the address of Customer set
forth at the beginning of this Loan Agreement, together with any other address
or addresses set forth on an exhibit hereto as being a Location of Tangible
Collateral.
(q) "Maturity Date" shall mean the date of expiration of the WCMA Line of
Credit.
(r) "Maximum WCMA Line of Credit" shall mean $3,000,000.00.
(s) "Obligations" shall mean all liabilities, indebtedness and other
obligations of Customer to MLBFS, howsoever created, arising or evidenced,
whether now existing or hereafter arising, whether direct or indirect, absolute
or contingent, due or to become due, primary or secondary or joint or several,
and, without limiting the foregoing, shall include interest accruing after the
filing of any petition in bankruptcy, and all present and future liabilities,
indebtedness and obligations of Customer under this Loan Agreement.
(t) ""Permitted Liens" shall mean with respect to the Collateral: (i) liens for
current taxes not delinquent, other non-consensual liens arising in the
ordinary course of business for sums not due, and, if MLBFS' rights to and
interest in the Collateral are not materially and adversely affected thereby,
any such liens for taxes or other non-consensual liens arising in the ordinary
course of business being contested in good faith by appropriate proceedings;
(ii) liens in favor of MLBFS; (iii) liens which will be discharged with the
proceeds of the Initial WCMA Loan; and (iv) any other liens expressly permitted
in writing by MLBFS.
(u) "Renewal Year" shall mean and refer to the 12-month period immediately
following the Initial Maturity Date and each 12-month period thereafter.
(v) "WCMA Account" shall mean and refer to the Working Capital Management
Account of Customer with MLPF&S identified as Account No. 79D-07298 and any
successor Working Capital Management Account of Customer with MLPF&S.
(w) "WCMA Loan" shall mean each advance made by MLBFS pursuant to this Loan
Agreement.
(x) "WCMA Loan Balance" shall mean an amount equal the aggregate unpaid
principal amount of all WCMA Loans.
1.2 OTHER TERMS. Except as otherwise defined herein: (i) all terms used in this
Loan Agreement which are defined in the Uniform Commercial Code of Illinois
("UCC") shall have the meanings set forth in the UCC, and (ii) capitalized
terms herein which are defined in the WCMA Agreement shall have the meanings
set forth in the WCMA Agreement.
ARTICLE II. THE WCMA LINE OF CREDIT
2.1 WCMA PROMISSORY NOTE. FOR VALUE RECEIVED, Customer hereby promises to pay
to the order of MLBFS, at the times and in the manner set forth in this Loan
Agreement, or in such other manner and at such place as MLBFS may hereafter
designate in writing, the following: (a) on the Maturity Date or if earlier,
on the date of termination of the WCMA Line of Credit, the WCMA Loan Balance;
(b) interest at the Interest Rate (or, if applicable at the Default Interest
Rate) on the outstanding WCMA Loan Balance, from and including the date on
which the initial WCMA Loan is made until the date of payment of all WCMA Loans
in full; and (c) on demand, all other sums payable pursuant to this Loan
Agreement, including, but not limited to, the periodic Line Fee. Except as
otherwise expressly set forth herein, Customer hereby waives presentment,
demand for payment, protest and notice of protest, notice of dishonor, notice
of acceleration, notice of intent to accelerate and all other notices and
formalities in connection with this WCMA Promissory Note and this Loan
Agreement.
2.2 WCMA LOANS
(a) ACTIVATION DATE. Provided that: (i) the Commitment Expiration Date shall
not then have occurred, and (ii) Customer shall have subscribed to the WCMA
Program and its subscription to the WCMA Program shall then be in effect, the
Activation Date shall occur on or promptly after the date, following the
acceptance of this Loan Agreement by MLBFS at its office in Chicago, Illinois,
upon which each of the General Funding Conditions shall have been met or
satisfied to the reasonable satisfaction of MLBFS. No activation by MLBFS of
the WCMA Line of Credit for a nominal amount shall be deemed evidence of the
satisfaction of any of the conditions herein set forth, or a waiver of any of
the terms or conditions hereof. Customer hereby authorizes MLBFS to pay out
<PAGE> 3
of any charge to Customer's WCMA Account on the Activation Date any and all
amounts necessary to fully pay off any bank or other financial institution
having a lien upon any of the Collateral other than a Permitted Lien.
(b) WCMA LOANS. Subject to the terms and conditions hereof, during the period
from and after the Activation Date to the first to occur of the Maturity Date
or the date of termination of the WCMA Line of Credit pursuant to the terms
hereof, and in addition to WCMA Loans automatically made to pay accrued
interest, as hereafter provided, MLBFS will make WCMA Loans to Customer in such
amounts as Customer may from time to time request in accordance with the terms
hereof, up to an aggregate outstanding amount not to exceed the Maximum WCMA
Line of Credit, and (ii) Customer may repay any WCMA Loans in whole or in part
at any time, and request a re-borrowing of amounts repaid on a revolving basis.
Customer may request such WCMA Loans by use of WCMA Checks, FTS, Visa(R)
charges, wire transfers, or such other means of access to the WCMA Line of
Credit as may be permitted by MLBFS from time to time; it being understood that
so long as the WCMA Line of Credit shall be in effect, any charge or debit to
the WCMA Account which but for the WCMA Line of Credit would under the terms of
the WCMA Agreement result in an overdraft, shall be deemed a request by
Customer for a WCMA Loan.
(c) CONDITIONS OF WCMA LOANS. Notwithstanding the foregoing, MLBFS shall not be
obligated to make any WCMA Loan, and may without notice refuse to honor any
such request by Customer, if at the time of receipt by MLBFS of Customer's
request: (i) the making of such WCMA Loan would cause the Maximum WCMA Line of
Credit to be exceeded; or (ii) the Maturity Date shall have occurred, or the
WCMA Line of Credit shall have otherwise been terminated in accordance with the
terms hereof; or (iii) Customer's subscription to the WCMA Program shall have
been terminated; or (iv) an event shall have occurred and be continuing which
shall have caused any of the General Funding Conditions to not then be met or
satisfied to the reasonable satisfaction of MLBFS. The making by MLBFS of any
WCMA Loan at a time when any one or more of said conditions shall not have been
met shall not in any event be construed as a waiver of said condition or
conditions or of any Default, and shall not prevent MLBFS at any time
thereafter while any condition shall not have been met from refusing to honor
any request by Customer for a WCMA Loan.
(d) LIMITATION OF LIABILITY. MLBFS shall not be responsible, and shall have no
liability to Customer or any other party, for any delay or failure of MLBFS to
honor any request of Customer for a WCMA Loan or any other act or omission of
MLBFS, MLPF&S or any of their affiliates due to or resulting from any system
failure, error or delay in posting or other clerical error, loss of power, fire,
Act of God or other cause beyond the reasonable control of MLBFS, MLPF&S or any
of their affiliates unless directly arising out of the willful wrongful act or
active gross negligence of MLBFS. In no event shall MLBFS be liable to Customer
or any other party for any incidental or consequential damages arising from any
act or omission by MLBFS, MLPF&S or any of their affiliates in connection with
the WCMA Line of Credit or this Loan Agreement.
(e) INTEREST. (i) An amount equal to accrued interest on the WCMA Loan Balance
shall be payable by Customer monthly on each Interest Due Date, commencing with
the Interest Due Date occurring in the calendar month in which the Activation
Date shall occur. Unless otherwise hereafter directed in writing by MLBFS on or
after the first to occur of the Maturity Date or the date of termination of the
WCMA Line of Credit pursuant to the terms hereof, such interest will be
automatically charged to the WCMA Account on the applicable Interest Due Date,
and, to the extent not paid with free credit balances or the proceeds of sales
of any Money Accounts then in the WCMA Account, as hereafter provided, paid by
the WCMA Loan and added to the WCMA Loan Balance. All interest shall be
computed for the actual number of days elapsed on the basis of a year
consisting of 360 days.
(ii) Upon the occurrence and during the continuance of any Default, but without
limiting the rights and remedies otherwise available to MLBFS hereunder or
waiving such Default, the interest payable by Customer hereunder shall at the
option of MLBFS accrue and be payable at the Default Interest Rate. The Default
Interest Rate, once implemented, shall continue to apply to the Obligations
under this Loan Agreement and be payable by Customer until the date such
Default is either cured or waived in writing by MLBFS.
(iii) Notwithstanding any provision to the contrary in this Agreement or any of
the Additional Agreements, no provision of this Agreement or any of the
Additional Agreements shall require the payment or permit the collection of any
amount in excess of the maximum amount of interest permitted to be charged by
law ("Excess Interest"). If any Excess Interest is provided for, or is
adjudicated as being provided for, in this Agreement or any of the Additional
Agreements, then: (A) Customer shall not be obligated to pay any Excess
Interest; and (B) any Excess Interest that MLBFS may have received hereunder or
under any of the Additional Agreements shall, at the option of MLBFS, be: (1)
applied as a credit against the then unpaid WCMA Loan Balance, (2) refunded to
the payer thereof, or (3) any combination of the foregoing.
(f) PAYMENTS. All payments required or permitted to be made pursuant to this
Loan Agreement shall be made in lawful money of the United States. Unless
otherwise directed by MLBFS, payments on account of the WCMA Loan Balance may
be made by the delivery of checks (other than WCMA Checks), or by means of FTS
or wire transfer of funds (other than funds from the WCMA Line of Credit) to
MLPF&S for credit to Customer's WCMA Account. Notwithstanding anything in the
WCMA Agreement to the contrary, Customer hereby irrevocably authorizes and
directs MLPF&S to apply available free credit balances in the WCMA Account to
the repayment of the WCMA Loan Balance prior to application for any other
purpose. Payments to MLBFS from funds in the WCMA Account shall be deemed to be
made by Customer upon the same basis and schedule as funds are made available
for investment in the Money Accounts in accordance with the terms of the WCMA
Agreement. All funds received by MLBFS from MLPF&S pursuant to the aforesaid
authorization shall be applied by MLBFS to repayment of the WCMA Loan Balance.
The acceptance by or on behalf of MLBFS of a check or other payment for a
lesser amount than shall be due from Customer, regardless of any endorsement or
statement thereon or transmitted therewith, shall not be deemed an accord and
satisfaction or anything other than a payment on account, and MLBFS or anyone
acting on behalf of MLBFS may accept such check or other payment without
prejudice to the rights of MLBFS to recover the balance actually due or to
pursue any other remedy under this Loan agreement or applicable law for such
balance. All checks accepted by or on behalf of MLBFS in connection with the
WCMA Line of Credit are subject to final collection.
(g) IRREVOCABLE INSTRUCTIONS TO MLPF&S. In order to minimize the WCMA Loan
Balance, Customer hereby irrevocably authorizes and directs MLPF&S, effective
on the Activation Date and continuing thereafter so long as this Agreement
shall be in effect: (i) to immediately and prior to application for any other
purpose pay to MLBFS to the extent of any WCMA Loan Balance or other amounts
payable by Customer hereunder all available free credit balances from time to
time in the WCMA Account; and (ii) if such available free credit balances are
insufficient to pay the WCMA Loan Balance and such other amounts, and there are
in the WCMA Account at any time any investments in Money Accounts (other than
any investments constituting any Minimum Money Accounts
<PAGE> 4
Balance under the WCMA Directed Reserve Program), to immediately liquidate such
investments and pay to MLBFS to the extent of any WCMA Loan Balance and such
other amounts the available proceeds from the liquidation of any such Money
Accounts.
(h) STATEMENTS. MLPF&S will include in each monthly statement it issues under
the WCMA Program Information with respect to WCMA Loans and the WCMA Loan
Balance. Any questions that Customer may have with respect to such information
should be directed to MLBFS; and any questions with respect to any other matter
in such statements or about or affecting the WCMA Program should be directed to
MLPF&S.
(i) USE OF WCMA LOAN PROCEEDS. The proceeds of each WCMA Loan initiated by
Customer shall be used by Customer solely for working capital in the ordinary
course of its business, or, with the prior written consent of MLBFS, for other
lawful business purposes of Customer not prohibited hereby. Customer agrees
that under no circumstances will the proceeds of any WCMA Loan be used: (i) for
personal, family or household purposes of any person whatsoever, or (ii) to
purchase, carry or trade in securities, or repay debt incurred to purchase,
carry or trade in securities, whether in or in connection with the WCMA
Account, another account of Customer with MLPF&S or an account of Customer at
any other broker or dealer in securities, or (iii) unless otherwise consented
to in writing by MLBFS, to repay any debt to Merrill Lynch and Co., Inc. or any
of its subsidiaries.
(j) RENEWAL AT OPTION OF MLBFS; RIGHT OF CUSTOMER TO TERMINATE. MLBFS may at any
time, in its sole discretion and at its sole option, renew the WCMA Line of
Credit for one or more Renewal Years; it being understood, however, that no such
renewal shall be effective unless set forth in a writing executed by a duly
authorized representative of MLBFS and delivered to Customer. Unless any such
renewal is accompanied by a proposed change in the terms of the WCMA Line of
Credit (other than the extension of the Maturity Date), no such renewal shall
require Customer's approval. Customer shall, however, have the right to
terminate the WCMA Line of Credit at any time upon written notice to MLBFS.
Customer shall also have, in its sole discretion and at its sole option, the
right to pre-pay the Line of Credit in whole or in part with no pre-payment
penalty of any kind.
(i) LINE FEES. (i) in consideration of the extension of the WCMA Line of Credit
by MLBFS to Customer during the period from the Activation Date to the Initial
Maturity Date, Customer has paid or shall pay the Line Fee to MLBFS. If the
Line Fee has not heretofore been paid by Customer, Customer hereby authorizes
MLBFS, at its option, to either cause the Line Fee to be paid on the Activation
Date with a WCMA Loan, or invoice Customer for such Line Fee (in which event
Customer shall pay said fee within 5 Business Days after receipt of such
invoice). No delay in the Activation Date, howsoever caused, shall entitle
Customer to any rebate or reduction in the Line Fee or to any extension of the
Initial Maturity Date.
(ii) Customer shall pay an additional Line Fee for each Renewal Year. In
connection therewith, Customer hereby authorizes MLBFS, at its option, to
either cause each such additional Line Fee to be paid with a WCMA Loan on or at
any time after the first Business Day of such Renewal Year or invoiced to
Customer at such time (in which event Customer shall pay such Line Fee within 5
Business Days after receipt of such invoice). Each Line Fee shall be deemed
fully earned by MLBFS on the date payable by Customer, and no termination of
the WCMA Line of Credit, howsoever caused, shall entitle Customer to any rebate
or refund of any portion of such Line Fee; provided, however, that if Customer
shall terminate the WCMA Line of Credit not later than 5 Business Days after
the receipt by Customer of notice from MLBFS of a renewal of the WCMA Line of
Credit, Customer shall be entitled to a refund of any Line Fee charged by MLBFS
for the ensuing Renewal Year.
ARTICLE III. GENERAL PROVISIONS
3.1 REPRESENTATIONS AND WARRANTIES
Customer represents and warrants to MLBFS that:
(a) ORGANIZATION AND EXISTENCE. Customer is a corporation, duly organized and
validly existing in good standing under the laws of the State of Florida and is
qualified to do business and in good standing in each other state where the
nature of its business or the property owned by it make such qualification
necessary.
(b) EXECUTION, DELIVERY AND PERFORMANCE. The execution, delivery and
performance by Customer of this Loan Agreement and by Customer and each
Guarantor of such of the Additional Agreements to which it is a party: (i) have
been duly authorized by all requisite action, (ii) do not and will not violate
or conflict with any law or other governmental requirement, or any of the
agreements, instruments or documents which formed or govern Customer or any
such Guarantor, and (iii) do not and will not breach or violate any of the
provisions of, and will not result in a default by Customer or any such
Guarantor under, any other agreement, instrument or document to which it is a
party or by which it or its properties are bound.
(c) NOTICES AND APPROVALS. Except as may have been given or obtained, no notice
to or consent or approval of any governmental body or authority or other third
party whatsoever (including, without limitation, any other creditor) is
required in connection with the execution, delivery or performance by Customer
or any Guarantor of such of this Loan Agreement and the Additional Agreements
to which it is a party.
(d) ENFORCEABILITY. This Loan Agreement and such of the Additional Agreements
to which Customer or any Guarantor is a party are the respective legal, valid
and binding obligations of Customer and such Guarantor, enforceable against it
or them, as the case may be, in accordance with their respective terms except
as enforceability may be limited by bankruptcy and other similar laws affecting
the rights of creditors generally or by general principles of equity.
(e) COLLATERAL. Except for any Permitted Liens: (i) Customer has good and
marketable title to the Collateral, (ii) none of the Collateral is subject to
any lien, encumbrance or security interest, and (iii) upon the filing of all
Uniform Commercial Code financing statements executed by Customer with respect
to the Collateral in the appropriate jurisdiction(s) and/or the completion of
any other action required by applicable law to perfect its liens and security
interests, MLBFS will have valid and perfected first liens and security
interests upon all of the Collateral.
(f) FINANCIAL STATEMENTS. Except as expressly set forth in Customer's financial
statements, all financial statements of Customer furnished to MLBFS have been
prepared in conformity with generally accepted accounting principles,
consistently applied, are true and correct in all material respects, and fairly
<PAGE> 5
present the financial condition of it as at such dates and the results of its
operations for the periods then ended (subject, in the case of interim
unaudited financial statements, to normal year-end adjustments); and since the
most recent date covered by such financial statements, there has been no
material adverse change in any such financial condition or operation. All
financial statements furnished to MLBFS of any Guarantor are true and correct
in all material respects and fairly represent such Guarantor's financial
condition as of the date of such financial statements, and since the most
recent date of such financial statements, there has been no material adverse
change in such financial condition.
(g) LITIGATION. No litigation, arbitration, administrative or governmental
proceedings are pending or, to the knowledge of Customer, threatened against
Customer or any Guarantor, which would, if adversely determined, materially and
adversely affect the liens and security interests of MLBFS hereunder or under
any of the Additional Agreements, the financial condition of Customer or any
such Guarantor or the continued operations of Customer.
(h) TAX RETURNS. All federal, state and local tax returns, reports and
statements required to be filed by Customer and each Guarantor have been filed
with the appropriate governmental agencies and all taxes due and payable by
Customer and each Guarantor have been timely paid (except to the extent that
any such failure to file or pay will not materially and adversely affect either
the liens and security interests of MLBFS hereunder or under any of the
Additional Agreements, the financial condition of Customer or any Guarantor, or
the continued operations of Customer).
(i) COLLATERAL LOCATION. All the tangible Collateral is located at a Location
of Tangible Collateral.
(j) NO OUTSIDE BROKER. Except for employees of MLBFS, MLPF&S or one of their
affiliates, Customer has not in connection with the transactions contemplated
hereby directly or indirectly engaged or dealt with, and was not introduced or
referred to MLBFS by, any broker or other loan arranger.
Each of the foregoing representations and warranties: (i) has been and will be
relied upon as an inducement to MLBFS to provide the WCMA Line of Credit, and
(ii) is continuing and shall be deemed remade by Customer concurrently with
each request for a WCMA Loan.
3.2 FINANCIAL AND OTHER INFORMATION
(a) Customer shall furnish or cause to be furnished to MLBFS during the term of
this Loan Agreement all of the following:
(i) ANNUAL FINANCIAL STATEMENTS. Within 120 days after the close of each fiscal
year of Customer, a copy of the annual audited financial statements of
Customer, including in reasonable detail, a balance sheet and statement of
retained earnings as at the close of such fiscal year and statements of profit
and loss and cash flow for such fiscal year.
(ii) INTERIM FINANCIAL STATEMENTS. Within 45 days after the close of each
fiscal quarter of Customer, a copy of the interim financial statements of
Customer for such fiscal quarter (including in reasonable detail both a balance
sheet as of the close of such fiscal period, and statement of profit and loss
for the applicable fiscal period); and
(iii) OTHER INFORMATION. Such other information as MLBFS may from time to
time reasonably request relating to Customer, any Guarantor or the Collateral.
(b) GENERAL AGREEMENTS WITH RESPECT TO FINANCIAL INFORMATION. Customer agrees
that except as otherwise specified herein or otherwise agreed to in writing by
MLBFS: (i) all annual financial statements required to be furnished by Customer
to MLBFS hereunder will be prepared by either the current independent
accountants for Customer or other independent accountants reasonably acceptable
to MLBFS, and (ii) all other financial information required to be furnished by
Customer to MLBFS hereunder will be certified as correct by its chief
financial officer.
3.3 OTHER COVENANTS
Customer further covenants and agrees during the term of this Loan Agreement
that:
(a) FINANCIAL RECORDS; INSPECTION. Customer will: (i) maintain at its principal
place of business complete and accurate books and records, and maintain all of
its financial records in a manner consistent with the financial statements
heretofore furnished to MLBFS, or prepared on such other basis as may be
approved in writing by MLBFS; and (ii) permit MLBFS or its duly authorized
representatives upon reasonable notice and at reasonable times, to inspect its
properties (both real and personal), operations, books and records.
(b) TAXES. Customer and each Guarantor will pay when due all taxes, assessments
and other governmental charges, howsoever designated, and all other liabilities
and obligations, except to the extent that any such failure to pay will not
materially and adversely affect either the liens and security interests of
MLBFS hereunder or under any of the Additional Agreements, the financial
condition of Customer or any Guarantor or the continued operations of Customer.
(c) COMPLIANCE WITH LAWS AND AGREEMENTS. Neither Customer nor any Guarantor
will violate any law, regulation or other governmental requirement, any
judgment or order of any court or governmental agency or authority, or any
agreement, instrument or document to which it is a party or by which it is
bound, if any such violation will materially and adversely affect either the
liens and security interests of MLBFS hereunder or under any of the Additional
Agreements, the financial condition of Customer or any Guarantor, or the
continued operations of Customer.
<PAGE> 6
(d) NO USE OF MERRILL LYNCH NAME. Except upon the prior written consent of
MLBFS, neither Customer nor any Guarantor will directly or indirectly publish,
disclose or otherwise use in any advertising or promotional material, or press
release or interview, the name, logo or any trademark of MLBFS, MLPF&S, Merrill
Lynch and Co., Incorporated or any of their affiliates.
(e) NOTIFICATION BY CUSTOMER. Customer shall provide MLBFS with prompt written
notification of: (i) any Default; (ii) any materially adverse change in the
business, financial condition or operations of Customer; (iii) any information
which indicates that any financial statements of Customer or any Guarantor fail
in any material respect to present fairly the financial condition and results
of operations purported to be presented in such statements; and (iv) any
change in Customer's outside accountants. Each notification by Customer
pursuant hereto shall specify the event or information causing such
notification, and, to the extent applicable, shall specify the steps being
taken to rectify or remedy such event or information.
(f) NOTICE OF CHANGE. Customer shall give MLBFS not less than 30 days prior
written notice of any change in the name (including any fictitious name) or
principal place of business or residence of Customer or any Guarantor.
(g) CONTINUITY. Except upon the prior written consent of MLBFS, which consent
will not be unreasonably withheld: (i) Customer shall not be a party to any
merger or consolidation with, or purchase or otherwise acquire all or
substantially all of the asset of, or any material stock, partnership, joint
venture or other equity interest in, any person or entity, or sell, transfer or
lease all or any substantial part of its assets, if any such action would
result in either: (A) a material change in the principal business, ownership or
control of Customer, or (B) a material adverse change in the financial
condition or operations of Customer; (ii) Customer shall preserve its existence
and good standing in the jurisdiction(s) of establishment and operation; (iii)
Customer shall not engage in any material business substantially different from
its business in effect as of the date of application by Customer for credit
from MLBFS, or cease operating any such material business; (iv) Customer shall
not cause or permit any other person or entity to assume or succeed to any
material business or operations of Customer; and (v) Customer shall not cause
or permit any material change in its controlling ownership.
3.4 COLLATERAL
(a) PLEDGE OF COLLATERAL. To secure payment and performance of the Obligations,
Customer hereby pledges, assigns, transfers and sets over to MLBFS, and grants
to MLBFS first liens and security interests in and upon all of the Collateral,
subject only to Permitted Liens.
(b) LIENS. Except upon the prior written consent of MLBFS, Customer shall not
create or permit to exist any lien, encumbrance or security interest upon or
with respect to any Collateral now owned or hereafter acquired other than
Permitted Liens.
(c) PERFORMANCE OF OBLIGATIONS. Customer shall perform all of its obligations
owing on account of or with respect to the Collateral; it being understood that
nothing herein, and no action or inaction by MLBFS, under this Loan Agreement
or otherwise, shall be deemed an assumption by MLBFS of any of Customer's said
obligations.
(d) SALES AND COLLECTIONS. So long as no Event of Default shall have occurred
and be continuing, Customer may in the ordinary course of its business: (i)
sell any inventory normally held by Customer for sale, (ii) use or consume any
materials and supplies normally held by Customer for use or consumption, and
(iii) collect all of its Accounts. Customer shall take such action with respect
to protection of its inventory and the other Collateral and the collection of
its Accounts as MLBFS may from time to time reasonably request.
(e) ACCOUNT SCHEDULES. Upon the request of MLBFS, made now or at any reasonable
time or times hereafter, Customer shall delver to MLBFS, in addition to the
other information required hereunder, a schedule identifying, for each Account
and all Chattel Paper subject to MLBFS' security interests hereunder, each
Account Debtor by name and address and amount, invoice or contract number and
date of each invoice or contract. Customer shall furnish to MLBFS such
additional information with respect to the Collateral, and amounts received by
Customer as proceeds of any of the Collateral, as MLBFS may from time to time
reasonably request.
(f) ALTERATIONS AND MAINTENANCE. Except upon the prior written consent of
MLBFS, Customer shall not make or permit any material alterations to any
tangible Collateral which might materially reduce or impair its market value or
utility. Customer shall at all times keep the tangible Collateral in good
condition and repair, reasonable wear and tear excepted, and shall pay or cause
to be paid all obligations arising from the repair and maintenance of such
Collateral, as well as all obligations with respect to any Location of Tangible
Collateral, except for any such obligations being contested by Customer in good
faith by appropriate proceedings.
(g) LOCATION. Except for movements required in the ordinary course of
Customer's business, Customer shall give MLBFS 30 days' prior written notice of
the placing at or movement of any tangible Collateral to any location other
than a Location of Tangible Collateral. In no event shall Customer cause or
permit any material tangible Collateral to be removed from the United States
without the express prior written consent of MLBFS.
(h) INSURANCE. Customer shall insure all of the tangible Collateral under a
policy or policies of physical damage insurance providing that losses will be
payable to MLBFS as its interest may appear pursuant to a Lender's Loss Payable
Endorsement and containing such other provisions as may be reasonably required
by MLBFS. Customer shall further provide and maintain a policy or policies of
comprehensive public liability insurance naming MLBFS as an additional party
insured. Customer shall maintain such other insurance as may be required by law
or is customarily maintained by companies in a similar business or otherwise
reasonably required by MLBFS. All such insurance policies shall provide that
MLBFS will receive not less than 10 days prior written notice of any
cancellation, and shall otherwise be in form and amount and with an insurer or
insurers reasonably acceptable to MLBFS. Customer shall furnish MLBFS with a
copy or certificate of each such policy or policies, and, prior to any
expiration or cancellation, each renewal or replacement thereof.
(i) EVENT OF LOSS. Customer shall at its expense promptly repair all repairable
damage to any tangible Collateral. In the event that any tangible Collateral is
damaged beyond repair, lost, totally destroyed or confiscated (an "Event of
Loss") and such Collateral had a value prior to such Event of Loss of
$25,000.00 or more, then, on or before the first to occur of (i) 90 days after
the occurrence of such Event of Loss, or (ii) 10 Business Days after the date on
<PAGE> 7
which either Customer or MLBFS shall receive any proceeds of insurance on
account of such Event of Loss, or any underwriter of insurance on such
Collateral shall advise either Customer or MLBFS that it disclaims liability in
respect of such Event of Loss, Customer shall, at Customer's option, either
replace the Collateral subject to such Event of Loss with comparable Collateral
free of all liens other than Permitted Liens (in which event Customer shall be
entitled to utilize the proceeds of insurance on account of such Event of Loss
for such purpose, and may retain any excess proceeds of such insurance), or
deposit into the WCMA Account an amount equal to the actual cash value of such
Collateral as determined by either the insurance company's payment (plus any
applicable deductible), or, in absence of insurance company payment, as
reasonably determined by MLBFS; it being further understood that any such
deposit shall be accompanied by a like permanent reduction in the Maximum WCMA
Line of Credit. Notwithstanding the foregoing, if at the time of occurrence of
such Event of Loss or any time thereafter prior to replacement or line
reduction, as aforesaid, an Event of Default shall have occurred and be
continuing hereunder, then MLBFS may at its sole option, exercisable at any
time while such Event of Default shall be continuing, require Customer to
either replace such Collateral or make a deposit into the WCMA Account and
reduce the Maximum WCMA Line of Credit, as aforesaid.
(j) NOTICE OF CERTAIN EVENTS. Customer shall give MLBFS immediate notice of any
attachment, lien, judicial process, encumbrance or claim affecting or involving
$25,000.00 or more of the Collateral.
(k) INDEMNIFICATION. Customer shall indemnify, defend and save MLBFS harmless
from and against any and all claims, liabilities, losses, costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses) of any
nature whatsoever which may be asserted against or incurred by MLBFS arising
out of or in any manner occasioned by (i) the ownership, collection,
possession, use or operation of any Collateral, or (ii) any failure by Customer
to perform any of its obligations hereunder; excluding, however, from said
indemnity any such claims, liabilities, etc. arising directly out of the
willful wrongful act or active gross negligence of MLBFS. This indemnity shall
survive the expiration or termination of this Loan Agreement as to all matters
arising or accruing prior to such expiration or termination.
3.5 EVENTS OF DEFAULT
The occurrence of any of the following events shall constitute an "Event of
Default" under this Loan Agreement:
(a) EXCEEDING THE MAXIMUM WCMA LINE OF CREDIT. If the WCMA Loan Balance shall at
any time exceed the Maximum WCMA Line of Credit and Customer shall fail to
deposit sufficient funds into the WCMA Account to reduce the WCMA Loan Balance
below the Maximum WCMA Line of Credit within five (5) Business Days after
written notice thereof shall have been given by MLBFS to Customer.
(b) OTHER FAILURE TO PAY. Customer shall fail to pay to MLBFS or deposit into
the WCMA Account when due any other amount owing or required to be paid or
deposited by Customer under this Loan Agreement, or shall fail to pay when due
any other Obligations, and any such failure shall continue for more than five
(5) Business Days after written notice thereof shall have been given by MLBFS
to Customer.
(c) FAILURE TO PERFORM. Customer or any Guarantor shall default in the
performance or observance of any covenant or agreement on its part to be
performed or observed under this Loan Agreement or any of the Additional
Agreements (not constituting an Event of Default under any other clause of this
Section), and such default shall continue unremedied for ten (10) Business Days
after written notice thereof shall have been given by MLBFS to Customer.
(d) BREACH OF WARRANTY. Any representation or warranty made by Customer or any
Guarantor contained in this Loan Agreement or any of the Additional Agreements
shall at any time prove to have been incorrect in any material respect when
made.
(e) DEFAULT UNDER OTHER AGREEMENT. A default or Event of Default by Customer or
any Guarantor shall occur under the terms of any other agreement, instrument or
document with or intended for the benefit of MLBFS, MLPF&S or any of their
affiliates, and any required notice shall have been given and required passage
of time shall have elapsed.
(f) BANKRUPTCY EVENT. Any Bankruptcy Event shall occur.
(g) MATERIAL IMPAIRMENT. Any event shall occur which shall reasonably cause
MLBFS to in good faith believe that the prospect of full payment or performance
by Customer or any Guarantor of any of their respective liabilities or
obligations under this Loan Agreement or any of the Additional Agreements to
which Customer or such Guarantor is a party has been materially impaired. The
existence of such a material impairment shall be determined in a manner
consistent with the intent of Section 1-20B of the UCC.
(h) ACCELERATION OF DEBT TO OTHER CREDITORS. Any event shall occur which results
in the acceleration of the maturity of any indebtedness of $500,000 or more of
Customer or any Guarantor to another creditor under any indenture, agreement,
undertaking, or otherwise.
(i) SEIZURE OR ABUSE OF COLLATERAL. The Collateral, or any material part
thereof, shall be or become subject to any material abuse or misuse, or any
levy, attachment, seizure or confiscation which is not released within ten (10)
Business Days.
3.6 REMEDIES
(a) REMEDIES UPON DEFAULT. Upon the occurrence and during the continuance of any
Event of Default, MLBFS may at its sole option do any one or more or all of the
following, at such time and in such order as MLBFS may in its sole discretion
choose:
(i) TERMINATION. MLBFS may without notice terminate the WCMA Line of Credit and
all obligations to provide the WCMA Line of Credit or otherwise extend any
credit to or for the benefit of Customer (it being understood, however, that
upon the occurrence of any Bankruptcy Event the WCMA Line of Credit and all such
obligations shall automatically terminate without any action on the part of
MLBFS); and upon any such termination MLBFS shall be relieved of all such
obligations.
<PAGE> 8
(ii) ACCELERATION. MLBFS may declare the principal of and interest on the WCMA
Loan Balance, and all other Obligations to be forthwith due and payable,
whereupon all such amounts shall be immediately due and payable, without
presentment, demand for payment, protest and notice of protest, notice of
dishonor, notice of acceleration, notice of intent to accelerate or other
notice or formality of any kind, all of which are hereby expressly waived;
provided, however that upon the occurrence of any Bankruptcy Event, all such
principal, interest and other Obligations shall automatically become due and
payable without any action on the part of MLBFS.
(iii) EXERCISE OTHER RIGHTS. MLBFS may exercise any or all of the remedies of
a secured party under applicable law, including, but not limited to, the UCC,
and any or all of its other rights and remedies under this Loan Agreement and
the Additional Agreements.
(iv) POSSESSION. MLBFS may require Customer to make the Collateral and the
records pertaining to the Collateral available to MLBFS at a place designated
by MLBFS which is reasonably convenient to Customer, or may take possession of
the Collateral and the records pertaining to the Collateral without the use of
any judicial process and without any prior notice to Customer.
(v) SALE. MLBFS may sell any or all of the Collateral at public or private sale
upon such terms and conditions as MLBFS may reasonably deem proper. MLBFS may
purchase any Collateral at any such public sale. The net proceeds of any such
public or private sale and all other amounts actually collected or received by
MLBFS pursuant hereto, after deducting all costs and expenses incurred at any
time in the collection of the Obligations and in the protection, collection and
sale of the Collateral, will be applied to the payment of the Obligations, with
any remaining proceeds paid to Customer or whoever else may be entitled
thereto, and with Customer and each Guarantor remaining jointly and severally
liable for any amount remaining unpaid after such application.
(vi) DELIVERY OF CASH, CHECKS, ETC. MLBFS may require Customer to forthwith
upon receipt, transmit and deliver to MLBFS in the form received, all cash,
checks, drafts and other instruments for the payment of money (properly
endorsed, where required, so that such items may be collected by MLBFS), which
may be received by Customer at any time in full or partial payment of any
Collateral, and require that Customer not commingle any such items which may be
so received by Customer with any other of its funds or property but instead
hold them separate and apart and in trust for MLBFS until delivery is made to
MLBFS.
(vii) NOTIFICATION OF ACCOUNT DEBTORS. MLBFS may notify any Account Debtor that
its Account or Chattel Paper has been assigned to MLBFS and direct such Account
Debtor to make payment directly to MLBFS of all amounts due or becoming due
with respect to such Account or Chattel Paper; and MLBFS may enforce payment
and collect, by legal proceedings or otherwise, such Account or Chattel Paper.
(viii) CONTROL OF COLLATERAL. MLBFS may otherwise take control in any lawful
manner of any cash or non-cash items of payment or proceeds of Collateral and
of any rejected, returned, stopped in transit or repossessed goods included in
the Collateral and endorse Customer's name on any item of payment on or
proceeds of the Collateral.
(b) SET-OFF. MLBFS shall have the further right upon the occurrence and during
the continuance of an Event of Default to set-off, appropriate and apply toward
payment of any of the Obligations, in such order of application as MLBFS may
from time to time and at any time elect, any cash, credit, deposits, accounts,
financial assets, investment property, securities and any other property of
Customer which is in transit to or in the possession, custody or control of
MLBFS, MLPF&S or any agent, bailee, or affiliate of MLBFS or MLPF&S. Customer
hereby collaterally assigns and grants to MLBFS a continuing security interest
in all such property as additional Collateral.
(c) POWER OF ATTORNEY. Effective upon the occurrence and during the continuance
of an Event of Default, Customer hereby irrevocably appoints MLBFS as its
attorney-in-fact, with full power of substitution, in its place and stead and
in its name or in the name of MLBFS, to from time to time in MLBFS' sole
discretion take any action and to execute any instrument which MLBFS may deem
necessary or advisable to accomplish the purposes of this Loan Agreement,
including, but not limited to, to receive, endorse and collect all checks,
drafts and other instruments for the payment of money made payable to Customer
included in the Collateral.
(d) REMEDIES ARE SEVERABLE AND CUMULATIVE. All rights and remedies of MLBFS
herein are severable and cumulative and in addition to all other rights and
remedies available in the Additional Agreements, at law or in equity, and any
one or more of such rights and remedies may be exercised simultaneously or
successively.
(e) NOTICES. To the fullest extent permitted by applicable law, Customer hereby
irrevocably waives and releases MLBFS of and from any and all liabilities and
penalties for failure of MLBFS to comply with any statutory or other
requirement imposed upon MLBFS relating to notices of sale, holding of sale or
reporting of any sale, and Customer waives all rights of redemption or
reinstatement from any such sale. Any notices required under applicable law
shall be reasonably and properly given to Customer if given by any of the
methods provided herein at least 5 Business Days prior to taking action. MLBFS
shall have the right to postpone or adjourn any sale or other disposition of
Collateral at any time without giving notice of any such postponed or adjourned
date. In the event MLBFS seeks to take possession of any or all of the
Collateral by court process, Customer further irrevocably waives to the fullest
extent permitted by law any bonds and any surety or security relating thereto
requested by any statute, court rule or otherwise as an incident to such
possession, and any demand for possession prior to the commencement of any suit
or action.
3.7 MISCELLANEOUS
(a) NON-WAIVER. No failure or delay on the part of MLBFS in exercising any
right, power or remedy pursuant to this Loan Agreement or any of the Additional
Agreements shall operate as a waiver thereof, and no single or partial exercise
of any such right, power or remedy shall preclude any other or further exercise
thereof, or the exercise of any other right, power or remedy. Neither any
waiver of any provision of this Loan Agreement or any of the Additional
Agreements, nor any consent to any departure by Customer therefrom, shall be
effective unless the same shall be in writing and signed by MLBFS. Any
<PAGE> 9
waiver of any provision of this Loan agreement or any of the Additional
Agreements and any consent to any departure by Customer from the terms of this
Loan Agreement or any of the Additional Agreements shall be effective only in
the specific instance and for the specific purpose for which given. Except as
otherwise expressly provided herein, no notice to or demand on Customer shall
in any case entitle Customer to any other or future notice or demand in similar
or other circumstances.
(b) DISCLOSURE. Customer hereby irrevocably authorizes MLBFS and each of its
affiliates, including without limitation MLPF&S, to at any time (whether or not
an Event of Default shall have occurred) obtain from and disclose to each other
any and all financial and other information about Customer. In connection with
said authorization, the parties recognize that in order to provide a WCMA Line
of Credit certain information about Customer is required to be made available
on a computer network accessible by certain affiliates of MLBFS, including
MLPF&S.
(c) COMMUNICATIONS, All notices and other communications required or permitted
hereunder shall be in writing, and shall be either delivered personally,
mailed by postage prepaid certified mail or sent by express overnight courier
or by facsimile. Such notices and communications shall be deemed to be given on
the date of personal delivery, facsimile transmission or actual delivery of
certified mail, or one Business Day after delivery to an express overnight
courier. Unless otherwise specified in a notice sent or delivered in
accordance with the terms hereof, notices and other communications in writing
shall be given to the parties hereto at their respective addresses set forth at
the beginning of this Loan agreement, or, in the case of facsimile
transmission, to the parties at their respective regular facsimile telephone
number.
(d) FEES, EXPENSES AND TAXES. Customer shall pay or reimburse MLBFS for: (i)
all Uniform Commercial Code filing and search fees and expenses incurred by
MLBFS in connection with the verification, perfection or preservation of MLBFS'
rights hereunder or in the Collateral or any other collateral for the
Obligations; (ii) any and all stamp, transfer and other taxes and fees payable
or determined to be payable in connection with the execution, delivery and/or
recording of this Loan Agreement or any of the Additional Agreements; and (iii)
all reasonable fees and out-of-pocket expenses (including, but not limited to,
reasonable fees and expenses of outside counsel) incurred by MLBFS in
connection with the collection of any sum payable hereunder or under any of the
Additional Agreements not paid when due, the enforcement of this Loan Agreement
or any of the Additional Agreements and the protection of MLBFS' rights
hereunder or thereunder, excluding, however, salaries and normal overhead
attributable to MLBFS' employees. Customer hereby authorizes MLBFS, at its
option, to either cause any and all such fees, expenses and taxes to be paid
with a WCMA Loan, or invoice Customer therefor (in which event Customer shall
pay all such fees, expenses and taxes within 5 Business Days after receipt of
such invoice). The obligations of Customer under this paragraph shall survive
the expiration or termination of this Loan Agreement and the discharge of the
other Obligations.
(e) RIGHT TO PERFORM OBLIGATIONS. If Customer shall fail to do any act or thing
which it has covenanted to do under this Loan Agreement or any representation
or warranty on the part of Customer contained in this Loan Agreement shall be
breached, MLBFS may, in its sole discretion, after 5 Business Days written
notice is sent to Customer (or such lesser notice, including no notice, as is
reasonable under the circumstances), do the same or cause it to be done or
remedy any such breach, and may expend its funds for such purpose. Any and all
reasonable amounts so expended by MLBFS shall be repayable to MLBFS by Customer
upon demand, with interest at the Interest Rate during the period from and
including the date funds are so expended by MLBFS to the date of repayment, and
all such amounts shall be additional Obligations. The payment or performance by
MLBFS of any of Customer's obligations hereunder shall not relieve Customer of
said obligations or of the consequences of having failed to pay or perform the
same, and shall not waive or be deemed a cure of any Default.
(f) FURTHER ASSURANCES. Customer agrees to do such further acts and things and
to execute and deliver to MLBFS such additional agreements, instruments and
documents as MLBFS may reasonably require or deem advisable to effectuate the
purposes of this Loan Agreement or any of the Additional Agreements, or to
establish, perfect and maintain MLBFS' security interests and liens upon the
Collateral, including, but not limited to: (i) executing financing statements
or amendments thereto when and as reasonably requested by MLBFS; and (ii) if in
the reasonable judgment of MLBFS it is required by local law, causing the
owners and/or mortgage of the real property on which any Collateral may be
located to execute and deliver to MLBFS waivers or subordinations reasonably
satisfactory to MLBFS with respect to any rights in such Collateral.
(g) BINDING EFFECT. This Loan Agreement and the Additional Agreements shall be
binding upon, and shall inure to the benefit of MLBFS, Customer and their
respective successors and assigns. Customer shall not assign any of its rights
or delegate any of its obligations under this Loan Agreement or any of the
Additional Agreements without the prior written consent of MLBFS. Unless
otherwise expressly agreed to in a writing signed by MLBFS, no such consent
shall in any event relieve Customer of any of its obligations under this Loan
Agreement or the Additional Agreements.
(h) HEADINGS. Captions in section and paragraph headings in this Loan Agreement
are inserted only as a matter of convenience, and shall not affect the
interpretation hereof.
(i) GOVERNING LAW. This Loan Agreement, and, unless otherwise expressly
provided therein, each of the Additional Agreements, shall be governed in all
respects by the laws of the State of Illinois.
(j) SEVERABILITY OF PROVISIONS. Whenever possible, each provision of this Loan
Agreement and the Additional Agreements shall be interpreted in such manner as
to be effective and valid under applicable law. Any provision of this Loan
Agreement or any of the Additional Agreements which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Loan Agreement and the Additional
Agreements or affecting the validity or enforceability of such provision in any
other jurisdiction.
(k) TERM. This Loan Agreement shall become effective on the date accepted by
MLBFS at its office in Chicago, Illinois, and, subject to the terms hereof
shall continue in effect so long thereafter as the WCMA Line of Credit shall be
in effect or there shall be any Obligations outstanding.
(l) COUNTERPARTS. This Loan Agreement may be executed in one or more
counterparts which, when taken together, constitute one and the same agreement.
<PAGE> 10
(m) JURISDICTION; WAIVER. CUSTOMER ACKNOWLEDGES THAT THIS LOAN AGREEMENT IS
BEING ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OF MLBFS' RIGHT AND OPTION, IN
ITS SOLE DISCRETION, TO ENFORCE THIS LOAN AGREEMENT (INCLUDING THE WCMA NOTE
SET FORTH HEREIN) AND THE ADDITIONAL AGREEMENTS IN EITHER THE STATE OF ILLINOIS
OR IN ANY OTHER JURISDICTION WHERE CUSTOMER OR ANY COLLATERAL FOR THE
OBLIGATIONS MAY BE LOCATED. CUSTOMER IRREVOCABLY SUBMITS ITSELF TO JURISDICTION
IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR FEDERAL COURT IN THE COUNTY
OF COOK FOR SUCH PURPOSES, AND CUSTOMER WAIVES ANY AND ALL RIGHTS TO CONTEST
SAID JURISDICTION AND VENUE AND THE CONVENIENCE OF ANY SUCH FORUM, AND ANY AND
ALL RIGHTS TO REMOVE SUCH ACTION FROM STATE TO FEDERAL COURT. CUSTOMER FURTHER
WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST MLBFS IN ANY JURISDICTION
EXCEPT IN THE COUNTY OF COOK AND STATE OF ILLINOIS. MLBFS AND CUSTOMER HEREBY
EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER
PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THE WCMA LINE OF CREDIT, THIS LOAN AGREEMENT, ANY ADDITIONAL
AGREEMENTS AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE SUBJECT MATTER OF THIS
LOAN AGREEMENT. CUSTOMER FURTHER WAIVES THE RIGHT TO BRING ANY NON-COMPULSORY
COUNTERCLAIMS.
(n) INTEGRATION. THIS LOAN AGREEMENT, TOGETHER WITH THE ADDITIONAL AGREEMENTS,
CONSTITUTES THE ENTIRE UNDERSTANDING AND REPRESENTS THE FULL AND FINAL
AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR WRITTEN AGREEMENTS OR PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. WITHOUT LIMITING THE FOREGOING,
CUSTOMER ACKNOWLEDGES THAT EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN: (i)
NO PROMISE OR COMMITMENT HAS BEEN MADE TO IT BY MLBFS, MLPF&S OR ANY OF THEIR
RESPECTIVE EMPLOYEES, AGENTS OR REPRESENTATIVES TO EXTEND THE AVAILABILITY OF
THE WCMA LINE OF CREDIT OR THE MATURITY DATE, OR TO INCREASE THE MAXIMUM WCMA
LINE OF CREDIT, OR OTHERWISE EXTEND ANY OTHER CREDIT TO CUSTOMER OR ANY OTHER
PARTY; (ii) NO PURPORTED EXTENSION OF THE MATURITY DATE, INCREASE IN THE
MAXIMUM WCMA LINE OF CREDIT OR OTHER EXTENSION OR AGREEMENT TO EXTEND CREDIT
SHALL BE VALID OR BINDING UNLESS EXPRESSLY SET FORTH IN A WRITTEN INSTRUMENT
SIGNED BY MLBFS; AND (iii) THIS LOAN AGREEMENT SUPERSEDES AND REPLACES ANY AND
ALL PROPOSALS, LETTERS OF INTENT AND APPROVAL AND COMMITMENT LETTERS FROM MLBFS
TO CUSTOMER, NONE OF WHICH SHALL BE CONSIDERED AN ADDITIONAL AGREEMENT. NO
AMENDMENT OR MODIFICATION OF THIS AGREEMENT OR ANY OF THE ADDITIONAL
AGREEMENTS TO WHICH CUSTOMER IS A PARTY SHALL BE EFFECTIVE UNLESS IN A WRITING
SIGNED BY BOTH MLBFS AND CUSTOMER.
IN WITNESS WHEREOF, this Loan Agreement has been executed as of the day and
year first above written.
CONTINUECARE CORPORATION f/k/a ZANART ENTERTAINMENT INCORPORATED
By: /s/ Spencer Angel
-----------------------------------------------------------------------
Signature (1) Signature (2)
Spencer Angel
-----------------------------------------------------------------------
Printed Name Printed Name
President & CEO
-----------------------------------------------------------------------
Title Title
<PAGE> 11
STATE OF GEORGIA )
------------- )
COUNTY OF FULTON )
------------- )
The foregoing instrument was acknowledged before me this day of
____________________ AD, 2000 by Spencer Angel of CONTINUCARE CORPORATION f/k/a
ZANART ENTERTAINMENT INCORPORATED, a Florida corporation, on behalf of the
corporation. Said person is personally known to me or has produced
___________________ as identification.
/s/ Nedrh Millner
- -------------------------------------
NOTARY PUBLIC
Nedrh Millner
- -------------------------------------
PRINTED NAME OF NOTARY PUBLIC
My Commission Expires:
Notary Public Fulton County, Georgia
My Commission Expires August 30, 2003
- -------------------------------------
[SEAL]
Accepted at Chicago, Illinois:
MERRILL LYNCH BUSINESS FINANCIAL
SERVICES, INC.
By: /s/ Nicole Busto
----------------------------------
<PAGE> 12
EXHIBIT A
ATTACHED TO AND HEREBY MADE A PART OF WCMA LOAN AND SECURITY AGREEMENT NO.
79D-07298 BETWEEN MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. AND
CONTINUCARE CORPORATION F/K/A ZANART ENTERTAINMENT INCORPORATED
==========================================================================
Additional Locations of Tangible Collateral:
SEE ATTACHED.
<PAGE> 13
CURRENT ADDRESS LIST FOR OUR CENTERS
- ------------------------------------
2437 N.W. 7th Street 2900 North University Drive
Miami, FL 33125 Sunrise, FL 33322
3631 West Flagler Street 11000 S.W. 211 Street
Miami, FL 33135 Miami, FL 33189
18853 S.W. 117th Avenue 11701 Mills Drive
Miami, FL 33157 Miami, FL 33183
1703 Thonotossassa Road
4680 West 17th Avenue Suite 300
Hileah, FL 33012 Plant City, FL 33567
217 Crystal Grove Blvd.
5201 Hollywood Boulevard Suite 101
Hollywood, FL 33021 Lutz, FL 33549
6971 West Sunrise Boulevard 4759 U.S. Highway 19
Plantation, FL 33313 New Port Richey, FL 34652
460 South University Drive 4189 Mariner Boulevard
Pembroke Pines, FL 33024 Springhill, FL 34609
3225 S. Mac Dill Avenue
4801 South University Drive Suite 117
Suite 113 Tampa, FL 33629
Davie, FL 33328
800 Fairway Drive, Suite 250
7101 West McNab Road Deerfield Beach, FL 33441
Tamarac, FL 33321
5643 N.W. 29th Street 2627 NE 203rd Street, Suite 216
Margate, FL 33063 Miami, FL 33180
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 3,115,992
<SECURITIES> 0
<RECEIVABLES> 4,844
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,508,677
<PP&E> 901,674
<DEPRECIATION> (1,519,710)
<TOTAL-ASSETS> 29,110,845
<CURRENT-LIABILITIES> 13,400,370
<BONDS> 0
0
0
<COMMON> 3,325
<OTHER-SE> 2,669,306
<TOTAL-LIABILITY-AND-EQUITY> 29,110,845
<SALES> 0
<TOTAL-REVENUES> 87,812,881
<CGS> 0
<TOTAL-COSTS> 73,017,112
<OTHER-EXPENSES> 12,064,027
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,870,952)
<INCOME-PRETAX> 279,922
<INCOME-TAX> 0
<INCOME-CONTINUING> 279,922
<DISCONTINUED> 0
<EXTRAORDINARY> 13,247,907
<CHANGES> 0
<NET-INCOME> 13,527,829
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
