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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 2000.
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______ to _______.
Commission File Number: 0-19815
CAREMATRIX CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 04-3069586
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(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
197 First Avenue, Needham, MA 02494
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(Address of principal executive offices) (Zip Code)
(781) 433-1000
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(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 (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 14, 2000
----- ----------------------------
Common Stock, $.05 par value 18,476,789 shares
<PAGE>
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CAREMATRIX CORPORATION
INDEX
PART I - FINANCIAL CONDITION Page
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Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3
Consolidated Statements of Earnings for the three months ended March
31, 2000, and March 31, 1999 4
Consolidated Statements of Cash Flows for the three months ended March
31, 2000, and March 31, 1999 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Quantitative and Qualitative Disclosures About Market Risk 14
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities 18
Item 3: Defaults Upon Senior Securities 18
Item 4: Submission of Matters to a Vote of Security Holders 18
Item 5: Other Information 18
Item 6: Exhibits and Reports of Form 8-K 18
2
<PAGE>
CAREMATRIX CORPORATION
CONSOLIDATED BALANCE SHEETS
as of March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 733,611 $ 4,276,918
Restricted cash 3,183,812 3,807,484
Receivables:
Accounts receivable, net 21,211,268 21,030,666
Accounts receivable, related party 18,670,661 16,949,886
Prepaid and refundable income taxes, net 10,908,897 17,206,913
Prepaid expenses and other current assets 2,800,840 2,910,196
------------ ------------
Total current assets 57,509,089 66,182,063
Lease acquisition costs and prepaid rent, net 21,308,886 22,023,025
Property and equipment, net 293,405,742 276,586,515
Other long-term assets, net 33,250,483 39,438,712
Goodwill, net 35,015,734 35,390,922
------------ ------------
Total assets $440,489,934 $439,621,237
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 25,848,277 $ 25,848,277
Accounts payable 13,508,766 14,766,916
Accrued compensation and benefits 4,830,669 4,265,313
Accrued liabilities 8,660,954 11,898,170
Other current liabilities 3,628,259 2,130,086
------------ ------------
Total current liabilities 56,476,925 58,908,762
Convertible subordinated notes 115,000,000 115,000,000
Mortgages and notes payable 75,948,968 76,527,746
Other long-term liabilities 150,166,268 132,596,446
Stockholders' equity 42,897,773 56,588,283
------------ ------------
Total liabilities and stockholders' equity $440,489,934 $439,621,237
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
3
<PAGE>
CAREMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
for the three months ended March 31, 2000 and March 31, 1999
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Resident operations $ 41,453,907 $ 39,270,868
Resident operations - related party 300,000 5,461,700
Development fee income -- 72,442
Development fee income - related party -- 1,438,652
------------ ------------
Total revenue 41,753,907 46,243,662
------------ ------------
Expenses:
Facility operating expenses 35,292,277 28,413,249
Facility lease expense 268,750 847,560
Facility lease expense - related party 5,042,465 3,720,845
General and administrative 4,920,219 4,754,785
Depreciation and amortization 3,240,056 2,778,974
------------ ------------
Total expenses 48,763,767 40,515,413
------------ ------------
Earnings (loss) from operations (7,009,860) 5,728,249
Other income (expense):
Interest income - related party -- 699,821
Interest and other income 231,654 783,271
Interest and other expense (6,486,072) (4,474,725)
------------ ------------
Total other income (expense) (6,254,418) (2,991,633)
------------ ------------
Earnings (loss) before income taxes and
preferred dividends (13,264,278) 2,736,616
Income taxes 424,457 1,080,963
------------ ------------
Earnings (loss) before preferred dividends (13,688,735) 1,655,653
Preferred dividends 1,775 1,825
------------ ------------
Net earnings (loss) available to common
shareholders $(13,690,510) $ 1,653,828
============ ============
Basic shares outstanding 18,476,789 18,012,159
============ ============
Basic earnings (loss) per share $ (0.74) $ 0.09
============ ============
Diluted shares outstanding 18,476,789 18,395,039
============ ============
Diluted earnings (loss) per share $ (0.74) $ 0.09
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
4
<PAGE>
CAREMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
for the three months ended March 31, 2000 and March 31, 1999
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(13,690,510) $ 1,653,828
Noncash items included in net earnings (loss):
Depreciation of fixed assets 2,386,364 1,771,506
Amortization of intangible assets 853,692 1,007,468
Increase in accounts receivable (2,031,908) (1,619,975)
Changes in current assets 7,789,401 (400,648)
Decrease in current liabilities (4,808,536) (2,567,029)
Loss on sale of interest in sublease 2,429,944 --
Accrued interest on capital lease obligations 1,142,869 765,045
Start up losses from facilities consolidated for
accounting purposes 1,509,429 101,735
Other noncash items 51,494 --
------------ ------------
Net cash provided (used) by operating activities (4,367,761) 711,930
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (360,789) (2,721,805)
Purchase of SeniorCare Group, Ltd. facility -- (5,780,000)
Proceeds from sale of interest in sublease 2,370,056 --
Change in lease deposits and other long-term assets (552,964) (15,464,137)
Change in restricted cash 156,532 4,682,421
Lease acquisition costs -- (688,453)
------------ ------------
Net cash provided (used) by investing activities 1,612,835 (19,971,974)
------------ ------------
Cash flows from financing activities:
Exercise of stock options and warrants -- 199,650
Repurchase of common shares -- (1,513,992)
Net proceeds from mortgage refinancing -- 8,736,198
Repayment of debt, net (578,778) (1,259,477)
Other, net (209,603) (74,493)
------------ ------------
Net cash provided (used) by financing activities (788,381) 6,087,886
------------ ------------
Decrease in cash and cash equivalents (3,543,307) (13,172,158)
Cash and cash equivalents, beginning of period 4,276,918 28,258,098
------------ ------------
Cash and cash equivalents, end of period $ 733,611 $ 15,085,940
============ ============
Other noncash items:
Change in capital lease obligations and lease acquistion costs $ 2,525,000 $ 5,280,000
============ ============
Additions to capital lease assets and liabilities $ 11,211,358 $ 23,561,780
============ ============
Additions to property and equipment $ 7,633,444 $ 10,519,700
============ ============
Additions to other long-term liabilities $ 8,623,982 $ 10,259,098
============ ============
Additions to other long-term assets $ 348,172 $ 137,555
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
5
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
CareMatrix Corporation (the "Company") develops, manages and operates
assisted living facilities and various other health care facilities.
The accompanying interim unaudited financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such regulations. The
financial statements reflect all adjustments and disclosures which are, in the
opinion of management, necessary for a fair presentation of the financial
position and results of operations for the periods presented. All such
adjustments are of a normal recurring nature. The interim financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, for additional disclosures. The results of
operations for the interim periods presented are not necessarily indicative of
the results that may be achieved for the full year. Certain reclassifications
have been made on the prior year's financial statements to conform to the
current year's presentations. All references to the "1999 Form 10-K" contained
herein refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, unless otherwise specified.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation. The financial statements also include the
accounts of certain special purpose entities that the Company is deemed to
control although it does not have an ownership interest in such entities.
2. RELATED PARTY TRANSACTIONS
As used herein, "Chancellor" or "Chancellor Entity" refers to Chancellor
Senior Housing Group, Inc., Abraham D. Gosman (Chief Executive Officer and
Chairman of the Board of the Company) or companies in which Mr. Gosman and
certain current and former members of the Company's senior management exercise
significant control.
During the quarter ended March 31, 2000, the Company sold its interest in
a sublease with a Chancellor Entity to a third-party. Chancellor leased this
facility from a third-party. As consideration for the sale, the Company received
cash of $2.4 million and expense and other credits in March 2000 of $1.25
million from certain Chancellor Entities related to facilities the Company
currently leases from Chancellor. The Company recorded a charge of $2.4 million
to write-off the unamortized portion of its lease investment. The net charge of
$1.4 million is included in Interest and Other Expense on the Consolidated
Statement of Operations.
3. CAPITAL LEASE AGREEMENT
As discussed in Note 7 of the 1999 Form 10-K, the Company has entered into
various agreements with a third party to develop, manage, and operate up to
seven assisted living facilities in Connecticut. Because the Company is required
to lease these facilities, the Company treats the development, management and
lease agreements as a single agreement. Although no lease agreement is legally
in effect, the financial statements reflect each of these facilities as a
capital lease asset and liability as of the date each facility opened. One
facility was opened in the first quarter of 2000 related to these agreements.
Accordingly, the Company recorded a capital lease asset and liability of $11.2
million during the quarter ended March 31, 2000. The balance of the capital
lease liability was reduced by $2.5 million which represents the application of
the lease deposits and commitment fees paid in connection with entering into the
agreements.
4. EARNINGS (LOSS) PER SHARE
For the quarter ended March 31, 2000, basic loss per share was the same as
diluted loss per share as the impact of the assumed exercise or conversion of
options, warrants, preferred stock, and 6.25% Convertible Notes would be
antidilutive.
6
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
Three months ended March 31, 1999
---------------------------------
Basic earnings per share Earnings Shares Per share
------------------------ ---------- ---------- ---------
<S> <C> <C> <C>
Earnings available to common shareholders $1,653,828 18,012,159 $0.09
Effect of dilutive securities:
Stock options and warrants -- 382,880 --
---------- ---------- -----
Diluted earnings per share $1,653,828 18,395,039 $0.09
========== ========== =====
</TABLE>
5. STRATEGIC ALTERNATIVES
The Company has incurred significant operating losses, is in violation of
its bank financing covenants, and is dependent upon certain future transactions
to generate sufficient cash flow. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The Company has planned
several initiatives to mitigate this doubt including the restructuring and
reduction of its corporate overhead, sales of certain assets, negotiation of a
settlement agreement with Chancellor to liquidate the remaining receivables, and
negotiating agreements with its lending institution to be fully paid after the
consummation of certain sale transactions. If these initiatives are successful,
the Company believes its remaining operations will allow it to return to
profitability.
The Company will require resources in the future to fund its working
capital requirements. The Company expects to fund these resource requirements
with its cash on hand, the sales of certain assets, the proceeds from its
expected federal tax refund of approximately $9.0 million, and the proceeds from
certain transactions being contemplated between the Company and Chancellor. If
certain of these transactions are either not completed or not completed in a
timely fashion or modified in such a way as to significantly reduce the expected
proceeds to the Company, then the Company would expect to be unable to meet its
then current obligations. Additionally, on April 25, 2000, the Company was
notified by Nasdaq that its stock would begin trading under the symbol "CMDCe"
due to the failure of the Company to file its Annual Report on Form 10-K for the
year ended December 31, 1999. Although the Company filed its Annual Report on
Form 10-K on July 5, 2000, and was not delisted, the Company received notice
from Nasdaq on July 7, 2000, that its stock would be delisted if the price of
the Company's common stock did not meet the minimum bid requirement of $1.00 per
share on or before October 9, 2000, and immediately thereafter the stock must
evidence a closing bid price of at least $1.00 per share for at least ten
consecutive trading days. In the event the price of the Company's stock does not
meet the minimum bid requirements, the Company is prepared to effect a reverse
stock split to meet such requirement. As of the date of this Report, the
Company's common stock has not been delisted. If the Company's common stock were
delisted and was ineligible to be traded on either a national exchange or
automated trading market, such an event would constitute a Repurchase Event, as
defined under the Company's $115,000,000 6.25% Convertible Notes (see Note 9 of
the 1999 Form 10-K). In a Repurchase Event, the holders of the Notes could
exercise a put option and require the Notes to be repaid. Such an event would
likely result in the Company filing for protection under Chapter 11 of the
United States Bankruptcy Code.
The Company's common stock could also be delisted from Nasdaq both as the
result of failing to comply with the minimum requirements regarding the market
value of public float and if its tangible net worth were to fall below $4.0
million. Additionally, Nasdaq has also notified the Company that it must timely
file all periodic reports required by the Securities and Exchange Commission and
Nasdaq for all reporting periods ending on or before June 30, 2001. In the event
the Company's stock was delisted as a result of any of these factors, the
Company believes that, if its filings with the Securities and Exchange
Commission are then current, its common stock might be able to be listed on
another national exchange, or alternatively, could be listed on an automated
trading market, and that therefore any delisting by Nasdaq would not cause a
Repurchase Event.
7
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In the event the Company is unable to continue as a going concern, assets
may not be recovered at their current carrying value and certain liabilities may
not be settled at their current carrying amount.
6. LITIGATION
CareMatrix Corporation and five of its officers and directors have been
named as defendants in fourteen class action lawsuits filing in the United
States District Court for the District of Massachusetts, one filed by Jonathan
Polansky on November 3, 1999, another filed by John P. Delmonico on November 5,
1999, another filed by James Cosentino on November 5, 1999, another filed by
Miriam Nathan on November 5, 1999, another filed by Patti Lisa on November 5,
1999, another filed by Leroy E. Schober on November 12, 1999, another filed by
Bradley Dunham on November 15, 1999, and another filed by Donald Camp, Marie
Camp and Arthur Boxer on December 23, 1999, another filed by Irving Ravens on
December 14, 1999, another filed by Gary A. Fryan and Michael B. London on
December 3, 1999, another filed by Brock Haynes on November 22, 1999, another
filed by Edward J. Oest on November 30, 1999. The complaints all make
substantially the same claims. Each complaint alleges that defendants violated
the federal securities laws by making material misstatements and omissions in
certain of CareMatrix's public filings and statements during 1998 and 1999.
Specifically, the complaints allege that such statements and omissions had the
effect of artificially inflating the market price for CareMatrix's common stock
until the disclosure by CareMatrix on October 7, 1999 of its expectation that
results for the third quarter and for the full year were not likely to meet
analysts' consensus anticipated levels. Damages are unspecified.
CareMatrix and each of its directors have been named as defendants in a
class action lawsuit filed in the Court of Chancery of the state of Delaware for
New Castle County. This class action was filed by the Howard Gunty Profit
Sharing Plan on August 18, 1999. The complaint alleges that the defendants are
engaged in a course of action that constitutes a breach of their fiduciary and
other common law duties to the public shareholders of CareMatrix. Specifically,
the complaint alleges that the defendants are preparing to execute a
management-led buy-out or other strategic alternatives that would be unfair to
the public shareholders of CareMatrix. Plaintiffs seek an injunction preventing
any such buy-out or, in the event that such a buy-out is consummated, an order
from the court setting it aside. Plaintiffs also seek damages and costs of an
unspecified amount.
A subsidiary of the Company (the "Subsidiary") has been named as a
defendant in a lawsuit filed in the Supreme Court of the State of New York,
County of Nassau. This lawsuit was filed on October 26, 1999 in the name of
Great Neck Holding, LLC and The Mayfair at Glen Cove, LLC, the owners of two
senior housing facilities located in Long Island, New York. The amended
complaint alleges that the Subsidiary has breached its duties under certain
management agreements covering the two facilities. The plaintiffs seek an
accounting by the Subsidiary as to all funds received and expended by it with
respect to he facilities covered by the management agreements, as well as
damages of at least $1,000,000 and costs. In addition, the plaintiffs are
seeking injunctive relief, preventing the Subsidiary from entering the subject
properties or otherwise interfering with the plaintiffs' operation of the
subject properties. The Subsidiary has filed a lawsuit in the same court against
plaintiffs and another entity and two individuals who acted to allegedly
terminate the Subsidiary as Manager without notice or cause as required under
the management agreements. The complaint in the Subsidiary's action seeks to
enjoin those parties from taking any further action to terminate the management
agreements, as well as damages and costs. On March 30, 2000, the Subsidiary's
motion for preliminary injunctive relief was granted (which included giving the
manager the right to manage the facilities on the condition that the Subsidiary
post an undertaking in the amount of $1,000,000) and the Plaintiff's motions for
preliminary injunctive relief were denied.
The Subsidiary has also sued the company allegedly hired to replace the
Subsidiary as Manager of the two facilities, for tortiously interfering with the
Subsidiary's rights and performance of its obligations under the management
agreements. That action was filed in the United States District Court for the
Eastern District of New York. The complaint in this lawsuit seeks damages,
costs, and injunctive relief. The defendant has answered the complaint, denying
certain of the material allegations and asserting affirmative defenses. The
defendant filed motions seeking (i) a stay of the action against it pending the
outcome of the two state-court lawsuits between the Subsidiary and the owners,
discussed above, and (ii) dismissal of one of the two claims for relief asserted
in the
8
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
complaint. On May 5, 2000, the United States District Court granted the
Subsidiary permission to amend the complaint to address the alleged pleading
defect and otherwise denied the defendant's motion to dismiss that claim.
Accordingly, on May 8, 2000, the Subsidiary filed an amended complaint. On May
11, 2000, the District Court denied the defendant's motion for a stay of the
proceedings until the litigation with the Owners is resolved.
CareMatrix has been named as a nominal defendant and each of its directors
has been named as defendant in two shareholder derivative class action lawsuits
filed in the Court of Chancery of the State of Delaware for New Castle County.
These class action lawsuits were filed by Patty Lisa and Magda Sejas on December
13, 1999. The complaint alleges that the defendant directors have breached their
fiduciary duties to CareMatrix and damaged the goodwill and reputation of
CareMatrix. Specifically, the complaint alleges that the defendant directors
engaged in wrongful self-dealing transactions, encouraged and allowed the
improper self-dealing complained of, failed to take action to stop such conduct
resulting in , among other adverse consequences, federal securities lawsuits
against CareMatrix, exposed CareMatrix to losses and took no steps to remove or
institute legal action against those officers, directors and employees
responsible for permitting the alleged misconduct. The plaintiffs seek an
injunction requiring an accounting by the defendant directors to CareMatrix of
the damages suffered by CareMatrix and the establishment and maintenance of
effective compliance programs to ensure that CareMatrix's affiliates and
employees do not engage in wrongful and self-dealing practices. The plaintiffs
also seek the unspecified costs and disbursements in connection with the action.
CareMatrix has been named as a defendant in a civil suit filed by Mariner
Health Resources, Inc. and Prism Rehab Systems, Inc. in the Superior Court for
Suffolk County, Massachusetts. The suit arises from the termination in 1998 of
various management, consulting and services agreements between certain
subsidiaries of CareMatrix and the plaintiffs in connection with certain skilled
nursing facilities in Maryland, Massachusetts, New Jersey and Florida. The
plaintiffs allege that CareMatrix failed to pay approximately $3.3 million owed
to the plaintiffs, plus interest and costs, under the terms of the termination
agreements between CareMatrix, certain of CareMatrix's subsidiaries and the
plaintiffs. CareMatrix and its subsidiaries have denied these allegations and
have counterclaimed against the plaintiffs and their corporate parent, Mariner
Post-Acute Network, Inc. ("MPAN"), seeking a declaration that no monies are
presently due under the termination agreements at issue. CareMatrix and its
subsidiaries also seek damages for certain misconduct by the plaintiffs and MPAN
relating to the management of the facilities, including, among other items, the
fraudulent misrepresentation of amounts due from Medicaid at the Maryland
skilled nursing facility. On January 12, 2000, plaintiffs and MPAN filed
voluntary petitions under Chapter 11 of the United States Bankruptcy Code,
staying the foregoing litigation.
CareMatrix Corporation and another entity have been named as defendants in
a class action lawsuit filed in the Supreme Court of the State of New York,
County of Nassau. The action was filed by Rosalind Romuno on June 15, 2000. The
Complaint alleges that the defendants breached their contractual obligations to
pay for certain medical services covered under the Company's health plan. The
plaintiff seeks injunctive relief requiring the defendants to pay for past,
present and future medical services covered under the Company's health plan, to
take all actions necessary to ensure that no entity will seek enforcement
against the plaintiff and other members of the class for medical services
covered under the Company's health plan, and to ensure that the credit rating of
the plaintiff and other members of the class is not affected by the defendant's
actions, and also seeks unspecified damages and costs.
The Company believes it has meritorious defenses to each of the actions
described above and intends to vigorously defend each such action. The Company
does not currently expect the outcome of any of the litigation, referenced
above, to have a material adverse impact on its financial position, results of
operations and cash flows.
The Company is also subject to litigation with various vendors as a result
of either contracts entered into or services provided related to facilities the
Company has developed and/or managed. The current aggregate amount of such
claims outstanding is approximately $3.9 million. Although the Company intends
to settle or otherwise resolve these claims, there can be no assurance any or
all such settlements or resolutions will be successful. Although an unfavorable
outcome of any individual claim would be unlikely to have a material adverse
impact on the Company,
9
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
an unsuccessful resolution of a number of such claims could, in the aggregate,
have a material adverse impact on the Company's financial position, results of
operations, and cash flows. The Company has not currently recorded a reserve to
cover such potential claims as the range of unsuccessful outcomes of such
litigation cannot be reasonably estimated at this time.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a provider of assisted living services to the elderly. At
March 31, 2000, the Company operated 50 facilities in 14 states with a capacity
of approximately 5,527 units. Of the facilities, 13 are owned, 19 are leased or
operated under long-term management agreements, 14 are managed or operated under
capital leases, and 4 new facilities are consolidated for accounting purposes.
The Company provides assistance with the activities of daily living and other
personalized support services in a residential setting for elderly residents who
cannot live independently but who do not need the level of medical care provided
in a skilled nursing facility. The Company also provides additional specialized
care and services to residents with certain low acuity medical needs and
residents with Alzheimer's disease or other forms of dementia. By offering this
full range of services, the Company is able to accommodate the changing needs of
residents as they age within a facility and develop further physical or
cognitive frailties.
The Company currently derives its revenues primarily from resident fees
for the delivery of independent and assisted living and other long-term care
services. Resident fees typically are paid monthly by residents, their families
or other responsible parties. Resident fees and management fees are recognized
as revenues when services are provided.
The Company has made forward-looking statements in this Report (and in
documents that are incorporated by reference) that are subject to risks and
uncertainties. Forward-looking statements include information concerning
possible or future results of operations of CareMatrix. Also, when the Company
uses words such as "believes," "expects," "anticipates" or similar expressions,
it is often, but not always, making forward-looking statements. Stockholders
should note that many factors could affect our future financial results and
could cause such results to differ materially from those expressed in our
forward-looking statements. Those factors include, but are not limited to, the
following:
o risks related to the Company's operating history and available
financing;
o risks related to the Company's evaluation of strategic alternatives;
o risks inherent in the construction and development industry;
o uncertainty about the changing regulatory environment;
o risks related to competition;
o risks related to the Company's ability to attract and retain key
personnel; and
o risks related to the ability of the Chancellor Entities' (the
entities that own a majority of the facilities the Company develops
and operates) to obtain adequate financing to fund the facilities
during start-up and any equity needed, including cash for operating
losses, to meet bank covenants, and to fund any amounts owed to the
Company. Any inability to do so, or any default by Chancellor under
its debt obligations, could have a material adverse effect on the
Company's financial position, results of operations, and cash flows
(see Note 17 of the 1999 Form 10K). As used herein "Chancellor" or
"Chancellor Entities" refer to Chancellor Senior Housing Group,
Inc., Abraham D. Gosman (Chief Executive Officer and Chairman of the
Board of the Company) or companies in which Mr. Gosman and certain
current and former members of the Company's senior management
exercise significant control.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
All references to "Notes" contained herein refer to Notes to Consolidated
Financial Statements in this Form 10-Q, and all references to "1999 Form 10-K"
contained herein refer to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, unless otherwise specified.
The quarter ended March 31, 2000 compared to the quarter ended March 31, 1999
Revenues. Resident operations revenue decreased by $3.0 million for the
first quarter of 2000 compared to the same period in 1999. The change is
comprised of increases in revenue from comparable facilities of $2.4 million,
non-comparable facilities of $$0.3 million, and $0.1 million from new facilities
that the Company is required to consolidate for accounting purposes (see Note
1), offset by a $5.8 million decline in revenue in fees related to management
contracts and other services both as a result of the decrease in the total
number of facilities under construction and in operation and the Company's
decision to not recognize revenue in situations where the Company is still
providing services but where it is more likely than not that such revenue will
not ultimately be realized. Included in resident operations revenue in the first
quarter of 1999 was $4.5 million earned from marketing and management services
provided to facilities under construction per the terms of existing development
agreements.
The Company did not record any development fee income in the first quarter
of 2000 as a result of the termination of the remaining projects in the
Company's development pipeline during 1999 (see Note 17 of the 1999 Form 10-K).
The Company does not currently intend to develop additional projects.
Facility Expenses. Facility operating expenses were $35.3 million in the
first quarter of 2000 compared to $28.4 million in the same period of 1999, an
increase of $6.9 million. The increase is comprised of $3.9 million from
comparable facilities, $1.7 million from non-comparable facilities, $0.2 million
from new facilities, and $1.1 million of start up and other operating costs from
facilities the Company consolidates for accounting purposes. Included in
facility operating expenses in the first quarter of 1999 was a credit of $1.2
million representing an adjustment of lost revenue due to the implementation of
Medicare's Prospective Payment System. Although the Company's leases with
Chancellor provide indemnification for such change in governmental regulations,
the Company did not record a benefit for this indemnification agreement in the
first quarter of 2000 since it is more likely than not that such benefit will
not ultimately be realized.
Facility lease expense was $5.3 million in the first quarter of 2000
compared to $4.6 million in the same period in 1999. The increase in lease
expense is primarily due to increased cash flow rent payments in 2000 compared
to the same period in 1999. Such cash flow rent payments are based on the
profitability of the specific facility.
General and Administrative. General and administrative expenses were $4.9
million in the first quarter of 2000 compared to $4.8 million in the comparable
period in 1999. Decreases in corporate overhead due to the restructuring of the
Company were offset by professional, legal, and insurance costs as a result of
the Company's review of strategic alternatives (see Note 17 of the 1999 Form
10-K) and various litigation in which the Company is currently involved (see
Note 6).
Depreciation and Amortization. Depreciation and amortization for the first
quarter of 2000 increased $0.5 million compared to the same period in 1999. The
increase is due primarily to $0.3 million of incremental amortization of capital
lease assets and $0.2 million of depreciation and amortization from new
facilities which the Company is required to consolidate for accounting purposes.
Interest and Other Income and Interest and Other Expense. Interest and
other income for the first quarter of 2000 was $0.2 million compared to $1.5
million for the same period in 1999. The decrease in interest income is due to
lower average cash balances during 2000 compared to 1999. Interest and other
expense for the first quarter of 2000 increased to $6.5 million from $4.5
million for the same period in 1999. The increase in interest expense is
primarily due to $0.4 million of incremental interest related to facilities
which were refinanced during 1999 (see Note 10 of the 1999 Form 10-K) and $0.4
million of interest expense related to facilities which the Company is required
to consolidate for accounting purposes. Also included in other expense in the
first quarter of 2000 is a $1.4 million charge which represents the net
write-off of the remaining balance of a lease deposit for a sublease interest
that was sold (see Note 2).
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Income Taxes. The Company's effective tax rate during the first quarter of
2000 was 3.2 % compared to 39.5% in 1999. The change in the effective tax rate
is due both to the Company's inability to recognize deferred tax benefits
because it is more likely than not that some portion of the deferred tax assets
would not be realized and the limitations on the utilization of loss carrybacks
at the state level.
The quarter ended March 31, 1999 compared to the quarter ended March 31, 1998
Revenues. Resident operations revenue increased by $21.1 million for the
first quarter of 1999 compared to the same period in 1998. The change is
comprised principally of revenue from facilities leased or owned for less than
one year, including $7.5 million from seven facilities acquired in the
SeniorCare Group, Ltd. ("SeniorCare") acquisition (see Note 3 of the 1999 Form
10-K), and from fees related to management contracts and other services as a
result of the increase in the number of facilities under construction and in
operation.
Development fee income decreased by $1.7 million for the first quarter of
1999 compared to the same period in 1998. The decrease is due to the impact of
the Company's adoption of the Financial Accounting Standards Board Emerging
Issues Task Force Issue 97-10, "The Effect of Lessee Involvement in Asset
Construction," (see Note 2 of 1999 Form 10-K) as the majority of the facilities
the Company was developing during the first quarter of 1999 related to projects
which were subject to the provisions of this pronouncement.
Facility Expenses. Facility operating expenses were $28.4 million in the
first quarter of 1999 compared to $15.5 million in the same period of 1998, an
increase of $12.9 million. The increase is primarily due to an increase from
operating expenses from facilities leased or owned less than one year. Included
in facility operating expenses in the first quarter of 1999 is a credit of $1.2
million representing an adjustment of lost revenue due to the implementation of
Medicare's Prospective Payment System. Under the terms of the Company's existing
leases, it has been indemnified by the various Chancellor Entity lessors for
this change in governmental regulations.
Facility lease expense was $4.6 million in the first quarter of 1999
compared to $3.7 million in the same period in 1998. The increase in lease
expense is primarily due to facilities leased less than one year.
General and Administrative. General and administrative expenses were $4.8
million in the first quarter of 1999 compared to $4.5 million in the comparable
period in 1998. The increase in expense is due primarily to increases in salary,
benefits, travel, and advertising expenses relating to the hiring of additional
regional operational and marketing staff as a result of the Company's growth.
Depreciation and Amortization. Depreciation and amortization for the first
quarter of 1999 increased $2.0 million compared to the same period in 1998. The
increase is due primarily to $1.1 million of depreciation from facilities open
less than one year, $0.6 million from the amortization of capital lease assets,
and $0.3 million from the amortization of other intangible assets.
Interest and Other Income and Interest and Other Expense. Interest and
other income for the first quarter of 1999 was $1.5 million compared to $2.3
million for the same period in 1998. The decrease is due to lower average cash
balances during 1999 compared to 1998. Interest and other expense for the first
quarter of 1999 increased to $4.5 million from $1.9 million for the same period
in 1998. The increase in interest expense is primarily due to interest expense
of $1.1 million related to debt assumed in the SeniorCare acquisition, $1.0
million of interest expense related to capital lease obligations, and $0.5
million from borrowings under the Company's line of credit.
Income Taxes. The Company's effective tax rate during the first quarter of
1999 was 39.5 % compared to 41.6% in 1998. The decrease in the effective tax
rate is due to a reduction in the effective state tax rate to 4.5% for 1999 from
6.0% for 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 31, 2000, were $0.7 million compared to
$4.3 million at December 31, 1999, a decrease of $3.6 million.
Cash used by operations was $4.4 million in the first quarter of 2000.
This is comprised of $10.5 million of net loss before depreciation and
amortization and a $2.0 million increase in accounts receivable, partially
offset by a net change in other working capital items of $3.0 million and $5.1
million of other noncash expenses related to facilities the Company consolidates
for accounting purposes, accrued interest on capital lease obligations, and the
charge of $1.4 million related to the write-off of the unamortized lease
costs related to a sublease interest that was sold (see Note 2).
Cash provided by investing activities was $1.6 million in the first
quarter of 2000 compared to a use of $20.0 million for the same period in 1999.
The source of cash was primarily due to a net of $2.0 million received from the
sale of the Company's interest in a sublease (see Note 2) and a decrease in
restricted cash of $0.2 million, partially offset by $0.4 million in additions
to property and equipment and $0.6 million used for a purchase deposit on one
facility.
Cash flows used by financing activities were $0.8 million in the first
three months of 2000 compared to a source of $6.1 million for the same period in
1999. The use of cash is primarily due to $0.6 million of debt repayments.
The Company has incurred significant operating losses, is in violation of
its bank financing covenants, and is dependent upon certain future transactions
to generate sufficient cash flow. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The Company has planned
several initiatives to mitigate this doubt including the restructuring and
reduction of its corporate overhead, sales of certain assets, negotiation of a
settlement agreement with Chancellor to liquidate the remaining receivables, and
negotiating agreements with its lending institution to be fully paid after the
consummation of certain sale transactions. If these initiatives are successful,
the Company believes its remaining operations will allow it to return to
profitability.
The Company will require resources in the future to fund its working
capital requirements. The Company expects to fund these resource requirements
with its cash on hand, the sales of certain assets, the proceeds from its
expected federal tax refund of approximately $9.0 million, and the proceeds from
certain transactions being contemplated between the Company and Chancellor. If
certain of these transactions are either not completed or not completed in a
timely fashion or modified in such a way as to significantly reduce the expected
proceeds to the Company, then the Company would expect to be unable to meet its
then current obligations. Additionally, on April 25, 2000, the Company was
notified by Nasdaq that its stock would begin trading under the symbol "CMDCe"
due to the failure of the Company to file its Annual Report on Form 10-K for the
year ended December 31, 1999. Although the Company filed its Annual Report on
Form 10-K on July 5, 2000, and was not delisted, the Company received notice
from Nasdaq on July 7, 2000, that its stock would be delisted if the price of
the Company's common stock did not meet the minimum bid requirement of $1.00 per
share on or before October 9, 2000, and immediately thereafter the stock must
evidence a closing bid price of at least $1.00 per share for at least ten
consecutive trading days. In the event the price of the Company's stock does not
meet the minimum bid requirements, the Company is prepared to effect a reverse
stock split to meet such requirement. As of the date of this Report, the
Company's common stock has not been delisted. If the Company's common stock were
delisted and was ineligible to be traded on either a
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
national exchange or automated trading market, such an event would constitute a
Repurchase Event, as defined under the Company's $115,000,000 6.25% Convertible
Notes (see Note 9 of the 1999 Form 10-K). In a Repurchase Event, the holders of
the Notes could exercise a put option and require the Notes to be repaid. Such
an event would likely result in the Company filing for protection under Chapter
11 of the United States Bankruptcy Code.
The Company's common stock could also be delisted from Nasdaq both as the
result of failing to comply with the minimum requirements regarding the market
value of public float and if its tangible net worth were to fall below $4.0
million. Additionally, Nasdaq has also notified the Company that it must timely
file all periodic reports required by the Securities and Exchange Commission and
Nasdaq for all reporting periods ending on or before June 30, 2001. In the event
the Company's stock was delisted as a result of any of these factors, the
Company believes that, if its filings with the Securities and Exchange
Commission are then current, its common stock might be able to be listed on
another national exchange, or alternatively, could be listed on an automated
trading market, and that therefore any delisting by Nasdaq would not cause a
Repurchase Event.
In the event the Company is unable to continue as a going concern, assets
may not be recovered at their current carrying value and certain liabilities may
not be settled at their current carrying amount.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk from exposure to changes in interest
rates based on its financing, investing and cash management activities. The
Company does not expect changes in interest rates to have a material effect on
income or cash flows for the year ended December 31, 1999, although there can be
no assurances that interest rates will not significantly change.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CareMatrix Corporation and five of its officers and directors have been
named as defendants in fourteen class action lawsuits filing in the United
States District Court for the District of Massachusetts, one filed by Jonathan
Polansky on November 3, 1999, another filed by John P. Delmonico on November 5,
1999, another filed by James Cosentino on November 5, 1999, another filed by
Miriam Nathan on November 5, 1999, another filed by Patti Lisa on November 5,
1999, another filed by Leroy E. Schober on November 12, 1999, another filed by
Bradley Dunham on November 15, 1999, and another filed by Donald Camp, Marie
Camp and Arthur Boxer on December 23, 1999, another filed by Irving Ravens on
December 14, 1999, another filed by Gary A. Fryan and Michael B. London on
December 3, 1999, another filed by Brock Haynes on November 22, 1999, another
filed by Edward J. Oest on November 30, 1999. The complaints all make
substantially the same claims. Each complaint alleges that defendants violated
the federal securities laws by making material misstatements and omissions in
certain of CareMatrix's public filings and statements during 1998 and 1999.
Specifically, the complaints allege that such statements and omissions had the
effect of artificially inflating the market price for CareMatrix's common stock
until the disclosure by CareMatrix on October 7, 1999 of its expectation that
results for the third quarter and for the full year were not likely to meet
analysts' consensus anticipated levels. Damages are unspecified.
CareMatrix and each of its directors have been named as defendants in a
class action lawsuit filed in the Court of Chancery of the state of Delaware for
New Castle County. This class action was filed by the Howard Gunty Profit
Sharing Plan on August 18, 1999. The complaint alleges that the defendants are
engaged in a course of action that constitutes a breach of their fiduciary and
other common law duties to the public shareholders of CareMatrix. Specifically,
the complaint alleges that the defendants are preparing to execute a
management-led buy-out or other strategic alternatives that would be unfair to
the public shareholders of CareMatrix. Plaintiffs seek an injunction preventing
any such buy-out or, in the event that such a buy-out is consummated, an order
from the court setting it aside. Plaintiffs also seek damages and costs of an
unspecified amount.
A subsidiary of the Company (the "Subsidiary") has been named as a
defendant in a lawsuit filed in the Supreme Court of the State of New York,
County of Nassau. This lawsuit was filed on October 26, 1999 in the name of
Great Neck Holding, LLC and The Mayfair at Glen Cove, LLC, the owners of two
senior housing facilities located in Long Island, New York. The amended
complaint alleges that the Subsidiary has breached its duties under certain
management agreements covering the two facilities. The plaintiffs seek an
accounting by the Subsidiary as to all funds received and expended by it with
respect to he facilities covered by the management agreements, as well as
damages of at least $1,000,000 and costs. In addition, the plaintiffs are
seeking injunctive relief, preventing the Subsidiary from entering the subject
properties or otherwise interfering with the plaintiffs' operation of the
subject properties. The Subsidiary has filed a lawsuit in the same court against
plaintiffs and another entity and two individuals who acted to allegedly
terminate the Subsidiary as Manager without notice or cause as required under
the management agreements. The complaint in the Subsidiary's action seeks to
enjoin those parties from taking any further action to terminate the management
agreements, as well as damages and costs. On March 30, 2000, the Subsidiary's
motion for preliminary injunctive relief was granted (which included giving the
manager the right to manage the facilities on the condition that the Subsidiary
post an undertaking in the amount of $1,000,000) and the Plaintiff's motions for
preliminary injunctive relief were denied.
The Subsidiary has also sued the company allegedly hired to replace the
Subsidiary as Manager of the two facilities, for tortiously interfering with the
Subsidiary's rights and performance of its obligations under the management
agreements. That action was filed in the United States District Court for the
Eastern District of New York. The complaint in this lawsuit seeks damages,
costs, and injunctive relief. The defendant has answered the complaint, denying
certain of the material allegations and asserting affirmative defenses. The
defendant filed motions seeking (i) a stay of the action against it pending the
outcome of the two state-court lawsuits between the Subsidiary and the owners,
discussed above, and (ii) dismissal of one of the two claims for relief asserted
in the complaint. On May 5, 2000, the United States District Court granted the
Subsidiary permission to amend the complaint to address the alleged pleading
defect and otherwise denied the defendant's motion to dismiss that claim.
Accordingly, on May 8, 2000, the Subsidiary filed an amended complaint. On May
11, 2000, the District Court denied the defendant's motion for a stay of the
proceedings until the litigation with the Owners is resolved.
15
<PAGE>
CareMatrix has been named as a nominal defendant and each of its directors
has been named as defendant in two shareholder derivative class action lawsuits
filed in the Court of Chancery of the State of Delaware for New Castle County.
These class action lawsuits were filed by Patty Lisa and Magda Sejas on December
13, 1999. The complaint alleges that the defendant directors have breached their
fiduciary duties to CareMatrix and damaged the goodwill and reputation of
CareMatrix. Specifically, the complaint alleges that the defendant directors
engaged in wrongful self-dealing transactions, encouraged and allowed the
improper self-dealing complained of, failed to take action to stop such conduct
resulting in , among other adverse consequences, federal securities lawsuits
against CareMatrix, exposed CareMatrix to losses and took no steps to remove or
institute legal action against those officers, directors and employees
responsible for permitting the alleged misconduct. The plaintiffs seek an
injunction requiring an accounting by the defendant directors to CareMatrix of
the damages suffered by CareMatrix and the establishment and maintenance of
effective compliance programs to ensure that CareMatrix's affiliates and
employees do not engage in wrongful and self-dealing practices. The plaintiffs
also seek the unspecified costs and disbursements in connection with the action.
CareMatrix has been named as a defendant in a civil suit filed by Mariner
Health Resources, Inc. and Prism Rehab Systems, Inc. in the Superior Court for
Suffolk County, Massachusetts. The suit arises from the termination in 1998 of
various management, consulting and services agreements between certain
subsidiaries of CareMatrix and the plaintiffs in connection with certain skilled
nursing facilities in Maryland, Massachusetts, New Jersey and Florida. The
plaintiffs allege that CareMatrix failed to pay approximately $3.3 million owed
to the plaintiffs, plus interest and costs, under the terms of the termination
agreements between CareMatrix, certain of CareMatrix's subsidiaries and the
plaintiffs. CareMatrix and its subsidiaries have denied these allegations and
have counterclaimed against the plaintiffs and their corporate parent, Mariner
Post-Acute Network, Inc. ("MPAN"), seeking a declaration that no monies are
presently due under the termination agreements at issue. CareMatrix and its
subsidiaries also seek damages for certain misconduct by the plaintiffs and MPAN
relating to the management of the facilities, including, among other items, the
fraudulent misrepresentation of amounts due from Medicaid at the Maryland
skilled nursing facility. On January 12, 2000, plaintiffs and MPAN filed
voluntary petitions under Chapter 11 of the United States Bankruptcy Code,
staying the foregoing litigation.
CareMatrix Corporation and another entity have been named as defendants in
a class action lawsuit filed in the Supreme Court of the State of New York,
County of Nassau. The action was filed by Rosalind Romuno on June 15, 2000. The
Complaint alleges that the defendants breached their contractual obligations to
pay for certain medical services covered under the Company's health plan. The
plaintiff seeks injunctive relief requiring the defendants to pay for past,
present and future medical services covered under the Company's health plan, to
take all actions necessary to ensure that no entity will seek enforcement
against the plaintiff and other members of the class for medical services
covered under the Company's health plan, and to ensure that the credit rating of
the plaintiff and other members of the class is not affected by the defendant's
actions, and also seeks unspecified damages and costs.
The Company believes it has meritorious defenses to each of the actions
described above and intends to vigorously defend each such action. The Company
does not currently expect the outcome of any of the litigation, referenced
above, to have a material adverse impact on its financial position, results of
operations and cash flows.
The Company is also subject to litigation with various vendors as a result
of either contracts entered into or services provided related to facilities the
Company has developed and/or managed. The current aggregate amount of such
claims outstanding is approximately $3.9 million. Although the Company intends
to settle or otherwise resolve these claims, there can be no assurance any or
all such settlements or resolutions will be successful. Although an unfavorable
outcome of any individual claim would be unlikely to have a material adverse
impact on the Company, an unsuccessful resolution of a number of such claims
could, in the aggregate, have a material adverse impact on the Company's
financial position, results of operations, and cash flows. The Company has not
currently recorded a reserve to cover such potential claims as the range of
unsuccessful outcomes of such litigation cannot be reasonably estimated at this
time.
The Company is a party to other litigation in the ordinary course of
business. The Company does not believe that any such litigation will have a
material adverse effect on its business, financial position or results of
operations.
16
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). The following exhibits are filed as part of this report:
3.01 Corrected Third Restated Certificate of Incorporation of CareMatrix
Corporation (2)
3.02 By-laws of CareMatrix Corporation, as amended through December 9,
1996 (1)
27 Financial Data Schedule (*)
(b). Reports on Form 8-K
None.
----------------------------
(*) Filed herewith.
(1) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(2) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities and Exchange Act of 1934, as amended, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAREMATRIX CORPORATION
By: /s/ Abraham D. Gosman
----------------------------------
Chief Executive Officer
By: /s/ Michael J. Zaccaro
----------------------------------
President, Chief Operating Officer
and Chief Accounting
Officer
Dated: July 17, 2000
18
