CONTINUCARE CORPORATION
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant þ
Filed by a Party other than the
Registrant o
Check the appropriate box:
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Preliminary proxy statement |
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Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2)) |
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Definitive proxy statement |
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Definitive Additional Materials |
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Soliciting Material under Rule 14a-12 |
Continucare Corporation
(Name of Registrant as Specified In Its charter)
(Name of Person(s) Filing proxy statement, if other than the
Registrant)
Payment of Filing Fee (Check the appropriate box):
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No fee required. |
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Fee computed on table below per Exchange Act
Rules 14a-6(i)(1)
and 0-11. |
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(1) |
Title of each class of securities to which transaction applies: |
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(2) |
Aggregate number of securities to which transaction applies: |
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(3) |
Per unit price or other underlying value of transaction computed
pursuant to Exchange Act
Rule 0-11 (set
forth the amount on which the filing fee is calculated and state
how it was determined): |
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Proposed maximum aggregate value of transaction: |
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Fee paid previously with preliminary materials. |
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Check box if any part of the fee is offset as provided by
Exchange Act
Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing. |
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(1) |
Amount Previously Paid: |
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Form, Schedule or Registration Statement No.: |
August 14, 2006
Dear Shareholder:
On behalf of the Board of Directors, I cordially invite you to
attend a special meeting of shareholders of Continucare
Corporation to be held at its executive offices, 7200 Corporate
Center Drive, Suite 600, Miami, Florida, 33126, on
September 19, 2006 at 10:00 A.M. Eastern Standard Time.
The attached Notice of Special Meeting and Proxy Statement
describe the only matter to be acted upon at the special
meeting the approval of the issuance of
20.0 million shares of our common stock in connection with
our acquisition of Miami-Dade Health Centers, Inc. and its
affiliated companies. At the special meeting, you will have an
opportunity to meet management and ask questions about this
proposal.
Whether or not you plan to attend the special meeting, it is
important that your shares be represented. Regardless of the
number of shares you own, please sign and date the enclosed
proxy card and promptly return it to us in the enclosed postage
paid envelope. If you sign and return your proxy card without
specifying your choices, your shares will be voted in accordance
with the recommendations of the Board of Directors contained in
the Proxy Statement.
We look forward to seeing you on September 19, 2006 and
urge you to return your proxy card as soon as possible. If you
plan to attend the meeting in person, please contact our
corporate secretary, Fernando L. Fernandez, at
(305) 500-2000 so that we can make appropriate preparations
for your attendance.
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Richard C. Pfenniger, Jr. |
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Chairman, Chief Executive Officer and President |
CONTINUCARE CORPORATION
7200 Corporate Center Drive, Suite 600
Miami, Florida 33126
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On September 19, 2006
To the Shareholders of Continucare Corporation:
You are hereby notified that a special meeting of shareholders
of Continucare Corporation (we or Continucare) will
be held at 10:00 A.M. local time, on September 19,
2006 at the executive offices of Continucare Corporation, 7200
Corporate Center Drive, Suite 600, Miami, Florida, 33126,
to consider and vote on a proposal to approve the issuance of
20.0 million shares of our common stock pursuant to an
asset purchase agreement (the Asset Purchase
Agreement) among Continucare, Continucare MDHC, LLC (f/k/a
CNU Blue 1, Inc.), a Florida limited liability company and
a wholly-owned subsidiary of Continucare (Buyer),
CNU Blue 2, LLC, a Florida limited liability company and a
wholly-owned subsidiary of Continucare (Buyer LLC),
Miami Dade Health and Rehabilitation Services, Inc., a Florida
corporation (MDHRS), Miami Dade Health Centers,
Inc., a Florida corporation (MDHC), West Gables Open
MRI Services, Inc., a Florida corporation (West
Dade), Kent Management Systems, Inc., a Florida
corporation (Kent), Pelu Properties, Inc.,
a Florida corporation (Pelu), Peluca Investments,
LLC, a Florida limited liability company (Peluca),
Miami Dade Health Centers One, Inc., a Florida corporation
(MDHC One, and, collectively with MDHRS, MDHC, West
Dade, Kent, Pelu and Peluca, the MDHC Companies),
MDHC Red, Inc., a Florida corporation (Retain), and
the principal shareholders of each MDHC Company (the
Owners). No other items of business may be presented
or considered at the special meeting.
The Board of Directors has fixed the close of business on
August 8, 2006 as the record date for determining those
shareholders entitled to notice of, and to vote at, the special
meeting and any adjournment(s) or postponement(s) thereof.
Section 712(b) of the American Stock Exchange Company Guide
requires shareholder approval in connection with acquisitions of
the assets of another company where the present or potential
issuance of common stock, or securities convertible into common
stock, in connection with such acquisition could result in an
increase in outstanding common shares of 20% or more. The
aggregate of the securities that may be issued in connection
with the acquisition may result in an increase in outstanding
common shares of 20% or more.
After careful consideration, the Board of Directors has approved
the acquisition and related transactions contemplated by the
Asset Purchase Agreement, including the issuance of
20.0 million shares of our common stock and recommends that
you vote FOR the proposal.
Whether or not you expect to be present, please sign, date and
return the enclosed proxy card in the enclosed pre-addressed
envelope as promptly as possible. No postage is required if
mailed in the United States.
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By Order of the Board of Directors |
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Fernando L. Fernandez |
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Senior Vice President-Finance, Chief Financial |
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Officer, Treasurer and Secretary |
Miami, Florida
August 14, 2006
THIS IS AN IMPORTANT MEETING AND ALL SHAREHOLDERS ARE INVITED TO
ATTEND THE MEETING IN PERSON. ALL SHAREHOLDERS ARE RESPECTFULLY
URGED TO EXECUTE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY
AS POSSIBLE. SHAREHOLDERS OF RECORD WHO EXECUTE A PROXY CARD MAY
REVOKE THEIR PROXY AND VOTE THEIR SHARES IN PERSON AT THE
MEETING.
TABLE OF CONTENTS
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CONTINUCARE CORPORATION
7200 Corporate Center Drive, Suite 600
Miami, Florida 33126
PROXY STATEMENT
FOR THE SPECIAL MEETING OF SHAREHOLDERS
To Be Held On September 19, 2006
This proxy statement is furnished in connection with the
solicitation by the Board of Directors (the Board of
Directors) of Continucare Corporation, a Florida
corporation, of proxies from the holders of Continucares
common stock, par value $0.0001 per share, for use at a
special meeting of shareholders of Continucare to be held at
10:00 A.M. local time, on September 19, 2006 at the
executive offices of Continucare Corporation, 7200 Corporate
Center Drive, Suite 600, Miami, Florida, 33126 or at any
adjournments or postponements thereof, pursuant to the foregoing
notice of special meeting. This proxy statement and the enclosed
form of proxy are first being sent to holders of
Continucares common stock on or about August 14, 2006.
This proxy statement contains important information for you to
consider when deciding how to vote on the sole matter brought
before the meeting. Please read it carefully. Continucares
principal executive offices are located at 7200 Corporate Center
Drive, Suite 600, Miami, Florida 33126 and its telephone
number is (305) 500-2000.
Except as otherwise specifically noted, Continucare,
the Company, we, our,
us and similar words in this proxy statement refer
to Continucare Corporation. The following words and
abbreviations have the following corresponding meanings:
Buyer means Continucare MDHC, LLC (f/k/a CNU
Blue 1, Inc.); Buyer LLC means CNU Blue 2,
LLC; MDHRS means Miami Dade Health and
Rehabilitation Services, Inc.; MDHC means Miami Dade
Health Centers, Inc.; West Dade means West Gables
Open MRI Services, Inc.; Kent means Kent Management
Systems, Inc.; Pelu means Pelu Properties, Inc.;
Peluca means Peluca Investments, LLC; MDHC
One means Miami Dade Health Centers One, Inc.; MDHC
Companies means MDHRS, MDHC, West Dade, Kent, Pelu, Peluca
and MDHC One, collectively; Retain means MDHC Red,
Inc.; and Owners means the principal shareholders of
the MDHC Companies.
INFORMATION CONCERNING YOUR PROXY
The enclosed proxy is solicited on behalf of the Board of
Directors. The giving of a proxy does not preclude the right of
a shareholder of record to vote in person at the special meeting
should any shareholder of record giving the proxy so desire.
Shareholders of record have an unconditional right to revoke
their proxy at any time prior to the exercise thereof, either in
person at the special meeting or by filing with
Continucares Secretary at Continucares headquarters
a written revocation or duly executed proxy bearing a later
date; however, no such revocation will be effective until
written notice of the revocation is received by Continucare at
or prior to the special meeting. Only shareholders of record are
entitled to grant a proxy or to vote at the meeting.
Shareholders who hold their shares through a broker, custodian
or other nominee must instruct the record owner of their shares
how to vote these shares.
The cost of preparing, assembling and mailing this proxy
statement, the notice of special meeting and the enclosed proxy
is to be borne by Continucare. In addition to the use of mail,
Continucares employees may solicit proxies personally, by
telephone and by facsimile. Continucares employees will
receive no compensation for soliciting proxies other than their
regular salaries. Continucare may request banks, brokers and
other
custodians, nominees and fiduciaries to forward copies of the
proxy material to their principals and to request authority for
the execution of proxies. Continucare may reimburse such persons
for their expenses in so doing.
PURPOSE OF THE MEETING
At the special meeting, Continucares shareholders will
consider and vote upon only the approval of the issuance of
20.0 million shares of Continucares common stock
pursuant to the terms of the asset purchase agreement dated as
of May 10, 2006 by and among Continucare, Buyer, Buyer LLC,
the MDHC Companies, Retain and Owners (the Asset Purchase
Agreement). We entered into the Asset Purchase Agreement
in connection with our proposed acquisition of the MDHC
Companies (the Acquisition).
Unless contrary instructions are indicated on the enclosed
proxy, all shares represented by valid proxies received pursuant
to this solicitation will be voted FOR the approval of
the issuance of 20.0 million shares of our common stock in
connection with the Acquisition pursuant to the Asset Purchase
Agreement.
OUTSTANDING VOTING SECURITIES AND VOTING RIGHTS
The Board of Directors has set the close of business on
August 8, 2006 as the record date for determining
shareholders of Continucare entitled to notice of and to vote at
the special meeting. As of the record date, there were
50,242,478 shares of common stock outstanding. Only the record
holders of issued and outstanding shares of common stock as of
the close of business on the record date are entitled to vote at
the special meeting. Shareholders that own their shares in
street name or through a broker, custodian or other
nominee may attend the meeting but may not grant a proxy or vote
at the meeting. Instead, those shareholders must instruct the
record holder of their shares of common stock how they wish
their shares to be voted. Shareholders do not have the right to
cumulate their votes, and are entitled to one vote for each
share held. Shareholders do not have rights of appraisal or
similar rights of dissenters under the Florida Business
Corporation Act with respect to the proposal set forth in this
proxy statement.
The attendance, in person or by proxy, of the holders of a
majority of the outstanding shares of common stock entitled to
vote at the special meeting is necessary to constitute a quorum
with respect to the matter presented. The issuance of the shares
of our common stock in connection with the Acquisition will be
approved if the number of shares of common stock voted in favor
of the proposal exceeds the number of shares voted in opposition
to the proposal. If less than a majority of outstanding shares
entitled to vote are represented at the special meeting, a
majority of the shares so represented may adjourn the special
meeting to another date, time or place, and notice need not be
given of the new date, time, or place if the new date, time, or
place is announced at the meeting before an adjournment is taken.
Prior to the special meeting, Continucare will select one or
more inspectors of election for the meeting. Such inspectors
shall determine the number of shares of common stock represented
at the meeting, the existence of a quorum and the validity and
effect of proxies, and shall receive, count and tabulate ballots
and votes and determine the results thereof. Abstentions will be
considered as shares present and entitled to vote at the special
meeting and will be counted as votes cast at the special
meeting, but will not be counted as votes cast for or against
the proposal. Accordingly, abstentions will have no effect on
the approval of the proposal.
Only shareholders of record are entitled to grant a proxy or
to vote at the meeting. Shareholders who hold their shares
through a broker, custodian or other nominee must instruct the
record owner of their shares how to vote their shares.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION
Any statement in this proxy statement that is not a statement of
historical fact is a forward-looking statement
within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are not guarantees
of future results and are subject to risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual
results could differ materially and adversely from those
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expressed in any forward-looking statement as a result of
various factors. Forward-looking statements may include
statements about:
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the benefits we expect to realize from the Acquisition; |
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our ability to integrate the MDHC Companies operations and
personnel and achieve expected synergies; |
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our ability to serve a significantly larger patient base; |
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our ability to successfully adapt our operations to accommodate
a larger Medicaid patient base; |
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our ability to work together effectively with our HMO affiliates
pending and following the consummation of the Acquisition; |
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the expected financial impact of the Acquisition on us, which
could be materially different than the impact we estimate; |
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the impact of the significant increase in our intangible assets
that will result if we complete the Acquisition; |
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our ability to make capital expenditures and respond to capital
needs; |
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our ability to enhance the services we provide to our patients; |
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our ability to strengthen our medical management capabilities; |
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our ability to improve our physician network; |
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our ability to enter into or renew our managed care agreements
and negotiate terms which are favorable to us and affiliated
physicians; |
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our ability to respond to future changes in Medicare
reimbursement levels and reimbursement rates from other third
parties; |
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our compliance with applicable laws and regulations; |
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our ability to establish new relationships with third party
payors and physicians; |
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our ability to expand our network through additional medical
centers or other facilities; and |
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the potential impact on our claims loss ratio as a result of the
Medicare Risk Adjustments (MRA) and the Medicare
Prescription Drug, Improvement and Modernization Act of 2003
(the Medicare Modernization Act). |
We cannot be sure that we will actually achieve the expectations
reflected in these forward-looking statements. Estimates of our
future performance are necessarily subject to a high degree of
uncertainty and may vary materially from actual results. We
caution our shareholders not to place undue emphasis on these
forward-looking statements, which speak only as of the date of
this proxy statement and we undertake no obligation to update or
revise these statements as a result of new information, future
events or otherwise.
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SUMMARY TERM SHEET
FOR THE ACQUISITION
The following summary provides an overview of the Acquisition.
The summary may not contain all of the information that is
important to you. For a more complete description of the terms
of the Acquisition, you should carefully read this entire proxy
statement and the attached annexes in their entirety.
The Companies
Continucare Corporation. We are a provider of primary
care physician services on an outpatient basis in Florida. We
provide medical services to patients through employee
physicians, advanced registered nurse practitioners and
physicians assistants. Additionally, we provide practice
management services to independent physician affiliates.
Substantially all of our net medical services revenue is derived
from managed care agreements with two health maintenance
organizations, Humana Medical Plans, Inc. (Humana)
and Vista Healthplan of South Florida, Inc. and its affiliated
companies (Vista). We were incorporated in 1996 as
the successor to a Florida corporation formed earlier in 1996.
Our principal place of business is 7200 Corporate Center Drive,
Suite 600, Miami, Florida 33126. Our telephone number is
305-500-2000.
The MDHC Companies. The following seven companies, each
of which was incorporated or organized under the laws of the
State of Florida, comprise the MDHC Companies: MDHRS, which was
incorporated in 1998; West Dade, which was incorporated in 1999;
MDHC, which was incorporated in 2000; MDHC One, which was
incorporated in 2000; Kent, which was incorporated in 2000;
Pelu, which was incorporated in 2001; and Peluca, which was
organized in 2005.
The MDHC Companies opened their first medical center in 1999 in
Miami, Florida, as a provider of medical services for Humana
HMOs. Today, although still providing a majority of its services
to patients who are members of Humana HMOs, pursuant to various
managed care agreements and within its five medical centers
located throughout Miami-Dade County, Florida, MDHRS and MDHC
provide primary-care physician services to approximately
18,000 patients, most of whom participate in Medicare and
Medicaid HMO plans. West Dade is a provider of magnetic
resonance imaging tests and services to patients, both within
and outside of the networks serviced by MDHRS and MDHC. In
addition to the entities of the MDHC Companies that provide
medical services, Pelu owns the largest of the five medical
centers operated by the MDHC Companies, which is located in
Hialeah, Florida; Peluca is building a 7,000 square foot
medical facility in Homestead, Florida, which will replace the
MDHC Companies existing medical center in Homestead; and
Kent manages all administrative services for the MDHC Companies.
The MDHC Companies principal place of business is 3233
Palm Avenue, Hialeah, Florida 33012. The MDHC Companies
primary telephone number is 305-642-0590.
Overview of the Acquisition
We, Buyer and Buyer LLC have entered into the Asset Purchase
Agreement with the MDHC Companies, Retain and Owners. Under the
terms of the Asset Purchase Agreement, Buyer will purchase
substantially all of the assets, properties and business of the
MDHC Companies. Immediately following the closing of the
Acquisition, Retain will assume all liabilities of the MDHC
Companies that we did not expressly assume and, pursuant to the
terms and conditions of the agreement and plan of merger by and
between each MDHC Company (other than Pelu and Peluca) and Buyer
LLC, each MDHC Company (other than Pelu and Peluca) will merge
with and into Buyer LLC, which will remain as the surviving
legal entity and our wholly-owned subsidiary.
Recommendation of the Board of Directors
Our Board of Directors recommends that our shareholders vote
FOR the issuance of 20.0 million shares of our
common stock in connection with the Acquisition. To review the
background and reasons for the Acquisition, in detail, see
Background of the Acquisition and Reasons for
the Acquisition, Factors Considered by our Board of Directors,
and Recommendations of our Board of Directors.
4
Opinion of Our Financial Advisor
In connection with the Acquisition, our Board of Directors
received a written opinion from Capitalink L.C.
(Capitalink) as to the fairness to Continucare and
its shareholders of the Acquisition consideration to be paid by
us pursuant to the Asset Purchase Agreement, from a financial
point of view. To review a summary of Capitalinks
analysis, in detail, see Opinion of Financial Advisor to
our Board of Directors. The full text of Capitalinks
written opinion is attached to this proxy statement as
Annex C. Please read this opinion carefully in its entirety
for a description of the assumptions made, matters considered
and limitations on the review undertaken.
The Acquisition Consideration
Upon the closing of the Acquisition, Continucare will pay the
MDHC Companies $5.0 million cash and issue to the MDHC
Companies 20.0 million shares of its common stock and
Continucare will also pay Owners $1.0 million cash on the
first anniversary date of the closing of the Acquisition. In
addition, upon the terms and subject to the conditions of the
Asset Purchase Agreement, following the closing of the
Acquisition, Continucare will pay to Owners up to
$2.0 million cash based on the working capital of the MDHC
Companies on the Closing Date and the monthly payments in
respect of the MDHC Companies business operations received
by Continucare or any of its subsidiaries from certain
identified third-party payors during the 14 day period
commencing the day after the date of the closing of the
Acquisition and make certain other payments to Owners depending
on the collection of certain receivables that were fully
reserved on the books of the MDHC Companies as of
December 31, 2005.
Terms of the Asset Purchase Agreement
The Asset Purchase Agreement is attached to this proxy statement
as Annex A. Our Board of Directors has approved the Asset
Purchase Agreement, which is the binding legal agreement that
governs the terms of the Acquisition. We encourage you to read
the Asset Purchase Agreement carefully.
Conditions Precedent to the Acquisition
The completion of the Acquisition depends on the satisfaction or
waiver of a number of conditions, including, but not limited to,
conditions relating to:
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the accuracy of each of the parties representations and
warranties and compliance by each of the parties with their
covenants; |
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the requisite vote of our shareholders approving the issuance of
the shares to be issued pursuant to the Asset Purchase Agreement; |
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the non-occurrence of a material adverse effect upon us or upon
the assets, properties and business of the MDHC Companies; |
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the receipt of all consents, assignments and authorizations from
the MDHC Companies reasonably necessary to consummate the
Acquisition; |
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the receipt of an unqualified opinion on the MDHC
Companies audited financial statements from the MDHC
Companies auditor; |
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the absence of an adjustment in any material respect of the MDHC
Companies financial statements from the form which was
previously provided to us as a result of the audit; |
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the absence of any action, suit or proceeding wherein an
unfavorable judgment would, in the reasonable judgment of
Owners, impose material limitations on their ability to acquire
or hold or exercise rights relating to their ownership of our
shares; and |
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the appointment of Luis Cruz, M.D. to our Board of
Directors. |
There are no conditions relating to financing the cash portion
of the Acquisition consideration.
5
Termination of the Asset Purchase Agreement
In addition to terminating upon mutual written consent of us and
the MDHC Companies, the Asset Purchase Agreement may be
terminated under a number of circumstances, including, but not
limited to, the following:
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if any law is enacted, promulgated or issued by any governmental
entity making the consummation of the Acquisition and related
transactions illegal; |
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if the Acquisition has not been completed by December 29,
2006; |
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if our shareholders do not approve the issuance of additional
shares; |
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if any party materially breaches any of their respective
representations, warranties, covenants or other agreements in
the Asset Purchase Agreement that cannot be materially cured or
has not been materially cured within 20 business days after they
are provided with written notice of the breach; |
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by us if the MDHC Companies or Owners violate their covenants
not to solicit or agree to other offers competitive with the
Acquisition; |
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by us if the MDHC Companies audited financial statements
reflect any material adverse audit adjustments from the MDHC
Companies unaudited financial statements; |
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by us if the MDHC Companies audited financial statements
for the year ended December 31, 2005 do not reflect
adjusted EBITDA of at least $6.0 million; |
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by the MDHC Companies if the Voting Agreement is
terminated; or |
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by the MDHC Companies if our Board of Directors withholds or
withdraws its recommendations to issue additional shares of our
common stock or modifies its recommendations to issue those
shares in a manner adverse to the MDHC Companies or any of the
Owners. |
Representations and Warranties
The Asset Purchase Agreement contains customary representations
and warranties made by the MDHC Companies and the Owners to us
and the Buyer and by us, the Buyer and Buyer LLC to the MDHC
Companies and the Owners for purposes of allocating the
risks associated with the Acquisition. You should be aware that
these representations and warranties are made by the parties to
each other, may be subject to important limitations and
qualifications and may or may not be accurate as of the date
they were made.
Indemnification
The MDHC Companies and Owners have agreed to indemnify us for
breaches of their covenants, warranties and representations as
well as for failures to perform obligations pursuant to the
Asset Purchase Agreement and ancillary agreements thereto and
liabilities not expressly assumed by us pursuant to an
instrument of assumption executed in connection with the Asset
Purchase Agreement (the Excluded Liabilities).
However, for most breaches of representations and warranties, we
are not entitled to recover any damages with respect to an
indemnification claim until the total damages incurred under the
Asset Purchase Agreement exceed $500,000 and only to the extent
that such loss and expense exceeds $500,000. In addition, the
maximum aggregate liability of all Owners for any claims based
on any such breach of a representation or warranty shall not
exceed one-half of the amount of the Acquisition consideration,
and, with limited exceptions, is further limited to claims
asserted within 18 months of the Closing Date.
Employment Agreements
Upon the closing of the Acquisition, we will enter into one-year
employment agreements with each of Luis Cruz, M.D., Jose
Garcia and Carlos Garcia. Under these agreements, Dr. Cruz
will be employed as our Vice Chairman at an annual salary of
$225,000 and appointed to our Board of Directors, Mr. Jose
Garcia will be employed as our Executive Vice President at an
annual salary of $275,000, and Mr. Carlos Garcia will be
6
employed as our President Diagnostics Division at an
annual salary of $225,000. Each of Dr. Cruz and
Messrs. Jose and Carlos Garcia will also receive options to
acquire 100,000 shares of our common stock at a per share
exercise price equal to the closing price of our common stock on
the date of grant. The options will vest ratably over a period
of four years and have a term of ten years.
Accounting Treatment of the Acquisition
We will treat the Acquisition as a purchase of the MDHC
Companies under United States generally accepted accounting
principles. Under the purchase method of accounting, the
aggregate consideration we pay in the Acquisition, together with
direct costs of the Acquisition, will be allocated to the assets
of the MDHC Companies that we acquire and liabilities of the
MDHC Companies that we assume based on their respective fair
values as of the effective time of the Acquisition. The assets
and liabilities and results of operations of the MDHC Companies
will be consolidated into our assets and liabilities after the
Acquisition is completed.
The final allocation will be determined after the Acquisition is
completed and after completion of a thorough analysis to
determine the fair values of the MDHC Companies tangible
and identifiable intangible assets and liabilities.
Federal Income Tax Consequences of the Acquisition
The Acquisition is intended to qualify as a tax-free
reorganization under Section 368(a) of the Internal Revenue
Code of 1986, as amended.
Regulatory Approvals
Our business and operations as well as the business and
operations of the MDHC Companies are subject to a substantial
body of federal, state, and local laws, rules and regulations
relating to the conduct, licensing and development of healthcare
businesses, facilities and equipment as well as the rules,
regulations and standards of various accrediting bodies. As a
result of the Acquisition, many of the agreements between the
MDHC Companies and third-party payors may be deemed to have been
transferred to us, thereby requiring the approval and consent of
such third-party payors. Similarly, a number of the facilities
operated by the MDHC Companies may be deemed to have been
transferred to us as a result of the Acquisition, thereby
requiring the approval and consent of various state licensing
and/or health regulatory agencies. In addition, we will be
required to obtain certain new licenses prior to consummating
the Acquisition. Many of the filings required in order to obtain
such new licenses as well as the approval and consent of
federal, state and local healthcare regulatory bodies and
agencies will have been made before this proxy statement is
mailed to you. However, under applicable laws, rules and
regulations, certain filings cannot be made until after the
closing of the Acquisition. Although it is anticipated that we
and the MDHC Companies will be able to obtain any approval,
consent or license required in connection with the Acquisition,
there can be no assurance that such required approvals, consents
or licenses will be obtained on a timely basis, if at all.
Dissenters Rights
Our shareholders are not entitled to exercise dissenters
rights in connection with the issuance of the shares of our
common stock pursuant to the Asset Purchase Agreement.
Registration Rights Agreement
At the closing of the Acquisition, we will enter into a
registration rights agreement whereby we will file a
registration statement with the Securities and Exchange
Commission with respect to certain of the shares of common stock
issued pursuant to the Asset Purchase Agreement. Pursuant to the
terms of the registration rights agreement, we will also grant
limited piggyback registration rights to the
recipients of the shares of our common stock received in the
Acquisition.
7
Voting Agreement
In connection with the Asset Purchase Agreement, Phillip
Frost, M.D., Frost Gamma Investments Trust, Frost Nevada
Investments Trust, and Richard C. Pfenniger, Jr. have
entered into a voting agreement with the Owners (the
Voting Agreement). Pursuant to the Voting Agreement,
Phillip Frost, M.D., Frost Gamma Investments Trust, Frost
Nevada Investments Trust, and Richard C. Pfenniger, Jr.
have agreed, in their respective capacities as shareholders of
Continucare, to vote or cause to be voted all of their shares of
Continucare common stock in favor of the issuance of additional
shares of Continucares common stock and any other matter
contemplated by the Asset Purchase Agreement. The shares of
Continucares common stock beneficially owned by the
shareholders subject to the Voting Agreement constituted
approximately 46% of the total issued and outstanding shares of
Continucares common stock, based on the number of shares
outstanding on June 1, 2006.
Stock Exchange Listing
We have agreed to list the shares of our common stock issued
pursuant to the Asset Purchase Agreement on the American Stock
Exchange (the AMEX). It is a condition to the
completion of the Acquisition that those shares be listed on the
AMEX, subject to official notice of issuance. Following the
Acquisition, our common stock will continue to be traded on the
AMEX under the symbol CNU.
Reasons We Need Shareholder Approval
Neither Florida law nor our charter or bylaws require us to
obtain shareholder approval in connection with the Acquisition.
The only company approval that was required pursuant to Florida
law, our charter and our bylaws to consummate the Acquisition
was the approval of our Board of Directors. However, our common
stock is listed on the AMEX and we are subject to the AMEX
Company Guide. Section 712(b) of the AMEX Company Guide
requires shareholder approval in connection with acquisitions of
the assets of another company where the present or potential
issuance of common stock, or securities convertible into common
stock, in connection with such acquisition could result in an
increase in outstanding common shares of 20% or more. The
aggregate of the securities that may be issued in connection
with the Acquisition may result in an increase in outstanding
common shares of 20% or more. Accordingly, the AMEX requires
that we obtain the approval of our shareholders prior to issuing
the shares of our common stock pursuant to the Asset Purchase
Agreement.
8
RISK FACTORS
Before deciding how to vote on the proposal described in this
proxy statement, you should carefully consider the risks
relating to the Acquisition and to our post-closing operations
as described below, together with the other information in this
proxy statement. Our business, financial condition and results
of operations could be adversely affected by any of the
following risks. If these risks adversely affect us, then the
trading price of our common stock could decline. You should keep
in mind that these risks are not the only risks that we face.
Other factors that could affect our post-closing results are
discussed in our SEC filings, including those identified in the
Risk Factors section and elsewhere in our Annual
Report on
Form 10-K for the
fiscal year ended June 30, 2005 and our other filings with
the SEC. Additional risks not presently known to us, or risks
that we currently believe are not material, may also impair our
business operations.
Risks Relating to the Acquisition
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If we are unable to complete the Acquisition, our business
may be adversely affected. |
If we do not complete the Acquisition as we intend, our business
and market price of our stock may be adversely affected, and we
may be unable to find other viable manners in which to grow our
business. We must pay the costs related to the Acquisition, such
as legal, accounting and financial advisor fees, even if the
Acquisition does not close.
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We must obtain several third party consents and government
permits to complete the Acquisition. |
We and the MDHC Companies must obtain approvals and consents in
a timely manner from several third parties and licenses and
permits from governmental authorities prior to completion of the
Acquisition. If these approvals, licenses and permits are not
received, or are received on terms that do not satisfy the
conditions set forth in the Asset Purchase Agreement, then the
parties will not be obligated to complete the Acquisition.
Neither we nor the MDHC Companies control the parties from which
we will seek these approvals, licenses and permits, and those
parties are not required to provide their consent to the
Acquisition or issue the applicable licenses and permits. As a
condition to approval of the Acquisition, those third parties
and governmental authorities may impose requirements,
limitations or costs that could negatively affect the way we
conduct business following the Acquisition. These requirements,
limitations or costs could also jeopardize or delay completion
of the Acquisition.
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The Acquisition will result in dilution to our current
shareholders. |
Pursuant to the terms of the Asset Purchase Agreement, upon
closing of the Acquisition, we will issue to the MDHC Companies
20.0 million shares of our common stock. This securities
issuance will dilute the voting power and ownership percentage
of our existing shareholders.
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Substantial sales of our common stock could adversely
affect its market price. |
We will issue 20.0 million shares of our common stock upon
completion of the Acquisition, which we expect to represent
approximately 28% of our then issued and outstanding common
stock. All such shares shall be deemed restricted
securities under federal securities laws. At the Closing,
we will enter into a registration rights agreement under which
we will agree to register the offer and resale of up to
1.5 million shares of our common stock issued pursuant to
the Asset Purchase Agreement, which Owners will, subject to the
terms and conditions of the registration rights agreement, be
permitted to sell in public or private transactions during the
six-month period commencing six months after the date on which
we complete the Acquisition. Further, Owners will be permitted
to offer and sell the shares of common stock they receive as a
result of the Acquisition pursuant to Rule 144 under the
Securities Act of 1933 beginning on the first anniversary of the
date on which we complete the Acquisition. The sale of a
substantial amount of our common stock after the Acquisition
could adversely affect its market price. It could also impair
our ability to raise money through the sale of more common stock
or other forms of capital.
9
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We may not realize the anticipated benefits from the
Acquisition. |
We may not achieve the benefits we are seeking from the
Acquisition. There is no assurance that we can successfully
integrate the MDHC Companies business with our operations,
that we will otherwise succeed in growing our business, or that
the financial results of the combined company will meet or
exceed the financial results that we would have achieved without
the Acquisition. As a result, our operations and financial
results may suffer and the market price of our common stock may
decline.
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The indemnification obligations under the Asset Purchase
Agreement are limited. |
The MDHC Companies and Owners have agreed to indemnify us for
certain breaches of covenants, warranties and representations,
for failures to perform their obligations pursuant to the Asset
Purchase Agreement and ancillary agreements as well as for the
Excluded Liabilities. In the event of certain breaches of
representations and warranties subject to indemnification, we
are only entitled to be indemnified by the breaching Owners if
the aggregate amount of damages resulting from such breach
exceeds $500,000; and then only to the extent such damages
exceed $500,000. Additionally, the indemnification obligations
of the Owners are not joint and several. As a result, if even
one Owner is unable to pay the amount owed to us under the
indemnification provisions of the Asset Purchase Agreement, we
will not be able to receive the full amount of indemnification
to which we are entitled. These indemnification obligations may
be inadequate to fully address any damages we may incur, and our
operations and financial results as well as the market price of
our common stock may suffer as a result.
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The Internal Revenue Service may disagree with the
parties description of the federal income tax
consequences. |
Neither we nor the MDHC Companies has applied for, or expects to
obtain, a ruling from the Internal Revenue Service with respect
to the federal income tax consequences of the Acquisition nor
have we or the MDHC Companies received an opinion of legal
counsel as to the anticipated federal income tax consequences of
the Acquisition. No assurance can be given that the Internal
Revenue Service will not challenge the income tax consequences
of the Acquisition to us.
Risks Relating to the Combined Company after the
Acquisition
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If we are unable to successfully integrate the MDHC
Companies business operations into our business operations
after the Acquisition, we may not realize the anticipated
benefits from the Acquisition and our business could be
adversely affected. |
The Acquisition involves the integration of companies that have
previously operated independently. Successful integration of the
MDHC Companies operations with ours will depend on our
ability to consolidate operations, systems and procedures,
eliminate redundancies and reduce costs. We will also have to be
able to integrate the MDHC Companies Medicaid line of
business, a business area with which we do not have significant
experience, into our business. If we are unable to do so, we may
not realize the anticipated potential benefits of the
Acquisition, and our business and results of operations could be
adversely affected. Difficulties could include the loss of key
employees, patients or HMO affiliations, the disruption of our
and the MDHC Companies ongoing businesses and possible
inconsistencies in standards, controls, procedures and policies.
Our integration of the MDHC Companies operations may be
complex and time-consuming. Additionally, a number of factors
beyond our control could prevent us from realizing any
efficiencies and cost savings we expect.
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If the combined company experiences losses following the
closing of the Acquisition, we could experience difficulty
meeting our business plan and our stock price could be
negatively affected. |
After the Acquisition, we may experience operating losses and
negative cash flow from operations as we implement our business
plan. Any failure to achieve or maintain profitability could
negatively affect the market price of our common stock. A
substantial failure to achieve profitability could make it
difficult or impossible for us to grow our business.
Accordingly, our business strategy may not be successful, and we
may
10
not generate significant revenues or achieve profitability. If
we do achieve profitability in the future, we may not be able to
sustain or increase profitability on a quarterly or annual basis.
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The debt we will assume in the Acquisition will increase
our debt to equity ratio and expose us to greater risks. |
We expect to assume approximately $7.8 million of the MDHC
Companies net indebtedness in connection with the
Acquisition. In addition, if necessary, we may fund the
Acquisition consideration from borrowings under our credit
facility. The indebtedness we assume and any portion of the
Acquisition consideration we finance from borrowings under our
credit facility may:
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increase our vulnerability to general adverse economic and
industry conditions; |
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limit our flexibility in planning for, or reacting to, changes
in our business and the healthcare industry, which may place us
at a disadvantage compared to our competitors that have less
debt; and |
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limit, along with the possible financial and other restrictive
covenants in our indebtedness, our ability to borrow additional
funds. |
Any of the foregoing could have a material adverse effect on our
operations and financial results.
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If we complete the Acquisition our substantial intangible
assets will greatly increase. |
Our balance sheet includes intangible assets, including goodwill
and other separately identifiable intangible assets, which
represented approximately 40% of our total assets at
March 31, 2006. If we complete the Acquisition we expect
our goodwill to increase by approximately $58.6 million and
our intangible assets to reflect approximately 71% of our total
assets following the Acquisition.
We are required to review our intangible assets including our
goodwill for impairment on an annual basis or more frequently if
certain indicators of permanent impairment arise. Because we
operate in a single segment of business, we perform our
impairment test on an enterprise level. In performing the
impairment test, we compare the then-current market price of our
outstanding shares of common stock to the current value of our
total net assets, including goodwill and intangible assets.
Should we determine that an indicator of impairment has occurred
we would be required to perform an additional impairment test.
Indicators of a permanent impairment include, among other things:
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a significant adverse change in legal factors or the business
climate; |
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the loss of a key HMO contract; |
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an adverse action by a regulator; |
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unanticipated competition; |
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loss of key personnel; or |
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allocation of goodwill to a portion of business that is to be
sold. |
Depending on the market value of our common stock at the time
that an impairment test is required, there is a risk that a
portion of our intangible assets would be considered impaired
and must be written-off during that period. The market price of
our common stock can fluctuate significantly because of many
factors, including factors that are beyond our ability to
control or foresee and which, in some cases, may be wholly
unrelated to us or our business. As a result, fluctuations in
the market price of our common stock, even those wholly
unrelated to us or our business may result in us incurring an
impairment charge relating to the write-off of our intangible
assets. Such a write-off could have a material adverse effect on
our results of operations and a further adverse impact on the
market price of our common stock.
11
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Our acquisitions could result in integration difficulties,
unexpected expenses, diversion of managements attention
and other negative consequences. |
As part of our growth strategy, we plan to continue to evaluate
potential business acquisition opportunities that we anticipate
will provide new product and market opportunities, benefit from
and maximize our existing assets and add critical mass. Any such
acquisitions would require us to integrate the technology,
products and services, operations, systems and personnel of the
acquired businesses with our own and to attempt to grow the
acquired businesses as part of our company. The successful
integration of businesses we have acquired and may acquire in
the future is critical to our future success, and if we are
unsuccessful in integrating these businesses, our operations and
financial results could suffer. The risks and challenges
associated with the acquisition and integration of an acquired
business include, but are not limited to, the following:
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we may be unable to centralize and consolidate our financial,
operational and administrative functions with those of the
businesses we acquire; |
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our managements attention may be diverted from other
business concerns; |
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we may be unable to retain and motivate key employees of an
acquired company; |
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litigation, indemnification claims and other unforeseen claims
and liabilities may arise from the acquisition or operation of
acquired businesses; |
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the costs necessary to complete integration may exceed our
expectations or outweigh some of the intended benefits of the
transactions we complete; |
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we may be unable to maintain the patients or goodwill of an
acquired business; and |
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the costs necessary to improve the operating systems and
services of an acquired business may exceed our expectations. |
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Competition for acquisition targets and acquisition
financing and other factors may impede our ability to acquire
other businesses and may inhibit our growth. |
We anticipate that a portion of our future growth may be
accomplished through acquisitions. The success of this strategy
depends upon our ability to identify suitable acquisition
candidates, reach agreements to acquire these companies, obtain
necessary financing on acceptable terms and successfully
integrate the operations of these businesses. In pursuing
acquisition and investment opportunities, we may compete with
other companies that have similar growth strategies. Some of
these competitors are larger and have greater financial and
other resources than we have. This competition may render us
unable to acquire businesses that could improve our growth or
expand our operations.
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We may be unable to manage the growth of our
business. |
If our management is unable to manage growth effectively, our
business, operating results and financial condition could be
adversely affected. Any new growth, including growth resulting
from the Acquisition, would be expected to place a significant
strain on our management systems and operational resources. We
anticipate that new growth, if any, may require us to recruit,
hire and retain new managerial, finance, sales, marketing and
support personnel. Although we expect to have the services of
the MDHC Companies management available to us following
the Acquisition, we cannot be certain that we will be successful
in retaining them or in recruiting, hiring or retaining any
additional personnel that our growth may require. Our ability to
compete effectively and to manage our future growth, if any,
will depend on our ability to maintain and improve operational,
financial, and management information systems on a timely basis
and to expand, train, motivate and manage our work force. We
cannot be certain that our personnel, systems, procedures, and
controls will be adequate to support our operations.
12
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We are exposed to risks relating to the evaluation of the
MDHC Companies internal controls. |
We are not presently subject to the assessment and attestation
processes required by Section 404 of the Sarbanes-Oxley Act
of 2002 (Section 404). However, when we become
subject to those Securities and Exchange Commission rules, we
will be required to assess the effectiveness of the internal
controls of the MDHC Companies in addition to those of our
existing business. The MDHC Companies are a privately-held
business and are not subject to the same requirements for
internal controls as public companies. There can be no assurance
that our auditors will not identify one or more significant
deficiencies or material weaknesses in the MDHC Companies
internal controls. If any such deficiencies or weaknesses are
identified and we fail to strengthen such deficiencies or
weaknesses we may not be able to conclude on an ongoing basis
that we have effective internal controls over financial
reporting in accordance with Section 404.
While we believe that we will be able to timely meet our
obligations under Section 404 and that our management will
be able to certify as to the effectiveness of our internal
controls, if we are unable to timely comply with
Section 404, if our management is unable to certify as to
the effectiveness of our internal controls or if our auditors
are unable to attest to that certification, the stock price of
our common stock may be adversely affected.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange
Commission (the SEC). You may read and copy any
document we file at the SECs public reference rooms in
Washington, D.C., New York, New York, and Chicago,
Illinois. Please call the SEC at
1-800-SEC-0330 for
further information on the public reference rooms. Our SEC
filings are also available to the public from the SECs
website at http://www.sec.gov. In addition, you can inspect the
reports, proxy statements and other information we file at
the offices of the American Stock Exchange, Inc., 86 Trinity
Place, New York, New York 10006.
Our website address is www.continucare.com. We make available
free of charge on or through our internet website our Annual
Report on
Form 10-K,
Quarterly Reports on
Form 10-Q, Current
Reports on
Form 8-K and
amendments to those reports, filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after such
material has been filed with, or furnished to, the SEC. Our
website does not constitute part of this proxy statement.
13
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
DATA
The following selected unaudited pro forma combined condensed
financial data present the effect of the Acquisition pursuant to
the Asset Purchase Agreement. The following selected unaudited
pro forma combined condensed statements of income data is
extracted from the historical consolidated statements of income
of Continucare and the MDHC Companies and combines them as if
the Acquisition had occurred on July 1, 2004. The following
selected unaudited pro forma combined condensed balance sheet
data is extracted from the historical consolidated balance sheet
of Continucare and the historical combined balance sheet of the
MDHC Companies and combines them, giving effect to the
Acquisition as if it had occurred on March 31, 2006.
The allocation of the Acquisition consideration in the
Acquisition as reflected in the following selected unaudited pro
forma combined condensed financial data has been based upon
preliminary estimates that we developed with the assistance of
an independent valuation specialist of the fair value of assets
to be acquired and liabilities to be assumed as of the date of
the Acquisition. This preliminary allocation of the Acquisition
consideration was based on available public information and is
dependent upon certain preliminary estimates and assumptions we
made solely for the purpose of developing such selected
unaudited pro forma combined condensed financial data. As a
result, a final determination of the fair values of the MDHC
Companies assets and liabilities cannot be made prior to
the completion of the Acquisition.
The final determination of the fair values of these assets will
be based on the actual net tangible and intangible assets of the
MDHC Companies as of the Closing Date. Consequently, amounts
preliminarily allocated to goodwill and identifiable intangibles
could change significantly from those used in the selected
unaudited pro forma combined condensed financial data presented
below and could result in a material change in amortization of
acquired intangible assets.
The following selected unaudited pro forma combined condensed
financial data does not give effect to any integration expenses
or cost savings or unexpected acquisition costs that may be
incurred or realized in connection with the Acquisition. The
selected unaudited pro forma combined condensed financial data
does not necessarily indicate our combined financial position or
the results of operations in the future or the combined
financial position or the results of operations that we would
have realized had the Acquisition been consummated during the
periods or as of the date for which the selected unaudited pro
forma combined condensed financial data is presented.
The selected unaudited pro forma combined condensed financial
data should be considered together with the historical financial
statements of Continucare and the MDHC Companies, including the
respective notes to those financial statements.
14
CONTINUCARE CORPORATION
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
DATA
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For the Nine Months Ended March 31, 2006 | |
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MDHC | |
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Pro Forma | |
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Pro Forma | |
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Continucare | |
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Companies | |
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Adjustments | |
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Combined | |
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Pro Forma Combined Condensed Statement of Income Data:
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Total revenue
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$ |
96,778,659 |
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$ |
64,913,738 |
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$ |
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$ |
161,692,397 |
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Operating expenses
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90,144,801 |
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64,135,620 |
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1,085,250 |
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155,365,671 |
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Income from operations
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6,633,858 |
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778,118 |
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(1,085,250 |
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6,326,726 |
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Net income (loss)
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$ |
4,229,366 |
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188,417 |
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(760,275 |
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3,657,508 |
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Net income per common share:
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Basic
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$ |
.08 |
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$ |
.05 |
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Diluted
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$ |
.08 |
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$ |
.05 |
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Cash dividends declared
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$ |
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$ |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, 2005 | |
|
|
| |
|
|
|
|
MDHC | |
|
Pro Forma | |
|
Pro Forma | |
|
|
Continucare | |
|
Companies | |
|
Adjustments | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
Pro Forma Combined Condensed Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
112,231,113 |
|
|
$ |
74,803,090 |
|
|
$ |
|
|
|
$ |
187,034,203 |
|
Operating expenses
|
|
|
102,920,236 |
|
|
|
70,250,880 |
|
|
|
1,434,000 |
|
|
|
174,605,116 |
|
Income from operations
|
|
|
9,310,877 |
|
|
|
4,552,210 |
|
|
|
(1,434,000 |
) |
|
|
12,429,087 |
|
Net income
|
|
$ |
15,891,492 |
|
|
$ |
2,751,440 |
|
|
$ |
(993,240 |
) |
|
$ |
17,649,692 |
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.32 |
|
|
|
|
|
|
|
|
|
|
$ |
.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
.31 |
|
|
|
|
|
|
|
|
|
|
$ |
.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006 | |
|
|
| |
|
|
|
|
MDHC | |
|
Pro Forma | |
|
Pro Forma | |
|
|
Continucare | |
|
Companies | |
|
Adjustments | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
Pro Forma Combined Condensed Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
38,091,948 |
|
|
$ |
11,119,809 |
|
|
$ |
63,370,000 |
|
|
$ |
112,581,757 |
|
Long-term obligations, including current portion
|
|
$ |
118,119 |
|
|
$ |
8,631,765 |
|
|
$ |
(130,000 |
) |
|
$ |
8,619,884 |
|
15
PROPOSAL 1
APPROVAL OF THE ISSUANCE OF 20.0 MILLION SHARES
OF OUR COMMON STOCK IN CONNECTION WITH THE ACQUISITION
Overview of the Acquisition
We are seeking the approval of the issuance of 20.0 million
shares of our common stock in connection with the Acquisition
pursuant to the terms of the Asset Purchase Agreement. If the
Acquisition is approved, we will acquire substantially all of
the MDHC Companies assets, properties and business, in
exchange for, among other things, $5.0 million in cash and
20.0 million shares of our common stock at the Closing and
at least $1.0 million in cash thereafter. A copy of the
Asset Purchase Agreement is attached to this
proxy statement as Annex A.
The Board of Directors has unanimously approved the Acquisition
and the issuance of 20.0 million shares of our common stock
in connection therewith as described in this
Proposal No. 1 and is recommending approval by the
shareholders of the issuance of 20.0 million shares of our
common stock in connection with the Acquisition because it
believes that it is in the best interest of Continucare. The
issuance of the shares of our common stock in connection with
the Acquisition will be approved if the number of shares of
common stock voted in favor of the issuance exceeds the number
of shares voted in opposition to the issuance.
Background of the Acquisition
As we have improved our business, we have become increasingly
interested in expanding our business through the addition and
integration of new medical operations to our network through
potential acquisitions or
start-ups. During
September 2005, Dr. Phillip Frost, our principal
shareholder and one of our directors, was contacted by a
representative of Owners who inquired whether Continucare would
be interested in a business combination transaction with the
MDHC Companies. Dr. Frost discussed the possibility of such
a transaction with Richard C. Pfenniger, Jr., our Chairman
and Chief Executive Officer, and Mr. Pfenniger and
Dr. Frost agreed it would be advisable to meet with the
MDHC Companies to explore whether a mutually-advantageous
business combination transaction between the MDHC Companies and
us could be structured.
On September 22, 2005, Mr. Pfenniger and
Dr. Frost met with two of the Owners and their financial
advisors. The parties met to discuss their respective business
operations and engage in preliminary discussions regarding
whether a business combination transaction between the MDHC
Companies and us might benefit both parties.
On September 29, 2005, Mr. Pfenniger and
Dr. Frost met again with one of the Owners financial
advisors. The financial advisor wanted to discuss the MDHC
Companies initial thoughts regarding a proposal for
Continucares acquisition of the MDHC Companies and a
possible means of valuing the business of the MDHC Companies.
Mr. Pfenniger responded that the specific proposed
valuation methodology for the MDHC Companies would not be
acceptable. The parties did not reach any agreement during the
conversation, but decided to continue with further discussions.
Following the September 29 meeting and continuing through
November 2005, Mr. Pfenniger engaged in periodic
discussions with Owners and their financial advisors regarding
the respective businesses of the MDHC Companies and us as well
as possible valuation metrics for the MDHC Companies. The
parties did not reach any agreement during these conversations.
During this time Mr. Pfenniger had a number of informal
discussions with the members of our Board of Directors and
updated our Board of Directors on the status of any ongoing
discussions with the MDHC Companies at the meetings of our Board
of Directors.
After executing a confidentiality agreement in November 2005,
the parties exchanged limited due diligence information. During
this time period, Mr. Pfenniger had informal discussions
with the members of our Board of Directors concerning the status
of the negotiations with the MDHC Companies.
During early November 2005, Continucare and the MDHC Companies
and their respective legal counsel negotiated a non-binding
letter of intent outlining the basic terms of the Acquisition,
which terms were subject
16
to each partys satisfactory conclusion of its due
diligence investigation and execution of definitive agreements
relating to the Acquisition. The non-binding letter of intent
also specified that the Acquisition was contingent upon the
delivery to Continucare of the MDHC Companies audited
financial statements reflecting certain minimum levels of
financial performance for the year ended December 31, 2005.
At a meeting in late November 2005, the parties exchanged
preliminary due diligence information requests and discussed the
steps needed to work towards execution of definitive
documentation of the Acquisition.
Beginning in December 2005 and continuing until the execution of
definitive transaction documents in May 2006, the parties
exchanged and reviewed due diligence information and members of
the parties management teams met frequently to learn more
about their respective businesses. During December 2005 and
January and February 2006, the parties respective legal
counsel worked to evaluate a tax-advantaged structure for the
Acquisition. Also during this period, Mr. Pfenniger had a
number of informal discussions with the members of our Board of
Directors and updated our Board of Directors on the status of
any ongoing discussions with the MDHC Companies at the meetings
of our Board of Directors.
In late February 2006, Continucares legal counsel
circulated draft copies of the definitive agreements relating to
the Acquisition. The parties and their respective legal counsel
continued to negotiate such definitive agreements during March
and April 2006. Also during this time, the MDHC Companies
prepared historical financial statements on an accrual
accounting basis and provided them to Continucare for review.
Mr. Pfenniger continued to informally advise members of our
Board of Directors on the status of the discussions during this
period.
On March 29, 2006, Continucare retained Capitalink as its
financial advisor to advise our Board of Directors in reviewing
the terms of the Asset Purchase Agreement and related agreements
and to provide an opinion as to the fairness of such terms, from
a financial point of view, to Continucare and its shareholders.
In April 2006, representatives of the parties met to discuss the
terms of the Acquisition and certain open points of negotiation.
At that meeting, the parties agreed to increase the number of
shares of Continucares common stock issuable in connection
with the Acquisition from 19.6 million to 20.0 million
and resolved certain other open points.
On April 26, 2006, our Board of Directors held a special
meeting at which Mr. Pfenniger and Continucares
outside legal counsel informed our Board of Directors of the
status of negotiations and our Board of Directors discussed the
proposed terms of the Acquisition.
During early May 2006, the parties and their respective legal
counsel finalized the terms of the definitive agreements
relating to the Acquisition.
Our Board of Directors met on May 10, 2006 to discuss the
Acquisition, including the Acquisition consideration and other
terms of the definitive transaction agreements.
Continucares management and outside legal counsel advised
our Board of Directors on the terms and conditions contained in
the definitive agreements, and the negotiations which led to
such terms. Also at that meeting, representatives of Capitalink
made a presentation to our Board of Directors and, after
reviewing the material factors in its assessment of the
Acquisition, Capitalink indicated that as of that date, in its
opinion, the proposed consideration to be paid by Continucare
was fair, from a financial point of view, to Continucare and its
shareholders. All directors participated in discussions
concerning the Acquisition and the course of action that
Continucare should take. After careful consideration of the
structure, terms and conditions of the Acquisition, our Board of
Directors unanimously approved the Acquisition as in the best
interests of Continucare and its shareholders.
On May 10, 2006, representatives of both Continucare and
the MDHC Companies executed the Asset Purchase Agreement and all
related agreements and documents thereto, and the Acquisition
was announced on May 11, 2006.
17
Reasons for the Acquisition, Factors Considered by our Board
of Directors, and Recommendation of our Board of Directors
Our Board of Directors believes that the MDHC Companies are
attractive acquisition candidates. It also believes that the
terms of the Acquisition are consistent with the long-term
business strategies of Continucare, and, based in part on the
opinion of Capitalink, that the terms of the Acquisition are
fair to and in the best interests of Continucare and its
shareholders. Specifically, our Board of Directors believes that
the Acquisition will, among other things:
|
|
|
|
|
further Continucares strategy to invest in growth
opportunities while creating operating efficiencies through
economies of scale; |
|
|
|
increase the patient-base served by Continucares
organization as well as expand Continucares market
penetration in Miami-Dade County, Florida; |
|
|
|
facilitate Continucares expansion in the Medicaid line of
business to augment Continucares strong Medicare Advantage
line of business; |
|
|
|
be accretive to earnings and cash flow; |
|
|
|
provide Continucare with access to the MDHC Companies
experienced management team; and |
|
|
|
further strengthen Continucares relationships with its HMO
affiliates. |
In making its decision to approve the Acquisition, our Board of
Directors also considered potential detriments related to the
Acquisition, including, without limitation:
|
|
|
|
|
possible disruptions to Continucares business and
management distractions that could arise from the Acquisition
and the integration of the MDHC Companies business into
Continucares business; |
|
|
|
the possibility that the expected synergies and benefits from
the Acquisition described above may not be realized; and |
|
|
|
the risks inherent in the fluctuating price of
Continucares common stock on the AMEX, such as the risk
that the value of the shares of Continucares common stock
issuable in connection with the Acquisition on the Closing Date
may exceed the value of those shares as of the date on which our
Board of Directors approved the Acquisition. |
This discussion of the potential benefits and detriments
considered by our Board of Directors is not intended to be
exhaustive. The determination to approve the Acquisition was
made after consideration of the potential benefits and
detriments related to the Acquisition and an analysis of the
Acquisition as a whole.
Our Board of Directors, after careful consideration, has
unanimously approved the Acquisition and unanimously determined
that the issuance of the shares of Continucares common
stock in connection with the Acquisition is in the best
interests of Continucare and its shareholders.
Our Board of Directors unanimously recommends that you vote
FOR the issuance of 20.0 million shares of our
common stock in connection with the Acquisition.
Financing for the Acquisition
We expect to fund the estimated cash consideration payable to
the MDHC Companies and Owners with cash flows from operations
or, if necessary, borrowings under our credit facility, which
provides for a revolving loan to us. The shares of common stock
we issue in connection with the Acquisition will be authorized
but previously unissued shares.
Opinion of Financial Advisor to our Board of Directors
Capitalink made a presentation to our Board of Directors on
May 10, 2006 and delivered its written opinion to our Board
of Directors, which stated that, as of May 10, 2006, and
based upon and subject to the assumptions made, matters
considered, and limitations on its review as set forth in the
opinion, the
18
consideration to be paid by Continucare is fair, from a
financial point of view, to Continucares shareholders. The
amount of the Acquisition consideration was determined pursuant
to negotiations between us and the MDHC Companies and not
pursuant to recommendations of Capitalink.
You are urged to read the Capitalink opinion carefully and in
its entirety for a description of the assumptions made, matters
considered, procedures followed and limitations on the review
undertaken by Capitalink in rendering its opinion. The summary
of the Capitalink opinion set forth in this proxy statement is
qualified in its entirety by reference to the full text of the
opinion, which is attached hereto as Annex C and is
incorporated by reference into this proxy statement.
The Capitalink opinion is not intended to be and does not
constitute a recommendation to you as to whether you should take
any action, if required, such as voting on any matter, in
connection with the Acquisition.
Capitalink was not requested to opine as to, and the opinion
does not in any manner address, the relative merits of the
Acquisition as compared to any alternative business strategy
that might exist for us, our underlying business decision to
proceed with or effect the Acquisition, and other alternatives
to the Acquisition that might exist for us.
In arriving at its opinion, Capitalink took into account an
assessment of general economic, market and financial conditions,
as well as its experience in connection with similar
transactions and securities valuations generally. In so doing,
among other things, Capitalink:
|
|
|
|
|
reviewed the draft of the asset purchase agreement dated
May 3, 2006; |
|
|
|
reviewed publicly available financial information and other data
with respect to us, including our Annual Report on
Form 10-K for the
year ended June 30, 2005 and our Quarterly Report on
Form 10-Q for the
quarterly period ended December 31, 2005; |
|
|
|
reviewed available financial information with respect to the
MDHC Companies, including draft unaudited income statements and
balance sheets for the years ended December 31, 2005 and
2004; |
|
|
|
considered the historical financial results and present
financial condition of the MDHC Companies; |
|
|
|
reviewed and compared the trading of, and the trading market for
our common stock; |
|
|
|
reviewed and analyzed the indicated value range of the
Acquisition consideration; |
|
|
|
reviewed and analyzed the MDHC Companies projected
unlevered free cash flows and prepared a discounted cash flow
analysis; |
|
|
|
reviewed and analyzed certain financial characteristics of
publicly-traded companies that Capitalink deemed to have
characteristics comparable to the MDHC Companies; and |
|
|
|
reviewed and analyzed certain financial characteristics of
target companies in transactions where Capitalink deemed such
target companies to have characteristics comparable to that of
the MDHC Companies. |
Capitalink also performed such other analyses and examinations
as it deemed appropriate and held discussions with the MDHC
Companies and our management in relation to certain
financial and operating information furnished to Capitalink,
including financial analyses with respect to the MDHC
Companies and Continucares business and operations.
In arriving at its opinion, Capitalink relied upon and assumed
the accuracy and completeness of all of the financial and other
information that was used without assuming any responsibility
for any independent verification of any such information.
Further, Capitalink relied upon the assurances of the MDHC
Companies and our management that they were not aware of any
facts or circumstances that would make any such information
inaccurate or misleading. With respect to the financial
information and projections utilized, Capitalink assumed that
such information has been reasonably prepared on a basis
reflecting the best currently available estimates and judgments,
and that such information provides a reasonable basis upon which
it could
19
make an analysis and form an opinion. Capitalink did not make a
physical inspection of the properties and facilities of the MDHC
Companies and did not make or obtain any evaluations or
appraisals of the MDHC Companies assets and liabilities
(contingent or otherwise). In addition, Capitalink did not
attempt to confirm whether the MDHC Companies had good title to
its assets. Capitalink assumed that the Acquisition will be
consummated in a manner that complies in all respects with the
applicable provisions of the Securities Act of 1933, as amended,
the Securities Exchange Act of 1934, as amended, and all other
applicable federal and state statutes, rules and regulations.
Capitalink assumes that the Acquisition will be consummated
substantially in accordance with the terms set forth in the
Asset Purchase Agreement, without any further amendments
thereto, and that any amendments, revisions or waivers thereto
will not be detrimental to our shareholders.
Capitalinks opinion is necessarily based upon market,
economic and other conditions as they existed on, and could be
evaluated as of, May 10, 2006. Accordingly, although
subsequent developments may affect its opinion, Capitalink has
not assumed any obligation to update, review or reaffirm its
opinion.
In connection with rendering its opinion, Capitalink performed
certain financial, comparative and other analyses as summarized
below. Each of the analyses conducted by Capitalink was carried
out to provide a different perspective on the Acquisition, and
to enhance the total mix of information available. Capitalink
did not form a conclusion as to whether any individual analysis,
considered in isolation, supported or failed to support an
opinion as to the fairness, from a financial point of view, of
the Acquisition consideration to our shareholders. Further, the
summary of Capitalinks analyses described below is not a
complete description of the analyses underlying
Capitalinks opinion. The preparation of a fairness opinion
is a complex process involving various determinations as to the
most appropriate and relevant methods of financial analysis and
the application of those methods to the particular circumstances
and, therefore, a fairness opinion is not readily susceptible to
partial analysis or summary description. In arriving at its
opinion, Capitalink made qualitative judgments as to the
relevance of each analysis and factor that it considered. In
addition, Capitalink may have given various analyses more or
less weight than other analyses, and may have deemed various
assumptions more or less probable than other assumptions, so
that the range of valuations resulting from any particular
analysis described above should not be taken to be
Capitalinks view of the value of the MDHC Companies
assets. The estimates contained in Capitalinks analyses
and the ranges of valuations resulting from any particular
analysis are not necessarily indicative of actual values or
actual future results, which may be significantly more or less
favorable than suggested by such analyses. In addition, analyses
relating to the value of businesses or assets neither purports
to be appraisals nor do they necessarily reflect the prices at
which businesses or assets may actually be sold. Accordingly,
Capitalinks analyses and estimates are inherently subject
to substantial uncertainty. Capitalink believes that its
analyses must be considered as a whole and that selecting
portions of its analyses or the factors it considered, without
considering all analyses and factors collectively, could create
an incomplete and misleading view of the process underlying the
analyses performed by Capitalink in connection with the
preparation of its opinion.
The analyses performed were prepared solely as part of
Capitalinks analysis of the fairness, from a financial
point of view, of the Acquisition consideration to our
shareholders, and were provided to our Board of Directors in
connection with the delivery of Capitalinks opinion. The
opinion of Capitalink was just one of the many factors taken
into account by our Board of Directors in making its
determination to approve the Acquisition, including those
described elsewhere in this proxy statement.
|
|
|
Acquisition Consideration Analysis |
The Acquisition consideration consists of 20.0 million
shares of Continucares common stock, initial cash
consideration of $5.0 million, a cash payment of
$1.0 million in one year from the Closing and a trailing
payment of up to $2.0 million based upon the monthly
payments in respect of the MDHC Companies business
received during the 14 days after the Closing.
Capitalink calculated an indicated value range for our common
stock by using a range of per share values of between $2.25 and
$3.00. The low end of the range is based on the mean share price
of our common stock over the last twenty-four months and the
high end of the range is based on our share price on the AMEX as
of May 5, 2006.
20
Capitalink discounted the $1 million cash payment at 7%
(based on our average current cost of debt) and arrived at
approximately $935,000.
Capitalink arrived at an indicated value range for the
Acquisition consideration of approximately $50.9 million to
approximately $67.9 million.
Capitalink generated an indicated valuation range for the MDHC
Companies based on a discounted cash flow analysis, a comparable
company analysis, and a comparable transaction analysis.
Capitalink weighted the three approaches equally and arrived at
an indicated equity value range of approximately
$51.0 million and approximately $63.0 million.
Capitalink noted that the MDHC Companies indicated equity
value range of approximately $51.0 million to approximately
$63.0 million is within the indicated Acquisition
consideration range of approximately $50.9 million to
approximately $67.9 million.
Further, Capitalink noted that the indicated Acquisition
consideration range implies a range of enterprise value/ EBITDA
transaction multiples of 9.0x to 11.6x, lower than that of our
current trading enterprise value/ EBITDA multiple of
approximately 16.0x, which Capitalink believed further supported
the fairness of the Acquisition consideration.
|
|
|
Discounted Cash Flow Analysis |
A discounted cash flow analysis estimates value based upon a
companys projected future free cash flow discounted at a
rate intended to reflect risks inherent in its business and
capital structure. Unlevered free cash flow represents the
amount of cash generated and available for principal, interest
and dividend payments after providing for ongoing business
operations.
While the discounted cash flow analysis is the most scientific
of the methodologies used, it is dependent on assumptions,
estimates and projections which involve subjective judgments and
is further dependent on numerous industry-specific and
macroeconomic factors.
Capitalink utilized forecasts provided by the MDHC Companies of
future growth in the MDHC Companies revenues, EBITDA and
EBITDA margin from fiscal 2006 to fiscal 2008, which increases
were primarily attributed to projected increases in membership
and premium rates.
In order to arrive at a present value for these projected cash
flows, Capitalink utilized discount rates ranging from 17.0% to
19.0%. This was based on an estimated weighted average cost of
capital of 18.1% (based on our estimated weighted average cost
of debt of 7.0% and a 19.0% estimated cost of equity). The cost
of equity calculation was derived utilizing the Ibbotson build
up method utilizing appropriate industry risk and size premiums.
Capitalink presented a range of terminal values at the end of
the forecast period by applying a range of terminal exit
multiples based on revenue and EBITDA as well as long-term
perpetual growth rates.
Utilizing terminal revenue multiples of between 0.70x and 0.90x,
terminal EBITDA multiples of between 9.0x and 11.0x and long
term perpetual growth rates of between 4.0% and 5.0%, Capitalink
calculated a range of indicated enterprise values by weighting
the above indications equally.
Capitalink then deducted the MDHC Companies net debt to
derive an indicated equity value range of approximately
$53.4 million to approximately $68.3 million.
|
|
|
Comparable Company Analysis |
A selected comparable company analysis reviews the trading
multiples of publicly traded companies that are believed to be
generally comparable to the MDHC Companies with respect to
business and revenue model, operating sector, size and target
customer base.
21
Capitalink located six companies that it deemed generally
comparable to the MDHC Companies with respect to their industry
sector and operating model (the Comparable
Companies). The Comparable Companies included us,
Metropolitan Health Networks Inc., Prospect Medical Holdings
Inc., Molina Healthcare Inc., Healthspring Inc. and Magellan
Health Services Inc.
All of the Comparable Companies provide managed care services
and arrange for the delivery of healthcare services
predominantly on a risk basis. One of the Comparable Companies
(Magellan Health Services Inc.) provides more specialized,
behavioral managed care services. Capitalink believed that we
are the most similar Comparable Company in terms of operations,
risks incurred and geographical location.
All Comparable Companies are larger than the MDHC Companies with
revenue for the last twelve months ranging from approximately
$118.2 million to approximately $1.8 billion.
Capitalink noted that four of the Comparable Companies are less
profitable than the MDHC Companies, with EBITDA margins ranging
from approximately 2.1% to approximately 13.4%.
Multiples utilizing market value and enterprise value were used
in the analyses. For comparison purposes, all operating profits
including EBITDA were normalized to exclude certain
non-continuing general and administrative expenses of the MDHC
Companies consistent with the methodology used to compute
Adjusted EBITDA under the Asset Purchase Agreement.
Capitalink generated a number of multiples worth noting with
respect to the Comparable Companies:
|
|
|
|
|
The multiple of enterprise value to revenue for the last twelve
months ranged from 0.28x to 1.24x, with a mean of 0.71x. |
|
|
|
The multiple of enterprise value to calendar year 2006 revenue
ranged from 0.30x to 0.99x, with a mean of 0.65x. |
|
|
|
The multiple of enterprise value to calendar year 2007 revenue
ranged from 0.28x to 0.88x, with a mean of 0.65x. |
|
|
|
The multiple of enterprise value to EBITDA for the last twelve
months ranged from 3.7x to 16.0x, with a mean of 9.2x. |
|
|
|
The multiple of enterprise value to calendar year 2006 EBITDA
ranged from 7.0x to 13.0x, with a mean of 9.0x. |
|
|
|
The multiple of enterprise value to calendar year 2007 EBITDA
ranged from 5.4x to 11.2x, with a mean of 7.9x. |
Capitalink also reviewed the historical multiples generated for
the Comparable Companies, and noted that the mean multiple of
enterprise value to EBITDA for the last twelve months over the
last ten years was 8.3x.
Capitalink selected an appropriate multiple range for the MDHC
Companies by examining the range indicated by the Comparable
Companies and taking into account certain company-specific
factors. Capitalink expects the MDHC Companies valuation
multiples to be above the mean of the Comparable Companies due
to its higher EBITDA margins and higher revenue growth offset by
its smaller size.
Based on the above factors, Capitalink applied the following
multiple range to the MDHC Companies revenue and pro forma
EBITDA for the last twelve months, and their projected revenue
and EBITDA for fiscal 2006 and fiscal 2007.
|
|
|
|
|
Between 0.70x and 0.90x revenue for the last twelve months; |
|
|
|
Between 0.60x and 0.70x fiscal 2006 revenue; |
|
|
|
Between 0.50x and 0.60x fiscal 2007 revenue; |
|
|
|
Between 9.0x and 11.0x EBITDA for the last twelve months; |
22
|
|
|
|
|
Between 8.0x and 10.0x fiscal 2006 EBITDA; and |
|
|
|
Between 7.0x and 9.0x fiscal 2007 EBITDA. |
Based on the selected multiple ranges, Capitalink calculated a
range of enterprise values for the MDHC Companies by weighting
the above indications equally.
Capitalink then deducted the MDHC Companies net debt to
derive an indicated equity value range of approximately
$49.9 million to approximately $63.4 million.
None of the Comparable Companies have characteristics identical
to the MDHC Companies. In particular and among other things, the
MDHC Companies may have an internal cost structure materially
different than that of a publicly traded company. An analysis of
publicly traded comparable companies is not mathematical; rather
it involves complex consideration and judgments concerning
differences in financial and operating characteristics of the
Comparable Companies and other factors that could affect the
public trading of the Comparable Companies.
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Comparable Transaction Analysis |
A comparable transaction analysis involves a review of merger,
acquisition and asset purchase transactions involving target
companies that are in related industries to the MDHC Companies.
The comparable transaction analysis generally provides the
widest range of value due to the varying importance of an
acquisition to a buyer, the potential differences in the
transaction process and other factors unique to the
circumstances surrounding each acquisition.
Capitalink located five transactions announced since April 2003
involving target companies providing healthcare services (the
Comparable Transactions) and for which detailed
financial information was available. The Comparable Transactions
were:
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Target |
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Acquiror |
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PSH Acquisition Corporation
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Horizon Health Corp. |
IASIS Healthcare Corp.
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Investors led by MTS Health Partners & Texas Pacific
Group |
Mid Atlantic Medical Services Inc.
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United Healthcare Corp. |
Kessler Rehabilitation Corp.
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Select Medical Corp. |
Ramsey Youth Services, Inc.
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Psychiatric Solutions Inc. |
Based on the information disclosed with respect to the targets
in the each of the Comparable Transactions, Capitalink
calculated and compared the enterprise values as a multiple of
revenue and EBITDA for the last twelve months. Capitalink noted
the following with respect to the multiples generated:
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The multiple of enterprise value to revenue for the last twelve
months ranged from 0.53x to 1.68x, with a mean of 1.11x. |
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The multiple of enterprise value to EBITDA for the last twelve
months ranged from 7.3x to 11.8x, with a mean of 9.7x. |
Capitalink believes the MDHC Companies should be valued below
the mean revenue multiple of the Comparable Transactions
multiples due to their lower profitability and smaller size, and
valued slightly below the mean EBITDA multiple due to their
smaller size.
Capitalink determined a range of indicated enterprise values for
the MDHC Companies by selecting the following range of valuation
multiples based on the Comparable Transactions, and then applied
them to the MDHC Companies revenue and pro forma EBITDA
for the last twelve months:
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Between 0.70x and 0.80x revenue for the last twelve months. |
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Between 9.0x and 10.0x EBITDA for the last twelve months. |
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Based on the selected multiple ranges, Capitalink calculated a
range of enterprise values for the MDHC Companies by weighting
the above indications equally.
Capitalink then deducted the MDHC Companies net debt to
derive an indicated equity value range of approximately
$50.6 million to approximately $57.9 million.
None of the target companies in the Comparable Transactions have
characteristics identical to the MDHC Companies. Accordingly, an
analysis of comparable business combinations is not
mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating
characteristics of the target companies in the Comparable
Transactions and other factors that could affect the respective
acquisition values.
Based on the information and analyses set forth above,
Capitalink delivered its written opinion to our Board of
Directors, which stated that, as of May 10, 2006, based
upon and subject to the assumptions made, matters considered,
and limitations on its review as set forth in the opinion, the
Acquisition consideration is fair, from a financial point of
view, to our shareholders.
Capitalink is an investment banking firm that, as part of its
investment banking business, regularly is engaged in the
evaluation of businesses and their securities in connection with
mergers, acquisitions, corporate restructurings, private
placements, and for other purposes. We determined to use the
services of Capitalink because it is a recognized investment
banking firm that has substantial experience in similar matters.
Capitalink has received a fee in connection with the preparation
and issuance of its opinion and we will reimburse Capitalink for
its reasonable
out-of-pocket expenses,
including attorneys fees. In addition, we have agreed to
indemnify Capitalink for certain liabilities that may arise out
of the rendering of its opinion. Capitalink does not
beneficially own any interest in either Continucare or the MDHC
Companies and has not provided either company with any other
services. Subsequent to the issuance of its fairness opinion, we
also retained Capitalink to assist us in the valuation of the
MDHC Companies assets for purposes of allocating the
Acquisition consideration among those assets for accounting and
federal income tax purposes.
Accounting Treatment of the Acquisition
We will treat the Acquisition as a purchase of the MDHC
Companies under United States generally accepted accounting
principles. Under the purchase method of accounting, the
aggregate consideration we pay in the Acquisition, together with
direct costs of the Acquisition, will be allocated to the assets
of the MDHC Companies that we acquire and liabilities of the
MDHC Companies that we assume based on their respective fair
values as of the effective time of the Acquisition. The assets
and liabilities and results of operations of the MDHC Companies
will be consolidated into our assets and liabilities after the
Acquisition is completed.
The final allocation will be determined after the Acquisition is
completed and after completion of a thorough analysis to
determine the fair values of the MDHC Companies tangible
and identifiable intangible assets and liabilities.
Federal Income Tax Consequences of the Acquisition
The Acquisition is intended to qualify as a tax-free
reorganization under Section 368(a) of the Internal Revenue
Code of 1986, as amended. Neither we nor the MDHC Companies has
applied for, or expects to obtain, a ruling from the Internal
Revenue Service with respect to the federal income tax
consequences of the Acquisition nor have we or the MDHC
Companies received an opinion of legal counsel as to the
anticipated federal income tax consequences of the Acquisition.
No assurance can be given that the Internal Revenue Service will
not challenge the income tax consequences of the Acquisition to
us.
24
Dissenters Rights
Our shareholders are not entitled to exercise dissenters
rights in connection with the Acquisition.
Regulatory Approvals Relating to the Acquisition
Our business and operations as well as the business and
operations of the MDHC Companies are subject to a substantial
body of federal, state, local laws, rules and regulations
relating to the conduct, licensing and development of healthcare
businesses, facilities and equipment as well as the rules,
regulations and standards of various accrediting bodies. As a
result of the Acquisition, many of the agreements between the
MDHC Companies and third-party payors may be deemed to have been
transferred to us, thereby requiring the approval and consent of
such third-party payors. Similarly, a number of the facilities
operated by the MDHC Companies may be deemed to have been
transferred to us as a result of the Acquisition, thereby
requiring the approval and consent of various state licensing
and/or health regulatory agencies. In addition, we will be
required to obtain certain new licenses prior to consummating
the Acquisition. Many of the filings required in order to obtain
such new licenses as well as the approval and consent of
federal, state and local healthcare regulatory bodies and
agencies will have been made before this proxy statement is
mailed to you. However, under applicable laws, rules and
regulations, certain filings cannot be made until after the
closing of the Acquisition. Although it is anticipated that we
and the MDHC Companies will be able to obtain any approval,
consent or license required in connection with the Acquisition,
there can be no assurance that such required approvals, consents
or licenses will be obtained on a timely basis, if at all.
25
THE ASSET PURCHASE AGREEMENT AND RELATED AGREEMENTS
General
The descriptions contained in this proxy statement regarding the
material terms of the Asset Purchase Agreement are qualified in
their entirety by reference to the Asset Purchase Agreement
attached as Annex A, which is incorporated into this proxy
statement. You should carefully read the Asset Purchase
Agreement, which governs the terms of the Acquisition.
Continucare, Buyer and Buyer LLC entered into the Asset Purchase
Agreement with the MDHC Companies, Retain and Owners on
May 10, 2006. The following information summarizes the
material terms of the Asset Purchase Agreement.
Effective Time of the Acquisition
The Asset Purchase Agreement provides that the closing of the
Acquisition (the Closing) will take place at
10:00 A.M. on the last business day of the month in which
all the conditions precedent to the parties respective
obligations under the Asset Purchase Agreement have been
satisfied or waived (the Closing Date); provided
that all conditions precedent which had not previously been
waived continue to be satisfied on the Closing Date. The Closing
will become effective as of 11:59 P.M. on the Closing Date.
There can be no assurances as to whether, and on what date, the
conditions precedent to the Closing will be satisfied or waived
or that the parties will complete the Acquisition at all. If the
Acquisition is not completed by December 29, 2006, either
we or the MDHC Companies may terminate the Asset Purchase
Agreement, except that a party may not terminate the Asset
Purchase Agreement if that partys failure to fulfill any
of its obligations under the Asset Purchase Agreement was the
cause of the Acquisition not being completed by that date.
Immediately following the Closing, each MDHC Company (other than
Pelu and Peluca) will merge with and into Buyer LLC pursuant to
the proper filing of executed articles of merger or other
appropriate documents with the Secretary of State of the State
of Florida.
Acquisition Consideration
In consideration for the sale of substantially all of the MDHC
Companies assets, properties and business, at Closing, we
will pay the MDHC Companies $5.0 million cash and an amount
in cash equal to the amount of all documented, out-of-pocket
capital expenditures arising from the construction and build-out
of Pelucas Homestead, Florida facility, in accordance with
the terms and conditions of the Asset Purchase Agreement and
disclosure schedules thereto. Also at Closing, we will issue to
the MDHC Companies 20.0 million shares of our common stock.
On the first anniversary of the Closing Date, we will pay Owners
$1.0 million cash. In addition, upon the terms and subject
to the conditions of the Asset Purchase Agreement, following the
Closing, we will pay Owners up to $2.0 million cash based
on the working capital of the MDHC Companies on the Closing Date
and the monthly payments in respect of the MDHC Companies
business operations received by us or any of our subsidiaries
from certain identified third-party payors during the
14 day period commencing the day after the Closing Date and
50% of all payments received by us or any of our subsidiaries on
account of the collection of certain receivables during the
three-year period from and after the Closing Date that were
fully reserved on the books of the MDHC Companies as of
December 31, 2005.
Representations and Warranties
The Asset Purchase Agreement contains customary representations
and warranties made by the MDHC Companies and Owners and by us
for purposes of allocating the risks associated with the
Acquisition. The representations and warranties are subject in
each case to the exceptions and limitations specifically set
forth in the Asset Purchase Agreement and the disclosure
schedules thereto.
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The representations and warranties in the Asset Purchase
Agreement are made with respect to various matters, including,
without limitation:
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the organization, qualification and good standing of each of the
MDHC Companies, Retain, Continucare, Buyer and Buyer LLC; |
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the authority of each of the MDHC Companies, Retain, Owner,
Continucare, Buyer and Buyer LLC to enter into, and carry out
the obligations under, the Asset Purchase Agreement and all
ancillary agreements thereto; |
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the absence of conflicts, violations or defaults under each
partys organizational documents, applicable laws and
material agreements; |
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the accuracy of the MDHC Companies financial statements
and Continucares SEC filings; |
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the absence of material adverse changes in the MDHC
Companies assets to be purchased pursuant to the Asset
Purchase Agreement (the Purchased Assets) since
December 31, 2005; |
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the absence of material adverse effects on the business of the
MDHC Companies and Continucare; |
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the absence of finders fees; |
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the absence of litigation matters which question the legality or
propriety of the transactions contemplated by the Asset Purchase
Agreement; |
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the validity of the Continucare shares to be issued pursuant to
the Asset Purchase Agreement; |
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compliance by each party with applicable legal requirements and
regulations; |
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employee matters; and |
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insurance. |
In addition, the Asset Purchase Agreement contains additional
representations and warranties by the MDHC Companies and Owners
to Continucare and Buyer as to certain other matters, including,
without limitation:
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title to the Purchased Assets; |
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the availability, condition and adequacy of the Purchased Assets; |
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the MDHC Companies intellectual property; |
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the MDHC Companies and Owners subsidiaries and
investments; |
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the MDHC Companies accounts receivable; |
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the MDHC Companies material contracts; |
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governmental permits and authorizations required in connection
with the operation of the MDHC Companies business; |
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no undisclosed liabilities; |
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tax matters; |
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employee matters; |
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environmental matters; and |
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the absence of certain related parties. |
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Certain Covenants
The MDHC Companies and Owners have agreed that during the period
from May 10, 2006 through the earlier of the termination of
the Asset Purchase Agreement pursuant to its terms and the
Closing Date, unless consented to in writing by Continucare, the
MDHC Companies and Owners shall, among other things:
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operate the MDHC Companies business in good faith, in the
usual, regular and ordinary course of business and consistent
with past practices; |
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use all commercially reasonable efforts consistent with past
practices and policies to preserve intact the MDHC
Companies business organizations; |
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keep available the services of its present officers and
employees and preserve its relationships with patients,
suppliers, third party payors and others having business
dealings with the MDHC Companies; |
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except for personal property sold or otherwise disposed of for
fair value in the ordinary course of business consistent with
past practices and other limited exceptions, not sell, lease,
transfer or otherwise dispose of, or mortgage, pledge or
encumber any of the assets reflected on the unaudited combined
balance sheet of the MDHC Companies as of December 31, 2005
or any assets acquired by the MDHC Companies after
December 31, 2005; |
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except in the ordinary course of business consistent with past
practices, not cancel any debts owed to the MDHC Companies or
claims held by the MDHC Companies; |
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except in the ordinary course of business consistent with past
practices (but in no event in an amount greater than $100,000
whether individually or in the aggregate), not create, incur,
assume or guarantee any indebtedness for borrowed money or enter
into, as lessee, any capitalized lease obligations; |
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except in the ordinary course of business consistent with past
practices and except for distributions to Owners of any and all
cash reflected on the MDHC Companies books and records as
owned by the MDHC Companies from time to time prior to the
Closing Date, not make any payment of cash or distribution to
any Owner or any affiliate of any Owner; |
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except in the ordinary course of business consistent with past
practices (but in no event in an amount greater than $10,000),
not institute or agree to institute any increase in any
compensation payable to any employee of the MDHC Companies; |
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not make any material changes in the accounting principles and
practices used by the MDHC Companies; |
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not enter into any material contract; |
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not grant any dividends nor redeem, repurchase or otherwise
acquire, directly or indirectly, recapitalize or reclassify any
shares of its capital stock; |
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not make any capital expenditure involving more than $25,000; and |
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not take any action or omit to take any action which could
reasonably be expected to cause any of the conditions to the
Closing not to be satisfied. |
Continucare and Buyer have agreed that during the period from
and after May 10, 2006 and until the earlier of the
termination of the Asset Purchase Agreement or the Closing Date,
Continucare and Buyer shall each, among other things:
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operate its respective business in good faith, in the usual,
regular and ordinary course of business and consistent with past
practices; and |
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not take any action that would make or cause any of its
respective representations and warranties made in the Asset
Purchase Agreement to become inaccurate in any material respect. |
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In addition, Continucare has agreed that during the period from
May 10, 2006 until the earlier of the termination of the
Asset Purchase Agreement or the Closing Date, Continucare shall
not, directly or indirectly:
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increase its consolidated indebtedness for borrowed money by
more than $10.0 million over the amount of indebtedness
reflected on Continucares consolidated balance sheet as of
December 31, 2005; nor |
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issue, in one or more transactions, a number of shares of
Continucares common stock or any securities convertible
into Continucares common stock, or subscriptions, rights,
warrants or options representing the right to acquire greater
than 20% of the number of shares of Continucares common
stock outstanding as of May 10, 2006 or enter into any
agreement obligating it to do so. |
Noncompete and Nonsolicitation Covenants
The Asset Purchase Agreement provides that until the fifth
anniversary of the Closing Date, each of the MDHC Companies and
Owners and each of their respective affiliates will be
prohibited from competing with Continucare or the business of
the MDHC Companies in certain counties in the state of Florida
and soliciting any employee, consultant, agent or customer of
any of the MDHC Companies.
Indemnification
Each Owner has agreed in the Asset Purchase Agreement to
indemnify Continucare and its affiliates from and against any
and all losses and expenses arising from:
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any breach by any of the MDHC Companies or any Owner of any of
the covenants in the Asset Purchase Agreement and ancillary
agreements thereto; |
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any failure of any of the MDHC Companies or any Owner to perform
any of the obligations required by the Asset Purchase Agreement
and ancillary agreements thereto; |
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any breach of any warranty or the inaccuracy of any
representation of any of the MDHC Companies or any Owner
contained in the Asset Purchase Agreement and ancillary
agreements thereto or any certificate delivered by or on behalf
of any of the MDHC Companies or any Owner pursuant to the Asset
Purchase Agreement; and |
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the failure of any of the MDHC Companies to perform any excluded
liability. |
With respect to any breach of warranty or inaccuracy of any
representation of any of the MDHC Companies or any Owner, with
limited exceptions, Owners shall be required to indemnify
Continucare and its affiliates only if the aggregate amount of
losses and expenses incurred by Continucare or its affiliates as
a result of such breach or inaccuracy exceeds $500,000 and only
to the extent that such loss and expense exceeds $500,000. In
addition, the maximum aggregate liability of all Owners for any
claims based on any such breach or inaccuracy shall not exceed
one-half of the amount of the Acquisition consideration, and,
with limited exceptions, is further limited to claims asserted
within 18 months of the Closing Date.
At the Closing, the Owners will deposit 1,500,000 shares of
Continucares common stock with an escrow agent, who will
hold and disburse such shares in accordance with the terms of an
escrow agreement as partial security for any indemnification
claims that Continucare or any of its affiliates may assert
against any Owner. If the Owners are found to be liable to
Continucare or any of its affiliates in connection with an
indemnification claim, the Owners will be given the option to
satisfy the claim from the shares deposited with the escrow
agent or by paying the claim in cash.
Continucare and Buyer have agreed in the Asset Purchase
Agreement to indemnify the MDHC Companies and their affiliates
and Owners from and against any and all losses and expenses
arising from:
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any breach by Continucare or Buyer of any of the covenants in
the Asset Purchase Agreement and ancillary agreements thereto; |
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any failure of Continucare or Buyer to perform any of the
obligations required by the Asset Purchase Agreement and
ancillary agreements thereto; |
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any breach of any warranty or the inaccuracy of any
representation of Continucare or Buyer contained in the Asset
Purchase Agreement and ancillary agreements thereto or any
certificate delivered by or on behalf of Buyer pursuant to the
Asset Purchase Agreement; and |
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the failure of Buyer to perform any liability assumed by Buyer
pursuant to an instrument of assumption delivered by Buyer to
the MDHC Companies on the Closing Date. |
With respect to any breach of warranty or inaccuracy of any
representation of Continucare or Buyer, the maximum aggregate
liability of Continucare and Buyer shall not exceed the amount
of the Acquisition consideration, and, with limited exceptions,
is further restricted to claims asserted within eighteen months
of the Closing Date.
Conditions Precedent to the Acquisition
The completion of the Acquisition depends on the satisfaction or
waiver of a number of conditions, including, but not limited to,
conditions relating to:
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the accuracy of each of the parties representations and
warranties and compliance by each of the parties with
their covenants; |
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the requisite vote of our shareholders approving the issuance of
the additional shares; |
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the non-occurrence of a material adverse effect upon us or upon
the assets, properties and business of the MDHC Companies; |
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the receipt of all consents, assignments and authorizations from
the MDHC Companies reasonably necessary to consummate the
Acquisition; |
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the receipt of an unqualified opinion on the MDHC
Companies audited financial statements from the MDHC
Companies auditor; |
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the absence of an adjustment in any material respect of the MDHC
Companies financial statements from the form which was
previously provided to us as a result of the audit; |
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the absence of any action, suit or proceeding wherein an
unfavorable judgment would, in the reasonable judgment of the
Owners, impose material limitations on their ability to acquire
or hold or exercise rights relating to their ownership of our
shares; and |
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the appointment of Luis Cruz, M.D. to our Board of Directors. |
There are no conditions relating to financing the cash portion
of the Acquisition consideration.
Termination of the Asset Purchase Agreement
In addition to terminating upon mutual written consent of the
Company and the MDHC Companies, the Asset Purchase Agreement may
be terminated under a number of circumstances, including, but
not limited to, by either party:
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if any law is enacted, promulgated or issued by any governmental
entity making the consummation of the Acquisition and related
transactions illegal; |
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if the Acquisition has not been completed by December 29,
2006; |
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if our shareholders do not approve the issuance of additional
shares; |
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if any governmental authority or regulatory body issues an
order, decree or ruling which permanently restrains, enjoins or
prohibits the consummation of the Acquisition; or |
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if any party materially breaches any of their respective
representations, warranties, covenants or other agreements in
the Asset Purchase Agreement that cannot be materially cured or
has not been materially cured within 20 business days after they
are provided with written notice of the breach; |
by the MDHC Companies:
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if the Voting Agreement is terminated; |
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if our Board of Directors withholds or withdraws its
recommendations to issue additional shares of Continucares
common stock or modifies its recommendations to issue those
shares in a manner adverse to the MDHC Companies or any of the
Owners; or |
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if there has been a change in the tax law that would apply to
the Acquisition that would reasonably be expected to impose
adverse tax consequences to the MDHC Companies or the Owners; and |
by us:
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if the MDHC Companies or Owners violate their covenants not to
solicit or agree to other offers competitive with the
Acquisition; |
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if the MDHC Companies audited financial statements reflect
any material adverse audit adjustments from the MDHC
Companies unaudited financial statements; |
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if the MDHC Companies audited financial statements for the
year ended December 31, 2005 do not reflect adjusted EBITDA
of at least $6.0 million. |
The adjustments to the MDHC Companies EBITDA contemplated
by the Asset Purchase Agreement consist of the elimination of
certain expenses associated with the status of the MDHC
Companies as privately-held companies which expenses are not
expected to be recurring after the Closing.
Amendments
Any provision of the Asset Purchase Agreement may be amended if
the amendment is signed by an authorized representative of each
of the parties to the Asset Purchase Agreement.
Fees and Expenses
All of the fees and expenses incurred in connection with the
Acquisition and the Asset Purchase Agreement are to be paid by
the party incurring such fees or expenses, whether or not the
Acquisition is consummated; provided, however, that all costs
and expenses of the MDHC Companies shall be borne by the Owners.
Registration Rights Agreement
On the Closing Date, we and the Owners have agreed to enter into
a registration rights agreement. The registration rights
agreement will provide that, as promptly as practicable after
the Closing, we will file a registration statement with the SEC
with respect to those shares held by the MDHC Companies, the
Owners or HAC Advisors LLC, the MDHC Companies financial
advisor, in connection with the Acquisition. In addition, we
will agree to use commercially reasonable efforts to cause the
registration statement to be declared effective and maintain
such effectiveness for 12 months after the Closing Date.
The registration rights agreement will also provide that if we,
at any time when shares issued in connection with the
Acquisition remain outstanding, propose to register any shares
of our common stock under the Securities Act of 1933 (other than
by a registration on Form S-4, or any successor form or
registrations with regard to conversion of any of our securities
or employee stock options, employee purchase plans or employee
benefit plans), then we will give the holders of the shares
issued in connection with the Acquisition an opportunity to have
their shares registered along with the shares of stock being
registered by us. If the holders desire for their shares to be
registered, then we will cause such securities to be covered by
the registration statement otherwise proposed to be filed by us,
subject to limited exceptions described in the registration
rights agreement that permit us to delay, prevent or cut back
the number of shares to be registered or sold. The registration
rights
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agreement is attached to this proxy statement as an exhibit to
the Asset Purchase Agreement, which is attached hereto as
Annex A.
Voting Agreement
Concurrently with the execution of the Asset Purchase Agreement,
the Owners entered a voting agreement dated as of May 10,
2006, with the following Continucare shareholders: Phillip
Frost, M.D., Frost Gamma Investments Trust, Frost Nevada
Investments Trust, and Richard C. Pfenniger, Jr. The shares of
our stock beneficially owned by our shareholders subject to the
Voting Agreement represent approximately 46% of those shares
entitled to vote at the meeting. Pursuant to the Voting
Agreement, such shareholders have agreed to vote or cause to be
voted all of their shares of our common stock in favor of the
Acquisition. The Voting Agreement is attached to this proxy
statement as Annex B.
Employment Agreements of Luis Cruz, M.D., Jose M. Garcia and
Carlos Garcia
We will enter into one-year employment agreements with each of
Luis Cruz, M.D., Jose Garcia and Carlos Garcia in connection
with the Acquisition. Under these employment agreements,
Dr. Cruz will be employed as our Vice Chairman, appointed
to our Board of Directors and receive an annual salary of
$225,000, Mr. Jose Garcia will be employed as our Executive
Vice President at an annual salary of $275,000 and
Mr. Carlos Garcia will be employed as our
President Diagnostics Division at an annual salary
of $225,000. Each of Dr. Cruz and Messrs. Jose and
Carlos Garcia will receive options to acquire 100,000 shares of
our common stock at a per share exercise price equal to the
closing price of our common stock on the date of grant. The
options will vest ratably over a period of four years and have a
term of ten years. Forms of the employment agreements are
attached to this proxy statement as an exhibit to the Asset
Purchase Agreement, which is attached hereto as Annex A.
Each of Dr. Cruz and Messrs. Jose and Carlos Garcia
are subject to the non-competition and non-solicitation
covenants in the Asset Purchase Agreement described above under
the heading Noncompete and Nonsolicitation Covenants.
Certain Leases
On the Closing Date, we will become a party to two lease
agreements with certain of the MDHC Companies and their
affiliates. Pursuant to a lease agreement between Kent and Pelu
dated May 1, 2006, Kent leases an 8,000 square foot
warehouse in Hialeah, Florida for a five-year term expiring
April 30, 2011 with monthly rent ranging from $3,031.67 per
month during the first year to $3,412.17 per month during the
fifth year. Additionally, pursuant to a lease agreement dated
January 1, 2000 between MDHRS and Cruz & Cruz
Partnership, an affiliate of Dr. Luis Cruz, one of the
Owners, MDHRS leases a medical clinic from Cruz & Cruz
Partnership for a monthly rent of $32,100. The lease expires
December 31, 2006 and grants MDHRS two five-year renewal
options. Conflicts of interest may arise under these lease
agreements between the MDHC Companies and their affiliates, as
landlords, and us, as tenants. We cannot guarantee that any such
conflicts that may arise will be resolved. Additionally, even if
we do resolve such conflicts, the resolutions may be less
favorable to us than it would be if we were dealing with an
unaffiliated third party as landlord.
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
APPROVAL OF
THE ISSUANCE OF 20.0 MILLION SHARES OF OUR COMMON STOCK IN
CONNECTION WITH THE ACQUISITION.
32
DESCRIPTION OF CONTINUCARE CORPORATION
Our Business
We are a provider of primary care physician services. Through
our network of 15 medical centers, we provide primary care
medical services on an outpatient basis. We also provide
practice management services to independent physician affiliates
(IPAs). All of our medical centers and IPAs are
located in Miami-Dade, Broward and Hillsborough Counties,
Florida. As of March 31, 2006, we were responsible for
providing services to or for approximately 15,800 patients on a
risk basis and approximately 10,400 patients on a limited or
non-risk basis. For the three and nine-month periods ended
March 31, 2006, approximately 96% of our revenue was
generated by providing services to Medicare-eligible members
under risk arrangements that require us to assume responsibility
to provide and pay for all of our patients medical needs
in exchange for a capitated fee, typically a percentage of the
premium received by an HMO from various payor sources.
We were incorporated in Florida in 1996 as the successor to a
Florida corporation formed earlier in 1996. Our principal place
of business is 7200 Corporate Center Drive, Suite 600,
Miami, Florida 33126. Our telephone number is 305-500-2000.
Our Medical Centers
At our medical centers physicians who are our employees or
independent contractors act as primary care physicians
practicing in the area of general, family and internal medicine.
A typical medical center is operated in an office space that
ranges from 5,000 to 8,000 square feet. A medical center is
typically staffed with approximately two to three physicians,
and is open five days a week. The physicians we employ or with
whom we contract are generally retained under written agreements
that provide for a rolling one-year term, subject to earlier
termination in some circumstances. Under our standard physician
agreements we are responsible for providing our physicians with
malpractice insurance coverage.
Our IPAs
We provide practice management assistance to IPAs. Our services
include providing assistance with medical utilization
management, pharmacy management and specialist network
development. Additionally, we provide financial reports for our
IPAs to further assist with their practices. These services
currently relate only to those patients served by the IPAs who
are enrolled in Humana health plans. Our IPAs practice primary
care medicine on an outpatient basis in facilities similar to
our medical centers. Our IPA physicians typically earn a
capitated fee for providing the services and may be entitled to
obtain bonus distributions if they operate their practice in
accordance with their negotiated contract. Effective
January 1, 2006, we entered into an Independent Practice
Association Participation Agreement (the Risk IPA
Agreement) with Humana under which we agreed to assume
certain management responsibilities on a risk basis for
Humanas Medicare and Medicaid members assigned to 14 IPAs
practicing in Miami-Dade and Broward Counties, Florida. Under
the Risk IPA Agreement, we receive a capitation fee established
as a percentage of premium that Humana receives for its members
who have selected the IPAs as their primary care physicians and
assume responsibility for the cost of all medical services
provided to these members, even those we do not provide
directly. The Risk IPA Agreement replaced our prior Physician
Group Participation Agreement with Humana that was terminated
effective December 31, 2005.
Our HMO Affiliates
We currently have managed care agreements with Humana, Vista and
WellCare. In fiscal 2005, we generated approximately 78% of our
net medical services revenue from Humana and approximately 22%
of our net medical services revenue from Vista. We continually
review and attempt to renegotiate the terms of our managed care
agreements in an effort to obtain more favorable terms. We may
selectively add new HMO affiliations, but we can provide no
assurance that we will be successful in doing so. The loss of
significant HMO contracts and/or the failure to regain or retain
such HMOs patients or the related revenues without
33
entering into new HMO affiliations could have a material adverse
effect on our business results of operations and financial
condition.
Compliance Program
We have implemented a compliance program intended to provide
ongoing monitoring and reporting to detect and correct potential
regulatory compliance problems but we cannot assure that it will
detect or prevent all regulatory problems. The program
establishes compliance standards and procedures for employees
and agents. The program includes, among other things: written
policies, including our Code of Conduct and Ethics; in-service
training for our employees on topics such as insider trading,
anti-kickback laws, Federal False Claims Act and Anti-Self
Referral Act; and a hot line for employees to
anonymously report violations.
Competition
The health care industry is highly competitive. We compete for
patients with many other health care providers, including local
physicians and practice groups as well as local, regional and
national networks of physicians and health care companies. We
believe that competition for patients is generally based upon
the reputation of the physician treating the patient, the
physicians expertise, the physicians demeanor and
manner of engagement with the patient, and the HMOs that the
physician is affiliated with. We also compete with other local,
regional and national networks of physicians and health care
companies for the services of physicians and for HMO
affiliations. Some of our competitors have greater resources
than we do, and we may not be able to continue to compete
effectively in this industry. Further, additional competitors
may enter our markets, and this increased competition may have
an adverse effect on our revenues.
Employees
At June 1, 2006, we employed or contracted with
approximately 264 individuals of whom approximately 34 are
physicians in our medical centers.
Insurance
We rely on insurance to protect us from many business risks,
including medical malpractice and stop-loss
insurance. Our business entails an inherent risk of claims
against physicians for professional services rendered to
patients, and we periodically become involved as a defendant in
medical malpractice lawsuits. Medical malpractice claims are
subject to the attendant risk of substantial damage awards.
Although we maintain insurance against these claims, if
liability results from any of our pending or any future medical
malpractice claims, there can be no assurance that our medical
malpractice insurance coverage will be adequate to cover
liability arising out of these proceedings. There can be no
assurance that pending or future litigation will not have a
material adverse affect on us or that liability resulting from
litigation will not exceed our insurance coverage.
In most cases, as is the trend in the health care industry, as
insurance policies expire, we may be required to procure
policies with narrower coverage, more exclusions and higher
premiums. In some cases, coverage may not be available at any
price. There can be no assurance that the insurance we maintain
and intend to maintain will be adequate, or that the cost of
insurance and limitations in coverage will not adversely affect
our business, financial position or results of operations.
34
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF
CONTINUCARE CORPORATION
The following table sets forth selected historical financial
data and operating data of Continucare as of and for the years
ended June 30, 2005, 2004, 2003, 2002 and 2001 and the nine
months ended March 31, 2006 and 2005, respectively. You
should read this data along with Our Managements
Discussion and Analysis of our Financial Condition and Results
of our Operations and our historical financial statements
and related notes included elsewhere in this document.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months | |
|
|
For the Year Ended June 30, | |
|
Ended March 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004(1) | |
|
2003(1) | |
|
2002(1) | |
|
2001(1) | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
Total revenue
|
|
$ |
112,231,113 |
|
|
$ |
101,824,102 |
|
|
$ |
97,164,834 |
|
|
$ |
90,978,930 |
|
|
$ |
85,824,012 |
|
|
$ |
96,778,659 |
|
|
$ |
83,097,240 |
|
Operating expenses
|
|
|
102,920,236 |
|
|
|
96,794,294 |
|
|
|
94,677,055 |
|
|
|
88,871,283 |
|
|
|
86,984,437 |
|
|
|
90,144,801 |
|
|
|
77,739,794 |
|
Income (loss) from operations
|
|
|
9,310,877 |
|
|
|
5,029,808 |
|
|
|
2,487,779 |
|
|
|
2,107,647 |
|
|
|
(1,160,425 |
) |
|
|
6,633,858 |
|
|
|
5,357,446 |
|
Income (loss) from continuing operations
|
|
|
15,891,492 |
|
|
|
6,246,797 |
|
|
|
1,538,020 |
|
|
|
(1,864,679 |
) |
|
|
(2,752,199 |
) |
|
|
4,229,366 |
|
|
|
4,718,881 |
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
(1,593,843 |
) |
|
|
(1,479,422 |
) |
|
|
(1,781,709 |
) |
|
|
2,614,297 |
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
15,891,492 |
|
|
$ |
4,652,954 |
|
|
$ |
58,598 |
|
|
$ |
(3,646,388 |
) |
|
$ |
(137,902 |
) |
|
$ |
4,229,366 |
|
|
$ |
4,718,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
.31 |
|
|
$ |
.12 |
|
|
$ |
.04 |
|
|
$ |
(.05 |
) |
|
$ |
(.08 |
) |
|
$ |
.08 |
|
|
$ |
.09 |
|
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
(.03 |
) |
|
|
(.04 |
) |
|
|
(.04 |
) |
|
|
.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
$ |
.31 |
|
|
$ |
.09 |
|
|
$ |
|
|
|
$ |
(.09 |
) |
|
$ |
|
|
|
$ |
.08 |
|
|
$ |
.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, | |
|
As of March 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004(1) | |
|
2003(1) | |
|
2002(1) | |
|
2001(1) | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
Total assets
|
|
$ |
34,137,935 |
|
|
$ |
21,908,181 |
|
|
$ |
20,999,976 |
|
|
$ |
21,546,985 |
|
|
$ |
22,343,279 |
|
|
$ |
38,091,948 |
|
|
$ |
27,420,155 |
|
Long-term obligations; including current portion
|
|
$ |
107,710 |
|
|
$ |
337,186 |
|
|
$ |
9,597,063 |
|
|
$ |
13,877,505 |
|
|
$ |
11,806,623 |
|
|
$ |
118,119 |
|
|
$ |
154,947 |
|
|
|
(1) |
These amounts have been adjusted to reflect the termination of
certain lines of business, discussed in Note 3 to the
consolidated financial statements included herein, as
discontinued operations. |
35
OUR MANAGEMENTS DISCUSSION AND ANALYSIS OF OUR
FINANCIAL CONDITION
AND RESULTS OF OUR OPERATIONS
General
We are a provider of primary care physician services. Through
our network of 15 medical centers, we provide primary care
medical services on an outpatient basis. We also provide
practice management services to independent physician affiliates
(IPAs). All of our medical centers and IPAs are
located in Miami-Dade, Broward and Hillsborough Counties,
Florida. As of March 31, 2006, we were responsible for
providing services to or for approximately 15,800 patients on a
risk basis and approximately 10,400 patients on a limited or
non-risk basis. For the three and nine-month periods ended
March 31, 2006, approximately 96% of our revenue was
generated by providing services to Medicare-eligible members
under risk arrangements that require us to assume responsibility
to provide and pay for all of our patients medical needs
in exchange for a capitated fee, typically a percentage of the
premium received by an HMO from various payor sources.
Effective January 1, 2006, we entered into an Independent
Practice Association Participation Agreement (the Risk IPA
Agreement) with Humana under which we agreed to assume
certain management responsibilities on a risk basis for
Humanas Medicare and Medicaid members assigned to 14 IPAs
practicing in Miami-Dade and Broward Counties, Florida. Under
the Risk IPA Agreement, we receive a capitation fee established
as a percentage of premium that Humana receives for its members
who have selected the IPAs as their primary care physicians and
assume responsibility for the cost of all medical services
provided to these members, even those we do not provide
directly. During the three-month period ended March 31,
2006, medical service revenue and medical services expenses
related to the Risk IPA Agreement approximated $4.4 million
and $4.0 million, respectively. As of March 31, 2006,
the 14 IPAs provided services to or for approximately 2,500
Medicare and Medicaid patients enrolled in Humana managed care
plans. The Risk IPA Agreement replaces the Physician Group
Participation Agreement with Humana (the Humana PGP
Agreement) that was terminated effective December 31,
2005. Under the Humana PGP Agreement, we assumed certain
management responsibilities on a non-risk basis for
Humanas Medicare, Medicaid and commercial members assigned
to selected primary care physicians in Miami-Dade and Broward
Counties, Florida. Revenue from the Humana PGP Agreement
consisted of a monthly management fee intended to cover the
costs of providing these services and amounted to approximately
$0.1 million and $0.4 million during the three and
nine-month periods ended March 31, 2005.
In an effort to streamline and stem operating losses, we
implemented a plan to dispose of our home health operations in
December 2003. The home health disposition occurred in three
separate transactions and was concluded in February 2004. As a
result of these transactions, the operations of our home health
operations are shown as discontinued operations in the Condensed
Consolidated Statements of Cash Flows included herein.
Medicare Considerations
Substantially all of our net medical services revenue from
continuing operations is based upon Medicare funded programs.
The federal government from time to time explores ways to reduce
medical care costs through Medicare reform and through health
care reform generally. Any changes that would limit, reduce or
delay receipt of Medicare funding or any developments that would
disqualify us from receiving Medicare funding could have a
material adverse effect on our business, results of operations,
prospects, financial results, financial condition or cash flows.
Due to the diverse range of proposals put forth and the
uncertainty of any proposals adoption, we cannot predict
what impact any Medicare reform proposal ultimately adopted may
have on our business, financial position or results of
operations.
On January 1, 2006, the Medicare Prescription Drug Plan
created by the Medicare Modernization Act became effective. As a
result, our HMO affiliates have established or expanded
prescription drug benefit plans for their Medicare Advantage
members. Under the terms of our risk arrangements, we are
financially responsible for a substantial portion of the cost of
the prescription drugs our patients receive, and, in exchange,
our HMO affiliates have agreed to provide us with an additional
per member capitated fee related to prescription drug coverage.
However, there can be no assurance that the additional fee that
we receive will be
36
sufficient to reimburse us for the additional costs that we may
incur under the new Medicare Prescription Drug Plan.
In addition, the premiums our HMO affiliates receive from the
Centers for Medicare and Medicaid Services (CMS) for
their Medicare Prescription Drug Plans is subject to periodic
adjustment, positive or negative, based upon the application of
risk corridors that compare their plans revenues targeted
in their bids to actual prescription drug costs. Variances
exceeding certain thresholds may result in CMS making additional
payments to the HMOs or require the HMOs to refund to CMS a
portion of the payments they received. Our HMO affiliates
estimate and periodically adjust premium revenues related to the
risk corridor payment adjustment, and a portion of the
HMOs estimated premium revenue adjustment is allocated to
us. As a result, revenue recognized under our risk arrangements
with our HMO affiliates are net of the portion of the estimated
risk corridor adjustment allocated to us. The portion of any
such risk corridor adjustment that the HMOs allocate to us may
not directly correlate to the historical utilization patterns of
our patients or the costs that we may incur in future periods.
During the three months ended March 31, 2006, one of our
HMO affiliates allocated to us an adjustment related to their
risk corridor payment which had the effect of reducing our
operating income by approximately $1.0 million. No amount
was recorded in the comparable period of Fiscal 2005 as the
Medicare Prescription Drug Plan program was not then effective.
The Medicare Prescription Drug Plan has also been subject to
significant public criticism and controversy, and members of
Congress have discussed possible changes to the program as well
as ways to reduce the programs cost to the federal
government. We cannot predict what impact, if any, these
developments may have on the Medicare Prescription Drug Plan or
on our future financial results.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2
to our consolidated financial statements included herein, which
were prepared in accordance with accounting principles generally
accepted in the United States of America. Included within these
policies are certain policies which contain critical accounting
estimates and, therefore, have been deemed to be critical
accounting policies. Critical accounting estimates are
those which require management to make assumptions about matters
that were uncertain at the time the estimate was made and for
which the use of different estimates, which reasonably could
have been used, or changes in the accounting estimates that are
reasonably likely to occur from period to period, could have a
material impact on the presentation of our financial condition,
changes in financial condition or results of operations.
We base our estimates and assumptions on historical experience,
knowledge of current events and anticipated future events, and
we continuously evaluate and update our estimates and
assumptions. However, our estimates and assumptions may
ultimately prove to be incorrect or incomplete and our actual
results may differ materially. We believe the following critical
accounting policies involve the most significant judgments and
estimates used in the preparation of our consolidated financial
statements.
Revenue Recognition
Under our risk contracts with HMOs, we receive a percentage of
premium or other capitated fee for each patient that chooses one
of our physicians as their primary care physician. Revenue under
these agreements is generally recorded in the period we assume
responsibility to provide services at the rates then in effect
as determined by the respective contract. As part of the
Medicare Advantage program, CMS periodically recomputes the
premiums to be paid to the HMOs based on updated health status
of participants, updated demographic factors and, in the case of
Medicare Prescription Drug Plan benefits CMSs risk
corridor adjustment methodology. We record any adjustments to
this revenue at the time that the information necessary to make
the determination of the adjustment is received from the HMO or
CMS.
Under our risk agreements, we assume responsibility for the cost
of substantially all medical services provided to the patient
(including prescription drugs), even those we do not provide
directly, in exchange for a percentage of premium or other
capitated fee. To the extent that patients require more frequent
or expensive care, our revenue under a contract may be
insufficient to cover the costs of care provided, but we are
covered
37
by stop-loss insurance policies and programs that limit our
maximum risk exposure for each of our patients. When it is
probable that expected future health care costs and maintenance
costs under a contract or group of existing contracts will
exceed anticipated capitated revenue on those contracts, we
recognize losses on our prepaid health care services with HMOs.
No contracts were considered loss contracts at March 31,
2006 because we have the right to terminate unprofitable
physicians and close unprofitable centers under our managed care
contracts.
Under our limited risk and no-risk contracts with HMOs, we
receive a management fee based on the number of patients for
which we are providing services on a monthly basis. The
management fee is recorded as revenue in the period in which
services are provided as determined by the respective contract.
Medical Claims Expense
Recognition
The cost of health care services provided or contracted for is
accrued in the period in which the services are provided. This
cost includes our estimate of the related liability for medical
claims incurred in the period but not yet reported, or IBNR.
IBNR represents a material portion of our medical claims
liability which is presented in the balance sheet net of amounts
due from HMOs. Changes in this estimate can materially affect,
either favorably or unfavorably, our results from operations and
overall financial position.
We develop our estimate of IBNR primarily based on historical
claims incurred per member per month. We adjust our estimate if
we have unusually high or low utilization or if benefit changes
provided under the HMO plans are expected to significantly
increase or reduce our claims exposure. We also adjust our
estimate for differences between the estimated claims expense
recorded in prior months to actual claims expense as claims are
paid by the HMO and reported to us.
To further corroborate our estimate of medical claims, an
independent actuarial calculation is performed for us on a
quarterly basis. This independent actuarial calculation
indicates that IBNR as of March 31, 2006 was between
approximately $13.3 million and $14.8 million. Based
on our internal analysis and the independent actuarial
calculation, as of March 31, 2006, we recorded a liability
of approximately $13.7 million for IBNR. The increase in
the liability for IBNR of $2.0 million or 17.1% to
$13.7 million as of March 31, 2006 from
$11.7 million as of June 30, 2005 was primarily due to
the additional liability recorded for IBNR related to the 14
IPAs converted to a risk arrangement. The liability for IBNR was
$11.5 million as of March 31, 2005 and June 30,
2004.
Consideration of Impairment
Related to Goodwill and Other Intangible Assets
Our balance sheet includes intangible assets, including goodwill
and other separately identifiable intangible assets, which
represented approximately 40% of our total assets at
March 31, 2006. Under Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, goodwill and intangible assets
with indefinite useful lives are no longer amortized, but are
reviewed for impairment on an annual basis or more frequently if
certain indicators of permanent impairment arise. Intangible
assets with definite useful lives are amortized over their
respective useful lives to their estimated residual values and
also reviewed for impairment annually, or more frequently if
certain indicators of permanent impairment arise. Indicators of
a permanent impairment include, among other things, a
significant adverse change in legal factors or the business
climate, the loss of a key HMO contract, an adverse action by a
regulator, unanticipated competition, the loss of key personnel
or allocation of goodwill to a portion of business that is to be
sold.
Because we operate in a single segment of business, we have
determined that we have a single reporting unit and we perform
our impairment test for goodwill on an enterprise level. In
performing the impairment test, we compare the total current
market value of all of our outstanding common stock, to the
current carrying value of our total net assets, including
goodwill and intangible assets. Depending on the market value of
our common stock at the time that an impairment test is
required, there is a risk that a portion of our intangible
assets would be considered impaired and must be written-off
during that period. We perform an annual impairment test as of
May 1st
of each year. Based on the annual impairment test completed as
of May 1, 2005, we determined that no indicators of
impairment existed. We have not completed our annual impairment
test
38
as of May 1, 2006, however, no indicators of impairment
were noted for the three and nine-month periods ended
March 31, 2006 and no impairment charges were recognized.
Should we later determine that an indicator of impairment
exists, we would be required to perform an additional impairment
test.
Realization of Deferred Tax
Assets
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes
(SFAS 109) which requires that deferred tax
assets and liabilities be recognized using enacted tax rates for
the effect of temporary differences between the book and tax
bases of recorded assets and liabilities. SFAS No. 109
also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all
of the deferred tax asset will not be realized.
As part of the process of preparing our consolidated financial
statements, we estimate our income taxes based on our actual
current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax
and accounting purposes. We also recognize as deferred tax
assets the future tax benefits from net operating loss
carryforwards. We evaluate the realizability of these deferred
tax assets by assessing their valuation allowances and by
adjusting the amount of such allowances, if necessary. During
the fourth quarter of Fiscal 2005, we determined that no
valuation allowance for deferred tax assets was necessary and we
decreased our valuation allowance by $10.2 million for
Fiscal 2005. This decision had the effect of increasing our
Fiscal 2005 net income by approximately $7.2 million. Among
the factors used to assess the likelihood of realization are our
projections of future taxable income streams, the expected
timing of the reversals of existing temporary differences, and
the impact of tax planning strategies that could be implemented
to avoid the potential loss of future tax benefits. However,
changes in tax codes, statutory tax rates or future taxable
income levels could materially impact our valuation of tax
accruals and assets and could cause our provision for income
taxes to vary significantly from period to period.
At March 31, 2006, we had deferred tax assets in excess of
deferred tax liabilities of approximately $4.8 million.
During the three and nine-month periods ended March 31,
2006, we determined that it is more likely than not that those
assets will be realized (although realization is not assured),
resulting in no valuation allowance at March 31, 2006.
Stock-Based Compensation
Expense
Effective July 1, 2005, we adopted SFAS 123(R) using
the modified prospective transition method. Prior to the
adoption of SFAS 123(R) we followed Accounting Principles
Board Opinion No. 25, (APB No. 25),
Accounting for Stock Issued to Employees, and
related Interpretations in accounting for its employee stock
options. The adoption of SFAS No. 123(R) had no effect
on cash flow from operations and cash flow from financing
activities for the three and nine-month periods ended
March 31, 2006.
SFAS 123(R) requires us to recognize compensation costs
related to our share-based payment transactions with employees
in our financial statements. SFAS 123(R) requires us to
calculate this cost based on the grant date fair value of the
equity instrument. As a result of adopting
SFAS No. 123(R) on July 1, 2005, for the three
and nine-month periods ended March 31, 2006, the
Companys income before income taxes was lower by
$0.3 million and $0.9 million, respectively, and net
income was lower by $0.2 million and $0.6 million,
respectively, than if it had continued to account for
share-based compensation under APB No. 25. Basic and
diluted earnings per share for the three and nine-month periods
ended March 31, 2006 would have been $.03 and $.03 and $.10
and $.09, respectively, if the Company had not adopted
SFAS No. 123(R). As of March 31, 2006, there was
$1.9 million of total unrecognized compensation cost
related to non-vested stock options, which is expected to be
recognized over a weighted-average period of 2.2 years.
Consistent with our practices prior to adopting
SFAS 123(R), we have elected to calculate the fair value of
our employee stock options using the Black-Scholes option
pricing model. Using this model we calculated the fair value for
employee stock options granted during the three-month period
ended March 31, 2006 based on the following assumptions:
risk-free interest rate ranging from 4.76% to 5.01%; dividend
yield of 0%; weighted-average volatility factor of the expected
market price of our common stock of 68.2%; and weighted-
39
average expected life of the options ranging from 3 to
6 years, depending on the vesting provisions of each
option. The fair value of employee stock options granted during
the nine-month period ended March 31, 2006 was calculated
based on the following assumptions: risk-free interest rate
ranging from 4.21% to 5.01%; dividend yield of 0%;
weighted-average volatility factor of the expected market price
of our common stock of 71.4%; and weighted-average expected life
of the options ranging from 3 to 6 years, depending on the
vesting provisions of each option. Based on the Black-Scholes
model and our assumptions, we recognized stock-based employee
compensation expense of $0.3 million and $0.9 million
for the three and nine-month periods ended March 31, 2006,
respectively. The expected life of the options is based on the
historical exercise behavior of the Companys employees.
The expected volatility factor is based on the historical
volatility of the market price of the Companys common
stock as adjusted for certain events that management deemed to
be non-recurring and non-indicative of future events.
SFAS 123(R) does not require the use of any particular
option valuation model. Because our stock options have
characteristics significantly different from traded options and
because changes in the subjective input assumptions can
materially affect the fair value estimate, in managements
opinion, it is possible that existing models may not necessarily
provide a reliable measure of the fair value of our employee
stock options. We selected the Black-Scholes model based on our
prior experience with it, its wide use by issuers comparable to
us, and our review of alternate option valuation models. Based
on these factors, we believe that the Black-Scholes model and
the assumptions we made in applying it provide a reasonable
estimate of the fair value of our employee stock options.
The effect of applying the fair value method of accounting for
stock options on reported net income for any period may not be
representative of the effects for future periods because our
outstanding options typically vest over a period of several
years and additional awards may be made in future periods.
Results of operations for the three-month and nine-month
periods ending March 31, 2006 and March 31, 2005
The following discussion and analysis should be read in
conjunction with our unaudited condensed consolidated financial
statements and notes thereto appearing elsewhere in this
document.
Comparison of the three-month period ended March 31,
2006 to the three-month period ended March 31, 2005
Revenue
Medical services revenue increased by $7.9 million, or
26.5%, to $37.5 million for the three-month period ended
March 31, 2006 from $29.6 million for the three-month
period ended March 31, 2005. The increase in medical
services revenue was primarily the result of increases in our
Medicare revenue.
The most significant component of our medical services revenue
is the revenue we generate from Medicare patients under risk
arrangements which increased by $7.3 million or 25.6%,
during the three-month period ended March 31, 2006. During
the three-month period ended March 31, 2006, revenue
generated by our Medicare risk arrangements increased
approximately 12.1% on a per patient per month basis and
Medicare patient months increased by approximately 12.0% over
the comparable period of Fiscal 2005. The increase in Medicare
revenue was primarily due to revenue associated with the 14 IPAs
that were converted from a non-risk arrangement to a risk
arrangement effective January 1, 2006, higher per patient
per month premiums and the increased phase-in of the Medicare
risk adjustment program. Under the Medicare risk adjustment
program, the health status and demographic factors of Medicare
Advantage participants are taken into account in determining
premiums paid for each participant. CMS periodically recomputes
the premiums to be paid to the HMOs based on updated health
status, demographic factors and, in the case of Medicare
Prescription Drug Plan benefits CMSs risk corridor
adjustment methodology. Included in medical services revenue for
the three-month periods ended March 31, 2006 and 2005 are
amounts due from HMOs related to Medicare risk adjustments of
approximately $1.6 million and $1.0 million,
respectively. The $1.6 million due from HMOs as of
March 31, 2006 includes retroactive Medicare risk
adjustments of $0.6 million. Future Medicare risk
adjustments may result in reductions of revenue depending on the
future health status and
40
demographic factors of our patients as well as the application
of CMSs risk corridor methodology to the HMOs Medicare
Prescription Drug Programs. The increase in Medicare patient
months was primarily due to the conversion of the 14 IPAs from a
non-risk arrangement to a risk arrangement effective
January 1, 2006.
Management fee revenue and other income of $0.1 million and
$0.2 million for the three-month periods ended
March 31, 2006 and 2005, respectively, related primarily to
revenue generated under our limited risk and non-risk contracts
with Humana.
Revenue generated under contracts with Humana accounted for
approximately 81% and 78% of our medical services revenue for
the three-month periods ended March 31, 2006 and 2005,
respectively. Revenue generated under contracts with Vista
accounted for approximately 18% and 22% of our medical services
revenue for the three-month periods ended March 31, 2006
and 2005, respectively.
Operating Expenses
Medical services expenses are comprised of medical claims
expense and other direct costs related to the provision of
medical services to our patients including a portion of our
stock based compensation expense. Because our risk contracts
with HMOs provide that we are financially responsible for
substantially all medical services provided to our patients
under those contracts, medical claims expenses include the costs
of prescription drugs our patients receive as well as medical
services provided to patients under our risk contracts by
providers other than us. Other direct costs include the
salaries, taxes and benefits of our health professionals
providing primary care services, medical malpractice insurance
costs, capitation payments to our IPA physicians and other costs
related to the provision of medical services to our patients.
Medical services expenses for the three-month period ended
March 31, 2006 increased by $6.6 million, or 26.4%, to
$31.6 million from $25.0 million for the three-month
period ended March 31, 2005. This increase is primarily due
to an increase in medical claims expense which is the largest
component of medical services expense. Medical claims expenses
increased by $6.1 million, or 27.8%, to $28.1 million
for the three-month period ended March 31, 2006 from
$22.0 million for the three-month period ended
March 31, 2005. This increase is primarily the result of an
11.8% increase on a per patient per month basis in medical
claims expenses related to our Medicare patients and a 12.0%
increase in Medicare patient months. The increase in per patient
per month medical claims expenses is primarily attributable to
inflationary trends in the health care industry and enhanced
benefits offered by our HMO affiliates. The increase in Medicare
patient months is primarily attributable to the conversion of
the 14 IPAs to a risk arrangement effective January 1, 2006.
Medical services expenses increased to 84.2% of total revenue
for the three-month period ended March 31, 2006 as compared
to 84.0% for the three-month period ended March 31, 2005,
and our claims loss ratio (medical claims expense as a
percentage of medical services revenue) increased to 75.0% in
the three-month period ended March 31, 2006 from 74.2% in
the three-month period ended March 31, 2005. This increase
is primarily due to the higher claims loss ratio experienced by
the 14 IPAs that were converted from a non-risk arrangement to a
risk arrangement effective January 1, 2006. In addition,
our HMO affiliates have enhanced certain benefits offered to
Medicare patients for calendar 2006. We anticipate that the
higher claims loss ratio associated with the 14 IPAs converted
to a risk arrangement and the HMOs benefit enhancements may
result in an increase in our claims loss ratio in future periods
which could reduce our profitability and cash flows. However, we
cannot quantify what impact, if any, these developments may have
on our claims loss ratio (which fluctuates from period to
period) or results of operations in future periods.
Other direct costs increased by $0.5 million, or 15.8%, to
$3.5 million for the three-month period ended
March 31, 2006, from $3.0 million for the three-month
period ended March 31, 2005. As a percentage of total
revenue, other direct costs decreased to 9.3% for the
three-month period ended March 31, 2006 from 10.1% for the
three-month period ended March 31, 2005. The increase in
other direct costs was primarily due to capitation fees paid to
the 14 IPAs and an increase in payroll expense.
Administrative payroll and employee benefits expense increased
by $0.5 million, or 38.3%, to $1.8 million for the
three-month period ended March 31, 2006 from
$1.3 million for the three-month period ended
March 31, 2005. As a percentage of total revenue,
administrative payroll and employee benefits expense
41
increased to 4.8% for the three-month period ended
March 31, 2006 from 4.4% for the three-month period ended
March 31, 2005. The increase in administrative payroll and
employee benefits expense was primarily due to the recognition
of stock-based employee compensation expense, which was not
required to be recognized in the comparable period of Fiscal
2005, and an increase in incentive plan accruals.
General and administrative expenses increased by
$0.2 million or 12.1%, to $2.0 million for the
three-month period ended March 31, 2006 from
$1.8 million for the three-month period ended
March 31, 2005. As a percentage of total revenue, general
and administrative expenses decreased to 5.4% for the
three-month period ended March 31, 2006 from 6.1% for the
three-month period ended March 31, 2005. The increase in
general and administrative expenses was primarily due to an
increase in professional fees.
Income from
Operations
Income from operations for the three-month period ended
March 31, 2006 increased by $0.4 million to
$2.1 million, or 5.6% of total revenue, from
$1.7 million or 5.6% of total revenue for the three-month
period ended March 31, 2005.
Interest Expense
Interest expense decreased by $0.2 million, or 98.8%, to
$3,000 for the three-month period ended March 31, 2006 from
$0.2 million for the three-month period ended
March 31, 2005. The decrease in interest expense of
$0.2 million was related to the amortization of deferred
financing costs during the three-month period ended
March 31, 2005. The deferred financing costs were fully
amortized as of March 31, 2005 and, accordingly, no related
interest expense was recorded during the three-month period
ended March 31, 2006.
Taxes
An income tax provision of $0.8 million was recorded for
the three-month period ended March 31, 2006. No provision
for income taxes was recorded for the three-month period ended
March 31, 2005 due primarily to the utilization of prior
year net operating loss carryforwards. As a result of our
utilization of deferred tax assets during the three-month period
ended March 31, 2005, we reduced the valuation allowance
for deferred tax assets by $0.4 million to offset income
tax liabilities that were generated from current operations.
During the fourth quarter of Fiscal 2005, the Company determined
that no valuation allowance for deferred tax assets was
necessary and decreased the related valuation allowance by
$10.2 million.
Net Income
Net income for the three-month period ended March 31, 2006
decreased by $0.2 million to $1.3 million from
$1.5 million for the three-month period ended
March 31, 2005.
Comparison of the nine-month period ended March 31, 2006
to the nine-month period ended March 31, 2005
Revenue
Medical services revenue increased by $14.1 million, or
17.1%, to $96.4 million for the nine-month period ended
March 31, 2006, from $82.3 million for the nine-month
period ended March 31, 2005. The increase in medical
services revenue was primarily the result of increases in our
Medicare revenue, partially offset by a decrease in commercial
revenue of $1.0 million which resulted primarily from a
decrease in commercial patients under risk arrangements.
During the nine-months ended March 31, 2006, revenue
generated by our Medicare risk arrangements increased by
$14.2 million, or 18.1%, due primarily to an increase in
revenue of approximately 14.1% on a per patient per month basis
over the comparable period of Fiscal 2005 and an increase of
approximately 3.4% in Medicare patient months over the
comparable period of the prior year. The increase in Medicare
revenue was primarily due to revenue generated by the 14 IPAs
that were converted from a non-risk arrangement to a risk
arrangement effective January 1, 2006, higher per patient
per month premiums resulting from the Medicare
42
Modernization Act and the increased phase-in of the Medicare
risk adjustment program. The effect of these developments was
partially offset by medical service revenue of $1.1 million
recognized during the nine-month period ended March 31,
2005 related to a one-time cash distribution received from an
HMO that represented additional Medicare Advantage funding.
Included in medical services revenue for the nine-month periods
ended March 31, 2006 and 2005 are Medicare risk adjustments
of approximately $2.2 million and $1.6 million,
respectively.
Management fee revenue and other income of $0.3 and
$0.8 million for the nine-month periods ended
March 31, 2006 and 2005, respectively, related primarily to
revenue generated under our limited risk and non-risk contracts
under the Humana PGP Agreement. The decrease in other income was
primarily due to the recovery of $0.3 million in escrow
funds during the nine-month period ended March 31, 2005
that had been previously written-off as uncollectible and the
conversion of the 14 IPAs to a risk arrangement effective
January 1, 2006.
Revenue generated by our managed care contracts with Humana
accounted for approximately 79% and 78% of our medical services
revenue for the nine-month periods ended March 31, 2006 and
2005, respectively. Revenue generated under our managed care
contracts with Vista accounted for approximately 20% and 22% of
our medical services revenue for the nine-month periods ended
March 31, 2006 and 2005, respectively.
Expenses
Medical services expenses for the nine-month period ended
March 31, 2006 increased by $10.1 million, or 14.6%,
to $79.4 million from $69.3 million for the nine-month
period ended March 31, 2005. This increase is primarily due
to an increase in medical claims expense. Medical claims
expenses increased by $10.0 million, or 16.9%, to
$69.6 million for the nine-month period ended
March 31, 2006 from $59.6 million for the nine-month
period ended March 31, 2005. This increase is primarily the
result of a 13.0% increase on a per patient per month basis in
medical claims expenses related to our Medicare patients which
is primarily attributable to inflationary trends in the health
care industry, enhanced benefits offered by our HMO affiliates
and an increase in Medicare patient months.
Notwithstanding the increase in the amount of our medical claims
expense during the nine-month period ended March 31, 2006,
our medical services expenses decreased to 82.0% of total
revenue for the nine-month period ended March 31, 2006 as
compared to 83.4% for the nine-month period ended March 31,
2005, and our claims loss ratio decreased to 72.2% for the
nine-month period ended March 31, 2006 from 72.4% for the
nine-month period ended March 31, 2005. This decrease is
primarily due to our medical services revenue increasing at a
greater rate than both our medical services expense and our
medical claims expense.
Other direct costs remained relatively unchanged at
$9.8 million and $9.7 million for the nine-month
periods ended March 31, 2006 and 2005, respectively. As a
percentage of total revenue, other direct costs decreased to
10.1% for the nine-month period ended March 31, 2006 from
11.7% for the nine-month period ended March 31, 2005.
Administrative payroll and employee benefits expense increased
by $1.2 million, or 32.1%, to $5.0 million for the
nine-month period ended March 31, 2006, from
$3.8 million for the nine-month period ended March 31,
2005. As a percentage of total revenue, administrative payroll
and employee benefits expense increased to 5.2% for the
nine-month period ended March 31, 2006, from 4.6% for the
nine-month period ended March 31, 2005. The increase in
administrative payroll and employee benefits expense was
primarily due to the recognition of stock-based employee
compensation expense, which were not required to be recognized
in the comparable period of Fiscal 2005, and an increase in
incentive plan accruals.
General and administrative expenses increased by
$0.6 million, or 11.6%, to $5.7 million for the
nine-month period ended March 31, 2006, from
$5.1 million for the nine-month period ended March 31,
2005. As a percentage of total revenue, general and
administrative expenses decreased to 5.9% for the nine-month
period ended March 31, 2006 from 6.2% for the nine-month
period ended March 31, 2005. The increase in general and
administrative expenses was primarily due to an increase in
professional fees.
43
The $0.5 million gain on extinguishment of debt recognized
during the nine-month period ended March 31, 2005 related
to the $3.9 million contract modification note with Humana
that was cancelled in April 2003. Simultaneously with the note
cancellation, we executed the Humana PGP Agreement which
contained a provision for liquidated damages which could be
asserted by Humana in certain circumstances. In November 2004,
Humana notified us that the maximum amount of liquidated damages
had been reduced by $0.5 million. Accordingly, we
recognized $0.5 million of the deferred gain on
extinguishment of debt during the three-month period ended
December 31, 2004. During the fourth quarter of Fiscal
2005, Humana notified us that the maximum amount of liquidated
damages had been reduced to $0 and we recognized the entire
remaining portion of the deferred gain at such time.
Income from
Operations
Income from operations for the nine-month period ended
March 31, 2006 increased by $1.2 million to
$6.6 million, or 6.9% of total revenue, from
$5.4 million, or 6.4% of total revenue, for the nine-month
period ended March 31, 2005.
Interest Expense
Interest expense decreased by $0.7 million, or 98.5%, to
$11,000 for the nine-month period ended March 31, 2006 from
$0.7 million for the nine-month period ended March 31,
2005. The decrease in interest expense of $0.5 million was
related to the amortization of deferred financing costs that
were incurred during the nine-month period ended March 31,
2005. The deferred financing costs were fully amortized as of
March 31, 2005 and, accordingly, no related interest
expense was recorded during the nine-month period ended
March 31, 2006.
Taxes
An income tax provision of $2.6 million was recorded for
the nine-month period ended March 31, 2006. No provision
for income taxes was recorded for the nine-month period ended
March 31, 2005 due primarily to the utilization of prior
year net operating loss carryforwards. As a result of our
utilization of deferred tax assets during the nine-month period
ended March 31, 2005, we reduced the valuation allowance
for deferred tax assets by $1.4 million to offset income
tax liabilities that were generated from current operations. As
discussed above, we eliminated the valuation allowance for our
deferred tax assets as of June 30, 2005.
Net Income
Net income for the nine-month period ended March 31, 2006
decreased by $0.5 million to $4.2 million from
$4.7 million for the nine-month period ended March 31,
2005.
44
Results of operations for the years ended June 30, 2005,
2004 and 2003
The following tables set forth, for the periods indicated,
selected operating data as a percentage of total revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical services revenue, net
|
|
|
99.2 |
% |
|
|
99.3 |
% |
|
|
100.0 |
% |
|
Management fee revenue and other income
|
|
|
0.8 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical claims
|
|
|
72.3 |
|
|
|
75.0 |
|
|
|
76.2 |
|
|
|
Other direct costs
|
|
|
11.2 |
|
|
|
11.4 |
|
|
|
11.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total medical services
|
|
|
83.5 |
|
|
|
86.4 |
|
|
|
87.2 |
|
|
Administrative payroll and employee benefits
|
|
|
4.6 |
|
|
|
3.8 |
|
|
|
3.8 |
|
|
General and administrative
|
|
|
6.3 |
|
|
|
5.7 |
|
|
|
6.4 |
|
|
Gain on extinguishment of debt
|
|
|
(2.7 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
91.7 |
|
|
|
95.1 |
|
|
|
97.4 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
8.3 |
|
|
|
4.9 |
|
|
|
2.6 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(0.6 |
) |
|
|
(1.0 |
) |
|
|
(1.0 |
) |
|
Medicare settlement related to terminated operations
|
|
|
|
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax benefit
|
|
|
7.8 |
|
|
|
6.1 |
|
|
|
1.6 |
|
Income tax benefit
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
14.2 |
|
|
|
6.1 |
|
|
|
1.6 |
|
Income (loss) from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home health operations
|
|
|
|
|
|
|
(1.6 |
) |
|
|
(1.9 |
) |
|
Terminated IPAs
|
|
|
|
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
|
|
|
|
(1.5 |
) |
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
14.2 |
% |
|
|
4.6 |
% |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
Comparison of fiscal year ended June 30, 2005 to fiscal
year ended June 30, 2004
Revenue from Continuing
Operations
Medical services revenue increased by $10.2 million, or
10.1%, to $111.3 million for Fiscal 2005 from
$101.1 million for Fiscal 2004. The increase in our medical
services revenue was primarily the result of increases in our
Medicare revenue, partially offset by a decrease in commercial
revenue of approximately $1.9 million which resulted
primarily from the conversion of certain commercial members of
an HMO from a risk arrangement to a non-risk arrangement during
Fiscal 2005.
The most significant component of our medical services revenue
is the revenue we generate from Medicare patients under full
risk arrangements. During Fiscal 2005, revenue generated by our
Medicare full risk arrangements increased approximately 18.0% on
a per patient per month basis as compared to Fiscal 2004, but
this increase was partially offset by a decrease of
approximately 4.7% in Medicare patient months from Fiscal 2004.
The increase in Medicare revenue was primarily due to higher per
patient per month premiums resulting from the Medicare
Modernization Act and the increased phase-in of the Medicare
risk adjustment program, both of which became effective in
January 2004. Our Fiscal 2005 medical services revenue also
included an additional $1.1 million of Medicare Advantage
funding that we received from an HMO in
45
December 2004 and Medicare risk adjustments of approximately
$2.0 million that we earned during the third and fourth
quarters of Fiscal 2005 that we expect to collect in the quarter
ended December 31, 2005. Under the Medicare risk adjustment
program, the health status of Medicare Advantage participants is
taken into account in determining premiums paid for each
participant rather than considering only demographic factors, as
was historically the case. CMS periodically recomputes the
premiums to be paid to the HMOs based on updated health status
of participants and updated demographic factors. Future Medicare
risk adjustments may result in reductions of revenue depending
on the future health status and demographic factors of our
patients.
Management fee revenue and other income of $0.9 million and
$0.7 million for Fiscal 2005 and 2004, respectively,
related primarily to revenue generated under our limited risk
and non-risk contracts under the Humana PGP Agreement.
Revenue from continuing operations generated by our managed care
entities under contracts with Humana accounted for approximately
78% and 75% of our medical services revenue for Fiscal 2005 and
2004, respectively. Revenue from continuing operations generated
by our managed care entities under contracts with Vista
accounted for 22% and 25% of our medical services revenue for
Fiscal 2005 and 2004, respectively.
Expenses from Continuing
Operations
Medical services expenses are comprised of medical claims
expense and other direct costs related to the provision of
medical services to our patients. Because our full risk
contracts with HMOs provide that we are financially responsible
for all medical services provided to our patients under those
contracts, our medical claims expense includes the costs of
medical services provided to patients under our full risk
contracts by providers other than us. Other direct costs include
the salaries, taxes and benefits of our health professionals
providing primary care services, medical malpractice insurance
costs, capitation payments to our IPA physicians and other costs
related to the provision of medical services to our patients.
Medical services expenses for Fiscal 2005 increased by
$5.8 million, or 6.5%, to $93.8 million from
$88.0 million for Fiscal 2004. However, as a percentage of
total revenue, medical services expenses decreased to 83.5% for
Fiscal 2005 as compared to 86.4% for Fiscal 2004. Medical claims
expense increased by $4.8 million, or 6.3%, to
$81.1 million for Fiscal 2005 from $76.3 million for
Fiscal 2004 primarily as a result of higher medical costs and an
increase in utilization of health care services by our Medicare
patients, partially offset by a decrease in claims expense of
approximately $1.7 million which resulted from the
conversion of certain commercial members of an HMO from a risk
arrangement to a non-risk arrangement during Fiscal 2005. As a
result of these developments, during Fiscal 2005 our medical
claims expense related to our Medicare patients increased on a
per patient per month basis by approximately 16.1%.
Notwithstanding the increase in the amount of our medical
services expenses and claims expense during Fiscal 2005, the
increase in our medical services revenue more than offset the
increase in our medical services expenses and claims expense. As
a result, our claims loss ratio (medical claims expense as a
percentage of medical services revenue) decreased to 72.9% in
Fiscal 2005 from 75.5% in Fiscal 2004. However, in response to
the Medicare Modernization Act, certain benefits offered to
Medicare patients were enhanced by the HMOs. We anticipate that
these benefit changes will result in an increase in our medical
claims expense and may result in an increase in our claims loss
ratio in future periods. We cannot quantify what impact, if any,
these developments may have on our claims loss ratio (which
fluctuates from period to period) or results of operations in
future periods.
Other direct costs increased by $0.9 million, or 8.4%, to
$12.6 million for Fiscal 2005 from $11.7 million for
Fiscal 2004. As a percentage of total revenue, other direct
costs decreased to 11.2% for Fiscal 2005 from 11.4% for Fiscal
2004. The increase in the amount of other direct costs was
primarily due to an increase in payroll expense and related
benefits for physicians and medical support personnel at our
medical centers and an increase in incentive plan accruals.
Administrative payroll and employee benefits expense increased
by $1.3 million, or 33.6%, to $5.1 million for Fiscal
2005 from $3.8 million for Fiscal 2004. As a percentage of
total revenue, administrative payroll and employee benefits
expense increased to 4.6% for Fiscal 2005 from 3.8% for Fiscal
2004. The increase in
46
administrative payroll and employee benefits expense was due to
an increase in salaries related to the hiring of additional
marketing and executive personnel and an increase in incentive
plan accruals.
General and administrative expenses increased by
$1.2 million, or 21.3%, to $7.1 million for Fiscal
2005 from $5.8 million for Fiscal 2004. As a percentage of
total revenue, general and administrative expenses increased to
6.3% for Fiscal 2005 from 5.7% for Fiscal 2004. The increase in
general and administrative expenses was primarily due to an
increase in professional fees and the settlement of two lawsuits
during Fiscal 2004 which reduced our accrual for legal claims by
$0.8 million during that fiscal year.
The $3.0 million and $0.9 million gain on
extinguishment of debt recognized during Fiscal 2005 and 2004,
respectively, related to the $3.9 million contract
modification note with Humana that was cancelled in April 2003.
Simultaneously with the note cancellation, we executed the
Humana PGP Agreement. The Humana PGP Agreement contained a
provision for liquidated damages in the amount of
$4.0 million, which could be asserted by Humana under
certain circumstances. To the extent that Humana reduced the
maximum amount of liquidated damages, we recognized gains from
extinguishment of debt in a corresponding amount. In Fiscal 2005
and Fiscal 2004, Humana notified us that the maximum amount of
liquidated damages had been reduced from $3.0 million to $0
and from $3.9 million to $3.0 million, respectively.
Accordingly, we recognized $3.0 million and
$0.9 million of the deferred gain on extinguishment of debt
in Fiscal 2005 and 2004, respectively.
Income from
Operations
Income from operations for Fiscal 2005 increased by
$4.3 million, or 85.1%, to $9.3 million from
$5.0 million for Fiscal 2004. Income from operations for
Fiscal 2005 increased to 8.3% of total revenue as compared to
4.9% of total revenue for Fiscal 2004.
Medicare Settlement Related
to Terminated Operations
During Fiscal 2004, we recorded other income of
$2.2 million relating to the settlement of an alleged
Medicare obligation. The alleged obligation related to
rehabilitation clinics that were previously operated by one of
our former subsidiaries and were sold in 1999. CMS had alleged
that Medicare overpayments were made relating to services
rendered by these clinics and other related clinics during a
period in which the clinics were operated by entities other than
us. We requested that CMS reconsider the alleged liability, and
in October 2003 we were notified that the liability had been
reduced from the originally asserted amount of $2.4 million
to $0.2 million.
Loss from Discontinued
Operations-Home Health Operations
Our home health operations contributed $3.1 million in
revenue and generated an operating loss of $1.7 million
(which included charges in connection with the disposition of
$0.5 million) during Fiscal 2004.
Income from Discontinued
Operations-Terminated IPAs
The terminated IPAs did not contribute any revenue but generated
operating income of $73,000 during Fiscal 2004. Income generated
by the terminated IPAs during Fiscal 2004 resulted from a
settlement with the HMO which eliminated all amounts due to and
amounts due from the HMO incurred prior to the termination of
the contracts on January 1, 2003.
Taxes
We periodically perform an analysis of the realizability of our
deferred tax assets based on our assessment of current and
expected operating results. As of June 30, 2005, we
determined that no valuation allowance for deferred tax assets
was necessary and we decreased our valuation allowance by
$10.2 million for Fiscal 2005. This decision had the effect
of increasing our Fiscal 2005 net income by approximately
$7.2 million. Since this decision eliminated our entire
valuation allowance, it represents a one-time gain that will not
contribute to our earnings in future periods. No provision for
income taxes was recorded in Fiscal 2004 due primarily to the
47
utilization of prior year net operating loss carryforwards. As a
result of our utilization of deferred tax assets during Fiscal
2004, we reduced the valuation allowance for our deferred tax
assets by $1.7 million as of June 30, 2004 to offset
income tax liabilities that were generated from current
operations.
Net Income
Net income for Fiscal 2005 increased by $11.2 million, or
242%, to $15.9 million from $4.7 million for Fiscal
2004.
Comparison of fiscal year ended June 30, 2004 to fiscal
year ended June 30, 2003
Revenue from Continuing
Operations
Medical services revenue increased by $3.9 million, or
4.1%, to $101.1 million for Fiscal 2004 from
$97.2 million for Fiscal 2003 primarily due to an increase
in our Medicare revenue resulting from the Medicare
Modernization Act and the increased phase-in of the Medicare
risk adjustment program, both of which became effective in
January 2004. During Fiscal 2004 revenue generated by our
Medicare full risk contracts increased approximately 8.1% on a
per patient per month basis which was partially offset by a
decrease of approximately 2.2% in Medicare patients months.
Management fee revenue of $0.7 million during Fiscal 2004
related to revenue generated under our limited risk and non-risk
contracts under the Humana PGP Agreement. We executed the Humana
PGP Agreement in April 2003 and did not record any revenue under
it during Fiscal 2003.
Revenue from continuing operations generated by our managed care
entities under contracts with Humana accounted for 75% and 73%
of our medical services revenue for Fiscal 2004 and 2003,
respectively. Revenue from continuing operations generated by
our managed care entities under contracts with Vista accounted
for 25% and 23% of our medical services revenue for Fiscal 2004
and 2003, respectively.
Expenses from Continuing
Operations
Medical services expenses for Fiscal 2004 increased by
$3.3 million, or 3.8%, to $88.0 million from
$84.7 million for Fiscal 2003. However, as a percentage of
total revenue, medical services expenses decreased to 86.4% for
Fiscal 2004 as compared to 87.2% of total revenue for Fiscal
2003. Medical claims expense increased by $2.3 million, or
3.1%, to $76.3 million for Fiscal 2004 from
$74.0 million for Fiscal 2003 primarily as a result of
higher stop-loss insurance costs and an increase in
utilization of health care services during 2004.
Notwithstanding the increase in our medical services expenses
and claims during Fiscal 2004, the increase in medical services
revenue more than offset the increase in our medical services
expenses and claims expenses. As a result, our claims loss ratio
decreased to 75.5% in Fiscal 2004 from 76.2% in Fiscal 2003.
Other direct costs increased by $1.0 million, or 9.1%, to
$11.7 million for Fiscal 2004 from $10.7 million for
Fiscal 2003. As a percentage of total revenue, other direct
costs increased to 11.4% for Fiscal 2004 from 11.0% for Fiscal
2003. The increase in other direct costs was primarily due to an
increase in payroll expense for physicians and medical support
personnel at our medical centers and an increase in medical
malpractice insurance costs.
Administrative payroll and employee benefits for Fiscal 2004 and
2003 remained relatively constant at $3.8 million and
$3.7 million, respectively, or 3.8% of total revenue for
each year.
General and administrative expenses decreased by
$0.5 million, or 6.9%, to $5.8 million for Fiscal 2004
from $6.3 million for Fiscal 2003. As a percentage of total
revenue, general and administrative expenses decreased to 5.7%
for Fiscal 2004 as compared to 6.4% for Fiscal 2003. The
decrease in general and administrative expenses was primarily
due to the settlement of two lawsuits in Fiscal 2004 as
discussed above, which was partially offset by separation costs
of $0.3 million incurred in Fiscal 2004 in connection with
the resignation of our former president.
48
The $0.9 million gain on extinguishment of debt recognized
during Fiscal 2004 related to the $3.9 million contract
modification note with Humana that was cancelled in April 2003.
In May 2004, Humana notified us that the maximum amount of
liquidated damages under the Humana PGP Agreement had been
reduced to $3.0 million. Accordingly, we recognized
$0.9 million of the deferred gain on extinguishment of debt
during Fiscal 2004. No similar transaction occurred during
Fiscal 2003.
Income from
Operations
Income from operations for Fiscal 2004 increased by
$2.5 million to $5.0 million, or 4.9% of total
revenue, from $2.5 million, or 2.6% of total revenue, for
Fiscal 2003.
Medicare Settlement Related
to Terminated Operations
During Fiscal 2004, we recorded other income of
$2.2 million relating to the settlement of the alleged
Medicare obligation discussed above.
Loss from Discontinued
Operations-Home Health Operations
Our home health operations contributed $3.1 million and
$4.2 million in revenue and generated operating losses of
$1.7 million (which included charges in connection with the
disposition of $0.5 million) and $1.8 million during
Fiscal 2004 and 2003, respectively.
Income from Discontinued
Operations-Terminated IPAs
The IPAs we terminated effective January 1, 2003
contributed $4.5 million in medical services revenue and
generated operating income of $351,000 during Fiscal 2003. The
terminated IPAs did not contribute any revenue but generated
operating income of $73,000 during Fiscal 2004. Income generated
by the terminated IPAs during Fiscal 2004 resulted from a
settlement with the HMO which eliminated all amounts due to and
amounts due from the HMO incurred prior to the termination of
the contracts on January 1, 2003.
Taxes
No provision for income taxes was recorded in Fiscal 2004 and
2003 due primarily to the utilization of prior year net
operating loss carryforwards. We periodically perform an
analysis of the realizability of our deferred tax assets based
on our assessment of current and expected operating results. As
a result of our utilization of deferred tax assets during Fiscal
2004, we reduced the valuation allowance for our deferred tax
assets by $1.7 million as of June 30, 2004. The
valuation allowance reduction was due to the utilization of
deferred tax assets during Fiscal 2004 to offset income tax
liabilities that were generated from current operations.
Net Income
Net income for Fiscal 2004 increased by $4.6 million to
$4.7 million from $0.1 million for Fiscal 2003.
Liquidity and Capital Resources
At March 31, 2006, working capital was $14.7 million,
an increase of $7.8 million from $6.9 million at
June 30, 2005. The increase in working capital was
primarily due to income before income tax provision of
$6.8 million generated during the nine-month period ended
March 31, 2006. Cash and cash equivalents were
$8.8 million at March 31, 2006 compared to
$5.8 million at June 30, 2005.
Net cash of $4.1 million was provided by operating
activities from continuing operations for the nine-month period
ended March 31, 2006 compared to $6.9 million for the
nine-month period ended March 31, 2005. The decrease of
$2.8 million in cash provided by operating activities for
the nine-month period ended March 31, 2006 was primarily
due to a net increase in amounts due from HMOs of
$3.7 million resulting from improvements in our
profitability as well as accruals for MRA adjustment payments.
49
Net cash of approximately $0.3 million was used for
investing activities for the nine-month period ended
March 31, 2006 compared to $0.8 million for the
nine-month period ended March 31, 2005. Net cash for
investing activities primarily relates to the purchase of
equipment, the purchase of certificates of deposit, and other
assets.
Net cash of approximately $0.7 million was used in
financing activities for the nine-month period ended
March 31, 2006 compared to net cash provided by financing
activities $0.4 million for the nine-month period ended
March 31, 2005. The increase in cash used in financing
activities of $1.1 million for the nine-month period ended
March 31, 2006 was primarily due to the repayment of the
remaining $0.5 million outstanding balance of a promissory
note payable to Humana and the repurchase of $0.7 million
of our common stock, partially offset by stock option exercises
of $0.6 million. Cash provided from financing activities of
$0.4 million for the nine-month period ended March 31,
2005 was primarily due to an increase in cash proceeds received
under a $1.0 million promissory note payable to Humana.
In May 2005, our Board of Directors increased our previously
announced program to repurchase shares of our common stock to a
total of 2,500,000 shares. Any such repurchases will be made
from time to time at the discretion of our management in the
open market or in privately negotiated transactions subject to
market conditions and other factors. We anticipate that any such
repurchases of shares will be funded through cash from
operations. As of May 5, 2006, we had repurchased 1,157,467
shares of our common stock for approximately $3.0 million.
On May 10, 2006, we entered into a definitive Asset
Purchase Agreement to acquire MDHC (the Agreement).
Under the Agreement, one of our subsidiaries will acquire
substantially all of the assets and operations of MDHC and
assume certain liabilities of MDHC (the
Acquisition). Under the terms of the Agreement, at
the closing, we will pay MDHC $5.0 million cash and issue
20.0 million shares of the Companys common stock (the
Shares) to MDHC. We will also pay the principal
shareholders of MDHC an additional $1.0 million cash on the
first anniversary date of the closing. In addition, upon the
terms and subject to the conditions of the Agreement, following
the closing we will pay to those shareholders up to
$2.0 million based on the monthly payments in respect of
MDHCs business operations that we or any of our
subsidiaries receive from certain identified third-party payors
during the fourteen day period commencing the day after the
closing date. We will also make certain other payments to
MDHCs principal shareholders depending on the collection
of certain receivables that were fully reserved on the books of
MDHC as of December 31, 2005. We expect to fund estimated
cash consideration payable to MDHC and its shareholders with
cash flows from operations or, if necessary, borrowings under
our Credit Facility.
We believe that we will be able to fund our capital commitments,
our anticipated operating cash requirements for the foreseeable
future and satisfy any remaining obligations from our working
capital, anticipated cash flows from operations, and our credit
facility.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT OUR MARKET
RISK
At March 31, 2006, we had only certificates of deposit and
cash equivalents invested in high grade, short-term securities,
which are not typically subject to material market risk. We have
loans outstanding at fixed rates. For loans with fixed interest
rates, a hypothetical 10% change in interest rates would have no
impact on our future earnings and cash flows related to these
instruments and would have an immaterial impact on the fair
value of these instruments. Our credit facility is interest rate
sensitive, however, we had no amount outstanding under this
facility at March 31, 2006. We have no material risk
associated with foreign currency exchange rates or commodity
prices.
OUR CHANGES IN AND DISAGREEMENTS WITH OUR ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
50
DESCRIPTION OF THE MDHC COMPANIES
The MDHC Companies Business
The following seven companies, each of which was incorporated or
organized under the laws of the State of Florida, comprise the
MDHC Companies: MDHRS, which was incorporated in 1998; West
Dade, which was incorporated in 1999; MDHC, which was
incorporated in 2000; MDHC One, which was incorporated in 2000;
Kent, which was incorporated in 2000; Pelu, which was
incorporated in 2001; and Peluca, which was organized in 2005.
Among the MDHC Companies, MDHRS and MDHC provide medical
services throughout
Miami-Dade County,
Florida. MDHRS and MDHC provide primary-care physician services,
primarily to participants in Medicare and Medicaid HMO plans
pursuant to various managed care agreements. Under such managed
care agreements, the MDHC Companies are financially responsible
for all the costs of medical care for these HMO patients. The
MDHC Companies carry insurance to cover their costs if services
provided to a single patient exceed a specified amount. West
Dade provides magnetic resonance imaging tests both to patients
of the MDHC Companies as well as to patients of physicians who
are not affiliated with the MDHC Companies. In addition, the
MDHC Companies provide transportation to and from their medical
centers through one of their affiliates, Miami Dade Clinical
Transportation, LLC (MD Transportation). Kent
manages the administrative services for all the MDHC Companies.
The MDHC Companies opened their first medical center in 1999 in
Miami, Florida, as a provider of medical services for Humana
Health Plan (Humana) HMOs. Although the MDHC
Companies continue to provide a majority of their medical
services to patients of HMOs operated by Humana, today, the MDHC
Companies also serve patients of HMOs operated by Vista Health
Plan of South Florida, WellCare, Summit Medicare,
UnitedHealthcare, Americhoice, Amerigroup, Healthease and
Staywell Health Plan. Through managed care agreements with these
HMOs, the MDHC Companies currently provide medical services to
approximately 18,000 patients. The loss of any significant
managed care agreement could have a material adverse effect on
the business and revenues of the MDHC Companies.
The MDHC Companies deliver medical services in five medical
centers located throughout Miami-Dade County. Each center
provides primary-care physician services to adults and children,
as well as certain specialty services, including acupuncture,
cardiology, dermatology, gastroenterology, gynecology,
nephrology, neurology, nutrition, ophthalmology, optometry,
orthopedics, pain management, podiatry, rheumatology, general
surgery and urology. For patients who need transportation, MD
Transportation owns and operates a fleet of air-conditioned
passenger vans, each displaying the MDHC Companies
respective logos, which are used to transport patients to and
from the medical centers. Each medical center also contains an
adult activity center where patients can participate in classes
and seminars as well as games and arts and crafts. The activity
centers hold monthly parties and send newsletters containing
information on health topics.
Competition in the health care industry is extremely intense as
insurers and medical service providers seek new members. The
MDHC Companies attempt to meet this challenge by ensuring that
patients receive excellent medical care coupled with added
services and benefits that distinguish the MDHC Companies from
other medical service providers. The inclusion of certain
specialty and diagnostic services within the medical centers
enables the MDHC Companies to provide these additional services
at lower costs, and patients appreciate the convenience of
receiving various treatments at a single location. The MDHC
Companies believe that their consistent growth is primarily
attributable to such a high level of patient satisfaction.
The MDHC Companies Properties
Pelu owns the MDHC Companies largest facility in Hialeah,
Florida, where the MDHC Companies provide patient care on the
first three floors, and the MDHC Companies administrative
offices are located on the fourth floor. MDHRS also leases a
medical clinic on Flagler Street, just west of downtown Miami,
from an entity affiliated with Dr. Luis Cruz, an Owner. See
The Asset Purchase Agreement and Related
Agreements Certain Leases.
51
The MDHC Companies are the sub-tenant of Humana Medical Plan,
Inc. for a 7,500 square foot medical center in West Miami. MDHRS
leases an additional 2,500 square feet of space in the same
location and uses such additional space as a conference and
meeting area. The landlord for the entire location is an
unaffiliated third party.
The MDHC Companies also are the sub-tenant of Humana Medical
Plan, Inc. for a 3,100 square foot medical facility in the City
of Homestead in south Miami-Dade County. Peluca is building a
7,000 square foot medical facility in Homestead, Florida, which
is expected to be completed and opened for business during the
fall of 2006. Upon completion and opening, Humana Medical Plan,
Inc. will lease the facility from Peluca and will sublet the
facility to the MDHC Companies. The MDHC Companies
existing medical clinic in Homestead will be closed upon the
opening of the newer, larger facility.
In addition to the above-described leases, MDHC leases from an
unaffiliated party approximately 4,700 square feet of space
in North Miami Beach that is used as a medical clinic and West
Dade leases 1,620 square feet of space for its magnetic
resonance imaging diagnostic services in West Miami.
The MDHC Companies Legal Proceedings
MDHRS was a defendant in a medical malpractice lawsuit, PORTO
v. HERNANDEZ AND MIAMI DADE HEALTH AND REHABILITATION SERVICES,
INC., which was filed in 2003 in county court for Miami-Dade
County, Florida. The case was settled subsequent to
December 31, 2005 in the amount of $31,000.
In 2004, West Dade purchased an MRI machine for $576,000. West
Dade initiated legal proceedings against the vendor to refund
its money contending adequate technical support required to
operate the machine was not provided by the vendor. The outcome
of this case cannot be predicted.
Additionally, in December 2005, MDHRS received a Notice of
Intent to Initiate Litigation for Medical Negligence from legal
counsel for a patient. MDHRS denies liability, but, if a lawsuit
is filed, the outcome of the case is not predictable.
In addition, the MDHC Companies are, from time to time, involved
in legal proceedings that arise in the ordinary course of their
businesses. Such legal proceedings include, but are not limited
to, medical malpractice claims, collection lawsuits against
patients or third-party payors, employment-related matters and
disputes with equipment lessors and suppliers.
52
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF THE MDHC
COMPANIES
COMBINED STATEMENTS OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
|
|
|
|
For the Three Months Ended | |
|
|
For the year ended December 31, | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total revenue
|
|
$ |
82,754,034 |
|
|
$ |
63,290,291 |
|
|
$ |
61,930,798 |
|
|
$ |
60,061,906 |
|
|
$ |
52,620,960 |
|
|
$ |
22,353,801 |
|
|
$ |
17,049,741 |
|
Operating expenses
|
|
|
79,559,239 |
|
|
|
62,907,756 |
|
|
|
62,557,023 |
|
|
|
61,374,015 |
|
|
|
51,040,422 |
|
|
|
21,765,318 |
|
|
|
16,490,716 |
|
Income (loss) from operations
|
|
|
3,194,795 |
|
|
|
382,535 |
|
|
|
(626,225 |
) |
|
|
(1,312,109 |
) |
|
|
1,580,538 |
|
|
|
588,483 |
|
|
|
559,025 |
|
Net income (loss)
|
|
|
1,246,198 |
|
|
|
(210,072 |
) |
|
|
(1,823,463 |
) |
|
|
(1,093,583 |
) |
|
|
1,655,949 |
|
|
|
279,393 |
|
|
|
266,349 |
|
COMBINED BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
|
|
As of December 31, | |
|
As of March 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total assets
|
|
$ |
13,062,865 |
|
|
$ |
8,649,200 |
|
|
$ |
7,494,983 |
|
|
$ |
5,785,880 |
|
|
$ |
3,213,968 |
|
|
$ |
11,119,809 |
|
|
$ |
8,256,772 |
|
Long-term obligations; including current portion
|
|
$ |
7,800,537 |
|
|
$ |
8,106,300 |
|
|
$ |
7,193,594 |
|
|
$ |
6,673,435 |
|
|
$ |
2,791,721 |
|
|
$ |
8,631,765 |
|
|
$ |
7,891,009 |
|
The combined balance sheet data as of December 31, 2004 and
2005 and the combined statements of operations data for the
years ended December 31, 2003, 2004 and 2005 are derived
from the audited combined financial statements of the MDHC
Companies contained herein. Data for other periods is unaudited.
53
THE MDHC COMPANIES MANAGEMENTS DISCUSSION AND
ANALYSIS OF THE MDHC COMPANIES FINANCIAL CONDITION AND
RESULTS OF THEIR OPERATIONS
The following discussion and analysis should be read in
conjunction with the MDHC Companies combined financial
statements and notes thereto appearing elsewhere in this proxy
statement.
General
The MDHC Companies, which opened their first medical center in
1999, provide primary care physician services and certain
medical specialty and diagnostic services to approximately
18,000 patients as of March 2006 in five medical centers located
in Miami-Dade County, Florida. Substantially all of the MDHC
Companies contracts with HMOs are on a full-risk basis.
The majority of the MDHC Companies patients are Medicare
and Medicaid recipients enrolled in HMOs. The MDHC
Companies contracts with the HMOs require the MDHC
Companies to assume responsibility for providing and paying for
substantially all of the patients medical needs. After
incurring losses in the early years, the MDHC Companies had
operating income in 2004, and net income was reported in 2005.
Medicare and Medicaid Considerations
The federal government and state governments, including Florida,
from time to time explore ways to reduce medical care costs
through Medicare and Medicaid reform, specifically, and through
health care reform, generally. Approximately 90% of the patients
treated by the MDHC Companies are enrolled in Medicare or
Medicaid programs. Accordingly, changes in these government
programs can have a substantial impact on the financial results
of the MDHC Companies. Any changes that would limit, reduce or
delay receipt of Medicare or Medicaid funding or that would
increase the benefits that the MDHC Companies are required to
provide to patients, or any developments that would disqualify
the MDHC Companies from receiving Medicare or Medicaid funding,
could have a material adverse effect on the MDHC Companies
business, results of operations, prospects, financial results,
financial condition or cash flows.
The Medicare Prescription Drug Plan created by the Medicare
Modernization Act became effective on January 1, 2006. As a
result, the HMOs have established or expanded prescription drug
benefit plans for their Medicare Advantage members. The MDHC
Companies are financially responsible for a substantial portion
of the cost of the drugs prescribed for patients and the HMOs
are paying an additional per member capitated fee related to
prescription drug coverage. However, there can be no assurance
that the additional fee will be sufficient to cover the
additional costs that the MDHC Companies may incur under the new
Medicare Prescription Drug Plan.
In addition, the premiums that the HMOs receive from the Centers
for Medicare and Medicaid Services (CMS) for their
Medicare Prescription Drug Plans are subject to periodic
adjustment, positive or negative, based upon the application of
risk corridors that compare the HMOs plans revenues
targeted in their bids to actual prescription drug costs.
Variances exceeding certain thresholds may result in CMS making
additional payments to the HMOs or may require the HMOs to
refund to CMS a portion of the payments received. The HMOs
estimate and periodically adjust premium revenues related to the
risk corridor payment adjustment, and a portion of the
HMOs estimated premium revenue adjustment is allocated to
the MDHC Companies. As a result, revenue recognized under the
MDHC Companies contracts with the HMOs is net of the
portion of the estimated risk corridor adjustment. The portion
of any such risk corridor adjustment that the HMOs allocate to
the MDHC Companies may not directly correlate to the historical
utilization patterns of patients or the costs that may be
incurred in future periods.
The MDHC Companies cannot predict what impact, if any, changes
in the Medicare Prescription Drug Plan may have on future
financial results.
Critical Accounting Policies and Estimates
This discussion and analysis of financial condition and results
of operations is based upon the MDHC Companies combined
financial statements and accompanying notes, which have been
prepared in accordance
54
with accounting principles generally accepted in the United
States of America. The preparation of these financial statements
and accompanying notes requires certain estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. These estimates and
assumptions are based on historical experience, knowledge of
current events and expectations of future events. If any of the
estimates and assumptions ultimately prove to be incorrect or
incomplete, actual results may differ materially from those
previously reported. The following accounting policies involve
the most significant judgments and estimates used in the
preparation of the MDHC Companies combined financial
statements.
Revenue Recognition
Under full-risk contracts with HMOs, the MDHC Companies receive
a percentage of premium or other capitated fee for each patient
that chooses one of the MDHC Companies physicians as their
primary care physician. Revenue under these agreements is
generally recorded in the period services are rendered at the
rates then in effect as determined by the respective contract.
As part of the Medicare Advantage program, the CMS periodically
recomputes the premiums paid to the HMOs based on updated health
status of participants and updated demographic factors. Any
adjustments to this revenue are recorded at the time that the
information necessary to determine the adjustment is received
from the HMO or CMS.
The MDHC Companies are responsible for the cost of all medical
services provided to the patient, whether or not the MDHC
Companies are the providers of the service. Revenue generated
under an HMO contract may be insufficient to cover the costs of
more frequent or expensive care provided to certain patients.
The MDHC Companies carry stop-loss insurance to reimburse costs
when care to a single patient exceeds a specified amount.
Medical Claims Expense
Recognition
Determining the costs of services also involves certain
estimates and assumptions. The cost of health care services is
accrued in the period in which such services are provided. This
cost includes an estimate of the related liability for medical
claims incurred in the period but not yet reported, or IBNR.
IBNR represents a material portion of medical claims liability,
which is presented in the balance sheet as an offset to amounts
due from HMOs. Changes in this estimate can materially affect,
either favorably or unfavorably, the results of the MDHC
Companies operations and overall financial position.
The estimate of IBNR is primarily based on historical claims
incurred per member per month. The estimate is adjusted for
unusually high or low patient utilization or if benefit changes
provided under the HMO plans are expected to significantly
increase or reduce the claims exposure. Estimates are also
adjusted for differences between the estimated claims expense
recorded in prior months and actual claims expense as claims are
paid by the HMO.
Results of operations for the three-month period ending
March 31, 2006 and March 31, 2005
The following discussion and analysis should be read in
conjunction with our unaudited condensed combined financial
statements and notes thereto appearing elsewhere in this
document.
Comparison of the three-month period ended March 31,
2006 to the three-month period ended March 31, 2005
Revenue
Medical services revenue increased by $5.3 million, or
31.1%, to $22.3 million for the three-month period ended
March 31, 2006 from $17.0 million for the three-month
period ended March 31, 2005. The increase in medical
services revenue was primarily the result of the increase in the
number of patients who chose one of the MDHC Companies as their
primary-care provider, increases in Medicare revenue
attributable to the increased phase-in of the Medicare risk
adjustment program, and increases in Medicare and Medicaid
premiums.
55
Revenue generated under contracts with Humana accounted for
approximately 67.1% and 66.5% of medical services revenue for
the three-month periods ended March 31, 2006 and 2005,
respectively. Revenue generated under contracts with other HMOs
accounted for approximately 32.9% and 33.5% of medical services
revenue for the three-month periods ended March 31, 2006
and 2005, respectively.
Operating Expenses
Medical services expenses are comprised of medical claims
expense and other direct costs related to the provision of
medical services to patients. Because the MDHC Companies
contracts with HMOs provide that the MDHC Companies are
financially responsible for substantially all medical services
provided to patients under such contracts, medical claims
expenses include the costs of prescription drugs as well as
medical services provided to patients by providers other than
the MDHC Companies. Other direct costs include the salaries of
health professionals providing primary care services and other
costs related to the provision of medical services to patients.
Medical services expenses for the three-month period ended
March 31, 2006 increased by $5.3 million, or 39.1%, to
$18.7 million from $13.4 million for the three-month
period ended March 31, 2005, primarily as a result of an
increase in medical claims expense. Medical claims expenses
increased by $4.9 million, or 42.3%, to $16.3 million
for the three-month period ended March 31, 2006 from
$11.4 million for the three-month period ended
March 31, 2005. This increase is primarily attributable to
inflationary trends in the health care industry, enhanced
benefits offered by the HMOs, and the increase in the number of
patients.
Medical services expenses increased to 83.4% of total revenue
for the three-month period ended March 31, 2006 as compared
to 78.9% for the three-month period ended March 31, 2005,
and the claims loss ratio (medical claims expense as a
percentage of medical services revenue) increased to 72.6% in
the three-month period ended March 31, 2006 from 67.0% in
the three-month period ended March 31, 2005. The increase
in the claims loss ratio was attributable to medical services
expenses increasing at a greater rate than medical services
revenue.
Other direct costs increased to $2.4 million for the
three-month period ended March 31, 2006, from
$2.0 million for the three-month period ended
March 31, 2005 primarily as a result of higher salaries
paid to health professionals following an internal review of the
compensation policies of the MDHC Companies. As a percentage of
total revenue, however, other direct costs decreased.
General and administrative expenses increased by $24,000 for the
three-month period ended March 31, 2006 from the
three-month period ended March 31, 2005, and, as a
percentage of total revenue, general and administrative expenses
decreased by 4.0%.
Income from
Operations
Income from operations for the three-month period ended
March 31, 2006 was $588,500, or 2.6% of total revenue.
Income from operations for the same period in 2005 was $559,000
or 3.3% of total revenue. The decrease in operating margins was
primarily attributable to medical services expenses increasing
at a greater rate than medical services revenue. Certain
non-continuing general and administrative expenses reduced
income from operations for the three months ended March 31,
2006 and 2005 by $177,500 and $180,750 respectively.
Interest Expense
Interest expense increased by approximately $12,800 to
approximately $131,100 for the three-month period ended
March 31, 2006 from approximately $118,300 for the
three-month period ended March 31, 2005, primarily due to
increases in interest rates.
56
Taxes
An income tax provision of $186,300 was recorded for the
three-month period ended March 31, 2006. A provision for
income taxes in the amount of $175,000 was recorded for the
three-month period ended March 31, 2005 when income was
slightly less.
Net Income
Net income for the three-month period ended March 31, 2006
increased by $13,100 to $279,400 from $266,300 for the
three-month period ended March 31, 2005, an increase of
4.9%.
Results of Operations
The following tables set forth, for the periods indicated,
selected operating data as a percentage of revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical services revenue, net
|
|
|
100.0% |
|
|
|
99.5% |
|
|
|
99.1% |
|
|
Other Income
|
|
|
0.0 |
|
|
|
0.5 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical claims
|
|
|
68.5 |
|
|
|
69.4 |
|
|
|
69.0 |
|
|
|
|
Other direct costs
|
|
|
10.6 |
|
|
|
12.6 |
|
|
|
14.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total medical services
|
|
|
79.1 |
|
|
|
82.0 |
|
|
|
83.9 |
|
|
General and administrative
|
|
|
17.0 |
|
|
|
17.4 |
|
|
|
17.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
96.1 |
|
|
|
99.4 |
|
|
|
101.0 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3.9 |
|
|
|
0.6 |
|
|
|
(1.0 |
) |
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(0.6 |
) |
|
|
(0.7 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
3.3 |
|
|
|
(0.1 |
) |
|
|
(1.8 |
) |
|
|
Income tax provision
|
|
|
1.7 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
1.6% |
|
|
|
(0.3 |
)% |
|
|
(1.8 |
)% |
|
|
|
|
|
|
|
|
|
|
Comparison of year ended December 31, 2005 to year ended
December 31, 2004
Revenue
Medical services revenue increased by approximately
$19.7 million, or 31.4%, to $82.7 million for 2005
from $63.0 million for 2004. This increase resulted from
Medicare and Medicaid premium increases, and the increased
phase-in of the Medicare risk adjustments.
Revenue under contracts with Humana accounted for approximately
66.9% and 66.1% of the MDHC Companies medical services
revenue for 2005 and 2004, respectively. Revenue generated under
contracts with other HMOs also remained constant and accounted
for 33.1% and 33.9% of medical services revenue for 2005 and
2004, respectively.
Operating Expenses
Medical services expenses for 2005 increased by
$13.6 million, or 26.3%, to $65.5 million from
$51.9 million for 2004, primarily as a result of increased
medical claims expense. Medical claims expenses, the major
component of medical services, increased to $56.7 million
for 2005 from $43.9 million for 2004 as a result of an
increase in utilization of health care services, enhanced
benefits offered by the HMOs and higher
57
pharmacy costs in 2005. Other direct costs increased by $801,300
from 2004 to 2005, an increase of 10.1%, primarily as a result
of higher insurance costs and higher salaries. The increase of
31.4% in medical services revenue more than offset the increase
of 26.3% in medical services expenses. As a result, the MDHC
Companies claims loss ratio (medical claims expense as a
percentage of medical services revenue) decreased to 68.5% in
2005 from 69.7% in 2004.
General and administrative expenses, including administrative
payroll and benefits, increased by $3.1 million, or 27.4%,
to $14.1 million for 2005 from $11.0 million for 2004
as a result of incentive compensation paid to the Owners. As a
percentage of total revenue, however, general and administrative
expenses decreased to 17.0% for 2005 from 17.4% for 2004.
Income from
Operations
Income from operations for 2005 increased by approximately
$2.8 million, or 735%, to approximately $3.2 million
from $382,500 for 2004. Income from operations for 2005 was 3.9%
of total revenue, while income from operations for 2004 was 0.6%
of total revenue. The increase in income in 2005 resulted from
significantly higher medical services revenue and lower
operating expenses as a percentage of revenue. Income from
operations for 2005 was reduced by incentive compensation of
$3.0 million and other non-continuing general and
administrative expenses of $536,400, and income from operations
for 2004 was reduced by non-continuing general and
administrative expenses of $194,000.
Taxes
An income tax expense of $1.4 million was recorded for
2005, compared to $109,000 in 2004. Certain of the entities that
comprise the MDHC Companies are pass-through entities, and the
combined financial statements do not include any provision or
liability for income taxes for the pass-through entities.
Interest Expense
Interest expense increased from $474,100 in 2004 to $517,200 in
2005 as a result of additional financing activities that
resulted in an increase in bank debt.
Net Income
Net income for 2005 was $1.2 million compared to a net loss
of $210,000 for 2004.
Comparison of year ended December 31, 2004 to year ended
December 31, 2003
Revenue
Medical services revenue increased by $1.6 million, or
2.6%, to $63.0 million for 2004 from $61.4 million for
2003 due to an increase in Medicare revenue resulting from the
Medicare Modernization Act and the increased phase-in of the
Medicare risk adjustment program, both of which became effective
in January 2004 and resulted in higher payments to the MDHC
Companies for Medicare patients.
Revenue generated by managed care contracts with Humana
accounted for 66.1% of medical services revenue in 2004 and
64.2% of medical services revenue in 2003, as revenue received
from Humana contracts continued to increase.
Operating Expenses
Medical services expenses for 2004 decreased by $82,400, to
$51.9 million from 2003, and, as a percentage of total
revenue, medical services expenses decreased from 83.9% in 2003
to 82.0% in 2004, primarily as a result of decreases in other
direct costs. Medical claims expense increased by 2.7% to
$43.9 million for 2004, from $42.7 million for 2003,
primarily as a result of higher stop-loss insurance
costs. Other direct costs decreased by $1.2 million, or
13.5%, to $8.0 million for 2004 from $9.2 million for
2003 as a result of a decrease in payroll expense for the health
professionals of the MDHC Companies.
58
Administrative payroll and employee benefits expense for 2004
decreased by $1.0 million to $4.4 million from
$5.4 million in 2003 as a result of the MDHC
Companies reduction in the number of its employees, and
general and administrative expenses for 2004 increased by
$1.4 million to $6.6 million from $5.2 million
for 2003 as a result of the use of contract labor instead of
employees.
Income from
Operations
The increase in revenue and decrease in expenses as percentages
of revenue during 2004 produced operating income for the first
time for the MDHC Companies. Income from operations for 2004 was
$382,500 compared to a loss from operations of $626,200 for 2003.
Taxes
An income tax provision of $109,000 was recorded for 2004 while
in 2003 the tax provision was $19,000.
Interest Expense
Interest expense decreased from $516,600 in 2003 to $474,100 in
2004.
Net Loss
The net loss for 2004 was $210,000, compared to a net loss of
$1.8 million in 2003.
Liquidity and Capital Resources
At December 31, 2005, the working capital deficit was
$1.1 million, a reduction of $1.6 million from the
working capital deficit at December 31, 2004. The decrease
in working capital deficit in 2005 resulted in part from the
increase in income from operations. Cash and cash equivalents
were $261,300 at December 31, 2005 compared to
$1.1 million at December 31, 2004.
The increase of $1.7 million in cash provided by operating
activities during 2005 was largely attributable to the effects
of an increase in net income of $1.5 million and increases
in amounts due from HMOs and accrued compensation and benefits.
Net cash of $1.4 million was used for investing activities
in 2005 compared to $960,000 in 2004 and $1.6 million in
2003. The increase of $480,000 in cash used for investing
activities during 2005 was primarily for the purchase of
equipment. Receivables due from HMOs increased by
$4.2 million from 2004 to 2005 due primarily to increased
profitability.
Net cash of $1.3 million was used in financing activities
for debt repayments in 2005 compared to net cash of
$1.3 million that was provided by borrowings in 2004. The
change of approximately $2.6 million in cash used in
financing activities from 2004 to 2005 reflects significant
reductions of bank debt in 2005.
The MDHC Companies believe that they are able to fund their
capital commitments and anticipated operating cash requirements
for the foreseeable future.
Off-Balance Sheet
Arrangements
The MDHC Companies have not entered into any transactions
involving off-balance sheet arrangements or unconsolidated,
limited purpose entities or commodity contracts.
59
Contractual
Obligations
The following is a summary of the MDHC Companies long-term
debt obligations, related party notes payable, and contractual
obligations as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by Period | |
|
|
| |
|
|
Total | |
|
Less than 1 Year | |
|
1-2 Years | |
|
3-5 Years | |
|
|
| |
|
| |
|
| |
|
| |
Long-term debt obligations
|
|
$ |
6,478,355 |
|
|
$ |
592,814 |
|
|
$ |
1,696,460 |
|
|
$ |
4,189,081 |
|
Amounts payable to related parties
|
|
|
354,809 |
|
|
|
354,809 |
|
|
|
|
|
|
|
|
|
Other notes payable
|
|
|
1,322,182 |
|
|
|
1,322,182 |
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
896,108 |
|
|
|
254,179 |
|
|
|
403,658 |
|
|
|
238,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9,051,454 |
|
|
$ |
2,523,984 |
|
|
$ |
2,100,118 |
|
|
$ |
4,427,352 |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT THE MDHC
COMPANIES MARKET RISK
At December 31, 2005, the MDHC Companies had no cash
equivalents that were subject to material market risk. In their
normal operations, the MDHC Companies have market risk exposure
to interest rates due to their interest-bearing debt
obligations. As of December 31, 2005, the MDHC Companies
had less than $2.0 million of debt obligations outstanding
that were subject to variable rates of interest. A hypothetical
1% change in rates would not have a material impact on future
earnings and cash flows. The MDHC Companies have no material
risk associated with foreign currency exchange rates or
commodity prices.
THE MDHC COMPANIES CHANGES IN AND DISAGREEMENTS WITH
THEIR
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
MARKET PRICE OF AND DIVIDENDS ON THE MDHC COMPANIES
COMMON SHARES
There is no trading market for the equity interests of any of
the MDHC Companies. MDHRS, MDHC, MDHC One, West Dade and Kent
each have six shareholders, Pelu has two shareholders and Peluca
has three members. No MDHC Company has paid any dividends since
its inception or has any equity compensation plan.
CONTROLS AND PROCEDURES
Because each of the MDHC Companies is not a public company and
is not subject to the reporting and other obligations imposed on
public companies under the federal securities laws, its
executive officers were not required to conduct and did not
conduct, as of March 31, 2006, an evaluation of the
effectiveness of its disclosure controls and procedures as
defined in Securities Exchange Act of 1934 Rule 13a-15(e).
There can be no assurance that Continucares auditors will
not identify one or more significant deficiencies or material
weaknesses in the MDHC Companies internal controls
following the Closing. If any such deficiencies or weaknesses
are identified and Continucare fails to strengthen such
deficiencies or weaknesses Continucare may not be able to
conclude on an ongoing basis that it has effective internal
controls over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002.
60
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of
June 1, 2006 concerning the beneficial ownership of the
common stock by (i) each person known by Continucare to be
the beneficial owner of more than 5% of the outstanding common
stock, (ii) each of our directors, (iii) our Chief
Executive Officer and each of our other executive officers, and
(iv) all executive officers and directors as a group. All
holders listed below have sole voting power and investment power
over the shares beneficially owned by them, except to the extent
such power may be shared with such persons spouse. Unless
noted otherwise, the address of each person listed below is 7200
Corporate Center Drive, Suite 600, Miami, Florida 33126.
|
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of | |
|
Percent of | |
Name and Address of Beneficial Owner |
|
Beneficial Ownership(1) | |
|
Common Stock(2) | |
|
|
| |
|
| |
Robert Cresci
|
|
|
340,000(3 |
) |
|
|
* |
|
Neil Flanzraich
|
|
|
240,000(4 |
) |
|
|
* |
|
Phillip Frost, M.D.
|
|
|
22,239,101(5 |
) |
|
|
44.2 |
% |
|
4400 Biscayne Boulevard |
|
|
|
|
|
|
|
|
|
Miami, FL 33137 |
|
|
|
|
|
|
|
|
Fernando L. Fernandez
|
|
|
233,333(6 |
) |
|
|
* |
|
Luis H. Izquierdo
|
|
|
200,000(6 |
) |
|
|
* |
|
Gemma Rosello
|
|
|
25,000(6 |
) |
|
|
* |
|
Jacob Nudel, M.D.
|
|
|
140,000(7 |
) |
|
|
* |
|
Richard C. Pfenniger, Jr.
|
|
|
1,015,000(8 |
) |
|
|
2.0 |
% |
A. Marvin Strait
|
|
|
53,333(9 |
) |
|
|
* |
|
Pecks Management Partners Ltd.
|
|
|
6,511,584(10 |
) |
|
|
13.0 |
% |
|
One Rockefeller Plaza |
|
|
|
|
|
|
|
|
|
Suite 900 |
|
|
|
|
|
|
|
|
|
New York, NY 10020 |
|
|
|
|
|
|
|
|
All directors and executive officers as a group (9 persons)
|
|
|
24,485,767 |
|
|
|
47.6 |
% |
|
|
|
|
(1) |
For purposes of this table, beneficial ownership is computed
pursuant to Rule 13d-3 under the Securities Exchange Act of
1934 (the Exchange Act); the inclusion of shares as
beneficially owned should not be construed as an admission that
such shares are beneficially owned for purposes of the Exchange
Act. |
|
|
(2) |
Based on 50,230,812 shares outstanding as of June 1, 2006. |
|
|
(3) |
Includes 140,000 shares of common stock underlying options that
are currently exercisable or exercisable within 60 days
after June 1, 2006. |
|
|
(4) |
Includes 40,000 shares of common stock underlying options that
are currently exercisable or exercisable within 60 days
after June 1, 2006. |
|
|
(5) |
Includes (i) 21,279,788 shares owned beneficially through
Frost Gamma Investments Trust; (ii) 819,313 shares
beneficially owned through Frost Nevada Investments Trust;
(iii) 100,000 shares of stock owned directly by
Dr. Frost and (iv) 40,000 shares of common stock
underlying options that are currently exercisable or exercisable
within 60 days after June 1, 2006. |
|
|
(6) |
Represents shares of common stock underlying options that are
currently exercisable or exercisable within 60 days after
June 1, 2006. |
|
|
(7) |
Includes 40,000 shares of common stock underlying options that
are currently exercisable or exercisable within 60 days
after June 1, 2006. |
|
|
(8) |
Includes 496,970 shares of common stock underlying options that
are currently exercisable or exercisable within 60 days
after June 1, 2006. |
|
|
(9) |
Includes 26,667 shares of common stock underlying options that
are currently exercisable or exercisable within 60 days
after June 1, 2006. |
|
|
(10) |
The information set forth herein is based solely on the most
recent Schedule(s) 13G/ A filed with the SEC by the entity and,
accordingly, may not reflect their respective holdings as of the
date of this report. |
61
OTHER BUSINESS
As of the date of this proxy statement, the Board of Directors
knows of no other business to be presented at the special
meeting. If any other business should properly come before the
special meeting, the persons named in the accompanying proxy
will vote thereon as in their discretion they may deem
appropriate, unless they are directed by a proxy to do otherwise.
|
|
|
By Order of the Board of Directors, |
|
|
|
|
Fernando L. Fernandez |
|
Senior Vice President-Finance, Chief Financial |
|
Officer, Treasurer and Secretary |
Miami, Florida
August 14, 2006
62
CONTINUCARE CORPORATION
INDEX TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
|
|
|
|
|
Unaudited Pro Forma Combined Condensed Financial Statements
|
|
|
P-2 |
|
Unaudited Pro Forma Combined Condensed Balance Sheet as of
March 31, 2006
|
|
|
P-3 |
|
Unaudited Pro Forma Combined Condensed Statements of Income for
the nine months ended March 31, 2006
|
|
|
P-4 |
|
Unaudited Pro Forma Combined Condensed Statements of Income for
the year ended June 30, 2005
|
|
|
P-5 |
|
Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
|
|
|
P-6 |
|
P-1
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS
The following unaudited pro forma combined condensed financial
statements are based on the historical financial statements of
Continucare and the MDHC Companies and have been prepared to
illustrate the effects of the Acquisition. The unaudited pro
forma combined condensed balance sheet as of March 31, 2006
combines the historical consolidated balance sheets of
Continucare and the MDHC Companies giving effect to the
Acquisition as if it had occurred on March 31, 2006. The
unaudited pro forma combined condensed statements of income for
the year ended June 30, 2005 and for the nine months ended
March 31, 2006 combine the historical consolidated
statements of income of Continucare and the MDHC Companies
giving effect to the Acquisition as if it had been consummated
at the beginning of the earliest period presented, or
July 1, 2004.
The allocation of the Acquisition consideration in the
Acquisition as reflected in the unaudited pro forma combined
condensed financial statements has been based upon preliminary
estimates that we developed with the assistance of an
independent valuation specialist of the fair value of assets to
be acquired and liabilities to be assumed as of the date of the
Acquisition. This preliminary allocation of the Acquisition
consideration was based on available public information and is
dependent upon certain preliminary estimates and assumptions we
made solely for the purpose of developing such unaudited pro
forma combined condensed financial statements. As a result, a
final determination of the fair values of the MDHC
Companies assets and liabilities cannot be made prior to
the completion of the Acquisition.
The final determination of the fair value of these assets will
be based on the actual net tangible and intangible assets of the
MDHC Companies as of the Closing Date. Consequently, amounts
preliminarily allocated to goodwill and identifiable intangibles
could change significantly from those used in the unaudited pro
forma combined condensed financial statements presented below
and could result in a material change in the amortization of
acquired intangible assets.
The unaudited pro forma combined condensed financial statements
do not give effect to any integration expenses or cost savings
or unexpected acquisition costs that may be realized or incurred
in connection with the Acquisition. The pro forma information
does not necessarily indicate the combined financial position or
the results of operations in the future or the combined
financial position or the results of operations that would have
been realized had the Acquisition been consummated during the
periods or as of the date for which the pro forma information is
presented.
The unaudited pro forma combined condensed financial statements
should be considered together with the historical financial
statements of Continucare and the MDHC Companies, including the
respective notes to those financial statements.
P-2
CONTINUCARE CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MDHC | |
|
Pro Forma | |
|
|
|
Pro Forma | |
|
|
Continucare | |
|
Companies | |
|
Adjustments | |
|
Note | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
8,802,949 |
|
|
$ |
936,574 |
|
|
$ |
(5,000,000 |
) |
|
|
(1 |
) |
|
$ |
4,739,523 |
|
|
Other receivables, net
|
|
|
200,761 |
|
|
|
136,677 |
|
|
|
|
|
|
|
|
|
|
|
337,438 |
|
|
Due from HMOs, net
|
|
|
6,868,227 |
|
|
|
3,290,197 |
|
|
|
|
|
|
|
|
|
|
|
10,158,424 |
|
|
Prepaid expenses and other current assets
|
|
|
797,558 |
|
|
|
311,337 |
|
|
|
|
|
|
|
|
|
|
|
1,108,895 |
|
|
Deferred tax assets, net
|
|
|
585,571 |
|
|
|
|
|
|
|
533,000 |
|
|
|
(2 |
) |
|
|
1,118,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
17,255,066 |
|
|
|
4,674,785 |
|
|
|
(4,467,000 |
) |
|
|
|
|
|
|
17,462,851 |
|
Certificates of deposit, restricted
|
|
|
548,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
548,373 |
|
Property and equipment, net
|
|
|
755,070 |
|
|
|
6,394,727 |
|
|
|
3,469,000 |
|
|
|
(3 |
) |
|
|
10,618,797 |
|
Goodwill, net
|
|
|
14,342,510 |
|
|
|
|
|
|
|
58,568,000 |
|
|
|
(4 |
) |
|
|
72,910,510 |
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
5,800,000 |
|
|
|
(5 |
) |
|
|
5,800,000 |
|
Managed care contracts, net
|
|
|
825,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
825,436 |
|
Deferred tax assets, net
|
|
|
4,214,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,214,135 |
|
Other assets, net
|
|
|
151,358 |
|
|
|
50,297 |
|
|
|
|
|
|
|
|
|
|
|
201,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
38,091,948 |
|
|
$ |
11,119,809 |
|
|
$ |
63,370,000 |
|
|
|
|
|
|
$ |
112,581,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
432,156 |
|
|
$ |
480,793 |
|
|
$ |
1,500,000 |
|
|
|
(6 |
) |
|
$ |
2,412,949 |
|
|
Accrued expenses and other current liabilities
|
|
|
2,037,561 |
|
|
|
921,668 |
|
|
|
|
|
|
|
|
|
|
|
2,959,229 |
|
|
Notes and loans payable
|
|
|
|
|
|
|
2,964,500 |
|
|
|
(130,000 |
) |
|
|
(7 |
) |
|
|
2,834,500 |
|
|
Due to owners
|
|
|
|
|
|
|
178,548 |
|
|
|
|
|
|
|
|
|
|
|
178,548 |
|
|
Income taxes payable
|
|
|
87,286 |
|
|
|
1,166,797 |
|
|
|
(1,166,797 |
) |
|
|
(8 |
) |
|
|
87,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,557,003 |
|
|
|
5,712,306 |
|
|
|
203,203 |
|
|
|
|
|
|
|
8,472,512 |
|
Capital lease obligations, less current portion
|
|
|
52,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,043 |
|
Deferred tax liability
|
|
|
|
|
|
|
112,000 |
|
|
|
3,596,000 |
|
|
|
(9 |
) |
|
|
3,708,000 |
|
Notes and loans payable, less current portion
|
|
|
|
|
|
|
5,667,265 |
|
|
|
|
|
|
|
|
|
|
|
5,667,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,609,046 |
|
|
|
11,491,571 |
|
|
|
3,799,203 |
|
|
|
|
|
|
|
17,899,820 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
5,013 |
|
|
|
1,155 |
|
|
|
(1,155 |
) |
|
|
(10 |
) |
|
|
5,013 |
|
|
Additional paid-in capital
|
|
|
63,454,217 |
|
|
|
500 |
|
|
|
59,198,535 |
|
|
|
(10 |
) |
|
|
122,653,252 |
|
|
Accumulated deficit
|
|
|
(27,976,328 |
) |
|
|
(373,417 |
) |
|
|
373,417 |
|
|
|
(10 |
) |
|
|
(27,976,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
35,482,902 |
|
|
|
(371,762 |
) |
|
|
59,570,797 |
|
|
|
|
|
|
|
94,681,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
38,091,948 |
|
|
$ |
11,119,809 |
|
|
$ |
63,370,000 |
|
|
|
|
|
|
$ |
112,581,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
P-3
CONTINUCARE CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF
INCOME
For the Nine Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MDHC | |
|
Pro Forma | |
|
|
|
Pro Forma | |
|
|
Continucare | |
|
Companies | |
|
Adjustments | |
|
Note | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical services revenue, net
|
|
$ |
96,436,949 |
|
|
$ |
64,784,638 |
|
|
$ |
|
|
|
|
|
|
|
$ |
161,221,587 |
|
|
Management fee revenue and other income
|
|
|
341,710 |
|
|
|
129,100 |
|
|
|
|
|
|
|
|
|
|
|
470,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
96,778,659 |
|
|
|
64,913,738 |
|
|
|
|
|
|
|
|
|
|
|
161,692,397 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical claims
|
|
|
69,640,075 |
|
|
|
45,134,975 |
|
|
|
|
|
|
|
|
|
|
|
114,775,050 |
|
|
|
Other direct costs
|
|
|
9,764,311 |
|
|
|
6,931,058 |
|
|
|
|
|
|
|
|
|
|
|
16,695,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total medical services
|
|
|
79,404,386 |
|
|
|
52,066,033 |
|
|
|
|
|
|
|
|
|
|
|
131,470,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative payroll and employee benefits
|
|
|
4,993,661 |
|
|
|
7,521,773 |
|
|
|
|
|
|
|
|
|
|
|
12,515,434 |
|
|
General and administrative
|
|
|
5,746,754 |
|
|
|
4,547,814 |
|
|
|
1,085,250 |
|
|
|
(11 |
) |
|
|
11,379,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
90,144,801 |
|
|
|
64,135,620 |
|
|
|
1,085,250 |
|
|
|
|
|
|
|
155,365,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,633,858 |
|
|
|
778,118 |
|
|
|
(1,085,250 |
) |
|
|
|
|
|
|
6,326,726 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
209,229 |
|
|
|
|
|
|
|
(141,000 |
) |
|
|
(12 |
) |
|
|
68,229 |
|
|
Interest expense
|
|
|
(10,580 |
) |
|
|
(403,401 |
) |
|
|
|
|
|
|
|
|
|
|
(413,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision (benefit)
|
|
|
6,832,507 |
|
|
|
374,717 |
|
|
|
(1,226,250 |
) |
|
|
|
|
|
|
5,980,974 |
|
Income tax provision (benefit)
|
|
|
2,603,141 |
|
|
|
186,300 |
|
|
|
(465,975 |
) |
|
|
(13 |
) |
|
|
2,323,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
4,229,366 |
|
|
$ |
188,417 |
|
|
$ |
(760,275 |
) |
|
|
|
|
|
$ |
3,657,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.08 |
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
$ |
.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
.08 |
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
$ |
.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
49,820,024 |
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
69,820,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
51,143,705 |
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
71,143,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
P-4
CONTINUCARE CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF
INCOME
For the Year Ended June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MDHC | |
|
Pro Forma | |
|
|
|
Pro Forma | |
|
|
Continucare | |
|
Companies | |
|
Adjustments | |
|
Note | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical services revenue, net
|
|
$ |
111,316,174 |
|
|
$ |
74,623,803 |
|
|
$ |
|
|
|
|
|
|
|
$ |
185,939,977 |
|
|
Management fee revenue and other income
|
|
|
914,939 |
|
|
|
179,287 |
|
|
|
|
|
|
|
|
|
|
|
1,094,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
112,231,113 |
|
|
|
74,803,090 |
|
|
|
|
|
|
|
|
|
|
|
187,034,203 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical claims
|
|
|
81,104,665 |
|
|
|
49,831,373 |
|
|
|
|
|
|
|
|
|
|
|
130,936,038 |
|
|
|
Other direct costs
|
|
|
12,648,297 |
|
|
|
8,580,311 |
|
|
|
|
|
|
|
|
|
|
|
21,228,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total medical services
|
|
|
93,752,962 |
|
|
|
58,411,684 |
|
|
|
|
|
|
|
|
|
|
|
152,164,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative payroll and employee benefits
|
|
|
5,107,672 |
|
|
|
4,538,554 |
|
|
|
|
|
|
|
|
|
|
|
9,646,226 |
|
|
General and administrative
|
|
|
7,059,602 |
|
|
|
7,300,642 |
|
|
|
1,434,000 |
|
|
|
(11 |
) |
|
|
15,794,244 |
|
|
Gain on extinguishment of debt
|
|
|
(3,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
102,920,236 |
|
|
|
70,250,880 |
|
|
|
1,434,000 |
|
|
|
|
|
|
|
174,605,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9,310,877 |
|
|
|
4,552,210 |
|
|
|
(1,434,000 |
) |
|
|
|
|
|
|
12,429,087 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
108,000 |
|
|
|
|
|
|
|
(101,000 |
) |
|
|
(12 |
) |
|
|
7,000 |
|
|
Interest expense
|
|
|
(702,946 |
) |
|
|
(308,770 |
) |
|
|
(67,000 |
) |
|
|
(12 |
) |
|
|
(1,078,716 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision (benefit)
|
|
|
8,715,931 |
|
|
|
4,243,440 |
|
|
|
(1,602,000 |
) |
|
|
|
|
|
|
11,357,371 |
|
Income tax provision (benefit)
|
|
|
(7,175,561 |
) |
|
|
1,492,000 |
|
|
|
(608,760 |
) |
|
|
(13 |
) |
|
|
(6,292,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
15,891,492 |
|
|
$ |
2,751,440 |
|
|
|
(993,240 |
) |
|
|
|
|
|
|
17,649,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.32 |
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
$ |
.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
.31 |
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
$ |
.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
50,231,870 |
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
70,231,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
52,006,064 |
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
72,006,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
P-5
CONTINUCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS
Basis of Presentation
The unaudited pro forma combined condensed balance sheet as of
March 31, 2006 gives effect to the Acquisition as if it had
occurred on March 31, 2006. The unaudited pro forma
combined condensed statements of income for the nine months
ended March 31, 2006 and the year ended June 30, 2005
give effect to the Acquisition as if it had occurred on
July 1, 2004. The pro forma adjustments are based on
preliminary estimates which may change as additional information
is obtained.
The estimated Acquisition consideration, including acquisition
costs, of approximately $65.7 million has been allocated to
the estimated fair value of tangible and intangible assets to be
acquired of $20.9 million and liabilities to be assumed of
$13.8 million as of March 31, 2006 resulting in
goodwill totaling $58.6 million. The estimated Acquisition
consideration of $65.7 million includes the estimated fair
value of Continucares common stock to be issued to the
Owners of $59.2 million, cash to be paid to the Owners of
$6.0 million, and estimated acquisition costs of
$0.5 million. The estimated fair value of
Continucares common stock to be issued to the Owners was
based on a per share consideration of $2.96 which was calculated
based upon the average of the closing market prices of
Continucares common stock for the period two days before
through two days after the announcement of the execution of the
Asset Purchase Agreement.
The allocation of the Acquisition consideration in the
Acquisition as reflected in the unaudited pro forma combined
condensed financial statements has been based upon preliminary
estimates that we developed with the assistance of an
independent valuation specialist of the fair value of assets to
be acquired and liabilities to be assumed as of the date of the
Acquisition. This preliminary allocation of the Acquisition
consideration was based on available public information and is
dependent upon certain preliminary estimates and assumptions we
made solely for the purpose of developing such unaudited pro
forma combined condensed financial statements. As a result, a
final determination of the fair value of the MDHC
Companies assets and liabilities cannot be made prior to
the completion of the Acquisition.
The final determination of the fair value of these assets will
be based on the actual net tangible and intangible assets of the
MDHC Companies as of the Closing Date. Consequently, amounts
preliminarily allocated to goodwill and identifiable intangibles
could change significantly from those used in the unaudited pro
forma combined condensed financial statements presented below
and could result in a material change in the amortization of
acquired intangible assets.
The following unaudited pro forma combined condensed financial
statements do not give effect to any integration expenses or
cost savings or unexpected acquisition costs that may be
incurred or realized in connection with the Acquisition. The
unaudited pro forma combined condensed financial statements do
not necessarily indicate our combined financial position or the
results of operations in the future or the combined financial
position or the results of operations that we would have
realized had the Acquisition been consummated during the periods
or as of the date for which the unaudited pro forma combined
condensed financial statements are presented.
The unaudited pro forma combined condensed financial statements
should be considered together with the historical financial
statements of Continucare and the MDHC Companies, including the
respective notes to those financial statements.
Acquisition Consideration
Under the terms of the Asset Purchase Agreement, upon the
closing of the Acquisition, Continucare will pay the MDHC
Companies $5.0 million cash and issue to the MDHC Companies
20.0 million shares of its common stock and Continucare
will also pay Owners $1.0 million cash on the first
anniversary of the Closing Date. In addition, upon the terms and
subject to the conditions of the Asset Purchase Agreement,
following the closing of the Acquisition, Continucare will pay
to Owners up to $2.0 million cash based on the working
capital of the MDHC Companies as of the Closing Date and the
monthly payments in respect of the MDHC
P-6
CONTINUCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS (Continued)
Companies business operations received by Continucare or
any of its subsidiaries from certain identified third-party
payors during the 14 day period commencing the day after
the Closing Date and make certain other payments to Owners
depending on the collection of certain receivables that were
fully reserved on the books of the MDHC Companies as of
December 31, 2005. These contingent payments are not
included in the estimated Acquisition consideration of
$65.7 million.
Pro Forma Balance Sheet Adjustments as of March 31,
2006
(1) Represents a payment of $5.0 million to the Owners.
(2) Represents the deferred income tax asset recorded in
connection with the assumption of certain liabilities of the
MDHC Companies.
(3) Represents (a) an adjustment to increase the net
book value of property and equipment to reflect estimated fair
value and (b) the elimination of a warehouse building
excluded from the acquisition of the MDHC Companies.
(4) Represents the excess of the estimated Acquisition
consideration, including acquisition costs, over the estimated
fair value of tangible and identifiable intangible assets
acquired and liabilities assumed, totaling approximately
$58.6 million. Total estimated goodwill of
$58.6 million is based upon a preliminary allocation of the
Acquisition consideration as of March 31, 2006. Adjustments
to goodwill may be made upon the finalization of the Acquisition
consideration allocation.
(5) Represents the estimated fair value of the acquired
trade name, customer relationships and a covenant not to compete
agreement of $5.8 million. Amortization of the trade name
and customer relationships and other intangible assets has been
provided on a straight-line basis over an estimated useful life
ranging from four to five years. The covenant not to compete
will be amortized on a straight-line basis over the five year
term of the agreement. Adjustments to acquired intangible assets
may be made upon the finalization of the valuation of such
assets.
(6) Represents a payment of $1.0 million to the Owners
on the first anniversary date of the closing of the Acquisition
and estimated acquisition costs of $0.5 million, which
includes, among other things, financial advisory, legal and
accounting costs.
(7) Represents the outstanding balance of a note payable
related to a warehouse building excluded from the acquisition of
the MDHC Companies.
(8) Represents income taxes payable of the MDHC Companies
that will not be assumed by Continucare under the terms of the
Asset Purchase Agreement.
(9) Represents the deferred income tax liabilities recorded
in connection with the estimated fair values of acquired
identifiable intangible assets and the increase in the net book
value of property and equipment to reflect estimated fair value.
(10) Reflects (a) the issuance of approximately
20.0 million shares of Continucare common stock with an
assumed total fair value of $59.2 million to holders of the
MDHC Companies common stock and (b) an adjustment to
eliminate shareholders equity reflected on the MDHC
Companies historical combined balance sheet as of
March 31, 2006. An assumed average stock price of $2.96 was
used to value the Continucare shares.
P-7
CONTINUCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS (Continued)
Pro Forma Statements of Income Adjustments for the Nine
Months Ended March 31, 2006 and the Year Ended
June 30, 2005
(11) Represents amortization of intangible assets of
approximately $1.0 million and $1.4 million for the
nine months ended March 31, 2006 and the year ended
June 30, 2005 established as part of the Acquisition
consideration allocation in connection with the Acquisition.
Intangible assets are amortized on a straight-line basis over
their estimated useful lives ranging from four to five years.
The amount of intangible assets, estimated useful life and
amortization methodology are subject to the completion of a
valuation.
The pro forma adjustment also includes (a) an estimated
increase in depreciation expense of approximately $42,000 and
$43,000 for the nine months ended March 31, 2006 and the
year ended June 30, 2005, respectively, related to the
property adjustment discussed in note (3) and (b) an
estimated increase in rent expense of approximately $27,000 and
$36,000 for the nine months ended March 31, 2006 and the
year ended June 30, 2005, respectively, related to a lease
for the warehouse building excluded from the acquisition of the
MDHC Companies.
(12) Represents a reduction in interest income and an
increase in interest expense resulting from the use of
Continucares cash and cash equivalents and line of credit
for payment of the cash consideration in the Acquisition.
(13) Represents the tax effect of the pro forma adjustments
at a combined effective income tax rate of 38%.
(14) Represents the effect of the issuance of
20.0 million shares of Continucares common stock
assuming such shares were issued on July 1, 2004.
P-8
CONTINUCARE CORPORATION
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
Historical
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
FA-2 |
|
Consolidated Balance Sheets as of June 30, 2005 and 2004
|
|
FA-3 |
|
Consolidated Statements of Income for the years ended
June 30, 2005, 2004 and 2003
|
|
FA-4 |
|
Consolidated Statements of Shareholders Equity for the
years ended June 30 2005, 2004 and 2003
|
|
FA-5 |
|
Consolidated Statements of Cash Flows for the years ended
June 30, 2005, 2004 and 2003
|
|
FA-6 |
|
Notes to Consolidated Financial Statements
|
|
FA-8 |
Unaudited
|
|
|
|
Condensed Consolidated Balance Sheets as of March 31, 2006
and June 30, 2005
|
|
FA-24 |
|
Condensed Consolidated Statements of Income for the three months
ended March 31, 2006 and 2005
|
|
FA-25 |
|
Condensed Consolidated Statements of Income for the nine months
ended March 31, 2006 and 2005
|
|
FA-26 |
|
Condensed Consolidated Statements of Cash Flows for the nine
months ended March 31, 2006 and 2005
|
|
FA-27 |
|
Notes to Condensed Consolidated Financial Statements
|
|
FA-28 |
FA-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Continucare
Corporation
We have audited the accompanying consolidated balance sheets of
Continucare Corporation as of June 30, 2005 and 2004, and
the related consolidated statements of income,
shareholders equity and cash flows for each of the three
years in the period ended June 30, 2005. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Continucare Corporation at June 30,
2005 and 2004, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended June 30, 2005, in conformity with U.S. generally
accepted accounting principles.
|
|
|
/s/ ERNST & YOUNG LLP |
|
CERTIFIED PUBLIC ACCOUNTANTS |
West Palm Beach, Florida
September 14, 2005
FA-2
CONTINUCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
5,780,544 |
|
|
$ |
720,360 |
|
|
Other receivables, net
|
|
|
144,973 |
|
|
|
423,215 |
|
|
Due from HMOs, net of a liability for incurred but not reported
medical claims expense of approximately $11,700,000 and
$11,450,000 at June 30, 2005 and 2004, respectively
|
|
|
3,485,530 |
|
|
|
2,701,878 |
|
|
Prepaid expenses and other current assets
|
|
|
719,577 |
|
|
|
992,321 |
|
|
Deferred tax assets, net
|
|
|
585,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,716,195 |
|
|
|
4,837,774 |
|
Certificates of deposit, restricted
|
|
|
530,350 |
|
|
|
30,000 |
|
Equipment, furniture and leasehold improvements, net
|
|
|
670,665 |
|
|
|
492,054 |
|
Goodwill, net of accumulated amortization of approximately
$7,608,000
|
|
|
14,342,510 |
|
|
|
14,342,510 |
|
Managed care contracts, net of accumulated amortization of
approximately $2,422,000 and $2,069,000 at June 30, 2005
and 2004, respectively
|
|
|
1,090,046 |
|
|
|
1,442,858 |
|
Deferred financing costs, net of accumulated amortization of
$222,500 at June 30, 2004
|
|
|
|
|
|
|
662,502 |
|
Deferred tax assets, net
|
|
|
6,721,353 |
|
|
|
|
|
Other assets, net
|
|
|
66,816 |
|
|
|
100,483 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
34,137,935 |
|
|
$ |
21,908,181 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
660,139 |
|
|
$ |
504,151 |
|
|
Accrued expenses and other current liabilities
|
|
|
2,620,802 |
|
|
|
1,794,019 |
|
|
Note payable
|
|
|
520,000 |
|
|
|
|
|
|
Deferred revenue
|
|
|
|
|
|
|
3,000,000 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,800,941 |
|
|
|
5,298,170 |
|
Capital lease obligations, less current portion
|
|
|
38,361 |
|
|
|
101,177 |
|
Related party notes payable, less current portion
|
|
|
|
|
|
|
117,717 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,839,302 |
|
|
|
5,517,064 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value: 100,000,000 shares
authorized; 52,591,895 shares issued and
49,595,702 shares outstanding at June 30, 2005 and
53,296,379 shares issued and 50,300,186 shares
outstanding at June 30, 2004
|
|
|
4,960 |
|
|
|
5,031 |
|
|
Additional paid-in capital
|
|
|
67,924,068 |
|
|
|
69,907,973 |
|
|
Accumulated deficit
|
|
|
(32,205,694 |
) |
|
|
(48,097,186 |
) |
|
Treasury stock, 2,996,193 shares at June 30, 2005 and
2004
|
|
|
(5,424,701 |
) |
|
|
(5,424,701 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
30,298,633 |
|
|
|
16,391,117 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
34,137,935 |
|
|
$ |
21,908,181 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
FA-3
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical services revenue, net
|
|
$ |
111,316,174 |
|
|
$ |
101,123,346 |
|
|
$ |
97,164,834 |
|
|
Management fee revenue and other income
|
|
|
914,939 |
|
|
|
700,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
112,231,113 |
|
|
|
101,824,102 |
|
|
|
97,164,834 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical claims
|
|
|
81,104,665 |
|
|
|
76,333,580 |
|
|
|
74,046,265 |
|
|
|
Other direct costs
|
|
|
12,648,297 |
|
|
|
11,665,894 |
|
|
|
10,696,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total medical services
|
|
|
93,752,962 |
|
|
|
87,999,474 |
|
|
|
84,743,262 |
|
|
|
|
|
|
|
|
|
|
|
|
Administrative payroll and employee benefits
|
|
|
5,107,672 |
|
|
|
3,822,949 |
|
|
|
3,681,446 |
|
|
General and administrative
|
|
|
7,059,602 |
|
|
|
5,821,871 |
|
|
|
6,252,347 |
|
|
Gain on extinguishment of debt
|
|
|
(3,000,000 |
) |
|
|
(850,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
102,920,236 |
|
|
|
96,794,294 |
|
|
|
94,677,055 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9,310,877 |
|
|
|
5,029,808 |
|
|
|
2,487,779 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
108,000 |
|
|
|
4,793 |
|
|
|
6,568 |
|
|
Interest expense
|
|
|
(702,946 |
) |
|
|
(1,006,082 |
) |
|
|
(956,327 |
) |
|
Medicare settlement related to terminated operations
|
|
|
|
|
|
|
2,218,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax benefit
|
|
|
8,715,931 |
|
|
|
6,246,797 |
|
|
|
1,538,020 |
|
Income tax benefit
|
|
|
7,175,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
15,891,492 |
|
|
|
6,246,797 |
|
|
|
1,538,020 |
|
Income (loss) from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home health operations
|
|
|
|
|
|
|
(1,666,934 |
) |
|
|
(1,830,118 |
) |
|
Terminated IPAs
|
|
|
|
|
|
|
73,091 |
|
|
|
350,696 |
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(1,593,843 |
) |
|
|
(1,479,422 |
) |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
15,891,492 |
|
|
$ |
4,652,954 |
|
|
$ |
58,598 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
.32 |
|
|
$ |
.14 |
|
|
$ |
.04 |
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(.03 |
) |
|
|
(.04 |
) |
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$ |
.32 |
|
|
$ |
.11 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
.31 |
|
|
$ |
.12 |
|
|
$ |
.04 |
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(.03 |
) |
|
|
(.04 |
) |
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$ |
.31 |
|
|
$ |
.09 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
50,231,870 |
|
|
|
43,763,835 |
|
|
|
40,776,903 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
52,006,064 |
|
|
|
49,232,716 |
|
|
|
40,776,903 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
FA-4
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
Additional | |
|
|
|
|
|
Total | |
|
|
| |
|
Paid-In | |
|
Accumulated | |
|
Treasury | |
|
Shareholders | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Deficit | |
|
Stock | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at June 30, 2002
|
|
|
39,634,601 |
|
|
$ |
3,964 |
|
|
$ |
59,511,614 |
|
|
$ |
(52,808,738 |
) |
|
$ |
(5,424,701 |
) |
|
$ |
1,282,139 |
|
Issuance of stock for director compensation
|
|
|
900,000 |
|
|
|
90 |
|
|
|
122,910 |
|
|
|
|
|
|
|
|
|
|
|
123,000 |
|
Issuance of stock to guarantor of credit facility
|
|
|
1,500,000 |
|
|
|
150 |
|
|
|
524,850 |
|
|
|
|
|
|
|
|
|
|
|
525,000 |
|
Issuance of stock as consideration for extension of note
repayment terms
|
|
|
344,400 |
|
|
|
35 |
|
|
|
120,506 |
|
|
|
|
|
|
|
|
|
|
|
120,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,598 |
|
|
|
|
|
|
|
58,598 |
|
Balance at June 30, 2003
|
|
|
42,379,001 |
|
|
|
4,239 |
|
|
|
60,279,880 |
|
|
|
(52,750,140 |
) |
|
|
(5,424,701 |
) |
|
|
2,109,278 |
|
Issuance of stock to guarantor of credit facility
|
|
|
300,000 |
|
|
|
30 |
|
|
|
869,970 |
|
|
|
|
|
|
|
|
|
|
|
870,000 |
|
Issuance of stock in private placement transaction
|
|
|
2,333,333 |
|
|
|
233 |
|
|
|
3,464,376 |
|
|
|
|
|
|
|
|
|
|
|
3,464,609 |
|
Issuance of stock upon exercise of stock options
|
|
|
546,000 |
|
|
|
55 |
|
|
|
351,315 |
|
|
|
|
|
|
|
|
|
|
|
351,370 |
|
Issuance of stock upon conversion of related party note payable
|
|
|
819,313 |
|
|
|
82 |
|
|
|
899,383 |
|
|
|
|
|
|
|
|
|
|
|
899,465 |
|
Issuance of stock upon conversion of subordinated notes payable
|
|
|
3,922,539 |
|
|
|
392 |
|
|
|
4,043,049 |
|
|
|
|
|
|
|
|
|
|
|
4,043,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,652,954 |
|
|
|
|
|
|
|
4,652,954 |
|
Balance at June 30, 2004
|
|
|
50,300,186 |
|
|
|
5,031 |
|
|
|
69,907,973 |
|
|
|
(48,097,186 |
) |
|
|
(5,424,701 |
) |
|
|
16,391,117 |
|
Recognition of compensation expense related to issuance of stock
options
|
|
|
|
|
|
|
|
|
|
|
264,802 |
|
|
|
|
|
|
|
|
|
|
|
264,802 |
|
Issuance of stock upon exercise of stock options
|
|
|
156,666 |
|
|
|
16 |
|
|
|
91,683 |
|
|
|
|
|
|
|
|
|
|
|
91,699 |
|
Fees related to private placement transactions
|
|
|
|
|
|
|
|
|
|
|
(98,244 |
) |
|
|
|
|
|
|
|
|
|
|
(98,244 |
) |
Issuance of stock upon conversion of related party note payable
|
|
|
14,550 |
|
|
|
1 |
|
|
|
14,549 |
|
|
|
|
|
|
|
|
|
|
|
14,550 |
|
Repurchase of common stock
|
|
|
(875,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,256,783 |
|
|
|
2,256,783 |
|
Retirement of treasury stock
|
|
|
|
|
|
|
(88 |
) |
|
|
(2,256,695 |
) |
|
|
|
|
|
|
(2,256,783 |
) |
|
|
(4,513,566 |
) |
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,891,492 |
|
|
|
|
|
|
|
15,891,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005
|
|
|
49,595,702 |
|
|
$ |
4,960 |
|
|
$ |
67,924,068 |
|
|
$ |
(32,205,694 |
) |
|
$ |
(5,424,701 |
) |
|
$ |
30,298,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
FA-5
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
15,891,492 |
|
|
$ |
4,652,954 |
|
|
$ |
58,598 |
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
1,593,843 |
|
|
|
1,479,422 |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
15,891,492 |
|
|
|
6,246,797 |
|
|
|
1,538,020 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including amortization of
deferred financing costs
|
|
|
1,258,289 |
|
|
|
1,201,675 |
|
|
|
1,162,034 |
|
|
|
Provision for bad debts
|
|
|
15,787 |
|
|
|
104,296 |
|
|
|
44,333 |
|
|
|
Recognition of compensation expense related to issuance of stock
options
|
|
|
264,802 |
|
|
|
|
|
|
|
|
|
|
|
Medicare settlement related to terminated operations
|
|
|
|
|
|
|
(2,218,278 |
) |
|
|
|
|
|
|
Loss on disposal of property and equipment and release from
asset related liabilities
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
Director compensation paid through the issuance of restricted
common stock
|
|
|
|
|
|
|
|
|
|
|
123,000 |
|
|
|
Gain on extinguishment of debt
|
|
|
(3,000,000 |
) |
|
|
(850,000 |
) |
|
|
|
|
|
|
Deferred tax benefit
|
|
|
(7,306,924 |
) |
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, excluding the
effect of disposals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
262,455 |
|
|
|
(12,450 |
) |
|
|
423,462 |
|
|
|
Due from HMOs, net
|
|
|
(783,652 |
) |
|
|
(1,287,409 |
) |
|
|
384,182 |
|
|
|
Prepaid expenses and other current assets
|
|
|
171,230 |
|
|
|
(105,724 |
) |
|
|
(297,231 |
) |
|
|
Other assets
|
|
|
33,667 |
|
|
|
3,763 |
|
|
|
(29,629 |
) |
|
|
Accounts payable
|
|
|
155,988 |
|
|
|
(179,337 |
) |
|
|
3,045 |
|
|
|
Accrued expenses and other current liabilities
|
|
|
894,710 |
|
|
|
(608,629 |
) |
|
|
(214,011 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
7,857,844 |
|
|
|
2,294,704 |
|
|
|
3,137,705 |
|
Net cash used in discontinued operations
|
|
|
(151,399 |
) |
|
|
(998,872 |
) |
|
|
(1,933,360 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
7,706,445 |
|
|
|
1,295,832 |
|
|
|
1,204,345 |
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
Purchase of certificate of deposit
|
|
|
(500,000 |
) |
|
|
(30,000 |
) |
|
|
(70,000 |
) |
|
Proceeds from maturity of certificates of deposit
|
|
|
101,165 |
|
|
|
29,743 |
|
|
|
99,555 |
|
|
Purchase of property and equipment
|
|
|
(421,586 |
) |
|
|
(144,585 |
) |
|
|
(170,273 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations
|
|
|
(820,421 |
) |
|
|
(144,842 |
) |
|
|
(140,218 |
) |
Net cash (used in) provided by discontinued operations
|
|
|
|
|
|
|
(938 |
) |
|
|
15,751 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(820,421 |
) |
|
|
(145,780 |
) |
|
|
(124,467 |
) |
FA-6
CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH
FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from note payable
|
|
|
1,040,000 |
|
|
|
|
|
|
|
|
|
|
Payments on note payable
|
|
|
(520,000 |
) |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of stock in private placement transaction
|
|
|
|
|
|
|
3,464,609 |
|
|
|
|
|
|
Payment of fees related to private placement transactions
|
|
|
(98,244 |
) |
|
|
|
|
|
|
|
|
|
Payments on convertible subordinated notes
|
|
|
|
|
|
|
(233,716 |
) |
|
|
(273,896 |
) |
|
Payments on related party notes
|
|
|
(7,882 |
) |
|
|
(35,953 |
) |
|
|
(63,853 |
) |
|
Principal repayments under capital lease obligations
|
|
|
(74,630 |
) |
|
|
(76,000 |
) |
|
|
(112,256 |
) |
|
Payment of deferred financing costs
|
|
|
|
|
|
|
(15,000 |
) |
|
|
(15,000 |
) |
|
Proceeds from exercise of stock options
|
|
|
91,699 |
|
|
|
351,370 |
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(2,256,783 |
) |
|
|
|
|
|
|
|
|
|
Payments on credit facility
|
|
|
|
|
|
|
(2,315,000 |
) |
|
|
|
|
|
Advances from HMOs
|
|
|
|
|
|
|
|
|
|
|
75,000 |
|
|
Payments on advances from HMOs
|
|
|
|
|
|
|
|
|
|
|
(75,000 |
) |
|
Third party assumption of capital lease obligation
|
|
|
|
|
|
|
|
|
|
|
(1,789 |
) |
|
Repayments to Medicare per agreement
|
|
|
|
|
|
|
(1,730,745 |
) |
|
|
(632,751 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,825,840 |
) |
|
|
(590,435 |
) |
|
|
(1,099,545 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
5,060,184 |
|
|
|
559,617 |
|
|
|
(19,667 |
) |
Cash and cash equivalents at beginning of fiscal year
|
|
|
720,360 |
|
|
|
160,743 |
|
|
|
180,410 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of fiscal year
|
|
$ |
5,780,544 |
|
|
$ |
720,360 |
|
|
$ |
160,743 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury stock
|
|
$ |
2,256,783 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for deferred financing costs
|
|
$ |
|
|
|
$ |
870,000 |
|
|
$ |
645,541 |
|
|
|
|
|
|
|
|
|
|
|
Stock issued upon conversion of subordinated notes payable
|
|
$ |
|
|
|
$ |
4,043,441 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued upon conversion of related party notes payable
|
|
$ |
14,550 |
|
|
$ |
899,465 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Note payable issued for refunds due to Medicare for overpayments
|
|
$ |
|
|
|
$ |
|
|
|
$ |
694,800 |
|
|
|
|
|
|
|
|
|
|
|
Note payable canceled due to settlement of cost report reopening
|
|
$ |
|
|
|
$ |
|
|
|
$ |
222,574 |
|
|
|
|
|
|
|
|
|
|
|
Purchase of furniture and fixtures with proceeds of capital
lease obligations
|
|
$ |
|
|
|
$ |
61,820 |
|
|
$ |
167,258 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
40,229 |
|
|
$ |
563,750 |
|
|
$ |
325,337 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
FA-7
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
Continucare Corporation (Continucare or the
Company), is a mixed model provider of primary care
physician services on an outpatient basis in Florida. The
Company provides medical services to patients through employee
physicians, advanced registered nurse practitioners and
physicians assistants. Additionally, the Company provides
practice management services to independent physician affiliates
(IPAs). Substantially all of the Companys net
medical services revenues are derived from managed care
agreements with two health maintenance organizations, Humana
Medical Plans, Inc. (Humana) and Vista Healthplan of
South Florida, Inc. and its affiliated companies
(Vista) (collectively, the HMOs). The
Company was incorporated in 1996 as the successor to a Florida
corporation formed earlier in 1996.
In an effort to streamline operations and stem operating losses,
effective January 1, 2003, the Company terminated the
Medicare and Medicaid lines of business for all of the IPA
physician contracts associated with one HMO, which consisted of
29 physicians at the time of the termination. Additionally, in
December 2003, the Company implemented a plan to dispose of its
home health operations. The home health disposition occurred in
three separate transactions and was concluded on
February 7, 2004. As a result of these transactions, the
operations of the terminated IPAs and the home health operations
are shown as discontinued operations (see Note 3).
During the year ended June 30, 2005, the Companys
claims loss ratio (medical claims expense expressed as a
percentage of medical services revenue) improved as compared to
Fiscal 2004 due primarily to an increase in revenue from higher
per member premiums for Medicare members resulting from the
Medicare Prescription Drug Improvement and Modernization Act of
2003 (the Medicare Modernization Act) and the
increased phase-in of the Medicare risk adjustment program. In
response to the Medicare Modernization Act, the HMOs enhanced
benefits offered to Medicare members. The Company anticipates
that these benefit changes will result in an increase in medical
claims expense and may result in an increase in the claims loss
ratio in future periods. Increases in the claims loss ratio
could reduce the Companys profitability and cash flows in
future periods. The Company cannot predict what impact, if any,
these developments may have on its results of operations.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A summary of significant accounting policies followed by the
Company is as follows:
|
|
|
Principles of Consolidation |
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States (generally accepted accounting
principles) requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Because of the inherent
uncertainties of this process, actual results could differ from
those estimates. Such estimates include the recognition of
revenue, the recoverability of intangible assets, the
collectibility of receivables, and the accrual for incurred but
not reported (IBNR) claims.
FA-8
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Fair Value of Financial Instruments |
The Companys financial instruments consist mainly of cash
and cash equivalents, certificates of deposit, accounts
receivable, accounts payable, related party notes payable, notes
payable, and capital lease obligations. The carrying amounts of
the Companys cash and cash equivalents, certificates of
deposit, accounts receivable, accounts payable and notes payable
approximate fair value due to the short-term nature of these
instruments. At June 30, 2005 and 2004, the fair value of
the related party notes payable was $253,000 and $241,000,
respectively, based on the market value of the Companys
common stock. At June 30, 2005 and 2004, the carrying value
of the Companys capital lease obligations approximate fair
value based on the terms of the obligations. The Company has
imputed interest on non-interest bearing debt using an
incremental borrowing rate of 8%.
|
|
|
Cash and Cash Equivalents |
The Company defines cash and cash equivalents as those
highly-liquid investments purchased with an original maturity of
three months or less.
Certificates of deposit have original maturities of greater than
three months and are pledged as collateral in support of various
stand-by letters of credit issued as required under the managed
care agreement with one of the Companys HMO affiliates and
as security for various leases.
The HMOs pay medical claims and other costs on the
Companys behalf. Based on the terms of the contracts with
the HMOs, the Company receives a net payment from the HMOs that
is calculated by offsetting revenue earned with medical claims
expense, calculated as claims paid on the Companys behalf
plus the HMOs estimate of claims incurred but not
reported. Therefore, the amounts due from HMOs are presented in
the balance sheet net of the estimated amounts for incurred but
not reported medical claims.
|
|
|
Equipment, Furniture and Leasehold Improvements |
Equipment, furniture and leasehold improvements are stated at
cost. Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets, which
range from three to five years. Leasehold improvements are
amortized over the underlying assets useful lives or the
term of the lease, whichever is shorter. Repairs and maintenance
costs are expensed as incurred. Improvements and replacements
are capitalized.
|
|
|
Goodwill and Other Intangible Assets |
Effective July 1, 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142). Under
SFAS No. 142, goodwill and intangible assets with
indefinite useful lives are reviewed annually for impairment, or
more frequently if certain indicators arise. Intangible assets
with definite useful lives are amortized over their respective
estimated useful lives to their estimated residual values, and
also reviewed for impairment annually, or more frequently if
certain indicators arise, in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets
(SFAS No. 144). Indicators of a permanent
impairment include, among other things, significant adverse
changes in legal factors or the business climate, loss of a key
HMO contract, an adverse action by a regulator, unanticipated
competition, loss of key personnel or allocation of goodwill to
a portion of a business that is to be sold.
FA-9
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As the Company operates in a single segment of business, the
Company has determined that it has a single reporting unit and
performs the impairment test for goodwill on an enterprise
level. In performing the impairment test, the Company compares
the current market value of all of its outstanding common stock
to the current carrying value of the Companys total net
assets, including goodwill and intangible assets. Depending on
the aggregate market value of the Companys outstanding
common stock at the time that an impairment test is required,
there is a risk that a portion of the intangible assets would be
considered impaired and must be written-off during that period.
The Company performs the annual impairment test as of
May 1st of
each year. Should it later be determined that an indicator of
impairment has occurred, the Company would be required to
perform an additional impairment test. No impairment charges
were required at June 30, 2005, 2004 or 2003.
The managed care contracts relate to the value of certain
amendments to a managed care agreement entered into with one of
the Companys HMOs. The amendments, among other things,
extended the term of the original agreement with the HMO from
six to ten years and modified for the Companys benefit the
value of the Medicare premium received by the Company. In
consideration of these amendments, the Company gave the HMO a
$3.9 million promissory note (see Deferred Revenue section
below). The managed care contracts are subject to amortization
and are being amortized over a weighted-average amortization
period of 9.6 years. Total amortization expense for
intangible assets subject to amortization was approximately
$353,000, $353,000 and $360,000 during Fiscal 2005, 2004 and
2003, respectively. The estimated aggregate amortization expense
will be approximately $355,000 for each of the four succeeding
fiscal years.
Expenses incurred in connection with the Credit Facility and the
previously issued guarantee related to the Credit Facility had
been deferred and were amortized using the straight-line method
which approximates the interest method over the life of the
facility or the guarantee, as applicable (see Note 5).
In April 2003, the Company executed a Physician Group
Participation Agreement with Humana (the Humana PGP
Agreement). Pursuant to the Humana PGP Agreement, the
Company agreed to assume certain management responsibilities on
a non-risk basis for Humanas Medicare, commercial and
Medicaid members assigned to selected primary care physicians in
Miami-Dade and Broward Counties of Florida. Revenue from this
contract consists of a monthly management fee intended to cover
the costs of providing these services. Simultaneously with the
execution of the Humana PGP Agreement, the Company restructured
the terms of a $3.9 million contract modification note with
Humana. Pursuant to the restructuring, the contract modification
note was cancelled and the Humana PGP Agreement contained a
provision for liquidated damages in the amount of
$4.0 million, which can be asserted by Humana under certain
circumstances. The initial term of the Humana PGP Agreement
expired in March 2005 but the term of the Humana PGP Agreement
continues by its terms until the agreement is terminated by
either party subject to prior notice.
Because there were contingent circumstances under which future
payments of liquidated damages to Humana could equal the amount
of debt forgiven, the $3.9 million gain that otherwise
would have been recognized from the extinguishment of the debt
in the fourth quarter of Fiscal 2003 was deferred. Under the
terms of the Humana PGP Agreement, if the Company remained in
compliance with terms of the agreement, Humana, at its option,
may reduce the liquidated damages at specified dates during the
term of the Humana PGP Agreement. To the extent that Humana
reduced the maximum amount of liquidated damages, a portion of
the deferred gain was recognized in an amount corresponding to
the amount by which the liquidated damages were reduced. In
Fiscal 2005 and Fiscal 2004, Humana notified the Company that
the maximum amount of liquidated damages had been reduced from
$3.0 million to $0 and from $3.9 million to
$3.0 million,
FA-10
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively. Accordingly, the Company recognized
$3.0 million and $0.9 million of the deferred gain on
extinguishment of debt in Fiscal 2005 and 2004, respectively.
|
|
|
Accounting for Stock-Based Compensation |
The Company follows Accounting Principles Board Opinion
No. 25, (APB No. 25) Accounting for
Stock Issued to Employees and related Interpretations in
accounting for its employee stock options. Under APB
No. 25, when the exercise price of the Companys
employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense
is recognized (see Note 9). Stock options issued to
independent contractors or consultants are accounted for in
accordance with SFAS No. 123
(SFAS No. 123), Accounting for
Stock-Based Compensation.
Although the Company follows APB No. 25 for its employee
stock options, SFAS No. 148, Accounting for
Stock Based Compensation Transition and
Disclosure, requires the Company to disclose pro forma
results of operations as if the Companys stock options had
been accounted for using the fair value provisions of
SFAS No. 123. The Companys pro forma information
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income as reported
|
|
$ |
15,891,492 |
|
|
$ |
4,652,954 |
|
|
$ |
58,598 |
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense included in
reported net income, net of related tax effect
|
|
|
254,000 |
|
|
|
|
|
|
|
123,000 |
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense determined under
SFAS No. 123 for all awards
|
|
|
(1,372,348 |
) |
|
|
(375,327 |
) |
|
|
(120,168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
14,773,144 |
|
|
$ |
4,277,627 |
|
|
$ |
61,430 |
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
.32 |
|
|
$ |
.11 |
|
|
$ |
|
|
|
|
Pro forma
|
|
$ |
.29 |
|
|
$ |
.10 |
|
|
$ |
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
.31 |
|
|
$ |
.09 |
|
|
$ |
|
|
|
|
Pro forma
|
|
$ |
.28 |
|
|
$ |
.09 |
|
|
$ |
|
|
Basic earnings per share is computed by dividing net income or
loss by the weighted average common shares outstanding for the
period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in
the earnings of the entity (see Note 6).
The Company provides services to patients on either a fixed
monthly fee arrangement with HMOs or under a fee for service
arrangement. Total medical services net revenue from continuing
operations relating to Humana approximated 78%, 75% and 73% for
Fiscal 2005, 2004 and 2003, respectively. Total medical services
net revenue from continuing operations related to Vista
approximated 22%, 25% and 23% for Fiscal 2005, 2004 and 2003,
respectively.
FA-11
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the Companys full risk contracts with Humana and
Vista, the Company receives a fixed monthly fee from the HMOs
for each patient that chooses one of the Companys
physicians as their primary care physician. The fixed monthly
fee is typically based on a percentage of the premium received
by the HMOs from various payor sources. Revenue under these
agreements is generally recorded in the period services are
rendered at the rates then in effect as determined by the
respective contract. As part of the Medicare Advantage program,
the Centers for Medicare Services (CMS) periodically
recomputes the premiums to be paid to the HMOs based on updated
health status of participants and updated demographic factors.
The Company records any adjustments to this revenue at the time
that the information necessary to make the determination of the
adjustment is received from the HMO or CMS.
Under the Companys full risk agreements, the Company
assumes responsibility for the cost of all medical services
provided to the patient, even those it does not provide directly
in exchange for a percentage of premium or other capitated fee.
To the extent that patients require more frequent or expensive
care than was anticipated by the Company, revenue to the Company
under a contract may be insufficient to cover the costs of care
provided. When it is probable that expected future health care
costs and maintenance costs under a contract or group of
existing contracts will exceed anticipated capitated revenue on
those contracts, the Company recognizes losses on its prepaid
health care services with HMOs. No contracts were considered
loss contracts at June 30, 2005 because the Company has the
right to terminate unprofitable physicians and close
unprofitable centers under its managed care contracts.
Under the Companys limited risk and no-risk contracts with
HMOs, the Company receives a capitation fee or management fee
based on the number of patients for which the Company provides
services on a monthly basis. The capitation fee or management
fee is recorded as revenue in the period in which services are
provided as determined by the respective contract.
The Company contracts with or employs various health care
providers to provide medical services to its patients. Primary
care physicians are compensated on either a salary or capitation
basis. For patients enrolled under full risk managed care
contracts, the cost of specialty services are paid on either a
fee for service, per diem or capitation basis.
The cost of health care services provided or contracted for
under full risk managed care contracts is accrued in the period
in which services are provided. In addition, the Company
provides for an estimate of the related liability for medical
claims incurred but not yet reported based on historical claims
experience and current factors such as inpatient utilization and
benefit changes provided under HMO plans. Estimates are adjusted
as changes in these factors occur and such adjustments are
reported in the year of determination. To further corroborate
our estimate of medical claims, an independent actuarial
calculation is performed on a quarterly basis.
|
|
|
Reinsurance (stop-loss insurance) |
Reinsurance premiums are reported as a health care cost and are
included in medical service expense in the accompanying
Consolidated Statements of Income. Reinsurance recoveries are
reported as a reduction of related health care costs.
|
|
|
Recent Accounting Pronouncements |
In May 2005, the Financial Accounting Standards Board (the
FASB) issued SFAS No. 154, Accounting
Changes and Error Corrections, which replaces APB
No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the
accounting for and reporting of a change in accounting
principles for all voluntary changes in
FA-12
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accounting principles and to changes required by accounting
pronouncements in the unusual instance that the pronouncements
do not include specific transition provisions. This statement
requires retrospective application to prior periods
financial statements of changes in accounting principles, unless
it is impracticable to determine the period specific effects or
cumulative effect of the change. When it is impracticable to
determine the period specific effects of an accounting change on
one or more individual prior periods presented, this statement
requires that the new accounting principle be applied to the
balances of assets and liabilities at the beginning of the
earliest period for which retrospective application is
practicable and a corresponding adjustment is to be made to the
opening balance of retained earnings for that period. When it is
impracticable to determine the cumulative effect of applying a
change in accounting principle to all prior periods, it requires
that the new accounting principle be applied as if it were
adopted prospectively from the earliest date practicable. This
statement defines retrospective application as the
application of a different accounting principle to prior
accounting periods as if that principle had always been used or
as the adjustment of previously issued financial statements to
reflect a change in the reporting entity. It also redefines
restatement as the revising of previously issued
financial statements to reflect the correction of an error. This
statement also requires that a change in depreciation,
amortization, or depletion method for long-lived, nonfinancial
assets be accounted for as a change in accounting estimate
effected by a change in accounting principle. It is effective
for fiscal years beginning after December 15, 2005. The
impact of adoption of this statement is not expected to be
significant to the Company.
On December 16, 2004, the FASB issued FASB Statement
No. 123 (revised 2004), Share-Based Payment
(Statement 123(R)), which is a revision of FASB
Statement No. 123, Accounting for Stock-Based
Compensation
(Statement 123).Statement 123(R)
supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach in
Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an
alternative. Statement 123(R) must be adopted as of the
beginning of the first annual reporting period that begins after
June 15, 2005. Early adoption is permitted in periods in
which financial statements have not yet been issued. The Company
will adopt Statement 123(R) for the first quarter of Fiscal
2006.
As currently permitted by Statement 123, the Company
accounts for share-based payments to employees using the
intrinsic value method under Accounting for Stock Issued
to Employees, Accounting Principles Board Opinion
No. 25 (APB No. 25), and, as such,
generally recognizes no compensation cost for employee stock
options. Accordingly, the adoption of
Statement 123(R)s fair value method is expected to
have a significant impact on our results of operations for
periods after its adoption by the Company, although it will have
no impact on our overall financial position. The precise impact
of adoption of Statement 123(R) cannot be predicted at this
time because it will depend on levels of share-based payments
granted in the future. However, had we adopted
Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of
Statement 123 as described in the disclosure of pro forma
net income and earnings per share in the Accounting for
Stock-Based Compensation section above. Statement 123(R)
can be adopted under two methods, the modified prospective or
the modified retrospective applications. Under the modified
prospective application, compensation cost for the portion of
awards for which the requisite service has not been rendered
that are outstanding as of the effective date should be
recognized as the requisite service is rendered on or after the
effective date. The compensation cost for that portion of awards
should be based on the grant-date fair value of those awards as
calculated for either recognition or pro forma disclosure under
Statement 123. Changes to the grant-date fair value of
awards granted before the effective date of
Statement 123(R) are precluded. The modified retrospective
application may be applied to all prior years that
Statement 123 was effective or only to prior interim
periods in the year of initial adoption if the effective date of
Statement 123(R) does not coincide with the beginning of
the fiscal year. The cumulative effect of the initial
application of Statement 123(R), if any, is to be
recognized as of the effective date. Statement 123(R)
FA-13
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash
flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods
after adoption. While the Company cannot estimate what those
amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), there was
no impact on operating cash flows recognized in prior periods
for such excess tax deductions.
|
|
|
Other Comprehensive Income |
The Company had no comprehensive income items other than net
income for all years presented.
Certain prior year amounts have been reclassified to conform
with the current year presentation.
NOTE 3 DISCONTINUED OPERATIONS
In an effort to streamline operations and stem anticipated
operating losses, effective January 1, 2003, the Company
terminated the Medicare and Medicaid lines of business for all
of the independent physician affiliates associated with one HMO.
The terminated IPAs, which consisted of 29 physicians at the
time of the termination and are shown as discontinued
operations, contributed approximately $4.5 million in
revenue and generated operating income of approximately $351,000
in Fiscal 2003.
On December 16, 2003, the Company announced that it would
dispose of its home health operations. The disposition occurred
in transactions with three entities that acquired substantially
all of the existing home health operations in separate
transactions that concluded on February 7, 2004. In two of
the transactions, the employees and patients of the
Companys Medicare certified home health agencies in
Broward and Miami-Dade Counties of Florida were transferred to
the acquirer and no assets or liabilities were transferred. In
the third transaction, the Company sold the stock of its private
duty home health agency subsidiary for a cash purchase price of
$9,000. The Company retained all of the related accounts
receivable, as well as all obligations for payables which
existed as of the date of the sale. In accordance with Statement
of Financial Accounting Standard No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the
home health operations are shown as discontinued operations. As
a result of the decision to dispose of its home health
operations, the Company assessed the recoverability of the
long-lived assets associated with the home health operations and
recorded a disposal charge of $0.5 million during Fiscal
2004, which consisted of the following:
|
|
|
|
|
Goodwill
|
|
$ |
320,882 |
|
Equipment, furniture and leasehold improvements
|
|
|
111,640 |
|
Other
|
|
|
24,868 |
|
|
|
|
|
|
|
$ |
457,390 |
|
|
|
|
|
The home health operations contributed $3.1 million and
$4.2 million in revenue and generated operating losses of
$1.7 million and $1.8 million during the fiscal years
ended June 30, 2004 and 2003, respectively, before any
corporate overhead allocation or interest expense.
Approximately 10 employees were terminated as a result of these
transactions. In accordance with Statement of Financial
Accounting Standard No. 146, Accounting for Costs
Associated with Exit or Disposal Activities
(SFAS No. 146), the Company recorded
$0.2 million of costs for severance payments and accrued
for lease obligations in the third quarter of Fiscal 2004. The
remaining loss incurred during Fiscal 2004 related to the
operations of the home health operations prior to
February 7, 2004 and the cost of winding
FA-14
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
up home health activities, including billing and collection of
outstanding accounts receivables. Approximately $56,000 and
$208,000 of liabilities from discontinued operations are
included in accrued expenses and other current liabilities as of
June 30, 2005 and 2004, respectively.
NOTE 4 EQUIPMENT, FURNITURE AND LEASEHOLD
IMPROVEMENTS
Equipment, furniture and leasehold improvements are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
Estimated | |
|
|
| |
|
Useful Lives | |
|
|
2005 | |
|
2004 | |
|
(in years) | |
|
|
| |
|
| |
|
| |
Furniture, fixtures and equipment
|
|
$ |
2,437,852 |
|
|
$ |
2,138,529 |
|
|
|
3-5 |
|
Furniture and equipment under capital lease
|
|
|
522,109 |
|
|
|
406,128 |
|
|
|
5 |
|
Leasehold improvements
|
|
|
157,225 |
|
|
|
150,943 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,117,186 |
|
|
|
2,695,600 |
|
|
|
|
|
Less accumulated depreciation
|
|
|
(2,446,521 |
) |
|
|
(2,203,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
670,665 |
|
|
$ |
492,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended June 30, 2005,
2004 and 2003 was approximately $243,000, $230,000 and $204,000,
respectively.
The Company has entered into various noncancellable leases for
certain furniture and equipment that are classified as capital
leases. The leases are payable over 3 to 5 years at
incremental borrowing rates ranging from 8% to 11% per
annum. Accumulated amortization for assets recorded under
capital lease agreements was approximately $413,000 and $332,000
at June 30, 2005 and 2004, respectively. Amortization of
assets recorded under capital lease agreements was approximately
$81,000, $56,000 and $99,000 for the years ended June 30,
2005, 2004 and 2003, respectively, and is included in
depreciation expense for all years presented.
Future minimum lease payments under all capital leases are as
follows:
|
|
|
|
|
For the year ending June 30,
|
|
|
|
|
2006
|
|
$ |
76,404 |
|
2007
|
|
|
37,602 |
|
2008
|
|
|
4,419 |
|
2009
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
118,425 |
|
Less amount representing imputed interest
|
|
|
(10,715 |
) |
|
|
|
|
Present value of obligations under capital lease
|
|
|
107,710 |
|
Less current portion
|
|
|
69,349 |
|
|
|
|
|
Long-term capital lease obligations
|
|
$ |
38,361 |
|
|
|
|
|
The current portion of obligations under capital leases is
classified within accrued expenses and other current liabilities
in the accompanying consolidated balance sheets.
NOTE 5 DEBT
On December 30, 2004, the Company received cash of
$1,040,000 from Humana in exchange for an unsecured,
non-interest bearing promissory note for an equal amount. The
promissory note is payable in
FA-15
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
12 monthly installments of $86,666, through
December 1, 2005, but Continucare can prepay the promissory
note in full or in part at any time without penalty or premium.
As of June 30, 2005, the Company had made principal
payments amounting to $520,000, reducing the outstanding balance
on the promissory note to $520,000. Amounts due under the
promissory note are subject to acceleration upon the happening
of customary events of default, including the failure to make
payments of principal.
The Company has in place a credit facility that provides for a
revolving loan to the Company of $3.0 million (the
Credit Facility). Effective March 31, 2005, the
Company obtained an extension of the maturity date for the
Credit Facility until March 31, 2006. All terms of the
Credit Facility remained substantially unchanged, except for the
addition of a requirement that the Company maintain a minimum
cash and cash equivalent balance of $1.0 million and the
elimination of the requirement that Dr. Frost, a principal
shareholder of the Company and member of the Board of Directors,
personally guarantee the Companys obligations under the
Credit Facility. In connection with a previous extension of the
Credit Facilitys maturity date in March 2004, an entity
controlled by Dr. Frost received 300,000 shares of the
Companys common stock in consideration for
Dr. Frosts renewal of his guarantee. The shares of
common stock issued were valued at $870,000 based on the market
price of the Companys common stock on March 26, 2004,
the date on which Dr. Frost renewed his guarantee. This
amount was recorded as deferred financing costs and was
amortized through March 31, 2005, the date on which
Dr. Frosts guarantee expired. At June 30, 2005,
there was no outstanding principal balance on the Credit
Facility. Interest under the Credit Facility is payable monthly
at 2.9% plus the 30-day
Dealer Commercial Paper Rate, which was 3.27% at June 30,
2005. All assets of the Company serve as collateral for the
Credit Facility.
Related party notes consist of convertible promissory notes
issued to Frost Nevada Investments Trust, an entity controlled
by Dr. Frost, and a group of six investors. In April 2004,
Frost Nevada Investments Trust converted a promissory note which
had an outstanding principal balance and unpaid accrued interest
of approximately $0.9 million into approximately
820,000 shares of common stock in accordance with the terms
of that note. The remaining related party notes bear interest at
7% and mature on October 31, 2005.
During Fiscal 2004, we recorded other income of
$2.2 million relating to the settlement of an alleged
Medicare obligation. The alleged obligation related to
rehabilitation clinics that were previously operated by one of
our former subsidiaries and were sold in 1999. The Centers for
Medicare and Medicaid Services (CMS) had alleged
that Medicare overpayments were made relating to services
rendered by these clinics and other related clinics during a
period in which the clinics were operated by entities other than
us. In an effort to resolve the matter with CMS and avoid
aggressive collection efforts that could have disrupted our
business, in 2002 we began making payments to resolve the
alleged liability while retaining the right to dispute the
alleged overpayments. We requested that CMS reconsider the
alleged liability and in October 2003 we were notified that the
liability had been reduced from the originally asserted amount
of $2.4 million to $0.2 million.
FA-16
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 6 INCOME/ LOSS PER SHARE
A reconciliation of the denominator of the basic and diluted
earnings per share computation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Basic weighted average number of shares outstanding
|
|
|
50,231,870 |
|
|
|
43,763,835 |
|
|
|
40,776,903 |
|
Dilutive effect of stock options
|
|
|
1,689,274 |
|
|
|
1,144,918 |
|
|
|
|
|
Dilutive effect of convertible debt
|
|
|
84,920 |
|
|
|
4,323,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares outstanding
|
|
|
52,006,064 |
|
|
|
49,232,716 |
|
|
|
40,776,903 |
|
|
|
|
|
|
|
|
|
|
|
Not included in calculation of dilutive earnings per share as
impact is antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding
|
|
|
255,000 |
|
|
|
300,000 |
|
|
|
2,716,000 |
|
|
Warrants
|
|
|
760,000 |
|
|
|
760,000 |
|
|
|
760,000 |
|
NOTE 7 RELATED PARTY TRANSACTIONS
On March 31, 2003, Dr. Frost extended his personal
guarantee of the Companys Credit Facility through
March 31, 2004. In consideration of Dr. Frosts
personal guarantee, the Company issued 1,500,000 shares of
restricted stock to an entity related to Dr. Frost and
increased the annual interest rate on a note payable to an
entity related to Dr. Frost from 7% to 9%. The shares of
common stock issued, which were valued at $525,000 based on the
closing price of the Companys common stock on
March 31, 2003 when the guarantee was granted, were
recorded as a deferred financing cost and amortized over the
term of the guarantee.
On March 30, 2004, Dr. Frost extended his personal
guarantee of the Companys Credit Facility through
March 31, 2005 (see Note 5). In consideration of
Dr. Frosts personal guarantee, the Company issued
300,000 shares of common stock to an entity controlled by
Dr. Frost. The shares of common stock issued, which were
valued at $870,000 based on the closing price of the
Companys common stock on March 30, 2004, were
recorded as a deferred financing cost and were amortized over
the term of the guarantee.
Effective March 31, 2005, the Company obtained an extension
of the maturity date for the Credit Facility until
March 31, 2006 without Dr. Frosts guarantee.
NOTE 8 RESTRICTED STOCK, STOCK OPTION PLAN
AND WARRANTS
On September 23, 2002, the Company issued a combined total
of 800,000 shares of restricted common stock to Board
members as compensation for their services. The value of the
restricted stock award of $112,000 (based on the closing price
of the Companys common stock on September 23, 2002)
has been recorded as director compensation in the first quarter
of Fiscal 2003. Also on September 23, 2002, two of the
Board members elected to receive their compensation in the form
of fully vested stock options, which represented a combined
total of 400,000 stock options. The fully vested stock options
have an exercise price of $0.36 per share and are valid for
a ten-year period.
On October 30, 2002, the Company issued 100,000 shares
of restricted common stock to a newly elected Board member. The
value of the 100,000 shares of restricted stock awarded of
$11,000 (based on the closing price of the Companys common
stock on October 30, 2002) was recorded as director
compensation in the second quarter of Fiscal 2003.
In August 2004, the Companys shareholders approved an
amendment to the Amended and Restated Continucare Corporation
2000 Stock Option Plan (the 2000 Stock Option Plan)
to increase the authorized shares for issuance upon the exercise
of stock options from 4,000,000 to 7,000,000 and to cover
employees,
FA-17
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
directors, independent contractors and consultants of the
Company. Under the terms of the 2000 Stock Option Plan, options
are granted at the fair market value of the stock at the date of
grant, with vesting up to four years and with an expiration
generally 10 years after the date of the grant.
Pro forma information regarding net income and earnings per
share is required by SFAS No. 123, and has been
determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2005, 2004 and 2003,
respectively: risk-free interest rates of 4.12%, 4.25% and
3.33%; dividend yields of 0%; volatility factors of the expected
market price of the Companys common stock of 101.2%,
106.5% and 107.9%, and a weighted-average expected life of the
options of 10 years.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Companys employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options.
The following table summarizes information related to the
Companys stock option activity for the years ended
June 30, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
Number of | |
|
Weighted Average | |
|
Number of | |
|
Weighted Average | |
|
Number of | |
|
Weighted Average | |
|
|
Shares | |
|
Exercise Price | |
|
Shares | |
|
Exercise Price | |
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding at beginning of the year
|
|
|
3,295,000 |
|
|
$ |
1.32 |
|
|
|
2,716,000 |
|
|
$ |
1.15 |
|
|
|
2,316,000 |
|
|
$ |
1.29 |
|
Granted
|
|
|
1,225,000 |
|
|
|
1.54 |
|
|
|
2,425,000 |
|
|
|
1.22 |
|
|
|
400,000 |
|
|
|
0.36 |
|
Exercised
|
|
|
(156,666 |
) |
|
|
.59 |
|
|
|
(546,000 |
) |
|
|
0.64 |
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(549,334 |
) |
|
|
2.74 |
|
|
|
(1,300,000 |
) |
|
|
1.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of the year
|
|
|
3,814,000 |
|
|
|
|
|
|
|
3,295,000 |
|
|
|
|
|
|
|
2,716,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of the year
|
|
|
1,728,333 |
|
|
|
|
|
|
|
945,000 |
|
|
|
|
|
|
|
2,360,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value per share of options granted during
the year
|
|
$ |
1.61 |
|
|
|
|
|
|
$ |
1.20 |
|
|
|
|
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about options
outstanding at June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
|
|
|
| |
|
Options Exercisable | |
|
|
|
|
Weighted Average | |
|
|
|
| |
|
|
Outstanding at | |
|
Remaining | |
|
Weighted Average | |
|
Number | |
|
Weighted Average | |
Range of Exercise Prices |
|
June 30, 2005 | |
|
Contractual Life | |
|
Exercise Price | |
|
Exercisable | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$1.35-$2.86
|
|
|
1,749,000 |
|
|
|
9.36 |
|
|
$ |
1.91 |
|
|
|
463,333 |
|
|
$ |
1.87 |
|
$ .35-$ .69
|
|
|
2,065,000 |
|
|
|
7.39 |
|
|
$ |
.63 |
|
|
|
1,265,000 |
|
|
$ |
.61 |
|
FA-18
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has 760,000 warrants outstanding at June 30,
2005 which are exercisable through December 31, 2007, with
exercise prices ranging from $7.25 to $12.50 per share.
Shares of common stock have been reserved for future issuance at
June 30, 2005 as follows:
|
|
|
|
|
Convertible related party note
|
|
|
77,645 |
|
Warrants
|
|
|
760,000 |
|
Stock options
|
|
|
4,883,334 |
|
|
|
|
|
Total
|
|
|
5,720,979 |
|
|
|
|
|
NOTE 9 INCOME TAXES
The Company accounts for income taxes under FASB Statement
No. 109, Accounting for Income Taxes. Deferred
income tax assets and liabilities are determined based upon
differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse.
The Company recorded an income tax benefit of $7,175,561 for the
year ended June 30, 2005. No provision or benefit for
income taxes was recorded for the years ended June 30, 2004
and 2003 as the Company had substantial tax assets, described
more fully below, which had not been recognized. The income tax
(benefit) provision from continuing operations consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
|
|
2005 | |
|
2004 |
|
2003 |
|
|
| |
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
131,363 |
|
|
$ |
|
|
|
$ |
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
131,363 |
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,411,423 |
|
|
|
|
|
|
|
|
|
|
State
|
|
|
435,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,846,696 |
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(10,153,620 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
$ |
(7,175,561 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
FA-19
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes reflect the net effect of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The tax effects of temporary
differences that give rise to deferred tax assets and deferred
tax liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt and notes receivable reserve
|
|
$ |
294,922 |
|
|
$ |
706,992 |
|
|
$ |
4,620,512 |
|
|
Alternative minimum tax credit
|
|
|
131,363 |
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
160,296 |
|
|
|
192,440 |
|
|
|
379,628 |
|
|
Impairment charge
|
|
|
1,746,800 |
|
|
|
1,975,228 |
|
|
|
3,036,963 |
|
|
Capital loss carryover
|
|
|
|
|
|
|
|
|
|
|
200,261 |
|
|
Net operating loss carryforward
|
|
|
6,340,985 |
|
|
|
7,925,846 |
|
|
|
4,590,657 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
8,674,366 |
|
|
|
10,800,506 |
|
|
|
12,828,021 |
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable/amortizable assets
|
|
|
(1,367,442 |
) |
|
|
(646,886 |
) |
|
|
(965,047 |
) |
|
Valuation allowance
|
|
|
|
|
|
|
(10,153,620 |
) |
|
|
(11,862,974 |
) |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(1,367,442 |
) |
|
|
(10,800,506 |
) |
|
|
(12,828,021 |
) |
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$ |
7,306,924 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 109 requires a valuation allowance to reduce
the deferred tax assets reported if, based on the weight of the
evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative
(including, among others, the Companys projections of
future taxable income and profitability in recent fiscal years),
management determined that a valuation allowance of $0,
$10,153,620 and $11,862,974 was necessary at June 30, 2005,
2004 and 2003, respectively, to reduce the deferred tax assets
to the amount that will more likely than not be realized. The
change in the valuation allowance for the current period was
$10,153,620 for the year ended June 30, 2005. At
June 30, 2005, the Company had available net operating loss
carryforwards of approximately $16,851,000, which expire in 2020
through 2025. Certain of the Companys net operating loss
carryforwards are subject to annual limitations.
A reconciliation of the statutory federal income tax rate with
the Companys effective income tax rate for the years ended
June 30, 2005, 2004 and 2003 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Statutory federal rate
|
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
State income taxes, net of federal income tax benefit
|
|
|
3.63 |
|
|
|
3.63 |
|
|
|
3.63 |
|
Goodwill and other non-deductible items
|
|
|
(3.46 |
) |
|
|
2.85 |
|
|
|
356.26 |
|
Change in valuation allowance
|
|
|
(116.49 |
) |
|
|
(40.48 |
) |
|
|
(404.03 |
) |
Other
|
|
|
|
|
|
|
|
|
|
|
10.14 |
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(82.32 |
)% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
NOTE 10 SHARE REPURCHASE PROGRAM
In May 2005, the Companys Board of Directors increased the
Companys previously announced program to repurchase shares
of its common stock to a total of 2,500,000 shares. Any
such repurchases will be made
FA-20
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from time to time at the discretion of our management in the
open market or in privately negotiated transactions subject to
market conditions and other factors. As of September 1,
2005, the Company had repurchased 957,467 shares of its
common stock for approximately $2,453,000.
NOTE 11 EMPLOYEE BENEFIT PLAN
As of January 1, 1997, the Company adopted a tax qualified
employee savings and retirement plan covering the Companys
eligible employees. The Continucare Corporation 401(k) Profit
Sharing Plan and Trust (the 401(k) Plan) was amended
and restated on July 1, 1998. The 401(k) Plan is intended
to qualify under Section 401 of the Internal Revenue Code
(the Code) and contains a feature described in Code
Section 401(k) under which a participant may elect to have
his or her compensation reduced by up to 70% (subject to IRS
limits) and have that amount contributed to the 401(k) Plan. On
October 25, 2001, the Internal Revenue Service issued a
favorable determination letter for the 401(k) Plan.
Under the 401(k) Plan, new employees who are at least
18 years of age are eligible to participate in the 401(k)
Plan after 90 days of service. Eligible employees may elect
to contribute to the 401(k) Plan up to a maximum amount of tax
deferred contribution allowed by the Internal Revenue Code. The
Company may, at its discretion, make a matching contribution and
a non-elective contribution to the 401(k) Plan. There were no
matching contributions for the years ended June 30, 2005,
2004 or 2003. Participants in the 401(k) Plan do not begin to
vest in the employer contribution until the end of two years of
service, with full vesting achieved after five years of service.
NOTE 12 COMMITMENTS AND CONTINGENCIES
The Company is a party to the case of JOAN LINDAHL v.
HUMANA MEDICAL PLAN, INC., COLUMBIA HOSPITAL CORPORATION OF
SOUTH BROWARD d/b/a WESTSIDE REGIONAL MEDICAL CENTER, INPHYNET
CONTRACTING SERVICES, INC., CONTINUCARE MEDICAL MANAGEMENT,
INC., LUIS GUERRERO AND JARSLAW PARKOLAP. This case was
filed on January 24, 2002 in the Circuit Court of the
17th Judicial Circuit in and for Broward County, Florida
and served on the companies and individuals in February 2003.
The complaint alleges vicarious liability for medical
malpractice. The Company intends to defend itself against this
case vigorously, but its outcome cannot be predicted. The
Companys ultimate liability, if any, with respect to the
lawsuit is presently not determinable.
The Company is a party to the case of MAUREEN MCCANN, AS
PERSONAL REPRESENTATIVE OF THE ESTATE OF WALTER MCCANN v.
AJAIB MANN, M.D. AND CONTINUCARE CORPORATION. This case
was filed on April 5, 2005, in the Circuit Court of the
Seventeenth Judicial Circuit in and for Broward County, Florida.
The complaint alleges vicarious liability for medical
malpractice. The Company intends to defend itself against this
case vigorously, but its outcome cannot be predicted. The
Companys ultimate liability, if any, with respect to the
lawsuit is presently not determinable.
In May 2005, the Company received a Notice of Intent to Initiate
Litigation for Medical Negligence from legal counsel to a former
patient. In July 2005, the Notice of Intent to Initiate
Litigation for Medical Negligence was withdrawn.
The Company is also involved in other legal proceedings
incidental to its business that arise from time to time out of
the ordinary course of business including, but not limited to,
claims related to the alleged malpractice of employed and
contracted medical professionals, workers compensation
claims and other employee-related matters, and minor disputes
with equipment lessors and other vendors. The Company has
recorded an accrual for medical malpractice claims, which
includes amounts for insurance deductibles and projected
exposure, based on managements estimate of the ultimate
outcome of such claims.
FA-21
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company leases office space and equipment under various
non-cancelable operating leases. Rent expense under such
operating leases was approximately $1.8 million for each of
the years ended June 30, 2005, 2004 and 2003, respectively.
Future annual minimum payments under such leases as of
June 30, 2005 are as follows:
|
|
|
|
|
|
For the fiscal year ending June 30,
|
|
|
|
|
2006
|
|
$ |
1,722,924 |
|
2007
|
|
|
1,654,634 |
|
2008
|
|
|
1,566,966 |
|
2009
|
|
|
404,014 |
|
2010
|
|
|
190,860 |
|
|
|
|
|
|
Total
|
|
$ |
5,539,398 |
|
|
|
|
|
NOTE 13 VALUATION AND QUALIFYING ACCOUNTS
Activity in the Companys Valuation and Qualifying Accounts
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Allowance for doubtful accounts related to other receivables and
accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
826,964 |
|
|
$ |
4,823,000 |
|
|
$ |
4,807,000 |
|
Provision for doubtful accounts
|
|
|
15,787 |
|
|
|
104,296 |
|
|
|
44,000 |
|
Write-offs of uncollectible accounts receivable
|
|
|
|
|
|
|
(4,100,332 |
) |
|
|
(28,000 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
842,751 |
|
|
$ |
826,964 |
|
|
$ |
4,823,000 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts related to notes receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
|
|
|
$ |
6,367,000 |
|
|
$ |
6,367,000 |
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-offs of uncollectible notes receivable
|
|
|
|
|
|
|
(6,367,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,367,000 |
|
Valuation allowance for deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
10,153,620 |
|
|
$ |
11,862,974 |
|
|
$ |
12,099,730 |
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Deductions
|
|
|
(10,153,620 |
) |
|
|
(1,709,354 |
) |
|
|
(236,756 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
|
|
|
$ |
10,153,620 |
|
|
$ |
11,862,974 |
|
|
|
|
|
|
|
|
|
|
|
FA-22
CONTINUCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 14 QUARTERLY CONSOLIDATED FINANCIAL
INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, 2005(a) | |
|
|
| |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
Full | |
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Total revenue from continuing operations
|
|
$ |
26,208,017 |
|
|
$ |
27,113,675 |
|
|
$ |
29,775,441 |
|
|
$ |
29,133,980 |
|
|
$ |
112,231,113 |
|
Net income
|
|
$ |
1,109,029 |
|
|
$ |
2,138,397 |
|
|
$ |
1,471,455 |
|
|
$ |
11,172,611 |
|
|
$ |
15,891,492 |
|
Basic net income per common share
|
|
$ |
.02 |
|
|
$ |
.04 |
|
|
$ |
.03 |
|
|
$ |
.22 |
|
|
$ |
.32 |
|
Diluted net income per common share
|
|
$ |
.02 |
|
|
$ |
.04 |
|
|
$ |
.03 |
|
|
$ |
.21 |
|
|
$ |
.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, 2004(a) | |
|
|
| |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
Full | |
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Total revenue from continuing operations
|
|
$ |
25,063,399 |
|
|
$ |
24,368,236 |
|
|
$ |
25,900,705 |
|
|
$ |
26,491,762 |
|
|
$ |
101,824,102 |
|
Net income (loss)
|
|
$ |
2,501,350 |
|
|
$ |
(354,808 |
) |
|
$ |
1,511,235 |
|
|
$ |
995,177 |
|
|
$ |
4,652,954 |
|
Basic net income (loss) per common share
|
|
$ |
.06 |
|
|
$ |
(.01 |
) |
|
$ |
.04 |
|
|
$ |
.02 |
|
|
$ |
.11 |
|
Diluted net income (loss) per common share
|
|
$ |
.05 |
|
|
$ |
(.01 |
) |
|
$ |
.03 |
|
|
$ |
.02 |
|
|
$ |
.09 |
|
|
|
(a) |
As discussed in Note 3, effective January 1, 2003, the
Company terminated the Medicare and Medicaid lines of business
for all of the physician contracts associated with one of its
IPAs. During Fiscal 2004, the Company disposed of its home
health operations. These transactions are shown as discontinued
operations. Therefore, the above quarterly information has been
reclassified to agree with the current presentation. These
reclassifications had no effect on the previously reported net
income (loss) or net income (loss) per share for any quarter
presented. |
FA-23
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 | |
|
June 30, 2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
8,802,949 |
|
|
$ |
5,780,544 |
|
|
Other receivables, net
|
|
|
200,761 |
|
|
|
144,973 |
|
|
Due from HMOs, net of a liability for incurred but not reported
medical claims expense of approximately $13,700,000 and
$11,700,000 at March 31, 2006 and June 30, 2005,
respectively
|
|
|
6,868,227 |
|
|
|
3,485,530 |
|
|
Prepaid expenses and other current assets
|
|
|
797,558 |
|
|
|
719,577 |
|
|
Deferred tax assets, net
|
|
|
585,571 |
|
|
|
585,571 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
17,255,066 |
|
|
|
10,716,195 |
|
Certificates of deposit, restricted
|
|
|
548,373 |
|
|
|
530,350 |
|
Equipment, furniture and leasehold improvements, net
|
|
|
755,070 |
|
|
|
670,665 |
|
Goodwill, net of accumulated amortization of approximately
$7,608,000
|
|
|
14,342,510 |
|
|
|
14,342,510 |
|
Managed care contracts, net of accumulated amortization of
approximately $2,687,000 and $2,422,000 at March 31, 2006
and June 30, 2005, respectively
|
|
|
825,436 |
|
|
|
1,090,046 |
|
Deferred tax assets, net
|
|
|
4,214,135 |
|
|
|
6,721,353 |
|
Other assets, net
|
|
|
151,358 |
|
|
|
66,816 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
38,091,948 |
|
|
$ |
34,137,935 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
432,156 |
|
|
$ |
660,139 |
|
|
Accrued expenses and other current liabilities
|
|
|
2,037,561 |
|
|
|
2,489,439 |
|
|
Note payable
|
|
|
|
|
|
|
520,000 |
|
|
Income taxes payable
|
|
|
87,286 |
|
|
|
131,363 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,557,003 |
|
|
|
3,800,941 |
|
Capital lease obligations, less current portion
|
|
|
52,043 |
|
|
|
38,361 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,609,046 |
|
|
|
3,839,302 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value: 100,000,000 shares
authorized; 50,130,812 shares issued and outstanding at
March 31, 2006 and 52,591,895 shares issued and
49,595,702 shares outstanding at June 30, 2005
|
|
|
5,013 |
|
|
|
4,960 |
|
Additional paid-in capital
|
|
|
63,454,217 |
|
|
|
67,924,068 |
|
Accumulated deficit
|
|
|
(27,976,328 |
) |
|
|
(32,205,694 |
) |
Treasury stock, 2,996,193 shares at June 30, 2005
|
|
|
|
|
|
|
(5,424,701 |
) |
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
35,482,902 |
|
|
|
30,298,633 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
38,091,948 |
|
|
$ |
34,137,935 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
FA-24
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
Revenue:
|
|
|
|
|
|
|
|
|
|
Medical services revenue, net
|
|
$ |
37,460,690 |
|
|
$ |
29,608,640 |
|
|
Management fee revenue and other income
|
|
|
64,114 |
|
|
|
166,801 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
37,524,804 |
|
|
|
29,775,441 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Medical services:
|
|
|
|
|
|
|
|
|
|
|
Medical claims
|
|
|
28,086,314 |
|
|
|
21,976,703 |
|
|
|
Other direct costs
|
|
|
3,497,134 |
|
|
|
3,019,984 |
|
|
|
|
|
|
|
|
|
|
|
Total medical services
|
|
|
31,583,448 |
|
|
|
24,996,687 |
|
|
|
|
|
|
|
|
|
Administrative payroll and employee benefits
|
|
|
1,815,775 |
|
|
|
1,312,965 |
|
|
General and administrative
|
|
|
2,028,805 |
|
|
|
1,810,418 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
35,428,028 |
|
|
|
28,120,070 |
|
|
|
|
|
|
|
|
Income from operations
|
|
|
2,096,776 |
|
|
|
1,655,371 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
86,398 |
|
|
|
40,223 |
|
|
Interest expense
|
|
|
(2,779 |
) |
|
|
(224,139 |
) |
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
2,180,395 |
|
|
|
1,471,455 |
|
Income tax provision
|
|
|
847,630 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,332,765 |
|
|
$ |
1,471,455 |
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.03 |
|
|
$ |
.03 |
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
.03 |
|
|
$ |
.03 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
49,832,351 |
|
|
|
50,345,997 |
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
51,046,373 |
|
|
|
52,373,915 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
FA-25
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
Revenue:
|
|
|
|
|
|
|
|
|
|
Medical services revenue, net
|
|
$ |
96,436,949 |
|
|
$ |
82,329,781 |
|
|
Management fee revenue and other income
|
|
|
341,710 |
|
|
|
767,459 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
96,778,659 |
|
|
|
83,097,240 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Medical services:
|
|
|
|
|
|
|
|
|
|
|
Medical claims
|
|
|
69,640,075 |
|
|
|
59,593,218 |
|
|
|
Other direct costs
|
|
|
9,764,311 |
|
|
|
9,717,310 |
|
|
|
|
|
|
|
|
|
|
|
Total medical services
|
|
|
79,404,386 |
|
|
|
69,310,528 |
|
|
|
|
|
|
|
|
|
Administrative payroll and employee benefits
|
|
|
4,993,661 |
|
|
|
3,780,809 |
|
|
General and administrative
|
|
|
5,746,754 |
|
|
|
5,148,457 |
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
(500,000 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
90,144,801 |
|
|
|
77,739,794 |
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,633,858 |
|
|
|
5,357,446 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
209,229 |
|
|
|
61,534 |
|
|
Interest expense
|
|
|
(10,580 |
) |
|
|
(700,099 |
) |
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
6,832,507 |
|
|
|
4,718,881 |
|
Income tax provision
|
|
|
2,603,141 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
4,229,366 |
|
|
$ |
4,718,881 |
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.08 |
|
|
$ |
.09 |
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
.08 |
|
|
$ |
.09 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
49,820,024 |
|
|
|
50,319,126 |
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
51,143,705 |
|
|
|
51,982,091 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
FA-26
CONTINUCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
4,229,366 |
|
|
$ |
4,718,881 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including amortization of
deferred financing costs
|
|
|
518,897 |
|
|
|
1,101,481 |
|
|
|
Provision for bad debts
|
|
|
159,518 |
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
959,140 |
|
|
|
261,627 |
|
|
|
Deferred tax expense
|
|
|
2,507,218 |
|
|
|
|
|
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
(500,000 |
) |
|
Changes in operating assets and liabilities, excluding the
effect of disposals:
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
(215,306 |
) |
|
|
199,710 |
|
|
|
Due from HMOs, net
|
|
|
(3,382,697 |
) |
|
|
306,554 |
|
|
|
Prepaid expenses and other current assets
|
|
|
(77,981 |
) |
|
|
65,091 |
|
|
|
Other assets
|
|
|
(4,206 |
) |
|
|
33,178 |
|
|
|
Accounts payable
|
|
|
(227,983 |
) |
|
|
25,848 |
|
|
|
Accrued expenses and other current liabilities
|
|
|
(313,913 |
) |
|
|
727,905 |
|
|
|
Income taxes payable
|
|
|
(44,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
4,107,976 |
|
|
|
6,940,275 |
|
Net cash used in discontinued operations
|
|
|
(32,512 |
) |
|
|
(89,454 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
4,075,464 |
|
|
|
6,850,821 |
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchase of certificates of deposit
|
|
|
(18,023 |
) |
|
|
(398,835 |
) |
|
Purchase of equipment and furniture
|
|
|
(229,587 |
) |
|
|
(406,578 |
) |
|
Other assets
|
|
|
(80,336 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(327,946 |
) |
|
|
(805,413 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from note payable
|
|
|
|
|
|
|
1,040,000 |
|
|
Payments on note payable
|
|
|
(520,000 |
) |
|
|
(259,051 |
) |
|
Payment of fees related to private placement transaction
|
|
|
|
|
|
|
(98,244 |
) |
|
Payments on related party notes
|
|
|
|
|
|
|
(4,358 |
) |
|
Principal repayments under capital lease obligations
|
|
|
(98,697 |
) |
|
|
(56,470 |
) |
|
Proceeds from exercise of stock options
|
|
|
589,718 |
|
|
|
91,700 |
|
|
Repurchase and retirement of common stock
|
|
|
(696,134 |
) |
|
|
(346,410 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(725,113 |
) |
|
|
367,167 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
3,022,405 |
|
|
|
6,412,575 |
|
Cash and cash equivalents at beginning of period
|
|
|
5,780,544 |
|
|
|
720,360 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
8,802,949 |
|
|
$ |
7,132,935 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Retirement of treasury stock
|
|
$ |
5,424,701 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Stock issued upon conversion of related party notes payable
(102,180 shares)
|
|
$ |
102,180 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Purchase of equipment with proceeds of capital lease obligations
|
|
$ |
109,160 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
FA-27
CONTINUCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 accounting principles generally accepted in the United
States 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
notes required by accounting principles generally accepted in
the United States 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 three and
nine-month periods ended March 31, 2006 are not necessarily
indicative of the results that may be reported for the remainder
of the year ending June 30, 2006 or future periods. Except
as otherwise indicated by the context, the terms the
Company or Continucare mean Continucare
Corporation and its consolidated subsidiaries. All references to
a fiscal year refer to the Companys fiscal
year which ends June 30. As used herein, Fiscal 2006 refers
to the fiscal year ending June 30, 2006, and Fiscal 2005
refers to the fiscal year ended June 30, 2005.
The balance sheet at June 30, 2005 has been derived from
the audited financial statements at that date but does not
include all of the information and notes required by accounting
principles generally accepted in the United States for complete
financial statements.
For further information, refer to the consolidated financial
statements and notes thereto included herein. These interim
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
to consolidated financial statements included in that report.
Certain reclassifications have been made to the prior year
amounts to conform to the current year presentation.
NOTE 2 GENERAL
Continucare Corporation is a provider of primary care physician
services on an outpatient basis in Florida. The Company provides
medical services to patients through employee physicians,
advanced registered nurse practitioners and physicians
assistants. Additionally, the Company provides practice
management services to independent physician affiliates
(IPAs). Substantially all of the Companys net
medical services revenues are derived from managed care
agreements with two health maintenance organizations, Humana
Medical Plans, Inc. (Humana) and Vista Healthplan of
South Florida, Inc. and its affiliated companies
(Vista) (collectively, the HMOs). The
Company was incorporated in 1996 as the successor to a Florida
corporation formed earlier in 1996.
In an effort to streamline operations and stem operating losses,
the Company implemented a plan to dispose of its home health
operations in December 2003. The home health disposition
occurred in three separate transactions and was concluded in
February 2004. As a result of these transactions, the operations
of the home health operations are shown as discontinued
operations in the Condensed Consolidated Statements of Cash
Flows.
Effective January 1, 2006, the Company entered into an
Independent Practice Association Participation Agreement (the
Risk IPA Agreement) with Humana under which the
Company agreed to assume certain management responsibilities on
a risk basis for Humanas Medicare and Medicaid members
assigned to 14 IPAs practicing in Miami-Dade and Broward
Counties, Florida. During the three-month period ended
March 31, 2006, medical service revenue and medical
services expenses related to the Risk IPA Agreement approximated
$4.4 million and $4.0 million, respectively. The Risk
IPA Agreement replaces the Physician Group Participation
Agreement with Humana (the Humana PGP Agreement)
that was terminated effective December 31, 2005. Under the
Humana PGP Agreement, the Company assumed certain management
responsibilities on a non-risk basis for Humanas Medicare,
Medicaid and commercial members assigned to selected primary
care physicians in Miami-Dade and Broward Counties, Florida.
Revenue from
FA-28
CONTINUCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
this contract consisted of a monthly management fee intended to
cover the costs of providing these services and amounted to
approximately $0.1 million and $0.4 million during the
three and nine-month periods ended March 31, 2005. The
Company anticipates that the higher claims loss ratio associated
with the 14 IPAs may result in an increase in the claims loss
ratio in future periods.
NOTE 3 STOCK-BASED COMPENSATION
The Amended and Restated Continucare Corporation 2000 Stock
Incentive Plan (the 2000 Stock Incentive Plan),
which was approved by the Companys shareholders, permits
the grant of stock options and restricted stock awards in
respect of up to 7,000,000 shares of common stock to the
Companys employees, directors, independent contractors and
consultants. Under the terms of the 2000 Stock Incentive Plan,
options are granted at the fair market value of the stock at the
date of grant and expire no later than 10 years after the
date of grant. Options granted under the plan generally vest
over four years, but the terms of the 2000 Stock Incentive Plan
provide for accelerated vesting if there is a change in control
of the Company. Historically, the Company has issued authorized
but previously unissued shares of common stock upon option
exercises. However, the Company does not have a policy regarding
the issuance or repurchase of shares upon option exercise or the
source of those shares. No restricted stock awards have been
issued under the 2000 Stock Incentive Plan.
Prior to July 1, 2005, the Company followed Accounting
Principles Board Opinion No. 25, (APB
No. 25), Accounting for Stock Issued to
Employees, and related Interpretations in accounting for
its employee stock options. Under APB No. 25, when the
exercise price of the Companys employee stock options
equaled or exceeded the market price of the underlying stock on
the date of grant, no compensation expense was recognized. Stock
options issued to independent contractors or consultants were
accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 123,
(SFAS No. 123), Accounting for
Stock-Based Compensation. For the three and nine-month
periods ended March 31, 2005, stock-based employee
compensation expense of approximately $0 and $0.3 million,
respectively, was recognized in the accompanying condensed
consolidated Statements of Income in accordance with APB
No. 25.
Effective July 1, 2005, the Company adopted
SFAS No. 123(R)
(SFAS No. 123(R)), Share-Based
Payment, which is a revision of SFAS No. 123,
using the modified prospective transition method. Under this
method, compensation cost recognized for the three and
nine-month periods ended March 31, 2006 includes:
(i) compensation cost for all share-based payments modified
or granted prior to, but not yet vested as of July 1, 2005,
based on the grant date fair value estimated in accordance with
the original provisions of SFAS No. 123, and
(ii) compensation cost for all share-based payments granted
subsequent to July 1, 2005, based on the grant date fair
value estimated in accordance with the provisions of
SFAS No. 123(R). Results for periods prior to
July 1, 2005 have not been restated.
The Company calculates the fair value for employee stock options
using a Black-Scholes option pricing model at the time the stock
options are granted and that amount is amortized over the
vesting period of the stock options, which is generally up to
four years. The fair value for employee stock options granted
during the three-month period ended March 31, 2006 was
calculated based on the following assumptions: risk-free
interest rate ranging from 4.76% to 5.01%; dividend yield of 0%;
weighted-average volatility factor of the expected market price
of the Companys common stock of 68.2%; and
weighted-average expected life of the options ranging from 3 to
6 years, depending on the vesting provisions of each
option. The fair value of employee stock options granted during
the nine-month period ended March 31, 2006 was calculated
based on the following assumptions: risk-free interest rate
ranging from 4.21% to 5.01%; dividend yield of 0%;
weighted-average volatility factor of the expected market price
of the Companys common stock of 71.4%; and
weighted-average expected life of the options ranging from 3 to
6 years, depending on the vesting provisions of each
option. The expected life of the options is based on the
historical exercise behavior of the Companys
FA-29
CONTINUCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employees. The expected volatility factor is based on the
historical volatility of the market price of the Companys
common stock as adjusted for certain events that management
deemed to be non-recurring and non-indicative of future events.
As a result of adopting SFAS No. 123(R) on
July 1, 2005, for the three and nine-month periods ended
March 31, 2006, the Companys income before income
taxes was lower by $0.3 million and $0.9 million,
respectively, and net income was lower by $0.2 million and
$0.6 million, respectively, than if it had continued to
account for share-based compensation under APB No. 25.
Basic and diluted earnings per share for the three and
nine-month periods ended March 31, 2006 would have been
$.03 and $.03 and $.10 and $.09, respectively, if the Company
had not adopted SFAS No. 123(R).
The adoption of SFAS No. 123(R) had no effect on cash
flow from operations and cash flow from financing activities for
the three and nine-month periods ended March 31, 2006.
SFAS No. 123(R) requires the tax benefits resulting
from tax deductions in excess of the compensation cost
recognized for options (excess tax benefits) to be classified as
financing cash flows. For the three and nine-month periods ended
March 31, 2006 and 2005, the Company had net operating loss
carryforwards and did not recognize any tax benefits resulting
from the exercise of stock options because the related tax
deductions would not have resulted in a reduction of income
taxes payable.
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to options
granted under the Companys stock option plans for the
three and nine-month periods ended March 31, 2005. For
purposes of this pro forma disclosure, the fair value of these
options was estimated at the date of grant using a Black-Scholes
option pricing model based on the following assumptions for the
nine-month period ended March 31, 2005: risk-free interest
rate of 4.25%; dividend yield of 0%; volatility factor of the
expected market price of the Companys common stock of
101.5% and a weighted-average expected life of the options of
10 years. There were no stock options granted during the
three-month period ended March 31, 2005. The Companys
pro forma information follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended | |
|
Nine-Months Ended | |
|
|
March 31, 2005 | |
|
March 31, 2005 | |
|
|
| |
|
| |
Net income as reported
|
|
$ |
1,471,455 |
|
|
$ |
4,718,881 |
|
Add:
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense reported in net
income
|
|
|
|
|
|
|
261,627 |
|
Deduct:
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense determined under
SFAS No. 123 for all awards
|
|
|
(511,061 |
) |
|
|
(1,139,446 |
) |
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
960,394 |
|
|
$ |
3,841,062 |
|
|
|
|
|
|
|
|
Basic net income per common share:
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
.03 |
|
|
$ |
.09 |
|
|
|
Pro forma
|
|
$ |
.02 |
|
|
$ |
.08 |
|
Diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
.03 |
|
|
$ |
.09 |
|
|
|
Pro forma
|
|
$ |
.02 |
|
|
$ |
.07 |
|
FA-30
CONTINUCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information related to the
Companys stock option activity for the nine-months ended
March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Nine-Months Ended | |
|
|
March 31, 2006 | |
|
|
| |
|
|
|
|
Weighted | |
|
|
Number of | |
|
Average | |
|
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
Outstanding at beginning of the period
|
|
|
3,814,000 |
|
|
$ |
1.22 |
|
Granted
|
|
|
695,000 |
|
|
|
2.42 |
|
Exercised
|
|
|
(714,696 |
) |
|
|
.83 |
|
Forfeited
|
|
|
(43,334 |
) |
|
|
1.81 |
|
|
|
|
|
|
|
|
Outstanding at end of the period
|
|
|
3,750,970 |
|
|
$ |
1.51 |
|
|
|
|
|
|
|
|
Exercisable at end of the period
|
|
|
1,805,884 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value per share of options granted during
the period
|
|
$ |
1.40 |
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value per share of options granted
during the nine-month period ended March 31, 2005 was $1.44.
The following table summarizes information about options
outstanding and exercisable at March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Weighted | |
|
Average | |
|
|
|
Weighted | |
|
Average | |
|
|
Number | |
|
Average | |
|
Remaining | |
|
Number | |
|
Average | |
|
Remaining | |
Range of Exercise Prices |
|
Outstanding | |
|
Exercise Price | |
|
Contractual Life | |
|
Exercisable | |
|
Exercise Price | |
|
Contractual Life | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
$1.61-$2.86
|
|
|
1,799,000 |
|
|
$ |
2.23 |
|
|
|
8.95 |
|
|
|
413,916 |
|
|
$ |
2.23 |
|
|
|
8.61 |
|
$ .35-$1.51
|
|
|
1,951,970 |
|
|
$ |
.85 |
|
|
|
6.91 |
|
|
|
1,391,968 |
|
|
$ |
.83 |
|
|
|
6.62 |
|
The total intrinsic value of options outstanding and options
exercisable was $4.5 million and $2.8 million,
respectively, at March 31, 2006. The total intrinsic value
of options exercised during the nine-month period ended
March 31, 2006 and 2005 was approximately $1.1 million
and $0.3 million, respectively.
As of March 31, 2006, there was $1.9 million of total
unrecognized compensation cost related to non-vested stock
options, which is expected to be recognized over a
weighted-average period of 2.2 years.
The Company has 760,000 warrants outstanding at March 31,
2006 which are exercisable through December 31, 2007, with
exercise prices ranging from $7.25 to $12.50 per share.
Shares of common stock have been reserved for future issuance at
March 31, 2006 as follows:
|
|
|
|
|
Warrants
|
|
|
760,000 |
|
Stock options
|
|
|
2,107,667 |
|
|
|
|
|
Total
|
|
|
2,867,667 |
|
|
|
|
|
NOTE 4 CREDIT FACILITY
Effective March 8, 2006, the Company obtained an extension
and amended the terms of its credit facility that provides for a
revolving loan to the Company (the Credit Facility).
The maturity date of the Credit Facility was extended until
September 30, 2007, the maximum amount available for
borrowing under the Credit Facility was increased to $5,000,000
and the interest rate under the Credit Facility was reduced to
the
FA-31
CONTINUCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sum of 2.5% plus the
30-day Dealer
Commercial Paper Rate. In addition, a financial covenant was
added to the Credit Facility requiring the Companys EBITDA
to exceed $1,500,000 on a trailing
12-month basis and the
financial covenant that previously required the Company to
maintain aggregate cash, unencumbered marketable securities and
other financial assets of at least $1,000,000 at any time during
which amounts were outstanding under the Credit Facility was
deleted. All other terms of the Credit Facility remained
substantially unchanged.
At March 31, 2006, there was no outstanding principal
balance on the Credit Facility. The interest rate under the
Credit Facility was 7.28% at March 31, 2006. All assets of
the Company serve as collateral for the Credit Facility.
NOTE 5 EARNINGS PER SHARE
A reconciliation of the denominator of the basic and diluted
earnings per share computation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended | |
|
Nine-Months Ended | |
|
|
March 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Basic weighted average number of shares outstanding
|
|
|
49,832,351 |
|
|
|
50,345,997 |
|
|
|
49,820,024 |
|
|
|
50,319,126 |
|
Dilutive effect of stock options
|
|
|
1,214,022 |
|
|
|
1,950,273 |
|
|
|
1,297,799 |
|
|
|
1,575,620 |
|
Dilutive effect of convertible debt
|
|
|
|
|
|
|
77,645 |
|
|
|
25,882 |
|
|
|
87,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average number of shares outstanding
|
|
|
51,046,373 |
|
|
|
52,373,915 |
|
|
|
51,143,705 |
|
|
|
51,982,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not included in calculation of diluted earnings per share as
impact is antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding
|
|
|
260,000 |
|
|
|
150,000 |
|
|
|
260,000 |
|
|
|
150,000 |
|
|
Warrants
|
|
|
760,000 |
|
|
|
760,000 |
|
|
|
760,000 |
|
|
|
760,000 |
|
NOTE 6 INCOME TAXES
The Company accounts for income taxes under FASB Statement
No. 109, Accounting for Income Taxes. Deferred
income tax assets and liabilities are determined based upon
differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse.
The Company recorded an income tax provision of
$0.8 million and $2.6 million for the three and
nine-month periods ended March 31, 2006, respectively. No
provision for income taxes was recorded for the three and
nine-month periods ended March 31, 2005 due primarily to
the utilization of prior year net operating loss carryforwards.
As a result of the utilization of deferred tax assets during the
three and nine-month periods ended March 31, 2005, the
valuation allowance for deferred tax assets was reduced by
$0.4 million and $1.4 million, respectively, to offset
income tax liabilities generated from operations. During the
fourth quarter of Fiscal 2005, the Company determined that no
valuation allowance for deferred tax assets was necessary and
decreased its valuation allowance by $10.2 million for
Fiscal 2005.
NOTE 7 CONTINGENCIES
The Company is involved in legal proceedings incidental to its
business that arise from time to time out of the ordinary course
of business including, but not limited to, claims related to the
alleged malpractice of employed and contracted medical
professionals, workers compensation claims and other
employee-related
FA-32
CONTINUCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
matters, and minor disputes with equipment lessors and other
vendors. The Company has recorded an accrual for claims, which
includes amounts for insurance deductibles and projected
exposure, based on managements estimate of the ultimate
outcome of such claims.
NOTE 8 ACQUISITION
On May 10, 2006, Continucare, entered into a definitive
Asset Purchase Agreement (the Agreement) with
Continucare MDHC, LLC (f/k/a CNU Blue 1, Inc.) a Florida
limited liability company and a wholly-owned subsidiary of the
Company (Buyer), CNU Blue 2, LLC, a Florida
limited liability company and a wholly-owned subsidiary of the
Company (Buyer LLC), Miami Dade Health and
Rehabilitation Services, Inc., a Florida corporation
(MDHRS), Miami Dade Health Centers, Inc., a Florida
corporation (Miami Dade), West Gables Open MRI
Services, Inc., a Florida corporation (West Dade),
Kent Management Systems, Inc. (Kent), Pelu
Properties, Inc., a Florida corporation (Pelu),
Peluca Investments, LLC, a Florida limited liability company
owned by the Owners (Peluca), and Miami Dade Health
Centers One, Inc., a Florida corporation (MDHC One, and,
collectively with MDHRS, Miami Dade, West Dade, Kent, Pelu and
Peluca, the MDHC Companies), MDHC Red, Inc., a
Florida corporation (Retain), and the principal
shareholders of each of the MDHC Companies (the
Owners). Upon the terms and subject to the
conditions of the Agreement, Buyer will acquire substantially
all of the assets and operations of the MDHC Companies and
assume certain liabilities of the MDHC Companies (the
Acquisition). The Acquisition is intended to qualify
as a tax-free reorganization under Section 368(a) of the
Internal Revenue Code of 1986, as amended.
Under the terms of the Agreement, at the Closing, the Company
will pay the MDHC Companies $5.0 million cash and issue to
the MDHC Companies 20.0 million shares of the
Companys common stock (the Shares). The
Company will also pay Owners an additional $1.0 million
cash on the first anniversary date of the Closing. In addition,
upon the terms and subject to the conditions of the Agreement,
following the Closing the Company will pay to Owners up to
$2.0 million based on the monthly payments in respect of
the MDHC Companies business operations received by the
Company or any of its subsidiaries from certain identified
third-party payors during the 14 day period commencing the
day after the Closing Date and make certain other payments to
Owners depending on the collection of certain receivables that
were fully reserved on the books of the MDHC Companies as of
December 31, 2005.
The Acquisition consideration, including acquisition costs, will
be allocated to the estimated fair values of assets acquired and
liabilities assumed as of the Closing Date. The Company expects
to fund estimated cash consideration payable to the MDHC
Companies and Owners with cash flow from operations or, if
necessary, borrowings under its Credit Facility. Consummation of
the Acquisition is contingent upon, among other things, the
requisite vote of the Companys shareholders approving the
issuance of Shares pursuant to the Agreement, the audit of the
MDHC Companies financial statements not reflecting any
material adverse audit adjustments from the MDHC Companies
unaudited financial statements and that such audited financial
statements reflect adjusted EBITDA of at least $6.0 million
for the year ended December 31, 2005, approval of the
transaction by certain regulatory and governmental authorities
and receipt of necessary third party consents.
FA-33
MDHC COMPANIES
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
Historical
|
|
|
|
Report of Independent Certified Public Accountants
|
|
FB-2 |
|
Combined Balance Sheets as of December 31, 2005 and 2004
|
|
FB-3 |
|
Combined Statements of Operations for the years ended
December 31, 2005, 2004 and 2003
|
|
FB-4 |
|
Combined Statements of Changes in Owners Deficit for the
years ended December 31, 2005, 2004 and 2003
|
|
FB-5 |
|
Combined Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
|
|
FB-6 |
|
Notes to Combined Financial Statements
|
|
FB-7 |
Unaudited
|
|
|
|
Condensed Combined Balance Sheets as of March 31, 2006 and
December 31, 2005
|
|
FB-15 |
|
Condensed Combined Statements of Operations for the three months
ended March 31, 2006 and 2005
|
|
FB-16 |
|
Condensed Combined Statements of Cash Flows for the three months
ended March 31, 2006 and 2005
|
|
FB-17 |
|
Notes to Condensed Combined Financial Statements
|
|
FB-18 |
FB-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Miami Dade Health Centers
Hialeah, Florida
We have audited the accompanying combined balance sheets of
Miami Dade Health Centers (the Group) as of
December 31, 2005 and 2004, and the related combined
statements of operations, changes in owners deficit and
cash flows for each of the three years in the period ended
December 31, 2005. These financial statements are the
responsibility of the Groups management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to
above present fairly, in all material respects, the financial
position of Miami Dade Health Centers as of December 31,
2005 and 2004, and the combined results of its operations and
its cash flows for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America.
|
|
|
/s/ MOORE, STEPHENS
LOVELACE, P.A.
|
|
Certified Public Accountants |
Orlando, Florida
July 14, 2006
FB-2
MIAMI DADE HEALTH CENTERS
COMBINED BALANCE SHEETS
December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
ASSETS |
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
261,290 |
|
|
$ |
1,067,310 |
|
|
Other receivables
|
|
|
70,499 |
|
|
|
12,189 |
|
|
Due from HMOs, net of a liability for incurred but not reported
medical claims expense of approximately $7,050,000 and
$2,149,000 and allowance for doubtful accounts of approximately
$3,267,000 and $3,000,000 at December 31, 2005 and 2004,
respectively
|
|
|
6,065,018 |
|
|
|
1,848,667 |
|
|
Prepaid expenses
|
|
|
251,815 |
|
|
|
267,487 |
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
6,648,622 |
|
|
|
3,195,653 |
|
PROPERTY AND EQUIPMENT, NET
|
|
|
6,345,647 |
|
|
|
5,398,091 |
|
DEFERRED FINANCING COSTS, NET
|
|
|
48,490 |
|
|
|
49,499 |
|
OTHER ASSETS, NET
|
|
|
20,106 |
|
|
|
5,957 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
13,062,865 |
|
|
$ |
8,649,200 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND OWNERS DEFICIT |
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
313,137 |
|
|
$ |
317,671 |
|
|
Bank overdraft
|
|
|
|
|
|
|
1,172,384 |
|
|
Accrued employee compensation and benefits
|
|
|
3,856,268 |
|
|
|
615,727 |
|
|
Accrued expenses and other liabilities
|
|
|
77,269 |
|
|
|
85,625 |
|
|
Due to owners
|
|
|
354,809 |
|
|
|
147,846 |
|
|
Income taxes payable
|
|
|
1,200,000 |
|
|
|
101,000 |
|
|
Notes payable
|
|
|
1,322,182 |
|
|
|
2,313,396 |
|
|
Current maturities of long-term debt
|
|
|
592,814 |
|
|
|
1,158,172 |
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
7,716,479 |
|
|
|
5,911,821 |
|
DEFERRED TAX LIABILITY
|
|
|
112,000 |
|
|
|
|
|
LONG-TERM DEBT, net of current maturities
|
|
|
5,885,541 |
|
|
|
4,634,732 |
|
OWNERS DEFICIT
|
|
|
(651,155 |
) |
|
|
(1,897,353 |
) |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND OWNERS DEFICIT
|
|
$ |
13,062,865 |
|
|
$ |
8,649,200 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
FB-3
MIAMI DADE HEALTH CENTERS
COMBINED STATEMENTS OF OPERATIONS
Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical services revenue, net
|
|
$ |
82,747,848 |
|
|
$ |
62,970,610 |
|
|
$ |
61,351,422 |
|
|
Other income
|
|
|
6,186 |
|
|
|
319,681 |
|
|
|
579,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUE
|
|
|
82,754,034 |
|
|
|
63,290,291 |
|
|
|
61,930,798 |
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical claims
|
|
|
56,719,927 |
|
|
|
43,896,681 |
|
|
|
42,733,640 |
|
|
|
Other direct costs
|
|
|
8,771,095 |
|
|
|
7,969,779 |
|
|
|
9,215,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,491,022 |
|
|
|
51,866,460 |
|
|
|
51,948,874 |
|
|
Administrative payroll and employee benefits
|
|
|
7,887,780 |
|
|
|
4,415,645 |
|
|
|
5,412,294 |
|
|
General and administrative
|
|
|
6,180,437 |
|
|
|
6,625,651 |
|
|
|
5,195,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OPERATING EXPENSES
|
|
|
79,559,239 |
|
|
|
62,907,756 |
|
|
|
62,557,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
3,194,795 |
|
|
|
382,535 |
|
|
|
(626,225 |
) |
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,978 |
|
|
|
13,648 |
|
|
|
12,969 |
|
|
Interest expense
|
|
|
(517,164 |
) |
|
|
(474,087 |
) |
|
|
(516,558 |
) |
|
Loss on disposal of property and equipment
|
|
|
(50,411 |
) |
|
|
(23,168 |
) |
|
|
(41,016 |
) |
|
Forgiveness of debt from related entities
|
|
|
|
|
|
|
|
|
|
|
(633,633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER INCOME (EXPENSE)
|
|
|
(565,597 |
) |
|
|
(483,607 |
) |
|
|
(1,178,238 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAX PROVISION
|
|
|
2,629,198 |
|
|
|
(101,072 |
) |
|
|
(1,804,463 |
) |
INCOME TAX PROVISION
|
|
|
1,383,000 |
|
|
|
109,000 |
|
|
|
19,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$ |
1,246,198 |
|
|
$ |
(210,072 |
) |
|
$ |
(1,823,463 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
FB-4
MIAMI DADE HEALTH CENTERS
COMBINED STATEMENTS OF CHANGES IN OWNERS DEFICIT
Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members | |
|
|
|
|
|
|
Contributed | |
|
Accumulated | |
|
Owners | |
|
|
Capital | |
|
Deficit | |
|
Deficit | |
|
|
| |
|
| |
|
| |
BALANCES AT JANUARY 1, 2003
|
|
$ |
1,655 |
|
|
$ |
134,527 |
|
|
$ |
136,182 |
|
NET LOSS
|
|
|
|
|
|
|
(1,823,463 |
) |
|
|
(1,823,463 |
) |
|
|
|
|
|
|
|
|
|
|
BALANCES AT DECEMBER 31, 2003
|
|
|
1,655 |
|
|
|
(1,688,936 |
) |
|
|
(1,687,281 |
) |
NET LOSS
|
|
|
|
|
|
|
(210,072 |
) |
|
|
(210,072 |
) |
|
|
|
|
|
|
|
|
|
|
BALANCES AT DECEMBER 31, 2004
|
|
|
1,655 |
|
|
|
(1,899,008 |
) |
|
|
(1,897,353 |
) |
NET INCOME
|
|
|
|
|
|
|
1,246,198 |
|
|
|
1,246,198 |
|
|
|
|
|
|
|
|
|
|
|
BALANCES AT DECEMBER 31, 2005
|
|
$ |
1,655 |
|
|
$ |
(652,810 |
) |
|
$ |
(651,155 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
FB-5
MIAMI DADE HEALTH CENTERS
COMBINED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
1,246,198 |
|
|
$ |
(210,072 |
) |
|
$ |
(1,823,463 |
) |
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including amortization of
deferred financing costs
|
|
|
446,531 |
|
|
|
386,619 |
|
|
|
397,322 |
|
|
|
Loss on disposal of property and equipment
|
|
|
50,411 |
|
|
|
23,168 |
|
|
|
41,016 |
|
|
|
Forgiveness of debt from related entities
|
|
|
|
|
|
|
|
|
|
|
633,633 |
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
(58,310 |
) |
|
|
(174 |
) |
|
|
112,876 |
|
|
|
|
Due from HMOs, net
|
|
|
(4,216,351 |
) |
|
|
(46,070 |
) |
|
|
(1,405,587 |
) |
|
|
|
Prepaid expenses and other current assets
|
|
|
1,523 |
|
|
|
(25,061 |
) |
|
|
139,373 |
|
|
|
|
Accounts payable
|
|
|
(4,534 |
) |
|
|
84,368 |
|
|
|
(11,860 |
) |
|
|
|
Accrued compensation and benefits
|
|
|
3,240,541 |
|
|
|
22,618 |
|
|
|
593,109 |
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
(8,356 |
) |
|
|
(118,160 |
) |
|
|
50,230 |
|
|
|
|
Income taxes payable
|
|
|
1,099,000 |
|
|
|
91,002 |
|
|
|
(168,544 |
) |
|
|
|
Deferred tax liability
|
|
|
112,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
1,908,653 |
|
|
|
208,238 |
|
|
|
(1,441,895 |
) |
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
24,000 |
|
|
Purchases of property and equipment
|
|
|
(1,440,746 |
) |
|
|
(960,857 |
) |
|
|
(1,653,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(1,440,746 |
) |
|
|
(960,857 |
) |
|
|
(1,629,616 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank overdraft
|
|
|
(1,172,384 |
) |
|
|
500,976 |
|
|
|
671,408 |
|
|
Proceeds from long-term debt
|
|
|
1,843,015 |
|
|
|
1,052,964 |
|
|
|
5,764,068 |
|
|
Payments on long-term debt
|
|
|
(1,157,564 |
) |
|
|
(1,110,142 |
) |
|
|
(2,992,043 |
) |
|
Payments for deferred financing costs
|
|
|
(2,743 |
) |
|
|
(11,666 |
) |
|
|
(54,122 |
) |
|
Changes in related-party payables
|
|
|
206,963 |
|
|
|
(129,221 |
) |
|
|
257,905 |
|
|
Proceeds from notes payable
|
|
|
|
|
|
|
1,874,000 |
|
|
|
|
|
|
Payments on notes payable
|
|
|
(991,214 |
) |
|
|
(904,116 |
) |
|
|
(156,488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
(1,273,927 |
) |
|
|
1,272,795 |
|
|
|
3,490,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(806,020 |
) |
|
|
520,176 |
|
|
|
419,217 |
|
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR
|
|
|
1,067,310 |
|
|
|
547,134 |
|
|
|
127,917 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS END OF YEAR
|
|
$ |
261,290 |
|
|
$ |
1,067,310 |
|
|
$ |
547,134 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
517,164 |
|
|
$ |
474,087 |
|
|
$ |
516,558 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$ |
191,524 |
|
|
$ |
18,177 |
|
|
$ |
191,524 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
FB-6
MIAMI DADE HEALTH CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
Miami Dade Health Centers (the Group) refers to the
combined presentation of the following entities:
|
|
|
Miami Dade Health & Rehabilitation Services, Inc., a
Florida corporation (MDHRS); |
|
|
Miami Dade Health Centers, Inc., a Florida corporation
(MDHC); |
|
|
West Gables Open MRI Services, Inc., a Florida corporation
(West Gables MRI); |
|
|
Miami Dade Health Centers One, Inc., a Florida corporation
(MDHC One); |
|
|
Pelu Properties, Inc., a Florida S corporation; |
|
|
Kent Management, Inc., a Florida corporation; |
|
|
Peluca Investments, LLC, a Florida limited liability company; and |
|
|
Miami Dade Clinical Transportation, LLC, a Florida limited
liability company wholly-owned by MDHRS, MDHC and MDHC One. |
These entities are presented herein on a combined basis based on
common control and ownership. The entities are also the subject
of the asset purchase agreement described in Note 9 of
these combined financial statements. All significant
inter-entity transactions have been eliminated in the
combination.
The Group is a provider of primary care physician services and
diagnostic imaging services on an outpatient basis in South
Florida. The Group provides medical services to patients through
employee and contractor physicians. Substantially all of the
Groups net medical services revenues are derived from
managed care agreements with four health maintenance
organizations, Humana Medical Plans, Inc. (Humana),
WellCare Health Plans, Inc. and its affiliated companies
Healthease and Staywell (Wellcare), Americhoice/
United Health Plans (Americhoice), and Vista
Healthplan of South Florida, Inc. and its affiliated companies
(Vista) (collectively, the HMOs).
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A summary of significant accounting policies followed by the
Group is as follows:
The preparation of combined financial statements in conformity
with accounting principles generally accepted in the United
States (U.S. GAAP) requires management to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses. Because of the
inherent uncertainties of this process, actual results could
differ from those estimates. Such estimates include, but are not
limited to, the recognition of revenue, the recoverability of
intangible assets, the collectibility of receivables, and the
accrual for incurred but not reported (IBNR) claims.
|
|
|
Cash and Cash Equivalents |
The Group defines cash and cash equivalents as those
highly-liquid investments purchased with an original maturity of
three months or less.
The HMOs pay medical claims and other costs on the Groups
behalf. Based on the terms of the contracts with the HMOs, the
Group receives a net payment from the HMOs that is calculated by
offsetting revenue earned with medical claims expense. Medical
claims expense is calculated as claims paid on the Groups
behalf plus the HMOs estimate of claims incurred but not
reported. Therefore, the amounts due
FB-7
MIAMI DADE HEALTH CENTERS
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
from HMOs are presented in the balance sheets net of the
estimated amounts for incurred but not reported medical claims.
Equipment, furniture, vehicles, buildings and leasehold
improvements are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the
related assets, which range from 3 to 40 years (see
Note 3). Leasehold improvements are amortized over the
underlying assets useful lives or the term of the lease,
whichever is shorter. Repairs and maintenance costs are expensed
as incurred. Improvements and replacements are capitalized.
Long-lived assets, including property and equipment, are
reviewed for impairment annually or more frequently if certain
indicators arise.
The Group provides services to patients on a fixed monthly fee
arrangement with HMOs. The Groups net medical services
revenue was derived from the following HMOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Humana
|
|
|
66.9% |
|
|
|
66.1% |
|
|
|
64.2% |
|
Vista
|
|
|
17.9% |
|
|
|
22.7% |
|
|
|
26.6% |
|
Wellcare
|
|
|
13.4% |
|
|
|
9.4% |
|
|
|
1.0% |
|
Americhoice
|
|
|
1.8% |
|
|
|
1.8% |
|
|
|
8.2% |
|
Under the Groups full-risk contracts with Humana, Wellcare
and Vista, the Group receives a fixed monthly fee from the HMOs
for each patient that chooses one of the Groups physicians
as their primary care physician. The fixed monthly fee is
typically based on a percentage of the premium received by the
HMOs from various payor sources. Revenue under these agreements
is recorded monthly at the rates then in effect, as determined
by the respective contract. As part of the Medicare Advantage
program, the Centers for Medicare Services (CMS)
periodically recomputes the premiums to be paid to the HMOs
based on an updated health status of participants and updated
demographic factors. The Group records any adjustments to this
revenue at the time that the information necessary to make the
determination of the adjustment is received from the HMO or CMS.
Under the Groups limited-risk and no-risk contracts with
HMOs, the Group receives a capitation fee based on the number of
patients for which the Group provides services on a monthly
basis.
Under the Groups full-risk agreements, the Group assumes
responsibility for the cost of all medical services provided to
the patient, even those it does not provide directly in exchange
for a percentage of premium or other capitated fee. To the
extent that patients require more frequent or expensive care
than was anticipated by the Group, revenue to the Group under a
contract may be insufficient to cover the cost of care provided.
When it is probable that expected future health care costs and
maintenance costs under a contract or group of existing
contracts will exceed anticipated capitated revenue on those
contracts, the Group recognizes losses on its prepaid health
care services with HMOs. No contracts were considered loss
contracts at December 31, 2005.
The Group contracts with or employs various health care
providers to provide medical services to its patients. Primary
care physicians are compensated on a salary basis for their
services to patients. Specialist physicians are paid on either a
salary capitation or hourly basis for their services to patients.
FB-8
MIAMI DADE HEALTH CENTERS
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
The cost of health care services provided or contracted for
under full-risk managed care contracts are accrued in the period
in which services are provided. In addition, the Group provides
for an estimate of the related liability for medical claims
incurred but not yet reported based on historical claims
experience and current factors, such as inpatient utilization
and benefit changes provided under HMO plans. Estimates are
adjusted as changes in these factors occur, and such adjustments
are reported in the year of determination.
|
|
|
Reinsurance (Stop-loss Insurance) |
Reinsurance premiums are reported as a health care cost and are
included in medical claims expense in the combined statements of
operations. Reinsurance recoveries are reported as a reduction
of related health care costs.
|
|
|
Other Comprehensive Income |
The Group had no comprehensive income items other than net
income for the years presented.
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated | |
|
|
|
|
|
|
Useful Lives | |
|
|
2005 | |
|
2004 | |
|
In Years | |
|
|
| |
|
| |
|
| |
Buildings
|
|
$ |
4,377,981 |
|
|
$ |
3,668,635 |
|
|
|
25-40 |
|
Land
|
|
|
612,675 |
|
|
|
404,175 |
|
|
|
|
|
Medical equipment
|
|
|
1,524,779 |
|
|
|
1,537,725 |
|
|
|
5 |
|
Transportation equipment
|
|
|
785,625 |
|
|
|
687,394 |
|
|
|
3-5 |
|
Office equipment and computers
|
|
|
223,231 |
|
|
|
207,373 |
|
|
|
3-5 |
|
Furniture
|
|
|
163,145 |
|
|
|
133,999 |
|
|
|
7-10 |
|
Leasehold improvements
|
|
|
169,697 |
|
|
|
146,571 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,857,133 |
|
|
|
6,785,872 |
|
|
|
|
|
Less accumulated depreciation
|
|
|
1,511,486 |
|
|
|
1,387,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
6,345,647 |
|
|
$ |
5,398,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2005,
2004 and 2003 was approximately $443,000, $374,000, and
$394,000, respectively.
NOTE 4 NOTES PAYABLE AND LONG-TERM
DEBT
Notes payable consist of the following at December 31, 2005
and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Noninterest-bearing notes payable to the HMOs due in periodic
payments within one year, balances may be offset against future
payments to the Group
|
|
$ |
574,500 |
|
|
$ |
1,233,666 |
|
Demand revolving line of credit to bank, interest at 1% over
prime, 8.25% and 6.25% at December 31, 2005 and 2004,
respectively, paid in monthly installments, collateralized by
real property and owners guarantees
|
|
|
747,682 |
|
|
|
1,079,730 |
|
|
|
|
|
|
|
|
|
|
$ |
1,322,182 |
|
|
$ |
2,313,396 |
|
|
|
|
|
|
|
|
FB-9
MIAMI DADE HEALTH CENTERS
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
The Group has several installment loans and notes collateralized
by mortgages and other security on corporate assets and assets
owned by the Groups principal shareholders. The loans and
notes mature through 2017. The following table outlines the
Groups debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity |
|
Interest | |
|
Original | |
|
|
|
Balance | |
|
Balance | |
Date |
|
Rate | |
|
Amount | |
|
Collateral |
|
12/31/05 | |
|
12/31/04 | |
|
|
| |
|
| |
|
|
|
| |
|
| |
06/30/2008
|
|
1% over Prime |
|
$ |
1,500,000 |
|
|
Real estate, corporate assets, and other real estate held by
owners |
|
$ |
1,318,750 |
|
|
$ |
1,393,750 |
|
06/21/2006
|
|
|
11% |
|
|
$ |
674,527 |
|
|
Corporate assets |
|
|
85,505 |
|
|
|
243,058 |
|
05/13/2009
|
|
|
7.015% |
|
|
$ |
310,000 |
|
|
Toshiba MRI equipment |
|
|
44,625 |
|
|
|
57,465 |
|
07/10/2006
|
|
1% over Prime |
|
$ |
199,280 |
|
|
Unsecured |
|
|
23,262 |
|
|
|
63,118 |
|
06/22/2008
|
|
|
4.75% |
|
|
$ |
89,210 |
|
|
Vehicle |
|
|
41,098 |
|
|
|
63,487 |
|
06/07/2008
|
|
|
7.49% |
|
|
$ |
144,930 |
|
|
Vehicle |
|
|
94,388 |
|
|
|
115,117 |
|
02/16/2011
|
|
|
7.75% |
|
|
$ |
174,694 |
|
|
Helical CT scanner |
|
|
155,009 |
|
|
|
|
|
12/15/2004
|
|
|
|
|
|
$ |
155,010 |
|
|
Helical CT scanner |
|
|
|
|
|
|
174,694 |
|
03/17/2009
|
|
|
6.50% |
|
|
$ |
878,000 |
|
|
Corporate assets |
|
|
202,682 |
|
|
|
251,304 |
|
03/05/2017
|
|
|
7% |
|
|
$ |
138,750 |
|
|
Real estate - 4930 E. 10 Ct. |
|
|
130,247 |
|
|
|
132,537 |
|
07/05/2013
|
|
|
6.25% |
|
|
$ |
3,801,622 |
|
|
Real estate - 3233 Palm Ave. |
|
|
3,738,252 |
|
|
|
2,816,574 |
|
10/31/2004
|
|
1% over Prime |
|
$ |
498,000 |
|
|
Real estate - 3233 Palm Ave. |
|
|
|
|
|
|
481,800 |
|
07/01/2017
|
|
|
7.25% |
|
|
$ |
652,000 |
|
|
Real estate - 442, 434, and 428 Washington Ave. |
|
|
644,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,478,355 |
|
|
|
5,792,904 |
|
Less current maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
592,814 |
|
|
|
1,158,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,885,541 |
|
|
$ |
4,634,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future maturities of long-term debt are as follows:
|
|
|
|
|
Years Ending December 31, |
|
Amount | |
|
|
| |
2006
|
|
$ |
592,814 |
|
2007
|
|
|
292,495 |
|
2008
|
|
|
1,403,965 |
|
2009
|
|
|
181,921 |
|
2010
|
|
|
194,375 |
|
Thereafter
|
|
|
3,812,785 |
|
|
|
|
|
|
|
$ |
6,478,355 |
|
|
|
|
|
FB-10
MIAMI DADE HEALTH CENTERS
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
NOTE 5 INCOME TAXES
The Group recorded an income tax expense of $1,383,000, $109,000
and $19,000, for the years ended December 31, 2005, 2004
and 2003, respectively. The income tax (benefit) provision
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
1,149,000 |
|
|
$ |
88,000 |
|
|
$ |
12,000 |
|
|
State
|
|
|
122,000 |
|
|
|
21,000 |
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,271,000 |
|
|
|
109,000 |
|
|
|
19,000 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
102,000 |
|
|
|
|
|
|
|
|
|
|
State
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
112,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$ |
1,383,000 |
|
|
$ |
109,000 |
|
|
$ |
19,000 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net effect of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The tax effects of temporary
differences that give rise to deferred tax assets and deferred
tax liabilities at December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Deferred tax asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacation accrual
|
|
$ |
126,000 |
|
|
$ |
103,000 |
|
|
$ |
90,000 |
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation difference
|
|
|
(238,000 |
) |
|
|
(103,000 |
) |
|
|
(44,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(112,000 |
) |
|
|
|
|
|
|
46,000 |
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(46,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$ |
(112,000 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Three of the entities comprising the Group are organized as
limited liability companies or an S corporation and have
elected to report their taxable income as pass-through entities.
Accordingly, the Group does not pay federal or state income
taxes on taxable income. Instead, their members or shareholders
are liable for individual income taxes on taxable income passed
through to them. As a result, these combined financial
statements include no provision or liability for income taxes
for these entities.
A valuation allowance is recorded to reduce the deferred tax
liabilities reported if, based on the weight of the evidence, it
is more likely than not that some portion or all of the deferred
tax liabilities will not be realized.
For the years ended December 31, 2005, 2004 and 2003, the
provision for income tax expense differs from amounts computed
at federal statutory rates primarily due to the unutilized
income or loss of pass through entities, state income taxes net
of federal benefit and permanent differences related to certain
travel and entertainment, and various other non-deductible
expenses.
FB-11
MIAMI DADE HEALTH CENTERS
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
NOTE 6 OWNERS CAPITAL ACCOUNTS
Contributed capital and its composition for the individual
entities comprising the Group for each of the years ended
December 31, 2005, 2004 and 2003, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
|
|
Additional | |
|
Total | |
|
|
|
|
| |
|
Contributed | |
|
Paid-In | |
|
Contributed | |
Entity |
|
Capital | |
|
# Shares | |
|
Amount | |
|
Capital | |
|
Capital | |
|
Capital | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Miami Dade Health & Rehabilitation Services, Inc.
|
|
Common Stock, no par value |
|
|
9,225,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Miami Dade Health Centers, Inc.
|
|
Common Stock, $1 par value |
|
|
100 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
100 |
|
West Gables Open MRI Services, Inc.
|
|
Common Stock, $5 par value |
|
|
100 |
|
|
|
500 |
|
|
|
|
|
|
|
500 |
|
|
|
1,000 |
|
Miami Dade Clinical Transportation, LLC
|
|
|
Membership Interest |
|
|
|
|
|
|
|
|
|
|
|
200 |
|
|
|
|
|
|
|
200 |
|
Miami Dade Health Centers One, Inc.
|
|
Common Stock, $1 par value |
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Pelu Properties, Inc.
|
|
Common Stock, $1 par value |
|
|
100 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
100 |
|
Kent Management, Inc.
|
|
Common Stock, $.01 par value |
|
|
4,500 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
45 |
|
Peluca Investments, LLC
|
|
|
Membership Interest |
|
|
|
|
|
|
|
|
|
|
|
200 |
|
|
|
|
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
755 |
|
|
$ |
400 |
|
|
$ |
500 |
|
|
$ |
1,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 RELATED-PARTY TRANSACTIONS
The Group had the following transactions with related parties:
Due to owners are advances to the Group for working capital
needs. The loans bear no interest and are due on demand. As of
December 31, 2005 and 2004, the balances on these loans
were $354,809 and $147,846, respectively.
Long-term debt includes a loan due to one of the Groups
owners for the purchase of medical equipment with a balance of
$155,009 at December 31, 2005. The owner secured a loan
from a financial institution in his name, which is
collateralized by medical equipment. The Groups repayment
terms to the owner are equivalent to the terms the owner has
with the financial institution.
During the year ended December 31, 2003, the Group forgave
a portion of notes receivable due from related entities in the
amount of $633,633. This is recorded as Forgiveness of
debt from owners on the combined statements of
operations.
The Group leases office space owned by shareholders or from
partnerships owned by shareholders (see Note 8).
NOTE 8 COMMITMENTS AND CONTINGENCIES
MDHRS was a defendant in a medical malpractice lawsuit, Porto V.
Hernandez and Miami Dade Health and Rehabilitation Services,
Inc., which was filed in 2003 in county court and in and for
Miami-Dade County, Florida. The case was settled subsequent to
December 31, 2005 in the amount of $31,000.
FB-12
MIAMI DADE HEALTH CENTERS
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
In 2004, West Gables MRI purchased an MRI machine for $576,000.
West Gables MRI initiated legal proceedings against the vendor
for a refund contending adequate technical support required to
operate the machine was not provided by the vendor. It cannot be
determined how this case will be resolved or if the machine has
any salvage value. Management believes the ultimate outcome of
these proceedings will not have a material effect on these
financial statements.
The Group is also involved in legal proceedings incidental to
its business that arise from time to time out of the ordinary
course of business including, but not limited to, claims related
to the alleged malpractice of employed and contracted medical
professionals, workers compensation claims and other
employee-related matters, and minor disputes with equipment
lessors and other vendors. These matters are currently in
various stages of litigation and there are inherent
uncertainties involved in determining the probability of
favorable or unfavorable outcomes. Accordingly, the financial
statements do not include any provision or accrual for possible
losses. Possible losses in excess of insurance coverage limits
could result in material adverse effects on the Groups
financial position.
Financial instruments, which potentially subject the Group to
concentrations of credit risk, consist principally of cash held
in financial institutions in excess of federally insured limits,
amounts due from HMOs and other receivables.
The Group leases office space and equipment under various
operating leases. Rent expense under such operating leases was
$990,570, $995,910 and $1,208,699 for the years ended
December 31, 2005, 2004 and 2003, respectively. Included in
these amounts is rent paid to related parties for office space,
which was approximately $64,000 for each of the years ended
December 31, 2005, 2004 and 2003. Future annual minimum
payments under leases as of December 31, 2005, are as
follows:
|
|
|
|
|
Year Ending December 31, |
|
Amount | |
|
|
| |
2006
|
|
$ |
254,179 |
|
2007
|
|
|
223,340 |
|
2008
|
|
|
180,318 |
|
2009
|
|
|
185,509 |
|
2010
|
|
|
52,762 |
|
|
|
|
|
|
|
$ |
896,108 |
|
|
|
|
|
NOTE 9 ACQUISITION
On May 10, 2006, the Group entered into a definitive Asset
Purchase Agreement (the Agreement) with Continucare
Corporation (Continucare), Continucare MDHC, LLC
(f/k/a CNU Blue 1, Inc.), a Florida limited liability
company, and a wholly-owned subsidiary of Continucare
(Buyer), CNU Blue 2, LLC, a Florida limited
liability company, and a wholly-owned subsidiary of Continucare,
MDHC Red, Inc., a Florida corporation (Retain), and
the principal shareholders of the MDHC Group (the
Owners). Upon the terms, and subject to the
conditions of the Agreement, Buyer will acquire substantially
all of the assets and operations of the Group and assume certain
liabilities of the Group (the Acquisition) and
certain members of the Group will merge with and into CNU
Blue 2, LLC immediately after such acquisition of assets
and assumption of such liabilities. The Acquisition is intended
to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as
amended.
FB-13
MIAMI DADE HEALTH CENTERS
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
Under the terms of the Agreement, at the Closing, Continucare
will pay to the Owners $5 million in cash and issue to the
Owners 20 million shares of Continucares common stock
(the Shares). Continucare will also pay to the
Owners an additional $1 million in cash on the first
anniversary date of the Closing. In addition, upon the terms and
subject to the conditions of the Agreement, following the
Closing, Continucare will pay to the Owners up to
$2 million based on the monthly payments in respect of the
Groups business operations received by Continucare or any
of its subsidiaries from certain identified third-party payors
during the 14-day
period commencing the day after the Closing Date and make
certain other payments to the Owners depending on the collection
of certain receivables that were fully reserved on the books of
the Group as of December 31, 2005.
Consummation of the Acquisition is contingent upon, among other
things, Continucares shareholders approving the issuance
of the shares pursuant to the Agreement, the audit of the
Groups financial statements not reflecting any material
adverse audit adjustments from the Groups unaudited
financial statements, the Groups audited financial
statements reflecting an adjusted EBITDA of at least
$6 million for the year ended December 31, 2005,
approval of the Acquisition by certain regulatory and
governmental authorities, and receipt of necessary third-party
consents.
FB-14
MIAMI DADE HEALTH CENTERS, INC. AND AFFILIATES
CONDENSED COMBINED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
936,574 |
|
|
$ |
261,290 |
|
|
Other receivables, net
|
|
|
136,677 |
|
|
|
70,499 |
|
|
Due from HMOs, net of a liability for incurred but not
reported medical claims expense of $2,981,466 and $7,050,000 and
allowance for doubtful accounts of $3,267,000 and $3,267,000 at
March 31, 2006 and December 31, 2005, respectively
|
|
|
3,290,197 |
|
|
|
6,065,018 |
|
|
Prepaid expenses and other current assets
|
|
|
311,337 |
|
|
|
251,815 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,674,785 |
|
|
|
6,648,622 |
|
|
Equipment, furniture and leasehold improvements, net
|
|
|
6,394,727 |
|
|
|
6,345,647 |
|
|
Deferred financing costs, net
|
|
|
48,240 |
|
|
|
48,490 |
|
|
Other assets, net
|
|
|
2,057 |
|
|
|
20,106 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
11,119,809 |
|
|
$ |
13,062,865 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND OWNERS DEFICIT |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
480,793 |
|
|
$ |
313,137 |
|
|
Accrued expenses and other current liabilities
|
|
|
60,025 |
|
|
|
77,269 |
|
|
Accrued employee compensation and benefits
|
|
|
861,643 |
|
|
|
3,856,268 |
|
|
Due to owners
|
|
|
178,548 |
|
|
|
354,809 |
|
|
Income taxes payable
|
|
|
1,166,797 |
|
|
|
1,200,000 |
|
|
Notes payable
|
|
|
2,324,500 |
|
|
|
1,322,182 |
|
|
Current maturities of long term debt
|
|
|
640,000 |
|
|
|
592,814 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,712,306 |
|
|
|
7,716,479 |
|
Deferred tax liability
|
|
|
112,000 |
|
|
|
112,000 |
|
Notes and loans payable, less current portion
|
|
|
5,667,265 |
|
|
|
5,885,541 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
11,491,571 |
|
|
|
13,714,020 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Owners deficit:
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,155 |
|
|
|
1,155 |
|
|
Additional paid-in-capital
|
|
|
500 |
|
|
|
500 |
|
|
Accumulated deficit
|
|
|
(373,417 |
) |
|
|
(652,810 |
) |
|
|
|
|
|
|
|
|
|
Total owners deficit
|
|
|
(371,762 |
) |
|
|
(651,155 |
) |
|
|
|
|
|
|
|
|
|
Total liabilities and owners equity
|
|
$ |
11,119,809 |
|
|
$ |
13,062,865 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements
FB-15
MIAMI DADE HEALTH CENTERS, INC. AND AFFILIATES
CONDENSED COMBINED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended | |
|
Three-Months Ended | |
|
|
March 31, | |
|
March 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
Revenue:
|
|
|
|
|
|
|
|
|
|
Medical services revenues, net
|
|
$ |
22,344,624 |
|
|
$ |
17,049,643 |
|
|
Other revenue
|
|
|
9,177 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
22,353,801 |
|
|
|
17,049,741 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Medical services:
|
|
|
|
|
|
|
|
|
|
|
Medical claims
|
|
|
16,298,081 |
|
|
|
11,421,580 |
|
|
|
Other direct costs
|
|
|
2,397,338 |
|
|
|
2,023,156 |
|
|
|
|
|
|
|
|
|
|
|
Total medical services
|
|
|
18,695,419 |
|
|
|
13,444,736 |
|
|
General and administrative
|
|
|
3,069,899 |
|
|
|
3,045,980 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
21,765,318 |
|
|
|
16,490,716 |
|
|
|
|
|
|
|
|
Income from operations
|
|
|
588,483 |
|
|
|
559,025 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
8,354 |
|
|
|
620 |
|
|
Interest expense
|
|
|
(131,144 |
) |
|
|
(118,296 |
) |
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
465,693 |
|
|
|
441,349 |
|
Income tax provision
|
|
|
186,300 |
|
|
|
175,000 |
|
|
|
|
|
|
|
|
Net income
|
|
|
279,393 |
|
|
|
266,349 |
|
Accumulated deficit January 1, 2005
|
|
|
(652,810 |
) |
|
|
(1,899,008 |
) |
|
|
|
|
|
|
|
Accumulated deficit March 31,
|
|
$ |
(373,417 |
) |
|
$ |
(1,632,659 |
) |
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements
FB-16
MIAMI DADE HEALTH CENTERS, INC. AND AFFILIATES
CONDENSED COMBINED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months | |
|
Three-Months | |
|
|
Ended | |
|
Ended | |
|
|
March 31, | |
|
March 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
279,393 |
|
|
$ |
266,349 |
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including amortization of
deferred financing costs
|
|
|
124,745 |
|
|
|
110,945 |
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
(66,178 |
) |
|
|
12,189 |
|
|
|
|
Due from HMOs, net
|
|
|
2,774,821 |
|
|
|
(365,778 |
) |
|
|
|
Prepaid expenses and other assets
|
|
|
(41,473 |
) |
|
|
(101,757 |
) |
|
|
|
Accounts payable
|
|
|
121,056 |
|
|
|
(424,504 |
) |
|
|
|
Accrued compensation and benefits
|
|
|
(2,994,625 |
) |
|
|
200,275 |
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
(17,244 |
) |
|
|
(48,813 |
) |
|
|
|
Deferred taxes
|
|
|
(33,203 |
) |
|
|
|
|
|
|
|
Accrued income taxes
|
|
|
|
|
|
|
(101,146 |
) |
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
147,292 |
|
|
|
(452,240 |
) |
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(173,575 |
) |
|
|
(292,029 |
) |
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(173,575 |
) |
|
|
(292,029 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long term debt
|
|
|
|
|
|
|
422,700 |
|
|
|
Payments on long term debt
|
|
|
(124,490 |
) |
|
|
(175,872 |
) |
|
|
Related party payables
|
|
|
(176,261 |
) |
|
|
(69,298 |
) |
|
|
Proceeds from notes payable
|
|
|
1,002,318 |
|
|
|
|
|
|
|
Payments on notes payable
|
|
|
|
|
|
|
(462,119 |
) |
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
701,567 |
|
|
|
(284,589 |
) |
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
675,284 |
|
|
|
(1,028,858 |
) |
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR
|
|
|
261,290 |
|
|
|
1,067,310 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS END OF YEAR
|
|
$ |
936,574 |
|
|
$ |
38,452 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
131,144 |
|
|
$ |
118,296 |
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$ |
199,850 |
|
|
$ |
101,146 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements
FB-17
MDHC COMPANIES
Notes to Condensed Combined Financial Statements
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The unaudited condensed combined financial statements included
herein have been prepared in accordance with the requirements of
Regulation S-B
and, therefore, omit or condense certain footnotes and other
information normally included in financial statements prepared
in accordance with accounting principles generally accepted in
the United States of America. In the opinion of management, all
adjustments (including all normal recurring adjustments)
necessary for a fair presentation of the financial information
for the interim periods reported have been made.
Miami-Dade Health Centers (the Group) refers to the
combined presentation of the following entities:
|
|
|
Miami Dade Health & Rehabilitation Services, Inc., a
Florida corporation (MDHRS); |
|
|
Miami Dade Health Centers, Inc., a Florida corporation
(MDHC); |
|
|
West Gables Open MRI Services, Inc., a Florida corporation
(West Gables MRI); |
|
|
Miami Dade Health Centers One, Inc., a Florida corporation
(MDHC One); |
|
|
Pelu Properties, Inc., a Florida S corporation
(Pelu); |
|
|
Kent Management, Inc., a Florida corporation; |
|
|
Peluca Investments, LLC, a Florida limited liability company
(Peluca); and |
|
|
Miami Dade Clinical Transportation, LLC, a Florida limited
liability company, wholly-owned by MDHRS, MDHC and MDHC One. |
These entities are presented herein on a combined basis based on
common control and ownership. The entities are also the subject
of the asset purchase agreement described in Note 8. All
significant inter-entity transactions have been eliminated in
the combination.
The Group is a provider of primary care physician services and
diagnostic imaging services on an outpatient basis in South
Florida. The Group provides medical services to patients through
employee and contractor physicians, advanced registered nurse
practitioners and physicians assistants. Substantially all
of the Groups net medical services revenues are derived
from managed care agreements with four health maintenance
organizations, Humana Medical Plans, Inc. (Humana)
WellCare Health Plans, Inc. and its affiliated companies,
Staywell and HealthEase, (Wellcare), Americhoice/
United Health Plans (Americhoice), and Vista
Healthplan of South Florida, Inc. and its affiliated companies
(Vista) (collectively, the HMOs).
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A summary of significant accounting policies followed by the
Group is as follows:
The preparation of combined financial statements in conformity
with accounting principles generally accepted in the United
States (U.S. GAAP) requires management to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses. Because of the
inherent uncertainties of this process, actual results could
differ from those estimates. Such estimates include the
recognition of revenue, the recoverability of intangible assets,
the collectibility of receivables, and the accrual for incurred
but not reported (IBNR) claims.
|
|
|
Cash and Cash Equivalents |
The Group defines cash and cash equivalents as those
highly-liquid investments purchased with an original maturity of
three months or less.
FB-18
MDHC COMPANIES
Notes to Condensed Combined Financial Statements
(Continued)
The HMOs pay medical claims and other costs on the Groups
behalf. Based on the terms of the contracts with the HMOs, the
Group receives a net payment from the HMOs that is calculated by
offsetting revenue earned with medical claims expense,
calculated as claims paid on the Groups behalf plus the
HMOs estimate of claims incurred but not reported.
Therefore, the amounts due from HMOs are presented in the
balance sheet net of the estimated amounts for IBNR medical
claims.
Equipment, furniture, transportation equipment, buildings and
leasehold improvements are stated at cost. Depreciation is
computed using the straight-line method over the estimated
useful lives of the related assets, which range from three to
forty years (see Note 3). Leasehold improvements are
amortized over the underlying assets useful lives or the
term of the lease, whichever is shorter. Repairs and maintenance
costs are expensed as incurred. Improvements and replacements
are capitalized.
Long-lived assets, including property and equipment are reviewed
for impairment annually or more frequently if certain indicators
arise.
The Group provides services to patients on either a fixed
monthly fee arrangement with HMOs or under a fee for service
arrangement. Total medical services net revenue from continuing
operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Humana
|
|
|
67.1 |
% |
|
|
66.5 |
% |
Vista
|
|
|
18.9 |
% |
|
|
18.2 |
% |
Wellcare
|
|
|
12.5 |
% |
|
|
13.5 |
% |
Americhoice
|
|
|
1.5 |
% |
|
|
1.8 |
% |
Under the Groups full risk contracts with Humana, Wellcare
and Vista, the Group receives a fixed monthly fee from the HMOs
for each patient that chooses one of the Groups physicians
as their primary care physician. The fixed monthly fee is
typically based on a percentage of the premium received by the
HMOs from various payor sources. Revenue under these agreements
is generally recorded in the period services are rendered at the
rates then in effect as determined by the respective contract.
As part of the Medicare Advantage program, the Centers for
Medicare Services (CMS) periodically recomputes the
premiums to be paid to the HMOs based on updated health status
of participants and updated demographic factors. The Group
records any adjustments to this revenue at the time that the
information necessary to make the determination of the
adjustment is received from the HMO or CMS.
Under the Groups limited risk and no-risk contracts with
HMOs, the Group receives a capitation fee based on the number of
patients for which the Group provides services on a monthly
basis. The capitation fee is recorded as revenue in the period
in which services are provided as determined by the respective
contract.
Under the Groups full risk agreements, the Group assumes
responsibility for the cost of all medical services provided to
the patient, even those it does not provide directly in exchange
for a percentage of premium or other capitated fee. To the
extent that patients require more frequent or expensive care
than was anticipated by the Group, revenue to the Group under a
contract may be insufficient to cover the costs of care
provided. When it is probable that expected future health care
costs and maintenance costs under a contract or group of
existing contracts will exceed anticipated capitated revenue on
those contracts, the Group recognizes losses on its prepaid
health care services with HMOs. No contracts were considered
loss contracts at
FB-19
MDHC COMPANIES
Notes to Condensed Combined Financial Statements
(Continued)
March 31, 2006 and December 31, 2005 because the Group
has the right to terminate unprofitable physicians and close
unprofitable centers under its managed care contracts.
The Group contracts with or employs various health care
providers to provide medical services to its patients. Primary
care physicians are compensated on a salary basis for their
services to patients. Specialist physicians are paid on either a
salary capitation, or hourly basis for their services to
patients.
The cost of health care services provided or contracted for
under full risk managed care contracts are accrued in the period
in which services are provided. In addition, the Group provides
for an estimate of the related liability for medical claims
incurred but not yet reported based on historical claims
experience and current factors such as inpatient utilization and
benefit changes provided under HMO plans. Estimates are adjusted
as changes in these factors occur and such adjustments are
reported in the year of determination.
|
|
|
Reinsurance (stop-loss insurance) |
Reinsurance premiums are reported as a health care cost and are
included in medical service expense in the Condensed Combined
Statements of Operations. Reinsurance recoveries are reported as
a reduction of related health care costs.
|
|
|
Other Comprehensive Income |
The Group had no comprehensive income items other than net
income for the periods presented.
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated | |
|
|
|
|
|
|
Useful Lives | |
|
|
31-Mar-06 | |
|
31-Dec-05 | |
|
In Years | |
|
|
| |
|
| |
|
| |
Buildings
|
|
$ |
4,509,217 |
|
|
$ |
4,377,981 |
|
|
|
25-40 |
|
Land
|
|
|
612,675 |
|
|
|
612,675 |
|
|
|
|
|
Medical equipment
|
|
|
1,528,279 |
|
|
|
1,524,779 |
|
|
|
5 |
|
Transportation equipment
|
|
|
794,365 |
|
|
|
785,625 |
|
|
|
3-5 |
|
Office equipment and computers
|
|
|
223,231 |
|
|
|
223,231 |
|
|
|
3-5 |
|
Furniture
|
|
|
164,494 |
|
|
|
163,145 |
|
|
|
7-10 |
|
Leasehold improvements
|
|
|
198,447 |
|
|
|
169,697 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,030,708 |
|
|
|
7,857,133 |
|
|
|
|
|
Less accumulated depreciation
|
|
|
1,635,981 |
|
|
|
1,511,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,394,727 |
|
|
$ |
6,345,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the three month periods ended
March 31, 2006 and 2005 was approximately $124,495, and
$110,695, respectively.
FB-20
MDHC COMPANIES
Notes to Condensed Combined Financial Statements
(Continued)
NOTE 4 NOTES PAYABLE AND LONG-TERM DEBT
Notes payable consists of the following at March 31, 2006
and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
Balance | |
|
Balance | |
|
|
03/31/06 | |
|
12/31/05 | |
|
|
| |
|
| |
Non-interest bearing notes payable to HMOs due in periodic
payments within one year, balances may be offset against future
payments to the Group
|
|
$ |
574,500 |
|
|
$ |
574,500 |
|
Demand revolving line of credit to bank, interest at 1% over
prime, paid in monthly installments, secured by real property
and owners guarantees
|
|
|
1,750,000 |
|
|
|
747,682 |
|
|
|
|
|
|
|
|
|
|
$ |
2,324,500 |
|
|
$ |
1,322,182 |
|
|
|
|
|
|
|
|
The Group has several installment loans and notes collateralized
by mortgages and other security on corporate assets and assets
owned by the Groups principal shareholders. The loans and
notes mature through 2017. The following table outlines the
Groups debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original | |
|
|
|
Balance | |
|
Balance | |
Maturity Date |
|
Interest Rate |
|
Amount | |
|
Secured |
|
3/31/2006 | |
|
12/31/2005 | |
|
|
|
|
| |
|
|
|
| |
|
| |
6/30/2008
|
|
1% over Prime |
|
|
1,500,000 |
|
|
Real Estate owed by Officers |
|
|
1,300,000 |
|
|
|
1,318,750 |
|
6/21/2006
|
|
11% |
|
|
674.527 |
|
|
Corporate Assets |
|
|
43,287 |
|
|
|
85,505 |
|
5/13/2009
|
|
7.015 |
|
|
310.000 |
|
|
Toshiba MRI Equipment |
|
|
41,493 |
|
|
|
44,625 |
|
7/10/2006
|
|
1% over Prime |
|
|
199.280 |
|
|
Unsecured |
|
|
13,299 |
|
|
|
23,262 |
|
6/22/2008
|
|
4.75% |
|
|
89,210 |
|
|
2003 Mercedes Benz |
|
|
35,436 |
|
|
|
41,098 |
|
6/7/2008
|
|
7.49% |
|
|
144,930 |
|
|
2003 Mercedes Benz |
|
|
88,959 |
|
|
|
94,388 |
|
2/16/2011
|
|
7.75% |
|
|
174,694 |
|
|
Helical CT Scanner. |
|
|
148,820 |
|
|
|
155,009 |
|
3/17/2009
|
|
6.50% |
|
|
878,000 |
|
|
Corporate assets |
|
|
153,037 |
|
|
|
202,682 |
|
3/5/2017
|
|
7% |
|
|
138,750 |
|
|
Real Estate 4930 E. l0 Ct. |
|
|
129,580 |
|
|
|
130,247 |
|
7/5/2013
|
|
6.25% |
|
|
3,801,622 |
|
|
Real Estate 3233 Palm Ave. |
|
|
3,712,475 |
|
|
|
3,738,252 |
|
7/1/2017
|
|
7.25% |
|
|
652,000 |
|
|
R/ E 442, 434 & 428 Washington Ave. Homestead |
|
|
640,879 |
|
|
|
644,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
|
|
|
|
|
|
|
|
6,307,265 |
|
|
|
6,478,355 |
|
Less: current maturities
|
|
|
|
|
|
|
|
|
|
|
640,000 |
|
|
|
592,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
|
|
|
|
|
|
|
|
$ |
5,667,265 |
|
|
$ |
5,885,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 INCOME TAXES
The Group accounts for income taxes under FASB Statement
No. 109, Accounting for Income Taxes.
Deferred income tax assets and liabilities are determined based
upon differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse.
The Group recorded an income tax expense of $186,300 and
$175,000 for the three months ended March 31, 2006 and
2005, respectively and $1,383,000 for the year ended
December 31, 2005.
FB-21
MDHC COMPANIES
Notes to Condensed Combined Financial Statements
(Continued)
Deferred income taxes of $112,000 reflect the net effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes.
Three of the entities comprising the Group are organized as
limited liability companies or an
S-corporation and have
elected to report their taxable income as pass-through entities.
Accordingly, the Group does not pay federal or state income
taxes on the taxable income of Pelu, Peluca or Miami Dade
Clinical Transportation, LLC. Instead, their members or
shareholders are liable for individual income taxes on taxable
income passed through to them. As a result, these combined
financial statements include no provision or liability for
income taxes for these entities.
NOTE 6 RELATED PARTY TRANSACTIONS
The Group had the following transactions with related parties:
Due to owners are advances to the Group for working capital
needs. The loans bear no interest and are due on demand. As of
March 31, 2006 and December 31, 2005, these loans were
included with current liabilities and amounted to $178,548 and
$354,809 respectively.
Long-term debt includes a loan due to one of the Groups
owners for the purchase of medical equipment with a balance of
$148,820 and $155,009 at March 31, 2006 and
December 31, 2005, respectively. The owner secured a loan
from a financial institution in his name, which is
collateralized by the medical equipment. The Groups
repayment terms to the owner are the equivalent to the terms the
owner has with the bank.
The Group leases office space owned by shareholders or from
partnerships owned by shareholders.
NOTE 7 COMMITMENTS AND CONTINGENCIES
MDHRS was a defendant in a medical malpractice lawsuit,
PORTO v. HERNANDEZ and MIAMI DADE HEALTH AND REHABILITATION
SERVICES, INC., which was filed in 2003 in county court and in
and for Miami-Dade County, Florida. The case was settled
subsequent to December 31, 2005 in the amount of $31,000.
This amount has been accrued and is included in accounts payable
at March 31, 2006.
In 2004, West Gables MRI purchased an MRI machine for $576,000.
West Gables MRI initiated legal proceedings against the vendor
to refund their money contending adequate technical support
required to operate the machine was not provided by the vendor.
It cannot be determined how this case will be resolved or if the
machine has any salvage value. Management believes the ultimate
outcome of these proceedings will not have a material effect on
the financial statements.
The Group is also involved in legal proceedings incidental to
its business that arise from time to time out of the ordinary
course of business including, but not limited to, claims related
to the alleged malpractice of employed and contracted medical
professionals, workers compensation claims and other
employee-related matters, and minor disputes with equipment
lessors and other vendors. These matters are currently in
various stages of litigation and there are inherent
uncertainties involved in determining the probability of
favorable or unfavorable outcomes. Accordingly, the financial
statements do not include any provision or accrual for possible
losses. Possible losses in excess of insurance coverage limits
could result in material adverse effects on the Groups
financial position.
Financial instruments, which potentially subject the Group to
concentrations of credit risk, consist principally of cash held
in financial institutions in excess of federally insured limits.
FB-22
MDHC COMPANIES
Notes to Condensed Combined Financial Statements
(Continued)
On May 10, 2006, the Group entered into a definitive Asset
Purchase Agreement (the Agreement) with Continucare
Corporation (Continucare) and the principal
shareholders of the MDHC Group (the Owners). Upon
the terms and subject to the conditions of the Agreement, Buyer
will acquire substantially all of the assets and operations of
the Group and assume certain liabilities of the Group (the
Acquisition). The Acquisition is intended to qualify
as a tax-free reorganization under Section 368(a) of the
Internal Revenue Code of 1986, as amended.
Under the terms of the Agreement, at the Closing, Continucare
will pay to the Group $5.0 million cash and issue to the
Group 20.0 million shares of Continucares common
stock (the Shares). Continucare will also pay to the
Owners an additional $1.0 million cash on the first
anniversary date of the Closing. In addition, upon the terms and
subject to the conditions of the Agreement, following the
Closing, Continucare will pay to the Owners up to
$2.0 million based on the monthly payments in respect of
the Groups business operations received by Continucare or
any of its subsidiaries from certain identified third-party
payors during the 14 day period commencing the day after
the Closing Date and make certain other payments to the Owners
depending on the collection of certain receivables that were
fully reserved on the books of the Group as of December 31,
2005.
Consummation of the Acquisition is contingent upon, among other
things, Continucares shareholders approving the issuance
of the Shares pursuant to the Agreement, the audit of the
Groups financial statements not reflecting any material
adverse audit adjustments from the Groups unaudited
financial statements, the Groups audited financial
statements reflecting an adjusted EBITDA of at least
$6.0 million for the year ended December 31, 2005,
approval of the Acquisition by certain regulatory and
governmental authorities and receipt of necessary third party
consents.
FB-23
ANNEX A
ASSET PURCHASE AGREEMENT
Dated as of May 10, 2006
Among
CONTINUCARE CORPORATION
and
THE OTHER PARTIES LISTED ON THE SIGNATURE PAGES HERETO
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of May 10, 2006,
among Continucare Corporation, a Florida corporation
(CNU) CNU Blue 1, Inc., a Florida corporation
and a wholly-owned subsidiary of CNU (Buyer),
CNU Blue 2, LLC, a Florida limited liability company and a
wholly-owned subsidiary of Buyer (Buyer LLC),
Miami Dade Health and Rehabilitation Services, Inc., a Florida
corporation (MDHRS), Miami Dade Health
Centers, Inc., a Florida corporation (MDHC),
West Gables Open MRI Services, Inc., a Florida corporation
(West Dade), Kent Management Systems, Inc.
(Kent), Pelu Properties, Inc., a Florida
corporation (Pelu), Peluca Investments, LLC,
a Florida limited liability company owned by the Owners
(Peluca), and Miami Dade Health Centers One,
Inc., a Florida corporation (MDHC One, and,
collectively with MDHRS, MDHC, West Dade, Kent, Pelu and Peluca,
the Sellers), MDHC Red, Inc., a Florida
corporation (Retain), and each of the
shareholders of each Seller listed on the signature pages hereto
(the Owners).
WHEREAS, Sellers are engaged in the business of providing
primary health care services and the selected specialty health
care services set forth on Schedule A at five
clinical locations in Miami-Dade County, Florida, and related
transportation, diagnostic and administrative support services
(the Business); and
WHEREAS, Buyer is a wholly-owned subsidiary of CNU and
Buyer LLC is wholly-owned by Buyer and is a disregarded entity
for federal income tax purposes under Code Section 7701; and
WHEREAS, Sellers desire to sell, and the Owners desire to
cause Sellers to sell to Buyer, and Buyer desires to purchase
from Sellers, on a going concern basis, substantially all of the
assets, properties and business of the Business, all on the
terms and subject to the conditions set forth herein; and
WHEREAS, immediately after the foregoing transactions,
Retain shall assume all of the Excluded Liabilities from Sellers
and thereafter each Seller other than Pelu and Peluca shall
merge with and into Buyer LLC with Buyer LLC as the surviving
entity of such mergers (the Merger); and
WHEREAS, contemporaneous with the execution and delivery
of this Agreement, certain shareholders of CNU have entered into
agreements (the Voting Agreements) to vote
their respective shares of CNU Common Stock in favor of the
issuance of the CNU Shares pursuant to this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants
and agreements hereinafter set forth, it is hereby agreed among
Sellers, Retain, the Owners, Buyer, Buyer LLC, and CNU as
follows:
ARTICLE I
DEFINITIONS
1.1. Definitions. In this Agreement, the following
terms have the meanings specified or referred to in this
Section 1.1 and shall be equally applicable to both
the singular and plural forms.
Accounting Firm has the meaning set
forth in Section 3.2(d).
Adjusted EBITDA has the meaning set
forth in Section 7.13.
Affiliate means, with respect to any
Person, any other Person who is a Family Member of such Person
or which directly or indirectly controls, is controlled by or is
under common control with such Person.
Agreed Adjustments has the meaning set
forth in Section 3.2(c).
Agreement and Plan of Merger means the
Agreement and Plan of Merger relating to the Merger
substantially in the form of Exhibit A, as the same
may be amended as a result of any determination pursuant to
Section 7.5.
Articles of Merger has the meaning
specified in Section 2.5(c).
Assumed Liabilities has the meaning
specified in Section 2.3.
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Auditor means Moore, Stephens,
Lovelace, P.A..
Balance Sheet means the unaudited
combined balance sheet of Sellers as of the Balance Sheet Date
included in Schedule 5.4.
Balance Sheet Date means
December 31, 2005.
Business has the meaning specified in
the recitals to this Agreement.
Business Day means any day that is
neither a Saturday, nor a Sunday nor a day on which state or
federally chartered banking institutions in New York, New York
are not required to be open.
Business Property means any real or
personal property, plant, building, facility, structure,
equipment or unit, or other asset owned, leased or operated by
any Seller in the conduct of the Business.
Buyer has the meaning specified in the
first paragraph of this Agreement.
Buyer Ancillary Agreements means all
agreements, instruments and documents being or to be executed
and delivered by Buyer or Buyer LLC under this Agreement or in
connection herewith.
Buyer Group Member means CNU and its
Affiliates and their respective successors and assigns.
Buyer LLC has the meaning specified in
the first paragraph of this Agreement.
CERCLA means the Comprehensive
Environmental Response, Compensation and Liability Act, 42
U.S.C. §§ 9601 et seq.
Claim Notice has the meaning specified
in Section 8.3(a).
Closing means the closing of the
transfer of the Purchased Assets from Sellers to Buyer and
Buyers assumption of the Assumed Liabilities.
Closing Date has the meaning specified
in Section 4.1.
Closing Date Cash Payment has the
meaning specified in Section 3.1.
Closing Date Working Capital has the
meaning specified in Section 3.3(a).
CNU SEC Documents has the meaning
specified in Section 6.5.
CNU Common Stock means the common
stock, par value $.0001 per share, of CNU.
CNU Shares means 20,000,000 shares of
CNU Common Stock. If, between the date of this Agreement and the
Closing Date, CNU shall effect any reclassification,
recapitalization, stock split, combination, or exchange of the
CNU Common Stock, or a stock dividend or dividend payable in any
other securities shall be declared with a record date occurring
within such period, or any similar event shall have occurred,
then the CNU Shares shall be appropriately adjusted to give
effect to such reclassification, recapitalization, stock split,
combination, or exchange, dividend or other event.
COBRA Beneficiary has the meaning
specified in Section 7.4(g).
Code means the Internal Revenue Code
of 1986, as amended from time to time.
Copyrights means United States and
foreign copyrights and mask works (as defined in 17 U.S.C.
§ 901), whether registered or unregistered, and pending
applications to register the same.
Court Order means any judgment, order,
award or decree of any foreign, federal, state, local or other
court or tribunal and any award in any arbitration proceeding.
Encumbrance means any lien (statutory
or other), claim, charge, security interest, mortgage, deed of
trust, pledge, hypothecation, assignment, conditional sale or
other title retention agreement, preference, priority or other
security agreement or preferential arrangement of any kind or
nature, and any easement, encroachment, covenant, restriction,
right of way, defect in title or other encumbrance of any kind.
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Environmental Laws means any federal,
state or local law, statute, ordinance, rule or regulation
governing pollution, contamination, protection of the
environment, human health or safety, or safety of employees,
sanitation or any matters relating to emissions, discharges,
disseminations, releases or threatened releases of Hazardous
Materials into the air (indoor and outdoor), surface water,
groundwater, soil, land surface or subsurface, buildings,
facilities, real or personal property or fixtures or otherwise
arising out of, relating to, or resulting from the manufacture,
processing, distribution, use, treatment, storage, disposal,
transport, handling, release or threatened release of Hazardous
Materials (collectively Environmental Matters) as
the same have been or may be amended from time to time,
including, without limitation, CERCLA and any common law cause
of action providing any right or remedy relating to
Environmental Matters, and all applicable judicial and
administrative decisions, order and decrees relating to
Environmental Matters.
Escrow Agent means the escrow agent
serving under the Escrow Agreement.
Escrow Agreement means the Escrow
Agreement substantially in the form of Exhibit B.
Escrow Funds has the meaning specified
in Section 4.2.
ERISA means the Employee Retirement
Income Security Act of 1974, as amended.
Excluded Assets has the meaning
specified in Section 2.2.
Excluded Liabilities has the meaning
specified in Section 2.4.
Excluded Real Property has the meaning
specified in Section 2.2(b).
Expenses means any and all direct
out-of-pocket expenses incurred in connection with
investigating, defending or asserting any claim, action, suit or
proceeding incident to any matter indemnified against hereunder
(including court filing fees, court costs, arbitration fees or
costs, witness fees, and reasonable fees and disbursements of
legal counsel, investigators, expert witnesses, consultants,
accountants and other professionals); provided,
however, that for purposes of computing the amount of
Expenses incurred by any Person, there shall be deducted an
amount equal to the amount of any insurance proceeds,
indemnification payments, contribution payments or
reimbursements actually received by such Person or any of such
Persons Affiliates from Persons other than a Seller Group
Member or a Buyer Group Member, as the case may be, in
connection with such Expenses or the circumstances giving rise
thereto.
Family Member means any child,
stepchild, grandchild, parent, stepparent, grandparent, spouse,
sibling, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law, and shall
include adoptive relationships.
FBCA means the Florida Business
Corporation Act, as amended.
GAAP means United States generally
accepted accounting principles, consistently applied from period
to period.
Governmental Body means any foreign,
federal, state, local or other governmental authority or
regulatory body.
Governmental Permits has the meaning
specified in Section 5.9.
Hazardous Materials means any
pollutants, contaminants, toxic or hazardous or extremely
hazardous substances, materials wastes, constituents, compounds,
chemicals, natural or manmade elements or forces (including
petroleum or any by-products or fractions thereof, any form of
natural gas, lead, asbestos and asbestos-containing materials
(ACMs), polychlorinated biphenyls
(PCBs) and PCB-containing equipment, radon
and other radioactive elements, ionizing radiation,
electromagnetic field radiation and other non-ionizing
radiation, infections, carcinogenic, mutagenic, or etiologic
agents, pesticides, defoliants, explosives, flammables,
corrosives and urea formaldehyde foam insulation that are
designated as such or regulated by, or form the basis of
liability under, any Environmental Laws.
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Income Tax means any Tax relating to
net income, gross income, gross receipts or windfall profit,
however characterized.
Indemnified Party has the meaning
specified in Section 8.3.
Indemnitor has the meaning specified
in Section 8.3.
Instrument of Assignment means the
Instrument of Assignment in form and substance reasonably
satisfactory to CNU and Sellers Representation.
Instrument of Assumption means the
Instrument of Assumption in the form of Exhibit C.
Intellectual Property means
Copyrights, Patent Rights, Trademarks and Trade Secrets.
IRS means the Internal Revenue Service.
Knowledge means (a) when used
with respect to Sellers, the knowledge after diligent inquiry of
one or more of the Owners or the persons identified on
Schedule 1.1(a) and (b) when used with respect
to Buyer or CNU, the knowledge after diligent inquiry of one or
more of Richard C. Pfenniger, Jr., Fernando Fernandez and Gemma
Rosello.
Leased Real Property has the meaning
specified in Section 5.11.
Loss(es) means any and all losses,
costs, obligations, liabilities, settlement payments, awards,
judgments, fines, penalties, damages, deficiencies or other
charges; provided, however, that for purposes of
computing the amount of Loss(es) incurred by any Person, there
shall be deducted an amount equal to the amount of any insurance
proceeds, indemnification payments, contribution payments or
reimbursements actually received by such Person or any of such
Persons Affiliates from Persons other than a Seller Group
Member or a Buyer Group Member, as the case may be, in
connection with such Loss(es) or the circumstances giving rise
thereto; and, provided, further, however, that
Loss(es) shall not include any incidental,
consequential or punitive damages or claims for loss of value.
Material Adverse Effect means any
effect, change, event, circumstance or condition which when
considered with all other effects, changes, events,
circumstances or conditions has materially and adversely
affected or could reasonably be expected to materially and
adversely affect the results of operations, financial condition,
assets, liabilities, business or prospects of CNU and its
subsidiaries or the Business, as the case may be, in each case,
taken as a whole, provided, however, that Material Adverse
Effect shall not include any effect, change, event,
circumstance or condition arising out of or attributable to
general economic conditions or events, circumstances, changes or
effects affecting the securities markets.
Merger has the meaning specified in
the fourth recital to this Agreement.
Owners has the meaning specified in
the first paragraph of this Agreement.
Owned Real Property has the meaning
specified in Section 5.10.
Owner Employment Agreements means,
collectively, the Employment Agreements, each in the form of
Exhibits D-1, D-2 and D-3, between CNU and
each of the Owners.
Patent Rights means United States and
foreign patents, provisional patent applications, patent
applications, continuations, continuations-in-part, divisions,
reissues, patent disclosures, industrial designs, inventions
(whether or not patentable or reduced to practice) or
improvements thereto.
Permitted Encumbrances means
(a) liens for Taxes and other governmental charges and
assessments which are not yet due and payable, (b) liens of
landlords and liens of carriers, warehousemen, mechanics and
materialmen and other similar liens imposed by law arising in
the ordinary course of business for sums not yet due and
payable, (c) other liens or imperfections on property which
do not adversely affect title to, detract from the value of, or
impair the existing use of, the property affected by such lien
or imperfection and (d) the liens listed on
Schedule 5.17.
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Person means any individual,
corporation, partnership, joint venture, limited liability
company, association, joint-stock company, trust, unincorporated
organization or Governmental Body.
Physician Employment Agreement means,
collectively, the employment agreements in CNUs standard
form between CNU and each of the physician employees of the
Business (other than Dr. Cruz).
Pro Rata Liability means for any
indemnifiable claim, one-third multiplied by the amount of
Losses and Expense arising from such claim.
Purchase Price has the meaning
specified in Section 3.1.
Purchased Assets has the meaning
specified in Section 2.1.
RCRA means the Resource Conservation
and Recovery Act, 42 U.S.C. §§ 6901 et
seq.
Real Property has the meaning
specified in Section 5.11.
Real Property Lease means the First
Amendment to the Lease for the Excluded Real Property between
Cruz & Cruz Partnership and MDHRS substantially in the form
of Exhibit E.
Receivables has the meaning specified
in Section 2.1(c).
Registration Rights Agreement means
the Registration Rights Agreement in the form of
Exhibit F.
Release means any release, spill,
emission, leaking, pumping, injection, deposit, disposal,
discharge, dispersal, leaching or migration of Hazardous
Materials into the indoor or outdoor environment or into or out
of any Business Property, including the movement of Hazardous
Materials through or in the air, soil, surface water,
groundwater or Business Property.
Remedial Action means actions required
to (i) clean up, remove, treat or in any other way address
Hazardous Materials in the indoor or outdoor environment;
(ii) prevent the Release or threatened Release or minimize
the further Release of Hazardous Materials or
(iii) investigate and determine if a remedial response is
needed and to design such a response and post-remedial
investigation, monitoring, operation and maintenance and care.
Requirements of Law means any foreign,
federal, state and local laws, statutes, regulations, rules,
codes or ordinances enacted, adopted, issued or promulgated by
any Governmental Body (including those pertaining to electrical,
building, zoning, environmental and occupational safety and
health requirements) or common law.
Retain has the meaning specified in
the first paragraph of this Agreement.
Second Instrument of Assumption means
in instrument of Assumption in the form of Exhibit G.
Securities Act means the Securities
Act of 1933, as amended.
Seller has the meaning specified in
the first paragraph of this Agreement.
Seller Agreements has the meaning
specified in Section 5.21.
Seller Ancillary Agreements means all
agreements, instruments and documents being or to be executed
and delivered by any Seller, Retain or any Owner under this
Agreement or in connection herewith.
Seller Excluded Representations has
the meaning specified in Section 8.5(a)(i).
Seller Group Member means Sellers and
their respective Affiliates and the Owners and their respective
successors and assigns.
Sellers Compensation Commitments
has the meaning specified in Section 5.18(b).
Sellers ERISA Plans has the
meaning specified in Section 5.18(d).
Sellers Non-ERISA Plans has the
meaning specified in Section 5.18(a).
Sellers Representative has the
meaning specified in Section 9.19.
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Shareholders Meeting has the
meaning specified in Section 7.10.
Software means computer software
programs and software systems, including all databases,
compilations, tool sets, compilers, higher level or
proprietary languages, related documentation and
materials, whether in source code, object code or human readable
form.
Straddle Period means any taxable year
or period beginning on or before and ending after the Closing
Date.
Tax (and, with correlative meaning,
Taxable) means: (i) any federal, state,
local or foreign net income, gross income, gross receipts,
windfall profit, severance, property, production, sales, use,
license, excise, franchise, employment, payroll, withholding,
alternative or add-on minimum, ad valorem, value-added,
transfer, stamp, or environmental (including taxes under Code
Section 59A) tax, or any other tax, custom, duty,
governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest or penalty, addition to
tax or additional amount imposed by any Governmental Body; and
(ii) any liability for the payment of amounts with respect
to payments of a type described in clause (i) as a result
of being a member of an affiliated, consolidated, combined or
unitary group, or as a result of any obligation under any Tax
Sharing Arrangement or Tax indemnity agreement.
Tax Return means any return, report or
similar statement required to be filed with respect to any Taxes
(including any attached schedules), including, any information
return, claim for refund, amended return or declaration of
estimated Tax.
Tax Sharing Arrangement means any
written or unwritten agreement or arrangement for the allocation
or payment of Tax liabilities or payment for Tax benefits with
respect to a consolidated, combined or unitary Tax Return which
Tax Return includes any Seller.
Trademarks means United States, state
and foreign trademarks, service marks, trade names, Internet
domain names, designs, logos, slogans and general intangibles of
like nature, whether registered or unregistered, and pending
registrations and applications to register the foregoing.
Trade Secrets means confidential
ideas, trade secrets, know-how, developments, concepts, methods,
processes, formulae, technology, algorithms, models, reports,
data, databases, customer lists, supplier lists, mailing lists,
business plans, or other proprietary information.
Trailing Payments means all monthly
payments received by CNU or any of its subsidiaries relating to
the Business during the fourteen day period commencing the day
after the Closing Date from the third-party payors listed on
Schedule 1.1(b), which payments are consistent with
the ordinary course of the Business prior to the Closing Date.
Transfer has the meaning specified in
Section 7.6(a).
Transferring Employees has the meaning
specified in Section 7.4(a).
Warehouse Lease means the lease
substantially in the form of Exhibit I.
Working Capital means the excess of
the amount of the current assets of the Business as of a given
date over the amount of the current liabilities of the Business
as of such date, each as calculated in accordance with GAAP;
provided, however, that, for purposes of calculating Working
Capital of Sellers, current assets of the Business that are
Excluded Assets and current liabilities of the Business that are
Excluded Liabilities shall be disregarded.
1.2. Interpretation. For purposes of this
Agreement, (i) the words include,
includes and including shall be deemed
to be followed by the words without limitation,
(ii) the word or is not exclusive and
(iii) the words herein, hereof,
hereby, hereto and hereunder
refer to this Agreement as a whole. Unless the context otherwise
requires, references herein: (i) to Articles, Sections,
Exhibits and Schedules mean the Articles and Sections of, and
the Exhibits and Schedules attached to, this Agreement;
(ii) to an agreement, instrument or other document means
such agreement, instrument or other document as amended,
supplemented and modified from time to time to the extent
permitted by the provisions thereof and by this
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Agreement; and (iii) to a statute means such statute as
amended from time to time and includes any successor legislation
thereto and any regulations promulgated thereunder. The
Schedules and Exhibits referred to herein shall be construed
with and as an integral part of this Agreement to the same
extent as if they were set forth verbatim herein. Titles to
Articles and headings of Sections are inserted for convenience
of reference only and shall not be deemed a part of or to affect
the meaning or interpretation of this Agreement.
ARTICLE II
PURCHASE AND SALE
2.1. Purchased Assets. Upon the terms and subject
to the conditions of this Agreement, on the Closing Date,
Sellers shall sell, transfer, assign, convey and deliver to
Buyer, and Buyer shall purchase from Sellers, on a going concern
basis, free and clear of all Encumbrances (except for Permitted
Encumbrances), all of the business and operations of Business
and the goodwill associated therewith and all of the assets and
properties of Sellers of every kind and description, wherever
located, real, personal or mixed, tangible or intangible, used
in the conduct of the Business and which are transferable by
Sellers, as the same shall exist on the Closing Date (herein
collectively called the Purchased Assets),
including, all right, title and interest of Sellers in, to and
under the following, as the same shall exist on the Closing Date
(other than the Excluded Assets):
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(a) all of the assets reflected on the Balance Sheet,
except for Excluded Assets and except for those assets disposed
of or converted into cash after the Balance Sheet Date; |
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(b) the real estate listed or described in
Schedule 5.10 other than the Excluded Real Property; |
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(c) all accounts receivable of the Business outstanding as
of the Closing Date and, except as provided in
Section 2.2(h), all rights of the Business to any
refund, repayment, recoupment or collection from any other
Person outstanding or existing as of the Closing Date
(including, without limitation, related party accounts
receivable owed by one of the Sellers to another Seller or any
subsidiary of one or more Sellers as of the Closing Date,
amounts due from any third-party payor, or amounts payable in
respect of any contestation or other right of recovery)
regardless of whether such right relates to periods prior to the
Closing Date (collectively, the Receivables); |
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(d) the Governmental Permits listed in
Schedule 5.9; |
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(e) the real estate leases and leasehold improvements
listed or described in Schedule 5.11; |
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(f) the equipment, vehicles, furniture and other personal
property listed or referred to in Schedule 5.13; |
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(g) the personal property leases listed in
Schedule 5.14; |
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(h) the Copyrights, Patent Rights and Trademarks (and all
goodwill associated therewith), and the agreements, contracts,
licenses, sublicenses, assignments and indemnities, listed in
Schedule 5.15; |
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(i) the contracts, agreements or understandings listed or
described in Schedule 5.20; |
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(j) the real property and all improvements thereto listed
or described in Schedule 5.10; |
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(k) all Trade Secrets and other proprietary or confidential
information; |
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(l) the Software listed in Schedule 5.15; |
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(m) all of Sellers rights, claims or causes of action
against third parties relating to the assets, properties,
business or operations of any Seller arising out of transactions
occurring prior to the Closing Date; |
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(n) all publications, know-how, developments, models,
databases, computer files, training programs, inventories, books
and records (including all data and other information stored on
discs, tapes or other media) of Sellers, including sales,
advertising and marketing materials; |
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(o) all telephone, telex and telephone facsimile numbers,
Internet sites and addresses and other directory listings
utilized by any Seller in the conduct of the Business; and |
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(p) all of Sellers right, title and interest in and
to the name Miami Dade Health Centers and all
derivations thereof. |
2.2. Excluded Assets. Notwithstanding the
provisions of Section 2.1, the Purchased Assets
shall not include the following (herein referred to as the
Excluded Assets):
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(a) any Sellers rights, claims or causes of action
against third parties relating to the Business which might arise
in connection with the discharge by such Seller of the Excluded
Liabilities; |
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(b) the real estate listed in Schedule 2.2(b)
(the Excluded Real Property); |
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(c) all minute books and stock transfer books of each
Seller; |
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(d) each Sellers employee benefit agreements, plans
or arrangements listed in Schedule 5.18(a) or
Schedule 5.18(d) or otherwise maintained by any
Seller on behalf of persons employed by any Seller. |
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(e) all refunds of any Tax which any Seller is entitled to
receive pursuant to Section 7.2; |
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(f) all rights of the Sellers and the Owners under this
Agreement and the Ancillary Agreements; |
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(g) all books and records (including all data and other
information stored on discs, tapes and other media) of any
Seller relating to: (i) Taxes, except as required pursuant
to Section 7.2, and (ii) the Excluded Assets; |
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(h) all rights of Sellers in and to any final retroactive
Medicare Risk Adjustment payments with respect to Humana for the
2004 plan year; and |
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(i) those assets identified on Schedule 2.2(i). |
2.3 Assumed Liabilities. On the Closing Date,
Buyer shall deliver to Sellers the Instrument of Assumption
pursuant to which Buyer shall assume and agree to discharge the
following obligations and liabilities of Sellers in accordance
with their respective terms and subject to the respective
conditions thereof:
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(a) all liabilities and obligations of Sellers reflected on
the Balance Sheet (and all related party liabilities owed by one
Seller to another Seller or any subsidiary of one or more
Sellers as of the Closing Date whether or not such liabilities
are included on the Balance Sheet) or incurred since the date of
the Balance Sheet in the ordinary course of business of the
Business consistent with past practices to be paid or performed
after the Closing Date including any such liabilities or
obligations incurred under (i) the contracts, licenses,
agreements or understandings listed or described in
Schedule 5.15 or 5.20 (ii) the real
estate leases listed in Schedule 5.11 and
(iii) the personal property leases listed in
Schedule 5.14and other agreements with respect to
the Business not required by the terms of
Section 5.20 to be listed in a Schedule to this
Agreement; provided, however, that notwithstanding
the foregoing or anything herein to the contrary, Buyer shall
not assume any liabilities and obligations of any Seller that,
but for a breach or default or violation of applicable
Requirements of Law by any Seller or any Owner, would have been
paid, performed or otherwise discharged on or prior to the
Closing Date or to the extent the same arise out of any such
breach or default; and |
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(b) all liabilities in respect of Taxes for which Buyer is
liable pursuant to Section 7.2; |
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(c) any liabilities in respect of the lawsuits, claims,
suits, proceedings or investigations set forth in
Schedule 5.22; |
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(d) any payables and other liabilities or obligations of
any Seller to any of its employees or Affiliates (other than an
Owner) set forth in Schedule 5.18(b); and |
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(e) all liabilities applicable to the Business pursuant to
the Worker Adjustment and Retraining Notification Act, effective
on February 4, 1989 and as amended from time to time (the
Warn Act), resulting from a termination of
one or more employees after the Closing. |
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All of the foregoing liabilities and obligations to be assumed
by Buyer hereunder are referred to herein as the
Assumed Liabilities.
2.4 Excluded Liabilities. Buyer shall not assume
or be obligated to pay, perform or otherwise discharge any
liability or obligation of any Seller, direct or indirect, known
or unknown, absolute or contingent, not expressly assumed by
Buyer pursuant to the Instrument of Assumption (all such
liabilities and obligations not being assumed being herein
called the Excluded Liabilities) and none of
the following shall be Assumed Liabilities for purposes of this
Agreement:
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(a) any liabilities in respect of Taxes for which any
Seller is liable pursuant to Section 7.2; |
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(b) any payables and other liabilities or obligations of
any Seller to any Owner or other shareholder of any Seller; |
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(c) any costs and expenses incurred by Sellers or Owners
incident to its negotiation and preparation of this Agreement
and its performance and compliance with the agreements and
conditions contained herein; |
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(d) any liabilities or obligations in respect of any
Excluded Assets; |
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(e) subject to Section 2.3, any liabilities and
obligations related to, associated with or arising from
(i) the occupancy, operation, use or control of any of the
Business Property prior to the Closing Date or (ii) the
operation of the Business prior to the Closing Date, in each
case incurred or imposed by any Requirements of Laws, including
liabilities and obligations related to, or arising from, any
Release of any Hazardous Materials on, at or from the Business
Property, including all facilities, improvements, structures and
equipment thereon, surface water thereon or adjacent thereto and
soil or groundwater thereunder, or any conditions whatsoever on,
under or in the vicinity of such real property, but only to the
extent that any such liabilities or obligations are not included
within the Assumed Liabilities; and |
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(f) those liabilities and obligations described on
Schedule 2.4. |
2.5 Subsequent Transactions. Immediately following
the Closing
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(a) Sellers will distribute the portion of the Purchase
Price received by Sellers on the Closing Date to Owners. |
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(b) Retain will deliver to Sellers the Second Instrument of
Assumption pursuant to which Retain shall assume and agree to
discharge all obligations and liabilities of Sellers whether
absolute or contingent, asserted or unasserted, known or
unknown, liquidated or nonliquidated (other than the Assumed
Liabilities) in accordance with their respective terms and
subject to the respective conditions thereof, including, without
limitation, all of the Excluded Liabilities. |
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(c) Each Seller (other than Pelu and Peluca) and Buyer LLC
shall thereafter effect the Merger pursuant to the terms and
conditions of the Agreement and Plan of Merger by filing
properly executed Articles of Merger or other appropriate
documents with the Secretary of State of the State of Florida in
accordance with the laws of the State of Florida. |
ARTICLE III
PURCHASE PRICE
3.1. Purchase Price. The purchase price for the
Purchased Assets (the Purchase Price) shall
be equal to:
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(a) An amount in cash equal to $5,000,000 paid at closing
as provided in Section 4.2 as the same may be
adjusted pursuant to Section 3.3(f) (the Closing
Date Cash Payment); plus |
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(b) The CNU Shares; plus |
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(c) An amount in cash equal to $1,000,000 paid on the first
anniversary of the Closing Date to Owners in the proportions the
Sellers Representative may specify in writing to CNU not
less than five (5) business days prior to the first
anniversary of the Closing Date; plus |
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(d) Any consideration payable to Sellers or Owners under
Section 3.2, 3.3 and 3.4. |
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3.2. PIP Receivables. As of the Balance Sheet
Date, certain Receivables of the Business arising from
fee-for-service personal injury claims had been fully reserved
against in the Seller Financial Statements (the
Reserved PIP Receivables). A true, correct
and complete itemized list of the Reserved PIP Receivables as of
the date hereof is attached hereto as Schedule 3.2.
In addition to the Purchase Price, CNU will pay to Owners fifty
percent of all payments received by CNU or any of its
subsidiaries on account of any Reserved PIP Receivables during
three years from and after the Closing Date. Any payment
pursuant to this Sections 3.2 shall be an adjustment
to the Purchase Price.
3.3. Trailing Payments.
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(a) Within fifteen (15) days after the Closing Date
Buyer shall (at its own cost) prepare and deliver to
Sellers Representative a schedule of the Trailing Payments
identifying the payor, the amount paid, and the date on which
such payment was received (the Trailing Payments
Schedule). Further, within seventy-five (75) days
after the Closing Date, Buyer shall (at its own cost) prepare,
in accordance with GAAP, a calculation of the Working Capital of
Sellers as of the Closing Date (the Closing Date
Working Capital) and shall deliver to the
Sellers Representative: (i) such calculation, and
(ii) Buyers determination of the Closing Date Working
Capital. |
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(b) Promptly following receipt of Buyers written
calculation of the Closing Date Working Capital, Sellers and
Owners may review the calculation of the Closing Date Working
Capital and the Trailing Payments Schedule and, within twenty
(20) days after the date of such receipt, Sellers
Representative may deliver to Buyer a certificate (signed by the
Sellers Representative) setting forth each of
Sellers and Owners objections to Buyers
calculation of the Closing Date Working Capital and/or the
Trailing Payments Schedule (the Unresolved
Objections), together with a reasonably complete and
detailed list of the reasons therefor and calculations which, in
Sellers and Owners view, are necessary to eliminate
such Unresolved Objections. If the Sellers and
Owners Representative does not so object within such
twenty (20) day period, Buyers calculation of the
Closing Date Working Capital and the Trailing Payments Schedule
shall be final and binding for purposes of this Agreement but
shall not limit the representations, warranties, covenants and
agreements of the parties set forth elsewhere in this Agreement. |
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(c) If the Sellers Representative so objects within
such twenty (20) day period, Buyer and the Sellers
Representative shall use their reasonable efforts to resolve by
written agreement (the Agreed Adjustments)
the Unresolved Objections and, if the Sellers
Representative and Buyer so resolve all the Unresolved
Objections, Buyers calculation of the Closing Date Working
Capital and/or the Trailing Payments Schedule, as adjusted by
the Agreed Adjustments, shall be final and binding for purposes
of this Agreement but shall not limit the representations,
warranties, covenants and agreements of the parties set forth
elsewhere in this Agreement. |
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(d) If any Unresolved Objections are not resolved by the
Agreed Adjustments within the twenty (20) day period next
following such twenty (20) day period, then Buyer and the
Sellers Representative shall submit the remaining
Unresolved Objections that have not been resolved by the Agreed
Adjustments to an independent national accounting firm
acceptable to both the Sellers Representative and Buyer,
and such firm (Accounting Firm) shall be
directed by Buyer and the Sellers Representative to
resolve such remaining Unresolved Objections (based solely on
the presentations by Buyer and by the Sellers
Representatives as to whether such remaining Unresolved
Objection has been determined in a manner consistent with this
Agreement) as promptly as reasonably practicable and to deliver
written notice to each of Buyer and the Sellers
Representative setting forth its resolution of such remaining
Unresolved Objections. Buyers calculation of the Closing
Date Working Capital and the Trailing Payments Schedule, after
giving effect to any Agreed Adjustments and to such resolution
by the |
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Accounting Firm, shall be final and binding as the calculation
of the Closing Date Working Capital and the Trailing Payments
Schedule for purposes of this Agreement but shall not limit the
representations, warranties, covenants and agreements of the
parties set forth elsewhere in this Agreement. |
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(e) The parties hereto shall make available to Buyer, the
Sellers Representative and, if applicable, the Accounting
Firm, such books, records and other information as any of the
foregoing may reasonably request to prepare or review the
Buyers calculation of the Closing Date Working Capital,
the Trailing Payments Schedule or any Unresolved Objections
submitted to the Accounting Firm. The fees and expenses of the
Accounting Firm hereunder shall be paid 50% by Buyer and 50% by
Sellers; provided, however, in the event the Accounting Firm
determines that Buyers calculation of the Closing Date
Working Capital or the amount of the Trailing Payments reflected
on the Trailing Payments Schedule (each as modified by any
Agreed Adjustments) is more than 20% less than the amount of the
Closing Date Working Capital or the amount of the Trailing
Payments determined by the Accounting Firm after resolving all
Unresolved Objections, then Buyer shall pay 100% of the fees and
expenses of the Accounting Firm. |
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(f) Within seven (7) days after such determination,
Buyer shall pay Owners in such proportions as the Sellers
Representative may advise Buyer and CNU in writing, an amount of
cash equal to the lesser of (i) the amount of the Closing
Date Working Capital, or (ii) $2,000,000, or (iii) the
amount of the Trailing Payments. Any payment pursuant to this
Section 3.3(f) shall be an adjustment to the
Purchase Price. |
3.4. Homestead Capital Expenditures. In addition
to the Closing Date Cash Payment, on the Closing Date Buyer will
pay Sellers an amount in cash equal to the amount of all
documented, out-of-pocket capital expenditures arising from the
construction and build-out of Pelucas Homestead, Florida,
facility incurred by Sellers in accordance with the terms of
Schedule 7.6. Any payment pursuant to this
Section 3.4 shall be an adjustment to the Purchase
Price.
ARTICLE IV
CLOSING
4.1. Closing Date. The Closing shall be
consummated at 10:00 A.M., Miami, Florida, local time, on
the last Business Day of the month in which all conditions
precedent to the parties respective obligations hereunder
have been satisfied or waived by all parties entitled to assert
the benefit of such conditions; provided that all conditions
which had not previously been waived by all parties entitled to
assert the benefit of such conditions continue to be satisfied
on the last Business Day of such month, at the offices of
Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A.,
Miami, Florida, or at such other date, time or place as may be
agreed upon by CNU and Sellers. The Closing shall be deemed to
be effective and title to the Purchased Assets and the Purchase
Price shall be deemed to pass to Buyer and Sellers,
respectively, as of 11:59 P.M. on such date, and such time
and date are sometimes referred to herein as the
Closing Date.
4.2. Payment on the Closing Date. At Closing
(a) Buyer shall pay Sellers the Closing Date Cash Payment
by (i) wire transfer of immediately available funds to Pelu
to the account in the United States and in an amount agreed to
in writing by CNU and Sellers Representative at least two
business days prior to the Closing (which amount shall not be
less than their good faith estimate of the fair market value of
the Purchased Assets of Pelu); provided that if CNU and
Sellers Representative do not so agree than the amount
shall be an amount equal to the appraised value of the real
property owned by Pelu as specified in an appraisal thereof
obtained by CNU at its expense prior to the Closing from an
appraiser reasonably acceptable to Sellers Representative,
(ii) wire transfer of immediately available funds to Peluca
to the account in the United States and in an amount agreed to
in writing by CNU and Sellers Representative in writing to
Buyer at least two business days prior to the Closing (which
amount shall not be less than their good faith estimate of the
fair market value of the Purchased Assets of Peluca, it being
understood that in no event will the aggregate amount allocated
to Pelu and Peluca pursuant to clause (i) above and this
clause (ii) exceed the amount of the Closing Date Cash
Payment); provided that if CNU and Sellers Representative
do not so agree than the
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amount shall be an amount equal to the appraised value of the
real property owned by Peluca as specified in an appraisal
thereof obtained by CNU at its expense prior to the Closing from
an appraiser reasonably acceptable to Sellers
Representative, and (iii) wire transfer any balance of the
Closing Date Cash Payment in immediately available funds to
Sellers to the account(s) in the United States in the
proportions specified by Sellers Representative in writing
to Buyer at least two business days prior to the Closing, and
(b) CNU shall issue and deliver to Sellers by
(i) depositing 1,500,000 of the CNU Shares (the
Escrow Shares) into escrow with the Escrow
Agent to be held and disbursed as provided in the Escrow
Agreement, and (ii) delivering to Sellers, in the
proportions specified to CNU in writing by the Sellers
Representative not less than ten (10) business days prior
to the Closing Date, certificates representing the balance of
the CNU Shares.
4.3. Buyers Additional Deliveries. At
Closing Buyer shall deliver to Seller all the following, all of
which shall be in form and substance reasonably acceptable to
Owners:
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(a) a copy of the respective Articles of Incorporation of
CNU and Buyer and the Articles of Organization of Buyer LLC,
certified as of a recent date by the Secretary of State of the
State of Florida; |
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(b) a certificate of good standing of each of CNU, Buyer
and Buyer LLC, issued as of a recent date by the Secretary of
State of the State of Florida; |
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(c) a certificate of the secretary or an assistant
secretary of each of CNU, Buyer, and Buyer LLC, dated the
Closing Date, in form and substance reasonably satisfactory to
Sellers, as to (i) the by-laws of CNU or Buyer or Operating
Agreement of Buyer LLC, as applicable; (ii) the resolutions
of the Board of Directors of each of CNU and Buyer or Board of
Managers of Buyer LLC, as applicable authorizing the execution
and performance of this Agreement and the transactions
contemplated hereby; and (iii) incumbency and signatures of
the officers of CNU, Buyer or Buyer LLC, as applicable executing
this Agreement and any Buyer Ancillary Agreement; |
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(d) a certificate, dated the Closing Date and signed by
CNUs Chief Executive Officer, certifying the satisfaction
of the conditions set forth in Sections 4.7(a),
(b), and (c). |
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(e) the Instrument of Assumption duly executed by Buyer; |
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(f) the Owner Employment Agreements duly executed by CNU; |
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(g) the Physician Employment Agreements duly executed by
CNU; |
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(h) the Registration Rights Agreement duly executed by CNU; |
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(i) the Escrow Agreement duly executed by CNU; |
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(j) the Agreement and Plan of Merger duly executed by Buyer
LLC; |
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(k) the Articles of Merger duly executed by Buyer LLC; and |
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(l) all consents, waivers or approvals obtained by CNU and
Buyer with respect to the Purchased Assets or the consummation
of the transactions contemplated by this Agreement. |
4.4. Deliveries of Sellers and Owners. At Closing
Sellers and the Owners shall deliver to Buyer all the following
all of which shall be reasonably acceptable to CNU:
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(a) a copy of the Articles of Incorporation [or
Organization] of each Seller certified as of a recent date by
the Secretary of State of the State of Florida; |
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(b) a certificate of good standing of each Seller issued as
of a recent date by the Secretary of State of the State of
Florida; |
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(c) a certificate of the secretary or an assistant
secretary of each Seller and Retain, dated the Closing Date, in
form and substance reasonably satisfactory to CNU, as to
(i) no amendments to the Articles of Incorporation of such
Seller or Retain since a specified date; (ii) the by-laws
of such Seller or Retain; (iii) the resolutions of the
board of directors of such Seller or Retain and of the
shareholders of Seller or Retain authorizing the execution and
performance of this Agreement and the Seller Ancillary |
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Agreements and the transactions contemplated hereby and thereby;
and (iv) incumbency and signatures of the officers of such
Seller or Retain executing this Agreement and any Seller
Ancillary Agreement; |
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(d) the Instrument of Assignment duly executed by Seller; |
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(e) the Owner Employment Agreements duly executed by each
party thereto (other than CNU); |
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(f) the Physician Employment Agreements duly executed by
each physician (other than Dr. Cruz) who is employed by
Seller on the Closing Date or who serves the Business as an
independent contractor on the Closing Date; |
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(g) certificates of title or origin (or like documents)
with respect to any vehicles or other equipment included in the
Purchased Assets for which a certificate of title or origin is
required in order to transfer title; |
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(h) special warranty deeds in form and substance reasonably
satisfactory to CNU transferring title to each parcel of real
property listed or described in Schedule 5.10 to
Buyer; |
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(i) all consents, waivers or approvals obtained by Sellers
with respect to the Purchased Assets or the consummation of the
transactions contemplated by this Agreement together with any
amendments to any Seller Agreement that may be obtained pursuant
to Section 7.16; |
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(j) an assignment, in recordable form, with respect to each
of the leases of real estate described in
Schedule 5.11, duly executed by the applicable
Seller and in form and substance reasonably satisfactory to
Buyer; |
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(k) the Registration Rights Agreement duly executed by each
party thereto (other than CNU); |
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(l) the Escrow Agreement duly executed by each party
thereto (other than CNU); |
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(m) the Real Property Lease executed by each party thereto; |
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(o) the Second Instrument of Assumption duly executed by
all parties thereto; |
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(p) the Agreement and Plan of Merger duly executed by all
parties thereto (other than Buyer LLC); |
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(q) the Articles of Merger duly executed by all parties
thereto (other than Buyer LLC); |
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(r) the Warehouse Lease duly executed by all parties
thereto; and |
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(s) such other bills of sale, assignments and other
instruments of transfer or conveyance as Buyer may reasonably
request or as may be otherwise necessary to evidence and effect
the sale, assignment, transfer, conveyance and delivery of the
Purchased Assets to Buyer free and clear of all Encumbrances
other than Permitted Encumbrances. |
In addition to the above deliveries, Seller shall take all steps
and actions as Buyer may reasonably request or as may otherwise
be necessary to put Buyer in actual possession or control of the
Purchased Assets.
4.5. Mutual Conditions Precedent. The respective
obligations of the parties to consummate the transactions
contemplated by this Agreement are subject to the satisfaction
at or prior to the Closing of the following conditions.
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(a) All consents, approvals, orders or authorizations of,
or registrations, declarations or filings with, any Governmental
Body required by or with respect to CNU, Buyer, any Seller or
any Owner in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated
hereby shall have been obtained or made, including, without
limitation, those set forth on Schedule 5.3 or
Schedule 6.2. |
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(b) This Agreement, and the transactions contemplated by
this Agreement shall, if necessary, have received the requisite
approval and authorization of the shareholders of CNU in
accordance with applicable Requirements of Law and the Articles
of Incorporation and Bylaws of CNU. |
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(c) No Requirement of Law shall have been enacted or
promulgated which prohibits the consummation of the transactions
contemplated by this Agreement; and there shall be no order or
injunction of a court of competent jurisdiction in effect
precluding consummation of the transactions contemplated by this
Agreement. |
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(d) No action, suit or proceeding shall be pending before
any Governmental Body wherein an unfavorable judgment, order,
decree, stipulation or injunction would (1) prevent
consummation of any of the transactions contemplated by this
Agreement, or (2) cause any of the transactions
contemplated by this Agreement to be rescinded following
consummation, and no such judgment, order, decree, stipulation
or injunction shall be in effect. |
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(e) There shall not have occurred and be continuing:
(1) any suspension of trading in the CNU Common Stock on
the American Stock Exchange, or (2) a declaration of
banking moratorium by federal or New York authorities, or
(3) any suspension of payments in respect of banks in the
United States that regularly participate in the market in loans
to large corporations, in each case which would prevent the
acceptance for payment or the payment for CNU Shares accepted
for payment hereunder. |
4.6 Conditions Precedent to the Obligations of CNU and
Buyer. The respective obligations of CNU and Buyer to
consummate the transactions contemplated by this Agreement are
subject to the satisfaction at or prior to the Closing of the
following conditions:
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(a) The representations and warranties of Sellers and the
Owners set forth in this Agreement that are qualified by
materiality shall have been true and correct as of the date of
this Agreement and shall be true and correct as of the Closing
Date as if made on and as of the Closing Date, and the
representations and warranties of Sellers and the Owners
contained in this Agreement that are not so qualified shall have
been true and correct in all material respects as of the date of
this Agreement and shall be true and correct in all material
respects as of the Closing Date as if made on and as of the
Closing Date except for those representations and warranties
which address matters only as of a particular date (which shall
remain true and correct as of such date). |
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(b) Sellers and the Owners shall have in all material
respects performed all obligations and complied in all material
respects with all covenants required by this Agreement to be
performed or complied with by it at or prior to the Closing Date. |
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(c) From the date of this Agreement to the Closing Date,
there shall not have been any event or development which results
in a Material Adverse Effect upon the Business. |
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(d) The Adjusted EBITDA as reflected on the audited Seller
Financial Statements shall be at least $6,000,000. |
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(e) Sellers shall have delivered to CNU all written
consents, assignments, waivers, authorizations or other
certificates reasonably necessary to consummate the transactions
contemplated hereby, including, without limitation, the approval
of applicable Governmental Bodies, together with any amendments
to any Seller Agreement that may be obtained pursuant to
Section 7.16. |
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(f) Sellers shall have received an unqualified opinion on
the audited Seller Financial Statements from the Auditor, and
the Seller Financial Statements shall not have been adjusted in
any material respect from the form in which such Seller
Financial Statements were previously provided to CNU and Buyer
as a result of the audit. |
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(g) No action, suit or proceeding shall be pending before
any Governmental Body wherein an unfavorable judgment, order,
decree, stipulation or injunction would affect adversely in the
reasonable judgment of CNU the right of Buyer and CNU to own,
operate or control any material portion of the assets and
operations of the Business following the consummation of the
transaction contemplated by this Agreement, and no such
judgment, order, decree, stipulation or injunction shall be in
effect. |
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(h) CNU shall have obtained an ALTA Title Insurance
Commitment (Florida Current Edition) from a nationally
recognized title insurance company licensed to write title
insurance in the State of |
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Florida selected by CNU(the
Title Commitment) and policies of title
insurance shall have been issued under the Title Commitment
at the Closing reflecting no Encumbrances other than Permitted
Encumbrances. |
4.7 Conditions Precedent to the Obligations of Sellers and
Owners. The respective obligations of Sellers and Owners
to consummate the transactions contemplated by this Agreement
are subject to the satisfaction at or prior to the Closing of
the following conditions.
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(a) The representations and warranties of Buyer and CNU set
forth in this Agreement that are qualified by materiality shall
have been true and correct as of the date of this Agreement and
shall be true and correct as of the Closing Date as if made on
and as of the Closing Date, and the representations and
warranties of Buyer and CNU contained in this Agreement that are
not so qualified shall have been true and correct in all
material respects as of the date of this Agreement and shall be
true and correct in all material respects as of the Closing Date
as if made on and as of the Closing Date except, in each case,
for those representations and warranties which address matters
only as of a particular date (which shall remain true and
correct or true and correct in all material respects, as
applicable, as of such date). |
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(b) Each of Buyer and CNU shall have in all material
respects performed all obligations and complied with in all
material respects all covenants required by this Agreement to be
performed or complied with by it at or prior to the Closing Date. |
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(c) From the date of this Agreement to the Closing Date,
there shall not have been any event or development which results
in a Material Adverse Effect upon CNU. |
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(d) Luis Cruz, M.D. shall have been appointed to the Board
of Directors of CNU. |
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(e) Owners shall have been released from any personal
guaranties of any indebtedness of the Business included in the
Assumed Liabilities that are identified on
Schedule 5.27 as guaranteed by one or more of the
Owners. |
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(f) CNU policies of directors and officers insurance
as in effect on the date hereof shall continue to be in full
force and effect on the Closing Date or CNU shall have
substituted policies of directors and officers
insurance with terms and conditions that, taken as a whole, are
not materially less favorable to CNUs directors and
officers which substitute policies shall be in full force and
effect on the Closing Date. |
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(g) No action, suit or proceeding shall be pending before
any Governmental Body wherein an unfavorable judgment, order,
decree, stipulation or injunction would in the reasonable
judgment of Owners impose material limitations on the ability of
Owners to acquire or hold, or exercise full rights of ownership
of, any CNU Shares, including the right to vote such CNU Shares
on all matters properly presented to the shareholders of CNU. |
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLERS AND THE
OWNERS
As an inducement to Buyer and CNU to enter into this Agreement
and to consummate the transactions contemplated hereby, each
Seller and each Owner jointly and severally represents and
warrants to Buyer and CNU and agree as set forth in this
Article V, subject in each case to the exceptions and
limitations specifically set forth therein:
5.1. Organization of Sellers. Each Seller and
Retain is a corporation duly organized, validly existing and in
good standing under the laws of the State of Florida. Each
Seller and Retain is duly qualified to transact business and is
in good standing in the State of Florida, which is the only
jurisdiction in which the ownership or leasing of their
respective assets or their conduct of the Business requires such
qualification. No other jurisdiction has demanded, requested or
otherwise indicated that any Seller is required so to qualify on
account of the ownership or leasing of their respective assets
or their respective conduct of the Business. Each Seller and
Retain has full power and authority to own or lease and to
operate and use their respective assets and to
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carry on the Business as now conducted. The Owners own all of
the issued and outstanding capital stock of each Seller and
Retain in the respective proportions set forth in
Schedule 5.1.
True and complete copies of the Articles of Incorporation and
bylaws of each Seller and Retain and all amendments thereto have
been delivered to Buyer.
5.2. Subsidiaries and Investments. Except as set
forth on Schedule 5.2, no Seller, directly or indirectly,
(i) owns, of record or beneficially, any outstanding voting
securities or other equity interests in any corporation,
partnership, joint venture or other entity or (ii) controls
any corporation, partnership, joint venture or other entity.
Except for MD HRS, MDMC and MDMC One, no Owner or Seller owns
any interest in any Person the name of which includes or which
does business under the name Miami Dade Health
Centers or any derivation thereof.
5.3. Authority of Seller.
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(a) Each Seller and Retain has full power and authority to
execute, deliver and perform this Agreement and all of the
Seller Ancillary Agreements to be executed, delivered and
performed by such Seller or Retain. The execution, delivery and
performance of this Agreement and such Seller Ancillary
Agreements by such Seller or Retain have been duly authorized
and approved by such Sellers or Retains board of
directors and the shareholders of Seller or Retain and do not
require any further authorization or consent of Seller or Retain
or their respective shareholders. This Agreement has been duly
authorized, executed and delivered by each Seller and Retain and
is the legal, valid and binding obligation of each Seller and
Retain enforceable in accordance with its terms, and each of the
Seller Ancillary Agreements to be executed, delivered and
performed by Sellers or Retain has been or will be duly
authorized by each Seller or Retain and is, or upon execution
shall be, a legal, valid and binding obligation of each Seller
or Retain enforceable in accordance with its terms, except as
such enforceability may be subject to the laws of general
application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance,
injunctive relief or other equitable remedies. |
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(b) Each Owner has the legal right, power and capacity to
execute, deliver and perform this Agreement and all of the
Seller Ancillary Agreements to be executed, delivered and
performed by such Owner. The execution, delivery and performance
of this Agreement and each such Seller Ancillary Agreement by
such Owner do not require any further authorization or consent
of any Seller or Retain, or any other Owner. This Agreement has
been duly executed and delivered by each Owner and is the legal,
valid and binding obligation of such Owner enforceable in
accordance with its terms, and each of the Seller Ancillary
Agreements to be executed, delivered and performed by such Owner
is, or upon execution shall be, a legal, valid and binding
obligation of such Owner enforceable in accordance with its
terms, except as such enforceability may be subject to the laws
of general application relating to bankruptcy, insolvency and
the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies. |
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(c) Except as set forth in Schedule 5.3,
neither the execution and delivery of this Agreement or any of
the Seller Ancillary Agreements, the consummation of any of the
transactions contemplated hereby or thereby nor compliance with
or fulfillment of the terms, conditions and provisions hereof or
thereof will: |
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(i) conflict with, result in a breach of the terms,
conditions or provisions of, or constitute a default, an event
of default or an event creating rights of acceleration,
termination or cancellation or a loss of rights under, or result
in the creation or imposition of any Encumbrance upon any of the
Purchased Assets, under (A) the Articles of Incorporation
or the bylaws of any Seller or Retain, (B) any Seller
Agreement, (C) any other material note, instrument,
agreement, mortgage, lease, license, franchise, permit or other
authorization, right, restriction or obligation to which any
Seller or Retain or any Owner is a party or any of the Purchased
Assets is subject or by which any Seller, Retain or any Owner is
bound, (D) any Court Order to which any Seller, Retain or
any Owner is a party or any of the Purchased Assets is subject
or by which any Seller, Retain or any Owner is bound, or
(E) any Requirement of Law generally recognized as
applicable to any Seller, Retain, any Owner or the Purchased
Assets; or |
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(ii) require the approval, consent, authorization or act
of, or the making by any Seller, Retain or any Owner of any
declaration, filing or registration with, any Person or
Governmental Body. |
5.4. Financial Statements.
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(a) Attached as Schedule 5.4 are true and
complete copies of (a) the combined balance sheets of the
Sellers as of December 31, 2003, 2004, and 2005, and the
combined statements of income, cash flows and retained earnings
of the Sellers for the years then ended, including any related
notes (collectively, the Seller Financial
Statements). Except as indicated on
Schedule 5.4, the Seller Financial Statements fairly
present in all material respects Sellers combined
financial condition, assets, liabilities, equity and the results
of their operations at the dates and for the periods specified
in those statements in accordance with GAAP consistently applied
with prior periods. |
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(b) The Sellers maintain a system of internal accounting
controls that is sufficient, to the Knowledge of Sellers, to
provide reasonable assurance that: (a) transactions are
executed in accordance with managements general or
specific authorization; (b) transactions are recorded as
necessary to permit preparation of financial statements in
conformity with GAAP and to maintain accountability for assets;
(c) access to assets is permitted only in accordance with
managements general or specific authorization; and
(d) the recorded accountability for inventory is compared
with existing inventory at reasonable intervals and appropriate
action is taken with respect to any differences, it being
acknowledged by Buyer and CNU that Sellers have not
(i) heretofore been subject to the provisions of the
Sarbanes-Oxley Act of 2002 or (ii) engaged consultants or
undertaken procedures customarily undertaken by public companies
subject to the Sarbanes-Oxley Act of 2002. |
5.5. Operations Since Balance Sheet Date.
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(a) Except as set forth in Schedule 5.5, since
the Balance Sheet Date, there has been |
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(i) no material adverse change in the Purchased Assets nor
any Material Adverse Effect on the Business and, to the
Knowledge of Sellers, no fact or condition exists or is
contemplated or threatened which would reasonably be expected to
cause such a change or effect in the future; |
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(ii) no material reduction in the amount of Sellers
Working Capital through the date of this Agreement or in the
amount of cash held by Sellers through the date of this
Agreement; and |
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(iii) no damage, destruction, loss or claim, whether or not
covered by insurance, or condemnation or other taking adversely
affecting any material portion of the Purchased Assets or the
Business. |
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(b) Except as set forth in Schedule 5.5, since
the Balance Sheet Date, Sellers have conducted the Business only
in the ordinary course of business consistent with past
practice; provided that nothing herein shall prohibit any of the
Sellers from distributing, selling, transferring or otherwise
dealing with any or all of the Excluded Assets or assuming,
satisfying or otherwise dealing with the Excluded Liabilities;
provided that no such distribution, sale, transfer, assumption,
satisfaction or dealing could reasonably be expected to:
(i) create or result in any liability or obligation of any
Buyer Group Member or any liability or obligation that would be
an Assumed Liability, (ii) cause any representation or
warranty of Sellers and the Owners set forth herein to be untrue
or incorrect, (iii) violate the terms of any covenant or
obligation of Sellers or Owners hereunder, or (iv) cause
any of the conditions to the Closing not to be satisfied.
Without limiting the generality of the foregoing, since the
Balance Sheet Date, except as set forth in
Schedule 5.5, no Seller has: |
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(i) sold, leased (as lessor), transferred or otherwise
disposed of (including any transfers from any Seller to any
Owner or to any of their respective Affiliates), or mortgaged or
pledged, or imposed or suffered to be imposed any Encumbrance
on, any of the assets reflected on the Balance Sheet or any
assets acquired by any Seller after the Balance Sheet Date,
except for personal property sold or otherwise disposed of for
fair value in the ordinary course of the Business consistent
with past practice and except for Permitted Encumbrances; |
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(ii) cancelled any debts owed to or claims held by such
Seller (including the settlement of any claims or litigation)
other than in the ordinary course of the Business consistent
with past practice; |
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(iii) created, incurred, assumed or guaranteed any
indebtedness for borrowed money or entered into, as lessee, any
capitalized lease obligations (as defined by GAAP); |
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(iv) accelerated or delayed collection of notes or accounts
receivable generated by the Business in advance of or beyond
their regular due dates or the dates when the same would have
been collected in the ordinary course of the Business consistent
with past practice; |
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(v) delayed or accelerated payment of any account payable
or other liability of the Business beyond or in advance of its
due date or the date when such liability would have been paid in
the ordinary course of the Business consistent with past
practice; |
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(vi) made any payment of cash or distribution of assets to
any Owner or any of their respective Affiliates through the date
of this Agreement, other than in the ordinary course of the
Business consistent with past practice; |
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(vii) instituted any increase in any compensation payable
to any employee of such Seller or in any profit-sharing, bonus,
incentive, deferred compensation, insurance, pension,
retirement, medical, hospital, disability, welfare or other
benefits made available to employees of such Seller, other than
in the ordinary course of the Business consistent with past
practice; |
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(viii) prepared or filed any Tax Return inconsistent with
past practice or, on any such Tax Return, taken any position,
made any election, or adopted any method that is inconsistent
with positions taken, elections made or methods used in
preparing or filing similar Tax Returns in prior periods
(including positions, elections or methods which would have the
effect of deferring income to periods for which Buyer is liable
pursuant to Section 7.2(a) or accelerating
deductions to periods for which a Seller is liable pursuant to
Section 7.2(a)); |
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(ix) made any material change in the accounting principles
and practices used by such Seller from those applied in the
preparation of the Balance Sheet and the related statements of
income and cash flow for the period then ended; |
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(x) declared or paid any dividends on or made any other
distributions (whether in cash, stock or property) in respect of
any of its capital stock, or split, combined or reclassified any
of its capital stock or issued or authorized the issuance of any
other securities in respect of, in lieu of or in substitution
for shares of capital stock of such Seller; |
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(xi) redeemed, repurchased or otherwise acquire, directly
or indirectly, recapitalized or reclassified any shares of its
capital stock; |
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(xii) issued, delivered or sold or authorized or proposed
the issuance, delivery or sale of, any shares of its capital
stock of any class or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or
entered into other agreements or commitments of any character
obligating it to issue any such shares or other convertible
securities; |
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(xiii) caused, permitted or proposed any amendments to its
Articles of Incorporation or bylaws; |
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(xiv) made any capital expenditure involving more than
$25,000; |
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(xv) taken any other action which could reasonably be
expected to cause any of the conditions to the Closing, not to
be satisfied; or |
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(xvi) agreed to do any of the foregoing. |
5.6. No Undisclosed Liabilities. Except as set
forth on the Balance Sheet or in Schedule 5.6, no
Seller is subject to any liability (including unasserted claims,
whether known or unknown), whether absolute, contingent, accrued
or otherwise, which is not shown or which is in excess of
amounts shown or reserved for in
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the Balance Sheet, other than immaterial liabilities incurred
after the Balance Sheet Date in the ordinary course of the
Business consistent with past practice to Persons other than
Affiliates of any Seller or any Owner, and to Sellers
Knowledge there is no reasonable basis for assertion against any
Seller of any such liability, commitment or obligation.
5.7. Taxes. Except as set forth in
Schedule 5.7:
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(a) Each Seller has filed all Tax Returns required to be
filed by any applicable Requirement of Law prior to the date
hereof. All such Tax Returns were (and as to Tax Returns not
filed as of the date hereof, will be) true, complete and correct
in all material respects and filed on a timely basis. Each
Seller has paid all Taxes that are due and payable, or claimed
or asserted by any taxing authority to be due and payable, from
such Seller for the periods covered by the Tax Returns. |
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(b) No jurisdiction (whether within or without the United
States) in which a Seller has not filed a specific Tax Return
has asserted that such Seller is required to file such Tax
Return in such jurisdiction. Schedule 5.7lists all
states and nations in which a Seller files any Tax Returns and
indicates in the case of Income Tax or franchise tax filings
whether such filings are made on a consolidated, combined or
unitary basis and the state allocation factors for the most
recent taxable year for which filings have been made. |
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(c) Each Seller has established (and until the Closing Date
will maintain) on its books and records reserves adequate to pay
all Taxes not yet due and payable and such reserves are clearly
identified as reserves for current Taxes. |
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(d) There are no Tax Encumbrances upon the assets of any
Seller except Encumbrances for Taxes not yet due. |
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(e) Each Seller has complied (and until the Closing Date
will comply) with all applicable laws, rules, and regulations
relating to the payment and withholding of Taxes (including
withholding and reporting requirements under Code
§§1441 through 1464, 3401 through 3406, 6041 and 6049
and similar provisions under any other laws) and has, within the
time and in the manner prescribed by all applicable Requirements
of Law, withheld from employee wages and paid over to the proper
Governmental Bodies all required amounts. |
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(f) No Seller has requested (and no request has been made
on its behalf) any extension of time within which to file any
Tax Return which extension is currently effective. No Seller has
executed any outstanding waivers or comparable consents
regarding the application of the statute of limitations for any
Taxes or Tax Returns (and no extensions have been executed on
their behalf). The statute of limitations for the assessment of
all Taxes has expired for all applicable Tax Returns of each
seller through December 31, 2001. |
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(g) No deficiency for any Taxes has been suggested,
proposed, asserted or assessed against any Seller that has not
been resolved and paid in full. No audits or other
administrative proceedings or court proceedings are presently
pending or to the Knowledge of Sellers threatened with regard to
any Taxes or Tax Returns of the Seller and all prior adjustments
of federal Tax liability resulting from the resolution of any
audit or proposed deficiency have been reported to appropriate
state and local taxing authorities and all resulting Taxes
payable to state and local taxing authorities have been paid. |
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(h) There is no power of attorney currently in force with
respect to any Tax matter involving any Seller. |
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(i) No Seller has received any written ruling of a taxing
authority relating to Taxes, or any other written and legally
binding agreement with a taxing authority relating to Taxes. |
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(j) Each Seller has made available (or, in the case of Tax
Returns to be filed on or before the Closing Date, will make
available) to Buyer and CNU complete and accurate copies of all
Tax Returns and associated work papers filed by or on behalf of
each Seller for all taxable years ending on or prior to the
Closing Date. |
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(k) No agreement as to indemnification for, contribution
to, or payment of Taxes exists between any Seller and any other
Person, including pursuant to any tax sharing agreement, lease
agreement, purchase or sale agreement, partnership agreement or
any other agreement. |
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(l) No Seller has any liability for Taxes of any Person
under Treasury Regulation 1.1502-6 (or any similar
provision of any state, local or foreign law), or as a
transferee or successor, or by contract or otherwise. |
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(m) No Seller is or has been a distributing
corporation or a controlled corporation within
the meaning of Code section 355. |
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(n) No Seller is a party to any agreement, contract, or
arrangement that would result, separately or in the aggregate,
in the payment of any excess parachute payments
within the meaning of Code Section 280G or in the
disallowance of any deductions pursuant to Code
Section 162(m). |
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(o) No property of any Seller is property that such Seller
or any party to this transaction is or will be required to treat
as being owned by another person pursuant to the provisions of
Code Section 168(f)(8) (as in effect prior to its amendment
by the Tax Reform Act of 1986) or is tax-exempt use
property or tax-exempt bond financed property
within the meaning of Code Section 168, |
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(p) No Seller is required to include in income any
adjustment pursuant to Code §481(a) by reason of a
voluntary change in accounting method initiated by such Seller,
and the IRS has not proposed an adjustment or change in
accounting method. No income of any Seller that economically
accrued prior to the Closing will be recognized as taxable
income after the Closing as a result of such Seller having been
a party to an installment sale, an open transaction or otherwise. |
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(q) Each Seller which is a corporation has continuously
since its incorporation qualified as an C Corporation for
federal income tax purposes except for Pelu which is an S
Corporation within the meaning of Code Section 1361 and
will continue to be treated as an S Corporation until the
Closing. Each state in which each Seller is required to file tax
returns respects such Sellers status as a C or S
Corporation, as applicable, and conforms to the federal Income
Tax treatment of S Corporations. |
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(r) No Seller has participated in or cooperated with any
international boycott with in the meaning of Code section 999. |
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(s) Other than Pelu, no Seller is a United States real
property holding corporation within the meaning of Code section
897(c)(2). |
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(t) Each Seller has disclosed on its federal Income Tax
Return all positions taken therein that could give rise to a
substantial understatement of federal Income Tax within the
meaning of Code section 6662. No Seller has engaged in any
reportable transactions that were required to be disclosed
pursuant to Treasury Regulation section 1.6011-4. No sales
Taxes, use Taxes, real estate transfer Taxes or other similar
Taxes will be imposed on the transfer of the Purchased Assets or
the assumption of the Assumed Liabilities pursuant to this
Agreement; or subject to a so-called TRAC lease
under Section 7701(h) of the Code (or any predecessor
provision). |
5.8. Availability of Assets.
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(a) Except as set forth in Schedule 5.8 and
except for the Excluded Assets, the Purchased Assets constitute
all the assets used in the Business (including all books,
records, computers and computer programs and data processing
systems) and, taken as a whole, are in good operating condition
and repair (subject to normal wear and tear) and serviceable
condition and are, to the Knowledge of Sellers, suitable for the
uses for which they are being used. |
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(b) Schedule 5.8 sets forth a description of
all material services provided by Sellers or any Affiliate of
Sellers utilizing either (i) assets not included in the
Purchased Assets or (ii) employees not listed in
Schedule 5.18(j) and the manner in which the costs
of providing such services have been allocated to the Business. |
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5.9. Governmental Permits.
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(a) Each Seller owns, holds or possesses all material
licenses, franchises, permits, privileges, immunities, approvals
and other authorizations from a Governmental Body which are
necessary to entitle such Seller to own or lease, operate and
use its respective Purchased Assets and to carry on and conduct
the Business as currently conducted by such Seller
(collectively, the Governmental Permits).
Schedule 5.9 sets forth a list and brief description
of each Governmental Permit. Complete and correct copies of all
of the Governmental Permits have heretofore been delivered or
made available to Buyer by Sellers. |
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(b) Except as set forth in Schedule 5.9,
(i) each Seller has fulfilled and performed in all material
respects its obligations under each of the Governmental Permits,
and no event has occurred or condition or state of facts exists
which constitutes or, after notice or lapse of time or both,
would constitute a material breach or default under any such
Governmental Permit or which permits or, after notice or lapse
of time or both, would permit revocation or termination of any
such Governmental Permit, or which would reasonably be expected
to adversely affect the rights of any Seller under any such
Governmental Permit; (ii) no notice of cancellation, of
default or of any dispute concerning any Governmental Permit, or
of any event, condition or state of facts described in the
preceding clause, has been received by, or is known to, any
Seller or any Owner; and (iii) each of the Governmental
Permits is valid, subsisting and in full force and effect. |
5.10. Real Property. Attached as
Schedule 5.10 is a true and complete list and legal
description of each parcel of real property owned by any Seller
and used in or relating to the Business, except for the Excluded
Real Property listed on Schedule 2.2. Complete and
correct copies of any current policies of title insurance,
surveys and recorded documents with respect to each such parcel
of real property listed on
Schedule 5.10(collectively, the Real
Property) have hereto been delivered to Buyer.
5.11. Real Property Leases.
Schedule 5.11 sets forth a list and brief
description of each lease or similar agreement (showing the
parties thereto, annual rental, expiration date, renewal and
purchase options, if any, the improvements thereon, the uses
being made thereof, and the location of the real property
covered by such lease or other agreement) under which any Seller
is lessee of, or holds or operates, any real property owned by
any third Person and used in or relating to the Business (the
Leased Real Property and, together with the
Owned Real Property, the Real Property).
Except as set forth in Schedule 5.11, Seller has the
right to quiet enjoyment of all the Leased Real Property for the
full term of the lease or similar agreement (and any renewal
option related thereto) relating thereto, and the leasehold or
other interest of such Seller in the Leased Real Property is not
subject or subordinate to any Encumbrance except for Permitted
Encumbrances. Complete and correct copies of any title opinions,
surveys and appraisals in Sellers possession or any
policies of title insurance currently in force and in the
possession of any Seller with respect to each parcel of Leased
Real Property have heretofore been delivered by Seller to Buyer.
5.12. Condemnation. To the Knowledge of Sellers,
neither the whole nor any part of the Real Property or the
Business is subject to any pending suit for condemnation or
other taking by any public authority, and, to the Knowledge of
Sellers, no such condemnation or other taking is threatened or
contemplated.
5.13. Personal Property. Schedule 5.13
contains a list of all equipment, vehicles, furniture and other
personal property owned by any Seller having an original cost of
$25,000 or more and used in or relating to the Business.
5.14. Personal Property Leases.
Schedule 5.14 contains a list and description of
each lease or other agreement or right, whether written or oral
(showing in each case the annual rental, the expiration date
thereof and a brief description of the property covered), under
which any Seller is lessee of, or holds or operates, any
machinery, equipment, vehicle or other tangible personal
property owned by a third Person.
A-21
5.15. Intellectual Property; Software.
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(a) Schedule 5.15 contains a list and
description (showing in each case the registered or other owner,
expiration date and registration or application number, if any)
of all Copyrights, Patents and Trademarks owned by, licensed to
or used by Seller. |
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(b) Schedule 5.15 contains a list and
description (showing in each case any owner, licensor or
licensee) of all Software owned by, licensed to or used by any
Seller; provided that Schedule 5.15 does not
list mass market Software licensed to Seller that is available
in consumer retail stores or otherwise commercially available
and subject to shrink-wrap or
click-through license agreements. |
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(c) Schedule 5.15 contains a list and
description of all agreements, contracts, licenses, sublicenses,
assignments and indemnities to which any Seller is a party which
relate to (i) any Copyrights, Patent Rights or Trademarks
listed in Schedule 5.15, (ii) any Trade Secrets
owned by, licensed to or used by any Seller or (iii) any
Software listed in Schedule 5.15 (collectively, the
Software Agreements). |
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(d) Except as disclosed in Schedule 5.15,
Sellers either: (i) own the entire right, title and
interest in and to the Intellectual Property included in the
Purchased Assets, free and clear of any Encumbrance (other than
Permitted Encumbrances), or (ii) have the perpetual,
royalty-free right to use the same and to use all Software
listed in Schedule 5.15. |
5.16. Accounts Receivable. All Receivables have
arisen from bona fide transactions by Sellers in the ordinary
course of the Business consistent with past practice. Except for
Receivables collected since the Balance Sheet Date, all
Receivables reflected in the Balance Sheet are good and
collectible in the ordinary course of the Business at the
aggregate recorded amounts thereof, net of any applicable
allowance for doubtful accounts reflected in the Balance Sheet.
5.17. Title to Property. Except for (a) liens
for Taxes and other governmental charges and assessments which
are not yet due and payable, (b) liens of landlords and
liens of carriers, warehousemen, mechanics and materialmen and
other similar liens imposed by law arising in the ordinary
course of business for sums not yet due and payable,
(c) other liens or imperfections on property which do not
adversely affect title to, detract from the value of, or impair
the existing use of, the property affected by such lien or
imperfection and (d) as set forth on
Schedule 5.17, Sellers have good and marketable
title to all of the Purchased Assets, free and clear of all
Encumbrances. Upon delivery to Buyer on the Closing Date of the
instruments of transfer contemplated by Section 4.4,
Sellers will thereby transfer to Buyer good and marketable title
to the Purchased Assets, subject to no Encumbrances, except for
Permitted Encumbrances.
5.18. Employees and Related Agreements; ERISA.
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(a) Schedule 5.18(a) sets forth a list of each
retirement, savings, thrift, deferred compensation, severance,
stock ownership, stock purchase, stock option, performance,
bonus, incentive, vacation or holiday pay, hospitalization or
other medical, disability, life or other insurance, or other
welfare, retiree welfare or benefit plan, policy, trust,
understanding or arrangement of any kind, whether written or
oral, to which Seller is a party or by which it is bound or
pursuant to which it may be required to make any payment at any
time, other than plans of the type described in
Section 5.18(d) (Sellers Non-ERISA
Plans). |
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(b) Schedule 5.18(b) sets forth a list of each
(i) employee collective bargaining agreement, and
(ii) agreement, commitment, understanding, plan, policy or
arrangement of any kind, whether written or oral, with or for
the benefit of any current or former officer, director,
employee, subcontractor or consultant (including each
employment, compensation, deferred compensation, severance,
supplemental pension, life insurance, termination or consulting
agreement or arrangement and any agreements or arrangements
associated with a change in control), to which Seller is a party
or by which it is bound or pursuant to which it may be required
to make any payment at any time, other than Sellers
Non-ERISA Plans and other than plans of the type described in
Section 5.18(d) (Sellers Compensation
Commitments). |
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(c) Copies of all written Sellers Non-ERISA Plans and
Sellers Compensation Commitments and of all related
insurance and annuity policies and contracts and other documents
with respect to each Sellers Non-ERISA Plan and
Sellers Compensation Commitment have been delivered or
made available to Buyer. Schedules 5.18(a) and
5.18(b), respectively, contain a description of all oral
Sellers Non-ERISA Plans and Sellers Compensation
Commitments. |
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(d) Schedule 5.18(d) sets forth a list of each
employee pension benefit plan (as such term is
defined in Section 3(2) of ERISA) and each
employee welfare benefit plan (as such term is
defined in Section 3(1) of ERISA) covering any employee or
former employee of Seller (collectively, Sellers
ERISA Plans). Except as set forth in
Schedule 5.18(d), (i) Seller has never
maintained any employee pension benefit plan and
(ii) Seller has never been required to contribute to any
multiemployer plan (as such term is defined in
Section 3(37) of ERISA). |
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(e) Seller has delivered or made available to Buyer, with
respect to each Sellers ERISA Plan, correct and complete
copies, where applicable, of (i) all plan documents and
amendments, trust agreements and insurance and annuity contracts
and policies, (ii) with respect to any ERISA Plan designed
to comply with Section 401(a) of the Code, the most recent
IRS determination letter, (iii) the Annual Reports
(Form 5500 Series) and accompanying schedules and actuarial
reports, as filed, for the most recently completed three plan
years, (iv) the summary plan description currently in use
and any other summary plan description in use at any time since
January 1, 2003, (v) discrimination testing reports
performed during the last two plan years and a description of
any corrective action taken in response to any such reports and
(vi) copies of correspondence from the IRS, the Department
of Labor or the Pension Benefit Guaranty Corporation regarding
any plan audit or investigation or any intent to conduct a plan
audit or investigation. |
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(f) Each Sellers ERISA Plan which is intended to
qualify under Section 401(a) of the Code has received a
favorable determination letter from the IRS that such Plan is so
qualified under the Code; and to the Knowledge of Sellers, no
circumstance exists that might cause such Plan to cease being so
qualified. |
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(g) Each Sellers ERISA Plan complies in all material
respects, and has been administered to comply in all material
respects, with all Requirements of Law, and there has been no
notice issued by any Governmental Body questioning or
challenging such compliance, and there are no actions, suits or
claims (other than routine claims for benefits) pending or, to
the Knowledge of Seller, threatened involving any such Plan or
the assets of any such Plan. |
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(h) Seller has no obligations under any of Sellers
Non-ERISA Plans, Sellers Compensation Commitments or
Sellers ERISA Plans or otherwise to provide health or
death benefits to or in respect of former employees of Seller,
except as specifically required by the continuation requirements
of Part 6 of Title I of ERISA. |
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(i) Seller has no liability of any kind whatsoever, whether
direct, indirect, contingent or otherwise, (i) on account
of any violation of the health care requirements of Part 6
of Title I of ERISA or Section 4980B of the Code,
(ii) under Section 502(i) or Section 502(l) of
ERISA or Section 4975 of the Code, (iii) under
Section 302 of ERISA or Section 412 of the Code or
(iv) under Title IV of ERISA. Assuming that each of
Sellers ERISA Benefit Plans that is subject to
Title IV of ERISA were terminated as of the Closing Date,
Seller would have no liability under Title IV of ERISA as a
result of such termination. |
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(j) Schedule 5.18(j) contains: (i) a list
of all employees of each Seller as of January 1, 2006;
(ii) the positions, service dates, position dates, and, if
any, leave status (including a designation, if applicable, of
the type of leave and whether the leave is paid or unpaid) of
each such employee; (iii) the then current annual
compensation of, and a description of the fringe benefits (other
than those generally available to employees of each Seller)
provided by each Seller to any such employees; (iv) a list
of all present or former employees of each Seller paid in excess
of $50,000 in calendar year 2005 who have terminated or given
notice of their intention to terminate their relationship with
any Seller since |
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January 1, 2006; (v) a list of any increase, effective
after January 1, 2006, in the rate of compensation of any
employees or commission salespersons; and (vi) a list of
all substantial changes in job assignments of, or arrangements
with, or promotions or appointments of, any employees or
commission salespersons whose compensation as of January 1,
2006 was in excess of $50,000 per annum. |
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(k) Except as set forth in Schedule 5.18(k),
(i) to the Knowledge of Sellers, no employee, officer,
director or Affiliate of any Seller has any direct or indirect
interests in the business of competitors, suppliers or customers
of any Seller, and (ii) there are no situations with
respect to the Business that involved or involves (A) the
use of any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to political
activity; (B) the making of any direct or indirect unlawful
payments to government officials or others from corporate funds
or the establishment or maintenance of any unlawful or
unrecorded funds; (C) the violation of any of the
provisions of The Foreign Corrupt Practices Act of 1977, or any
rules or regulations promulgated thereunder; or (D) the
receipt of any illegal discounts or rebates or any other
violation of the antitrust laws. |
5.19. Employee Relations. Except as set forth in
Schedule 5.19, Sellers have complied in all material
respects with all applicable Requirements of Law relating to
prices, wages, hours, discrimination in employment and
collective bargaining and to the operation of the Business and
is not liable for any arrears of wages or any Taxes or penalties
for failure to comply in any material respect with any of the
foregoing. Sellers relations with employees of the
Business are satisfactory. No Seller is a party to, and the
Business is not affected by or, to the Knowledge of Sellers
threatened with, any dispute or controversy with a union or with
respect to unionization or collective bargaining involving the
employees of the Business. No Seller is adversely affected by
any dispute or controversy with a union or with respect to
unionization or collective bargaining involving any customer of
the Business. Schedule 5.19 sets forth a description
of any union organizing or election activities involving any
non-union employees of the Business that have occurred since
January 1, 2001 or, to the Knowledge of the Sellers, are
threatened as of the date hereof. No Seller has Knowledge that
any employee of the Business will terminate his or her
employment as a result of the execution and delivery of this
Agreement or the consummation of the transactions contemplated
hereby.
5.20. Contracts. Except as set forth in
Schedule 5.20 and except for any of the following
that can be cancelled or terminated by a Seller without penalty
or premium on not more than thirty (30) days notice,
no Seller is a party to or bound by:
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(a) any contract for the purchase, sale or lease of real
property; |
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(b) any contract for the purchase of services, materials,
supplies or equipment which involved the payment of more than
$25,000 in 2005, which Sellers anticipate will involve the
payment of more than $25,000 in 2006 or which extends beyond
January 1, 2007; |
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(c) any contract for the sale of goods or services which
involved the payment of more than $25,000 in 2005, which Sellers
anticipate will involve the payment of more than $25,000 in 2006
or which extends beyond January 1, 2007; |
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(d) any contract for the purchase, licensing or development
of Software to be used by any Seller, except for mass market
software licensed to a Seller that is available in consumer
retail stores or otherwise commercially available and subject to
shrink-wrap or click-through license
agreements; |
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(e) any consignment, distributor, dealer, manufacturers
representative, sales agency, advertising representative or
advertising or public relations contract; |
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(f) any guarantee of the obligations of patients,
suppliers, third party payors, officers, directors, employees,
Owners, Affiliates or others; |
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(g) any agreement which provides for, or relates to, the
incurrence or guarantee by any Seller of debt for borrowed money
(including, without limitation, any interest rate or foreign
currency swap, cap, collar, hedge or insurance agreements, or
options or forwards on such agreements, or other similar
agreements for the purpose of managing the interest rate and/or
foreign exchange risk associated with its financing); |
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(h) any contract not made in the ordinary course of the
Business consistent with past practice; |
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(i) any contract or agreement which provides for a most
favored pricing provision for any patient, supplier or third
party payor of any Seller; |
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(j) any contract which limits or restricts where any Seller
may conduct the Business; |
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(k) any partnership agreements, joint venture agreements or
strategic alliance agreements; or |
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(l) any other contract, agreement, commitment,
understanding or instrument which is material to any Seller or
to the Business. |
5.21. Status of Contracts. Except as set forth in
Schedule 5.21, each of the leases, contracts and
other agreements listed in Schedules 5.11, 5.14,
5.15, 5.18 and 5.20(collectively, the
Seller Agreements) constitutes a valid and
binding obligation of the parties thereto and, to the Knowledge
of Sellers, is in full force and effect and (except as set forth
in Schedule 5.3) may be transferred to Buyer
pursuant to this Agreement and will continue in full force and
effect thereafter, in each case without breaching the terms
thereof or resulting in the forfeiture or impairment of any
rights thereunder and without the consent, approval or act of,
or the making of any filing with, any other party. Each Seller
has fulfilled and performed in all material respects its
respective obligations under each of the Seller Agreements, and
no Seller is in, or alleged by any other party thereto to be in,
breach or default in any material respect under, nor is there or
is there alleged to be any basis for termination of, any of the
Seller Agreements and, to the Knowledge of Sellers, no other
party to any of the Seller Agreements has breached or defaulted
thereunder in any material respect, and, to the Knowledge of
Sellers, no event has occurred and no condition or state of
facts exists which, with the passage of time or the giving of
notice or both, would constitute such a default or breach by
Sellers or by any such other party. No Seller is currently
renegotiating any of the Seller Agreements or paying damages in
lieu of performance thereunder. Complete and correct copies of
each of the Seller Agreements have heretofore been delivered or
made available to Buyer. Sellers have provided Buyer and CNU
with true, correct and complete copies of all written reports,
audits and compliance investigations conducted by or on behalf
of any party to any Seller Agreement regarding Sellers
compliance with the requirements of such Seller Agreement or
applicable Requirements of Law.
5.22. No Violation, Litigation or Regulatory Action.
Except as set forth in Schedule 5.22:
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(a) the Purchased Assets and their current uses comply in
all material respects with all applicable Requirements of Law
and Court Orders; |
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(b) Sellers have complied in all material respects with all
Requirements of Law and Court Orders which are applicable to the
Purchased Assets or the Business and no Seller nor any Owner has
been excluded or debarred from providing services to a
Governmental Body or to any customer that participates in a
program sponsored by a Governmental Body; |
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(c) there are no lawsuits, claims, suits, proceedings or
investigations pending or, to the Knowledge of Sellers,
threatened against or affecting any Seller nor, to the Knowledge
of Sellers, is there any basis for any of the same, and there
are no lawsuits, suits or proceedings pending in which any
Seller is the plaintiff or claimant; |
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(d) there is no action, suit or proceeding pending or, to
the Knowledge of Sellers, threatened which questions the
legality or propriety of the transactions contemplated by this
Agreement; and |
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(e) no Seller nor any of the Purchased Assets are subject
to any Court Order. |
5.23. Environmental Matters. Except as set forth
in Schedule 5.23:
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(a) to the Knowledge of Sellers, no Seller nor any of the
present Business Property or operations, or the past Business
Property or operations, is subject to any on-going investigation
by, order from or agreement with any Person (including without
limitation any prior owner or operator of Business Property)
respecting (i) any Environmental Law, (ii) any
Remedial Action or (iii) any claim of Losses |
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and Expenses arising from the Release or threatened Release of
Hazardous Materials into the environment; |
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(b) no Seller is subject to any judicial or administrative
proceeding, order, judgment, decree or settlement alleging or
addressing a violation of or liability under any Environmental
Law; |
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(c) no Seller has: (A) reported a Release of a
Hazardous Material; (B) filed a notice related to the
presence, generation, transportation or release of any Hazardous
Material pursuant to any Environmental Laws; (C) filed
notice, pursuant to any Environmental Laws, indicating the
generation of any regulated Hazardous Material; or
(D) filed any notice under any applicable Requirements of
Laws reporting a substantial violation of any applicable
Requirements of Laws; |
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(d) to the Knowledge of Sellers, there is not now nor has
there ever been, on or in any Business Property: (A) any
treatment, recycling, storage or disposal of any Hazardous
Material that requires or required a Governmental Permit; or
(B) any above ground or underground storage tank or surface
impoundment or landfill or waste pile. |
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(e) to the Knowledge of Sellers, there is not now nor has
there ever been on or in any Business Property any
polychlorinated biphenyls (PCB) used in pigments, hydraulic
oils, electrical transformers or other equipment; |
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(f) no Seller nor any Owner has received any written notice
or claim to the effect that it is or may be liable to any Person
as a result of the Release or threatened Release of Hazardous
Materials; and |
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(g) to the Knowledge of Sellers, any asbestos-containing
material which is on or part of any Business Property is in good
repair according to the current standards and practices
governing such material, and its presence or condition does not
violate any currently applicable Requirements of Laws. |
5.24. Insurance. Schedule 5.24 sets
forth a list and brief description of all policies of insurance
maintained, owned or held by any Seller on the date hereof. Each
Seller has complied in all material respects with each of such
insurance policies and has not failed to give any notice or
present any claim thereunder in a due and timely manner. Sellers
have delivered or made available to Buyer correct and complete
copies of the most recent inspection reports, if any, received
from insurance underwriters as to the condition of the Purchased
Assets.
5.25. Regulation.
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(a) As of the date of this Agreement, each of MDHC, MDHRS
and West Dade, as required, is (i) certified for
participation or enrollment in the Medicare and Medicaid
programs; (ii) has a current and valid provider contract
with the Medicare and Medicaid programs; and (iii) is in
substantial compliance with the conditions of participation of
those programs. Except as otherwise set forth in
Schedule 5.25, no Seller has received notice from
the regulatory authorities which enforce the statutory or
regulatory provisions in respect of either the Medicare or the
Medicaid program of any pending or threatened investigations,
and to Sellers Knowledge, no investigations or surveys are
pending or threatened. No Seller is a party to, or the
beneficiary of, any agreement, contract, understanding or
business venture with any provider or referral source which
violates the Medicare/ Medicaid Fraud and Abuse amendments or
any regulations thereunder adopted by the U.S. Department of
Health and Human Services or any regulations adopted by any
other federal or state agency. |
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(b) No Seller nor, to the Knowledge of Sellers, any
physician or other health care professional employee of the
Business has engaged in any activities which are prohibited
under 42 U.S.C. § 1320a-7b, or the regulations promulgated
thereunder pursuant to such statutes, or related state or local
statutes or regulations, or which are prohibited by rules of
professional conduct, including the following:
(a) knowingly and willfully making or causing to be made a
false statement or representation of a fact in any application
for any benefit or payment; (b) knowingly and willfully
making or causing to be made any false statement or
representation of a fact for use in determining rights to any
benefit or payment; (c) failing to disclose knowledge by a
claimant of the occurrence of any event affecting the initial or
continued right to any benefit or payment on its own behalf or
on behalf of another, with intent to |
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fraudulently secure such benefit or payment; and
(d) knowingly and willfully soliciting or receiving any
remuneration (including any kickback, bribe, or rebate),
directly or indirectly, overtly or covertly, in cash or in kind
or offering to pay or receive such remuneration: (A) in
return for referring an individual to a Person for the
furnishing or arranging for the furnishing of any item or
service for which payment may be made in whole or in part by
Medicare or Medicaid; or (B) in return for purchasing,
leasing, or ordering or arranging for or recommending
purchasing, leasing, or ordering any good, facility, service or
item for which payment may be made in whole or in part by
Medicare or Medicaid. Each Seller has at all times complied with
the applicable Requirements of Law which prohibit physicians who
have an ownership, investment or beneficial interest in certain
health care facilities from referring patients to such
facilities for the provisions of designated and other health
services. Each Seller has filed all reports required to be filed
pursuant to any applicable Requirement of Law regarding
compensation arrangements and financial relationships between a
physician and an entity to which the physician refers patients. |
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(c) Schedule 5.25 lists and describes all plans
and other efforts of the Business with respect to the practice
locations to comply with the Health Insurance Portability and
Accountability Act of 1996 (HIPAA), including the
final regulations promulgated thereunder, whether such plans and
efforts have been put in place or are in process.
Schedule 5.25 includes, but is not limited in any manner
whatsoever, to any privacy compliance plan of the Business in
place or in development, and any plans, analyses or budgets
relating to information systems including but not limited to
necessary purchases, upgrades or modifications to effect HIPAA
compliance. |
5.26. Securities Law Matters. Each of the Owners
and each Seller acknowledges that (a) he or it has been
furnished with such documents, materials and information as he,
she or it deems necessary or appropriate for evaluating an
investment in CNU (including, without limitation, all reports
filed by CNU under Section 13 or 15(d) of the Exchange Act
since June 30, 2005, CNUs Annual Report to
Shareholders for the fiscal year ended June 30, 2005,
CNUs proxy statement dated October 28, 2005 and the
description of CNUs common stock contained in the
Registration Statement on Form 8-A filed by CNU with the
Securities and Exchange Commission on September 14, 1996)
and confirms that he, she or it has made such further
investigation of CNU as was deemed appropriate to evaluate the
merits and risks of this investment and (b) he or it has
had the opportunity to ask questions of, and receive answers
from, the directors and officers of CNU and persons acting on
CNUs behalf, concerning the terms and conditions of the
offering of the CNU Shares. Each Seller and each Owner is
acquiring the CNU Shares solely for his or its own account for
purposes of investment, and no Seller or Owner has any intention
of selling the CNU Shares in violation of the federal securities
laws or any applicable state securities laws or the Registration
Rights Agreement; provided that, notwithstanding the
foregoing, each Seller intends to distribute the CNU Shares
immediately prior to the Merger to its shareholders in
compliance with federal securities laws and any applicable state
securities laws and as otherwise permitted by the Registration
Rights Agreement. Each of the Owners and each Seller is an
accredited investor as such term is defined in
Rule 501(a) of Regulation D under the Securities Act
and has such knowledge and experience in financial and business
matters that he is capable of evaluating the merits and risks of
an investment in the CNU Shares. Each of the Owners and each
Seller understands that the CNU Shares have not been registered
under the Securities Act, or applicable state securities laws,
and are being issued in reliance on exemptions for private
offerings contained in Sections 3(b) and 4(2) of the
Securities Act and the provisions of Regulation D
promulgated thereunder and in reliance on exemptions from the
registration requirements of certain state securities laws.
Because the CNU Shares have not been registered under the
Securities Act or applicable state securities laws, the CNU
Shares may not be re-offered or resold except through a valid
and effective registration statement or pursuant to a valid
exemption from the registration requirements under the
Securities Act and applicable state securities laws. Each of the
Owners and each Seller is fully aware (i) of the
restrictions on sale, transferability and assignment of the CNU
Shares as described in this Agreement and the Registration
Rights Agreement, (ii) that each Seller and the Owners must
bear the economic risk of the investment in CNU for an
indefinite period of time and (iii) that because the sale
of the CNU Shares has not been registered, an investment in the
CNU Shares may not be readily liquidated. Each of the Owners and
each Seller acknowledges that each certificate representing the
CNU Shares shall bear a legend with respect to the restrictions
described in this Section 5.26 and the Registration
Rights Agreement.
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5.27. Related Party Transactions. Except as set
forth on Schedule 5.27, no Owner, nor any Seller nor
any of their respective directors or officers, nor, to the
Knowledge of Sellers, any employee of any Seller (a) owns,
directly or indirectly, any interest or has made any investment
in any Person which is a competitor, potential competitor, or
supplier of any Seller or any third-party payor with which any
Seller has a business relationship; (b) owns, directly or
indirectly, in whole or in part, any property, asset or right,
real, personal or mixed, tangible or intangible which is
utilized in the operation of the Business as presently conducted
but which is not included within the Purchased Assets; or
(c) has an interest or investment in or is, directly or
indirectly, a party to any Seller Agreement or other arrangement
or relationship (whether or not in writing) pertaining or
relating to the Business. Schedule 5.27 also
identifies each liability or other item of indebtedness owed by
any Seller included in the Assumed Liabilities the repayment of
which is personally guaranteed by any Owner.
5.28. No Finder. No Seller nor any Owner nor any
Person acting on their behalf has paid or become obligated to
pay any fee or commission to any broker, finder or intermediary
for or on account of the transactions contemplated by this
Agreement for which Buyer or CNU would be liable after the
Closing.
5.29. Disclosure. None of the representations or
warranties of Sellers or any Owner contained herein, none of the
information contained in the Schedules referred to in
Article V, and none of the other written information
or documents furnished to Buyer or any of its representatives by
any Seller or any Owner or their representatives pursuant to the
terms of this Agreement, is false or misleading in any material
respect or omits to state a fact herein or therein necessary to
make the statements herein or therein not misleading in any
material respect.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF BUYER, BUYER LLC AND
CNU
As an inducement to Sellers and the Owners to enter into this
Agreement and to consummate the transactions contemplated
hereby, Buyer, Buyer LLC and CNU hereby jointly and severally
represent and warrant to Sellers and the Owners and agree as
follows:
6.1. Organization of Buyer, Buyer LLC and CNU.
Each of Buyer, Buyer LLC and CNU is a corporation or limited
liability company as applicable duly organized, validly existing
and in good standing under the laws of the State of Florida and
has full power and authority to own or lease and to operate and
use its respective properties and assets and to carry on its
respective business as now conducted.
6.2. Authority of Buyer, Buyer LLC and CNU.
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(a) Each of Buyer, Buyer, LLC and CNU has full power and
authority to execute, deliver and perform this Agreement and all
of the Buyer Ancillary Agreements. The execution, delivery and
performance of this Agreement and the Buyer Ancillary Agreements
by Buyer, Buyer LLC and CNU have been duly authorized and
approved by Buyers and CNUs board of directors or
board of managers, as applicable, and, except for the approval
of CNUs shareholders, do not require any further corporate
authorization or consent of Buyer, Buyer LLC or CNU. This
Agreement has been duly authorized, executed and delivered by
Buyer, Buyer LLC and CNU and is a legal, valid and binding
agreement of Buyer, Buyer LLC or CNU enforceable in accordance
with its terms, and each of the Buyer Ancillary Agreements has
been or will be duly authorized by Buyer, Buyer LLC and CNU and
is, or upon execution will be, a legal, valid and binding
obligation of Buyer, Buyer LLC and CNU enforceable in accordance
with its terms, except as such enforceability may be subject to
the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable
remedies. |
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(b) Except as set forth in Schedule 6.2,
neither the execution and delivery of this Agreement or any of
the Buyer Ancillary Agreements the consummation of any of the
transactions contemplated hereby or thereby, nor compliance with
or fulfillment of the terms, conditions and provisions hereof or
thereof will: |
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(i) conflict with, result in a material breach of the
terms, conditions or provisions of, or constitute a default, an
event of default or an event creating rights of acceleration,
termination or cancellation or a loss of rights under
(A) the Articles of Incorporation, Articles of Organization
or Bylaws or Operating Agreement of Buyer, Buyer LLC or CNU,
(B) any material note, instrument, agreement, mortgage,
lease, license, franchise, permit or other authorization, right,
restriction or obligation to which Buyer, Buyer LLC or CNU is a
party or any of its properties is subject or by which Buyer,
Buyer LLC or CNU is bound, (C) any Court Order to which
Buyer, Buyer LLC or CNU is a party or by which it is bound or
(D) any Requirement of Law affecting Buyer, Buyer LLC or
CNU; or |
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(ii) require the approval, consent, authorization or act
of, or the making by Buyer, Buyer LLC or CNU of any declaration,
filing or registration with, any Person. |
6.3. No Finder. Neither Buyer, Buyer LLC nor CNU
nor any Person acting on their behalf has paid or become
obligated to pay any fee or commission to any broker, finder or
intermediary for or on account of the transactions contemplated
by this Agreement for which any Seller or any Owner would be
liable after the Closing.
6.4. Capital Stock of Buyer. Subject in all
respects to the terms and conditions of this Agreement and the
consummation of the transactions contemplated by this Agreement
in accordance within the terms and conditions of this Agreement,
the CNU Shares to be issued pursuant to this Agreement
(i) will be duly authorized, validly issued, fully paid and
non-assessable and not subject to preemptive rights created by
statute, or by CNUs Articles of Incorporation or bylaws,
and (ii) will, when issued, be listed on the American Stock
Exchange. CNU has reserved for issuance a sufficient number of
authorized and unissued shares of its common stock to complete
the transactions contemplated by this Agreement. Other than
(w) pursuant to any applicable Requirements of Law,
(x) this Agreement, (y) any agreement, arrangement or
understanding to which any Seller or any Owner may be a party,
or (z) as a result of any Seller or any Owner being an
Affiliate of CNU at any time, there are no restrictions upon the
resale of the CNU Shares by any Seller or any Owner. Except for
this Agreement or as disclosed in the CNU SEC Documents, CNU has
no commitments to issue any capital stock prior to the Closing.
6.5. SEC Filings; Financial Statements.
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(a) CNU has delivered or made available to Sellers accurate
and complete copies of each report and definitive proxy
statement filed by CNU with the Securities and Exchange
Commission under the Exchange Act since June 30, 2004 (the
CNU SEC Documents). All statements, reports,
schedules, forms and other documents required to have been filed
by CNU with the Securities and Exchange Commission under the
Exchange Act since June 30, 2004 have been so filed. As of
the time it was filed with the Securities and Exchange
Commission (or, if amended or superseded by a filing prior to
the date of this Agreement, then on the date of such filing):
(i) each of the CNU SEC Documents complied in all material
respects with the applicable requirements of the Exchange Act;
and (ii) none of the CNU SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading. |
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(b) The consolidated financial statements of CNU contained
in the CNU SEC Documents: (i) complied as to form in all
material respects with the published rules and regulations of
the Securities and Exchange Commission applicable thereto;
(ii) were prepared in accordance with GAAP throughout the
periods covered (except as may be indicated in the notes to such
financial statements and, in the case of unaudited statements,
as permitted by Form 10-Q of the Securities and Exchange
Commission, and except that unaudited financial statements may
not contain footnotes and are subject to normal and recurring
year-end audit adjustments which will not, individually or in
the aggregate, be material in |
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amount); and (iii) fairly present the consolidated
financial position of CNU and its consolidated subsidiaries as
of the respective dates thereof and the consolidated results of
operations of CNU and its consolidated subsidiaries for the
periods covered thereby. |
6.6. Absence of Changes. Since December 31,
2005, there has been no Material Adverse Effect on CNU, nor,
except as disclosed in the CNU SEC Documents, has CNU;
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(a) conducted its business other than in the ordinary
course of business consistent with past practice; |
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(b) made any material change in the accounting principles
and practices used by CNU; |
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(c) declared or paid any dividends on or made any other
distributions (whether in cash, stock or property) in respect of
any of its capital stock, or split, combined or reclassified any
of the CNU Common Stock or issued or authorized the issuance of
any other securities in respect of, in lieu of or in
substitution for shares of CNU Common Stock; |
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(d) other than upon the exercise of securities that are
exercisable or exchangeable for or convertible into shares of
CNU Common Stock, issued, delivered or sold or authorized or
proposed the issuance, delivery or sale of, any shares of CNU
Common Stock of any class or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or
entered into other agreements or commitments of any character
obligating it to issue any such shares or other convertible
securities; |
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(e) caused, permitted or proposed any amendments to its
Articles of Incorporation or bylaws; |
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(f) created, incurred, assumed or guaranteed any
indebtedness for borrowed money or entered into, as lessee, any
capitalized lease obligations (as defined by GAAP) other than in
the ordinary course of business consistent with past practices; |
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(g) taken any other action which could reasonably be
expected to cause any of the conditions to the Closing not to be
satisfied; or |
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(h) agreed to do any of the foregoing. |
6.7. No Action, Suit or Proceedings. Except as set
forth in the CNU SEC Documents, there is no action, suit or
proceeding pending against CNU, Buyer or Buyer LLC or, to the
Knowledge of CNU, threatened which questions the legality or
propriety of the transactions contemplated by this Agreement.
6.8. No Violation, Litigation or Regulatory
Action. Except as set forth in the CNU SEC Documents or
Schedule 6.8:
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(a) CNU, Buyer and Buyer, LLC have complied in all material
respects with all Requirements of Law and Court Orders which are
applicable to their business and neither CNU, Buyer nor Buyer,
LLC has been excluded or debarred from providing services to a
Governmental Body or to any customer that participates in a
program sponsored by a Governmental Body; |
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(b) there are no lawsuits, claims, suits, proceedings or
investigations pending or, to the Knowledge of CNU and Buyer,
threatened against or affecting CNU, and Buyer nor, to the
Knowledge of CNU and Buyer, is there any basis for any of the
same, and there are no lawsuits, suits or proceedings pending in
which CNU, Buyer or Buyer, LLC is the plaintiff or claimant; and |
6.9 Employee Relations. Except as set forth in the
CNU SEC Documents or Schedule 6.9, CNU and Buyer
have complied in all material respects with all applicable
Requirements of Law relating to prices, wages, hours,
discrimination in employment and collective bargaining and to
the operation of their business and are not liable for any
arrears of wages or any Taxes or penalties for failure to comply
in any material respect with any of the foregoing. CNU and
Buyers relations with employees of their business are
satisfactory. Neither CNU nor Buyer is a party to, and their
business is not affected by or, to the Knowledge of CNU and
Buyer threatened with, any dispute or controversy with a union
or with respect to unionization or collective bargaining
involving the employees of the Business. Neither CNU nor Buyer
is adversely affected by any dispute or controversy with a union
or with respect to unionization or collective bargaining
involving any
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customer of their business. Schedule 6.9 sets forth
a description of any union organizing or election activities
involving any non-union employees of their business that have
occurred since January 1, 2001 or, to the Knowledge of CNU
and Buyer, are threatened as of the date hereof.
6.10 Regulation.
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(a) As of the date of this Agreement, each of CNU, Buyer
and all of its other subsidiaries and affiliates, to the extent
applicable, as required, is (i) certified for participation
or enrollment in the Medicare programs; (ii) has a current
and valid provider contract with the Medicare programs; and
(iii) is in substantial compliance with the conditions of
participation of those programs. Except as otherwise set forth
in the CNU SEC Documents or Schedule 6.10, none of
such parties has received notice from the regulatory authorities
which enforce the statutory or regulatory provisions in respect
of either the Medicare program of any pending or threatened
investigations, and to CNUs and Buyers Knowledge, no
investigations or surveys are pending or threatened. None of
such parties is a party to, or the beneficiary of, any
agreement, contract, understanding or business venture with any
provider or referral source which violates the Medicare/
Medicaid Fraud and Abuse amendments or any regulations
thereunder adopted by the U.S. Department of Health and Human
Services or any regulations adopted by any other federal or
state agency. |
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(b) Neither of CNU, Buyer, its other subsidiaries and
affiliates, nor, to the Knowledge of CNU, any physician or other
health care professional employee of their business has engaged
in any activities which are prohibited under 42 U.S.C. §
1320a-7b, or the regulations promulgated thereunder pursuant to
such statutes, or related state or local statutes or
regulations, or which are prohibited by rules of professional
conduct, including the following: (i) knowingly and
willfully making or causing to be made a false statement or
representation of a fact in any application for any benefit or
payment; (ii) knowingly and willfully making or causing to
be made any false statement or representation of a fact for use
in determining rights to any benefit or payment;
(iii) failing to disclose knowledge by a claimant of the
occurrence of any event affecting the initial or continued right
to any benefit or payment on its own behalf or on behalf of
another, with intent to fraudulently secure such benefit or
payment; and (iv) knowingly and willfully soliciting or
receiving any remuneration (including any kickback, bribe, or
rebate), directly or indirectly, overtly or covertly, in cash or
in kind or offering to pay or receive such remuneration:
(A) in return for referring an individual to a Person for
the furnishing or arranging for the furnishing of any item or
service for which payment may be made in whole or in part by
Medicare; or (B) in return for purchasing, leasing, or
ordering or arranging for or recommending purchasing, leasing,
or ordering any good, facility, service or item for which
payment may be made in whole or in part by Medicare. CNU and
Buyer have at all times complied with the applicable
Requirements of Law which prohibit physicians who have an
ownership, investment or beneficial interest in certain health
care facilities from referring patients to such facilities for
the provisions of designated and other health services. Each of
CNU, Buyer and all of its other subsidiaries and affiliates, as
may be applicable, has filed all reports required to be filed
pursuant to any applicable Requirement of Law regarding
compensation arrangements and financial relationships between a
physician and an entity to which the physician refers patients. |
6.11. Insurance. CNU has delivered or made
available to Sellers correct and complete copies of the policies
of directors and officers insurance maintained,
owned or held by CNU on the date hereof. CNU has complied in all
material respects with its policies of directors and
officers insurance and has not failed to give any notice
or present any claim thereunder in a due and timely manner.
6.12. Disclosure. None of the representations or
warranties of CNU, Buyer and Buyer LLC contained herein, none of
the information contained in the Schedules referred to in
Article VI, and none of the other written
information or documents furnished to Sellers, Owners or any of
their representatives by CNU, Buyer or Buyer LLC or their
representatives pursuant to the terms of this Agreement, is
false or misleading in any material respect or omits to state a
fact herein or therein necessary to make the statements herein
or therein not misleading in any material respect.
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ARTICLE VII
ADDITIONAL AGREEMENTS
7.1. Covenant Not to Compete or Solicit Business.
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(a) In furtherance of the sale of the Purchased Assets and
the Business to Buyer and CNU hereunder by virtue of the
transactions contemplated hereby and more effectively to protect
the value and goodwill of the Purchased Assets and the Business
so sold, each Seller and each Owner covenants and agrees that,
for a period ending on the fifth anniversary of the Closing
Date, neither such Seller or such Owner nor any of their
respective Affiliates will: |
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(i) directly or indirectly anywhere in West Palm Beach,
Broward, Miami-Dade, Hillsborough or Pinellas County, Florida,
(whether as principal, agent, consultant, independent
contractor, partner or otherwise) own, manage, operate, control,
participate in, perform services for, or otherwise carry on, a
business the same as the Business or competitive with CNUs
business of providing primary health care services and physician
practice management services or competitive with any other line
of business that CNU may engage in or pursue at any time that
any Owner is either employed by or serving on the Board of
Directors of CNU (it being understood by the parties hereto that
the Business is not limited to any particular region of the
aforementioned counties and that such business may be engaged in
effectively from any location in any of such counties), other
than on behalf of or for the benefit of Buyer or CNU; |
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(ii) induce or attempt to persuade any employee,
consultant, agent or customer of any Seller to terminate such
employment, consulting, agency or business relationship in order
to enter into any such relationship on behalf of any other
business organization in competition with the Business; |
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(iii) conduct business under or own any interest in any
Person the name of which includes or which does business under
the name Miami Dade Health Centers or any derivation
thereof; or |
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provided, however, that (A) nothing set forth
in this Section 7.1 shall prohibit any Seller or any
Owner or their respective Affiliates from owning not in excess
of 5% in the aggregate of any class of capital stock of any
corporation if such stock is publicly traded and listed on any
national or regional stock exchange or on the NASDAQ national
market and (B) no Owner shall be responsible for any breach
of this Section 7.1 by any other Owner. In addition,
each Seller and each Owner covenants and agrees that it will
not, and will not permit any of its Affiliates to, divulge or
make use of any trade secrets or other confidential information
of the Business other than to disclose such secrets and
information to Buyer or CNU, (ii) as otherwise required by
any Requirement of Law or judicial process; provided that, to
the extent reasonably practicable the affected Sellers or Owners
shall first provide CNU with notice of such Requirement of Law
or judicial process and an opportunity to seek a protective
order maintaining the confidentiality of such information, or
(iii) in connection with professional services rendered to
the Sellers or Owners provided the recipient of such information
has a bona fide need to know such information in connection with
such professional services and is bound to a duty of
confidentiality with respect to disclosure of such information. |
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(b) If any Seller or any Owner or any Affiliate of any
Seller or such Owner violates any of its obligations under this
Section 7.1, Buyer and CNU may each proceed against
it in law or in equity for such damages or other relief as a
court may deem appropriate. Each Seller and each Owner
acknowledges that a violation of this Section 7.1
may cause Buyer and CNU irreparable harm which may not be
adequately compensated for by money damages. Each Seller and
each Owner therefore agrees that in the event of any actual or
threatened violation of this Section 7.1, Buyer and
CNU shall be entitled, in addition to other remedies that either
of them may have, to a temporary restraining order and to
preliminary and final injunctive relief against such Seller or
such Owner or such Affiliate of such Seller or such Owner to
prevent any violations of this Section 7.1, without
the necessity of posting a bond. The prevailing party in any
action commenced under this Section 7.1 shall also
be entitled to receive reasonable attorneys fees and court
costs. It is the intent and understanding of each party hereto
that if, in any action before any court or agency legally
empowered to enforce this Section 7.1, any term, |
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restriction, covenant or promise in this
Section 7.1is found to be unreasonable and for that
reason unenforceable, then such term, restriction, covenant or
promise shall be deemed modified to the extent necessary to make
it enforceable by such court or agency to the maximum extent
permitted by applicable Requirements of Law. |
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(c) Without limiting the generality of
Section 7.1(a), the parties acknowledge
(i) that nothing contained herein is intended to prevent
Dr. Luis Cruz from personally practicing medicine anywhere
in the State of Florida in a manner that does not violate
Section 7.1(a) and (ii) that none of the
activities described on Schedule 7.1(c) shall be
deemed to violate Section 7.1(a). |
7.2. Taxes.
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(a) Sellers and the Owners shall be liable for and pay, and
shall indemnify Buyer and CNU against, (i) all Income Taxes
(whether assessed or unassessed) applicable to the Business, the
Purchased Assets and the Assumed Liabilities, in each case
attributable to taxable years or periods ending on and including
or prior to the Closing Date, (ii) with respect to any
Straddle Period, all Income Taxes applicable to the Business for
the portion of such Straddle Period ending on and including the
Closing Date and (iii) any Tax applicable to the Business
payable by Sellers or Owners by reason of the transactions
contemplated by this Agreement; provided, that Sellers and
Owners shall not be liable to any Income Taxes for which CNU or
Buyer are liable under this Agreement. Buyer and CNU shall be
liable for and shall pay and shall indemnify each Seller and
each Owner against all Income Taxes (whether assessed or
unassessed) applicable to the Business, the Purchased Assets and
the Assumed Liabilities that are attributable to taxable years
or periods beginning after the Closing Date and, with respect to
any Straddle Period, the portion of such Straddle Period
beginning after the Closing Date; provided, that Buyer
and CNU shall not be liable for any Income Taxes for which any
Seller or any Owner is liable under this Agreement. For purposes
of this Section 7.2, any Straddle Period shall be
treated on a closing of the books basis as two
partial periods, one ending at the close of the Closing Date and
the other beginning on the day after the Closing Date. Buyer and
CNU shall assume and shall discharge and pay when due all Taxes
other than Income Taxes payable after the Closing Date. |
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(b) Notwithstanding Section 7.2(a), any sales
Tax, use Tax, real property transfer Tax, documentary stamp Tax
or similar Tax attributable to the sale or transfer of the
Business, the Purchased Assets or the Assumed Liabilities shall
be paid one-half by Sellers and one-half by Buyer. Buyer and
Sellers each agree to timely sign and deliver such certificates
or forms as may be necessary or appropriate to establish an
exemption from (or otherwise reduce), or file Tax Returns with
respect to, such Taxes. |
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(c) Sellers or Buyer, as the case may be, shall provide
reimbursement for any Tax paid by one party all or a portion of
which is the responsibility of the other party in accordance
with the terms of this Section 7.2. Within a
reasonable time prior to the payment of any said Tax, the party
paying such Tax shall give notice to the other party of the Tax
payable and the portion which is the liability of each party,
although failure to do so will not relieve the other party from
its liability hereunder. |
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(d) After the Closing Date, each Seller and each Owner and
CNU shall (and cause their respective Affiliates to): |
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(i) assist the other party in preparing any Tax Returns
which such other party is responsible for preparing and filing; |
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(ii) cooperate fully in preparing for any audits of, or
disputes with taxing authorities regarding, any Tax Returns of
the Business or the Purchased Assets; |
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(iii) make available to the other and to any taxing
authority as reasonably requested all information, records, and
documents relating to Taxes of the Business or the Purchased
Assets; |
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(iv) provide timely notice to the other in writing of any
pending or threatened Tax audits or assessments relating to
Taxes of the Business or the Purchased Assets for taxable
periods for which the other may have a liability under this
Section 7.2; and |
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(v) furnish the other with copies of all correspondence
received from any taxing authority in connection with any Tax
audit or information request with respect to any such taxable
period. |
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(e) Notwithstanding anything to the contrary in this
Agreement, the obligations of the parties set forth in this
Section 7.2 shall be unconditional and absolute and
shall remain in effect without limitation as to time. |
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7.3. Discharge of Business Liabilities. |
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(a) Retain and each Owner covenants and agrees that, from
and after the Closing, it will pay and discharge as and when due
(except as disputed in good faith), and hold Buyer, Buyer LLC,
Sellers and CNU harmless from, each and every liability and
obligation of Sellers arising from events occurring on or prior
to the Closing Date, excepting only the Assumed Liabilities; it
being understood and agreed that Buyer is assuming no
liabilities or obligations of Sellers other than the Assumed
Liabilities. |
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(b) CNU and Buyer covenant and agree that, from and after
the Closing, they will pay and discharge as and when due (except
as disputed in good faith), and hold Retain and Owners harmless
from, each and every liability and obligation of CNU or Buyer
arising from (i) the Assumed Liabilities and (ii) the
operation of the Business from and after the Closing, except, in
the case of clause (ii) above, to the extent of any Loss or
Expense arising as a result of any action or omission of any
Owner after the Closing Date that constitutes gross negligence
or willful misconduct on the part of such Owner. |
7.4. Employees and Employee Benefit Plans.
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(a) CNU shall hire all employees of the Business at time of
Closing. Effective as of the Closing Date, the employment by the
Sellers of the employees of the Business shall terminate, and
each such employee shall be offered employment at will by CNU at
a salary or hourly rate not less than that indicated on
Schedule 5.18(j); provided that any physician
employed by the Business shall be offered employment upon the
terms and conditions of such employees Physician
Employment Agreement at a salary not less than that reflected on
Schedule 5.18(j). The Sellers and the Owners shall
cooperate with CNU in the orderly transfer of the employees of
the Business to CNU. Notwithstanding anything set forth herein
to the contrary, (i) nothing in this Agreement shall create
any obligation on the part of the CNU to continue the employment
of any employee for any period following the Closing Date and
(ii) nothing in this Agreement shall preclude CNU from
altering, amending or terminating any of its employee benefit
plans, or the participation of any of its employees in such
plans, at any time; provided however, that CNU shall be
liable for any expenses, penalties, fines or other obligations
of Sellers or Owners pursuant to the WARN Act for CNUs or
Buyers termination of any such employee after the Closing Date. |
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(b) To the extent permitted by the applicable insurance
contracts or plans, all employees who become employees of CNU
(the Transferring Employees) and their
eligible dependents shall be covered by CNUs medical,
prescription drug, dental, vision, flexible spending (with
respect to medical and/or dependent care expenses), life and
accidental death and dismemberment plans on the Closing Date. |
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(c) With respect to each Transferring Employee, Sellers
shall retain the obligation and liability for any workers
compensation or similar workers protection claims with
respect to any such individual, which are the result of an
injury or illness originating prior to the Closing Date,
regardless of whether such claim is asserted prior to, on or
after the Closing Date. Neither Buyer nor CNU shall assume or be
obligated to pay, perform or discharge any liability or
obligation under any employee benefit plan of Sellers or their
Affiliates. |
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(d) Sellers shall transfer to CNU on the Closing Date
complete copies of the personnel records of Transferring
Employees. |
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(e) Neither Buyer nor CNU shall have any liabilities:
(i) related to the employees of Sellers who do not become
Transferring Employees through no fault of CNU or Buyer; or
(ii) related to Transferring Employees to the extent such
liability arises from any action, event or course of conduct of
Sellers on or |
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prior to the Closing Date, regardless of whether such liability
is asserted prior to, on or after the Closing Date; |
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(f) CNU and Buyer shall be responsible for satisfying
continuation coverage requirements for all
group health plans under Section 4980B of the
Code, Part 6 of Title I of ERISA and comparable state
law with respect to each employee of Sellers who does not become
a Transferring Employee (and any spouse, dependents or
beneficiary of such employee) and with respect to each former
employee of Sellers whose employment terminated before the
Closing Date and any spouse, dependents or beneficiary of such
former employee (each such person entitled to continuation
coverage, a COBRA Beneficiary). To
satisfy this obligation, CNU and Buyer shall use commercially
reasonable efforts to continue to maintain in effect all
group health plans that are in effect immediately
prior to the Closing Date until such time as all rights to
continuation coverage for all COBRA Beneficiaries
have ended under all applicable laws. |
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(g) CNU and Buyer will treat an individuals
employment as an employee of a Seller the same as employment as
an employee by CNU or Buyer for purposes of satisfying any
service requirement to participate in any CNU or Buyer benefit
arrangement and to determine the extent to which a benefit
earned under such a plan is non-forfeitable if such individual
is employed as an employee by a Seller at the Closing Date. |
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(h) After the Closing and immediately prior to the
execution of the Second Instrument of Assumption, Sellers will
terminate all Sellers Non-ERISA Plans and Sellers
ERISA Plans. |
7.5. Collection of Trailing Payments. During the
fourteen (14)-day period commencing the day after the Closing
Date, Buyer and CNU shall use all commercially reasonable
efforts to collect payments that would constitute Trailing
Payments if collected during such fourteen (14)-day period. The
parties acknowledge that Buyer and CNU shall be collecting and
holding such Trailing Payments in trust for the benefit of the
Owners as contemplated in Section 3.3 hereof. Buyer
and CNU will, upon receipt, deposit and, until paid to Owners,
maintain all Trailing Payments in a segregated interest-bearing
account with a financial institution mutually agreeable to the
Sellers Representative and CNU. Neither Buyer, CNU nor any
of its Affiliates shall take any action that could reasonably be
expected to delay, reduce, suspend, impede or otherwise prevent
the collection of the payments from the payors as set forth on
Schedule 1.1(b) during the 14-day period commencing
the day after the Closing Date; provided that the foregoing
shall not limit the ability of CNU, Buyer or any of their
respective Affiliates to take any action or refrain from taking
any action unrelated to and not impacting the Trailing Payments.
If the Sellers notify CNU in writing no less than ten
(10) days prior to the Closing Date that the Merger would
adversely affect or delay the collection of Trailing Payments,
then the parties shall work together in good faith to modify the
Merger so as to mitigate any such adverse affect or delay,
including without limitation, by causing the Buyer to create one
or more wholly-owned limited liability companies which will be
merged with and into the Sellers in a reorganization under Code
Sections 368(a)(2)(E) and 368(a)(1)(A) so that the Sellers
are the surviving entities. Notwithstanding the foregoing,
neither CNU nor Buyer shall be obligated to take any action
which would require a resolicitation of proxies for the Special
Meeting or an amendment or supplement to the Proxy Statement to
be mailed to CNUs shareholders or, if the Special Meeting
shall have already then occurred, require the shareholders of
CNU to approve such alternate structure for the Merger.
7.6. Conduct of Business by Sellers Pending Closing.
During the period from the date of this Agreement and
continuing until the earlier of the termination of this
Agreement pursuant to its terms and the Closing Date, Sellers
and Owners agree, except as set forth in
Schedule 7.6 or to the extent that CNU shall
otherwise consent in writing, to carry on its business in the
usual, regular and ordinary course in substantially the same
manner as heretofore conducted, to pay timely its debts and
Taxes, subject to good faith disputes over such debts or Taxes,
and on the same payment terms such debts and taxes have
historically been paid, to collect its receivables in the same
manner and on the same terms such receivables have historically
been collected, to timely pay or perform other material
obligations when due, and to use all commercially reasonable
efforts consistent with past practices and policies to preserve
intact the Sellers present business organizations, keep
available the services of its present officers and employees and
preserve its relationships with patients,
A-35
suppliers, third party payors and others having business
dealings with the Sellers, to the end that the Sellers
goodwill and ongoing businesses be unimpaired on the Closing
Date. The Sellers shall promptly notify CNU of any material
event or occurrence not in the ordinary course of business of
the Company. Except as required by applicable Requirements of
Law or GAAP or as expressly permitted by this Agreement or as
set forth in Schedule 7.6, the Sellers shall not,
and the Owners shall cause the Sellers not to, prior to the
Closing Date or earlier termination of this Agreement pursuant
to its terms, without the prior written consent of CNU, which
consent shall not be unreasonably withheld or delayed:
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(a) sell, lease (as lessor), transfer or otherwise dispose
of (including any transfers from any Seller to any Owner or to
any of their Affiliates), or mortgage or pledge, or impose or
suffer to be imposed any Encumbrance on, any of the assets
reflected on the Balance Sheet or any assets acquired by Sellers
after the Balance Sheet Date, except for personal property sold
or otherwise disposed of for fair value in the ordinary course
of the Business consistent with past practice and except for
Permitted Encumbrances and except for the Excluded Assets;
provided that no such, sale, lease, transfer, disposition,
mortgage, pledge, or Encumberance of Excluded Assets could
reasonably be expected to: (i) create or result in any
liability or obligation of any Buyer Group Member or any
liability or obligation that would be an Assumed Liability,
(ii) cause any representation or warranty of Sellers and
the Owners set forth herein to be untrue or incorrect,
(iii) violate the terms of any covenant or obligation of
Sellers or Owners hereunder, or (iv) cause any of the
conditions to the Closing not to be satisfied; |
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(b) cancel any debts owed to or claims held by such Seller
(including the settlement of any claims or litigation) other
than in the ordinary course of the Business consistent with past
practice; |
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(c) create, incur, assume or guarantee any indebtedness for
borrowed money or entered into, as lessee, any capitalized lease
obligations (as defined by generally accepted accounting
principles) other than in the ordinary course of business
consistent with past practices but in no event in an amount
greater than $100,000 whether individually or in the aggregate; |
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(d) accelerate or delay collection of Receivables generated
by the Business in advance of or beyond their regular due dates
or the dates when the same would have been collected in the
ordinary course of the Business consistent with past practice; |
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(e) delay or accelerate payment of any account payable or
other liability of the Business beyond or in advance of its due
date or the date when such liability would have been paid in the
ordinary course of the Business consistent with past practice; |
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(f) except for distributions to Owners of any and all cash
reflected on Sellers books and records as owned by Sellers
from time to time prior to the Closing Date, make any payment of
cash or distribution of assets to any Owner or any of their
Affiliates, other than in the ordinary course of the Business
consistent with past practice; and other than the sale,
distribution, transfer or otherwise dealing with the Excluded
Assets as the Owners determine from time to time and at any time
in their sole and absolute discretion; provided that no such
sale, distribution, transfer or dealing could reasonably be
expected to: (i) create or result in any liability or
obligation of any Buyer Group Member or any liability or
obligation that would be an Assumed Liability, (ii) cause
any representation or warranty of Sellers and the Owners set
forth herein to be untrue or incorrect, (iii) violate the
terms of any covenant or obligation of Sellers or Owners
hereunder, or (iv) cause any of the conditions to the
Closing not to be satisfied; |
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(g) institute or agree to institute any increase in any
compensation payable to any employee of such Seller or in any
profit-sharing, bonus, incentive, deferred compensation,
insurance, pension, retirement, medical, hospital, disability,
welfare or other benefits made available to employees of such
Seller, other than in the ordinary course of the Business
consistent with past practice and in an amount not to exceed
$10,000; |
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(h) prepare or filed any Tax Return inconsistent with past
practice or, on any such Tax Return, take any position, make any
election, or adopt any method that is inconsistent with
positions taken, elections made or methods used in preparing or
filing similar Tax Returns in prior periods (including
positions, elections or methods which would have the effect of
deferring income to periods for which Buyer is liable |
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pursuant to Section 7.2(a) or accelerating
deductions to periods for which Seller is liable pursuant to
Section 7.2(a)); |
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(i) make any material change in the accounting principles
and practices used by Sellers from those applied in the
preparation of the Balance Sheet and the related statements of
income and cash flow for the period then ended; |
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(j) enter into any agreement that would be a Seller
Agreement if it existed on the date of this Agreement or amend
any Seller Agreement; |
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(k) commence any litigation other than (1) for the
routine collection of bills, or (2) in such cases where
such Seller in good faith determines that failure to commence
suit could result in the material impairment of a valuable
aspect of the Business; |
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(l) declare or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of
any of its capital stock, or split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution
for shares of capital stock of such Seller; |
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provided however, that nothing herein shall prevent the sale,
distribution, transfer or otherwise dealing with the Excluded
Assets as the Owners determine from time to time and at any time
in their sole and absolute discretion ; provided that no such
sale, distribution, transfer or dealing could reasonably be
expected to: (i) create or result in any liability or
obligation of any Buyer Group Member or any liability or
obligation that would be an Assumed Liability, (ii) cause
any representation or warranty of Sellers and the Owners set
forth herein to be untrue or incorrect, (iii) violate the
terms of any covenant or obligation of Sellers or Owners
hereunder, or (iv) cause any of the conditions to the
Closing not to be satisfied. |
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(m) redeem, repurchase or otherwise acquire, directly or
indirectly, recapitalize or reclassify any shares of its capital
stock; |
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(n) issue, deliver or sell or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock
of any class or securities convertible into, or subscriptions,
rights, warrants or options to acquire, or enter into other
agreements or commitments of any character obligating it to
issue any such shares or other convertible securities; |
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(o) cause, permit or propose any amendments to its Articles
of Incorporation or bylaws; |
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(p) make any capital expenditure involving more than
$25,000; |
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(q) take any action or omit to do any action which could
reasonably be expected to cause any of the conditions to the
Closing, not to be satisfied; or |
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(r) agree to do any of the foregoing. |
7.7. Conduct of Business by Buyer and CNU. Except
as expressly provided for by this Agreement, from and after the
date of this Agreement and until the earlier of the termination
of this Agreement or the Closing Date, Buyer and CNU shall each
carry on its respective business in the usual, regular and
ordinary course substantially in the same manner as heretofore
carried on and shall not enter into any agreement, arrangement
or understanding with respect to any of the foregoing and shall
not take any action with would make or cause any of its
representation and warranties made herein to become inaccurate
in any material respect. Without limiting the generality of the
foregoing, from the date of this Agreement until and until the
earlier of the termination of this Agreement or the Closing
Date, CNU will not, directly or indirectly: (a) increase
its consolidated indebtedness for borrowed money by more than
$10 million over the amount of indebtedness reflected on
CNUs consolidated balance sheet as of December 31,
2005; provided, however, that the unused portion of any lines of
credit and other borrowings available to CNU shall not be deemed
to be indebtedness until actually drawn upon, or (b) issue,
in one or more transactions, a number of shares of CNU Common
Stock or any securities convertible into, or subscriptions,
rights, warrants or options representing the right to acquire
greater than 20% of the number of shares of CNU Common Stock
outstanding as of the date hereof or enter into any agreement
obligating it to do so.
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7.8. Assignment or Enforcement of Certain Agreements.
In furtherance of the sale of the Purchased Assets and the
Business to Buyer and CNU hereunder by virtue of the
transactions contemplated hereby and more effectively to protect
the value and goodwill of the Purchased Assets and the Business
so sold, Sellers covenant and agree that, with respect to each
Transferring Employee, Sellers shall either (a) assign to
Buyer all rights of such Seller pursuant to all agreements,
covenants or other obligations of such employee relating to
noncompetition, nonsolicitation of employees or clients and
similar matters or (b) if such agreements, covenants or
obligations cannot be assigned to Buyer, then, upon Buyers
request and at Buyers expense, enforce such agreements,
covenants and obligations to the maximum extent permitted by
applicable law.
7.9. Assignment of Uncollected Receivables. In the
event that Buyer is unable to collect one or more Receivables
and Sellers or the Owners pay to Buyer amounts pursuant to
Section 8.1 based on inaccuracy or breach of the
representations and warranties contained in
Section 5.16 related to such Receivable or
Receivables, Buyer shall assign to such Seller or Owner the
uncollected portion of such Receivable or Receivables promptly
after receiving such payment (and such assignment shall be made
free and clear of any liens or encumbrances created by Buyer).
Sellers or the Owners may collect such uncollected portion of
such Receivable or Receivables using only billing and collection
practices applied by Sellers prior to the Closing in the
collection of its accounts receivable and shall not commence
litigation in connection with such collection without the prior
written consent of Buyer, which consent shall not be
unreasonably withheld or delayed.
7.10. Meeting of Shareholders. CNU shall,
consistent with its Articles of Incorporation and Bylaws, call
and hold a meeting of its shareholders, as promptly as
practicable for the purpose of voting upon the approval of the
issuance of the CNU Shares pursuant to this Agreement (the
Shareholders Meeting), and shall use
all commercially reasonable efforts to hold its
Shareholders Meeting as soon as practicable. CNU shall
(a) use all commercially reasonable efforts to solicit from
its shareholders proxies in favor of the approval of the
issuance of the CNU Shares pursuant to this Agreement,
(b) take all other action necessary or advisable to secure
the vote or consent of CNUs shareholders, as required by
the FBCA to obtain such approval, and (c) include in the
Proxy Statement the recommendation of its Board of Directors in
favor of the approval of the issuance of the CNU Shares pursuant
to this Agreement and not withhold, withdraw or adversely modify
such recommendation.
7.11. Proxy Statement. As promptly as practicable
after the date of this Agreement, the CNU shall prepare and file
with the SEC preliminary proxy materials relating to the
Shareholders Meeting (together with any definitive proxy
materials and amendments thereof or supplements thereto, the
Proxy Statement). As promptly as practicable
upon request, the Sellers shall supply CNU with the information
pertaining to Sellers, Owners or the Business required by the
Exchange Act for inclusion or incorporation by reference in the
Proxy Statement, which information shall not at the time the
Proxy Statement is filed with the SEC, at the time the Proxy
Statement is mailed to CNUs shareholders or at the time of
the Shareholders Meeting, contain any untrue statement of
a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein,
not misleading. If before the Closing Date, any event or
circumstance relating to the Sellers, the Owners, the Business
or their respective officers or directors, should be discovered
by the Sellers that should be set forth in an amendment or a
supplement to the Proxy Statement, the Sellers shall promptly
inform CNU and CNU shall make appropriate amendments or
supplements to the Proxy Statement. CNU will advise Sellers,
promptly after CNU receives notice thereof, of the receipt of
any comments by the SEC on the preliminary proxy materials, of
any request by the SEC for the amendment or supplement of the
Proxy Statement or for additional information. As promptly as
practicable following the resolution of any SEC comments on the
preliminary proxy materials, CNU shall mail the Proxy Statement
to the its shareholders.
7.12. Access to Information About Sellers. CNU
may, from and after the date of this Agreement to the Closing
Date upon 48 hours prior notice, directly or through its
representatives, review the properties, books and records of
Sellers and its financial and legal condition, including all of
the Purchased Assets, to the extent it deems necessary or
advisable to familiarize itself with the Business; this review
will not, however, affect or limit the representations and
warranties made by Sellers or the Owners in this Agreement or
the remedies of Buyer or CNU for breaches of those
representations and warranties. Sellers and the Owners will
permit CNU and its representatives to have, from the date of
this Agreement to the Closing Date, full access to the
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premises and to all the books and records of the Sellers, and
will cause the representatives of the Sellers to furnish CNU
with financial and operating data and other information with
respect to the Business as CNU from time to time requests.
Sellers and the Owners will deliver or cause to be delivered to
CNU additional instruments, documents, and certificates as CNU
may reasonably request for the purpose of (a) verifying the
information set forth in this Agreement and on any Exhibit or
Schedule to this Agreement and, (b) consummating or
evidencing the transactions contemplated by this Agreement.
After the execution of this Agreement, the Sellers shall
cooperate with CNU in developing post-Closing transition
policies with respect to management information systems,
marketing, personnel, outsourcing, operations, regulatory
matters, accounting and financial reporting, including, without
limitation, meeting regularly (at such times as shall be
mutually agreed upon by the Sellers and CNU) with on-site
transition teams of CNU with respect to marketing, management
information systems, regulatory matters, accounting and
financial reporting.
7.13. Financial Statement Audit. Sellers have
engaged the Auditor as their independent auditors for the
purpose of conducting an audit of the Seller Financial
Statements (and any financial statements of the Sellers as of
and for periods ending on or after the Balance Sheet Date for
which CNU is required to include audited financial statements of
the Sellers in its filings with the SEC) and rendering an
opinion thereon. The Auditor is registered with the Public
Company Accounting Oversight Board. Sellers and Owners shall
work together in good faith with the Auditor and cooperate with
all of the Auditors reasonable requests in order to
complete such audit(s) as promptly as possible, and Sellers
shall deliver to CNU such audited financial statements and all
unaudited interim financial statements of Sellers for any period
since December 31, 2005, that are required to be included
in the Proxy Statement as promptly as reasonably possible but in
no event later than August 1, 2006. Sellers and Owners
shall cause the Auditor to conduct such audit(s) in accordance
with generally accepted auditing standards and the audit
standards adopted by the SEC and the Public Company Accounting
Oversight Board. Sellers shall advise the Auditor that the
audited financial statements and the Auditors opinion
thereon shall be included or incorporated by reference in
CNUs filings with the SEC, including, without limitation
the Proxy Statement. The Auditor shall also perform a
calculation of the Adjusted EBITDA. For purposes of the
foregoing, the Adjusted EBITDA shall be the
combined earnings before interest, taxes, depreciation and
amortization of the Sellers for the year ended December 31,
2005, calculated in accordance with GAAP, as adjusted in the
manner set forth in Schedule 7.13.
7.14. Exclusive Dealing. From the date of this
Agreement until the earlier to occur of the Closing Date or the
valid termination of this Agreement, Sellers and the Owners will
not directly or indirectly initiate or engage in any discussions
or negotiations with, or provide any information to, any person,
other than Buyer or CNU, concerning any purchase or option to
purchase the Business or the Purchased Assets or any merger,
sale of substantial assets or similar transaction involving any
of the Sellers or take or permit to be taken any action that
could encourage any of the foregoing.
7.15. Tax-Free Reorganization Treatment. To the
extent consistent with the other terms and conditions of this
Agreement, Sellers, Owners, CNU and Buyer shall use all
commercially reasonable efforts to cause the transactions
contemplated by this Agreement to be treated as a
reorganization within the meaning of
Section 368(a)(1)(A) and 368(a)(2)(D) (or 368(a)(2)(E), if
applicable, pursuant to Section 7.5 hereof) of the
Code to the maximum extent permissible and shall not knowingly
take or fail to take any action which action or failure to act
would jeopardize the qualification of the Merger as a
reorganization within the meaning of
Section 368 of the Code.
7.16. Reasonable Efforts. So long as this
Agreement has not been terminated, Sellers, Owners, CNU and
Buyer shall: (a) promptly obtain waivers, consents, permits
and approvals, and thereafter make any other submissions
required under all applicable Requirements of Law in order to
consummate the transactions contemplated by this Agreement and
(b) use their respective commercially reasonable efforts to
promptly take, or cause to be taken, all other actions and do,
or cause to be done, all other things necessary, proper or
appropriate to consummate the transactions contemplated by this
Agreement. If requested by CNU, Sellers shall cooperate with CNU
in obtaining any amendment to any Seller Agreement that CNU may
reasonably request.
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ARTICLE VIII
INDEMNIFICATION
8.1. Indemnification by Sellers and the Members.
Each Owner agrees to indemnify and hold harmless each Buyer
Group Member from and against any and all Losses and Expense
incurred by such Buyer Group Member or arising from:
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(a) any breach by any Seller or any Owner of any of the
covenants in thisAgreement or in any Seller Ancillary Agreement; |
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(b) any failure of any Seller or any Owner to perform any
of the obligations in this Agreement or in any Seller Ancillary
Agreement; |
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(c) any breach of any warranty or the inaccuracy of any
representation of any Seller or any Owner contained in this
Agreement or any Seller Ancillary Agreement or any certificate
delivered by or on behalf of any Seller or any Owner pursuant
hereto; |
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(d) the failure of any Seller to perform any Excluded
Liability. |
With respect to any breach or inaccuracy of
Sections 4.4, 5.3, 7.1, 7.14,
9.2 or 9.3, each Owner shall be liable only for
such Owners own breach or inaccuracy of such Sections and,
with respect to any breach of any covenant or obligation herein
or in any Seller Ancillary Agreement, each Owner shall be liable
only for such Owners own breach (it being understood that
no Owner shall be liable for any other Owners breach or
inaccuracy of Sections 4.4, 5.3, 7.1,
7.14, 9.2 and 9.3 or of any other covenant
or obligation herein or in any Seller Ancillary Agreement).
The obligation of the Owners to indemnify and hold harmless each
Buyer Group Member under Section 8.1(c)(other than
with respect to any breach or inaccuracy of
Section 5.3) and (d) shall be several to the
extent of their respective Pro Rata Liability; provided,
however, that for purposes of calculating an Owners Pro
Rata Liability, such Owner and all of such Owners
Affiliates who are themselves Owners shall be deemed to be a
single Owner and, as between such Owner and such Owners
Affiliates, the obligation to indemnify and hold harmless each
Buyer Group Member under Section 8.1(c)(other than
with respect to any breach or inaccuracy of
Section 5.3) and (d) for such Owners
Pro Rata Liability shall be joint and several. Notwithstanding
the foregoing it is understood and acknowledged that each Owner
and all of such Ownerss Affiliates will be jointly and
severally responsible for the entire amount of all Losses and
Expense with respect to any breach of any covenant or obligation
in this Agreement or in any Seller Ancillary Agreement by such
Owner or by any Affiliate of such Owner. Solely for purposes of
Owners indemnification obligations hereunder, Jose M.
Garcia and Carlos Garcia shall not be deemed to be Affiliates of
each other.
8.2. Indemnification by Buyer. Buyer and CNU agree
to indemnify and hold harmless each Seller Group Member from and
against any and all Loss and Expense incurred by such Seller
Group Member in connection with or arising from:
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(a) any breach by Buyer or CNU of any of its covenants or
agreements in this Agreement or in any Buyer Ancillary Agreement; |
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(b) any failure by Buyer or CNU to perform any of its
obligations in this Agreement or in any Buyer Ancillary
Agreement; |
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(c) any breach of any warranty or the inaccuracy of any
representation of Buyer or CNU contained in this Agreement or in
any Buyer Ancillary Agreement or in any certificate delivered by
or on behalf of Buyer pursuant hereto; or |
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(d) the failure of Buyer to perform any Assumed Liability. |
Notwithstanding anything to the contrary contained in this
Section 8.2or elsewhere in this Agreement, the
parties agree that the maximum aggregate liability of CNU and
Buyer for any claims under Section 8.2(c) shall not
exceed the amount of the Purchase Price.
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8.3. Notice of Claims. Any Buyer Group Member or
Seller Group Member (the Indemnified Party)
seeking indemnification hereunder shall give to the party
obligated to provide indemnification to such Indemnified Party
(the Indemnitor) a notice (a Claim
Notice) describing in reasonable detail the facts
giving rise to any claim for indemnification hereunder and shall
include in such Claim Notice (if then known or, if not then
known, a reasonable estimate thereof) the amount or the method
of computation of the amount of such claim, and a reference to
the provision of this Agreement or any other agreement, document
or instrument executed hereunder or in connection herewith upon
which such claim is based; provided, that a Claim Notice
in respect of any action at law or suit in equity by or against
a third Person as to which indemnification will be sought shall
be given promptly after the action or suit is commenced;
provided further that failure to give such notice
shall not relieve the Indemnitor of its obligations hereunder
except to the extent it shall have been prejudiced by such
failure.
8.4. Third Person Claims.
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(a) Subject to Section 8.4(b), the Indemnitor
shall have the right to conduct and control, through counsel
reasonably satisfactory to the Indemnified Party, the defense,
compromise or settlement of any third Person claim, action or
suit against such Indemnified Party as to which indemnification
will be sought by any Indemnified Party from any Indemnitor
hereunder, and in any such case the Indemnified Party shall
cooperate in connection therewith and shall furnish such
records, information and testimony and attend such conferences,
discovery proceedings, hearings, trials and appeals as may be
reasonably requested by the Indemnitor in connection therewith;
provided, that the Indemnified Party may participate,
through counsel chosen by it and at its own expense, in the
defense of any such claim, action or suit as to which the
Indemnitor has so elected to conduct and control the defense
thereof; and provided, further, that the
Indemnitor shall not, without the written consent of the
Indemnified Party (which written consent shall not be
unreasonably withheld or delayed), pay, compromise or settle any
such claim, action or suit, unless such settlement involves only
the payment of money damages, includes a complete and
unconditional release of the Indemnified Party and does not
provide for any action or affirmative refraining from any action
on the part of the Indemnified Party. Notwithstanding the
foregoing, the Indemnified Party shall have the right to pay,
settle or compromise any such claim, action or suit with respect
to itself and its Affiliates without such consent,
provided that in such event the Indemnified Party shall
waive any right to indemnity therefor hereunder unless such
consent is unreasonably withheld. The Indemnified Party shall
not be entitled to assume the defense or settlement of any third
Person claim for which an Indemnified Party has indicated it
intends to seek indemnity hereunder unless the Indemnitor and
the Indemnified Party agree that the Indemnified Party shall so
assume the defense or settlement, or unless the Indemnitor fails
to actually assume the defense of the third Person claim. |
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(b) If any third Person claim, action or suit against any
Indemnified Party where Sellers and Owners are the Indemnitors,
could have a Material Adverse Effect on the Business or the
Purchased Assets, then the Indemnified Party shall have the
right to conduct and control, through counsel reasonably
satisfactory to the Indemnitor, the defense, compromise or
settlement of any such third Person claim, action or suit
against such Indemnified Party as to which indemnification will
be sought by any Indemnified Party from any Indemnitor hereunder
and in any such case the Indemnitor shall cooperate in
connection therewith and shall furnish such records, information
and testimony and attend such conferences, discovery
proceedings, hearings, trials and appeals as may be reasonably
requested by the Indemnified Party in connection therewith;
provided, that the Indemnitor may participate, through
counsel chosen by it and at its own expense, in the defense of
any such claim, action or suit as to which the Indemnified Party
has so elected to conduct and control the defense thereof.
Notwithstanding the foregoing, the Indemnified Party shall have
the right to pay, settle or compromise any such claim, action or
suit with respect to itself and its Affiliates, provided
that in such event the Indemnified Party shall waive any right
to indemnity therefor hereunder unless the Indemnified Party
shall have sought the consent of the Indemnitor to such payment,
settlement or compromise and such consent was unreasonably
withheld, in which event no claim for indemnity therefor
hereunder shall be waived. |
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8.5. Limitations on Indemnification Obligations.
(a) The obligations of Sellers and the Owners pursuant
to the provisions of Section 8.1 are subject to the
following limitations:
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(i) Sellers and the Owners shall be required to indemnify
and hold harmless under Section 8.1(c) with respect
to Loss and Expense incurred by Buyer Group Members (other than
Loss and Expense incurred as a result of inaccuracies of the
representations and warranties contained in
Sections 5.1, 5.2, 5.3, 5.7,
5.17 and 5.27 (the Sellers Excluded
Representations), as to which this subsection
(i) shall have no effect) only if the aggregate amount of
such Loss and Expense exceeds $500,000; and then only to the
extent such Loss and Expense exceeds $500,000. Notwithstanding
anything to the contrary contained in this
Section 8.1 or elsewhere in this Agreement, the
parties agree that (A) the maximum aggregate liability of
all Owners for any claims under Section 8.1(c)(other
than Loss and Expense incurred as a result of inaccuracies of
Seller Excluded Representations) shall not exceed one-half of
the amount of the Purchase Price, and (B) the maximum
aggregate liability of each Owner for any claims under
Section 8.1(c) (other than Loss and Expense incurred
as a result of inaccuracies of Seller Excluded Representations)
shall not exceed one-sixth of the amount of the Purchase Price. |
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(ii) The amount of any Loss or Expense for which
indemnification is provided by Sellers or any Owner under this
Article VIII shall be net of any specific reserve
attributable to the subject matter of the related claim, as
reflected on the portion of the work papers to the Balance
Sheet. In addition, to the extent any Loss or Expense arises in
respect of a breach of any representation and warranty as to
Real Estate, such Loss or Expense shall be reduced, dollar for
dollar, by the amount of coverage paid to Buyer or any of its
Affiliate under any title insurance policy in respect of such
Loss or Expense. |
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(iii) the indemnification provided for in
Section 8.1(c) shall terminate eighteen
(18) months after the Closing Date (and no claims shall be
made by any Buyer Group Member under Section 8.1(c)
thereafter), except that the indemnification by Sellers and the
Owners shall continue as to: (A) the Seller Excluded
Representations, which shall terminate 30 days after the
expiration of the applicable statute of limitations and
(B) any Loss or Expense of which any Buyer Group Member has
notified Sellers or the Owners in accordance with the
requirements of Section 8.3on or prior to the date
such indemnification would otherwise terminate in accordance
with this Section 8.5, as to which the obligation of
Sellers and the Owners shall continue until the liability of
Sellers and the Owners shall have been determined pursuant to
this Article VIII, and Seller and the Owners shall
have reimbursed all Buyer Group Members for the full amount of
any such Loss and Expense determined to be payable to such Buyer
Group Members in accordance with this Article VIII. |
(b) The indemnification obligations of Buyer and CNU
provided for in Section 8.2(c) shall terminate
eighteen (18) months after the Closing Date (and no claims
shall be made by any Seller Group Member under
Section 8.2(c) thereafter), except that the
indemnification by Buyer shall continue as to (A) the
representations and warranties set forth in
Sections 6.1, 6.2, 6.3 and 6.4,
as to all of which no time limitation shall apply and
(B) any Loss or Expense of which any Seller Group Member
has notified CNU in accordance with the requirements of
Section 8.3 on or prior to the date such
indemnification would otherwise terminate in accordance with
this Section 8.5, as to which the obligation of CNU
shall continue until the liability of CNU shall have been
determined pursuant to this Article VIII, and CNU
shall have reimbursed all Seller Group Members for the full
amount of such Loss and Expense in accordance with this
Article VIII. The maximum aggregate liability of CNU
and Buyer for any claims under Section 8.2(c) shall
not exceed the amount of the Purchase Price.
8.6. No Implied Representations. Buyer, CNU,
Seller and the Owners acknowledge that, except as expressly
provided in this Agreement, no party hereto has made or is
making any representations or warranties whatsoever, implied or
otherwise.
8.7. Escrow Fund for Indemnification. At the
Closing, the Owners shall deposit One Million Five Hundred
Thousand (1,500,000) CNU Shares (the Escrowed
Shares) with the Escrow Agent, who shall hold and
disburse such Escrowed Shares in accordance with the terms of
the Escrow Agreement as partial security for any claims that any
Buyer Group Member may assert against any Owner pursuant to this
Article VIII. If the Owners are found to be liable to any
Buyer Group Member in connection with a claim by a
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Buyer Group Member for indemnification under this
Article VIII, the Owners shall have the option of
satisfying such claim from the Escrowed Shares or by paying such
claim in cash. If the claim is to be satisfied from the Escrowed
Shares, the Sellers Representative shall so notify the
Escrow Agent and the Escrowed Shares shall be valued at the
greater of (a) closing price of the CNU Common Stock on the
Closing Date or (b) the closing price of the CNU Common
Stock on the date that the Escrowed Shares are released to the
Buyer Group Member.
8.8. Exclusive Remedy. This Article VIII sets
forth the exclusive remedies of all parties, whether in contract
or in tort, in connection with any breach of any of the
representations and warranties set forth herein.
ARTICLE IX
GENERAL PROVISIONS
9.1. Survival of Obligations. All representations,
warranties, covenants and obligations contained in this
Agreement shall survive the consummation of the transactions
contemplated by this Agreement; provided, however,
that, except as otherwise provided in Article VIII,
the representations and warranties contained in this Agreement
shall terminate eighteen (18) months after the Closing Date
and the covenants in Section 7.1 shall terminate five
(5) years after the Closing Date. Except as otherwise
provided herein, no claim shall be made for the breach of any
representation or warranty contained in this Agreement or under
any certificate delivered with respect thereto under this
Agreement after the date on which such representations and
warranties terminate as set forth in this Section.
9.2. Confidential Nature of Information. Each
party agrees that it will treat in confidence all documents,
materials and other information which it shall have obtained
regarding the other party during the course of the negotiations
leading to the consummation of the transactions contemplated
hereby (whether obtained before or after the date of this
Agreement), the investigation provided for herein and the
preparation of this Agreement and other related documents. Such
documents, materials and information shall not be communicated
to any third Person (other than, in the case of Buyer or CNU, to
its counsel, accountants, financial advisors or lenders, and in
the case of Sellers or any Owner, to its (or their) counsel,
accountants or financial advisors). The obligation of each party
to treat such documents, materials and other information in
confidence shall not apply to any information which (i) is
or becomes available to such party from a source other than the
other parties hereto, (ii) is or becomes available to the
public other than as a result of disclosure by such party or its
agents, (iii) is required to be disclosed under applicable
law or judicial process, but only to the extent it must be
disclosed, or (iv) such party reasonably deems necessary to
disclose to obtain any of the consents or approvals contemplated
hereby. Notwithstanding the foregoing, this
Section 9.2 shall not apply to Buyer or CNU after
the Closing with respect to information relating to the Business.
9.3. No Public Announcement. Neither Buyer, CNU,
any Owner nor any Seller shall, without the approval of CNU and
Sellers, make any press release or other public announcement
concerning the transactions contemplated by this Agreement,
except as and to the extent that any such party shall be so
obligated by law or the rules of any stock exchange. The
foregoing shall not preclude communications or disclosures
necessary to implement the provisions of this Agreement or to
comply with the accounting and Securities and Exchange
Commission disclosure obligations.
9.4. Termination. This Agreement may be terminated
and the transactions contemplated by this Agreement may be
abandoned at any time prior to the Closing Date (whether before
or after the approval of this Agreement by the CNUs
shareholders), only as follows:
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(a) by mutual written consent of the CNU and Sellers; |
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(b) by CNU or Sellers: |
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(1) if there shall be any Requirement of Law enacted,
promulgated or issued and applicable to the transactions
contemplated by this Agreement by any Governmental Entity which
would make consummation of the transactions contemplated by this
Agreement illegal; or |
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(2) if the Closing shall not have been consummated by the
later of (A) October 31, 2006, (B) the last
Business Day of the calendar month that includes the day that is
150 days after the date on which the Sellers deliver to CNU
copies of the audited financial statements of Sellers for the
year ended December 31, 2005, and (C) the last
Business Day of the calendar month that includes the day that is
ninety (90) days after the date on which the Sellers
deliver to CNU all unaudited interim financial statements of
Sellers for any period since December 31, 2005 that are
required to be included in the Proxy Statement; provided,
however, that the right to terminate this Agreement under
this Section 9.4(b)(2) shall not be available to:
(i) any party whose failure, or whose Affiliates
failure, to fulfill any obligation under this Agreement has been
the cause of, or resulted in, the failure of the Closing to
occur on or before such date or (ii) any Owner if such
Owner or any other Owner shall have failed to fulfill any
obligation under this Agreement has been the cause of, or
resulted in, the failure of the Closing to occur on or before
such date. |
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(3) if CNUs shareholders do not approve the issuance
of the CNU Shares pursuant to this Agreement at the
Shareholders Meeting; or |
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(4) if any Governmental Body shall have issued an order,
decree or ruling or taken any other action (which order, decree,
ruling or other action the parties hereto shall use their
reasonable efforts to lift), which permanently restrains,
enjoins or otherwise prohibits consummation of the transactions
contemplated by this Agreement and such order, decree, ruling or
other action shall have become final and non-appealable. |
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(1) any Seller or any Owner shall have breached in any
material respect any representation, warranty, covenant or other
agreement contained in this Agreement (other than
Section 7.13), which breach (A) cannot be or
has not been cured, in all material respects, within twenty
(20) business days after the giving of written notice to
Sellers or (B) would result in the failure to satisfy a
condition set forth in Sections 4.5 or 4.6; |
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(2) if any Seller or any Owner (or any of these Affiliates)
shall breach Section 7.13; |
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(3) if the Auditor shall not render an unqualified opinion
or the Seller Financial Statements or shall require any material
adjustments to the Seller Financial Statements from the form
previously provided to CNU and Buyer in order to render an
unqualified opinion thereon; or |
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(4) if the Adjusted EBITDA is not at least $6,000,000. |
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(1) if CNU or Buyer shall have breached in any material
respect any of their respective representations, warranties,
covenants or other agreements contained in this Agreement, which
breach (A) cannot be or has not been cured, in all material
respects, within twenty (20) business days after the giving
of written notice to CNU, or (B) would result in the
failure to satisfy a condition set forth in
Sections 4.5 or 4.7 or; |
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(2) if any of the Voting Agreements shall be terminated; |
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(3) if the Board of Directors of CNU shall withhold or
withdraw its recommendation of the issuance of the CNU Shares
pursuant to this Agreement or modify its recommendation of the
issuance of the CNU shares pursuant to this Agreement in a
manner adverse to Sellers or Owners; or |
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(4) if since the date of this Agreement, there has been a
change in the Code, final or temporary Treasury Regulations
promulgated under Code Section 368, published
pronouncements of the Internal Revenue Service having the same
force and effect as final or temporary Treasury Regulations
promulgated under Code Section 368, case law applying Code
Section 368, or other relevant binding legal authority
relating to Code Section 368 (collectively Change
in Tax Law), that (i) would apply to a
transaction consummated subsequent to such Change in Tax Law
notwithstanding the existence of a binding written agreement
with respect to such transaction, and |
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(ii) would reasonably be expected to result in (A) the
imposition of tax on gain realized with respect to the CNU
Shares issued hereunder, or (B) a material increase in the
tax liability of the Owners or Sellers resulting from the
transactions contemplated herein as compared to the tax
liability that would have arisen in the absence of such Change
in Tax Law. |
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(e) In the event of a valid termination of this Agreement
pursuant to this Section 9.4, this Agreement shall
become void and of no further force and effect, and there shall
be no liability or obligation on the part of CNU, Buyer, any
Seller or any Owner or any of their respective officers or
directors or Affiliates under this Agreement except as set forth
in (1) the provisions of Section 9.2 relating
to the obligations of the parties to keep confidential and not
to use certain information obtained from the other party,
(2) the provisions of Sections 6.15 and
Article 9, or (3) any liability a terminating
party may suffer as a result of anothers willful or
intentional breach of this Agreement. |
9.5. Notices. All notices or other communications
required or permitted hereunder shall be in writing and shall be
deemed given or delivered when delivered personally or by fax
with automatic confirmation (with a copy via other means
specified herein) or two (2) business days after being sent
by registered or certified mail or by private courier or express
delivery service addressed as follows:
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Continucare Corporation |
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7200 Corporate Center Drive, Suite 600 |
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Miami, FL 33126 |
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Attention: Chief Executive Officer |
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Fax: (305) 500-2104 |
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with a copy (which shall not constitute notice), to: |
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Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A. |
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150 West Flagler Street, Suite 2200 |
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Miami, FL 33130 |
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Attention: Geoffrey MacDonald, Esq. |
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Fax: (305) 789-3395 |
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If to any Seller or any Member, to: |
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Miami Dade Health Centers, Inc. |
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3233 Palm Avenue |
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4th Floor |
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Hialeah, FL 33012 |
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Attention: Jose M. Garcia, CEO |
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Fax: 305-642-3142 |
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with a copy (which shall not constitute notice), to: |
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Sandra Greenblatt, P.A. |
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One Biscayne Tower, Suite 3500 |
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2 South Biscayne Boulevard |
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Miami, FL 33131 |
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Attention: Sandra P. Greenblatt, Esq. |
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Fax: (305) 577-9951 |
or to such other address as such party may indicate by a notice
delivered to the other party hereto.
9.6. Successors and Assigns. (a) The rights
of either party under this Agreement shall not be assignable by
such party hereto without the written consent of the other
(which consent shall not be unreasonably withheld or delayed);
provided that Buyer and CNU may assign any of its rights
hereunder to a wholly-owned subsidiary of CNU, but no such
assignment shall relieve it of its obligations hereunder.
Notwithstanding the
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foregoing, Sellers shall be permitted to make distributions to
the Owners after the Closing Date of the Purchase Price without
the consent of Buyer or CNU, subject to compliance with
Section 7.6.
(b) This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their successors and permitted
assigns. The successors and permitted assigns hereunder shall
include without limitation, in the case of any party hereto, any
permitted assignee as well as the successors in interest to such
permitted assignee (whether by merger, liquidation (including
successive mergers or liquidations) or otherwise. Nothing in
this Agreement, expressed or implied, is intended or shall be
construed to confer upon any Person other than the parties and
successors and assigns permitted by this Section 9.6
any right, remedy or claim under or by reason of this Agreement.
9.7. Access to Records after Closing. For a period
of seven years after the Closing Date, Sellers and its
representatives shall have reasonable access to all of the books
and records of Sellers transferred to Buyer hereunder to the
extent that such access may reasonably be required by Sellers in
connection with matters relating to or affected by the
operations of Sellers prior to the Closing Date. Such access
shall be afforded by Buyer upon receipt of reasonable advance
notice and during normal business hours. Sellers shall be solely
responsible for any costs or expenses incurred by it pursuant to
this Section 9.7. If Buyer shall desire to dispose
of any of such books and records prior to the expiration of such
seven (7) year period, Buyer shall, prior to such
disposition, give Sellers a reasonable opportunity, at
Sellers expense, to segregate and remove such books and
records as Sellers may select.
For a period of seven years after the Closing Date, Buyer and
CNU and their representatives shall have reasonable access to
all of the books and records relating to the Business which
Sellers or any of their Affiliates may retain after the Closing
Date. Such access shall be afforded by Sellers and their
Affiliates upon receipt of reasonable advance notice and during
normal business hours. Buyer and CNU shall be solely responsible
for any costs and expenses incurred by them pursuant to this
Section 9.7. If Sellers or any of their Affiliates
shall desire to dispose of any of such books and records prior
to the expiration of such six-year period, Seller shall, prior
to such disposition, give Buyer and CNU a reasonable
opportunity, at Buyers expense, to segregate and remove
such books and records as Buyer and CNU may select.
9.8. Entire Agreement; Amendments. This Agreement
and the Exhibits and Schedules referred to herein and the
documents delivered pursuant hereto contain the entire
understanding of the parties hereto with regard to the subject
matter contained herein or therein, and supersede all prior
agreements, understandings or letters of intent between or among
any of the parties hereto. This Agreement shall not be amended,
modified or supplemented except by a written instrument signed
by an authorized representative of each of Buyer, CNU, Sellers
and Owners.
9.9. Interpretation. Wherever possible, each
provision hereof shall be interpreted in such manner as to be
effective and valid under applicable law, but in case any one or
more of the provisions contained herein shall, for any reason,
be held to be invalid, illegal or unenforceable in any respect,
such provision shall be ineffective to the extent, but only to
the extent, of such invalidity, illegality or unenforceability
without invalidating the remainder of such invalid, illegal or
unenforceable provision or provisions or any other provisions
hereof, unless such a construction would be unreasonable.
9.10. Waivers. Any term or provision of this
Agreement may be waived, or the time for its performance may be
extended, by the party entitled to the benefit thereof, or by
Seller if the Members are entitled to the benefit thereof. Any
such waiver shall be validly and sufficiently authorized for the
purposes of this Agreement if, as to any party, it is authorized
in writing by an authorized representative of such party. The
failure of any party hereto to enforce at any time any provision
of this Agreement shall not be construed to be a waiver of such
provision, nor in any way to affect the validity of this
Agreement or any part hereof or the right of any party
thereafter to enforce each and every such provision. No waiver
of any breach of this Agreement shall be held to constitute a
waiver of any other or subsequent breach.
9.11. Expenses. Each party hereto will pay all
costs and expenses incident to its negotiation and preparation
of this Agreement and to its performance and compliance with all
agreements and conditions contained herein on its part to be
performed or complied with, including the fees, expenses and
disbursements
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of its counsel and accountants; provided however that all costs
and expenses of Sellers shall be borne by Owners.
9.12. Execution in Counterparts. This Agreement
may be executed in one or more counterparts, each of which shall
be considered an original instrument, but all of which shall be
considered one and the same agreement, and shall become binding
when one or more counterparts have been signed by each of the
parties hereto and delivered to each of Sellers and Buyer.
9.13. Enforcement of Agreement. In the event of an
action at law or in equity between the parties hereto to enforce
any of the provisions hereof, the unsuccessful party to such
litigation or proceeding shall pay to the successful party all
costs and expenses, including reasonable attorneys fees,
incurred therein by such successful party on trial and appeal as
adjudged by the court, and if such successful party or parties
shall recover judgment in any such action or proceeding, such
costs, expenses and attorneys fees may be included as part
of such judgment.
9.14. Further Assurances. On the Closing Date
Sellers and each Owner shall (i) deliver to Buyer such
other bills of sale, deeds, endorsements, assignments and other
good and sufficient instruments of conveyance and transfer, in
form reasonably satisfactory to Buyer and its counsel, as Buyer
may reasonably request or as may be otherwise reasonably
necessary to vest in Buyer all the right, title and interest of
Sellers in, to or under any or all of the Purchased Assets, and
(ii) take all steps as may be reasonably necessary to put
Buyer in actual possession and control of all the Purchased
Assets. From time to time following the Closing, Sellers and
each Owner shall execute and deliver, or cause to be executed
and delivered, to Buyer such other instruments of conveyance and
transfer as Buyer may reasonably request or as may be otherwise
necessary to more effectively convey and transfer to, and vest
in, Buyer and put Buyer in possession of, any part of the
Purchased Assets, and, in the case of licenses, certificates,
approvals, authorizations, agreements, contracts, leases,
easements and other commitments included in the Purchased Assets
(a) which cannot be transferred or assigned effectively
without the consent of third parties which consent has not been
obtained prior to the Closing, to cooperate with Buyer at its
request in endeavoring to obtain such consent promptly, and if
any such consent is unobtainable, to use its commercially
reasonable efforts to secure to Buyer the benefits thereof in
some other manner, or (b) which are otherwise not
transferable or assignable, to use its best efforts jointly with
Buyer to secure to Buyer the benefits thereof in some other
manner (including the exercise of the rights of Sellers
thereunder). Notwithstanding anything in this Agreement to the
contrary, this Agreement shall not constitute an agreement to
assign any license, certificate, approval, authorization,
agreement, contract, lease, easement or other commitment
included in the Purchased Assets if an attempted assignment
thereof without the consent of a third party thereto would
constitute a breach thereof. After the Closing, if Sellers
receive any payment, refund or other amount which is a Purchased
Asset or is otherwise properly due and owing to Buyer, Seller
will promptly remit or will cause to be remitted, such amount to
Buyer. After the Closing, if Buyer or CNU receives any payment,
refund or other amount which is related to claims (including
workers compensation), litigation, insurance or other
matters for which Sellers are responsible hereunder, which is an
Excluded Asset or which is otherwise properly due and owing to
Sellers, Buyer or CNU will promptly remit, or cause to be
remitted, such amount to Seller.
9.15. Governing Law. This Agreement shall be
governed by and construed in accordance with the internal laws
(as opposed to the conflicts of law provisions) of the State of
Florida.
9.16. Time is of the Essence. With respect to all
dates and time periods set forth or referred to in this
Agreement, time is of the essence.
9.17. Sellers Representative.
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(a) Jose M. Garcia is hereby constituted and appointed as
agent for and on behalf of the Sellers and the Owners (the
Sellers Representative) to give and
receive notices and communications, to agree to, negotiate,
enter into settlements and compromises of, and demand
arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions
necessary or appropriate in the judgment of the Sellers
Representative for the accomplishment of the foregoing. Such
agency may be changed b a unanimous vote of the Owners upon not
less that ten Business Days prior |
A-47
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written notice to CNU. In the event of the death or disability
(for more than 40 days) of the Sellers Representative
or his resignation as Sellers Representative and until a
successor Sellers Representative shall be appointed as
provided above, Carlos Garcia shall act as the Sellers
Representative pending the appointment of the successor
Sellers Representative. No bond shall be required of the
Sellers Representative and the Sellers
Representative shall receive no compensation for his/her
services. Notices or communications to or from the Sellers
Representative shall constitute notice to or from each of the
Sellers and each of the Owners. In connection with this
Agreement, any Seller Ancillary Agreement, and any instrument,
agreement or document relating hereto or thereto, and in
exercising or failing to exercise all or any of the powers
conferred upon the Sellers Representative hereunder or
thereunder, the Sellers Representative shall incur no
responsibility whatsoever to any Seller or any Owner by reason
of any error in judgment or other act or omission performed or
omitted hereunder or thereunder or any other agreement,
instrument or document, excepting the only responsibility for
any act or failure to act which represents fraud, willful
misconduct, or gross negligence. The Sellers
Representative shall be indemnified, jointly and severally, by
the Sellers and the Owners against all Losses of any nature
whatsoever, arising out of or in connection with any claim or
proceeding relating to the acts or omissions of the
Sellers Representative in his capacity as such hereunder
or pursuant to any Seller Ancillary Agreement. |
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(b) A decision, act, consent or instruction of the
Sellers Representative shall constitute a decision of all
Sellers and all Owners and shall be final, binding and
conclusive upon each such Seller an each such Owner, and CNU and
Buyer may rely upon any such decision, act consent, or
instruction of the Sellers Representative as being the
decision, act, consent or instruction of each Seller and each
Owner. CNU and Buyer is hereby relieved from any liability to
any person for any acts done by it in accordance with such
decision, act, consent or instruction of the Sellers
Representative. |
[REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed the day and year first above written.
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CONTINUCARE CORPORATION |
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By: /s/ Richard C. Pfenniger, Jr. |
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Name: Richard C. Pfenniger, Jr. |
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Its: Chief Executive Officer |
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CNU BLUE 1, INC. |
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By: /s/ Richard C. Pfenniger, Jr. |
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Name: Richard C. Pfenniger, Jr. |
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Its: President |
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CNU BLUE 2, LLC |
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By: /s/ Richard C. Pfenniger, Jr. |
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Name: Richard C. Pfenniger, Jr. |
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Its: Manager |
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MIAMI DADE HEALTH AND REHABILITATION SERVICES, INC |
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By: /s/ Jose Garcia |
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Name: Jose Garcia |
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Its: President |
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MIAMI DADE HEALTH CENTERS, INC. |
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By: /s/ Jose Garcia |
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Name: Jose Garcia |
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Its: President |
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WEST GABLES OPEN MRI SERVICES, INC. |
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By: /s/ Jose Garcia |
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Name: Jose Garcia |
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Its: President |
A-49
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KENT MANAGEMENT SYSTEMS, INC. |
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By: /s/ Jose Garcia |
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Name: Jose Garcia |
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Its: President |
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MIAMI DADE, HEALTH CENTERS ONE, INC. |
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By: /s/ Jose Garcia |
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Name: Jose Garcia |
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Its: President |
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PELU PROPERTIES, INC. |
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By: /s/ Luis Cruz |
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Name: Luis Cruz |
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Its: President |
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PELUCA INVESTMENTS, LLC |
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By: /s/ Luis Cruz |
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Name: Luis Cruz |
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Its: Manager |
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MDHC RED, INC. |
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By: /s/ Jose Garcia |
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Name: Jose Garcia |
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Its: President |
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/s/ Jose M. Garcia |
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Jose M. Garcia |
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/s/ Carlos Garcia |
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Carlos Garcia |
A-50
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/s/ Luis Cruz |
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Luis Cruz |
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LUIS CRUZ CHILDRENS IRREVOCABLE |
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TRUST A |
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By: /s/ Luis Cruz |
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Name: Luis Cruz |
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Trustee |
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LUIS CRUZ CHILDRENS IRREVOCABLE |
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TRUST B |
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By: /s/ Luis Cruz |
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Name: Luis Cruz |
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Trustee |
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LUIS CRUZ CHILDRENS IRREVOCABLE |
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TRUST C |
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By: /s/ Luis Cruz |
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Name: Luis Cruz |
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Trustee |
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LUIS CRUZ CHILDRENS IRREVOCABLE |
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TRUST D |
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By: /s/ Luis Cruz |
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Name: Luis Cruz |
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Trustee |
A-51
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the
Agreement) made and entered into
this day
of ,
2006 by and between Miami Dade Health and Rehabilitation
Services, Inc, a Florida corporation (MDHRS), Miami
Dade Heath Centers, Inc., a Florida corporation
(MDHC), West Gables Open MRI Services, Inc., a
Florida corporation (West Dade), Kent Management
Systems, Inc., a Florida corporation (Kent), Miami
Dade Heath Centers One, Inc., a Florida corporation (MDHC
One), (collectively, the Constituent Entities)
and CNU Blue 2, LLC, a Florida limited liability company
(Acquisition or the Surviving Entity).
W I T N E S S E T H:
WHEREAS, MDHRS is a corporation duly organized and
existing under and by virtue of the laws of the State of Florida;
WHEREAS, MDHC is a corporation duly organized and
existing under and by virtue of the laws of the State of Florida;
WHEREAS, West Dade is a corporation duly organized and
existing under and by virtue of the laws of the State of Florida;
WHEREAS, Kent is a corporation duly organized and
existing under and by virtue of the laws of the State of Florida;
WHEREAS, MDHC is a corporation duly organized and
existing under and by virtue of the laws of the State of Florida;
WHEREAS, the Surviving Entity is a limited liability
company duly organized and existing under and by virtue of the
laws of the State of Florida and will be wholly owned by CNU
Blue 1, Inc., a Florida corporation (the Buyer) and
a wholly-owned subsidiary of Continucare Corporation, a Florida
corporation (CNU); and
WHEREAS, pursuant to duly authorized action by their
respective Board of Directors and sole shareholder and
Management Committee and member, as applicable, the Constituent
Entities and the Surviving Entity have determined that they
shall merger (the Merger) upon the terms and
conditions and in the manner set forth in this Agreement in
accordance with Section 607.1108 of the Florida Business
Corporation Act and Section 608.438 of the Florida Limited
Liability Company Act;
NOW THEREFORE, in consideration of the mutual premises
herein contained, the Constituent Entities and the Surviving
Entity hereby agree as follows:
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1. MERGER. The Constituent Entities and the
Surviving Entity agree that the Constituent Entities shall be
merged into Acquisition, as a single and surviving entity upon
the terms and conditions set forth in this Agreement and that
Acquisition, shall continue under the laws of the State of
Florida as the surviving entity. |
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2. EFFECTIVE DATE OF MERGER. The Merger shall
be effective at 12:00 a.m.
on ,
2006 or the Merger shall become effective upon the acceptance
and filing of the Articles of Merger with the Secretary of State
of the State of Florida (the Effective Date). |
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3. SURVIVING ENTITY. On and after the
Effective Date of the Merger: |
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a. Acquisition shall be the surviving entity,
and shall continue to exist as a limited liability company under
the laws of the State of Florida, with all of the rights and
obligations of such Surviving Entity as are provided by the
Florida Limited Liability Company Act. Immediately |
A-52
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following the Merger, Acquisition shall be wholly owned by Buyer
and Buyer shall be wholly-owned by CNU. |
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b. The Constituent Entities shall cease to exist, and their
respective property shall become the property of the
Acquisition as the surviving entity. |
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c. The Surviving Entity shall remain a member managed
limited liability company. The name and address of the sole
member of Acquisition is: |
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CNU Blue 1, Inc.
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7200 Corporate Center Drive
Suite 600
Miami, Florida 33126 |
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4. TERMS AND CONDITIONS OF THE MERGER. The
terms and conditions of the Merger are as follows: |
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a. Operating Agreement. The Operating Agreement of
the Surviving Entity shall continue on and after the Effective
Date as the Operating Agreement of the Surviving Entity. |
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5. MANNER AND BASIS OF CONVERTING SHARES AND
MEMBERSHIP INTERESTS OF THE CONSTITUENT ENTITIES. The
issued and outstanding shares and rights to acquire shares of
each of the respective merging corporations and the membership
interests of each of the respective merging limited liability
companies shall be converted as follows: |
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a. Each and every share of the common stock of MDHRS and
each right to acquire shares of common stock or other securities
of MDHRS shall be canceled and no longer be issued or
outstanding, and no membership interests in the Surviving Entity
will be issued in respect thereof. |
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b. Each and every share of the common stock of MDHC and
each right to acquire shares of common stock or other securities
of MDHC shall be canceled and no longer be issued or
outstanding, and no membership interests in the Surviving Entity
will be issued in respect thereof. |
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c. Each and every share of the common stock of West Dade
and each right to acquire shares of common stock or other
securities of West Dade shall be canceled and no longer be
issued or outstanding, and no membership interests in the
Surviving Entity will be issued in respect thereof. |
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d. Each and every share of the common stock of Kent and
each right to acquire shares of common stock or other securities
of Kent shall be canceled and no longer be issued or
outstanding, and no membership interests in the Surviving Entity
will be issued in respect thereof. |
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e. Each and every share of the common stock of MDHC One and
each right to acquire shares of common stock or other securities
of MDHC One shall be canceled and no longer be issued or
outstanding, and no membership interests in the Surviving Entity
will be issued in respect thereof. |
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g. The Buyer, as the sole member of Acquisition immediately
following the Merger, shall remain the sole member of the
Surviving Entity. |
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6. APPROVAL. The Merger contemplated by this
Agreement has previously been submitted to and approved by the
respective Board of Directors and Shareholder or Management
Committee and Member, as the case may be of the Constituent
Entities and the Surviving Entity. Subsequent to the execution
of this Agreement by the duly authorized officers of the each of
Constituent Entities and the Surviving Entity, such officers of
the Constituent Entities and the Surviving Entity shall, and are
hereby authorized and directed to, perform all such further acts
and executed and deliver to the proper authorities for filing
all documents, as the same may be necessary or proper to render
effective the Merger contemplated by this Agreement. |
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7. MISCELLANEOUS. |
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a. Governing Law. This Agreement shall be construed
in accordance with the laws of the State of Florida. |
A-53
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b. Third Party Beneficiaries. The terms and
conditions of this Agreement are solely for the benefit of the
parties hereto and each of the shareholders of the merging
corporations and the members of the merging limited liability
companies, and no person not a party to this Agreement shall
have any rights or benefits whatsoever under this Agreement,
either as a third party beneficiary or otherwise. |
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c. Complete Agreement. This Agreement constitutes
the complete agreement between the parties and incorporates all
prior agreements and representations in regard to the matters
set forth herein and it may not be amended, changed or modified
except by a writing signed by the party to be charged by said
amendment, change or modification. |
IN WITNESS WHEREOF, the Constituent Entities and the
Surviving Entity have caused this Agreement to be executed by
their duly authorized officers as of the date first written
above.
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CONTITUENT ENTITIES: |
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MIAMI DADE HEALTH AND |
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REHABILITATION SERVICES, INC. |
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a Florida corporation |
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By: |
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Name: |
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Title: |
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MIAMI DADE HEALTH CENTERS, INC., |
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a Florida corporation |
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By: |
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Name: |
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Title: |
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WEST GABLES OPEN MRI SERVICES, INC., |
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a Florida corporation |
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By: |
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Name: |
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Title: |
A-54
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KENT MANAGEMENT SYSTEMS, INC., |
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a Florida corporation |
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By: |
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Name: |
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Title: |
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MIAMI DADE HEALTH CENTERS ONE, INC., |
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a Florida corporation |
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By: |
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Name: |
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Title: |
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SURVIVING ENTITY: |
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CNU BLUE 2, LLC, |
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a Florida limited liability company |
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By: |
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Name: |
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Title: |
A-55
EXHIBIT B
ESCROW AGREEMENT
Escrow Agreement (the Agreement), dated as
of ,
2006, by and among Continucare Corporation, a Florida
corporation (CNU) on behalf of itself and on
behalf of CNU Blue 1, Inc., a Florida corporation
(Buyer), Jose M. Garcia, as Sellers
Representative on behalf of each of Miami Dade Health and
Rehabilitation Services, Inc., a Florida corporation
(MDHRS), Miami Dade Health Centers, Inc., a
Florida corporation (MDHC), West Gables Open
MRI Services, Inc., a Florida corporation (West
Dade), Kent Management Systems, Inc.
(Kent), Pelu Properties, Inc., a Florida
corporation (Pelu), Peluca Investments, LLC,
a Florida limited liability company owned by the Owners
(Peluca), and Miami Dade Health Centers One,
Inc., a Florida corporation (MDHC One, and,
collectively with MDHRS, MDHC, West Dade, Kent, Pelu and Peluca,
the Sellers), MDHC Red, Inc., a Florida
corporation (Retain), and each of the
shareholders of each Seller listed on the signature pages hereto
(the Owners), and American Stock Transfer
& Trust Company, Inc. (the Escrow
Agent).
WHEREAS, the parties hereto are entering into this Agreement
pursuant to the terms of that certain Asset Purchase Agreement
(the Purchase Agreement) dated as of
April , 2006, by and among
CNU, Buyer, CNU Blue 2, LLC, a Florida limited liability company
and a wholly-owned subsidiary of Buyer, Sellers, Retain and
Owners;
WHEREAS, each capitalized term used in this Agreement without
definition, other than for syntax or grammar, has the meaning
given to it in the Purchase Agreement;
WHEREAS, Section 4.2 of the Purchase Agreement provides for
Buyer to deposit on behalf of Sellers 1,500,000 CNU Shares in
escrow, to be disbursed on the terms and conditions set forth
herein;
WHEREAS, CNU, Buyer, Sellers, Owners and the Escrow Agent desire
to evidence their agreement with respect to the CNU Shares
deposited herewith.
NOW, THEREFORE, in consideration of the covenants hereinafter
set forth and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties
hereto hereby agree as follows:
Section 1. Appointment; Escrow Shares Deposit.
(a) CNU, Buyer, Sellers and Owners each hereby appoint and
designate American Stock Transfer, Inc. to act as Escrow Agent
hereunder, on the terms and subject to the conditions set forth
in this Agreement, and the Escrow Agent hereby accepts such
appointment. The fees to be paid to the Escrow Agent for its
services hereunder are set forth in Section 3(g) below.
(b) On the date hereof, Buyer shall deposit 1,500,000 CNU
Shares (the Escrow Shares) with the Escrow
Agent.
Section 2. Escrow Disbursement; Escrow Date.
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(a) Subject to Section 3(d), any Buyer Group Member
shall be entitled to reimbursement from the Escrow Shares or
from cash payments by some or all of the Owners, as applicable,
at the sole option of the affected Owners, on account of any
matter for which such Buyer Group Member is entitled to
indemnification pursuant to Section 8.1 of the Purchase
Agreement (any such matter being referred to as an
Indemnified Matter). |
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(b) In the event a Buyer Group Member asserts a claim for
an Indemnified Matter for which such Buyer Group Member seeks
reimbursement from the Escrow Shares, CNU shall deliver
simultaneously to the Escrow Agent and to Sellers
Representative a request (an Escrow Shares
Request) executed by CNU stating that a Buyer Group
Member has asserted a claim for indemnification, together with a
description of such Indemnified Matter in reasonable detail,
together with a good faith estimate of the amount of Loss and
Expense incurred as a result of such Indemnified Matter, as such
amount may be |
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limited by Section 8.5 of the Purchase Agreement
(Claimed Amount). It is understood and agreed
that the amount of any liability of any Owner to any Buyer Group
Member shall only be as determined in accordance with
Article VIII of the Purchase Agreement and that the Claimed
Amount shall not: (i) be binding upon Owners or any Buyer
Group Member, (ii) limit the liability of Owners to any
Buyer Group Member, or (iii) be admissible as evidence in
any proceeding between any Owner and any Buyer Group Member. |
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(c) Upon receipt of an Escrow Shares Request, the Escrow
Agent shall place a hold on and shall not disburse
the number of Escrow Shares having a value, determined in
accordance with Section 8.7 of the Purchase
Agreement (measured as of the date of the Escrow Shares Request
rather than the date of release), equal to the Claimed Amount
(Restricted Shares). None of the Restricted
Shares shall be disbursed until the amount of any liability of
Owners to the Buyer Group Member has been finally determined in
accordance with Article VIII of the Purchase Agreement for
such Indemnified Matter. Upon a final determination of an
Owners indemnification liability to a Buyer Group Member
under the Purchase Agreement, CNU shall deliver simultaneously
to the Escrow Agent and to Sellers Representative written
evidence of such determination, including the final amount of
reimbursement owed pursuant to Article VIII of the Purchase
Agreement (Indemnified Amount), and a request
for release of the number of Escrow Shares having a value,
determined in accordance with Section 8.7 of the
Purchase Agreement, equal to the Indemnified Amount to CNU or to
such other Buyer Group Member as CNU shall otherwise direct (the
Distribution Notice). |
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(d) Unless Sellers Representative shall
simultaneously advise CNU and the Escrow Agent in writing within
fifteen (15) days after delivery of such Distribution
Notice that the Owner(s) have satisfied all of their liability
for the Indemnified Amount that is the subject of the
Distribution Notice by means of a cash payment together with
written evidence confirming such payment to the applicable Buyer
Group Member, then the Escrow Agent shall immediately release to
CNU, or to such other Buyer Group Member as CNU may otherwise
direct, either (i) the number of Escrow Shares having a
value, determined in accordance with Section 8.7 of
the Purchase Agreement as of the date such shares are released,
equal to the Indemnified Amount (the Owed Escrow
Shares) or, (ii) only if the amount owed to the
Buyer Group Member for such Indemnified Matter shall exceed the
value of all remaining Escrow Shares, all remaining Escrow
Shares, valued in accordance with Section 8.7 of the
Purchase Agreement as of the date such shares are released, up
to and not exceeding the Indemnified Amount and (iii) shall
remove any hold which may remain on any remaining
Restricted Shares. |
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(e) If within fifteen (15) days after delivery of such
Distribution Notice Sellers Representative simultaneously
advises CNU and Escrow Agent in writing that Owners(s) have
satisfied a portion of their liability for the Indemnified
Amount with respect to the Indemnified Matter that is the
subject of the Distribution Notice with a cash payment together
with written evidence confirming such payment to the applicable
Buyer Group Member, Escrow Agent shall release to CNU, or to
such other Buyer Group Member as CNU may otherwise direct,
(i) only the number of Owed Escrow Shares equal to the
portion of such Indemnified Amount that Owner(s) did not satisfy
in cash, or (ii) if the balance of the Indemnified Amount
not paid in cash by Owner(s) shall exceed the value of all
remaining Escrow Shares, all remaining Escrow Shares, valued in
accordance with Section 8.7 of the Purchase
Agreement as of the date such shares are released, up to and not
exceeding the unpaid balance of the Indemnified Amount and
(iii) shall remove any hold which may remain on
any remaining Restricted Shares. |
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(f) Subject to the terms and provisions of this
Section 2, CNU and Sellers Representative agree to
deliver joint written instructions to the Escrow Agent upon the
date which is eighteen (18) months after the date of this
Agreement (the Escrow Shares Release Date).
Upon receipt of such joint instructions, the Escrow Agent shall
disburse the then existing balance of the Escrow Shares to
Owners. In the event, however, that the Escrow Agent has
received, on or before such Escrow Shares Release Date, an
Escrow Shares Request for an Indemnified Matter for which
payment has not been made, the amount of Escrow Shares disbursed
by the Escrow Agent on such Escrow Shares Release Date shall be
reduced by the number of Restricted Shares, valued in accordance
with Section 8.7 of the Purchase Agreement (measured
as of the date of the Escrow Shares request rather than the date
of release), required to satisfy |
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all unsatisfied Escrow Shares Requests and the Escrow Agent
shall continue to hold such Restricted Shares under the terms
and conditions of this Agreement. In the event the Escrow Agent
has received an Escrow Shares Request with respect to any Escrow
Shares for which payment has not been made prior to the Escrow
Shares Release Date, the provisions of this Section 2 shall
continue to govern the release of such Escrow Shares. In the
event of any disputes among the parties and/or the Escrow Agent,
Section 3(d) shall apply with respect to the Restricted
Shares so retained by the Escrow Agent. |
Section 3. Escrow Agent. In order to induce the
Escrow Agent to hold and disburse the Escrow Shares as required
by this Agreement, Sellers, Owners, CNU and Buyer do hereby
agree that:
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(a) The functions and duties of the Escrow Agent with
respect to disbursements hereunder are those of an independent
contractor and include only those set forth in this Agreement.
The Escrow Agent is not entitled to act in any manner whatsoever
except in accordance with the terms and conditions of this
Agreement or pursuant to written instructions or demands given
in accordance with such terms and conditions. |
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(b) The Escrow Agent shall not be liable for any loss or
damage resulting from the following: |
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(i) Any default, error, action or omission of any other
party. |
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(ii) Subject to the final paragraph of Section 2
above, the expiration of any time limit or other delay, unless
such time limit was known to the Escrow Agent and the resulting
loss was solely caused by failure of the Escrow Agent to proceed
in accordance herewith. |
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(iii) Lack of authenticity, sufficiency and effectiveness
of any documents delivered to it and lack of genuineness of any
signature or authority of any person to sign any such document. |
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(iv) Any loss or impairment of Shares or funds deposited in
a federally or state insured account with a stock or trust
company (other than the Escrow Agent or its affiliates), bank,
savings bank, or savings association resulting from the failure,
insolvency or suspension of such institution. |
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(v) Compliance by the Escrow Agent with any and all legal
process, writs, orders, judgments and decrees of any court
whether issued with or without jurisdiction and whether or not
subsequently vacated, modified, set aside or reversed. |
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(vi) The Escrow Agents assertion or failure to assert
any cause of action or defense in any judicial, administrative
or other proceeding either in its own interest or in the
interest of any other party or parties, provided the Escrow
Agent shall have furnished timely written notice of such
proceeding to the parties hereto. |
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(c) The Escrow Agent shall have no duty to inquire into the
authenticity of any written instructions or other documents
delivered to it as required by this Agreement or to inquire as
to the genuineness of any signature or authority of any person
to issue such instructions or execute such other documents. |
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(d) If there is any dispute regarding the disbursement of
the Escrow Shares, the Escrow Agent shall continue to hold all
Restricted Shares, including the amounts thereof in dispute,
until directed to disburse the same in accordance with
(i) the joint instructions of Sellers Representative
and CNU, or (ii) a final judgment of a court of competent
jurisdiction as contemplated by the Purchase Agreement. In lieu
of the foregoing, the Escrow Agent may deposit the disputed
Restricted Shares with a court of competent jurisdiction and
commence an action of interpleader between the parties in
dispute. |
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(e) The Escrow Agent may resign and be discharged from its
duties hereunder (but only to the extent such duties arise from
and after the date such resignation becomes effective in
accordance with the terms hereof) at any time by giving at least
thirty (30) calendar days written notice of such
resignation simultaneously to CNU and Sellers
Representative, specifying a date upon which such resignation
shall take effect; provided, however, that the
Escrow Agent shall continue to serve until its successor accepts
the Escrow Shares and assumes all responsibilities as escrow
agent hereunder; provided, further,
however, that the Escrow Agent shall remain obligated to
perform any and all of its duties hereunder until the date such
resignation becomes effective in accordance with the terms
hereof. Upon receipt of such notice, a |
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successor escrow agent shall be jointly appointed by CNU, on the
one hand, and Sellers Representative, on the other hand,
such successor escrow agent to become the Escrow Agent hereunder
on the later of the resignation date specified in such notice or
the date specified by such successor escrow agent in the
instrument of acceptance (which date shall not be more than
sixty (60) calendar days after Escrow Agent gives notice of
such proposed resignation in accordance with the terms hereof) .
If an instrument of acceptance by a successor escrow agent shall
not have been delivered to the resigning Escrow Agent within
sixty (60) calendar days after the resigning Escrow Agent
gives notice of such proposed resignation in accordance with the
terms hereof, the resigning Escrow Agent may tender into the
registry or custody of any court of competent jurisdiction all
of the Escrow Shares and shall thereafter be relieved of its
duties and obligations hereunder (but only to the extent such
duties and obligations arise from and after the date of such
tender in accordance with the terms hereof); provided,
however, that the Escrow Agent shall remain obligated to
perform any and all of its duties and obligations hereunder
until the date of such tender in accordance with the terms
hereof. CNU and Sellers Representative may at any time
substitute a new Escrow Agent by giving thirty
(30) calendar days written notice thereof to the existing
Escrow Agent and paying all fees and expenses of such Escrow
Agent incurred in accordance with this Agreement prior to the
date of the substitution. |
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(f) Indemnification. Each Seller and each Owner
shall, jointly and severally, hold the Escrow Agent harmless
from, and shall indemnify the Escrow Agent against, any loss,
liability, expense (including reasonable attorneys fees
and expenses), claim, cost, damage or demand (a
Loss) arising out of or in connection with
the performance of the Escrow Agents obligations in
accordance with the provisions of this Escrow Agreement to the
extent attributable to any act or omission of any Seller or any
Owner, except for any Loss arising out of any violation of law
or breach of this Agreement by, or the gross negligence or
willful misconduct of, the Escrow Agent. CNU shall hold the
Escrow Agent harmless from, and shall indemnify the Escrow Agent
against, any Loss arising out of or in connection with the
performance of the Escrow Agents obligations in accordance
with the provisions of this Escrow Agreement to the extent
attributable to any act or omission of CNU or Buyer, except for
any Loss arising out of any violation of law or breach of this
Agreement by, or the gross negligence or willful misconduct of,
the Escrow Agent. CNU, Buyer, each Seller and each Owner,
jointly and severally, shall hold the Escrow Agent harmless
from, and indemnify the Escrow Agent against, any Loss arising
out of or in connection with the performance of its obligations
in accordance with the provisions of this Escrow Agreement and
which are not attributable to any act or omission of CNU, Buyer,
any Seller, or any Owner, except for any of the foregoing
arising out of any violation of law or breach of this Agreement
by, or the gross negligence or willful misconduct of, the Escrow
Agent. The foregoing indemnities in this paragraph shall survive
the resignation or substitution of the Escrow Agent or the
termination of this Escrow Agreement. |
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(g) Expenses of Escrow Agent. For its services
hereunder, the Escrow Agent shall be entitled to a fee of
$ per
year, pro rated for any shorter period for which the Escrow
Agent shall act hereunder. The first annual payment of
$ shall
be payable on the date hereof with each remaining payment, if
applicable, payable each year thereafter (or portion thereof) on
the anniversary date of the date hereof. No increase in the rate
of any fee charged by the Escrow Agent shall be valid hereunder
unless previously approved in writing by CNU, on the one hand,
and Sellers Representative, on the other hand. Such fees
shall be paid one-half by CNU and one-half by Sellers. |
Section 4. Tax Identification Number. Each Owner has
heretofore provided such Owners tax identification number
for reporting purposes under this Agreement.
Section 5. No Third Party Rights. Nothing contained
in this Agreement shall be deemed to create, either expressly or
by implication, any liens, claims or rights on behalf of
laborers, mechanics, materialmen or other lien holders which in
any way could be construed as creating any third party rights of
any kind or nature in or to the Escrow Shares.
Section 6. Notices. Any notice, request, instruction
or other document to be given hereunder (a
Notice) by any party hereto to any other
party shall be in writing and delivered personally, sent by a
A-59
recognized worldwide or nationwide (whichever is applicable)
overnight delivery service with charges prepaid, sent by
certified mail, return receipt requested, with postage prepaid,
or sent by facsimile transmission with written confirmation:
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Continucare Corporation |
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7200 Corporate Center Drive, Suite 600 |
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Miami, FL 33126 |
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Attention: Chief Executive Officer |
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Fax: (305) 500-2104 |
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with a copy (which shall not constitute notice), to: |
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Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A. |
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150 West Flagler Street, Suite 2200 |
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Miami, FL 33130 |
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Attention: Geoffrey MacDonald, Esq. |
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Fax: (305) 789-3395 |
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If to any Seller or any Owner, to: |
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Miami Dade Health Centers, Inc. |
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3233 Palm Avenue |
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4th Floor |
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Hialeah, FL 33012 |
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Attention: Jose M. Garcia, CEO |
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Fax: 305-642-3142 |
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with a copy (which shall not constitute notice), to: |
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Sandra Greenblatt, P.A. |
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One Biscayne Tower, Suite 3500 |
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2 South Biscayne Boulevard |
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Miami, FL 33131 |
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Attention: Sandra Greenblatt, Esq. |
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Fax: (305) 577-9951 |
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American Stock Transfer & Trust Company |
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6201 15th Avenue |
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Brooklyn, NY 11219 |
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Attn: Herbert J. Lemmer |
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General Counsel |
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Fax: (718) 921-8336 |
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or at such other address for a party as shall be specified by
like Notice. Any Notice which is sent in the manner provided
herein shall be deemed to have been duly given to and received
by the party to whom it is directed upon actual receipt by such
party, except that any Notice sent by facsimile transmission
shall be deemed to have been given and received upon
confirmation of transmission; provided that Notice sent
by facsimile is promptly followed by duplicate Notice to that
same party sent by certified mail, return receipt requested,
postage prepaid, or sent by recognized worldwide or nationwide
courier (whichever is applicable) delivery overnight service
with charges prepaid. |
Section 7. Counterparts. This document may be
executed in multiple counterparts, each of which shall be deemed
an original, but all of which, when taken together, shall
constitute a fully executed document.
A-60
Section 8. Successors and Assigns. The rights and
obligations created by this Agreement may not be assigned by any
party hereto to any other person or entity without the prior
written consent of the remaining parties hereto. This Agreement
shall be binding upon and inure to the benefit of the parties
hereto and their successors and permitted assigns.
Section 9. Governing Law. This Agreement shall be
governed by and construed in accordance with the internal laws
of the State of Florida, without regard to rules or principles
respecting conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year first above written.
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CONTINUCARE CORPORATION |
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By: |
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Name: |
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Title: |
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SELLERS REPRESENTATIVE |
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By: |
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Name: |
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AMERICAN STOCK TRANSFER & |
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TRUST COMPANY |
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By: |
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Name: |
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Title: |
A-61
EXHIBIT C
INSTRUMENT OF ASSUMPTION
THIS INSTRUMENT OF ASSUMPTION is made as
of ,
2006 by CNU Blue 1, Inc., a Florida corporation,
(Buyer), in favor of each of Miami Dade
Health and Rehabilitation Services, Inc., a Florida corporation
(MDHRS), Miami Dade Health Centers, Inc., a
Florida corporation (MDHC), West Gables Open
MRI Services, Inc., a Florida corporation (West
Dade), Kent Management Systems, Inc.
(Kent), Pelu Properties, Inc., a Florida
corporation (Pelu), Peluca Investments, LLC,
a Florida limited liability company (Peluca),
and Miami Dade Health Centers One, Inc., a Florida corporation
(MDHC One, and, collectively with MDHRS, MDHC, West
Dade, Kent, Pelu, and Peluca the Sellers),
provides:
RECITALS:
Pursuant to that certain Asset Purchase Agreement dated
May , 2006 (the
Purchase Agreement) Sellers have agreed to
sell, transfer and convey certain assets to Buyer that are
designated the Purchased Assets in the Purchase Agreement, and
Buyer has assumed certain liabilities of the Sellers that are
designated as the Assumed Liabilities in the Purchase Agreement.
Pursuant to the terms and conditions of the Purchase Agreement,
Buyer now desires to make a formal assumption from the Sellers
of the all Assumed Liabilities as contemplated by the Purchase
Agreement. Unless otherwise defined or the context otherwise
requires, capitalized terms used herein shall have the
respective meanings given to them in the Purchase Agreement.
NOW, THEREFORE, for and in consideration of the transfer
of the Purchased Assets and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the Buyer hereby assumes and agrees to discharge
and perform the Assumed Liabilities in accordance with the
requirements of the Purchase Agreement and in accordance with
the respective terms and subject to the respective conditions of
the Assumed Liabilities. In the event that the Buyer shall fail
to perform its obligations under this Assumption Agreement,
Sellers and Owners shall be entitled to all rights and remedies
available to them with respect to indemnification pursuant to
the Purchase Agreement.
Buyer shall not assume or have any responsibility, obligation or
liability for or with respect to, the Excluded Liabilities. In
the event of a conflict between this Assumption Agreement and
the Purchase Agreement, the terms and provisions of the Purchase
Agreement will control.
IN WITNESS WHEREOF, Buyer has caused this Assumption Agreement
to be executed and delivered in a manner sufficient to bind it,
as of the day and year first above written.
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CNU BLUE 1, INC. |
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By: |
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Name: |
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Title: |
A-62
EXHIBIT D-1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (Agreement), is dated as
of ,
2006, by and among Continucare Corporation, a Florida
corporation (the Company) and Jose Garcia (the
Executive).
WHEREAS, the Company desires to employ the Executive in an
executive capacity and the Executive desires to accept such
employment, all upon the terms and subject to the conditions set
forth in this Agreement; and
WHEREAS, the Company is engaged in the business of providing
primary health care services in Miami-Dade, Broward and
Hillsborough Counties, Florida, and related transportation,
diagnostic and administrative support services (the
Business); and the Executive has experience
and expertise in the Business and, by virtue of his employment
with Company, the Executive shall become familiar with and
possess the manner, methods, trade secrets and other
confidential information pertaining to the Business.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants set forth in this Agreement, the Company and the
Executive agree as follows:
1. Recitals. The above recitals are true and correct
and are incorporated herein by reference.
2. Employment; Term. The Company shall employ the
Executive, and the Executive accepts such employment, on the
terms and subject to the conditions set forth in this Agreement,
for a term commencing as of the date hereof (the Effective
Date) and ending on the first anniversary of the Effective
Date. This Agreement may be renewed upon the mutual written
agreement of the Executive and the Company.
3. Services.
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3.1 Office and Duties. The Executive shall report to the
Chief Executive Officer of the Company (the Chief
Executive Officer). During the Term, the Executive shall
serve as Executive Vice President of the Company with such
duties, authority and responsibility as are commensurate with
such position, subject to oversight and direction of the Chief
Executive Officer. In exercising his duties and responsibilities
hereunder, the Executive shall have all the power and authority
necessary to fulfill and discharge his duties and
responsibilities hereunder and shall abide by any lawful
directions given by the Chief Executive Officer in good faith.
Notwithstanding the foregoing, the Executive shall not, in
connection with his employment hereunder, cause or permit the
Company or any of its subsidiaries to enter into any agreement,
commitment or arrangement with, or pay any fees or other amounts
to any person not dealing at arms length with the
Executive without first disclosing the nature of such
relationship to the Chief Executive Officer and obtaining the
prior written approval of the Chief Executive Officer to any
such agreement, commitment, arrangement or payment. The
Executive shall be responsible for such additional duties
commensurate with his position not materially inconsistent with
the foregoing as may be reasonably determined by the Chief
Executive Officer from time to time. |
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3.2 Best Efforts. During the Term, the Executive shall
diligently and competently devote the Executives best
efforts, full time and energies during business hours to the
business and affairs of the Company and shall use his best
efforts, skills and abilities to promote the interests of the
Company and otherwise to discharge his obligations under this
Agreement. |
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3.3 Location of Executive. The Executive shall perform
the duties of his employment under this Agreement at the
Companys main business offices in Miami-Dade County,
subject to travel from time to time to other areas as may be
reasonably required or reasonably desirable in connection with
the businesses, affairs and operations of the Company from time
to time and the performance by the Executive of his duties,
obligations and responsibilities under this Agreement; provided
that subject to travel to other areas as hereinbefore
specifically provided for in this Section 3.3, the Company
shall have no right to require the Executive to re-locate
outside of Miami-Dade County, Florida. |
A-63
4. Compensation.
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4.1 Annual Salary. During the Term, the Executive shall
receive a base salary at the annual rate of $275,000 (Base
Salary), payable in accordance with the Companys
normal payroll practices or at such other reasonable intervals
as may from time to time be used by the Company for paying its
employees generally. |
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4.2 Bonus. The Executive shall be eligible to participate
in the Companys Management Compensation Program in
accordance with the terms and conditions thereof; provided,
however, that the Executive acknowledges that any amounts paid
under the Companys Management Compensation Program are
determined in accordance with the terms of that program and that
eligibility to participate in such program does not constitute a
guarantee that Executive shall receive a bonus under such plan
or a guarantee of the amount of any bonus that the Executive may
receive thereunder. |
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4.3 Employee Automobile. The Company shall permit the
Executive to use the motor vehicle previously leased by Kent
Management Systems, Inc. on behalf of the Executive prior to the
date hereof, which lease (the Auto Lease) was
assumed by the Company. It being understood that the Company
shall have no obligation to continue to permit the Executive to
use such motor vehicle or any other motor vehicle beyond the
termination or expiration of the Term and the Auto Lease,
whichever shall first terminate or expire. |
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4.4 Options. The Executive shall receive options to
acquire 100,000 shares of the Companys common stock, par
value $.0001 per share (the Options). The Options
shall be issued under the Companys Amended and Restated
2000 Stock Option Plan (the Plan) and shall be
subject to the terms and conditions set forth therein. The
Options shall be documented by the Companys standard form
of Stock Option Agreement. The terms of the Options shall
provide that the Options shall: (a) have a per share
exercise price equal to the per share closing price of the
Common Stock on the American Stock Exchange as of the date of
this Agreement, (b) vest in four equal annual installments
with the first such installment vesting on the first anniversary
date of this Agreement, and (c) unless exercised prior to
such date terminate and be of no further force and effect on the
tenth anniversary of this Agreement. |
5. Reimbursement of Expenses; Benefits.
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5.1 Reimbursement of Expenses. Upon submission of
appropriate documentation and in specific accordance with such
guidelines as may be reasonably established from time to time by
the Company, the Executive shall be entitled to reimbursement
for all reasonable, out-of-pocket expenses incurred by him
during the Term in connection with the proper and efficient
discharge of his duties hereunder. |
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5.2 Employee Benefit Plans and Programs. During the Term,
the Executive shall be entitled to participate in the
Companys employee benefit plans and programs. The
Executives service with the Company prior to the Effective
Date shall be counted for purposes of all eligibility, waiting
periods and vesting requirements from time to time in effect.
Nothing in this Agreement shall require the Company at any time
to create or continue any such plan or program or to fix, amend
or retain eligibility requirements so as to include the
Executive. |
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5.3 Vacations. The Executive shall be entitled to four
(4) weeks of paid vacation during the Term, taking into
consideration the business needs of the Company. |
6. Termination. The Executives employment
under this Agreement may be terminated prior to the end of the
Term by the Company or the Executive without any breach of this
Agreement only under the following circumstances:
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6.1 Death. This Agreement and the Executives
employment under this Agreement shall terminate immediately and
automatically upon the Executives death. |
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6.2 Disability. This Agreement and the Executives
employment under this Agreement may be terminated if the
Executive shall suffer a Disability, which shall
mean any incapacity, illness or disability of the Executive
which renders the Executive mentally or physically unable to
perform his |
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duties under this Agreement for a continuous period of sixty
(60) or more consecutive days or for ninety (90) days,
whether consecutive or not, within a one hundred eighty
(180) day period, during the Term, as reasonably determined
by a physician mutually selected by Executive and the Company.
Termination due to Disability shall be deemed to have occurred
upon the first day of the month following the determination of
Disability as defined in the preceding sentence. |
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6.3 For Cause. The Company may terminate the
Executives employment under this Agreement for Cause (as
hereinafter defined). Cause shall mean:
(a) committing or participation in an act of fraud, gross
neglect, willful misconduct, recklessness, embezzlement or
dishonesty against the Company or any of its affiliates or any
customer or supplier of the Company or any other person, entity
or governmental body having dealing with the Company;
(b) being indicted for or convicted of an act or acts
constituting a felony under applicable laws of the United States
or any state thereof; (c) if applicable, loss of any state
or federal license required for the Executive to perform the
Executives material duties or responsibilities for the
Company; provided, however, that this Section 6.3(c) shall
not be applicable if such loss of license shall be a result of
any actions or inactions outside the Executives control;
(d) habitual neglect of duty or willful disobedience of the
lawful orders of the Chief Executive Officer given in good faith
that are not inconsistent with the provisions of this Agreement;
(e) breach of or failure to observe any of the material
terms or conditions of this Agreement; or (f) any
assignment of this Agreement by the Executive in violation of
this Agreement; provided, however, that if an event constituting
Cause under clauses (a) (with respect to gross
neglect only), (c), (d) or (e) above is curable, then
the Executive shall have the opportunity to cure the same within
fifteen (15) days after receipt of written notice from
Company setting forth the conduct committed in reasonable detail
and that Company intends to terminate the Executive for
Cause if the breach is not timely cured. |
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6.4 Without Cause. Upon prior written notice to
Executive, the Company may (a) terminate the
Executives employment hereunder other than for Cause;
(b) substantially diminish the duties and responsibilities
of Executive; or (c) materially change the title or
position of Executive in the hierarchy of the Company (all of
the foregoing together with any other material breach of this
Agreement by the Company shall be deemed a termination
Without Cause). In the instance of the
Companys actions pursuant to (b) or (c) above,
the Executive may either consent to such action or terminate his
employment with the Company in writing fifteen (15) days
after such written notice form the Company, which termination
shall be deemed a termination Without Cause by the Company. |
7. Payments After Termination. If this Agreement and
the Executives employment hereunder are terminated then
the Executive or the Executives estate, as the case may
be, shall receive the Base Salary and any unpaid expense
reimbursements through the date of termination in accordance
with the terms of this Agreement and, in the event that this
Agreement is terminated pursuant to Section 6.4 above, the
Executive shall also receive the Base Salary for the remainder
of the twelve month period from the Effective Date. Thereafter,
the Executive shall not be entitled to receive any further
compensation or benefits from the Company whatsoever.
8. Trade Secrets. Executive covenants and agrees
that he will not divulge or make use of any trade secrets or
other confidential information of the Business other than to
disclose such secrets and information to the Company or as
necessary to perform his duties under this Agreement. If
Executive violates any of its obligations under this
Section 8, the Company may proceed against him in
law or in equity for such damages or other relief as a court may
deem appropriate. Executive acknowledges that a violation of
this Section 8 may cause the Company irreparable
harm which may not be adequately compensated for by money
damages. Executive therefore agrees that in the event of any
actual or threatened violation of this Section 8,
the Company shall be entitled, in addition to other remedies
that either of them may have, to a temporary restraining order
and to preliminary and final injunctive relief against Executive
or to prevent any violations of this Section 8,
without the necessity of posting a bond. The prevailing party in
any action commenced under this Section 8 shall also
be entitled to receive reasonable attorneys fees and court
costs. It is the intent and understanding of each party hereto
that if, in any action before any court or agency legally
empowered to enforce this Section 8, any term,
restriction, covenant or promise in this Section 8
is found to be unreasonable and for that reason unenforceable,
then such term, restriction, covenant or promise shall be deemed
modified
A-65
to the extent necessary to make it enforceable by such court or
agency to the maximum extent permitted by applicable
requirements of law.
9. Withholding. Anything to the contrary
notwithstanding, all payments required to be made by the Company
hereunder to the Executive or the Executives estate or
beneficiaries shall be subject to the withholding of such
amounts, if any, relating to tax and other payroll deductions as
the Company may reasonably determine it should withhold pursuant
to any applicable law or regulation.
10. Notices. All notices or other communications
required or permitted hereunder shall be in writing and shall be
deemed given or delivered when delivered personally or by fax
with automatic confirmation (with a copy via other means
specified herein) or two (2) business days after being sent
by prepaid registered or certified mail, return receipt
requested, or by private courier or express delivery service
addressed as follows:
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Continucare Corporation |
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7200 Corporate Center Drive, Suite 600 |
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Miami, FL 33126 |
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Attention: Chief Executive Officer |
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Fax: (305) 500-2104 |
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with a copy (which shall not constitute notice), to: |
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Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A. |
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150 West Flagler Street, Suite 2200 |
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Miami, FL 33130 |
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Attention: Geoffrey MacDonald, Esq. |
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Fax: (305) 789-3395 |
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Jose M. Garcia |
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Attention:
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with a copy (which shall not constitute notice), to: |
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Sandra Greenblatt, P.A. |
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One Biscayne Tower, Suite 3500 |
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2 South Biscayne Boulevard |
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Miami, FL 33131 |
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Attention: Sandra P. Greenblatt, Esq. |
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Fax: (305) 577-9951 |
or to such other address as such party may indicate by a notice
delivered to the other party hereto.
11. Prevailing Party. In the event of any dispute
with regard to this Agreement, the prevailing party shall be
entitled to receive from the non-prevailing party and the
non-prevailing party shall pay upon demand all reasonable fees
and expenses of counsel for the prevailing party.
12. Entire Agreement. This Agreement sets forth the
entire agreement and understanding between the parties, and
supersedes all prior discussions, agreements and understandings
of every kind and nature among them as to the subject matter
hereof.
13. Amendments to Agreement. This Agreement shall
not be amended except by a writing signed by each party to the
Agreement, and this Agreement may not be discharged except by
performance in accordance with its terms or by a writing signed
by each party to the Agreement.
A-66
14. U.S. Dollars. All dollar amounts in this
Agreement are stated in United States Dollars.
15. Governing Law. This agreement and its validity,
construction and performance shall be governed in all respects
by the law of the State of Florida, without giving effect to
principles of conflicts of laws. Venue for any proceeding
arising from or related to this Agreement shall be in Miami-Dade
County, Florida.
16. Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
This Agreement may not be assigned by the Executive without the
prior written consent of the Company. This Agreement may be
assigned by the Company in connection with the sale, transfer or
other disposition of all or substantially all of the
Companys assets or business; provided, however, that such
assignee shall agree in writing to be bound by the terms of this
Agreement.
17. Pronouns. Whenever the context requires, the use
in this Agreement of a pronoun of any gender shall be deemed to
refer also to any other gender, and the use of the singular
shall be deemed to refer also to the plural.
18. Headings. The headings of this Agreement are
inserted for convenience of reference only and shall not
constitute a part hereof.
19. Execution in Counterparts. This Agreement may be
executed in several counterparts, by original or facsimile
signature, each of which so executed shall be deemed to be an
original and such counterparts together shall be deemed to be
one and the same instrument, which shall be deemed to be
executed as of the date first above written.
20. Further Assurances. The parties hereto shall
sign such further documents and do and perform and cause to be
done and performed such further and other acts and things as may
be necessary or desirable in order to give full effect to this
Agreement and every party thereof.
21. Survival. Any termination of this Agreement
shall not affect the ongoing provisions of this Agreement, which
shall survive such termination in accordance with their terms.
22. Severability. The invalidity or
unenforceability, in whole or in part, or any covenant, promise
or undertaking, or any section, subsection, paragraph, sentence,
clause, phrase or word or of any provision of this Agreement
other than Section 4, shall not affect the validity or
enforceability of the remaining portions thereof.
23. Participation of Parties; Construction. The
parties hereto acknowledge that this Agreement and all matters
contemplated herein have been negotiated between both of the
parties hereto and their respective legal counsel and that both
parties have participated in the drafting and preparation of
this Agreement from the commencement of negotiations at all
times through the execution hereof. The parties hereto
acknowledge that they have each read this Agreement and
understand the effect of its provisions. Accordingly, this
Agreement shall be interpreted and construed without reference
to any rule requiring that this Agreement be interpreted or
construed against the party causing it to be drafted.
24. Independent Counsel. The Executive acknowledges
that counsel to the Company has not represented him nor provided
him with legal or other advice in connection with the
transactions contemplated by this Agreement and that he has been
urged to seek independent legal, tax and financial advice in
order to analyze the risks and merits of the transactions
contemplated by this Agreement.
THE EXECUTIVE AND THE COMPANY EACH ACKNOWLEDGES THAT HE OR IT
HAS READ ALL OF THE TERMS OF THIS AGREEMENT, UNDERSTANDS THE
AGREEMENT, AND AGREES TO ABIDE BY ITS TERMS AND CONDITIONS.
A-67
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date set forth in the first paragraph of this Agreement.
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THE COMPANY: |
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CONTINUCARE CORPORATION, |
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By: |
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Name: |
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Title: |
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THE EXECUTIVE: |
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A-68
EXHIBIT D-2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (Agreement), is dated as
of ,
2006, by and among Continucare Corporation, a Florida
corporation (the Company) and Dr. Luis Cruz
(the Executive).
WHEREAS, the Company desires to employ the Executive in an
executive capacity and the Executive desires to accept such
employment, all upon the terms and subject to the conditions set
forth in this Agreement; and
WHEREAS, the Company is engaged in the business of providing
primary health care services in Miami-Dade, Broward and
Hillsborough Counties, Florida, and related transportation,
diagnostic and administrative support services (the
Business); and the Executive has experience
and expertise in the Business and, by virtue of his employment
with Company, the Executive shall become familiar with and
possess the manner, methods, trade secrets and other
confidential information pertaining to the Business.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants set forth in this Agreement, the Company and the
Executive agree as follows:
1. Recitals. The above recitals are true and correct
and are incorporated herein by reference.
2. Employment; Term. The Company shall employ the
Executive, and the Executive accepts such employment, on the
terms and subject to the conditions set forth in this Agreement,
for a term commencing as of the date hereof (the Effective
Date) and ending on the first anniversary of the Effective
Date. This Agreement may be renewed upon the mutual written
agreement of the Executive and the Company.
3. Services.
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3.1 Office and Duties. The Executive shall report to the
Chief Executive Officer of the Company (the Chief
Executive Officer). During the Term, the Executive shall
serve as Vice Chairman of the Company with such duties,
authority and responsibility as are commensurate with such
position, subject to oversight and direction of the Chief
Executive Officer. In exercising his duties and responsibilities
hereunder, the Executive shall have all the power and authority
necessary to fulfill and discharge his duties and
responsibilities hereunder and shall abide by any lawful
directions given by the Chief Executive Officer in good faith.
Notwithstanding the foregoing, the Executive shall not, in
connection with his employment hereunder, cause or permit the
Company or any of its subsidiaries to enter into any agreement,
commitment or arrangement with, or pay any fees or other amounts
to any person not dealing at arms length with the
Executive without first disclosing the nature of such
relationship to the Chief Executive Officer and obtaining the
prior written approval of the Chief Executive Officer to any
such agreement, commitment, arrangement or payment. The
Executive shall be responsible for such additional duties
commensurate with his position not materially inconsistent with
the foregoing as may be reasonably determined by the Chief
Executive Officer from time to time. |
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3.2 Best Efforts. During the Term, the Executive shall
diligently and competently devote the Executives best
efforts, full time and energies during business hours to the
business and affairs of the Company and shall use his best
efforts, skills and abilities to promote the interests of the
Company and otherwise to discharge his obligations under this
Agreement. |
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3.3 Location of Executive. The Executive shall perform
the duties of his employment under this Agreement at the
Companys main business offices in Miami-Dade County,
subject to travel from time to time to other areas as may be
reasonably required or reasonably desirable in connection with
the businesses, affairs and operations of the Company from time
to time and the performance by the Executive of his duties,
obligations and responsibilities under this Agreement; provided
that subject to travel to other areas as hereinbefore
specifically provided for in this Section 3.3, the Company
shall have no right to require the Executive to re-locate
outside of Miami-Dade County, Florida. |
A-69
4. Compensation.
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4.1 Annual Salary. During the Term, the Executive shall
receive a base salary at the annual rate of $225,000 (Base
Salary), payable in accordance with the Companys
normal payroll practices or at such other reasonable intervals
as may from time to time be used by the Company for paying its
employees generally. |
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4.2 Bonus. The Executive shall be eligible to participate
in the Companys Management Compensation Program in
accordance with the terms and conditions thereof; provided,
however, that the Executive acknowledges that any amounts paid
under the Companys Management Compensation Program are
determined in accordance with the terms of that program and that
eligibility to participate in such program does not constitute a
guarantee that Executive shall receive a bonus under such plan
or a guarantee of the amount of any bonus that the Executive may
receive thereunder. |
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4.3 Options. The Executive shall receive options to
acquire 100,000 shares of the Companys common stock, par
value $.0001 per share (the Options). The Options
shall be issued under the Companys Amended and Restated
2000 Stock Option Plan (the Plan) and shall be
subject to the terms and conditions set forth therein. The
Options shall be documented by the Companys standard form
of Stock Option Agreement. The terms of the Options shall
provide that the Options shall: (a) have a per share
exercise price equal to the per share closing price of the
Common Stock on the American Stock Exchange as of the date of
this Agreement, (b) vest in four equal annual installments
with the first such installment vesting on the first anniversary
date of this Agreement, and (c) unless exercised prior to
such date terminate and be of no further force and effect on the
tenth anniversary of this Agreement. |
5. Reimbursement of Expenses; Benefits.
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5.1 Reimbursement of Expenses. Upon submission of
appropriate documentation and in specific accordance with such
guidelines as may be reasonably established from time to time by
the Company, the Executive shall be entitled to reimbursement
for all reasonable, out-of-pocket expenses incurred by him
during the Term in connection with the proper and efficient
discharge of his duties hereunder. |
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5.2 Employee Benefit Plans and Programs. During the Term,
the Executive shall be entitled to participate in the
Companys employee benefit plans and programs. The
Executives service with the Company prior to the Effective
Date shall be counted for purposes of all eligibility, waiting
periods and vesting requirements from time to time in effect.
Nothing in this Agreement shall require the Company at any time
to create or continue any such plan or program or to fix, amend
or retain eligibility requirements so as to include the
Executive. |
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5.3 Vacations. The Executive shall be entitled to four
(4) weeks of paid vacation during the Term, taking into
consideration the business needs of the Company. |
6. Termination. The Executives employment
under this Agreement may be terminated prior to the end of the
Term by the Company or the Executive without any breach of this
Agreement only under the following circumstances:
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6.1 Death. This Agreement and the Executives
employment under this Agreement shall terminate immediately and
automatically upon the Executives death. |
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6.2 Disability. This Agreement and the Executives
employment under this Agreement may be terminated if the
Executive shall suffer a Disability, which shall
mean any incapacity, illness or disability of the Executive
which renders the Executive mentally or physically unable to
perform his duties under this Agreement for a continuous period
of sixty (60) or more consecutive days or for ninety
(90) days, whether consecutive or not, within a one hundred
eighty (180) day period, during the Term, as reasonably
determined by a physician mutually selected by Executive and the
Company. Termination due to Disability shall be deemed to have
occurred upon the first day of the month following the
determination of Disability as defined in the preceding sentence. |
A-70
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6.3 For Cause. The Company may terminate the
Executives employment under this Agreement for Cause (as
hereinafter defined). Cause shall mean:
(a) committing or participation in an act of fraud, gross
neglect, willful misconduct, recklessness, embezzlement or
dishonesty against the Company or any of its affiliates or any
customer or supplier of the Company or any other person, entity
or governmental body having dealing with the Company;
(b) being indicted for or convicted of an act or acts
constituting a felony under applicable laws of the United States
or any state thereof; (c) if applicable, loss of any state
or federal license required for the Executive to perform the
Executives material duties or responsibilities for the
Company; provided, however, that this Section 6.3(c) shall
not be applicable if such loss of license shall be a result of
any actions or inactions outside the Executives control;
(d) habitual neglect of duty or willful disobedience of the
lawful orders of the Chief Executive Officer given in good faith
that are not inconsistent with the provisions of this Agreement;
(e) breach of or failure to observe any of the material
terms or conditions of this Agreement; or (f) any
assignment of this Agreement by the Executive in violation of
this Agreement; provided, however, that if an event constituting
Cause under clauses (a) (with respect to gross
neglect only), (c), (d) or (e) above is curable, then
the Executive shall have the opportunity to cure the same within
fifteen (15) days after receipt of written notice from
Company setting forth the conduct committed in reasonable detail
and that Company intends to terminate the Executive for
Cause if the breach is not timely cured. |
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6.4 Without Cause. Upon prior written notice to
Executive, the Company may (a) terminate the
Executives employment hereunder other than for Cause;
(b) substantially diminish the duties and responsibilities
of Executive; or (c) materially change the title or
position of Executive in the hierarchy of the Company (all of
the foregoing together with any other material breach of this
Agreement by the Company shall be deemed a termination
Without Cause). In the instance of the
Companys actions pursuant to (b) or (c) above,
the Executive may either consent to such action or terminate his
employment with the Company in writing fifteen (15) days
after such written notice form the Company, which termination
shall be deemed a termination Without Cause by the Company. |
7. Payments After Termination. If this Agreement and
the Executives employment hereunder are terminated then
the Executive or the Executives estate, as the case may
be, shall receive the Base Salary and any unpaid expense
reimbursements through the date of termination in accordance
with the terms of this Agreement and, in the event that this
Agreement is terminated pursuant to Section 6.4 above, the
Executive shall also receive the Base Salary for the remainder
of the twelve month period from the Effective Date. Thereafter,
the Executive shall not be entitled to receive any further
compensation or benefits from the Company whatsoever.
8. Trade Secrets. Executive covenants and agrees
that he will not divulge or make use of any trade secrets or
other confidential information of the Business other than to
disclose such secrets and information to the Company or as
necessary to perform his duties under this Agreement. If
Executive violates any of its obligations under this
Section 8, the Company may proceed against him in
law or in equity for such damages or other relief as a court may
deem appropriate. Executive acknowledges that a violation of
this Section 8 may cause the Company irreparable
harm which may not be adequately compensated for by money
damages. Executive therefore agrees that in the event of any
actual or threatened violation of this Section 8,
the Company shall be entitled, in addition to other remedies
that either of them may have, to a temporary restraining order
and to preliminary and final injunctive relief against Executive
or to prevent any violations of this Section 8,
without the necessity of posting a bond. The prevailing party in
any action commenced under this Section 8 shall also
be entitled to receive reasonable attorneys fees and court
costs. It is the intent and understanding of each party hereto
that if, in any action before any court or agency legally
empowered to enforce this Section 8, any term,
restriction, covenant or promise in this Section 8
is found to be unreasonable and for that reason unenforceable,
then such term, restriction, covenant or promise shall be deemed
modified to the extent necessary to make it enforceable by such
court or agency to the maximum extent permitted by applicable
requirements of law.
9. Withholding. Anything to the contrary
notwithstanding, all payments required to be made by the Company
hereunder to the Executive or the Executives estate or
beneficiaries shall be subject to the
A-71
withholding of such amounts, if any, relating to tax and other
payroll deductions as the Company may reasonably determine it
should withhold pursuant to any applicable law or regulation.
10. Notices. All notices or other communications
required or permitted hereunder shall be in writing and shall be
deemed given or delivered when delivered personally or by fax
with automatic confirmation (with a copy via other means
specified herein) or two (2) business days after being sent
by prepaid registered or certified mail, return receipt
requested, or by private courier or express delivery service
addressed as follows:
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Continucare Corporation |
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7200 Corporate Center Drive, Suite 600 |
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Miami, FL 33126 |
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Attention: Chief Executive Officer |
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Fax: (305) 500-2104 |
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with a copy (which shall not constitute notice), to: |
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Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A. |
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150 West Flagler Street, Suite 2200 |
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Miami, FL 33130 |
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Attention: Geoffrey MacDonald, Esq. |
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Fax: (305) 789-3395 |
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with a copy (which shall not constitute notice), to: |
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Sandra Greenblatt, P.A. |
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One Biscayne Tower, Suite 3500 |
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2 South Biscayne Boulevard |
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Miami, FL 33131 |
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Attention: Sandra P. Greenblatt, Esq. |
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Fax: (305) 577-9951 |
or to such other address as such party may indicate by a notice
delivered to the other party hereto.
11. Prevailing Party. In the event of any dispute
with regard to this Agreement, the prevailing party shall be
entitled to receive from the non-prevailing party and the
non-prevailing party shall pay upon demand all reasonable fees
and expenses of counsel for the prevailing party.
12. Entire Agreement. This Agreement sets forth the
entire agreement and understanding between the parties, and
supersedes all prior discussions, agreements and understandings
of every kind and nature among them as to the subject matter
hereof.
13. Amendments to Agreement. This Agreement shall
not be amended except by a writing signed by each party to the
Agreement, and this Agreement may not be discharged except by
performance in accordance with its terms or by a writing signed
by each party to the Agreement.
14. U.S. Dollars. All dollar amounts in this
Agreement are stated in United States Dollars.
15. Governing Law. This agreement and its validity,
construction and performance shall be governed in all respects
by the law of the State of Florida, without giving effect to
principles of conflicts of laws. Venue for any proceeding
arising from or related to this Agreement shall be in Miami-Dade
County, Florida.
A-72
16. Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
This Agreement may not be assigned by the Executive without the
prior written consent of the Company. This Agreement may be
assigned by the Company in connection with the sale, transfer or
other disposition of all or substantially all of the
Companys assets or business; provided, however, that such
assignee shall agree in writing to be bound by the terms of this
Agreement.
17. Pronouns. Whenever the context requires, the use
in this Agreement of a pronoun of any gender shall be deemed to
refer also to any other gender, and the use of the singular
shall be deemed to refer also to the plural.
18. Headings. The headings of this Agreement are
inserted for convenience of reference only and shall not
constitute a part hereof.
19. Execution in Counterparts. This Agreement may be
executed in several counterparts, by original or facsimile
signature, each of which so executed shall be deemed to be an
original and such counterparts together shall be deemed to be
one and the same instrument, which shall be deemed to be
executed as of the date first above written.
20. Further Assurances. The parties hereto shall
sign such further documents and do and perform and cause to be
done and performed such further and other acts and things as may
be necessary or desirable in order to give full effect to this
Agreement and every party thereof.
21. Survival. Any termination of this Agreement
shall not affect the ongoing provisions of this Agreement, which
shall survive such termination in accordance with their terms.
22. Severability. The invalidity or
unenforceability, in whole or in part, or any covenant, promise
or undertaking, or any section, subsection, paragraph, sentence,
clause, phrase or word or of any provision of this Agreement
other than Section 4, shall not affect the validity or
enforceability of the remaining portions thereof.
23. Participation of Parties; Construction. The
parties hereto acknowledge that this Agreement and all matters
contemplated herein have been negotiated between both of the
parties hereto and their respective legal counsel and that both
parties have participated in the drafting and preparation of
this Agreement from the commencement of negotiations at all
times through the execution hereof. The parties hereto
acknowledge that they have each read this Agreement and
understand the effect of its provisions. Accordingly, this
Agreement shall be interpreted and construed without reference
to any rule requiring that this Agreement be interpreted or
construed against the party causing it to be drafted.
24. Independent Counsel. The Executive acknowledges
that counsel to the Company has not represented him nor provided
him with legal or other advice in connection with the
transactions contemplated by this Agreement and that he has been
urged to seek independent legal, tax and financial advice in
order to analyze the risks and merits of the transactions
contemplated by this Agreement.
THE EXECUTIVE AND THE COMPANY EACH ACKNOWLEDGES THAT HE OR IT
HAS READ ALL OF THE TERMS OF THIS AGREEMENT, UNDERSTANDS THE
AGREEMENT, AND AGREES TO ABIDE BY ITS TERMS AND CONDITIONS.
A-73
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date set forth in the first paragraph of this Agreement.
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THE COMPANY: |
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CONTINUCARE CORPORATION, |
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By: |
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Name: |
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Title: |
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THE EXECUTIVE: |
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A-74
EXHIBIT D-3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (Agreement), is dated as
of ,
2006, by and among Continucare Corporation, a Florida
corporation (the Company) and Carlos Garcia (the
Executive).
WHEREAS, the Company desires to employ the Executive in an
executive capacity and the Executive desires to accept such
employment, all upon the terms and subject to the conditions set
forth in this Agreement; and
WHEREAS, the Company is engaged in the business of providing
primary health care services in Miami-Dade, Broward and
Hillsborough Counties, Florida, and related transportation,
diagnostic and administrative support services (the
Business); and the Executive has experience
and expertise in the Business and, by virtue of his employment
with Company, the Executive shall become familiar with and
possess the manner, methods, trade secrets and other
confidential information pertaining to the Business.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants set forth in this Agreement, the Company and the
Executive agree as follows:
1. Recitals. The above recitals are true and correct
and are incorporated herein by reference.
2. Employment; Term. The Company shall employ the
Executive, and the Executive accepts such employment, on the
terms and subject to the conditions set forth in this Agreement,
for a term commencing as of the date hereof (the Effective
Date) and ending on the first anniversary of the Effective
Date. This Agreement may be renewed upon the mutual written
agreement of the Executive and the Company.
3. Services.
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3.1 Office and Duties. The Executive shall report to the
Chief Executive Officer of the Company (the Chief
Executive Officer). During the Term, the Executive shall
serve as President Diagnostics Division of the
Company with such duties, authority and responsibility as are
commensurate with such position, subject to oversight and
direction of the Chief Executive Officer. In exercising his
duties and responsibilities hereunder, the Executive shall have
all the power and authority necessary to fulfill and discharge
his duties and responsibilities hereunder and shall abide by any
lawful directions given by the Chief Executive Officer in good
faith. Notwithstanding the foregoing, the Executive shall not,
in connection with his employment hereunder, cause or permit the
Company or any of its subsidiaries to enter into any agreement,
commitment or arrangement with, or pay any fees or other amounts
to any person not dealing at arms length with the
Executive without first disclosing the nature of such
relationship to the Chief Executive Officer and obtaining the
prior written approval of the Chief Executive Officer to any
such agreement, commitment, arrangement or payment. The
Executive shall be responsible for such additional duties
commensurate with his position not materially inconsistent with
the foregoing as may be reasonably determined by the Chief
Executive Officer from time to time. |
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3.2 Best Efforts. During the Term, the Executive shall
diligently and competently devote the Executives best
efforts, full time and energies during business hours to the
business and affairs of the Company and shall use his best
efforts, skills and abilities to promote the interests of the
Company and otherwise to discharge his obligations under this
Agreement. |
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3.3 Location of Executive. The Executive shall perform
the duties of his employment under this Agreement at the
Companys main business offices in Miami-Dade County,
subject to travel from time to time to other areas as may be
reasonably required or reasonably desirable in connection with
the businesses, affairs and operations of the Company from time
to time and the performance by the Executive of his duties,
obligations and responsibilities under this Agreement; provided
that subject to travel to other areas as hereinbefore
specifically provided for in this Section 3.3, the Company
shall have no right to require the Executive to re-locate
outside of Miami-Dade County, Florida. |
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4. Compensation.
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4.1 Annual Salary. During the Term, the Executive shall
receive a base salary at the annual rate of $225,000 (Base
Salary), payable in accordance with the Companys
normal payroll practices or at such other reasonable intervals
as may from time to time be used by the Company for paying its
employees generally. |
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4.2 Bonus. The Executive shall be eligible to participate
in the Companys Management Compensation Program in
accordance with the terms and conditions thereof; provided,
however, that the Executive acknowledges that any amounts paid
under the Companys Management Compensation Program are
determined in accordance with the terms of that program and that
eligibility to participate in such program does not constitute a
guarantee that Executive shall receive a bonus under such plan
or a guarantee of the amount of any bonus that the Executive may
receive thereunder. |
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4.3 Options. The Executive shall receive options to
acquire 100,000 shares of the Companys common stock, par
value $.0001 per share (the Options). The Options
shall be issued under the Companys Amended and Restated
2000 Stock Option Plan (the Plan) and shall be
subject to the terms and conditions set forth therein. The
Options shall be documented by the Companys standard form
of Stock Option Agreement. The terms of the Options shall
provide that the Options shall: (a) have a per share
exercise price equal to the per share closing price of the
Common Stock on the American Stock Exchange as of the date of
this Agreement, (b) vest in four equal annual installments
with the first such installment vesting on the first anniversary
date of this Agreement, and (c) unless exercised prior to
such date terminate and be of no further force and effect on the
tenth anniversary of this Agreement. |
5. Reimbursement of Expenses; Benefits.
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5.1 Reimbursement of Expenses. Upon submission of
appropriate documentation and in specific accordance with such
guidelines as may be reasonably established from time to time by
the Company, the Executive shall be entitled to reimbursement
for all reasonable, out-of-pocket expenses incurred by him
during the Term in connection with the proper and efficient
discharge of his duties hereunder. |
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5.2 Employee Benefit Plans and Programs. During the Term,
the Executive shall be entitled to participate in the
Companys employee benefit plans and programs. The
Executives service with the Company prior to the Effective
Date shall be counted for purposes of all eligibility, waiting
periods and vesting requirements from time to time in effect.
Nothing in this Agreement shall require the Company at any time
to create or continue any such plan or program or to fix, amend
or retain eligibility requirements so as to include the
Executive. |
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5.3 Vacations. The Executive shall be entitled to four
(4) weeks of paid vacation during the Term, taking into
consideration the business needs of the Company. |
6. Termination. The Executives employment
under this Agreement may be terminated prior to the end of the
Term by the Company or the Executive without any breach of this
Agreement only under the following circumstances:
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6.1 Death. This Agreement and the Executives
employment under this Agreement shall terminate immediately and
automatically upon the Executives death. |
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6.2 Disability. This Agreement and the Executives
employment under this Agreement may be terminated if the
Executive shall suffer a Disability, which shall
mean any incapacity, illness or disability of the Executive
which renders the Executive mentally or physically unable to
perform his duties under this Agreement for a continuous period
of sixty (60) or more consecutive days or for ninety
(90) days, whether consecutive or not, within a one hundred
eighty (180) day period, during the Term, as reasonably
determined by a physician mutually selected by Executive and the
Company. Termination due to Disability shall be deemed to have
occurred upon the first day of the month following the
determination of Disability as defined in the preceding sentence. |
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6.3 For Cause. The Company may terminate the
Executives employment under this Agreement for Cause (as
hereinafter defined). Cause shall mean:
(a) committing or participation in an act of fraud, gross
neglect, willful misconduct, recklessness, embezzlement or
dishonesty against the Company or any of its affiliates or any
customer or supplier of the Company or any other person, entity
or governmental body having dealing with the Company;
(b) being indicted for or convicted of an act or acts
constituting a felony under applicable laws of the United States
or any state thereof; (c) if applicable, loss of any state
or federal license required for the Executive to perform the
Executives material duties or responsibilities for the
Company; provided, however, that this Section 6.3(c) shall
not be applicable if such loss of license shall be a result of
any actions or inactions outside the Executives control;
(d) habitual neglect of duty or willful disobedience of the
lawful orders of the Chief Executive Officer given in good faith
that are not inconsistent with the provisions of this Agreement;
(e) breach of or failure to observe any of the material
terms or conditions of this Agreement; or (f) any
assignment of this Agreement by the Executive in violation of
this Agreement; provided, however, that if an event constituting
Cause under clauses (a) (with respect to gross
neglect only), (c), (d) or (e) above is curable, then
the Executive shall have the opportunity to cure the same within
fifteen (15) days after receipt of written notice from
Company setting forth the conduct committed in reasonable detail
and that Company intends to terminate the Executive for
Cause if the breach is not timely cured. |
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6.4 Without Cause. Upon prior written notice to
Executive, the Company may (a) terminate the
Executives employment hereunder other than for Cause;
(b) substantially diminish the duties and responsibilities
of Executive; or (c) materially change the title or
position of Executive in the hierarchy of the Company (all of
the foregoing together with any other material breach of this
Agreement by the Company shall be deemed a termination
Without Cause). In the instance of the
Companys actions pursuant to (b) or (c) above,
the Executive may either consent to such action or terminate his
employment with the Company in writing fifteen (15) days
after such written notice form the Company, which termination
shall be deemed a termination Without Cause by the Company. |
7. Payments After Termination. If this Agreement and
the Executives employment hereunder are terminated then
the Executive or the Executives estate, as the case may
be, shall receive the Base Salary and any unpaid expense
reimbursements through the date of termination in accordance
with the terms of this Agreement and, in the event that this
Agreement is terminated pursuant to Section 6.4 above, the
Executive shall also receive the Base Salary for the remainder
of the twelve month period from the Effective Date. Thereafter,
the Executive shall not be entitled to receive any further
compensation or benefits from the Company whatsoever.
8. Trade Secrets. Executive covenants and agrees
that he will not divulge or make use of any trade secrets or
other confidential information of the Business other than to
disclose such secrets and information to the Company or as
necessary to perform his duties under this Agreement. If
Executive violates any of its obligations under this
Section 8, the Company may proceed against him in
law or in equity for such damages or other relief as a court may
deem appropriate. Executive acknowledges that a violation of
this Section 8 may cause the Company irreparable
harm which may not be adequately compensated for by money
damages. Executive therefore agrees that in the event of any
actual or threatened violation of this Section 8,
the Company shall be entitled, in addition to other remedies
that either of them may have, to a temporary restraining order
and to preliminary and final injunctive relief against Executive
or to prevent any violations of this Section 8,
without the necessity of posting a bond. The prevailing party in
any action commenced under this Section 8 shall also
be entitled to receive reasonable attorneys fees and court
costs. It is the intent and understanding of each party hereto
that if, in any action before any court or agency legally
empowered to enforce this Section 8, any term,
restriction, covenant or promise in this Section 8
is found to be unreasonable and for that reason unenforceable,
then such term, restriction, covenant or promise shall be deemed
modified to the extent necessary to make it enforceable by such
court or agency to the maximum extent permitted by applicable
requirements of law.
9. Withholding. Anything to the contrary
notwithstanding, all payments required to be made by the Company
hereunder to the Executive or the Executives estate or
beneficiaries shall be subject to the
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withholding of such amounts, if any, relating to tax and other
payroll deductions as the Company may reasonably determine it
should withhold pursuant to any applicable law or regulation.
10. Notices. All notices or other communications
required or permitted hereunder shall be in writing and shall be
deemed given or delivered when delivered personally or by fax
with automatic confirmation (with a copy via other means
specified herein) or two (2) business days after being sent
by prepaid registered or certified mail, return receipt
requested, or by private courier or express delivery service
addressed as follows:
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Continucare Corporation |
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7200 Corporate Center Drive, Suite 600 |
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Miami, FL 33126 |
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Attention: Chief Executive Officer |
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Fax: (305) 500-2104 |
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with a copy (which shall not constitute notice), to: |
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Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A. |
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150 West Flagler Street, Suite 2200 |
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Miami, FL 33130 |
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Attention: Geoffrey MacDonald, Esq. |
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Fax: (305) 789-3395 |
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with a copy (which shall not constitute notice), to: |
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Sandra Greenblatt, P.A. |
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One Biscayne Tower, Suite 3500 |
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2 South Biscayne Boulevard |
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Miami, FL 33131 |
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Attention: Sandra P. Greenblatt, Esq. |
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Fax: (305) 577-9951 |
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or to such other address as such party may indicate by a notice
delivered to the other party hereto. |
11. Prevailing Party. In the event of any dispute
with regard to this Agreement, the prevailing party shall be
entitled to receive from the non-prevailing party and the
non-prevailing party shall pay upon demand all reasonable fees
and expenses of counsel for the prevailing party.
12. Entire Agreement. This Agreement sets forth the
entire agreement and understanding between the parties, and
supersedes all prior discussions, agreements and understandings
of every kind and nature among them as to the subject matter
hereof.
13. Amendments to Agreement. This Agreement shall
not be amended except by a writing signed by each party to the
Agreement, and this Agreement may not be discharged except by
performance in accordance with its terms or by a writing signed
by each party to the Agreement.
14. U.S. Dollars. All dollar amounts in this
Agreement are stated in United States Dollars.
15. Governing Law. This agreement and its validity,
construction and performance shall be governed in all respects
by the law of the State of Florida, without giving effect to
principles of conflicts of laws. Venue for any proceeding
arising from or related to this Agreement shall be in Miami-Dade
County, Florida.
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16. Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
This Agreement may not be assigned by the Executive without the
prior written consent of the Company. This Agreement may be
assigned by the Company in connection with the sale, transfer or
other disposition of all or substantially all of the
Companys assets or business; provided, however, that such
assignee shall agree in writing to be bound by the terms of this
Agreement.
17. Pronouns. Whenever the context requires, the use
in this Agreement of a pronoun of any gender shall be deemed to
refer also to any other gender, and the use of the singular
shall be deemed to refer also to the plural.
18. Headings. The headings of this Agreement are
inserted for convenience of reference only and shall not
constitute a part hereof.
19. Execution in Counterparts. This Agreement may be
executed in several counterparts, by original or facsimile
signature, each of which so executed shall be deemed to be an
original and such counterparts together shall be deemed to be
one and the same instrument, which shall be deemed to be
executed as of the date first above written.
20. Further Assurances. The parties hereto shall
sign such further documents and do and perform and cause to be
done and performed such further and other acts and things as may
be necessary or desirable in order to give full effect to this
Agreement and every party thereof.
21. Survival. Any termination of this Agreement
shall not affect the ongoing provisions of this Agreement, which
shall survive such termination in accordance with their terms.
22. Severability. The invalidity or
unenforceability, in whole or in part, or any covenant, promise
or undertaking, or any section, subsection, paragraph, sentence,
clause, phrase or word or of any provision of this Agreement
other than Section 4, shall not affect the validity or
enforceability of the remaining portions thereof.
23. Participation of Parties; Construction. The
parties hereto acknowledge that this Agreement and all matters
contemplated herein have been negotiated between both of the
parties hereto and their respective legal counsel and that both
parties have participated in the drafting and preparation of
this Agreement from the commencement of negotiations at all
times through the execution hereof. The parties hereto
acknowledge that they have each read this Agreement and
understand the effect of its provisions. Accordingly, this
Agreement shall be interpreted and construed without reference
to any rule requiring that this Agreement be interpreted or
construed against the party causing it to be drafted.
24. Independent Counsel. The Executive acknowledges
that counsel to the Company has not represented him nor provided
him with legal or other advice in connection with the
transactions contemplated by this Agreement and that he has been
urged to seek independent legal, tax and financial advice in
order to analyze the risks and merits of the transactions
contemplated by this Agreement.
THE EXECUTIVE AND THE COMPANY EACH ACKNOWLEDGES THAT HE OR IT
HAS READ ALL OF THE TERMS OF THIS AGREEMENT, UNDERSTANDS THE
AGREEMENT, AND AGREES TO ABIDE BY ITS TERMS AND CONDITIONS.
A-79
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date set forth in the first paragraph of this Agreement.
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THE COMPANY: |
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CONTINUCARE CORPORATION, |
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By: |
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Name: |
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Title: |
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THE EXECUTIVE: |
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A-80
EXHIBIT E
FIRST AMENDMENT TO LEASE
This First Amendment to Lease
dated ,
2006, is made by and between Cruz & Cruz Partnership, a
Florida partnership (Landlord), and Miami
Dade Health & Rehabilitation Services, Inc., a Florida
corporation (Tenant).
WHEREAS, Landlord and Tenant are parties to a Lease dated
as of January 1, 2006 (the Lease); and
WHEREAS, Tenant has entered into an Asset Purchase
Agreement (the Asset Purchase Agreement)
dated as of May , 2006, with,
among others, Continucare Corporation, a Florida corporation
(CNU) and CNU Blue 1, Inc., a Florida
corporation and a wholly-owned subsidiary of CNU
(Buyer), pursuant to which Tenant will sell
and transfer to Buyer substantially all of Tenants assets,
properties and business to Buyer, including, without limitation,
Tenants rights under the Lease; and
WHEREAS, Tenant desires to obtain the consent of Landlord
to Tenants assignment of Tenants rights under the
Lease to Buyer pursuant to the Asset Purchase Agreement; and
WHEREAS, in connection with the assignment by Tenant of
the Lease to Buyer, Landlord and Tenant desire to enter into
certain amendments to the terms and conditions of the Lease;
NOW, THEREFORE, in consideration of the mutual covenants
and agreements hereinafter set forth, it is hereby agreed among
Landlord and Tenant as follows:
1. Consent to Assignment. By its execution of
this Amendment, Landlord hereby consents to Tenants sale,
transfer and assignment of all of Tenants rights under the
Lease to Buyer pursuant to the terms of the Asset Purchase
Agreement.
2. Amendments to Lease.
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a. Section 2.04 License.
Section 2.04 of the Lease is hereby amended by
adding the following sentence as the final sentence of such
section: Notwithstanding anything herein to the contrary,
Landlord shall not be permitted to revoke or terminate any
license in favor of Tenant to use and occupy any common areas or
facilities not within the leased premises or diminish the amount
of such areas covered by any such license unless an event of
default specified in Section 17.01 of this Lease
shall occur and be continuing. |
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b. Section 3.04 Changes and Additions
to Building. Section 3.04 of the Lease is hereby
amended by adding the following sentence as the final sentence
of such section: Landlord shall use all commercially
reasonable efforts to minimize any disruption to Tenants
business or use and occupancy of the leased premises occasioned
by any maintenance, repairs, alterations, additions or
construction. |
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c. Section 4.02 Operation of
Business. Section 4.02 of the Lease is hereby
amended by adding the following at the end of the final sentence
of such section: ; provided, however, that Tenant shall at
all times during the term of this Lease be permitted to conduct
activities consistent with the operation of a medical office on
the leased premises. |
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d. Section 6.01 Installation by
Tenant. Section 6.01 of the Lease is hereby
amended by adding the following at the end of the final sentence
of such section: , which consent will not be unreasonably
withheld or delayed. |
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e. Section 6.02 Tenant Shall Discharge
All Liens. Section 6.02 of the Lease is hereby
amended by deleting the words ten (10) in the first
sentence of such section and replacing them with the words
thirty (30). |
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f. Section 7.01- Responsibility of Tenant. |
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i. Subsection (f) of Section 7.01 of the
Lease is hereby amended by adding the following to the end of
such section: ; provided, however, that Landlord shall use
all commercially reasonable efforts |
A-81
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to minimize any disruption to Tenants business or use and
occupancy of the leased premises occasioned thereby. |
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ii. Subsection (g) of Section 7.01 of the
Lease is hereby amended by adding the following to the end of
the first sentence and the end of the second sentence of such
section: other than any damages conclusively determined to
have been caused by Landlords gross negligence or willful
misconduct. |
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g. Section 11.01 Significant Change of
Ownership. Section 11.01 of the Lease is hereby amended
by adding the following to the end of section:
Notwithstanding the foregoing, it is understood and agreed
that any change of ownership of Tenant resulting from any person
or entity acquiring, directly or indirectly, substantially all
of the business or assets of any entity that owns or controls
Tenant shall not give Landlord a the right to terminate this
Lease. |
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h. Section 12.01 Government
Regulations. Section 12.01 of the Lease is hereby
amended by adding the following to the end of such section:
Landlord shall, at Landlords sole cost and expense,
comply with all county, municipal, state, and federal laws,
orders, ordinances and other applicable requirements of all
governmental authorities, now in force, or which may hereafter
be in force, pertaining to the common areas and facilities not
within the leased premises. |
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i. Section 13.01 Rules and
Regulations. Section 13.01 of the Lease is
hereby amended by adding the following to the end of the first
sentence of such section: ; provided, however, that
Landlord shall not adopt or promulgate any rules and regulations
that are inconsistent with the operation of a medical office on
the leased premises nor amend, suspend or supplement any rules
and regulations that would prevent or materially limit the
ability of Tenant to operate a medical office on the leased
premises. |
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j. Section 15.01 Total or Partial
Destruction. Section 15.01 of the Lease is
hereby amended by adding the following to the end of such
section Notwithstanding the foregoing or anything else
herein to the contrary, if the leased premises shall be damaged
by fire, the elements, unavoidable accident or other casualty
without the fault of Tenant and as a result either: (a) 50%
or more of the of the leased premises are rendered untenantable
thereby; or (b) the building of which the leased premises
is a part is destroyed; then, if such damage or destruction
shall occur during the last year of the term of this Lease (or
any renewal term) Tenant shall have the right, to be exercised
by notice to Landlord, to cancel and terminate this Lease
effective as of the date stipulated in Tenants notice
which shall not be earlier than thirty (30) days nor later
than sixty (60) days after the giving of such notice. |
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k. Section 18.01 Right of Entry.
Section 18.01 of the Lease is hereby amended by adding the
following at the end of such section: Notwithstanding
anything herein to the contrary, Landlord shall use all
commercially reasonable efforts to minimize any disruption to
Tenants business or use and occupancy of the leased
premises occasioned by any entry by Landlord or Landlords
agents on, examination or showing of, or repair, alteration,
improvement, or addition to the leased premises. |
3. Miscellaneous. Except as amended by this
Amendment, the Lease shall remain in full force and effect in
all respects. This Amendment may be executed in counterparts,
and all counterparts will collectively constitute a single
agreement. This Amendment may not be amended a modified or any
provision waived except in writing. This Amendment together with
the Lease constitutes the entire agreement of the parties and
supersedes all prior agreements or understandings. This
Amendment is binding upon and inures to the benefit of the
parties and their successors and permitted assigns. This
Amendment may not be assigned or the duties delegated without
the written consent of all parties. No failure or delay of any
party in exercising any power or right under this Amendment will
operate as a waiver thereof, nor will any single or partial
exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise
of any other right or power. Any provision of this Agreement
that is prohibited or unenforceable in any jurisdiction will, as
to that jurisdiction, be ineffective to the extent of the
prohibition or unenforceability without invalidating the
remaining provisions of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed the day and year first above written.
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LANDLORD |
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CRUZ & CRUZ PARTNERSHIP |
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By |
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Name: |
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Its: |
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TENANT |
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MIAMI DADE HEALTH AND REHABILITATION SERVICES, INC |
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By |
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Name: |
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Its: |
A-83
EXHIBIT F
REGISTRATION RIGHTS AGREEMENT
Registration Rights Agreement (this
Agreement) is made and entered into as of
the day
of ,
2006 by and between Continucare Corporation, a Florida
corporation (the CNU) and Jose Garcia, as
Sellers Representative on behalf of each of Miami Dade
Health and Rehabilitation Services, Inc., a Florida corporation
(MDHRS), Miami Dade Health Centers, Inc., a
Florida corporation (MDHC), West Gables Open
MRI Services, Inc., a Florida corporation (West
Dade), Kent Management Systems, Inc.
(Kent), Miami Dade Health Centers One, Inc.,
a Florida corporation (MDHC One), Pelu
Properties, Inc., a Florida corporation
(Pelu) and Peluca Investments, LLC, a Florida
limited liability company (Peluca, and,
collectively with MDHRS, MDHC, West Dade, Kent, MDHC One, and
Pelu the Sellers), and each of the
shareholders of each Seller (the Owners).
W I T N E S S E T H:
WHEREAS, the parties hereto are entering into this Agreement
pursuant to the terms of that certain Asset Purchase Agreement
(the Purchase Agreement) dated as of
May , 2006, by and among CNU,
CNU Blue 1, Inc., a Florida corporation and wholly-owned
subsidiary of the CNU (Buyer), CNU Blue 2,
LLC, a Florida limited liability company and a wholly owned
subsidiary of Buyer (Buyer LLC), Sellers,
MDHC Red, Inc., a Florida corporation, and Owners;
WHEREAS, each capitalized term used in this Agreement without
definition has the meaning given to it in the Purchase Agreement;
WHEREAS, pursuant to the Purchase Agreement Buyer has acquired
the Business from Sellers and CNU has issued the CNU Shares to
Sellers; and
WHEREAS, CNU has agreed to grant the Sellers and Owners certain
registration rights with respect to the CNU Shares received by
the Sellers pursuant to the Purchase Agreement.
NOW, THEREFORE, in consideration of the covenants hereinafter
set forth and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties
hereto hereby agree as follows:
1. Registration Rights.
(a) Secondary Registration. CNU will file, as
promptly as practicable after the Closing Date, a registration
statement (the Registration Statement) on
Form S-3 covering the resale of the Registrable Securities
(as hereinafter defined) by Sellers and Owners and thereafter
shall use all commercially reasonable efforts to cause the
Registration Statement to be declared effective as soon as
practicable following such filing (but in any event by the date
that is six months after the Closing Date) and to maintain such
effectiveness until the date that is 12 months after the
Closing Date; provided, however, that CNU shall
have the right to prohibit the sale of Registrable Securities
pursuant to the Registration Statement, upon notice to the
Sellers Representative (A) if in the opinion of
counsel for CNU, CNU would thereby be required to disclose
information not otherwise then required by law to be publicly
disclosed, provided that CNU shall use all commercially
reasonably efforts to minimize the period of time, but in no
event more than 60 days, in which it shall prohibit the
sale of any shares of Registrable Securities pursuant to this
clause (A); (B) during the period starting with the date
10 days prior to CNUs estimate of the date of filing
of, and ending on a date 60 days after the effective date
of, a Company initiated registration in which any Seller or
Owner is entitled to participate in accordance with
Section 1(b) hereof, or such longer post-effective periods
as may be reasonably required by the underwriter or underwriters
if such offering is underwritten and if all other holders of
more than five percent (5%) of the Companys stock agree to
such terms; or (C) upon the happening of any event, as a
result of which the prospectus under the Registration Statement
(the Prospectus) includes an untrue statement
of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing (in
which case, CNU
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shall within a reasonable period provide the Sellers
Representative with revised or supplemental prospectuses and the
Sellers and Owners shall promptly take action to cease making
any offers of the Registrable Securities until receipt and
distribution of such revised or supplemental prospectuses). All
Registrable Securities offered and sold pursuant to the
Registration Statement shall be sold in transactions on the
American Stock Exchange or any other national securities
exchange on which the CNU shares may then be listed or on Nasdaq
if the CNU shares are then listed on Nasdaq.
(b) Incidental (Piggyback) Registration. In addition
to the aforementioned rights, and subject to the limitations set
forth in this Agreement, if at any time, and from time to time
therein, CNU proposes to register the offer and sale of any of
its securities under the Securities Act of 1933, as amended (the
Act), for its own account in a public
offering (other than registrations on Form S-4 (or any
successor form) or registrations with regard to conversion of
any of CNUs securities or employee stock options, employee
purchase plans or other employee benefit plans), CNU shall use
its best efforts to give notice to the Sellers
Representative of its intention to effect such a registration at
least twenty days prior to the filing with the Securities and
Exchange Commission (the SEC) of such
registration statement. Upon written request of the
Sellers Representative, given within ten (10) days
after receipt from CNU of such notice, CNU shall cause the
number of the Sellers or Owners Registrable
Securities (as hereinafter defined) then held by such Seller or
Owner and referred to in such request to be included in such
registration statement, at CNUs expense subject to the
provisions of Section 3(a) hereof; provided, however, that
in the event the offering pursuant to such registration
statement shall be underwritten and the underwriters advise CNU
that in their opinion the number of securities requested to be
included in such registration pursuant to this Section 1(b)
and pursuant to any other rights granted by CNU to holders of
its securities to request inclusion of any such securities in
such registration exceeds the number of securities which can be
sold in the offering without adversely affecting the offering
price or the marketing of CNUs securities, CNU may first
include in such registration all securities CNU proposes to
sell, and the Sellers or Owners, as applicable shall accept a
reduction (including a total elimination) in the number of
shares to be included in such registration in accordance with
Section 6 below. Nothing in this Section 1(b) shall
limit CNUs ability to withdraw a registration statement it
has filed under this Section 1(b) either before or after
effectiveness.
2. Indemnification. In the event that CNU shall
register under the Act any Sellers or Owners
Registrable Securities:
(a) CNUs Indemnification. CNU will indemnify
and hold harmless such Seller or owner and any person who
controls the Shareholder within the meaning of the Act and the
Securities Exchange Act of 1934 (the Exchange
Act) against any losses, claims, expenses, damages or
liabilities (including reasonable attorneys fees)
(Losses), to which the Seller, Owner or
controlling person become subject under the Act, insofar as such
Losses (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement
(including, without limitation, the Registration Statement)
under which such Registrable Securities were registered under
the Act, any prospectus contained therein (including without
limitation the Prospectus) which is utilized, or any amendment
or supplement thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse such
Seller or Owner and any such controlling person for any
reasonable legal or other reasonable expenses incurred by them
in connection with investigating or defending any such Loss;
provided, however, that CNU will not be liable in any such case
if and to the extent that any such Loss arises out of or is
based upon an untrue statement or alleged untrue statement or
omission or alleged omission so made in conformity with
information furnished to CNU by such Seller or Owner, such
controlling person or any Affiliate of such Seller or Owner and
provided further, that with respect to any untrue statement or
omission or alleged untrue statement or omission made in any
Prospectus under the Registration Statement, the indemnity
contained in this Section 2(a) shall not inure to the
benefit of such Seller or Owner (or the benefit of any person
controlling such Seller or Owner) if the person asserting any
such Losses, purchased the Registrable Securities that are the
subject of such Losses, and such Seller or Owner or any person
controlling such Seller or Owner (i) failed to comply with
the prospectus delivery requirements of the Act in connection
with the sale of Registrable Securities to such person or
(ii) utilized a Prospectus after such Seller or Owner
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was notified, in accordance with Section 1(b) hereof, to
cease making any offers or sales of Registrable Securities
pursuant to the Registration Statement.
(b) Sellers and Owners Indemnification. The Sellers
and Owners will jointly and severally indemnify and hold
harmless CNU and each underwriter of CNUs securities under
Section 1 and each person who controls CNU or underwriter
within the meaning of the Act and the Exchange Act, each officer
of CNU who signs the registration statement and each director of
CNU, against all Losses, to which CNU, such underwriter or such
officer or director or controlling person become subject under
the Act, but only insofar as such Losses arise out of or are
based upon any untrue statement or alleged untrue statement of
any material fact (i) made in reliance on and in conformity
with information relating to such Seller or Owner furnished in
writing to CNU expressly for use in any registration statement
under which such Registrable Securities were registered under
the Act pursuant to Section 1 hereof or (ii) contained
in any Prospectus which was utilized by [CNU in connection with
the registration of the Registrable Securities or any
controlling person or Affiliate of the Sellers and Owners after
such Seller or Owner was notified, in accordance with
Section 1(b) hereof, to cease making any offers or sales of
Registrable Securities pursuant to the Registration Statement.
(c) Notification. Promptly after receipt by an
indemnified party hereunder of notice of the commencement of any
action, such indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof; provided,
however, that any failure to give such notice will not waive any
rights of the indemnified party except to the extent the rights
of the indemnified party are materially prejudiced. In case any
such action shall be brought against any indemnified party and
it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate
in and, to the extent it shall wish, to assume and undertake the
defense thereof with counsel reasonably satisfactory to such
indemnified party and, after notice from the indemnifying party
to such indemnified party of its election so to assume and
undertake the defense thereof, the indemnifying party shall not
be liable to such indemnified party under this Section 2
for any legal expenses subsequently incurred by such indemnified
party in connection with the defense thereof other than
reasonable costs of investigation and of liaison with counsel so
selected; provided, however, that if the indemnifying party has
failed to assume the defense and employ counsel then the
indemnified party shall have the right to select counsel and to
assume such legal defense and otherwise to participate in the
defense of such action, with the expenses and fees of such
separate counsel and other expenses related to such
participation to be reimbursed by the indemnifying party as
incurred.
(d) If the indemnification provided for in this
Section 2 is unavailable or insufficient to hold harmless
an indemnified party in respect of any losses, claims, expenses,
damages or liabilities or actions in respect thereof, then each
indemnifying party shall in lieu of indemnifying such
indemnified party contribute to the amount paid or payable by
such indemnified party as a result of such Losses in such
proportion as is appropriate to reflect the relative fault of
CNU, on the one hand, and on the other, in connection with the
statements or omissions which resulted in such Losses as well as
any other relevant equitable considerations. The relative fault
shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by CNU or any Affiliate thereof, on the one
hand, or the applicable Sellers or Owners or any Affiliate
thereof, on the other, and the parties relative intent,
knowledge, access to information and opportunity to correct or
present such statement or omission. CNU and the Sellers and
Owners agree that it would not be just and equitable if
contribution pursuant to this Section 2(d) were determined
by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations
referred to above in this Section 2(d). The amount paid or
payable by an indemnified party as a result of the Losses in
respect thereof referred to above in this Section 2(d)
shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent
misrepresentation.
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3. Expenses.
(a) Secondary Registration. In connection with the
Registration Statement filed pursuant to Section 1(a) of
this Agreement: (i) the Sellers and Owners shall pay all
the expenses of their legal counsel, accountants and other
experts; (ii) CNU shall pay the fees and disbursements of
legal counsel for CNU, fees and disbursements of experts used by
CNU in connection with such registration, expenses of any audits
of CNU incidental to or required in connection with such
registration and all expenses of registration not otherwise
specifically described in this Section 3(a), including
expenses incidental to any post-effective amendment to any such
registration statement; and (iii) the Sellers and Owners
and any other persons selling securities pursuant to such
Registration Statement shall pay all SEC and blue sky
registration and filing fees, fees and expenses attributable to
the printing and distribution of Prospectuses, underwriting
discounts and commissions.
(b) Incidental Registration. If a Sellers or
Owners Registrable Securities are included in any
registration statement pursuant to Section 1(b) of this
Agreement, CNU shall pay the costs and expenses incurred in
connection with the preparation and filing of such registration
statement covering such shares, including, but not limited to,
the fees and expenses of counsel, accountants and other experts
for CNU, printing costs, registration and filing fees and blue
sky fees and expenses (other than the incremental portion of the
federal and state registration and filing fees attributable to
the Sellers or Owners Registrable Securities, which
shall be paid by the such Seller or Owner), commissions and
expenses of underwriters (other than fees and expenses of
underwriters attributable to the Registrable Securities, which
shall be paid by such Seller or Owner and all other direct and
indirect costs and expenses in connection with the registration
and public offering of the Sellers or Owners
Registrable Securities. Notwithstanding anything contained
herein to the contrary, CNU shall not be required to pay the
fees and expenses of counsel for the Sellers or Owners.
4. Registrable Securities. For purposes of this
Agreement, the term Registrable Securities shall
mean (i) any CNU Shares issued to the Sellers, the Owners
or HAC Advisors LLC pursuant to the terms of the Purchase
Agreement and (ii) any shares of securities of CNU issued
or issuable with respect to the CNU Shares by way of a stock
dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other
reorganizations.
5. Information for Registration Statement; Certain
Limitations. CNUs obligations under Section 1
with respect to the Sellers and Owners are expressly conditioned
upon (i) such holder furnishing to CNU in writing such
information concerning such holder and its controlling persons
and the terms of such holders proposed offering of shares
of the Registrable Securities as CNU shall reasonably request
for inclusion in the Registration Statement; and (ii) there
not having occurred (a) a material breach by such Seller or
Owner or an Affiliate of such Seller or Owner of any agreement,
covenant, representation or warranty contained in the Purchase
Agreement or any Seller Ancillary Agreement to which such Seller
or Owner is a party.
6. Allocation of Registration Opportunities. In any
circumstance in which all of the Registrable Securities and
other Securities of CNU with registration rights (Other
Shares) requested to be included in a registration on
behalf of other Security Holders of CNU cannot be so included as
a result of limitations of the aggregate number of shares of
Registrable Securities and Other Shares that may be so included,
the number of Shares of Registrable Securities and Other Shares
that may be so included shall be allocated among the Seller and
Owner and other selling security holders requesting inclusion of
shares pro rata on the basis of the number of shares of
Registrable Securities and Other Shares that are requested to be
registered by such holders.
7. Rule 144 Covenants. CNU agrees, for a period
of two (2) years from the date of this Agreement, to file
with the SEC, all reports required to be filed by CNU under the
Exchange Act.
8. Standstill.
(a) Except as set forth on Schedule 8 to this
Agreement, during the six month period starting on the Closing
Date, neither Sellers nor Owners shall be permitted to offer or
sell any Registrable Securities whether pursuant to the
Registration Statement or otherwise.
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(b) During the period commencing on the date that is six
months after the Closing Date and ending on the date that is one
year after the Closing Date, each Owner shall be permitted to
sell during any three-month period up to a maximum of 500,000
CNU Shares pursuant to the Registration Statement provided,
however, that for purposes of calculating the number of shares
that an Owner may sell under this Section 8(b), such Owner
and all of such Owners Affiliates who are themselves
Owners shall be deemed to be a single Owner and, sales by such
Owner shall be aggregated with sales by such Owners
Affiliates. Solely for purposes of this Section 8(b) Jose
M. Garcia and Carlos Garcia shall not be deemed to be Affiliates
of each other.
Sellers and Owners agree that, in addition to any legend that
may be required by applicable Requirements of Law, any
certificate representing Registrable Securities shall bear a
restrictive legend concerning the restrictions set forth in this
Section 8.
9. Termination. The obligations of the parties under
Sections 1, 5, 6 and 7 of this
Agreement shall terminate and be of no further force and effect
on the earlier of (i) the date on which all Registrable
Securities may be sold without registration under the Act;
(ii) the date on which Sellers and Owners cease to own, in
the aggregate, at least ten percent of CNUs issued and
outstanding common stock, (iii) the date on which all
Registrable Securities then held by Sellers and Owners become
convertible into or exchangeable for securities of CNU or any
other person issued under an effective registration statement
under the Act and (iv) the date that is three years after
the date of this Agreement; provided however, that the
obligations of the parties under any other sections of this
Agreement shall survive such termination for a period of two
years thereafter.
10. Governing Law. This Agreement shall be governed
by and construed and enforced in accordance with the internal
laws of the State of Florida, without regard to the conflict of
law principles thereof
11. Binding Effect. The obligations of this
Agreement shall be binding upon the parties, their heirs,
successors and legal representatives.
12. Assignment. This Agreement may not be assigned
by any part without the prior written consent of the other party
hereto.
13. Amendment. Amendments to this Agreement may only
be made in writing signed by each of the parties.
14. Entire Agreement. This Agreement contains the
entire understanding of the parties and there are no other
agreements, written or oral, regarding the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
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CONTINUCARE CORPORATION |
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By: |
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Name: |
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Title: |
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SELLERS REPRESENTATIVE |
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By: |
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Name: Jose Garcia |
A-88
EXHIBIT G
INSTRUMENT OF ASSUMPTION
THIS INSTRUMENT OF ASSUMPTION is made as
of ,
2006 by MDHC Red, Inc., a Florida corporation
(Retain) in favor of each of Miami Dade
Health and Rehabilitation Services, Inc., a Florida corporation
(MDHRS), Miami Dade Health Centers, Inc., a
Florida corporation (MDHC), West Gables Open
MRI Services, Inc., a Florida corporation (West
Dade), Kent Management Systems, Inc.
(Kent), Pelu Properties, Inc., a Florida
corporation (Pelu), and Miami Dade Health
Centers One, Inc., a Florida corporation (MDHC One,
and, collectively with MDHRS, MDHC, West Dade, Kent, and Pelu,
the Sellers), provides:
RECITALS:
Pursuant to that certain Asset Purchase Agreement dated
May , 2006 (the
Purchase Agreement) Sellers have sold,
transferred and conveyed certain assets to CNU Blue 1, Inc., a
Florida corporation (Buyer), and Buyer has
assumed certain liabilities of the Sellers that are designated
as the Assumed Liabilities in the Purchase Agreement. Pursuant
to the terms and conditions of the Purchase Agreement, Retain
now desires to make a formal assumption from the Sellers of all
obligations and liabilities of Sellers, whether absolute or
contingent, asserted or unasserted, known or unknown, liquidated
or nonliquidated (other than the Assumed Liabilities),
including, without limitation, all of the Excluded Liabilities
(collectively, the Retained Liabilities), as
contemplated by the Purchase Agreement. Unless otherwise defined
or the context otherwise requires, capitalized terms used herein
shall have the respective meanings given to them in the Purchase
Agreement.
NOW, THEREFORE, for and in consideration of the transfer
of certain of the Excluded Assets and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, Retain hereby assumes and agrees to discharge and
perform the Retained Liabilities. In the event that Retain shall
fail to perform its obligations under this Instrument of
Assumption, the Sellers, Buyer, Buyer LLC, and CNU shall be
entitled to all rights and remedies available to them with
respect to indemnification pursuant to the Purchase Agreement.
Retain shall not assume or have any responsibility, obligation
or liability for or with respect to, the Assumed Liabilities. In
the event of a conflict between this Instrument of Assumption
and the Purchase Agreement, the terms and provisions of the
Purchase Agreement will control.
IN WITNESS WHEREOF, Retain has caused this Instrument of
Assumption to be executed and delivered in a manner sufficient
to bind it, as of the day and year first above written.
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MDHC RED, INC. |
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By: |
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Name: |
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Title: |
A-89
EXHIBIT H
LEASE
BY AND BETWEEN
LANDLORD:
Pelu Properties, Inc.
AND
Kent Management Systems, Inc.
(TENANT)
DATED
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TENANTS PRINCIPAL OFFICER:
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Jose M. Garcia, C.E.O. |
TENANTS CURRENT ADDRESS:
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2260 SW 8 StreetMiami, FL 33195 |
PHONE NUMBER:
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305-796-9442 |
LEASE AGREEMENT
THIS LEASE AGREEMENT, dated as of the 1st day of May, 2006
between
Pelu Properties, Inc. LANDLORD and Kent
Management Systems, Inc. TENANT.
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WITNESSETH:
ARTICLE I
Basic Lease Provisions
Section 1.01 Leased Premises.
Landlord hereby demises and leases to the Tenant, and Tenant
rents from the Landlord, the premises described as follows
(hereinafter the leased premises):
All commercial Space located at 4930 E. 10th Ct., Hialeah, Fl.
33012 and all parking spaces located in said complex.
No. of Square Feet: Appx. 8,000 sq ft of rentable
space
Section 1.02 Use of Additional Areas.
The use and occupation by the Tenant of the leased premises
shall include the use in common with other entities thereto of
the common areas, parking areas, service roads, loading
facilities, sidewalks and customer car parking areas as such
common areas now exist or as such common areas may hereafter be
constructed, and other facilities as may be designated from time
to time by the Landlord, subject however to the terms and
conditions of this lease and to reasonable rules and regulations
for the use thereof as prescribed from time to time by the
Landlord.
Section 1.03 Term.
This lease shall be for the term of 5 Years commencing on
05/01/2006 (hereinafter the Commencement Date) and
ending April 30, 2011.
Section 1.04 Commencement of Rent and Term.
The term of this Lease and Tenants obligations to pay rent
shall commence on the Commencement Date. Throughout the term
hereof Tenant agrees, upon request of Landlord or of
Landlords Mortgages, to execute and deliver without charge
and within ten (10) days a written declaration in form and
content satisfactory to the requesting party ratifying this
lease and the status thereof. Failure by Tenant to execute the
declaration required hereunder within said ten (10) days
shall be deemed an event of default hereunder and the terms
hereby granted are expressly so limited. Anything herein to the
contrary notwithstanding, Landlord agrees not to collect nor
accept from Tenant and Tenant agrees not to pay Landlord rent of
more than one (1) month in advance of its due date.
Section 1.05 Failure of Tenant to Open
In the event that the Tenant received notice that the leased
premises are ready for occupancy as herein defined and fails to
take possession and open the leased premises for business within
120 days thereafter, then Tenant shall be in default and
the Landlord shall have the right to exercise any remedies
herein provided.
Section 1.06 Excuse of Landlords
performance.
Landlord shall not be deemed in default with respect to failure
to perform any of the terms, covenants and conditions of this
lease if same shall be due to any strike, lockout, civil
commotion, inability to obtain any materials, service or
financing, through Act of God or other cause beyond control of
the Landlord.
ARTICLE II
Rent
Section 2.01 Fixed Minimum Rent.
Throughout the term of this lease (and subject to any earlier
termination of the Lease in accordance with its terms) Tenant
agrees to pay Landlord as fixed minimum rent the amounts
specified below. The fixed minimum annual rent during the term
of this lease shall be payable by Tenant in equal monthly
installments,
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on or before the first day of each month, in advance, at the
office of the Landlord without any deductions whatsoever as
hereinafter set forth (except that simultaneously with the
execution of this lease.
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FIRST YEAR:
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$ |
3,031.67 Per Month |
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(1) Year Gross Rent: $34,000.00
Sales tax: $2,380.00
$36,380 |
SECOND YEAR:
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$ |
3,122.62 Per Month |
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(2) Year Gross Rent: $35,020.00
Sales tax: $2,451.40
$37,471.40 |
THIRD YEAR:
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$ |
3,216.30 Per Month |
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(3) Year Gross Rent: $36,070.60
Sales tax: $2,524.95
$38,595.55 |
FOURTH YEAR:
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$ |
3,312.79 Per Month |
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(4) Year Gross Rent: $37,152.72
Sales tax: $2,600.69
$39,753.41 |
FIFTH YEAR:
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$ |
3,412.17 Per Month |
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(5) Year Gross Rent: $38,267.30
Sales tax: $2,678.72
$40,946.02 |
Section 2.02 Taxes and Insurance.
Tenant shall pay Property Taxes and Insurance. The
insurance shall be in an insurance company approved by Landlord
and a certified copy of the policy and/or certificate of
insurance shall be delivered to Landlord.
Section 2.03 Sales, Use and Rent Taxes
Tenant shall pay as additional rent all taxes in the nature of
sales, use or similar taxes, now or hereafter assessed or levied
by any taxing authority upon the payment of fixed rent or
additional rent, and which the Landlord is required or permitted
to collect from Tenant, payable simultaneously with the payment
of fixed rent or additional rent, as applicable.
Section 2.04 License.
All common areas and facilities not within the leased premises,
which Tenant may be permitted to use and occupy, are to be used
and occupied under a revocable license, and if any such license
be revoked or if the amount of such areas be diminished,
Landlord shall not be subject to any liability nor shall Tenant
be entitled to any compensation or diminution or abatement of
rent, nor shall revocation or diminution of such areas be deemed
constructive or actual eviction. Notwithstanding anything herein
to the contrary, Landlord shall not be permitted to revoke or
terminate any license in favor of Tenant to use and occupy any
common areas or facilities not within the leased premises or
diminish the amount of such areas covered by any such license
unless an event of default specified in
Section 17.01 of this Lease shall occur and be
continuing.
Section 2.05 Additional Rent.
In order to give Landlord a lien of equal priority with
Landlords lien for rent, and for no other purpose, any and
all sums of money or charges required to be paid by Tenant under
this lease whether or not same be so designated, shall be
considered additional rent. If such amounts or
charges are not paid at the time provided in this lease, they
shall nevertheless, if not paid when due, be collectible as
additional rent with the next payment of any amount of money or
charges as the same becomes due and payable hereunder or limit
any other remedy of Landlord (See Below).
A-92
ARTICLE III
Construction of Leased Premises
Section 3.01 Landlords Work
Landlord agrees that it will supply, at its expense, its
standard store as more particularly set forth in Exhibit
A attached hereto and made a part hereof. Landlord
shall notify Tenant when Landlord has completed Landlords
work pursuant to said Exhibit A.
The Landlord intends to complete the subject improvements on or
about Ready to Use. If the Landlord is unable to give
possession of the demised premises on the date stipulated in
paragraph 1 hereof as the commencement of the term hereof
by reason of the holding over of any prior Tenant of
Landlords failure to complete the subject improvements, or
for any other reason, an abatement or diminution of the rent to
be paid hereunder shall be allowed Tenant under such
circumstances, but nothing herein shall operate to extend the
term.
Additional Rent. Late Charge.
If Tenant fails to pay the rent in the full before the end of
the 10th day after it is due, Tenant will pay Landlord a late
charge of $25.00. Landlord does not waive the right to
insist on payment of the rent in full on the date it is due.
Money paid by the Tenant to the Landlord shall be applied to the
Tenants account in the following order: first, to
outstanding late fees and returned check fees; second, to
outstanding legal fees and/or court costs legally chargeable to
Tenant; and third, to rent.
Landlords liability to Tenant for any loss or damage to
Tenant on account of said delay in obtaining possession of the
premises. If Landlord is unable to give possession of the
demised premises to Tenant within one hundred twenty
(120) days next after the stipulated commencement of this
Lease, then Tenant shall have the right to cancel this Lease
upon written notice hereof delivered to Landlord within ten
(10) days after the lapse of said one hundred twenty
(120) day period; and, upon such cancellation, Landlord and
Tenant shall each be released and discharged from all liability
hereunder each to the other. Failure by the Tenant to make
timely delivery of said written notice of cancellation shall be
conclusively deemed to constitute a waiver of Tenants
right to cancel as provided by this paragraph.
Section 3.02 Tenants Work.
Tenant agrees, at its own cost and expense, to perform all work
which is necessary to make the leased premises conform with
Tenants plans to be approved by Landlord. Within thirty
(30) days after execution of this lease, Tenant shall
furnish Landlord, for Landlords written approval,
Tenants plans and specifications. Landlord agrees it will
not unreasonably withhold such approval, it being the purpose of
this requirement that Tenants leased premises be fixtured
and laid out so as not to be a detriment to the other Tenants in
the building of which the Premixes are a part and that
Tenants work shall be detrimental to Landlords
building.
Section 3.03 Acceptance by Tenant.
(a) If Landlords work has been completed at the time
this lease is executed, Tenant certifies that it has inspected
the leased premises and accepts same in its existing condition;
in such event no repair work, alterations, or remodeling of the
leased premises shall be required to be done by Landlord as a
condition of this lease or otherwise.
(b) If Landlords work is not completed when this
Lease is executed, Tenant agrees that acceptance by Tenant of
possession of the leased premises for the purpose of
construction of Tenants improvements or the issuance of a
certificate of Occupancy for the premises will be deemed as an
acceptance of the leased premises in its then existing condition
and the satisfactory completion of all of Landlords work.
Section 3.04 Changes and Additions to Building.
Landlord hereby reserves the right at any time to perform
maintenance operations and to make the repairs, alterations or
additions, and to build stories on the building in which the
premises are contained and to build adjoining the same. Tenant
agrees to cooperate with Landlord permitting Landlord to
accomplish any such
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maintenance, repairs, alterations, additions or construction.
Landlord shall use all commercially reasonable efforts to
minimize any disruption to Tenants business or use and
occupancy of the leased premises occasioned by any maintenance,
repairs, alterations, additions or construction.
ARTICLE IV
Conduct of Business by Tenant
Section 4.01 Use of Premises.
Tenant shall use the leased premises solely for the purpose of:
warehouse and storage.
Tenant shall occupy the leased premises without delay upon
commencement of the term of this lease, and shall conduct
continuously in the leased premises the business above stated.
Tenant will not use or permit, or suffer the use of the leased
premises for any other business or purpose.
Section 4.02 Operation of Business.
Tenant shall conduct business in the leased premises during the
regular customary days and hours for such type of business in
Miami-Dade County, Florida. Tenant shall not perform any acts or
carry on any practices which may damage the building or
improvements or be a nuisance or menace to other Tenants in the
building or their customers, employees or invites or which will
result in the increase of casualty insurance premiums; provided,
however, that Tenant shall at all times during the term of this
Lease be permitted to conduct activities consistent with the
operation of a medical office on the leased premises.
ARTICLE V
Security Deposit
Section 5.01 Amount of Deposit.
Tenant contemporaneously with the execution of this lease, has
deposited with the Landlord the sum of $None receipt of
which is hereby acknowledged by Landlord, receipt of which is
hereby acknowledged by Landlord, if by check, subject to
collection. Said deposit shall be held by Landlord, without
liability for interest and may be commingled with other funds of
Landlord, as security for the faithful performance by Tenant of
all terms, covenants, and conditions of this lease by Tenant to
be kept and performed during the term hereof. If this lease
shall terminate or be terminated by reason of the failure of
Tenant to keep and perform any of the terms, covenants and
conditions of this lease, then Landlord, at its option, may
appropriate and apply said entire deposit, or so much thereof as
may be necessary to compensate the Landlord for all loss or
damage sustained or suffered by Landlord due to such breach on
the part of Tenant.
Section 5.02 Transfer of Deposit.
Landlord may deliver the funds deposited hereunder by Tenant to
the purchaser or transferee of Landlords interest in the
leased premises, in the event that such interest be sold or
transferred, and thereupon Landlord shall be discharged from any
further liability with respect to such deposit and this Lease
Agreement.
ARTICLE VI
Signs, Awnings, Canopies, Fixtures, Alteration
Section 6.01 Installation by Tenant.
All fixtures installed by Tenant shall be new or completely
reconditioned. Tenant shall not make or cause to be made any
alterations, conditions or improvements or install or cause to
be installed any exterior signs, exterior lighting, plumbing
fixtures, shades or awnings or make any changes to the store
front without first obtaining Landlords written approval
and consent. Tenant shall present to Landlord plans and
specifications for such work at the time approval is sought. All
alterations, improvements, and additions made by Tenant as
aforesaid shall remain upon the premises at the expiration or
earlier termination of this lease and shall become the property
of Landlord, unless Landlord shall, prior to the termination of
the Lease, have given written notice to
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Tenant to remove the same, in which event Tenant shall remove
such alterations, improvements, and additions and restore the
premises to the same good order and condition in which it was at
the commencement of this Lease ordinary wear and tear excepted.
Should Tenant fail to do so, Landlord may do so, collecting, at
Landlords option, the cost and expense thereof from the
Tenant as additional rent. All alterations, decorations,
additions and improvements made by Tenant, or made by the
Landlord on the Tenants behalf by agreement under this Lease,
shall remain the property of the Tenant for the term of this
lease, or any extension or renewal thereof. The Tenant shall at
all times maintain fire insurance with extended coverage in the
name of the Landlord and the Tenant, in an amount adequate to
cover the cost of replacement of all alterations, decorations,
additions or improvements in the event of fire or extended
coverage loss. Tenant shall deliver to the Landlord certificates
of such fire insurance policies which shall contain a clause
requiring the insurer to give the Landlord thirty (30) days
of notice of cancellation of such policies. Such alterations,
decorations, additions and improvements shall not be removed
from the premises without prior consent in writing from the
Landlord, which consent will not be unreasonably withheld or
delayed.
Section 6.02 Tenant Shall Discharge All Liens.
Tenant shall promptly pay all contractors and material man, so
as to minimize the possibility of a lien attaching to the leased
premises, and should any such lien be made or filed, Tenant
shall bond against or discharge the same within thirty
(30) days thereafter.
The Tenant herein shall not have any authority to create any
liens for labor or material on the Landlords interest in
the above described property, and all persons contracting with
the Tenant for the doing of any work or the furnishing of any
materials on or to the premises and all material man,
contractors, mechanics and laborers, are hereby charged with
notice that they must look to the Tenant only to secure the
payment of any bill for work done or material furnished during
the term of this Lease.
ARTICLE VII
Repairs and Maintenance of Leased Premises.
Section 7.01 Responsibility of Tenant.
(a) Without limiting the generality of the foregoing
subparagraph 7.01 (b), Tenant agrees to repair and maintain in
good order and condition the non-structural interior portion of
the leased premises, including store fronts, show windows,
doors, windows, plate and window glass.
(b) Tenant will not install any equipment which exceeds the
capacity of the utility lines leading into the leased premises
of the building of which the leased premises constitute a
portion.
(c) Tenant, its employees, or agents, shall not mark,
paint, drill or in any way deface any walls, ceilings,
partitions, floors, wood, stone or ironwork without
Landlords written consent.
(d) Tenant shall comply with the requirements of all laws,
orders, ordinances and regulations of all governmental
authorities and will not permit any waste of property to be done
and will take good care of the leased premises at all times.
(e) If Tenant refuses or neglects to repair properly as
required hereunder and to the reasonable satisfaction of
Landlord as soon as reasonably possible after written demand,
Landlord may make such repairs without liability to Tenant for
any loss or damage that may accrue to Tenants merchandize,
fixtures, or other property, or to Tenants business by
reason thereof and upon completion thereof, Tenant shall pay
Landlords cost for making such repairs, plus twenty
percent (20%) for overhead, upon presentation of bill therefor,
as additional rent, said bill shall include interest at eighteen
percent (18%) per annum or said cost from the date of completion
of repairs by Landlord. In the event Landlord shall undertake
any maintenance or repair in the course of which it shall be
determined that such maintenance or repair work was made
necessary by the negligence or willful act of Tenant or any of
its employees or agents or that the maintenance or repair is,
under the terms of this lease, the responsibility of Tenant,
Tenant shall pay Landlords cost therefor plus overhead and
interest as above provided in this section together with the
monthly rents payment next due.
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(f) Landlord reserves the right to enter the leased
premises and to make such repairs and to do such work on or
about said premises as Landlord may deem desirable, necessary or
proper or that Landlord may be lawfully required to make.
Landlord reserves the right to visit and inspect said premises
at all reasonable times and show same to prospective tenants,
purchasers or mortgagors; provided, however, that Landlord shall
use all commercially reasonable efforts to minimize any
disruption to Tenants business or use and occupancy of the
leased premises occasioned thereby.
(g) Neither Landlord nor Landlords agent or servants
shall be liable for any damages caused by or growing out of any
breakage, leakage, getting out of order or defective condition
of electric wiring, air conditioning or heating pipes and
equipment, closets, plumbing, appliances, sprinklers, other
equipment, or other facilities serving the leased premises.
Neither Landlord nor Landlords agents or servants shall be
liable for any damages caused by, or growing out of any defect
in the building or any part thereof, or in said leased premises
or in any part thereof, or caused by, or growing out of, fire,
rain, wind or other cause other than any damages conclusively
determined to have been caused by Landlords gross
negligence or willful misconduct.
(h) All property belonging to Tenant or any occupant of
leased premises are there at the risk of Tenant or such other
person only, and Landlord shall not be liable for damages
thereto or theft or misappropriation thereof.
(i) Tenant shall at its own expense perform all janitorial
and cleaning services within the premises and of the sidewalk or
parking area immediately adjacent to the leased premises in
order to keep same in a neat, clean and orderly condition.
ARTICLE VIII
Insurance and Indemnity
Section 8.01 Liability Insurance
Tenant shall, during the term hereof, keep in full force and
effect, bodily injury and property damage comprehensive public
liability insurance with respect to the licensed premises for
the combined single coverage of not less than $100,000. The
policy shall name Landlord, any person, firms or corporations
designated by Landlord, and Tenant as insured, and shall contain
a clause that the insurer will not cancel or change the
insurance without first giving the Landlord thirty
(30) days prior written notice. The insurance shall be in
an insurance company approved by Landlord and a certified copy
of the policy and/or certificate of insurance shall be delivered
to Landlord.
Section 8.02 Plate Glass Insurance.
The replacement of any plate glass damaged or broken from any
cause whatsoever in and about the leased premises shall be
Tenants responsibility. Tenant shall, during the entire
term hereof, keep in full force and effect a policy of plate
glass insurance covering all the plate glass of the leased
premises. The policy shall name Landlord and any person, firm or
corporation designated by Landlord and Tenant as insured and
shall contain a clause that the insurer will not cancel or
change the insurance without first giving the Landlord thirty
(30) days prior written notice. The insurance shall be in
an insurance company approved by the Landlord and a copy of the
policy and/or a certificate of insurance shall be delivered to
Landlord.
Section 8.03 Increase in Insurance Premiums.
Tenant agrees that it will not keep, use, sell or offer for sale
in or upon the leased premises any article which may be
prohibited by the standard form of fire and extended risk
insurance policy. Tenant agrees to pay any increase in premiums
for casualty, loss or rent, fire and extended coverage that may
be charged during the term of this lease on the amount of such
insurance which may be carried by Landlord on said premises or
the building of which they are a part, resulting from the type
of merchandise sold by Tenant in the leased premises or from
Tenants use or occupancy, whether or not Landlord has
consented to the same. In from determining whether increase
premiums are result of Tenants use of the leased premises,
a schedule issued by the organization making the insurance rate
on the leased premises, showing the various components of such
rate, shall be conclusive evidence of the several items and
charges which make up the fire insurance rate on the
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leased premises. Tenant agrees to promptly make, at
Tenants cost, any repairs, alterations, changes and/or
improvements to equipment in the leased premises required by the
company issuing Landlords fire insurance so as to avoid
the cancellation of, or cause the increase in premiums on said
insurance.
Section 8.04 Indemnification of Landlord.
Tenant shall indemnity Landlord and save it harmless from and
against all claims, actions, damages, liability and expense in
connection with loss of life, personal injury and/or damage to
property arising from or out of any occurrence in, upon or at
the leased premises, or the occupancy or use by Tenant of the
leased premises of any part thereof, or occasioned wholly or in
part by an act or omission of Tenant, its agents, contractors,
employees, servants, lessees, or concessionaires, whether
occurring in or about the leased premises or outside the leased
premises but within the Common Areas. In the case Landlord shall
be made a party to any litigation commenced by or against
Tenant, then Tenant shall protect and hold Landlord harmless and
shall pay all costs, expenses and reasonable attorneys
fees incurred or paid by Landlord in enforcing the covenants and
agreements in this lease.
Section 8.05 Waiver of Subrogation.
Landlord and Tenant waive, unless said waiver should invalidate
any such insurance, their right to recover damages against each
other for any reason whatsoever to the extent the damaged party
recovers indemnity from its insurance carrier.
ARTICLE IX
Utilities
Section 9.01 Payment of Utilities.
Tenant shall be solely responsible for and promptly pay all
charges for gas, electricity or any other utility used or
consumed in the leased premises. Should Landlord elect to supply
any utility used or consumed in the leased premises, Tenant
agrees to purchase and pay for the same as additional rent at
the applicable rates charged to the Landlord. In no event shall
Landlord be liable for any interruption or failure in the supply
of any such utilities to the leased premises.
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Tenant shall pay for:
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ARTICLE X
Attornment, Subordination
Section 10.01 Attornment.
Tenant shall, in the event any proceedings are brought for the
foreclosure of, or in the event of exercise of the power of sale
under any mortgage made the Landlord covering the leased
premises or in the event a deed is given in lieu of foreclosure
of any such mortgage, attorn to the purchaser or grantee in lieu
of foreclosure upon any such foreclosure or Sale and recognize
such purchaser or grantee in lieu of foreclosure as the Landlord
under this lease.
Section 10.02 Subordination.
Tenant agrees that this lease and the interest of Tenant therein
shall be, and the same hereby is made subject and subordinated
at all times to all covenants, restrictions, assessments and
other encumbrances now or hereafter affecting the fee title of
the building containing the premises and to all ground and
underlying leases and to any mortgages in any amounts, and all
advances made and to be made thereon, which may now or at any
time throughout the term of this lease be placed against or
affect any or all of the land and/or all of the buildings and
improvements, including the leased premises, and to all
renewals, modifications, consolidations, participation,
replacements and extensions thereof. The term
mortgages as used herein shall be deemed to
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include trust indentures and deed of trust. The aforesaid
provisions shall be self-operative and no further instrument of
subordination shall be necessary unless required by any such
ground or underlying lessor or mortgagees. Should Landlord or
any ground or underlying lessors or mortgagees desire
confirmation of such subordination, then Tenant, within ten
(10) days following Landlords written request
therefore, agrees to execute and deliver, without charge, any
and all documents (in form acceptable to Landlord and such
ground or underlying lessors or mortgagees) subordinating this
lease and the Tenants rights hereunder. However, should
any such ground or underlying lessors or any mortgagees request
that this lease be made superior, rather than subordinate, to
any ground or underlying lease and/or mortgage, then Tenant,
within ten (10) days following Landlords written
request therefor, agrees to execute and deliver, without charge,
any and all documents (in form acceptable to Landlord and such
underground lessors or mortgagees) effectuating such priority.
ARTICLE XI
Assignment and Subletting
Section 11.01 Significant Change of Ownership.
Tenant is a partnership. Tenant represents that the partner
executing this lease is duly authorized to execute the same on
behalf of the partnership. If there shall occur any change in
the ownership of the interest of the general partners of the
partnership, whether such change results from a sale,
assignment, bequest, inheritance, operation of law or otherwise,
or if the partnership is dissolved, without the prior written
consent of Landlord, then Landlord shall have the option to
terminate this lease upon ten (10) days notice to Tenant.
If Tenant is a partnership, Tenant represents that the partner
executing this lease is duly authorized to execute the same on
behalf of the partnership. If there shall occur any change in
the ownership of the interest of the general partners of the
partnership, whether such change results from a sale,
assignment, bequest, inheritance, operation of law or otherwise,
or if the partnership is dissolved, without the prior written
consent of Landlord, then Landlord shall have the option to
terminate this lease upon ten (10) days notice to Tenant.
Notwithstanding the foregoing, it is understood and agreed that
any change of ownership of Tenant resulting from any person or
entity acquiring, directly or indirectly, substantially all of
the business or assets of any entity that owns or controls
Tenant shall not give Landlord a the right to terminate this
Lease.
ARTICLE XII
Governmental Regulations
Section 12.01 Government Regulations.
Tenant shall, at Tenants sole cost and expense, comply
with all county, municipal, state, federal laws, orders,
ordinances and other applicable requirements of all governmental
authorities, now in force, or which may hereafter be in force,
pertaining to the leased premises, and shall faithfully observe
in the use and occupancy of the leased premises all municipal
and county ordinances and state and federal statutes now in
force or which may hereafter be in force. Landlord shall, at
Landlords sole cost and expense, comply with all county,
municipal, state, and federal laws, orders, ordinances and other
applicable requirements of all governmental authorities, now in
force, or which may hereafter be in force, pertaining to the
common areas and facilities not within the leased premises.
ARTICLE XIII
Rules and Regulations
Section 13.01 Rules and Regulations.
Landlord reserves the right from time to time to adopt, suspend,
amend or supplement reasonable rules and regulations, and to
adopt and promulgate additional rules and regulations applicable
to the leased premises. Notice of such rules and regulations and
amendments and supplements thereto, if any, shall be given to
Tenant. Tenant acknowledges receipt of and agrees to abide by
the Rules and Regulations presently in effect a
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copy of which is attached hereto; provided, however, that
Landlord shall not adopt or promulgate any rules and regulations
that are inconsistent with the operation of a medical office on
the leased premises nor amend, suspend or supplement any rules
and regulations that would prevent or materially limit the
ability of Tenant to operate a medical office on the leased
premises.
ARTICLE XIV
Advertising
Section 14.01 Solicitation of Business.
Tenant and Tenants employees ands agents shall not solicit
business in the parking or other common areas, nor shall Tenants
distribute any handbills or other advertising matter in
automobiles parked in the parking area or in other common areas.
ARTICLE XV
Destruction of Leased Premises.
Section 15.01 Total or Partial Destruction.
If the leased premises shall be damaged by fire, the elements,
unavoidable accident or other casualty, without the fault of
Tenant, but are not thereby rendered untenantable in whole or in
part, Landlord shall at its own expenses cause such damage,
except to Tenants equipment and trade fixtures, to be
repaired, and the rent and other charges shall not be abated. If
by reason of such occurrence, the premises shall be rendered
untenantable only in part, Landlord shall at its own expense
cause the damage, except to Tenants equipment and trade
fixtures, to be repaired, but only to the extent of
Landlords original obligation to construct pursuant to
Section 3.01, and the fixed minimum rent meanwhile shall be
abated proportionately as to the portion of the premises
rendered untenantable; provided, however, if such damage shall
occur during the last two (2) years of the term of this
lease (or of any renewal term), Landlord shall have the right to
be exercised by notice to Tenant within sixty (60) days
after said occurrence, to elect not to repair such damage and to
cancel and terminate this lease effective as of a date
stipulated in Landlords notice, which shall not be earlier
than thirty (30) days nor later than sixty (60) days
after the giving of such notice. If the premises shall be
rendered wholly untenantable by reason of such occurrence, the
Landlord shall at its own expense cause such damage, except to
Tenants equipment and trade fixtures, to be repaired, but
only to the extent of the Landlords original obligation to
construct pursuant to Section 3.01 and the fixed minimum
rent meanwhile shall be abated in whole or in part except that
Landlord shall have the right to be exercised by notice to
Tenant within sixty (60) days after said occurrence, to
elect not to reconstruct the destroyed premises, and in such
event this shall be construed to permit the abatement in whole
or in part of the charges for insurance, taxes and operating
costs attributable to any period during which the demised
premises shall be in untenantable condition, nor shall there be
any abatement in these items nor the fixed minimum rent if such
damage is caused by the fault of the Tenant. Whenever the fixed
minimum rent shall be abated pursuant to this
Section 15.01, such abatement shall continue until the date
which shall be the sooner to occur of (i) fifteen
(15) days after notice by Landlord to Tenant that the
leased premises has been substantially repaired and restored, or
(ii) the date Tenants business operations are
restored in the entire leased premises. Notwithstanding the
foregoing or anything else herein to the contrary, if the leased
premises shall be damaged by fire, the elements, unavoidable
accident or other casualty without the fault of Tenant and as a
result either: (a) fifty (50%) or more of the of the leased
premises are rendered untenantable thereby; or (b) the
building of which the leased premises is a part is destroyed;
then, if such damage or destruction shall occur during the last
year of the term of this Lease (or any renewal term) Tenant
shall have the right, to be exercised by notice to Landlord, to
cancel and terminate this Lease effective as of the date
stipulated in Tenants notice which shall not be earlier
than thirty (30) days nor later than sixty (60) days
after the giving of such notice.
Section 15.02 Partial Destruction of Building.
In the event that fifty percent (50%) or more of the rentable
area of the building of which the premises are a part shall be
damaged or destroyed by fire or other causes, notwithstanding
any other provisions contained
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herein and that the leased premises may be unaffected by such
fire or other causes, Landlord shall have the right to be
exercised by notice in writing to Tenant within sixty
(60) days after said occurrence, to elect to cancel and
terminate this lease. Upon the giving of such notice to Tenant,
the term of this lease shall expire by lapse of time upon the
third day after such notice is given, and Tenant shall vacate
the leased premises and surrender the same to Landlord.
ARTICLE XVI
Eminent Domain
Section 16.01 Total Condemnation.
If the whole of the leased premises shall be acquired or
condemned by eminent domain for a public quasi-public use or
purpose, then the term of this lease shall cease and terminate
as of the date of title vesting in such proceeding and all
rentals and other charges shall be paid to that date and Tenant
shall have no claim against Landlord for the value of any
unexpired term of this lease.
Section 16.02 Partial Condemnation.
If any part of the leased premises shall be acquired or
condemned by eminent domain for public or quasi-public use or
purpose, and in the event that such partial taking or
condemnation shall, in the opinion of the Landlord, render the
leased premises unsuitable for the business of the Tenant, then
Landlord shall have the right to terminate this lease by notice
given to the Tenant within sixty (60) days after the date
of title vesting in such proceeding and Tenant shall have no
claim against Landlord for the value of any unexpired term of
this lease. In the event of a partial taking or condemnation
which is not extensive enough to render the premises unsuitable
for the business of the Tenant, then Landlord shall promptly
restore the leased premises (exclusive of Tenants
equipment and trade fixtures) to a condition comparable to its
condition at the time of such condemnation less the portion lost
in the taking and the building of which the leased premises
forms a part to the extent necessary to constitute the portion
of the building not so taken as a complete architectural unit;
provided that Landlord shall not in any event be required to
spend for such repair, restoration or alteration work an amount
in excess of the respective amounts received by Landlord as
damages for the taking of such part of the leased premises and
of the building of which the same forms part. As used herein,
received by Landlord shall mean that portion of the
award or damages in condemnation received by Landlord from the
condemning authority which is free and clear of all prior claims
or collections by the holders of any mortgages or deeds of trust
or any ground or underlying lessors, and this lease shall
continue in full force and effect except that the fixed minimum
annual rent shall be reduced in proportion to the portion of the
leased premises lost in the taking. If more than twenty percent
(20%) of the floor area of the building shall be taken as
aforesaid (whether or not the leased premises shall be affected
by the taking), Landlord shall have the right to terminate this
lease by notice to Tenant given within sixty (60) days
after the date of title vesting in such proceeding and Tenant
shall have no claim against Landlord for the value of the
unexpired term of this lease.
ARTICLE XVII
Default of Tenant
Section 17.01 Event of Default.
Upon the happening of one or more of the events as expressed
below, the Landlord shall have any and all rights and remedies
hereinafter set forth:
(a) In the event Tenant should fail to pay anyone or more
of the said monthly installments or rent, or any other sums
required to be paid hereunder, as and when the same becomes due.
(b) In the event a petition in Bankruptcy be filed by the
Tenant, or be filed against Tenant, and such petition is not
dismissed within thirty (30) days from the filing thereof,
or in the event Tenant is adjudged a bankrupt.
(c) In the event an assignment for the benefit of the
creditors is made by Tenant.
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(d) In the event of an appointment of any court of a
receiver or other court officer on Tenants property and
such receivership is not dismissed within thirty (30) days
from such appointment.
(e) In the event Tenant removes, attempts to remove, or
permits to be removed from the leased premises, except in the
usual course of trade, the goods, furniture, effects or other
property of the Tenant brought thereon.
(f) In the event Tenant, before the expiration of the term
hereof and without the written consent of the Landlord, vacates
the leased premises or abandons the possession thereof, or uses
the same for purposes other than the purposes for which the same
is hereby leased, or ceases to use the leased premises for the
purposes herein expressed.
(g) In the event an execution or other legal process is
levied upon the goods, furniture, effects or other property of
Tenant brought on the leased premises, or upon the interest of
Tenant in this lease, and the same is not satisfied or dismissed
within ten (10) days from this levy.
(h) In the event the Tenant fails to keep, observe or
perform any of the other terms, conditions or covenants on the
part of Tenant herein to be kept, observed and performed for
more than ten (10) days after written notice thereof is
given by Landlord to Tenant specifying the nature of such
default, or if the default so specified shall not be of such
nature that the same cannot be reasonably cured or remedied
within the said ten (10) days period, if Tenant shall not
in good faith have commenced the curing and shall not hereafter
continuously and diligently proceed therewith to completion.
Section 17.02 Remedies of Landlord.
(a) In the event of any such default or breach, Landlord
shall have the immediate right to re-enter the leased premises,
either by summary proceedings or other lawful method, and to
dispossess Tenant and all other occupants therefrom and remove
and dispose of all property therein in the manner provided in
subdivision (c) of this section, without Landlord being
deemed guilty of trespass or becoming liable for any loss or
damage which may be occasioned thereby. Landlord shall also have
the right, at the option of the Landlord, to terminate this
lease upon ten (10) days written notice to Tenant, and to
thereupon re-enter and take possession of said premises in any
manner above described. In the event of any such default or
breach, Landlord shall have the right, at its option, from time
to time, without terminating this lease, to re-enter and re-let
the premises or any part thereof, with or without legal process,
as the agent and for the account of Tenant, upon such terms and
conditions as Landlord may deem advisable or satisfactory, in
which event the rents received on such re-letting and collection
including but not limited to, necessary renovation and
alterations of the leased premises, reasonable attorneys
fees, any real estate commissions paid, and thereafter payments
of all sums due or to become due Landlord hereunder, and if
sufficient sum shall not be thus realized or secured to pay such
sums and other charges, (i) at the Landlords option,
Tenant shall pay Landlord any deficiency monthly,
notwithstanding Landlord may have received rental in excess of
the rental stipulated in this lease in previous or subsequent
months, and Landlord may bring an action therefore as such
monthly deficiency shall arise, or (ii) at Landlords
option, the entire deficiency, which is subject to ascertainment
for the remaining to require Landlord to re-enter and re-let in
any event. The Landlord shall not, in any event be required to
pay Tenant any surplus of any sums received by Landlord on a
re-letting of said premises in excess of rent provided in this
lease.
(b) In the event of any default or breach, the Landlord
shall have the right, at its option, to declare the rents for
the entire remaining term and other indebtedness, if any,
immediately due and payable without regard to whether or not
possession shall have been surrendered to or taken by Landlord,
and may commence action immediately thereupon and recover
judgment therefor.
Thereof, and the Tenant hereby waives any and all loss,
destruction and/or damage or injury which may be occasioned by
any of the aforesaid acts.
(c) The Landlord, in addition to other rights and remedies
it may have, shall have the right to remove all or any part of
the Tenants property from said premises and any property
removed may be stored in any public warehouse or elsewhere at
the cost of and for the account Tenant and the Landlord shall
not be responsible for
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the care of safekeeping thereof, and the Tenant hereby waives
any and all loss, destruction and/or damage or injury which may
be occasioned by any of the aforesaid acts.
(d) Any and all rights, remedies and options given in this
lease to Landlord shall be cumulative and in addition to and
without waiver of or in derogation of any right or remedy given
to it under any law now or hereafter in effect.
Section 17.03 Waiver.
The waiver of Landlord of any breach of any term, condition or
covenant herein contained shall not be waiver of such term,
condition or covenant, or subsequent breach of the same or any
other term, condition or covenant herein contained. The consent
or approval by Landlord to or any act by Tenant requiring
Landlords consent or approval shall not be deemed to waive
or render unnecessary Landlords consent to approval of any
subsequent similar act by Tenant. No re-entry hereunder shall
bar the recovery or rents or damages for the breach of any of
the terms, conditions or covenants on the part of Tenant herein
contained. The receipt of rent after breach or condition broken,
or delay on the part of Landlord to enforce any right hereunder,
shall not be deemed a waiver of forfeiture, or a waiver of the
right of Landlord to annul this lease or to re-enter said leased
premises or to re-let same.
Section 17.04 Expenses of Enforcement.
In the event any payment due Landlord under this lease shall not
have paid ten (10) days after due date, Tenant agrees to
pay the sum of Ten Dollars ($10.00) per day, or five percent
(5%) of the amount due, whichever is greater, for such
delinquent payment until made. In the event that any check, bank
draft, order for payment or negotiable instrument given for any
payment under this lease shall be dishonored for any reason
whatsoever not attributable to Landlord, Landlord shall be
entitled to make an administrative charge to Tenant of
Twenty-Five Dollars ($25.00). In the event it shall be necessary
for Landlord to give more than one (1) written notice to
Tenant of any violation of this lease, Landlord shall be
entitled to make an administrative charge to Tenant of
Twenty-Five Dollars ($25.00) for each such notice. Tenant
recognized and agrees that the charges which Landlord is
entitled to make upon the conditions stated in this section,
represent, at the time this lease is made, a fair and reasonable
estimate and liquidation of the costs of Landlord in the
administration of the building resulting to Landlord from the
events described which costs are not contemplated or included in
any other rental or charges provided to be paid by Tenant to
Landlord in this lease. Any charges becoming due under this
Section of this lease shall be added and become due with the
next ensuing monthly payment of fixed minimum rental and shall
be collectable as a part thereof.
Section 17.05 Legal Expenses.
In the event that it shall become necessary for Landlord to
employ the services of any attorney to enforce any of its rights
under this lease to collect any sums due to it under this lease
or to remedy the breach of any covenant of this lease on the
part of the Tenant to be kept or performed, regardless of
whether suit is brought, Tenant shall pay to Landlord such fees
as shall be charged by Landlords attorney for such
services.
ARTICLE XVIII
Access by Landlord
Section 18.01 Right of Entry.
Landlord and Landlords agent shall have the right to enter
the leased premises at all times to examine the same, and to
show them to prospective purchasers or leases of the building,
and to make such repair or alterations, improvements or
additions as Landlord may deem necessary or desirable, and
Landlord shall be allowed to take all material into and upon
said premises that may be required therefore without the same
constituting an eviction of Tenant in whole or in part and the
rent reserved shall in no way abate while said repairs,
alterations, improvements or additions are being made unless
Tenant is prevented from operating in the leased premises in
whole or in part, in which event rent shall be proportionately
abated during said period. During the six (6) months prior
to the expiration of the term of this lease or any renewal term,
Landlord may exhibit the premises to prospective tenants or
purchasers, and place upon the premises the usual notices
To
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Let or For Sale which notices Tenant shall
permit to remain without molestation. If Tenant shall not be
personally present to open and permit as entry into said
premises, at any time, when for any reason an entry therein
shall be necessary or permissible, Landlord or Landlords
agent may enter same without, in any manner, affecting the
obligations and covenants of this lease, nothing herein
contained however, shall be construed to impose upon Landlord
any obligation, responsibility or liability whatsoever, for the
care, maintenance or repair of the building or any part thereof,
except as otherwise herein specifically provided.
Notwithstanding anything herein to the contrary, Landlord shall
use all commercially reasonable efforts to minimize any
disruption to Tenants business or use and occupancy of the
leased premises occasioned by any entry by Landlord or
Landlords agents on, examination or showing of, or repair,
alteration, improvement, or addition to the leased premises.
ARTICLE XIX
Tenants Property
Section 19.01 Taxes on Leasehold or Personalty.
Tenant shall be responsible for and shall pay before delinquent
all municipal, county or state taxes assessed during the term of
this lease against any leasehold interest or personal property
of any kind, owned by or placed in, upon or about the leased
premises by the Tenant.
Section 19.02 Notice by Tenant.
Tenant shall give immediate notice to Landlord in case of fire
or accidents in the leased premises or in the building of which
the premises are a part or of defects therein or in any fixture
or equipment.
ARTICLE XX
Holding over; Successor
Section 20.01 Holding Over.
In the event Tenant remains in possession of the leased premises
after the expiration of the tenancy created hereunder, and
without the execution of a new lease or other agreement in
writing, Tenant, at the option of Landlord, shall be deemed to
be occupying the leased premises as a Tenant from
month-to-month, at a monthly rent equal to two (2) time the
fixed minimum rent payable during the last month of the lease
term and a twenty-five percent (25%) increase for each month
that occupancy continues thereafter.
Section 20.02 Successors.
All rights and liability herein given to, or imposed upon the
respective parties hereto shall extend to and bind the several
respective heirs, executors, administrators, successors, and
assigns of the said parties; and if there shall be more than one
Tenant, they shall be bound jointly and severally by the terms,
covenants and agreements herein. No rights, however, shall inure
to the benefit of assignee of Tenant unless the assignment to
such assignee has been approved by Landlord in writing as
provided in section 11.01 hereof. Nothing contained in this
lease shall in any manner restrict Landlords right to
assign or encumber this lease and, in the event Landlord sells
or transfers its interest in the building and the purchaser or
transferor assumes Landlords obligations and covenants,
Landlord shall thereupon be relieved of all further obligations
hereunder.
ARTICLE XXI
Quiet Enjoyment
Section 21.01 Landlords Covenant.
Upon payment by the Tenant of the rents herein provided, and
upon the observance and performances of all the covenants, terms
and conditions on Tenants part to be observed and
performed, Tenant shall peaceably and quietly hold and enjoy the
leased premises for the term hereby demised without hindrance or
interruption
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by Landlord or any other person or persons lawfully or equitably
claiming by, through or under that Landlord, subject,
nevertheless, to the terms and conditions of this lease.
ARTICLE XXII
Miscellaneous
Section 22.01 Accord and satisfaction.
No payment by tenant or receipt by Landlord of a lesser amount
than the monthly rent herein stipulated shall be deemed to be
other than an account of the earliest stipulated rent, nor shall
any endorsement or statement on any check or any letter
accompanying the check or payment as rent be deemed an accord
and satisfaction, and landlord may accept such check or payment
without prejudice to Landlords right to recover the
balance of such rent or pursue any other remedy in therein
provided.
Section 22.02 Entire Agreement.
The lease and the exhibits, and rider, if any, attached hereto
and forming a part hereof, set forth all covenants, promises,
agreements, conditions and understandings between Landlord and
Tenant concerning the leased premises and there are no
covenants, promises, conditions or understanding, either oral or
written, between them other than are herein set forth. Except as
herein otherwise provided, no subsequent alteration, change or
addition to this lease shall be binding upon Landlord or Tenant
unless reduced to writing and signed by them.
Section 22.03 No Partnership.
Landlord does not, in any way or any purpose, become a partner
of Tenant in the conduct of its business, or otherwise, or joint
venturer or a member of a joint enterprise with Tenant.
Section 22.04 Force Majeure.
In the event that either party hereto shall be delayed or
hindered in or prevented from the performance of any act
required hereunder by reason of strikes, lock-outs, labor
troubles, inability to procure materials, failure of power,
restrictive governmental laws or regulations, riots,
insurrection, war or other reason of a like nature not the fault
of the party delayed in performing work or doing act is required
under the terms of this lease, then performance of such act
shall be excused for the period of the delay and the period for
the performance of any such act shall be extended for a period
of such delay. The provisions of this section 22.04 shall not
operate to excuse Tenant from the prompt payment of rent,
percentage rent, additional rent or any other payment required
under the terms of this lease.
Section 22.05 Notices.
All notices shall be in writing.
(a) Any notice by Tenant to Landlord must be served by
certified or registered mail, postage prepaid, addressed to
Landlord at the address first hereinabove given or at such other
address as Landlord may designate by written notice.
(b) After commencement of the term hereof any notice by
Landlord to Tenant shall be serviced by first class mail,
postage prepaid, addressed to Tenant at the leased premises or
at such address as Tenant shall designate by written notice or
by delivery by Landlord to the leased premises or to such other
address. Prior to the commencement of the term hereof such
notice may be given by Landlord by such mail or delivery at the
address designated for Tenant on the cover sheet of this Lease.
(c) Notice shall be deemed to be properly given if
addressed to Tenant at the last known address, if such first
class mail is refused or otherwise not delivered.
Section 22.06 Captions and Section Numbers.
The captions, section numbers, article number on the index
appearing in this lease are inserted only as a matter of
convenience and in no way define, limit, construe, or describe
the scope of intent or subsections or articles of this lease nor
in any way affect this lease.
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Section 22.07 Tenant Defined, Use of Pronoun.
The word Tenant shall be deemed and taken to mean
each and every person mentioned as a Tenant herein be the same,
one or more, and if there shall be more than one Tenant, any
notice required or permitted by the terms of this lease may be
given by or to anyone thereof and shall have the same force and
effect as if given to all thereof. The use of the neuter
singular pronoun to refer to Landlord or Tenant shall be deemed
a proper reference even though Landlord or Tenant may be an
individual, a partnership, a corporation or a group of two or
more individuals or corporations. The necessary grammatical
change required to make the provisions of this lease apply in
the plural sense where there is more than one Landlord or Tenant
and to either corporations, associations, partnerships, or
individuals, males or females, shall in all instances be assumed
as though in each case fully expressed.
Section 22.08 Partial Validity.
If any term, covenant or condition of this lease or the
application thereof to any person or circumstances shall, to any
extent, be invalid or unenforceable, the remainder of this
lease, or the application of such term, covenant or condition to
persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby and each
term, covenant or condition of this lease shall be valid and be
enforced to the fullest extent permitted by law.
Section 22.09 No Option.
The submission of this lease for examination does not constitute
a reservation of or option for the leased premises and this
lease becomes effective as a lease only upon execution and
delivery thereof by Landlord to Tenant.
Section 22.10 Recording.
Tenant shall not record this lease or any memorandum thereof
without the written consent of Landlord.
Section 22.11 Liability of Landlord.
Anything contained in this lease at law or in equity to be the
contrary notwithstanding, Tenant expressly acknowledges and
agrees that there shall at no time be or in any way related
hereto or the leased premises; it being further acknowledged and
agreed that Tenant is accepting this lease and the estate
created hereby upon and subject to the understanding that it
shall not enforce or seek to enforce any claim or judgment or
any other matter, for money or otherwise, personally or directly
against Landlord or an officer, director, stockholder, partner,
principal (disclosed or undisclosed), representatives or agent
of Landlord, but will look solely to the Landlords
interest in the building of which the Premises is a part for the
satisfaction of any and all claims, remedies or judgments (or
other judicial process) in favor of Tenant requiring the payment
of money by Landlord in the event of any breach by landlord of
any of the terms, covenants or agreements to be performed by
Landlord under this lease or otherwise, subject, however, to the
prior rights of any ground or underlying lessors or the holders
of the mortgage encumbering the same and no other assets of
Landlord shall be subject to levy, execution or other judicial
process for the satisfaction of Tenants claims; such
exculpation of personal liability as herein set forth to be
absolute, unconditional and without exception of any kind.
Section 22.12 Guaranty of Lease.
The person(s) who execute this lease at the place provided below
for Guarantors, if any, express their agreement to the terms
hereof and unconditionally hereby, jointly and severally,
personally guarantee all of the Tenants obligations
hereunder.
Section 22.13 Attachments.
Any exhibits and any guarantee form as well as any addendums
which are attached to this lease are a part of this lease and
are incorporated herein as if fully set forth herein.
A-105
ARTICLE XXIII
Termination; Option to Renew
Section 23.01 Termination.
Tenant may terminate this lease at any time without penalty or
prepayment on not less than 180 days written notice
to Landlord.
Section 23.02 Option to Renew.
The Landlord grants to the Tenant the right and option to renew
this Lease for the additional term of two terms of five
(5) years upon the terms and conditions as set forth herein
and as hereinafter set forth. After the first term the Tenant
shall pay cost of living increase annually.
The minimum fixed rent for the first year of the renewed term
shall be the annual sum of $47,446.19 payable in advance monthly
in the manner and together with the additional rent due pursuant
to Article II of this lease.
Unless otherwise provided above, the minimum fixed rent for such
additional year of the option period, if any, commencing with
the first months rent of the second year shall be the
minimum fixed rent for the previous year PLUS the Cost of Living
adjustment calculated pursuant to Article XXIV hereof.
To exercise this option, the Tenant must not be in default of
any of the terms and conditions of this lease and shall give
180 days written notice in advance of the then current term
of this lease of its intention to renew. In the absence of such
timely notice, the option to renew shall be null and void. If
the Tenant shall give notice of exercise of an election in the
manner and within the time provided aforesaid, the term shall be
extended upon the giving of the notice without the requirement
of any action on the part of Landlord.
ARTICLE XXIV
Cost of Living Increases in Fixed Minimum Rent
Unless otherwise provided in the preceding Article, the fixed
minimum rent for each annual period commencing with the option
of the renew term, if any, shall be the fixed minimum rent for
the then current period PLUS the increase, if any, in the
Consumer Price Index, for all Urban Customers (U.S. city average
1967 + 100). All Items published by the Bureau of Labor
Statistics of the United States Department of Labor (hereinafter
the Index) over the most recent twelve
(12) month period for which published indexes are available
at the time that Landlord calculates the adjustment. In the
alternative, at Tenants option, Tenant hereby agrees that
the fixed minimum rent for each annual period commencing with
the second year of the option term shall automatically increase
the rate of three percent (3%) per year. In no event shall the
fixed minimum rent, as adjusted, be less than the fixed minimum
rent payable for the then current period. Said adjusted rental
shall be due and payable monthly, in advance, in the manner and
together with the additional rent due set forth in
Article II hereof.
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IN WITNESS WHEREOF, Landlord and Tenant have signed and sealed
this lease on the day and year first above written. Tenant have
signed and sealed this lease on the day and year first above
written.
Signed, sealed, and delivered in the presence of:
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LANDLORD |
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PELU PROPERTIES, Inc. |
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By: |
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As to Landlord
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TENANT |
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KENT MANAGEMENT SYSTEMS, INC. |
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By: |
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As to Tenant Tenants Signature
A-107
ANNEX B
VOTING AGREEMENT
THIS VOTING AGREEMENT (the Agreement) dated
as of May 10, 2006 is by and between
Luis Cruz, M.D., Jose M. Garcia, and Carlos Garcia
(collectively Principals) and the other
parties signatory hereto (each a Shareholder).
RECITALS
Continucare Corporation, a Florida corporation
(CNU) CNU Blue 1, Inc., a Florida
corporation and a wholly-owned subsidiary of CNU
(Buyer), CNU Blue 2, LLC, a Florida
limited liability company and a wholly-owned subsidiary of Buyer
(Buyer LLC), Miami Dade Health and
Rehabilitation Services, Inc., a Florida corporation
(MDHRS), Miami Dade Health Centers, Inc., a
Florida corporation (MDHC), West Gables Open
MRI Services, Inc., a Florida corporation (West
Dade), Kent Management Systems, Inc.
(Kent), Pelu Properties, Inc., a Florida
corporation (Pelu), Peluca Investments, LLC,
a Florida limited liability company (Peluca),
and Miami Dade Health Centers One, Inc., a Florida corporation
(MDHC One, and, collectively with MDHRS, MDHC, West
Dade, Kent, and Pelu, the Sellers), MDHC Red,
Inc., a Florida corporation (Retain),
Principals and each of the other shareholders of each Seller
have entered into an Asset Purchase Agreement (the
Acquisition Agreement) pursuant to which Sellers
shall sell Buyer, and Buyer shall purchase from Sellers, on a
going concern basis, substantially all of the assets, properties
and business of the Business (such term and each other
capitalized term used in this Agreement without definition shall
have the meaning given to it in the Acquisition Agreement), all
on the terms and subject to the conditions set forth therein
As a condition to Principals entering into and causing Sellers
to enter into the Acquisition Agreement, Principals require that
each Shareholder enter into, and each such Shareholder has
agreed to enter into, this Agreement with Principals.
AGREEMENT
To implement the foregoing and in consideration of the mutual
agreements contained herein, the parties hereby agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS.
Each Shareholder hereby severally and not jointly represents and
warrants to Principals as follows:
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(i) Such Shareholder is either (a) the record holder
or beneficial owner, either alone or with such
Shareholders spouse, of the number of or (b) trustee
of a trust that is the record holder or beneficial owner of, and
whose beneficiaries are the beneficial owners (such trustee, a
Trustee) of the number of shares of CNU
Common Stock as is set forth opposite such Shareholders
name on Schedule 1(a)(i) hereto (such shares shall
constitute the Existing Shares, and together
with any shares of CNU Common Stock acquired of record or
beneficially by such Shareholder in any capacity after the date
hereof and prior to the termination hereof, whether upon
exercise of options, conversion of convertible securities,
purchase, exchange or otherwise shall constitute the
Shares). |
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(ii) On the date hereof, the Existing Shares set forth
opposite such Shareholders name on Schedule 1(a)(i)
hereto constitute all of the outstanding shares of CNU Common
Stock owned of record or beneficially by such Shareholder. Such
Shareholder does not have record or beneficial ownership of any
Shares not set forth on Schedule 1(a)(i) hereto. |
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(iii) Except as set forth on Schedule 1(a)(iii)
hereto, such Shareholder has sole power of disposition with
respect to all of the Existing Shares set forth opposite such
Shareholders name on |
B-1
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Schedule 1(a)(i), with no restrictions on such rights,
subject to applicable securities Laws and the terms of this
Agreement. |
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(b) POWER; BINDING AGREEMENT. Such Shareholder has
the legal capacity, power and authority to enter into and
perform all of such Shareholders obligations under this
Agreement. The execution, delivery and performance of this
Agreement by such Shareholder will not violate any other
agreement to which such Shareholder is a party or by which such
Shareholder is bound including, without limitation, any trust
agreement, voting agreement, shareholders agreement, voting
trust, partnership or other agreement. This Agreement has been
duly and validly executed and delivered by such Shareholder and,
assuming this Agreement has been duly and validly executed and
delivered by or on behalf of the respective other party thereto,
which party has the power to enter into and perform its
obligations, this Agreement constitutes a valid and binding
agreement of such Shareholder, enforceable against such
Shareholder in accordance with its terms, except as the
enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar Requirements
of Law generally affecting the rights of creditors and subject
to general equity principles. There is no beneficiary of or
holder of interest in any trust of which a Shareholder is
Trustee whose consent is required for the execution and delivery
of this Agreement or the consummation of the transactions
contemplated hereby. If such Shareholder is married and such
Shareholders Shares constitute community property, this
Agreement has been duly authorized, executed and delivered by,
and assuming this Agreement has been duly and validly executed
and delivered by or on behalf of the respective other party
thereto, which party has the power to enter into and perform its
obligations, this Agreement constitutes a valid and binding
agreement of, such Shareholders spouse, enforceable
against such person in accordance with its terms, except as the
enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar Requirements
of Law generally affecting the rights of creditors and subject
to general equity principles. |
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(c) NO CONFLICTS. Except for filings under the
Exchange Act, (A) to such Shareholders knowledge, no
filing with, and no permit, authorization, consent or approval
of, any state or federal public body or authority is necessary
for the execution of this Agreement by such Shareholder and the
consummation by such Shareholder of the transactions
contemplated hereby and (B) neither the execution and
delivery of this Agreement by such Shareholder nor the
consummation by such Shareholder of the transactions
contemplated hereby nor compliance by such Shareholder with any
of the provisions hereof shall (x) conflict with or result
in any breach of any applicable trust, partnership agreement or
other agreements or organizational documents applicable to such
Shareholder, (y) result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a
default (or give rise to any third party right of termination,
cancellation, material modification or acceleration) under any
of the terms, conditions or provisions of any note, bond,
mortgage, indenture, license, contract, commitment, arrangement,
understanding, agreement or other instrument or obligation of
any kind to which such Shareholder is a party or by which such
Shareholder or any of such Shareholders properties or
assets may be bound or (z) to the knowledge of such
Shareholder violate any order, writ, injunction, decree,
judgment, statute, rule or regulation applicable to such
Shareholder or any of such Shareholders properties or
assets. |
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(d) LIENS. Such Shareholders Shares and the
certificates representing such Shares are now and at all times
during the term hereof will be held by such Shareholder, or by a
nominee or custodian for the benefit of such Shareholder, free
and clear of all Encumbrances except for inchoate tax liens for
taxes not yet due. |
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(e) BROKERS. No broker, investment banker, financial
adviser or other person is entitled to any brokers,
finders, financial advisers or other similar fee or
commission in connection with the transactions contemplated
hereby based upon arrangements made by or on behalf of such
Shareholder in his or her capacity as such. |
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(f) ACKNOWLEDGMENT. Such Shareholder understands and
acknowledges that Principals are entering into the Acquisition
Agreement in reliance upon such Shareholders execution and
delivery of this Agreement with Acquiror. |
2. CERTAIN COVENANTS OF SHAREHOLDERS. Except in
accordance with the terms of this Agreement, each Shareholder
hereby severally covenants and agrees as follows:
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(a) RESTRICTION ON PROXIES AND NONINTERFERENCE.
Prior to the earlier of the termination of the Acquisition
Agreement in accordance with its terms and the Closing, no
Shareholder shall, directly or indirectly: (i) grant any
proxies or powers of attorney with respect to any Shares,
deposit any Shares into a voting trust or enter into a voting
agreement with respect to any Shares; or (ii) take any
action that would make any representation or warranty of such
Shareholder contained herein untrue or incorrect or that could
reasonably be expected to have the effect of preventing or
disabling such Shareholder from performing such
Shareholders obligations under this Agreement in any
material respect. |
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(b) VOTING OF COMPANY STOCK. Each Shareholder hereby
agrees that, prior to the first to occur of the termination of
the Acquisition Agreement in accordance with its terms and the
Closing, at any meeting (whether annual or special and whether
or not an adjourned or postponed meeting) of the holders of CNU
Common Stock, however called, or in connection with any written
consent of the holders of the CNU Common Stock, he will appear
at the meeting or otherwise cause the Shares to be counted as
present thereat for purposes of establishing a quorum and vote
or consent (or cause to be voted or consented) the Shares over
which such Shareholder holds the power, directly or indirectly,
to direct the vote, except as otherwise agreed to in writing in
advance by the Principals in their sole discretion, in favor of
the issuance of the CNU Shares pursuant to the Acquisition
Agreement and against any action which is intended, or could
reasonably be expected, to impede, interfere with, delay,
postpone or adversely affect the transactions contemplated by
the Acquisition Agreement. Each Shareholder agrees that he will
not enter into any agreement or understanding with any Person
the intended or anticipated effect of which would be
inconsistent with or violative of any provision contained in
this Section 2(b). Nothing in this Agreement to the
contrary, no Shareholder shall be required to acquire any Shares
that such Shareholder has, directly or indirectly, the right to
acquire, including, without limitation, by exercise of stock
options or otherwise. |
Notwithstanding the foregoing or anything to the contrary in
this Agreement, nothing in this Agreement shall require a
Shareholder to exercise any stock option or other security
convertible into or exercisable for shares of CNU Common Stock.
3. FURTHER ASSURANCES. From time to time, at the
other partys request and without further consideration,
each party hereto shall execute and deliver such additional
documents and take all such further action as may be necessary
or desirable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by
this Agreement.
4. CERTAIN EVENTS. Each Shareholder agrees that this
Agreement and the obligations hereunder shall attach to such
Shareholders Shares and shall be binding upon any person
or entity to which legal or beneficial ownership of such Shares
shall pass, whether by operation of law or otherwise, including
without limitation such Shareholders heirs, guardians,
administrators or successors or as a result of any divorce.
5. TERMINATION. The obligations set forth in this
Agreement will terminate upon the first to occur of the
termination of the Acquisition Agreement in accordance with its
terms and the Effective Time.
6. MISCELLANEOUS.
(a) ENTIRE AGREEMENT; ASSIGNMENT. This Agreement and
the schedules hereto (i) constitute the entire agreement
between the parties with respect to the subject matter hereof
and supersedes all other prior agreements and understandings,
both written and oral, between the parties with respect to the
subject matter hereof and (ii) shall not be assigned by
operation of law or otherwise without the prior written consent
of the other party.
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(b) AMENDMENTS. This Agreement may not be modified,
amended, altered or supplemented, except upon the execution and
delivery of a written agreement executed by the parties hereto.
(c) NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed to have been
duly given; as of the date of delivery, if delivered personally;
upon receipt of confirmation, if telecopied, or upon the next
business day when delivered during normal business hours to an
overnight courier service, such as Federal Express, in each case
to the parties at the following addresses or at such other
addresses as shall be specified by the parties by like notice;
unless the sending party has knowledge that such notice or other
communication hereunder was not received by the intended
recipient:
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If to a Shareholder to: |
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Continucare Corporation |
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7200 Corporate Center Drive, Suite 600 |
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Miami, FL 33126 |
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Attention: Chief Executive Officer |
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Fax: (305) 500-2104 |
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with a copy to: |
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Stearns Weaver Miller |
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Weissler Alhadeff & Sitterson, P.A. |
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150 West Flagler Street, Suite 2200 |
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Miami, Florida 33130 |
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Fax: 305-789-3395 |
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Attention: Geoffrey MacDonald, Esq. |
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If to Principals, to: |
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Miami Dade Health Centers, Inc. |
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3233 Palm Avenue |
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4th Floor |
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Hialeah, FL 33012 |
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Attention: Jose M. Garcia, CEO |
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Fax: 305-642-3142 |
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With a copy to: |
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Sandra Greenblatt, P.A. |
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One Biscayne Tower, Suite 3500 |
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2 South Biscayne Boulevard |
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Miami, FL 33131 |
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Attention: Sandra P. Greenblatt, Esq. |
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Fax: (305) 577-9951 |
or to such other address as the person to whom notice is given
may have previously furnished to the others in writing in the
manner set forth above.
(d) GOVERNING LAW. The validity, interpretation and
effect of this Agreement shall be governed exclusively by the
laws of the State of Florida, without giving effect to the
principles of conflict of laws thereof.
(e) COSTS. The parties will each be solely
responsible for and bear all of its own respective expenses,
including, without limitation, expenses of legal counsel,
accountants, and other advisors, incurred at any time in
connection with pursuing or consummating the Agreement and the
transactions contemplated thereby.
(f) ENFORCEMENT. The parties agree that irreparable
damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly
agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement.
B-4
(g) COUNTERPARTS. This Agreement may be executed in
two or more counterparts, each of which shall be deemed to be an
original, but both of which shall constitute one and the same
Agreement.
(h) DESCRIPTIVE HEADINGS. The descriptive headings
used herein are inserted for convenience of reference only and
are not intended to be part of or to affect the meaning or
interpretation of this Agreement.
(i) SEVERABILITY. If any term or provision of this
Agreement or the application thereof to any party or set of
circumstances shall, in any jurisdiction and to any extent, be
finally held invalid or unenforceable, such term or provision
shall only be ineffective as to such jurisdiction, and only to
the extent of such invalidity or unenforceability, without
invalidating or rendering unenforceable any other terms or
provisions of this Agreement under any other circumstances, and
the parties shall negotiate in good faith a substitute provision
which comes as close as possible to the invalidated or
unenforceable term or provision, and which puts each party in a
position as nearly comparable as possible to the position it
would have been in but for the finding of invalidity or
unenforceability, while remaining valid and enforceable.
(j) DEFINITIONS. For purposes of this Agreement:
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(i) Beneficially Own or
Beneficial Ownership with respect to any
securities shall mean having beneficial ownership
of such securities (as determined pursuant to
Rule 13d-3 under
the Exchange Act), including pursuant to any agreement,
arrangement or understanding, whether or not in writing. Without
duplicative counting of the same securities by the same holder,
securities Beneficially Owned by a Person shall include
securities Beneficially Owned by all other Persons with whom
such Person would constitute a group as
described in Section 13(d)(3) of the Exchange Act. |
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(ii) Person shall mean an individual,
corporation, partnership, joint venture, association, trust,
unincorporated organization or other entity. |
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(iii) If, between the date of this Agreement and the
Closing Date, the CNU shall effect any reclassification,
recapitalization, stock split, combination, or exchange of the
CNU Common Stock, or a stock dividend or dividend payable in any
other securities shall be declared with a record date occurring
within such period, or any similar event shall have occurred,
then the Shares shall be appropriately adjusted to give effect
to such reclassification, recapitalization, stock split,
combination, or exchange, dividend or other event. |
(k) SHAREHOLDER CAPACITY. Notwithstanding anything
herein to the contrary, no person executing this Agreement who
is, or becomes during the term hereof, an officer or director of
CNU makes any agreement or understanding herein in his or her
capacity as such director, and the agreements set forth herein
shall in no way restrict any director in the exercise of his or
her fiduciary duties as an officer or director of CNU. Each
Shareholder has executed this Agreement solely in his or her
capacity as the record or beneficial holder of such
Shareholders Shares or as the trustee of a trust whose
beneficiaries are the beneficial owners of such
Shareholders Shares.
(l) NO STRICT CONSTRUCTION. The language used in
this Agreement will be deemed to be the language chosen by the
parties hereto to express their mutual intent, and no rule of
strict construction will be applied against any party hereto.
[SIGNATURE PAGE FOLLOWS]
B-5
IN WITNESS WHEREOF, Principals and each Shareholder have caused
this Agreement to be duly executed as of the day and year first
above written.
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PRINCIPALS |
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Luis Cruz, M.D. |
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Jose M. Garcia |
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Carlos Garcia |
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SHAREHOLDERS: |
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Richard C. Pfenniger, Jr. |
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Phillip Frost, M.D. |
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FROST GAMMA INVESTMENTS TRUST |
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Phillip Frost, M.D., Trustee |
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FROST NEVADA INVESTMENTS TRUST |
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Phillip Frost, M.D., Trustee |
B-6
SCHEDULE 1(a)(i)
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Number of Shares of | |
Record Holder |
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CNU Common Stock | |
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Phillip Frost, M.D
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100,000 |
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Frost-Gamma Investments Trust
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21,279,788 |
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Frost Nevada Investments Trust
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819,313 |
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Richard C. Pfenniger, Jr.
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1,015,000 |
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B-7
SCHEDULE 1(a)(iii)
NONE
B-8
ANNEX C
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Capitalink, L.C.
One Alhambra Plaza
Suite 1410
Coral Gables, Florida 33134
Phone 305-446-2026
Fax 305-446-2926
www.capitalinklc.com |
May 10, 2006
Board of Directors
Continucare Corporation
7200 Corporate Center Drive
Suite 600
Miami, FL 33126
Gentlemen:
We have been advised that, pursuant to the draft Asset Purchase
Agreement, dated May 3, 2006 (the APA), by and
among, among others, Miami Dade Health and Rehabilitation
Services, Inc., Miami Dade Heath Centers, Inc., West Gables Open
MRI Services, Inc., Kent Management Systems, Inc., Miami Dade
Heath Centers One, Inc., Pelu Properties, Inc. and Peluca
Investments, LLC (collectively, MDHC) and
Continucare Corporation (Continucare), Continucare
proposes to acquire MDHC (the Transaction). Subject
to the terms and on the conditions of the APA, Continucare shall
pay MDHC the following consideration:
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i) |
issue 20,000,000 shares of Continucare common stock at the
closing; |
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ii) |
pay $5,000,000 in cash at the closing; |
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iii) |
pay $1,000,000 in cash on the first anniversary of the closing; |
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iv) |
pay an amount in cash up to the lesser of net working capital as
of the closing or $2 million based on collection of certain
funds during the fourteen day period subsequent to closing from
identified third-party payors; and, |
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v) |
pay an amount in cash equal to one-half of any amounts collected
subsequent to closing with respect to certain receivables that
have been fully reserved on MDHCs financial statements as
of December 31, 2005. |
Items (i) through (v) above are collectively
hereinafter, the Purchase Consideration.
We have been retained by the Board of Directors of Continucare
to render an opinion as to whether, on the date of such opinion
the Purchase Consideration is fair, from a financial point of
view, to Continucares shareholders.
We have not been requested to opine as to, and the opinion does
not in any manner address, the relative merits of the
Transaction as compared to any alternative business strategy
that might exist for Continucare, the decision on whether
Continucare should complete the Transaction, or other
alternatives to the Transaction that might exist for
Continucare. The amount of the Purchase Consideration was
determined pursuant to negotiations between Continucare and MHDC
and each of their respective advisors, and not pursuant to
recommendations of Capitalink.
C-1
Continucare Corporation
Board of Directors
May 10, 2006
Page 2
In arriving at our opinion, we took into account an assessment
of general economic, market and financial conditions as well as
our experience in connection with similar transactions and
securities valuations generally and, among other things:
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Reviewed the APA. |
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Reviewed publicly available financial information and other data
with respect to Continucare, including the Annual Report on
Form 10-K for the
year ended June 30, 2005 and the Quarterly Report on
Form 10-Q for the
six months ended December 31, 2005. |
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Reviewed available financial information with respect to MDHC,
including draft unaudited income statements and balance sheets
for the years ended December 31, 2005 and 2004. |
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Considered the historical financial results and present
financial condition of MDHC. |
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Reviewed and compared the trading of, and the trading market for
Continucares common stock. |
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Reviewed and analyzed the indicated value range of the Purchase
Consideration. |
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Reviewed and analyzed MDHCs projected unlevered free cash
flows and prepared a discounted cash flow analysis. |
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Reviewed and analyzed certain financial characteristics of
publicly-traded companies that were deemed to have
characteristics comparable to MDHC. |
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Reviewed and analyzed certain financial characteristics of
target companies in transactions where such target company was
deemed to have characteristics comparable to that of MDHC. |
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Reviewed and discussed with representatives of Continucare and
MDHC certain financial and operating information furnished by
them, including financial analyses with respect to the
MDHCs business and operations. |
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Performed such other analyses and examinations as were deemed
appropriate. |
In arriving at our opinion, we have relied upon and assumed the
accuracy and completeness of all of the financial and other
information that was used by us without assuming any
responsibility for any independent verification of any such
information and have further relied upon the assurances of
Continucare and MDHC management that they are not aware of any
facts or circumstances that would make any such information
inaccurate or misleading. With respect to the financial
information utilized, we assumed that such information has been
reasonably prepared on a basis reflecting the best currently
available estimates and judgments, and that such information
provides a reasonable basis upon which we could make its
analysis and form an opinion.
It is noted that we have not reviewed complete financial
statements prepared in accordance with generally accepted
accounting principles and have relied entirely upon unaudited
and limited financial information with respect to MDHCs
financial performance and financial condition. The value of
MDHC, and in turn our analyses and this opinion, may be
significantly impacted in the event such information is
inaccurate or fails to disclose material information.
We have not made a physical inspection of the properties and
facilities of MDHC and have not made or obtained any evaluations
or appraisals of MDHC assets or liabilities (contingent or
otherwise). We have not attempted to confirm whether the MDHC
has good title to its assets.
We assumed that the Transaction will be consummated in a manner
that complies in all respects with the applicable provisions of
the Securities Act of 1933, as amended, the Securities Exchange
Act of 1934, as amended, and all other applicable federal and
state statues, rules and regulations. We assumed that the
C-2
Continucare Corporation
Board of Directors
May 10, 2006
Page 3
Transaction will be consummated substantially in accordance with
the terms set forth in the APA, without any further amendments
thereto, and that any amendments, revisions or waivers thereto
will not be detrimental to the stockholders of Continucare.
Our analysis and opinion are necessarily based upon market,
economic and other conditions, as they exist on, and could be
evaluated as of May 10, 2006. Accordingly, although
subsequent developments may affect our opinion, we do not assume
any obligation to update, review or reaffirm our opinion.
Our opinion is for the use and benefit of Continucares
Board of Directors in connection with its consideration of the
Transaction and is not intended to be and does not constitute a
recommendation to any shareholder of Continucare whether such
shareholder should take any action, if required, such as voting
on any matter, in connection with the contemplated Transaction.
We do not express any opinion as to the future performance of
MDHC or Continucare or the price at which Continucares
common stock would trade at any time in the future.
Based upon and subject to the foregoing, it is our opinion that,
as of the date of this letter, the Purchase Consideration is
fair, from a financial point of view, to Continucares
shareholders.
In connection with our services, we have previously received a
retainer and will receive the balance of our fee upon the
rendering of this opinion. Our fee for providing the fairness
opinion is not contingent on the completion of the Transaction.
In addition, Continucare has agreed to indemnify us for certain
liabilities that may arise out of the rendering this opinion.
Neither Capitalink nor its principals beneficially own any
interest in Continucare or MDHC. Further Capitalink has not
provided any previous services to Continucare or MDHC.
Our opinion is for the use and benefit of the Board of Directors
and is rendered in connection with its consideration of the
Transaction and may not be used by Continucare for any other
purpose or reproduced, disseminated, quoted or referred to by
Continucare at any time, in any manner or for any purpose,
without the prior written consent of Capitalink, except that
this opinion may be reproduced in full in, and references to the
opinion and to Capitalink and its relationship with Continucare
may be included in filings made by Continucare with the
Securities and Exchange Commission, if required by Securities
and Exchange Commission rules, and in any proxy statement or
similar disclosure document disseminated to shareholders if
required by the Securities and Exchange Commission rules. We
hereby consent to any such inclusion of this opinion in any such
filing.
Very truly yours,
/s/ Capitalink, L.C.
C-3
Form of Proxy Common Stock
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
CONTINUCARE CORPORATION
7200 Corporate Center Drive, Suite 600
Miami, Florida 33126
The undersigned hereby appoints Richard C. Pfenniger, Jr.
and Fernando L. Fernandez, and each of them, acting alone, with
the power to appoint his substitute, proxy to represent the
undersigned and vote as designated on the reverse all of the
shares of Common Stock of Continucare Corporation held of record
by the undersigned on August 8, 2006, at the special
meeting of shareholders of Continucare Corporation to be held on
September 19, 2006 and at any adjournment or postponement
thereof.
(Continued and to be signed on the reverse side)
SPECIAL MEETING OF SHAREHOLDERS OF
CONTINUCARE CORPORATION
SEPTEMBER 19, 2006
Please date, sign and mail your proxy card in the envelope
provided as soon as possible.
Please detach along perforated line and mail in the envelope
provided.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE
þ
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1. |
APPROVAL OF THE ISSUANCE OF 20.0 MILLION SHARES OF OUR COMMON
STOCK IN CONNECTION WITH THE ACQUISITION |
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FOR
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AGAINST |
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ABSTAIN |
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION
IS MADE, THIS PROXY WILL BE VOTED FOR THE APPROVAL
OF THE ISSUANCE OF 20.0 MILLION SHARES OF OUR COMMON STOCK IN
CONNECTION WITH THE ACQUISITION.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING
THE ENCLOSED ENVELOPE.
To change the address on your account, please check the box at
right and indicate your new address in the address space above.
Please note that changes to the registered name(s) on the
account may not be submitted via this
method. o
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Signature of Shareholder
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Date: |
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Signature of Shareholder
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Date: |
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NOTE: Please sign exactly as your name or names appear on this
Proxy. When shares are held jointly, each holder should sign.
When signing as executor, administrator, attorney, trustee or
guardian, please give full title as such. If the signer is a
corporation, please sign full corporate name by duly authorized
officer, giving full title as such. If the signer is a
partnership, please sign in partnership name by authorized
person.