================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2000. |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to _______ . Commission File Number: 0-19815 ------- CAREMATRIX CORPORATION ---------------------- (Exact name of Registrant as specified in its charter) Delaware 04-3069586 -------- ---------- (State of other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 197 First Avenue, Needham, MA 02494 ----------------------------------- (Address of principal executive offices) (Zip Code) (781) 433-1000 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 14, 2000 ----- ------------------------------ Common Stock, $.05 par value 18,563,491 shares ================================================================================ CAREMATRIX CORPORATION Table of Contents PART I - FINANCIAL INFORMATION FINANCIAL STATEMENTS Page ---- Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations for the three and six months ended June 30, 2000 and June 30, 1999 4 Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and June 30, 1999 5 Notes to Consolidated Financial Statements 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16 PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS 17 ITEM 2: CHANGES IN SECURITIES 19 ITEM 5: OTHER INFORMATION 19 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 19 2 CAREMATRIX CORPORATION CONSOLIDATED BALANCE SHEETS as of June 30, 2000 and December 31, 1999

~~March~~June 3130, 2000 December 31, 1999 --------------- ----------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ ~~733~~1,~~611~~696,762 $ 4,276,918 Restricted cash 35,~~183~~384,~~812~~891 3,807,484 Receivables: Accounts receivable, net 2120,~~211~~663,~~268~~076 21,030,666 Accounts receivable, -related party, net 18,~~670~~035,~~661~~215 16,949,886 Prepaid and refundable income taxes, net 10,~~908~~357,~~897~~354 17,206,913 Prepaid expenses and other current assets 2,~~800~~086,~~840~~587 21,~~910~~831,~~196~~448 --------------- --------------- Total current assets 5758,~~509~~223,~~089~~885 6665,~~182~~103,~~063~~315 Lease acquisition costs and prepaid rent, net 21,~~308~~122,~~886~~256 22,023,025 Property and equipment, net ~~293~~301,~~405~~493,~~742~~012 276,586,515 Other long-term assets, net 33,~~250~~834,~~483~~098 3940,~~438~~517,~~712~~460 Goodwill, net 3534,~~015~~640,~~734~~546 35,390,922 --------------- --------------- Total assets $~~440~~ 449,~~489~~313,~~934~~797 $ 439,621,237 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 25,~~848~~085,~~277~~921 $ 25,848,277 Accounts payable 1315,~~508~~394,~~766~~903 14,766,916 Accrued compensation and benefits 46,~~830~~709,~~669~~263 4,265,313 Accrued liabilities 823,~~660~~642,~~954~~819 11,898,170 Other current liabilities 32,~~628~~092,~~259~~777 2,130,086 --------------- --------------- Total current liabilities 5672,~~476,~~925,683 58,908,762 ~~Convertible~~Mortgages ~~subordinated~~and notes ~~115~~payable 75,~~000~~389,~~000~~200 ~~115~~76,~~000~~527,~~000~~746 ~~Mortgages~~Convertible ~~and~~subordinated notes ~~payable 75~~115,~~948~~000,~~968~~000 76115,~~527~~000,~~746~~000 Other long-term liabilities ~~150~~160,~~166~~310,~~268~~523 132,596,446 Commitments and contingencies Stockholders' equity 4225,~~897~~688,~~773~~391 56,588,283 --------------- --------------- Total liabilities and ~~stockholders~~shareholders' equity $~~440~~ 449,~~489~~313,~~934~~797 $ 439,621,237 =============== ===============

The accompanying notes are an integral part of the consolidated financial statements. 3 CAREMATRIX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) for the three and six months ended June 30, 2000 and June 30, 1999

Three Months Ended ~~March~~Six ~~31,~~Months Ended ---------------------------------- ---------------------------------- June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 --------------- --------------- --------------- --------------- Revenues: Resident operations $ 39,204,009 $ 41,~~453~~103,~~907~~175 $ 3980,~~270~~657,~~868~~916 $ 80,374,043 Resident operations - related party 300,000 5,~~461~~294,~~700~~257 600,000 10,755,957 Development fee income -- -- -- 72,442 Development fee income - related party -- 12,~~438~~739,~~652~~857 -- 4,178,509 --------------- --------------- --------------- --------------- Total revenue 4139,~~753~~504,~~907~~009 4649,~~243~~137,~~662~~289 81,257,916 95,380,951 --------------- --------------- --------------- --------------- Expenses: Facility operating expenses 3532,~~292~~990,~~277~~857 2831,~~413~~259,~~249~~479 68,283,134 59,672,728 Facility lease expense 268,750 ~~847~~219,~~560~~809 537,500 1,067,369 Facility lease expense - related party 53,~~042~~818,~~465~~033 34,~~720~~709,~~845~~007 8,860,498 8,429,852 General and administrative 47,~~920~~084,~~219~~879 45,~~754~~534,~~785~~130 12,005,098 10,288,915 Depreciation and amortization 4,514,059 3,~~240~~185,~~056~~525 27,~~778~~754,~~974~~115 5,964,499 --------------- --------------- --------------- --------------- Total expenses 48,~~763~~676,~~767~~578 4044,~~515~~907,~~413~~950 97,440,345 85,423,363 --------------- --------------- --------------- --------------- Earnings (loss) from operations (79,~~009~~172,~~860~~569) 54,~~728~~229,~~249~~339 (16,182,429) 9,957,588 Other income (expense): Interest income - related party -- ~~699~~949,~~821~~819 -- 1,649,640 Interest and other income ~~231~~70,~~654~~386 ~~783~~1,~~271~~168,859 300,265 1,952,130 Interest and other expense (67,~~486~~571,~~072~~855) (4,~~474,~~725,544) (14,056,152) (9,200,269) --------------- --------------- --------------- --------------- Total other income (expense) (67,~~254~~501,~~418~~469) (2,~~991~~606,~~633~~866) (13,755,887) (5,598,499) --------------- --------------- --------------- --------------- Earnings (loss) before income taxes and preferred dividends (1316,~~264~~674,~~278~~038) 21,~~736~~622,~~616~~473 (29,938,316) 4,359,089 Income taxes ~~424~~533,~~457~~569 640,877 958,026 1,~~080~~721,~~963~~840 --------------- --------------- ~~Earnings~~--------------- ~~(loss)~~--------------- Earnings before preferred dividends (1317,~~688~~207,~~735~~607) 1981,~~655~~596 (30,~~653~~896,342) 2,637,249 Preferred dividends 1,775 1,~~825~~775 3,550 3,600 --------------- --------------- --------------- --------------- Net earnings (loss) ~~available~~$ to(17,209,382) ~~common~~$ ~~shareholders~~979,821 $ (1330,~~690~~899,~~510~~892) $ 12,~~653~~633,~~828~~649 =============== =============== =============== =============== Basic shares outstanding 18,~~476~~563,~~789~~491 17,938,288 18,~~012~~520,~~159~~140 17,975,224 =============== =============== =============== =============== Basic earnings (loss) per share $ (0.7493) $ 0.0905 $ (1.67) $ 0.15 =============== =============== =============== =============== Diluted shares outstanding 18,~~476~~563,~~789~~491 17,982,387 18,~~395~~520,~~039~~140 18,168,330 =============== =============== =============== =============== Diluted earnings (loss) per share $ (0.7493) $ 0.0905 $ (1.67) $ 0.15 =============== =============== =============== ===============

The accompanying notes are an integral part of the consolidated financial statements. 4 CAREMATRIX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) for the six months ended June 30, 2000 and June 30, 1999

~~Three~~Six Months Ended ~~March 31,~~ --------------- --------------- June 30, 2000 June 30, 1999 --------------- --------------- ~~Cash flows from operating activities:~~ Net earnings (loss) $ (1330,~~690~~899,~~510~~892) $ 12,~~653~~633,~~828~~649 Noncash items included in net earnings (loss): Depreciation of fixed assets 25,~~386~~287,~~364~~779 13,~~771~~754,~~506~~416 Amortization of intangible assets ~~853~~2,~~692~~466,336 12,~~007~~210,~~468~~083 Increase in accounts receivable (2,~~031~~042,~~908~~191) (16,~~619~~218,~~975~~300) Changes in current assets 7,~~789~~492,~~401~~373 (~~400~~1,~~648~~403,799) ~~Decrease~~Changes in current liabilities (46,~~808~~763,~~536)~~098 (213,~~567~~728,~~029~~895) Loss on sale of interest in sublease 2,429,944 -- Accrued interest on capital lease obligations 1,~~142~~529,~~869~~695 ~~765~~1,~~045~~624,183 Start up losses from facilities consolidated for accounting purposes 15,~~509~~511,~~429~~231 ~~101~~359,~~735~~073 ~~Other noncash items 51,494~~ -- ------------- --------------- Net cash ~~provided (~~used) by operating activities (41,~~367~~461,~~761~~627) ~~711~~(10,~~930~~769,590) --------------- --------------- Cash flows from investing activities: Additions to property and equipment, net (~~360~~692,~~789~~011) (23,~~721~~184,~~805~~007) Purchase of SeniorCare Group, Ltd. facility -- (5,780,000) Proceeds from sale of interest in sublease 2,370,056 -- Change in lease deposits and other long-term assets (~~552~~230,~~964~~588) (15,~~464~~677,~~137~~701) Change in restricted cash ~~156~~(360,~~532~~060) 416,~~682~~989,~~421~~547 Lease acquisition costs -- (~~688~~4,~~453~~040,611) --------------- --------------- Net cash provided (used) by investing activities 1,~~612~~087,~~835~~397 (1911,~~971~~692,~~974~~772) --------------- --------------- Cash flows from financing activities: Exercise of stock options and warrants -- 199,~~650~~651 Repurchase of common shares -- (12,~~513~~884,~~992~~045) Borrowings (payments) under the line of credit, net (762,356) 2,000,000 Net proceeds from mortgage refinancing -- 825,~~736~~474,~~198~~266 Repayment of debt, net (~~578~~1,~~778~~138,546) (1,~~259~~849,~~477~~090) Other, net (~~209~~305,~~603~~024) ~~(74,493)~~-- --------------- --------------- Net cash provided (used) by financing activities (~~788~~2,~~381~~205,926) 622,~~087~~940,~~886~~782 --------------- --------------- ~~Decrease~~Increase (decrease) in cash and cash equivalents (32,~~543~~580,~~307~~156) ~~(13~~478,~~172,158)~~420 Cash and cash equivalents, beginning of period 4,276,918 28,258,098 --------------- --------------- Cash and cash equivalents, end of period $ ~~733~~1,~~611~~696,762 $ 1528,~~085~~736,~~940~~518 =============== =============== Other noncash items: Change in capital lease obligations and lease ~~acquistion~~acquisition costs $ 2,525,000 $ 5,280,000 =============== =============== Additions to capital lease assets and liabilities $ 1114,~~211~~705,~~358~~361 $ 23,561,780 =============== =============== Additions to property and equipment $ 714,~~633~~796,~~444~~904 $ 1027,~~519~~777,~~700~~757 =============== =============== Additions to other long-term liabilities $ 815,~~623~~021,~~982~~901 $ 1028,~~259~~655,~~098~~092 =============== =============== Additions to other long-term assets $ ~~348~~392,~~172~~534 $ ~~137~~235,~~555~~518 =============== ===============

The accompanying notes are an integral part of the financial statements. 5 CAREMATRIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION CareMatrix Corporation (the "Company") develops, manages and operates assisted living facilities and various other health care facilities. The accompanying interim unaudited financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such regulations. The financial statements reflect all adjustments and disclosures which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal recurring nature. The interim financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1999, for additional disclosures. The results of operations for the interim periods presented are not necessarily indicative of the results that may be achieved for the full year. Certain reclassifications have been made on the prior year's financial statements to conform to the current year's presentations. All references to the "1999 Form 10-K" contained herein refer to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, unless otherwise specified. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The financial statements also include the accounts of certain special purpose entities that the Company is deemed to control although it does not have an ownership interest in such entities. 2. RELATED PARTY TRANSACTIONS As used herein, "Chancellor" or "Chancellor Entity" refers to Chancellor Senior Housing Group, Inc., Abraham D. Gosman (Chief Executive Officer and Chairman of the Board of the Company) or companies in which Mr. Gosman and certain current and former members of the Company's senior management exercise significant control. During the quarter ended March 31, 2000, the Company sold its interest in a sublease with a Chancellor Entity to a third-party. Chancellor leased this facility from a third-party. As consideration for the sale, the Company received cash of $2.4 million and expense and other credits in March 2000 of $1.1 million from certain Chancellor Entities related to facilities the Company currently leases from Chancellor. The Company recorded a charge of $2.4 million to write-off the unamortized portion of its lease investment. The net charge of $1.4 million is included in Interest and Other Expense in the Consolidated Statement of Operations. 3. CAPITAL LEASE AGREEMENT As discussed in Note 7 of the 1999 Form 10-K, the Company has entered into various agreements with a third party to develop, manage, and operate up to seven assisted living facilities in Connecticut. Because the Company is required to lease these facilities, the Company treats the development, management, and lease agreements as a single agreement. Although no lease agreement is legally in effect, the financial statements reflect each of these facilities as a capital lease asset and liability as of the date each facility opened. One facility was opened in the first quarter of 2000 related to these agreements. Accordingly, the Company recorded a capital lease 6 CAREMATRIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) asset and capital lease liability of $11.2 million during the quarter ended March 31, 2000. The balance of the capital lease liability was reduced by $2.5 million which represents the application of the lease deposits and commitment fees paid in connection with entering into the agreements. During the quarter ended June 30, 2000, the agreements referred to above were modified. The primary modifications were: (1) the lease terms for all of the existing facilities began May 1, 2000, (2) the due dates for the outstanding loans to the facilities were changed to the earlier of the date the mortgages related to the facilities are refinanced or December 2005, (3) the rent payments were decreased for a limited time period with the savings in rent required to be used for specified purposes, and (4) the requirement for the Company to enter into agreements for the remaining two facilities was eliminated. As a result of the change in the agreements, the Company increased both its capital lease assets and capital lease liabilities by $3.5 million which represents the change in the present value of the payments due under the associated lease agreements. 4. EARNINGS PER SHARE For the quarter and six months ended June 30, 2000, basic loss per share was the same as diluted loss per share as the impact of the assumed exercise or conversion of the options, warrants, preferred stock, and 6.25% Convertible Notes would be antidilutive.

Three months ended ~~March~~June 3130, 1999 --------------------------------------------- Basic earnings per share Earnings Shares Per share ------------------------ ------------- ------------- ------------- Earnings available to common shareholders $1 979,~~653,828~~821 1817,~~012~~938,~~159~~288 $ 0.0905 Effect of dilutive securities: Stock options and warrants 52,982 -- ~~382~~------------- ------------- ------------- Diluted earnings per share $ 979,~~880~~821 17,991,270 $ 0.05 ============= ============= ============= Six months ended June 30, 1999 --------------------------------------------- Basic earnings per share Earnings Shares Per share ------------------------ ------------- ------------- ------------- Earnings available to common shareholders $ 2,633,649 17,975,224 $ 0.15 Effect of dilutive securities: Stock options and warrants 217,931 -- ------------- ------------- ------------- Diluted earnings per share $1 2,~~653~~633,~~828~~649 18,~~395~~193,~~039~~155 $ 0.0915 ============= ============= =============

5. STRATEGIC ALTERNATIVES The Company has incurred significant operating losses and is dependent upon certain future transactions to generate sufficient cash flow. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has planned several initiatives to mitigate this doubt including the restructuring and reduction of its corporate overhead, sales of certain assets, negotiation of a settlement agreement with Chancellor to liquidate the remaining receivables, and negotiating agreements with its lending institution to be fully paid after the consummation of certain sale transactions. If these initiatives are successful, the Company believes its remaining operations will allow it to return to profitability. The Company will require resources in the future to fund its working capital requirements. The Company expects to fund these resource requirements with its cash on hand, the sales of certain assets, the proceeds from its expected federal tax refund of approximately $9.0 million, and the proceeds from certain transactions being contemplated between the Company and Chancellor. If certain of these transactions are either not completed or not completed in a timely fashion or modified in such a way as to significantly reduce the expected proceeds to the 7 CAREMATRIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Company, then the Company would expect to be unable to meet its then current obligations. Additionally, on April 25, 2000, the Company was notified by Nasdaq that its stock would begin trading under the symbol "CMDCe" due to the failure of the Company to file its Annual Report on Form 10-K for the year ended December 31, 1999. Although the Company filed its Annual Report on Form 10-K on July 5, 2000, and was not delisted, the Company received notice from Nasdaq on July 7, 2000, that its stock would be delisted if the price of the Company's common stock did not meet the minimum bid requirement of $1.00 per share on or before October 9, 2000, and immediately thereafter the stock must evidence a closing bid price of at least $1.00 per share for at least ten consecutive trading days. In the event the price of the Company's stock does not meet the minimum bid requirements, the Company is prepared to effect a reverse stock split to meet such requirement. On July 24, 2000, the Company's stock began trading under the symbol "CMDC." As of the date of this Report, the Company's common stock has not been delisted. If the Company's common stock were delisted and was ineligible to be traded on either a national exchange or automated trading market, such an event would constitute a Repurchase Event, as defined under the Company's $115,000,000 6.25% Convertible Notes (see Note 9 of the 1999 Form 10-K). In a Repurchase Event, the holders of the Notes could exercise a put option and require the Notes to be repaid. Such an event would likely result in the Company filing for protection under Chapter 11 of the United States Bankruptcy Code. The Company's common stock could also be delisted from Nasdaq both as the result of failing to comply with the minimum requirements regarding the market value of public float and if its tangible net worth were to fall below $4.0 million. Additionally, Nasdaq has also notified the Company that it must timely file all periodic reports required by the Securities and Exchange Commission and Nasdaq for all reporting periods ending on or before June 30, 2001. In the event the Company is unable to continue as a going concern, assets may not be recovered at their current carrying value and certain liabilities may not be settled at their current carrying amount. 6. LITIGATION CareMatrix Corporation and five of its officers and directors have been named as defendants in fourteen class action lawsuits filing in the United States District Court for the District of Massachusetts, one filed by Jonathan Polansky on November 3, 1999, another filed by John P. Delmonico on November 5, 1999, another filed by James Cosentino on November 5, 1999, another filed by Miriam Nathan on November 5, 1999, another filed by Patti Lisa on November 5, 1999, another filed by Leroy E. Schober on November 12, 1999, another filed by Bradley Dunham on November 15, 1999, and another filed by Donald Camp, Marie Camp and Arthur Boxer on December 23, 1999, another filed by Irving Ravens on December 14, 1999, another filed by Gary A. Fryan and Michael B. London on December 3, 1999, another filed by Brock Haynes on November 22, 1999, another filed by Edward J. Oest on November 30, 1999. The complaints all make substantially the same claims. Each complaint alleges that the defendants violated the federal securities laws by making material misstatements and omissions in certain of CareMatrix's public filings and statements during 1998 and 1999. Specifically, the complaints allege that such statements and omissions had the effect of artificially inflating the market price for CareMatrix's common stock until the disclosure by CareMatrix on October 7, 1999 of its expectation that results for the third quarter and for the full year were not likely to meet analysts' consensus anticipated levels. Damages are unspecified. CareMatrix and each of its directors have been named as defendants in a class action lawsuit filed in the Court of Chancery of the State of Delaware for New Castle County. This class action was filed by the Howard Gunty Profit Sharing Plan on August 18, 1999. The complaint alleges that the defendants are engaged in a course of action that constitutes a breach of their fiduciary and other common law duties to the public shareholders of CareMatrix. Specifically, the complaint alleges that the defendants are preparing to execute a management-led buy-out or other strategic alternatives that would be unfair to the public shareholders of CareMatrix. Plaintiffs seek an 8 CAREMATRIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) injunction preventing any such buy-out or, in the event that such a buy-out is consummated, an order from the court setting it aside. Plaintiffs also seek damages and costs of an unspecified amount. A subsidiary of the Company (the "Subsidiary") has been named as a defendant in a lawsuit filed in the Supreme Court of the State of New York, County of Nassau. This lawsuit was filed on October 26, 1999 in the name of Great Neck Holding, LLC and The Mayfair at Glen Cove, LLC, the owners of two senior housing facilities located in Long Island, New York. The amended complaint alleges that the Subsidiary has breached its duties under certain management agreements covering the two facilities. The plaintiffs seek an accounting by the Subsidiary as to all funds received and expended by it with respect to the facilities covered by the management agreements, as well as damages of at least $1,000,000 and costs. In addition, the plaintiffs are seeking injunctive relief, preventing the Subsidiary from entering the subject properties or otherwise interfering with the plaintiffs' operation of the subject properties. The Subsidiary has filed a lawsuit in the same court against plaintiffs and another entity and two individuals who acted to allegedly terminate the Subsidiary as Manager without notice or cause as required under the management agreements. The complaint in the Subsidiary's action seeks to enjoin those parties from taking any further action to terminate the management agreements, as well as damages and costs. On March 30, 2000, the Subsidiary's motion for preliminary injunctive relief was granted (which included giving the manager the right to manage the facilities on the condition that the Subsidiary post an undertaking in the amount of $1,000,000) and the Plaintiff's motions for preliminary injunctive relief were denied. The Subsidiary has also sued the company allegedly hired to replace the Subsidiary as Manager of the two facilities, for tortiously interfering with the Subsidiary's rights and performance of its obligations under the management agreements. That action was filed in the United States District Court for the Eastern District of New York. The complaint in this lawsuit seeks damages, costs, and injunctive relief. The defendant has answered the complaint, denying certain of the material allegations and asserting affirmative defenses. The defendant filed motions seeking (i) a stay of the action against it pending the outcome of the two state-court lawsuits between the Subsidiary and the owners, discussed above, and (ii) dismissal of one of the two claims for relief asserted in the complaint. On May 5, 2000, the United States District Court granted the Subsidiary permission to amend the complaint to address an alleged pleading defect and otherwise denied the defendant's motion to dismiss that claim. Accordingly, on May 8, 2000, the Subsidiary filed an amended complaint. On May 11, 2000, the District Court denied the defendant's motion for a stay of the proceedings until the litigation with the Owners is resolved. CareMatrix has been named as a nominal defendant and each of its directors has been named as defendant in two shareholder derivative class action lawsuits filed in the Court of Chancery of the State of Delaware for New Castle County. These class action lawsuits were filed by Patty Lisa and Magda Sejas on December 13, 1999. The complaint alleges that the defendant directors have breached their fiduciary duties to CareMatrix and damaged the goodwill and reputation of CareMatrix. Specifically, the complaint alleges that the defendant directors engaged in wrongful self-dealing transactions, encouraged and allowed the improper self-dealing complained of, failed to take action to stop such conduct resulting in, among other adverse consequences, federal securities lawsuits against CareMatrix, exposed CareMatrix to losses and took no steps to remove or institute legal action against those officers, directors and employees responsible for permitting the alleged misconduct. The plaintiffs seek an injunction requiring an accounting by the defendant directors to CareMatrix of the damages suffered by CareMatrix and the establishment and maintenance of effective compliance programs to ensure that CareMatrix's affiliates and employees do not engage in wrongful and self-dealing practices. The plaintiffs also seek unspecified costs and disbursements in connection with the action. CareMatrix has been named as a defendant in a civil suit filed by Mariner Health Resources, Inc. and Prism Rehab Systems, Inc. in the Superior Court for Suffolk County, Massachusetts. The suit arises from the termination in 1998 of various management, consulting and services agreements between certain subsidiaries of CareMatrix and 9 CAREMATRIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) the plaintiffs in connection with certain skilled nursing facilities in Maryland, Massachusetts, New Jersey and Florida. The plaintiffs allege that CareMatrix failed to pay approximately $3.3 million owed to the plaintiffs, plus interest and costs, under the terms of the termination agreements between CareMatrix, certain of CareMatrix's subsidiaries and the plaintiffs. CareMatrix and its subsidiaries have denied these allegations and have counterclaimed against the plaintiffs and their corporate parent, Mariner Post-Acute Network, Inc. ("MPAN"), seeking a declaration that no monies are presently due under the termination agreements at issue. CareMatrix and its subsidiaries also seek damages for certain misconduct by the plaintiffs and MPAN relating to the management of the facilities, including, among other items, the fraudulent misrepresentation of amounts due from Medicaid at the Maryland skilled nursing facility. On January 12, 2000, plaintiffs and MPAN filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code, staying the foregoing litigation. CareMatrix Corporation and another entity have been named as defendants in a class action lawsuit filed in the Supreme Court of the State of New York, County of Nassau. The action was filed by Rosalind Romuno on June 15, 2000. The Complaint alleges that the defendants breached their contractual obligations to pay for certain medical services covered under the Company's health plan. The plaintiff seeks injunctive relief requiring the defendants to pay for past, present and future medical services covered under the Company's health plan, to take all actions necessary to ensure that no entity will seek enforcement against the plaintiff and other members of the class for medical services covered under the Company's health plan, and to ensure that the credit rating of the plaintiff and other members of the class is not affected by the defendant's actions, and also seeks unspecified damages and costs. CareMatrix has been named as a nominal defendant and each of its directors and a former director have been named as defendants in a shareholder derivative class action lawsuit filed in the court of Chancery of the State of Delaware for New Castle County. This class action was filed by Patty Lisa and Magda Sejas on August 1, 2000. The complaint alleges that the defendant directors have breached their fiduciary duties to CareMatrix by approving of the termination of various management contracts with Chancellor in connection with the sale by Chancellor of various assets without fairly compensating CareMatrix for the loss of its management rights and without paying CareMatrix the receivables owed by Chancellor to CareMatrix. The plaintiffs seek an injunction preventing the defendants from taking any steps in furtherance of the sale of the Chancellor Entities' assets, recission of the termination of the management agreements with the Chancellor Entities and requiring an accounting by the defendants to CareMatrix for the damages suffered by CareMatrix. The plaintiffs also seek unspecified costs and disbursements in connection with the action. The Company believes it has meritorious defenses to each of the actions described above and intends to vigorously defend each such action. The Company does not currently expect the outcome of any of the litigation, referenced above, to have a material adverse impact on its financial position, results of operations and cash flows. The Company is also subject to litigation with various vendors as a result of either contracts entered into or services provided related to facilities the Company has developed and/or managed. The current aggregate amount of such claims outstanding is approximately $3.9 million. Although the Company intends to settle or otherwise resolve these claims, there can be no assurance any or all such settlements or resolutions will be successful. Although an unfavorable outcome of any individual claim would be unlikely to have a material adverse impact on the Company, an unsuccessful resolution of a number of such claims could, in the aggregate, have a material adverse impact on the Company's financial position, results of operations, and cash flows. The Company has not currently recorded a reserve to cover such potential claims as the range of unsuccessful outcomes of such litigation cannot be reasonably estimated at this time. 7. SUBSEQUENT EVENTS. On August 14, 2000, the Company announced that it had elected to utilize the 30 day grace period for the $3.6 million semi-annual interest payment due on August 15, 2000, for its 6.25% Convertible Notes. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company is a provider of assisted living services to the elderly. At June 30, 2000, the Company operated 51 facilities in 13 states with a capacity of approximately 5,591 units. Of the facilities, 13 are owned, 19 are leased or operated under long-term management agreements, 13 are managed or operated under capital leases, and 6 new facilities are consolidated for accounting purposes. The Company provides assistance with the activities of daily living and other personalized support services in a residential setting for elderly residents who cannot live independently but who do not need the level of medical care provided in a skilled nursing facility. The Company also provides additional specialized care and services to residents with certain low acuity medical needs and residents with Alzheimer's disease or other forms of dementia. By offering this full range of services, the Company is able to accommodate the changing needs of residents as they age within a facility and develop further physical or cognitive frailties. The Company currently derives its revenues primarily from resident fees for the delivery of independent and assisted living and other long-term care services. Resident fees typically are paid monthly by residents, their families or other responsible parties. Resident fees and management fees are recognized as revenues when services are provided. The Company has made forward-looking statements in this Report (and in documents that are incorporated by reference) that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or future results of operations of CareMatrix. Also, when the Company uses words such as "believes," "expects," "anticipates," or similar expressions, it is often, but not always, making forward-looking statements. Stockholders should note that many factors could affect our future financial results and could cause such results to differ materially from those expressed in our forward-looking statements. Those factors include, but are not limited to, the following: o risks related to the Company's operating history and available financing; o risks related to the potential delisting of the Common Stock from the Nasdaq Stock Market; o risks related to the Company's evaluation and implementation of strategic alternatives; o risks inherent in the construction and development industry; o uncertainty about the changing regulatory environment; o risks related to competition; o risks related to the litigation pending against the Company; o risks related to the Company's ability to attract and retain key personnel; and o risks related to the ability of the Chancellor Entities' (the entities that own a majority of the facilities the Company develops and operates) to obtain adequate financing to fund the facilities during start-up and any equity needed, including cash for operating losses, to meet bank covenants, and to fund any amounts owed to the Company. Any inability to do so, or any default by Chancellor under its debt obligations, could have a material adverse effect on the Company's financial position, results of operations, and cash flows (see Note 5 and Note 17 of the 1999 Form 10K). As used herein "Chancellor" or "Chancellor Entities" refer to Chancellor Senior Housing Group, Inc., Abraham D. Gosman (Chief Executive Officer and Chairman of the Board of the 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Company) or companies in which Mr. Gosman and certain current and former members of the Company's senior management exercise significant control. All references to "Notes" contained herein refer to Notes to Consolidated Financial Statements in this Form 10-Q, and all references to "1999 Form 10-K" contained herein refer to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, unless otherwise specified. The quarter ended June 30, 2000 compared to the quarter ended June 30, 1999 REVENUES. Resident operations revenue decreased by $6.9 million for the second quarter of 2000 compared to the same period in 1999. The change is comprised of increases in revenue from comparable facilities of $0.8 million, $0.1 million from new facilities, and $1.0 million from new facilities that the Company is required to consolidate for accounting purposes (see Note 1), offset by a decrease of $3.2 million in revenue from facilities that were sold, and $5.6 million decline in revenue in fees related to management contracts and other services both as a result of the decrease in the total number of facilities under construction and in operation and the Company's decision to not recognize revenue in situations where the Company is still providing services but where it is more likely than not that such revenue will not ultimately be realized. Included in resident operations revenue in the second quarter of 1999 was $2.5 million earned from marketing and management services provided to facilities under construction per the terms of existing development agreements. The Company did not record any development fee income in the second quarter of 2000 as a result of the termination of the remaining projects in the Company's development pipeline during 1999 (see Note 17 of the 1999 Form 10-K). The Company does not currently intend to develop additional projects. FACILITY EXPENSES. Facility operating expenses were $33.0 million in the second quarter of 2000 compared to $31.3 million in the same period of 1999, an increase of $1.7 million. The increase is comprised of $1.7 million from comparable facilities, $0.2 million from new facilities, and $1.8 million of start up and other operating costs from facilities the Company consolidates for accounting purposes, offset by a $2.0 million decrease in operating expenses from facilities that were sold. Included in facility operating expenses in the second quarter of 1999 was a credit of $1.6 million representing an adjustment of lost revenue due to the implementation of Medicare's Prospective Payment System. Although the Company's leases with Chancellor provide indemnification for such change in governmental regulations, the Company did not record a benefit for this indemnification agreement in the second quarter of 2000 since it is more likely than not that such benefit will not ultimately be realized. Facility lease expense was $4.1 million in the second quarter of 2000 compared to $4.9 million in the same period in 1999. The decrease is primarily due to the sale of one facility in the first quarter of 2000. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $7.1 million in the second quarter of 2000 compared to $5.5 million in the comparable period in 1999. Decreases in corporate overhead due to the restructuring of the Company were offset by severance, professional, legal, and insurance costs as a result of the Company's review of strategic alternatives (see Note 5 and Note 17 of the 1999 Form 10-K) and various litigation in which the Company is currently involved (see Note 6). Included in general and administrative costs in the second quarter of 2000 is a charge of $1.9 million related to the write-off of the remaining balance of certain development fee receivables from a third-party as a result of the termination of the associated development and management contracts. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the second quarter of 2000 increased $1.3 million compared to the same period in 1999. The increase is due primarily to $0.2 million of incremental amortization of capital lease assets and $1.3 million of depreciation and amortization from new facilities which the Company is required to consolidate for accounting purposes, partially offset by a decline of $0.2 million in the amortization of certain intangible assets as a result of the asset impairment charges recorded in 1999 (see Note 17 of the 1999 Form 10-K). INTEREST AND OTHER INCOME AND INTEREST AND OTHER EXPENSE. Interest and other income for the second quarter of 2000 was $0.1 million compared to $2.1 million for the same period in 1999. The decrease in interest income is due to lower average cash balances during 2000 compared to 1999 and a decrease in related party interest income of $0.9 million as a result of the Company's decision to not recognize income in situations where it is more likely than not that such income will not be realized. Interest and other expense for the second quarter of 2000 increased to $7.6 million from $4.7 million for the same period in 1999. The increase in interest expense is primarily due to $0.3 million of incremental interest related to facilities which were refinanced during 1999 (see Note 10 of the 1999 Form 10-K), $2.4 million of interest expense related to facilities which the Company is required to consolidate for accounting purposes, and an increase in the cost of borrowing under the Company's line of credit. INCOME TAXES. The Company's effective tax rate during the second quarter of 2000 was 3.2 % compared to 39.5% in 1999. The change in the effective tax rate is due both to the Company's inability to recognize deferred tax benefits because it is more likely than not that some portion of the deferred tax assets would not be realized and the limitations on the utilization of loss carrybacks at the state level. The six months ended June 30, 2000 compared to the six months ended June 30, 1999 REVENUES. Resident operations revenue decreased by $9.9 million through June 30, 2000, compared to the same period in 1999. The change is comprised of increases in revenue from comparable facilities of $3.0 million, $2.3 million from facilities that are contributing a full six months of revenue in 2000 compared to three months in 1999, $0.1 million from new facilities, and $1.2 million from new facilities that the Company is required to consolidate for accounting purposes (see Note 1), offset by a decrease of $5.1 million in revenue from facilities that were sold, and a $11.4 million decline in revenue in fees related to management contracts and other services both as a result of the decrease in the total number of facilities under construction and in operation and the Company's decision to not recognize revenue in situations where the Company is still providing services but where it is more likely than not that such revenue will not ultimately be realized. Included in resident operations revenue through June 30, 1999 was $7.0 million earned from marketing and management services provided to facilities under construction per the terms of existing development agreements. The Company did not record any development fee income during 2000 as a result of the termination of the remaining projects in the Company's development pipeline during 1999 (see Note 17 of the 1999 Form 10-K). The Company does not currently intend to develop additional projects. FACILITY EXPENSES. Facility operating expenses were $68.3 million through June 30, 2000, compared to $59.7 million in the same period of 1999, an increase of $8.6 million. The increase is comprised of $5.7 million from comparable facilities, $2.9 million from non-comparable facilities, $0.3 million from new facilities, and $2.9 million of start up and other operating costs from facilities the Company consolidates for accounting purposes, partially offset by a decrease in expenses of $3.2 million from facilities that were sold. Included in facility operating expenses in the six months ended June 30, 1999, was a credit of $2.8 million representing an adjustment of lost revenue due to the implementation of Medicare's Prospective Payment System. Although the Company's 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) leases with Chancellor provide indemnification for such change in governmental regulations, the Company did not record a benefit for this indemnification agreement in 2000 since it is more likely than not that such benefit will not ultimately be realized. Facility lease expense was $9.4 million through June 30, 2000, compared to $9.5 million in the same period in 1999. Increases in lease expense due to increased cash flow rent payments in 2000 compared to the same period in 1999 were offset by a decline in lease expense as a result of the sale in the first quarter of 2000 of the Company's interest in a sublease. Such cash flow rent payments are based on the profitability of the specific facility. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $12.0 million through June 30, 2000, compared to $10.3 million in the comparable period in 1999. Decreases in corporate overhead due to the restructuring of the Company were offset by severance, professional, legal, and insurance costs as a result of the Company's review of strategic alternatives (see Note 5 and Note 17 of the 1999 Form 10-K) and various litigation in which the Company is currently involved (see Note 6). Included in general and administrative costs in the six months ended June 30, 2000, is a charge of $1.9 million related to the write-off of the remaining balance of certain development fee receivables from a third-party as a result of the termination of the associated development and management contracts. DEPRECIATION AND AMORTIZATION. Depreciation and amortization through June 30, 2000, increased $1.8 million compared to the same period in 1999. The increase is due primarily to $0.5 million of incremental amortization of capital lease assets, $1.4 million of depreciation and amortization from new facilities which the Company is required to consolidate for accounting purposes, and $0.3 million from the amortization of other intangible assets, partially offset by a decline of $0.4 million in the amortization of certain intangible assets as a result of the asset impairment charges recorded in 1999 (see Note 17 of the 1999 Form 10-K). INTEREST AND OTHER INCOME AND INTEREST AND OTHER EXPENSE. Interest and other income through June 30, 2000 was $0.3 million compared to $3.6 million for the same period in 1999. The decrease in interest income is due to lower average cash balances during 2000 compared to 1999 and a decrease in related party interest income of $1.6 million as a result of the Company's decision to not recognize income in situations where it is more likely than not that such income will not be realized. Included in other income in 1999 is $1.0 million from the Company's investments in two limited partnerships. Interest and other expense through June 30, 2000, increased to $14.1 million from $9.2 million for the same period in 1999. The increase in interest expense is primarily due to $0.7 million of incremental interest related to facilities which were refinanced during 1999 (see Note 10 of the 1999 Form 10-K), $2.8 million of interest expense related to facilities which the Company is required to consolidate for accounting purposes, and an increase in the cost of borrowing under the Company's line of credit. Also included in other expense in the first quarter of 2000 is a $1.4 million charge which represents the net write-off of the remaining balance of a lease deposit related to an interest in a sublease that was sold (see Note 2). INCOME TAXES. The Company's effective tax rate through June 30, 2000, was 3.2 % compared to 39.5% in 1999. The change in the effective tax rate is due both to the Company's inability to recognize deferred tax benefits because it is more likely than not that some portion of the deferred tax assets would not be realized and the limitations on the utilization of loss carrybacks at the state level. LIQUIDITY AND CAPITAL RESOURCES 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Cash and cash equivalents at June 30, 2000, were $1.7 million compared to $4.3 million at December 31, 1999, a decrease of $2.6 million. Cash used by operations was $1.5 million through June 30, 2000, compared to a use of $10.8 million for the same period in 1999. This use of cash is comprised of $23.1 million of net loss before depreciation and amortization, a $14.3 million increase in other working capital items, $5.5 million of noncash expenses related to facilities the Company consolidates for accounting purposes, $1.5 million for accrued interest on capital lease obligations, and the charge of $2.4 million related to the write-off of the unamortized lease costs related to a sublease interest that was sold (see Note 2), partially offset by an increase in accounts receivable of $2.0 million. Cash provided by investing activities was $1.1 million through June 30, 2000, compared to a use of $11.7 million for the same period in 1999. The source of cash was primarily due to a net of $2.4 million received from the sale of the Company's interest in a sublease (see Note 2), $0.6 million received from the sale of a parcel of investment property to a third party, partially offset by $0.7 million in additions to property and equipment, $0.6 million used for a purchase deposit on one facility, and an increase in restricted cash of $0.4 million. Cash flows used by financing activities were $2.2 million through June 30, 2000, compared to $22.9 million provided by fiancing activities for the same period in 1999. The use of cash is primarily due to $1.9 million of debt repayments. The Company has incurred significant operating losses and is dependent upon certain future transactions to generate sufficient cash flow. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has planned several initiatives to mitigate this doubt including the restructuring and reduction of its corporate overhead, sales of certain assets, negotiation of a settlement agreement with Chancellor to liquidate the remaining receivables, and negotiating agreements with its lending institution to be fully paid after the consummation of certain sale transactions. If these initiatives are successful, the Company believes its remaining operations will allow it to return to profitability. The Company will require resources in the future to fund its working capital requirements. The Company expects to fund these resource requirements with its cash on hand, the sales of certain assets, the proceeds from its expected federal tax refund of approximately $9.0 million, and the proceeds from certain transactions being contemplated between the Company and Chancellor. If certain of these transactions are either not completed or not completed in a timely fashion or modified in such a way as to significantly reduce the expected proceeds to the Company, then the Company would expect to be unable to meet its then current obligations. Additionally, on April 25, 2000, the Company was notified by Nasdaq that its stock would begin trading under the symbol "CMDCe" due to the failure of the Company to file its Annual Report on Form 10-K for the year ended December 31, 1999. Although the Company filed its Annual Report on Form 10-K on July 5, 2000, and was not delisted, the Company received notice from Nasdaq on July 7, 2000, that its stock would be delisted if the price of the Company's common stock did not meet the minimum bid requirement of $1.00 per share on or before October 9, 2000, and immediately thereafter the stock must evidence a closing bid price of at least $1.00 per share for at least ten consecutive trading days. In the event the price of the Company's stock does not meet the minimum bid requirements, the Company is prepared to effect a reverse stock split to meet such requirement. On July 24, 2000, the Company's stock began trading under the symbol "CMDC." As of the date of this Report, the Company's common stock has not been delisted. If the Company's common stock were delisted and was ineligible to be traded on either a national exchange or automated trading market, such an event would constitute a Repurchase Event, as defined under the Company's $115,000,000 6.25% Convertible Notes (see Note 9 of the 1999 Form 10-K). In a Repurchase Event, the holders of the Notes could exercise a put option and require the Notes to be repaid. Such an event would likely result in the Company filing for protection under Chapter 11 of the United States Bankruptcy Code. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company's common stock could also be delisted from Nasdaq both as the result of failing to comply with the minimum requirements regarding the market value of public float and if its tangible net worth were to fall below $4.0 million. Additionally, Nasdaq has also notified the Company that it must timely file all periodic reports required by the Securities and Exchange Commission and Nasdaq for all reporting periods ending on or before June 30, 2001. In the event the Company is unable to continue as a going concern, assets may not be recovered at their current carrying value and certain liabilities may not be settled at their current carrying amount. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk from exposure to changes in interest rates based on its financing, investing and cash management activities. The Company does not expect changes in interest rates to have a material effect on income or cash flows for the year ended June 30, 2000, although there can be no assurances that interest rates will not significantly change. 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS CareMatrix Corporation and five of its officers and directors have been named as defendants in fourteen class action lawsuits filing in the United States District Court for the District of Massachusetts, one filed by Jonathan Polansky on November 3, 1999, another filed by John P. Delmonico on November 5, 1999, another filed by James Cosentino on November 5, 1999, another filed by Miriam Nathan on November 5, 1999, another filed by Patti Lisa on November 5, 1999, another filed by Leroy E. Schober on November 12, 1999, another filed by Bradley Dunham on November 15, 1999, and another filed by Donald Camp, Marie Camp and Arthur Boxer on December 23, 1999, another filed by Irving Ravens on December 14, 1999, another filed by Gary A. Fryan and Michael B. London on December 3, 1999, another filed by Brock Haynes on November 22, 1999, another filed by Edward J. Oest on November 30, 1999. The complaints all make substantially the same claims. Each complaint alleges that the defendants violated the federal securities laws by making material misstatements and omissions in certain of CareMatrix's public filings and statements during 1998 and 1999. Specifically, the complaints allege that such statements and omissions had the effect of artificially inflating the market price for CareMatrix's common stock until the disclosure by CareMatrix on October 7, 1999 of its expectation that results for the third quarter and for the full year were not likely to meet analysts' consensus anticipated levels. Damages are unspecified. CareMatrix and each of its directors have been named as defendants in a class action lawsuit filed in the Court of Chancery of the State of Delaware for New Castle County. This class action was filed by the Howard Gunty Profit Sharing Plan on August 18, 1999. The complaint alleges that the defendants are engaged in a course of action that constitutes a breach of their fiduciary and other common law duties to the public shareholders of CareMatrix. Specifically, the complaint alleges that the defendants are preparing to execute a management-led buy-out or other strategic alternatives that would be unfair to the public shareholders of CareMatrix. Plaintiffs seek an injunction preventing any such buy-out or, in the event that such a buy-out is consummated, an order from the court setting it aside. Plaintiffs also seek damages and costs of an unspecified amount. A subsidiary of the Company (the "Subsidiary") has been named as a defendant in a lawsuit filed in the Supreme Court of the State of New York, County of Nassau. This lawsuit was filed on October 26, 1999 in the name of Great Neck Holding, LLC and The Mayfair at Glen Cove, LLC, the owners of two senior housing facilities located in Long Island, New York. The amended complaint alleges that the Subsidiary has breached its duties under certain management agreements covering the two facilities. The plaintiffs seek an accounting by the Subsidiary as to all funds received and expended by it with respect to the facilities covered by the management agreements, as well as damages of at least $1,000,000 and costs. In addition, the plaintiffs are seeking injunctive relief, preventing the Subsidiary from entering the subject properties or otherwise interfering with the plaintiffs' operation of the subject properties. The Subsidiary has filed a lawsuit in the same court against plaintiffs and another entity and two individuals who acted to allegedly terminate the Subsidiary as Manager without notice or cause as required under the management agreements. The complaint in the Subsidiary's action seeks to enjoin those parties from taking any further action to terminate the management agreements, as well as damages and costs. On March 30, 2000, the Subsidiary's motion for preliminary injunctive relief was granted (which included giving the manager the right to manage the facilities on the condition that the Subsidiary post an undertaking in the amount of $1,000,000) and the Plaintiff's motions for preliminary injunctive relief were denied. The Subsidiary has also sued the company allegedly hired to replace the Subsidiary as Manager of the two facilities, for tortiously interfering with the Subsidiary's rights and performance of its obligations under the management agreements. That action was filed in the United States District Court for the Eastern District of New York. The complaint in this lawsuit seeks damages, costs, and injunctive relief. The defendant has answered the complaint, denying certain of the material allegations and asserting affirmative defenses. The defendant filed motions seeking (i) a stay of the action against it pending the outcome of the two state-court lawsuits between the Subsidiary and the owners, discussed above, and (ii) dismissal of one of the two claims for relief asserted in the complaint. On May 5, 2000, the United States District Court granted the Subsidiary permission to amend the complaint to address an alleged pleading defect and otherwise denied the defendant's motion to dismiss that claim. 17 Accordingly, on May 8, 2000, the Subsidiary filed an amended complaint. On May 11, 2000, the District Court denied the defendant's motion for a stay of the proceedings until the litigation with the Owners is resolved. CareMatrix has been named as a nominal defendant and each of its directors has been named as defendant in two shareholder derivative class action lawsuits filed in the Court of Chancery of the State of Delaware for New Castle County. These class action lawsuits were filed by Patty Lisa and Magda Sejas on December 13, 1999. The complaint alleges that the defendant directors have breached their fiduciary duties to CareMatrix and damaged the goodwill and reputation of CareMatrix. Specifically, the complaint alleges that the defendant directors engaged in wrongful self-dealing transactions, encouraged and allowed the improper self-dealing complained of, failed to take action to stop such conduct resulting in, among other adverse consequences, federal securities lawsuits against CareMatrix, exposed CareMatrix to losses and took no steps to remove or institute legal action against those officers, directors and employees responsible for permitting the alleged misconduct. The plaintiffs seek an injunction requiring an accounting by the defendant directors to CareMatrix of the damages suffered by CareMatrix and the establishment and maintenance of effective compliance programs to ensure that CareMatrix's affiliates and employees do not engage in wrongful and self-dealing practices. The plaintiffs also seek unspecified costs and disbursements in connection with the action. CareMatrix has been named as a defendant in a civil suit filed by Mariner Health Resources, Inc. and Prism Rehab Systems, Inc. in the Superior Court for Suffolk County, Massachusetts. The suit arises from the termination in 1998 of various management, consulting and services agreements between certain subsidiaries of CareMatrix and the plaintiffs in connection with certain skilled nursing facilities in Maryland, Massachusetts, New Jersey and Florida. The plaintiffs allege that CareMatrix failed to pay approximately $3.3 million owed to the plaintiffs, plus interest and costs, under the terms of the termination agreements between CareMatrix, certain of CareMatrix's subsidiaries and the plaintiffs. CareMatrix and its subsidiaries have denied these allegations and have counterclaimed against the plaintiffs and their corporate parent, Mariner Post-Acute Network, Inc. ("MPAN"), seeking a declaration that no monies are presently due under the termination agreements at issue. CareMatrix and its subsidiaries also seek damages for certain misconduct by the plaintiffs and MPAN relating to the management of the facilities, including, among other items, the fraudulent misrepresentation of amounts due from Medicaid at the Maryland skilled nursing facility. On January 12, 2000, plaintiffs and MPAN filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code, staying the foregoing litigation. CareMatrix Corporation and another entity have been named as defendants in a class action lawsuit filed in the Supreme Court of the State of New York, County of Nassau. The action was filed by Rosalind Romuno on June 15, 2000. The Complaint alleges that the defendants breached their contractual obligations to pay for certain medical services covered under the Company's health plan. The plaintiff seeks injunctive relief requiring the defendants to pay for past, present and future medical services covered under the Company's health plan, to take all actions necessary to ensure that no entity will seek enforcement against the plaintiff and other members of the class for medical services covered under the Company's health plan, and to ensure that the credit rating of the plaintiff and other members of the class is not affected by the defendant's actions, and also seeks unspecified damages and costs. CareMatrix has been named as a nominal defendant and each of its directors and a former director have been named as defendants in a shareholder derivative class action lawsuit filed in the court of Chancery of the State of Delaware for New Castle County. This class action was filed by Patty Lisa and Magda Sejas on August 1, 2000. The complaint alleges that the defendant directors have breached their fiduciary duties to CareMatrix by approving of the termination of various management contracts with Chancellor in connection with the sale by Chancellor of various assets without fairly compensating CareMatrix for the loss of its management rights and without paying CareMatrix the receivables owed by Chancellor to CareMatrix. The plaintiffs seek an injunction preventing the defendants from taking any steps in furtherance of the sale of the Chancellor Entities' assets, recission of the termination of the management agreements with the Chancellor Entities and requiring an accounting by the defendants to CareMatrix for the damages suffered by CareMatrix. The plaintiffs also seek unspecified costs and disbursements in connection with the action. 18 The Company believes it has meritorious defenses to each of the actions described above and intends to vigorously defend each such action. The Company does not currently expect the outcome of any of the litigation, referenced above, to have a material adverse impact on its financial position, results of operations and cash flows. The Company is also subject to litigation with various vendors as a result of either contracts entered into or services provided related to facilities the Company has developed and/or managed. The current aggregate amount of such claims outstanding is approximately $3.9 million. Although the Company intends to settle or otherwise resolve these claims, there can be no assurance any or all such settlements or resolutions will be successful. Although an unfavorable outcome of any individual claim would be unlikely to have a material adverse impact on the Company, an unsuccessful resolution of a number of such claims could, in the aggregate, have a material adverse impact on the Company's financial position, results of operations, and cash flows. The Company has not currently recorded a reserve to cover such potential claims as the range of unsuccessful outcomes of such litigation cannot be reasonably estimated at this time. The Company is a party to litigation in the ordinary course of business. The Company does not believe that any such litigation will have a material adverse effect on its business, financial position or results of operations. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a). The following exhibits are filed as part of this report: 3.01 Corrected Third Restated Certificate of Incorporation of CareMatrix Corporation (2) 3.02 By-laws of CareMatrix Corporation, as amended through December 9, 1996 (1) 27 Financial Data Schedule (*) (b). Reports on Form 8-K None. ---------------------- (*) Filed herewith. (1) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (2) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 19 SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities and Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CAREMATRIX CORPORATION By: /s/ Michael J. Zaccaro -------------------------------------- Michael J. Zaccaro Chief Operating Officer and Principal Accounting Officer Dated: August 14, 2000 20

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