FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-24542
CONTINENTAL CHOICE CARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW JERSEY 22-3276736
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
25-B VREELAND ROAD
FLORHAM PARK, NEW JERSEY 07932
(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number, Including Area Code (201) 593-0500
N.A.
Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _____ No _____
Applicable only to corporate issuers.
Shares outstanding as of November 12, 1996
3,237,500 shares of common stock, no par value.
Transitional Small Business Disclosure Format: Yes ____ No X
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
FORM 10-QSB
SEPTEMBER 30, 1996
PART I. FINANCIAL INFORMATION
The comparative consolidated balance sheets and statements of
operations and cash flows for Continental Choice Care, Inc. and Subsidiaries
(the "Company") are presented with management's discussion and analysis of
material changes in operations on the pages which follow.
The consolidated financial statements and accompanying financial
information as of September 30, 1996 and for the three-month and nine-month
periods ended September 30, 1996 and 1995 are unaudited but, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments and accruals) which the Company considers necessary for a fair
presentation of the financial position of the Company at such dates and the
operating results and cash flows for those periods. Results for the interim
periods are not necessarily indicative of results for the entire year. The
interim consolidated financial statements and the related notes should be read
in conjunction with the notes to the consolidated financial statements of the
Company as included in its Form 10-KSB filed with the Securities and Exchange
Commission.
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<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPT. 30, 1996 DEC. 31, 1995
--------------- -------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash........................................................................ $1,873,236 $1,341,955
Accounts receivable, less allowance for doubtful accounts of $521,000
at September 30, 1996 and $728,000 at December 31, 1995................. 730,862 1,685,888
Supplies inventories........................................................ 50,887 57,134
Deferred tax asset.......................................................... 112,670 112,670
Other current assets........................................................ 159,243 102,466
------------ -----------
Total current assets .................................................... 2,926,898 3,300,113
Amounts due from affiliates................................................. 773,273 763,273
Amounts due from consulting customers....................................... 2,683,582 2,553,475
Property and equipment, at cost, less accumulated depreciation.............. 448,718 615,698
Other assets................................................................ 228,250 10,477
------------ ------------
$7,060,721 $7,243,036
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Accounts payable.............................................................. $ 1,061,675 $1,444,461
Accrued expenses ............................................................. 305,651 341,003
Current portion of notes payable and obligations under
capital leases............................................................. 27,650 43,082
Income taxes payable.......................................................... 121,111 20,000
--------- -------------
Total current liabilities ................................................. 1,516,087 1,848,546
--------- ------------
Notes payable and obligations under capital leases,
less current portion....................................................... 50,692 83,148
Deferred income taxes and other liabilities................................... 107,242 106,159
---------- -------------
157,934 189,307
---------- -------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, no par value, 10,000,000 shares authorized
3,237,500 shares issued and outstanding
at September 30, 1996 and December 31, 1995................................ 5,414,061 5,414,061
Preferred stock, 5,000,000 shares authorized, none issued or outstanding...... --- ---
Paid-in capital............................................................... 500 500
Retained earnings (deficit)................................................... (27,861) (209,378)
------------- ------------
Total stockholders' equity.................................................... 5,386,700 5,205,183
------------ -----------
$7,060,721 $7,243,036
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
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<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, 1996 SEPT. 30, 1995 SEPT. 30, 1996 SEPT. 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Patient Revenues:
Equipment and supplies...................... $ 753,958 $1,153,817 $2,317,871 $4,051,423
Services.................................... 418,673 930,386 1,939,530 2,353,622
---------- ------------ --------- -----------
Total net patient revenues.... 1,172,631 2,084,203 4,257,401 6,405,045
--------- ----------- --------- -----------
Costs and Expenses:
Cost of goods sold.......................... 346,866 679,622 962,726 2,106,978
Cost of services............................ 196,786 233,985 655,724 785,241
Provision for doubtful accounts............. 56,400 234,083 298,018 713,362
Selling, general and administrative......... 1,205,540 1,065,594 3,739,592 3,519,229
Cost of failed acquisition and discontinuation
of infusion pharmacy.................... - 0 - - 0 - - 0 - 365,208
Depreciation and amortization............... 33,040 37,766 99,228 113,211
Interest income, net........................ (20,803) (12,830) (54,603) (48,417)
---------- ------------ -------- ----------
Total costs and expenses...... 1,817,829 2,238,220 5,700,685 7,554,812
--------- ----------- --------- ----------
Loss from operations........................... (645,198) (154,017) (1,443,284) (1,149,767)
Gain on sale of former New Jersey in-center
facility and certain other assets........... - 0 - - 0 - 1,749,080 - 0 -
----------- ----------- ------------ ----------
Income (loss) before income taxes.............. (645,198) (154,017) 305,796 (1,149,767)
Provision for income taxes..................... 2,550 -0- 124,280 -0-
------------- ---------- ---------- ------------
Net income (loss)............. $(647,748) $(154,017) $181,516 $(1,149,767)
========== ========== ======== ============
Net income (loss) per share.................... $ (.20) $ (.05) $ .06 $ (.36)
=========== ========== ========= ===========
Weighted average number of shares
outstanding................................ 3,237,500 3,237,500 3,237,500 3,237,500
========== ========== ========== =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
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<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPT. 30, 1996 SEPT. 30, 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) .................................................... $ 181,516 $(1,149,767)
Adjustments to reconcile net income (loss) to net cash
used in operating activities --
Depreciation and amortization....................................... 99,228 113,211
Provision for doubtful accounts..................................... 298,018 713,362
Gain on sale of former New Jersey in-center facility................ (1,749,080) - 0 -
Write-off unamortized pharmacy intangibles.......................... - 0 - 45,208
Decrease (increase) in accounts receivable............................ 657,008 (14,547)
Decrease in supplies inventories...................................... 6,247 43,660
Increase in other assets.............................................. (299,374) (138,715)
Increase in amounts due from affiliates .............................. (10,000) (8,800)
Increase (decrease) in accounts payable............................... (382,786) 62,361
Decrease in accrued expenses.......................................... (35,352) (10,227)
Increase (decrease) in income taxes payable........................... 101,111 (30,492)
------------- -----------
Net cash used in operating activities............................... (1,133,464) (374,746)
-------------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of former New Jersey in-center facility
and certain other assets ............................................. 2,010,330 - 0 -
Amounts loaned or advanced to consulting customers.................... (930,424) (1,418,199)
Amounts repaid by consulting customers................................ 800,317 1,248,925
Purchases of property and equipment.................................. (167,591) (182,744)
----------- ---------
Net cash provided from (used in) investing activities............ 1,712,632 (352,018)
----------- ---------
Cash Flows From Financing Activities:
Principal payments on notes payable and obligations under
capital leases.................................................. (47,887) (37,894)
------------- --------
Net increase (decrease) in cash.......................................... 531,281 (764,658)
Cash, beginning of year.................................................. 1,341,955 2,169,250
------------ -----------
Cash, end of period...................................................... $1,873,236 $1,404,592
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for income taxes............................ $ 60,455 $ 94
=========== =============
Cash paid during the year for interest................................ $ 354 $ 3,661
============= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
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<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS:
Continental Choice Care, Inc. is a New Jersey corporation incorporated
in December 1993 in connection with the reorganization of the health care
related subsidiaries and affiliated companies of TechTron, Inc., a Delaware
corporation ("TechTron"). Continental Choice Care, Inc. and its subsidiaries are
referred to collectively as the "Company." The Company is engaged primarily in
the business of providing dialysis related equipment, services and supplies to
individuals in their homes and other residential alternative sites, including
prisons and nursing homes. The Company owned and operated an in-center facility
in Cape May Court House, New Jersey, ("New Jersey In-Center Facility") for the
provision of in-center dialysis for the Company's clients. The assets of the New
Jersey In-Center Facility and certain other assets were sold by the Company in
March 1996 (the "RTC Transaction"). See "Sale of New Jersey In-Center Facility".
During fiscal year 1995, the Company commenced operations at a training center
owned by the Company in Linden, New Jersey. Training centers are freestanding
centers to train individual clients in the self-administration of dialysis
treatments ("Training Centers"). The Company is also engaged in the provision of
consulting and administrative services and acute care dialysis nursing placement
services. The Company discontinued providing infusion services in 1995.
Substantially all of the Company's revenues are dependent upon
reimbursement from third party payors, including the Medicare and Medicaid
programs and commercial insurance companies. Such third party payors maintain
standards which providers must satisfy to remain eligible for participation and
reimbursement, thus the Company's future operating results are dependent on its
ability to remain eligible for participation in such third party payor programs.
A significant portion of the Company's patients are covered by Medicare under
the End Stage Renal Disease Program ("ESRD"). This program began in 1973 through
legislation which extended benefits to qualifying individuals with permanent
kidney failure at rates set from time to time by the government. The Company is
generally reimbursed by Medicare 80% of an allowed rate established by the
government for the services rendered in connection with ESRD. The patient or
third party insurance company is responsible for the remaining 20% of the fee in
these cases. Any change in these regulations or reimbursement could have a
significant impact on the Company's operations. In addition, the continuing
efforts of third party payors to contain or reduce health care costs by lowering
reimbursement rates, increasing case management review of services and
negotiating reduced contract pricing could have a material adverse impact on the
Company's operations. The Company's operations and cash flows are dependent upon
the rate and timeliness of payment for patient services from third party payors.
In 1996 and 1995, approximately 30% and 33%, respectively, of the Company's cash
receipts were received under the Medicare program, while approximately 70% and
67%, respectively, of cash receipts were received from commercial insurance
companies or contracted entities and Medicaid programs.
- 5 -
<PAGE>
The health care industry is subject to extensive government
regulations. Such regulations are broad and subject to change and
interpretation. Such regulations do not specifically address certain of the
Company's business arrangements and it is possible the Company's past or present
arrangements or business practices could be challenged. Regulations could be
amended or interpreted to require the Company to change its practices or
business arrangements, the impact of which could have a material adverse effect
on the Company's business and prospects.
The Company is dependent upon referrals of patients for treatment by
physicians practicing in communities served by the Company. A limited number of
physicians account for a significant portion of the Company's patient referral
base. The loss of key referring physicians could have a material adverse impact
on the Company's operations.
(2) EARNINGS PER SHARE:
Earnings (loss) per share is computed by dividing the net income by the
weighted average number of common shares outstanding during the periods. The
impact of common stock equivalents is antidilutive and thus not included in the
calculation of earnings (loss) per share in 1996 and 1995.
(3) RELATED PARTY TRANSACTIONS:
As of September 30, 1996 and December 31, 1995, $90,232 and $550,754
respectively, was due from the South Bronx Kidney Center, a dialysis facility
located in the Bronx section of New York (the "Bronx Facility"), and is included
in amounts due from consulting customers in the accompanying consolidated
balance sheets. The amounts are net of certain transactions not recorded due to
realization uncertainties.
Alpha Administration Corp. ("Alpha"), an entity owned by the
Company's Chairman, President and Corporate Medical Director ("Certain Executive
Officers"), entered into an Agreement for Purchase of Assets ("Purchase
Agreement") with National Nephrology Foundation ("NNF"), an Amended Employment
Agreement with the Estate of Norman Deane, M.D., the former medical director of
the Bronx Facility (the "Estate"), and certain related agreements. The new
agreements supersede the agreements previously in effect between and among
Alpha, NNF and the Estate. Under the terms of the Purchase Agreement, NNF agreed
to sell to Alpha substantially all of the assets of the Bronx Facility,
including accounts receivable and cash. The purchase price is equal to $650,000
previously paid to NNF in respect of the Bronx Facility plus an amount not in
excess of $95,000 to pay certain expenses of NNF plus the waiver of certain fees
due Alpha and to the Company to the extent such fees exceed the cash available
to NNF for the operations of the Bronx Facility. Alpha will also assume certain
liabilities arising out of the operations of the Bronx Facility. Alpha obtained
the right to be paid its accrued and current fees under the Consulting and
Service Agreement with NNF on an unsubordinated basis to the extent of available
cash of the Bronx Facility. The Company remains liable for the payment of net
cash shortfalls, if any, prior to the closing of the transaction or
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<PAGE>
other termination of the Agreement. The closing of the asset purchase
transaction is subject to certain conditions, including the approval of the
Attorney General of the State of New York and final approval of the New York
Department of Health. Upon execution of the agreement, NNF paid $310,000 to
reduce its outstanding liabilities to the Company. Under the terms of the
Amended Employment Agreement, the parties agreed to settle all amounts
outstanding under the original employment agreement with Dr. Deane for the sum
of $225,000, $25,000 of which was paid to the Estate upon the execution of the
Amended Employment Agreement and the remainder of which was paid into escrow and
is included in the balance sheet as of September 30, 1996 in Other Assets. The
escrowed funds will be released upon the closing of the transaction contemplated
by the Purchase Agreement, if any, provided, however, that $50,000 may be
released six months following the execution of the Amended Employment Agreement
upon the occurrence of certain events.
The Company has also advanced funds to Continental Dialysis of the
Bronx, Inc. ("CDBI") for the construction of a new In-Center Dialysis Facility
in the Bronx, New York, a company owned by Certain Executive Officers. At
December 31, 1995, $479,000 had been advanced to CDBI. Additional 1996 advances
to CDBI through September 30, 1996 totaled $594,755. At September 30, 1996,
$1,073,755 was due from CDBI and has been included in amounts due from
consulting customers. The Company also is the guarantor of a lease for CDBI.
The Company, as well as Certain Executive Officers, have guaranteed an
aggregate of $2,400,000 of bank credit facilities of the Upper Manhattan
Dialysis Center, Inc. ("UMDC") to construct the UMDC facility and to provide
working capital to UMDC. The facilities are comprised of a $500,000 Credit
Facility (the "Revolver") and separate loans originally totalling $1,900,000. As
of September 30, 1996, an aggregate of $1,519,000 was outstanding under the
credit facilities. Under the terms of the Revolver, which was renewed and
matured in August, 1996, certain amounts due the Company are subordinated to
UMDC's obligations to the bank. The Company and UMDC are currently negotiating
with the bank to extend the term of the Revolver to December 31, 1997. No
assurance can be given that the term of the Revolver will be extended or that
the bank will not call upon the guarantees of the Company or Certain Executive
Officers. In addition, amounts due the Company from UMDC may not be paid if UMDC
is in default under the terms of the $1,900,000 credit facility. In December
1995, Certain Executive Officers acquired an aggregate of 50% of the common
stock of UMDC. In 1994, the Company loaned certain principals of UMDC (who are
not affiliated with the Company) $450,000 and UMDC an aggregate of $304,524 at a
designated prime rate less 1%. Certain of these loans are due on demand and
certain of these loans which were due on various stated maturity dates have been
extended by the Company to become due on November 30, 1995. These notes remain
outstanding as of September 30, 1996. The Company currently intends to extend
the due dates. In addition, the Company provided equipment and supplies to UMDC
aggregating $846,492 through September 30, 1996 at no margin. These amounts and
the previously mentioned loans to UMDC and its principals are included in
amounts due from consulting customers in the accompanying consolidated balance
sheets. The total amounts due from UMDC and its principals of $1,519,595 and
$1,523,284 as of September 30, 1996 and December 31, 1995, respectively, are net
of certain transactions not recorded due to realization uncertainties. The
Company is the guarantor of a lease for UMDC.
- 7 -
<PAGE>
(4) SALE OF NEW JERSEY IN-CENTER FACILITY:
In March 1996, Courthouse Dialysis, Inc., a subsidiary of the Company,
sold substantially all of its assets, including the New Jersey in-center
facility to Renal Treatment Centers - New Jersey, Inc. ("RTC - NJ") and
Continental Dialysis, Inc. sold its rights to provide certain services to
designated patients in the Cape May Court House, New Jersey area to RTC Supply,
Inc. The respective buyers of the assets are subsidiaries of Renal Treatment
Centers, Inc. ("RTC"). The prices paid in the all-cash transaction were
approximately $1,370,000 to Courthouse Dialysis, Inc. and approximately $640,000
to Continental Dialysis, Inc. and resulted in an aggregate net gain of
$1,749,080. A significant portion of the proceeds received by Courthouse
Dialysis, Inc. were used to repay intercompany balances due to other
subsidiaries of the Company. The obligations of the buyers were guaranteed by
RTC and the obligations of the sellers were guaranteed by the Company. In
connection with the transaction, the Company and Certain Executive Officers
entered into a Covenant Not to Compete which obligates each of them to refrain
from competing with the buyers and RTC in New Jersey within 35 miles of Cape May
Court House, New Jersey in certain businesses for a term of seven years. The
restricted activities include most of those previously conducted by the Company
in the covered area.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Nine Months ended September 30, 1996 Compared With Nine Months ended September
30, 1995.
NET PATIENT REVENUES
Net patient revenues of the Company are derived from providing
equipment and supplies to patients (54% for the first nine months of 1996 and
63% for 1995) and services (46% for 1996 and 37% for 1995), which services
consist of contract nursing services and dialysis treatments provided by the
Company's former New Jersey in-center facility and the Training Facility. In
1996 and 1995, 30% and 33%, respectively, of the Company's cash receipts were
received under the Medicare program, while approximately 70% and 67%,
respectively, of cash receipts were received from commercial insurance companies
or contracted entities and Medicaid programs.
The Company anticipates that Medicare payments will continue to be a
major source of revenue. The reimbursement rates for dialysis treatments and for
Epogen, a dialysis medication, are separately determined by Medicare and are
subject to change from time to time. The Medicare reimbursement rate for
dialysis treatments per month per patient was $1,193 in both 1996 and 1995. The
Company is dependent upon such factors as substantial government regulation and
the ability to grow and be profitable in a highly competitive industry.
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<PAGE>
Competition for patients and referral sources in the dialysis business
is highly competitive. The Company competes with many health care providers
ranging in size from single location in-center facilities and small home health
care providers to regional and national companies, and may face additional
competition from others that may decide to enter into business in the geographic
areas served by the Company. Many of the Company's competitors have
substantially greater financial resources than the Company. In addition, the
Company faces competition from other health care providers seeking acquisition
candidates of the type and size which are or may in the future be sought by the
Company. There is no assurance that the Company can continue to compete
effectively with such providers. In the past, the Company has been successful in
serving the home dialysis market. The combination of increased competition from
the Company's larger competitors and the pressures to reduce reimbursement rates
paid by private insurers make it difficult for the Company to maintain or
improve its revenue base. There is no assurance that the Company's increased
sales and marketing efforts will be successful in increasing the Company's net
patient revenues.
Net patient revenues for the nine month periods ended September 30 were
$4,257,401 in 1996 as compared with $6,405,045 in 1995. The decrease of
$2,147,644 is attributable to a number of factors. Sales to consulting customers
were lower by $688,707 for the first nine months of 1996 as compared to the same
period in 1995. As a result of the sale of the Company's New Jersey in-center
facility in March 1996, sales decreased by $869,828 in the first nine months of
1996 as compared to the same period in 1995. In addition, there were no net
patient revenues related to the Company's infusion services business for the
first nine months of 1996 as compared to $292,269 for 1995 as a result of the
termination of that business in June 1995. Additionally, reductions in the
Company's former southern New Jersey equipment and supplies revenues of $331,417
and New York sales of equipment and supplies of $560,408 were partially offset
by $305,880 in revenues due to the opening of the Company's Linden Training
Facility, and revenues of $336,604 relating to the Company's new Renal
Management, Inc. subsidiary.
The Company is not permitted to operate, own or control health care
facilities licensed under New York law and has, accordingly, determined to
provide services in New York through consulting, administrative, or
subcontracting service arrangements with Consulting Customers in New York. The
Consulting Customers are, or are expected to be, partially or 100% owned by the
Certain Executive Officers.
In addition, the Company is the assignee of the Bronx Facility
Agreement between Alpha and the Bronx Facility. The Bronx Facility Agreement
provides that for a maximum annual consulting fee of $240,000, the Company, as
assignee, provides various administrative and consulting services to the Bronx
Facility. The Company has also provided equipment and supplies to the Bronx
Facility under the agreement in exchange for the Company's listed cost for the
equipment and supplies. The $240,000 consulting fee is expressly subordinated to
the payment of operating expenses of the Bronx Facility arising after April 16,
1993. Effective August 1994, the Company entered into an agreement to provide
administrative and consulting services to UMDC for a monthly fee of $33,333. The
agreement with UMDC similarly provides for reimbursement to the Company for
services rendered and for its direct costs of equipment and supplies. The UMDC
agreement was automatically renewed
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<PAGE>
in 1995, extends for a period of two years and is automatically renewable for
successive two year periods unless either party decides to terminate. Neither
consulting fee has been recorded in 1996 or 1995 due to realization
uncertainties.
The Company established a new subsidiary, Renal Management, Inc.
("RMI"), to expand the scope of the Company's services and enable it to be more
directly involved in renal disease state management and nephrology practice
management. RMI intends to contract with third parties to provide care to renal
patients and to manage the overall care of renal patients for others. During the
second quarter of 1996, RMI prepared and submitted a proposal to the Health Care
Financing Administration ("HCFA") End Stage Renal Disease Managed Care
Demonstration Project ("Demonstration Project") on behalf of four New Jersey
healthcare entities (the "Consortium"). In the event a portion of the project
was awarded by HCFA to the Consortium, RMI expected to manage the project for
the Consortium. Second quarter 1996 revenues include $336,604 of RMI expenses
billed to the Consortium by RMI at no margin pursuant to a letter agreement
between the Company and the Consortium. No assurance can be given that the
Company will recover some or all of such expenses from the Consortium. In the
third quarter of 1996, the Federal Department of Health and Human Services
advised the Consortium that, in light of the Department's limited resources, the
Department could not fund the Consortium's application. Accordingly, the Company
does not expect to participate in the Demonstration Project.
COST OF GOODS SOLD/COST OF SERVICES
Cost of goods sold was $962,726 or 42% of net patient revenues
attributable to equipment and supplies in the nine months ended September 30,
1996 as compared with $2,106,978 or 52% of net patient revenues attributable to
equipment and supplies in 1995. This decrease in cost of goods sold is primarily
the result of a decrease of equipment and supplies purchased by Consulting
Customers at no margin.
The cost of services totaled $655,724 or 34% of net patient revenues
attributable to services in 1996, nearly the same as $785,241 or 33% of net
patient revenues in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses totaled $3,739,592 for the
nine months of 1996 as compared with $3,519,229 in 1995. The net increase of
$220,363 is primarily comprised of $641,344 of expenses relating to the start-up
of RMI and $135,128 pertaining to the Company's Linden training facility
partially offset by a decrease of $294,363 due to the sale of the Company's New
Jersey in-center facility and tighter control over payroll and operating costs.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts was $298,018 for the first nine
months of 1996 as compared with $713,362 in the corresponding period in 1995.
The provision for doubtful accounts
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is incurred to the extent deemed to be adequate to absorb possible losses
resulting from uncollectible receivables. Management takes into consideration
such factors as business volume, historical loss experience, regional and
economic conditions and industry trends in developing the allowance for doubtful
accounts. At September 30, 1996, the allowance for doubtful accounts was
$521,000 as compared with $728,000 as of December 31, 1995. As a percentage of
receivables outstanding, such allowance was 42% at September 30, 1996 and 30% at
December 31, 1995. Due to the reduction in current period revenues discussed
above and aggressive collection activity, the patient accounts receivable have
been significantly reduced. As a consequence, the percentage of older
receivables is larger and requires a higher percentage allowance. Management is
continuing to evaluate the collectibility of all accounts and believes the
stated allowance as of September 30, 1996 is adequate to absorb possible losses
resulting from uncollectible receivables.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense in 1996 totaled $99,228, a
decrease of $13,983 from the nine months of 1995. This decrease is primarily the
result of the write-off of intangibles related to the 1994 LDL acquisition at
year end 1995 and the sale of the Company's former New Jersey in-center facility
in March 1996.
INTEREST INCOME, NET
Net interest income was $54,603 in the nine months ended September 30,
1996 and $48,417 in 1995. Interest expense on the Company's debt obligations in
both periods was more than offset by interest earned on the remaining proceeds
from the 1994 Offering of common stock and from the sale of assets and rights in
the Cape May Courthouse, New Jersey area. See "Liquidity and Capital Resources"
and "Sale of New Jersey In-Center Facility."
PROVISION FOR INCOME TAXES
The Federal income tax provision was $30,000 in 1996 and $0 in 1995.
The state income tax provision was $94,280 in 1996 and $0 in 1995. During the
first nine months of 1996, net operating losses were utilized to reduce Federal
and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a positive net cash flow of $531,281 during the
first nine months of 1996 comprised of $1,712,632 provided from investing
activities, derived primarily from the proceeds of the sale of certain southern
New Jersey assets of the Company, partially offset by $1,133,464 used in
operating activities and $47,887 used in financing activities.
The Company has made advances to certain affiliates and Consulting
Customers. In the second quarter of 1994, a note receivable of $125,868 was
created for the amount due from
- 11 -
<PAGE>
TechTron for costs incurred by the Company on TechTron's behalf. This note bears
interest at an Internal Revenue Service imputed rate for instruments having a
maturity of two or more years and otherwise without a stated interest rate.
Principal and accrued interest under the note is due and payable in full no
later than December 31, 1996; the Company expects to extend the due date of this
note. The note has been guaranteed by Certain Executive Officers. Through
September 30, 1996, the Company had advanced loans to certain principals of UMDC
(who are not affiliated with the Company) aggregating $450,000 and loans to UMDC
in the amount of $622,448, and had provided $846,492 of equipment and supplies
to UMDC for which the Company had not yet been reimbursed. The loans bear
interest at prime less 1% and are not expected to be repaid before December 31,
1996. The Company, Certain Executive Officers and the shareholders of UMDC have
guaranteed UMDC's credit facilities aggregating $2,400,000, of which
approximately $1,519,000 is outstanding as of September 30, 1996. Through
December 31, 1994, Alpha had funded $565,000 of the cash requirements of the
Bronx Facility with funds provided from the Company. The advances were converted
into loan agreements with Alpha, bearing interest of 8%, and payable in full in
1999. The Company has loaned $57,405 to Alpha to enable Alpha to meet its
obligations under its agreement with the estate of the former director of the
Bronx Facility. All notes from Alpha have been guaranteed by Certain Executive
Officers. As of September 30, 1996, $90,232 was due from the Bronx facility.
Total repayments made by the Bronx Facility in 1996 were $800,317. Additional
1996 advances to the Bronx Facility for supplies and equipment totaled $339,795.
The Company has also advanced funds to CDBI for the construction of a
new in-center dialysis facility in the Bronx, New York. At December 31, 1995,
$479,000 had been advanced to CDBI. Additional 1996 advances to CDBI through
September 30, 1996 totaled $594,755.
The RTC Transaction resulted in an aggregate net gain of $1,749,080. A
significant portion of the proceeds received by Courthouse Dialysis, Inc. were
used to repay intercompany balances due to other subsidiaries of the Company.
As of April 30, 1996, the Company had completed the planned use of
proceeds of its 1994 Offering of common stock. The Company expects that the cash
flow from operations and from the sale of the New Jersey in-center facility will
be sufficient to fund its operations at least through 1996. After such time, the
Company may require additional funds. The Company has no current commitments or
arrangements for additional financing and there can be no assurance that
additional financings, through bank borrowings, debt or equity financings or
otherwise, will be available on acceptable terms, if at all.
The Company has also guaranteed leases for UMDC and CDBI for their
respective in-center facilities in New York. Each has a 15 year term at an
annual rental of $145,000 and $138,000, respectively.
- 12 -
<PAGE>
PART II.
Item 6. Exhibits and Reports on Form 8-K.
(a) No Exhibits accompany this 10-QSB.
(b) No reports filed on Form 8-K.
- 13 -
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONTINENTAL CHOICE CARE, INC.
Registrant
Date: November 12, 1996 By: /s/ Steven L. Trenk
-------------------
STEVEN L. TRENK
President and Chief Operating
Officer and Director
Date: November 12, 1996 By: /s/ Ronald A. Lefkon
--------------------
RONALD A. LEFKON
Chief Financial Officer
- 14 -
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