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 June 30, 1997
- 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
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CONTINENTAL CHOICE CARE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
NEW JERSEY 22-3276736
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(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.
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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 August 12, 1997
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
June 30, 1997
Part I. Financial Information
The comparative consolidated statements of operations, balance sheets and
statements of 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 June 30, 1997 and for the three-month and six-month periods
ended June 30, 1997 and 1996 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 included in
its Form10-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 June 30, 1997 Dec. 31, 1996
------------- -------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash including restricted cash of $200,000 ......... $ 1,145,999 $ 1,418,054
Accounts receivable, less allowance for
doubtful accounts of $660,000 at June
30, 1997 and $517,000 at December 31, 1996 ....... 929,987 989,363
Supplies inventories ............................... 34,663 52,028
Deferred tax asset ................................. 125,000 125,000
Other current assets ............................... 71,659 129,163
----------- -----------
Total current assets ............................ 2,307,308 2,713,608
Amounts due from affiliates ........................ 175,368 779,273
Amounts due from consulting customers .............. 3,707,191 2,872,468
Property and equipment, at cost, less
accumulated depreciation ......................... 610,075 691,237
Other assets ....................................... 72,880 57,907
----------- -----------
$ 6,872,822 $ 7,114,493
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................... $ 1,767,693 $ 1,408,939
Accrued expenses ................................... 808,621 611,344
Current portion of notes payable
and obligations under
capital leases .................................. 39,974 57,643
Income taxes payable ............................... -0- 48,939
----------- -----------
Total current liabilities ....................... 2,616,288 2,126,865
----------- -----------
Notes payable and obligations under
capital leases, less current portion ............ 44,332 64,319
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, 5,000,000 shares authorized,
none issued or outstanding ....................... -- --
Common stock, no par value, 10,000,000 shares
authorized 3,237,500 shares issued and
outstanding at June 30, 1997 and December 31, 1996 5,464,061 5,464,061
Paid-in capital .................................... 500 500
Accumulated deficit ................................ (1,252,359) (541,252)
----------- -----------
Total stockholders' equity ......................... 4,212,202 4,923,309
----------- -----------
$ 6,872,822 $ 7,114,493
=========== ===========
</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 Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Patient Revenues:
Equipment and supplies ................... $ 705,123 $ 748,078 $ 1,430,621 $ 1,563,913
Services ................................. 511,899 691,341 1,027,527 1,520,856
----------- ----------- ----------- -----------
Total net patient revenues ......... 1,217,022 1,439,419 2,458,148 3,084,769
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of goods sold ....................... 333,356 315,756 638,498 615,861
Cost of services ......................... 176,758 204,513 340,103 458,938
Provision for doubtful accounts .......... 64,693 36,472 137,671 241,617
Selling, general and administrative ...... 963,477 1,417,106 1,979,718 2,534,052
Depreciation and amortization ............ 48,442 32,068 96,499 66,188
Interest income, net ..................... (13,161) (26,976) (27,996) (33,800)
----------- ----------- ----------- -----------
Total costs and expenses ........... 1,573,565 1,978,939 3,164,493 3,882,856
----------- ----------- ----------- -----------
Loss from operations ........................ (356,543) (539,520) (706,345) (798,087)
Gain on sale of former New Jersey
in-center facility and certain other assets -0- -0- -0- 1,749,080
----------- ----------- ----------- -----------
Income (loss) before income taxes ........... (356,543) (539,520) (706,345) 950,993
Provision for income taxes .................. -0- 10,791 4,762 121,730
----------- ----------- ----------- -----------
Net income (loss) ........................ $ (356,543) $ (550,311) $ (711,107) $ 829,263
=========== =========== =========== ===========
Net income (loss) per share ................. $ (.11) $ (.17) $ (.22) $ .26
=========== =========== =========== ===========
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>
Six Months Ended
June 30, 1997 June 30, 1996
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) ................................. (711,107) $ 829,263
Adjustments to reconcile net income
(loss) to net cash used in operating
activities --
Depreciation and amortization ................. 96,499 66,188
Provision for doubtful accounts ............... 137,671 241,617
Gain on sale of former New Jersey
in-center facility ........................... -0- (1,749,080)
(Increase) decrease in accounts receivable ........ (78,295) 903,524
Decrease in supplies inventories .................. 17,365 16,935
(Decrease) increase in other assets ............... 42,531 (394,622)
Increase in amounts due from affiliates ........... (18,500) (10,000)
Increase (decrease) in accounts payable ........... 358,754 (344,267)
Increase (decrease) in accrued expenses ........... 197,277 (47,419)
Increase (decrease) in income taxes payable ....... (48,939) 101,111
----------- -----------
Net cash used in operating activities ......... (6,744) (386,750)
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of former New Jersey
in-center facility ............................... -0- 2,010,330
Amounts loaned or advanced to consulting customers (532,262) (781,778)
Amounts repaid by consulting customers ............ 319,944 440,317
Purchases of property and equipment ............... (15,337) (137,684)
----------- -----------
Net cash provided from (used in) investing
activities ................................. (227,655) 1,531,185
----------- -----------
Cash Flows From Financing Activities:
Principal payments on notes payable and obligations
under capital leases .............................. (37,656) (24,321)
----------- -----------
Net increase (decrease) in cash .................... (272,055) 1,120,114
Cash, beginning of year ............................ 1,418,054 1,341,955
----------- -----------
Cash, end of period ................................ $ 1,145,999 $ 2,462,069
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for income taxes ...... $ 19,882 $ 121,730
=========== ===========
Cash paid during the period for interest .......... $ 424 $ 354
=========== ===========
</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 owns and operates a training center 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.
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. Any change in these regulations or
reimbursement could have a significant impact on the Company's operations. 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. In addition, management believes that the continuing
consolidation of the dialysis treatment business by the Company's largest
competitors has adversely affected the Company's ability to acquire new patients
and could materially adversely impact the Company's financial condition. The
Company's operations and cash flows are dependent upon the rate and timeliness
of payment for patient services from third party payors. In 1997 and 1996,
approximately 26% and 30%, respectively, of the Company's cash receipts were
received under the Medicare program, while approximately 74% and 70%,
respectively, of cash receipts were received from commercial insurance companies
or contracted entities and Medicaid programs.
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.
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<PAGE>
(2) Earnings per share:
On March 31, 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share" ("Statement 128"). Statement 128 is effective for
fiscal years ending after December 15, 1997, and, when adopted, will require
restatement of prior years' earnings per share. If the Company had adopted
Statement 128 for the period ending June 30, 1997, there would have been no
effect on net loss per common share, on either the basic or diluted basis.
(3) Related Party transactions:
As of June 30, 1997 and December 31, 1996, $756,733 and $205,300,
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"), completed its acquisition of the Bronx Facility as of
April 3, 1997. In connection with this acquisition, Alpha assumed the
obligations of the Bronx Facility, and all amounts due from Alpha are included
in due from consulting customers as of June 30, 1997.
The Company has advanced funds to Continental Dialysis of the Bronx, Inc.
("CDBI"), a company owned by Certain Executive Officers, for the construction
and start-up operations of a new In-Center Dialysis Facility in the Bronx, New
York. At June 30, 1997 and December 31, 1996, $1,440,275 and $1,176,985,
respectively, was due from CDBI and has been included in amounts due from
consulting customers. The Company is also the guarantor of a lease for CDBI.
CDBI commenced operations in January 1997.
The Company, as well as Certain Executive Officers, guaranteed certain
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 were originally comprised of a $500,000 credit facility (the
"Revolver") and separate loans originally totalling $1,900,000. As of June 30,
1997, an aggregate of $982,000 was outstanding under the credit facilities.
Under the terms of the "Revolver," which was renewed and will mature on December
31, 1997, certain amounts due the Company are subordinated to UMDC's obligations
to the bank. No assurance can be given 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 credit facilities. Certain Executive Officers acquired an aggregate of
50% of the common stock of UMDC as of March 31, 1996. 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
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<PAGE>
extended by the Company to become due on November 30, 1995. These notes remain
outstanding as of June 30, 1997. The Company has advised the obligors under the
promissory notes that the notes are in default. The Company is currently
determining whether to extend the due dates pending completion of all or part of
the IHS transaction. (See Note 4.) No assurance can be given that the Company
will extend some or all of the promissory notes between the Company and UMDC or
its shareholders. In addition, the Company provided equipment and supplies to
UMDC aggregating $942,489 through June 30, 1997 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 $1,510,183 and
$1,490,183 as of June 30, 1997 and December 31, 1996, respectively, are net of
certain transactions not recorded due to realization uncertainties. The Company
is the guarantor of a lease for UMDC.
(4) Agreement to Sell Assets:
On February 12, 1997, the Company and substantially all of its
subsidiaries, other than RMI, signed a definitive agreement to sell
substantially all of their respective operating assets to IHS of New York, Inc.,
a privately held company ("IHS"). In addition, Alpha and CDBI signed the
definitive agreement, thereby agreeing to sell substantially all of their
respective operating assets to IHS. UMDC, which is 50% owned by Certain
Executive Officers, is a signatory to the definitive agreements but has not
executed the same. The Certain Executive Officers owning 50% of UMDC have
granted an option (the "UMDC Option") to IHS to acquire their interests in UMDC
if UMDC does not approve the transaction, subject to restrictions contained in
certain existing agreements.
The maximum aggregate purchase price for the assets to be sold, including
the assets of the consulting customers, is $13,120,000. In the event IHS
exercises the UMDC Option, the Purchase Price shall be reduced by $5,750,000.
The Certain Executive Officers have assigned to the Company all proceeds which
they may receive upon the exercise of the UMDC Option, if any. The Company has
agreed to indemnify the Certain Executive Officers to the extent of any taxes
and certain other liabilities resulting from the transaction contemplated by the
assignment. The sellers will retain substantially all of their cash, accounts
receivable and liabilities. The purchase price will be reduced by the amount of
any liabilities assumed by IHS other than real estate leases. The purchase price
will be allocated among the Company and the selling consulting customers and all
amounts due from selling consulting customers, are anticipated to be repaid at
the closing of the transaction. The aggregate amount due from all consulting
customers is $3,707,191 at June 30, 1997. The Company and IHS will enter into a
consulting agreement pursuant to which the Company will provide the consulting
services of certain officers of the Company to IHS over the three-year term of
the agreement. The Company will also enter into a covenant not to compete with
IHS. A hospital which has an affiliation agreement with UMDC has asserted a
right of first refusal with respect to any transfer of the assets or stock of
UMDC. Although the Company and Certain Executive Officers of the Company who
hold 50% of the
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<PAGE>
outstanding voting shares of UMDC do not agree that the position taken by the
hospital has merit, the parties have signed an amendment (the "Amendment") to
the definitive agreements. The Amendment provides that, if the transactions
contemplated thereby are consummated, the purchase price for the assets,
exclusive of the assets of UMDC, will be $5,120,000. If the assets ("Manhattan
Assets") of UMDC or another dialysis facility which is located in Manhattan and
is acceptable to IHS are later transferred to IHS, IHS will pay not less than
$6,000,000 nor more than $8,000,000 for those assets and IHS may pay a market
penetration bonus to the Company. The amount of the market penetration bonus is
$2,000,000, less amounts in excess of $6,000,000 paid by IHS for the Manhattan
Assets, if any.
The definitive agreements were approved by the shareholders of the Company
at the Annual Meeting of Shareholders on May 27, 1997. The closing of the
transaction is subject to certain conditions, including without limitation,
governmental approvals and the continuing accuracy of certain representations
and warranties contained in the definitive agreement among the parties. In the
event the transaction is not consummated, IHS is not in breach of the definitive
agreement, among other things, and the Company enters into a similar transaction
at a higher aggregate price with a third party, the Company may be obligated to
pay a $500,000 break-up fee to IHS. No assurance can be given that IHS will
receive any or all of the state licenses and approvals required to permit the
consummation of the proposed transactions.
The Company continues to operate in a highly competitive market and has
experienced a decrease in patients served. In addition, the Company has incurred
operating losses in the past eleven quarters. The proposed IHS transaction would
provide for realization of certain recorded net asset values and provide cash
for the Company's operating needs. The transaction is expected to close in the
third or fourth quarter of 1997. The closing of the transaction is subject to
various conditions, and no assurance can be given that the transaction will be
consummated. In the event such sale is not consummated, the Company may be
forced to seek additional sources of financing; however, no assurance can be
given that such sources will be available. The Company's 1997 operating plan
contains assumptions regarding revenue and margins consistent with historical
levels and planned reductions to the Company's cost structure. The achievement
of the operating plan depends heavily on maintaining existing patients and the
timely reduction of costs. An inability to maintain existing patients and to
reduce costs could have an adverse impact on the Company's ability to fully
execute its operating plan and maintain adequate cash flow. In the event actual
results do not meet the operating plan, management believes it could execute
contingency plans to mitigate such effects. The contingency plans include
consideration of the sale of assets and additional cost reductions. Considering
the cash on hand and based on the achievement of the operating plan and
management's actions taken to date, management believes it has the ability to
continue to generate sufficient cash to satisfy its operating requirements in
the normal course of business for the remainder of 1997. However, no assurance
can be given that sufficient cash will be generated from operations, that
sufficient cost reductions can be achieved or that the Company will be able to
sell assets on terms acceptable to the Company.
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<PAGE>
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Six months ended June 30, 1997 Compared With Six Months Ended June 30,
1996.
Net Patient Revenues
Net patient revenues of the Company are derived from providing equipment
and supplies to patients (58% for the first six months of 1997 and 51% for 1996)
and services (42% for 1997 and 49% for 1996), 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 1997 and 1996, 26% and
30%, respectively, of the Company's cash receipts were received under the
Medicare program, while approximately 74% and 70%, respectively, of cash
receipts were received from commercial insurance companies or contracted
entities and Medicaid programs.
Absent a sale of substantially all of the Company's assets, 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 1997 and 1996. The
continuing profitability of the dialysis business is also dependent upon such
factors as substantial government regulation and the ability to grow and remain
profitable in a highly competitive industry.
Competition for patients and referral sources in the dialysis business is
substantial. 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 will be
successful in increasing the Company's net patient revenues.
Net patient revenues for the six month periods were $2,458,148 in 1997 as
compared with $3,084,769 in 1996. The decrease of $626,621 is attributable to a
decrease of $274,711 due to the sale of the Company's former New Jersey
in-center facility and its former southern New Jersey equipment and supply
business in March 1996, as well as to reductions in New York sales
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<PAGE>
of equipment and supplies revenues of $119,317. In addition, there were no net
patient revenues related to the Company's Renal Management, Inc. subsidiary in
1997 as compared to $336,604 in 1996. These reductions in revenues were
partially offset by an increase of $148,154 from the Company's Connecticut
operation and $120,000 in consulting fees pertaining to the Bronx Facility.
The Company is not permitted to operate, own or control health care
facilities licensed under New York law and has, accordingly, determined to
provide service in New York through consulting, administrative, or
subcontracting service arrangements with Consulting Customers in New York. The
Consulting Customers are partially or 100% owned by the Certain Executive
Officers.
Alpha has assumed the obligations of the National Nephrology Foundation
under the terms of the Bronx Facility Agreement. The Bronx Facility Agreement
provides that for a maximum annual consulting fee of $240,000, the Company will
provide 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. For the six months ended June 30, 1997, the Company recognized
$120,000 in consulting fees from the Bronx Facility compared to $0 for the six
months ended June 30, 1996 due to realization uncertainties. Effective August
1994 and January 1997, the Company entered into agreements to provide
administrative and consulting services to UMDC and CDBI for monthly fees of
$33,333 and $20,000, respectively. The agreements with UMDC and CDBI similarly
provide for reimbursement to the Company for services rendered and for its
direct costs of equipment and supplies. The UMDC agreement was automatically
renewed in 1996, extends for a period of two years and is automatically
renewable for successive two year periods unless either party decides to
terminate. Neither the UMDC nor the CDBI consulting fee has been recorded in
1997 or 1996 due to realization uncertainties.
Cost of Goods Sold/Cost of Services
Cost of goods sold was $638,498 or 45% of net patient revenues
attributable to equipment and supplies in the six months ended June 30, 1997 as
compared with $615,861 or 39% of net patient revenues attributable to equipment
and supplies in 1996. This increase in cost of goods sold as a percentage of
revenues is primarily due to price increases for equipment and supplies.
The cost of services totaled $340,103 or 33% of net patient revenues
attributable to services in 1997, as compared with $458,938 or 30% of net
patient revenues in 1996. This increase in cost of services as a percentage of
revenues is primarily due to increases in payments to independent nursing
subcontractors.
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<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $1,979,718 in the six
months ended June 30, 1997 as compared with $2,534,052 for the 1996 period. The
net decrease of $554,334 is primarily comprised of a decrease in salaries, rent
and other office expenses due to the sale of the Company's former Cape May Court
House, New Jersey in-center facility in March 1996, as well as a decrease in
costs associated with the Company's Renal Management, Inc. subsidiary.
Provision for Doubtful Accounts
The provision for doubtful accounts was $137,671 for the first six months
of 1997 as compared with $241,617 in 1996 due primarily to a decrease in patient
revenues. The provision for doubtful accounts is recorded to the extent deemed
to be adequate to absorb possible losses resulting from uncollectible
receivables. The Company reviews each individual account in detail to determine
the collectibility of each item in the account. A reserve is established to
reflect any amounts considered doubtful of collection. The calculation of
doubtful accounts is based on the Company's knowledge of specific payors, past
experience with the account under review and historic experience with accounts
having characteristics similar to the one being reviewed. Due to the unusually
long third-party reimbursement process, especially as to secondary and tertiary
payors and self-pay patients, the Company often does not write off receivables
for a year or more.
As of June 30, 1997, the allowance for doubtful accounts was $660,000 as
compared with $517,000 at December 31, 1996. As a percentage of receivables
outstanding, such allowance was 42% at June 30, 1997, and 34% at December 31,
1996. Management continues to evaluate the collectibility of all accounts and
believes the stated allowance as of June 30, 1997 is adequate to absorb possible
losses resulting from uncollectible receivables. As of June 30, 1997, $331,000
or 36% of net receivables were greater than 90 days past due.
Depreciation and Amortization Expense
Depreciation and amortization expense in the first six months of 1997
totaled $96,499, an increase of $30,311 from the first six months of 1996. The
increase is due to new dialysis equipment placed in service in mid-1996.
Net Interest Income
Net interest income was $27,996 in the six months ended June 30, 1997 and
$33,800 in 1996. Interest expense on the Company's debt obligations in both
periods was more than offset by interest earned on the remaining proceeds from
the 1996 sale of assets and rights in the Cape May Court House, New Jersey area.
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<PAGE>
Provision for Income Taxes
The Federal income tax provision was $0 in 1997 and $30,000 in 1996. The
state income tax provision was $4,762 in 1997 and $91,730 in 1996.
Forward Looking Statements
Certain statements contained in this Quarterly Report on Form 10-QSB
constitute "forward-looking statements" and involve known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements of the Company to be materially different from any future events,
acts, results, performance or achievements expressed or implied by such
forward-looking statements. Certain known factors are noted in this report,
including, without limitation, those set forth under the headings "Related Party
Transactions," "Agreement to Sell Assets," and Management's Discussion and
Analysis of Results of Operations and Financial Condition," as well as in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996. Words such as "expects," anticipates," "intends," "plans," "believes,"
"seeks, and "estimates," are intended to identify forward-looking statements.
These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions which are difficult to predict. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
Liquidity and Capital Resources
The Company experienced a negative net cash flow of $272,055 during the
first six months of 1997 comprised of $6,744 used in operating activites,
$227,655 used in investing activities, and $37,656 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 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 was due and payable in full no later than December 31, 1996. Payment
was not made, and the borrower has executed a new note which is due and payable
on demand. The note has been guaranteed by Certain Executive Officers. Through
June 30, 1997, 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 $942,489 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, 1997. The
Company, Certain Executive Officers and the shareholders of UMDC have guaranteed
UMDC's credit facilities aggregating $2,400,000, of which approximately $982,000
is outstanding as of June 30, 1997. Through December 31, 1994, Alpha had funded
$565,000 of
- 12 -
<PAGE>
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 June 30, 1997, $756,733 was
due from Alpha and the Bronx facility. Total repayments made by the Bronx
Facility in 1997 were $261,944. Additional 1997 advances to the Bronx Facility
totaled $190,972, primarily for supplies and equipment.
The Company has also advanced funds to CDBI for the construction and
start-up costs of a new in-center dialysis facility in the Bronx, New York. At
June 30, 1997, $1,440,275 had been advanced to CDBI. CDBI commenced operations
in January 1997.
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.
The Company expects that the cash flow from operations and from the 1996
sale of assets will be sufficient to fund its operations at least through 1997.
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.
Part II.
Item 6. Exhibits and Reports on Form 8-K.
(a) No Exhibits accompany this Form 10-QSB
(b) A report on Form 8-K was filed by the Company on May 30, 1997
concerning (1) the execution of an amendment dated May 23, 1997 to
the definitive agreement to sell substantially all of the operating
assets of the Company and certain of the Company's Consulting
Customers to IHS of New York, Inc., and (2) the approval at the 1997
Annual Meeting of Shareholders of the Company, held on May 27, 1997,
of the sale of substantially all of the assets of the Company and
certain of its subsidiaries to IHS of New York, Inc.
(c) A report on Form 8-K was filed by the Company on July 30, 1997
concerning the resignation of Jeffrey A. Claman from the Company's
Board of Directors.
- 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: August 12, 1997 By: /s/ Steven L. Trenk
------------------------------------
STEVEN L. TRENK
President and Chief Operating
Officer and Director
Date: August 12, 1997 By: /s/ Ronald A. Lefkon
------------------------------------
RONALD A. LEFKON
Chief Financial Officer
- 14 -
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