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, 1998
- 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 (973) 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 September 13, 1998 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, 1998
This Annual Report on Form 10-QSB contains "forward-looking statements"
that are based on management's assumptions, estimates and projections. The
Company's actual results could differ materially from the results anticipated in
such forward-looking statements as a result of known and unknown risks,
uncertainties and other factors.
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 September 30, 1998 and for the three and nine-month periods
ended September 30, 1998 and 1997 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 Sept. 30, 1998 Dec. 31, 1997
--------------- -------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents including restricted cash of
$250,000 at December 31, 1997 ............................................................. $1,285,612 $ 406,909
Investments in U.S. Government securities .................................................... 4,298,308 3,570,301
Accounts receivable, less allowance for doubtful accounts of $34,000
at September 30, 1998 and $257,000 at December 31, 1997 .................................. 118,615 197,133
Amounts due from consulting customers ........................................................ 100,000 2,805,105
Other current assets ......................................................................... 630,008 608,746
--------- ---------
Total current assets ...................................................................... 6,432,543 7,588,194
Amounts due from affiliates .................................................................. 329,864 235,864
Property and equipment, at cost, less accumulated depreciation................................ 1,135,585 90,962
Goodwill and other intangibles, net of amortization .......................................... 740,642 -0-
Other assets ................................................................................. 62,762 139,295
--------- ---------
$8,701,396 $8,054,315
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................................................. $ 543,400 $ 670,540
Accrued expenses ............................................................................. 1,202,611 964,100
Current portion of notes payable ............................................................. 117,318 -0-
Income taxes payable ......................................................................... 39,632 87,000
--------- ---------
Total current liabilities ................................................................. 1,902,961 1,721,640
--------- ---------
Notes payable, less current portion .......................................................... 899,644 -0-
Other liabilities ............................................................................ 54,360 -0-
--------- ---------
954,004 -0-
--------- ---------
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 September 30, 1998
and December 31, 1997 ..................................................................... 5,524,061 5,524,061
Paid-in capital .............................................................................. 500 500
Retained earnings ............................................................................ 319,870 782,977
Accumulated other comprehensive income ....................................................... -0- 25,137
--------- ---------
Total stockholders' equity ................................................................ 5,844,431 6,332,675
--------- ---------
$8,701,396 $8,054,315
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
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<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues from continuing operations
Consulting services ...................................................$ 83,331 $ -0- $ 249,993 $-0-
Dry cleaning services ................................................. 371,809 -0- 555,980 -0-
--------- ---------- --------- ----------
455,140 -0- 805,973 -0-
Costs of services from continuing operations ................................ 241,857 -0- 352,973 -0-
--------- ---------- --------- ----------
Gross profit from continuing operations...................................... 213,283 -0- 453,000 -0-
General and administrative expenses ......................................... 609,682 563,158 1,683,873 1,684,172
Depreciation and amortization ............................................... 56,920 7,230 94,007 21,109
Interest income, net ........................................................ (54,104) (6,577) (241,497) (33,461)
--------- ---------- --------- ----------
Total costs and expenses .............................................. 612,498 563,811 1,536,383 1,671,820
--------- ---------- --------- ----------
(399,215) (563,811) (1,083,383) (1,671,820)
Benefit for income taxes .................................................... (1,932) (11,276) (86,671) (33,436)
--------- ---------- --------- ----------
Loss from continuing operations ............................................. (397,283) (552,535) (996,712) (1,638,384)
--------- ---------- --------- ----------
Income loss from discontinued operations, less applicable income taxes of
$690 and $18,424 for three months ended Sept. 30, 1998 and 1997,
respectively and income taxes of $101,065 and $45,345 for nine months
ended Sept. 30, 1998 and 1997, respectively (Note 1) ...................... 3,624 430,800 533,605 1,049,012
--------- ---------- --------- ----------
Net income (loss) ..................................................... (393,659) 121,735 (463,107) (589,372)
Retained earnings (accumulated deficit),
beginning of period ....................................................... 713,529 (1,252,359) 782,977 (541,252)
--------- ---------- --------- ----------
end of period .............................................................$ 319,870 $(1,130,624) $ 319,870 $(1,130,624)
========= ========== ========= ==========
Basic and diluted income (loss) per share:
Continuing operations .....................................................$ (.12) $ (.17) $ (.31) $ (.51)
Discontinued operations ................................................... -0- .13 .17 .33
--------- --------- ---------- ---------
Net loss per share ........................................................$ (.12) $ (.04) $ (.14) $ (.18)
========= ========= ========= =========
Basic and diluted weighted average 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,
1998 1997
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss .......................................... $(463,107) $ (589,372)
Adjustments to reconcile net loss to net cash
used in operating activities --
Depreciation and amortization...................... 94,007 21,109
Income from discontinued operations, net........... (533,605) (1,049,012)
Decrease in accounts receivable.................... 78,518 95,481.
Decrease in other assets........................... 305,271 101,212
Increase in amounts due from affiliates ........... (94,000) (29,996)
(Decrease) increase in accounts payable............ (127,140) 388,930
Increase in accrued expenses....................... 238,511 331,072
Decrease in income taxes payable................... (47,368) (48,939)
----------- -------------
Net cash used in operating activities of continuing
operations..................................... (548,913) (779,515)
Net cash provided by discontinued operations..... -0- 664,891
----------- -------------
Net cash used in operating activities................. (548,913) (114,624)
----------- ------------
Cash Flows From Investing Activities:
Amounts loaned or advanced to consulting customers. -0- (812,300)
Amounts repaid by consulting customers............. 3,168,033 447,081
Purchases of U.S. Government securities............(9,647,436) -0-
Proceeds from sale of U.S. Government securities... 8,919,429 -0-
Purchases of businesses............................ (582,087) -0-
Purchases of property and equipment................ (143,285) (27,157)
Loan to officer ................................... (250,000) -0-
----------- -------------
Net cash provided by (used in) investing activities... 1,464,654 (392,376)
----------- -------------
Cash Flows from Financing Activities
Principal payments on notes payable................ (37,038) (47,650)
----------- ------------
Net increase (decrease) in cash....................... 878,703 (554,650)
Cash, beginning of year............................... 406,909 1,418,054
----------- ------------
Cash, end of period...................................$1,285,612 $ 863,404
=========== ============
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes.........................$ 59,035 $ 24,730
---------- ------------
Cash paid for interest.............................$ 31,126 $ 449
========== ============
Non-cash investing and financing activities:
Assets acquired by incurring notes payable ......$1,054,000 $ -0-
========== ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-4-
<PAGE>
. CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of business and discontinued operations:
Continental Choice Care, Inc. and subsidiaries, (collectively, the
"Company") was primarily engaged in the business of providing dialysis related
services, training, equipment and supplies to patients at home, in prisons and
in hospitals. The Company also provided acute dialysis nursing services and
administrative services. In the fourth quarter 1997, the Company completed the
sale of substantially all of its dialysis related assets to IHS of New York,
Inc., a New York corporation ("IHS"). Alpha Administration Corp. and Continental
Dialysis Center of the Bronx, Inc. ("CDBI"), affiliates and consulting customers
of the Company also sold substantially all of their respective assets to IHS. In
addition, during the first fiscal quarter of 1998, Upper Manhattan Dialysis
Center, Inc. ("UMDC"), another consulting customer of the Company, sold
substantially all of its assets to Renal Research Institute, LLC ("RRI"). Fifty
percent (50%) of UMDC's outstanding common stock is owned by certain executive
officers of the Company. Consummation of the second closing under the
transaction is pending New York State regulatory approval. No assurance can be
given that such approval will be received.
In connection with the transaction with IHS, the Company and IHS entered
into a consulting agreement pursuant to which the Company agreed to provide
certain consulting services to IHS. IHS is required to make payments to the
Company aggregating $1,000,000 over the three year term of the agreement. While
IHS failed to make payments to the Company aggregating approximately $54,000
during the first half of 1998, which remain outstanding, IHS was otherwise
current in its payment obligations to the Company as of September 30, 1998. In
addition, the Company believes that IHS has obtained final regulatory approval
to own and operate the Alpha and CDBI facilities.
The operating results and the gain on the disposition of the Company's
dialysis-related businesses have been segregated from continuing operations and
reported as separate line items on the Consolidated Statements of Operations and
Cash Flows. The prior period Consolidated Financial Statements have been
restated to reflect the discontinued operations.
(2) New Businesses:
Effective April 14, 1998, the Company established a subsidiary, United Dry
Cleaning, L.L.C. ("United") for the purpose of acquiring and operating dry
cleaning facilities initially in the Phoenix, Arizona area. The Company
committed an aggregate of $1,000,000 to United's initial operations.
Effective May 21, 1998, United acquired substantially all of the assets of
Ultimate Cleaners, Inc., an Arizona corporation ("Ultimate"), other than
Ultimate's cash and accounts receivable. The assets acquired from Ultimate
include operating dry cleaning operations at six
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<PAGE>
facilities, two dry cleaning plants and four drop stores. All facilities are
located at leased locations in Arizona. United assumed Ultimate's obligation
under its real property leases and assumed substantially no other liabilities.
The original aggregate purchase price for the assets of Ultimate was
$1,420,000, of which $350,000 was paid as cash consideration at closing and
$20,000 was payable over a period of 20 months. The remainder was paid in the
form of a promissory note in the principal amount of $1,050,000. Under the terms
of a Mutual Release and Settlement Agreement ("Settlement Agreement") entered
into between Ultimate and UDC in November 1998, the outstanding principal amount
due under the promissory note was reduced by $175,000 and the term of the
promissory note was reduced to seven and one half years. In addition, United
agreed to pay approximately $3,166 per month over the six months immediately
following the date of the Settlement Agreement in settlement of all other sums
due or claimed to be due by Ultimate under the Asset Purchase Agreement and
otherwise. The obligations of the parties pursuant to an Employment Agreement
between UDC and the former principal of Ultimate were also terminated.
Effective May 19, 1998, United acquired substantially all of the assets of
Cleaners Headquarters, Inc., an Arizona corporation. Cleaners Headquarters, Inc.
conducts dry cleaning operations from one location in Arizona. The all cash
purchase price for the assets was $15,000.
Effective July 28, 1998, United acquired substantially all of the assets of
G & P Associates, Inc., an Arizona corporation which conducts dry cleaning
operations from two leased locations in Arizona. The aggregate purchase price
for the assets was $165,750, of which $95,750 was paid at closing and $70,000
was paid in the form of a promissory note bearing an interest rate of 10% with a
term of two years.
Effective August 4, 1998, United acquired substantially all of the assets of
Alyssa's Magic Touch, an Arizona proprietorship which conducts dry cleaning
operations from a leased location in Arizona. The aggregate purchase price for
the assets was $224,000, of which $115,000 was paid at closing and $109,000 was
paid in the form of a promissory note bearing an interest rate of 10% with a
term of five years.
These acquisitions have been accounted for as purchases and, accordingly,
the operating results of these companies have been included in the Company's
consolidated financial statements since the dates of acquisition. The excess of
net assets acquired of approximately $609,000 is being amortized over twenty
years. Additionally, the Company paid approximately $153,000 to the former
owners of these businesses as part of a covenant not to compete. This amount is
being amortized over the terms of the agreements which range from two to five
years.
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<PAGE>
(3) Income (loss) per share:
As of September 30, 1998 and 1997, the basic and diluted weighted average
common shares outstanding were 3,237,500.
(4) Related party transactions:
The Company has obtained a $125,868 note from TechTron, Inc. ("TechTron")
for expenses of TechTron paid for by the Company. TechTron holds approximately
47.18% of the Company's outstanding common stock, and approximately 80.7% of
TechTron's outstanding common stock is held by Alvin S. Trenk, the Company's
Chairman, Chief Executive Officer and a Director, Steven L. Trenk, the Company's
President and Chief Operating Officer and a Director, and Martin G. Jacobs, MD,
the Company's Medical Director and a Director (collectively, "Certain Executive
Officers"). The note bears interest at the rate imputed by the Internal Revenue
Service for instruments having a maturity of two or more years and without a
stated interest rate. The principal and accrued interest thereon were due on
December 31, 1996. Amounts due under the note were not paid and Techtron
executed a new note bearing the same interest rate which is payable on demand.
During 1998, 1997, 1996 and 1995, an additional $94,000, $78,996, $16,000 and
$15,000, respectively, was advanced to TechTron by the Company. The Company has
obtained notes from TechTron for these additional advances. The notes bear
interest at the rate of 8% and are payable on demand. All notes have been
guaranteed by Certain Executive Officers.
As of September 30, 1998 and December 31, 1997, $(75,765) and $74,878,
respectively, was (payable to) due from Alpha. At September 30, 1998 and
December 31, 1997, $2,166 and $64,350, respectively, was due from CDBI. However,
there was inadequate cash flow to pay $200,000 in consulting fees which have not
been recorded by the Company due to realization uncertainties. Amounts (payable
to) due from Alpha and CDBI are included in accounts payable or amounts due from
consulting customers in the accompanying balance sheets.
As of December 31, 1997, UMDC owed the Company $831,483 and the physician
shareholders of UMDC owed the Company $100,000 in principal plus interest for
loans previously advanced by the Company. As of September 30, 1998, all amounts
due from UMDC under these loans were repaid, and $100,000 of principal plus
accrued interest due from the physician shareholders of UMDC to the Company was
still outstanding. In addition, the Company provided equipment and supplies to
UMDC aggregating $1,048,841 through September 30, 1998 and December 31, 1997 at
no margin. The total amounts due from UMDC and its physician principals totaled
$100,000 and $2,665,677 as of September 30, 1998 and December 31, 1997,
respectively. Amounts due as of September 30, 1998 are net of certain
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<PAGE>
transactions including consulting fees aggregating $1,388,875 and $376,633 in
interest and other accrued fees not recorded due to realization uncertainties.
In 1998, the Company loaned $250,000 to Steven L. Trenk, the Company's
President and Chief Executive Officer. Mr. Trenk executed a promissory note for
this advance due and payable in full within one year. The note bears interest at
rate imputed by the Internal Revenue Service for instruments having a maturity
of one or more years and without a stated interest rate. This loan is included
in other current assets in the accompanying balance sheets.
(5) New Accounting Pronouncement.
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which modifies the financial statement presentation of comprehensive income and
its components. Adoption of this Statement had no effect on the Company's
financial position or operating results in the periods presented as there are no
changes in stockholder's equity during the period other than changes resulting
from the Company's net loss for the nine months ended September 30, 1998.
(6) Subsequent Events
Effective October 30, 1998, the Company's securities were moved from trading
on the Nasdaq National Market System to trading on the Nasdaq SmallCap Market.
No assurance can be given that Nasdaq will not determine to delist the Company'
Securities from trading in the future.
MANAGEMENT'S DISCUSSION AND ANALYSIS.
Results of Operations
Nine Months Ended September 30, 1998 Compared With Nine Months Ended
September 30, 1997.
At the IHS Closing on October 8, 1997, the Company completed the sale of
its New Jersey, Connecticut and Pennsylvania dialysis business assets to IHS.
The Company also conveyed its New York nursing and home and alternate site
businesses and its consulting and service agreements with Alpha and CDBI to IHS.
Following the IHS Closing, the Company's sources of revenue included amounts
payable for consulting services to be provided to IHS through October 2000 and
amounts payable by UMDC pursuant to the UMDC Agreement. Further, in January,
1998, UMDC sold substantially all of its assets to RRI and the Company and UMDC
terminated the UMDC Agreement. As a result of the UMDC transaction, the Company
received repayment of certain sums due the Company from UMDC and certain of
UMDC's shareholders and became entitled to receive
-8-
<PAGE>
repayment of certain other amounts due from UMDC and its shareholders and to
receive amounts to be earned by UMDC in connection with its continuing business
pending the RRI Second Closing.
In the nine months ended September 30, 1998, the Company recognized
$249,993 from the IHS Consulting Agreement, which is payable at the rate of
approximately $28,000 per month for its three year term. In addition, the
Company received $2,665,000 from UMDC as a result of the First RRI Closing for
amounts previously due from this consulting customer. The proceeds from the IHS
Closing, the IHS Consulting Agreement and the RRI Transaction were invested by
the Company in U.S. Government securities and money market funds. Costs incurred
by the Company relating to the RRI transaction were not significant. No
assurance can be given that the Company will continue to receive income from the
IHS Consulting Agreement or from the continued operations of UMDC.
Effective April 14, 1998, Continental Choice Care, Inc. established a new
subsidiary, United Dry Cleaning, L.L.C. ("United"). United is engaged in the
acquisition and consolidation of dry cleaning stores in the Phoenix, Arizona
Area. This area was selected for its rapid growth in construction and
development and increase in population, which, it is believed, will provide
United with growth potential. United's objective is to capitalize on the trend
toward consolidation of small closely held companies where significant critical
mass can be achieved rapidly with limited capital. The Company believes that
economies, and therefore enhanced profitability, can be gained through greater
utilization of the cleaning plants and/or consolidation of plant functions as
well as through the use of marketing and sales campaigns which are not
customarily employed by existing competitive operations.
Beginning in May, 1998, United has acquired substantially all of the assets
of Ultimate Cleaners, Inc., Cleaner Headquarters, Inc., and G & P Associates,
Inc., Arizona corporations, as well as Alyssa's Magic Touch, an Arizona
proprietorship. The results of the dry cleaning operations are included in
Continuing Operations from the date of acquisition in the accompanying
Consolidated Financial Statements.
Revenues
Net patient revenues of the Company in 1997 prior to the IHS Closing were
derived from providing equipment and supplies to patients (52%) and services
(48%), which services consisted of contract nursing services, and dialysis
treatments provided by the Company's Training Facility in Linden, New Jersey. In
1997, 25% of the Company's cash receipts were received under the Medicare
program, while approximately 75% of cash receipts were received from commercial
insurance companies or contracted entities and Medicaid programs.
Net patient revenues were $4,097,683 for the first nine months of 1997.
There were no such revenues in 1998. The decrease is attributable to the sale of
substantially all of the Company's assets in October, 1997. This decrease in the
Company's net patient revenues in 1998 was partially offset by $241,497 in
interest income, net derived in part from the Company's investment of the
proceeds
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<PAGE>
of the IHS Closing and the RRI Transaction and income of $249,993 derived from
the IHS Consulting Agreement.
As of the end of the 1997 fiscal year, the Company recorded revenues of
$941,000 from Alpha, $62,000 from CDBI and $794,000 from UMDC, of which an
aggregate of approximately $800,000 related to prior periods that was not
previously recorded due to realization uncertainties attributable to services,
equipment and supplies. In the first nine months of 1998, the Company recorded
$593,470 in revenues related to UMDC not previously recorded due to realization
uncertainties.
The Company does not expect to receive future operating revenues related to
its former dialysis based businesses or from the business of its former
Consulting Customers other than such amounts as it may receive under its
consulting agreement with IHS, the consulting agreement between RRI and UMDC and
amounts due from UMDC pending consummation of the second closing.
The Company's Renal Management, Inc. ("RMI") subsidiary recognized no
revenue on expenses of $184,205 through September 30, 1997. No expenses were
incurred for RMI in 1998, nor does the Company expect to provide additional
substantive financial support for RMI.
The Company's United subsidiary recognized revenues of $555,980 from the
period of acquisition to September 30, 1998. There were no such revenues in 1997
since United was not established and did not begin operating until the second
quarter of 1998.
Cost of Goods Sold/Cost of Services
Cost of goods sold for discontinued operations was $949,115 or 45% of net
patient revenues attributable to equipment and supplies in the nine months ended
September 30, 1997. The cost of services for discontinued operations totaled
$501,495 or 25% of net patient revenues attributable to services in 1997. In
1998, there was no cost of equipment and supplies and services relating to net
patient revenues due to the termination of business which occurred as a result
of the IHS Closing. The Company also experienced a decrease in personnel costs,
primarily attributable to reductions in workforce resulting from and following
the IHS Closing.
Cost of services for continuing operations was $352,973 or 63% of revenues
attributable to the Company's dry cleaning business from the period of
acquisition to September 30, 1998. Cost of services is mostly comprised of
$284,778 in salaries and other payroll expenses as well as $63,372 for supplies.
There were no such expenses in 1997 due to United being established and
commencing operations in the second quarter of 1998.
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<PAGE>
General and Administrative Expenses
General and administrative expenses for continuing and discontinued
operations totaled $1,633,611 for the nine months ended September 30, 1998, as
compared with $2,973,812 for the 1997 period. The net decrease of $1,340,201
from the 1997 period is primarily comprised of a reduction of $229,917 relating
to expenses of RMI and a reduction in salaries, rent and other office expenses
of $1,253,934 due to a reduction in head count resulting from the IHS
transaction. These decreases were partially offset by an increase of $230,685
related to the Company's dry cleaning businesses.
In connection with the IHS transaction, the Company retained substantially
all of its accounts receivable and accounts payable. Accordingly, during the
period immediately following the IHS Closing, the Company maintained its
accounts receivable and accounts payable personnel. The number of employees
employed in those departments decreased in 1998. The Company expects to continue
to incur general and administrative expenses of not less than approximately
$1,800,000 per annum, including the salaries of the Company's officers and
professional fees.
Allowance for Doubtful Accounts
A provision for doubtful accounts was recorded to the extent deemed to be
adequate to absorb possible losses resulting from uncollectible patient
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 September 30, 1998, the allowance for doubtful accounts was $34,000
as compared with $257,000 at December 31, 1997. As a percentage of patient
receivables outstanding, such allowance was 60% at September 30, 1998, and 57%
at December 31, 1997. Due to the discontinuance of current revenues discussed
above and collection activity, the patient accounts receivable have been
significantly reduced. Management continues to evaluate the collectibility of
all accounts and believes the stated allowance as of September 30, 1998 is
adequate to absorb possible losses resulting from uncollectible receivables. As
of September 30, 1998, all patient receivables were greater than 90 days past
due.
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<PAGE>
As of September 30, 1998, the Company's dry cleaning business had accounts
receivable of $96,341. Substantially all receivables relating to the Company's
dry cleaning business are deemed to be collectible.
Depreciation and Amortization Expense
Depreciation and amortization expense for continuing operations for the
nine months ended September 30, 1998 totaled $94,007, an increase of $72,898
from the 1997 period. This increase resulted from the purchase of substantially
all of the assets from the acquisition of dry cleaning stores by United as well
as the associated goodwill and other intangibles generated from these
transactions.
Interest Income, Net
Net interest income for continuing operations was $241,497 and $33,461 in
the nine months ended September 30, 1998 and 1997, respectively. Interest
expense on the Company's debt obligations in 1997 was more than offset by
interest earned on the proceeds from the sale of assets to IHS and the RRI
Transaction.
Provision (benefit) for Income Taxes
The provision (benefit) for Federal income taxes was $0 in 1998 and 1997.
The state income tax provision was $14,394 in 1998 and $11,909 in 1997. All of
the Company's deferred tax assets as of September 30, 1998 has been offset by a
valuation allowance as a result of the Company's operating results.
Year 2000
The Company's outside computer consultants have been engaged to address Year
2000 issues. The consultants are scheduled to perform an inventory and review of
all information systems, both hardware and software, in the first quarter of
1999. The Company expects to complete remediation and testing of its internal
systems by June 30, 1999. Although there can be no assurances, the Company does
not presently anticipate any material disruptions in its operations as a result
of any failure by the Company to be in compliance. The Company does not
currently have information concerning the Year 2000 compliance status of its
suppliers. In the event the Company's significant suppliers do not successfully
and timely achieve Year 2000 compliance, the company's operations could be
adversely affected.
Based on the Company's current estimates, costs relating to Year 2000 are
not expected to be significant. The Company intends to develop contingency plans
based on information provided by the Company's consultants in the first quarter
of 1999.
-12-
<PAGE>
Liquidity and Capital Resources
The Company experienced a positive net cash flow of $878,703 during the
first nine months of 1998. Net cash used in operating activities of continuing
operations was $548,913 relating primarily to corporate general and
administrative expenses. Net cash provided by investing activities of $1,464,654
reflects the investment in U.S. Government securities of available cash arising
from the proceeds received directly by the Company from the sale of discontinued
operations, and the repayments by Consulting Customers of $3,168,033. Net cash
used in financing activities of $37,038 reflects principal payments on notes
issued in connection with the Company's acquisition of dry cleaning stores.
The Company has made advances to certain affiliates and Consulting
Customers. As of January 1, 1997, the Company had advanced $156,868 to Techtron.
During 1998 and 1997, an additional $94,000, and $78,996, respectively, was
advanced to TechTron by the Company. The Company has obtained notes from
TechTron for all of the advances.Payments on the notes are not anticipated in
1998 due to the fact that Techtron does not expect to earn sufficient revenues
to make payment. Although the notes have been guaranteed by Certain Executive
Officers, no assurance can be given that the notes will be repaid. Through
December 31, 1997, the Company had advanced loans to the physician principals of
UMDC not affiliated with the Company aggregating $450,000 and loans to UMDC in
the amount of $622,449, and had provided $1,048,841 of equipment and supplies to
UMDC for which the Company had not yet been reimbursed. The loans bear interest
at prime less 1% and remained outstanding as of December 31, 1997. There were no
repayments made by UMDC during 1997. Advances and supplies and equipment in 1997
to UMDC totaled $1,175,494.
The Company expects that the cash received from the sale of the Company's
assets to IHS, the proceeds derived by the Company as repayments of amounts due
from Alpha and CDBI following the IHS Closing and repayments of amounts due the
Company from UMDC resulting from the RRI transaction and from UMDC's continuing
operations will be sufficient to fund the Company's operations through year-end
1999.
Although the Company is currently investigating prospective merger and
acquisition candidates, with the exception of the Company's investment in United
the Company has not determined the specific application of the proceeds from the
IHS transaction (including amounts payable pursuant to the Consulting Agreement)
and the amounts paid and payable to the Company from the sale of UMDC's assets
to RRI and from the ongoing operations of UMDC (collectively, the "Proceeds").
Although the Company does not presently intend to spend in excess of the net
cash Proceeds in any future acquisitions or investments, it is possible that
future transactions could require additional funds. Sources of funds could
include bank and other third party borrowings or the sale of debt or equity
securities. The Company has no current commitments or arrangements for
additional financing and there can be no assurance that the Company would be
successful in obtaining any required additional funds.
-13-
<PAGE>
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997.
This statement is effective for the Company's fiscal year ending December 31,
1998. This statement addresses the reporting and displaying of comprehensive
income and its components. The Company has adopted SFAS No. 130 as of January 1,
1998.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the Company's shareholders ("Annual Meeting") was held
on April 28, 1998. At the Annual Meeting, the Company's shareholders elected
each of Martin G. Jacobs, M.D. and Stanley B. Amsterdam as Class I directors.
There were 2,646,383 votes cast for, and 16,100 votes withheld from the election
of each of Dr. Jacobs and Mr. Amsterdam. No votes were cast against the nominees
and there were no broker non-votes. The shareholders of the Company also
ratified the appointment of Arthur Andersen LLP as the Company's independent
public accountants for the fiscal year ending December 31, 1998. There were
2,657,683 votes cast for, 1,800 votes cast against and 3,000 votes abstained
from the ratification. There were no broker non-votes.
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 21, 1998
concerning the acquisition of substantially all of the operating
assets of Ultimate Cleaners, Inc., an Arizona corporation by United
Dry Cleaning, L.L.C., a subsidiary of the Company.
A report on Form 8-K was filed by the Company on May 15, 1998
concerning the appointment of Mark N. Raab, the Company's controller,
as acting Chief Financial Officer of the Company and the resignation
of Ronald A. Lefkon from his position as Chief Financial Officer.
-14-
<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: September 13, 1998 By: /s/ Steven L. Trenk
STEVEN L. TRENK
President and Chief Operating
Officer and Director
Date: September 13, 1998 By: /s/ Mark N. Raab
MARK N. RAAB
Acting Chief Financial Officer
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