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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act Of 1934 for the fiscal year ended December 31, 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 No. 0-24542
Continental Choice Care, Inc.
(Name of small business issuer 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)
Issuer's Telephone Number, Including Area Code: (973) 593-0500
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock
Warrants, each to purchase one share of Common Stock Units, each
comprised of one share of Common Stock and one Warrant
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuers's revenues for its most recent fiscal year: $4,365,749
As of March 20, 1998, 3,237,500 common shares were outstanding, and the
aggregate market value of the common shares of Continental Choice Care, Inc.
held by non-affiliates was approximately $2,974,270.
Documents Incorporated By Reference
Document Incorporated Part of Report
By Reference Into Which Incorporated
Proxy Statement for 1998 Annual Meeting
of Shareholders Part III
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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This Annual Report on Form 10-KSB 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. Certain factors which could cause actual
results to differ and which are known to the Company are set forth in, without
limitation, the Items of this Annual Report designated "Item 1. Business,""Item
5. Market for Company Common Stock and Related Security Holder Matters" and
"Item 6. Management's Discussion and Analysis."
Item 1. Business
General
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." Prior to the sale of substantially
all of the Company's operating assets (see "Recent Developments") the Company
was 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, and owned and operated a
training center in Linden, New Jersey to train individual clients in the
self-administration of dialysis treatments. The Company previously owned and
operated an in-center facility in Cape May Court House, New Jersey for the
provision of in-center dialysis for the Company's clients. The Cape May Court
House facility was sold by the Company in 1996. The Company was also engaged in
the provision of consulting and administrative services and acute care dialysis
nursing placement services. Consulting and administrative services were provided
by the Company to Upper Manhattan Dialysis Center, Inc. ("UMDC"), Alpha
Administration Corp. ("Alpha") and Continental Dialysis Center of the Bronx,
Inc. ("CDBI"), each of which is a New York corporation. Alpha, CDBI and UMDC are
sometimes referred to collectively as the "Consulting Customers". All of the
outstanding common stock of Alpha and CDBI and 50% of the outstanding common
stock of UMDC is owned by Alvin S. Trenk, Steven L. Trenk and Martin G. Jacobs,
M.D., the Company's Chairman, President and Corporate Medical Director,
respectively (collectively, the "Certain Executive Officers").
Recent Developments
UMDC Sale of Assets
At a closing effective on January 29, 1998 (the "First RRI Closing"),
UMDC sold substantially all of its assets to Renal Research Institute, LLC
("RRI") pursuant to the terms of an Asset Purchase Agreement (the "RRI Purchase
Agreement") among UMDC, RRI and the shareholders of UMDC. RRI is a joint venture
between Fresenius Medical Care, N.A. and Beth Israel Medical Center.
<PAGE>
At the First RRI Closing, RRI paid approximately $4,174,000, in partial
payment of an aggregate purchase price of approximately $7,984,000, for the
assets of UMDC. UMDC retained its accounts receivable, cash and cash equivalents
in the transaction, as well as certain liabilities of UMDC outstanding as of the
date of First RRI Closing.
Under New York law, ownership of a New York health care facility such
as UMDC generally cannot be sold or otherwise transferred without the approval
("NY Approval") of the New York State Department of Health ("NYDH"). Further,
due to the fact that RRI is neither a natural person nor a New York health care
facility, New York law prohibits RRI from owning and operating UMDC. See
"Operations - Consulting Services and Subcontracting" and "Governmental
Regulation - New York Health Care Licensure Requirements." Under the terms of
the RRI Purchase Agreement, Beth Israel Medical Center has applied for a NY
Approval to own and operate the in-center dialysis facility currently operated
by UMDC. In the event NY Approval is received, RRI is expected to promptly pay
the remainder of the purchase price for the assets of UMDC at a second closing
(the "RRI Second Closing"). The remainder of the UMDC purchase price is
approximately $3,810,000, of which approximately $2,375,000 is additional
purchase price for the assets of UMDC and $1,435,000 will be paid for a covenant
not to compete. The aggregate purchase price paid as of the RRI Second Closing
is expected to be reduced by the net value of certain current assets retained by
UMDC as of the RRI Second Closing, including without limitation, cash and
accounts receivable. There can be no assurance that the NY Approval will be
granted by NYDH or that the RRI Second Closing will otherwise occur.
The Company and Certain Executive Officers previously guaranteed
certain bank debt of UMDC, of which approximately $628,000 was outstanding as of
the date of the First RRI Closing. See "Liquidity and Capital Resources". As of
the First RRI Closing, $3,452,000 was due from UMDC to the Company for monies
loaned to UMDC and additional non-bank liabilities incurred by the Company on
behalf of UMDC and certain of its shareholders. Further, as of the date of the
sale, UMDC owed the Company approximately $1,389,000 in various accrued
consulting and service fees. See "Consulting Services and Subcontracting." The
Company has not recorded certain transactions relating to the foregoing
transactions, approximating $2,176,000 through December 31, 1997 due to
realization uncertainties.
The Company expects to receive an aggregate of approximately $4,500,000
from UMDC from the proceeds of the transaction and from the operations of UMDC.
There can be no assurance that the RRI Second Closing will occur. In the event
the RRI Second Closing does occur, there can be no assurance that the Company
will receive additional amounts due it or, if received, that such amounts will
be received in the near term. At the time of the First RRI Closing, the Company
received approximately $2,665,000. In addition, at the First RRI Closing, UMDC
paid its remaining outstanding bank debt, which was guaranteed by the Company
and Certain Executive Officers. The Company's guaranty of the UMDC bank debt was
partially secured by a deposit of $250,000 held by the lending bank. The
guaranties to the extent related to UMDC and the deposit were released to the
Company following the First RRI Closing.
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Pending the NY Approval, RRI and UMDC have entered into a Consulting
and Administrative Services Agreement (the "RRI Consulting Agreement") pursuant
to which RRI will provide UMDC with the use of the assets sold by UMDC to RRI
and RRI will provide certain other enumerated services to UMDC in exchange for a
consulting fee. RRI's fee is not payable, and accrues to the extent not paid,
during any month in which UMDC does not retain a minimum of $28,000 of cash from
net income. As discussed below, the Company is entitled to receive a portion of
funds derived from the operations of UMDC. UMDC has advised the Company that it
expects to earn net income of approximately $252,000 after the First RRI Closing
and pending the NY Approval if the NY Approval is granted in November 1998. The
amount of monthly net income which UMDC expects to earn during the term of the
RRI Consulting Agreement is subject to substantial variation based on a wide
variety of factors and no assurance can be given that such amount will be
attained or that UMDC will not operate on a break even basis or suffer losses
during the relevant periods.
In connection with the transaction, the Company terminated its
consulting and administrative services agreement with UMDC. Pursuant to the
terms of an Agreement and Release among the Company, UMDC and the shareholders
of UMDC, the parties agreed that all amounts payable after the First RRI Closing
from the RRI transaction or otherwise payable or paid to UMDC would generally be
distributed first to the Company in the amount of $516,663, second to the
physician shareholders of UMDC in the amount of $135,000, third to the Company
in the amount of $270,000 and thereafter, with respect to all remaining amounts,
25% of each dollar to Jonathan Lorch, M.D., 25% of each dollar to Stanley
Cortell, M.D., and 50% of each dollar to the Company. To the extent the
aggregate amount paid to the Company shall exceed $5,000,000, the agreement
provides that any excess payments otherwise due to the Company are to be paid to
Certain Executive Officers. However, any such monies are subject to an agreement
among the Company and Certain Executive Officers pursuant to which the Certain
Executive Officers generally assign all monies received by them in connection
with the New York Consulting Customers to the Company and the Company
indemnifies the Certain Executive Officers for any tax liability arising from
such assignment.
In the event the NY Approval is not granted before February 2000 or
upon the occurrence of certain other events, UMDC and RRI may extend the term of
the RRI Consulting Agreement or may enter into a joint sale of UMDC. In
addition, upon the occurrence of certain events, the RRI Consulting Agreement
may be terminated, in which event UMDC will be required to repurchase its assets
at a fixed monthly rate over a term of years, unless sooner paid. In addition,
UMDC and its shareholders, including Certain Executive Officers, have
indemnified RRI against damages arising from certain breaches of the Purchase
Agreement.
No assurance can be given that the NY Approval will be granted or that
the transactions contemplated by the RRI Purchase Agreement or the RRI
Consulting Agreement will otherwise be consummated or that NYDH will not seek to
modify or terminate the arrangements between UMDC and RRI. No assurance can be
given that UMDC will earn sufficient net income to be able to make payments to
the Company during the term of the RRI Consulting Agreement or that UMDC will
not suffer losses during the term of the RRI Consulting Agreement. In the event
of a breach of the covenant not to compete, no assurance can be given that the
Company will not be obligated to pay damages to RRI. No assurance can be given
that Certain Executive Officers will not incur costs, expenses, liabilities or
damages which are subject to indemnity by the Company in connection with the
Purchase Agreement, the RRI Consulting Agreement, the ownership and operation of
UMDC or any covenant not to compete.
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Sale of Assets to IHS of New York, Inc.
The Company, other than Renal Management, Inc. ("RMI"), as well as CDBI
and Alpha, (collectively, the "IHS Sellers") sold substantially all of their
respective assets to IHS of New York, Inc., a New York corporation ("IHS") at a
closing effective October 8, 1997. The transaction was closed pursuant to the
terms of an Asset Purchase Agreement among the Company, CDBI and Alpha dated
February 12, 1997, as amended (the "IHS Purchase Agreement") on substantially
the terms approved by the shareholders of Continental Choice Care, Inc. The
assets sold did not include cash, cash equivalents, accounts receivable, or
other related assets. In addition, International Health Specialists, Inc., an
affiliate of IHS, executed a guaranty of all obligations of IHS to close the
transactions contemplated by the IHS Purchase Agreement and to pay the purchase
price.
The purchase price for the assets was $5,120,000. $500,000 of the
purchase price was placed in escrow pursuant to an escrow agreement to secure
the indemnity obligations of the IHS Sellers to IHS under the terms of the IHS
Purchase Agreement. Pursuant to the terms of the escrow, $250,000 of the
escrowed amount is to be released to the Company on April 8, 1998, $125,000 is
to be released to the Company on October 8, 1998 and $125,000 is to be released
to the Company on April 8, 1999. The Company is not aware of any pending or
threatened claims against the escrowed funds.
In addition to the IHS Purchase Agreement and related escrow
agreements, the Company and IHS entered into a consulting agreement (the "IHS
Consulting Agreement"). Under the terms of the IHS Consulting Agreement, the
Company has agreed to provide the consulting services of the Certain Executive
Officers to IHS for a period of three years in exchange for aggregate payments
of $1,000,000 from IHS to the Company payable over the term of the IHS
Consulting Agreement. The IHS Consulting Agreement may be terminated by IHS in
the event the Company is unable to provide the services of two or more of the
Certain Executive Officers or upon a breach by the Company or the Certain
Executive Officers of the terms of the IHS Consulting Agreement. The Company is
entitled to terminate the IHS Consulting Agreement and IHS will thereafter be
relieved of its obligation to make payments under the IHS Consulting Agreement.
IHS may terminate the IHS Consulting Agreement at any time on 90 days' notice,
provided that thereafter IHS is required to continue making payments to the
Company in accordance with the agreement.
IHS has advised the Company and the Certain Executive Officers that IHS
has, to date, failed to obtain final NY Approval to become the duly licensed
owner and operator of CDBI and South Bronx Kidney Center ("SBKC"), currently
owned and operated by Alpha. As a result, Alpha and CDBI currently remain the
owners and operators of the New York in-center facilities other than those owned
by UMDC. Alpha and CDBI are currently negotiating with IHS to enter into
consulting and service agreements with IHS pursuant to which IHS would provide
certain services to the New York facilities and would make the assets acquired
by IHS available to Alpha and CDBI. No assurance can be given that IHS will
receive any or all of the state licenses and approvals required to permit IHS to
own and operate the facilities. The failure of IHS to obtain NY Approvals could
cause IHS to be unable to pay amounts due to the Company under the terms of the
IHS Consulting Agreement. Further, in the event IHS is unable to obtain NY
Approval and the parties are unable to negotiate the
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terms of consulting and service agreements, Alpha and CDBI could be required to
close the SBKC and CDBI facilities. In such event, or in the event Alpha or CDBI
incur liabilities or penalties not indemnified by IHS pursuant to the IHS
Purchase Agreement, the Certain Executive Officers could incur liabilities for
which they may be able to seek indemnity from the Company. If and to the extent
the Certain Executive Officers are entitled to indemnification, the Company
could incur costs and expenses, which could have a material adverse effect on
the consolidated financial condition of the Company.
The Company and the Certain Executive Officers agreed not to compete in
the dialysis treatment and certain related businesses (i) in the case of IHS,
within 25 miles of any business acquired by IHS for a period of five years
following October 8, 1997 and (ii) in the case of RRI, generally within the
Borough of Manhattan, New York for a period of ten years following January 29,
1998. Further, the Company and Certain Executive Officers remain subject to a
Covenant Not to Compete which obligates each of them to refrain from competing
with Renal Treatment Centers, Inc. and certain of its subsidiaries in New Jersey
within 35 miles of Cape May Court House, New Jersey in certain businesses for a
term of seven years. The covenants not to compete do not restrict RMI from
engaging in the renal disease state management and physician practice management
businesses.
Certain Post Sale Matters
Although the Board of Directors of the Company (the "Board") is
currently investigating prospective merger and acquisition candidates, the Board
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"). The
Board does not currently intend to distribute the Proceeds to the Company's
shareholders. However, the uses of the Proceeds currently being considered by
the Board include the development, acquisition or investment in or merger with
new or existing businesses and general business purposes. Such activities could
include the acquisition of an entire company or companies, or divisions thereof,
either through a merger or a purchase of assets, as well as an investment in the
securities of a company or companies or, alternatively, a combination with
another business in which the Company would not be the surviving corporation.
The Company has had preliminary discussions concerning some acquisitions. There
can be no assurance that the Company will be successful in its efforts.
Redeployment of the Company's assets into new investments and businesses entails
risk to the shareholders. 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. There can be no assurance that the
Company would be successful in obtaining any required additional funds.
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Personal Holding Company Considerations
Section 541 of the Internal Revenue Code of 1986, as amended (the
"IRC") subjects a corporation which is a "personal holding company," as defined
in the IRC, to a 39.6% penalty tax on undistributed personal holding company
income in addition to the corporation's normal income tax. While the Company
does not currently come within the definition of a "personal holding company,"
certain events could cause the Company to be subject to the penalty tax. See,
"Certain Tax Matters."
Nasdaq Listing Considerations
The Nasdaq Stock Market, Inc. ("Nasdaq") has advised the Company that
Nasdaq is likely to seek a delisting of the Company's securities from trading in
the event the Company is a "public shell" following the consummation of the
asset sale transactions. Further, the Company does not currently meet the
continuing listing requirements for the national market system adopted by Nasdaq
in February 1998. No assurance can be given that Nasdaq will not determine that
the Company constitutes a "public shell" or otherwise delist the Company's
securities from the national market system. See, "Item 5. Market for Company
Common Stock and Related Security Holder Matters."
Investment Company Act Considerations
The Investment Company Act of 1940, as amended ("1940 Act"), requires the
registration of, and imposes various substantive restrictions on, certain
companies that engage primarily, or propose to engage primarily, in the business
of investing, reinvesting, or trading in securities, or that fail certain
statistical tests regarding the composition of assets and sources of income, and
are not primarily engaged in businesses other than investing, holding, owning or
trading securities. The Company intends to engage in businesses other than
investing, reinvesting, owning, holding or trading in securities in the 1998
fiscal year. The Company will seek to invest temporarily the proceeds of the RRI
and IHS transactions and to utilize the proceeds in a manner so as to avoid
becoming subject to the registration requirements of the 1940 Act. Such
investment is likely to result in the Company obtaining lower yields on the
funds invested than might be available in the securities market generally. There
can be no assurance that such investments and utilization can be made. If the
Company were required to register as an investment company under the 1940 Act,
it would become subject to substantial regulation with respect to its capital
structure, management, operations, transactions with affiliates, and other
matters.
Background
The Company's former clients and the patients of the Consulting
Customers who receive dialysis treatments suffer from end stage renal disease
("ESRD"), which is the permanent failure of the kidneys to function properly.
The function of the kidney is to remove waste products, maintain healthy levels
of bodily fluids and help regulate blood pressure. Kidneys generally act as the
body's filter, separating harmful substances from useful substances and
maintaining a healthy balance of chemicals and water in the blood. When the
kidneys fail, a chemical imbalance and buildup of toxic chemicals can cause
serious illness or death. Individuals with ESRD must either undergo a kidney
transplant or receive dialysis treatments on a continuing basis.
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Dialysis treatments are in the form of either hemodialysis or
peritoneal dialysis. Hemodialysis uses a machine and an "artificial kidney," or
dialyzer, to remove toxic chemicals from the blood stream and replace cleansed
blood to the patient. Patients generally undergo hemodialysis three times a week
for 2-1/2 to 4 hours per treatment.
Peritoneal dialysis is a form of dialysis therapy which involves
placing sterile dialysis solutions into the peritoneal cavity of the body for
periodic removal. This process cleanses a patient's blood within the body,
rather than through a machine. Peritoneal dialysis treatments can be divided
into three categories: (i) intermittent peritoneal dialysis ("IPD") involves the
connection of a patient's catheter to a machine which performs the necessary
exchanges through the peritoneum, (ii) continuous cycling peritoneal dialysis
("CCPD") involves the connection of the patient's catheter to a machine which
performs three or more solution exchanges while the patient sleeps and (iii)
continuous ambulatory peritoneal dialysis ("CAPD") in which patients fill their
peritoneum with dialysate through their catheter.
Operations
Residential Alternative Site Dialysis
Residential clients are those who receive some or all treatments in a
residential setting, whether at home or in an institution. Prior to the IHS
Transaction, residential clients were generally referred to the Company by the
client's treating physician or, less frequently, by a hospital or social welfare
agency. Services for clients who reside in institutions, such as prisons, with
which the Company had agreements, were generally supplied pursuant to the terms
of the agreement between the Company and the institution.
Upon receiving a referral, the Company confirmed the existence of
insurance or Medicare eligibility. Dialysis equipment and the supplies needed by
the client were supplied directly by the Company or on the Company's behalf by
third party suppliers. Prescription drugs were also supplied by third party
suppliers, including pharmacies.
Equipment provided to the Company's clients was purchased or leased by
the Company and maintained through the manufacturer of the equipment or using
the Company's employees.
If the physician or the patient required nursing services to assist in
the administration of dialysis treatments, the Company provided the nurse at an
additional charge. Nursing services are not reimbursed under the Medicare
program. The Company generally placed nurses with clients on an independent
contractor or per diem basis and retained some nurses on a full time basis.
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The provision of supplies and equipment, as well as the maintenance of
patient records and other regulatory and operational requirements, were
supervised by physicians ("Medical Directors") retained by the Company, usually
pursuant to Medical Director's agreements with the Company.
New York Operations
The Company's operations in New York included the provision of
dialysis-related services, equipment and supplies to clients in their homes, to
the SBKC, CDBI, UMDC, one hospital and three long-term care facilities. Alpha
acquired the assets of SBKC during the second quarter of 1997. In connection
with the provision of such services, equipment and supplies to its home-based
clients, the Company had arrangements with physicians who provided protocol
development services to the Company and reviewed dialysis patient performance
for such clients. To supplement its furnishing of dialysis-related services,
equipment and supplies to New York based long-term care facilities, the Company
provided, through its staff of nurses and medical technicians, a program of
dialysis training to staff members of the long-term care facilities. The
Company's arrangements with SBKC, Alpha, CDBI, the New York hospital and long
term care facilities were terminated or assigned to IHS at the closing of the
IHS Transaction (the "IHS Closing"). The Company's agreement to provide
consulting services, equipment and supplies to UMDC was terminated at the First
RRI Closing.
The Company also operated a licensed employment agency specializing in
the placement of nurses (a "nurse registry") in homes, freestanding dialysis
centers, long-term care facilities and hospitals. The assets of the nurse
registry were transferred to IHS at the IHS Closing.
The Company established a home care services agency to enable the
Company to directly provide in-home dialysis and in-home nursing services to
individual clients in New York. The operation of the home care services agency,
the assets of which were transferred at the IHS Closing, was licensed by the
NYDH. Substantially no operations were conducted by the agency prior to the IHS
Closing.
Nursing Services
The Company placed dialysis nurses on a part-time basis to provide
hemodialysis treatments pursuant to agreements with three hospitals and pursuant
to a subcontract to provide dialysis services to prisoners in prisons operated
by the State of New Jersey. In addition, the Company had contracts to provide
training services to approximately eighteen nursing homes. Each of the Company's
agreements to provide nursing services were assigned or terminated in connection
with the IHS Closing. The Company was not reimbursed separately under Medicare
for nursing services rendered to institutionalized patients. Nursing services
were included in the services provided to clients at prisons and In-Center
Facilities. Patients receiving nursing services for home-dialysis treatments
paid for the nursing services separately, usually relying on private insurance
for funds.
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Training
The provision of services in the Linden Training Center was generally
reimbursed by Medicare at the same reimbursement rate at which Medicare
reimbursed the Company for dialysis treatments generally. In addition, Medicare
reimbursed approximately $12.00 to $20.00 (depending upon modality) per
treatment for the training component of the services.
Consulting Services and Subcontracting
New York law provides that entities which operate certain health care
facilities may be owned only by natural persons or corporations or general
partnerships comprised solely of natural persons. In addition, New York health
care regulations prohibit certain health care facilities, such as In-Centers
from entering into management agreements with third parties. General hospitals
may not enter into management agreements without the prior approval of the NYDH.
See "Governmental Regulation -- New York Health Care Licensure Requirements." As
a result of the foregoing, the Company did not own or operate licensed health
care facilities in New York.
The Company operated in New York by entering into consulting, service
or subcontracting agreements with the Consulting Customers which are licensed
New York health care facilities.
The Company provided services to three Consulting Customers, National
Nephrology Foundation, Inc. ("NNF"), CDBI and UMDC. NNF was the previous owner
and operator of SBKC. The Company also provided services to Alpha in connection
with and following its acquisition of the assets of SBKC from NNF. Alpha and
CDBI are wholly-owned by the Certain Executive Officers. In addition, the
Certain Executive Officers acquired an aggregate of 50% of the outstanding
common stock of UMDC in 1995. Prior to the sale of the assets of SBKC to Alpha,
the Company provided services to SBKC pursuant to a consulting and
administrative services agreement (the "NNF In- Center Agreement") between Alpha
and NNF which Alpha assigned to the Company. The obligations of NNF under the
terms of the NNF In-Center Agreement were assumed by Alpha upon the acquisition
of the assets of SBKC. In connection with the acquisition of the assets of SBKC
by Alpha, Alpha entered into a consulting and services agreement with the
Company (the "Alpha Agreement") containing substantially the same terms as the
NNF In-Center Agreement.
Under the terms of the NNF In-Center and Alpha Agreements, the Company
provided a variety of advisory services for a maximum annual consulting fee of
$240,000. The consulting fee was expressly subordinated to the payment of all
operating expenses of SBKC arising after April 16, 1993 and prior to the
acquisition of SBKC's assets by Alpha.
Alpha obtained an option (the "NNF Option") to acquire the assets and
business of SBKC from NNF, subject to regulatory approval. As consideration for
the NNF Option, Alpha agreed to pay an aggregate sum of $500,000. Alpha also
agreed to pay an amount (each a "Shortfall") equal to the amount by which Alpha
and NNF agreed that the monthly current cash requirements for the operation of
SBKC exceeded the cash available from the operation of SBKC. The purchase price
for the acquisition of the assets under the terms of the NNF Option was
$500,000, less all amounts other than Shortfalls paid by Alpha in connection
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with the NNF Option. The Company paid the option purchase price and all other
costs incurred by Alpha in connection with the NNF Option, including any
Shortfall payments, other than Shortfall payments aggregating $565,000 which
were in the form of promissory notes made by Alpha payable to the Company
bearing interest at 8% per annum and payable on April 24, 1999 ($300,000) and
December 31, 1999 ($265,000). The $565,000 represents Shortfalls incurred by
SBKC during the period from May 1, 1993 through December 31, 1994. The
obligations of Alpha under the terms of the promissory note were guaranteed,
jointly and severally, by each of the shareholders of Alpha. Alpha also incurred
an obligation, pursuant to the terms of an employment agreement with a former
officer of NNF, to make payments of $200,000 per annum for a period of five
years to the estate of the former officer of NNF, the payment of which was also
guaranteed by CDI.
In 1997, NNF and Alpha entered into a settlement pursuant to which NNF
transferred substantially all of the assets of SBKC to Alpha in consideration of
(i) all amounts previously paid to or on behalf of NNF by Alpha and the Company,
an aggregate of $650,000, plus (ii) the sum of $95,000, representing certain
expenses incurred by NNF pending the approval of the transaction by NYDH and the
courts of the State of New York. In addition, the estate of the former medical
director agreed to settle all claims the estate had for payment by Alpha for
$225,000, which was paid by the Company. In connection with the IHS Closing,
Alpha repaid the Company the sum of $900,000 and paid an additional $353,000
from the collection of pre-closing accounts receivable net of Alpha's
liabilities through December 31, 1997. No assurance can be given that Alpha will
have sufficient funds to repay the Company all amounts due the Company.
The Company was also a party to a consulting and services agreement
(the "CDBI Agreement") with CDBI. Under the terms of the CDBI Agreement, the
Company provided consulting and administrative services in connection with
CDBI's formation, construction and operations. CDBI accrued annual fees of
$240,000 for the provision of services under the CDBI Agreement. However, the
Company did not record income related to these fees due to realization
uncertainties. As of the IHS Closing, CDBI accrued $200,000 of fees under the
CDBI Agreement. The obligations of payment under the CDBI Agreement were not
subordinated to the payment of operating expenses of CDBI. As of October 8, 1997
and December 31, 1996, the Company had advanced approximately $1,550,000 and
$1,177,000, respectively, to CDBI, which amounts were reflected by promissory
notes bearing interest at the rate of 8% per annum due March 19, 2001 and
February 24, 2002. Payment under the promissory notes and payment of advances in
the amount of $1,600,000 was made in connection with the IHS Closing. CDBI is
not expected to have sufficient resources to pay its accrued consulting fees.
Under the terms of a consulting and services agreement (the "UMDC
Agreement") with UMDC, the Company provided consulting and administrative
services to UMDC in consideration of a fee of $400,000 per annum plus the amount
of all direct costs incurred by the Company in connection with the rendering of
services and the provisions of equipment and supplies. The Company also
guaranteed payment by UMDC under the terms of a lease for the premises occupied
by UMDC. The Company's guaranty of the lease was released in connection with the
RRI Closing.
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In September 1994, a bank lender (the "Bank") loaned the sum of
$1,900,000 to UMDC (the "UMDC Term Loan") to finance capital improvements, to
repay principal and accrued interest on a bridge loan advanced by the Bank to
finance construction costs associated with the center and to provide working
capital for use in connection with UMDC's In-Center Facility. In April 1995, the
Bank agreed to advance up to an additional $500,000 to UMDC for working capital
purposes under a revolving line of credit (the "Revolver"). The UMDC Term Loan
and the Revolver bore interest at the Bank's prime rate plus 1%.
The UMDC Term Loan and the Revolver were guaranteed by the Company,
the Certain Executive Officers and Drs. Lorch and Cortell, the physician
shareholders holding 50% of the outstanding common stock of UMDC. Principal
under the Revolver was originally due and payable on December 31, 1995. The
principal payment date was extended to the RRI Closing. The principal amounts
and interest outstanding under the UMDC Term Loan and the Revolver, aggregating
approximately $628,000, were paid in connection with the RRI Closing and the
Bank released its interest in $250,000 cash collateral provided by the Company.
In 1994, Drs. Lorch and Cortell were required to make a $350,000
capital contribution to UMDC. The Company advanced the sum of $350,000 to Drs.
Lorch and Cortell as a loan. As of the date of the UMDC loan, Drs. Lorch and
Cortell had contributed an aggregate of $100,000 to the capital of UMDC. Such
amount was also advanced by the Company to Drs. Lorch and Cortell. All advances
were made pursuant to the terms of promissory notes which bear interest at the
Bank's prime rate less 1% and were due on May 16, 1995. The maturity dates were
extended by the Company to November 30, 1995. The principal amount outstanding
of the physicians' loans is expected to be repaid pursuant to the proceeds of
the UMDC Agreement and Release. See "Recent Developments". Further, the Company
loaned an aggregate of $301,500 to UMDC, which amount UMDC repaid to the Company
in January, 1998, with accrued interest at the Bank's prime rate less 1%. As
security for repayment of the loans and to secure the individual guarantees,
Drs. Lorch and Cortell have pledged the outstanding common stock of UMDC held by
them to the Company, and Certain Executive Officers. The pledges are required to
be released upon payment of certain amounts pursuant to the UMDC Agreement and
Release. While the Company released its existing security interest in UMDC's
furniture, fixtures and equipment in connection with the RRI Closing, it
generally retained its rights with respect to proceeds of the RRI Transaction
and amounts arising or delivered from the operation of UMDC prior to the RRI
Closing.
As of December 31, 1997 and 1996, the Company had amounts due from UMDC
for working capital advances and for equipment and supplies delivered by the
Company to UMDC and consulting and other fees of $2,665,677 and $1,490,183,
respectively. To the extent that the RRI Second Closing is consummated,
the Company expects to recognize some or all of the consulting and service
fees due from UMDC which were not previously recorded due to realization
uncertainties. No assurance can be given that the RRI Second Closing will
be consummated. See, "Recent Developments--UMDC Sale of Assets."
Physician Relationships
The primary source of clients for the Company was local physicians and,
to a lesser extent, hospitals and social agencies and organizations. The ability
of the Company to obtain Medicare and certain other third party reimbursement is
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conditioned upon the provision of services being under the general supervision
of a Medical Director who is a physician. Except for Dr. Jacobs, the Corporate
Medical Director, the Company's Medical Directors were generally either
consultants retained by, or employees hired by, the Company on a part time basis
pursuant to agreements providing for payments ranging, during 1997, from
approximately $6,000 to a maximum of approximately $24,000 per annum. In
substantially all cases, the Company's Medical Directors referred patients to
the Company and the Medical Directors of the Consulting Customers referred or
may in the future refer patients to the respective Consulting Customer.
Third Party Reimbursement
Substantially all of the Company's revenues were, and the Consulting
Customers revenues are, dependent upon reimbursement from third party payors,
including the Medicare and Medicaid programs and commercial insurance companies.
Under the Medicare ESRD program, Medicare reimburses dialysis providers
for the treatment of individuals who are diagnosed to have ESRD and are
otherwise eligible for Medicare, regardless of age or financial circumstances.
For each treatment, Medicare pays 80% and a secondary payor, usually Medicare
supplemental insurance or, to a lesser extent, private insurance or Medicaid,
pays approximately 20% of the amount set by the Medicare prospective
reimbursement systems. The States of New Jersey and New York provide Medicaid
benefits to qualified recipients to supplement their Medicare entitlement.
During the period following a patient's diagnosis of ESRD, payments to
the Company for its dialysis services were made by commercial insurance company
payors or private payors if the patient was not eligible for primary Medicare
coverage. Thereafter, patients enter the Medicare ESRD program in which
reimbursement rates are established by the Health Care Financing Administration
("HCFA"). Individuals receiving or entitled to Medicare reimbursement at the
time they develop ESRD are entitled to immediate reimbursement under Medicare
upon being diagnosed as having the disease.
Individuals not covered by group insurance and not already entitled to
Medicare benefits, but who are Medicare eligible, generally must wait until the
first day of the third month after the month in which a regular course of
dialysis begins, to be entitled to Medicare benefits.
Claims for Medicare reimbursement must generally be presented by
December 31 of the next calendar year if the claim relates to services or
supplies received from January 1 to September 30, and by December 31 of the
second calendar year if the claim relates to services or supplies received from
October 1 to December 31. Claims for secondary reimbursement must generally be
presented 60 to 90 days after payment of the Medicare claim.
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Governmental Regulation
General
The Company's operations were, and the operations of the Consulting
Customers are subject to extensive governmental regulations at the federal,
state and local levels. The laws, rules and regulations which govern the Company
and other persons with whom the Company has relationships are very broad and are
subject to continuing change and interpretation. There is also an absence of
regulations or decisions specifically addressing the dialysis business. Thus, it
is possible that certain of the Company's past or present contractual
arrangements or business practices might be challenged, and if so successfully
challenged, there can be no assurance that the Company would not be adversely
affected thereby.
In certain circumstances, federal and state law mandate that conviction
of certain abusive or fraudulent behavior with respect to one health care
facility may subject other facilities under common control or ownership to
disqualification for participation in Medicare and Medicaid programs. In
addition, some regulations provide that all facilities under common control or
ownership are subject to revocation of their licenses if any one or more of such
facilities' licenses are revoked. The Company is not subject to any proceedings
at this time to revoke its licenses. The Company provided consulting services to
certain facilities that are administered by corporations and/or physicians who
are not under the direct control of the Company. Because the Company does not
have control over the actions of such corporations and physicians who render
services, the Company is subject to the risk that such corporations or
physicians may have violated federal or state laws and regulations including
Medicare and Medicaid laws without the knowledge or consent of the Company.
Limited violations may have occurred at such facilities in the past. However,
the Company is not aware of any ongoing violations as of the date of this
filing.
Federal and State Anti-Kickback Laws
The Company was subject to state and federal laws prohibiting direct or
indirect remuneration for patient referrals and regulating reimbursement
procedures and practices under Medicare, Medicaid and other third party payors.
State and federal law may also prohibit physicians from referring patients to
providers with which the physician or his/her immediate family member has a
financial relationship. The federal Medicare and Medicaid legislation contains
the anti-kickback provisions which prohibit any remuneration in return for the
referral of Medicare or Medicaid patients. Applicable regulations provide
exceptions, or "safe harbors," from federal criminal and civil penalties by
identifying certain types of joint ventures and other arrangements that will be
deemed not to violate the illegal remuneration provisions. Arrangements which do
not fall within the safe harbors are not illegal per se; however, such
arrangements are subject to greater governmental scrutiny. The Medical
Directors, who are also in private practice, were the most important referral
sources of the Company's business. The compensation of the Medical Directors was
fixed by agreement and reflected competitive factors in their local markets and
the Medical Directors' professional qualifications, commitments and
responsibilities. The Company has never been challenged under these statutes and
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endeavors in good faith to comply with them. While the arrangements between the
Company and its former joint venture partners and certain other Medical
Directors did not fall within the protection afforded by these safe harbors, the
Company believes its operations were in material compliance with applicable
laws. Nevertheless, because of the breadth of the statutory provisions and the
absence of regulations or court decisions specifically addressing the
arrangements by which the Company conducted its business, it is possible that
certain of the Company's past contractual arrangements might be challenged.
There can be no assurance that the Company will not be materially adversely
affected as a result of a review or challenge to its past or present practices
under these statutory provisions. Violations of these provisions are punishable
by criminal and civil penalties, including individual monetary fines for each
separate service billed to Medicare in violation of the anti-kickback
provisions, exclusion of the provider from future participation in the Medicare
and Medicaid programs, and imprisonment for up to five years.
State Physician Self-Referral Laws
Several states have statutes prohibiting financial arrangements with
health care providers which, while similar in many respects to the federal
legislation, vary from state to state and are often vague and have infrequently
been interpreted by courts or regulatory agencies.
Medicare ESRD Program Regulations
As required by Medicare regulations, certain of the Company's
facilities were, and the Consulting Customers are supervised by Medical
Directors. In addition, the Company was and the Consulting Customers are
required to maintain complete medical records, obtain back-up agreements with
other renal dialysis facilities in certain instances, comply with record keeping
and reporting requirements of HCFA and satisfy other detailed regulatory
requirements. The failure to comply with these applicable regulations could
result in fines and penalties and in the Company's or the Consulting Customer's
loss of its Medicare and Medicaid certification. The loss of Medicare and
Medicaid certification by a Consulting Customer could result in the loss of the
provider's right to receive Medicaid and Medicare reimbursement, which comprises
the major source of revenue for the Consulting Customers.
State Corporate Practice of Professions
Under New York law, the Company may not arrange for the provision of or
directly engage physicians or nurses to provide or arrange for the provision of
professional services. Violation of the New York law prohibiting the
unauthorized practice of a profession is a felony with sanctions, including
fines of up to $10,000 and/or up to four years' imprisonment per offense.
Despite this broad prohibition, not all affiliations between corporations and
professionals are unlawful. New Jersey and New York also prohibit physicians and
14
nurses from splitting or sharing their professional fees with anyone other than
a partner, subcontractor or employee authorized to practice their profession. In
New York, this prohibition includes any fee the Company may have received from
its nurses which is set in terms of a percentage of a nurse's fee or otherwise
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clearly tied to a nurse's professional income, except any placement fee received
from a nurse for placement services provided by the Company's licenced nurse
registry.
New Jersey Nurse Registries
New Jersey also regulates the operations of an employment agency, which
is defined to include a nurses' registry, requiring such entity to be licensed
by the Division of Consumer Affairs, Department of Law and Public Safety. As a
licensed employment agency, the Company was required to maintain job placement
records, advertisement records, fee records and other correspondence by and
between the Company and the employer and the Company and the nurses it placed.
In addition, among other licensing and operating requirements, the Company was
required to prepare and execute written agreements with employers and nurses
which include information relating to the Company's fee schedule, timing of the
payment of the Company's fee and by whom, and the conditions under which an
adjustment or refund in the fee will be made.
New York Health Care Licensure Requirements
The rendering of health care services, including the provision and
management of renal dialysis services and nursing services, is highly regulated
in the State of New York with respect to licensure, management and control of
licensed facilities. Failure to comply with the applicable laws and regulations
could result in, among other things, the imposition of fines and in extreme
circumstances, license revocation and/or criminal prosecution.
Health care facilities, including hospitals, nursing homes, and
In-Center Facilities, are required to maintain an operating license under
Article 28. Article 28 facilities are subject to the New York State Health
Commissioner's (the "Health Commissioner") review and approval of the
management, certain operational activities, and the change of ownership thereof.
Health care facilities licensed under Article 28 may be owned or operated only
by natural persons or corporations or general partnerships if they are comprised
solely of natural persons. In addition, the change of control of 10% or more of
the stock or voting interest of an Article 28 facility is subject to regulatory
approval. The Company's operations in New York are subject to Article 28 and its
regulations as a result of the consulting and services agreements they maintain
with clients which are licensed under Article 28.
Under Article 28, the Company is permitted to provide consulting and
other administrative services to hospitals, In-Center Facilities and nursing
homes and management services to hospitals, subject to certain restrictions. The
Company is also permitted to be the lessor of real property and equipment
utilized in the operation of an In-Center Facility. However, the Company cannot
be licensed to operate an In-Center Facility in New York since Article 28
requires that only natural persons or corporations or general partnerships
comprised solely of natural persons may have an ownership interest in an Article
28 facility.
Article 28 limits the manner and extent to which licensed facilities
may delegate authority to perform certain management activities. Article 28
facilities, other than hospitals, are not permitted to enter into management
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agreements which give an outside entity which is not an Article 28 facility
primary responsibility for managing the day-to-day operations of an entire
facility or a defined patient unit.
The fees charged by the Company under any consulting and administrative
services agreement or management agreement with an Article 28 facility must be
determined in a manner which is not tied to the total gross income or net
revenue of the health care facility, since Article 28 facilities are subject to
regulations which prohibit fee splitting with non-Article 28 entities. The
Company believes that its consulting and administrative services agreements
were in compliance with the applicable provisions of Article 28 and its
regulations during the fiscal year.
New York also regulates the operations of nurse placement agencies. New
York law prohibits any person from operating a business within the City of New
York which procures or attempts to procure employment or other engagement for
registered nurses or licenced practical nurses without a license issued by the
Commissioner of Consumer Affairs of the City of New York. The Company operated a
duly licensed employment agency/nurse registry. As a licensed nurse registry,
the Company was restricted in the manner in which it could place nurses and the
amount of fees it could charge for a placement. The fee limitation to which a
licensed nurse registry is subject varies according to the services to be
provided by the nurse placed by the registry. A licensed nurse registry may
charge each nurse placed to provide private duty nursing services and the client
separate fees of up to five percent of the nurse's compensation for the first
ten weeks of the engagement for a total placement fee of ten percent of such
nurse's compensation. For all other nursing services, the licensed nurse
registry may charge each nurse placed and the client separate fees of up to five
percent of the nurse's compensation for the first year of the engagement, for a
total placement fee of ten percent of such nurse's compensation. In each
instance, the client may voluntarily assume the payment of the fee charged to
the nurse. See "Operations -- New York Operations" for the application of these
provisions to the Company's former operations.
Environmental Laws
The Company's operations were subject to various state hazardous waste
disposal laws. The Company disposed of its medical waste through hazardous waste
vendors which are primarily responsible for compliance with such laws. Those
laws in effect during the period in which the Company was engaged in the
provision of dialysis related services did not classify most of the waste
produced during the provision of dialysis services to be hazardous, although
disposal of nonhazardous medical waste is also subject to regulation. The
Company incurred disposal expenses of approximately $1,600 in 1997 for hazardous
and non-hazardous medical wastes.
In its role as owner and/or operator of properties or facilities, the
Company may be subject to liability for investigating and remedying any
hazardous substances that have come to be located on the property, including any
such substances that may have migrated from, or emitted, discharged, leaked,
escaped or been transported from the property.
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At the present time, the Company is not aware of any pending or
threatened claim, investigation or enforcement action regarding such
environmental issues that, if determined adversely to the Company, would have
material adverse consequences.
The Company believes that it is and was in substantial compliance with
all applicable environmental regulatory requirements, and is not aware of any
noncompliance with applicable environmental regulatory requirements which could
have a material adverse effect upon the Company.
The Company is also subject to state and federal laws, including OSHA,
relating to occupational safety and health standards designed to protect the
Company's employees and clients. OSHA regulations require employers of workers
who are occupationally exposed to blood or other potentially infectious
materials, including workers involved in the Company's former dialysis business,
to provide those workers with certain prescribed protections against blood borne
pathogens. The regulatory requirements apply to all health care centers,
including dialysis centers. The regulations require employers to make a
determination as to which employees may be exposed to blood or other potentially
infectious materials and maintain a written exposure control plan. In addition,
employers are required to provide hepatitis B vaccinations, personal protective
equipment, infection control training, post-exposure evaluation and follow-up,
waste disposal techniques and procedures, and engineering and work practice
controls.
The Company's former dialysis operations were subject to a wide variety
of other federal, state and local environmental laws and regulations. Among the
types of general regulatory requirements faced by health care providers are: air
and water quality control requirements; waste management requirements; specific
regulatory requirements applicable to asbestos, polychlorinated biphenyls, and
radioactive substances; requirements for providing notice to employees and
members of the public about hazardous materials and wastes; and certain other
requirements.
Competition
Competition for patients and referral sources in the dialysis business
previously conducted by the Company and currently conducted by the former
Consulting Customers is highly competitive. The Company competed 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.
Certain Tax Matters
A substantial number of nurses who provided services on behalf of the
Company and on behalf of UMDC and NNF were not employed as employees by the
Company and were treated by the Company as independent contractors for purposes
of federal and state tax laws. The Company is aware that the Internal Revenue
Service (the "IRS") recently considered the status of nurses providing services
through a specific nurse registry and concluded that the nurses in that case
were employees and not independent contractors of the nurse registry. The
Company believes that the former relationship between its nurse registry and the
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nurses providing services through the nurse registry and the former relationship
among the consulting customers and the nurses providing services through the
consulting customers are distinguishable from the case considered by the IRS.
Further, even if the nurses were considered to have been employees of the
Company or the consulting customers, the Company believes it and the consulting
customers would be entitled to relief provisions which would permit the Company
to continue treating the nurses as independent contractors for tax and other
purposes. In addition, if the Company or the consulting customers must pay
additional taxes as a result of a tax assessment arising from this issue, other
federal provisions may reduce the overall liability if the Company or the
consulting customers, respectively, can show that it did not intentionally
disregard the requirements to deduct and withhold income or FICA taxes. However,
in the event the IRS or certain other federal or state governmental agencies
were to determine that the nurses were in fact employees of the Company or the
consulting customers, the Company or the consulting customers could incur
liability for unpaid social security, unemployment, withholding, and state and
local taxes. Further, reclassification of the nurses could result in the
disqualification of, or increased expense to the Company's or the consulting
customer's pension plans, health insurance programs and other benefit
arrangements and the entitlement of certain workers to a range of employee
rights under federal and state laws.
The Division of Taxation of the State of New Jersey (the "Tax
Division") has preliminarily advised the Company that the Tax Division believes
the Company has underpaid sales and use taxes in an amount which, without
assessment of interest and penalty charges, aggregates approximately $86,500.
The Company has not been advised of the amount of interest and penalties, if
any, sought by the Tax Division. The Company disagrees with a substantial
portion of the assessment and plans to dispute a substantial portion of the
proposed assessment. No assurance can be given that the Company will be
successful in its dispute or that the Company will not have to pay the full
assessment. In addition, the preliminary assessment resulted from an ongoing
audit by the Tax Division of the Company's tax affairs generally. No assurance
can be given that the Tax Division will not assert additional claims against the
Company as a result of the audit or that the Company will be able to
successfully defend against any such claims.
Section 541 of the Internal Revenue Code of 1986, as amended (the
"IRC") subjects a corporation which is a "personal holding company," as defined
in the IRC, to a 39.6% penalty tax on undistributed personal holding company
income in addition to the corporation's normal income tax. In order to be deemed
a "personal holding company" under the IRC, a corporation must have personal
holding company income of at least 60% of its adjusted ordinary gross income and
more than 50% of its stock must be owned, directly or indirectly by five or
fewer individuals. Personal holding company income is composed primarily of
passive investment income plus, in certain events, personal service income. Due
to the fact that more than 48% of the stock of the Company, as computed in
accordance with the IRC, is held by fewer than five individuals, and due to the
fact that more than 60% of the Company's adjusted ordinary gross income may be
composed primarily of passive investment income and personal service income for
some period of time following the IHS and RRI closings, the Company may be
subject to the penalty tax imposed by Section 541 of the IRC with respect to any
net income it may have following the IHS and RRI closings. The Company does not
expect to have substantial net income during 1998. Further, the penalty tax does
not apply to dividends or interest derived from certain tax-free securities in
which the Company may invest, nor does it apply to net income distributed by the
Company to its shareholders. However, the Company may nonetheless be subject to
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the penalty tax. The Company does not currently intend to distribute its net
income to the shareholders of the Company, nor does it currently intend to limit
its investments to tax free securities. No assurance can be given that the net
income, if any, of the Company will not be subject to the penalty imposed by
Section 541 of the IRC.
Employees
As of March 18, 1998, the Company had 11 full-time and no part-time
employees. All of the Company's employees were employed as the Company's
corporate staff. No employees are covered by collective bargaining agreements,
and the Company considers its employee relations to be good.
Liability Insurance
The Company carries property, general liability and professional
liability insurance in amounts and coverage deemed adequate by management.
However, there can be no assurance that any future claims will not exceed
applicable insurance coverage. Furthermore, no assurance can be given that
liability insurance will continue to be available at a reasonable cost. Medical
Directors and nurses previously acting as independent contractors for the
Company maintained their own malpractice insurance.
Item 2. Properties
The Company's corporate headquarters currently consists of 5,000 square
feet of leased office space located in Florham Park, New Jersey. The lease
provides for a base annual rent of approximately $82,000, expires March 31, 1999
and is renewable for an additional five-year term. The Company's New York
subsidiaries occupied two offices located in Bayside, New York, under leases
which were assigned to IHS in connection with the IHS Closing.
The Company's former Training Center in Linden, New Jersey occupied
approximately 1,500 square feet pursuant to a lease which provides for an annual
rent of approximately $30,000. The lease has a term of 5 years, expiring
November 30, 1999, and was assigned to IHS.
The Company assumed the obligations of LDL under a lease for 3,900
square feet previously used by LDL as office and warehouse space located in East
Hanover, New Jersey at a rate of $37,225 per annum, plus 39% of all utilities
for the entire premises which includes the leased space. The term of the lease
expires July 1, 1998. The lease for the LDL premises was assigned to IHS.
Item 3. Legal Proceedings
The Company is not currently a party to any material pending legal
proceeding.
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Many aspects of the former business of the Company and its subsidiaries
involved risks of potential liability. The Company and its subsidiaries and
affiliates are subject to actions by patients and employees in the normal course
of the Company's and the subsidiaries' respective former businesses, including
actions grounded in personal injury. Further, the Company and its subsidiaries
may, from time to time, be involved in proceedings with, and investigations by,
governmental agencies relating to licensure and to the federal, state and local
laws, rules and regulations under which the Company and its subsidiaries
operated. Management believes that the outcome of these proceedings will not
have a material adverse effect on the Company's financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the fourth quarter of the year ended December 31, 1997.
PART II
Item 5. Market for Company Common Stock and Related Security Holder Matters
The Company's common stock (CCCI) and the Company's Common Stock
Purchase Warrants (CCCIW) and the Company's units, each comprised of one share
of Common Stock and one Common Stock Purchase Warrant, (CCCIU) are traded in the
NASDAQ national market system. There were approximately 17 holders of record and
approximately 600 beneficial owners of the Company's common stock as of March
18, 1998. The following table sets forth the closing high and low bids for each
of the securities for each quarter following the quarter ended June 30, 1996.
The figures set forth below were obtained from the National Association of
Securities Dealers (NASD) "Monthly Statistical Report".
Common Stock Warrants Units
Three months ended (CCCI) (CCCIW) (CCCIU)
High Low High Low High Low
December 31, 1997 2-1/16 1-5/32 3/32 1/32 2-1/8 1-1/4
September 30, 1997 1-5/8 1 1/32 1/32 1-1/4 1-1/16
June 30, 1997 1-7/16 1 5/32 1/32 1-1/2 1
March 31, 1997 2-3/8 13/16 1/4 1/16 2-1/4 7/8
December 31, 1996 3-3/8 1-7/16 11/32 3/16 3-3/8 1-3/8
September 30, 1996 4 2 1/2 1/4 4-1/8 2-1/16
June 30, 1996 4-1/8 3-7/8 1/2 3/8 4-1/2 4-1/8
March 31, 1996 4-1/8 3-1/4 1/2 1/4 4-1/2 3-1/2
The Company has paid no cash or stock dividends since its inception.
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The Nasdaq Stock Market, Inc. ("Nasdaq") has advised the Company that
Nasdaq is likely to seek a delisting of the Company's securities from trading in
the event the Company is a "public shell" following the closing of the
consummation of the asset sale transactions. The term "public shell" generally
includes a company whose securities are publicly traded but which conducts no
substantial operating business. No assurance can be given that Nasdaq will not
determine that the Company constitutes a "public shell." In the event the
Company's securities are delisted and the Company thereafter ceases to be a
"public shell," the Company may reapply to have its securities relisted for
trading. However, it is the position of Nasdaq that the Company will have to
meet the original listing requirements for trading, as opposed to the continuing
listing requirements for trading, under which the Company's securities currently
trade. The original listing requirements are more stringent than those for
continued listing. No assurance can be given that the Company will cease to meet
the definition of a "public shell" following the closing of the RRI and IHS
transactions, that the Company will apply for the relisting of its securities
for trading on Nasdaq NMS or that, if the Company does so apply, that it will be
able to meet the original listing requirements.
Nasdaq recently adopted new requirements for original and continued
listing of securities for trading on Nasdaq's national market system. Although
the Company is in compliance with most of the revised listing requirements, it
does not currently meet the requirement that the value of the Company's
securities in the "public float" have an aggregate market value of $5,000,000.
In the event the Company is not able to comply with the new requirements, the
Company would have the option of listing its securities on the Nasdaq small cap
market. No assurance can be given that the Company will be able to increase the
market value of its securities in the "public float" to the required levels.
Item 6. Management's Discussion and Analysis.
Results of Operations
Year Ended December 31, 1997 Compared With Year Ended December 31,
1996.
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 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. See, "Item 1. Business -
Recent Developments."
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<PAGE>
The Company recognized a gain of $1,855,120 on proceeds of $2,620,000
from the IHS Closing, plus an additional $83,331 from the IHS Consulting
Agreement, which is payable at the rate of approximately $28,000 per month for
its three year term. The $2,620,000 did not include proceeds from the IHS
Closing allocated to the sales of Alpha's and CDBI's assets. In addition, the
Company received $2,665,000 from UMDC as a result of the First RRI Closing. The
remainder of the proceeds from the IHS Closing, the proceeds from the IHS
Consulting Agreement and the proceeds from the RRI Transaction were invested by
the Company in U.S. Government securities and money market funds pending
application. The Company incurred transaction costs of $235,000 in connection
with the IHS transaction. 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.
Revenues
Net patient revenues of the Company prior to the IHS Closing were
derived from providing equipment and supplies to patients (51% for 1997 and 52%
for 1996) and services (49% for 1997 and 48% for 1996), which services consisted
of contract nursing services, and dialysis treatments provided by the Company's
Training Facility in Linden, New Jersey. In 1997 and 1996, 25% and 30%,
respectively, of the Company's cash receipts were received under the Medicare
program, while approximately 75% and 70%, respectively, of cash receipts were
received from commercial insurance companies or contracted entities and Medicaid
programs.
The reimbursement rates for dialysis treatments and for Epogen, a
dialysis medication, are separately determined by Medicare. The Medicare
reimbursement rate for dialysis treatments per month per patient was $1,193 and
the reimbursement rate for Epogen was $10 in both 1997 and 1996.
During 1996 and 1997, the number of patients served by the Company
decreased from 121 at December 31, 1996 to 101 at October 1997. This represented
what the Company believes is a trend resulting primarily from (i) the wind down
and termination of relationships between the Company and certain physicians,
which relationships the Company believes may not have complied with applicable
law, (ii) the retention by physicians of more services, rather than referring
those services to third party providers, as a result of changes in applicable
law and (iii) increases in the number of arrangements between physicians and
larger consolidators in the industry who are exempt from certain legal
restrictions on physician relationships.
Net patient revenues were $4,365,749 in 1997 as compared with
$5,751,896 in 1996. The decrease of $1,386,147 is attributable to the sale of
substantially all of the Company's assets in October, 1997 and to the overall
decrease in patient census discussed above. Reductions in the Company's
operating revenues following the IHS Closing were partially offset by $24,000 in
interest income derived in part from the Company's investment of the proceeds of
the IHS Closing and income of $83,331 derived from the IHS Agreement.
22
<PAGE>
The Company provided certain services in New York through consulting,
administrative, or subcontracting service arrangements with the Consulting
Customers in New York. The Consulting Customers are partially or 100% owned by
the Certain Executive Officers. Under the Company's agreement with Alpha, the
Company provided various administrative and consulting services to SBKC. The
Company also provided equipment and supplies to SBKC under the agreement at
the Company's listed cost for the equipment and supplies. The $240,000 annual
consulting fee payable by SBKC was assumed by Alpha upon Alpha's purchase of the
SBKC assets. Further, the Company provided administrative and consulting
services to UMDC for a monthly fee of $33,333. The agreement with UMDC similarly
provided for reimbursement to the Company for services rendered and for its
direct costs of equipment and supplies. The Company also had a consulting and
services agreement with CDBI. The CDBI Agreement provided for payments of
$20,000 per month. 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 relates to prior periods that was
not recorded due to realization uncertainties attributable to services,
equipment and supplies.
The Company's Renal Management, Inc. ("RMI") subsidiary recognized no
revenue on expenses of $209,724. The Company does not expect to provide
additional substantive financial support for RMI.
Cost of Goods Sold/Cost of Services
Cost of goods sold was $966,210 or 43% of net patient revenues
attributable to equipment and supplies in 1997 as compared with $1,322,308 or
44% of net patient revenues attributable to equipment and supplies in 1996. The
decrease in cost of equipment and supplies is due primarily to the termination
of business which occurred as a result of the IHS Closing. The cost of services
totaled $475,239 or 22% of net patient revenues attributable to services in
1997, a reduction from $859,499 or 31% in 1996. The decrease in cost of services
as a percentage of revenues is primarily the result of the recognition of
current and prior year SBKC consulting fees aggregating $680,000. The Company
also experienced a decrease in personnel costs, primarily attributable to
reductions in workforce resulting from and following the IHS Closing.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $4,067,223 or 93%
of net patient revenues for 1997 as compared with $5,183,414 or 90% of net
patient revenues for 1996 The net decrease of $1,116,191 is primarily comprised
of a reduction of $557,209 relating to expenses of RMI and a reduction in
salaries, rent and other office expenses of $468,724 due to a reduction in work
force resulting from the IHS transaction. 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
during the remainder of fiscal year 1997. 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, for so long as the Company is not engaged in additional
businesses.
23
<PAGE>
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 December 31, 1997, the allowance for doubtful accounts was
$257,000 as compared with $517,000 at December 31, 1996. As a percentage of
receivables outstanding, such allowance was 57% at December 31, 1997, and 34% at
December 31, 1996. Due to the discontinuance of current revenues discussed above
and 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 continues to evaluate the
collectibility of all accounts and believes the stated allowance as of December
31, 1997 is adequate to absorb possible losses resulting from uncollectible
receivables. As of December 31, 1997, substantially all receivables were greater
than 90 days past due.
Depreciation and Amortization Expense
Depreciation and amortization expense for 1997 totaled $149,311, a
decrease of $28,042 or 16% from 1996. The decrease resulted primarily from the
sale of assets included in the IHS transaction.
Interest Income, Net
Net interest income was $56,769 in 1997 and $68,981 in 1996. Interest
expense on the Company's debt obligations in both periods was more than offset
by interest earned on the proceeds from the sale of assets to IHS and on the
remaining proceeds from the 1996 sale of assets and rights in the Cape May Court
House, New Jersey area. See "Liquidity and Capital Resources."
24
<PAGE>
Gain on sale of former New Jersey in-center facility
In February, 1996, the Company completed the sale of its Cape May, New
Jersey in-center facility and certain other southern New Jersey dialysis assets
for an aggregate of approximately $2,010,000. The Company recorded a gain on
these sales aggregating $1,749,080.
Provision (benefit) for Income Taxes
The provision (benefit) for Federal income taxes was $176,000 in 1997
and ($58,345) in 1996. The state income tax provision was $36,000 in 1997 and
$37,930 in 1996. The effective income tax rate was 14% and (6%) in 1997 and
1996, respectively. The 1996 effective income tax rate primarily results from
state income taxes assessed related to the sale of assets and rights in the Cape
May Court House, New Jersey area. All of the Company's deferred tax asset as of
December 31, 1997 has been offset by a valuation allowance as a result of the
Company's operating results.
Liquidity and Capital Resources
The Company experienced a negative net cash flow of $1,011,145 in 1997.
Net cash used in operating activities of continuing operations was approximately
$1,576,000 relating primarily to corporate general and administrative expenses.
Net cash used in investing activities of approximately $264,000 reflects the
investment in U.S. Government securities of available cash arising from the
$2,620,000 proceeds received directly by the Company from the sale of
discontinued operations, the net repayments by Consulting Customers of
approximately $690,000, and the net cash of $829,000 provided by discontinued
operations prior to the IHS Closing.
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 thereon
were payable on December 31, 1996. Payment was not made. The borrower has
executed a new note which is due and payable on demand. During 1997, 1996 and
1995, an additional $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. 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 remain 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, Certain Executive Officers and the physician
shareholders of UMDC not affiliated with the Company guaranteed UMDC's credit
25
<PAGE>
facilities aggregating $2,400,000, of which approximately $623,000 was
outstanding as of December 31, 1997. In conjunction with the sale of UMDC assets
to RRI, all remaining amounts owing under the credit facilities were paid, and
substantially all amounts due the Company from UMDC for loans, advances,
supplies and equipment were also paid in January 1998. UMDC continues to owe the
Company $1,389,000 for fees generated pursuant to the UMDC Consulting Agreement.
To the extent that the RRI Second Closing is consummated, the Company expects to
recognize some or all of the consulting and services fees due from UMDC which
were not previously recorded due to realization uncertainties. The physician
shareholders of UMDC unaffiliated with the Company continue to owe the Company
$100,000 in principal plus interest due pursuant to loans from the Company. The
Company expects that the fees due from the unpaid services and the principal due
under the physician loans will be paid during fiscal year 1998. The Company does
not currently expect to be repaid the interest due it from the physicians and
expects to forgive the unpaid accrued interest in accordance with the various
agreements among the physicians, Certain Executive Officers, UMDC, RRI and the
Company.
Through December 31, 1994, Alpha had funded $565,000 of the cash
requirements of SBKC with funds provided from the Company. The Company loaned an
additional $57,405 to Alpha to enable Alpha to meet its obligations under its
agreement with the estate of the former director of the NNF. The advances were
converted into loan agreements with Alpha in the amounts of $265,000 and
$357,405, bearing interest of 8% and the IRS imputed rate for two-year
investments, respectively. Both notes were payable in full in 1999. In
conjunction with the sale of Alpha's assets to IHS these amounts, together with
amounts advanced for supplies and equipment, were fully paid in 1997.
The Company advanced funds to CDBI for the construction of a new
in-center dialysis facility in the Bronx, New York. At December 31, 1996,
$1,176,985 was due from CDBI. In conjunction with the sale of CDBI's assets to
IHS, all amounts due at December 31, 1996, together with amounts advanced for
supplies and equipment in 1997 were all substantially repaid.
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 1998.
In conjunction with the sales of assets to IHS and to RRI, the Company
has been released from its guarantees of leases for UMDC and CDBI for In-Center
Facilities in New York City.
Although the Company is currently investigating prospective merger and
acquisition candidates, 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
26
<PAGE>
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.
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. Adoption of SFAS No. 130 relates to
disclosure within the financial statements and is not expected to have a
material effect on the Company's financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997. This statement is effective for the
Company's fiscal year ending December 31, 1998. This statement changes the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports. Adoption of SFAS No. 131 relates to
disclosure within the financial statements and is not expected to have a
material effect on the Company's financial statements.
Item 7. Financial Statements.
The response to this item is submitted in a separate section of this
report commencing on Page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
No change in accountants or disagreement requiring disclosure pursuant
to applicable regulations took place within the Company's two most recent fiscal
years or in any subsequent interim period.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Sections 16(c) of the Exchange Act.
The material contained in "Election of Directors" and "The Board of
Directors and Executive Officers" of the Company's definitive proxy statement
(to be filed pursuant to the Securities Exchange Act of 1934, as amended) for
the 1998 annual meeting of Shareholders of the Company is hereby incorporated by
reference.
Item 10. Executive Compensation
The material contained in "Executive Compensation" of the Company's
definitive proxy statement (to be filed pursuant to the Securities Exchange Act
of 1934, as amended) for the 1998 annual meeting of the Shareholders of the
Company is hereby incorporated by reference.
Item 11. Securities Ownership of Certain Beneficial Owners and Management.
The material contained in "Security Ownership of Certain Beneficial
Owners," "Election of Directors," and "The Board of Directors and Executive
Officers" of the Company's definitive proxy statement (to be filed pursuant to
the Securities Exchange Act of 1934, as amended) for the 1998 annual meeting of
the Shareholders of the Company is hereby incorporated by reference.
Item 12. Certain Relationships and Related Transactions.
The material contained in "Certain Relationships and Related
Transactions" of the Company's definitive proxy statement (to be filed pursuant
to the Securities Exchange Act of 1934, as amended) for the 1998 annual meeting
of the Shareholders of the Company is hereby incorporated by reference.
27
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
No exhibits are filed with this report or are incorporated
herein by reference.
(b) A report on Form 8-K was filed by the Company on October 10,
1997 concerning the completion of the sale of assets of the Company to IHS of
New York, Inc.
28
<PAGE>
CONTINENTAL CHOICE CARE, INC.
INDEX TO FINANCIAL STATEMENTS
------------------------------------
Page
Report of Independent Public Accountants.......................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 31, 1997 and 1996................................... F-3
Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit) for the Years Ended December 31,
1997 and 1996 ............................................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996................................... F-5
Notes to Consolidated Financial Statements................... F-6
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
Continental Choice Care, Inc.:
We have audited the accompanying consolidated balance sheets of
Continental Choice Care, Inc. (a New Jersey corporation) and subsidiaries as of
December 31, 1997 and 1996 and the related consolidated statements of operations
and retained earnings (accumulated deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Continental Choice
Care, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 11, 1998
F-2
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- ----------
<S> <C>
Current Assets:
Cash and cash equivalents including restricted cash of
$250,000 in 1997 and $200,000 in 1996 ..................................... $ 406,909 $1,418,054
Investments in U.S. Government securities....................................... 3,595,438 -0-
Accounts receivable, less allowance for doubtful accounts of $257,000
in 1997 and $517,000 in 1996................................................ 197,133 989,363
Current portion of amounts due from consulting customers........................ 2,805,105 -0-
Deferred tax asset.............................................................. -0- 125,000
Other current assets ........................................................... 583,609 129,163
---------- ------------
Total current assets ........................................................ 7,588,194 2,661,580
Amounts due from affiliates .................................................... 235,864 779,273
Amounts due from consulting customers........................................... -0- 2,872,468
Property and equipment, at cost, less accumulated depreciation ................. 90,962 116,750
Other assets ................................................................... 139,295 13,865
Net non-current assets of discontinued operations............................... -0- 548,594
----------- ------------
$8,054,315 $6,992,530
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................................................. $ 670,540 $1,408,939
Accrued professional fees..................................................... 162,949 122,353
Other accrued expenses ....................................................... 801,151 488,990
Income taxes payable.......................................................... 87,000 48,939
--------- -----------
Total current liabilities ................................................. 1,721,640 2,069,221
--------- -----------
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 December 31, 1997
and December 31, 1996...................................................... 5,524,061 5,464,061
Paid-in capital............................................................... 500 500
Retained earnings (accumulated deficit)....................................... 782,977 (541,252)
Unrealized gain on investments............................................... 25,137 -0-
---------- ----------
Total stockholders' equity................................................. 6,332,675 4,923,309
---------- ----------
$8,054,315 $6,992,530
=========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
F-3
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
for the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C>
Revenues from continuing operations........................................ $ 83,331 $ -0-
------------ ---------------
Costs and Expenses:
General and administrative ............................................ 1,939,187 1,764,240
Depreciation and amortization ......................................... 29,046 22,453
Interest income, net .................................................. (56,769) (68,981)
------------- -------------
Total costs and expenses ......................................... 1,911,464 1,717,712
----------- -----------
(1,828,133) (1,717,712)
Gain on sale of former New Jersey in-center facility and
certain other assets.................................................... -0- 1,749,080
------------ -----------
(1,828,133) 31,368
Provision (benefit) for income taxes....................................... (252,282) 1,842
------------ -----------
Income (loss) from continuing operations................................... (1,575,851) 29,526
----------- -----------
Discontinued operations (Note 1):
Income (loss) from discontinued operations (less applicable income
taxes (benefit) of $208,275 in 1997 and ($22,297) in 1996).......... 1,300,967 (361,400)
Gain on sale of discontinued operations (less applicable income
taxes of $256,007 in 1997).......................................... 1,599,113 -0-
--------- ---------------
Income (loss) from discontinued operations................................. 2,900,080 (361,400)
--------- ---------
Net income (loss)................................................. 1,324,229 (331,874)
Accumulated deficit, beginning of year..................................... (541,252) (209,378)
------------ -------------
Retained earnings (accumulated deficit), end of year....................... $ 782,977 $ (541,252)
------------ -------------
Basic and diluted income (loss) per share:
Continuing Operations................................................... $ (.49) $ .01
Discontinued operations................................................. .90 (.11)
------------ --------------
Net income (loss) per share............................................. $ .41 $ (.10)
============ ==============
Basic weighted average shares outstanding.................................. 3,237,500 3,237,500
============= =============
Diluted weighted average shares outstanding................................ 3,250,100 3,237,500
============ =============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-4
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C>
Cash Flows From Operating Activities:
Net income (loss) ......................................................... $1,324,229 $ (331,874)
Adjustments to reconcile net income (loss) to net cash
used in operating activities --
Depreciation and amortization............................................ 29,046 22,453
Provision for doubtful accounts.......................................... 99,401 379,672
Expense related to warrants ............................................. 60,000 50,000
Gain on sale of former New Jersey in-center
facility and certain other assets..................................... -0- (1,749,080)
(Income) loss from discontinued operations, net.......................... (1,300,967) 361,400
Gain on sale of discontinued operations, net............................. (1,599,113) -0-
Decrease (increase) in deferred taxes, net............................... 125,000 (118,489)
Decrease in accounts receivable............................... 692,829 568,853
Increase in other assets................................................. (579,876) (82,707)
Increase in amounts due from affiliates ................................. (78,996) (16,000)
Decrease in accounts payable............................................. (738,399) (35,522)
Increase in accrued expenses............................................. 352,757 18,341
Increase in income taxes payable......................................... 38,061 28,939
-------------- ------------
Net cash used in operating activities of continuing operations......... (1,576,028) (904,014)
Net cash provided by (used in ) discontinued operations................ 828,674 (290,769)
------------- ------------
Net cash used in operating activities......................................... (747,354) (1,194,783)
------------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of former New Jersey in-center
facility and certain other assets...................................... -0- 2,010,330
Proceeds from sale of discontinued operations............................ 2,620,000 -0-
Amounts loaned or advanced to consulting customers....................... (2,350,547) (1,276,441)
Amounts repaid by consulting customers ................................. 3,040,315 957,448
Purchases of U.S. Government securities.................................. (3,570,301) -0-
Purchases of property and equipment...................................... (3,258) (420,455)
-------------- --------------
Net cash (used in) provided by investing activities
of continuing operations............................................. (263,791) 1,270,882
------------ -------------
Net (decrease) increase in cash............................................... (1,011,145) 76,099
Cash, beginning of year....................................................... 1,418,054 1,341,955
------------ -------------
Cash, end of year............................................................. $ 406,909 $ 1,418,054
============ =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for income taxes................................. $ 26,674 $ 64,850
Cash paid during the year for interest..................................... 1,178 5,385
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-5
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of business, reorganization and discontinued operations:
Continental Choice Care, Inc. was formed on December 27, 1993 in
connection with the reorganization of the health care related subsidiaries and
affiliates of TechTron, Inc. ("TechTron"). The health care related
subsidiaries and affiliates of TechTron were reorganized as subsidiaries of
Continental Choice Care, Inc. with the assets and liabilities transferred being
accounted for in a manner similar to that of a pooling of interests.
Continental Choice Care, Inc. and subsidiaries are herein referred to as the
Company.
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. The Company operated primarily in New
Jersey and New York. The above and other activities conducted by the Company
were performed primarily through the following wholly-owned subsidiaries --
Continental Dialysis, Inc. (CDI)
Courthouse Dialysis, Inc. (Courthouse) (See Note 9)
Dialysis Staffing, Inc. (DSI)
Continental Dialysis, Inc. of Linden (Linden)
Renal Management, Inc. (RMI) (80% owned)
Effective October 8, 1997, the Company, other than RMI, completed the
sale of substantially all of its dialysis related assets to IHS of New York,
Inc., a New York corporation ("IHS"). In addition, Alpha Administration Corp.
("Alpha"), the operator of the South Bronx Kidney Center, and Continental
Dialysis Center of the Bronx, Inc. ("CDBI") sold substantially all of their
respective assets to IHS. Prior to the sale, the Company provided consulting and
administrative services to Alpha and CDBI. The assets of the Upper Manhattan
Dialysis Center, Inc. ("UMDC"), a New York corporation to which the Company also
provided consulting and administrative services, were not included in this sale
transaction (the "IHS Sale"). The aggregate price paid by IHS at the closing of
the IHS Sale was approximately $5,120,000, of which $500,000 was placed in an
escrow to secure certain contingent obligations of the sellers. As of December
31, 1997, $375,000 of the escrow is included in other current assets and
$125,000 is included in other assets in the accompanying consolidated balance
sheets. The sellers retained substantially all of their cash, accounts
receivable and liabilities. The Company and IHS entered into a consulting
agreement pursuant to which the Company will provide certain consulting services
to IHS over the three-year term of the agreement in consideration of an
aggregate of $1,000,000 payable by IHS to the Company over the term of the
agreement. The Company also entered into a Non-Competition Agreement with IHS
pursuant to which the Company, CDBI, Alpha and certain officers and directors of
each of them agreed not to engage in certain activities
F-6
<PAGE>
in competition with IHS in certain specified areas for a period of five years
following October 8, 1997.
The $5,120,000 purchase price was allocated $2,620,000 to the Company,
$900,000 to Alpha and $1,600,000 to CDBI. Substantially all amounts allocated to
Alpha and CDBI from the sale to IHS, plus all accounts receivable, cash and cash
equivalents retained by Alpha and CDBI have been used to pay outstanding
liabilities of those entities, including substantially all amounts in accrued
and current consulting and administrative fees and other amounts due to the
Company. As of December 31, 1997, approximately $200,000 of consulting fees due
from CDBI have not been recorded due to realization uncertainties. All of the
outstanding common stock of Alpha and CDBI and 50% of the outstanding common
stock of UMDC is owned by Alvin S. Trenk, Steven L. Trenk and Martin G. Jacobs,
M.D., the Company's Chairman, President and Corporate Medical Director,
respectively, (collectively, the "Certain Executive Officers"), who have
previously assigned to the Company all proceeds, if any, which they might
otherwise receive upon the sale of those entities. 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.
Primarily as a result of the Company's sale of assets, the Company could
become subject to the Investment Company Act of 1940 (the "1940 Act") and could
be deemed a "personal holding company" pursuant to Section 541 of the Internal
Revenue Code of 1986 ("Section 541"). If the Company were to become subject to
the 1940 Act, it would be subject to substantial regulation with respect to its
capital structure, management, operation, transactions with affiliates and other
matters. If the Company were to become a "personal holding company", the Company
could become subject to a 39.6% penalty tax on undistributed personal holding
company income in addition to the Company's normal income tax. In order to
reduce the likelihood that the Company will become subject to the 1940 Act or
Section 541, the Company may invest its capital in securities bearing interest
at rates lower than those which the Company could otherwise obtain and may make
investments or take other action which it might otherwise not make or take. No
assurance can be given that the Company will take all actions which might be
required to avoid coverage of the 1940 Act or Section 541 or, if taken, that the
Company will otherwise avoid coming within the coverage of the 1940 Act or
Section 541.
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.
The Consolidated Financial Statements have been restated to reflect the
discontinued operations.
F-7
<PAGE>
Revenues from the discontinued operations were $4,282,418 and $5,751,896
for 1997 and 1996, respectively.
For 1996, the net assets of the discontinued operations are reflected in
"Net non-current assets of discontinued operations" in the consolidated balance
sheets as follows:
December 31, 1996
-----------------
Current assets...................................... $ 52,028
Current liabilities................................. (56,064)
-----------
Net current assets (liabilities)................. (4,036)
Equipment and leasehold improvements................ 574,487
Other non-current assets (net)...................... 44,042
Non-current liabilities (65,899)
-----------
Net non-current assets of discontinued
operations.......................................... $ 548,594
=========
(2) Summary of significant accounting policies:
Consolidation -- The consolidated financial statements include the
accounts of the Company and all majority-owned subsidiaries. All significant
intercompany transactions have been eliminated.
Use of estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the recorded amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash equivalents -- The Company considers all highly liquid investments
with a maturity of three months or less at the time of purchase to be cash
equivalents. The carrying amount of cash equivalents approximates fair value.
Accounts receivable and allowances -- The allowance for doubtful
accounts consists of management's estimate of amounts that may prove
uncollectible from insurers or former patients. Actual results could differ from
these estimates. As of December 31, 1997, substantially all of the accounts
receivable exceeded 90 days since services were discontinued October 8, 1997.
F-8
<PAGE>
Investments -- The Company classifies all of its investments, which
consist of U.S. Government securities, as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses
reported as a component of stockholders' equity. The unrealized gain on
investments was $25,137 as of December 31, 1997.
Property and equipment -- Property and equipment are stated at cost and
depreciation is provided using the straight line method over the shorter of the
useful lives or lease term for leasehold improvements (five to ten years). Costs
of maintenance and repairs are charged to expense as incurred.
The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the unamortized balance of its long-lived
assets from expected future cash flows from its operations on an undiscounted
basis.
Income taxes -- The Company and its subsidiaries file a consolidated
Federal income tax return. The Company and each subsidiary file separate state
income tax returns. Deferred income taxes are recognized for tax consequences of
temporary differences by applying enacted statutory tax rates to differences
between the financial reporting and tax basis of assets and liabilities.
Income (loss) per share -- The Company has adopted Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (FAS 128). FAS 128
requires the presentation of basic earnings per share and diluted earnings per
share. "Basic earnings (loss) per share" represents net income (loss) divided by
the weighted average shares outstanding and is consistent with the Company's
historical presentations. "Diluted earnings (loss) per share" represents net
income (loss) divided by the weighted average shares outstanding adjusted for
the incremental dilution of outstanding employee stock options and awards, if
dilutive.
As of December 31, 1997, the basic weighted average common shares
outstanding is 3,237,500, and the weighted average common shares outstanding
assuming dilution is 3,250,100. The difference of 12,600 relates to incremental
shares issuable relating to dilutive stock options and warrants.
Stock-Based Compensation -- Stock-based compensation is recognized
using the intrinsic value method. For disclosure purposes, pro forma net income
(loss) and income (loss) per share are provided as if the fair value method had
been applied.
Reclassifications -- Certain reclassifications have been made to the
1996 financial statements in order to conform to the 1997 presentation.
F-9
<PAGE>
(3) Property and equipment:
Property and equipment consist of the following as of December 31, 1997
and 1996:
1997 1996
---- ----
Furniture and fixtures.......................$ 3,588 $ 3,588
Office and other equipment................... 161,080 157,822
Leasehold improvements....................... 2,013 2,013
--------- ---------
166,681 163,423
Less -- Accumulated depreciation
and amortization.......................... (75,719) (46,673)
------ -------
$ 90,962 $ 116,750
========== ========
Depreciation expense for continuing operations was $29,046 and $22,453
in 1997 and 1996, respectively.
(4) Note payable:
During 1997, the Company financed a Directors and Officers Insurance
policy aggregating $41,478. The note required an initial payment of $8,000 and
the remaining balance of $33,478, to be payable over nine months with an
interest rate of 10.95%. Monthly principal and interest payments aggregate
$3,720. Principal maturities, including the initial payment, aggregated $18,377
in 1997. Interest expense totaled $1,178 in 1997.
(5) Income taxes:
The provision (benefit) for income taxes relating to continuing
operations for the years ended December 31, 1997 and 1996 consists of the
following:
1997 1996
---- ----
Current:
Federal.......................... $51,000 $-0-
State............................ 36,000 41,000
------ ------
87,000 41,000
Deferred:
Federal.......................... (200,176) (37,201)
State............................ (139,106) (1,957)
--------- -------
$(252,282) $ 1,842
========== =========
At December 1997 and 1996, the Company had a current deferred tax asset
of $114,000 and $847,000, and a deferred tax liability of $8,000 and $0,
respectively. The deferred
F-10
<PAGE>
tax asset is netted by a valuation allowance of $114,000 and $722,000,
respectively as of December 1997 and 1996. The deferred tax asset is primarily
related to the allowance for doubtful accounts of $103,000 and $188,000 as of
December 31, 1997 and 1996 and net operating loss carryforwards of $0 and
$682,000 as of December 31, 1997 and 1996, while the deferred tax liability is
primarily related to depreciation and amortization.
Realization of the net deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards and the
timing of the reversal of other temporary differences. Although realization is
not assured, as of December 31, 1996, management believed it was more likely
than not, that a portion of the net deferred tax asset would be realized. As of
December 31, 1997, a full valuation allowance has been provided against the net
deferred tax asset due to the sale of substantially all operations.
The following is a reconciliation of the statutory Federal income tax
rate to the effective rate as a percentage of income before provision (benefit)
for income taxes as reported in the consolidated financial statements for the
years ended December 31, 1997 and 1996:
1997 1996
------ ------
U.S. Federal income tax rate ................ (34%) 34%
State income taxes, net of Federal
tax benefit................................ 6 7
Non-deductible expenses ..................... 3 8
Net operating loss for which no tax benefit
is currently available.................... 17 --
Net operating loss utilization............... -- (43)
Valuation allowance.......................... (6) --
--------- ------
Effective income tax rate ................... (14%) 6%
======== ======
(6) Related party transactions:
The Company has obtained a $125,868 note from TechTron for expenses of
TechTron paid for by the Company. 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; however, a new note was executed which is
payable on demand. During 1997, 1996 and 1995, an additional $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 the Company's Chairman, President and Corporate Medical Director
("Certain Executive Officers").
In 1996, Alpha Administration Corp. ("Alpha"), an entity owned by
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
F-11
<PAGE>
of Norman Deane, M.D., the former medical director of a New York free-standing
dialysis in- center known as the "Bronx Facility" (the "Estate"), and certain
related agreements. The new agreements superseded 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 was equal to $650,000 previously paid to NNF for 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
also agreed to assume certain operating liabilities 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 closing of the asset purchase
transaction was 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. Such approvals were received in February 1997. 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 held in escrow. Such amount was funded by the
Company and expensed in the fourth quarter of 1996 in anticipation of release of
the escrowed funds upon the closing of the transaction contemplated by the
Purchase Agreement.
Through December 31, 1994, the Company had advanced Alpha $565,000
required to fund the cash requirements, as defined, of the Bronx Facility, plus
an additional $57,405, and has included these amounts in due from affiliates as
of December 31, 1996. Notes due from Alpha as of December 31, 1996, in the
amounts of $265,000 and $357,405, bear interest at 8% and the IRS imputed rate
for two-year investments, respectively. Both are payable in 1999 and are
guaranteed by Alpha's shareholders (the Company's Chairman, President and
Corporate Medical Director). During 1997, Alpha repaid $547,527 to the Company
which has been applied against the advance. To date, the Company has not
recognized interest income related to the advances due to realization
uncertainties.
The Company and Alpha have entered into a consulting and services
agreement. This agreement is essentially identical to the Company's agreement
with the Bronx Facility. The Bronx Facility agreement entitles the Company to
$240,000 per year for services rendered. As of December 31, 1996, $205,300 was
due from the Bronx Facility and is included in amounts due from consulting
customers in the accompanying consolidated balance sheets. During 1997 and 1996,
the Company recorded $680,000 ($480,000 of which relates to prior years not
previously recorded due to realization uncertainties) and $240,000 respectively
in consulting fees for services provided to the Bronx Facility. In addition, the
Company provided equipment and supplies to the Bronx Facility approximating
$216,000 at no margin for the year ended December 31, 1997. The Consulting and
Services Agreement was terminated during 1997.
F-12
<PAGE>
In December 1995, Certain Executive Officers acquired an aggregate of
50% of the common stock of UMDC. The Company, as well as Certain Executive
Officers had guaranteed an aggregate of $2,400,000 of bank credit facilities of
the Upper Manhattan Dialysis Center ("UMDC") to construct the UMDC facility and
provide working capital. The facilities were comprised of a $500,000 credit
facility and separate loans originally totaling $1,900,000. As of December 31,
1997, an aggregate of $623,000 was outstanding under the credit facilities. In
conjunction with the sale of substantially all of UMDC's assets, all of these
credit facilities were repaid and the Company's guarantee extinguished. In 1994,
the Company loaned the principals of UMDC $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 had been extended by the Company to become due on November 30, 1995. These
notes remain outstanding as of December 31, 1997. The Company extended the due
dates pending completion of the sale of substantially all of UMDC's assets. In
addition, the Company provided equipment and supplies to UMDC aggregating
$1,048,841 through December 31, 1997 and $875,248 through December 31, 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 $2,665,677 and $1,490,183 as of December 31, 1997 and 1996,
respectively, are net of certain transactions not recorded due to realization
uncertainties. During 1997, the Company recognized income aggregating $794,000
relating to UMDC, the majority of which was not recorded in prior years due to
realization uncertainties. Such amounts were collected subsequent to December
31, 1997.
CDBI, a company owned by Certain Executive Officers, was a consulting
customer to whom the Company had advanced funds for construction of a new
in-center dialysis facility in the Bronx, New York. At December 31, 1997 and
1996, $64,350 and $1,176,985, respectively, was due from CDBI. During 1997,
substantially all amounts due to the Company were repaid. However, due to the
unit being at an early phase in its startup, there was inadequate cash flow to
pay $200,000 in consulting fees which have not been recorded by the Company due
to realization uncertainties.
(7) Commitments:
Employment agreements -- In 1994, the Company entered into compensation
agreements with its Chairman, President and Corporate Medical Director. The
agreements with the Chairman and President have initial terms of five years and
are extended automatically after the first year and thereafter unless such
extensions are terminated by the Board of Directors. The Corporate Medical
Director's agreement has a term of one year. These agreements provide for
minimum aggregate compensation of $550,000 in 1998, $550,000 in 1999, $550,000
in 2000, $550,000 in 2001 and $550,000 in 2002. Each of the individuals may
receive bonuses as determined by the Board of Directors, except the President
whose bonus is equal to 10% of the Company's pretax income in excess of the
prior year's pretax income, limited to $100,000. The Corporate Medical Director
received a $25,000 bonus for 1997; no other such bonuses were paid for 1997 or
1996. Compensation paid to the Chairman, President and Corporate Medical
Director aggregated $534,000 and $422,000 in 1997 and 1996, respectively. All
executive
F-13
<PAGE>
officers of the Company took voluntary pay cuts in mid-1995, some of which were
restored in mid-1996; one executive officer continues to receive reduced pay.
Legal -- The Company is engaged in certain legal proceedings incidental
to its normal course of business activities. Management believes the outcome of
these proceedings will not have a material adverse effect on the Company's
financial position or results of operations.
Benefit plan -- The Company maintains a 401(k) profit sharing plan. The
Company matches 10% of the employees' contributions up to 6% of base pay.
Company contributions were $3,771 and $3,465 in 1997 and 1996, respectively.
Lease agreements -- Future minimum rental commitments for an office
space operating lease at December 31, 1997 are: $82,000 in 1998 and $20,000 in
1999. The current lease expires in March 1999. Rent expense from continuing
operations was $83,320 and $88,560 for the years ended December 31, 1997 and
1996, respectively.
(8) Capital stock:
On July 27, 1994, the Company completed an initial public offering of
equity securities (the "Offering"). The Offering was comprised of 1,610,000
units, each unit consisting of one share of common stock and one warrant. Each
warrant entitles the holder to purchase one share of common stock at an exercise
price of $7.25 (subject to adjustment) at any time through July 15, 1999,
subject to earlier redemption by the Company under certain circumstances. The
exercise price and number of shares issuable upon exercise of the warrants are
subject to adjustment under certain circumstances. The Company has reserved
1,610,000 shares of its common stock for these warrants.
The Company sold to the Underwriters or their designees, for nominal
consideration, options (the "Unit Purchase Options") to purchase up to 140,000
Units. The Unit Purchase Options are exercisable during the four-year period
commencing in July 1995 at an exercise price equal to $8.05, subject to
adjustment in certain events to protect against dilution.
F-14
<PAGE>
The Company has reserved 280,000 shares of its common stock for the Unit
Purchase Options.
During 1996, the Company became obligated to issue five-year warrants
to purchase 210,000 shares of its common stock to service providers at exercise
prices ranging from $3.00 to $4.25 per share. The Company recorded $50,000 in
expense related to these warrants in selling, general and administrative
expenses in the accompanying Consolidated Statements of Operations for 1996. In
October 1997, the Company repriced and reissued certain of these warrants to
purchase 60,000 shares of its common stock to an exercise price of $1.15625. The
Company recorded $60,000 in expense related to this repricing in selling,
general and administrative expenses in the accompanying Consolidated Statement
of Operations for 1997. Accordingly, common stock has been increased by $60,000
and $50,000 for the years ended December 31, 1997 and 1996, respectively.
The Company has adopted the 1994 Long-Term Incentive Award Plan under
which shares of the Company's common stock as well as incentive and nonqualified
stock options to purchase the Company's common stock and stock appreciation
rights may be awarded or granted to senior executives. The Company has reserved
300,000 shares of its common stock for this plan. The plan terminates in 2004.
The Company has also adopted a Directors' Stock Option Plan under which each
nonemployee director will annually receive nonqualified stock options to
purchase 10,000 shares of the Company's common stock which commenced July 1,
1994. The exercise price of the options will be the fair market value of the
Company's common stock at the date of grant. The Company has reserved 200,000
shares of its common stock for this plan.
In the first quarter of 1997, the Board of Directors of the Company
adopted the Continental Choice Care, Inc. 1997 Equity Incentive Plan (the "1997
Plan"), a broad-based employee equity incentive plan. The Board of Directors
reserved 1,250,000 shares of the Company's common stock and granted options to
acquire 296,225 shares of the Company's common stock to officers and employees
of the Company. The 1997 Plan and the options granted thereunder were approved
by the Company's stockholders in May 1997. All options under the 1994
Long-Term Incentive Award Plan were repriced by the Board of Directors in
February 1997 to $1.875 per share or 100% of fair market value of the Company's
common stock at the repricing date.
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), which was effective as of
January 1, 1996, the fair value of option grants is estimated on the date of
grant using the Black-Scholes option-pricing model for pro forma footnote
purposes with the following weighted average assumptions used for grants in all
years; dividend yield of 0%, risk-free interest rate of approximately 6% and
expected option life of 5 to 10 years. Expected volatility was assumed to be 85%
and 46% in 1997 and 1996, respectively.
F-15
<PAGE>
Weighted Weighted
Number Average Average
of Exercise Fair
Shares Price Value
-------- ---------- ---------
Options outstanding, December 31, 1994.... 20,000 $5.75
Granted.............................. 60,000 5.50 $2.63
-------
Options outstanding, December 31, 1995....
(60,000 exercisable)................. 80,000 5.44
Granted.............................. 130,000 4.00 1.91
--------
Options outstanding December 31, 1996
(190,000 exercisable)................ 210,000 4.55
Granted.............................. 820,000 1.69 1.45
Canceled............................. (150,000) 5.25 3.89
---------
Options outstanding December 31, 1997
(625,000 exercisable)................ 880,000 1.93
=========
As permitted by FAS 123, the Company has chosen to continue accounting
for stock options at their intrinsic value. Accordingly, no compensation expense
has been recognized for its stock option compensation plans. Had the fair value
method of accounting been applied to the Company's stock option plans, the
tax-effected impact would be as follows:
1997 1996
---- ----
Net income (loss) as reported............... $1,324,229 $(331,874)
Estimated fair value of the year's option
grants, net of tax..................... 747,403 256,140
--------- ----------
Net income (loss) adjusted.................. $ 576,826 $ (588,014)
========= ==========
Adjusted net income (loss) per share........ $ .18 $ (.18)
========== ==========
This pro forma impact only takes into account options granted since
January 1, 1995 and is likely to increase in future years if additional options
are granted and amortized ratably over the vesting period.
(9) 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
F-16
<PAGE>
respective buyers of the assets are subsidiaries of Renal Treatment Centers,
Inc. ("RTC"). The price paid in the all-cash transaction approximated
$2,010,000 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.
(10) Subsequent Event
On January 29, 1998, the Upper Manhattan Dialysis Center, Inc. ("UMDC"),
the Company's consulting customer, sold substantially all of its assets to Renal
Research Institute, LLC ("RRI") pursuant to the terms of an Asset Purchase
Agreement (the "RRI Purchase Agreement") among UMDC, RRI and the shareholders of
UMDC for an aggregate purchase price of approximately $7,984,000 (the "RRI
Sale").
At the January 29, 1998 closing (the "First RRI Closing"), RRI paid
approximately $4,174,000 in partial payment for the assets of UMDC. UMDC
retained its accounts receivable, cash and cash equivalents in the transaction,
as well as certain liabilities of UMDC outstanding as of the date of the First
RRI Closing.
Under the terms of the Purchase Agreement, Beth Israel Medical Center, or
an alternate designee of RRI, will apply for approval from the New York State
Department of Health (the "NY Approval") to operate the in-center dialysis
facility currently operated by UMDC. In connection with any grant of the NY
Approval, which is currently expected to occur in the fourth quarter of 1998,
RRI is expected to pay additional amounts aggregating approximately $3,810,000,
less the net value of certain current assets to be retained by UMDC.
Pending the NY Approval, RRI and UMDC have entered into a Consulting and
Administrative Services Agreement (the "RRI Consulting Agreement") pursuant to
which RRI will provide UMDC with the use of the assets sold by UMDC to RRI and
will provide certain other enumerated services to UMDC in exchange for a
consulting fee. RRI's fee is not payable, and accrues to the extent not paid,
during any month in which UMDC does not retain a minimum of $28,000 of cash from
its net income. UMDC expects to earn net income of approximately $252,000
pending the NY Approval if the NY Approval is granted in November 1998. The
amount of monthly net income which UMDC expects to earn during the term of the
RRI Consulting Agreement is subject to substantial variation based on a wide
variety of factors and no assurance can be given that such amount will be
attained or that UMDC will not suffer losses during the relevant periods.
The Company and certain of its officers, directors and major shareholders
("Certain Executive Officers") previously guaranteed certain bank debt of UMDC,
of which approximately $628,000 was outstanding as of the date of the First RRI
Closing. The Company previously loaned monies to and incurred additional
non-bank liabilities on behalf of UMDC and certain of its shareholders, of which
approximately $3,452,000 was outstanding as of the date of the First RRI
Closing. Further, as of the date of the sale, UMDC owed the Company
approximately $1,389,000 in various accrued consulting and service fees. Through
December 31, 1997, the Company has not recorded certain transactions relating to
the above approximating $2,176,000 due to realization uncertainties.
F-17
<PAGE>
Although the Company expects to receive an aggregate of approximately
$4,500,000 from UMDC from the proceeds of the transaction and from the
operations of UMDC, there can be no assurance given that the RRI Second Closing
will occur as a NY Approval must be attained. At the time of the First RRI
Closing, the Company received approximately $2,665,000. In addition, at the
First RRI Closing, UMDC paid the remaining outstanding bank debt which was
guaranteed by the Company and Certain Executive Officers. The Company's guaranty
was partially secured by a deposit of $250,000 held by the lending bank, and
this deposit was released to the Company following the First RRI Closing.
In the event the NY Approval is not granted before February 2000 or upon
the occurrence of certain other events, UMDC and RRI may extend the term of the
RRI Consulting Agreement or may enter into a joint sale of UMDC. In addition,
upon the occurrence of certain events, the RRI Consulting Agreement may be
terminated, in which event UMDC will be required to repurchase its assets at a
fixed monthly rate over a term of years, unless sooner paid. In addition, UMDC
and its shareholders, including Certain Executive Officers, have indemnified RRI
against damages arising from certain breaches of the RRI Purchase Agreement.
In connection with the transaction, the Company and certain of its
affiliates have agreed not to engage in the dialysis services business or
certain related businesses within the Borough of Manhattan, New York for a
period of ten years following the First RRI Closing. RRI is a joint venture
between Fresenius Medical Care, N.A. and Beth Israel Medical Center.
No assurance can be given that the NY Approval will be granted or that
the transactions contemplated by the RRI Purchase Agreement or the RRI
Consulting Agreement will otherwise be consummated. No assurance can be given
that UMDC will earn sufficient net income to be able to make payments to the
Company during the term of the RRI Consulting Agreement or that UMDC will not
suffer losses during the term of the RRI Consulting Agreement. In the event of a
breach of the covenant not to compete, no assurance can be given that Certain
Executive Officers will not incur costs, expenses, liabilities or damages which
are subject to indemnity by the Company in connection with the RRI Purchase
Agreement, the RRI Consulting Agreement or any covenant not to compete.
F-18
<PAGE>
Signatures
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CONTINENTAL CHOICE CARE, INC.
Date: March 30, 1998 By: /s/ Alvin S. Trenk
------------------------------
Alvin S. Trenk, Chairman
In accordance with the Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
--------- ------------------------ ----
<S> <C>
/s/ Alvin S. Trenk Chairman & Director
- ------------------------------------- (Principal Executive March 30, 1998
Alvin S. Trenk Officer)
/s/ Steven L. Trenk President
- ------------------------------------- Chief Operating Officer March 30, 1998
Steven L. Trenk Director
/s/ Martin G. Jacobs Corporate Medical Director
- ------------------------------------- & Director March 30, 1998
Martin G. Jacobs, M.D.
/s/ Stanley B. Amsterdam Director
- ------------------------------------- March 30, 1998
Stanley B. Amsterdam
/s/ Jeffrey Mendell Director
- ------------------------------------- March 30, 1998
Jeffrey Mendell
/s/ Ronald A. Lefkon Chief Financial Officer
- ------------------------------------- (Principal Financial Officer) March 30, 1998
Ronald A. Lefkon
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