CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
FORM 10-QSB
JUNE 30, 1998
This Annual Report on Form 10-QSB contains "forward-looking statements"
that are based on management's assumptions, estimates and projections. The
Company's actual results could differ materially from the results anticipated in
such forward-looking statements as a result of known and unknown risks,
uncertainties and other factors.
PART I. FINANCIAL INFORMATION
The comparative consolidated statements of operations, balance sheets and
statements of cash flows for Continental Choice Care, Inc. and Subsidiaries (the
"Company") are presented with management's discussion and analysis of material
changes in operations on the pages which follow.
The consolidated financial statements and accompanying financial
information as of June 30, 1998 and for the three and six-month periods ended
June 30, 1998 and 1997 are unaudited but, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments and accruals)
which the Company considers necessary for a fair presentation of the financial
position of the Company at such dates and the operating results and cash flows
for those periods. Results for the interim periods are not necessarily
indicative of results for the entire year. The interim consolidated financial
statements and the related notes should be read in conjunction with the notes to
the consolidated financial statements of the Company included in its Form10-KSB
filed with the Securities and Exchange Commission.
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CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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ASSETS JUNE 30, 1998 DEC. 31, 1997
-------------- -------------
(unaudited)
Current Assets:
Cash and cash equivalents including restricted cash of
$250,000 at December 31, 1997 ........................................... $1,661,157 $ 406,909
Investments in U.S. Government securities................................... 4,551,701 3,570,301
Accounts receivable, less allowance for doubtful accounts of $152,000
at June 30, 1998 and $257,000 at December 31, 1997...................... 138,747 197,133
Amounts due from consulting customers....................................... 100,000 2,805,105
Other current assets ....................................................... 673,307 608,746
---------- ----------
Total current assets ................................................... 7,124,912 7,588,194
Amounts due from affiliates ................................................ 298,864 235,864
Property and equipment, at cost, less accumulated depreciation ............. 972,578 90,962
Goodwill and other intangibles, net of amortization......................... 630,204 -0-
Other assets ............................................................... 82,207 139,295
---------- ----------
$9,108,765 $8,054,315
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................................ $ 573,701 $ 670,540
Accrued expenses ........................................................... 1,142,805 964,100
Current portion of notes payable............................................ 64,355 0
Income taxes payable........................................................ 59,000 87,000
---------- ----------
Total current liabilities ............................................... 1,839,861 1,721,640
---------- ----------
Notes payable, less current portion......................................... 980,564 0
Other liabilities........................................................... 50,250 0
---------- ----------
1,030,814 0
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Commitments and Contingencies
Stockholders' Equity:
Preferred stock, 5,000,000 shares authorized, none issued or outstanding --- ---
Common stock, no par value, 10,000,000 shares authorized,
3,237,500 shares issued and outstanding at June 30, 1998
and December 31, 1997.................................................... 5,524,061 5,524,061
Paid-in capital............................................................. 500 500
Retained earnings........................................................... 713,529 782,977
Accumulated other comprehensive income...................................... -0- 25,137
---------- ----------
Total stockholders' equity............................................... 6,238,090 6,332,675
---------- ----------
$9,108,765 $ 8,054,315
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</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
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CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
Revenues from continuing operations
Consulting services .................. $ 83,331 -0- $ 166,662 $ -0-
Dry cleaning services ................ 184,171 -0- 184,171 -0-
----------- ----------- ----------- -----------
276,502 -0- 350,833 -0-
Costs of services from continuing operations 111,116 -0- 111,116 -0-
----------- ----------- ----------- -----------
Gross profit from continuing operations .... 156,386 -0- 239,717 -0-
General and administrative expenses ........ 558,373 540 443 1,076,782 1,121,015
Depreciation and amortization .............. 28,732 6,981 37,087 13,880
Interest income, net ....................... (89,215) (13,189) (187,393) (26,884)
----------- ----------- ----------- -----------
Total costs and expenses ............. 497,890 534,235 926,476 1,108,011
----------- ----------- ----------- -----------
(341,504) (534,235) (686,759) (1,108,011)
Benefit for income taxes ................... (5,939) (10,685) (54,940) (22,160)
----------- ----------- ----------- -----------
Loss from continuing operations ............ (335,565) (523,550) (631,819) (1,085,851)
----------- ----------- ----------- -----------
Income from discontinued operations, less
applicable income taxes of $4,591 and
$10,685 for three months ended June 30,
1998 and 1997, respectively and income
taxes of $67,984 and $26,921 for six
months ended June 30, 1998 and 1997,
respectively (Note 1) .................... 34,594 167,007 562,371 374,744
----------- ----------- ----------- -----------
Net loss ............................. (300,971) (356,543) (69,448) (711,107)
Retained earnings (accumulated deficit),
beginning of period ...................... 1,014,500 (895,816) 782,977 (541,252)
----------- ----------- ----------- -----------
end of period ............................ $ 713,529 $(1,252,359) $ 713,529 $(1,252,359)
=========== =========== =========== ===========
Basic and diluted income (loss) per share:
Continuing operations .................... $ (.10) $ (.16) $ (.19) $ (.34)
Discontinued operations .................. .01 .05 .17 .12
----------- ----------- ----------- -----------
Net loss per share ....................... $ (.09) $ (.11) $ (.02) $ (.22)
=========== =========== =========== ===========
Basic and diluted weighted average shares
outstanding .............................. $ 3,237,500 $ 3,237,500 $ 3,237,500 $ 3,237,500
=========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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SIX MONTHS ENDED JUNE 30,
1998 1997
---- ----
(unaudited) (unaudited)
Cash Flows From Operating Activities:
Net loss ..................................................... $ (69,448) $ (711,107)
Adjustments to reconcile net loss to net cash
used in operating activities --
Depreciation and amortization ................................ 37,087 13,879
Provision for doubtful accounts .............................. -0- 137,671
Income from discontinued operations, net ..................... (562,371) (374,744)
Decrease (increase) in accounts receivable ................... 58,386 (78,295)
(Increase) decrease in other assets .......................... (37,812) 59,896
Increase in amounts due from affiliates ...................... (63,000) (18,500)
(Decrease) increase in accounts payable ...................... (96,839) 358,754
Increase in accrued expenses ................................. 178,705 197,277
Decrease in income taxes payable ............................. (28,000) (48,939)
---------- -----------
Net cash used in operating activities of continuing
operations ............................................... (583,292) (464,108)
Net cash provided by discontinued operations ............... -0- 457,364
---------- -----------
Net cash used in operating activities ........................... (583,292) (6,744)
---------- -----------
Cash Flows From Investing Activities:
Amounts loaned or advanced to consulting customers ........... -0- (532,262)
Amounts repaid by consulting customers ....................... 3,253,177 319,944
Purchases of U.S. Government securities....................... (6,295,378) -0-
Proceeds from sale of U.S. Government securities ............. 5,313,978 -0-
Purchases of businesses ...................................... (388,329) -0-
Purchases of property and equipment .......................... (45,908) (15,337)
---------- -----------
Net cash provided by (used in) investing activities ............. 1,837,540 (227,655)
---------- -----------
Cash Flows from Financing Activities
Principal payments on notes payable .......................... -0- (37,656)
---------- -----------
Net increase (decrease) in cash ................................. 1,254,248 (272,055)
Cash, beginning of year ......................................... 406,909 1,418,054
---------- -----------
Cash, end of period.............................................. $1,661,157 $ 1,145,999
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes.................................... $ 41,037 $ 19,882
========== ===========
Cash paid for interest........................................ $ 8,950 $ 424
========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
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. CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND DISCONTINUED OPERATIONS:
Continental Choice Care, Inc. and subsidiaries, (collectively, the
"Company") was primarily engaged in the business of providing dialysis related
services, training, equipment and supplies to patients at home, in prisons and
in hospitals. The Company also provided acute dialysis nursing services and
administrative services. In the fourth quarter 1997, the Company completed the
sale of substantially all of its dialysis related assets to IHS of New York,
Inc., a New York corporation ("IHS"). Alpha Administration Corp. and Continental
Dialysis Center of the Bronx, Inc. ("CDBI"), affiliates and consulting customers
of the Company also sold substantially all of their respective assets to IHS. In
addition, during the first fiscal quarter of 1998, Upper Manhattan Dialysis
Center, Inc. ("UMDC"), another consulting customer of the Company, sold
substantially all of its assets to Renal Research Institute, LLC ("RRI"). Fifty
percent (50%) of UMDC's outstanding common stock is owned by certain executive
officers of the Company. Consummation of the of the second closing under the
transaction is pending New York State regulatory approval. No assurance can be
given that such approval will be received.
In connection with the transaction with IHS, the Company and IHS entered
into a consulting agreement pursuant to which the Company agreed to provide
certain consulting services to IHS. IHS is required to make payments to the
Company aggregating $1,000,000 over the three year term of the agreement. While
IHS failed to make payments to the Company aggregating approximately $54,000
during the first half of 1998, which remain outstanding, IHS was otherwise
current in its payment obligations to the Company as of June 30, 1998. In
addition, the Company believes that IHS has obtained final regulatory approval
to own and operate the Alpha and CDBI facilities.
The operating results and the gain on the disposition of the Company's
dialysis-related businesses have been segregated from continuing operations and
reported as separate line items on the Consolidated Statements of Operations and
Cash Flows. The prior period Consolidated Financial Statements have been
restated to reflect the discontinued operations.
(2) NEW BUSINESSES:
Effective April 14, 1998, the Company established a subsidiary, United Dry
Cleaning, L.L.C. ("United") for the purpose of acquiring and operating dry
cleaning facilities initially in the Phoenix, Arizona area. The Company
committed an aggregate of $1,000,000 to United's initial operations.
Effective May 21, 1998, United acquired substantially all of the assets of
Ultimate Cleaners, Inc., an Arizona corporation ("Ultimate"), other than
Ultimate's cash and accounts receivable. The assets acquired from Ultimate
include currently operating dry cleaning operations
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at five facilities and two additional facilities under construction. Current
operations include two dry cleaning plants and three drop stores. The facilities
under construction are drop stores. All facilities are located at leased
locations. The aggregate purchase price for the assets was $1,420,000, of which
$350,000 was paid as cash consideration at closing and $20,000 is payable over a
period of 20 months. The remainder was paid in the form of a promissory note in
the principal amount of $1,050,000. The note has a term of ten years and bears
interest at the rate of 10% per annum. United assumed Ultimate's obligation
under its real property leases and assumed substantially no other liabilities.
Effective May 19, 1998, United acquired substantially all of the assets of
Cleaners Headquarters, Inc., an Arizona corporation. Cleaners Headquarters, Inc.
conducts dry cleaning operations from one location. The all cash purchase price
for the assets was $15,000.
These acquisitions have been accounted for as purchases and, accordingly,
the operating results of these companies have been included in the Company's
consolidated financial statements since the dates of acquisition. The excess of
net assets acquired of approximately $533,000 is being amortized over twenty
years. Additionally, the company paid approximately $103,000 to the former
owners of these businesses as part of a covenant not to compete. This amount is
being amortized over the terms of the agreements which range from two to five
years.
(3) INCOME (LOSS) PER SHARE:
As of June 30, 1998 and 1997, the basic weighted average common shares
outstanding were 3,237,500.
(4) RELATED PARTY TRANSACTIONS:
The Company has obtained a $125,868 note from TechTron, Inc. ("TechTron")
for expenses of TechTron paid for by the Company. TechTron holds approximately
47.18% of the Company's outstanding common stock, and approximately 80.7% of
TechTron's outstanding common stock is held by Alvin S. Trenk, the Company's
Chairman, Chief Executive Officer and a Director, Steven L. Trenk, the Company's
President and Chief Operating Officer and a Director, and Martin G. Jacobs, MD,
the Company's Medical Director and a Director (collectively, "Certain Executive
Officers"). The note bears interest at the rate imputed by the Internal Revenue
Service for instruments having a maturity of two or more years and without a
stated interest rate. The principal and accrued interest thereon were due on
December 31, 1996. Amounts due under the note were not paid and Techtron
executed a new note bearing the same interest rate which is payable on demand.
During 1998, 1997, 1996 and 1995, an additional $63,000, $78,996, $16,000 and
$15,000, respectively, was advanced to TechTron by the Company. The Company has
obtained notes from TechTron for these additional advances. The notes bear
interest at the rate of 8% and are payable on demand. All notes have been
guaranteed by Certain Executive Officers.
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As of June 30, 1998 and December 31, 1997, $(108,419) and $74,878,
respectively, was (payable to) due from Alpha. The amounts are net of certain
transactions in the amount of $174,584, not recorded due to realization
uncertainties. At June 30, 1998 and December 31, 1997, $(3,492) and $64,350,
respectively, was (payable to) due from CDBI. However, there was inadequate cash
flow to pay $200,000 in consulting fees which have not been recorded by the
Company due to realization uncertainties. Amounts (payable to) due from Alpha
and CDBI are included in accounts payable or amounts due from consulting
customers in the accompanying balance sheets.
As of December 31, 1997, UMDC owed the Company $831,483 and the physician
shareholders of UMDC owed the Company $100,000 in principal plus interest for
loans previously advanced by the Company. As of June 30, 1998, all amounts due
from UMDC under these loans were repaid, and $100,000 of principal plus accrued
interest due from the physician shareholders of UMDC to the Company was still
outstanding. In addition, the Company provided equipment and supplies to UMDC
aggregating $1,048,841 through June 30, 1998 and December 31, 1997 at no margin.
The total amounts due from UMDC and its physician principals totaled $100,000
and $2,665,677 as of June 30, 1998 and December 31, 1997, respectively. Amounts
due as of June 30, 1998 are net of certain transactions including consulting
fees aggregating $1,388,875 and $376,633 in interest and other accrued fees not
recorded due to realization uncertainties.
In 1998, the Company loaned $250,000 to Steven L. Trenk, the Company's
President and Chief Executive Officer. Mr. Trenk executed a promissory note for
this advance due and payable in full within one year. The note bears interest at
rate imputed by the Internal Revenue Service for instruments having a maturity
of one or more years and without a stated interest rate. This loan is included
in other current assets in the accompanying balance sheets.
(5) NEW ACCOUNTING PRONOUNCEMENTS.
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which modifies the financial statement presentation of comprehensive income and
its components. Adoption of this Statement had no effect on the Company's
financial position or operating results in the periods presented as there are no
changes in stockholders equity during the period other than changes resulting
from the Company's stock for the six months ended June 30, 1998.
(6) SUBSEQUENT EVENTS
In July 1998, United acquired substantially all of the assets of G & P
Associates, Inc., an Arizona corporation which conducted dry cleaning operations
from two leased locations. The aggregate purchase price for the assets was
$165,750, of which $95,750 was paid at closing and $70,000 was paid in the form
of a promissory note in the principal amount of $70,000 bearing an
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interest rate of 10% and a term of two years. In August 1998, United acquired
substantially all of the assets of Alyssa's Magic Touch, an Arizona
proprietorship which conducted dry cleaning operations from a leased location in
the Phoenix Arizona area. The aggregate purchase price for the assets was
$224,000, of which $115,000 was paid at closing and $109,000 was paid in the
form of a promissory note in the principal amount of $109,000 bearing an
interest rate of 10% and a term of five years.
While United intends to acquire additional dry cleaning facilities in the
Phoenix, Arizona area, no assurance can be given that United will be successful
in negotiating or executing additional agreements or in consummating additional
transactions in Arizona or elsewhere.
MANAGEMENT'S DISCUSSION AND ANALYSIS.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared With Six Months Ended June 30,
1997.
At the IHS Closing on October 8, 1997, the Company completed the sale of
its New Jersey, Connecticut and Pennsylvania dialysis business assets to IHS.
The Company also conveyed its New York nursing and home and alternate site
businesses and its consulting and service agreements with Alpha and CDBI to IHS.
Following the IHS Closing, the Company's sources of revenue included amounts
payable for consulting services to be provided to IHS through October 2000 and
amounts payable by UMDC pursuant to the UMDC Agreement. Further, in January,
1998, UMDC sold substantially all of its assets to RRI and the Company and UMDC
terminated the UMDC Agreement. As a result of the UMDC transaction, the Company
received repayment of certain sums due the Company from UMDC and certain of
UMDC's shareholders and became entitled to receive repayment of certain other
amounts due from UMDC and its shareholders and to receive amounts to be earned
by UMDC in connection with its continuing business pending the RRI Second
Closing.
In the six months ended June 30, 1998, the Company recognized $166,662
from the IHS Consulting Agreement, which is payable at the rate of approximately
$28,000 per month for its three year term. In addition, the Company received
$2,665,000 from UMDC as a result of the First RRI Closing for amounts previously
due from this consulting customer. The proceeds from the IHS Closing, the IHS
Consulting Agreement and the RRI Transaction were invested by the Company in
U.S. Government securities and money market funds. Costs incurred by the Company
relating to the RRI transaction were not significant. No assurance can be given
that the Company will continue to receive income from the IHS Consulting
Agreement or from the continued operations of UMDC.
Effective April 14, 1998, Continental Choice Care, Inc. established a new
subsidiary, United Dry Cleaning, L.L.C. ("United"). United is engaged in the
acquisition and consolidation of dry cleaning stores in the Phoenix, Arizona
Area. This area was selected for its rapid growth in construction and
development and increase in population, which, it is believed, will provide
United with growth potential. United's objective is to capitalize on the trend
toward consolidation of small closely held companies where significant critical
mass can be achieved rapidly with limited capital.
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The Company believes that economies, and therefore enhanced profitability, can
be gained through greater utilization of the cleaning plants and/or
consolidation of plant functions as well as through the use of marketing and
sales campaigns which are not customarily employed by existing competitive
operations.
In May, 1998, United acquired substantially all of the assets of Ultimate
Cleaners, Inc. and Cleaner Headquarters, Inc., Arizona corporations. The results
of the dry cleaning operations are included in Continuing Operations from the
date of acquisition in the accompanying Consolidated Financial Statements.
REVENUES
Net patient revenues of the Company in 1997 prior to the IHS Closing were
derived from providing equipment and supplies to patients (51%) and services
(49%), which services consisted of contract nursing services, and dialysis
treatments provided by the Company's Training Facility in Linden, New Jersey. In
1997, 25% of the Company's cash receipts were received under the Medicare
program, while approximately 75% of cash receipts were received from commercial
insurance companies or contracted entities and Medicaid programs.
Net patient revenues were $2,458,148 for the first six months of 1997.
There were no such revenues in 1998. The decrease is attributable to the sale of
substantially all of the Company's assets in October, 1997. This decrease in the
Company's net patient revenues in 1998 was partially offset by $187,393 in
interest income, net derived in part from the Company's investment of the
proceeds of the IHS Closing and the RRI Transaction and income of $166,662
derived from the IHS Consulting Agreement.
The Company provided certain services in New York through consulting,
administrative, or subcontracting service arrangements with the Alpha, CDBI and
UMDC Consulting Customers in New York. Under the Company's agreements with
Alpha, CDBI and UMDC, the Company provided various administrative and consulting
services for a monthly fee of $20,000, $20,000 and $33,333, respectively. The
Company also provided equipment and supplies to the Consulting Customers under
the agreements at the Company's listed cost for the equipment and supplies. As
of the end of the 1997 fiscal year, the Company recorded revenues of $941,000
from Alpha, $62,000 from CDBI and $794,000 from UMDC, of which an aggregate of
approximately $800,000 related to prior periods that was not previously recorded
due to realization uncertainties attributable to services, equipment and
supplies. In the first six months of 1998, the Company recorded $593,470 in
revenues related to UMDC not previously recorded due to realization
uncertainties.
The Company does not expect to receive future operating revenues related
to its former dialysis based businesses or from the business of its former
Consulting Customers other than such amounts as it may receive under its
consulting agreement with IHS and the consulting agreement between RRI and UMDC.
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The Company's Renal Management, Inc. ("RMI") subsidiary recognized no
revenue on expenses of $156,907 through June 30, 1997. No expenses were incurred
for RMI in 1998, nor does the Company expect to provide additional substantive
financial support for RMI.
The Company's United subsidiary recognized revenues of $184,171 from the
period of acquisition to June 30, 1998. There were no such revenues in 1997
since United was not established and did not begin operating until the second
quarter of 1998.
COST OF GOODS SOLD/COST OF SERVICES
Cost of goods sold for discontinued operations was $638,498 or 45% of net
patient revenues attributable to equipment and supplies in the six months ended
June 30, 1997. The cost of services for discontinued operations totaled $340,103
or 33% of net patient revenues attributable to services in 1997. In 1998, there
was no cost of equipment and supplies and services relating to net patient
revenues due to the termination of business which occurred as a result of the
IHS Closing. The Company also experienced a decrease in personnel costs,
primarily attributable to reductions in workforce resulting from and following
the IHS Closing.
Cost of services for continuing operations was $111,116 or 60% of revenues
attributable to the Company's dry cleaning business from the period of
acquisition to June 30, 1998. Cost of services is mostly comprised of $90,981 in
salaries and other payroll expenses as well as $19,700 for supplies. There were
no such expenses in 1997 due to United being established and commencing
operations in the second quarter of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $1,030,836 for the six months
ended June 30, 1998, as compared with $1,979,718 for the 1997 period. The net
decrease of $948,882 from the 1997 period is primarily comprised of a reduction
of $156,907 relating to expenses of RMI and a reduction in salaries, rent and
other office expenses of $835,392 due to a reduction in head count resulting
from the IHS transaction. These decreases were partially offset by an increase
of $75,981 related to the Company's dry cleaning businesses.
In connection with the IHS transaction, the Company retained substantially
all of its accounts receivable and accounts payable. Accordingly, during the
period immediately following the IHS Closing, the Company maintained its
accounts receivable and accounts payable personnel. The number of employees
employed in those departments decreased in 1998. The Company expects to continue
to incur general and administrative expenses of not less than approximately
$1,800,000 per annum, including the salaries of the Company's officers and
professional fees.
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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 June 30, 1998, the allowance for doubtful accounts was $152,000 as
compared with $257,000 at December 31, 1997. As a percentage of patient
receivables outstanding, such allowance was 49% at June 30, 1998, and 57% at
December 31, 1997. Due to the discontinuance of current revenues discussed above
and collection activity, the patient accounts receivable have been significantly
reduced. Management continues to evaluate the collectibility of all accounts and
believes the stated allowance as of June 30, 1998 is adequate to absorb possible
losses resulting from uncollectible receivables. As of June 30, 1998, all
patient receivables were greater than 90 days past due.
As of June 30, 1998, the Company's dry cleaning business had accounts
receivable of $63,291. Substantially all receivables relating to the Company's
dry cleaning business are deemed to be collectible.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense for the six months ended June 30,
1998 totaled $37,087, an increase of $23,208 from the 1997 period. This increase
resulted from the purchase of substantially all of the assets from the
acquisition of dry cleaning stores by United as well as the associated goodwill
and other intangibles generated from these transactions.
INTEREST INCOME, NET
Net interest income was $187,393 and $27,996 in the six months ended June
30, 1998 and 1997, respectively. Interest expense on the Company's debt
obligations in 1997 was more than offset by interest earned on the proceeds from
the sale of assets to IHS and the RRI Transaction.
Provision (benefit) for Income Taxes
The provision (benefit) for Federal income taxes was $0 in 1998 and 1997.
The state income tax provision was $13,044 in 1998 and $4,761 in 1997. All of
the Company's deferred tax assets as
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of June 30, 1998 has been offset by a valuation allowance as a result of the
Company's operating results.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a positive net cash flow of $1,254,248 during the
first six months of 1998. Net cash used in operating activities of continuing
operations was $583,292 relating primarily to corporate general and
administrative expenses. Net cash provided by investing activities of
approximately $1,837,540 reflects the investment in U.S. Government securities
of available cash arising from the proceeds received directly by the Company
from the sale of discontinued operations, and the repayments by Consulting
Customers of approximately $3,253,177.
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 1998, 1997, 1996
and 1995, an additional $63,000, $78,996, $16,000 and $15,000, respectively, was
advanced to TechTron by the Company. The Company has obtained notes from
TechTron for these additional advances. The notes bear interest at the rate of
8% and are payable on demand. Payments on the notes are not anticipated in 1998
due to the fact that Techtron does not expect to earn sufficient revenues to
make payment. Although the notes have been guaranteed by Certain Executive
Officers, no assurance can be given that the notes will be repaid. Through
December 31, 1997, the Company had advanced loans to the physician principals of
UMDC not affiliated with the Company aggregating $450,000 and loans to UMDC in
the amount of $622,449, and had provided $1,048,841 of equipment and supplies to
UMDC for which the Company had not yet been reimbursed. The loans bear interest
at prime less 1% and remained outstanding as of December 31, 1997. There were no
repayments made by UMDC during 1997. Advances and supplies and equipment in 1997
to UMDC totaled $1,175,494.
The Company expects that the cash received from the sale of the Company's
assets to IHS, the proceeds derived by the Company as repayments of amounts due
from Alpha and CDBI following the IHS Closing and repayments of amounts due the
Company from UMDC resulting from the RRI transaction and from UMDC's continuing
operations will be sufficient to fund the Company's operations through year-end
1998.
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
to spend in excess of the net cash Proceeds in any future acquisitions or
investments, it is
-12-
<PAGE>
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. The Company has adopted SFAS No. 130 as of January 1,
1998.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the Company's shareholders ("Annual Meeting") was held
on April 28, 1998. At the Annual Meeting, the Company's shareholders elected
each of Martin G. Jacobs, M.D. and Stanley B. Amsterdam as Class I directors.
There were 2,646,383 votes cast for, and 16,100 votes withheld from the election
of each of Dr. Jacobs and Mr. Amsterdam. No votes were cast against the nominees
and there were no broker non-votes. The shareholders of the Company also
ratified the appointment of Arthur Andersen LLP as the Company's independent
public accountants for the fiscal year ending December 31, 1998. There were
2,657,683 votes cast for, 1,800 votes cast against and 3,000 votes abstained
from the ratification. There were no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) No Exhibits accompany this Form 10-QSB
(b) A report on Form 8-K was filed by the Company on May 21, 1998
concerning the acquisition of substantially all of the operating
assets of Ultimate Cleaners, Inc., an Arizona corporation by United
Dry Cleaning, L.L.C., a subsidiary of the Company.
A report on Form 8-K was filed by the Company on May 15, 1998
concerning the appointment of Mark N. Raab, the Company's
controller, as acting Chief Financial Officer of the Company and
the resignation of Ronald A. Lefkon from his position as Chief
Financial Officer.
-13-
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONTINENTAL CHOICE CARE, INC.
Registrant
Date: August 14, 1998 B /s/ Steven L. Trenk
--------------------
STEVEN L. TRENK
President and Chief Operating
Officer and Director
Date: August 14, 1998 B /s/ Mark N. Raab
-----------------
MARK N. RAAB
Acting Chief Financial Officer
E-1
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<PERIOD-START> JAN-01-1998
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