<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
--------------------------------
- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-24542
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CONTINENTAL CHOICE CARE, INC.
-----------------------------
(Exact Name of Registrant as Specified in Its Charter)
NEW JERSEY 22-3276736
------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
35 AIRPORT ROAD
MORRISTOWN,NEW JERSEY 07960
--------------------------------------- --------
(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number, Including Area Code (973) 898-9666
--------------
N.A.
- -------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--------- ----------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.
Yes No
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Applicable only to corporate issuers.
Shares outstanding as of November 12, 1999
3,267,500 shares of common stock, no par value.
Transitional Small Business Disclosure Format: Yes No X
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Continental Choice Care, Inc. and Subsidiaries
Form 10-QSB
September 30, 1999
This Annual Report on Form 10-QSB contains "forward-looking statements"
that are based on management's assumptions, estimates and projections. The
Company's actual results could differ materially from the results anticipated in
such forward-looking statements as a result of known and unknown risks,
uncertainties and other factors.
Part I. Financial Information
The comparative consolidated statements of operations, balance sheets and
statements of cash flows for Continental Choice Care, Inc. and Subsidiaries (the
"Company") are presented with management's discussion and analysis of material
changes in operations on the pages which follow.
The consolidated financial statements and accompanying financial
information as of September 30, 1999 and for the three and nine-month periods
ended September 30, 1999 and 1998 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 Form 10-KSB/A filed with the Securities and Exchange
Commission.
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CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS Sept. 30, 1999 Dec. 31, 1998
--------------- -------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................. $ 597,913 $3,058,676
Investments in U.S. Government securities................................. 1,485,180 1,991,658
Accounts receivable, less allowance for doubtful accounts of $45,000
at September 30, 1999 and $67,000 at December 31, 1998.................. 117,836 60,295
Amounts due from officer.................................................. 335,000 385,000
Notes receivable.......................................................... 1,027,000 -0-
Other current assets...................................................... 141,533 202,295
----------- ----------
Total current assets.................................................... 3,704,462 5,697,924
Amounts due from affiliates............................................... 444,258 370,264
Property and equipment, at cost, less accumulated depreciation of
$227,092 at September 30, 1999 and $154,368 at December 31, 1998........ 341,289 560,236
Goodwill and other intangibles, less accumulated amortization of
$122,320 at September 30, 1999 and $67,943 at December 31, 1998......... 796,988 1,306,352
Pine Tree escrow deposit.................................................. 915,000 -0-
Other assets.............................................................. 19,305 17,581
----------- ----------
$ 6,221,302 $7,952,357
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Lines of credit........................................................... 228,419 -0-
Accounts payable.......................................................... 1,038,938 423,415
Accrued expenses.......................................................... 946,648 984,976
Current portion of notes payable.......................................... 843,675 931,807
----------- ----------
Total current liabilities............................................ 3,057,680 2,340,198
----------- ----------
Notes payable, less current portion....................................... -0- 86,609
----------- ----------
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,
3,267,500 shares issued and outstanding at September 30, 1999
and 3,237,500 at December 31, 1998...................................... 5,645,061 5,524,561
(Accumulated deficit) retained earnings................................... (2,481,439) 989
----------- ----------
Total stockholders' equity.............................................. 3,163,622 5,525,550
----------- ----------
$ 6,221,302 $7,952,357
=========== ==========
</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 (ACCUMULATED DEFICIT) RETAINED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues from continuing operations
Consulting services.............. $ 83,331 $ 83,331 $ 249,993 $ 249,993
Dry cleaning services............ 290,679 371,809 1,133,760 555,980
----------- ---------- ----------- -----------
374,010 455,140 1,383,753 805,973
Costs of services..................... 265,141 241,857 904,613 352,973
General and administrative expenses... 604,542 609,682 2,035,478 1,683,873
Depreciation and amortization......... 46,454 56,920 146,466 94,007
Interest income, net.................. (2,861) (54,104) (41,450) (241,497)
Loss on sale of businesses............ 427,665 -0- 427,665 -0-
Costs of failed acquisition........... 393,409 -0- 393,409 -0-
----------- ---------- ----------- -----------
Total costs and expenses......... 1,734,350 854,355 3,866,181 1,889,356
----------- ---------- ----------- -----------
(1,360,340) (399,215) (2,482,428) (1,083,383)
Benefit for income taxes.............. -0- (1,932) -0- (86,671)
----------- ---------- ----------- -----------
Loss from continuing operations....... (1,360,340) (397,283) (2,482,428) (996,712)
----------- ---------- ----------- -----------
Income from discontinued operations,
less applicable income taxes of $-0- and
$690 for three months ended September 30,
1999 and 1998, respectively and income taxes
of $-0- and $101,065 for nine months ended
September 30, 1999 and 1998,
respectively........................ -0- 3,624 -0- 533,605
----------- ---------- ----------- -----------
Net loss......................... (1,360,340) (393,659) (2,482,428) (463,107)
(Accumulated deficit) retained earnings,
Beginning of period.................. (1,121,099) 713,529 989 782,977
----------- ---------- ----------- -----------
End of period........................ $(2,481,439) $ 319,870 $(2,481,439) $ 319,870
=========== ---------- =========== -----------
Basic and diluted (loss) income per share:
Continuing operations................ $(.42) $(.12) $(.76) $ (.31)
Discontinued operations.............. -0- -0- -0- .17
----------- ---------- ----------- -----------
Net loss per share................... $(.42) $(.12) $(.76) $ (.14)
=========== ========== =========== ===========
Basic and diluted weighted average
shares outstanding.......................... 3,267,500 3,237,500 3,260,687 3,237,500
=========== ========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
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CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
1999 1998
-------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss...................................................... $(2,482,428) $ (463,107)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................................. 181,549 94,007
Provision for doubtful accounts............................... 15,000 -0-
Stock grant and warrants issued............................... 120,500 -0-
Loss on sale of businesses.................................... 427,665 -0-
Income from discontinued operations, net...................... -0- (533,605)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.............. (72,541) 78,518
Decrease in other assets................................ 59,038 305,271
Increase in amounts due from affiliates................. (73,994) (94,000)
Increase (decrease) in accounts payable................. 615,523 (127,140)
(Decrease) increase in accrued expenses................. (65,080) 238,511
Decrease in income taxes payable........................ -0- (47,368)
Repayments from (loans to) officer...................... 50,000 (250,000)
----------- -----------
Net cash used in operating activities of continuing operations.. (1,224,768) (798,913)
----------- -----------
Cash Flows From Investing Activities:
Issuance of notes receivable.................................. (1,027,000) -0-
Pine Tree escrow deposit...................................... (915,000) -0-
Amounts repaid by consulting customers........................ -0- 3,168,033
Purchases of U.S. Government securities....................... (4,493,522) (9,647,436)
Proceeds from sale of U.S. Government securities.............. 5,000,000 8,919,429
Purchases of businesses....................................... -0- (582,087)
Purchases of property and equipment........................... (17,005) (143,285)
----------- -----------
Net cash (used in) provided by investing activities............. (1,452,527) 1,714,654
----------- -----------
Cash Flows From Financing Activities
Net borrowings under lines of credit.......................... 228,419 -0-
Principal payments on notes payable........................... (11,887) (37,038)
----------- -----------
Net cash provided by (used in) financing activities............. 216,532 (37,038)
----------- -----------
Net (decrease) increase in cash and cash equivalents............ (2,460,763) 878,703
Cash and cash equivalents, beginning of year.................... 3,058,676 406,909
----------- -----------
Cash and cash equivalents, end of period........................ $ 597,913 $ 1,285,612
----------- ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes.................................... $ 5,141 $ 59,035
----------- ===========
Cash paid for interest........................................ $ 12,896 $ 31,126
----------- ===========
</TABLE>
Non-Cash Disclosures:
Loss on sale of business consists of net fixed assets of $140,570, net
goodwill of $423,199 and additional accrued rent of $32,205 offset by a
reduction in notes payable and accrued interest of $168,309.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
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CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of business and discontinued operations:
In 1997 and 1998, the Company completed the sale of substantially all of its
dialysis related assets. In addition, Alpha Administration Corp. ("Alpha"), the
operator of the South Bronx Kidney Center, ("Bronx Facility"), and Continental
Dialysis Center of the Bronx, Inc. ("CDBI") sold substantially all of their
respective assets to IHS. All of the outstanding common stock of Alpha and CDBI
is owned by the Company's Chairman, President and Corporate Medical Director
("Certain Executive Officers"). 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. 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 due the Company by Alpha and CDBI
for consulting and administrative fees and other amounts have been paid to the
Company. However, as of September 30, 1999, approximately $200,000 of consulting
fees due from CDBI had not been recorded due to realization uncertainties.
In April 1998, the Company established a subsidiary, United Dry Cleaning, LLC
("United"), for the purpose of acquiring and operating dry cleaning facilities
in the Phoenix, Arizona area. During 1998, United acquired substantially all of
the assets of four Arizona dry cleaning businesses. In addition, United opened
two dry cleaning stores not related to these transactions which were
subsequently closed.
In July 1999, United sold back substantially all of the assets of two dry
cleaning stores United had acquired in July 1998 from G&P Associates, Inc., an
Arizona corporation. In consideration of the transaction, G&P Associates, Inc.
released a promissory note for $70,000 plus accrued interest United had issued
to G&P Associates. Inc. in connection with the original purchase.
In September 1999, United sold back substantially all of the assets of one dry
cleaning store United had acquired in August 1998 from Alyssa's Magic Touch
("Alyssa's"), an Arizona proprietorship. In consideration of the transaction,
Alyssa's released the promissory note that United had issued to Alyssa's in
connection with the original transaction. At the time of the sale, the note had
a balance of $92,854 plus accrued interest.
In addition, in September 1999, United closed the store it had acquired in May
1998 from Cleaner Headquarters, Inc., an Arizona corporation as well as one of
the five stores it had acquired in May 1998 from Ultimate Cleaners Inc., an
Arizona corporation. An additional two of the five stores acquired from
Ultimate were closed in October, 1999. The Company recognized a net loss from
sale of businesses of $427,665 in 1999, which included a write-off of net
goodwill of
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$423,199 related to these transactions. United, which operates as one segment of
the Company, currently operates dry cleaning stores and plants from two
locations and provides dry cleaning services to certain hotels.
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 in the Consolidated Statements of Operations.
Revenues from discontinued operations were $-0-and $310,000 for 1999 and 1998,
respectively.
(2) Income (loss) per share:
Basic income (loss) per share represents net income (loss) divided by the
weighted average shares outstanding. Diluted income (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 September 30, 1999 and 1998, the basic and dilutive weighted average
common shares outstanding were 3,260,687 and 3,237,500 respectively. As of
September 30, 1999, there were 1,493,350 of outstanding stock options issued to
Directors, officers and employees of the Company as well as 75,000 warrants
issued to a financial services provider which were excluded from basic and
diluted net income (loss) per share for both periods because the effect would be
antidilutive.
(3) Related party transactions:
As of December 31, 1998, the Company had advanced $370,264 to TechTron.
During 1999, an additional $73,994 was advanced to TechTron. The Company has
obtained notes from TechTron for all of the advances. The majority of the notes
issued in connection with these advances bear interest at a rate of 8% and are
payable upon demand. Payments on the notes are not anticipated in 1999 due to
the fact that TechTron does not expect to earn sufficient revenues to make
payment.
In 1998 and 1997, respectively, the Company loaned $350,000 and $35,000 to the
Company's President and Chief Operating Officer. The President and Chief
Operating Officer executed promissory notes for these advances which were due
and payable in full within one year. In July, 1999, the Company received
$50,000 representing payment of the 1997 loan and partial payment of the 1998
advances. The notes relating to the 1998 advances bear interest at a rate
imputed by the Internal Revenue Service for instruments having a maturity of one
or more years (4.33% to 5.58%). The Company has extended the terms of the notes
to be payable prior to December 31, 2000.
As of September 30, 1999 and December 31, 1998, $109,754 and $115,681,
respectively, was payable to Alpha. At September 30, 1999 and December 31,
1998, $13,601 and $4,083, respectively, was due from CDBI. The Company had a
Consulting Services Agreement with
6
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CDBI. The CDBI agreement provided for payments of $20,000 per month. However,
there was inadequate cash flow to pay $200,000 in consulting fees due from CDBI
which have not been recorded by the Company due to realization uncertainties.
Amounts payable to Alpha and due from CDBI are included in accounts payable in
the accompanying balance sheets.
Of amounts due under the agreements with related parties, only consulting fees
due the Company from CDBI under the Consulting Services Agreement are in
default. The $200,000, representing all consulting fees from the inception of
the agreement until the time of the sale of CDBI to IHS, is due the Company from
CDBI.
In addition, several promissory notes and associated guarantees of related
parties were in default under the original terms of the notes. As of September
30, 1999, amounts due the Company from Techtron totaled $444,258. Of this
amount, $125,868 was secured by a promissory note dated August 9, 1994. Under
the original terms of this note, principal and interest were due and payable by
December 31, 1996. The terms of the note were amended by the Company to become
due and payable on demand. All amounts due from Techtron are guaranteed by
Certain Executive Officers. Any demand for payment under the personal
guarantees will have to be made by the Company's Board of Directors. The
Company's Board of Directors does not currently intend to make demand for
payment.
As of September 30, 1999, all amounts due from Alpha had been paid, except for
interest on a promissory note for $300,000 dated April 24, 1994. Principal and
interest were originally due April 24, 1999. As of September 30, 1999, $109,754
was payable to Alpha by the Company. The Company intends to offset amounts
payable to Alpha with amounts due from Alpha for interest once the Company has
determined that there are no outstanding liabilities of Alpha that the Company
may be required to pay on Alpha's behalf.
The Company has obtained a $100,000 revolving line of credit to provide
financing for United. The line of credit is with a company of which a Certain
Executive Officer is a majority stockholder. As of September 30, 1999, $70,000
of availability remained on the line of credit. The line is primarily secured by
all of United's assets.
(4) Commitments and Contingencies:
The former owners of Ultimate Cleaners, Inc., an Arizona corporation
("Ultimate") who sold United substantially all of its assets, primarily
machinery and equipment, have commenced an action against United for nonpayment
in connection with the above transaction. The plaintiffs seek to accelerate the
promissory note and also foreclose on the assets which it sold to United.
Management contests the plaintiff's action and acceleration of the note, is
vigorously defending against the claim and has raised counter claims. As a
result of this legal action, the note payable balance of $843,675 is reflected
as a current liability in the consolidated balance sheets for the periods
presented.
(5) Lines of Credit:
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The Company obtained a $200,000 line of credit to provide additional financing
for United. As of September 30, 1999, $1,581 of availability remained on the
line of credit. The line is primarily secured by all of United's assets and is
further secured by an investor. The line of credit bears interest at a rate of
Prime less 1/2% and matures January 31, 2000.
The Company obtained an additional $100,000 revolving line of credit to
provide financing for United. The line of credit is with a company of which a
Certain Executive Officer is a majority stockholder. As of September 30, 1999,
$70,000 of availability remained on the line of credit. The line is primarily
secured by all of United's assets. The line of credit bears interest at a rate
of 8% and is payable on demand.
(6) Termination of Proposed Merger:
On February 5, 1999, the Company and TelaLink Network, Ltd., a privately held
Delaware corporation ("TelaLink") executed an Agreement and Plan of Merger
("Merger Agreement") to merge the two companies in a stock-for-stock transaction
(the "Merger") to be accounted for under the purchase method of accounting.
TelaLink is a telecommunications company which was formed for the purpose of
acquiring, consolidating and operating rural telephone companies known as rural
local exchange carriers ("RLECs"). Under the terms of the Merger Agreement,
Quorum Communications, Inc. ("Quorum"), a wholly owned subsidiary of the
Company, was to merge with TelaLink with Quorum being the surviving entity. On
June 30, 1999, the merger was approved by the Company's shareholders.
Under the terms of the Merger Agreement, any party to the Agreement was
entitled, as of July 31, 1999, to terminate the proposed merger by giving notice
of termination to the remaining parties. On September 21, 1999, the Company
terminated the Agreement and Plan of Merger among the Company, TelaLink Network,
Ltd. and Quorum. The Company decided to terminate the Merger Agreement upon
determining that financing for the proposed transactions would not be available
on terms acceptable to the Company. For the nine months ended September 30,
1999, the Company has recorded $393,409 in failed acquisition costs relating to
the merger.
As of the date of termination, the Company had loaned a total of $1,027,000 to
TelaLink and its affiliates. These funds were to provide working capital to
TelaLink and have been recorded on TelaLink's books as notes payable to the
Company and on the Company's books as notes receivable. The notes bear interest
at a rate of 12%. The notes are due and payable on April 30, 2000 subject to
prior default.
In addition to amounts loaned to TelaLink, the Company also entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") by and among the
Company, Pine Tree Telephone and Telegraph Company ("PTTC") and the principal
(95%) stockholder of PTTC, whereby the Company would purchase not less than 95%
of its issued and outstanding capital stock. PTTC is a telecommunication
services provider to areas near Lewiston and Portland, Maine.
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To secure the Company's rights under the Stock Purchase Agreement, the Company
deposited the sum of $915,000 in an escrow account. Such funds were to be
treated as a non-refundable deposit against the purchase price to be paid by the
Company to the stockholders of PTTC at Closing, or otherwise in accordance with
the Stock Purchase Agreement. The Company was assigned the opportunity to
purchase the Pine Tree capital stock from TelaLink based primarily on the
Company's ability to make the $915,000 down payment required under the Stock
Purchase Agreement.
On October 14, 1999, the Company has agreed with a third party to accept
return of the Company's down payment of $915,000 plus accrued interest in
exchange for the Company's assignment of the Pine Tree contract. Under the
terms of the agreement, the Company would also receive repayment of amounts
loaned to TelaLink. No assurance can be given that the proposed transaction
will be consummated. Failure to consummate the transaction could have an
adverse effect on the Company.
(7) Other Matters
On April 26, 1999, the Company granted warrants to purchase up to an aggregate
of seventy-five thousand (75,000) shares of its common stock to a financial
services provider at an exercise price of $2.625, which was the fair market
value on the date of grant. The Company recorded $50,000 in expense related to
these warrants in selling, general and administrative expenses in the
accompanying Consolidated Statements of Operations.
On July 20, 1999, the Company's units and warrants that were issued in
connection with the Company's initial public offering on July 27, 1994 expired.
Management's Discussion and Analysis
Results of Operations
Nine Months Ended September 30, 1999 Compared with Nine Months Ended September
30, 1998.
On October 8, 1997, the Company completed the sale of substantially all its
New Jersey, New York, Connecticut and Pennsylvania dialysis business assets to
IHS of New York, a New York corporation ("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, at a rate of approximately $28,000 per
month. For the nine months ended September 30, 1999 and 1998, respectively, the
Company recognized a total of $249,993 each year for consulting services under
this agreement.
In January 1998, UMDC, a consulting customer of the Company that is 50% owned
by Certain Executive Officers, sold substantially all of its assets to Renal
Research Institute, LLC ("RRI"). As a result, the Company and UMDC terminated
the UMDC Consulting Agreement
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(the "UMDC Agreement"). The Company received from UMDC $2,665,000 at the First
RRI Closing and a subsequent payment of $310,000. The Company recognized
revenues in 1998 of $310,000 from UMDC which are included in income from
discontinued operations. There were no such revenues recorded in 1999.
Additionally, the Company and certain of UMDC's shareholders became entitled to
receive repayment of other amounts due from UMDC and its shareholders, to
receive amounts to be earned by UMDC in connection with its continuing business
and to receive amounts payable by UMDC pursuant to the Company's Consulting
Agreement with UMDC.
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. 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.
Beginning in May 1998, the Company's subsidiary, United Dry Cleaning, L.L.C.
("United"), acquired substantially all of the assets of Ultimate Cleaners, Inc.,
Cleaner Headquarters, Inc., and G & P Associates, Inc., Arizona corporations, as
well as Alyssa's Magic Touch, an Arizona proprietorship.
Beginning in July 1999, United sold back substantially all of the assets of
G&P Associates, Inc. and Alyssa's Magic Touch to their original owners. In
addition, United closed the store it acquired from Cleaners Headquarters, Inc.
The Company recognized a net loss from sale of businesses of $427,665 in 1999
which included a write-off of net goodwill of $423,199 related to these
transactions.
Since inception in May 1998, United's sales have been below levels originally
anticipated by the Company. This reduced level of sales has resulted in lower
than planned cash flow. Although the Company has obtained $300,000 in lines of
credit for United, United may need additional financing to fund its operations.
As of September 30, 1999, a total of $71,581 of availability existed on the
lines of credit. The $200,000 line of credit accrues interest at a rate of
Prime less 1/2% and matures January 31, 2000. The $100,000 revolving line of
credit bears interest at a rate of 8% and is payable on demand.
The sale and closing of several of United's dry cleaning stores and plants
signifies a movement from a multi-retail store and plant operation towards a
single plant focused on hotel business. Management believes that in order for
United to reach originally anticipated sales levels and cash flow, it must
continue to aggressively focus on its existing hotel customers as well as seek
out new hotel customers. Management continues to seek ways to reduce United's
costs, primarily payroll and supplies, and to increase revenues. No assurance
can be given that United will be successful in its efforts to expand its
customer base or that United will not need additional financing.
Revenues
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Prior to the IHS and RRI First Closings, the Company provided certain services
in New York through consulting, administrative, or subcontracting service
arrangements with consulting customers. The consulting customers were partially
or 100% owned by the Certain Executive Officers of the Company. Under the
Company's agreements with Alpha, UMDC and CDBI, the Company provided various
administrative and consulting services in addition to equipment and supplies to
each facility for monthly fees of $20,000, $33,333 and $20,000, respectively.
The Alpha and CDBI agreements terminated in October 1997 at the time of the IHS
sale, and the UMDC agreement terminated in January 1998 at the time of the RRI
First Closing. In 1998, the Company recorded $310,000 in additional revenues
related to payments from UMDC subsequent to the First RRI Closing, not
previously recorded due to realization uncertainties. No additional revenues
have been recorded in 1999.
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 customer other than such amounts as it may receive under its
consulting agreement with IHS, the consulting agreement between RRI and UMDC and
amounts due from UMDC pending consummation of the second closing. Amounts due
from UMDC have not been recorded due to realization uncertainties. No assurance
can be given that the RRI second closing will occur.
The Company's United subsidiary recognized revenues of $1,133,760 and $555,980
in 1999 and 1998, respectively. 1998 revenues are lower than in 1999, primarily
because United did not commence operations until the second quarter of 1998. Of
these amounts, approximately $559,271 and $358,215 or 49% and 64% in 1999 and
1998, respectively, related to dry cleaning services provided by United's dry
cleaning facilities, including plants and stores. The remaining $574,489 and
$197,765 related to dry cleaning services provided to hotel customers. The
Company anticipates that hotels will continue to be a major source of revenue.
United continues to target additional businesses in the Phoenix, Arizona area to
maximize plant capacity as well as broaden the Company's revenue base.
Cost of Services
Cost of services was $904,613 and $352,973 or 80% and 63% of revenues
attributable to the Company's dry cleaning business in 1999 and 1998
respectively. 1998 expenses are lower than in 1999, since United did not
commence operations until the second quarter of 1998. Cost of services is
mostly comprised of $727,555 and $284,778 in salaries and other payroll expenses
as well as $128,429 and $63,372 for supplies in 1999 and 1998, respectively.
The increase in cost of services as a percentage of sales is due primarily to a
full nine months of depreciation expense in 1999 attributable to the dry
cleaning machinery and equipment being allocated to cost of services as well as
sales being below levels originally anticipated with a lesser corresponding
reduction in staff. Management continues to seek ways to reduce United's costs
and to increase revenues.
General and Administrative Expenses
General and administrative expenses totaled $2,035,478 in 1999, as compared
with
11
<PAGE>
$1,683,873 for the nine months ended September 30, 1998. The net increase
of $351,605 is primarily comprised of an increase of $415,077 relating to the
Company's dry cleaning businesses and the issuance of 30,000 shares of Common
Stock valued at $70,500 to a retiring Director of the Company, offset by a
reduction of $127,994 in salaries and other office expenses due to a reduction
in corporate staff 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 throughout 1998.
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 receivables.
The Company reviews each individual account and a reserve is established to
reflect any amounts considered doubtful of collection based on the Company's
knowledge of specific payors, an analysis of the aging of the accounts, as well
as past experience with the accounts.
As of September 30, 1999, the allowance for doubtful accounts was $45,000 as
compared with $67,000 at December 31, 1998. Of this allowance, $15,000 relates
to the discontinued dialysis treatment business. As a percentage of patient
receivables outstanding, such allowance was 100% at September 30, 1999, and 75%
at December 31, 1998. Due to the discontinuance of current revenues discussed
above and collection activity, the patient accounts receivable have been fully
reserved at September 30, 1999.
As of September 30, 1999, the Company's dry cleaning business had accounts
receivable of $148,590. Of the Company's $45,000 allowance at September 30,
1999, $30,000 relates to the dry cleaning business. As a percentage of
receivables outstanding, such allowance was 20% at September 30, 1999.
Management continues to evaluate the collectibility of all accounts and
believes the stated allowance as of September 30, 1999 is adequate to absorb
possible losses resulting from uncollectible receivables.
Depreciation and Amortization Expense
Depreciation and amortization expense for 1999 and 1998 totaled $181,549
($35,083 of which is included in cost of services) and $94,007. The increase
from 1998 resulted from the purchase of the assets in connection with the
acquisition of dry cleaning stores and plants by United beginning in the second
quarter of 1998 as well as the associated goodwill and other intangibles
generated from these transactions.
Interest Income and Interest Expense
12
<PAGE>
Net interest income was $41,450 and $241,497 for the nine months ended
September 30, 1999 and 1998, respectively. The net decrease of $200,047 is
related primarily to the issuance of notes payable in connection with the
acquisition of dry cleaning stores and plants by United as well as a reduction
of investment income due to cash used in the operating and investing activities
of the Company. Interest expense on the Company's debt obligations in both
periods was offset by interest earned on the proceeds from the sale of assets to
IHS and RRI.
Provision for Income Taxes
The provision for federal and state income taxes was $-0- in 1999 and $14,394
in 1998. The effective income tax rate was -0-% and 2% in 1999 and 1998
respectively. All of the Company's deferred tax assets as of September 30, 1999
have been offset by a valuation allowance as a result of the Company's operating
results.
Year 2000
The Company's outside computer consultants have addressed the Company's Year
2000 issues. The consultants performed an inventory and review of all
information systems, both hardware and software. Based on the consultants'
recommendations, the Company installed various upgrades to its computer systems
including the Company's accounting software. The Company has confirmed that the
POS machines and billing systems utilized in the Company's dry cleaning
operations are Year 2000 compliant. Although there can be no assurances, the
Company does not presently anticipate any material disruptions in its
operations. The Company does not currently have information concerning the Year
2000 compliance status of all of its suppliers. In the event the Company's
significant suppliers do not successfully and timely achieve Year 2000
compliance, the Company's operations could be adversely affected.
The Company's costs relating to Year 2000 system review and upgrade were not
significant. There can be, however, no assurance that the Company will not incur
significant unforeseen additional expenses to be in compliance. The Company has
developed contingency plans based on discussions and information provided by the
Company's consultants.
Liquidity and Capital Resources
The Company experienced a negative net cash flow of $2,460,763 in 1999. Net
cash used in operating activities of $1,224,768 related primarily to corporate
general and administrative expenses as well as additional expenses including
loss on sale of businesses of $427,665 incurred by the dry cleaning business.
Net cash used in investing activities of $1,452,527 reflects the proceeds from
the sale of U.S. Government securities offset by purchases of U.S. Government
securities, the issuance of loans to TelaLink and amounts held in escrow
relating to the Pine Tree Stock Purchase Agreement. Net cash provided by
financing activities of $216,532 reflects proceeds from borrowing on United's
lines of credit offset by principal payments on notes issued in connection with
the dry cleaning acquisitions.
The Company has made advances to certain affiliates and consulting customers.
As of
13
<PAGE>
December 31, 1998, the Company had advanced $370,264 to TechTron. During 1999,
the Company advanced an additional $73,994 to TechTron. The Company has obtained
demand promissory notes from TechTron for all of the advances, of which the
majority of notes issued bear an 8% rate of interest. Interest of $62,211 has
accrued through September 30, 1999 but has not been recorded due to TechTron's
lack of sufficient revenues to make payment. Payments on the notes are not
anticipated in 1999 due to the fact that TechTron does not expect to earn
sufficient revenue to make payment. All amounts due from TechTron are unsecured
and are guaranteed by Certain Executive Officers.
In conjunction with the sale of UMDC assets to RRI, substantially all amounts
due the Company from UMDC for loans, advances, supplies and equipment were paid
in January 1998. As of September 30, 1999, amounts due the Company from UMDC
totaled $1,764,000, including $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 if consummated, the Company
will receive the fees due from the unpaid services as well as amounts due under
the physician loans at the RRI Second Closing.
The Company expects that its cash, cash equivalents and investments in U.S.
Government securities will be sufficient to fund the Company's operations
through September, 2000.
Through December 31, 1998, the Company advanced an aggregate of $1,000,000 to
fund United's initial operations. In addition, the Company arranged for a
$200,000 line of credit and subsequent $100,000 revolving line of credit for
United to provide additional financing. As of September 30, 1999, a total of
$70,581 was available under these lines of credit. The lines are primarily
secured by all of United's assets. The $200,000 line of credit is further
secured by assets of an unrelated entity that is an equity investor in United.
The $200,000 line of credit bears interest at a rate of Prime less 1/2% and
matures January 31, 2000. The $100,000 revolving line of credit bears interest
at a rate of 8% and is payable on demand. In connection with United's
acquisition of dry cleaning stores in Arizona, the Company incurred notes
payable in the aggregate of approximately $1,064,000. Of this amount, United
has been released from $179,000 of its original obligations under these notes
due to the sale back of certain dry cleaning stores and plants to their original
owners.
As of September 30, 1999 and prior to the termination of the merger between
the Company and TelaLink Network, Ltd ("TelaLink"), the Company had loaned
$1,027,000 to TelaLink. These funds were advanced to provide working capital to
TelaLink. Amounts advanced to TelaLink are reflected as notes receivable in the
accompanying consolidated balance sheets. There can be no guarantee that the
Company will be repaid amounts loaned to TelaLink in connection with the merger.
Failure of the Company to receive payment through assignment of its interest in
the TelaLink transaction could have an adverse effect on the Company.
14
<PAGE>
In connection with the Stock Purchase Agreement by and among the Company, Pine
Tree Telephone and Telegraph Company and the principal (95%) stockholder of
PTTC, the Company has deposited the sum of $915,000 in an escrow account. If
the Company is unable to assign its interest in the Pine Tree transaction on
terms acceptable to the Company, the Company will forfeit its deposit, which
could have an adverse effect on the Company.
PART II
Item 6 - 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 September 30, 1999
concerning the termination of the Agreement and Plan of Merger among the
Company, TelaLink Network, Ltd. and Quorum Communications, Inc., a wholly owned
subsidiary of the Company.
15
<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: November 12, 1999 By: /s/Steven L. Trenk
____________________________________
Steven L. Trenk
President, and Chief Operating Officer
Date: November 12, 1999 /s/ Mark N. Raab
____________________________________
Mark N. Raab
Chief Financial Officer
Principal Financial Officer
16
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