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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 March 31, 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.
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(Exact Name of Registrant as Specified in Its Charter)
NEW JERSEY 22-3276736
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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.
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report:
Former Address 25-B Vreeland Road, Florham Park, NJ 07932
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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _________ No _________
Applicable only to corporate issuers.
Shares outstanding as of May 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
March 31, 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 March 31, 1999 and for the three month periods ended March 31,
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
filed with the Securities and Exchange Commission.
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CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS March 31, 1999 Dec. 31, 1998
-------------- -------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................... $2,867,700 $3,058,676
Investments in U.S. Government securities............... 1,484,839 1,991,658
Accounts receivable, less allowance for doubtful
accounts of $55,000 at March 31, 1999 and $67,000 at
December 31, 1998...................................... 121,636 60,295
Amounts due from officer................................ 385,000 385,000
Notes receivable........................................ 250,000 -0-
Other current assets.................................... 175,841 202,295
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Total current assets.................................. 5,285,016 5,697,924
Amounts due from affiliates............................. 393,714 370,264
Property and equipment, at cost, less accumulated
depreciation of $186,913 at March 31, 1999 and $154,368
at December 31, 1998................................... 529,982 560,236
Goodwill and other intangibles, less accumulated
amortization of $97,627 at March 31, 1999 and
$67,943 at December 31, 1998........................... 1,276,668 1,306,352
Other assets............................................ 171,740 17,581
---------- ----------
$7,657,120 $7,952,357
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................ $ 612,499 $ 423,415
Accrued expenses........................................ 993,520 984,976
Current portion of notes payable........................ 932,265 931,807
Line of credit.......................................... 30,000 -0-
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Total current liabilities............................. 2,568,284 2,340,198
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Notes payable, less current portion..................... 81,786 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 March 31, 1999 and 3,237,500 at December 31, 1998... 5,595,061 5,524,561
(Accumulated deficit) retained earnings................. (588,011) 989
---------- ----------
Total stockholders' equity............................ 5,007,050 5,525,550
---------- ----------
$7,657,120 $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 RETAINED EARNINGS (ACCUMULATED DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
-------------- --------------
<S> <C> <C>
Revenues from continuing operation:
Dry cleaning services............................... $ 430,248 $ -0-
Consulting services................................. 83,331 83,331
---------- ----------
513,579 83,331
Costs of services...................................... 321,608 -0-
General and administrative expenses.................... 756,283 519,500
Depreciation and amortization.......................... 49,852 8,356
Interest expense....................................... 24,761 495
Interest income........................................ (49,925) (99,530)
---------- ----------
Total costs and expenses 1,102,579 (428,821)
Benefit for income taxes............................... -0- (20,038)
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Loss from continuing operations........................ (589,000) (325,452)
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Income from discontinued operations, less applicable
income taxes of $-0- in 1999 and $34,430 in 1998.... -0- 556,975
---------- ----------
Net (loss) income................................... (589,000) 231,523
Retained earnings, beginning of year................... 989 782,977
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(Accumulated deficit) retained earnings, end of period $ (588,011) $1,014,500
---------- ----------
Basic and diluted (loss) income per share:
Continuing operations............................... $ (.18) $ (.10)
Discontinued operations............................. -0- .17
---------- ----------
Net loss per share.................................. $ (.18) $ (.07)
========== ==========
Basic and diluted weighted average shares outstanding.. 3,246,833 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
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net (loss) income............................................ $ (589,000) $ 231,523
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization................................ 62,229 8,356
Stock grant issued........................................... 70,500 -0-
Income from discontinued operations, net..................... -0- (556,975)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable................ (61,341) 110,139
Increase in other assets.................................. (127,705) (12,037)
Increase in amounts due from affiliates................... (23,450) (31,000)
Increase in accounts payable.............................. 189,084 73,738
Increase in accrued expenses.............................. 8,544 62,863
Decrease in income taxes payable.......................... -0- (13,000)
----------- -----------
Net cash used in operating activities of continuing operations.. (471,139) (126,393)
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Cash Flows From Investing Activities:
Issuance of notes receivable................................. (250,000) -0-
Amounts repaid by consulting customers....................... -0- 3,014,555
Purchases of U.S. Government securities...................... (1,493,181) (4,317,167)
Proceeds from sale of U.S. Government securities............. 2,000,000 1,386,268
Purchases of property and equipment.......................... (2,291) (2,405)
----------- -----------
Net cash provided by investing activities....................... 254,528 81,251
----------- -----------
Cash Flows from Financing Activities
Proceeds from borrowings..................................... 30,000 -0-
Principal payments on notes payable.......................... (4,365) -0-
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Net cash provided by financing activities....................... 25,635 -0-
----------- -----------
Net decrease in cash and cash equivalents....................... (190,976) (45,142)
Cash and cash equivalents, beginning of year.................... 3,058,676 406,909
----------- -----------
Cash and cash equivalents, end of period........................ $ 2,867,700 $ 361,767
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes................................... $ 4,141 $ 27,017
=========== ===========
Cash paid for interest....................................... $ 3,140 $ 495
=========== ===========
</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:
In October, 1997, the Company, other than Renal Management Inc. ("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,
("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 March 31, 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 initially in the Phoenix, Arizona area. During 1998, United acquired
substantially all of the assets of four Arizona dry cleaning businesses.
United, which operates as one segment of the Company, currently operates ten dry
cleaning stores 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 March 31, 1999 and 1998, the basic and dilutive weighted average
common shares outstanding were 3,246,833 and 3,237,500 respectively. Common
stock equivalents are excluded
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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 $23,450 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%. All
notes have been guaranteed by Certain Executive Officers. 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. 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 note relating to
the 1997 advance bears interest at a rate of 6%. The Company has extended the
term of the initial note to be payable prior to December 31, 2000.
As of March 31, 1999 and December 31, 1998, $112,201 and $115,681,
respectively, was payable to Alpha. At March 31, 1999 and December 31, 1998,
$8,908 and $4,083, respectively, was due from CDBI. The Company had a
consulting and services agreement with 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.
(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, and is
vigorously defending against the claim and expects to raise 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 both
periods presented.
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(5) Debt.
The Company has obtained a $200,000 line of credit to provide additional
financing for United. As of March 31, 1999, $170,000 of debt availability
remained on the line of credit. The line is primarily secured by all of United's
assets and is further secured by assets of an equity investor in United. The
line of credit bears interest at a rate of 7.25%.
(6) 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").
Prior to December 1998, TelaLink conducted no substantive operations. In
that month, TelaLink acquired substantially all of the operating assets of an
RLEC located in West Virginia. The RLEC operates approximately 1,550 access
lines and employs three full time employees. The purchase price for the assets
of the RLEC was approximately $4,500,000. TelaLink obtained debt financing from
the Rural Telecommunications Financing Corporation ("RTFC") for approximately
$3,000,000 of the purchase price. For the fiscal year ended December 31, 1997,
the RLEC reported earnings before interest expense, taxes, depreciation and
amortization of approximately $397,000 on reported revenues of approximately
$1,059,000.
Under the terms of the Merger Agreement, TNL Acquisition Corp. ("TNLAC"), a
wholly-owned subsidiary of the Company, will merge with TelaLink. TNLAC will be
the surviving entity. Management expects that TNLAC will change its name to
"Quorum Communications, Inc." promptly following the Merger. The Merger
Agreement requires the Company to issue 1,640,000 shares of its common stock, of
which 1,540,000 will be issued directly to the holders of the capital stock of
TelaLink. The remaining 100,000 shares to be issued in the Merger will be
returned to the Company's treasury immediately following the Merger. The
Company is also required to issue 1,540,000 shares into an escrow at the
closing. If the Merger is completed and the Company meets certain financial
goals described in the Merger Agreement before January 1, 2001 (subject to
extension to June 30, 2001 under certain circumstances), the holders of TelaLink
common stock will receive 900,000 shares of the Company's common stock, of which
640,000 will be escrowed shares and 260,000 of which will be newly issued
shares. If the Company meets certain alternative financial goals within the
same time period, the remaining 900,000 shares of the Company's common stock
will be released from the escrow. The release of the first group of shares is
not contingent on the release of the second group, and the release of the second
group of shares in the escrow is not contingent on the release
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of the first. As a result, the aggregate number of shares of common stock which
the company will issue in connection with the Merger will be either 1,540,000,
2,440,000 or 3,340,000 depending upon whether certain post-Merger financial
goals are attained.
In anticipation of the Merger, the Company expects to loan up to a total of
$1,250,000 to TelaLink and its affiliates. Of the $1,250,000, $850,000 is to be
loaned to TelaLink Acquisition Corp. ("LoanCo") and $400,000 was loaned to
TelaLink. Of the $400,000 loaned to TelaLink, $250,000 had been advanced by the
Company as of March 31, 1999. The remaining $150,000 was advanced in April
1999. These funds were to provide working capital to TelaLink and have been
recorded on TelaLink's books as a notes payable to the Company and on the
Company's books as a notes receivable. If the merger is closed, both the notes
receivable and payable will convert to intercompany due to/from accounts and
eliminate in consolidation.
If the Company advances the remaining $850,000 to LoanCo., the Company will
record an $850,000 note receivable from LoanCo. At the time of the merger, the
Company will acquire all of the outstanding stock of LoanCo in consideration for
150,000 shares of the Company's Common stock. Accordingly, the note receivable
will convert to an intercompany due from account and eliminate in consolidation.
The Company will record the acquisition of LoanCo under the purchase method of
accounting. Of the $850,000, $250,000 will be paid by LoanCo to Benchmark
Equity Group ("Benchmark") as repayment of amounts previously advanced by
Benchmark to LoanCo. The remaining $600,000 is expected to be advanced by
LoanCo to TelaLink. TelaLink is expected to use these funds to pay existing
accounts payable of TelaLink. If the merger is not consummated, the loans will
be due and payable in April 2000. If the merger is consummated, the loans will
eliminate in consolidation.
(7) Subsequent Event
Effective May 15, 1999, the Company 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 will purchase not less than 95% of its issued and
outstanding capital stock. PTTC is a telecommunication services provider to
areas near Portland, Maine. Subject to regulatory approval and pursuant to the
terms of the Stock Purchase Agreement, the Company will acquire all of the
outstanding capital stock of PTTC for a purchase price of approximately
$30,500,000. The funds to pay the $30,500,000 purchase price are comprised of
$915,000 of cash from the Company, expected low-cost loans from industry sources
in the expected approximate amount of $19,500,000, and equity financing in the
approximate amount of $11,000,000 representing expected proceeds from a new
issuance of the Company's capital stock.
The transaction will be consummated on the first day following the end
of the calendar quarter during which the Public Utilities Commission of the
State of Maine ("PUC") gives written notification that the transaction has
received regulatory approval. Until the Closing and without affecting the
purchase price, PTTC may distribute to its stockholders its accumulated cash,
certain non-performing assets and any securities held including additional non-
regulated, non-operating assets.
To secure the Company's rights under the Stock Purchase Agreement, the
Company has deposited the sum of $915,000 in an escrow account. Such funds shall
be treated as a 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.
At the Closing, the purchase price may be increased or decreased by various
amounts as provided by the terms in the Stock Purchase Agreement. After giving
effect to such adjustments, the Company shall pay the balance of the purchase
price less $2,900,000. The Company shall deposit an additional $2,900,000 (the
"Closing Escrow") which shall be held in escrow to secure the performance of the
obligations of PTTC's principal stockholder. Such funds shall be held in escrow
for purposes of adjusting the purchase price up until the first anniversary of
the Closing in accordance with the Stock Purchase Agreement.
Management's Discussion and Analysis
Results of Operations
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
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 three months ended March 31, 1999 and 1998,
respectively, the Company recognized a total of $83,331 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 (the "UMDC Agreement"). The Company received from
UMDC $2,665,000 at the First RRI
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Closing and a subsequent payment of $310,000. The Company recognized revenues
in 1998 of $310,000 from UMDC. 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.
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 a $200,000 line of
credit for United, United may need additional financing to fund its operations.
As of March 31, 1999, $170,000 of debt availability existed on the line of
credit. Interest accrues at a rate of 7.25%. Management continues to seek ways
to reduce United's costs, primarily payroll and supplies, and to increase
revenues. Management believes that in order for United to reach originally
anticipated sales levels, it must continue to aggressively seek out new hotel
customers. 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
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 agreement 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.
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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.
The Company's United subsidiary recognized revenues of $430,248 in 1999. Of
the $430,248, approximately $213,381 or 50% related to dry cleaning services
provided by United's ten dry cleaning facilities, including plants and stores.
The remaining $216,867, 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. There were no such revenues in 1998 since United did not
commence operations until the second quarter of 1998.
Cost of Services
Cost of services was $321,608 or 75% of revenues attributable to the Company's
dry cleaning business in 1999. Cost of services is mostly comprised of $253,761
in salaries and other payroll expenses as well as $51,211 for supplies. In
addition, $12,738 of depreciation expense attributable to the dry cleaning
machinery and equipment has been allocated to cost of services. There were no
such expenses in 1998 since United did not commence operations until the second
quarter of 1998.
General and Administrative Expenses
General and administrative expenses totaled $756,283 in 1999, as compared with
$519,500 for 1998. The net increase of $236,783 is primarily comprised of an
increase of $257,223 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, partially offset by a reduction of $64,426 in salaries
and other office expenses due to a reduction in corporate staff resulting from
the IHS transaction.
In connection with 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.
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
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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 March 31, 1999, the allowance for doubtful accounts was $55,000 as
compared with $67,000 at December 31, 1998. Of this allowance, $14,500 relates
to the discontinued dialysis treatment business. As a percentage of patient
receivables outstanding, such allowance was 79% at March 31, 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
significantly reduced. As a consequence, the percentage of older receivables is
larger and requires a higher percentage allowance.
As of March 31, 1999, the Company's dry cleaning business had accounts
receivable of $158,111. Of the Company's $55,000 allowance at March 31, 1999,
$40,500 relates to the dry cleaning business. A significant amount of the
allowance for doubtful accounts results primarily from an unusual non-recurring
event: the non-recoverable crash in October 1998 of the computer system software
previously used by the dry cleaning business to track accounts receivable and
generate invoices. A replacement billing and collection system has been
installed.
Management continues to evaluate the collectibility of all accounts and
believes the stated allowance as of March 31, 1999 is adequate to absorb
possible losses resulting from uncollectible receivables.
Depreciation and Amortization Expense
Depreciation and amortization expense for 1999 totaled $62,229, of which
$12,738 of depreciation expense relating to the dry cleaning business is
included in cost of services. This increase of $53,873 from 1998 resulted from
the purchase of the assets in connection with the acquisition of dry cleaning
stores and plants by United as well as the associated goodwill and other
intangibles generated from these transactions.
Interest Income and Interest Expense
Net interest income was $25,164 and $99,035 for the three months ended March
31, 1999 and 1998, respectively. 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 $14,392
in 1998. The effective income tax rate was -0-% and 9% in 1999 and 1998
respectively. All of the Company's deferred tax assets as of March 31, 1999
have been offset by a valuation allowance as a result of the Company's operating
results.
11
<PAGE>
Year 2000
The Company's outside computer consultants have been engaged to address Year
2000 issues. The consultants are scheduled to perform an inventory and review
of all information systems, both hardware and software, in the first half of
1999. Although there can be no assurances, the Company does not presently
anticipate any material disruptions in its operations. This assessment is based
on management's initial review of its systems and discussions with their outside
computer consultants. The Company does not currently have information
concerning the Year 2000 compliance status of its suppliers. In the event the
Company's significant suppliers do not successfully and timely achieve Year 2000
compliance, the Company's operations could be adversely affected.
Based on the Company's current estimates, costs relating to Year 2000 are not
expected to be significant. There can be, however, no assurance that the
Company will not incur significant unforeseen additional expenses to be in
compliance. The Company intends to develop contingency plans based on
information provided by the Company's consultants in the second quarter of 1999.
Liquidity and Capital Resources
The Company experienced a negative net cash flow of $190,976 in 1999. Net cash
used in operating activities of $471,139 related primarily to corporate general
and administrative expenses as well as additional expenses incurred from the dry
cleaning business. Net cash provided by investing activities of $254,528
reflects the proceeds from the sale of U.S. Government securities offset by
purchases of U.S. Government securities and the issuance of a loan to TelaLink.
Net cash provided by financing activities of $25,635 reflects proceeds from
borrowings under a line 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 December 31, 1998, the Company had advanced $370,264 to TechTron. During
1999, the Company advanced an additional $23,450 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. 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.
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. 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
12
<PAGE>
from the unpaid services and the principal due under the physician loans will be
paid during fiscal year 1999. The Company does not currently expect to be repaid
and thus has not recorded 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.
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 1999.
Through December 31, 1998, the Company advanced an aggregate of $1,000,000 to
fund United's initial operations. In addition, the Company has arranged for a
$200,000 line of credit for United to provide additional financing of which
$170,000 was available as of March 31, 1999. The line is primarily secured by
all of United's assets and is further secured by assets of an unrelated entity
that is an equity investor in United. The line of credit bears interest at a
rate of 7.25%. 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. These notes currently have maturities ranging from two to seven and
one half years, and provide for total monthly principal and interest payments of
$15,743 and quarterly principal and interest payments of $9,763.
In anticipation of the merger between the Company and TelaLink Network, Ltd.
("TelaLink"), the Company has loaned $250,000 to TelaLink as of March 31, 1999.
These funds were advanced to provide working capital to TelaLink. An additional
$150,000 was advanced by the Company to TelaLink in April 1999. Amounts
advanced to TelaLink are reflected as notes receivable in the accompanying
consolidated balance sheets.
PART II
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Waiver of Steven L. Trenk right to terminate employment agreement
upon consummation of proposed merger.
(b) A report on Form 8-K was filed by the Company on February 19, 1999
concerning the Agreement and Plan of Merger among the Company, TNL
Acquisition Corp. and TelaLink Network, Ltd. dated February 5, 1999.
13
<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: May 12, 1999 By: /s/ Steven L. Trenk
--------------------------------------
Steven L. Trenk
President, and Chief Operating Officer
Date: May 12, 1999 /s/ Mark N. Raab
--------------------------------------
Mark N. Raab
Chief Financial Officer
Principal Financial Officer
<PAGE>
Steven Trenk
459 Mountain Blvd.
Watchung, New Jersey 07060
April 22, 1999
Board of Directors
Continental Choice Care, Inc.
25-B Vreeland Road
Florham Park, NJ 07932
Attn: Jeff Ellentuck, Exec. Vice
President & General Counsel
Dear Jeff:
As you are aware, Continental Choice Care, Inc. ("the Company") has
executed an Agreement and Plan of Merger dated February 5, 1999 among the
Company, TelaLink Network, Ltd. and TNL Acquisition Corp., and certain loan,
shareholder and other related agreements (collectively, the "Merger
Agreements"). Pursuant to the terms of the Merger Agreements, TelaLink Network,
Ltd. proposes to merge with a subsidiary of the Company and the Company proposes
to acquire the outstanding common stock of TelaLink Acquisition Corp. Further,
the Merger Agreements relate to certain post closing corporate governance
issues. All capitalized terms used herein and not defined herein shall have the
meanings ascribed to them in the Amended and Restated Employment Agreement
between the undersigned and the Company (the "Employment Agreement").
Section 8.5 of the Employment Agreement provides, among other things,
that I am entitled to terminate my employment pursuant to your Employment
Agreement in the event of a Change in Control. I hereby waive all rights I have
or may have to deliver a Control Termination Notice or otherwise terminate the
Employment Agreement based in whole or part on the transactions contemplated by
the Merger Agreements. This waiver is delivered to you pursuant to your
request for good and valuable consideration received. I acknowledge and agree
that you are relying upon this waiver in the preparation of the Company's proxy
materials and in connection with representations to be made to the United States
Securities and Exchange Commission. This waiver is effective immediately upon
receipt by you.
Very truly yours,
/s/ Steven L. Trenk
-----------------------
Steven L. Trenk
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