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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
Of 1934
for the fiscal year ended December 31, 1998
Or
[_] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act Of 1934
for the transition period from_________ to ___________
Commission File No. 0-245424
Continental Choice Care, Inc.
(Name of small business issuer in its charter)
New Jersey 22-3276736
(State or other jurisdiction of (I.R.S. Employer
corporation or organization Identification No.)
25-B Vreeland Road, Florham Park, New Jersey 07932
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (973) 593-0500
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock
Warrants, each to purchase one share of Common Stock
Units, each comprised of one share of Common Stock and one Warrant
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB/A or any amendment to
this Form 10-KSB/A. [X]
State issuer's revenues for its most recent fiscal year: $1,299,024
As of February 9, 1999, 3,267,500 common shares were outstanding, and the
aggregate market value of the common shares of Continental Choice Care, Inc.
held by non-affiliates was approximately $3,847,500.
Documents Incorporated By Reference
Document Incorporated Part of Report
By Reference Into Which Incorporated
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Proxy Statement for 1999 Annual Meeting of Shareholders Part III
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X ]
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This Annual Report on Form 10-K contains certain "forward-looking
statements." These statements are generally accompanied by words such as
"intend," "anticipate," "believe," "estimate," "expect" or similar terms
referenced in the Private Securities Litigation Reform Act of 1995. They are
typically used where certain factors may cause actual results to be materially
different from the future outcome expressed or implied by such statements.
Although Continental Choice Care, Inc. (the "Company") believes that the
assumptions underlying its forward-looking statements are reasonable, any of
these assumptions could, of course, prove to be inaccurate. Therefore, the
Company cannot assure you that it will realize the results contemplated in any
of these statements. You should not regard such forward-looking information as a
representation by the Company that future expectations will be achieved. It is
important to note that past performance is not necessarily predictive of future
performance. You should understand that the following important factors, in
addition to those discussed elsewhere in this document and in any documents
which we may incorporate by reference, could affect the future results of the
Company, and could cause those results to differ materially from those expressed
in our forward- looking statements: materially adverse changes in economic
conditions in the markets served or proposed to be served by us; a significant
delay in the expected closing of the merger between the Company and TelaLink
Network, Ltd.; future regulatory actions and conditions in existing and proposed
operating areas; and competition from others in our existing or proposed service
markets. Certain factors which are known to the Company are set forth in,
without limitation, the Items of this Annual Report designated "Item 1.
Business,"Item 5. Market for Company Common Stock and Related Security Holder
Matters" and "Item 6. Management's Discussion and Analysis."
Item 1. Business
Overview
Formation. The Company was incorporated as a New Jersey corporation in
1993.
Dialysis Treatment Business. Until October 1997, the Company was engaged
primarily in the dialysis treatment business. The Company and its subsidiaries
provided equipment, services and supplies to individuals in their homes and
other residential alternative sites, including prisons and nursing homes and
provided acute care dialysis placement services. The Company also owned and
operated a center to train individual patients in the self-administration of
peritoneal dialysis treatments. Until January 1998, the Company was also engaged
in providing consulting and administrative services to customers (the
"Consulting Customers") that provide dialysis treatments to patients at and from
in-center facilities owned and operated by the customers. The Consulting
Customers included Upper Manhattan Dialysis Center, Inc. ("UMDC"), Alpha
Administration Corp. ("Alpha") and Continental Dialysis Center of the Bronx,
Inc. ("CDBI"), each of which is a New York corporation. All of the outstanding
common stock of Alpha and CDBI and 50% of the outstanding common stock of UMDC
is owned by Alvin S. Trenk, Steven L. Trenk and Martin G. Jacobs, M.D., the
Company's Chairman, President and Corporate Medical Director, respectively
(collectively, "Certain Executive Officers"). The Company sold substantially all
of its assets relating to the dialysis treatment business in October 1997. Alpha
and CDBI also sold substantially all of their respective assets at that time.
UMDC, the Company's remaining Consulting Customer, sold substantially all of its
assets in January 1998, subject to regulatory consent (which is still pending).
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RMI. The Company also established an 80% owned subsidiary, Renal
Management, Inc. ("RMI"), to engage in renal disease and nephrology practice
management. From inception, RMI engaged primarily in forming a network of
healthcare providers, exploring financing alternatives and marketing its
business. RMI did not conduct any substantive business nor enter into any
agreements with customers. In December 1998, the Company sold its interest in
RMI to Renal Disease Management, Inc. in exchange for shares of that company's
common stock.
Dry Cleaning Business. The Company currently holds a majority interest in
United Dry Cleaning, L.L.C., an Arizona limited liability company ("United").
United was formed by the Company to engage in the dry cleaning business,
initially in the Phoenix, Arizona area. United acquired and operates ten dry
cleaning facilities, including plants and drop stores.
Recent Developments
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
"TelaLink Network, Ltd." 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
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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 the previously escrowed
shares and 260,000 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 is not contingent on
the release 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. To date, only the $400,000 to TelaLink has been advanced. These
funds are to provide working capital to TelaLink. This advance has been
recorded on TelaLink's books as a note payable to the Company and has been
recorded on the Company's books as a note receivable. If the merger is closed,
both the note receivable and payable will convert to intercompany due to/from
accounts and eliminate through intercompany consolidation entries.
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, both the note
receivable will convert to an intercompany due from account and eliminate
through intercompany 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 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 closed, the loans will be
due and payable April, 2000. If the merger is closed, the loans will eliminate
through intercompany consolidation.
New Business
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 in the form of equity and debt to United's
initial operations. This area was selected for its rapid growth in construction
and development and increase in population, which, management believes, will
provide United with growth potential. United's objective is to capitalize on the
trend toward consolidation of small closely held companies where significant
critical mass can be achieved rapidly with limited capital. The Company believes
that economies, and therefore enhanced profitability, can be gained through
greater utilization of the cleaning plants and/or consolidation of plant
functions as well as through the use of marketing and sales campaigns which are
not customarily employed by existing
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competitive operations. The Company has conveyed or agreed to convey an
aggregate of approximately 33% of its interest in United to additional investors
and/or lenders in the subsidiary.
Effective May 14, 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 dry cleaning operations at six facilities, which include two dry
cleaning plants and four drop stores, one of which was subsequently closed. All
facilities are located at leased locations in Arizona. United, except for
Ultimate's obligation under certain of its real property leases, assumed
substantially no liabilities.
The original aggregate purchase price for the assets of Ultimate was
$1,420,000, of which $350,000 was paid as cash consideration at closing and
$20,000 was payable over a period of 20 months. The remainder was paid in the
form of a promissory note in the principal amount of $1,050,000. Under the terms
of a Mutual Release and Settlement Agreement ("Settlement Agreement") entered
into between Ultimate and United in November 1998, the outstanding principal
amount due under the promissory note was reduced by $165,493 and the term of the
promissory note was reduced to seven and one half years. In addition, United
agreed to pay approximately $3,166 per month over the six months immediately
following the date of the Settlement Agreement in settlement of all other sums
due or claimed to be due by Ultimate under the Asset Purchase Agreement and
otherwise. The obligations of the parties pursuant to an Employment Agreement
between United and the former principal of Ultimate were also terminated. The
former owners of Ultimate have commenced an action against United in connection
with the transaction. See "Item 3. Legal Proceedings."
Effective May 19, 1998, United acquired substantially all of the assets of
Cleaner Headquarters, Inc., an Arizona corporation. Cleaner Headquarters, Inc.
conducts dry cleaning operations from one location in Arizona. The all cash
purchase price for the assets was $15,000.
Effective July 28, 1998, United acquired substantially all of the assets of
G & P Associates, Inc., an Arizona corporation which conducts dry cleaning
operations from two leased locations in Arizona. The aggregate purchase price
for the assets was $165,750, of which $95,750 was paid at closing and $70,000
was paid in the form of a promissory note bearing an interest rate of 10% with a
term of two years.
Effective August 4, 1998, United acquired substantially all of the assets
of Alyssa's Magic Touch, an Arizona proprietorship which conducts dry cleaning
operations from a leased location in Arizona. The aggregate purchase price for
the assets was $224,000, of which $115,000 was paid at closing and $109,000 was
paid in the form of a promissory note bearing an interest rate of 10% with a
term of five years.
These acquisitions have been accounted for as purchases and, accordingly,
the operating results of these companies have been included in the Company's
consolidated financial statements since the dates of acquisition. The excess of
net assets acquired of approximately $1,221,295 is being amortized over fourteen
years. Additionally, the Company paid approximately $153,000 to the former
owners of these businesses as part of a non compete agreement. This amount is
being amortized over the terms of the agreements which range from two to five
years.
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Discontinued Operations
UMDC Sale of Assets
At a closing effective on January 29, 1998 (the "First RRI Closing"), UMDC
sold substantially all of its assets to Renal Research Institute, LLC ("RRI")
pursuant to the terms of an Asset Purchase Agreement (the "RRI Purchase
Agreement") among UMDC, RRI and the
shareholders of UMDC. RRI is a joint venture between Fresenius Medical Care,
N.A. and Beth Israel Medical Center.
At the First RRI Closing, RRI paid approximately $4,174,000, in partial
payment of an aggregate purchase price (inclusive of payments for a covenant not
to compete) of approximately $7,984,000, for the assets of UMDC. UMDC retained
its accounts receivable, cash and cash equivalents in the transaction, as well
as certain liabilities of UMDC outstanding as of the date of the First RRI
Closing. Under the terms of the RRI Purchase Agreement, Beth Israel Medical
Center has applied for state regulatory approval (the "NY Approval") to own and
operate the in- center dialysis facility currently operated by UMDC. In the
event the NY Approval is received, RRI is expected to promptly pay the remainder
of the purchase price for the assets of UMDC at a second closing (the "RRI
Second Closing"). The aggregate purchase price paid as of the RRI Second Closing
is expected to be reduced by the net value of certain current assets retained by
UMDC as of the RRI Second Closing.
Subject to the NY Approval, the Company expects to receive an aggregate of
approximately $4,500,000 from UMDC from the proceeds of the transaction and from
the operations of UMDC. At the time of the First RRI Closing, the Company
received approximately $2,665,000. In 1998, the Company received additional
payments aggregating $310,000 from UMDC subsequent to the First RRI Closing.
Pending the NY Approval, RRI and UMDC have entered into a Consulting and
Administrative Services Agreement (the "RRI Consulting Agreement") pursuant to
which RRI is providing UMDC with the use of the assets sold by UMDC to RRI and
RRI is providing certain other enumerated services to UMDC in exchange for a
consulting fee. RRI's fee is not payable, and accrues to the extent not paid,
during any month in which UMDC does not retain a minimum of $28,000 of cash from
net income. UMDC has advised the Company that in 1998, UMDC earned aggregate net
income of approximately $224,000 under the RRI Consulting Agreement. To date
these amounts remain outstanding and due from RRI.
Pursuant to the terms of an Agreement and Release among the Company, UMDC
and the shareholders of UMDC, the parties agreed that all amounts payable to
UMDC after the First RRI Closing would generally be distributed first to the
Company in the amount of $516,663, second to the physician shareholders of UMDC
in the amount of $135,000, third to the Company in the amount of $270,000 and
thereafter 50% of each dollar will be paid to the Company. The agreement
provides that 50% of amounts in excess of $5,000,000 are to be paid to Certain
Executive Officers. Certain Executive Officers generally assigned such monies to
the Company and the Company agreed to indemnify the Certain Executive Officers
for any tax liability arising from such assignment.
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Upon the occurrence or failure of certain other events, UMDC and RRI may
extend the term of the RRI Consulting Agreement or may enter into a joint sale
of UMDC. If the RRI Consulting Agreement is terminated, UMDC will be required to
repurchase its assets at a fixed monthly rate over a term of years, unless
sooner paid.
No assurance can be given that the transactions contemplated by the RRI
Purchase Agreement or the RRI Consulting Agreement will be completed or that
regulatory authorities will not seek to modify or terminate the arrangements
between UMDC and RRI.
Sale of Assets to IHS of New York, Inc.
The Company, other than Renal Management, Inc. ("RMI"), as well as CDBI and
Alpha, (collectively, the "IHS Sellers") sold substantially all of their
respective assets to IHS of New York, Inc., a New York corporation ("IHS") at a
closing effective October 8, 1997. The transaction was closed pursuant to the
terms of an Asset Purchase Agreement among the Company, CDBI and Alpha dated
February 12, 1997, as amended (the "IHS Purchase Agreement") on substantially
the terms approved by the shareholders of Continental Choice Care, Inc.
The purchase price for the assets was $5,120,000, of which $125,000 remains
in an escrow to secure the indemnity obligations of the IHS Sellers to IHS. The
$125,000 is expected to be released to the Company in 1999.
The Company and IHS entered into a consulting agreement (the "IHS
Consulting Agreement"). Under the terms of the IHS Consulting Agreement, the
Company has agreed to provide the consulting services of the Certain Executive
Officers to IHS for a period of three years in exchange for aggregate payments
of $1,000,000 from IHS to the Company payable over the term of the IHS
Consulting Agreement. The IHS Consulting Agreement may be terminated by IHS in
the event the Company is unable to provide the services of two or more of the
Certain Executive Officers or upon a breach by the Company or the Certain
Executive Officers of the terms of the IHS Consulting Agreement.
Non Competition Agreements
The Company and the Certain Executive Officers agreed not to compete in the
dialysis treatment and certain related businesses (i) in the case of IHS, within
25 miles of any business acquired by IHS for a period of five years following
October 8, 1997 and (ii) in the case of RRI, generally within the Borough of
Manhattan, New York for a period of ten years following January 29, 1998.
Further, the Company and Certain Executive Officers remain subject to a covenant
not to compete which obligates each of them to refrain from competing with Renal
Treatment Centers, Inc. and certain of its subsidiaries in New Jersey within 35
miles of Cape May Court House, New Jersey in certain businesses for a term of
seven years.
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Governmental Regulation
General Health Care Regulation
The Company's former business operations were, and the operations of UMDC
are subject to extensive governmental regulations at the federal, state and
local levels. The laws, rules and regulations which govern its consulting
customers are very broad and are subject to continuing change and
interpretation. There is also an absence of regulations or decisions
specifically addressing the dialysis business. Thus, it is possible that certain
of the Company's or UMDC's past or present contractual arrangements or business
practices might be challenged, and if so successfully challenged, there can be
no assurance that the Company would not be adversely affected thereby.
The Company provided consulting services to certain facilities that are
administered by corporations and/or physicians who are not under the direct
control of the Company. Because the Company does not have control over the
actions of such corporations and physicians who render services, the Company is
subject to the risk that such corporations or physicians may have violated
federal or state laws and regulations including Medicare and Medicaid laws
without the knowledge or consent of the Company. Limited violations may have
occurred at such facilities in the past. However, the Company is not aware of
any ongoing violations.
Environmental Laws
The Company's former operations were and its current dry cleaning
operations are subject to various state hazardous waste disposal laws. The
Company disposed of its medical waste through hazardous waste vendors which are
primarily responsible for compliance with such laws. Those laws in effect during
the period in which the Company was engaged in the provision of dialysis related
services did not classify most of the waste produced during the provision of
dialysis services to be hazardous, although disposal of non-hazardous medical
waste is also subject to regulation. The dry cleaning business uses various
cleaning chemicals which are classified as hazardous substances under applicable
state and federal regulations. Management believes that all hazardous substances
used in the dry cleaning operations are handled by United in accordance with
applicable laws, rules and regulations.
In its role as owner and/or operator of properties or facilities, the
Company may be subject to liability for investigating and remedying any
hazardous substances that have come to be located on the property, including any
such substances that may have migrated from, or emitted, discharged, leaked,
escaped or been transported from the property. Management is not aware of any
such events. Further, management is not aware of any pending or threatened
claim, investigation or enforcement action regarding such environmental issues
that, if determined adversely to the Company, would have material adverse
consequences.
The Company's former dialysis operations were subject to a wide variety of
other federal, state and local environmental laws and regulations. Among the
types of general regulatory
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requirements faced by health care providers are: air and water quality control
requirements; waste management requirements; specific regulatory requirements
applicable to asbestos, polychlorinated biphenyls, and radioactive substances;
requirements for providing notice to employees and members of the public about
hazardous materials and wastes; and certain other requirements.
The Company believes that it is and was in substantial compliance with all
applicable environmental regulatory requirements, and is not aware of any
noncompliance with applicable environmental regulatory requirements which could
have a material adverse effect upon the Company.
Competition
United's dry cleaning business faces competition from many individual and
franchised cleaners. The cost of entry into the dry cleaning business is
relatively low. It requires only a low or semi skilled labor force which
management believes is generally available at low to moderate wages in the
Phoenix, Arizona area. United believes it can compete by targeting the
hospitality industry and by combining and centralizing operations, thereby
limiting expenses. Nonetheless, the Company's dry cleaning business faces
substantial local competition from smaller and similar sized competitors.
Employees
As of February 9, 1999, the Company employed 6 full-time employees,
including officers, at its corporate offices. In addition, as of that date,
United employed 48 full time and 11 part time employees. No employees are
covered by collective bargaining agreements, and the Company considers its
employee relations to be good.
Liability Insurance
The Company carries property, general liability and professional liability
insurance in amounts and coverage deemed adequate by management. However, there
can be no assurance that any future claims will not exceed applicable insurance
coverage. Furthermore, no assurance can be given that liability insurance will
continue to be available at a reasonable cost. Medical Directors and nurses
previously acting as independent contractors for the Company maintained their
own malpractice insurance.
Item 2. Properties
The Company's corporate headquarters currently consists of 5,000 square
feet of leased office space located in Florham Park, New Jersey. The lease
provides for a base annual rent of approximately $82,000, expires March 31, 1999
and is renewable for an additional five-year term. The Company does not expect
to renew its lease and is currently negotiating a lease for approximately 3,500
square feet of office space in Morristown, New Jersey. The Company
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expects that the new lease will provide for a base annual rent of approximately
$70,000 and will expire January 31, 2006. The Company's subsidiary, United,
conducts dry cleaning operations from ten leased plant and store locations. The
locations range from 900 to 2,436 square feet in size. The leases generally have
terms of five years, expiring at staggered times from March, 2000 to February,
2004 and provide for base annual rent ranging from $9,435 to $48,000. No plant
lease has a term, including renewal terms, which expires before December 31,
2005. Management believes that alternative store locations are readily available
in substantially all locations in which United conducts business.
Item 3. Legal Proceedings
In November, 1998, United delivered a promissory note in the principal
amount of approximately $850,000 to Ultimate Cleaners, Inc. in connection with
the Settlement Agreement (See "Item 1. Business - Recent Developments"). The
former owners of Ultimate Cleaners, Inc. have brought an action in Arizona state
court to accelerate the promissory note and for certain related costs. The
plaintiff also seeks to foreclose on the assets which it sold to United. The
Company is defending against the claim and expects to raise counterclaims. The
Company is not currently a party to any other material pending legal proceeding.
Many aspects of the former businesses of the Company and its subsidiaries
involved risks of potential liability. The Company and its subsidiaries and
affiliates are subject to actions by patients and employees in the normal course
of the Company's and the subsidiaries' respective former businesses, including
actions grounded in personal injury. Further, the Company and its subsidiaries
may, from time to time, be involved in proceedings with, and investigations by,
governmental agencies relating to licensure and to the Federal, state and local
laws, rules and regulations under which the Company and its subsidiaries
operated. Management believes that the outcome of these proceedings will not
have a material adverse effect on the Company's financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1998.
PART II
Item 5. Market for Company Common Stock and Related Security Holder Matters
Effective October 30, 1998, the Company's common stock (CCCI) and the
Company's Common Stock Purchase Warrants (CCCIW) and the Company's Units, each
comprised of one share of Common Stock and one Common Stock Purchase Warrant,
(CCCIU) ceased trading on the Nasdaq National Market and commenced trading in
the NASDAQ SmallCap Market. There
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were approximately 17 holders of record and approximately 318 beneficial owners
of the Company's common stock as of February 11, 1999. The following table sets
forth the closing high and low bids for each of the securities for each quarter
following the quarter ended December 31, 1996. The figures set forth below were
obtained from the National Association of Securities Dealers (NASD) "Monthly
Statistical Report".
<TABLE>
<CAPTION>
Common Stock Warrants Units
Three months ended (CCCI) (CCCIW) (CCCIU)
- ------------------ ------ ------- -------
High Low High Low High Low
------ ------- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998 2-1/4 1-27/32 1/8 1/32 2-9/32 1-15/16
September 30, 1998 2-1/4 1-11/16 1/8 1/32 2-1/4 1-11/16
June 30, 1998 2-7/16 1-13/16 1/8 1/32 2-7/16 2-1/32
March 31, 1998 2-1/4 1-7/16 1/16 1/32 2-1/16 1-5/16
December 31, 1997 2-1/16 1-5/32 3/32 1/32 2-1/8 1-1/4
September 30, 1997 1-5/8 1 1/32 1/32 1-1/4 1-1/16
June 30, 1997 1-7/16 1 5/32 1/32 1-1/2 1
March 31, 1997 2-3/8 13/16 1/4 1/16 2-1/4 7/8
</TABLE>
Item 6. Management's Discussion and Analysis
Results of Operations
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997.
At the IHS Closing on October 8, 1997, the Company completed the sale of
its New Jersey, New York, Connecticut and Pennsylvania dialysis business assets
to IHS. The aggregate price paid 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. Alpha and CDBI which
are 100% owned by Certain Executive Officers were Consulting Customers of the
Company. Substantially all amounts due the Company by Alpha and CDBI for
consulting and administrative fees and other amounts have been paid to the
Company subsequent to the sale. As a result of the IHS sale, the Company
recognized a gain of $1,855,120 on proceeds of $2,620,000. 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. In 1997 and 1998 respectively, the Company
recognized a total of $83,331 and $333,324 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
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 Closing and a subsequent payment
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of $310,000. The Company recognized revenues in 1997 and 1998, respectively, of
$794,000 and $310,000 from UMDC. 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. See, "Item 1. Business - Recent
Developments."
The proceeds from the IHS Closing, the proceeds from the IHS Consulting
Agreement and the proceeds from the RRI Transaction were invested by the Company
in U.S. Government securities and money market funds. 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. 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
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 consisted of contract nursing services and dialysis treatments. In
1997, 25% of the Company's cash receipts were received under the Medicare
program, while approximately 75% of cash receipts were received from commercial
insurance companies or contracted entities and Medicaid programs.
Net patient revenues were $4,365,749 in 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 $343,444 in interest income derived in
part from the Company's investment of the proceeds of the IHS Closing and RRI
First Closing, as well as $333,324 derived from the IHS Consulting Agreement.
Prior to the IHS and RRI First Closing, the Company provided certain
services in New York through consulting, administrative, or subcontracting
service arrangements with the Consulting Customers. The Consulting Customers
were partially or 100% owned by the Certain
11
<PAGE>
Executive Officers. Under the Company's agreement with Alpha, the Company
provided various administrative and consulting services in addition to equipment
and supplies to the South Bronx Kidney Center, ("Bronx facility"). The $240,000
annual consulting fee payable by SBKC was assumed by Alpha upon Alpha's purchase
of the SBKC assets. Further, the Company provided administrative and consulting
services to UMDC for a monthly fee of $33,333. The agreement with UMDC similarly
provided for reimbursement to the Company for services rendered and for its
direct costs of equipment and supplies. The Company also had a consulting and
services agreement with CDBI. The CDBI Agreement provided for payments of
$20,000 per month. For the year ended December 31, 1997, 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 was not recorded in prior periods
due to realization uncertainties attributable to services, equipment and
supplies. 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.
The Company does not expect to receive future operating revenues related to
its former dialysis based businesses or from the business of its former
Consulting Customers other than such amounts as it may receive under its
consulting agreement with IHS, the consulting agreement between RRI and UMDC and
amounts due from UMDC pending consummation of the second closing.
The Company's Renal Management, Inc. ("RMI") subsidiary was sold in 1998 to
Renal Disease Management ("RDM"), an Ohio based disease management company, in
an all stock transaction. RMI recognized no revenue in 1998 or 1997, had no
expenses in 1998, and had $209,724 in expenses in 1997.
The Company's United subsidiary recognized revenues of $965,700 from the
period of acquisition to December 31, 1998. Of these revenues, approximately
$616,000 or 64% related to dry cleaning services provided by United's ten dry
cleaning facilities, including plants and stores. The remaining $349,700, or 36%
of total revenues, 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 1997 since United did not commence
operations until the second quarter of 1998.
Cost of Goods Sold/Cost of Services
Cost of services for continuing operations was $678,761 or 70% of revenues
attributable to the Company's dry cleaning business from the period of
acquisition to December 31, 1998. Cost of services is mostly comprised of
$532,154 in salaries and other payroll expenses as well as $111,578 for
supplies. In addition, $25,171 of depreciation expense attributable to the dry
cleaning business machinery and equipment has been allocated to cost of
services. There were no such expenses in 1997 due to United being established
and commencing operations in the second quarter of 1998.
12
<PAGE>
Cost of goods sold for discontinued operations was $966,210 or 43% of net
patient revenues attributable to equipment and supplies in 1997. The cost of
services for discontinued operations totaled $475,239 or 22% of net patient
revenues attributable to services in 1997. In 1998, there was no cost of
equipment, supplies or services relating to the terminated businesses. The
Company also experienced a decrease in personnel costs, primarily attributable
to reductions in workforce resulting from and following the IHS closing.
General and Administrative Expenses
General and administrative expenses for continuing operations totaled
$2,021,662 in 1998, as compared with $1,939,187 for 1997. The net increase of
$82,475 is primarily comprised of an increase of $465,910 relating to the
Company's dry cleaning businesses, offset by a reduction of $328,376 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 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 collection. The calculation of doubtful
accounts is 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 under
review.
As of December 31, 1998, the allowance for doubtful accounts was $67,000 as
compared with $257,000 at December 31, 1997. Of this allowance, $14,500 relates
to the discontinued dialysis treatment business. As a percentage of patient
receivables outstanding, such allowance was 75% at December 31, 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. As a consequence, the percentage of older receivables is larger and
requires a higher percentage allowance.
As of December 31, 1998, the Company's dry cleaning business had accounts
receivable of $107,957. Of the Company's $67,000 allowance at December 31, 1998,
$52,500 related 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 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.
13
<PAGE>
Management continues to evaluate the collectibility of all accounts and
believes the stated allowance as of December 31, 1998 is adequate to absorb
possible losses resulting from uncollectible receivables.
Depreciation and Amortization Expense
Depreciation and amortization expense for continuing operations for 1998
totaled $146,592, of which $25,171 of depreciation expense relating to the dry
cleaning business is included in cost of services. This increase of $117,546
from 1997 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 for continuing operations was $285,568 in 1998 and
$56,769 in 1997. 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 the RRI transaction.
Provision for Income Taxes
The provision for Federal income taxes was $-0- in 1998 and $176,000 in
1997. The state income tax provision was $-0- in 1998 and $36,000 in 1997. The
effective income tax rate was 0% and 14% in 1998 and 1997, respectively. All of
the Company's deferred tax assets as of December 31, 1998 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 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.
14
<PAGE>
Liquidity and Capital Resources
The Company experienced a positive net cash flow of $2,651,767 in 1998. Net
cash used in operating activities of continuing operations was of $584,104
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 $3,280,962 reflects the investment in U.S. Government
securities from the repayments by the Company's Consulting Customers of
$2,805,105, which consists primarily of amounts received at the First RRI
Closing. These amounts were partially offset by upfront payments in connection
with the Company's acquisition of dry cleaning businesses. Net cash used in
financing activities of $45,091 reflects principal payments on notes issued in
connection with these acquisitions.
The Company has made advances to certain affiliates and Consulting
Customers. As of January 1, 1997, the Company had advanced $156,868 to TechTron.
During 1998 and 1997, an additional $134,400 and $78,996, respectively, was
advanced to TechTron by the Company. 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 revenues
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 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 advanced funds to CDBI for the construction of a new in-center
dialysis facility in the Bronx, New York. At December 31, 1996, $1,176,985 was
due from CDBI. In conjunction with the sale of CDBI's assets to IHS, all amounts
due at December 31, 1996, together with amounts advanced for supplies and
equipment in 1997 were all substantially repaid. 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.
15
<PAGE>
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.
In conjunction with the sales of assets to IHS and to RRI, the Company has
been released from its guarantees of leases for UMDC and CDBI for In-Center
Facilities in New York City.
Through December 31, 1998, the Company has 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 to provide additional financing. The line
is primarily secured by all of its assets and is further secured by personal
assets by a Certain Executive Officer. 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. As discussed in Item 3 Legal Proceedings, Ultimate Cleaners,
Inc. has demanded acceleration and full payment of the note delivered by United
in connection with the settlement agreement (See "Item 1. Business - Recent
Developments") and Notes to the consolidated financial statements.
Item 7. Financial Statements
The response to this item is submitted in a separate section of this report
commencing on Page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No change in accountants or disagreement requiring disclosure pursuant to
applicable regulations took place within the Company's two most recent fiscal
years or in any subsequent interim period.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Sections 16 (c) of the Exchange Act
The material contained in "Election of Directors" and "The Board of
Directors and Executive Officers" of the Company's definitive proxy statement
(to be filed pursuant to the Securities Exchange Act of 1934, as amended) for
the 1998 annual meeting of Shareholders of the Company is hereby incorporated by
reference.
Item 10. Executive Compensation
The material contained in "Executive Compensation" of the Company's
definitive proxy statement (to be filed pursuant to the Securities Exchange Act
of 1934, as amended) for the 1999 annual meeting of the Shareholders of the
Company is hereby incorporated by reference.
16
<PAGE>
Item 11. Securities Ownership of Certain Beneficial Owners and Management
The material contained in "Security Ownership of Certain Beneficial
Owners," "Election of Directors," and "The Board of Directors and Executive
Officers" of the Company's definitive proxy statement (to be filed pursuant to
the Securities Exchange Act of 1934, as amended) for the 1999 annual meeting of
the Shareholders of the Company is hereby incorporated by reference.
Item 12. Certain Relationships and Related Transactions
The material contained in "Certain Relationships and Related Transactions"
of the Company's definitive proxy statement (to be filed pursuant to the
Securities Exchange Act of 1934, as amended) for the 1999 annual meeting of the
Shareholders of the Company is hereby incorporated by reference.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
No exhibits are filed with this report or are incorporated herein
by reference.
(b) The Agreement and Plan of Merger among the Company, TNL
Acquisition Corp. and Telalink Network, Ltd. dated February 5,
1999, filed as an exhibit to a report on Form 8-K filed by the
Company on February 19, 1999, is incorporated into this 10-K by
reference.
No reports on Form 8-K were filed by the Company during the fiscal
quarter of the Company ended December 31, 1998.
17
<PAGE>
CONTINENTAL CHOICE CARE, INC.
INDEX TO FINANCIAL STATEMENTS
----------------
Page
----
Report of Independent Public Accountants............................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and
1997............................................................. F-3
Consolidated Statements of Operations for the Years
Ended December 31,1998 and 1997.................................. F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998 and 1997........................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997....................................... F-6
Notes to Consolidated Financial Statements........................ F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and
Board of Directors of
Continental Choice Care, Inc.:
We have audited the accompanying consolidated balance sheets of Continental
Choice Care, Inc. (a New Jersey corporation) and subsidiaries as of December 31,
1998 and 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Continental Choice Care,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 15, 1999
F-2
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents including restricted cash of
$250,000 in 1997........................................................ $3,058,676 $ 406,909
Investments in U.S. Government securities................................. 1,991,658 3,595,438
Accounts receivable, less allowance for doubtful accounts of $67,000
in 1998 and $257,000 in 1997............................................ 60,295 197,133
Amounts due from consulting customers..................................... -0- 2,805,105
Amounts due from officer.................................................. 385,000 35,000
Other current assets...................................................... 202,295 548,609
---------- ----------
Total current assets..................................................... 5,697,924 7,588,194
Amounts due from affiliates............................................... 370,264 235,864
Property and equipment, at cost, less accumulated depreciation............ 560,236 90,962
Goodwill and other intangibles, less accumulated amortization of $67,943.. 1,306,352 -0-
Other assets.............................................................. 17,581 139,295
---------- ----------
$7,952,357 $8,054,315
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................................... $ 423,415 $ 670,540
Accrued expenses.......................................................... 984,976 964,100
Current portion of notes payable.......................................... 931,807 -0-
Income taxes payable...................................................... -0- 87,000
---------- ----------
Total current liabilities................................................ 2,340,198 1,721,640
---------- ----------
Notes payable, less current portion....................................... 86,609 -0-
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock 5,000,000 shares authorized, none issued or outstanding... -0- -0-
Common stock, no par value, 10,000,000 shares authorized,
3,237,500 shares issued and outstanding at December 31, 1998 and 1997.... 5,524,561 5,524,561
Retained earnings......................................................... 989 782,977
Unrealized gain on investments............................................ -0- 25,137
---------- ----------
Total stockholders' equity............................................... 5,525,550 6,332,675
---------- ----------
$7,952,357 $8,054,315
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues from continuing operations:
Consulting services............................................... $ 333,324 $ 83,331
Dry cleaning services............................................. 965,700 -0-
---------- ----------
1,299,024 83,331
---------- ----------
Costs of services................................................... 678,761 -0-
General and administrative expenses................................. 2,021,662 1,939,187
Depreciation and amortization....................................... 121,421 29,046
Interest expense.................................................... 57,876 1,178
Interest income..................................................... (343,444) (57,947)
---------- ----------
Total costs and expenses.......................................... 2,536,276 1,911,464
---------- ----------
Loss before benefit for income taxes................................ (1,237,252) (1,828,133)
Benefit for income taxes............................................ (154,790) (252,282)
---------- ----------
Loss from continuing operations..................................... (1,082,462) (1,575,851)
---------- ----------
Discontinued operations (Note 1):
Income from discontinued operations (less applicable income
taxes of $154,790 in 1998 and $208,275 in 1997).................. 300,474 1,300,967
Gain on sale of discontinued operations (less applicable income
taxes of $256,007 in 1997)....................................... -0- 1,599,113
---------- ----------
Income from discontinued operations................................. 300,474 2,900,080
---------- ----------
Net (loss) income................................................. $(781,988) $1,324,229
========== ==========
Basic and diluted (loss) income per share:
Continuing operations............................................. $ (.33) $ (.49)
Discontinued operations........................................... .09 .90
---------- ----------
Net (loss) income per share....................................... $ (.24) $ .41
========== ==========
Basic and diluted weighted average shares outstanding............... 3,237,500 3,237,500
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Comprehensive Retained Comprehensive
Stock Income Earnings Total Income
----- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C>
Balance,
December 31,1996
$5,524,561 $ -0- $(541,252) $4,983,309
---------- ---------- ---------- ----------
Net income 1,324,229 1,324,229 $1,324,229
----------
Other comprehensive
income:
Unrealized gain on
investments 25,137 25,137 25,137
----------
Total comprehensive
income $1,349,366
==========
Balance,
December 31,1997 5,524,561 25,137 782,977 6,332,675
--------- -------- -------- ---------
Net loss (781,988) (781,988) $(781,988)
Other comprehensive
income:
Realized gain on
investments (25,137) (25,137) (25,137)
--------
Total comprehensive
income $(807,125)
=========
Balance,
December 31,1998
$5,524,561 $ -0- $ 989 $5,525,550
========== ========== ======== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net (loss) income................................................ $(781,988) $ 1,324,229
Adjustments to reconcile net (loss) income to net cash
used in operating activities --
Depreciation and amortization.................................... 146,592 29,046
Provision for doubtful accounts.................................. 61,207 99,401
Expense related to warrants...................................... -0- 60,000
Income from discontinued operations, net......................... (300,474) (1,300,967)
Gain on sale of discontinued operations, net..................... -0- (1,599,113)
Decrease in deferred taxes, net.................................. -0- 125,000
Decrease in accounts receivable.................................. 75,631 692,829
Decrease (increase) in other assets.............................. 503,028 (544,876)
Increase in amounts due from affiliates.......................... (134,400) (78,996)
Decrease in accounts payable..................................... (247,125) (738,399)
Increase in accrued expenses..................................... 20,876 352,757
(Decrease) increase in income taxes payable...................... (87,000) 38,061
--------- -----------
Net cash used in operating activities of continuing operations.. (743,653) (1,541,028)
Net cash provided by discontinued operations.................... 159,549 828,674
--------- -----------
Net cash used in operating activities.............................. (584,104) (712,354)
--------- -----------
Cash Flows From Investing Activities:
Purchases of dry cleaning businesses................. (594,000) -0-
Proceeds from sale of discontinued operations........ -0- 2,620,000
Amounts loaned or advanced to consulting customers... -0- (2,350,547)
Amounts repaid by consulting customers............... 2,805,105 3,040,315
Purchases of U.S. Government securities.............. (10,635,707) (3,570,301)
Proceeds from sale of U.S. Government securities..... 12,239,487 -0-
Purchases of property and equipment.................. (183,923) (3,258)
Amounts due from officer............................. (350,000) (35,000)
--------- ----------
Net cash provided by (used in) investing activities ... 3,280,962 (298,791)
--------- ----------
Cash Flows From Financing Activities:
Principal payments on notes payable. (45,091) -0-
--------- ----------
Net increase (decrease) in cash and cash equivalents... 2,651,767 (1,011,145)
Cash and cash equivalents, beginning of year......... 406,909 1,418,054
---------- -----------
Cash and cash equivalents, end of year............... $3,058,676 $ 406,909
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for income taxes............ $ 63,174 $ 26,674
========== ===========
Cash paid during the year for interest................ $ 57,876 $ 1,178
========== ===========
Non-Cash Investing and Financing Activities:
Notes payable issued in connection with acquisitions.. $1,063,507 $ -0-
========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of business, reorganization and discontinued operations:
Continental Choice Care, Inc. was formed on December 27, 1993 in connection
with the reorganization of the health care related subsidiaries and affiliates
of TechTron, Inc. ("TechTron"). The health care related subsidiaries and
affiliates of TechTron were reorganized as subsidiaries of Continental Choice
Care, Inc. with the assets and liabilities transferred being accounted for in a
manner similar to that of a pooling of interests. Continental Choice Care, Inc.
and subsidiaries are herein referred to as the Company.
The Company was primarily engaged in the business of providing dialysis
related services, training, equipment and supplies to patients at home, in
prisons and in hospitals. The Company also provided acute dialysis nursing
services and administrative services. The Company operated primarily in New
Jersey and New York. The above and other activities conducted by the Company
were performed primarily through the following wholly-owned subsidiaries --
Continental Dialysis, Inc. (CDI)
Dialysis Staffing, Inc. (DSI)
Continental Dialysis of Linden, Inc.- (Linden)
Renal Management, Inc. (RMI) (80% owned)
In October, 1997, the Company, other than RMI, completed the sale of
substantially all of its dialysis related assets to IHS of New York, Inc., a New
York corporation ("IHS"). In addition, Alpha Administration Corp. ("Alpha"), the
operator of the South Bronx Kidney Center, ("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 December 31, 1998, approximately $200,000 of consulting
fees due from CDBI had not been recorded due to realization uncertainties.
The Company and IHS entered into a consulting agreement pursuant to which
the Company is providing certain consulting services to IHS over the three-year
term of the agreement in consideration of an aggregate of $1,000,000 payable by
IHS to the Company over the term of the agreement. The Company also entered into
a Non-Competition Agreement with IHS pursuant to which the Company, CDBI, Alpha
and certain officers and directors of each of these
F-7
<PAGE>
companies agreed not to engage in certain activities in competition with IHS in
certain specified geographic areas for five years from October 8, 1997.
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. (See Note
3)
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 $310,000 and $4,282,418 for 1998 and
1997, respectively.
(2) Summary of significant accounting policies:
Consolidation -- The consolidated financial statements include the accounts
of the Company and its wholly-owned and majority-owned subsidiaries. All
significant intercompany transactions have been eliminated.
Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the recorded amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash equivalents -- The Company considers all highly liquid investments
with a maturity of three months or less at the time of purchase to be cash
equivalents. The carrying amount of cash equivalents approximates fair value.
Accounts receivable and allowances -- The allowance for doubtful accounts
consists of management's estimate of amounts that may prove uncollectible.
Actual results could differ from these estimates.
Property and equipment -- Property and equipment are stated at cost.
Depreciation is provided using the straight line method based on the estimated
useful lives of individual assets ranging from two to ten years. Leasehold
improvements are depreciated over the estimated useful lives or lease term.
Costs of maintenance and repairs are charged to expense as incurred.
The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the unamortized balance of its long-lived
assets from expected future cash flows from its operations on an undiscounted
basis.
F-8
<PAGE>
Intangibles -- The Company amortizes on a straight line basis the excess
cost of net assets acquired over periods not exceeding 14 years. Other
intangible assets, including non competition agreements with the former owners
of the dry cleaning businesses, are amortized over the life of the respective
agreements ranging from 2 to 5 years.
Revenue Recognition -- Revenue is recognized upon the performance of
services or shipment of equipment and supplies. Consulting services provided as
well as equipment and supplies sold to related parties are recorded once
management has determined that collection is probable.
Income taxes -- The Company and its subsidiaries file a consolidated
Federal income tax return. The Company and each subsidiary file separate state
income tax returns. Deferred income taxes are recognized for tax consequences of
temporary differences by applying enacted statutory tax rates to differences
between the financial reporting and tax basis of assets and liabilities.
Income (loss) per share -- The Company has adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). SFAS 128 requires
the presentation of basic earnings per share and diluted earnings per share.
"Basic earnings (loss) per share" represents net income (loss) divided by the
weighted average shares outstanding. "Diluted earnings (loss) per share"
represents net income (loss) divided by the weighted average shares outstanding
adjusted for the incremental dilution of outstanding employee stock options and
awards, if dilutive.
As of December 31, 1998 and 1997, the basic and diluted weighted average
common shares outstanding was 3,237,500.
Stock-Based Compensation -- Stock-based compensation is recognized using
the intrinsic value method. For disclosure purposes, pro forma net income (loss)
and income (loss) per share are provided as if the fair value method had been
applied.
New Accounting Pronouncements -- In April, 1998, the Accounting Standards
Executive Committee issued Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-Up Activities." The SOP requires all costs incurred as start-up
costs or organization costs be expensed as incurred. Adoption of the SOP is
required for fiscal years beginning after December 15, 1998. The Company does
not believe that the new standard will have a material impact on the Company's
consolidated financial statements.
In March, 1998, the Accounting Standards Executive Committee issued SOP 98-
1. "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." TIHS SOP requires that computer software costs that are incurred
in the preliminary project stage be expensed as incurred and that criteria be
met before capitalization of costs to develop or obtain internal use computer
software. Adoption of the SOP is required for fiscal years beginning after
December 15, 1998. The Company does not believe that the new standard will have
a material impact on the Company's consolidated financial statements.
Reclassifications -- Certain reclassifications have been made to the 1997
financial statements in order to conform to the 1998 presentation.
F-9
<PAGE>
(3) Acquisitions:
Effective May 14, 1998, United acquired substantially all of the assets,
primarily machinery and equipment, of Ultimate Cleaners, Inc., an Arizona
corporation ("Ultimate"), other than Ultimate's cash and accounts receivable.
Ultimate's operations consist of six dry cleaning facilities, which includes two
dry cleaning plants and four stores, one of which subsequently was closed. All
facilities are located at leased locations in Arizona. United assumed Ultimate's
obligation under certain of its real property leases.
The original aggregate purchase price for the assets of Ultimate was
$1,420,000, of which $350,000 was paid as cash consideration at the closing and
$20,000 was payable over a period of 20 months. The remainder of the purchase
price was paid in the form of a promissory note in the principal amount of
$1,050,000 bearing interest at a rate of 10%. Under the terms of a Mutual
Release and Settlement Agreement ("Settlement Agreement") entered into between
Ultimate and United in November 1998, the outstanding principal amount due under
the promissory note was reduced by $165,493 and the term of the promissory note
was reduced from ten to seven and one half years. In addition, United agreed to
pay approximately $3,166 per month over the six months immediately following the
date of the Settlement Agreement in settlement of all other sums due or claimed
to be due by Ultimate under the Asset Purchase Agreement. The obligations of the
parties pursuant to an Employment Agreement between United and the former
principal of Ultimate were also terminated.
The former owners of Ultimate 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 will vigorously defend 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 sheet as of
December 31, 1998.
Effective May 19, 1998, United acquired substantially all of the assets of
Cleaner Headquarters, Inc., an Arizona corporation. Cleaner Headquarters, Inc.
conducts dry cleaning operations from one location in Arizona. The all cash
purchase price for the assets was $15,000.
Effective July 28, 1998, United acquired substantially all of the assets of
G & P Associates, Inc., an Arizona corporation which conducts dry cleaning
operations from two leased locations in Arizona. The aggregate purchase price
for the assets was $165,750, of which $95,750 was paid at closing and $70,000
was paid in the form of a promissory note bearing an interest rate of 10% with a
term of two years.
Effective August 4, 1998, United acquired substantially all of the assets
of Alyssa's Magic Touch, an Arizona proprietorship which conducts dry cleaning
operations from a leased location in Arizona. The aggregate purchase price for
the assets was $224,000, of which $115,000 was paid at closing and $109,000 was
paid in the form of a promissory note bearing an interest rate of 10% with a
term of five years.
F-10
<PAGE>
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 $1,221,295 is being amortized over fourteen
years. Additionally, the Company paid approximately $153,000 to the former
owners of these businesses as part of a covenant not to compete. This amount is
being amortized over the terms of the agreements which range from two to five
years.
The following unaudited pro forma information represents a summary of the
Company's consolidated results of operations adjusted for the acquired dry
cleaning businesses. The information presented for the 1997 fiscal year was
supplied by the prior owners of these businesses. Management has presented this
information in accordance with generally accepted accounting principles.
However, management believes that the information provided by certain prior
owners of these businesses may be inaccurate. Accordingly, management suggests
that the reader use appropriate caution in determining whether to rely upon the
information.
Fiscal Year
-----------
1998 1997
----------- -----------
Revenues............................. $ 2,028,736 $ 2,002,779
Net loss from continuing operations.. (1,289,639) (1,470,393)
Basic and diluted loss per share:.... $ (.40) $ (.45)
=========== ===========
(4) Property and equipment:
Property and equipment consist of the following as of December 31, 1998 and
1997:
1998 1997
---- ----
Furniture and fixtures................ $ 21,668 $ 3,588
Office equipment...................... 225,289 161,080
Dry cleaning machinery and equipment.. 347,492 -0-
Vehicles.............................. 52,392 -0-
Leasehold improvements................ 67,763 2,013
--------- --------
714,604 166,681
Less -- Accumulated depreciation...... (154,368) (75,719)
--------- --------
$560,236 $90,962
======== =======
Depreciation expense for continuing operations was $78,649 and $29,046 in
1998 and 1997, respectively.
F-11
<PAGE>
(5) Notes payable:
In connection with the acquisitions of dry cleaning businesses, the Company
issued notes payable to the sellers aggregating $1,063,507. The notes bear
interest at 10% per annum and have maturities ranging from two to seven and one
half years. As discussed in Note 3, the former owners of Ultimate Cleaners, Inc.
have demanded acceleration and full payment of the note. This note has been
classified as a current liability as of December 31, 1998.
The notes are secured by the assets purchased, but are subordinated to the
bank financing discussed below. Principal repayments are due as follows:
1999 $ 931,807
2000 20,032
2001 22,129
2002 24,447
2003 20,001
----------
Total $1,018,416
==========
During 1998, the Company financed a directors and officers insurance policy
aggregating $34,986. The note required an initial payment of $10,000 and the
remaining balance of $24,986 payable over nine months at an interest rate of
9.75%.
Subsequent to year end, United obtained a $200,000 line of credit from a
bank. The line, which is primarily secured by all of its assets, bears interest
at the prime lending rate less one-half percent. The line is further secured by
the assignment of personal assets by a Certain Executive Officer.
(6) Income taxes:
The provision (benefit) for income taxes relating to continuing operations
for the years ended December 31, 1998 and 1997 consists of the following:
1998 1997
---- ----
Current:
Federal............................. $(154,790) $ 51,000
State............................... -0- 36,000
--------- ---------
(154,790) 87,000
Deferred:
Federal............................. -0- (200,176)
State............................... -0- (139,106)
--------- ---------
$(154,790) $(252,282)
========= =========
F-12
<PAGE>
At December 1998 and 1997, the Company had a current deferred tax asset of
$403,900 and $114,000, and a deferred tax liability of $3,000 and $8,000,
respectively. The deferred tax asset is reduced by a valuation allowance of
$403,900 and $114,000, respectively as of December 1998 and 1997. The deferred
tax asset is primarily related to the allowance for doubtful accounts of $27,000
and $103,000 as of December 31, 1998 and 1997 and net operating loss
carryforward of $372,000 and $0 as of December 31, 1998 and 1997, while the
deferred tax liability is primarily related to depreciation and amortization.
Realization of the net deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforward and the
timing of the reversal of other temporary differences. As of December 31, 1998
and 1997, full valuation allowances have been provided against the net deferred
tax asset.
The following is a reconciliation of the statutory Federal income tax rate
to the effective rate as a percentage of income before benefit for income taxes
as reported in the consolidated financial statements for the years ended
December 31, 1998 and 1997:
1998 1997
------ ------
U.S. Federal income tax rate................. (34%) (34%)
State income taxes, net of Federal
tax benefit................................ 0 6
Non-deductible expenses...................... 2 3
Net operating loss for which no tax benefit
is currently available..................... 19 17
Valuation allowance.......................... (0) (6)
----- -----
Effective income tax rate (13%) (14%)
===== =====
(7) Related party transactions:
As of January 1, 1997, the Company had advanced $156,868 to TechTron.
During 1998 and 1997, an additional $134,400, and $78,996, respectively, was
advanced to TechTron by the Company. 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 are 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.
F-13
<PAGE>
The Company and Alpha had entered into a consulting and services agreement.
This agreement was essentially identical to the Company's agreement with the
Bronx Facility. The Bronx Facility agreement entitled the Company to $240,000
per year for services rendered. During 1997, the Company recorded $680,000 of
revenue related to this agreement ($480,000 of which relates to prior years not
previously recorded due to realization uncertainties). In addition, the Company
provided equipment and supplies to the Bronx Facility approximating $261,000 at
no margin for the year ended December 31, 1997. The consulting and services
agreement was terminated during 1997.
In 1994, the Company provided certain financing to UMDC and its owners at a
designated prime rate less 1%. In December 1995, Certain Executive Officers
acquired 50% of the common stock of UMDC and along with the Company, guaranteed
certain bank credit facilities. In addition, the Company provided equipment and
supplies to UMDC aggregating $1,048,841 through December 31, 1997 at no margin.
On January 29, 1998, UMDC sold substantially all of its assets to Renal
Research Institute, LLC ("RRI") pursuant to the terms of an Asset Purchase
Agreement (the "RRI Purchase Agreement") among UMDC, RRI and the shareholders of
UMDC for an aggregate purchase price of approximately $7,984,000 (the "RRI
Sale"). UMDC retained its accounts receivable, cash and cash equivalents in the
transaction, as well as certain liabilities of UMDC outstanding as of the date
of the First RRI Closing. At the January 29, 1998 closing (the "First RRI
Closing"), RRI paid approximately $4,174,000 in partial payment for the assets
of UMDC.
Under the terms of the Purchase Agreement, Beth Israel Medical Center
applied for approval from the New York State Department of Health (the "NY
Approval") to operate the in-center dialysis facility currently operated by
UMDC. In connection with any grant of the NY Approval, which is currently
expected to occur in the second quarter of 1999, RRI is expected to pay
additional amounts aggregating approximately $3,810,000, less the net value of
certain current assets to be retained by UMDC.
The Company and Certain Executive Officers previously guaranteed certain
bank debt of UMDC, of which approximately $628,000 was outstanding as of the
date of the First RRI Closing. The Company previously loaned monies to and
incurred additional non-bank liabilities on behalf of UMDC and certain of its
shareholders, of which approximately $3,452,000 was outstanding as of the date
of the First RRI Closing. Further, as of the date of the sale, UMDC owed the
Company approximately $1,389,000 in various accrued consulting and service fees.
At the time of the First RRI Closing, the Company received approximately
$2,665,000 from UMDC. In 1998, the Company received additional payments
aggregating $310,000 from UMDC subsequent to the First RRI Closing. Through
December 31, 1998 the Company has not recorded certain transactions relating to
the above approximating $1,866,000 due to realization uncertainties.
F-14
<PAGE>
Although the Company expects to receive an aggregate of approximately
$4,500,000 from UMDC from the proceeds of the transaction and from the
operations of UMDC, there can be no assurance given that the RRI Second Closing
will occur as a NY Approval must be attained. In addition, at the First RRI
Closing, UMDC paid the remaining outstanding bank debt which was guaranteed by
the Company and Certain Executive Officers. The Company's guaranty was partially
secured by a deposit of $250,000 held by the lending bank, and this deposit was
released to the Company following the First RRI Closing.
Upon the occurrence of certain events, the RRI Consulting Agreement may be
terminated, in which event UMDC will be required to repurchase its assets at a
fixed monthly rate over a term of years, unless sooner paid. In addition, UMDC
and its shareholders, including Certain Executive Officers, have indemnified RRI
against damages arising from certain breaches of the RRI Purchase Agreement.
No assurance can be given that the NY Approval will be granted or that the
transactions contemplated by the RRI Purchase Agreement or the RRI Consulting
Agreement will otherwise be consummated. As of December 31, 1998, there are no
net amounts due the Company from UMDC as the Company has not recorded certain
transactions due to realization uncertainties. In the event of a breach of
covenant not to compete, no assurance can be given that Certain Executive
Officers will not incur costs, expenses, liabilities or damages which are
subject to indemnity by the Company in connection with the RRI Purchase
Agreement or any covenant not to compete.
As of December 31, 1998 and 1997, $(115,681) and $74,878, respectively, was
(payable to) due from Alpha. At December 31, 1998 and 1997, $4,083 and $64,350,
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. For the year ended December 31, 1997, 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 was not recorded in prior
periods due to realization uncertainties attributable to services, equipment and
supplies. In 1998, the Company recorded $310,000 in additional revenue related
to payments from UMDC subsequent to the first RRI Closing not previously
recorded due to realization uncertainties. Amounts (payable to) due from Alpha
and CDBI are included in accounts payable in the accompanying balance sheets.
(8) Commitments:
Employment agreements -- In 1994, the Company entered into compensation
agreements with its Chairman, President and Corporate Medical Director. The
agreements with the Chairman and President have initial terms of five years and
are extended automatically after the first year and thereafter unless such
extensions are terminated by the Board of Directors. The Corporate Medical
Director's agreement has a term of one year. These agreements provide for
minimum aggregate compensation of $661,000 in 1999, $550,000 in 2000, $550,000
in 2001, $550,000 in 2002 and $550,000 in 2003. Each of the individuals may
receive bonuses as determined by the Board of Directors, except the President
whose bonus is equal to 10% of the Company's pretax income in excess of the
prior year's pretax income, limited to $100,000. The Corporate Medical Director
received a $25,000 bonus for 1997; no other such bonuses were paid for 1998 or
1997. Compensation paid to the Chairman, President and Corporate Medical
Director aggregated $604,884 and $534,000 in 1998 and 1997, respectively.
F-15
<PAGE>
Legal -- The Company is engaged in certain legal proceedings incidental to
its normal course of business activities. Management believes the outcome of
these proceedings will not have a material adverse effect on the Company's
financial position or results of operations. See Note (3) regarding current
legal proceedings.
Benefit plan -- The Company maintains a 401(k) profit sharing plan. The
Company matches 10% of the employees' contributions up to 6% of base pay.
Company contributions were $2,109 and $3,771 in 1998 and 1997, respectively.
Lease agreements -- Future minimum rental commitments for an office space
operating lease at December 31, 1998 are:$20,000 in 1999. The current lease
expires in March 1999. The Company does not expect to renew its lease and is
currently negotiating a lease for approximately 3,500 square feet of office
space with a base annual rent of approximately $70,000. This new lease would
expire January 31, 2006. Rent expense relating to continuing operations was
$238,406 and $83,320 for the years ended December 31, 1998 and 1997,
respectively. The increase of $155,086 is primarily due to the assumption of
leases in connection with the Company's acquisition of dry cleaning stores.
Lease commitments for the dry cleaning stores provide for minimum payments
aggregating $223,933 in 1999, $215,636 in 2000, $181,130 in 2001, $152,491 in
2002 and $35,358 in 2003.
(9) Capital stock:
On July 27, 1994, the Company completed an initial public offering of
equity securities (the "Offering"). The Offering was comprised of 1,610,000
units, each unit consisting of one share of common stock and one warrant. Each
warrant entitles the holder to purchase one share of common stock at an exercise
price of $7.25 (subject to adjustment) at any time through July 15, 1999,
subject to earlier redemption by the Company under certain circumstances. The
exercise price and number of shares issuable upon exercise of the warrants are
subject to adjustment under certain circumstances. The Company has reserved
1,610,000 shares of its common stock for these warrants.
The Company sold to the Underwriters or their designees, for nominal
consideration, options (the "Unit Purchase Options") to purchase up to 140,000
Units. The Unit Purchase Options are exercisable during the four-year period
commencing in July 1995 at an exercise price equal to $8.05, subject to
adjustment in certain events to protect against dilution. The Company has
reserved 280,000 shares of its common stock for the Unit Purchase Options.
During 1996, the Company became obligated to issue five-year warrants to
purchase 210,000 shares of its common stock to service providers at exercise
prices ranging from $3.00 to $4.25 per share. In October 1997, the Company
repriced and reissued certain of these warrants to purchase 60,000 shares of its
common stock to an exercise price of $1.15625. The Company recorded $60,000 in
expense related to this repricing in selling, general and administrative
expenses in the accompanying consolidated statement of operations for 1997.
Accordingly, common stock was increased by $60,000 for the year ended December
31, 1997.
The Company adopted the 1994 Long-Term Incentive Award Plan under which
shares of
F-16
<PAGE>
the Company's common stock as well as incentive and non-qualified stock options
to purchase the Company's common stock and stock appreciation rights may be
awarded or granted to senior executives. The Company has reserved 300,000 shares
of its common stock for this plan. The plan terminates in 2004. The Company has
also adopted a Directors' Stock Option Plan under which each nonemployee
director will annually receive nonqualified stock options to purchase 10,000
shares of the Company's common stock which commenced July 1, 1994. The exercise
price of the options will be the fair market value of the Company's common stock
at the date of grant. The Company has reserved 200,000 shares of its common
stock for this plan.
In the first quarter of 1997, the Board of Directors of the Company adopted
the Continental Choice Care, Inc. 1997 Equity Incentive Plan (the "1997 Plan"),
a broad-based employee equity incentive plan. The Board of Directors reserved
1,250,000 shares of the Company's common stock and granted options to acquire
296,225 shares of the Company's common stock to officers and employees of the
Company. All options under the 1994 Long- Term Incentive Award Plan were
repriced by the Board of Directors in February 1997 to $1.875 per share or 100%
of fair market value of the Company's common stock at the repricing date.
In the first quarter of 1999, the Board of Directors of the Company awarded
30,000 shares of common stock to a non-employee Director of the Company. The
Director was also granted options to acquire an additional 20,000 shares of the
Company's common stock at $2.06 per share.
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Average
Of Exercise Fair
Shares Price Value
------------- ------------- --------------
<S> <C> <C> <C>
Options outstanding December 31, 1996
(190,000 exercisable)......................... 210,000 4.55
Granted....................................... 826,600 1.69 1.45
Canceled...................................... (150,000) 5.25 3.89
---------
Options outstanding December 31, 1997
(631,600 exercisable)......................... 886,600 1.93
Granted....................................... 541,500 1.46 1.07
---------
Options outstanding December 31, 1998
(1,428,100 exercisable)....................... 1,428,100 1.76
---------
</TABLE>
<TABLE>
<CAPTION>
Weighted Weighted
Range of Number Average Average
Exercise Outstanding Remaining Exercise
Prices at 12/31/98 Life Price
-------- ----------- --------- --------
<S> <C> <C> <C>
$1.00-$1.44 705,000 9.0 $1.35
$1.75-$2.00 663,100 7.7 1.88
$3.88-$5.88 60,000 6.5 5.17
----------- -------- ------- ----------
$1.00-$5.88 1,428,100 8.3 $1.76
</TABLE>
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation",
the fair market value of option grants is estimated on the date of grant using
the Black-Scholes option-
F-17
<PAGE>
pricing model for pro forma footnote purposes with the following weighted
average assumptions used for grants in all years: dividend yield of 0%, risk-
free interest rate of approximately 6% and expected option life of 5 to 10
years. Expected volatility was assumed to be 57% and 85% in 1998 and 1997,
respectively.
As permitted by SFAS 123, the Company has chosen to continue accounting for
stock options at their intrinsic value. Accordingly, no compensation expense has
been recognized for its stock option compensation plans. Had the fair value
method of accounting been applied to the Company's stock option plans, the tax-
effected impact would be as follows:
1998 1997
---- ----
Net (loss) income as reported. $ (781,988) $1,324,229
Estimated fair value of the year's option
grants, net of tax as applicable... 586,824 1,354,772
------------ ----------
Net loss adjusted.................... $ (1,368,812) $ (30,543)
============ ==========
Adjusted net loss per share.......... $ (.42) $ (.01)
============ ==========
This pro forma impact only takes into account options granted since January
1, 1995 and is likely to increase in future years if additional options are
granted and amortized ratably over the vesting period.
(10) Subsequent event.
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.
F-18
<PAGE>
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
"TelaLink Network, Ltd." 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 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. To date, only the $400,000 to TelaLink has been advanced. These
funds are to provide working capital to TelaLink. This advance has been
recorded on TelaLink's books as a note payable to the Company and has been
recorded on the Company's books as a note receivable. If the merger is closed,
both the note receivable and payable will convert to intercompany due to/from
accounts and eliminate through intercompany consolidation entries.
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, both the note
receivable will convert to an intercompany due from account and eliminate
through intercompany 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 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 closed, the loans will be
due and payable April, 2000. If the merger is closed, the loans will eliminate
through intercompany consolidation.
F-19
<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: _________, 1999 By: /s/Alvin S. Trenk
-----------------
Alvin S. Trenk, Chairman
In accordance with the Exchange Act of 1934, this report has been signed by
the following persons on behalf of the registrant in the capacities and on the
dates indicated.
Signature Capacity in Which Signed Date
--------- ------------------------ ----
/s/ Alvin S. Trenk Chairman &Director ,1999
- ------------------- (Principal Executive
Alvin S. Trenk Officer)
/s/ Steven L. Trenk President ,1999
- -------------------- Chief Operating Officer
Steven L. Trenk Director
/s/ Martin G. Jacobs, M.D. Corporate Medical Director ,1999
- -------------------------- & Director
Martin G. Jacobs, M.D.
/s/ Stanley B. Amsterdam Director ,1999
- -------------------------
Stanley B. Amsterdam
/s/ Jeffrey B. Mendell Director ,1999
- -----------------------
Jeffrey Mendell
/s/ Mark N. Raab Chief Financial Officer ,1999
- ----------------- (Principal Financial Officer)
Mark N. Raab
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