<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
-------------------------------------------
-OR-
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to _____________________
Commission File Number 0-24542
-----------------------
CONTINENTAL CHOICE CARE, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
NEW JERSEY 22-3276736
- ------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
35 AIRPORT ROAD, SUITE 120
MORRISTOWN, NEW JERSEY 07960
- ------------------------------- -------------------------------
(Address of Principal Executive Offices Zip Code
Registrant's Telephone Number, Including Area Code (973) 898-9666
------------------------------
N.A.
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
Applicable only to corporate issuers.
Shares outstanding as of August 12, 1999
3,267,500 shares of common stock, no par value.
Transitional Small Business Disclosure Format: Yes No X
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Continental Choice Care, Inc. and Subsidiaries
Form 10-QSB
June 30, 1999
This Annual Report on Form 10-QSB contains "forward-looking statements"
that are based on management's assumptions, estimates and projections. The
Company's actual results could differ materially from the results anticipated in
such forward-looking statements as a result of known and unknown risks,
uncertainties and other factors.
Part I. Financial Information
The comparative consolidated statements of operations, balance sheets and
statements of cash flows for Continental Choice Care, Inc. and Subsidiaries (the
"Company") are presented with management's discussion and analysis of material
changes in operations on the pages which follow.
The consolidated financial statements and accompanying financial
information as of June 30, 1999 and for the three and six-month periods ended
June 30, 1999 and 1998 are unaudited but, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments and accruals)
which the Company considers necessary for a fair presentation of the financial
position of the Company at such dates and the operating results and cash flows
for those periods. Results for the interim periods are not necessarily
indicative of results for the entire year. The interim consolidated financial
statements and the related notes should be read in conjunction with the notes to
the consolidated financial statements of the Company included in its Form 10-
KSB/A filed with the Securities and Exchange Commission.
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, 1999 Dec. 31, 1998
-------------- -------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................. $ 1,217,698 $3,058,676
Investments in U.S. Government securities................................. 1,487,100 1,991,658
Accounts receivable, less allowance for doubtful accounts of $65,000
at June 30, 1999 and $67,000 at December 31, 1998....................... 133,747 60,295
Amounts due from officer.................................................. 385,000 385,000
Notes receivable.......................................................... 707,000 -0-
Other current assets...................................................... 153,417 202,295
----------- ----------
Total current assets.................................................... 4,083,962 5,697,924
Amounts due from affiliates............................................... 414,214 370,264
Property and equipment, at cost, less accumulated depreciation of
$219,769 at June 30, 1999 and $154,368 at December 31, 1998............. 504,286 560,236
Goodwill and other intangibles, less accumulated amortization of
$127,311 at June 30, 1999 and $67,943 at December 31, 1998............. 1,246,985 1,306,352
Pine Tree escrow deposit.................................................. 915,000 -0-
Merger and acquisition costs.............................................. 289,077 -0-
Other assets.............................................................. 22,508 17,581
----------- ----------
$ 7,476,032 $7,952,357
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit............................................................ 175,000 -0-
Accounts payable.......................................................... 862,072 423,415
Accrued expenses.......................................................... 905,422 984,976
Current portion of notes payable.......................................... 932,734 931,807
----------- ----------
Total current liabilities............................................ 2,875,228 2,340,198
----------- ----------
Notes payable, less current portion....................................... 76,842 86,609
----------- ----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, 5,000,000 shares authorized, none issued or outstanding.. --- ---
Common stock, no par value, 10,000,000 shares authorized,
3,267,500 shares issued and outstanding at June 30, 1999
and 3,237,500 at December 31, 1998...................................... 5,645,061 5,524,561
(Accumulated deficit) retained earnings................................... (1,121,099) 989
----------- ----------
Total stockholders' equity.............................................. 4,523,962 5,525,550
----------- ----------
$ 7,476,032 $7,952,357
=========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
2
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CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND (ACCUMULATED DEFICIT) RETAINED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues from continuing operations
Consulting services...................... $ 83,331 $ 83,331 $ 166,662 $ 166,662
Dry cleaning services.................... 412,833 184,171 843,081 184,171
----------- ---------- ----------- ----------
496,164 267,502 1,009,743 350,833
Costs of services............................. 318,590 111,116 640,198 111,116
General and administrative expenses........... 673,926 558,373 1,430,179 1,076,782
Depreciation and amortization................. 50,160 28,732 100,012 37,087
Interest income, net.......................... (13,424) (89,215) (38,558) (187,393)
----------- ---------- ----------- ----------
Total costs and expenses................. 1,029,252 609,006 2,131,831 1,037,592
----------- ---------- ----------- ----------
(533,088) (341,504) (1,122,088) (686,759)
Benefit for income taxes...................... -0- (5,939) -0- (54,940)
----------- ---------- ----------- ----------
Loss from continuing operations............... (533,088) (335,565) (1,122,088) (631,819)
----------- ---------- ----------- ----------
Income from discontinued operations, less
applicable income taxes of $-0- and
$4,591 for three months ended June 30, 1999
and 1998, respectively and income taxes of
$-0- and $67,984 for six months ended
June 30, 1999 and 1998, respectively......... -0- 34,594 -0- 562,371
----------- ---------- ----------- ----------
Net loss................................. (533,088) (300,971) (1,122,088) (69,448)
(Accumulated deficit) retained earnings,
Beginning of period.......................... (588,011) 1,014,500 989 782,977
----------- ---------- ----------- ----------
End of period................................ $(1,121,099) $ 713,529 $(1,121,099) $ 713,529
=========== ========== =========== ==========
Basic and diluted income (loss) per share:
Continuing operations........................ $ (.16) $ (.10) $ (.34) $ (.19)
Discontinued operations...................... -0- .01 -0- .17
----------- ---------- ----------- ----------
Net loss per share........................... $ (.16) $ (.09) $ (.34) $ (.02)
=========== ========== =========== ==========
Basic and diluted weighted average shares
outstanding.................................. 3,267,500 3,237,500 3,257,224 3,237,500
=========== ========== =========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
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CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
-------------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss..................................................... $(1,122,088) $ (69,448)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................................ 124,769 37,087
Stock grant and warrants issued.............................. 120,500 -0-
Income from discontinued operations, net..................... -0- (562,371)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable............. (73,452) 58,386
Increase in other assets.............................. (245,126) (37,812)
Increase in amounts due from affiliates............... (43,950) (63,000)
Increase (decrease) in accounts payable............... 438,657 (96,839)
(Decrease) increase in accrued expenses............... (79,554) 178,705
Decrease in income taxes payable...................... -0- (28,000)
----------- -----------
Net cash used in operating activities of continuing operations.. (880,244) (583,292)
----------- -----------
Cash Flows From Investing Activities:
Issuance of notes receivable................................. (707,000) -0-
Amounts held in escrow....................................... (915,000) -0-
Amounts repaid by consulting customers....................... -0- 3,253,177
Purchases of U.S. Government securities...................... (2,995,442) (6,295,378)
Proceeds from sale of U.S. Government securities............. 3,500,000 5,313,978
Purchases of businesses...................................... -0- (388,329)
Purchases of property and equipment.......................... (9,452) (45,908)
----------- -----------
Net cash (used in) provided by investing activities............. (1,126,894) 1,837,540
----------- -----------
Cash Flows From Financing Activities
Proceeds from borrowings..................................... 175,000 -0-
Principal payments on notes payable.......................... (8,840) -0-
----------- -----------
Net cash provided by financing activities....................... 166,160 -0-
----------- -----------
Net (decrease) increase in cash and cash equivalents............ (1,840,978) 1,254,248
Cash and cash equivalents, beginning of year.................... 3,058,676 406,909
----------- -----------
Cash and cash equivalents, end of period........................ $ 1,217,698 $ 1,661,157
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes................................... $ 5,141 $ 41,037
=========== ===========
Cash paid for interest....................................... $ 5,885 $ 8,950
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
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CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of business and discontinued operations:
In October 1997, the Company completed the sale of substantially all of its
dialysis related assets to IHS of New York, Inc., a New York Corporation
("IHS"). 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 June 30, 1999, approximately $200,000 of consulting fees due from CDBI had
not been recorded due to realization uncertainties.
In April 1998, the Company established a subsidiary, United Dry Cleaning,
LLC ("United"), for the purpose of acquiring and operating dry cleaning
facilities in the Phoenix, Arizona area. During 1998, United acquired
substantially all of the assets of four Arizona dry cleaning businesses.
In July 1999, United sold back substantially all of the assets of two dry
cleaning stores United had acquired in July 1998 from G&P Associates, Inc., an
Arizona corporation. In consideration of the transaction, G&P Associates, Inc.
released a promissory note in the amount of $70,000 plus accrued interest United
had issued to G&P Associates, Inc. in connection with the original purchase.
United currently operates eight dry cleaning stores and provides dry cleaning
services to certain hotels.
The operating results of the Company's dialysis-related businesses has been
segregated from continuing operations and reported as a separate line item in
the Consolidated Statements of Operations. Revenues from discontinued operations
were $-0-and $310,000 for 1999 and 1998, respectively.
(2) Income (loss) per share:
Basic income (loss) per share represents net income (loss) divided by the
weighted average shares outstanding. Diluted income (loss) per share represents
net income (loss) divided by the
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weighted average shares outstanding adjusted for the incremental dilution of
outstanding employee stock options and awards, if dilutive.
As of June 30, 1999 and 1998, the basic and dilutive weighted average
common shares outstanding were 3,257,224 and 3,237,500 respectively. As of June
30, 1999,there were 1,485,350 of outstanding stock options issued to Directors,
officers and employees of the Company as well as 75,000 warrants issued to a
financial services provider which were excluded from basic and diluted net
income (loss) per share because the effect would have been antidilutive.
(3) Related party transactions:
As of December 31, 1998, the Company had advanced $370,264 to TechTron.
During 1999, an additional $43,950 was advanced to TechTron. The Company has
obtained notes from TechTron for all of the advances. The majority of the notes
issued in connection with these advances bear interest at a rate of 8% and are
payable upon demand. Payments on the notes are not anticipated in 1999 due to
the fact that TechTron does not expect to earn sufficient revenues to make
payment.
In 1998 and 1997, respectively, the Company loaned $350,000 and $35,000 to
the Company's President and Chief Operating Officer. The President and Chief
Operating Officer executed promissory notes for these advances which were due
and payable in full within one year. 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
terms of the notes to be payable prior to December 31, 2000.
As of June 30, 1999 and December 31, 1998, $112,366 and $115,681,
respectively, was payable to Alpha. At June 30, 1999 and December 31, 1998,
$8,908 and $4,083, respectively, was due from CDBI. The Company had a
Consulting Services Agreement with CDBI. The CDBI agreement provided for
payments of $20,000 per month. However, there was inadequate cash flow to pay
$200,000 in consulting fees due from CDBI which have not been recorded by the
Company due to realization uncertainties. Amounts payable to Alpha and due from
CDBI are included in accounts payable in the accompanying balance sheets.
Of amounts due under the agreements with consulting customers, only
consulting fees due the Company from CDBI under the Consulting Services
Agreement are in default. The $200,000, representing all consulting fees from
the inception of the agreement until the time of the sale of CDBI to IHS, is due
the Company from CDBI.
In addition, several promissory notes and associated guarantees of related
parties were in default under the original terms of the notes. As of June 30,
1999, amounts due the Company from Techtron totaled $414,214. Of this amount,
$125,868 was secured by a promissory note dated August 9, 1994. Under the
original terms of this note, principal and interest were due and
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payable by December 31, 1996. The terms of the note were amended by the Company
to become due and payable on demand. All amounts due from Techtron are
guaranteed by Certain Executive Officers. Any demand for payment under the
personal guarantees will have to be made by the Company's Board of Directors.
The Company's Board of Directors does not currently intend to make demand for
payment.
As of June 30, 1999, all amounts due from Alpha had been paid, except for
interest on a promissory note for $300,000 dated April 24, 1994. Principal and
interest were originally due April 24, 1999. As of June 30, 1999, $112,366 was
payable to Alpha by the Company. The Company intends to offset amounts payable
to Alpha with amounts due from Alpha for interest once the Company has
determined that there are no outstanding liabilities of Alpha that the Company
may be required to pay on Alpha's behalf.
(4) Commitments and Contingencies:
The former owners of Ultimate Cleaners, Inc., an Arizona corporation
("Ultimate") who sold United substantially all of its assets, primarily
machinery and equipment, have commenced an action against United for nonpayment
on the promissory note. The plaintiffs seek to accelerate the promissory note
and also foreclose on the assets which it sold to United. Management contests
the plaintiff's action and acceleration of the note, is vigorously defending
against the claim and has raised counter claims. As a result of this legal
action, the note payable balance of $843,675 is reflected as a current liability
in the consolidated balance sheets for the periods presented.
(5) Line of Credit:
The Company has obtained a $200,000 line of credit to provide additional
financing for United. As of June 30, 1999, $25,000 of availability remained on
the line of credit. The line is primarily secured by all of United's assets and
is further secured by an investor. The line of credit bears interest at a rate
of Prime less 1/2% and matures January 31, 2000.
(6) Proposed Merger:
On February 5, 1999, the Company and TelaLink Network, Ltd., a privately
held Delaware corporation ("TelaLink") executed an Agreement and Plan of Merger
("Merger Agreement") to merge the two companies in a stock-for-stock transaction
(the "Merger") to be accounted for under the purchase method of accounting. On
June 30, 1999, the merger was approved by the Company's shareholders. In
addition, the shareholders approved a change of the Company's name to "Quorum
Holding Corp." which management plans to complete promptly following the merger.
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
7
<PAGE>
("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, 1998,
TelaLink and the RLEC reported a combined loss on a pro-forma basis before
interest expense, taxes, depreciation and amortization of approximately $294,000
on revenues of approximately $1,159,000.
Under the terms of the Merger Agreement, Quorum Communication, Inc.
("Quorum"), a wholly-owned subsidiary of the Company, will merge with TelaLink.
Quorum will be the surviving entity. 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.
The Company has loaned a total of $707,000 to TelaLink and its affiliates
as of June 30, 1999. These funds were to provide working capital to TelaLink and
have been recorded on TelaLink's books as notes payable to the Company and on
the Company's books as notes receivable. The notes bear interest at a rate of
12%. If the merger is not closed, the notes become due and payable on April 30,
2000 subject to prior default. If the merger is closed, the notes will convert
to intercompany accounts and eliminate in consolidation.
Under the terms of the Merger Agreement, any party to the Agreement is
entitled, as of July 31, 1999, to terminate the proposed merger by giving notice
of termination to the remaining parties. To date, no party has given any notice
of termination. The parties continue to await final regulatory approval of the
proposed transaction, the fulfillment of certain conditions to the proposed
merger and the resolution of certain issues among and between the parties to the
Agreement and their respective affiliates. No assurance can be given that the
transactions
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<PAGE>
contemplated by the Agreement will be consummated or, if consummated, the timing
of the transactions.
(7) Stock Purchase Agreement
Effective May 15, 1999, the Company entered into a Stock Purchase Agreement
(the "Stock Purchase Agreement") by and among the Company, Pine Tree Telephone
and Telegraph Company ("PTTC") and the principal (95%) stockholder of PTTC,
whereby the Company will purchase not less than 95% of its issued and
outstanding capital stock. PTTC is a telecommunication services provider to
areas near Lewiston and Portland, Maine. Subject to regulatory approval and
pursuant to the terms of the Stock Purchase Agreement, the Company will acquire
all of the outstanding capital stock of PTTC for a purchase price of
approximately $30,500,000.
To secure the Company's rights under the Stock Purchase Agreement, the
Company has deposited the sum of $915,000 in an escrow account. Such funds shall
be treated as a non-refundable deposit against the purchase price to be paid by
the Company to the stockholders of PTTC at Closing, or otherwise in accordance
with the Stock Purchase Agreement. The Company intends to obtain a combination
of debt and equity financing to finance the remainder of the purchase price.
The Company was assigned the opportunity to purchase the Pine Tree capital
stock from TelaLink based primarily on the Company's ability to make the
$915,000 down payment required under the Stock Purchase Agreement. Although the
Company intends to obtain debt financing of up to $19,500,000 in connection with
the Pine Tree transaction, no assurance can be given that the Company will be
successful in obtaining such debt financing or that it can obtain financing on
terms acceptable to it. The Company intends to raise the remaining $11,000,000
of the Pine Tree purchase price primarily through the sale of equity. In
addition, the Company may use some or all of its existing and future cash
reserves to fund a portion of the acquisition. The Company is unable to
accurately estimate the timing or amount of any future offering of equity
securities. Further, the Company cannot give any assurance as to the form, type,
nature or voting rights of any securities it may issue to finance the
acquisition or whether those securities will be sold publicly or privately. As a
result, the Company is unable to accurately predict the amount of any dilution
to existing holders of Company Stock as a result of the financing of the Pine
Tree transaction. To the extent that any issuance of equity securities or other
voting rights exceeds 50% or more of the voting rights of the Company then
outstanding (or issuable upon exercise, conversion or exchange of outstanding
securities) and in the absence of a voting trust, shareholders or similar
agreement, a change of control of the Company can occur. No assurance can be
given that future issuances of equity securities or voting rights of the Company
will not result in a change of control of the Company.
The transaction will be consummated on the first day following the end of
the calendar quarter during which the Public Utilities Commission of the State
of Maine ("PUC") gives written
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notification that the transaction has received regulatory approval. The Company
continues to work towards such approval. Until the Closing and without affecting
the purchase price, PTTC may distribute to its stockholders its accumulated
cash, certain non-performing assets and any securities held including additional
non-regulated, non-operating assets.
At the Closing, the purchase price may be increased or decreased by various
amounts as provided by the terms in the Stock Purchase Agreement. After giving
effect to such adjustments, the Company shall pay the balance of the purchase
price less $2,900,000. The Company shall deposit an additional $2,900,000 (the
"Closing Escrow") which shall be held in escrow to secure the performance of the
obligations of PTTC's principal stockholder. Such funds shall be held in escrow
for purposes of adjusting the purchase price up until the first anniversary of
the Closing in accordance with the Stock Purchase Agreement. No assurance can be
given that the Company will be able to obtain financing for the PTTC transaction
or, if financing is obtained on terms acceptable to the Company, that the
transaction will otherwise be consummated. The Company intends to account for
the transaction as a purchase.
(8) Unaudited Pro Forma Financial Information:
The following unaudited pro forma information represents a summary of the
Company's consolidated results of operations adjusted to reflect the estimated
effects of the merger pursuant to the Merger Agreement between the Company and
TelaLink Ltd. ("TelaLink") as well as the Stock Purchase Agreement between the
Company and Pine Tree Telephone and Telegraph Company ("PTTC"). The Unaudited
Pro Forma Financial Information was prepared as if the merger and stock purchase
was consummated at the beginning of the fiscal year presented.
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1999 1998
<S> <C> <C>
Revenues:...................... $ 3,987,257 $3,429,572
----------- ----------
Net loss....................... $(2,054,731) $ (763,351)
=========== ==========
Net loss per share............. $ (.42) $ (.15)
=========== ==========
</TABLE>
(9) Other Matters:
On April 26, 1999, the Company granted warrants to purchase up to an
aggregate of seventy-five thousand (75,000) shares of its common stock to a
financial services provider at an exercise price of $2.625, which was the fair
market value on the date of grant. The Company recorded $50,000 in expense
related to these warrants in selling, general and administrative expenses in the
accompanying Consolidated Statements of Operations.
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(10) Subsequent Event
On July 20, 1999, the Company's units and warrants that were issued in
connection with the Company's initial public offering on July 27, 1994 expired.
Management's Discussion and Analysis
Results of Operations
Six Months Ended June 30, 1999 Compared with Six Months Ended June 30,
1998.
On October 8, 1997, the Company completed the sale of substantially all its
New Jersey, New York, Connecticut and Pennsylvania dialysis business assets to
IHS of New York, a New York corporation ("IHS"). Following the IHS closing, the
Company's sources of revenue included amounts payable for consulting services to
be provided to IHS through October 2000, at a rate of approximately $28,000 per
month. For the six months ended June 30, 1999 and 1998, respectively, the
Company recognized a total of $166,662 for consulting services under this
agreement.
In January 1998, UMDC, a consulting customer of the Company that is 50%
owned by Certain Executive Officers, sold substantially all of its assets to
Renal Research Institute, LLC ("RRI"). As a result, the Company and UMDC
terminated the UMDC Consulting Agreement (the "UMDC Agreement"). The Company
received from UMDC $2,665,000 at the First RRI Closing and a subsequent payment
of $310,000. The Company recognized revenues in 1998 of $310,000 from UMDC.
There were no such revenues recorded in 1999. Additionally, the Company and
certain of UMDC's shareholders became entitled to receive repayment of other
amounts due from UMDC and its shareholders, to receive amounts to be earned by
UMDC in connection with its continuing business and to receive amounts payable
by UMDC pursuant to the Company's Consulting Agreement with UMDC.
The proceeds from the IHS closing, the IHS consulting agreement and the RRI
transaction were invested by the Company in U.S. Government securities and money
market funds. No assurance can be given that the Company will continue to
receive income from the IHS consulting agreement or from the continued
operations of UMDC.
Beginning in May 1998, the Company's subsidiary, United Dry Cleaning,
L.L.C. ("United"), acquired substantially all of the assets of Ultimate
Cleaners, Inc., Cleaner Headquarters, Inc., and G & P Associates, Inc., Arizona
corporations, as well as Alyssa's Magic Touch, an Arizona proprietorship.
In July 1999, United sold back substantially all of the assets of two dry
cleaning stores United had acquired in July 1998 from G & P Associates Inc. In
consideration of the transactions, G & P Associates, Inc. released a promissory
note in the amount of $70,000 plus accrued interest United had issued to G & P
Associates, Inc. in connection with the original purchase.
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
11
<PAGE>
additional financing to fund its operations. As of June 30, 1999, $25,000 of
availability existed on the line of credit. Interest accrues at a rate of Prime
less 1/2% and matures January 31, 2000. Management continues to seek ways to
reduce United's costs, primarily payroll and supplies, and to increase revenues.
Management believes that in order for United to reach originally anticipated
sales levels, it must continue to aggressively seek out new hotel customers. No
assurance can be given that United will be successful in its efforts to expand
its customer base or that United will not need additional financing.
Revenues
Prior to the IHS and RRI First Closings, the Company provided certain
services in New York through consulting, administrative, or subcontracting
service arrangements with consulting customers. The consulting customers were
partially or 100% owned by the Certain Executive Officers of the Company. Under
the Company's agreements with Alpha, UMDC and CDBI, the Company provided various
administrative and consulting services in addition to equipment and supplies to
each facility for monthly fees of $20,000, $33,333 and $20,000, respectively.
The Alpha and CDBI agreements terminated in October 1997 at the time of the IHS
sale, and the UMDC agreement terminated in January 1998 at the time of the RRI
First Closing. In 1998, the Company recorded $310,000 in additional revenues
related to payments from UMDC subsequent to the First RRI Closing, not
previously recorded due to realization uncertainties. No additional revenues
have been recorded in 1999.
The Company does not expect to receive future operating revenues related to
its former dialysis based businesses or from the business of its former
consulting customer other than such amounts as it may receive under its
consulting agreement with IHS, the consulting agreement between RRI and UMDC and
amounts due from UMDC pending consummation of the second closing. No assurance
can be given that the RRI second closing will occur or, if consummated, the
timing of the transaction.
The Company's United subsidiary recognized revenues of $843,081 and
$184,171 in 1999 and 1998, respectively. 1998 revenues are lower than in 1999,
primarily because United did not commence operations until the second quarter of
1998. Of these amounts, approximately $422,595 and $63,050 or 50% and 34% in
1999 and 1998, respectively, related to dry cleaning services provided by
United's ten dry cleaning facilities, including plants and stores. The
remaining $420,486 and $121,121 related to dry cleaning services provided to
hotel customers. The Company anticipates that hotels will continue to be a major
source of revenue. United continues to target additional businesses in the
Phoenix, Arizona area to maximize plant capacity as well as broaden the
Company's revenue base.
Cost of Services
Cost of services was $640,198 and $111,116 or 76% and 60% of revenues
attributable to the Company's dry cleaning business in 1999 and 1998
respectively. 1998 expenses are lower
12
<PAGE>
than in 1999, since United did not commence operations until the second quarter
of 1998. Cost of services is mostly comprised of $512,220 and $90,981 in
salaries and other payroll expenses as well as $92,559 and $19,700 for supplies
in 1999 and 1998, respectively. In addition, $24,757 of depreciation expense
attributable to the dry cleaning machinery and equipment has been allocated to
cost of services in 1999.
General and Administrative Expenses
General and administrative expenses totaled $1,430,179 in 1999, as compared
with $1,076,782 for the six months ended June 30, 1998. The net increase of
$353,397 is primarily comprised of an increase of $380,841 relating to the
Company's dry cleaning businesses and the issuance of 30,000 shares of Common
Stock valued at $70,500 to a retiring Director of the Company, offset by a
reduction of $87,329 in salaries and other office expenses due to a reduction in
corporate staff resulting from the IHS transaction.
In connection with the IHS transaction, the Company retained substantially
all of its accounts receivable and accounts payable. Accordingly, during the
period immediately following the IHS Closing, the Company maintained its
accounts receivable and accounts payable personnel. The number of employees
employed in those departments decreased throughout 1998.
Allowance for Doubtful Accounts
A provision for doubtful accounts was recorded to the extent deemed to be
adequate to absorb possible losses resulting from uncollectible receivables.
The Company reviews each individual account and a reserve is established to
reflect any amounts considered doubtful of collection based on the Company's
knowledge of specific payors, an analysis of the aging of the accounts, as well
as past experience with the accounts.
As of June 30, 1999, the allowance for doubtful accounts was $65,000 as
compared with $67,000 at December 31, 1998. Of this allowance, $14,513 relates
to the discontinued dialysis treatment business. As a percentage of patient
receivables outstanding, such allowance was 82% at June 30, 1999, and 75% at
December 31, 1998. Due to the discontinuance of current revenues discussed
above and collection activity, the patient accounts receivable have been
significantly reduced. As a consequence, the percentage of older receivables is
larger and requires a higher percentage allowance.
As of June 30, 1999, the Company's dry cleaning business had accounts
receivable of $180,922. Of the Company's $65,000 allowance at June 30, 1999,
$50,487 relates to the dry cleaning business. As a percentage of receivables
outstanding, such allowance was 28% at June 30, 1999.
Management continues to evaluate the collectibility of all accounts and
believes the stated allowance as of June 30, 1999 is adequate to absorb possible
losses resulting from uncollectible
13
<PAGE>
receivables.
Depreciation and Amortization Expense
Depreciation and amortization expense for 1999 and 1998 totaled $124,769
and $37,087, of which $24,757 of depreciation expense relating to the dry
cleaning business is included in cost of services in 1999. The increase from
1998 resulted from the purchase of the assets in connection with the acquisition
of dry cleaning stores and plants by United beginning in the second quarter of
1998 as well as the associated goodwill and other intangibles generated from
these transactions.
Interest Income and Interest Expense
Net interest income was $38,558 and $187,393 for the six months ended June
30, 1999 and 1998, respectively. The net decrease of $148,835 is related
primarily to the issuance of notes payable in connection with the acquisition of
dry cleaning stores and plants by United as well as a reduction of investment
income due to cash used in the operating and investing activities of the
Company. Interest expense on the Company's debt obligations in both periods was
offset by interest earned on the proceeds from the sale of assets to IHS and
RRI.
Provision for Income Taxes
The provision for federal and state income taxes was $-0- in 1999 and
$13,044 in 1998. The effective income tax rate was -0-% and 23% in 1999 and 1998
respectively. All of the Company's deferred tax assets as of June 30, 1999 have
been offset by a valuation allowance as a result of the Company's operating
results.
Year 2000
The Company's outside computer consultants have been engaged to address
Year 2000 issues. The consultants performed an inventory and review of all
information systems, both hardware and software. 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
14
<PAGE>
contingency plans based on the information provided by the Company's consultants
review.
Liquidity and Capital Resources
The Company experienced a negative net cash flow of $1,840,978 in 1999. Net
cash used in operating activities of $880,244 related primarily to corporate
general and administrative expenses as well as additional expenses incurred from
the dry cleaning business. Net cash used in investing activities of $1,126,894
reflects the proceeds from the sale of U.S. Government securities offset by
purchases of U.S. Government securities, the issuance of loans to TelaLink and
amounts held in escrow relating to the Pine Tree Stock Purchase Agreement. Net
cash provided by financing activities of $166,160 reflects proceeds from
borrowing on United's line of credit offset by principal payments on notes
issued in connection with the dry cleaning acquisitions.
The Company has made advances to certain affiliates and consulting
customers. As of December 31, 1998, the Company had advanced $370,264 to
TechTron. During 1999, the Company advanced an additional $43,950 to TechTron.
The Company has obtained demand promissory notes from TechTron for all of the
advances, of which the majority of notes issued bear an 8% rate of interest.
Interest of $59,870 has accrued through June 30, 1999 but has not been recorded
due to TechTron's lack of sufficient revenues to make payment. Payments on the
notes are not anticipated in 1999 due to the fact that TechTron does not expect
to earn sufficient revenue to make payment. All amounts due from TechTron are
unsecured and are guaranteed by certain Executive Officers.
In conjunction with the sale of UMDC assets to RRI, substantially all
amounts due the Company from UMDC for loans, advances supplies and equipment
were paid in January 1998. As of June 30, 1999, amounts due the Company from
UMDC totaled $1,764,000, including $1,389,000 for fees generated pursuant to the
UMDC Consulting Agreement. To the extent that the RRI Second Closing is
consummated, the Company expects to recognize some or all of the consulting and
services fees due from UMDC which were not previously recorded due to
realization uncertainties. The physician shareholders of UMDC unaffiliated with
the Company continue to owe the Company $100,000 in principal plus interest due
pursuant to loans from the Company. The Company expects that 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 expects that its cash, cash equivalents and investments in U.S.
Government securities will be sufficient to fund the Company's operations
through June, 2000.
Through December 31, 1998, the Company advanced an aggregate of $1,000,000
to fund United's initial operations. In addition, the Company has arranged for
a $200,000 line of credit
15
<PAGE>
for United to provide additional financing of which $25,000 was available as of
June 30, 1999. The line is primarily secured by all of United's assets and is
further secured by assets of an investor in United. The line of credit bears
interest at a rate of Prime less 1/2% and matures January 31, 2000. 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 five to seven and one half
years, and provide for total monthly principal and interest payments of $15,743.
In anticipation of the merger between the Company and TelaLink
Network, Ltd ("TelaLink") the Company has loaned $707,000 to TelaLink as of June
30, 1999. These funds were advanced to provide working capital to TelaLink.
Amounts advanced to TelaLink are reflected as notes receivable in the
accompanying consolidated balance sheets.
In connection with the Stock Purchase Agreement by and among the
Company, Pine Tree Telephone and Telegraph Company and the principal (95%)
stockholder of PTTC, the Company has deposited the sum of $915,000 in an escrow
account. Such funds shall be treated as a non-refundable deposit against the
purchase price to be paid by the Company to the stockholders of PTTC at Closing
or otherwise in accordance with the Stock Purchase Agreement. To date the
Company has been unable to obtain sufficient financing for this transaction. No
assurance can be given that the Company will be able to obtain financing for the
Pine Tree transaction or, if financing is obtained on terms acceptable to the
Company, that the transaction will otherwise be consummated. If the Company is
unable to obtain financing or otherwise unable to close the transaction, the
Company will forfeit its deposit, which could have an adverse effect on the
Company.
PART II
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
No exhibits are filed with this report or are incorporated herein by
reference.
(b) A report on Form 8-K was filed by the Company on May 28, 1999
concerning the Stock Purchase Agreement by and among the Company. PTTC
and the principal (95%) stockholder of PTTC.
16
<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: August 12, 1999 By: /s/Steven L. Trenk
------------------------------------
Steven L. Trenk
President, and Chief Operating Officer
Date: August 12, 1999 /s/ Mark N. Raab
------------------------------------
Mark N. Raab
Chief Financial Officer
Principal Financial Officer
17
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