<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the registrant [x]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Materials Pursuant to 240.14a-11(c) or 240.14a-12
CONTINENTAL CHOICE CARE, INC.
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(Name of Registrant as Specified in its Charter)
N.A.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[_] No fee required
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
(1) Title of each class of securities to which transaction applies:
N.A.
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
N.A.
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
N.A.
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$8,170,000
- --------------------------------------------------------------------------------
(5) Total fee paid:
$1,634.00
- --------------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
N.A.
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
N.A.
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(3) Filing party:
N.A.
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(4) Date filed:
N.A.
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Continental Choice Care, Inc.
35 Airport Road
Morristown, New Jersey 07960
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Notice Of Annual Meeting Of Stockholders
To Be Held May 17, 1999
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Continental Choice Care, Inc. (the "Company") will hold a special meeting
(the "Meeting") of the stockholders to be held at the Hamilton Park Conference,
175 Park Avenue, Florham Park, New Jersey 07932 on May 17, 1999 at 4:00 p.m.,
Eastern Standard Time, for the purpose of considering and voting upon the
following matters:
(i) To approve an Agreement and Plan of Merger dated as of February 5, 1999,
a copy of which is attached as Annex A to the accompanying Proxy
Statement, providing for the merger of TelaLink Network, Ltd., a Delaware
corporation with and into Quorum Communications, Inc. (formerly "TNL
Acquisition Corp."), a Delaware corporation, and a wholly owned
subsidiary of the Company, and related matters, and to amend the
Company's Certificate of Incorporation to change the Company's name from
"Continental Choice Care, Inc." to "Quorum Holding Corp."
(ii) To approve an amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock.
(iii) To approve an increase in the number of shares of the Company's Common
Stock reserved for issuance under the Company's 1997 Equity Incentive
Plan.
(iv) To elect one director to hold office for a term of three years or until
his successor has been duly elected and qualified.
(v) To ratify the appointment of Arthur Andersen LLP as the Company's
independent public accountants for the fiscal year ending December 31,
1999.
(vi) To transact such other business as may properly come before the Meeting
and any adjournment of the Meeting.
Holders of Common Stock of the Company at the close of business on April 13,
1999 are entitled to notice of and to vote at the Meeting and any adjournment of
the Meeting.
Your attention is directed to the accompanying Proxy Statement for further
information regarding each proposal to be made.
<PAGE>
The Company's Annual Report for the Fiscal Year ended December 31, 1998
accompanies these proxy materials.
Whether or not you expect to attend the Meeting, please complete, sign and
date the enclosed proxy and return it promptly by mail in the enclosed self-
addressed envelope, which does not require postage if mailed in the United
States.
By Order of the Board of Directors
Steven L. Trenk
President
April 15, 1999
Florham Park, New Jersey
<PAGE>
Continental Choice Care, Inc.
35 Airport Road
Morristown, New Jersey 07960
973-898-9666
------------------------------------------------------
Proxy Statement For Annual Meeting of
Stockholders
------------------------------------------------------
GENERAL INFORMATION
This Proxy Statement is furnished by the Board of Directors (the "Board of
Directors") of Continental Choice Care, Inc. (the "Company"), solely to the
stockholders of the Company in connection with the solicitation of proxies for
an Annual Meeting of the Company's Stockholders (the "Meeting") to be held at
the Hamilton Park Conference Center, 175 Park Avenue, Florham Park, New Jersey
07932 on May 17, 1999 at 4:00 p.m., Eastern Standard Time, and at any
adjournment of the Meeting. We expect to mail these proxy materials to
stockholders on or about April 15, 1999. The principal executive offices of the
Company are located at 35 Airport Road, Morristown, New Jersey 07960. The
telephone number of the Company is (973) 898-9666.
This Proxy Statement 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 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 also 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; future regulatory
actions and conditions in existing and proposed operating areas; and competition
from others in our existing or proposed service markets.
<PAGE>
Voting Of Proxies
Only stockholders of record at the close of business on the record date,
April 13, 1999, will be entitled to vote at the Meeting and at adjournments of
the Meeting.
On March 4, 1999, there were outstanding and entitled to vote 3,267,500
shares of the Company's common stock ("Company Stock"). Each outstanding share
of Company Stock entitles you to one vote on each matter. A majority of the
shares of Company Stock entitled to vote at the Meeting will constitute a quorum
for the transaction of business.
If you properly sign your proxy and do not revoke it, your shares will be
voted at the meeting in accordance with your instructions. If no instruction is
specified, your shares will be voted by the persons that you designated (with
respect to the matters as to which you are entitled to vote) in the following
manner:
(i) "FOR" approval of the Agreement and Plan of Merger dated as of February
5, 1999 (the "Merger Agreement"), the consummation of the transactions
contemplated thereby and related matters, and the amendment of the
Company's Certificate of Incorporation to change the Company's name from
"Continental Choice Care, Inc." to "Quorum Holding Corp."
(ii) "FOR" the amendment of the Company's Certificate of Incorporation to
increase the authorized number of shares of the Company's common stock
from 10,000,000 to 20,000,000 shares.
(iii) "FOR" an increase in the number of shares of the Company's Common Stock
reserved for issuance under the Company's 1997 Equity Incentive Plan from
1,250,000 to 2,500,000.
(iv) "FOR" the election of a director of the Company, as described in this
Proxy Statement.
(v) "FOR" the ratification of the appointment of Arthur Andersen LLP as the
Company's independent public accountants for the fiscal year ending
December 31, 1999.
(vi) In connection with the transaction of such other business as may properly
be brought before the Meeting, in accordance with the judgment of the
person or persons voting the proxy.
You may change your mind and revoke your proxy at any time before voting by
giving written notice of revocation to the Secretary of the Company. This may
be done by filling out, signing and delivering to the Secretary a proxy bearing
a later date or by showing up at the meeting and voting in person.
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Required Vote
The affirmative vote of the holders of at least a majority of the
outstanding shares of Company Stock present, in person or by proxy, and entitled
to vote at the Meeting is required for approval of each of the proposals and any
other matter which may be put to a stockholder vote at the Meeting. As to any
particular proposal, if you abstain (or leave the proxy card blank) it will have
the same effect as a vote against that proposal. A "broker non-vote" (a card
returned by a broker because voting instructions were not received and the
broker does not have discretionary authority to vote on that matter) will not be
counted as a vote either for or against the proposal. Votes cast, either in
person or by proxy, will be counted by First City Transfer Company, the
Company's transfer agent.
Shareholder Proposals For Next Annual Meeting
Any shareholder proposals intended to be presented at the Company's next
annual meeting of shareholders must be received by the Company at its offices by
January 17, 2000 for consideration for inclusion in the proxy material for the
next annual meeting of shareholders. Except for matters that a shareholder of
the Company raises pursuant to the procedures contained in Securities and
Exchange Commission ("SEC") Rule 14a-8, no business may be brought before an
annual meeting except as specified in the notice of meeting or as otherwise
brought before the meeting by or at the direction of the Board of Directors or
by a shareholder entitled to vote who has delivered notice to the Company not
less than 45 days prior to the first anniversary of the record date for the
preceding year's annual meeting. For the annual meeting of the stockholders of
the Company in the year 2000, the Company must receive this notice on or after
January 14, 2000 and on or before February 28, 2000.
Proxy Solicitation
The accompanying proxy is solicited by the Company. All costs of
soliciting proxies will be borne by the Company. In addition to the use of the
mails, proxies may be solicited by regular employees of the Company, either
personally or by telephone or telegraph. The Company does not expect to pay any
compensation for the solicitation of proxies, but it may reimburse brokers and
other persons holding shares in their names or in the names of nominees for
expenses in sending proxy material to beneficial owners and obtaining proxies of
such owners.
Summary of this Proxy Statement
The following information is intended to be a short introductory summary of
information contained elsewhere in this proxy statement. The proxy statement
itself contains summaries of various information, including summaries of laws,
transactions, businesses, industries and agreements. You are urged to read all
of the proxy materials and other information provided by the Company. You are
also urged to read the laws, agreements and filings to which the Company refers
you. Due to its substantially condensed format, the following short
introductory
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<PAGE>
summary omits details, references and warnings which are vital to a complete
understanding of the proposals which you are being asked to approve.
Proposal 1.
. What companies will merge? The Company formed a wholly-owned subsidiary named
Quorum Communication, Inc. (formerly "TNL Acquisition Corp.") ("AcquiSub").
TelaLink Network, Ltd. ("TelaLink") will merge with AcquiSub (the "Merger")
and AcquiSub will be the surviving entity. TelaLink will cease to exist and
AcquiSub's certificate of incorporation and by-laws will govern the surviving
entity. TelaLink will take AcquiSub's name, or choose a new name, leaving the
Company as parent to a new corporation called "Quorum Communications, Inc." or
such other name as the new company selects.
. What is TelaLink's business? TelaLink was formed primarily for the purpose of
acquiring, operating and expanding the services provided by rural local
exchange carriers ("RLECs"). RLECs provide local telecommunications services
in rural areas throughout the United States. TelaLink conducted substantially
no business prior to December 1998. In December 1998, its subsidiary Bridges
Telecommunications, Inc. d/b/a War Telecommunications, Inc., ("WarTel")
acquired the assets of War Telephone Company ("WTC"), a RLEC located in War,
West Virginia. WarTel provides telephone service to approximately 1,550 access
lines.
. Why is the Company proposing a merger with TelaLink? How will this affect my
shareholdings? As a result of the merger of TelaLink with a newly-formed
subsidiary of the Company, the Company will enter the telecommunications
business. You will become a stockholder of an enterprise that operates a
telecommunications business and will seek additional acquisitions and
opportunities for growth in the telecommunications business. Management
believes that this business will experience significant expansion.
. What will happen to TelaLink's capital stock? As of the effective time of the
Merger, shares of the capital stock of TelaLink shall automatically convert
into the right to receive a portion of the Company Stock to be issued as
consideration for the Merger.
. What other agreements were made in connection with the Merger? In anticipation
of the Merger, the Company is loaning $850,000 to a company, TelaLink
Acquisition Corp., ("LoanCo") which holds 250,000 shares of TelaLink Series A
Preferred Stock. $600,000 of that amount will be loaned to TelaLink by LoanCo.
and will use the remaining $250,000 to repay existing LoanCo. obligations.
Simultaneously with the Merger, the Company will acquire all of the
outstanding capital stock of LoanCo in consideration for 150,000 shares of
Company Stock. In addition, the Company has agreed to loan up to $400,000
directly to TelaLink pending completion of the Merger. Under the terms of the
Merger Agreement, the Company is obligated to issue employee options to
acquire 500,000 shares of Company Stock to Mr. Harry S. Bennett, the Chairman
and Chief Executive Officer of TelaLink (the "Bennett Options") and to make
Mr. Bennett an Executive Vice President of the Company.
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<PAGE>
. What consideration will the Company give for the Merger? At or shortly
following the closing of the Merger, the Company will issue 1,540,000 shares
of Company Stock directly to the holders of the capital stock of TelaLink. An
additional 100,000 shares of the Company Stock will be issued at the time of
the Merger, but will promptly be returned to the Company's treasury.
The Company will also issue 1,540,000 shares into an escrow at the closing.
If 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), holders of TelaLink capital stock will receive 900,000 shares
of Company Stock, of which 640,000 will be escrowed shares and 260,000 shares
will be newly issued Company Stock. If the Company meets certain alternative
financial goals within the same time period, the other 900,000 shares of
Company Stock will be released from the escrow.
The release of the second group of shares of Company Stock from the escrow is
not contingent on the release of the first group of shares and vice versa. As
a result, the net aggregate number of shares of Company Stock which the
Company will issue in connection with the Merger will be either 1,540,000,
2,440,000 or 3,340,000.
In connection with the LoanCo Acquisition, the Company will issue 150,000
shares of its Company Stock to the holders of the capital stock of LoanCo in
exchange for all outstanding LoanCo capital stock. The 150,000 shares are in
addition to the shares to be issued in the Merger.
. When is the Merger expected to be completed? The parties to the Merger are
working as quickly as possible towards a completion date of May 24, 1999 or
promptly following receipt of stockholder approvals and any required
regulatory approvals, if later.
. What are the tax consequences to stockholders? Management of the Company
believes the exchange of shares in the Merger will not result in a taxable
event for the Company's stockholders. The Company expects to account for the
Merger as a purchase of the shares of capital stock of TelaLink and LoanCo.
. Why is the Company asking me to approve a name change for the Company. The
change of name is a condition to the Merger originally requested by TelaLink.
However, Management of the Company believes the Company's existing name is
more appropriate for a health care business than it is for a Company involved
in several businesses. Management further believes that the name "Quorum
Holding Corp." is more appropriate for a company involved in several
businesses which are not related to health care if TelaLink is included among
those businesses. If the Merger is not consummated, management does not
believe the proposed name is appropriate for the Company.
. Do I Have The Right To Dissent From The Merger? Stockholders of the Company
have the right to dissent from the Merger pursuant to New Jersey law. If you
intend to exercise
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<PAGE>
dissenters' rights, you must file a written notice of dissent with the
----
Company, stating that you intend to demand payment for your shares if the
Merger is approved. Neither an abstention nor a vote against the Merger will
constitute such a notice. You will lose your right to dissent if you vote FOR
the Merger or consent in writing to the Merger or if you fail to properly make
demand for payment. You and the Company each have specific rights and
---
obligations. There are specific action and time requirements with which you
must comply in order to dissent. We urge you to carefully read the summary
----
contained in this proxy statement under the heading "Dissenter's Rights" and
the laws to which that summary refers.
Proposal 2
. Why does the Company want to increase the number of authorized shares of
Common Stock? The Company's certificate of incorporation currently authorizes
the issuance of 10,000,000 shares of common stock and 5,000,000 shares of
preferred stock. The Company does not have any preferred stock issued or
outstanding. However, 3,267,500 shares of Company Stock were issued and
outstanding as of March 4, 1999, and 3,480,000 shares of Company Stock were
reserved for issuance pursuant to outstanding warrants, options and other
securities. If the Merger is approved by the stockholders and is closed, the
number of shares of Company Stock which the Company will be required to issue
and reserve for issuance under the terms of the Merger Agreement and related
agreements will be greater than the number of shares of Company Stock that the
Company currently has available for issuance. Whether or not the Merger is
closed, management believes that the Company should have additional authorized
shares available for use in any future acquisitions or mergers and for other
corporate purposes. The approval of the Company's stockholders is required to
amend the Company's certificate of incorporation to increase the number of
authorized shares of capital stock.
Proposal 3
. Why am I voting to approve additional shares for a plan we recently approved?
Under the terms of the Merger Agreement, the Company is required to make
1,000,000 shares available under the terms of the Company's 1997 Equity
Incentive Plan (the"1997 Plan") to cover the issuance of options to new
management of the Company and its subsidiaries. This is a condition to
TelaLink's obligation to close the Merger. Management of TelaLink advised the
Company that they believe it is necessary to have shares available under the
plan in order to attract and retain the most qualified management personnel,
including personnel for the telecommunications business. Management of the
Company also believes that additional shares should be available for options
to attract and retain qualified personnel. Of the 1,250,000 shares currently
available under the 1997 Plan, 1,190,000 are reserved for issuance on the
exercise of currently outstanding options.
. Will the Board of Directors change? Under the terms of the Merger Agreement,
the Company has agreed to expand the Board of Directors from five to seven
members and to allow the TelaLink stockholders to nominate three of those
directors. One of the three
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directors nominated by TelaLink must qualify as "independent" under applicable
rules and regulations. At such time as TelaLink designates an "independent"
director, management believes that Stanley B. Amsterdam will resign from his
term as a director of the Company and expects that the newly nominated
independent director will serve the remainder of Mr. Amsterdam's term,
expiring in 2001. Other individuals nominated by the TelaLink shareholders
will initially be elected by the Company's Board of Directors.
PROPOSAL 1. APPROVAL OF THE MERGER AND CHANGE OF CORPORATE NAME
The following information is a summary of information relating to the
Merger described in the Merger Agreement. This summary is not intended to be a
complete description of the Merger. It is subject to and qualified by the more
detailed information contained in the Merger Agreement and related documents. A
copy of the Merger Agreement is attached to this Proxy Statement as Appendix A
and copies of other relevant documents have been incorporated into this Proxy
Statement from the Company's report on Form 8-K filed with the United States
Securities and Exchange Commission on February 19, 1999 which is available from
the Company upon request. We urge you to read each of these documents.
Information Concerning the Business of TelaLink
TelaLink is a Delaware corporation formed April 2, 1996. Its principal
place of business and its executive offices are located at 30 Butternut Lane,
Basking Ridge, New Jersey 07920. Its telephone number is (908) 221-0360.
TelaLink is a provider of telecommunications services. It seeks to grow through
the acquisition of rural local exchange carriers ("RLECs") that provide basic
local telecommunications services throughout rural communities and protected
territories in the United States. TelaLink presently owns and operates WTC, a
RLEC with over 1500 access lines that has provided rural telephone service to
residents of the community of War, West Virginia, for over thirty years.
For the year ended December 31, 1998, TelaLink had revenue and net loss of
approximately $97,000 and $499,000, respectively. On a pro forma basis, after
giving effect to the acquisition of the assets of WTC, TelaLink would have had
revenue and net loss of approximately $1,159,000 and $839,000, respectively, for
the year ended December 31, 1998.
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Industry Overview
The local telephone industry is comprised of a group of five Regional Bell
Operating Companies ("RBOCs"), comprised of Ameritech, Bell Atlantic, BellSouth
Corporation, Southwestern Bell, and U.S. West, and a large number of smaller
independent telephone companies. According to the United States
Telecommunications Association ("USTA"), over 1,300 telephone companies in the
United States each have fewer than 25,000 access lines. Many of these small
telephone companies operate in thinly populated, rural areas. In many cases,
there has historically been limited competition within the rural areas due to
the high cost of constructing and operating a competing network for use by the
limited customer base in such areas. Many of these RLECs are owned by families
or small groups of individuals and were founded shortly after World War I. The
Telecommunications Act of 1996 ("Telecommunications Act") has led many of these
companies to modernize and provide varied expanded services. As a result of the
mandates of the Telecommunications Act, management of TelaLink believes there
will be increasing opportunities to acquire RLECs. In addition, RBOCs may seek
to dispose of rural access lines in certain markets in order to focus on urban
and international markets. However, newer competing technologies, increased
housing density in formerly rural areas and regulatory changes are likely to
increase competition for RLECs and for the customers historically served by
RLECs.
The independent RLECs market has limited competition relative to the non-
rural telecommunications market and a favorable regulatory environment. The
largest use of telecommunication services in the rural areas is for telephone
voice transmission, but TeleLink management believes there is a rapidly growing
demand for such services as Internet access, Caller ID, Call Forwarding, Voice
Mail, Telemedicine and Distance Learning Applications.
Recent Acquisition
TelaLink was party to an Asset Purchase Agreement by and among TelaLink,
WarTel, WTC and Colonial Telephone Company (the sole shareholder of WTC), dated
June 9, 1998 and amended on November 23, 1998. Pursuant to the terms of that
agreement, TelaLink's subsidiary WarTel acquired substantially all of the assets
of WTC for $4,500,000. The funds to pay the $4,500,000 purchase price were
comprised of $1,500,000 in cash and the proceeds of a $3,000,000 loan from the
Rural Telephone Finance Cooperative ("RTFC"). The RTFC is a privately funded,
not-for-profit cooperative whose mission is to provide its member
telecommunications companies with an assured source of low-cost capital, state-
of-the-art financial products and business management services. The RTFC loan is
secured by a first priority lien on the assets acquired from WarTel.
WarTel is located in McDowell County, West Virginia and operates
approximately 1,550 access lines. WarTel currently employs three full time
employees and operates from a company-owned facility in War, West Virginia.
WarTel's operating area comprises approximately 5 square miles and contains
approximately 300 access lines per square mile. The customers using WarTel's
access lines are approximately 98%
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residential and 2% business. In the year ended December 31, 1997, WTC had
revenues of approximately $1.1 million.
Business and Acquisition Strategies
Introduction. Management of TelaLink believes that the rural
telecommunications market is particularly attractive due to limited competition
for customers in individual rural markets and a favorable regulatory
environment. Management of TelaLink intends to have the company acquire
additional RLECs and rural telephone operations currently operated by larger
telephone companies in the mid-west and western regions of the United States.
They intend to focus acquisition efforts on rural telephone operations that
exhibit significant opportunities for synergies and economies of scale, positive
economic and demographic characteristics, deployment of under utilized advanced
technology and strong mid-level management. Management believes that, by
consolidating rural telephone operations, TelaLink can achieve operating
efficiencies by the reduction of overhead costs. They further believe that
TelaLink can increase the revenues historically achieved by the operations by
offering enhanced services such as voicemail, conference calling, Internet
access, call forwarding, cellular services and other premium services that are
not currently generally provided to customers in rural areas in which TelaLink
operates and intends to operate.
Continued Growth Through Acquisitions. TelaLink expects to grow primarily
by acquiring independent RLECs and by purchasing rural telephone operations from
large telephone companies such as the RBOCs, GTE Corporation and others.
TelaLink will focus its acquisition efforts on rural telephone companies that
exhibit: (i) significant opportunities to realize management and operating
synergies and economies of scale; (ii) positive economic and demographic
characteristics; (iii) a positive regulatory and operating environment; (iv)
deployment of advanced technology; and (v) strong mid-level management
capabilities. TelaLink is also considering the acquisition of cellular, cable
television, long distance resale, paging and wireless operations, but primarily
as ancillary business segments of acquired RLECs. There is substantial
competition for the purchase of RLECs. Further any such acquisitions will
require and depend upon TelaLink's continuing ability to obtain acquisition
financing and to find willing sellers. There can be no assurance that TelaLink
will obtain any such acquisition financing or execute agreements with
acquisition candidates. Such acquisitions will also depend on the ability of
TelaLink to obtain appropriate Federal Communications Commission ("FCC") and
state regulatory licenses to engage in these services.
Improve Operating Efficiency Of Acquired RLECs. By consolidating RLECs and
other rural telephone operations under a single corporate organization, TelaLink
management believes that TelaLink can achieve significant operating efficiencies
that the independent telephone operators could not attain individually. To
accomplish this, TelaLink management intends to consolidate the regulatory,
accounting and billing functions of the acquired companies in order to reduce
overhead costs. TelaLink management believes its operating, regulatory,
marketing, technical and management expertise and its potential financial
resources from sources such as the RTFC will improve the operations and
profitability of the acquired RLECs.
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Increase Revenue Through Enhanced Service Offerings. TelaLink management
believes that local community presence and brand recognition will allow it to
grow revenues by offering enhanced and ancillary telecommunications services to
its anticipated customer base. Unlike the RBOCs, TelaLink's RLEC operations are
not presently subject to regulatory restrictions that would prohibit it from
marketing other services such as long distance services in its existing
franchise territory or elsewhere. TelaLink intends to pursue incremental
revenue growth through: (i) traditional ancillary telephony service offerings
such as enhanced calling services, including voice mail and conference calling;
(ii) long distance resale services, including related products such as "800"
service and long distance calling cards; (iii) multimedia services such as
Internet access, cable television and other entertainment services; and (iv)
various wireless services, including cellular, PCS and paging.
Expand Existing Market Presence By Launching CLEC Services. TelaLink
management believes TelaLink has an opportunity to penetrate underserved markets
adjacent to its proposed franchise areas as a competitive local exchange carrier
("CLEC"). TelaLink management believes that by pursuing this opportunity it can
generate incremental revenue by utilizing its existing RLEC network
infrastructure. TelaLink plans to offer an array of telecommunications
services, such as local, long distance, data and wireless, to customers in rural
and small urban markets (populations between 25,000 and 75,000) within
approximately 200 miles of any company-owned RLEC. There can be no assurance
that TelaLink will be successful in implementing its strategy, including
obtaining appropriate FCC or state regulatory certifications or licenses to
engage in these services.
RTFC Financing. As a key component of its strategy, TelaLink expects to
finance a significant amount of its acquisitions through the RTFC, a privately
funded, not-for-profit cooperative whose mission is to provide its member
telecommunications companies with an assured source of low-cost capital, state-
of-the-art financial products, and business management services. The RTFC is a
branch of the National Rural Utilities Cooperative Financing Corporation
("CFC"). TelaLink plans to finance a material portion of the cost of future
acquisitions through the issuance of additional debt securities to the RTFC as
well as through the issuance of equity securities. Upon the closing of the WTC
acquisition, TelaLink became a member of the RTFC. TelaLink obtained
acquisition and working capital financing from the RTFC for WTC and may obtain
additional financing in respect of other RLECs it may acquire. Although the
RTFC is permitted by law to lend up to 80% of the purchase price of an RLEC,
there can be no assurance that the RTFC will provide any future financing for
TelaLink or will provide future financing at such a funding ratio.
Revenue Generation
RLECs typically receive the majority of their revenue from "access charges"
(the rates long-distance carriers pay to a local exchange carrier ("LEC") for
use of it's network to originate and terminate toll calls), as compared to the
RBOCs, which receive a majority of their revenues from basic local service
charges. In addition, RLECs receive federal Universal Service Support Fund
("USSF") revenue. The USSF was created to assist small telephone companies
serving rural and sparsely populated communities by granting funds to carriers
that are designated as
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Eligible Telecommunications Carriers ("ETCs"). ETCs are designated by state
regulatory agencies, which usually are called public service commissions or
public utility commissions ("PUCs"). TelaLink's current and targeted RLEC
acquisitions are designated as ETCs and, accordingly, TelaLink will be eligible
to benefit from the USSF. Large LECs, in contrast, are not eligible to receive
the funds because of their overall size and the assumption that they can afford
to subsidize rural areas with profits from their larger urban/suburban
franchises. Also, the PUCs generally impose greater demands on LECs to spend
capital to modernize plant facilities than they do with respect to RLECs and/or
holding companies that own only RLECs in their portfolios.
TelaLink plans to generate revenue through: (i) the provision of basic
local telephone service to customers within its planned service areas; (ii) the
provision of network access to interexchange carriers for origination and
termination of interstate and intrastate long-distance phone calls; (iii) USSF
payments; and (iv) the provision of ancillary services such as billing and
collection, long-distance resale, enhanced services, wireless services, cable
television services, Internet services and customer premises equipment sales.
The FCC established the National Exchange Carrier Association ("NECA") in
1983. Among the duties and responsibilities assigned to the NECA is the
development of interstate access service tariff rates, terms, and conditions in
which LECs may concur. The NECA develops interstate access rates on the basis
of data that is provided individually by each LEC that participates in the
various portions of its tariff and that is aggregated for presentation to the
FCC. The result yields blended rates based upon averaged costs of all of the
participating LECs that reflect a level intended to generate revenue equal to
the aggregate costs and a return on the investment of all of the participants.
Compensation for interstate access services is based on reimbursement of costs
and an allowed rate of return. This compensation is received from the NECA in
the form of monthly settlements.
Competition
TelaLink faces competition for acquisition targets from a variety of other
consolidators of RLEC businesses. These include "Regional Bell" operating
companies and other independent telephone companies which are also engaged in
the business of consolidating RLECs and other LECs. The largest of these
competitors include without limitation, the RBOCs MJD Communications, Inc., TDS
Telecom, a subsidiary of Telephone and Data Systems, Inc., Century Telephone
Corp., Citizens Telephone Corp., Pioneer Telephone Corp., Inc. and Frontier
Communications, Inc. TelaLink also faces competition from both traditional
service providers and from a wide variety of cellular service, internet service,
cable based service and the providers in the local market in which WarTel
operates, and will have competition in each of the local markets in which it
acquires RLECs. In the current regulatory environment, which stresses universal
communications service, RLECs have had relatively little competition in their
local service areas. This results, in part, from regulatory cost structures
which are intended to keep rural customer telephone charges at reasonable levels
while allowing RLECs to earn a fair return investment. Because the regulatory
pricing and cost recovery advantages available to RLECs are
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generally unavailable to competitors of RLECs, there has been a substantial
economic barrier to entry for potential competitors. However, based on the
Telecommunications Act of 1996 (the "Telecommunications Act") and other recent
actions of federal and state regulatory authorities, TelaLink's management
believes that the competition in the rural markets is likely to increase over
the next several years.
Properties
WTC, TelaLink's RLEC subsidiary, operates from a 1058 square foot free
standing facility located on approximatly one-half acre property in War, West
Virginia. WAR wholly owns the facility and its surrounding property, subject to
certain security interests including the security interest of the RTFC.
TelaLink Management
Senior management of TelaLink is comprised of Harry S. Bennett, the Chief
Executive Officer and Chairman, and Jane Medlin, its Chief Operating Officer.
Harry S. Bennett joined TelaLink as its Chairman and Chief Executive
Officer. He has over 25 years of experience with AT&T and most recently was its
Executive Vice President of the Local Service Division. He holds a Bachelor of
Science degree from the United States Military Academy and a Master of Science
degree from the Massachusetts Institute of Technology (MIT).
Jane Medlin joined TelaLink in December 1998 as its Chief Operating
Officer. She has over 30 years of local and long distance telephony experience
concentrating in the operating and product segments of the business. During her
local career at Bell Atlantic, she held a wide range of positions that spanned
from Operator Services, Local Office Administration, Business Premises
Engineering, Installation and Maintenance, and Marketing. Her most recent
position was as Chief Technical Officer for several business units. Ms. Medlin
holds a Bachelor of Arts degree from the University of Richmond, a Master of
Arts degree from Virginia Commonwealth University, and a Master of Business
Administration from Fairleigh Dickinson University.
Litigation
There is presently no litigation pending against TelaLink or WarTel. A
former officer of a company owned in part by Edward Bridges, a director of
TelaLink, has informally raised claims against that company, Mr. Bridges and
companies affiliated with or formerly affiliated with Mr. Bridges, including
TelaLink, regarding alleged money and stock compensation claimed to be owed.
TelaLink expects to vigorously defend against any such claim. In addition, the
shareholders of TelaLink will indemnify the Company from any liability it may
incur as a result of any such claim.
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Regulatory Matters
The telecommunications industry is heavily regulated on the federal level
by the FCC, on the state level by the various PUCs, and by numerous local
authorities. While resulting regulations have historically supported the
revenue base of WarTel, they have also caused WarTel and TelaLink to incur
additional costs. Certain recent and probable future changes in the regulatory
landscape are likely to result in additional competition. The regulatory
summary which follows is limited in scope and does not purport to describe all
present and proposed federal, state and local regulation and legislation
affecting TelaLink and WarTel. Further, certain existing regulations are
currently, and more might become, the subject of judicial challenges and
legislative and administrative hearings and proceedings that could substantially
impact the regulatory environment. The effect of any current or future change
in regulation cannot be predicted with any certainty.
Federal Regulation. TelaLink must comply with the Communications Act of
1934, as amended (the "Communications Act") and applicable regulations
promulgated thereunder. Among other mandates, the FCC requires common carriers
to file periodic reports concerning interstate circuits and deployment of
network facilities. The FCC also regulates rates charged by carriers for
interstate access services (i.e., the originating and terminating of connections
to the local telephone network for long distance calls) and requires carriers
providing interstate access services to file tariffs with the FCC reflecting the
rates, terms and conditions of those services. LECs may file their own company
rates or, if they prefer, may concur in a common tariff prepared by the National
Exchange Carrier Association ("NECA"), which contains blended rates based on the
average costs of all participating LECs. These tariffs are subject to review
and potential objection by the FCC or third parties. Federal rules also require
that carriers separate their costs between regulated and non-regulated services.
Carriers may not subsidize the provision of regulated services through the
provision of non-regulated services. In addition, the Federal rules govern the
way in which costs incurred in the combined provision of both interstate and
intrastate services are identified for purposes of federal or state regulation.
State Regulation. Many PUCs regulate the purchase and sale of LECs,
prescribe certain accounting procedures, and regulate various other matters,
including service standards and operating procedures. PUCs, like the FCC, can
sanction a carrier, order fines and penalties, or revoke authorizations for
violations of applicable state laws and PUC regulations. In most states, LECs
are required to file tariffs setting forth the terms, conditions, and prices for
services that are classified as intrastate. While state procedures with respect
to tariffs vary, these tariffs generally are subject to review and potential
objection by PUCs or third parties.
As noted, a LEC incurs expenses that are utilized for the provision of both
interstate and intrastate services. FCC rules establish the separations process
that identifies the LEC's interstate costs. The remaining costs are the LEC's
intrastate costs. Generally, a LEC's intrastate regulated revenue requirement
is recovered by the revenues the LEC generates from its intrastate regulated
services. Local service rates used by LECs to recover these revenues generally
are regulated by PUCs. Many PUCs have traditionally overseen pricing through
"rate of return" regulation that focuses on authorized levels of earnings by
LECs. As part of the movement toward deregulation,
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several states are turning away from traditional rate of return regulation
towards "price cap" and incentive regulation. Currently, however, in most
states, LECs continue to be subject to rate of return regulation.
Local Regulation. LECs also are subject to numerous local regulations,
such as building code and zoning requirements. These regulations may vary
greatly from state to state and from city to city.
Telecommunications Act. The Telecommunications Act of 1996 (the
"Telecommunications Act") brought about comprehensive revisions to the
Communications Act, causing plenary changes in regulation at both the federal
and state levels that affect virtually every segment of the telecommunications
industry. The Telecommunications Act is intended to promote competition in all
areas of telecommunications and to reduce regulation. While the Company
believes that it will take years for the industry to experience the full impact
of the Telecommunications Act, it is already clear that the legislation provides
the Company with both opportunities and challenges.
As a result of the passage of the Telecommunications Act, LECs, including
RLECs, face the prospect of being subject to competition for the first time in
the provision of traditional local telephone and intrastate toll services.
However, the Telecommunications Act also provides for the codification of
principles of "universal service," which ensure (1) the availability of quality
services at just, reasonable and affordable rates, (2) increased access to
advanced telecommunications services to all consumers, including those in low
income, rural, insular and high cost areas, at rates reasonably comparable to
those charged in urban areas, (3) increased access to advanced
telecommunications services for all schools, libraries and health care
providers, and (4) that all providers of telecommunications services contribute,
in some equitable and nondiscriminatory manner, to the USSF. One of the initial
changes that has been implemented is that USSF monies are distributed only to
carriers that are designated as eligible telecommunications carriers ("ETCs") by
a state PUC. WarTel has been designated as an ETC pursuant to the
Telecommunications Act. In areas served by RLECs, the Telecommunications Act
provides that a state PUC may designate more than one ETC only after determining
that the designation of an additional ETC will serve the public interest. As a
result, an incumbent RLEC has an opportunity to maintain its status as the sole
recipient of USSF payments in its service area even if it is subsequently
subjected to competition.
A number of issues regarding the appropriate model for assessment of costs
recovered through the USSF and the level of federal funding of this program
remain outstanding. In addition, there are pending a number of appellate court
cases and petitions for reconsideration challenging several aspects of the FCC's
universal service rules. It is not possible at this time to predict whether the
FCC or Congress will order modification of the fund, or the ultimate impact of
any such modification on TelaLink.
The Telecommunications Act also mandates the promulgation of new
regulations for interconnection between competing carriers, generally providing
that LECs are entitled to recover their costs and may receive a reasonable
profit for providing interconnection to competitors. The
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ability to recover adequately costs of interconnection recently was subject to
legal challenge in the United States Supreme Court. While the Supreme Court
upheld the FCC's authority to require such interconnection, the Court also
directed the FCC to reexamine its determination of which network elements must
be made available to competing carriers. In addition, the issue of whether the
FCC's current pricing mechanism ensures the adequacy of cost recovery appears
unresolved. Depending on its outcome, this reexamination could, in the future,
affect TelaLink's ability to continue to operate at a profit.
Under the Telecommunications Act, WarTel, as a rural carrier, is eligible
to request exemption, suspension or modification of certain interconnection
requirements from its state PUC. Such request may be granted by the PUC to the
extent it determines that such exemption, suspension or modification is
necessary to avoid significant adverse economic impact, to the extent the
requirement is technically or economically infeasible or burdensome, and such
action would serve the public interest. It is not known at this time how state
regulators would respond to such a request.
In addition, as a rural telephone carrier, WarTel automatically is exempt
from those interconnection requirements applying only to ILECs. Such automatic
exemption may be lifted by a state PUC only on the request of a competing LEC
which is technically feasible, not unduly burdensome and is consistent with the
goals of universal service. If such a request is filed by a potential
competitor with respect to TelaLink's operational territory, TelaLink likely
would ask the state PUC to retain the exemption.
The Telecommunications Act also makes entry into the telecommunications
industry more attractive to competitors by, among other things, removing most
state and local barriers to competition, and may increase the level of
competition TelaLink faces. For example, after notice and an opportunity for
comment, the FCC may preempt a state requirement that prohibits or has the
effect of prohibiting a carrier from providing intrastate or interstate
telecommunications services in an area under that state's jurisdiction.
Congress, however, recognized that states should not be prohibited from taking
actions necessary to preserve and advance universal service, and further
recognized that special consideration should be given to the appropriate
conditions for competitive entry in areas served by RLECs.
TelaLink believes that competition in any areas it serves ultimately will
increase as a result of the Telecommunications Act, although the form and degree
of competition cannot be ascertained until such time as the FCC (and, in certain
instances, state regulatory bodies) adopts final regulations.
Promotion of Local Service Competition and Rural Telephone Companies. As
discussed above, the Telecommunications Act provides, in general, for the
removal of barriers to entry into the telecommunications industry in order to
promote local service competition. Congress, however, recognized that states
should not be prohibited from taking actions necessary to preserve and advance
universal service, and further recognized that special consideration should be
given to the appropriate conditions for competitive entry in areas served by
RLECs.
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Pursuant to the Telecommunications Act, LECs, including both ILECs and new
competitive carriers, are required to: (i) allow others to resell their services
at retail rates; (ii) ensure that customers can keep their telephone numbers
when changing carriers; (iii) ensure that competitors' customers can use the
same number of digits when dialing and receive nondiscriminatory access to
telephone numbers, operator service, directory assistance and directory
listings; (iv) ensure access to telephone poles, ducts, conduits and rights of
way; and (v) compensate competitors for the competitors' costs of completing
calls to competitors' customers. Competitors are required to compensate the ILEC
for the cost of providing these interconnection services.
Under the Telecommunications Act, the Company, as a rural carrier, is
eligible to request exemption, suspension or modification of any or all of the
requirements described above from state PUCs. A PUC may grant such a petition to
the extent that it determines that such suspension or modification is necessary
to avoid a significant adverse economic impact on telecommunications users
generally, to avoid imposing a requirement that is technically unfeasible or
unduly economically burdensome, and that such suspension or modification is
consistent with the public interest. It is not known at this time how state
regulators will respond to such a request. If the regulators deny some or all of
a request and if the regulators do not allow the Company adequate compensation
for the costs of providing interconnection, the Company's costs could increase.
In addition, with such a denial, competitors could enjoy benefits that would
make their services more attractive than if they did not receive such
interconnection rights.
Pursuant to the Telecommunications Act, with certain exceptions, ILECs are
required to: (i) interconnect their facilities and equipment with any requesting
telecommunications carrier at any technically feasible point; (ii) unbundle and
provide nondiscriminatory access to network elements (such as local loops,
switches and transport facilities) at nondiscriminatory rates and on
nondiscriminatory terms and conditions; (iii) offer their retail services for
resale at wholesale rates; (iv) provide reasonable notice of changes in the
information necessary for transmission and routing of services over the ILEC's
facilities or in the information necessary for interoperability; and (v)
provide, at rates, terms and conditions that are just, reasonable and
nondiscriminatory, for the physical co-location of equipment necessary for
interconnection or access to unbundled network elements at the premises of the
ILEC. Competitors are required to compensate the ILEC for the cost of providing
these interconnection services.
However, pursuant to the Telecommunications Act, the Company, as a rural
telephone carrier, is also automatically exempt from these additional ILEC
requirements. This exemption can be lifted or modified by a state PUC if a
competing carrier files a bona fide request for such interconnection, services,
or network elements. If such a request is filed by a potential competitor with
respect to one of the Company's operating territories, the Company is likely to
ask a state PUC to retain the exemption. A PUC may grant such a potential
competitor's petition to the extent that it determines such interconnection
request is not unduly economically burdensome, is technically feasible and is
consistent with universal service obligations. If a state PUC lifts such
exemption in whole or in part and if the state PUC does not allow the Company
adequate compensation for the costs of providing the interconnection, the
Company's costs would significantly increase and it could suffer a significant
loss of customers to competition. Finally,
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the FCC issued an order in May 1997 that directed that ILECs could not impose
access charges on long distance and other carriers that purchase unbundled
network elements from the ILECs. This decision could serve to reduce access
revenues for the Company and other ILECs. Several parties have appealed this and
other aspects of the FCC's May 1997 order, but the Company is unable to predict
the outcome of such appeals at this time.
The risk to the Company from competitive entrants into its local telephone
markets must be weighed against any new opportunities the Company could take
advantage of in terms of new services offerings, such as interstate service,
Internet access, PCS or other wireless service, cable TV or international
services.
The Company believes that competition in its telephone service areas will
ultimately increase as a result of the Telecommunications Act, although the form
and degree of competition cannot be ascertained until such time as the FCC (and,
in certain instances, state regulatory bodies), adopts final regulations.
Promotion of Universal Service. Newly codified universal service
principles are being implemented by both the FCC and the state PUCs. One of the
initial changes that has been implemented is that USSF funds are distributed
only to carriers that are designated as eligible telecommunications carriers
("ETCs") by a state PUC. The Company's telephone operating company has been
designated as ETCs pursuant to the Telecommunications Act.
In order to promote competition in areas served by incumbents that are not
RLECs, the Telecommunications Act requires the designation of two or more ETCs.
In areas served by RLECs, however, the Telecommunications Act provides that a
state PUC may designate more than one ETC only after determining that the
designation of an additional ETC will serve the public interest. As a result, an
incumbent RLEC has an opportunity to maintain its status as the sole recipient
of USSF payments in its service area even if it is subsequently subjected to
competition. The Company's telephone operating company has been designated as
RLECs pursuant to the Telecommunications Act.
RLECs temporarily will receive USSF payments pursuant to existing
mechanisms for determining the amounts of such payments with some limitations,
such as on the amount of corporate operating expense that can be recovered from
the USSF. In 2001, after a transition period, RLECs will secure USSF payments
based upon forward-looking economic costs. The FCC is expected to initiate a
proceeding to develop "cost proxy models" to establish the forward- looking
costs of RLECs, and the Federal-State Joint Board on Universal Service is
establishing a working group to assist in that process. The FCC is engaged in a
proceeding to revise the methodology for determining universal service support.
It is uncertain whether the proxy model will allow for an accurate cost
assessment for rural telephone companies. Also, even if the model accurately
predicts the forward looking economic costs of an RLEC, if that number is
significantly less than its embedded costs, full cost recovery will not be
assured. Several parties have expressed objections to the size of the fund and
the services eligible for subsidization. In addition, the FCC also decided that
it would fund only
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25% of the nationwide universal service costs, leaving to the states the
responsibility to fund the remaining 75% of the costs. Parties, including state
PUCs, also have objected to the recovery of only 25% of costs in the federal
USSF, arguing that the remaining burden on states will result in increased rates
for local services.
In addition, there are a number of petitions for reconsideration
challenging several aspects of the Commission's universal service rules.
Legislation has been introduced that would require the FCC to modify the rules.
It is not possible to predict at this time whether the FCC or Congress will
order modification to the fund, or the ultimate impact from any such
modification on the Company.
Cost Recovery of Regulated Services; Sources of Regulated Revenues
Introduction. As regulated common carriers, RLECs are entitled by law to
an opportunity to recover the reasonable costs they incur in the provision of
regulated telecommunications services and to earn a reasonable rate of return on
the investment required to provide the regulated services. The costs of
providing regulated services are recovered through rates established by the
appropriate regulatory authority (i.e., the FCC for interstate services and
generally the state PUC for intrastate services). For RLECs, the cost recovery
process may also be achieved through the application of "pooling" and
distributions from the USSF. In general, the rate regulated services provided by
RLECs include basic local exchange services and interexchange access service
that entails originating and terminating connections of the local telephone
network to long distance networks. The rate making process for LEC rate
regulated services is complicated by the fact that the costs incurred by LECs in
the provision of rate regulated services are utilized for both local exchange
services and interexchange access services. Moreover, the provision of
interexchange access service is required for the origination and termination of
both interstate and intrastate long distance calls.
The fact that a cost incurred by a carrier may be simultaneously associated
with the provision of both interstate and intrastate services results in the
need to allocate the costs between the jurisdictions for rate making purposes.
This process is referred to as "separations" and is governed by the FCC's rules
and regulations. The underlying legal purpose of the separations rules is to
define how a carrier's expenses are to be allocated between the federal and
state jurisdiction--i.e., how much of the company's costs are recovered from the
interstate jurisdiction and how much from the intrastate jurisdiction.
Because government regulators generally recognize that such an allocation
could have a significant impact on RLECs' abilities to provide needed services
to their customers, such regulators typically allow RLECs to recover a
reasonable level of expenses and return on investment while concurrently
charging acceptable service rates regardless of the demographics and economic
market conditions of their rural service areas.
Interstate Regulation. Although the network of a RLEC may be confined to
its facilities within a state, the RLEC is subject to FCC regulation of the
rates it charges for interstate access service.
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Establishment of Individual Access Service Costs
To the extent that a telecommunications carrier engages in the provision of
any nonregulated services, interstate or otherwise, the applicable law requires
that the provision of any such services can not be subsidized by the provision
of regulated services. Accordingly, when a carrier incurs an expense that is
utilized for the provision of both regulated and nonregulated service, the FCC
requires the carrier to engage in a process similar to the separations process
described above in order to first allocate expenses between regulated and
nonregulated services.
After identifying the LEC's regulated costs, the carrier applies a
separation analysis to identify the company's interstate costs or revenue
requirements including its authorized rate of return. The rates for interstate
access services are established to allow LECs to recover their identified
interstate costs.
One of the most significant of such costs are those associated with
deployment of the local loop. As a general rule, the FCC has determined that,
with certain limited exceptions, 25% of the cost of a local loop will be
allocated to the interstate jurisdiction. The FCC has established a rate
structure that provides for the recovery of these costs (up to an established
level per month) directly from the end user customer through the assessment of a
subscriber line charge. Generally, the remaining interstate portion of the loop
costs are recovered from access charges, assessed in accordance with FCC rules,
to the long distance carriers for the utilization of the local loop to originate
and terminate interstate long distance calls.
As a result of the market and geographic conditions in rural areas, the
costs of providing local loop and switching services are often higher for RLECs
than for other LECs. In the absence of an accommodation in the FCC rules to
address this fact, a substantial portion of an RLEC's costs would remain
unrecovered, and it would have little alternative other than to charge very high
rates for intrastate services. Accordingly, the FCC provides for additional
interstate recovery by eligible RLECs through the USSF, which is available to
those companies whose loop costs are significantly above the national average as
calculated pursuant to the FCC rules. In addition, the FCC rules also provide
for additional interstate cost recovery of switching costs for smaller companies
serving fewer than 50,000 access lines.
Individual Company Access Tariffs or the NECA Tariff
The purpose of applying the FCC's separations and access rules is to
identify the interstate allocation of costs to be recovered from each of the
various access rate elements. Individual LEC interstate access service rates are
developed on the basis of the individual LEC's determination of its access costs
divided by its projected demand for each service. The resulting individual
company rates are published in a company's interstate access tariff and filed
with the FCC, where they are subject to challenge by third parties and FCC
review.
The FCC recognized that this individual company rate making and tariff
filing process
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may be administratively and economically burdensome for small LECs. In order to
address this concern, the FCC established the NECA in 1983. Among the duties and
responsibilities assigned to the NECA is the development of interstate access
service tariff rates, terms, and conditions in which LECs may concur.
NECA develops interstate access rates on the basis of data that is provided
individually by each LEC that participates in the various portions of its tariff
and that is aggregated for presentation to the FCC. The result yields blended
rates based upon averaged costs of all of the participating LECs that reflect a
level intended to generate revenue equal to the aggregate costs and a return on
the investment of all of the participants. As a result of this process,
individual participating LECs are likely to have costs of providing service that
are either higher or lower than the revenues generated by applying the NECA
tariff rate. In order to rectify this result, the revenues generated by applying
the NECA rates are pooled by all of the participating companies and
redistributed on the basis of each individual company's costs. The result of
this process not only eliminates the burden of individual tariff filing, it also
produces a system whereby small companies can share and spread risk. For
example, if an RLEC filed its own tariff and subsequently suffered the loss of
major customers that utilize interstate access service, the RLEC could suffer
significant under-recovery of its costs. In the NECA pool environment, the
impact of the loss of access usage and associated revenues is reduced because it
is spread over all of the pool participants and may be offset by increases in
usage and associated revenues realized through service provided by another pool
member.
Many of the NECA pool participants derive their interstate revenues from
the NECA pool on the basis of "average schedule" settlements as an alternative
to reporting their individual company specific costs. By participating in this
process, a LEC avoids the requirement of applying the procedures otherwise
necessary to separate regulated and nonregulated costs and interstate and
intrastate regulated costs. In order to be an average schedule company, a LEC
must have been utilizing the average schedules since December 1, 1983, or have
been permitted to convert to average schedule status pursuant to an FCC waiver.
All average schedule companies must participate in the NECA tariff and, as
with all other NECA tariff pool participants, average schedule companies charge
for interstate access services on the basis of the rates, terms and conditions
set forth in the NECA tariff, and they report their interstate access revenues
to NECA. Instead of recovering their company specific identified interstate
revenue requirement, however, a company that utilizes average schedules receives
payments based on formulas developed by NECA and submitted for approval to the
FCC. The average schedule formulas are applied to each average schedule company
and produce average schedule settlements for each company that are based in part
on the number of access lines served by each company and in part on the number
of interstate access messages handled by each company.
The average schedule formulas are developed in a manner intended to yield
results that would approximate the results derived from the utilization of
actual costs based on individual company costs and jurisdictional separations.
In practice, an average schedule company will typically receive either more or
less revenues than its individual company interstate costs. If the
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company experiences significant growth in messages without a proportionate
increase in costs the formulas provide, to an extent, for growth in revenue. A
company that is not currently receiving settlements on an average schedule basis
cannot convert to average schedule status without a waiver from the FCC, which
has clearly made known its intent that it is not likely to grant any such waiver
requests.
If a company that utilizes average schedules experiences a decline in
usage, or if its growth does not generate revenues that keep pace with increased
costs, the company may not recover its actual costs from the average schedules.
The FCC rules do permit a LEC to address this concern by converting from average
schedule status to an actual cost basis for the determination of its interstate
access costs. The FCC rules, however, do not permit a LEC to convert back to
average schedules subsequent to its election to convert to a cost based
settlement. However, the Company is not an average schedule company.
In May 1997, the FCC issued a decision modifying its rules and policies
governing interstate exchange access services of ILECs. This decision applied,
with limited exceptions, solely to ILECs that are governed by the FCC's price
cap system of regulation. As for ILECs that are subject to federal rate-of-
return regulation, the FCC stated that it plans to initiate a separate
proceeding in 1998. The FCC has also proposed modification of its existing
separations procedures, which allocate the costs of facilities providing
intrastate and interstate services between the federal and state jurisdictions.
The outcome of each of these proceedings, and their ultimate impact on the
Company, cannot be predicted at this time.
Intrastate Revenue Requirement and Rate Regulation
A LEC incurs expenses that are utilized for the provision of both
interstate and intrastate services. The FCC rules establish the separations
process that identifies the LEC's interstate costs. The remainder of the costs
represent the LEC's intrastate costs. Generally, the LEC's intrastate regulated
revenue requirement is recovered by the revenues the rates for which are
established by the LEC generates from its intrastate regulated services, in
accordance with the applicable rules of each state.
Although the rules and processes vary from state to state, general
principles emerge that are useful in understanding intrastate regulated cost
recovery. The following discussion is limited to those general principles and
does not address specific states or the development of intrastate incentive
regulation mechanisms. As with federal incentive regulation programs, however,
these alternative regulatory systems are generally useful only for RLECs that
have lower than average costs and serve areas with a likelihood of continued
high growth.
Intrastate InterLATA Toll and Intrastate Access Charges
Intrastate regulated services are generally subject to traditional "rate of
return" regulation. The intrastate regulated services provided by RLECs can
typically be divided into three categories: intrastate interLATA access service;
intrastate intraLATA access and long distance
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service; and local services. The term "LATA" is a remnant from the break-up of
the Bell system. In connection with the divestiture of the local operating
companies from AT&T, the RBOCs were limited to providing service within a LATA
or a group of LATAs; AT&T and other long distance carriers handled traffic
between LATAs. As a result, the shorter haul long distance calls within a LATA
were generally handled by an RBOC together with any other LECs providing service
within the LATA. The rules regarding the provision of intraLATA toll service are
changing to provide for competitive choice in the same way interLATA toll
service is offered. In addition, the Telecommunications Act permits RBOCs to
provide interLATA services outside of their regions, and within their region
conditioned upon a demonstration that the RBOC had opened its local markets to
competition. To date, no RBOC has been deemed by the FCC to have made this
demonstration. The amount of competition to which the Company is subject may
also be affected by a recent decision of the U.S. District Court in Texas
invalidating those portions of the Telecommunications Act that prohibit RBOCs
from providing certain services, including in-region interLATA services. The
decision has been stayed, and an appeal is currently pending. While all states
have established an access charge environment for LECs to charge long distance
carriers for originating and terminating intrastate long distance calls,
variations exist among the states with respect to the treatment of the role of
the RLECs in the provision of intrastate intraLATA toll service.
The development of service specific costs and rates for the establishment
of intrastate regulated services also varies among the states. Some states
require the utilization of the FCC separations rules with state specific
modifications to specifically identify an intrastate toll and access revenue
requirement. In other states, intrastate access rates are adopted that mirror
interstate access rates as an alternative to the development of LEC specific
intrastate access costs and rates. Another variation that has developed is a
process that has resulted in the establishment of intrastate access charges and
subsequent modifications through industry negotiation and consensus.
Local Service Rates
Regardless of the variation of the process utilized to establish the
intrastate access rates, the local service revenue requirement is residually
derived as the remaining costs. Local services include basic service rates,
custom calling features, installation and repair services, and any other
services that are not designated interexchange (including extended area service,
measured usage, area calling plans and other variations of services that are not
subject to long distance charges).
Pending Regulatory Change and Conclusion
Although there is no single model for state regulatory change, many states
have initiated proceedings to review the level of intrastate access charges and
to consider changes in the provision of intraLATA toll services. Concurrent
consideration is often given to issues regarding whether decreased revenue
resulting from reduced access charges should be offset by increases in local
service rates; or support from a state universal service funding mechanism.
22
<PAGE>
Background of the Merger
Prior to the sale of substantially all of the Company's dialysis business
assets and the sales of the assets of the Company's affiliated consulting
customers in October 1997 and January 1998, the Company began to investigate
potential acquisition and merger candidates. This search continued through
November 1998. The Company engaged in preliminary discussions and substantive
negotiations with other companies. However, except for the acquisition of
certain dry cleaning businesses, none of the discussions or negotiations
resulted in the execution of a merger or other agreement.
In November 1998, Stephen L. Trenk, the President and Chief Operating
Officer of the Company, and Alvin S. Trenk, the Chairman and Chief Executive
Officer of the Company, were approached by Mr. Frank M. DeLape, a principal of
Benchmark Equity Group ("Benchmark"). Benchmark and its affiliates own
approximately 47% of the outstanding common stock of TelaLink. Mr. DeLape met
with Steven and Alvin Trenk on several occasions to engage in preliminary
negotiations regarding a possible acquisition or merger. Subsequent
negotiations involving other officers of the Company and Mr. Harry S. Bennett,
the Chairman and CEO of TelaLink, were conducted shortly thereafter. These
talks resulted in the execution of a letter of intent in December 1998. The
parties continued negotiations culminating in the execution of the proposed
Merger Agreement on February 5, 1999.
The Merger Agreement
General
The Merger Agreement generally provides that, on consummation of the
Merger, TelaLink will be merged with AcquiSub, with AcquiSub as the surviving
corporation. The Merger shall become effective upon filing of certificates of
merger with the State of Delaware. At the effective time of the Merger (the
"Effective Time"), TelaLink will cease to exist, AcquiSub will succeed to any
and all interests of TelaLink, including in its current subsidiaries and
AcquiSub will continue to operate as a wholly-owned subsidiary of the Company.
At the Effective Time, title to all real and personal property of TelaLink and
all of TelaLink's rights, debts and liabilities will vest in AcquiSub. The
certificate of incorporation and by-laws of AcquiSub, as in effect as of the
Effective Time, will be the Certificate of Incorporation of the surviving
corporation. Shares of the capital stock of TelaLink will be converted into the
right to receive shares of Company Stock and an interest in the Company Stock to
be placed in an escrow as of the closing of the Merger (the "Closing") or to be
issued contingently.
Consideration
The Company will issue an aggregate of up to 3,340,000 net shares of its
common stock to the holders of the capital stock of TelaLink in exchange for all
outstanding TelaLink capital stock and all rights to acquire TelaLink capital
stock. In connection with the LoanCo Acquisition, the Company will issue an
additional 150,000 shares of its common stock to the holders of common stock of
LoanCo in exchange for all outstanding LoanCo common stock and
23
<PAGE>
all rights to acquire LoanCo common stock.
Of the shares of Company Stock to be issued in the Merger, 1,640,000 shares
will be issued at or promptly following the Closing, 1,540,000 shares will be
issued into an escrow (the "Escrow") and 260,000 shares will be issued if the
Company attains certain post Effective Date financial goals. 100,000 of the
1,640,000 shares of Company Stock issued at or promptly following the Closing
will be issued in respect of TelaLink Series A Preferred Stock held by LoanCo
and will be returned to the Company's treasury promptly following the Merger.
1,540,000 of the shares of Company Stock held pursuant to the Escrow (the
"Escrow Shares") will be distributed from the Escrow to the holders of TelaLink
common stock if certain financial goals are achieved (the "Initial Escrow
Shares") and/or the remaining Escrow Shares ("Final Escrow Shares") will be
released if certain alternative financial goals are achieved. In addition,
260,000 shares of Company Stock (the "Contingent Shares") will be issued to the
current holders of TelaLink Common Stock if and when the Initial Escrow Shares
are released from the Escrow. The following charts illustrate the minimum
conditions to the release of the Escrow Shares.
Release of Initial & Final Escrow Shares and Issuance of Contingent Shares
The Initial Escrow Shares will be released and the Contingent Shares will
be issued if any of the following financial goals are achieved:
<TABLE>
<CAPTION>
If the "Closing Price"
Of Company The Company
Common Stock is/(1)/: On or Before: And/Or has "Earnings" of: On or Before:
--------------------- ------------- ----- ------------------ -------------
<S> <C> <C> <C> <C>
$10.00/(2)/ 12/31/99 AND $ 4,500,000 12/31/99
$12.50 6/30/00 AND $ 9,000,000 6/30/00
$15.00 12/31/00 AND $20,000,000 12/31/00
</TABLE>
The Final Escrow Shares will be released if any of the following financial goals
are achieved:
<TABLE>
<CAPTION>
If the "Closing Price"
Of Company The Company
Common Stock is/(1)/: On or Before: And/Or has "Earnings" of: On or Before:
--------------------- ------------- ----- ------------------ -------------
<S> <C> <C> <C> <C>
$15.00 12/31/00 OR $20,000,000 12/31/00
</TABLE>
(1) The designated price is the minimum price which must be maintained for
20 consecutive trading days for so long as the Company's Common Stock
Purchase Warrants are outstanding (including any extensions) and as an
average of the preceding 20 consecutive trading days thereafter.
(2) In lieu of the requirement that Company Stock have a Closing Price equal
to or greater than $10.00 per share by December 31, 1999, TelaLink's
current affiliates are entitled to obtain
24
<PAGE>
equity financing for the Company based solely on the issuance of Company
Stock in the public markets by December 31, 1999 at a price not less than
$7.25 per share resulting in net proceeds to the Company of not less than
$11,600,000.
In the event the Initial Escrow Shares or the Final Escrow Shares are not
released, they will be returned to the Company's treasury.
As used in the Escrow Agreement, the term "Closing Price" means the closing
bid price or the closing sale price of Company Stock depending on the market in
which such stock trades. The term "Earnings" means pro forma earnings before
interest, taxes, depreciation and amortization ("EBITDA") calculated on an
annualized basis by multiplying EBITDA for the last month of the relevant
measurement period by 12. The calculation of Earnings shall include only the
results of operations of AcquiSub following the Closing and shall exclude any
charges to earnings resulting solely from the release of Escrow Shares.
Acquisitions which have been closed pending only state or local regulatory
approval shall be included in the calculation of Earnings solely to the extent
all regulatory approvals in respect of the acquisitions are obtained within six
months. As a result, an acquisition which is closed on December 31, 2000
pending only regulatory approval will be included in the calculation of Earnings
if the requisite regulatory approvals are received on or before June 30, 2001.
In the event there is no interim closing, the date of the final closing shall
control.
Additional Agreements Contained In The Merger Agreement
The Merger Agreement contains certain additional agreements to be performed
by the parties. The Company has agreed to grant options to acquire 500,000
shares of the Company's common stock at an exercise price of $1.875 to Harry S.
Bennett pursuant to the Company's 1997 Equity Incentive Plan. Options covering
approximately 166,667 shares of Company Stock will vest each year during the
term of Mr. Bennett's Employment Agreement. In addition, by operation of law,
as of the Effective Time, the Company will assume the obligations under Mr.
Bennett's Employment Agreement with TelaLink. This Employment Agreement
provides for an initial term of three years and a base salary of $250,000 per
year, plus annual bonuses of up to $250,000, of which $125,000 is guaranteed.
The Company agreed to call a shareholders meeting, prepare proxy materials
and use its best efforts to obtain approval of the Merger Agreement, subject to
the fiduciary duties of the Board. Subject to the fiduciary duties of the
Board, the Company and TelaLink each agreed not to take any action with respect
to any transaction which could reasonably be expected to interfere with the
Merger.
Representations and Warranties
The Merger Agreement contains various representations and warranties of the
Company, AcquiSub and TelaLink. The representations and warranties relate to,
among other things, the following: (i) corporate organization, existence and
good standing, (ii) ownership of other business entities, (iii) due
authorization of the Merger Agreement and the related agreements
25
<PAGE>
referred to in the Merger Agreement, (iv) capitalization of the entities; (v)
the accuracy and completeness of various filings and financial reports; (vi)
ownership of assets; (vii) the lack of any material loss or adverse change;
(viii) compliance with applicable laws; (ix) disclosures relating to actions,
suits, proceedings, or investigations; (x) status of employee benefit plans;
(xi) permits; (xii) unlawful payments; (xiii) environmental matters; (xiv) loan
arrangements with affiliates; (xv) solvency, (xvi) a reasonable belief on the
part of the Company that not less than $2,000,000 of its accounts receivable are
receivable or have been realized; and (xvii) various other matters.
Conditions to the Merger
The obligations of the parties to consummate the Merger are subject to
certain conditions including, but not limited to (i) the approval of the Merger
by the shareholders of the Company at the Meeting; (ii) the receipt of certain
approvals, consents or waivers of governmental authorities and the passage of
all applicable statutory waiting periods; (iii) no material adverse change
relating to the Company; (iv) the accuracy of the representations and the
warranties of, and the performance of all convenants to be performed by the
Company and AcquiSub; and (v) approval of the Merger by the Company's
Shareholders. The conditions to the Company's obligations under the Agreement
also include (i) the lack of any material adverse change in the business of
TelaLink; (ii) the accuracy of all representations and warranties of and the
performance of all convenants by TelaLink and its subsidiaries; (iii) the
obtaining of all consents; (iv) the lack of any litigation; (v) the approval of
the Merger and Merger Agreement by the shareholders of the Company and TelaLink.
The Company is also required to maintain minimum aggregate cash and short and
medium term investments of $5,000,000, less funds advanced and expended in
connection with the Merger and loans to LoanCo and TelaLink and less certain
other permitted reductions.
Termination
The Merger Agreement may be terminated at any time prior to the closing of
the Merger by mutual written consent of the parties. The Agreement may be
terminated by any party who has not caused the closing not to occur if the
closing does not occur on or before July 31, 1999. The Merger Agreement may
also be terminated if the transactions contemplated by the Merger are made
illegal or otherwise prohibited by any statute, rule or regulation or if a court
or governmental agency of competent jurisdiction has issued an order, decree or
ruling or otherwise seeks to restrain, enjoin or prohibit the consummation of
such transactions.
TelaLink may terminate the Merger Agreement upon a failure of the
representations, warranties or obligations of the Company or if any of
TelaLink's conditions to closing as set forth in the Merger Agreement, are not
met. Similarly, the Company may terminate the Agreement upon the failure of any
of the representations, warranties or covenants of TelaLink, if the Company's
conditions to closing as set forth in the Merger Agreement, do not exist. If
the holders of more than ten (10%) percent of the outstanding TelaLink Common
Stock or Company Stock shall dissent from the Merger or if an aggregate of ten
(10%) percent of TelaLink Common Stock and Company Stock shall dissent from the
Merger, any party may terminate the Merger Agreement.
26
<PAGE>
Except in cases of mutual consent and certain other cases, in the event
that any party fails or refuses to consummate the Merger or in the event of any
other default or breach which results in the failure of the Merger, the non-
defaulting party is entitled to seek and obtain money damages from the
defaulting party or may seek to obtain specific performance of the Merger
Agreement.
Related Agreements
In addition to the Merger Agreement, certain other parties have entered
into additional agreements (the "Related Agreements"). The Related Agreements
include the Shareholders' Agreement, the Resale Restriction/Lock-Up Agreement
and the Registration Rights Agreement. In addition, the Company, LoanCo and the
shareholders of LoanCo including principals of Benchmark Equity Group
("Benchmark") have entered into a Promissory Note, Loan Agreement and Pledge and
certain other documents relating to the loan from the Company to LoanCo
(collectively "LoanCo Documents").
The Shareholders' Agreement is to be entered into among the shareholders of
LoanCo, the Shareholders of TelaLink ("TelaLink Group") and Techtron, Inc.
("Techtron"). See "Security Ownership of Management and Certain Beneficial
Owners." Under the terms of the Merger Agreement, the Company has agreed to
increase the number of members of the board of directors of the Company by two
members to a total of seven members. Under the terms of the Shareholders'
Agreement, the parties have agreed to act, in their capacities as shareholders,
to nominate up to three nominees for director designated by TelaLink
shareholders and up to four nominees for director designated by Techtron until
June 30, 2001. At least one director nominated by Techtron and one director
nominated by TelaLink must be "independent" in accordance with certain
provisions of the Internal Revenue Code, regulations of the SEC and rules of the
Nasdaq Stock Market, Inc. with respect voting committees, compensation
committees and stock option plans. The Resale Restrictions/Lock-Up Agreement
will be entered into among Techtron, TelaLink Group and the Company. Pursuant
to the terms of the Resale Restriction/Lock-Up Agreement, Techtron and the
TelaLink Group each agree not to sell, hypothecate, pledge or otherwise transfer
any shares of Company Stock held by it or him for a period following the
Effective Date. Techtron will agree to a restriction of 12 months, and the
TelaLink Group will agree to an 18 month period.
The Registration Rights Agreement will be entered into among the Company
and the TelaLink Group. Under the terms of the Registration Rights Agreement
the Company will grant certain securities registration rights to the TelaLink
Group. The Company will grant the TelaLink Group two "piggyback" and one demand
registration right. Under the terms of the "piggyback" registration rights, the
TelaLink Group members are entitled to require the Company to include those
shares in any registration statement filed under the federal Securities Act of
1933. The "piggyback" rights do not apply to certain registrations in
connection with mergers, sales of assets, consolidations and like transactions
and registrations of securities issued pursuant to certain employee benefit
plans and certain other registrations. Piggyback registration
27
<PAGE>
rights may be demanded by the TelaLink Group only after the earlier of June 30,
2001 and the date, if any, upon which all of the Escrow Shares are released from
the Escrow and are limited to two such piggyback registrations. The TelaLink
Group also has a one time right to demand registration of the Company shares
received by them at any time after the earlier of June 30, 2001 or the date, if
any, on which all of the Escrow Shares shall be released from the Escrow.
Subject to certain limitations contained in the Registration Rights Agreement,
the Company is obligated to comply with such request. In the case of a
registration demand, the Company is required to prepare and file a registration
statement covering the shares to be registered and to pay substantially all the
expenses incurred in connection with the registration statement, other than
certain underwriting fees, commissions, expenses, discounts and transfer taxes.
The Related Agreements are Exhibits to the Company's Report on Form 8-K filed
with the SEC on February 19, 1999 copies of which are available to stockholders
from the Company upon request.
At the request of TelaLink, the Company agreed to advance $850,000 to
TelaLink Acquisition Corp. ("LoanCo"), a Delaware corporation which is owned by
certain affiliates of TelaLink. LoanCo was formed for the purposes of acquiring
and holding certain preferred stock of TelaLink and for engaging in the loan
transaction Of this loan to LoanCo, $600,000 will be loaned by LoanCo to
TelaLink and the remaining $250,000 will be used by LoanCo to repay a loan to it
that was made by Frank M. DeLape, one of LoanCo's shareholders. In addition,
the Company has agreed to loan up to $400,000 directly to TelaLink for working
capital at the rate of $100,000 per month. The loans bear interest of the rate
of 12% per annum. Payment of the obligations under the terms of the Company's
loan to LoanCo is guaranteed by the shareholders of LoanCo and the guarantees
are secured by marketable securities. The loan to TelaLink from the Company is
secured by assets and a pledge of capital stock of TelaLink. The security
interests of the Company in TelaLink's assets are subordinate to the security
interests of the RTFC. Further, the Company has agreed with the guarantors of
the LoanCo loan that the security interests of the Company and the security
interests of the guarantors will be pari passu in certain circumstances. As a
result, in the event of a default by TelaLink or LoanCo, the Company may not be
secured to the full amount of the loans. The outstanding capital stock of
LoanCo will be acquired by the Company in exchange for 150,000 shares of Company
Stock and the guarantees will be released, each as of the Effective Time, if
any. In the event that the Merger is not consummated, the loans will be due
April 30, 2000.
Accounting for the Merger
The Merger and the LoanCo acquisition will be accounted for by the Company
as purchases. In accordance with the purchase method of accounting, the Company
expects to determine the fair value of the shares of Company Stock distributed
in the transactions as of the date those shares are distributed. As a result,
management believes that Company Stock distributed as of the Closing will be
valued as of a date prior to the Closing and escrowed shares and contingent
shares will be valued as of the date, if any, they are released from the Escrow
or issued, respectively.
28
<PAGE>
Federal Income Tax Consequences of the Merger
The following is a general discussion of certain of the expected federal
income tax consequences of the Merger. This summary does not discuss all
aspects of Federal income taxation that may be relevant to a particular investor
in light of his personal circumstances or to certain types of investors subject
to special treatment under the Federal income tax laws (for example, life
insurance companies, tax-exempt organizations, foreign taxpayers, dealers in
securities and taxpayers subject to any aspect of state, local or foreign tax
laws). Further, this discussion does not relate to the LoanCo Acquisition. The
Company has not requested a written opinion of its legal counsel, nor has it
requested a ruling from the Internal Revenue Service in connection with the
Merger. Management believes the principal federal income tax consequences of
the Merger will be the following:
1. The Merger of TelaLink into AcquiSub will constitute a reorganization
within the meaning of (S)368 of the Code.
2. No gain or loss will be recognized by TelaLink or AcquiSub as a result of
the Merger.
3. No gain or loss will be recognized by the Company as a result of the
Merger.
4. Upon the exchange by stockholders of TelaLink Common Stock and/or TelaLink
Preferred stock for Company Stock, no gain or loss will be recognized by
any such TelaLink stockholder.
5. The basis of the Company Stock received by the stockholders of TelaLink
will be the same basis as the TelaLink Common Stock or TelaLink Series A
Preferred Stock surrendered.
6. The holding period of the Company Stock received by stockholders of
TelaLink will include the holding period of the TelaLink Common Stock or
TelaLink Series A Preferred stock surrendered in exchange therefor,
provided the TelaLink Common Stock or TelaLink Preferred Stock so
surrendered was held as a capital asset at the time of the Merger.
7. Each Dissenting holder of TelaLink or the Company receiving cash in
exchange for his securities will be treated as if he received such cash in
redemption of his securities subject to the provisions of the Code. The
amount of such stockholder's recognized gain or loss will be the
difference, if any, between (i) the amount of cash so received and (ii)
such stockholder's tax basis in the securities exchanged. Such gain or loss
would be capital gain or loss if the securities were held as a capital
asset, and would be long term if the holding period was more than one year.
29
<PAGE>
The above description is subject to certain assumptions and qualifications,
including that each affiliate of TelaLink who has executed the Lock-Up Agreement
which restricts the disposition of Company Stock received in connection with the
Merger will continue to be bound to the current terms of that agreement.
There can be no assurance that the Internal Revenue Service (the "Service")
will take a similar view with respect to the tax consequences described above.
Management's belief as to the tax consequences of the Merger is subject to
the following additional assumptions, among others: that the fair value of
Company Stock will be approximately equal to the fair market value of TelaLink
Common Stock and TelaLink Series A Preferred Stock exchanged therefore; that
AcquiSub will acquire at least ninety (90%) percent of the fair market value of
the net assets and gross assets held by TelaLink immediately prior to the
Effective Time; that the liabilities of TelaLink assumed by AcquiSub and the
liabilities of which the transferred assets of TelaLink are subject were
incurred by TelaLink in the ordinary course of business; that the fair market
value of the assets of TelaLink transferred to AcquiSub will equal or exceed the
sum of the liabilities assumed by AcquiSub plus the amount of liabilities, if
any, to which the transferred assets are subject; that prior to the Effective
Time, the Company will be in control of AcquiSub; that no stock of AcquiSub will
be issued in the Merger, that the Company, AcquiSub, TelaLink and the
securityholders of TelaLink will pay their respective expenses incurred in
connection with the merger transaction; that following the Merger, AcquiSub will
continue the historical business of TelaLink or use a significant portion of
TelaLink's business assets in a business; and that there is no intercorporate
indebtedness existing between the Company and TelaLink or between Acquisition
Sub and TelaLink that was acquired or will be settled at a discount.
Management has assumed, without independent investigation, that the
representations contained in the Lock-Up Agreement and other representations of
TelaLink's management and shareholders contained in the agreements and
certifications delivered or to be delivered at closing are true and accurate.
A successful challenge by the Internal Revenue Service to the tax-free
status of the Merger would result in a TelaLink stockholder recognizing gain or
loss with respect to each share of TelaLink Common Stock or TelaLink Series A
Preferred Stock surrendered equal to the difference between his, her or its
basis in such share and the fair market value, as of the Effective Time, of the
Company Stock received in exchange therefor. In such event, a TelaLink
stockholder's aggregate basis in the TelaLink stock received in the exchange
would equal the fair market value of such shares and the holding period for such
shares would not include the period during which he held TelaLink Common Stock
or TelaLink Series A Preferred stock, as the case may be.
Holders of LoanCo common stock receiving Company Stock in the LoanCo
Acquisition will recognize a gain or loss with respect to each share of LoanCo
Common stock purchased by the Company. The amount of gain or loss recognized
will be equal to the difference between the LoanCo stockholder's basis in the
share of LoanCo Common Stock and the fair market value, as
30
<PAGE>
of the effective time, of the Company Stock delivered as consideration for the
share of LoanCo Common Stock. The basis of the Company Stock received by the
Loan Co stockholder will be equal to the fair market value of the Company Stock
as of the Effective Time and holding period for such shares will commence as of
the Effective Time.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
fiscal year ended December 31, 1998 and the Unaudited Pro Forma Condensed
Combined Balance Sheet as of December 31, 1998 have been prepared to illustrate
the estimated effects of the Merger pursuant to the Merger Agreement. The
Unaudited Pro Forma Condensed Combined Statement of Operations for the year
ended December 31, 1998 was prepared as if the Merger was effective as of
January 1, 1998. The Unaudited Pro Forma Condensed Combined Balance Sheet was
prepared as if the Merger was effective December 31, 1998. The Unaudited Pro
Forma Condensed Combined Financial Information do not purport to represent what
the Company's financial position or results of operations would actually have
been if such Merger had in fact occurred on such date. The Unaudited Pro Forma
Condensed Combined Financial Information also do not purport to project the
financial position or results of operations of the Company as of any future date
or for any future period.
The Unaudited Pro Forma Condensed Combined Statement of Operations includes
the historical sales and costs of the Company adjusted for the effects of the
Merger.
The unaudited pro forma financial information should be read in conjunction
with the Company's consolidated financial statements and the related notes
appearing in the Company's Annual Report on Form 10-KSB accompanying this Proxy
and TelaLink's consolidated financial statements and WTC's financial statements
included in this Proxy.
31
<PAGE>
Unaudited Pro Forma Condensed Combined Balance Sheet
As of December 31, 1998
<TABLE>
<CAPTION>
Continental Pro Forma Pro Forma
Choice Care, Inc. TelaLink Adjustments Combined
----------------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $3,058,676 $ 102,200 $3,160,876
Investments in US Government securities 1,991,658 0 1,991,658
Accounts receivable, net 60,295 207,280 267,575
Amounts due from officer 385,000 0 385,000
Other current assets 202,295 22,773 225,068
---------- ---------- ---------- ----------
Total current assets 5,697,924 332,253 $ 0 6,030,177
Amounts due from affiliates 370,264 0 370,264
Property and equipment, net 560,236 1,365,904 1,926,140
Goodwill and other intangibles, net 1,306,352 3,045,075 2,515,130(4) 6,866,557
Other assets 17,581 167,753 185,334
---------- ---------- ----------
Total Assets $7,952,357 $4,910,985 $2,515,130 $15,378,472
========== ========== ========== ===========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT):
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts payable $ 423,415 $ 68,241 $ 491,656
Accrued expenses 984,976 56,602 $ 215,000(4) 1,256,578
Customer deposits and advance billings 0 71,770 71,770
Due to shareholder 0 200,000 200,000
Current portion of long term debt 931,807 306,873 1,238,680
---------- ---------- ---------- ----------
Total Current Liabilities 2,340,198 703,486 215,000 3,258,684
Long term debt, less current portion 86,609 3,117,689 3,204,298
Preferred stock 1,500,000 (1,500,000)(4) 0
Commitments and Contingencies
Stockholders' Equity (Deficit):
Common stock 5,524,561 2,840 3,387,100(4) 8,914,501
Paid-in-capital 0 83,083 (83,083)(4) 0
Retained earnings (deficit) 989 (496,113) 496,113(4) 989
---------- ---------- ---------- -----------
Total Stockholders' Equity (Deficit) 5,525,550 (410,190) 3,800,130 8,915,490
---------- ---------- ---------- -----------
Total Liabilities and Stockholders'
Equity (Deficit):
$7,952,357 $4,910,985 $2,515,130 $15,378,472
========== ========== ========== ===========
</TABLE>
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information are an integral part of this statement.
33
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical TelaLink
Continental Pro Forma Pro Forma Pro Forma
Choice Care, Inc. Combined Adjustments Combined
------------------ ----------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Consulting $ 333,324 $ 0 $ 333,324
Dry cleaning 965,700 0 965,700
Telecommunications 0 1,159,261 1,159,261
----------- ---------- ------------ ------------
1,299,024 1,159,261 $ 0 2,458,285
Cost of services 678,761 384,222 1,062,983
General and administrative 2,021,662 1,068,565 3,090,227
Depreciation and amortization 121,421 225,288 62,878(4) 409,587
Interest (income) expense, net (285,568) 282,537 (3,031)
----------- ---------- ------------ ------------
Total costs and expenses 2,536,276 1,960,612 62,878 4,559,766
----------- ---------- ------------ ------------
Loss before income taxes (1,237,252) (801,351) (62,878) (2,101,481)
Provision (benefit) for taxes (154,790) 36,500 154,790(4) 36,500
----------- ---------- ------------ ------------
Loss from continuing operations (1,082,462) (837,851) (217,668) (2,137,981)
Income from discontinued operations 300,474 0 (300,474)(4) 0
----------- ---------- ------------ ------------
Net loss ($781,988) ($837,851) ($518,142) ($2,137,981)
=========== ========== ============ ============
Net loss per share $(0.24) $(0.43)
=========== ============
Basic and diluted weighted average
shares outstanding 3,237,500 1,690,000 4,927,500
=========== ============ ============
</TABLE>
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information are an integral part of this statement.
34
<PAGE>
TelaLink
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
TelaLink
Pro Forma Pro Forma
TelaLink WTC Adjustments Combined
----------- --- -------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications $ 96,530 $1,062,731 0 $1,159,261
Cost of services 58,054 326,168 0 384,222
General and administrative 475,202 127,863 465,500(2) 1,068,565
Depreciation and amortization 32,960 123,332 70,068(2) 226,360
Interest expense, net 29,084 79,953 173,500(2) 282,537
---------- ---------- ----------- ----------
Total costs and expenses 595,300 657,316 709,068 1,961,684
---------- ---------- ----------- ----------
Loss before income taxes (498,770) 405,415 (709,068) (802,423)
Provision for taxes 0 177,919 (141,419)(2) 36,500
---------- ---------- ----------
Net loss ($498,770) $ 227,496 ($567,649) ($838,923)
========== ========== =========== ==========
</TABLE>
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information are an integral part of this statement.
Notes to Unaudited Pro Forma Condensed Combined Financial Information
1. Basis of Presentation
The unaudited pro forma condensed combined financial information combines
the historical consolidated balance sheet of Continental Choice Care, Inc. and
subsidiaries (the "Company") as of December 31, 1998 with the historical
consolidated balance sheet of TelaLink Network, Ltd. and subsidiary (TelaLink)
after giving effect to the proposed merger as if the transaction happened on
December 31, 1998.
The unaudited pro forma combined financial information combines the
historical consolidated statement of operations of the Company for the year
ended December 31, 1998 with the historical consolidated statement of operations
of TelaLink for the year ended December 31, 1998 after giving effect to
TelaLink's acquisition of substantially all assets of WTC and the Company's
acquisition of TelaLink as if the purchases had occurred on January 1, 1998.
35
<PAGE>
2. TelaLink Purchase of WTC
TelaLink was party to an Asset Purchase Agreement by and among TelaLink,
WarTel, WTC and Colonial Telephone Company (the sole shareholder of WTC), dated
June 9, 1998 and amended and finalized on November 23, 1998. Pursuant to the
terms of that agreement, TelaLink's subsidiary WarTel acquired nearly all of the
assets of WTC for $4,500,000. The funds to pay the $4,500,000 purchase price
were comprised of $1,500,000 in cash and the proceeds of a $3,000,000 loan from
the Rural Telephone Finance Cooperative ("RTFC"), a privately funded, not-for-
profit cooperative whose mission is to provide its member telecommunications
companies with an assured source of low-cost capital, state-of-the-art financial
products, and business management services. The RTFC loan is secured by a first
priority lien on the assets acquired from WarTel.
The application of the purchase accounting method resulted in $3,057,510 in
excess purchase price over net assets acquired. Such intangible assets will be
amortized over 40 years and thus accordingly, a pro forma adjustment for the
amortization of intangibles of $70,068 for the period January 1, 1998 to
December 2, 1998 (the date on which the acquisition was consummated) has been
recorded in the accompanying unaudited pro forma condensed combined statement of
operations. In addition, a pro forma salary adjustment for TelaLink's new
management and an interest expense adjustment have been included for $537,000
and $173,500 respectively for the period January 1, 1998 to December 2, 1998 as
well as a pro forma income tax expense adjustment for ($141,419) which considers
the combined loss for federal income tax purposes. The management fee of
$71,500 paid to the former owner of WTC has been eliminated through a pro forma
adjustment as it will not be paid in the future.
3. Proposed Merger
The proposed merger between the Company and TelaLink would be accounted for
under the purchase method pursuant to APB16. The Company would issue 1,690,000
shares of its common stock, which is net of 100,000 shares to be returned to the
Company from LoanCo, all of which have been valued at the average price of the
Company's common stock for three days prior to the announcement of the proposed
transaction and three days subsequent to such announcement ($1.976). Escrow
shares have not been considered in the accompanying unaudited pro forma combined
balance sheet as their release is contingent on the achievement of certain
financial results.
36
<PAGE>
4. Proposed Merger Pro Forma Adjustments
The estimated purchase price is $3,604,940 which consists of $3,339,440 for
the value of the Company's common stock issued, $50,500 for the granting of
500,000 options to purchase the Company's common stock at $1.875 per share and
$215,000 of estimated transaction costs. The computation of excess purchase
price over net assets acquired is as follows:
Estimated purchase price $3,604,940
Net assets acquired 1,089,810
----------
Excess of estimated purchase price over
net assets acquired $2,515,130
==========
Any future issuances of escrowed common shares would result in an increase in
intangible assets and stockholders' equity of the Company and increase
amortization expense of such intangible assets.
The pro forma adjustments include the elimination of the preferred stock
and stockholders' deficit accounts of TelaLink as of December 31, 1998, the
issuance of the Company's common stock to TelaLink common shareholders and
options valued at $3,043,040. Estimated transaction costs are included in
accrued expenses.
The excess of pro forma purchase price over net assets acquired will be
amortized over forty years. Additional amortization expense of $62,878 has been
included in the unaudited pro forma condensed combined statement of operations.
The Company's benefit for income taxes and income from discontinued
operations have been eliminated in the accompanying unaudited pro forma
condensed combined statement of operations. The Company's benefit for income
taxes has been eliminated due to realization uncertainties.
TelaLink Management's Discussion and Analysis
General
TelaLink is in the business of merging, acquiring and consolidating Rural
Local Exchange Carriers ("RLECs"). RLECs provide basic local telecommunications
services throughout rural communities in the United States. TelaLink's proposed
business includes upgrading such facilities as necessary, and providing enhanced
standard services such as voice mail, Internet access, wireless services, and
data services. TelaLink also expects in the future to provide Broadband
Services including Digital Subscriber Loop (DSL) technology to offer integrated,
interactive multi-media capabilities combining communications, information and
entertainment services.
TelaLink did not commence telecommunications operations until December
1998, when its subsidiary, War Telecommunications Company, Inc. ("WarTel"),
purchased substantially all
37
<PAGE>
the assets of War Telephone Company ("WTC"). WTC was an RLEC with operations
located in War, West Virginia. The purchase price of the assets was $4,500,000,
all of which was paid in cash. $3,157,895 of the purchase price was comprised of
the proceeds of debt financing obtained from the RTFC, as discussed below. The
asset acquisition was accounted for as a purchase, and as such TelaLink has
recorded approximately $3,058,000 of goodwill related to the excess of fair
value of the assets at the date of acquisition. This goodwill is to be amortized
over a period of 40 years. The results of operations of WTC are included in
TelaLink's consolidated financial statements only from the date of acquisition,
and all operational results of TelaLink are attributable to that acquisition.
As a result of the timing of the acquisition of the assets of WTC, TelaLink
and WTC are discussed separately below.
TelaLink
Results of Operations
TelaLink incurred a net loss from operations of $499,000 for the year ended
December 31, 1998, compared to a net loss of $9,000 for the year ended December
31, 1997. The net loss in 1998 was attributed principally to general and
administrative expenses of $468,000 associated with various start-up and
acquisition costs, such as travel, consulting fees, etc. Other operating
expenses in 1998 of $58,000 were directly related to plant and customer
operations to provide telecommunication services for WarTel, including billing,
collections, rearrangements and changes, new customer additions, and employee
related expenses.
Interest expense was $29,000 for the year ended December 31, 1998, and
related to the November 30, 1998 RTFC credit facility of $3,500,000, discussed
in more detail below.
Liquidity and Capital Resources
On November 30, 1998, TelaLink entered into a credit facility offered by
the RTFC which includes a promissory note in the amount of $3,157,895 and a
$300,000 line of credit, of which $100,000 had been used by TelaLink at December
31, 1998. Proceeds from the credit facility were used by TelaLink to finance
the acquisition of the assets of WTC. The RTFC credit facility has a fifteen
year term and is secured by substantially all of the subsidiary's assets plus
the guarantee of TelaLink. The credit facility includes covenants which among
other things, require the subsidiary to maintain specified financial ratios and
restrict payments of dividends.
In addition to the above, TelaLink obtained cash from the following
financing sources: notes payable to related parties in the amount of $250,000,
the issuance of 600,000 shares of Series A convertible preferred stock for cash
proceeds of $1,500,000 and amounts due to a shareholder totaling $200,000. The
$200,000 due to shareholder results from a 1998 consulting agreement that
TelaLink entered into with Benchmark Equity Group, Inc. ("Benchmark"), a
shareholder of TelaLink. Under the terms of this agreement the parties have
agreed that TelaLink will pay
38
<PAGE>
Benchmark an aggregate of $200,000 upon the closing of the WTC transaction. At
December 31, 1998, these fees had not been paid.
During 1999 TelaLink plans to use cash generated from the revenues of its
subsidiary to fund required capital improvements at the subsidiary, including
Year 2000 upgrades, and to convert billing and associated processes from the
former owner to an independent external vendor. These capital improvements are
necessary to achieve required customer service levels and to enable the
provisioning of value added services, such as voice mail, caller ID, and
Internet services to enhance revenue. Subsidiary revenues for 1999 are expected
to remain at the 1998 level until these capital improvements are made
TelaLink anticipates that income from operations will not be sufficient
during 1999 to fund its merger and acquisition activities. TelaLink expects to
finance a significant portion of its acquisition activity with low cost debt
financing available from the RTFC. TelaLink became a member of the RTFC in 1998
upon obtaining funding for the acquisition of WTC. Under certain conditions of
financial and operational due diligence, and dependent upon cash flow and
revenues associated with RLEC acquisition candidates, the RTFC can potentially
provide favorable acquisition financing to TelaLink of up to $250 million.
TelaLink will also require additional funds from public or private
financing markets for future acquisitions. TelaLink management believes that all
or a substantial portion of those additional funds may be raised in the form of
equity financing. TelaLink also plans additional financing activities by issuing
equity to the sellers of acquired companies. The availability of such capital
sources will depend on prevailing market conditions, interest rates and the
financial position and results of operations of TelaLink. There can be no
assurance, however, that such financing will be available.
Year 2000
Background
Year 2000 issues results from computer programs and embedded computer chips
that do not differentiate between the 19th century and the 20th century because
they are written using two digit rather than four digit dates to define the
applicable year. If not corrected, many computer applications and date-
sensitive devices could fail or produce erroneous results when processing data
involving dates after December 31, 1999. The Year 2000 issue affects virtually
all companies and organizations, including TelaLink. The failure to correct
Year 2000 problems could result in an interruption or failure of normal business
activities or operations. Such failures could materially and adversely affect
TelaLink's results of operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Year 2000 problem, resulting from, in part,
the uncertainty of the Year 2000 readiness of third-party suppliers such as
Communications Date Group and Northern Telecom, TelaLink is unable to determine
at this time whether the consequences of Year 2000 failure will have a material
impact on their results of operation,
39
<PAGE>
liquidity or financial condition.
State of Readiness
TelaLink has secured the technical services of an external
telecommunications engineering company to evaluate its systems to determine Year
2000 impact and to prepare questionnaires to send to TelaLink's subscribers to
determine the status of their Year 2000 review.
TelaLink is aware that certain digital switching equipment at WTC is not
Year 2000 compliant. However, the total cost for the design, installation, and
acceptance testing of a generic upgrade to the equipment is not expected to
exceed $15,000, and should be completed by the middle of 1999. Funds related to
these expenditures are expected to come from operations.
Risks
While TelaLink does not anticipate any difficulties achieving the upgrading
and testing schedule described above, there is a risk that the current schedule
will not be met. Additionally, there can be no guarantee that the systems of
other companies on which TelaLink's business relies will be timely converted or
that failure to convert by another company, or a conversion that is incompatible
with TelaLink's systems, would not have a material adverse effect on the results
of operations, liquidity and financial position of TelaLink.
TelaLink believes that with the completion of its planned upgrade, the
possibility of significant interruptions of normal operations should be greatly
reduced. However, TelaLink's failure to resolve Year 2000 issues on or before
December 31, 1999 could result in system failures or miscalculations causing
disruption in operations including, among other things, a temporary inability to
provide telephony services or engage in normal business activities.
Additionally, failure of third parties upon whom TelaLink's business relies to
timely remediate their Year 2000 issues could result in disruptions in
TelaLink's intrastate-intralata access, missed or unapplied payments, temporary
disruptions in telephony services and other general problems related to
TelaLink's daily operations. While TelaLink believes that its Year 2000
readiness efforts will adequately address its own internal Year 2000 issues, the
overall risks associated with the Year 2000 remain difficult to accurately
describe and quantify, and there can be no guarantee that the Year 2000 issue
will not have a material adverse effect on the results of operations, liquidity
and financial position of TelaLink.
40
<PAGE>
Contingency Plan
TelaLink has not implemented a Year 2000 contingency plan. As detailed
above, TelaLink has initiated actions to identify and resolve Year 2000 issues.
TelaLink intends to develop and implement a contingency plan in the event its
present course of action to identify and resolve Year 2000 issues should fall
behind schedule.
War Telephone Company
Results of Operations
Revenues from local, long distance network and other services were
$1,063,000 for the eleven months ended November 30, 1998 compared to $1,060,000
for the year ended December 31, 1997. Revenues from local network services were
$387,000 for the eleven months ended November 30, 1998 compared to $418,000 for
the year ended December 31, 1997. Revenues from long distance network services
were $571,000 for the eleven months ended November 30, 1998 compared to $517,000
for the year ended December 31, 1997. WTC has a stable customer base of 1,550
access lines.
Total operating expenses were $585,000 for the eleven months ended November
30, 1998 compared to $782,000 for the year ended December 31, 1997. The
decrease in operating expenses from 1997 to 1998 was primarily due to a
decreased corporate allocation from WTC's former parent company.
Depreciation and amortization was $123,000 for the eleven months ended
November 30, 1998 compared to $130,000 for the year ended December 31, 1997.
Interest expense was $83,000 for the eleven months ended November 30, 1998
compared to $109,000 for the year ended December 31, 1997. Interest expense
incurred by WTC related to a note payable to McDowell County, West Virginia.
This note was not assumed by WarTel when it acquired the assets of WTC.
Income taxes were $178,000 for the eleven months ended November 30, 1998
compared to $77,000 for the year ended December 31, 1997. During 1998 and 1997,
WTC filed a consolidated federal income tax return with its former parent
company.
Liquidity and Capital Resources
During 1998 and 1997, WTC had outstanding a 13.5% note payable to McDowell
County, West Virginia, with a remaining balance of $675,000. This note was not
assumed by WarTel when it acquired the assets of WTC.
Net cash provided by operating activities during the eleven months ended
November 30, 1998 was $216,000 compared to $75,000 during the year ended
December 31, 1997. The increase in cash provided by operating activities was due
primarily to the increase in net income over the corresponding period.
41
<PAGE>
Net cash used in investing activities during the eleven months ended
November 30, 1998 was $37,000 compared to $92,000 during the year ended December
31, 1997. The decrease in cash used in investing activities was due primarily to
the failure of the debt service trustee to pay the scheduled debt payment for
August 1998, offset by additional net advances to WTC's former parent company.
Corporate Name Change
The Company has agreed to change the name of the Company to "Quorum Holding
Corp." or another name acceptable to the parties to the Merger Agreement. The
name "Continental Choice Care, Inc." was designated in the Company's Amended and
Restated Certificate of Incorporation. In order to comply with its agreement,
the Company must amend its Certificate of Incorporation to effectuate the
adoption of the new name. Management of the Company believes the Company's
existing name is more appropriate for a health care business than it is for a
company involved in several businesses. Management further believes that the
name "Quorum Holding Corp." is more appropriate for the Company if TelaLink is
included among those businesses.
Dissenter's Rights
Stockholders of the Company have the right to dissent from the Merger
pursuant to the provisions of Section 14A:11-1 et seq. ("Chapter 11") of the New
Jersey Business Corporation Act ("NJBCA").
Chapter 11 of the NJBCA sets forth the procedures to be followed by a
stockholder in order to exercise his dissenter's rights. The following brief
summary does not purport to be a complete statement of the provisions of Chapter
11 and is qualified in its entirety by reference to the text of Chapter 11 of
the NJBCA.
A stockholder who intends to exercise dissenters' rights under New Jersey
law must file a written notice of dissent with the Company at 35 Airport Road,
Morristown, NJ 07960, Attention: President, stating that the stockholder intends
to demand payment for his or her shares if the Merger is approved. Neither an
abstention nor a vote against the Merger will constitute such a notice.
However, if the required written notice is properly filed, failure to vote
against the Merger will not constitute a waiver of dissenter's rights. It is
recommended that any written objection which is mailed be sent by registered or
certified mail, "Return Receipt Requested." A stockholder will lose his or her
right to dissent if he or she votes FOR the Merger or consents in writing to the
Merger.
Within 10 days after the approval of the Merger by the stockholders of the
Company, the Company will give written notice of such favorable vote, by
certified mail, to each stockholder who has duly filed a written objection, at
such holder's address as it appears on the books of the Company, except any
holder who voted "FOR" the Merger or consented in writing to the Merger.
42
<PAGE>
Within 20 days after mailing such notice, any stockholder who filed a
written objection and who elects to dissent must file with the Company a written
demand for the payment of the fair value of his or her shares. For the
convenience of the Company, such demand should be filed at 35 Airport Road,
Morristown, New Jersey 07960, Attention: President, and should state the
holder's name and residence address and the number of shares as to which he or
she holds and a demand for payment of the fair value of his or her shares. It
is recommended that any such demand for payment which is mailed be sent by
registered or certified mail, "Return Receipt Requested".
A stockholder may not dissent as to less than all of the shares that he or
she owns beneficially, and with respect to which he or she has a right to
dissent. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such beneficial owner, as to which
such nominee or fiduciary has a right to dissent, held of record by such nominee
or fiduciary.
Not later than 10 days after the expiration of the period within which
stockholders may make written demand to be paid the fair value of their shares
(the "10 Day Deadline"), the Company will mail to each dissenting stockholder
its most recent financial statements and may offer, but is not required, to pay
all dissenting stockholders a specified price per share. If the fair value of
the shares is not agreed upon within 30 days, a stockholder may make written
demand on the Company that it commence an action in the Superior Court of New
Jersey for a determination of the fair value of the shares. Such demand must be
made within 60 days after the 10 Day Deadline and such action will be commenced
by the Company within 30 days after receipt by the Company of such demand. If
the Company fails to commence an action, any dissenting stockholder may do so in
the name of the Company provided such action is brought not later than 60 days
after the expiration of the time in which the Company was to commence such
proceeding. The court shall thereupon determine the fair value of the shares
and in connection therewith, may allow such interest on such amount from the
date demand was made until the date of payment as it finds to be equitable. The
court may also apportion and assess against dissenting stockholders or the
Company the costs and expenses of such proceeding.
Any stockholder who fails to properly file a written notice of dissent or
who votes for the Merger or who fails to properly make demand for will lose his
or her right to dissent. Furthermore, if no court petition demanding
determination of the fair value of the shares of dissenting holders is filed
within the time limits described above, all dissenting holders will lose their
right to dissent under Chapter 11. However, if any stockholder properly files
such a petition, the proceeding will be for the benefit of all stockholders who
had duly elected to dissent.
At the time of the filing of the demand for payment or within 20 days
thereafter, a dissenting stockholder must submit the certificate representing
his or her shares of common stock to the Company in order that there may be
conspicuously noted thereon that a demand for payment has been filed. After
notation, such certificates shall be returned to the stockholder or other person
who submitted them on his behalf. Any stockholder who fails to submit his or
her
43
<PAGE>
certificate for such notation may lose his or her right to dissent. A dissenting
stockholder may withdraw his election to dissent with the consent of the
Company. The right of a dissenting stockholder who has complied with the
required procedures to receive payment of the fair value of his or her shares is
exclusive of any other right which he may have as a stockholder, except as
otherwise provided by New Jersey common law.
Recommendation of the Board of Directors.
The Board of Directors of the Company has approved the Merger and believes
that the consummation of the Merger is in the best interests of the Company and
the stockholders of the Company. The Board of Directors recommends that the
stockholders of the Company vote in favor of approval of the Merger Agreement,
the Merger and the amendment to the Company's Certificate of Incorporation to
change the Company's name from "Continental Choice Care, Inc." to "Quorum
Holding Corp."
PROPOSAL 2. APPROVAL OF INCREASE IN AUTHORIZED SHARES
The Company's Amended and Restated Certificate of Incorporation
("Certificate") authorizes the issuance 15,000,000 shares of capital stock
consisting of 10,000,000 shares designated "Common Stock", with no par value,
and 5,000,000 shares designated " Preferred Stock." The Certificate generally
permits the Board to create and issue shares of Preferred Stock in series or
classes, with such number of shares, designations, par value, relative voting,
dividend, liquidation and other rights, preferences and limitations as shall be
determined by action by the Board of Directors pursuant to the provisions of the
New Jersey Business Corporation Act. As of the date of this Proxy Statement, no
shares of Preferred Stock have been created or issued by the Board and the Board
does not have any present plan to create or issue any Preferred Stock.
As of February 18, 1999, the Company had 3,267,500 shares of Common Stock
outstanding. In addition, as of such date, the Company had reserved 3,480,000
shares of Common Stock for the purposes of the Company's Director Stock Option
Plan, the Company's 1997 Plan and the Company's 1994 Plan, outstanding warrants
and outstanding underwriter's unit purchase options. After giving effect to the
prior issuances of Common Stock and the prior reservations of Common Stock, the
Company has 3,252,500 shares of Common Stock remaining which are authorized but
not yet reserved or issued.
The Company has agreed to issue up to 3,340,000 shares in connection with
the Merger and 150,000 in connection with the LoanCo transaction. The Company
has also agreed to reserve 500,000 shares for issuance upon the exercise of Mr.
Bennett's options as to make 1,000,000 shares available for new management
employees pursuant to the 1997 plans.
As a result, the number of authorized shares of Company Stock not otherwise
issued and outstanding or reserved for issuance is less than the number of
shares which the Company will require to meet its outstanding obligations if the
Merger is consummated.
44
<PAGE>
Whether or not the Merger is approved by the stockholders of the Company at
the Meeting, the Company intends to acquire additional businesses and companies.
In addition, Management believes that additional authorized shares should be
available to the Company for the purpose of raising equity capital in the
future, to permit the adoption of additional benefit plans and for other
corporate purposes. In most cases, the Board will have discretion to determine
the terms of any issuance of additional Company Stock.
If this proposal is adopted, Article 4 of the Company's Certificate of
Incorporation will be amended to read as follows:
4. The total number of shares of capital stock which the Corporation is
authorized to issue is 25,000,000 shares of which 20,000,000 shares
shall be designated common stock, no par value ("Common Stock") and
5,000,000 shares shall be designated preferred stock ("Preferred
Stock"). The Board of Directors of the Corporation is authorized to
create and issue shares of Preferred Stock in series or classes, with
such number of shares, designations, par value, relative voting,
dividend, liquidation and other rights, preferences and limitations as
shall be determined by action by the Board of Directors pursuant to
the provisions of the New Jersey Business Corporation Act. The
authority granted to the Board of Directors hereunder with respect to
each class or series shall include, but not be limited to, the ability
to determine the following:
(i) The extent of cumulative, non-cumulative or partially
cumulative dividends;
(ii) The rights of holders to receive dividends payable on a parity
with subordinate to or in preference to dividends payable on
any other class or series;
(iii) The preferential rights of holders upon the distribution of the
assets of or on liquidation of the Corporation;
(iv) The terms and conditions of redemption privileges of holders,
if any;
(v) The terms and conditions of voting rights of holders, if any;
and
(vi) Any other rights, preferences and limitations as may be
determined from time to time by action of the Board of
Directions of the Corporation pursuant to the New Jersey
Business Corporation Act.
The Board of Directors shall also have such authority to change from time to
time the designation or number of Preferred Stock or the relative rights,
preferences and limitations of the shares of Preferred Stock as shall be
permitted by the New Jersey Business Corporation Act.
45
<PAGE>
The Board of Directors of the Company recommends increasing the authorized
shares of Common Stock to 20,000,000 shares, thereby increasing total number of
common stock and preferred stock shares authorized to 25,000,000 shares.
Market for Company Stock and Related Security Holder Matters
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) are traded in the Nasdaq
Small Cap market. There were approximately 17 holders of record of the Company's
common stock as of February 11, 1999. The following table sets forth the
closing prices 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".
Common Stock Warrants Units
Three months ended (CCCI) (CCCIW) (CCCIU)
- ------------------ ------ -------- -------
High Low High Low High Low
------ ------- ---- ---- ------ -------
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 2-11/16
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 1-3/16 1/4 1/16 2-1/4 7/8
The prices shown reflect interdealer quotations without adjustment for
retail mark-up, mark-down or commission and may not represent actual
transactions. The Company has paid no cash or stock dividends since its
inception. The Company's securities were delisted from trading on the Nasdaq
National Market System and commenced trading on the Nasdaq Small Cap Market
effective October 1998.
PROPOSAL 3. INCREASE IN SHARES SUBJECT TO 1997 PLAN
At the time the Company's 1997 Equity Incentive Plan ("1997 Plan") was
adopted, 1,250,000 shares of Company Stock were reserved for issuance under the
1997 Plan. Pursuant to the Merger Agreement, the Company agreed to reserve
500,000 shares of Company Stock for issuance upon the exercise of options to be
granted to Harry S. Bennett under the terms of the 1997 Plan and agreed to make
not less than 1,000,000 shares available for issuance upon the exercise of
options or otherwise, under the terms of the 1997 Plan. As a result, the number
of shares of Company Stock reserved for issuance pursuant to the 1997 Plan is
less than the number
46
<PAGE>
of shares which the Company will require to meet its outstanding obligations if
the Merger is consummated.
Pursuant to the terms of the 1997 Plan, it is to be administered by a
committee designated by the Board of Directors (the "Committee") or by the full
Board.
The purposes of the 1997 Plan are to assist in attracting, retaining, and
motivating persons who can make a significant contribution to the Company and to
promote the identification of their interests with those of the shareholders of
the Company. The 1997 Plan is open to all management and non-management
employees of the Company, as well as certain consultants and independent
contractors. The Company and its subsidiaries employed approximately 62 full
time employees, including officers, as of February 16, 1999. In addition, Alvin
S. Trenk, the Company's Chairman and Chief Executive Officer serves as a
consultant to the Company. If the Merger is consummated, Harry S. Bennett will
become eligible to participate in the 1997 Plan (and will be entitled to receive
options to acquire up to 500,000 shares of Company Stock at $1.875 per share),
as will other existing and future employees and certain consultants to the
Company's subsidiaries. Management believes that the number of shares of
Company Stock reserved for issuance pursuant to the 1997 Plan should be
increased to enable to Company to fulfill the goals of the 1997 Plan regardless
of whether the Merger is approved. Management believes that the increase is
appropriate if the Merger is not consummated primarily to permit the Company to
attract and retain qualified personnel in the Company's current and future
businesses.
Pursuant to the terms of the 1997 Plan, the Company may grant awards in the
form of Options (both incentive stock options, as defined under Section 422 of
the Code ("ISO") and nonstatutory stock options ("NSO"), Stock Appreciation
Rights ("SARs")), an award of shares for no cash consideration subject to
certain restricts (a "Restricted Stock Award") or the award of shares to be
delivered in the future ("Deferred Stock Award") to employees of the Company and
others which or who may be in a position to make a significant contribution to
the Company. ISOs, however, may only be issued to employees of the Company.
Incentive stock options granted under the 1997 Plan will be exercisable
during the period commencing on the date of grant of the option and terminating
up to ten (10) years from the date of grant (five (5) years in the case of an
ISO granted to a holder of 10% of the Company's issued and outstanding shares)
at an exercise price which is not less than one hundred (100%) percent of the
fair market value of the Common Stock on the date of the grant (110% in the case
of an ISO granted to a holder of 10% of the Company's issued and outstanding
shares). NSOs will be exercisable during the period commencing on the date of
the grant of the option and terminating up to ten (10) years from the date of
grant at an exercise price which is not less than fifty (50%) percent of the
fair market value of the Common Stock on the date of grant.
SARs granted under the 1997 Plan are exercisable during the period
established by the Committee (except in the event of death or disability of the
holder), or in the case of a SAR related to an option, the expiration of the
related option. In addition, a SAR may be exercised only when the fair market
value of a share exceeds either the fair market value per share on the
47
<PAGE>
date of grant of the SAR or the base price of the SAR (which is determined by
the Committee) if it is not a SAR related to an option. A SAR related to an
option may be exercised only when and to the extent the option is able to be
exercised.
Upon the exercise of an Option, payment must be made in full (in the form
of cash or shares) together with payment for any withholding taxes then required
to be paid. The receipt of incentive shares is subject to full payment by the
recipient of any withholding taxes required to be paid.
Incentive shares, either in the form of Restricted Stock or Deferred Stock,
may be issued as provided in the agreement with the recipient, based upon such
standards as may be established by the Committee, including but not limited to
the achievement of the performance standards set forth in the agreement.
The Committee has the authority to interpret the provisions of the 1997
Plan, to prescribe, amend and rescind rules and regulations relating to it and
to make all determinations deemed necessary or advisable for its administration,
including the individuals to whom grants are made and the type, vesting, timing,
amount, exercise price and other terms of such grants.
The Board of Directors may amend or terminate the 1997 Plan except that
shareholder approval is required to effect any change which would require
shareholder approval pursuant to Section 16 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), such as to increase materially the
aggregate number of shares that may be issued under the Incentive Plan (unless
the change is merely an adjustment to reflect such changes as a stock dividend,
stock split, recapitalization, merger or consolidation of the Company), to
modify materially the requirements as to eligibility to receive options, SARs or
incentive shares or to increase materially the benefits accruing to
participants. No action taken by the Board may materially and adversely affect
any outstanding grant or award without the consent of the holder.
The Committee may also modify, extend or renew outstanding options, SARs or
accept the surrender of outstanding options or rights granted under the 1997
Plan and authorize the granting of new options and SARs pursuant to the 1997
Plan in substitution therefor, including specifying a longer term than the
surrendered options or rights. Further, the Committee may modify the terms of
any outstanding agreement providing for the award of incentive shares. In no
event, however, may modifications adversely affect the grantee of the grant of
incentive stock without the grantee's consent.
Termination. The Plan will terminate April 28, 2007, ten years after the
date of its initial approval by the shareholders of the Company.
The Board of Directors recommends approval of the increase from
1,250,000 to 2,500,000 shares of Company Stock reserved for issuance under the
1997 Plan.
48
<PAGE>
PROPOSAL 4. ELECTION OF DIRECTORS
The Company's Certificate of Incorporation requires that the Board of
Directors be divided into three classes. The members of each class of directors
serve for staggered three-year terms, including two Class I directors (Martin G.
Jacobs, M.D. and Stanley B. Amsterdam), one Class II director (Steven L. Trenk)
and two Class III directors (Alvin S. Trenk and Jeffrey B. Mendell). The current
Class I directors are serving a three year term expiring in 2001, the Class II
director is serving a three year term expiring as of the date of the Meeting and
the current Class III directors are serving three year terms expiring in 2000.
Each of the current directors holds office until the expiration of his
respective term and until his respective successor is elected and qualified, or
until death, resignation or removal.
Pursuant to the terms of the Merger Agreement, the Company has agreed to
nominate up to three nominees for director designated by TelaLink. In the event
the Merger is consummated, Mr. Amsterdam is expected to resign as a Class I
director following the date on which TelaLink designates a replacement who is
"independent" under applicable regulatory and Nasdaq requirements. TelaLink has
advised the Company that it expects to nominate Harry S. Bennett as its nominee
for Class I director. TelaLink has not advised the Company of the names of its
other nominees, if any. If the Merger is consummated, the Board is expected to
elect the TelaLink designees. If elected by the shareholders of the Company,
Steven L. Trenk will serve for a three year term expiring in 2002 or until his
successor is elected and qualified, or until death, resignation or removal.
Officers serve at the discretion of the Board of Directors.
The affirmative vote of the holders of a plurality of the shares of Common
Stock voted in person or by proxy at the Meeting is required for the election of
each director. Unless otherwise directed, each proxy executed and returned by a
shareholder will be voted for the election of Steven L. Trenk. If Mr. Trenk
becomes unable to serve or for good cause will not serve, an event that is not
anticipated by the Company, (i) the shares represented by the proxies will be
voted for a substitute nominee or substitute nominees designated by the Board of
Directors or (ii) the Board of Directors may determine to reduce the size of the
Board of Directors. At this time, the Board of Directors knows of no reason why
Mr. Trenk may not be able to serve as directors if elected.
The Board of Directors recommends that Steven L. Trenk be elected as a director.
The name and age of each of the nominees and each of the incumbent
directors whose term will continue following the Meeting, the executive officers
and significant employees of the Company, their respective positions with the
Company and, to the extent applicable, the period during which each such
individual has served as a director are set forth below. Additional
biographical information concerning each of the nominees, the incumbent
directors, executive officers and significant employees of the Company follows
the table.
49
<PAGE>
<TABLE>
<CAPTION>
Position with
Name Age the Company Director Since
- ---- --- ------------- --------------
<S> <C> <C> <C>
Class I Directors
Martin G. Jacobs, M.D. 69 Director, Corporate Medical 1993
Director
Stanley B. Amsterdam 69 Director 1998
Class II Directors
Steven L. Trenk 45 Director, President and Chief 1993
Operating Officer
Class III Directors
Alvin S. Trenk 69 Director, Chairman, Chief 1993
Executive Officer
Jeffrey B. Mendell 45 Director 1994
Executive Officers
Jeff Ellentuck 45 Executive VP and General Counsel,
Asst. Secretary
Mark Raab 34 Chief Financial Officer
And Treasurer
</TABLE>
50
<PAGE>
Certain Biographical Information Concerning
Incumbent Directors and Executive Officers
Alvin S. Trenk, a founder of Techtron and of the Company, has served as
Chairman of the Board of Directors of Techtron since prior to 1989. Mr. A.
Trenk has served as the Chairman, Chief Executive Officer and a director of each
of the Company's current subsidiaries since the formation of each subsidiary and
as Chairman, Chief Executive Officer and a Director of Continental Dialysis
Center of the Bronx, Inc., an affiliate and former consulting customer of the
Company ("CDBI"), since its formation. Since December 1993 he has served as
Chairman and Chief Executive Officer of Alpha Administration Corp., an affiliate
and former consulting customer of the Company ("Alpha"). Mr. A. Trenk is also
Chairman of the Board of Directors of Upper Manhattan Dialysis Center, Inc., a
former consulting customer of the Company ("UMDC"). See "Certain Transactions."
Mr. A. Trenk also serves as Chairman, Chief Executive Officer and a director of
Trenk Enterprises, Inc. ("TEI"), which is wholly-owned by Mr. A. Trenk and
pursuant to which Mr. A. Trenk provides services to the Company. See
"Compensation Arrangements - Employment Agreements." In addition, Mr. A. Trenk
is an officer and director of various corporations engaged in the ownership and
development of real property and the operation of helicopter landing facilities,
helicopter charter, air taxi, sightseeing and tour operations, as well as other
activities.
Steven L. Trenk, a founder of the Company, served as Vice President for
Business Development of Techtron from 1987 through October 1991. Since October
1991, Mr. S. Trenk has served as the President of each of the Company's
subsidiaries, other than Renal Management, Inc., and, since December 1993, has
served as the President of Alpha. Mr. S. Trenk has served as the Vice Chairman
of RMI since its inception. Mr. S. Trenk is the Treasurer of UMDC. Mr. S.
Trenk also serves as the Vice President of Orange Y Associates, Inc., a real
estate development company.
Martin G. Jacobs, M.D., a founder of the Company, is a physician engaged in
the treatment of renal disease and hypertension. Dr. Jacobs has served as
President of Nephrological Associates, P.A., which he founded in 1964. Dr.
Jacobs has served as the Corporate Medical Director for Techtron since its
formation and for the Company since its formation.
Mark Raab joined the Company in 1995, was appointed as Controller in 1997
and was appointed Chief Financial Officer and Treasurer of the Company in 1998.
From 1987 until joining the Company, Mr. Raab worked in the banking industry in
various positions, the last being Accounting Manager, the position he held with
First Fidelity Bank, N.A. Mr. Raab holds a bachelor's degree in business
administration.
Jeff Ellentuck joined the Company as Executive Vice President and General
Counsel in October 1994. Prior to joining the Company, Mr. Ellentuck was an
attorney with Gibbons, Del Deo, Dolan, Griffinger & Vecchione, a law firm in
Newark, New Jersey. Mr. Ellentuck also provides services to certain businesses
in which Alvin S. Trenk, Steven L. Trenk, Martin G. Jacobs, M.D. and their
families have interests.
51
<PAGE>
Jeffrey B. Mendell is an owner and Managing Director of G.S. Wilcox & Co.,
LLC, a commercial mortgage banking company based in White Plains, New York, a
position he has held since September, 1996. In addition, Mr. Mendell is the
Chairman and Chief Executive Officer of JBM Realty Capital Corp. through which
he acts as principal in the acquisition and development of commercial real
estate. He was the president of National Realty & Development Corp., a
privately held corporation which owns and manages commercial real estate, from
May 1992 to August, 1996. Mr. Mendell also participates in various other
business ventures.
Mr. Amsterdam is the Product Manager for the elastic fabrics division of
Guilford Mills, Inc., a position he has held for approximately 20 years.
Alvin S. Trenk is the father of Steven L. Trenk and the brother-in-law of
Martin G. Jacobs, M.D. Martin G. Jacobs, M.D. is the uncle of Steven L. Trenk.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who beneficially own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the Nasdaq. The Company is not aware that any director, officer or 10%
beneficial owner of the Company's Common Stock failed to file reports during the
year ended December 31, 1998.
Meetings of the Board and Committees
During fiscal year 1998, the Board of Directors held meetings and acted by
unanimous written consent on 11 occasions during 1998. Each of the directors
attended all meetings of the Board of Directors and meetings held by all
committees of the Board of Directors of which each respective director was a
member during the time he was serving as such during 1998.
The Company has a standing Compensation Committee and Audit Committee. Each
of the committees are comprised of Mr. Amsterdam and Mr. Mendell. The
Compensation Committee provides recommendations concerning salaries and
incentive compensation for executive officers and key personnel, and administers
the Company's Equity Incentive Plans. All actions which would otherwise be
taken by the Compensation Committee were taken by the full Board of Directors
during the fiscal year ended December 31, 1998. The Audit Committee is
responsible for recommending to the Board of Directors the appointment of the
Company's outside auditors, examining the results of audits and reviewing
internal accounting controls. The Audit Committee held 1 meeting during the
fiscal year ended December 31, 1998. The Board of Directors has no nominating
committee or any committee performing the functions of such a committee.
52
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and long-
term compensation for services in all capacities to the Company and its
subsidiaries for each of the fiscal years ended December 31, 1998, 1997 and 1996
of those persons who were, at December 31, 1998, (i) the chief executive officer
and (ii) the other three most highly compensated executive officers of the
Company for the fiscal year ended December 31, 1998 (the "named executive
officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------
Common Stock
Underlying
Name and Principal Position Fiscal Year Salary Bonus Options
- --------------------------- ----------- ------ ----- -------
<S> <C> <C> <C> <C>
Alvin S. Trenk (1)
Chairman and 1998 $300,000 $0 150,000
Chief Executive Officer 1997 300,000 0 150,000
1996 241,800 0 0
Steven L. Trenk
President and Chief 1998 189,615 0 150,000
Operating Officer 1997 120,000 0 175,000 (2)
1996 120,000 0 25,000
Martin G. Jacobs
Corporate Medical Director 1998 115,269 0 150,000
1997 88,923 25,000 175,000 (2)
1996 60,000 0 25,000
Jeff Ellentuck
Executive Vice President
And General Counsel 1998 135,000 0 0
1997 130,000 25,000 100,000 (2)
1996 117,385 0 25,000
</TABLE>
- -------------------
(1) Paid to TEI, a corporation wholly-owned by Alvin S. Trenk which provides
consulting services to the Company. See "Compensation Arrangements -
Employment Agreements."
(2) Includes all options issued during fiscal years 1995 and 1996, each of which
were repriced to $1.875 per share in February 1997.
See "Certain Transactions" for additional information with respect to
benefits received by certain members of management of the Company.
53
<PAGE>
Security Ownership of Management and Certain Beneficial Owners
The following table sets forth certain information, as of March 4, 1999
regarding the beneficial ownership of the Company's Common Stock by each
director and named executive officer (see "Compensation of Directors and
Executive Officers") of the Company and by all directors and executive officers
as a group and each person known to be the beneficial owner of more than five
percent of the outstanding shares of the Common Stock. The Company has been
advised that each shareholder listed below has sole voting and dispositive power
with respect to such shares unless otherwise noted in the footnotes below.
<TABLE>
<CAPTION>
Percent of
Name and Address Amount and Nature of Outstanding
of Beneficial Owner Beneficial Ownership Common Stock
- ------------------- -------------------- ----------------
Company Techtron Company Techtron
Common Stock Common Stock Common Stock Common Stock
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Techtron, Inc. (1) 1,527,500 0 46.70% --
Alvin S. Trenk(1) 303,000(2) 4,841,666 51.31%(3) 80.69%
Steven L. Trenk(1) 326,000(4) 4,841,666 51.59%(3) 80.69%
Martin G. Jacobs, M.D. (1) 325,000(5) 4,841,666 51.57%(3) 80.69%
Jeff Ellentuck(1) 100,000(6) 0 2.97% --
Stanley B. Amsterdam(1) 65,000(7) 2,000 1.98% *
Jeffrey B. Mendell(1) 140,000(8) 4.11% --
All Directors and Officers
as a Group (7 persons) 2,799,250(3) 4,843,666 62.48% 80.73%
- ------------------
</TABLE>
* Less than one percent
(1) The address of each named person and entity is 35 Airport Road, Morristown,
New Jersey 07960.
(2) Includes 300,000 shares underlying currently exercisable options issued to
Mr. A. Trenk under the Company's 1997 Equity Incentive Plan (the "1997
Plan").
(3) Includes 1,527,500 shares held by Techtron. Alvin S. Trenk, Steven L. Trenk
and Martin G. Jacobs, M.D. are each officers, directors and principal
shareholders of Techtron and directly own an aggregate of approximately
80.69% of the outstanding stock of Techtron. These individuals may also be
considered to beneficially own, and to have shared investment and voting
power with respect to, all shares of Common Stock owned by Techtron. Alvin
S. Trenk, Steven L. Trenk and Martin G. Jacobs, M.D. are treated as a group
herein for purposes of determining beneficial ownership.
(4) Includes 1,000 shares held in the name of Mr. S. Trenk's children. Includes
25,000 and 300,000 shares of Company Stock underlying currently exercisable
options issued to Mr. S. Trenk under the Company's 1994 Long Term Incentive
Award Plan (the "1994 Plan") and the 1997 Plan, respectively.
54
<PAGE>
(5) Includes 25,000 and 300,000 shares of Company Stock underlying currently
exercisable options issued to Dr. Jacobs under the 1994 Plan and the 1997
Plan, respectively.
(6) Includes 50,000 and 50,000 shares of Company Stock underlying currently
exercisable options issued to Mr. Ellentuck under the 1994 Plan and the 1997
Plan, respectively.
(7) Includes 10,000 shares of Company Stock underlying currently exercisable
options issued to Mr. Amsterdam under the Director's Stock Option Plan.
(8) Includes 50,000 and 90,000 shares of Company Stock underlying currently
exercisable options issued to Mr. Mendell under the Director's Stock Option
Plan and the 1997 Plan, respectively.
Compensation Arrangements
Director Compensation
The non-employee directors of the Company receive compensation of $1,000
per meeting of the Board of Directors attended and $500 for each meeting of a
committee of the Board of Directors which they attend as a committee member.
Directors are entitled to participate in the Company's Director's Stock Option
Plan, described below. Further, certain directors received options to acquire
Common Stock pursuant to the 1997 Plan.
Employment Agreements
The Company entered into a consulting agreement (the "TEI Agreement") with
TEI dated as of April 1, 1994. TEI is wholly-owned by Alvin S. Trenk. Under
the terms of the TEI Agreement, TEI agreed to make Mr. A. Trenk available to
serve as the Chairman of the Board and Chief Executive Officer of the Company,
to serve as Chairman of the Board, Chief Executive Officer and director of any
of the Company's subsidiaries and to serve as a shareholder, officer and
director of any entity to which the Company provides services, equipment and
supplies. Mr. A. Trenk is required to perform up to 750 hours of service per
year. The TEI Agreement provides for payments by the Company to TEI of a fee of
$300,000 per year plus such cash bonuses as may be determined by the Board of
Directors.
The TEI Agreement has an initial term of five years which automatically
renews for an additional year on every anniversary date unless such renewal is
terminated by the Board of Directors in writing not less than 90 days prior to
the anniversary date or unless the TEI Agreement is otherwise terminated
pursuant to its terms. The Company has agreed to permit the employees of TEI to
participate in employee benefit plans established for senior management of the
Company. The Company has also agreed to make payments, not in excess of $1,500
per month, for an automobile for Mr. A. Trenk's use, to pay for $1,000,000 of
term life insurance for Mr. A. Trenk, the beneficiary of which will be the
Company, to pay for disability insurance for Mr. A. Trenk and to permit Mr. A.
Trenk to participate in stock option plans consistent with other members of
senior management of the Company. The TEI Agreement terminates upon the death
of Mr. A. Trenk and may be terminated by the Company upon his disability (as
defined in the TEI Agreement).
55
<PAGE>
Steven L. Trenk entered into an employment agreement with the Company dated
as of April 1, 1994 providing for an annual base salary of $150,000 for serving
as President of the Company and its subsidiaries on an essentially full-time
basis. In May 1998, the Board amended the employment agreement and increased
Mr. Trenk's annual base salary to $250,000. In addition, Mr. S. Trenk is
entitled to receive an annual bonus equal to 10% of the Company's pre-tax income
in excess of the prior year's pre-tax income, up to a maximum of $100,000 per
annum. The agreement has a term of five years and renews for an additional one
year term on every anniversary date, unless terminated by the Board of Directors
in writing no later than 90 days preceding the end of the initial or any renewal
term unless sooner terminated upon the death or disability of Mr. S. Trenk. The
Company has also agreed to permit Mr. S. Trenk to participate in any employee
benefit plans established for senior management employees of the Company, to
make payments not in excess of $1,500 per month on an automobile for his use, to
pay for $1,000,000 term life insurance for Mr. S. Trenk, the beneficiary of
which will be the Company, to pay for disability insurance for Mr. S. Trenk and
to permit Mr. S. Trenk to participate in stock option plans consistent with
other members of senior management of the Company. Under the terms of Mr. S.
Trenk's amended employment agreement, Mr. S. Trenk is entitled to terminate his
employment if there is a "change of control." If Mr. S. Trenk terminates his
employment as a result of a change of control, he will be entitled to receive
all amounts due to him from the Company to the date of termination plus two
years' base salary, payable in cash in two lump sum payments. A "change of
control" pursuant to the amended employment agreement includes among others: (i)
the approval by the public shareholders of the Company of a merger, as a result
of which the shareholders of the Company immediately prior to such approval do
not, immediately after the consummation of such transaction own more than 50% of
the voting stock of the surviving entity; (ii) the acquisition, other than from
the Company directly, by any person or group (other than Alvin S. Trenk, Steven
L. Trenk or Martin G. Jacobs or their respective family members or any person in
which any of them individually or collectively holds 30% or more of the voting
stock, collectively, the "Trenk Group"), of beneficial ownership of 50% or more
of the outstanding common stock of the Company, or (iii) if the individuals who
serve on the Board as of the date of the Employment Agreement no longer
constitute a majority of the members of the Board; provided, however, that any
person who becomes a director subsequent to the date of the Employment Agreement
who is elected to fill a vacancy by a majority of the individuals then serving
on the Board shall be considered as if such person was a member prior to the
Commencement date. Accordingly, in the event the escrowed and contingent shares
are released to the TelaLink shareholders or upon the occurrence of certain
changes in the composition of the Board, Mr. S. Trenk could terminate his
Employment Agreement and be entitled to a cash payout of two years' salary.
Martin G. Jacobs, M.D. entered into a medical director agreement dated as
of April 1, 1994 (the "Medical Director Agreement"). The Agreement, as amended,
provides for an annual base salary of $111,000 for serving as Corporate Medical
Director and agreeing to devote not less than 500 hours per year to the
Company's business. The Medical Director Agreement has an initial one year term
and renews every anniversary thereafter, unless terminated by the Board of
Directors in writing no later than ninety (90) days preceding the anniversary
date. The Medical Director Agreement also provides that Dr. Jacobs shall
participate in any employee benefit plans
56
<PAGE>
established for senior management employees of the Company. The Company has also
agreed to make payments not in excess of $500 per month for an automobile for
Dr. Jacob's use, to pay for disability insurance for Dr. Jacobs and to permit
Dr. Jacobs to participate in stock option plans consistent with other members of
senior management of the Company. The Medical Director Agreement terminates upon
the death of Dr. Jacobs and may be terminated by the Company upon his disability
(as defined in the Medical Director Agreement).
Jeff Ellentuck entered into an Employment Agreement with the Company dated
as of October 1, 1994. The agreement, as amended, provides for an annual base
salary of $130,000 for serving as Executive Vice President and General Counsel
of the Company on a substantially full-time basis. Mr. Ellentuck is entitled to
receive an annual bonus based on his personal performance and the Company's
performance as determined by the Board of Directors of the Company. The
Agreement has an initial term ending April 15, 1999. The Company has also
agreed to permit Mr. Ellentuck to participate in employee benefit plans
established for senior management of the Company, to make payments of $650 per
month on an automobile for his use and to pay the balance on the same in the
event of a termination prior to September 2000 and to pay for not less than
$250,000 of assumable life insurance.
Each of Alvin Trenk, Steven Trenk and Dr. Jacobs has agreed that during the
term of his employment or medical director agreement, he will not, directly or
indirectly, engage in business activities that are competitive with the
Company's activities in any county of any state in the United States, or any
country outside of the United States, in which, during his employment, the
Company conducted any material business or in which its customers were located.
In addition, each employee has agreed that he will not solicit or accept
business from any customers of the Company or hire any employees of the Company
and shall maintain the Company's proprietary information during the term of his
agreement and for at least one year after the expiration of his or her
agreement.
57
<PAGE>
Compensation Plans
1994 Long-Term Incentive Award Plan
The Continental Choice Care, Inc. 1994 Long-Term Incentive Award Plan (the
"1994 Plan") covers 300,000 shares of Common Stock pursuant to which officers
and key employees of the Company designated as senior executives are eligible to
receive incentive and/or non-statutory stock options, awards of shares of Common
Stock and stock appreciation rights ("Rights"). The 1994 Plan, which expires in
2004, is generally administered by the Compensation Committee designated by the
Board of Directors. The Board of Directors in its entirety may also administer
the 1994 Plan. The purposes of the 1994 Plan are to assist in attracting,
retaining, and motivating senior executives and to promote the identification of
their interests with those of the shareholders of the Company. Incentive stock
options and Rights granted under the 1994 Plan are generally exercisable during
the period commencing six months from the date of grant of the option and
terminating ten years from the date of grant. The exercise prices for incentive
stock options are not less than the fair market value of the Common Stock on the
date of the grant. In addition, a Right may be exercised only when the fair
market value of a share exceeds either the fair market value per share on the
date of grant of the Right or the base price of the Right (which is determined
by the Committee) if it is not a Right related to an option. A Right related to
an option may be exercised only when and to the extent the option is able to be
exercised. No participant in the 1994 Plan is entitled to receive grants of
options, Rights and awards of incentive shares in the aggregate exceeding 25,000
shares per year.
1997 Equity Incentive Plan
See "Proposal 3 - Increase in Shares Subject to 1997 Plan" for a
description of the 1997 Plan.
401(k) Plan
In January 1994, the Company adopted a salary deferral and savings plan
(the "Savings Plan") which is qualified under section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code") and includes a qualified cash or
deferred arrangement under Section 401(k) of the Code. Subject to limits set
forth in the Code, an employee who meets certain age and service requirements
may participate in the Savings Plan by contributing through payroll deductions
up to 15% of compensation into an account established for the participating
employee and may allocate amounts in such account among a variety of investment
vehicles. The Company makes matching contributions to an employee's account in
an amount of up to and including 10% of the first 6% of the compensation
contributed by each employee. The Savings Plan also provides for loans to, and
withdrawals by, participating employees, subject to certain limitations.
58
<PAGE>
Option Exercises and Fiscal Year-End Values
The following table contains information with respect to the exercise of
options by the named executive officers during the last fiscal year and with
respect to unexercised options held by those officers as of the end of the
fiscal year.
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option Value
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Number of Options at In-the-Money Options
Shares Fiscal Year End at Fiscal Year End
Acquired on Value --------------- ------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----- -------- -------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alvin S. Trenk 0 $ 0 300,000 0 $ 0 $159,525
Steven L. Trenk 0 0 326,000 0 0 200,413
Martin G. Jacobs 0 0 325,000 0 0 202,569
Jeff Ellentuck 0 0 100,000 0 0 67,238
</TABLE>
Option Grants during Last Fiscal Year
Shown below is information with respect to the number of options to
purchase Common Stock granted to the named executive officers during the
Company's last fiscal year.
Option Grants during the Fiscal Year
Ended December 31, 1998
<TABLE>
<CAPTION>
% of Total
Number of Options Granted
Shares Underlying to Employees in Exercise
Name Options Granted Fiscal Year Price ($/Sh) Expiration Date
- ---- --------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Alvin S. Trenk 150,000 32.5% 1.4375 January 22, 2003
Steven L. Trenk 150,000 32.5% 1.4375 January 22, 2003
Martin G. Jacobs 150,000 32.5% 1.4375 January 22, 2003
</TABLE>
________________
Each of the options in the foregoing table was issued effective January 23, 1998
and became exercisable July 23, 1998.
Certain Relationships And Related Transactions
The Company was a party to consulting and service agreements with, or
assumed certain rights and obligations of Alpha Administration Corp. ("Alpha"),
Upper Manhattan
59
<PAGE>
Dialysis Center, Inc. ("UMDC"), the National Nephrology Foundation ("NNF") and
Continental Dialysis of the Bronx, Inc. ("CDBI"). Alpha, CDBI and UMDC are
referred to collectively as the "Consulting Customers." Under the terms of the
various consulting and services agreements, the Company provided consulting,
administrative and other services to or on behalf of each of such corporations.
All of the outstanding common stock of each of Alpha and CDBI is held by,
and 50% of the outstanding common stock of UMDC is held by, Alvin S. Trenk, the
Chairman and Chief Executive Officer of the Company, Steven L. Trenk, President
and Chief Operating Officer of the Company, and Martin G. Jacobs, M.D., Medical
Director of the Company (collectively, "Certain Executive Officers").
Effective October 8, 1997 (the "IHS Closing Date"), each of Alpha and CDBI
sold substantially all of their respective assets to IHS of New York, Inc.,
retaining certain liabilities and certain assets. In addition, UMDC sold
substantially all of its assets to Renal Research Institute, L.L.C. ("RRI") in a
two stage closing. The first closing occurred in January 1998. The second
closing is contingent upon approval from the New York State Department of
Health.
As of the IHS Closing Date, approximately $1,298,930 was due to the Company
from Alpha for loans, advances and accrued consulting fees. The Certain
Executive Officers personally guaranteed certain loans and advances due from
Alpha, aggregating $565,000 as of the IHS Closing Date. Further, approximately
$1,749,564 was due to the Company from CDBI for loans, advances and consulting
fees.
The proceeds of the IHS transaction were applied, in part, to the repayment
of amounts due the Company. Following the IHS Closing Date, all amounts due
from Alpha and CDBI, other than $200,000 of consulting fees, were paid in full.
The unpaid consulting fees were not recognized by the Company due to realization
uncertainties.
The Company and Certain Executive Officers jointly and severally guaranteed
the repayment of loans made by a bank lender to UMDC and to Drs. Lorch and
Cortell, the remaining shareholders of UMDC, aggregating approximately $623,000
as of the first RRI closing. The Company loaned UMDC additional amounts
aggregating approximately $3,452,000 and UMDC had accrued consulting and service
fees and certain accounting fees aggregating approximately $1,907,000 as of the
first RRI Closing. In addition, the Company was a guarantor of UMDC's real
property lease. In connection with the first RRI closing, the bank loan was
repaid and the Company and the Certain Executive Officers were released from
their various guarantees related to UMDC. As of December 31, 1998 $1,764,000 of
consulting, service and other fees remained outstanding from UMDC and $127,000
of principal and interest remained outstanding from Drs. Lorch and Cortell.
Pending the completion of the second RRI closing with UMDC, if any, UMDC
and RRI have entered into a consulting and service agreement pursuant to which
RRI will perform certain services for UMDC.
60
<PAGE>
While the agreements with Alpha and CDBI were not negotiated in arms-length
transactions, the Company believes the terms of its agreements with the
Consulting Customers are the same or better than those which the Company could
have obtained in arms-length transactions.
Martin G. Jacobs, M.D., the Corporate Medical Director and a director of
the Company is also in private practice with Nephrological Associates, P.A.
which provided services to the Company as a Medical Director and which, prior to
the sale of the Company's dialysis treatment assets generated, together with
Dr. Jacobs individually, approximately 10% of the Company's clients.
During fiscal year 1998, the Company advanced an aggregate of approximately
$134,400 to Techtron, Inc. Certain Executive Officers hold a majority of the
outstanding common stock of Techtron, Inc., the Company's principal shareholder.
The advances were made pursuant to promissory notes which bear interest at the
rate of 8% per annum and are payable on demand. Repayment of the promissory
notes has been personally guaranteed by Certain Executive Officers.
United retains the services of Jeffrey Trenk as a consultant to provide day
to day management of United's dry cleaning operations. Mr. Trenk received
consulting and finder's fees of $65,150 from United during the 1998 fiscal year.
In addition, Mr. Trenk has the right under certain circumstances to acquire up
to 10% of the outstanding equity interests in United. Jeffrey Trenk is the son
of Alvin S. Trenk, brother of Steven L. Trenk and nephew of Martin G. Jacobs.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors, and persons who beneficially own
more than ten percent of a registered class of the Company's equity securities,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission and the Nasdaq. The Company is not aware that any director,
officer or 10% beneficial owner of the Company's Common Stock failed to file
reports during the year ended December 31, 1998.
PROPOSAL 5. RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Company, subject to shareholder ratification, has selected Arthur
Andersen LLP, to serve as its independent public accountants for the fiscal year
ending December 31, 1999. If the shareholders do not ratify the appointment of
Arthur Andersen LLP, the Company may reconsider its selection.
61
<PAGE>
The affirmative vote of the holders of a majority of the shares of Common
Stock of the Company present, in person or by proxy, and entitled to vote at the
Meeting is required for the ratification and approval of the appointment of
auditors.
The Board of Directors recommends ratification and approval of the
appointment of Arthur Andersen LLP as independent auditors of the Company for
the fiscal year ended December 31, 1999.
Other Matters
The Board of Directors does not intend to bring any matters before the
Meeting other than as stated in this Proxy Statement, and is not aware that any
other matters will be presented for action at the Meeting. If any other matters
come before the Meeting, the persons named in the enclosed form of proxy will
vote the proxy with respect thereto in accordance with their best judgment,
pursuant to the discretionary authority granted by the proxy. Whether or not
you plan to attend the Meeting in person, please complete, sign, date and return
the enclosed proxy card promptly.
Attendance by Accountants
A representative of Arthur Andersen LLP is expected to be present at the
Meeting to respond to appropriate questions and will be given the opportunity to
make a statement if he desires to do so.
Information Incorporation by Reference
The information contained under the headings "Item 1-- Business," "Item 2--
Properties," "Item 3-- Legal Proceedings," and "Item 6-- Management's Discussion
and Analysis" in the Company's Annual Report for the Fiscal Year Ended December
31, 1998 ("Annual Report") is incorporated into this Proxy Statement. No other
part of the Annual Report is incorporated herein. The Related Agreements were
filed as exhibits to the Company's Report on Form 8-K filed with the SEC on
February 19, 1999, copies of which are available from the Company on request.
By Order of the Board of Directors
Steven L. Trenk
President
Dated: April 15, 1999
62
<PAGE>
TELALINK NETWORK, LTD. AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1998 and 1997
(With Independent Auditors'
Report Thereon)
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
TelaLink Network, Ltd. and subsidiary:
We have audited the accompanying consolidated balance sheets of TelaLink
Network, Ltd. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
TelaLink Network, Ltd. and subsidiary 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.
February 17, 1999 KPMG LLP
Houston, Texas
F-2
<PAGE>
TELALINK NETWORK, LTD. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
---------------- ----------------
<S> <C> <C>
Current assets:
Cash $ 102,200 -
Accounts receivable 207,280 -
Prepaid expenses and other current assets 22,773 -
---------------- ----------------
Total current assets 332,253 -
Property, plant and equipment, net 1,365,904 2,521
Goodwill, net 3,045,075 -
Other noncurrent assets 167,753 135
---------------- ----------------
Total assets $ 4,910,985 2,656
================ ================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Note payable to RTFC - current $ 140,206 -
Notes payable to related party 166,667 -
Due to shareholder 200,000 -
Accounts payable and accrued expenses 163,978 -
Customer deposits 32,635 -
---------------- ----------------
Total current liabilities 703,486 -
Note payable to RTFC - long term 3,117,689 -
Series A convertible preferred stock, $.001 par value; 2,000,000 shares
authorized, 600,000 and -0- shares issued and
outstanding, respectively 1,500,000 -
Stockholders' equity (deficit):
Common stock, $.001 par value; 10,000,000 shares authorized,
2,840,000 and -0- shares issued and outstanding, respectively 2,840 -
Additional paid-in capital 83,083 -
Retained earnings (accumulated deficit) (496,113) 2,656
---------------- ----------------
Total stockholders' equity (deficit) (410,190) 2,656
---------------- ----------------
Total liabilities and stockholders' equity (deficit) $ 4,910,985 2,656
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TELALINK NETWORK, LTD. AND SUBSIDIARY
Consolidated Statements of Operations
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Revenues:
Local network services $ 34,529 -
Long distance network access 32,161 -
Other 29,840 -
---------------- ----------------
Total revenues 96,530 -
Operating expenses:
Plant operations 45,945 -
Customer operations 12,109 -
General and administrative 468,090 8,467
Depreciation and amortization 32,960 878
Other operating 5,557 -
---------------- ----------------
Total operating expenses 564,661 9,345
---------------- ----------------
Loss from operations (468,131) (9,345)
Interest expense 29,084 -
Other expense 1,554 -
---------------- ----------------
Net loss $ (498,769) (9,345)
================ ================
Basic loss per share:
Net loss $ (2.11)
================
Weighted-average common shares outstanding 236,667
================
Diluted loss per share:
Net loss $ (2.11)
================
Weighted-average common and dilutive shares outstanding 236,667
================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TELALINK NETWORK, LTD. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Retained
Common stock Additional earnings Total
------------------------------- paid-in (accumulated stockholders'
Shares Amount capital deficit) equity (deficit)
----------------- ------------ ---------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996 - $ - - 12,001 12,001
Net loss - - - (9,345) (9,345)
----------------- ------------ ---------------- ------------------- --------------------
Balances, December 31, 1997 - - - 2,656 2,656
Issuance of common stock for
services performed 2,550,000 2,550 - - 2,550
Conversion of notes payable to
common stock 250,000 250 83,083 - 83,333
Issuance of common stock for
notes payable concession 40,000 40 - - 40
Net loss - - - (498,769) (498,769)
----------------- ------------ ---------------- ------------------- --------------------
Balances, December 31, 1998 2,840,000 $ 2,840 83,083 (496,113) (410,190)
================= ============ ================ =================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TELALINK NETWORK, LTD. AND SUBSIDIARY
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 $ (498,769) (9,345)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 32,960 878
Common stock issued for services 2,590 -
Changes in assets and liabilities net of working capital acquired:
Accounts receivable, net (42,199) -
Prepaid expenses and other current assets (22,773) -
Accounts payable and accrued liabilities 163,978 -
Customer deposits (6,200) -
---------------- ---------------
Net cash used in operating activities (370,413) (8,467)
---------------- ---------------
Cash flows from investing activities:
Cash paid for acquisition (4,534,351) -
Cash paid for property, plant and equipment additions (33,313) -
Cash paid for other noncurrent assets (3,408) -
---------------- ---------------
Net cash used in investing activities (4,571,072) -
---------------- ---------------
Cash flows from financing activities:
Cash proceeds from note payable to RTFC 3,257,895 -
Cash proceeds from notes payable to related parties 250,000 -
Due to shareholder 200,000 -
Cash paid for subordinated capital certificate and
other debt costs (164,210) -
Cash proceeds from preferred stock issuance 1,500,000 -
---------------- ---------------
Net cash provided by financing activities 5,043,685 -
---------------- ---------------
Net increase (decrease) in cash and cash equivalents 102,200 (8,467)
Cash and cash equivalents:
Beginning of period - 8,467
---------------- ---------------
End of period $ 102,200 -
================ ===============
Summary of significant noncash financing activities:
Conversion of notes payable to common stock $ 83,333 -
Issuance of common stock for notes payable concession 40 -
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TELALINK NETWORK, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Organization and Business
TelaLink Network, Ltd. and subsidiary (the Company) is a Delaware corporation
headquartered in Washington D.C. and founded in 1986. The Company is
dedicated to the acquisition, consolidation and growth of rural local
exchange carriers (RLECs) that provide basic telecommunications services
throughout rural communities and protected territories in the United States.
(2) Summary of Significant Accounting Policies
General
The Company's telephone operations are regulated in nature and its telephone
accounting records are maintained in accordance with the rules and
regulations of the Public Service Commission of West Virginia which
substantially adhere to the rules and regulations of the Federal
Communications Commission. The Company's regulated operations are subject to
the provisions of Statement of Financial Accounting Standards No. 71 (SFAS
71), Accounting for the Effects of Certain Types of Regulation.
Principles of Consolidation
The consolidated financial statements include the accounts of TelaLink
Network, Ltd. and its wholly-owned subsidiaries. All significant
intercompany balances have been eliminated in consolidation.
Revenue Recognition
Included in revenues are local service revenues and toll service revenues
that are recognized when earned, regardless of the period in which they are
billed. Local exchange service revenues are based upon tariffs filed with
the West Virginia Public Service Commission. Telephone toll and long distance
network access services are furnished jointly with AT&T Communications, Inc.
and Citizens Telecommunications. Interstate access charges are based on a
tariff filed by the National Exchange Carrier Association (NECA) with the
Federal Communication Commission (FCC). Intrastate-intralata toll and access
revenues are based upon a special settlement arrangement with certain
intrastate-intralata long distance carriers. Interstate toll and access
revenues are based on the average settlement schedule as determined by NECA.
Advanced billings are recorded when monthly local service is billed in
advance of the month it is earned.
Cash and Cash Equivalents
For purposes of financial statement presentation and reporting cash flows,
all liquid investments with original maturities at date of purchase of three
months or less are considered cash equivalents.
F-7
<PAGE>
TELALINK NETWORK, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Property, Plant and Equipment
Property, plant and equipment consist primarily of telephone switching
equipment, real property, vehicles and other equipment and is stated at cost.
Depreciation is computed using the straight-line method over lives approved
by regulators, which range from 5 to 25 years. Such depreciable lives have
generally exceeded the depreciable lives used by nonregulated entities.
Income Taxes
No provision for Federal, state and local income taxes has been made because
the Company has sustained cumulative losses since its inception. A 100%
valuation allowance has been established for the related deferred tax asset.
Loss Per Share
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding for
the period, and excludes the effect of potentially dilutive securities (such
as options, warrants and convertible securities) which are convertible into
common stock. Dilutive loss per share reflects the potential dilution from
options, warrants and convertible securities. In calculating diluted loss
per share for 1998, potential dilutive securities were excluded due to their
antidilutive effect, as the Company incurred a loss for the year. Basic and
diluted loss per share has not been calculated for 1997 due to the fact that
no shares were outstanding.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS No. 123), requires companies to recognize stock-
based expense based on the estimated fair value of employee stock options.
Alternatively, SFAS No. 123 allows companies to retain the current approach
set forth in APB Opinion 25, Accounting for Stock Issued to Employees,
provided that expanded footnote disclosure is presented. The Company has not
adopted the fair value method of accounting for stock-based compensation
under SFAS No. 123, but has provided the pro forma disclosure required
therein.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
the disclosure of estimated fair values for financial statement instruments.
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgement and therefore, cannot be
determined with precision. The Company believes that the carrying amounts of
its current assets and current liabililties approximate the fair value of
such items due to their short-term nature. The carrying amount of long-term
debt approximates its fair value because the interest rates approximate
market.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported 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.
(3) Acquisition of War Telephone Company
On December 2, 1998, the Company acquired substantially all of the assets of
War Telephone Company (War) for total cash proceeds of $4,500,000, plus
acquisition costs. War is an RLEC with operations located in War, West
Virginia.
F-8
<PAGE>
TELALINK NETWORK, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The following unaudited pro forma information represents the combined results
of operations as if the acquisition had been combined with the Company as of
January 1, 1997:
December 31,
-------------------------------------
1998 1997
---------------- ----------------
Revenues $ 1,159,261 1,059,601
Net income (loss) (271,273) 73,702
================ ================
The pro forma information is not necessarily indicative of operating results
that would have occurred if the acquisition had been consummated as of
January 1, 1997, nor is it necessarily indicative of future operating
results. The actual results of operations of War are included in the
Company's consolidated financial statements only from the date of
acquisition. In addition, actual results of operations for 1998 include
certain general and administrative charges as more fully discussed in note 6.
(4) Property, Plant and Equipment
Property, plant and equipment consist of the following at December 31:
1998 1997
---------------- ----------------
Telephone switching equipment $ 1,247,730 -
Land and buildings 106,188 -
Vehicles and other equipment 32,511 3,399
---------------- ----------------
1,386,429 3,399
Less accumulated depreciation 20,525 878
---------------- ----------------
$ 1,365,904 2,521
================ ================
(5) Goodwill
In connection with the acquisition of War, the Company recorded goodwill
equal to the excess of fair value of the assets at the date of acquisition.
Goodwill is being amortized using the straight-line method over a period of
forty years for financial statement purposes.
Goodwill consists of the following at December 31:
1998 1997
--------------- ---------------
Goodwill attributed to purchase $ 3,057,510 -
of War, December 2, 1998
Less accumulated amortization 12,435 -
--------------- ---------------
Goodwill, net $ 3,045,075 -
=============== ===============
Amortization expense $ 12,435 -
=============== ===============
F-9
<PAGE>
TELALINK NETWORK, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(6) Due to Shareholder
During 1998, the Company entered into a consulting agreement with Benchmark
Equity Group (Benchmark), a shareholder of the Company. Under the terms of
the consulting agreement, the Company was required to pay to Benchmark a fee
of $200,000 as invoiced by Benchmark. At December 31, 1998, these costs had
not been paid.
(7) Note Payable to RTFC
On December 2, 1998, a subsidiary of the Company borrowed $3,157,895 from the
Rural Telephone Finance Cooperative (RTFC) to finance the purchase of War.
The borrowings accrue interest at a variable rate, as determined by the RTFC
(6.10% at December 31, 1998), and require quarterly principal and/or interest
payments, as determined by the RTFC. Any remaining principal and accrued
interest are payable in full on September 24, 2013. The borrowings are
secured by substantially all the assets of War.
In conjunction with the loan agreement, and using a portion of the proceeds
from the loan, the Company purchased a 5% subordinated capital certificate,
which represents an investment in the RTFC, for $157,895. This amount is
included in other noncurrent assets on the accompanying consolidated balance
sheets.
Additionally, the Company has secured a revolving line of credit with the
RTFC that allows the Company to borrow up to $300,000 for working capital
purposes, at RTFC's short-term variable rate (6.7% at December 31, 1998),
until September 24, 2003 at which time all borrowings under the line of
credit are payable. Borrowings are secured by substantially all the assets
of War. As of December 31, 1998, the Company had borrowings of $100,000
outstanding under the line of credit, which are included in note payable to
RTFC on the accompanying consolidated balance sheets.
Proceeds from the borrowings were used to finance the acquisition of War and
for general corporate purposes. In connection with the borrowings, the
Company has entered into security agreements which assign substantially all
of the assets of the Company as collateral against the notes. The loan
agreement includes covenants which among other things, require the subsidiary
to maintain specified financial ratios and restrict payments of dividends.
The aggregate maturities of notes payable to RTFC as of December 31, 1998 are
as follows:
1999 $ 140,206
2000 148,957
2001 158,253
2002 168,129
2003 278,622
Thereafter 2,363,728
-----------
$ 3,257,895
===========
F-10
<PAGE>
TELALINK NETWORK, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(8) Notes Payable to Related Party
In three separate transactions during 1998 the Company borrowed $75,000,
$50,000 and $125,000 from Trident III, L.L.C. (Trident III). Trident III is
an investment fund managed by Benchmark, a shareholder of the Company.
The notes accrue interest at 15% and mature in April 1999. One-third of the
unpaid principal amount of each note is convertible at the option of Trident
III into common stock of the Company at a price per share equal to $0.33 per
share. During 1998, Trident III converted $83,333 of notes payable into
250,000 shares of the Company's common stock.
Under the original terms of the notes payable, repayment was accelerated by a
private equity or debt offering by the Company. In connection with the
offering of Series A convertible preferred stock discussed below, Trident III
agreed to delay the effectiveness of its right of repayment until April 30,
1999. In exchange for this concession, the Company issued 40,000 shares of
its common stock to Trident III.
(9) Series A Convertible Preferred Stock
On December 2, 1998, the Company sold 600,000 shares of Series A convertible
preferred stock to various investors for cash proceeds of $1,500,000. The
preferred stock is initially convertible into common stock of the Company at
a 1:1 ratio at the earlier of either: (1) the discretion of the stockholder;
or (ii) the acquisition of 10,000 cumulative access lines by the Company, at
which point the conversion is mandatory. Further, if the Company does not
acquire at least 10,000 cumulative access lines by June 30, 1999, the
preferred stockholders will be entitled to receive dividends from the total
unencumbered cash flow (as defined in the Preferred Stock Subscription
Agreement) until the total purchase price of the preferred stock has been
received by each preferred stockholder.
After payment of such dividends, the Company shall be required to use 100% of
unencumbered cash flow to redeem the Series A convertible preferred stock, on
a pro rata basis among the holders, for 100% of the purchase price of the
preferred stock. Upon redemption, holders of the preferred stock shall also
receive a right to receive common stock, exercisable upon the completion of
the redemption of all of the preferred stock such that the total number of
such conversion rights attributable to the preferred stock will convert into
such a number of outstanding shares of common stock as shall equal 10% of the
total outstanding common stock of the Company, and each holder of the rights
attributable to the preferred stock shall be entitled to receive a number of
shares of common stock, as shall reflect his proportionate holding of such
rights prior to the conversion.
(10) Common Stock
On November 30, 1998, the Company issued 2,550,000 shares of common stock to
several individuals as compensation for consulting and other services
performed. As a result, the Company recorded an expense in the amount of
$2,550 based on the fair value of the common stock on the date of issuance.
F-11
<PAGE>
TELALINK NETWORK, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(11) Loss Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted computations for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Weighted-
average
shares Per share
Loss outstanding amount
---------------- ------------------ ----------------
<S> <C> <C> <C>
Year ended December 31, 1998:
Basic loss per share $ (498,769) 236,667 $ (2.11)
Effect of dilutive warrants and options - - -
---------------- ------------------ ----------------
Diluted loss per share $ (498,769) 236,667 $ (2.11)
================ ================== ================
</TABLE>
Series A convertible preferred stock, which is convertible into 600,000
shares of common stock, and options to purchase 500,000 shares of common
stock at an exercise price of $1.87 per share were outstanding for a portion
of 1998, but were not included in the computation of diluted loss per share
due to their antidilutive effects.
(12) Employee Stock Options
The Company has issued options to purchase 500,000 shares of common stock to
a key employee. The options were granted with an exercise price equal to
$1.87 and vest ratably over a period of 3 years.
The Company applied APB Opinion No. 25 in accounting for its stock options
and, accordingly, no compensation cost has been recognized for its stock
options in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income would have been no
different.
At December 31, 1998, the exercise price of the options was $1.87 and the
remaining contractual life of the outstanding options was 9 years. Stock
option activity during the periods indicated was as follows:
Weighted-average
Number of exercise
shares price
---------------- ------------------
Balance at December 31, 1997 - $ -
Granted 500,000 1.87
Balance at December 31, 1998 500,000 $ 1.87
================ ==================
At December 31, 1998, no options were exercisable.
F-12
<PAGE>
TELALINK NETWORK, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(13) Employment Agreements
The Company has entered into employment agreements with three key executives
which provide for, among other things, guaranteed salaries and bonuses,
generally over a term of three years. In connection with one of these
employment agreements, the Company issued 500,000 shares of common stock to
the executive. Of these 500,000 shares, 250,000 shares are callable by the
Company at a price per share of $.001 if the Company does not achieve certain
financial targets by December 31, 1999.
(14) Concentration of Credit Risk
The Company is dependent upon sales to customers in the geographic area that
it serves. The Company provides services on credit to many of its customers
in the ordinary course of business, generally without collateral.
(15) Year 2000 Compliance (Unaudited)
The Company is continuing its efforts to prepare for the impact of the Year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 issues are a result of
computer programs, including microprocessing chips, using two digits rather
than four to define the applicable year. Any Company programs that have time-
sensitive software may recognize a date using "00" as the year 1900, rather
than the year 2000, which could result in miscalculation or system failures.
The Company's Year 2000 compliance efforts are focused principally on
information and telecommunication systems. The Company is aware that at
December 31, 1998 its digital electronic switching equipment is not Year 2000
compliant. However, management of the Company expects to make upgrades
necessary to bring the equipment into compliance by June 30, 1999, at a cost
of approximately $15,000. Should the Company be unable to complete the
necessary upgrades on a timely basis, its operations, cash flow and financial
position could be adversely affected.
(16) Merger Agreement
The Company has entered into a merger agreement with Continental Choice Care,
Inc. (CCCI). Upon completion of the merger, the Company's common stockholders
will receive 1,040,000 shares of CCCI common stock in exchange for all of the
outstanding common stock of the Company. The Company's Series A convertible
preferred stockholders will receive 600,000 shares of CCCI common stock in
exchange for all of the outstanding Series A convertible preferred stock of
the Company.
CCCI will enter 1,540,000 additional shares of its common stock into escrow
to be released to the Company's common stockholders upon the achievement of
certain earnings and stock price conditions. Additionally, CCCI will reserve
500,000 shares of its common stock for issuance upon the exercise of Company
management's stock options.
F-13
<PAGE>
WAR TELEPHONE COMPANY
Financial Statements
November 30, 1998 and December 31, 1997
(With Independent Auditors'
Report Thereon)
F-14
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholder
War Telephone Company
Bay Springs, Mississippi
We have audited the accompanying balance sheets of War Telephone Company (a
wholly-owned subsidiary of Colonial Telephone Company as of July 1, 1997) as of
November 30, 1998 and December 31, 1997, and the related statements of income,
stockholder's equity (deficit) and cash flows for the eleven-month period ended
November 30, 1998 and the year ended December 31, 1997. 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 War Telephone Company as of
November 30, 1998 and December 31, 1997, and the results of its operations and
its cash flows for the periods then ended in conformity with generally accepted
accounting principles.
Houston, Texas KPMG LLP
February 10, 1999
F-15
<PAGE>
WAR TELEPHONE COMPANY
Balance Sheets
November 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
Assets 1998 1997
---------------- ----------------
<S> <C> <C>
Current assets:
Cash $ 2,151 1,272
Cash-restricted 236,397 63,481
Accounts receivable-trade 165,081 90,127
Accounts receivable-NECA 44,890 --
Income tax receivable 9,304 --
Materials and supplies 6,002 6,064
Prepaid expenses 8,812 8,640
---------------- ----------------
Total current assets 472,637 169,584
---------------- ----------------
Noncurrent assets:
Accounts receivable-NECA 141,757 --
Due from officer, net -- 1,089,019
Goodwill, net of accuumulated amortization 408,577 422,334
Other assets 200 3,572
---------------- ----------------
Total noncurrent assets 550,534 1,514,925
---------------- ----------------
Property, plant and equipment:
Plant in service-regulated 3,011,594 2,747,208
Plant in service-nonregulated 16,970 16,255
---------------- ----------------
Total plant in service 3,028,564 2,763,463
---------------- ----------------
Accumulated depreciation-regulated (1,607,566) (1,497,992)
Accumulated depreciation-nonregulated (16,970) (15,240)
---------------- ----------------
Total accumulated depreciation (1,624,536) (1,513,232)
---------------- ----------------
Net property, plant, and equipment 1,404,028 1,250,231
---------------- ----------------
Total assets $2,427,199 2,934,740
================ ================
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
WAR TELEPHONE COMPANY
Balance Sheets
November 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
(Continued)
Liabilities and Stockholder's Equity (Deficit) 1998 1997
---------------- ----------------
<S> <C> <C>
Current liabilities:
Bank overdraft payable $ 5,850 101
Accounts payable 527,625 243,355
Current maturities of note payable 295,000 140,000
Customers' deposits 32,335 30,835
Advance billings 38,835 34,534
Accrued expenses 82,216 76,112
Accrued interest 75,656 45,563
Deferred revenue - NECA 22,092 -
Accrued income taxes - 69,611
---------------- ----------------
Total current liabilities 1,079,609 640,111
Long-term liabilities:
Note payable, net of current maturities 380,000 535,000
Due to officer, net 67,809 -
Due to Colonial Telephone Company, net 363,852 382,608
Deferred revenue - NECA 141,757 -
Deferred tax liability 403,788 427,561
---------------- ----------------
Total liabilities 2,436,815 1,985,280
---------------- ----------------
Stockholder's equity (deficit):
Common stock - $1 par; 5,000 shares authorized,
issued and outstanding 5,000 5,000
Retained earnings (accumulated deficit) (14,616) 944,460
---------------- ----------------
Total stockholders' equity (deficit) (9,616) 949,460
---------------- ----------------
Total liabilities and stockholder's equity (deficit) $ 2,427,199 2,934,740
================ ================
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
<TABLE>
<CAPTION>
WAR TELEPHONE COMPANY
Statements of Income
For the eleven-month period ended November 30, 1998
and the year ended December 31, 1997
1998 1997
---------------- ----------------
<S> <C> <C>
Operating revenues:
Basic local network services $ 386,711 417,846
Long distance network services 570,754 516,591
Network access services 54,049 65,776
Other operating revenue 51,217 59,388
---------------- ----------------
Total revenues 1,062,731 1,059,601
---------------- ----------------
Operating expenses:
Plant specific operations 106,408 137,523
Plant nonspecific operations 30,264 18,933
Customer operations 135,578 219,689
Corporate operations 135,507 211,332
Depreciation and amortization 123,332 130,172
Other operating expenses 53,918 64,739
---------------- ----------------
Total operating expenses 585,007 782,388
---------------- ----------------
Income from operations 477,724 277,213
Other income (expense):
Interest income 2,953 1,719
Interest expense (82,906) (108,708)
Other income (expense) 7,644 (10,568)
---------------- ----------------
Total other income (expense) (72,309) (117,557)
---------------- ----------------
Income before provision for income taxes 405,415 159,656
Provision for income taxes:
Current 201,692 114,194
Deferred tax expense (benefit) (23,773) (37,585)
---------------- ----------------
Total provision for income taxes 177,919 76,609
---------------- ----------------
Net income $ 227,496 83,047
================ ================
Basic earnings per share $ 45.50 16.61
================ ================
Diluted earnings per share $ 45.50 16.61
================ ================
Weighted-average common shares outstanding 5,000 5,000
================ ================
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
<TABLE>
<CAPTION>
WAR TELEPHONE COMPANY
Statements of Stockholder's Equity (Deficit)
For the eleven-month period ended November 30, 1998
and the year ended December 31, 1997
Retained Total
earnings stockholder's
Common (accumulated equity
stock deficit) (deficit)
-------------- -------------------- --------------------
<S> <C> <C> <C>
Balances at December 31, 1996 $ 5,000 861,413 866,413
Net income - 83,047 83,047
-------------- -------------------- --------------------
Balances at December 31, 1997 5,000 944,460 949,460
Net income - 227,496 227,496
Dividend to stockholder - (1,186,572) (1,186,572)
-------------- -------------------- --------------------
Balances at November 30, 1998 $ 5,000 (14,616) (9,616)
============== ==================== ====================
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
<TABLE>
<CAPTION>
WAR TELEPHONE COMPANY
Statements of Cash Flows
For the eleven-month period ended November 30, 1998
and the year ended December 31, 1997
1998 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 982,108 1,089,082
Interest and dividends received 2,953 1,719
Cash paid to suppliers and employees (435,447) (673,860)
Interest paid (52,813) (116,808)
Taxes paid (280,617) (225,354)
---------------- ----------------
Net cash provided by operating activities 216,184 74,779
---------------- ----------------
Cash flows from investing activities -
purchases of property, plant and equipment (10,671) (7,459)
---------------- ----------------
Cash flows from financing activities:
Net advances to/from related parties (37,467) 27,789
Principal payments on note payable - (120,000)
---------------- ----------------
Net cash used in financing activities (37,467) (92,211)
---------------- ----------------
Increase (decrease) in cash and cash equivalents 168,046 (24,891)
Cash and cash equivalents, beginning of period 64,652 89,543
---------------- ----------------
Cash and cash equivalents, end of period $ 232,698 64,652
================ ================
Classified on the balance sheets as follows:
Current assets:
Cash $ 2,151 1,272
Cash - restricted 236,397 63,481
Current liabilities - bank overdraft payable (5,850) (101)
---------------- ----------------
Cash and cash equivalents, end of period $ 232,698 64,652
================ ================
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
WAR TELEPHONE COMPANY
Statements of Cash Flows
For the eleven-month period ended November 30, 1998
and the year ended December 31, 1997
1998 1997
---------------- ----------------
(Continued)
<S> <C> <C>
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 227,496 83,047
Adjustments reconciling net income to net cash
provided by operating activities:
Depreciation and amortization 123,332 130,172
Provision for deferred taxes (23,773) (37,585)
(Increase) decrease in assets:
Accounts receivable - trade (74,954) 24,121
Accounts receivable - NECA (22,798) -
Income tax receivable (9,304) -
Materials and supplies 62 216
Prepaid expenses (172) 8,810
Other assets 3,372 (3,372)
Increase (decrease) in liabilities:
Accounts payable 20,536 (49,273)
Customers' deposits 1,500 1,300
Advance billings 4,301 1,730
Accrued expenses 6,104 34,873
Accrued interest 30,093 (8,100)
Accrued income taxes (69,611) (111,160)
---------------- ----------------
Total adjustments (11,312) (8,268)
---------------- ----------------
Net cash provided by operating activities $ 216,184 74,779
================ ================
Supplemental schedule of noncash financing activities:
Assignment of due from officer receivable
as dividend to stockholder in lieu of cash $ 1,186,572 -
================ ================
Short-term borrowings for purchase of property,
plant and equipment $ 263,734 -
================ ================
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
WAR TELEPHONE COMPANY
Notes to Financial Statements
November 30, 1998 and December 31, 1997
(1) Summary of Significant Accounting Policies
Organization
War Telephone Company (the Company) was incorporated in the state of West
Virginia on September 1, 1985 and is engaged in the ownership and operation
of a telephone system to approximately 1,650 customers in War, West Virginia.
The Company is a wholly-owned subsidiary of Colonial Telephone Company
(Colonial) effective July 1, 1997.
The Company's telephone operations are regulated in nature and its telephone
accounting records are maintained in accordance with the rules and
regulations of the Public Service Commission of West Virginia which
substantially adheres to the rules and regulations of the Federal
Communications Commission. The Company's regulated operations are subject to
the provisions of Statement of Financial Accounting Standards No. 71 (SFAS
71), Accounting for the Effects of Certain Types of Regulation.
As discussed further in note 9, the Company sold substantially all of its
assets and liabilities to TelaLink Network, Inc. on December 2, 1998.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect certain reported amounts and disclosures. Accordingly, actual
results may differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers cash in
operating bank accounts, cash on hand and bank overdrafts payable as cash and
cash equivalents.
Cash - Restricted
Cash - restricted consists of funds deposited on a monthly basis with Regions
Bank, trustee for the McDowell County West Virginia Industrial Development
Bonds (War Telephone Project). These deposits are required by the bond
indenture agreement and can only be used to fund the semi-annual debt service
payments.
Revenue Recognition
Included in revenues are local service revenues and toll service revenues
that are recognized when earned, regardless of the period in which they are
billed. Local exchange service revenues are based upon tariffs filed with
the West Virginia Public Service Commission. Telephone toll and access
services are primarily furnished jointly with AT&T Communications, Inc. and
Citizens Telecommunications. The interstate access charges are based on a
tariff filed by the National Exchange Carrier Association (NECA) with the
Federal Communication Commission (FCC). The Company's intrastate-intralata
toll and access revenues are based upon a special settlement arrangement with
certain intrastate-intralata long distance carriers. Interstate toll and
access revenues are based on the average settlement schedule as determined by
NECA.
F-22
<PAGE>
WAR TELEPHONE COMPANY
Notes to Financial Statements
November 30, 1998 and December 31, 1997
Advance billings are recorded when monthly local service is billed in advance
of the month it is earned.
Accounts Receivable - NECA and Deferred Revenue - NECA
These accounts represent the amounts approved by NECA for the Company to
recover a portion of the capital costs related to a certain equipment upgrade
for equal access. The eight-year recovery period began on May 6, 1998 (equal
access conversion date) and continues through April 2006. The recovery
amount is $1,841 monthly and the Company recognizes the deferred revenue
monthly over the recovery period.
Advances to/from Related Parties
The Company makes advances to and receives advances from its parent,
Colonial, and its officers without specified terms and conditions for
repayment.
Goodwill
Goodwill is amortized over forty years using the straight-line method.
Plant in Service - Regulated
Telephone plant in service is stated at original cost of construction,
including capitalized costs such as taxes, payroll and related expenses.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as provided by the West Virginia Public Service
Commission. Renewals and betterment of units of property are charged to
telephone plant in service. The original cost of depreciable property
retired, together with removal cost, less any salvage realized, is charged to
accumulated depreciation. Repairs and renewals of minor items of property
are charged to maintenance expense. No gain or loss is recognized on
ordinary retirements of depreciable property.
Plant in Service - Nonregulated
Nonregulated equipment held for lease (customer premises equipment) is stated
at cost. Depreciation is provided using the straight-line method. Only a
small amount of the customers' nonregulated equipment is owned by the
Company. The Company utilizes nonregulated equipment owned by Colonial,
which charges the Company a monthly fee for maintaining the Company's
customer's equipment.
Income Taxes
The Company files a consolidated federal income tax return with its parent,
Colonial, for the period of January 1, 1998 to November 30, 1998 and the
short period of July 1, 1997 to December 31, 1997. For the period of
January 1, 1997 to June 30, 1997, the Company filed a separate return. For
book purposes, the Company computes its federal and state income tax
provision by applying the statutory rates of 34% and 9%, respectively, to its
pretax income (separate return method).
F-23
<PAGE>
WAR TELEPHONE COMPANY
Notes to Financial Statements
November 30, 1998 and December 31, 1997
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of fixed assets for
financial and income tax reporting. The deferred tax liability represents
the future tax return consequence of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or
settled.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
the disclosure of estimated fair values for financial statement instruments.
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgement and therefore, cannot be
determined with precision. The Company believes that the carrying amounts of
its current assets and current liabilities approximate the fair value of such
items due to their short-term nature. The carrying amount of long-term debt
approximates its fair value because the interest rates approximate market.
Earnings Per Share
Basic earnings per share is calculated by dividing income available to the
common stockholder by the weighted-average number of common shares
outstanding for the period, and excludes the effects of potentially dilutive
securities which are convertible into common stock. Dilutive earnings per
share reflects the potential dilution from options, warrants and convertible
securities. For 1998 and 1997, there were no potentially dilutive securities
outstanding.
(2) Goodwill
The Company recorded goodwill related to the cost of the acquisition in
excess of fair value of the assets at the date of acquisition. Goodwill is
being amortized using the straight-line method over a period of forty years
for financial statement purposes.
Goodwill consists of the following at November 30, 1998 and December 31,
1997:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Goodwill attributed to purchase of business, December 1,
1985 $ 603,680 603,680
Less accumulated amortization (195,103) (181,346)
---------------- ----------------
Net goodwill 408,577 422,334
================ ================
Amortization expense $ 13,757 15,008
================ ================
</TABLE>
F-24
<PAGE>
WAR TELEPHONE COMPANY
Notes to Financial Statements
November 30, 1998 and December 31, 1997
(3) Property, Plant and Equipment
The major classes of telephone plant as of November 30, 1998 and December 31,
1997 and their related straight-line depreciation rates are as follows:
<TABLE>
<CAPTION>
Annual
depreciation
1998 1997 rate
---------------- ---------------- ----------------
<S> <C> <C> <C>
Regulated:
Land and right of ways $ 19,677 19,677 -
Buildings 70,484 70,484 2.5 - 4.0 %
Digital electronic switching 1,115,798 851,799 5.0 %
Circuit equipment 133,662 133,662 5.0 %
Other equipment 94,085 94,085 20.0 %
Pole lines, cable, and wire 1,505,432 1,505,229 3.5 - 12.5 %
Furniture and office equipment 22,468 22,468 4.0 - 10.0 %
Vehicles 49,988 49,804 20.0 %
---------------- ----------------
Total plant in service - regulated 3,011,594 2,747,208
Less accumulated depreciation (1,607,566) (1,497,992)
Total plant in service - regulated,
net 1,404,028 1,249,216
---------------- ----------------
Nonregulated:
Equipment 16,970 16,255 15.65 %
Less accumulated depreciation (16,970) (15,240)
---------------- ----------------
Total plant in service - nonregulated,
net - 1,015
---------------- ----------------
Net property, plant and equipment $ 1,404,028 1,250,231
================ ================
</TABLE>
Depreciation expense for regulated equipment amounted to $109,575 for 1998
and $115,164 for 1997. Depreciation expense for nonregulated equipment
amounted to $1,730 for 1998 and $2,377 for 1997.
In May 1998, the Company completed an equipment upgrade, including software
for equal access, totaling $279,724, which is reported in digital electronic
switching. A portion of these equal access capital costs has been approved
for recovery by NECA, as further described in note 1 to the financial
statements.
F-25
<PAGE>
WAR TELEPHONE COMPANY
Notes to Financial Statements
November 30, 1998 and December 31, 1997
(4) Note Payable
Note payable consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Note payable - Promissory note to McDowell
County, West Virginia, payable to its trustee,
Regions Bank; substantially all of the Company's
telephone plant in service is pledged as collateral
for the promissory note and the promissory note
is pledged as security for the McDowell County
West Virginia Industrial Development Bonds
(War Telephone Project), Series 1981, in the
original amount of $1,500,000; interest at 13.5%
per annum on the remaining balance; semi-annual
interest payments are due February 1 and
August 1, with principal payments required
annually on August 1, varying in amount;
matures in August 2001. $ 675,000 675,000
Less current maturities (295,000) (140,000)
---------------- ----------------
Note payable, net of current maturities $ 380,000 535,000
================ ================
</TABLE>
The scheduled annual requirement for principal payments on the note payable
as of November 30, 1998, are as follows:
Year Amount
----------- ---------
1998 $ 140,000
1999 155,000
2000 180,000
2001 200,000
---------
Total $ 675,000
=========
The trustee, Regions Bank, failed to pay the scheduled debt service payment
for August 1, 1998 to the bondholders from the Company's restricted cash
funds deposited with the trustee, summarized as follows:
Principal $ 140,000
Interest 45,563
---------
Total debt service payment due August 1, 1998 $ 185,563
==========
F-26
<PAGE>
WAR TELEPHONE COMPANY
Notes to Financial Statements
November 30, 1998 and December 31, 1997
In January 1999, the above note payable in the amount of $535,000 and the
related accrued interest of approximately $30,000 was paid in full with the
proceeds from the sale of substantially all of the Company's assets, as
further explained in note 9 to the financial statements.
(5) Related Party Transactions
The amounts due to, or receivable from, related parties are summarized below.
Due to/from officer
The Company made advances to and received advances from one of its officers.
These advances are without specified terms or conditions for repayment.
During the eleven-month period ended November 30, 1998 and the year ended
December 31, 1997, no interest was received or paid by the Company and/or the
officer.
1998 1997
---------------- ----------------
Due from officer, net $ - 1,089,019
================ ================
Due to officer, net $ 67,809 -
================ ================
Due to Colonial Telephone Company
The Company made advances to and received advances from its parent, Colonial,
(effective July 1, 1997). These advances are without specified terms or
conditions for repayment. During the eleven-month period ended November 30,
1998 and the year ended December 31, 1997, no interest was received or paid
by the Company and/or Colonial.
1998 1997
---------------- ----------------
Due to Colonial Telephone
Company, net $ 363,852 382,608
================ ================
Additional related party information is as follows:
Parent cost allocation - Colonial Telephone Company
Colonial provides the Company with certain management services including
centralized management, accounting, consulting, data processing, purchasing
and customer billing. Colonial also provides similar services to other
companies that are owned by the same shareholder or are wholly-owned
subsidiaries. Expenses which may be directly associated with the Company are
directly charged. Other costs incurred by Colonial are allocated to all
entities under its management. The total costs charged to the Company were
$81,592 for 1998 and $77,619 for 1997 and are included in the statements of
income, as summarized below:
1998 1997
---------------- ----------------
Customer operations $ 50,088 44,494
Corporate operations 31,504 33,125
---------------- ----------------
Total parent cost allocation $ 81,592 77,619
================ ================
F-27
<PAGE>
WAR TELEPHONE COMPANY
Notes to Financial Statements
November 30, 1998 and December 31, 1997
Management fees - Colonial Telephone Company
In addition to actual costs incurred and allocated (parent cost allocation),
Colonial charges a management fee to the companies under its management. For
1998 and 1997, the management fees charged to the Company were $71,500 and
$156,000, respectively, and are included in corporate operations in the
statements of income.
Equipment maintenance fees - Colonial Telephone Company
Additionally, monthly fees are charged to the Company by Colonial for
services rendered on behalf of the Company for the maintenance of its
customer's premise equipment, as further explained in note 1 to the financial
statements. These fees generally represent the net of equipment fees charged
to the Company's customers less the direct expenses incidental to this income
such as labor, material and depreciation expense on nonregulated equipment.
For 1998 and 1997, the fees charged to the Company were $51,585 and $65,327,
respectively.
(6) Income Taxes
The Company filed its own federal income tax return for the short period of
January 1, 1997 to June 30, 1997. The Company files a consolidated federal
income tax return with its parent, Colonial, for the period of July 1, 1997
to December 31, 1997 and for the period of January 1, 1998 to November 30,
1998. The Company's 1998 and 1997 tax expense is $177,919 and $76,609,
respectively. As of November 30, 1998 and December 31, 1997, the income tax
related amounts included in due to Colonial Telephone Company were $201,692
and $69,933, respectively.
Deferred income taxes are calculated on the difference between the financial
reporting and the income tax basis of property, plant and equipment.
The component of the deferred tax liability is as follows:
1998 1997
---------------- ----------------
Property, plant
and equipment $ 403,788 427,561
================ ================
F-28
<PAGE>
WAR TELEPHONE COMPANY
Notes to Financial Statements
November 30, 1998 and December 31, 1997
The components of federal and state income tax expense are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Currently payable:
Federal $ 156,243 89,071
State 45,449 25,123
Total currently payable 201,692 114,194
---------------- ----------------
Deferred:
Federal (21,670) (34,260)
State (2,103) (3,325)
Total deferred (benefit) (23,773) (37,585)
---------------- ----------------
Total provision for income taxes $ 177,919 76,609
================ ================
</TABLE>
The Company's effective tax rate applicable to income before taxes differed
from the U.S. federal income tax rate of 34% primarily due to state income
taxes of $43,346 and $21,798 in 1998 and 1997, respectively, and
nondeductible expenses.
(7) Contingencies
Concentration of Credit Risk
Cash
The Company's cash balance in one financial institution is insured by the
Federal Deposit Insurance Corporation up to $100,000. At November 30, 1998,
the amount on deposit in that one institution exceeded the federally insured
limit by approximately $136,000.
Accounts Receivable
The Company is dependent upon sales to customers in the geographic area that
it serves. The Company provides services on credit to many of its customers
in the ordinary course of business generally without collateral.
(8) Commitments
Compensated Absences
The Company did not accrue a liability for compensated absences as of
November 30, 1998 or December 31, 1997. The Company's policy is to allow for
the carryover of sick leave but not vacation leave. Due to the small number
of employees of the Company, this liability is not considered material to the
financial statements.
F-29
<PAGE>
WAR TELEPHONE COMPANY
Notes to Financial Statements
November 30, 1998 and December 31, 1997
(9) Subsequent Events
Sale of Business Operations
On December 2, 1998, the Company sold substantially all of its assets and
liabilities that related to the operation of the telephone business for
approximately $4.5 million to War Telecommunications Company, Inc. and its
parent company, TelaLink Network, Ltd. Approximately $565,000 of the sale
proceeds was used to pay off the note payable and related accrued interest,
as more fully described in note 4 to the financial statements.
Corporate Name Change
Subsequent to November 30, 1998, the Company changed its corporate name to
McDowell Telephone Company.
(10) Year 2000 Compliance (Unaudited)
The Company is continuing in its efforts to prepare for the impact of the
Year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 issues are a result of
computer programs, including microprocessing chips, using two digits rather
than four to define the applicable year. Any Company programs that have
time-sensitive software may recognize a date using "00" as the year 1900,
rather than the year 2000, which could result in miscalculation or system
failures.
The Company's efforts are focused principally on information and
telecommunication systems. The Company is aware that at November 30, 1998
its digital electronic switching equipment is not Year 2000 compliant.
However, management of the Company expects to make upgrades necessary to
bring the equipment into compliance by June 30, 1999 at a cost of
approximately $15,000. Should the Company be unable to complete the
necessary upgrades on a timely basis, its operations, cash flow and financial
position could be adversely affected.
F-30
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
TelaLink Network, Ltd.
We consent to the use of our report dated February 17, 1999, related to the
consolidated financial statements of TelaLink Network, Ltd. and subsidiary as of
December 31, 1998 and 1997, and for each of the years in the two year period
ended December 31, 1998, included in the Proxy Statement of Continental Choice
Care, Inc. filed pursuant to Rule 14(a) of the Securities and Exchange Act of
1934.
/s/ KPMG LLP
Houston, Texas
March 15, 1999
F-31
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
War Telephone Company
We consent to the use of our report dated February 10, 1999, related to the
financial statements of War Telephone Company as of November 30, 1998 and
December 31, 1997, and for the eleven months ended November 30, 1998 and the
year ended December 31, 1997, included in the Proxy Statement of Continental
Choice Care, Inc. filed pursuant to Rule 14(a) of the Securities and Exchange
Act of 1934.
/s/ KPMG LLP
Houston, Texas
March 15, 1999
F-32
<PAGE>
CONTINENTAL CHOICE CARE, INC.
The undersigned hereby appoints Steven L. Trenk and Alvin S. Trenk or
either of them, with full power of substitution, as proxies for the undersigned,
to vote the number of shares of common stock of the Company that the undersigned
would be entitled to vote, and with all the power the undersigned would possess,
if personally present, at the annual meeting of shareholders of Continental
Choice Care, Inc. (the "Company"), to be held at Hamilton Park Conference, 175
Park Avenue, Florham Park, New Jersey 07932, on May 17, 1999, at 4:00 p.m.,
New York City time, or any adjourmnent thereof, as follows:
1. Approve the Agreement and Plan of Merger dated as of February 5, 1999, the
consummation of the transactions contemplated thereby and related matters,
and the amendment of the Company's Certificate of Incorporation to change the
Company's name from "Continental Choice Care, Inc." to "TelaLink Holding
Corp."
-For or -Against or -Abstain
2. Approve the amendment of the Company's Certificate of Incorporation to
increase the authorized number of shares of the Company's common stock from
10,000,000 to 20,000,000 shares.
-For or -Against or -Abstain
3. Approve the increase in the number of shares of the Company's Common Stock
reserved for issuance under the Company's 1997 Equity Incentive Plan from
1,250,000 to 2,500,000.
-For or -Against or -Abstain
4. For election of Steven L. Trenk as Class II director.
-For or -Withhold Authority
5. Approval of the appointment for Arthur Andersen LLP as the Company's
independent auditors for the fiscal year ending December 31, 1999.
-For or -Against or -Abstain
6. In their discretion, on such other business as may properly come before the
meeting or any adjournment thereof.
The Proxies will vote as specified herein or, if a choice is not specified,
they will vote for the proposals set forth in Items 1, 2, 3 and 5 and for the
nominee listed in Item 4.
<PAGE>
This Proxy is solicited by the Board of Directors of the Company.
Receipt of the Notice Annual Meeting of
Shareholders, Proxy Statement dated April 28,
1998 and Annual Report to Shareholders is hereby
acknowledged:
Date: , 1999
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(Signatures)
(Please sign exactly as your names appear
hereon, indicating, where proper, official
position or representative capacity.)
