<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:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Materials Pursuant to 240.14a-11(c) or 240.14a-12
CONTINENTAL CHOICE CARE, INC.
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
[X] 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.
- --------------------------------------------------------------------------------
(3) Filing party:
N.A.
- --------------------------------------------------------------------------------
(4) Date filed:
N.A.
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<PAGE>
Continental Choice Care, Inc.
35 Airport Road
Morristown, New Jersey 07960
------------------------------------------------------
Notice Of Annual Meeting Of Stockholders
To Be Held June 29, 1999
------------------------------------------------------
Continental Choice Care, Inc. (the "Company") will hold a special meeting
(the "Meeting") of the stockholders to be held at the Westin Morristown Hotel, 2
Whippany Road, Morristown, New Jersey 07960 on June 29, 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., a Delaware
corporation, which is 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 May 21,
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
June 7, 1999
Morristown, 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 Westin Morristown Hotel, 2 Whippany Road, Morristown, New Jersey 07960 on
June 29, 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
June 7, 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.
Voting Of Proxies
Only stockholders of record at the close of business on the record date,
May 21, 1999, will be entitled to vote at the Meeting and at adjournments of the
Meeting.
On May 21, 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
<PAGE>
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.
2
<PAGE>
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 by the broker
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. Management of
the Company holds approximately 48.5% of the outstanding shares of Company
Stock, net of shares underlying outstanding stock options. Management intends
to vote in favor of each of the proposals and in their discretion with respect
to any other matters which may properly come before the Annual Meeting. Each
member of management holding currently exercisable stock options has advised the
Company that he does not intend to exercise any stock options and vote the
shares underlying any of such options. 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
February 24, 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:
(i) 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
(ii) business brought before an annual meeting 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
February 21, 2000 and on or before April 6, 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.
3
<PAGE>
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 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. ("Quorum"). TelaLink Network, Ltd. ("TelaLink")
will merge (the "Merger") with Quorum and Quorum will be the surviving entity.
. 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. From its inception in 1996,
TelaLink has actively engaged in seeking potential mergers and acquisitions in
the telecommunications industry, although TelaLink had substantially no
revenues prior to December 1998. In December 1998, TelaLink acquired the
assets of War Telephone Company, a RLEC located in War, West Virginia. As a
result, TelaLink currently provides telephone service to approximately 1,550
customers.
. Why is the Company proposing a merger with TelaLink? How will this affect my
shareholdings? As a result of the merger of TelaLink with Quorum, the Company
will enter the telecommunications business. You will become a stockholder of
an enterprise that operates a telecommunications business and that 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? TelaLink currently has 2,990,000
shares of common stock outstanding held by approximately 20 shareholders and
500,000 shares of preferred stock outstanding, held by 5 shareholders. See
"Security Ownership of Management and Certain Beneficial Owners" for a list of
holders of five percent or more of TelaLink's common stock and holders of
TelaLink preferred 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 transactions has the Company entered into in contemplation of the
Merger? On May 15, 1999, the Company entered into an agreement (the "Stock
Purchase Agreement") pursuant to which the Company agreed to acquire not less
than 95% of the issued and outstanding capital stock of Pine Tree Telephone
and Telegraph Company ("Pine Tree").
4
<PAGE>
TelaLink assigned its rights under a certain letter of intent between TelaLink
and Pine Tree to the Company which gave the Company the right to pursue the
Pine Tree acquisition. Pine Tree is a telecommunication service provider with
approximately 6,500 customers located in areas near Portland, Maine. The
purchase price is approximately $30,500,000. The Company has deposited the sum
of $915,000 in an escrow account as a deposit against the purchase price. The
Company intends to obtain a combination of debt and equity financing to
finance the remainder of the purchase price. The Company is not seeking
shareholder approval of the proposed transaction with Pine Tree and is not
currently seeking approval of any financing transaction in which the Company
may engage to obtain acquisition financing or other financing in connection
with the Pine Tree transaction. Approval of the Merger will not constitute
approval of the Pine Tree transaction nor approval of the issuance of any
securities by the Company in connection with the Pine Tree transaction. The
transaction is subject to state regulatory approval and is expected to be
consummated following the end of the calendar quarter during which state
regulatory approval is obtained. Under the terms of the Stock Purchase
Agreement, Pine Tree is permitted to distribute to its existing shareholders
its accumulated cash, certain non-performing assets and any securities held
prior to the closing of the transaction. At the closing, the purchase price
may be adjusted as provided by the terms to the Stock Purchase Agreement. No
assurance can be given that the Company will be able to obtain financing for
the Pine Tree transaction or, if financing is obtained on terms acceptable to
the Company, that the transaction will otherwise be consummated.
. What other agreements were made in connection with the Merger? In anticipation
of the Merger, the Company has loaned $400,000 to TelaLink. TelaLink currently
owes expenses aggregating $200,000 to Benchmark Equity Group, Inc.
("Benchmark") and its affiliates in connection with services rendered and
Benchmark is expected to assert additional fees of $319,000 in the event the
Merger is consummated. Benchmark and its affiliates hold approximately 41.5%
of TelaLink's outstanding common stock and approximately 16.7% of TelaLink's
outstanding preferred stock. Frank DeLape, a TelaLink designee for director
of the Company, holds all of the outstanding securities of Benchmark.
Benchmark has entered into an agreement with TelaLink pursuant to which
Benchmark agrees to provide merger and acquisition transaction services to
TelaLink in exchange for fees based on the transaction consideration. The fees
range from 5% of the first $3,000,000 of aggregate consideration paid or
received in connection with a covered transaction, to a 1% fee of amounts
which exceed $12,000,000. The Company expects to pay a fee of 1.5% of the
consideration payable in the Pine Tree transaction, or $457,500, to Benchmark
in the event the Pine Tree transaction is consummated. Accordingly, Benchmark
is expected to assert claims for fees and expenses of $519,000 if the Pine
Tree transaction is not consummated and of $976,000 if the Pine Tree
transaction is consummated.
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") at an exercise price of $1.875 per share of Company Stock and to
make Mr. Bennett an Executive Vice President of the Company.
Techtron, Inc., a majority stockholder of the Company has granted TelaLink an
irrevocable
5
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proxy to vote its shares of common stock in favor of the Merger.
. What consideration will the Company give for the Merger? At or shortly
following the closing of the Merger, the Company will issue 1,640,000 shares
of Company Stock directly to the holders of the capital stock of TelaLink.
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 remaining 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 1,640,000,
2,540,000 or 3,440,000. The following table shows the approximate percentage
of outstanding Company Stock which the former shareholders of TelaLink will
hold following the Merger where Company management's currently exercisable "in
the money" options are deemed to have been exercised and where those options
are not deemed to have been exercised:
<TABLE>
<CAPTION>
Company Stock Issued If Options are deemed exercised If Options are not deemed exercised
- ------------------------------------ -------------------------------------- --------------------------------------
<S> <C> <C>
1,640,000 26.85% 33%
2,540,000 36.25% 44%
3,440,000 43.50% 51%
</TABLE>
See "Security Ownership of Management and Certain Beneficial Owners" for a more
detailed table of TelaLink share ownership calculations.
. When is the Merger expected to be completed? The parties to the Merger are
working as quickly as possible towards a completion date of June 30, 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
transaction as a purchase of the shares of capital stock of TelaLink.
. 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
6
<PAGE>
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 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 to consult an attorney regarding 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 Company to issue 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 May 21, 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
7
<PAGE>
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, the Company has reserved 1,190,000 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 directors nominated by TelaLink must qualify as
"independent" under applicable rules and regulations. At such time as
TelaLink's designee for "independent" director is elected, 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. Individuals
nominated by the TelaLink shareholders will initially be elected by the
Company's Board of Directors. TelaLink management has advised the Company
that it intends to nominate three directors, Frank DeLape, Harry Bennett and
Robert J. Ranalli. Mr. Ranalli is TelaLink's designee for "independent"
director.
. Certain terms used throughout this Proxy Statement. The following is a
summary list of certain defined terms used throughout this Proxy Statement.
"Colonial" - Colonial Telephone Company. The parent of War Telephone Company.
War Telephone Company was an RLEC which sold substantially all of its assets
to a subsidiary of TelaLink.
"FCC" - Federal Communications Commission.
"Pine Tree" - Pine Tree Telephone and Telegraph Company. A RLEC located near
Portland, Maine which the Company proposes to acquire.
"PUC" - Public Utility Commission. State regulatory authorities which
administer state telecommunications regulations.
"Quorum" - Quorum Communications, Inc., a wholly owned subsidiary of the
Company which the Company intends to merge with TelaLink. Quorum was
originally named "TNL Acquisition, Inc.", the name which appears in the
Merger Agreement.
"RLEC" - Rural Local Exchange Carrier. A rural telephone company.
"RTFC" - Rural Telephone Finance Cooperative. A cooperative which provides
financing and business management services to RLECs.
"RBOC" - Regional Bell Operating Company.
"TelaLink" - TelaLink Network, Ltd. A telephone company which the Company
intends to
8
<PAGE>
merge into Quorum, a subsidiary of the Company.
"Telecommunications Act" - The federal Telecommunications Act of 1996.
"1997 Plan" - The Company's 1997 Equity Incentive Plan.
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 35 Airport Road,
Morristown, New Jersey 07960. Its telephone number is (973) 898-9666. TelaLink
is a provider of telecommunications services. It seeks to grow through the
acquisition of rural local exchange carriers ("RLECs"). RLECs are companies
that provide basic local telecommunications services to customers in rural
communities and other protected territories throughout the United States and
which meet certain other regulatory requirements. TelaLink recently acquired
and operates a RLEC with over 1500 customers 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 the West Virginia RLEC,
TelaLink would have had revenue and net loss of approximately $1,159,000 and
$839,000, respectively, for the year ended December 31, 1998.
9
<PAGE>
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 other
smaller independent telephone companies. According to the United States
Telecommunications Association over 1,300 telephone companies in the United
States each have fewer than 25,000 customers. 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 federal
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 and other
larger companies may seek to dispose of rural customers 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 customers
historically served by RLECs.
The independent RLEC market has limited competition as compared to the non-
rural telecommunications market and has a favorable regulatory environment,
currently including regulatory assurance of a reasonable rate of return on
investment. See "Regulatory Matters". The largest use of telecommunication
services in rural areas is for telephone voice transmission, but TelaLink
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
A subsidiary of TelaLink acquired substantially all of the assets of War
Telephone Company for $4,500,000 in December 1998. 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
RFTC 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 TelaLink's RLEC
assets.
TelaLink's RLEC is located in McDowell County, West Virginia and has
approximately 1,550 customers. The RLEC currently employs three full time
employees and operates from a company-owned facility in War, West Virginia. Its
operating area comprises approximately 5 square miles and contains approximately
300 customers per square mile. The RLEC's customers are approximately 98%
residential and 2% business. In the year ended December 31, 1997, revenues
derived by War under its precedent owner were approximately $1.1 million.
10
<PAGE>
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.
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:
(i) retain qualified technical, management, administrative and customer oriented
professionals who would be assets to TelaLink's local and company wide
operations; (ii) have operational, management, administrative and customer
oriented functions that benefit TelaLink as a whole or which can be reduced,
eliminated or combined with other facilities operated by TelaLink; (iii) exhibit
positive economic and demographic characteristics which increase the opportunity
for the acquired company to grow; (iv) have a positive regulatory and operating
environment; (v) have deployed advanced technology; and (vi) have strong mid-
level management capabilities.
TelaLink may also consider the acquisition of cellular, cable television,
long distance resale, paging and wireless operations, in connection with
operations of RLECs which TelaLink may otherwise acquire. 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.
There is substantial competition for the purchase of RLECs. Any further
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.
Increase Revenue Through Enhanced Service Offerings. TelaLink management
believes
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that local community presence and brand recognition will allow it to grow
revenues by offering additional 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)
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 Competing in Adjacent Markets. TelaLink
management believes TelaLink has an opportunity to penetrate underserved markets
adjacent to its proposed franchise areas. TelaLink management believes that by
pursuing this opportunity it can generate additional 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. Applicable
regulations assure RLECs an opportunity to recover reasonable costs incurred in
the provision of regulated telecommunication services and to earn a reasonable
rate of return on the investment required to provide those services inside of
the RLEC's area. However, the regulations do not mandate such cost recovery and
rate of return for activities in areas not included in the RLEC's area, such as
adjoining areas in which TelaLink proposes to compete, or for non-regulated
services, such as wireless services. In addition, a portion of the cost of
operating the RLEC (such as personnel costs) may be allocated to the competitive
business conducted by the RLEC in adjoining areas. As a result, TelaLink may be
entitled to exclude certain revenues from, and be required to exclude certain
costs from the regulatory calculations pursuant to which the RLEC's assured rate
of return and cost recovery are calculated. 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.
Debt Financing. As a key component of its strategy, TelaLink expects to
finance a significant amount of its acquisitions through affiliates of the Farm
Credit Banks and Cooperative Finance Corporation ("CFC") whose mission is to
provide rural telecommunications companies (as well as other rural utilities)
with an assured source of low-cost capital, state-of-the-art financial products,
and business management services. TelaLink plans to finance a material portion
of the cost of future acquisitions through the issuance of additional debt
securities to such entities as well as through the issuance of equity
securities. Upon acquiring its RLEC assets, TelaLink obtained acquisition and
working capital financing from one such entity for the acquisition of its RLEC
assets and may obtain additional financing in respect of other RLECs it may
acquire. Although these entities are permitted by law to lend up to 80% of the
purchase price of an RLEC, there can be no assurance that such entities will
provide any future financing for TelaLink or will provide future financing at
such a funding ratio. Further, TelaLink would be required to provide that
portion of the RLEC purchase price not provided by them in the form of equity.
No assurance can be given that TelaLink will be able to obtain the necessary
equity funding or that it will be able to obtain such funding on terms
acceptable to the Company.
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Revenue Generation
RLECs typically receive the majority of their revenue from "access charges"
(the rates long-distance carriers pay to a local exchange carrier 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.
RLECs also receive revenues from services the RLECs provide under collection
agreements with long distance carriers. Under each collection agreement, the
RLEC bills its customers for long distance calls made by the customers through
the long distance carrier, in addition to billing the customers for local calls
handled wholly by the RLEC. The long distance carrier pays an agreed service
fee to the RLEC for the billing and collection services provided to the carrier
by the RLEC. In addition, RLECs receive federal Universal Service Support Fund
revenue. The Universal Service Support Fund was created to assist small
telephone companies serving rural and sparsely populated communities by granting
funds to carriers that are designated as "Eligible Telecommunications Carriers".
"Eligible Telecommunications Carriers" 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 Eligible Telecommunications Carriers and, accordingly, TelaLink
will be eligible to benefit from the Universal Service Support Fund. Large
local exchange carriers which do not qualify as RLECs, in contrast, are not
eligible to receive the funds because of their overall size and the regulatory
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 larger local exchange carriers 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 whereby TeleLink will connect its local customers'
calls with other carriers for origination and termination of interstate and
intrastate long-distance phone calls; (iii) Universal Service Support Fund
payments; and (iv) the provision of ancillary services to long distance carriers
such as billing and collection services and (v) ancillary competitive services
such as long-distance resale, enhanced services, wireless services, cable
television services, Internet services and customer premises equipment sales.
Competition
TelaLink faces competition for acquisition targets from a variety of other
consolidators of RLEC businesses. 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 other providers in the local markets in which TelaLink
operates and expects to operate. 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
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structures which are intended to keep rural customer telephone charges at
reasonable levels while allowing RLECs to recover costs and earn a fair return
on investment. Because the regulatory pricing and cost recovery advantages
available to RLECs are 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
TelaLink's RLEC subsidiary operates from a 1058 square foot free
standing facility located on approximately 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 its
subsidiary. A former officer of a company owned in part by Edward Bridges, a
former 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 have agreed to 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. Although such regulations have historically supported the revenue
base of WarTel, they have also caused TelaLink and WarTel to incur additional
costs. Although future changes in the regulatory landscape are probable and are
likely to result in additional competition, the precise effect of any current or
future change in regulation cannot be predicted with any certainty. A brief
description of some of the sources of such regulatory authority follows.
Federal Regulation. TelaLink is subject to the Communications Act of
1934, as amended (the "Communications Act") pursuant to which the FCC (i)
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); (ii) requires carriers providing interstate access
services to file tariffs with the FCC reflecting the rates, terms and conditions
of those services, which are reviewed by the FCC; (iii) requires that carriers
separate their costs between regulated and non-regulated services; and (iv)
governs 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 RLECs and
other local exchange carriers, prescribe certain accounting procedures, review
tariffs and regulate various other matters, including service standards and
operating procedures. Local service rates used by RLECs to recover revenues
from its intrastate services generally are regulated by PUCs through "rate of
return" regulation that focuses on authorized levels of earnings by RLECs.
Local Regulation. RLECs also are subject to local regulations, such as
building code and zoning requirements, which vary greatly from jurisdiction to
jurisdiction.
Telecommunications Act. The Telecommunications Act of 1996 (the
"Telecommunications Act"), which was intended to promote competition in all
areas of telecommunications and to reduce regulation, brought broad regulatory
changes to virtually every aspect of the telecommunications industry, at both
the state and federal level. As a result of the Telecommunications Act, local
exchange carriers, including RLECs, have become subject to competition for the
first time in traditional local telephone and intrastate toll services. The
Telecommunications Act also seeks to provide (1) the availability of quality
services at reasonable rates; (2) increased access to affordable services for
all consumers, including those in low income, rural, insular and high cost
areas, and to schools, libraries and health care providers; and (3) that all
providers of telecommunications services contribute to the Universal Service
Support Fund.
The Telecommunications Act also mandates the promulgation of new
regulations for interconnection between competing carriers, by providing that
local exchange carriers are entitled to recover their costs and may receive a
reasonable profit for providing interconnection to competitors.
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Under the Telecommunications Act, TelaLink's RLEC, as a rural carrier, is
eligible to request exemption, suspension or modification of certain
interconnection requirements from its state PUC, however, it is unknown whether
the PUC will grant such relief. In addition, as a rural telephone carrier,
TelaLink's RLEC automatically is exempt from those interconnection requirements
applying only to incumbent local exchange carriers, however, such exemption may
be challenged upon application by a potential competitor in TelaLink's
operational territory.
The Telecommunications Act also eases entry into the telecommunications
industry for competitors by, among other things, removing most state and local
barriers to competition. TelaLink believes that competition in many areas it
serves will likely 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. The risk to the Company from competitive entrants into its local
telephone markets could be offset by the Company's potential opportunities in
new services offerings, such as interstate service, Internet access, PCS or
other wireless service, cable TV or international services.
Regulatory Matters Relating to Cost Recovery and Regulated Revenues
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
Universal Service Support Fund
The RLEC is subject to FCC regulation of the rates it charges for
interstate access service. The process known as "separations" which allocates a
carrier's costs between interstate and intrastate services is governed by the
FCC's rules and regulations. Such process establishes how much of TelaLink'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 irrespective of the economic
market conditions of their rural service areas.
To the extent that a telecommunications carrier engages in providing
nonregulated services, such services cannot 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) which allocate expenses between (i) regulated and nonregulated
services; and (ii) the company's interstate costs or revenue requirements
including its authorized rate of return.
The purpose of applying the FCC's separations and access rules is to
identify the
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interstate allocation of costs to be recovered from each of the various access
rate elements. Because the individual company rate making and tariff filing
process was considered burdensome for small local exchange carriers, the FCC
established the National Exchange Carrier Association in 1983 which, among other
things, is responsible for developing interstate access service tariff rates and
terms, as such rates are based on a pooling of data provided by the local
exchange carrier. NECA establishes interstate access rates on information
provided to it by participating local exchange carriers. The revenues generated
by applying the NECA rates are pooled by the participating companies, reported
to NECA and redistributed on the basis of each company's costs.
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 41% 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 Quorum, a newly formed subsidiary of the
Company with Quorum 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, Quorum will succeed to any and all interests of TelaLink, including in
its current subsidiaries and Quorum 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 Quorum. 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
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to be issued contingently.
Consideration
All currently outstanding preferred stock of TelaLink will be converted
into TelaLink common stock immediately preceding the closing. The holders of
TelaLink common stock will receive a minimum of 1,640,000 and a maximum of
3,440,000 of its Company Stock in exchange for all outstanding TelaLink capital
stock and all rights to acquire TelaLink capital 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 the Escrow and 260,000 shares will be issued if the Company attains
certain post Effective Date financial goals. 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:
If the "Closing Price"
of Company The Company
Common Stock is(1): On or Before: And/Or has "Earnings" of: On or Before:
- ------------------- ------------- ------ ------------------ -------------
$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
The Final Escrow Shares will be released if any of the following financial goals
are achieved:
If the "Closing Price"
of Company The Company
Common Stock is(1): On or Before: And/Or has "Earnings" of: On or Before:
- ------------------- ------------- ------ ------------------ -------------
$15.00 12/31/00 OR $20,000,000 12/31/00
(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.
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(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 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 Quorum 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 per annum 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, Quorum and TelaLink. The representations and warranties relate to,
among other things, the
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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 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 Quorum; 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, loans to 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 either the outstanding TelaLink
Common Stock or the outstanding Company Stock shall dissent from the Merger or
if an aggregate of ten (10%)
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percent of TelaLink Common Stock and Company Stock shall dissent from the
Merger, any party may terminate the Merger Agreement.
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.
The Shareholders' Agreement is to be entered into among each individual or
entity which is a shareholder of TelaLink as of the closing date of the Merger
(such TelaLink shareholders referred to collectively as the "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 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
21
<PAGE>
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.
The Company has loaned $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 of such amount, $250,000 was loaned to TelaLink in the first three months
of 1999, and $150,000 was loaned in April 1999. No portion of the TelaLink loan
had been repaid as of the date of this Proxy Statement. 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. As a result, in the event of a default by
TelaLink, the Company may not be secured to the full amount of the loans. In
the event that the Merger is not consummated, the loans will be due April 30,
2000.
Accounting for the Merger
The Merger will be accounted for by the Company as a purchase. In
accordance with the purchase method of accounting, Company Stock distributed as
part of the Closing will be valued at the average stock price prior to and
subsequent to the announcement of the Merger and escrowed shares and contingent
shares will be valued as of the date, if any, they are released from the Escrow
or issued, respectively.
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). This discussion refers to the Internal Revenue Code of 1986, as amended
(the "Code"). 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 to the Company and its stockholders will be the
following:
1. The Merger of TelaLink into Quorum will constitute a reorganization within
the meaning of (S)368 of the Code.
22
<PAGE>
2. No gain or loss will be recognized by the Company as a result of the
Merger.
3. Each Dissenting holder of 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 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.
Management believes the principal federal income tax consequences to the
shareholders of TelaLink will be the following:
1. 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.
2. 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.
3. 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.
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 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.
23
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The Unaudited Pro Forma Condensed Combined Statements of Operations for the
fiscal year ended December 31, 1998 and for the three months ended March 31,
1999, and the Unaudited Pro Forma Condensed Combined Balance Sheet as of March
31, 1999 have been prepared to illustrate the estimated effects of the Merger
pursuant to the Merger Agreement between the Company and TelaLink Ltd.
("TelaLink") as well as the Stock Purchase Agreement between the Company and
Pine Tree Telephone and Telegraph Company ("Pine Tree"). The Unaudited Pro
Forma Condensed Combined Statements of Operations for the periods were prepared
as if the Merger and Stock Purchase was consummated at the beginning of the
fiscal year presented. The Unaudited Pro Forma Condensed Combined Balance Sheet
was prepared as if the Merger and Stock Purchase was effective March 31, 1999.
The Unaudited Pro Forma Condensed Combined Financial Information does not
purport to represent what the Company's financial position or results of
operations would actually have been if such Merger and Stock Purchase had in
fact occurred on such date. The Unaudited Pro Forma Condensed Combined
Financial Information also does 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 and Stock Purchase.
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/A accompanying this
Proxy and TelaLink's consolidated financial statements, War Telephone Company's
("WTC") financial statements and Pine Tree's financial statements included in
this Proxy Statement.
24
<PAGE>
Unaudited Pro Forma Condensed Combined Balance Sheet
As of March 31, 1999
<TABLE>
<CAPTION>
ASSETS:
Continental Pro Forma Pro Forma
Choice Care, Inc. Pine Tree TelaLink Adjustments Combined
-------------------- ----------------- ----------------- --------------------- -------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents $2,867,700 $ 1,396,308 $ 152,441 (1,396,308) (4) $ 3,020,141
Investments 1,484,839 3,996,037 157,895 (3,996,037) (4) 1,642,734
Accounts receivable,
net 121,636 729,256 268,475 1,119,367
Amounts due from
officer 385,000 0 0 385,000
Notes receivable 250,000 0 0 (250,000) (6) 0
Other current assets 175,841 82,292 14,192 272,325
---------- ----------- ---------- --------------- -----------
Total current assets 5,285,016 6,203,893 593,003 (5,642,345) 6,439,567
Amounts due from
affiliates 393,714 0 0 393,714
Property and
equipment, net 529,982 5,397,633 1,349,310 1,000,474(4) 8,277,399
Goodwill and other
intangibles, net 1,276,668 0 3,006,346 2,861,112(6) 31,241,088
24,096,961(4)
Other assets 171,740 163,677 337,477 (100,000) (6) 572,894
---------- ----------- ---------- --------------- -----------
Total Assets $7,657,120 $11,765,203 $5,286,136 $ 22,216,202 $46,924,661
========== =========== ========== =============== ===========
</TABLE>
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information are an integral part of this statement.
25
<PAGE>
Unaudited Pro Forma Condensed Combined Balance Sheet
As of March 31, 1999
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT):
<TABLE>
<CAPTION>
Continental Pro Forma
Choice Care, Inc. Pine Tree TelaLink Pro Forma Adjustments Combined
----------------- ----------------- ---------------- --------------------- --------
<S> <C> <C> <C> <C> <C>
Current Liabilities:
Accounts payable $ 612,499 $ 228,430 $ 501,909 $ 1,342,838
Accrued expenses 993,520 367,542 91,503 $ 115,000(6) 1,892,565
325,000(4)
Line of Credit 30,000 0 200,000 230,000
Customer deposits and advance
billings 0 49,321 73,134 122,455
Due to shareholder 0 0 200,000 200,000
Notes payable 0 0 250,000 (250,000) (6) 0
Current portion of long term
debt 932,265 0 304,186 820,476(4) 2,056,927
---------- ----------- ---------- ---------------- -----------
Total Current Liabilities 2,568,284 645,293 1,620,732 1,010,476 5,844,785
Long term debt, less current 81,786 0 3,020,376 18,679,524(4) 21,781,686
portion
Preferred Stock 0 0 1,500,000 (1,500,000)(6) 0
Commitments and
contingencies
Stockholders' Equity (Deficit):
Common Stock 5,595,061 21,440 2,840 3,288,300(6) 19,886,201
10,978,560(4)
Paid in capital 0 4,340 83,083 (83,083)(6) 0
(4,340)(4)
Accumulated other
comprehensive income 0 (20,925) 0 20,925(4) 0
Retained (deficit) earnings (588,011) 11,115,055 (940,895) 940,895(6) (588,011)
(11,115,055)(4)
---------- ----------- ---------- ----------------
Total Stockholders' Equity
(Deficit) 5,007,050 11,119,910 (854,972) 4,026,202 19,298,190
---------- ----------- ---------- ---------------- -----------
Total Liabilities and
Stockholders' Equity (Deficit) $7,657,120 $11,765,203 $5,286,136 $ 22,216,202 $46,924,661
========== =========== ========== ================ ===========
</TABLE>
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information are an integral part of this statement.
26
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Continental
Choice Care, Historical TelaLink Pro Pro Forma
Inc. Pine Tree Forma Combined Pro Forma Adjustments Combined
------------ ------------------ -------------- --------------------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Consulting $ 333,324 0 0 $ 333,324
Dry cleaning 965,700 0 0 965,700
Telecommunications 0 5,061,010 1,159,261 6,220,271
----------- ---------- ---------- ------------ ------------
1,299,024 5,061,010 1,159,261 $ 0 7,519,295
Cost of services 678,761 793,681 384,222 0 1,856,664
General and administrative 2,021,662 1,208,326 1,068,565 0 4,298,553
Depreciation & amortization 121,421 635,091 225,288 71,528(6) 1,755,799
702,471(4)
Interest (income) expense, net (285,568) (19,531) 282,537 1,186,343(4) 1,163,781
----------- ---------- ---------- ------------
Total costs & expenses 2,536,276 2,617,567 1,960,612 1,960,342 9,074,342
----------- ---------- ---------- ------------ ------------
(Loss) income before income
taxes and investment income (1,237,252) 2,443,443 (801,351) (1,960,342) (1,555,047)
Investment income, net 0 424,321 0 (424,321)(4) 0
(Benefit) provision for taxes (154,790) 0 36,500 154,790(6) 294,500
----------- ---------- ---------- 258,000 (4) ------------
------------
(Loss) income from continuing
operations (1,082,462) 2,867,764 (837,851) (2,539,453) (1,850,002)
Income from discontinued
operations 300,474 0 0 (300,474)(6) 0
----------- ---------- ---------- ------------ ------------
Net (loss) income ($781,988) $2,867,764 ($837,851) ($2,839,927) ($1,850,002)
=========== ========== ========== ============ ============
Net (loss) income per share
from continuing operations $(0.33) $1,337.58 $(3.54) $(0.22)
=========== ========== ========== ============
Net (loss) income per share $(0.24) $1,337.58 $(3.54) $(0.22)
=========== ========== ========== ============
Basic and diluted weighted
average shares outstanding 3,237,500 2,144 236,667 5,281,178 8,518,678
=========== ========== ========== ============ ============
</TABLE>
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information are an integral part of this statement.
27
<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 68,996(2) 225,288
Interest expense, net 29,084 79,953 173,500(2) 282,537
---------- ---------- ----------- ----------
Total costs and expenses 595,300 657,316 707,996 1,960,612
---------- ---------- ----------- ----------
Loss before income taxes (498,770) 405,415 (707,996) (801,351)
Provision for taxes 0 177,919 (141,419)(2) 36,500
---------- ---------- ----------
Net loss ($498,770) $ 227,496 ($566,577) ($837,851)
========== ========== =========== ==========
</TABLE>
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information are an integral part of this statement.
28
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Historical
Continental Historical Historical Pro Forma Pro Forma
Choice Care, Inc. Pine Tree TelaLink Adjustments Combined
----------------- ----------------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Consulting $ 83,331 $ 0 $ 0 $ 83,331
Dry Cleaning 430,248 0 0 430,248
Telecommunications 0 1,137,390 282,344 1,419,734
---------- ---------- ---------- ------------ ------------
513,579 1,137,390 282,344 $ 0 1,933,313
Cost of Services 321,608 190,719 77,882 590,209
General and Administrative 756,283 277,598 516,643 1,550,524
Depreciation & amortization 49,852 160,946 77,064 175,618(4) 481,979
17,882(6)
Interest (income) expense, net (25,164) (6,534) 55,535 302,893(4) 326,730
---------- ---------- ---------- ------------ ------------
Total costs & expenses 1,102,579 622,729 727,124 497,010 2,949,442
---------- ---------- ---------- ------------ ------------
(Loss) income before income (589,000) 514,661 (444,780) (497,010) (1,016,129)
taxes
Investment income, net 0 18,613 0 (18,613) (4) 0
Provision for taxes 0 0 5,750 48,000 (4) 53,750
---------- ---------- ---------- ------------ ------------
Net (loss) income ($589,000) $ 533,274 ($450,530) ($563,623) ($1,069,879)
========== ========== ========== ============ ============
Net (loss) income per share $(0.18) $248.73 $(0.16) $(0.12)
========== ========== ========== ============
Basic and diluted weighed 3,246,833 2,144 2,840,000 5,281,178 8,528,011
average shares outstanding ========== ========== ========== ============ ============
</TABLE>
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information are an integral part of this statement.
29
<PAGE>
Below are the historical and pro forma per share data relating to book
value, cash dividends and income (loss) per share from continuing operations for
the periods presented. The pro forma equivalent per share amounts were
calculated by multiplying the pro forma income (loss) per share before non-
recurring charges or credits directly attributable to the transaction, pro forma
book value per share and pro forma dividends per share of the Company by the
exchange ratio of TelaLink shares issued in connection with the proposed
transaction so that the per share amounts are equated to the respective values
for one share of Pine Tree, TelaLink and combined.
Historical and Pro Forma Per Share Data
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Continental
Choice Care, Historical Pro Forma
Inc. Pine Tree Historical TelaLink Combined
----------------- ------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Book value per share $ 1.71 $5,075.06 $(1.73) $ 2.34
====== =================== ====== ======
Equivalent pro forma book value per share $ 0.77
======
Net (loss) income per share $(0.24) $1,337.58 A $(3.54) $(0.22)
====== =================== ====== ======
Equivalent net loss per share $(0.07)
======
Cash dividends per share $ 0 $ 757.24 $ 0 $ 0
====== =================== ====== ======
</TABLE>
Historical and Pro Forma Per Share Data
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Historical
Continental
Choice Care, Historical Pro Forma
Inc. Pine Tree Historical TelaLink Combined
------------------ ------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Book value per share $ 1.54 $5,186.53 A $ (0.30) $ 2.26
====== =================== =========== ======
Equivalent pro forma book value per share $ 0.75
===========
Net (loss) income per share $(0.18) $248.73 A $ (0.16) $(0.12)
====== =================== =========== ======
Equivalent net (loss) per share $ (0.04)
===========
Cash dividends per share $ 0 $127.50 $ 0 $ 0
====== =================== =========== ======
</TABLE>
A - Equivalent information for Pine Tree is not presented as the company will be
purchased for cash.
30
<PAGE>
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 March 31, 1999 with the historical
consolidated balance sheet of TelaLink Network, Ltd. and subsidiary (TelaLink)
and the historical balance sheet of Pine Tree Telephone and Telegraph Company
("Pine Tree") after giving effect to the proposed merger and acquisition as if
the transactions happened on March 31, 1999.
The unaudited pro forma combined financial information combines the
historical consolidated statements of operations of the Company for the year
ended December 31, 1998 and for the three months ended March 31, 1999 with the
pro forma combined statements of operations of TelaLink for the same periods
after giving effect to TelaLink's acquisition of substantially all assets of War
Telephone Company and the Company's proposed acquisitions of TelaLink and Pine
Tree as if the purchases had occurred at the beginning of the fiscal year
presented.
2. TelaLink Purchase of RLEC
TelaLink was party to an Asset Purchase Agreement by and among TelaLink,
Colonial Telephone Company ("Colonial"), dated June 9, 1998 and amended and
finalized on November 23, 1998. Pursuant to the terms of that agreement,
TelaLink's subsidiary acquired substantially all of the assets of War Telephone
Company ("WTC"), a RLEC subsidiary of Colonial 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 RLEC assets
acquired from War Telephone Company.
The application of the purchase accounting method resulted in $3,057,510 in
excess purchase price over net assets acquired. Such intangible assets are
being amortized over forty years and thus accordingly, a pro forma adjustment
for the amortization of intangibles of $68,996 for the period January 1, 1998 to
December 2, 1998 (the date on which the acquisition was consummated) has been
recorded in the accompanying TelaLink unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1998. In addition, for
the year ended December 31, 1998, 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 previously paid to Colonial, as the former owner of War Telephone
Company has been eliminated as of December 31, 1998 through a pro forma
adjustment as it will not be paid in the future. No pro forma adjustments are
required in the
31
<PAGE>
accompanying unaudited pro forma condensed combined statement of operations for
the three months ended March 31, 1999 due to WTC and TelaLink's operations being
consolidated for the 1999 period.
3. Pine Tree Stock Purchase Agreement
Effective May 15, 1999, the Company entered into a Stock Purchase Agreement
(the "Stock Purchase Agreement") by and among the Company, Pine Tree and the
principal (95%) stockholder of Pine Tree, whereby the Company will purchase not
less than 95% of Pine Tree's issued and outstanding capital stock. Pine Tree is
a telecommunication service provider to areas near Portland, Maine. The Company
will acquire capital stock of Pine Tree for approximately $30,500,000, of which
$19,500,000 is expected to be financed from low cost loans from industry
sources, which may include the RTFC, and the remainder from other equity
financing sources. No assurance can be given that the RTFC will provide the
Company any financing for this transaction. The proposed merger would be
accounted for under the purchase method pursuant to APB 16.
The transaction will be consummated on the first day following the end of
the calendar quarter during which the Public Utilities Commission of the State
of Maine ("PUC") gives written notification that the transaction has received
regulatory approval. The Company has deposited the sum of $915,000 in an escrow
account as a deposit against the purchase price under the Stock Purchase
Agreement. Pine Tree may distribute to its stockholders its accumulated cash,
certain non-performing assets and any securities held. At the closing, the
purchase price may be adjusted as provided by the terms to the Stock Purchase
Agreement.
4. Proposed Pine Tree Acquisition Pro Forma Adjustments
The estimated purchase price for Pine Tree is $30,825,000, which consists
of approximately $30,500,000 for the purchase of all 2,144 issued and
outstanding shares of capital stock of Pine Tree and $325,000 of estimated
transaction costs. The computation of excess purchase price over the net assets
acquired is as follows:
Estimated purchase price $30,825,000
Net assets acquired 6,728,039
-----------
Excess of estimated purchase price over net assets acquired $24,096,961
===========
The excess of estimated purchase price over net assets acquired will be
amortized over forty years and thus accordingly, a pro forma adjustment for the
amortization of $602,424 and $150,606 for the year ended December 31, 1998 and
three months ended March 31, 1999, respectively, has been recorded in the
accompanying unaudited pro forma condensed combined statements of operations.
In addition, the pro forma adjustments include the elimination of cash and cash
equivalents, investments and associated interest and investment income, as well
as Pine Tree's stockholder's equity.
32
<PAGE>
<TABLE>
<S> <C>
Pine Tree Stockholders Equity $11,119,910
Less - Cash and cash equivalents 1,396,308
Investments 3,996,037
Plus - Book vs. appraised value of assets 1,000,474
acquired -----------
Net assets acquired $ 6,728,039
===========
</TABLE>
Pro forma income tax expense adjustments of $258,000 and $48,000 for year
ended December 31, 1998 and three months ended March 31, 1999, respectively,
have been recorded to consider the impact of Pine Tree's earnings on the
combined statement of operations. Transaction costs are estimated to be
$325,000 and are included in accrued expenses.
Pro forma adjustments include a $1,000,474 increase in the fair market
value of land, property and equipment being acquired as determined by an asset
valuation performed. Pro Forma adjustments include an increase of $100,047 and
$25,012 in associated depreciation expense for the year ended December 31, 1998,
and the three months ended March 31, 1999.
Additional pro forma adjustments include an $11,000,000 increase in the
Company's capital stock which equates to an assumed issuance of 3,641,178 shares
of common stock based on the Company's average price per share three days
preceding and following the announcement of the transaction, as well as an
increase of $19,500,000 in notes payable. Accordingly, $1,166,812 and $296,359
of interest expense has been recorded in the accompanying unaudited pro forma
condensed combined statement of operations for the year ended December 31, 1998
and the three months ended March 31, 1999, respectively, assuming an expected
interest rate of approximately 6.1%. The assumptions as to the nature, amount
and price of equity securities to be issued for the purpose of financing the
Pine Tree transaction are made solely for the purpose of demonstrating one
possible effect on shareholders' equity as a result of the financing of the
proposed transaction. Approval of the Merger will not constitute approval of the
Pine Tree transaction nor approval of the issuance of any securities by the
Company in connection with the Pine Tree transaction.
5. Proposed TelaLink Merger
The proposed merger between the Company and TelaLink would be accounted for
under the purchase method pursuant to APB 16. The Company would issue 1,640,000
shares of its common stock, 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.
6. Proposed TelaLink Merger Pro Forma Adjustments
33
<PAGE>
The estimated purchase price is $3,506,140 which consists of $3,240,640 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 $3,506,140
Net assets acquired 645,028
----------
Excess of estimated purchase price over net assets acquired $2,861,112
==========
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 March 31, 1999, the
issuance of the Company's common stock to TelaLink common shareholders and
options valued at $3,240,640 as well as $250,000 advanced by the Company to
TelaLink in the first quarter of 1999. Transaction costs are estimated to be
$215,000 of which approximately $100,000 was recorded by the Company in the
first quarter of 1999 and is included in other assets. Recorded transaction
costs have been eliminated and the remaining $115,000 of estimated transaction
costs are included in accrued expenses in the accompanying unaudited pro forma
condensed combined balance sheets.
The excess of pro forma purchase price over net assets acquired will be
amortized over forty years. Additional amortization expense of $71,528 and
$17,882 has been included in the unaudited pro forma condensed combined
statement of operations as of December 31, 1998 and March 31, 1999,
respectively.
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 as of December 31, 1998 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 in rural communities throughout 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 integrated,
interactive multi-media capabilities combining communications, information
34
<PAGE>
and entertainment services.
TelaLink did not commence telecommunications operations until December
1998, when its subsidiary, War Telecommunications Company, Inc., purchased
substantially all the assets of War Telephone Company, Colonial's West Virginia
based RLEC subsidiary. 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 War Telephone
Company 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, results
of operations for TelaLink and WTC as of December 31, 1998, are discussed
separately below. For the period ended March 31, 1999, the results of
operations for TelaLink and WTC have been consolidated.
TelaLink
Results of Operations for the year ended December 31, 1998
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 TelaLink's RLEC subsidiary,
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 related
to the November 30, 1998 RTFC credit facility of $3,500,000 discussed in more
detail below.
Results of Operations for the three months ended March 31, 1999
For the three months ended March 31, 1999, TelaLink had net operating losses
of $451,000. The net loss in 1999 is attributable to general and administrative
expenses of $517,000 associated with various start-up costs, such as travel,
consulting fees, etc. as well as salaries and related benefits expense.
TelaLink recognized revenues from local, long distance network and other
services of $282,000 in 1999. Costs associated with these services totaled
$78,000, or 28% of revenues. There were no such revenues or costs in 1998 since
TelaLink did not commence telecommunications operations until December 1998.
Depreciation and amortization expenses for 1999 totaled $77,000, of which
$70,000
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relates to the purchase of assets in connection with the acquisition of WTC as
well as the associated goodwill generated from this transaction.
For the three months ended March 31, 1999, net interest expense was $56,000
resulting from debt financing obtained from the RTFC as discussed below.
The provision for federal and state income taxes was $-0- and $5,750 in
1999. The income tax rate was 0% and 9% in 1999. The state tax provision
relates directly to the operating results of TelaLink's subsidiary
telecommunications business.
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 $200,000 was unused and available for use by
TelaLink at December 31, 1998. As of March 31, 1999, $100,000 was unused and
available for use by TelaLink. Proceeds from the credit facility were used by
TelaLink to finance the acquisition of the assets of War Telephone Company. The
RTFC credit facility has a fifteen year term, accrues interest at a variable
rate 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,
and the issuance of 600,000 shares of Series A convertible preferred stock for
cash proceeds of $1,500,000. TelaLink also has a liability for an amount 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 agreed that TelaLink would pay Benchmark an aggregate of
$200,000 upon the closing of the War Telephone Company asset transaction. At
March 31, 1999, these fees had not been paid. In addition, in the first four
months of 1999, Continental Choice Care, Inc. loaned $400,000 at 12% interest to
TelaLink for working capital purposes.
During 1999, TelaLink has used cash generated from the revenues of WTC 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 provide value added services,
such as voice mail, caller ID, and Internet services to enhance revenue. WTC
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 or other similar industry sources. TelaLink
became a member of the RTFC in 1998, when it first obtained RTFC funding for
the acquisition of RLEC assets. If TelaLink's proposed RLEC acquisition
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candidates meet RFTC financial and operational criteria and subject to
TelaLink's obligations to provide a portion of the purchase price in the form of
equity financing, the RTFC and other industry sources can provide acquisition
financing as needed.
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 result 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 management is unable to
determine at this time whether the consequences of Year 2000 failure will have a
material impact on their results of operation, 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's operating and administrative hardware have been certified as
Year 2000 compliant. Certain operating equipment requires additional software
upgrades to assure Year 2000 compliance. TelaLink has contracted for software
upgrades to be performed. The price for this additional service, including
testing and certification, is approximately $12,725. The work is expected to be
completed in the second fiscal quarter of 1999.
Risks
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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, will 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 for WTC,
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 telephone service 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.
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 is currently developing 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 for the year ended December 31, 1998
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. Prior to the sale of substantially all of
its assets, War Telephone Company had 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 overhead allocation from Colonial, the former parent company
of War Telephone Company. The corporate overhead
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allocation represented the estimate of Colonial's management of finance,
administrative and other overhead changes incurred by Colonial on behalf of its
War Telephone Company subsidiary prior to the sale of assets to TelaLink.
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 War Telephone Company related to a note payable to McDowell County,
West Virginia. This note was not assumed by TelaLink's subsidiary when it
acquired the assets of War Telephone Company.
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,
War Telephone Company filed a consolidated federal income tax return with its
former parent company.
Liquidity and Capital Resources
During 1998 and 1997, War Telephone Company 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 TelaLink's subsidiary when it acquired the assets
of War Telephone Company.
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.
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 Colonial.
Pine Tree Telephone and Telegraph Company
On May 15, 1999 the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with Pine Tree Telephone and Telegraph Company
("Pine Tree") and the holder of approximately 95% of the outstanding capital
stock of Pine Tree. Pine Tree is a telecommunications service provider to areas
near Lewiston and Portland, Maine. The Company was assigned the opportunity to
purchase the Pine Tree capital stock from TelaLink based primarily on the
Company's ability to make the $915,000 down payment required under the Stock
Purchase Agreement. Under the Stock Purchase Agreement, the Company will acquire
not less than 95% of Pine Tree's outstanding stock for $30,500,000. The Company
has deposited the sum of $915,000 in an escrow account as a deposit against the
purchase price. The Company intends to obtain a combination of debt and equity
financing to finance the remainder of the purchase price. Although the Company
intends to obtain debt financing of up to $19,500,000 in connection with the
Pine Tree transaction, no assurance can be given that
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the Company will be successful in obtaining such debt financing or that it can
obtain financing on terms acceptable to it. The Company intends to raise the
remaining $11,000,000 of the Pine Tree purchase price primarily through the sale
of equity. In addition, the Company may use some or all of its existing and
future cash reserves to fund a portion of the acquisition. The Company is unable
to accurately estimate the timing or amount of any future offering of equity
securities. Further, the Company cannot give any assurance as to the form, type,
nature or voting rights of any securities it may issue to finance the
acquisition or whether those securities will be sold publicly or privately. As a
result, the Company is unable to accurately predict the amount of any dilution
to existing holders of Company Stock as a result of the financing of the Pine
Tree transaction. To the extent that any issuance of equity securities or other
voting rights exceeds 50% or more of the voting rights of the Company then
outstanding (or issuable upon exercise, conversion or exchange of outstanding
securities) and in the absence of a voting trust, shareholders agreement or
similar agreement, a change of control of the Company can occur. No assurance
can be given that future issuances of equity securities or voting rights of
the Company will not result in a change of control of the Company. The
transaction is subject to state regulatory approval and is expected to be
consummated following the end of the calendar quarter during which state
regulatory approval is obtained. Under the terms of the Stock Purchase
Agreement, Pine Tree is permitted to distribute its accumulated cash, certain
non-performing assets and any securities held. At the closing, the purchase
price may be adjusted as provided by the terms to the Stock Purchase Agreement.
The Company intends to account for the transaction as a purchase.
Results of Operations for the year ended December 31, 1998
For the year ended December 31, 1998 and 1997, Pine Tree had total net
income of $2,868,000 and $2,886,000, on revenue of $5,061,000 and $4,733,000
respectively. This increase in revenue of $328,000 was specifically
attributable to an increase of $93,000 in interstate revenues and an increase of
$175,000 in billing and collection revenues. Pine Tree distributed $1,624,000
to shareholders in 1998 compared to $1,308,000 in 1997. There were no material
charges in operating expenses for the corresponding periods.
Results of Operations for the three months ended March 31, 1999
For the three months ended March 31, 1999 and 1998, respectively, Pine Tree
had total net income of $533,000 and $683,000, on revenue of $1,137,000 and
$1,289,000. The decline in revenue of $152,000 and corresponding decline in
Income from Operations was specifically attributable to a decline in interstate
revenue of $129,000 and state toll and access revenue of $44,000. Pine Tree
distributed $273,000 to shareholders during the three months ended March 31,
1999, compared to $51,000 during the same period in 1998. There were no
material changes in operating expenses for the corresponding periods.
Year 2000
Pine Tree began its assessment of being Year 2000 compliant in 1997 by
looking at its major systems and increased that scope in 1998. Upgrades to
software and equipment were also
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started in 1997.
All or nearly all of Pine Tree's exposure to Year 2000 problems involve
reliance on third parties, i.e. interconnecting LEC's switch manufacturers, and
billing service bureaus. Pine Tree has contacted third party providers of
services and has been informed that Year 2000 issues are being addressed.
Pine Tree has determined that one subsystem remains non Year 2000
compliant. Pine Tree expects to be fully compliant by mid-year 1999. Pine Tree
is not able to certify Year 2000 compliance due to its reliance on statements
and certifications provided by Pine Tree's vendors and service providers. Pine
Tree continues to assess its readiness status, and although Pine Tree does not
feel that the Year 2000 problems will have a material impact on their results of
operation, liquidity or financial condition, no guarantee can be made.
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.
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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.
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.
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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 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 May 21, 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.
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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.
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
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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.
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
------- ------- ---- ---- ------- -------
March 31, 1999 2-11/16 2-1/16 3/16 1/8 2-13/16 2-5/16
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. Management believes the delisting resulted primarily
from the sale of the Company's health care assets and the resulting decrease in
Company operations.
PROPOSAL 3. INCREASE IN SHARES SUBJECT TO 1997 PLAN
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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 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
46
<PAGE>
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 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.
47
<PAGE>
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.
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. TelaLink
management has advised the Company that it intends to nominate three directors,
Frank DeLape, Harry Bennett and Robert J. Ranalli. Mr. Ranalli is TelaLink's
designee for "independent" director. In the event the Merger is consummated,
Mr. Amsterdam is expected to resign as a Class I director following the date on
which Mr. Ranalli is elected or TelaLink designates another director nominee who
is "independent" under applicable regulatory and Nasdaq requirements. 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
48
<PAGE>
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 Director 993
Stanley B. Amsterdam 69 Director 998
Class II Directors
Steven L. Trenk 45 Director, President and Chief Operating 993
Officer
Class III Directors
Alvin S. Trenk 69 Director, Chairman, Chief Executive 993
Officer
Jeffrey B. Mendell 45 Director 994
Executive Officers
Mark Raab 35 Chief Financial Officer,
Treasurer -
Proposed TelaLink Designees
Harry S. Bennett 54 - -
Robert J. Ranalli 60 - -
Frank DeLape 45 - -
</TABLE>
Certain Biographical Information Concerning
Incumbent Directors and Executive Officers and
50
<PAGE>
Proposed TelaLink Designees
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.
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.
51
<PAGE>
Mr. Amsterdam is the Product Manager for the elastic fabrics division of
Guilford Mills, Inc., a position he has held for approximately 20 years.
Harry S. Bennett joined TelaLink as its Chairman and Chief Executive
Officer in December, 1998. Prior to joining TelaLink, Mr. Bennett was employed
by AT&T for over 25 years and held the position of Executive Vice President of
AT&T's Local Services Division at the time of his departure just prior to
joining TelaLink.
Robert J. Ranalli was the President of AT&T Consumer Services division, the
consumer long distance business, Chairman of the Board of AT&T Universal Card
division and Chairman of the Board of AT&T Transtech Services at the time of his
retirement from AT&T in 1994. Mr. Ranalli is currently a director of each of
CMGI, Ariel Corp., Sterling Networks, Inc. and DirectAg.com, Inc. The
securities of CMGI, an Internet operating company, and Ariel Corp., a
manufacturer of remote access equipment for internet service providers and
businesses, are publicly traded. Sterling Networks, Inc., a professional
services data network design and consulting company, and DirectAg.com, Inc., an
internet based dealer of agricultural seed products to businesses, are privately
held.
Frank DeLape has served as the Chief Executive Officer of Benchmark Equity
Group, Inc. ("Benchmark") since its formation in 1994. Benchmark is a privately
held venture capital firm which, with its affiliates, is primarily engaged in
providing financing and financial advice to companies, including a number of
public companies in a variety of industries. These industries include the
telecommunications, Internet services, retailing, business services and computer
technology industries. Mr. DeLape has also served as the President, Secretary,
Treasurer and a Director of Oak Tree Capital, Inc., a privately held financial
consulting firm since its formation in 1996. Mr. DeLape served as a director of
THINK New Ideas, Inc., a publicly traded company engaged in advertising,
marketing, Internet and intranet services and data management, from January 1996
through February 1998.
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
52
<PAGE>
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.
53
<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 Trenk Enterprises, Inc, 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.
54
<PAGE>
Security Ownership of Management and Certain Beneficial Owners
The following table sets forth certain information, as of May 21, 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 table also sets
forth information, on a pro forma basis, regarding the beneficial ownership of
the Company by each listed individual and by all directors and officers as a
group to illustrate the estimated effects of the Merger transaction as if the
transaction was effective as of May 21, 1999. The table assumes that all
conditions to release of all escrows have been met. 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 Minimum Maximum
Common Stock Current Pro Forma(2) Pro Forma (2)
------------ ------- ------------ -------------
<S> <C> <C> <C> <C>
Techtron, Inc. (1) 1,527,500 46.75% 31.13% 22.77%
Alvin S. Trenk(1) 303,000(3) 51.31%(4) 35.13% 26.12%
Steven L. Trenk(1) 326,000(5) 51.58%(1) 35.42% 26.35%
Martin G. Jacobs, M.D. (1) 325,000(6) 51.57%(1) 35.40% 26.34%
Jeff Ellentuck(1) 100,000(7) 3.06% 2.04% 1.49%
Stanley B. Amsterdam(1) 65,000(8) 1.99% 1.32% .97%
Jeffrey B. Mendell(1) 140,000(9) 4.28% 2.85% 2.09%
All Directors and Officers
as a Group (7 persons) 2,799,250 85.67% 57.04% 41.73%
- ------------------
</TABLE>
* Less than one percent
(1) The address of each named person and entity is 35 Airport Road, Morristown,
New Jersey 07960.
(2) The pro forma minimum column assumes an aggregate issuance of 1,690,000 and
the pro forma maximum column assumes an aggregate issuance of 3,490,000
shares of Company Stock in the Merger and the LoanCo stock purchase
transaction.
(3) Includes 300,000 shares underlying currently exercisable options issued to
Mr. A. Trenk under the Company's 1997 Equity Incentive Plan (the "1997
Plan").
(4) 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.
55
<PAGE>
(5) 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.
(6) 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.
(7) 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.
(8) Includes 10,000 shares of Company Stock underlying currently exercisable
options issued to Mr. Amsterdam under the Director's Stock Option Plan.
(9) 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.
56
<PAGE>
The following table sets forth certain information, as of May 21, 1999
regarding the beneficial ownership of TelaLink's common stock and preferred
stock by (i) each person known to be the beneficial owner of more than five
percent of the outstanding shares of TelaLink common stock or preferred stock
and (ii) by each person expected to be designated as a director of the Company
by TelaLink. 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.
TelaLink Beneficial Ownership
<TABLE>
<CAPTION>
TelaLink Common Number of Percentage of
Stock Holders TelaLink Shares TelaLink Shares
- ------------- --------------------- -----------------------
<S> <C> <C>
Benchmark Equity Group, Inc. (1)(9) 629,850 21.07%
Edward Bridges (2) 525,000 17.56%
Trident III, LLC (1)(8) 329,900 11.03%
Lighthouse Capital Insurance 250,000 8.36%
Company (3)
Emerging Ventures, LLC (1) 217,500 7.27%
Christopher Efird (8) 217,500 7.27%
Harry S. Bennett(4)(6) 500,000 16.72%
Frank DeLape (4)(5)(8) 847,350 28.34%
Robert J. Ranalli (4)(6) -0- *
Benchmark Equity Group, Inc. 1,210,100 41.47%
and affiliates as a group (5 holders)(8)
All TelaLink Common Holders 2,990,000
as a group (20 holders)
<CAPTION>
TelaLink Preferred
Stock Holders
- -------------
<S> <C> <C>
Saud Naif Abdulaziz Al-Saud (7) 200,000 --
Mohammed Musaed El-Seif (7) 100,000 --
The Sutton Group, Inc. (7) 100,000 --
Naif Bandar Ahmed Al-Sudairy (7) 50,000 --
Abdullah M. Al-Sheikh (7) 50,000 --
TelaLink Acquisition Corp. 100,000
</TABLE>
__________________
* Less than one percent
(1) The address of the named person or entity is 700 Gemini, Suite 100, Houston
Texas 77058.
(2) The address of the named person is c/o McInroy & Rigby, Suite 800,
Arlington, Virginia.
(3) The address of the named entity is Lighthouse Capital Insurance Company Mees
Pierson (Cayman) Limited, P.O. Box 2003, George Town, Grand Cayman, BWI.
57
<PAGE>
(4) TelaLink designee for director of the Company.
(5) Includes 629,850 shares held by Benchmark Equity Group, Inc. ("Benchmark")
and 217,500 shares held by Emerging Ventures LLC, a Delaware limited
liability company. Mr. DeLape holds 100% of the outstanding common stock of
Benchmark. Benchmark is the manager of Emerging Ventures LLC. Does not
include 250,000 shares of TelaLink common stock held by Lighthouse Capital
Insurance Company ("Lighthouse"). Mr. DeLape and his children are remote
contingent beneficiaries of a variable universal life insurance contract
issued by Lighthouse. Mr. DeLape disclaims beneficial ownership of such
shares and does not have voting or dispositive power with respect to such
shares.
(6) The address of the named person is c/o TelaLink Network, Ltd., 35 Airport
Road, Morristown, New Jersey.
(7) The address of the named person is c/o Pound Capital Corporation, 277 Park
Avenue, 47th Floor New York, NY 10172.
(8) Does not include 100,000 shares of preferred stock held by TelaLink
Acquisition Corp. of which Trident III, LLC owns 39%, Frank DeLape owns 51%
and Christopher Efird owns 10% of the outstanding capital stock.
(9) Does not include 217,500 shares held by Emerging Ventures LLC; 217,500
shares held by Christopher Efird; or 250,000 shares held by Lighthouse.
The following table sets forth information, on a pro forma basis, regarding
the beneficial ownership of the Company by each individual named in the
preceding table to illustrate the estimated effects of the Merger as if the
Merger was effective as of May 21, 1999. The table shows the effect of the
Merger as if (i) no portion of the escrows are released and no contingent shares
are issued, (ii) the Initial Escrow has been released and the contingent shares
have been issued and (iii) all escrows are released and all contingent shares
are issued. The table also shows the effect on percentage ownership of Company
Stock following the merger where all currently exercisable "in the money"
options held by management of the Company are exercised prior to the Merger.
For purposes of the following table, the phrase "in the money" refers to options
which, as of May 21, 1999, had an exercise price which was less than the closing
per share price of Company Stock on that date.
58
<PAGE>
<TABLE>
<CAPTION>
Shares of Company Stock to be Issued in
the Merger.
--------------------------------------------------------------------
1,640,000 2,540,000 3,440,000
----------------------------- ----------------------------- ------------------------------
Company % of Company % of Company % of
Shares Company Shares Company Shares Company
TelaLink Common Received Stock Post Received Stock Post Received Stock Post
Stock Holders in Merger Closing in Merger Closing In Merger Closing
- ---------------------- ------------- ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Benchmark Equity 219,078 4.46% 339,304 5.84% 459,530 6.85%
Group, Inc.
Edward Bridges 182,609 3.72% 282,821 4.87% 383,033 5.71%
Trident III, LLC 114,748 2.34% 177,719 3.06% 240,691 3.59%
Lighthouse Capital 86,957 1.77% 134,677 2.32% 182,397 2.72%
Insurance Company
Emerging Ventures, LLC 75,652 1.54% 117,169 2.02% 158,685 2.37%
Christopher Efird (1) 75,652 1.54% 117,169 2.02% 158,685 2.37%
Harry S. Bennett 173,913 3.54% 269,353 4.64% 364,793 5.44%
Frank DeLape 294,730 6.01% 456,473 7.86% 618,215 9.22%
Robert J. Ranalli -0- * -0- * -0- *
Benchmark Equity 420,904 8.58% 651,888 11.22% 882,873 13.16%
Group, Inc.
and affiliates as a
group (5 holders)
All TelaLink Common 1,040,000 21.19% 1,610,732 27.74% 2,181,463 32.52%
Holders as a group (20
holders)
<CAPTION>
TelaLink Preferred
Stock Holders
- -------------
<S> <C> <C> <C> <C> <C> <C>
Saud Naif Abdulaziz 200,000 3.95% 316,883 5.32% 433,766 6.33%
Al-Saud
Mohammed Musaed 100,000 1.98% 158,442 2.66% 216,883 3.16%
El-Seif
The Sutton Group, Inc. 100,000 1.98% 158,442 2.66% 216,883 3.16%
Naif Bandar Ahmed 50,000 * 79,221 1.33% 108,442 1.58%
Al-Sudairy
Abdullah M. Al-Sheikh 50,000 * 79,221 1.33% 108,442 1.58%
All TelaLink 500,000 9.89% 792,208 13.30% 1,084,416 15.81%
Preferred Holders
as a group (6 holders)
If current "in the money"
options held by Management
are exercised
All TelaLink Common 1,040,000 16.62% 1,647,792 23.02% 2,255,584 27.99%
Holders as a group (20
holders)
All TelaLink 600,000 9.59% 950,649 13.28% 1,301,299 16.15%
Preferred Holders
as a group (6 holders)
</TABLE>
59
<PAGE>
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
Trenk Enterprises, Inc.("TEI") dated as of April 1, 1994. TEI is wholly-owned
by Alvin S. Trenk. Under the terms of the TEI Agreement, Mr. A. Trenk serves as
the Chairman of the Board and Chief Executive Officer of the Company, and as
Chairman of the Board, Chief Executive Officer and director of the Company's
subsidiaries. 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
$300,000 per year plus such cash bonuses as may be determined by the Board of
Directors.
The TEI Agreement has a five year term which automatically renews for an
additional year on every anniversary date unless the 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 automobile
payments up to $1,500 per month, to pay for $1,000,000 of term life insurance,
the beneficiary of which will be the Company, and to pay for disability
insurance for Mr. A. Trenk.
In May 1998, the Board amended Steven L. Trenk's employment agreement and
increased Mr. Trenk's annual base salary from $150,000 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 five year term and renews
for an additional one year term on every anniversary date, unless the agreement
is otherwise terminated in accordance with its terms. The Company has also
agreed to make automobile payments up to $1,500 per month, to pay for $1,000,000
term life insurance, the beneficiary of which will be the Company and to pay for
disability insurance for Mr. S. Trenk. 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" as defined in his employment agreement, 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 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) a third party acquisition of
beneficial ownership of 50% or more of the outstanding common stock of the
Company (other than from the Company), or
60
<PAGE>
(iii) upon certain changes in the composition of the Board. Mr. Trenk has waived
any rights he may have to terminate his employment agreement as resulting from
the transactions contemplated by the Merger Agreement and the acquisition of
LoanCo.
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 Company has also agreed to make automobile payments up to $500 per
month and to pay for disability insurance for Dr. Jacobs.
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.
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.
61
<PAGE>
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.
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 $159,525 $0
Steven L. Trenk 0 0 326,000 0 200,413 0
Martin G. Jacobs 0 0 325,000 0 202,569 0
Jeff Ellentuck 0 0 100,000 0 67,238 0
</TABLE>
Option Grants during Last Fiscal Year
Shown below is information with respect to the number of options to
purchase Common Stock granted to the named executive officers during the
Company's last fiscal year.
Option Grants during the Fiscal Year
Ended December 31, 1998
62
<PAGE>
<TABLE>
<CAPTION>
% of Total
Number of Options Granted
Shares Underlying to Employees in Exercise
Name Options Granted Fiscal Year Price ($/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 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. The Company and IHS of New York, Inc. are parties to a Consulting
Agreement pursuant to which the Company has agreed to provide the consulting
services of certain Executive Officers for three years in exchange for aggregate
payments to the Company of $1,000,000. Except as described herein there are no
material relationships between the Company or TelaLink and/ either of RRI or IHS
of New York, Inc.
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 promissory notes relating to loans and advances to both Alpha and
CDBI had a fixed annual rate of 8%. As of March 31, 1999, interest on these
notes had not been recorded by the Company due to realization
63
<PAGE>
uncertainties. Interest payments are not expected due to insufficient borrower
cash flow to pay these amounts.
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 due from CDBI, were
paid in full. The unpaid consulting fees were not recognized by the Company
since there was insufficient cash from the IHS Closing to pay these amounts and
CDBI does not expect to earn sufficient revenues to make payments.
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. Loans to UMDC accrued interest at a floating rate equal to
the applicable prime rate less 1%. 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 March 31, 1999 $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.
Although the Company expects to receive payment of these amounts at the RRI
Second Closing, there can be no assurance given that the RRI Second Closing will
occur as the transaction is contingent on the NY Approval. No assurance can be
given that the NY Approval will be granted. However, 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. Under the terms of the RRI agreements, UMDC is entitled to a
set rate of income from available UMDC cash prior to any payments being made to
RRI and UMDC's entitlement accrues if not paid. Further, the amount of the
entitlement increases in the event NY Approval is not received in a timely
manner.
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.
64
<PAGE>
From January 1, 1998 through March 31, 1999, the Company advanced an
aggregate of approximately $157,850 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.
Payments on the notes are not anticipated in 1999 due to the fact that Techtron
does not expect to earn sufficient revenues to make payments.
Of amounts due under agreements with related parties, only consulting fees
due the Company from CDBI under a Consulting Services Agreement are in default.
A total of $200,000, representing all consulting fees from the inception of the
agreement until the time of the sale of CDBI to IHS, is due the Company from
CDBI.
In addition, several promissory notes and associated guarantees of related
parties were in default under the original terms of the notes. As of March 31,
1999, amounts due the Company from Techtron totaled $393,714. Of this amount,
$125,868 was secured by a promissory note dated August 9, 1994. Under the
original terms of this note, principal and interest were due and payable by
December 31, 1996. The terms of the note were amended by the Company to become
due and payable on demand. Interest of approximately $53,000 has accrued
through March 31, 1999 but has not been recorded due to Techtron's lack of
sufficient revenues to make payment. All amounts due from Techtron, are
unsecured and are guaranteed by Certain Executive Officers. Any demand for
payment under the personal guarantees will have to be made by the Company's
Board of Directors. The Company's Board of Directors does not currently intend
to make demand for payment.
As of March 31, 1999, all amounts due from Alpha had been paid, except for
interest on a promissory note for $300,000 dated April 24, 1994. Principal and
interest were originally due April 24, 1999. The principal was repaid in
October 1997 and interest aggregating approximately $83,000 remains owing to the
Company as of March 31, 1999. As of March 31, 1999, $115,681 was payable to
Alpha by the Company. The interest is not considered to be in default since the
Company intends to offset amounts payable to Alpha with amounts due from Alpha
for interest once the Company has determined that there are no outstanding
liabilities of Alpha that the Company may be required to pay on Alpha's behalf.
As of March 31, 1999, amounts due the Company from UMDC totaled $1,866,000.
Of this amount, two notes dated May 16, 1994 each in the amount of $50,000 were
due from Drs. Lorch and Cortell, the remaining unaffiliated physician
shareholders of UMDC. Under the original terms of these notes, principal plus
interest was due one year from the date of the notes. The Company does not
currently expect to be repaid and thus has not recorded the interest of $26,758
as of March 31, 1999 due it under these notes. The Company expects to forgive
the unpaid accrued interest in accordance with the various agreements among Drs.
Lorch and Cortell, Certain Executive Officers, UMDC, RRI and the Company. All
other notes relating to UMDC, including accrued interest, were paid to the
Company at the first RRI Closing. 65
<PAGE>
United Dry Cleaning, L.L.C., the Company's Arizona based dry cleaning
subsidiary, 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.
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.
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.
66
<PAGE>
Information Incorporated 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" and the Company's certified financial statements for
the fiscal year ended December 31, 1998, each of which is contained in the
Company's Annual Report for the Fiscal Year Ended December 31, 1998 as amended
which accompanies this Proxy Statement ("Annual Report") are 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: June 4, 1999
67
<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>
Pine Tree Telephone
and Telegraph Company
Audited Financial Statements
Years Ended December 31, 1998 and 1997
With Independent Auditors' Report
<PAGE>
Pine Tree Telephone
and Telegraph Company
Audited Financial Statements
and Additional Information
Years Ended December 31, 1998 and 1997
With Independent Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Pine Tree Telephone and Telegraph Company
We have audited the accompanying balance sheets of Pine Tree Telephone and
Telegraph Company as of December 31, 1998 and 1997, and the related statements
of income, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pine Tree Telephone and
Telegraph Company at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying additional information (Schedules
1 and 2) is presented for purposes of additional analysis and is not a required
part of the financial statements. Such information has been subjected to the
procedures applied in our audit of the financial statements and, in our opinion,
is fairly stated in all material respects in relation to the financial
statements taken as a whole.
February 4, 1999 /s/ Baker Newman & Noyes
Limited Liability Company
1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Pine Tree Telephone and Telegraph Company
We have audited the accompanying balance sheets of Pine Tree Telephone and
Telegraph Company as of December 31, 1998 and 1997, and the related statements
of income, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pine Tree Telephone and
Telegraph Company at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
February 4, 1999 /s/ Baker Newman & Noyes
Limited Liability Company
2
<PAGE>
PINE TREE TELEPHONE AND TELEGRAPH COMPANY
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
------
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 861,467 $ 59,955
Trading account - investments, at fair value (note 2) 3,999,351 3,429,533
Accounts receivable, net of allowance for
doubtful accounts of $36,000 720,145 734,977
Note receivable 1,576 1,425
Materials and supplies 80,817 79,727
----------- ----------
Total current assets 5,663,356 4,305,617
Property, plant and equipment:
Telephone operating plant, at cost (note 3) 10,153,580 9,768,293
Nonoperating plant 50,915 50,915
----------- ----------
10,204,495 9,819,208
Less accumulated depreciation:
Telephone operating plant (note 3) 4,688,665 4,271,998
Nonoperating plant 12,483 8,893
----------- ----------
4,701,148 4,280,891
----------- ----------
5,503,347 5,538,317
Other assets:
Cash value - life insurance 136,091 125,562
Other 26,006 26,006
----------- ----------
162,097 151,568
----------- ----------
$11,328,800 $9,995,502
=========== ==========
</TABLE>
3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 183,599 $ 127,829
Other taxes accrued 34,577 22,200
Other current liabilities 39,676 58,011
Customer deposits 42,114 42,173
Accrued pension (note 5) 147,913 108,609
----------- ----------
Total current liabilities 447,879 358,822
Stockholders' equity:
Common stock, par value $10; authorized 2,500 shares;
issued and outstanding 2,144 shares 21,440 21,440
Deferred income taxes (note 4) 9,901 13,732
Customers' contribution to plant 4,340 4,340
Retained earnings (note 4) 10,845,240 9,597,168
----------- ----------
Total stockholders' equity 10,880,921 9,636,680
----------- ----------
$11,328,800 $9,995,502
=========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
PINE TREE TELEPHONE AND TELEGRAPH COMPANY
STATEMENTS OF INCOME
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Operating revenues:
State toll service $1,415,228 $1,569,430
Interstate exchange access 1,715,427 1,622,084
Intrastate exchange access 336,525 201,815
Local telephone service 1,267,955 1,218,553
Billing and collection 230,416 55,147
Retail 23,736 17,261
Other 84,272 62,673
---------- ----------
5,073,559 4,746,963
Uncollectible revenues 12,549 14,047
---------- ----------
Net operating revenues 5,061,010 4,732,916
Operating expenses:
Plant operations expense 462,511 417,581
Plant nonspecific operations expense 762,985 741,797
Customer operations expense 524,732 560,212
Corporate operations expense 683,594 609,946
Operating taxes 163,972 147,458
Pension expense (note 5) 39,304 59,882
---------- ----------
2,637,098 2,536,876
---------- ----------
Operating income 2,423,912 2,196,040
Nonoperating income (expense):
Dividend income 42,006 35,310
Interest income 21,708 23,698
Interest expense (2,177) (1,913)
Unrealized gain on investments 309,327 271,272
Capital gain distributions on investments 167,629 185,794
Realized gain (loss) on sale of investments (94,606) 142,510
Paystation, net (35) (161)
Paging income, net - 33,935
---------- ----------
443,852 690,445
---------- ----------
Net income (note 4) $2,867,764 $2,886,485
========== ==========
Pro forma net income assuming application
of "C" Corporation tax rates:
Income before income taxes $2,867,764 $2,886,485
Normal corporate tax provision (note 4) 1,135,000 1,142,000
---------- ----------
Net income on basis described above $1,732,764 $1,744,485
========== ==========
</TABLE>
See accompanying notes.
5
<PAGE>
PINE TREE TELEPHONE AND TELEGRAPH COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Deferred Customers' Total
Common Income Contribution Retained Stockholders'
Stock Taxes to Plant Earnings Equity
------- --------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1997 $21,440 $18,333 $4,340 $ 8,013,922 $ 8,058,035
Amortization of deferred income
taxes (note 4) - (4,601) - 4,601 -
Net income - - - 2,886,485 2,886,485
Dividends to stockholders to pay
individual income taxes related to
corporate income, $500 per share - - - (1,072,000) (1,072,000)
Other dividends on common stock,
$110 per share - - - (235,840) (235,840)
------- -------- ------------ ----------- -----------
Balances, December 31, 1997 21,440 13,732 4,340 9,597,168 9,636,680
Amortization of deferred income
taxes (note 4) - (3,831) - 3,831 -
Net income - - - 2,867,764 2,867,764
Dividends to stockholders to pay
individual income taxes related to
corporate income, $647 per share - - - (1,387,683) (1,387,683)
Other dividends on common stock,
$110 per share - - - (235,840) (235,840)
------- -------- ------------ ----------- -----------
Balances, December 31, 1998 $21,440 $ 9,901 $4,340 $10,845,240 $10,880,921
======= ======== ============ =========== ===========
</TABLE>
See accompanying notes.
6
<PAGE>
PINE TREE TELEPHONE AND TELEGRAPH COMPANY
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,867,764 $ 2,886,485
Adjustments to reconcile net income to net cash
provided by operating activities:
Unrealized gain on investments (309,327) (271,272)
Gain on sale of paging assets - (33,967)
Depreciation and amortization 635,091 585,246
Pension expense 39,304 59,882
Life insurance credit (7,361) (8,076)
Changes in operating assets and liabilities:
Accounts receivable 14,832 (13,020)
Materials and supplies (1,090) (9,968)
Accounts payable and accrued expenses 49,753 (124,528)
----------- -----------
Net cash provided by operating activities 3,288,966 3,070,782
Cash used in investing activities:
Increase in investments (260,491) (803,467)
Note receivable - other (151) 837
Capital expenditures - telephone plant, net (595,018) (1,358,205)
Plant removal costs and salvage (5,103) (5,869)
Life insurance premiums (3,168) (3,168)
Proceeds from sale of property, plant and equipment - 55,542
----------- -----------
Net cash used by investing activities (863,931) (2,114,330)
Cash used in financing activities:
Dividends paid (1,623,523) (1,307,840)
----------- -----------
Net cash used by financing activities (1,623,523) (1,307,840)
----------- -----------
Net increase (decrease) in cash and cash equivalents 801,512 (351,388)
Cash and cash equivalents at beginning of year 59,955 411,343
----------- -----------
Cash and cash equivalents at end of year $ 861,467 $ 59,955
=========== ===========
</TABLE>
See accompanying notes.
7
<PAGE>
PINE TREE TELEPHONE AND TELEGRAPH COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. Accounting Policies
-------------------
Description of the Business
---------------------------
The Company's principal business is to provide telecommunication services to
customers located in the Gray and New Gloucester, Maine area. The Company's
telephone operations are regulated by various agencies.
Telephone Plant
---------------
Extensions of, and major improvements to, the telephone system are recorded
at cost, including all direct and an allocable portion of indirect overhead.
The original cost of assets retired is removed from both the cost and
accumulated depreciation accounts. This treatment does not allow for
recognition of any resulting gains or losses on other than extraordinary
disposals.
Depreciation of plant and equipment is computed on the straight-line method,
at rates calculated to amortize the original cost, adjusted for estimated
removal costs and salvage, over the average useful lives of the assets.
Other Nonoperating Plant
------------------------
Other nonoperating property, plant and equipment are depreciated on the
straight-line method.
Materials and Supplies
----------------------
Inventories of materials and supplies are stated at cost (first-in, first-
out), which is not in excess of market value.
Cash Equivalents
----------------
For purposes of the balance sheets and statements of cash flows, short-term
investments which have a maturity of 90 days or less when purchased are
considered cash equivalents.
Investments
-----------
Investments consist of investments in mutual funds, which are carried at
fair value as the Company considers these investments to constitute trading
securities. Trading account gains and losses (realized and unrealized) are
included in nonoperating income.
8
<PAGE>
PINE TREE TELEPHONE AND TELEGRAPH COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. Accounting Policies (Continued)
------------------------------
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Advertising
-----------
It is the Company's policy to expense advertising costs as incurred.
2. Investments
-----------
Trading account investments consisted of the following at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Cost Market Cost Market
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
T. Rowe Price - Equity Income Fund $ 197,596 $ 283,731 $ 201,991 $ 285,470
T. Rowe Price - Small Cap Value Fund 361,270 479,167 390,615 616,408
T. Rowe Price - Growth and Income Fund - - 1,238 1,919
T. Rowe Price - International Stock Fund 12,168 17,690 11,522 15,232
T. Rowe Price - New Asia Fund - - 719 587
T. Rowe Price - Mid-cap Growth 323,015 475,049 313,077 389,385
Dreyfus - Short/Intermediate Tax Exempt
Bond Fund - - 3,068 3,102
Vanguard - World International Growth
Fund 444,230 545,644 232,867 272,279
Vanguard - Total Stock 304,081 390,794 345,710 353,412
Vanguard - Prime Cap 34,060 55,802 31,945 44,494
Vanguard - Gold and Precious Metals
Fund - - 110,075 67,732
Vanguard - Index Trust 500 495,746 720,947 267,763 346,257
Fidelity - Equity Income II Fund 410,913 605,938 355,430 492,712
Fidelity - Value Fund 341,055 389,015 400,244 504,644
Fidelity - Latin America Fund - - 423 515
Fidelity - Low Priced Stock 29,581 35,574 26,537 35,385
---------- ---------- ---------- ----------
$2,953,715 $3,999,351 $2,693,224 $3,429,533
========== ========== ========== ==========
</TABLE>
9
<PAGE>
PINE TREE TELEPHONE AND TELEGRAPH COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
3. Telephone Plant
---------------
A summary of activity during 1998 in the telephone plant accounts
follows:
<TABLE>
<CAPTION>
COST
---------------------------------------------------------------
Balances Transfers and Balances
January 1, 1998 Additions Retirements December 31, 1998
--------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C>
Land $ 99,509 $ - $ - $ 99,509
Vehicles 227,502 18,945 (14,880) 231,567
Other work equipment 85,337 7,596 - 92,933
Buildings 681,131 3,400 - 684,531
Furniture 46,587 3,095 (2,725) 46,957
Office equipment 29,159 - (3,440) 25,719
General purpose computers 68,415 34,993 (55,293) 48,115
Voice mail equipment 151,845 - - 151,845
Digital switching equipment 3,543,905 131,960 (3,633) 3,672,232
Circuit equipment 557,008 32,247 - 589,255
Other terminal equipment 11,967 1,279 - 13,246
Poles 897,710 99,873 (2,541) 995,042
Cable 3,354,144 228,060 (94,795) 3,487,409
Wire 12,115 3,456 (474) 15,097
Plant under construction 1,959 30,114 (31,950) 123
---------- -------- --------- -----------
$9,768,293 $595,018 $(209,731) $10,153,580
========== ======== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION
---------------------------------------------------------------
Balances Transfers and Balances
January 1, 1998 Additions Retirements December 31, 1998
--------------- ------------- ----------- -----------------
<S> <C> <C> <C> <C>
Vehicles $ 119,723 $ 18,195 $ (14,880) $ 123,038
Other work equipment 58,830 8,913 - 67,743
Buildings 216,962 17,306 - 234,268
Furniture 29,090 3,134 (2,725) 29,499
Office equipment 15,435 3,841 (3,440) 15,836
General purpose computers 47,318 11,653 (55,292) 3,679
Voice mail equipment 25,915 12,451 - 38,366
Digital switching equipment 2,003,095 295,862 (7,359) 2,291,598
Circuit equipment 196,381 34,244 - 230,625
Other terminal equipment 6,746 1,261 - 8,007
Poles 104,507 46,451 (10,642) 140,316
Cable 1,446,962 176,285 (119,825) 1,503,422
Wire 1,034 1,905 (671) 2,268
---------- -------- --------- -----------
$4,271,998 $631,501 $(214,834) $ 4,688,665
========== ======== ========= ===========
</TABLE>
10
<PAGE>
PINE TREE TELEPHONE AND TELEGRAPH COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
4. Income Taxes
------------
The Company and its stockholders have elected S corporation status.
Under such election, the Company's taxable income is reportable by its
stockholders and no income taxes will normally be payable by the Company.
Accordingly, the liability related to deferred income taxes at the date of the
S election (January 1, 1988) was reclassified to stockholders' equity. The
unamortized balance of such taxes, however, will be utilized in the
computation of the return on capital investment for regulatory purposes and
is, therefore, being separately accounted for within the stockholders' equity
section.
Retained earnings at December 31, 1998 includes approximately
$7,431,000 of earnings reported as taxable income by the Company's
stockholders and available for tax free distributions. A rollforward of these
earnings for the year ended December 31, 1998, is as follows:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Balance, December 31, 1997 $ 6,187
Net income 2,868
Dividends paid (1,624)
-------
Balance, December 31, 1998 $ 7,431
=======
</TABLE>
5. Pension Plan
------------
The Company's defined benefit pension plan, covering substantially all
full time employees, is incorporated in the United States Independent
Telephone Association (U.S.I.T.A.) master plan. Pension benefits are based
upon average annual compensation for the highest three consecutive years of
credited service. The Company's plan attained fully funded status in 1986 and
no contributions have been permitted since then. The assets of the plan are
held in trust and are invested in a diversified portfolio that includes common
stocks, U.S. Government obligations and short-term financial instruments.
Net pension expense for 1998 and 1997 included the following components:
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Service cost - benefits earned during period $ 63,854 $ 67,208
Interest incurred on projected benefit obligations 79,328 71,923
Net return on plan assets (expected in 1998) (91,915) (258,416)
Net amortization and deferral (11,963) 179,167
-------- ---------
Net pension expense $ 39,304 $ 59,882
======== =========
</TABLE>
11
<PAGE>
PINE TREE TELEPHONE AND TELEGRAPH COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
5. Pension Plan (Continued)
-----------------------
Significant assumptions used in 1998 and 1997 in determining the net
periodic pension credit were:
Discount rate 7.0%
Increase in compensation levels 4.5
Long-term rate of return on assets 7.0
The funded status at December 31, 1997 (the latest information available)
and December 31, 1996 is reconciled to accrued (prepaid) pension expense as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accrued benefit obligations, including vested benefits
of $751,977 ($685,516 at December 31, 1996) $ 769,482 $ 698,227
Effects of future services and salary growth 365,765 331,247
---------- ----------
Projected benefit obligations 1,135,247 1,029,474
Plan assets 1,315,070 1,060,339
---------- ----------
Excess of plan assets over projected
benefit obligations (179,823) (30,865)
Unrecognized net gain from experience
different from that assumed 240,270 26,265
Unrecognized prior service cost (56,297) (60,628)
Unrecognized net transition asset being amortized
over 20 years 104,459 113,957
---------- ----------
Accrued (prepaid) pension expense $ 108,609 $ 48,729
========== ==========
</TABLE>
6. Related Party Transaction
-------------------------
During 1997, the Company rendered administrative services on behalf of
Northeast Cellular L.P., an entity controlled by the Company's majority
stockholder. The Company charged Northeast Cellular L.P. $86,303 for these
and other services.
12
<PAGE>
ADDITIONAL INFORMATION
<PAGE>
SCHEDULE 1
PINE TREE TELEPHONE AND TELEGRAPH COMPANY
SCHEDULE OF NET INCOME BY DIVISION
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Telephone Retail Total
Operations and Other Company
----------- ---------- -----------
<S> <C> <C> <C>
Operating revenues:
State toll service $1,415,228 $ - $1,415,228
Interstate exchange access 1,715,427 - 1,715,427
Intrastate exchange access 336,525 - 336,525
Local telephone service 1,267,955 - 1,267,955
Billing and collection 230,416 - 230,416
Retail - 23,736 23,736
Other 84,272 - 84,272
---------- -------- ----------
5,049,823 23,736 5,073,559
Uncollectible revenues 12,549 - 12,549
---------- -------- ----------
Net operating revenues 5,037,274 23,736 5,061,010
Operating expenses:
Plant operations expense 462,511 - 462,511
Plant nonspecific operations expense 762,985 - 762,985
Customer operations expense 522,626 2,106 524,732
Corporate operations expense 666,617 16,977 683,594
Operating taxes 163,972 - 163,972
Pension expense 39,304 - 39,304
---------- -------- ----------
2,618,015 19,083 2,637,098
---------- -------- ----------
Operating income 2,419,259 4,653 2,423,912
Nonoperating income (expense):
Dividend income 150 41,856 42,006
Interest income - 21,708 21,708
Interest expense (2,177) - (2,177)
Unrealized gain on investments - 309,327 309,327
Capital gain distributions on investments - 167,629 167,629
Realized loss on sale of investments - (94,606) (94,606)
Paystation, net - (35) (35)
---------- -------- ----------
(2,027) 445,879 443,852
---------- -------- ----------
Net income $2,417,232 $450,532 $2,867,764
========== ======== ==========
Pro forma net income if Company had
continued to be taxed as a
C corporation:
Income before income taxes $2,417,232 $450,532 $2,867,764
Normal corporate tax provision 963,000 172,000 1,135,000
---------- -------- ----------
Net income $1,454,232 $278,532 $1,732,764
========== ======== ==========
</TABLE>
12
<PAGE>
SCHEDULE 2
PINE TREE TELEPHONE AND TELEGRAPH COMPANY
SCHEDULE OF CASH FLOWS BY DIVISION
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Telephone Retail Total
Operations and Other Company
------------ ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,417,232 $ 450,532 $ 2,867,764
Adjustments to reconcile net income to net cash provided
by operating activities:
Unrealized appreciation on investments - (309,327) (309,327)
Depreciation and amortization 631,501 3,590 635,091
Pension expense 39,304 - 39,304
Life insurance credit (7,361) - (7,361)
Changes in assets and liabilities:
Accounts receivable 14,832 - 14,832
Materials and supplies (1,090) - (1,090)
Accounts payable and accrued expenses 49,753 - 49,753
----------- --------- -----------
Net cash provided by operating activities 3,144,171 144,795 3,288,966
Cash used in investing activities:
Increase in investments - (260,491) (260,491)
Note receivable - other - (151) (151)
Capital expenditures (595,018) - (595,018)
Plant removal costs (5,103) - (5,103)
Life insurance premium (3,168) - (3,168)
----------- --------- -----------
Net cash used by investing activities (603,289) (260,642) (863,931)
Cash used in financing activities:
Dividends paid (1,623,523) - (1,623,523)
----------- --------- -----------
Net cash used by financing activities (1,623,523) - (1,623,523)
----------- --------- -----------
Net increase (decrease) in cash and cash equivalents 917,359 (115,847) 801,512
Transfer of cash (917,359) 917,359 -
Cash and cash equivalents at beginning of year - 59,955 59,955
----------- --------- -----------
Cash and cash equivalents at end of year $ - $ 861,467 $ 861,467
=========== ========= ===========
</TABLE>
13
<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 "Quorem 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
--------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
(Signatures)
(Please sign exactly as your names appear
hereon, indicating, where proper, official
position or representative capacity.)
